Opinion
Civil Action No. 03-5023.
September 9, 2004
MEMORANDUM and ORDER
Donna J. Zavecz asks this Court to grant summary judgment on two of her four claims that sheis entitled to: the 9,800 shares of Yield Dynamics stock held in escrow and the benefits of a twofor-one split in Yield Dynamics stocks. For the reasons that follow, we agree.
Donna Zavecz brought this action in Lehigh County Court, seeking in Count I a declaratory judgment that Yield Dynamics failed to release 9,800 escrowed shares of its stock to Zavecz in violation of the Agreement for Purchase and Sale of Assets ("Asset Purchase Agreement") — a contract entered into by both parties on May 21, 1999; alleging in Count II Yield Dynamics wrongfully converted the escrowed shares; seeking in Count III a declaratory judgment that Yield Dynamics wrongfully refused to issue to Zavecz 49,000 shares resulting from a stock split; and, alleging in Count IV Yield Dynamics wrongfully converted the additional shares. Yield Dynamics removed the case to this Court, which has jurisdiction under 28 U.S.C. § 1332 because citizenship is diverse and the amount in controversy exceeds $75,000.
Zavecz asks this Court for partial summary judgment on counts I and III, arguing that she is entitled to the escrowed shares and the stock split shares as a matter of law.
FACTS
Zavecz and her husband, Terence Zavecz, are Pennsylvania residents. Yield Dynamics is a California corporation with its principal place of business in California. Yield Dynamics's business includes the marketing and selling of computer-related products and software to companies engaged in the semi-conductor industry. On May 21, 1999, Donna and Terrence Zavecz, acting as shareholders and officers of TEA Systems Corporation, entered into the Asset Purchase Agreement with Yield Dynamics at their residence in Alburtis, Pennsylvania. In return for the assets of TEA Systems Corporation, the Zaveczs received shares of Yield Dynamics common stock. Some of the shares owing to Zavecz were escrowed for a two year indemnification period which expired on May 31, 2002, without a claim having been made. Under the Asset Purchase Agreement, the 9,800 shares should have been released to Zavecz. Zavecz also says she was denied the benefits of a two-for-one stock split in Yield Dynamics common stock in January, 2001.
Yield Dynamics argues it is entitled to withhold the two blocks of shares as recoupment or set off against claimed damages. Yield Dynamics has sued Donna and Terrence Zavecz and TEA Systems Corporation in California alleging trade secret misappropriation, breach of contract and fraud. The essence of Yield Dynamics's California claim is that the Zaveczs failed to deliver all the software they were obligated to deliver under the Asset Purchase Agreement and Terrence Zavecz continues to use software or knowledge he sold to Yield Dynamics in a new business.
DISCUSSION
A motion for summary judgment will only be granted if there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. Rule 56(c). Rule 56(c) "mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corporation v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552 (1986).
The moving party bears the burden of proving no genuine issue of material fact is in dispute and the court must review all of the evidence in the record and draw all reasonable inferences in favor of the nonmoving party. Matsushita Elec. Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348 (1986). Once the moving party has carried its initial burden, the nonmoving party must then "come forward with specific facts showing there is a genuine issue for trial." Matsushita, 475 U.S. at 587 (citing Fed.R.Civ.P. 56(e)). A motion for summary judgment will not be denied because of the mere existence of some evidence in support of the nonmoving party. The nonmoving party must present sufficient evidence for a jury to reasonably find for them on that issue. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 2510 (1986).
The question in this summary judgment motion is whether Zavecz is entitled as a matter of law to the two blocks of shares — the 4,900 escrowed shares and the 49,000 from the stock split. Yield Dynamics muddies the waters when it asserts contract defenses of recoupment and set-off to the declaratory judgment action. Zavecz's demand in Count I for escrowed shares depends only on the fact that two years after the execution of Asset Purchase Agreement no claim requiring indemnification was filed. Yield Dynamics admits that no claim was made. Therefore, no impediment to the release of the shares exists and the shares must be delivered to Zavecz.
In Count III Zavecz asks for the delivery of 49,000 shares of Yield Dynamics stock to which she is entitled under the January, 2001 stock split. Yield Dynamics does not deny that a stock split occurred and that Zavecz's additional shares were not delivered to her. Yield Dynamics relies on its affirmative defenses of recoupment and set off to establish genuine issues of material fact sufficient to overcome summary judgment. That it cannot do.
Zavecz is entitled to the 49,000 shares owed as a result of the split of Yield Dynamics stock as a matter of law because a "stock split is a dividing up of the outstanding shares of a corporation into a greater number of units, without altering the stockholder's proportional ownership in the corporation." Lynam v. Gallagher, 526 A.2d 878, 882 (Del. 1987); see also 18B Am.Jur. Corporations § 1173 (2004). If Yield Dynamics were permitted to withhold Zavecz's 49,000 shares it would be impermissibly reducing her proportional ownership in Yield Dynamics. There is no significant issue of material fact outstanding on the question of whether Yield Dynamics owes Zavecz her outstanding shares. Zavecz was a stockholder of record at the time of the two-for-one split and is, therefore, owed 49,000 shares.
Under Pennsylvania law, a recoupment is a counterclaim arising out of the contract sued upon; a set-off is a counterclaim arising from an independent transaction. Northwestern Nat. Bank v. Commonwealth, 345 Pa. 192, 201-02, 27 A.2d 20, 25 (1942). The defense of recoupment "is the setting up of a demand arising from the same transaction as the plaintiff's claim or cause of action, strictly for the purpose of abatement or reduction of such claim. . . . [W]here the creditor's claim against the debtor arises from the same transaction as the debtor's claim, it is essentially a defense to the debtor's claim against the creditor . . ." Cohen v. Goldberg, 554 Pa. 201, 205-06, 720 A.2d 1028, 1030 (1998) (citations omitted; emphasis in the original).
Yield Dynamics argues that this case is governed by California law as required by the contract, the Asset Purchase Agreement between the Zaveczs and Yield Dynamic. Because we find that the case is not a suit upon the contract, Pennsylvania law applies in this diversity case. Erie Railroad Company v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 822, 82 L.Ed. 1188 (1938). The outcome would not change because, under California law, recoupment is a defensive claim which must arise out of the same transaction as the plaintiff's claim. See United States v. Iron Mountain Mines, Inc., 952 F.Supp. 673, 676 (E.D. Cal. 1996). Set-off is not an independent cause of action, but must rest on a claim enforceable in its own right, such as a claim that the contract at issue is void and unenforceable or a claim for breach of contract. See R.M. Sherman Co. v. W.R. Thomson, Inc., 191 Cal. App. 3d 559, 563, 236 Cal. Rptr. 577 (1987).
Federal courts have held that the "same transaction" requirement must be interpreted narrowly. The Third Circuit held "[f]or the purposes of recoupment, a mere logical relationship is not enough; the fact that the same two parties are involved, and that a similar subject matter gave rise to both claims, . . . does not mean that the two arose from the same transaction." In re University Medical Center, 973 F.2d 1065, 1079 (3d Cir. 1992). In a bankruptcy action, which depends on common law recoupment, the fact that a contract exists between the debtor and creditor does not automatically enable the creditor to effect a recoupment. University Medical Center, 973 F.2d at 1080. Both debts must arise out of a single integrated transaction so that it would be inequitable for the debtor to enjoy the benefits of that transaction without also meeting its obligations. University Medical Center, 973 F.2d at 1080.
Yield Dynamics's claims for recoupment and/or set-off fail because Zavecz's claims for declaratory judgment do not arise from the same transaction. Zavecz bases this action on her rights as a shareholder of Yield Dynamics; Yield Dynamics's claims arise from an alleged breach of a contract and are inchoate. See Hutchins v. I.R.S., 67 F.3d 40, 44 (3d Cir. 1995) (holding an unexpected tax refund did not need to be separately listed to qualify as abandoned in a bankruptcy action). It has long been the law of Pennsylvania that set-off can not be claimed against an unripe, undesignated debt. See Fox v. Reed 1861 WL 5770, 14 (Pa. 1861) (holding that the treasurer of the Erie Canal Corporation could not protect corporate funds on grounds they were owed to him because the "plea of set-off [is] defective, in that it does not describe any particular bonds to be set off.")
In this case, Yield Dynamics claim against the Zaveczs is unrealized and will arise in a separate transaction from the California litigation. Therefore, the defenses of recoupment and/or set off do not raise significant issues of material fact in this case.
Accordingly, this court enters the following:
ORDER
AND NOW, this 9th day of September, 2004, it is hereby ORDERED that Plaintiff Donna Zavecz's Motion for Partial Summary Judgment (Document 11) is GRANTED as to Counts I and III of the Complaint.