Borough of Honesdale v. M.C. Morris & S.G. Smith

IN THE COMMONWEALTH COURT OF PENNSYLVANIA

Borough of Honesdale, :

Appellant :

:

v. : No. 795 C.D. 2018

: ARGUED: September 10, 2019

Michael C. Morris and Stephen G. Smith :

:

Borough of Honesdale :

:

v. :

:

Michael C. Morris :

:

Borough of Honesdale :

:

v. : No. 896 C.D. 2018

: ARGUED: September 10, 2019

Stephen G. Smith :

:

Appeal of: Michael C. Morris and :

Stephen G. Smith :

BEFORE: HONORABLE P. KEVIN BROBSON, Judge

HONORABLE MICHAEL H. WOJCIK, Judge

HONORABLE BONNIE BRIGANCE LEADBETTER, Senior Judge

OPINION NOT REPORTED

MEMORANDUM OPINION BY

SENIOR JUDGE LEADBETTER FILED: October 11, 2019

The Borough of Honesdale appeals from orders of the Court of

Common Pleas of Wayne County (1) partially granting the amended petitions to

open confessed judgments of Stephen G. Smith and Michael C. Morris (Developers);

(2) granting Developers’ oral motion to mold the jury’s verdict as to strike the

(confessed) judgments entered against them and to dismiss, with prejudice, the

complaints for confession of judgment that the Borough had filed; and (3) denying

the Borough’s post-trial motion. In relevant part, Developers cross appeal from

orders striking their counterclaims. We affirm all of the orders at issue.

The relevant background is as follows. In 2011, Developers formed

Smith & Morris Holdings, LLC (SMH), purchased the Old Sullums Building at 560

Main Street in the Borough, and began renovating the 10,800-square-foot building

(the project). SMH planned to use one-third of the building for a technical

center/high-speed internet hub and the remainder for office space. Financing for the

project included, inter alia, a grant through the Department of Community and

Economic Development (DCED) for $255,076.00, a bridge loan with Dime Bank,

and a construction loan agreement (Agreement) with the Borough.

As the applicant/grantee for the 2013 DCED grant, the Borough formed

a three-person committee to handle its responsibilities and appointed a committee

chair to manage the paperwork. As for the mechanics of the grant, “SMH was

required to provide [the Borough] with invoices for qualifying expenses. Upon

receipt of those invoices, [the Borough] was required to send DCED reimbursement

requests. Grant money would not be disbursed by DCED until a reimbursement

request was received from [the Borough].” (Trial Court’s Sept. 28, 2018 Op. at 3.)

As for the April 2013 bridge loan, SMH secured interim financing with

Dime Bank in the amount of $255,076.00 with the proceeds from the grant serving

as collateral. In practice, SMH submitted invoices to the Borough and the committee

chair reviewed them. Upon approval, the committee chair would send a letter to

Dime Bank, which in turn would pay SMH’s contractors.1 (Id. at 7.)

1

At some point, Dime Bank froze the account where the grant money was being deposited.

2

In May 2013, the parties entered into the Agreement whereby the

Borough was to make progress payments to SMH pursuant to paragraph nine of the

Agreement:

During the Construction Period, progress payments will be

disbursed by Lender [Borough] to Borrower’s [SMH’s]

Contractor(s), upon Lender’s receipt of Construction

Progress Payment Authorizations executed by the

Borrower, and a satisfactory inspection report from

Lender’s representative or nominee. Minor finish items of

a cosmetic nature for which the Borrower is responsible

must be completed before the final payment can be made

to the contractor.

(Id. at 4.) Once the Borough received the authorizations, the Agreement did not

specify the time by which the Borough was obligated to disburse progress payments

(grant money) to SMH. (Id.)

In May 2013, Developers also entered into two personal guaranty and

suretyship agreements in favor of the Borough by which they personally secured the

obligation of SMH. On August 5, 2016, the Borough filed two complaints for

confession of judgment, one against each of Developers in the sum of $304,176.31

based on their personal guaranty and suretyship agreements. The prothonotary

entered both judgments.2 Shortly thereafter Developers, acting pro se, filed answers

with affirmative defenses and counterclaims, and petitions to open the confessed

judgments. The trial court struck Developers’ answers, affirmative defenses, and

counterclaims but granted them the opportunity to file amended petitions to open the

confessed judgments.

2

For a total of $304,176.31, the calculation was as follows: original debt—$250,076.00

(Borough did not use $255,076.00); interest—$15,191.27; late fees—$1,397.64; and attorney’s

fees of 15% per document—$37,511.40. (Reproduced Record “R.R.” at 73a.)

3

In February 2017, Developers’ counsel filed amended petitions to open

the confessed judgments. Notably, the amended petitions did not contain

counterclaims. In June 2017, the trial court granted their amended petitions pursuant

to Rule 2959 of the Pennsylvania Rules of Civil Procedure, stating that viewing the

evidence in the light most favorable to them, they had raised a meritorious defense

(breach of contract). In addition, the trial court stated that the exclusive issue to be

tried was whether the Borough was contractually obligated under the Agreement to

make disbursements to SMH pursuant to the schedule of progress payments set forth

in the Agreement and whether the Borough breached the Agreement by disbursing

the grant money to SMH in a manner so untimely, erratic, and improper that it caused

the project to fail. (Trial Court’s June, 15, 2017, Order.) In September 2017, the

trial court consolidated the two cases.

In November 2017, Developers’ counsel filed answers, new matter, and

counterclaims. The Borough filed preliminary objections in the form of a motion to

strike, to which Developers each filed an answer. In addition, Developers filed

motions for summary judgment and the Borough filed cross-motions for summary

judgment. In January 2018, the trial court granted the Borough’s motion to strike

the answers, new matter, and counterclaims from the record, citing Rule 2960 of the

Pennsylvania Rules of Civil Procedure. The trial court denied both parties’ motions

for summary judgment, characterizing the issue of whether the Borough disbursed

the grant money to SMH within a reasonable time as a disputed material issue of fact

dependent upon various factors. Acknowledging that the Agreement did not provide

a specific schedule by which the Borough was to disburse progress payments (grant

money) to SMH, the trial court relied on long-established precedent that, in the

absence of a time frame in which a contractual obligation is to be performed, the law

4

requires performance within a reasonable amount of time.3 (Trial Court’s Sept. 28,

2018, Op. at 2.)

In May 2018, the trial court presided over a three-day jury trial. SMH

alleged that the Borough breached the Agreement by disbursing the money to SMH

in a manner so erratic and untimely that it caused the project to fail. The Borough

alleged that it was not obligated to disburse payments to SMH pursuant to a schedule

in the Agreement and that the project failed because it was undercapitalized and

wasteful. (Trial Court’s Jan. 31, 2018, Op. at 3.) The jury entered a verdict in favor

of Developers, in pertinent part finding that they proved by a preponderance of the

evidence that the Borough was contractually obligated pursuant to the Agreement to

make disbursements to them within a reasonable time, that it materially breached its

duty to do so, and that its failure caused the project to fail. (May 18, 2018, Hearing,

Notes of Testimony “N.T.” at 191; Reproduced Record “R.R.” at 1274a.)

After the jury announced its verdict, the trial court granted Developers’

oral motion to mold the verdict so as to strike the confessed judgments against them

and to dismiss the complaints for confession of judgment with prejudice.

Subsequently, both parties filed post-trial motions, which the trial court denied. The

parties’ timely appeals followed.4

Borough’s Appeal-Cognizable Issues:

(1) Whether the trial court erred in determining that two individual guarantors could

raise a defense held by their limited liability company (LLC).

3

E.g., Hodges v. Pa. Millers Mut. Ins. Co., 673 A.2d 973, 974-75 (Pa. Super. 1996).

4

Although both parties filed concise statements, the trial court filed an opinion pursuant to

Rule 1925 of the Pennsylvania Rules of Appellate Procedure only with respect to the Borough’s

appeal and not with respect to Developers’ cross-appeal. However, we are able to discern the trial

court’s rationale from its earlier orders and/or opinions with respect to Developers’ sole cognizable

issue on cross-appeal.

5

(2) Whether the trial court erred in partially granting Developers’ amended petitions

to open judgment in light of their alleged failure to submit evidence of their

meritorious defense.

(3) Whether the trial court erred in refusing to allow graphs that summarized

voluminous financial records without authentication by any witness.

(4) Whether the trial court erred in permitting hearsay testimony from Developers

concerning why contractors walked off the job.

(5) Whether the trial court erred in denying the Borough’s motion to enter judgment

notwithstanding the verdict or to grant a new trial when the verdict was allegedly

against the great weight of the evidence. 5

5

In addition, the Borough proffers the following issues in its “Statement of Questions

Involved”: (1) whether the trial court erred in permitting testimony from non-party lay witnesses

regarding their opinions; and (2) whether the trial court erred in sustaining an objection during

closing arguments and failing to explain the basis for sustaining the objection. Although the

Borough raised these issues in paragraphs twelve and thirteen of its concise statement, it failed to

develop them in the argument portion of its brief in accordance with Rule 2119 of the Pennsylvania

Rules of Appellate Procedure.

In any event, the Borough’s arguments with respect to these issues are without merit. With

respect to the testimony of lay witnesses, especially the retired DCED employee who was directly

involved with the grant at issue, the trial court has broad latitude in assessing the admissibility of

evidence. Commonwealth v. Poplawski, 130 A.3d 697, 716 (Pa. 2015). As for the trial court’s

ruling on an objection during closing arguments, an evidentiary ruling will be reversed only for an

abuse of discretion. Notably, “[a]n abuse of discretion may not be found merely because an

appellate court might have reached a different conclusion, but requires a result of manifest

unreasonableness, or partiality, prejudice, bias, or ill-will, or such lack of support so as to be clearly

erroneous.” Id.

6

Developers’ Cross-Appeal-Cognizable Issue:

(1) Whether the trial court erred in striking the Developers’ counterclaims in a

confession of judgment action.6

Borough’s Appeal

(1) Whether the trial court erred in determining that two individual guarantors

could raise a defense held by their LLC.

It is clear that if a petitioner moves promptly to open a confession of

judgment and presents a meritorious defense sufficient to require submission of

issues to a jury, a trial court does not err in opening that judgment. M.N.C. Corp. v.

Mt. Lebanon Med. Ctr., Inc., 509 A.2d 1256, 1258 (Pa. 1986). Here, the Borough

first challenges the trial court’s grant of the petition to open on the ground that

Developers could not assert a defense held by SMH. We disagree. Even though

SMH was the party to the Agreement, Developers personally guaranteed the

indebtedness of SMH. The jury found that SMH was not in default; rather, the

Borough was in default. Thus, because there was no liability on the part of SMH,

there was no right to confess judgment against Developers based on their personal

6

Developers also argue that the trial court erred in denying Developers’ motion for summary

judgment when they established that the Borough was contractually obligated to make

disbursements within a reasonable period of time and failed to do so. This issue is moot in light

of the judgment ultimately entered in their favor. They also claim that the trial court erred in

denying Developers’ amended petitions to open confessed judgments “when the warrant of

attorney constitutes an impermissible penalty, in that DCED has not demanded that the [Borough]

pay it back the subject monies and as such the [Borough] has not suffered any actual loss, and

[Developers] present[ed] sufficient evidence to indicate that they did not knowingly, intelligently,

and voluntarily sign the personal guaranties.” (Developers’ Brief at 10.) In addition to being

moot, this argument is difficult to understand since the trial court did, in fact, grant the amended

petitions to open the judgments.

7

guarantees of SMH’s obligations. Under these circumstances, the Borough’s

argument that individuals could not assert a defense for their LLC lacks merit.7

(2) Whether the trial court erred in partially granting Developers’ amended

petitions to open judgment in light of their alleged failure to submit evidence of

their meritorious defense.

Next, the Borough challenges the opening of the confession of

judgments on the ground that Developers’ petitions stated, but did not offer evidence

of, a meritorious defense. We agree that ordinarily a petition to open judgment

should cite evidence in support of its defense(s). However, the Borough waived this

issue by failing to raise it in its opposition to the amended petitions to open confessed

judgments or in its concise statement of errors pursuant to Rule 1925 of the

Pennsylvania Rules of Appellate Procedure. Moreover, we observe that Developers

presented numerous witnesses and documents at trial and ultimately proved a

meritorious defense before the final order striking the confessed judgments and

dismissing the Borough’s complaints with prejudice.

(3) Whether the trial court erred in refusing to allow graphs that summarized

voluminous financial records based on the preparer’s unavailability for cross-

examination.

At trial, the Borough sought to submit graphs prepared by an associate

of the law firm representing the Borough that allegedly depicted the total monthly

liabilities that SMH owed to Dime Bank, the total amount that SMH spent on

vendors and laborers, and the percentage of funds that SMH spent from April 2013

7

Notably, LLCs are composed of their members, thereby bolstering the determination that

Developers could raise arguments on behalf of their LLC. See the Limited Liability Company

Law of 1994, 15 Pa.C.S. §§ 8901-8993 (repealed 2016) and the Pennsylvania Uniform Limited

Liability Company Act of 2016, 15 Pa.C.S. §§ 8811-8898 (applies to LLCs formed after February

21, 2017).

8

to January 2014. (Trial Court’s Sept. 28, 2018, Op. at 12.) The Borough alleges

that the associate extrapolated these summaries from the balance sheet and monthly

statements for SMH’s checking account with Dime Bank. The Borough asserts that

these summaries were necessary to explain cogently to the jury how SMH used the

funds that it received from the bridge loan. The trial court determined that it did not

err in excluding the summaries on the ground that the preparer was unavailable for

cross-examination, despite the fact that the Borough made them available to

Developers before trial. We conclude that the trial court did not err in excluding the

summaries. In making its argument, the Borough cites Rule 1006 of the

Pennsylvania Rules of Evidence, Summaries to Prove Content, which provides:

The proponent may use a summary, chart, or

calculation to prove the content of voluminous writings,

recordings, or photographs that cannot be conveniently

examined in court. The proponent must make the originals

or duplicates available for examination or copying, or

both, by other parties at a reasonable time and place. And

the court may order the proponent to produce them in

court.

Rule 1006 “is aimed at efficiency in the presentation of evidence” and at helping a

jury to comprehend voluminous evidence that cannot be conveniently examined in

court and that may be difficult to digest without the assistance of some sort of

summaries. West’s Pa. Practice, Pa. Evidence, § 1006-1 (2013).

This rule does not stand alone, however. Rule 901(a) and (b)(1) of the

Pennsylvania Rules of Evidence provides:

Rule 901. Authenticating or Identifying Evidence

(a) In General. To satisfy the requirement of

authenticating or identifying an item of evidence, the

proponent must produce evidence sufficient to support a

finding that the item is what the proponent claims it is.

9

....

(b ) Examples. . . . .

(1) Testimony of a Witness with Knowledge.

Testimony that an item is what it is claimed to be.

Applying the applicable evidentiary rules to the summaries at issue: “A

diagram, chart, map, or model may be authenticated under Pa.R.E. 901(b)(1) by a

witness with knowledge who testified that the exhibit accurately represents what it

purports to represent. The authenticating witness need not have prepared the exhibit,

but must have sufficient knowledge to verify it.” West’s Pa. Practice, Pa. Evidence,

§ 901-4 (2013) (footnotes omitted) (emphasis added). This is consistent with

Pennsylvania case law pertaining to demonstrative evidence. E.g., Commonwealth

v. Serge, 896 A.2d 1170, 1177 (Pa. 2006) (citing Rule 901 and stating that the

proponent of demonstrative evidence such as a chart must authenticate it by

testimony from a witness who has knowledge that it is what it purports to be).

Therefore, the trial court had the authority to require the proponent of the summaries

to present a witness (whether or not the preparer) with sufficient personal knowledge

to authenticate the charts and to explain them.

Moreover, having reviewed the charts in question, we note they would

be almost impossible for a jury to understand without contemporary explanation. In

other words, without testimony of what they purport to show (in addition to

testimony that they show what they purport), the charts would have been virtually

meaningless, and it would have been demonstrable error for the trial court to allow

counsel to explain them to the jury in the absence of testimony supporting his

10

statements.8 Accordingly, the trial court did not abuse its discretion in refusing to

admit the charts without authentication.

(4) Whether the trial court erred in permitting alleged hearsay testimony from

Developers concerning why contractors walked off the job.

With respect to this issue, the trial court stated that it did not recall a

specific instance where it overruled a hearsay objection. (Trial Court’s Sept. 28,

2018, Op. at 10.) Developers maintain that the Borough waived this issue by failing

to specify in its brief where in the record any rulings and/or objections were made

in violation of the appellate rules pertaining to “statement of place of raising or

preservation of issues.” [Rule 2117(c) of the Pennsylvania Rules of Appellate

Procedure (statement of the case) and Rule 2119(e) (argument)]. In addition, the

Borough did not seem to develop this issue sufficiently in its brief for meaningful

appellate review. To the extent that the Borough did not waive the issue, it is without

merit.

Developer Morris testified that the contractors walked away when he

could not pay them. This information was within his personal knowledge as the

principal of SMH with responsibility for the “daily activities in the building, hiring

contractors. . . .” (May 18, 2018, Hearing, N.T. at 94; R.R. at 1377a). While

testimony of what contractors told him about why they walked away would

constitute hearsay, the record reflects that the Borough made approximately two

hearsay objections to such statements. (N.T. at 41; R.R. at 1324a [objection as to

what a subcontractor said about not being paid] and N.T. at 115; R.R. at 1398a

8

A trial court has considerable discretion to determine whether to accept demonstrative

evidence and its evidentiary rulings are entitled to great deference. See, e.g., Commonwealth v.

Rickabaugh, 706 A.2d 826, 837 (Pa. Super. 1997).

11

[objection to Smith’s statements that contractors “bad mouthed us around town”

because they weren’t getting paid].)9 Nonetheless, there were numerous other

statements to the same effect to which the Borough made no objection. (See

generally, N.T. at 40-65; R.R. at 1323a-48a.) (See also N.T. at 116; R.R. at 1399a

[testimony of Smith that after the original contractors walked, other “contractors

wouldn’t even walk into the building unless they were tripling their charge or getting

money up front to even start.”; N.T. at 192-203; R.R. at 1240a-51a [testimony of

executive director of Wayne County Economic Development Corporation regarding

an email describing the domino effect of the Borough’s delay in disbursing progress

payments causing Developers’ inability to pay contractors and bringing the project

to a halt].) Accordingly, any error regarding the two particular objections is of no

moment.

(5) Whether the trial court erred in denying the Borough’s motion to enter

judgment notwithstanding the verdict or to grant a new trial when the verdict

was allegedly against the great weight of the evidence.

As this Court has noted, “a new trial based on weight of the evidence

issues will not be granted unless the verdict is so contrary to the evidence as to shock

one’s sense of justice.” Dep’t of Gen. Servs. v. U.S. Mineral Prods. Co., 927 A.2d

717, 723 (Pa. Cmwlth. 2007). In this regard, the Borough is simply re-arguing its

version of the facts, but credibility is for the jury, which has the right to believe some

or none of the evidence presented. Commonwealth v. Larsen, 682 A.2d 783, 788

(Pa. Super. 1996). After three days of considering extensive documentary evidence

9

We note that both of these “objections” were made after the statements were uttered, and

neither a motion to strike nor a cautionary instruction was requested. An objection to the question,

“Why did Duffy [the subcontractor] stop working?” was overruled, but the answer given did not

contain any hearsay statements. (N.T. at 43; R.R. at 1326a).

12

and testimony, the jury believed Developers and found that the Borough was

responsible for the failure of the project. Accordingly, the Borough’s argument that

the verdict was against the great weight of the evidence is without merit.

Developers’ Cross-Appeal

(1) Whether the trial court erred in striking Developers’ counterclaims in a

confession of judgment action.

In considering counterclaims in confession of judgment proceedings, it

is instructive to consider both Rules 2959 and 2960 of the Pennsylvania Rules of

Civil Procedure. Rule 2959(a)(1) and (c) provide:

Rule 2959. Striking Off or Opening Judgment;

Pleadings; Procedure

(a)(1) Relief from a judgment by confession shall be

sought by petition. . . . [A]ll grounds for relief whether to

strike off the judgment or to open it must be asserted in a

single petition.

....

(c) A party waives all defenses and objections

which are not included in the petition.

Rule 2960 provides, in pertinent part:

Rule 2960. Proceedings upon Opening of Judgment.

Pleadings. Jury Trial. Waiver

If a judgment is opened in whole or in part the issues

to be tried shall be defined by the complaint if a complaint

has been filed, and by the petition, answer and order of the

court opening the judgment. There shall be no further

pleadings.

As the Superior Court observed, the provision in Rule 2960 providing that “[t]here

shall be no further pleadings” complements the provision in Rule 2959(c) providing

that “[a] party waives all defenses and objections which he does not include in his

13

petition or answer.” J.M. Korn & Sons, Inc. v. Fleet-Air Corp., 446 A.2d 945, 947

n.2 (Pa. Super. 1982).

On appeal, Developers maintain that the trial court erred in striking both

their August 2016 pro se counterclaims and November 2017 counterclaims filed by

their counsel as this precluded them from raising additional affirmative defenses and

counterclaims in the confession of judgment proceeding. We reject Developers’

assertion that the trial court should have determined that their August 2016 pro se

counterclaims were somehow preserved. Once Developers secured counsel and the

trial court afforded them an opportunity to file amended petitions to open judgment,

they waived the opportunity to raise counterclaims before the judgments were

opened by failing to do so in their amended petitions. Consequently, the trial court

did not err in striking Developers’ November 2017 counterclaims as further

pleadings prohibited by the plain language of Rule 2960.10 Malicia v. Proietta

Catering and Cocktail Lounge, Inc., 411 A.2d 751, 753 (Pa. Super. 1979)

(unambiguous language of Rule 2960 does not call for additional pleadings beyond

those expressly identified).

Conclusion:

Accordingly, we affirm all of the orders at issue.

_____________________________________

BONNIE BRIGANCE LEADBETTER,

Senior Judge

10

See Rule 1017 of the Pennsylvania Rules of Civil Procedure, Pleadings Allowed, for the

proposition that an answer and new matter constitute “pleadings.”

14

IN THE COMMONWEALTH COURT OF PENNSYLVANIA

Borough of Honesdale, :

Appellant :

:

v. : No. 795 C.D. 2018

:

Michael C. Morris and Stephen G. Smith :

:

Borough of Honesdale :

:

v. :

:

Michael C. Morris :

:

Borough of Honesdale :

:

v. : No. 896 C.D. 2018

:

Stephen G. Smith :

:

Appeal of: Michael C. Morris and :

Stephen G. Smith :

ORDER

AND NOW, this 11th day of October, 2019, the orders of the Court of

Common Pleas of Wayne County with respect to the appeal of Appellant, Borough

of Honesdale, and the cross-appeal of Cross-Appellants, Michael C. Morris and

Stephen G. Smith, are hereby AFFIRMED in accordance with the foregoing opinion.

_____________________________________

BONNIE BRIGANCE LEADBETTER,

Senior Judge