Publications

Pennsylvania Law Weekly
Monday, February 15, 2010
Copyright 2010, ALM Properties, Inc.

Ford v. Lloyd Industries Inc.
$4.3 Million Verdict

Date of Verdict: July 31, 2009.
Court and Case No.: C.P. Montgomery No. 05-11241.
Judge: Joseph A. Smyth.
Type of Action: Shareholders suit.
Injuries: Illegal taking of stock.
Plaintiff’s Attorney: Alan L. Frank, Alan L. Frank Law Associates, Elkins Park, Pa.
Plaintiff’s Expert: William E. Harris, economics, Philadelphia.
Defense Counsel: Stephen M. Howard, Landsale, Pa.
Defense Experts: David Goldner and Mark Reynolds, economics, Baltimore, Md.

A man who was run out of his business after a dispute with his former business partner has been awarded $4.3 million by a Montgomery County Common Pleas judge for having his stock taken from him illegally.

The judge in the case, Joseph A. Smyth, reduced the award to $4 million on Dec. 7, 2009, following post-trial arguments on the award.

Smyth did not provide a reasoning for the change in his opinion and order. Plaintiff’s attorney, Alan L. Frank, said he believed the judge may have been correcting a mathematical error.

The defendants’ trial attorney, Stephen M. Howard, could not be reached for comment. Their appellate attorney, Joseph M. Armstrong of Eizen Fineburg & McCarthy in Philadelphia, declined comment. The case is currently on appeal to the Superior Court.

According to Smyth’s opinion and order related to the award reduction, plaintiff Michael D. Ford and defendant William Lloyd co-owned a company that manufactures and distributes fire dampers. The company is named Lloyd Industries.

The two men began working together in 1988 when they formed Lloyd and Ford Inc., a local tool and die maker, according to Ford’s memorandum of law.

In 1994, however, the two decided to enter the fire damper manufacturing business and chose to operate that business out of a dormant company previously formed by Lloyd and his brother, Lloyd Industries. According to Ford’s memorandum of law, the two men agreed each would own 50 percent of the business, but Lloyd never issued Ford a certificate showing his share of ownership.

Lloyd, though, began filing tax forms that showed he owned 75 percent of the business and Ford only owned 25 percent of the business, according to Ford’s memorandum of law.

In February 2005, Lloyd removed Ford from the company because he continued to claim his ownership interest in Lloyd Industries, according to Ford’s memorandum of law. When that happened, Lloyd stopped listing Ford as a 25 percent shareholder on the company’s tax returns. That fact was important, Frank said, because Lloyd

Industries is a “S” type corporation, meaning its profits are distributed to owners pro rata based on ownership. The owners then pay taxes on those profits on their individual tax returns.

Ford alleged, however, that Lloyd Industries reclaimed his share of stocks without paying him for the shares.

In his memorandum of law, Ford argued that Lloyd diverted company funds to his personal bank account to hide profits and “deny, conceal and convert … Ford’s ownership interest.”

“Lloyd, in his individual capacity, as the alter ego of Lloyd Industries, has intentionally, maliciously and oppressively converted corporate assets improperly to his personal use and benefit and has intentionally, maliciously and oppressively converted … Ford’s ownership interest in … Lloyd Industries.”

A bench trial began in the case July 21, according to Smyth’s opinion, and the parties eventually agreed to stipulate regarding liability. Specifically, the parties stipulated that Ford was a 25 percent shareholder in the company between Jan. 1, 1994, and July 22. On July 22, Ford’s interest was redeemed but he was not paid for it, according to the stipulation.

The two sides also stipulated that Smyth would determine the value of the stocks along with any damages, according to Smyth’s opinion and order.

The defendants argued Ford was entitled to no money, because he was never a shareholder in the company. Frank said the defendants pointed to the fact Ford was never issued a certificate.

Ford countered the number was much higher.

Ford presented several tax returns that indicated he owned 25 percent of the business along with applications for life insurance and documents averring Lloyd and Ford did not need to be covered by workers’ compensation insurance because they were both co-owners in the company, Frank said.

“We had a lot of that kind of evidence,” Frank said. “I thought the evidence was very compelling.”

Frank also said his client employed an economics expert who testified profits Lloyd took from the business should be separately calculated when ruling on damages and that the company’s capitalization rate was relatively low.

Ford also argued that Pennsylvania case law requires that no minority discount should apply when a company’s majority is found to be taking advantage of the minority.

That issue was debated over between Ford’s expert and two defense experts who were “pushing for a very substantial discount,” Frank said.

The defense experts also testified that the company’s capitalization rate was much higher than Ford’s expert had said and that the profits Lloyd had pulled from the company couldn’t be counted separately because those figures made up the value of the company.

Frank noted that most of those issues were “furiously” contested.

Though Smyth did not provide an explanation as to how he originally reached his $4.3 million verdict, Frank said he believed the judge took the middle road on the minority discount issue and sided with the defense on the issue of calculating the profits Lloyd had taken from the business.

– Leo Strupczewski, of the Law Weekly •