OPINION
ALAN E. HIGHERS, P.J., W.S.
This appeal involves a father's child support and alimony arrearages. The trial court found the father in contempt and sentenced him to ten days in jail, with three days suspended. The court also awarded interest on the alimony and child support arrearages. We affirm in part and reverse and vacate in part.
I. FACTS PROCEDURAL HISTORY
William Cottingham ("Father") and Donna Cottingham ("Mother") have one daughter, who was born in 1983. When Father and Mother divorced in 1996, Father was ordered to pay $1,150 per month in child support and $600 per month in rehabilitative alimony for five years. The parties' daughter turned eighteen in 2001. On December 11, 2002, a judgment was entered against Father for $73,117.69 in alimony and child support arrearages. The judgment included a $36,000 alimony arrearage, as the court found that he had "never made a payment," and a child support arrearage of $37,117.69. On October 6, 2004, another judgment was entered against Father after the court determined that he still owed $30,500.58 on his child support arrearage. Father was ordered to pay $300 per month toward the child support arrearage. An agreed order was entered in 2005 whereby Father agreed to increase his child support arrearage payment to $600 per month.
Father consistently made his child support arrearage payments until he lost his job in February 2008. He contacted Child Support Services to request a temporary reduction in his arrearage payment until he could find another job, but he was told that he would have to petition the court for relief. On May 6, 2008, the State of Tennessee, on behalf of Mother, filed a "Motion to Determine Child Support and Alimony Arrearage," seeking an order reducing Father's arrearage to judgment and further requesting that statutory interest be set on the judgment. The State claimed that Father still owed $12,096.88 on his child support arrearage. Thereafter, the State filed a petition to show cause seeking to have Father held in contempt for failing to make payments toward his child support arrearage since February 22, 2008.
At a hearing on July 14, 2008, Father testified that he was laid off from his job as a traffic reporter due to lack of work after his employer lost some of its contracts. He introduced a letter from his former employer corroborating his testimony. Father testified that he had submitted approximately fifty to seventy-five job applications on the Internet and that he was also attending a class "for networking and finding jobs." He named numerous companies to which he had applied unsuccessfully and said he had even applied for positions earning eight and ten dollars an hour. Father testified that his "take-home" amount of unemployment compensation was less than $800 per month.
Mother testified that Father had only paid about $225 toward his child support arrearage since he lost his job in February. She testified that Father worked in television production during the parties' marriage and that she had no personal knowledge about why he could not work.
The trial court entered an order on September 22, 2008, finding that Father was $1,200 delinquent in his arrearage payments, despite "a good history of paying." The court further found that Father "made good faith attempts to reconcile his current inability to pay with the Child Support offices," but nevertheless, the court found Father in contempt and sentenced him to ten days in jail, with three days suspended. The court instructed counsel for the parties to submit written memoranda on the issue of imposing interest on the prior judgments. Regarding the interest calculations, the State argued that interest should be imposed beginning in 1996 when Father was originally ordered to pay alimony and child support. Father, however, argued that the doctrine of res judicata prohibited the court from "going behind" the 2002 and 2004 orders, claiming that those orders conclusively established his total arrearages as of their respective dates of entry.
On October 2, 2008, the trial court entered an order finding that "it would be improper to assess interest prior to the [2002 and 2004] court dates under the theory of res judicata." However, the court awarded ten percent interest on the alimony arrearage judgment of $36,000 since its date of entry on December 11, 2002, and it awarded twelve percent interest on the most recent child support arrearage judgment since its date of entry on October 6, 2004. The total interest due on the alimony judgment was calculated to be $20,893.55. The remaining balance owed on Father's child support judgment was determined to be $10,175.72, and the interest due on that amount was calculated at $8,735.40. Father timely filed a notice of appeal.
II. DISCUSSION A. Contempt
Father's first issue on appeal challenged the trial court's decision to hold him in contempt. However, the State's brief on appeal states that it "will not pursue the contempt finding on appeal" because there was no finding by the trial court that Father's actions were willful, and the State "concedes that the evidence at trial failed to establish [Father's] ability to pay." One of the essential elements of a civil contempt claim based upon alleged disobedience of a court order is that "the person's violation of the order must be `willful.'" Konvalinka v. Chattanooga-Hamilton County Hosp. Auth. , 249 S.W.3d 346, 355 (Tenn. 2008) (citing Tenn. Code Ann. § 29-2-102(3)). In order to find that failure to pay alimony and child support was contemptuous, "the court first must determine that [the obligor] had the ability to pay at the time the support was due and then determine that the failure to pay was wilful." Ahern v. Ahern , 15 S.W.3d 73, 78-79 (Tenn. 2000). The trial court failed to make such findings in this case, and the evidence would not support such findings. Therefore, the trial court's finding of contempt is reversed and the sentence is vacated.
B. Standing
Next, Father raises various arguments regarding whether the State of Tennessee and/or Policy Studies, Inc. d/b/a Child Support Services of Tennessee ("PSI") had standing to petition the court on Mother's behalf. At the hearing before the trial court, Father's attorney argued that "the state by way of the Child Support Office lacked any standing" to represent Mother in her attempt to enforce the alimony obligation because the child was no longer a minor and no longer lived with Mother. He went on to quote a provision of a contract that allegedly exists between the State of Tennessee and PSI, authorizing PSI to enforce "all orders of support," which "shall include, but are not limited to, the enforcement of spousal support when it is contained in the same order with child support . . . and when the child who is due the child support continues to reside with the parent due the spousal support." (emphasis added).
Father previously appealed to this Court after the arrearage judgments were entered in 2002, see State ex rel. Cottingham v. Cottingham , No. M2003-00535-COA-R3-CV, 2004 WL 2387563, at *2 (Tenn. Ct. App. W.S. Oct. 26, 2004) rev'd on other grounds, 193 S.W.3d 531 (Tenn. 2006), and he raised this same argument. He contended that "the attorney under contract with the State of Tennessee to enforce child and spousal support orders does not have the standing, under the contract, . . . to assist clients with alimony issues after the emancipation of the children for whom support was ordered." We noted that the contract upon which Father relied was not in the record before us but went on to reject his argument as follows:
However, it is plain that Mr. Cottingham's argument is without merit. Mr. Cottingham is not a party to the contract in question. Nor is Mr. Cottingham a third-party beneficiary of the contract. He cannot be heard to assert rights based on a contract to which he is neither a party nor a third-party beneficiary. As the appellee correctly points out in its appeal brief:
[Mr. Cottingham] has no say in what attorney represents his ex-wife. Nor does he have any say in the terms of the representation, such as whether she has to pay for such legal services or how much the fee will be. Nor does the Appellant have any say in the scope of the representation. Those are matters between DHS, its contractor and Ms. Cottingham. The Appellant is not even a third party beneficiary of the contract between DHS and its child support contractor. Thus, the Appellant has no legal right to raise the issue at all.
We agree with the appellees' analysis in concluding that Mr. Cottingham has no standing to contest the scope of representation provided to Donna Cottingham by her counsel. Therefore, this assignment of error is without merit.
Id. at *2. We note that our opinion in the first appeal of
Cottingham was designated a memorandum opinion, which "shall not be published, and shall not be cited or relied on for any reason in any
unrelated case." (emphasis added). However, this case is clearly related, and Father cannot raise the same argument now that we rejected in the previous appeal.
Father's initial brief on appeal also questions "[w]hether the State of Tennessee and/or Policy Studies, Inc. had standing to pursue the collection of alimony" under various federal statutes found in Title IV-D of the Social Security Act. Father's reply brief further contended that the State and/or PSI lacked standing to pursue the collection of child support in this case under Title IV-D. When addressing standing before the trial court, Father's counsel did not discuss the federal statutes and only mentioned the alleged contractual limitation. Thus, we deem Father's arguments based on his interpretation of the federal statutes waived because "[i]ssues not raised in the trial court cannot be raised for the first time on appeal." Barnes v. Barnes , 193 S.W.3d 495, 501 (Tenn. 2006). In addition, we will not consider an issue raised for the first time in a reply brief as properly raised on appeal. Castle v. State, Dep't of Corr. , No. E2005-00874-COA-R3-CV, 2005 WL 2372762, at *4 (Tenn. Ct. App. Sept. 27, 2005).
C. Interest
Finally, Father contends that the trial court erred in imposing interest on the child support arrearage and the alimony arrearage. The State's brief on appeal states that it "will not seek to have the interest that was applied to [Father's] child support payments affirmed" because the State "concedes that calculating interest on the arrearages now would be an impermissible retroactive modification of child support and in part is res judicata based on the court's prior orders." Thus, we reverse and vacate the trial court's award of interest on Father's child support arrearage. However, we express no opinion as to the merit, or lack thereof, in the State's reasoning.
The State does ask this Court to affirm the trial court's award of interest on the alimony arrearage, and Father seeks to have the award reversed. "Interest on judgments in Tennessee is statutorily mandated, and `shall be computed at the effective rate of ten percent per annum.'" Tallent v. Cates , 45 S.W.3d 556, 563 (Tenn. Ct. App. 2000) (citing Tenn. Code Ann. § 47-14-121). The failure of a court to expressly provide for such postjudgment interest in the judgment does not abrogate the statute. Id. (citing Inman v. Inman, 840 S.W.2d 927, 932 (Tenn. Ct. App. 1992)). "[W]e have concluded on many occasions that post-judgment interest is mandatory." Hommerding v. Hommerding , No. M2008-00672-COA-R3-CV, 2009 WL 1684681, at *10 (Tenn. Ct. App. W.S. June 15, 2009) (citing State v. Thompson, 197 S.W.3d 685,693 (Tenn. 2006); Vooys v. Turner, 49 S.W.3d 318, 322 (Tenn. Ct. App. 2001)). "Post-judgment interest compensates the party who was entitled to money but deprived of its use by requiring an additional payment by one who benefitted from retaining the money." Lucius v. City of Memphis , 925 S.W.2d 522, 526 (Tenn. 1996).
We note that the State does not argue that the trial court erred in refusing to calculate interest prior to the 2002 judgment.
Father argues that the facts of this case "exactly match" the circumstances considered in State ex rel. Jones v. May , 2008 WL 2557374, at *2 (Tenn. Ct. App. 2008), and that the State is therefore barred from seeking interest on the arrearages. In Jones , an order had been entered in 2005 holding that a father's child support arrearage from May 2004 until December 31, 2004, equaled $7,777. Id. at *1. DHS subsequently terminated the father's wage assignment and informed credit agencies that his child support debt had been discharged. Id. Thereafter, DHS asserted that the father was in arrears on the interest he owed on child support in the amount of nearly $30,000, and the trial court entered an order finding that Father owed interest back to 1992. Id. On appeal, the Eastern Section of this Court reversed, stating:
The doctrine of
res judicata prevents a re-examination of "all matters material to the decision of the case which the parties exercising reasonable diligence might have brought forward at the [earlier] time."
Collins v. Greene County Bank, 916 S.W.2d 941, 946 (Tenn. Ct. App. 1995). The doctrine is implicated when (1) a court of competent jurisdiction rendered the prior judgment, (2) the prior judgment was final and on the merits, (3) the same parties or their privies were involved in both proceedings, and (4) both proceedings involved the same cause of action. See
Lee v. Hall, 790 S.W.2d 293, 294 (Tenn. Ct. App. 1990). In the case before us, no one questions the jurisdiction of the trial court; the order of March 14, 2005, was on the merits, was not appealed from, and, with the passage of time, became final; the parties have been the same throughout this case; and the issue is and always has been that of child support. We hold that the March 2005 order covered the subject matter of the arrearage and is conclusive as to the
total amount of Father's obligation as of the date of the order's entry,
i.e., March 14, 2005. Accordingly, the March 2005 order is
res judicata as to the arrearage issue. The court cannot go behind that order. Father's total obligation as of March 14, 2005, is as stated in the order of that date. It is clear from the record, that this obligation has been paid in full. On
the subject of periodic child support, Father has no further obligation to Mother or the State. Therefore, the "interest" determination by the trial court was erroneous and must be reversed.
Id. at *2. In sum,
Jones held that the previous order was "conclusive as to the total amount of Father's obligation
as of the date of the order's entry." (emphasis ours). In this case, however, the trial court did not "go behind" the most recent order establishing Father's alimony arrearage. It simply calculated the interest owed since the 2002 judgment was entered. Thus,
Jones does not require that we vacate the interest award, and it is hereby affirmed.
III. CONCLUSION
For the aforementioned reasons, we affirm the decision of the chancery court awarding interest on Father's alimony arrearage. We reverse and vacate the trial court's finding of contempt, Father's jail sentence, and the award of interest on Father's child support arrearage. Costs of this appeal are taxed equally to the appellant, William B. Cottingham, and the appellee, State of Tennessee, ex rel Donna J. Cottingham, for which execution may issue if necessary.
that motion and the Kaufman defendants filed their amended answer on August 26, 2009.
The plaintiffs filed a motion for partial summary judgment on June 17, 2009. The motion sought summary judgment against the Kaufman defendants under the second count of the amended complaint, the plaintiffs' request for an accounting and receivership. The Court denied the plaintiffs' motion in an Order dated October 13, 2009. Part of the plaintiffs' accounting request had been rendered moot because the Kaufman defendants had provided the plaintiffs with an accounting for the prior six years. The Court stated that it would consider the rest of the plaintiffs' accounting claim with the defendants' motions for summary judgment. The plaintiffs also moved to file a second amended complaint on September 30, 2009. The Court denied that motion in an Order dated October 21, 2009, finding that amendment would delay the resolution of the case and prejudice the defendants.
During the period of limited discovery, the parties filed several motions to compel discovery and motions for protective orders. Included in these motions was a motion from the plaintiffs, filed on October 13, 2009, requesting the Court to compel the Kaufman defendants to produce discovery. The plaintiffs alleged that the Kaufman defendants had failed to answer interrogatories and failed to produce several requested documents. The Court denied the motion in an Order dated November 12, 2009. The Court stated that it was persuaded that the defendants had produced the discovery called for by the Court's June 11 Order. The Court stated that, if, in responding to the defendants' summary judgment motion, the plaintiffs believed they needed additional discovery to meet the defendants' statement of the facts, they could file an affidavit pursuant to Rule 56(f) of the Federal Rules of Civil Procedure.
The defendants filed their motions for summary judgment on January 21, 2010. The Kaufman defendants moved for summary judgment on all counts. Wells Fargo moved for summary judgment on the third count of the plaintiffs' amended complaint.
On January 26, 2010, the plaintiffs filed an affidavit of Cyrus Bloom pursuant to Rule 56(f) of the Federal Rules of Civil Procedure that stated that, in order to respond to the Kaufman defendants' motion for summary judgment and the accompanying affidavit of Gerald Kaufman (the "Kaufman affidavit"), the plaintiffs needed to take Gerald Kaufman's deposition. Viewing the plaintiffs' Rule 56(f) affidavit as a response to their motion for summary judgment, the Kaufman defendants filed a reply brief in support of their motion on February 2, 2010.
Also on January 26, 2010, the plaintiffs filed a motion for summary judgment against Wells Fargo under the third count of the amended complaint, asking the Court to declare the mortgage between Kaufman and Wells Fargo null and void. Wells Fargo filed an emergency motion to strike the plaintiffs' motion for summary judgment. In an Order dated February 2, 2010, the Court denied the request to strike the plaintiffs' motion and, instead, ordered that Wells Fargo was not to respond to the plaintiffs' motion unless and until the Court ordered it to do so. On February 9, 2010, the plaintiffs filed another motion for partial summary judgment on the third count of the amended complaint, this time against the Kaufman defendants. In an Order dated February 17, 2010, upon an emergency motion for the Kaufman defendants to stay the time to respond to that motion, the Court also ordered that the Kaufman defendants did not need to respond to the plaintiffs' motion unless and until the Court ordered it to do so.
On February 17, 2010, the plaintiffs moved to strike the Kaufman affidavit on the ground that it contained facts that were not based on Mr. Kaufman's personal knowledge. The plaintiffs also requested sanctions for the filing of the affidavit. The Kaufman defendants filed a motion for sanctions pursuant to Rule 11 of the Federal Rules of Civil Procedure against Mr. Bloom, and argued that the plaintiffs' motion was an improper sur-reply to the Kaufman defendants' motion for summary judgment.
In an Order dated April 12, 2010, the Court denied both of the motions. The Court found that sanctions were not warranted. The Court also stated that it would not strike Mr. Kaufman's affidavit but would consider only the facts stated in Mr. Kaufman's affidavit that are based on his own personal knowledge. The Court also recognized that the plaintiffs had not responded to the Kaufman defendants' motion for summary judgment. The Court ordered the plaintiffs to do so within two weeks of the Court's Order. The Kaufman defendants were granted one week to file a brief in reply.
On June 9, 2010, the plaintiffs filed a motion to dismiss the pleadings and defenses of the Kaufman defendants on the ground that Mr. Kaufman committed perjury in statements made in his affidavit. The plaintiffs also requested that the Court order sanctions against Mr. Kaufman's counsel for their complicity in the alleged perjury. In a letter dated June 14, 2010, the Kaufman defendants requested that the Court hold the plaintiffs' motion in abeyance until the Court decided the defendants' motions for summary judgment. The Court granted the Kaufman defendants' request in an Order of that date.
The Court held oral argument on the defendants' motions for summary judgment on June 24, 2010.
III. Analysis
The Court will first discuss the plaintiffs' request to continue the Kaufman defendants' motion for summary judgment pursuant to Rule 56(f) in order to take Mr. Kaufman's deposition. The Court then presents its analysis of the defendants' arguments for summary judgment on the plaintiffs' claims in the order that the counts are alleged in the amended complaint.
A. The Plaintiffs' Rule 56(f) Affidavit
In their Rule 56(f) affidavit, the plaintiffs argue that they needed to depose defendant George Kaufman before responding to the Kaufman defendants' motion for summary judgment. Rule 56(f)(2) provides that, "[i]f a party opposing the motion shows by affidavit that, for specified reasons, it cannot present facts essential to justify its opposition, the court may order a continuance to enable affidavits to be obtained, depositions to be taken, or other discovery to be undertaken."
The Court denies the plaintiffs' request to continue the summary judgment motion. First, the defendants aver that they offered to present Mr. Kaufman for deposition on numerous occasions but the plaintiffs refused on the ground that the defendants had not responded to their requests for written discovery. Second, the deposition is not necessary to decide the Kaufman defendants' motion because the motion concerns what the plaintiffs and their counsel knew or should have known from the parties' previous correspondence, not what Mr. Kaufman knew at the time.
B. Fraud and Breach of Fiduciary Duty
The plaintiffs allege that the Kaufman defendants committed fraud and breached their fiduciary duty to the tenants-in-common. Their allegations fall into the following general categories: (1) that Mr. Kaufman and the Kaufman Corporation wrongfully assumed the role of Nominee, (2) that Mr. Kaufman paid himself management fees that were not permitted under the Agreement, (3) that the Kaufman defendants mortgaged the property without authority and for undisclosed purposes, (4) that the Kaufman defendants maintained a financial interest in the tenant in conflict with the interests of the tenants-in-common, and (5) the Kaufman defendants failed to pay the tenants-in-common in amounts equal to the net rents collected.
The plaintiffs' specific allegations are that the Kaufman defendants committed fraud and breached their fiduciary duty by (1) collecting the rents and making distributions to the tenants-in-common in amounts less than the net rents, (2) paying Mr. Kaufman management fees, (3) placing mortgages on the property for unknown purposes, (4) making loans to the property's tenant and others, (5) paying taxes and other charges required by the lease to be paid by the tenant, (6) making other expenditures for unknown purposes, (7) holding money in "escrow" for no known reason, and (8) maintaining a financial interest in the tenant in conflict with the interests of the plaintiffs and the other tenants-in-common and in violation of the fiduciary obligations assumed by him or imposed upon him by law.
All of these claims are barred by Pennsylvania's two-year statute of limitations for fraud, 42 Pa. C.S. 5524(7). This statute of limitations began to run, at the latest, in March of 2001, upon the completion of the parties' 2000-2001 correspondence. The limitations period, therefore, expired in March of 2003. The plaintiffs do not state any separate causes of action for fraud or breach of a fiduciary duty that occur within the limitations period.
The statute provides, in relevant part, that any "action or proceeding sounding in trespass, including deceit or fraud, except an action or proceeding subject to another limitation specified in this subchapter" is subject to a two-year period of limitations. 42 Pa. C.S. 5524(7).
In the case of an express trust, such as this one, the general principle under Pennsylvania law is that "[t]he statute of limitations begins to run against the trust beneficiary with respect to a suit against the express trustee, if at all, when he knows the trust has been repudiated or reasonably should have known it." United States v. Rose, 346 F.2d 985, 989-90 (3d Cir. 1965); Pa. Co. for Ins. Lives and Granting Annuities v. Ninth Bank Trust Co., 158 A. 251, 154 (Pa. 1932) ("Pennsyvania Co."). This generally means that the statute of limitations begins to run when the trustee openly and unequivocally violates his duties. Weis-Buy Services, Inc. v. Paglia, 411 F.3d 415, 422 (3d Cir. 2005) (citing Philippi v. Philippe, 115 U.S. 151 (1885)).
Mr. Kaufman is either the trustee of the property by nature of his status as Nominee, or, as the plaintiffs' assert, trustee ex maleficio. Either way, he owes the same fiduciary obligations to the tenants. Pennsylvania Co., 158 A. at 253.
The plaintiffs argue that, because Kaufman has never openly repudiated the trust, they never knew of a repudiation and the statute has never begun to run. In support of that argument, the plaintiffs cite to the Supreme Court of Pennsylvania's statement in Pennsylvania Co. that the statute of limitations "does not begin to run in favor of an express trustee who has repudiated his trust until knowledge of the repudiation has been brought home to the cestui que trust." Pa. Co. for Ins. on Lives and Granting Annuities v. Ninth Bank Trust Co., 158 A. 251, 154 (Pa. 1932).
That statement, however, is best read in context. The full paragraph reads
The statute of limitations applies to all cases at law and in the orphans' court, and to all cases in equity except those technical and continuing trusts over which equity has exclusive jurisdiction. . . .
But the statute, however, does not begin to run in favor of a participant in a breach of trust until the discovery of the fraud; that is, until the cestui knows, or under the circumstances ought to know, of the facts that give rise to his cause of action. It does not begin to run in favor of an express trustee who has repudiated his trust until
knowledge of the repudiation has been brought home to the cestui que trust. And in actions based upon fraud, where the fraud has been actively concealed, or where a relationship of trust and confidence exists, it does not begin to run until the discovery of the fraud.
Id. (emphasis added). In the case of fraud, therefore, the statute begins to run when the fraud has been discovered, or when the "cestui knows, or under the circumstances ought to know, of the facts that give rise to his cause of action." This rule has been codified at 42 Pa. C.S. § 5532(c), which provides that
[i]n the case of a civil action or proceeding against the trustee of an express or implied trust, the time within which such an action or proceeding by or on behalf of a beneficiary on account of fraud must be commenced shall be computed from the discovery of the fraud, or when, by reasonable diligence, the person defrauded might have discovered the fraud.
In this case, therefore, the question is whether the plaintiffs discovered or, by reasonable diligence, might have discovered their claims of fraud and breach of fiduciary duty through the 2000-2001 correspondence.
Reasonable diligence is an objective standard. Cochran v. GAF Corporation, 666 A.2d 245, 217 (Pa. 1995). Under that standard, a plaintiff's actions are evaluated to determine whether he "exhibited those qualities of attention, knowledge, intelligence and judgment which society requires of its members for the protection of their own interests and the interests of
others." Kach v. Hose, 589 F.3d 626, 642 (3d Cir. 2009). The burden is on the plaintiff to show reasonable diligence. Id. Although reasonable diligence is often a factual issue for a jury to decide, "when reasonable minds would not differ that the plaintiff has failed to exercise due diligence in ascertaining the existence of his injury, the court can decide the matter rather than submit it to the jury." Id.
Under these circumstances, no reasonable finder of fact could conclude that the plaintiffs exercised reasonable diligence in pursuing their fraud and breach of fiduciary duty claims. The plaintiffs, in their own correspondence, raised the very questions that serve as the basis for each of the fraud allegations made in the amended complaint. Once the plaintiffs were aware of such concerns, they had a duty to exercise reasonable diligence in pursuing any causes of action arising out of the alleged fraudulent acts.
The plaintiffs have questioned Mr. Kaufman's status as a legitimate nominee since at least February 15, 2001. In his letter of that date, Mr. Bloom asked by what authority and by what document, signed by the investors, Mr. Kaufman assumed the role of nominee, and with what rights and powers. In his letter dated March 22, 2001, Mr. Bloom concluded that Mr. Kaufman is "an interloper" with no authority whatsoever to act, or to do anything, on behalf of the tenants-in common, or to take any management fees in any amount.
Nor was this the first time the plaintiffs had raised the question of Mr. Kaufman's management fees. The plaintiffs' questioning of Mr. Kaufman's receipt of management fees date back to, at least, plaintiff Ronald Appel's letter of October 22, 1997. In the January 18, 2001, correspondence, Mr. Bloom demanded, "on behalf of my wife, Nanette Bloom, and Ronald Appel and Lee Appel," that Mr. Kaufman repay all management fees and distribute them to the tenants-in-common, cease payment of the management fees, and fully account for all of his activities.
Mr. Kaufman states in his affidavit that he has not received management fees for approximately 6.5 years. He received his last management fee on June 1, 2003. Kaufman Aff. at ¶ 26 n. 19.
The plaintiffs have also questioned Mr. Kaufman's right to mortgage the property since, at least, July 27, 2000. In the correspondence of that date, Mr. Bloom asked several pointed questions concerning the mortgage loan that was eventually revealed to be the Aries mortgage. In his letter dated August 16, 2000, Mr. Kaufman responded with answers to those questions. In his letter dated December 7, 2000, however, Mr. Bloom asked additional questions concerning the mortgage.
The plaintiffs questioned whether Mr. Kaufman has maintained a financial interest in the tenant in conflict with the interests of the plaintiffs and the other tenants-in-common since, at least, Mr. Bloom's letter of December 7, 2000. In his letter of March 22, 2001, Mr. Bloom stated that, because Mr. Kaufman failed to answer his question, he must conclude that Mr. Kaufman or one or more members of his family has a direct or indirect ownership or other financial interest in the tenant.
Finally, the plaintiffs have threatened litigation since at least February 15, 2001. In his letter of that date, Mr. Bloom stated that the letter from Mr. Feinstein of February 7, 2001, was an "invitation to litigation, which, if it becomes necessary, would likely be in the form of a class action on behalf of all of the investors/tenants-in-common." In his letter of March 15, 2001, Mr. Bloom stated that "we are in the process of consulting with counsel in Philadelphia with a view to instituting appropriate legal action."
In summary, by the end of the 2000-2001 correspondence, plaintiffs' counsel had concluded: (1) that Mr. Kaufman was an interloper with no right to act as Nominee or mortgage the property, (2) that Mr. Kaufman or a member of his family had a direct or indirect ownership or other financial interest in the property, (3) that Mr. Kaufman had no right to management fees and demanded that Mr. Kaufman repay all management fees and cease the payment of those fees. The plaintiffs' counsel had also demanded that Mr. Kaufman provide a full accounting for all of his actions in managing the property and had threatened litigation on two occassions. Viewing the evidence in the light most favorable to the plaintiffs, the statute began running on March 22, 2001, when the plaintiffs had made all of these allegations, demanded an accounting and twice threatened litigation. Their time to bring an action arising out of those claims expired on March 22, 2003. They filed this action on November 27, 2007.
When asked by the Court at oral argument why suit was not brought earlier than 2007, counsel for the plaintiffs stated that "effective advocacy on the part of Mr. Kaufman's advocates . . . discouraged [the plaintiffs] and convinced them that maybe [the defendants are] right." Transcript of June 24, 2010, Oral Argument at 26:14-24. The effective advocacy of opposing counsel is no excuse for a failure to exercise reasonable diligence.
The plaintiffs, however, argue that they were unaware of their claims at the time of the correspondence because they had not read the Agreement at that time. Transcript of June 24, 2010, Oral Argument at 23:11-16. Counsel for the plaintiffs argued that, in order to appreciate the wrongfulness of Mr. Kaufman's occupation of the role of Nominee, Mr. Bloom needed to read the Agreement. Id. at 23:18-21.
At his deposition, Mr. Bloom testified that he did not read the Agreement until sometime in early 2002. Bloom Dep. at 48:14-49:3. This would toll the statute of limitations for less than one year. The limitations period would have expired in early 2004, and the plaintiffs' fraud claims would still be untimely. Moreover, even if this fact was sufficient to indefinitely toll the plaintiffs' limitations period, the details of the parties' correspondence shows that, through reasonable diligence, the plaintiffs should have known of the Agreement at the time of the correspondence. In the letter dated March 13, 2001, Mr. Feinstein answered Mr. Bloom's question as to the document from which Mr. Kaufman derives his authority as Nominee by explaining that Mr. Kaufman's authority derived from the "Tenancy in Common Agreement." If the plaintiffs did not know the details of that Agreement until 2002, their lack of knowledge derives from a failure to exercise reasonable diligence after receipt of the March 13 letter.
C. Accounting and Receivership
The plaintiffs' claims against the Kaufman defendants for an accounting and receivership under count II are also time-barred, either by Pennsylvania's six-year statute of limitations for actions at law for an accounting or by the equitable doctrine of laches.
The Kaufman defendants also argue that these claims are barred by the doctrines of ratification, estoppel and waiver. Because the Court finds that the plaintiffs' claims in count II are barred by either the statute of limitations or laches, the Court does not reach these arguments.
Under Pennsylvania law, an action at law for an accounting has a limitations period of six years. 42 Pa. C.S. § 5527. Although the plaintiffs state that their request for an accounting is a claim under equity and that the statute of limitations does not apply, "it is well established that equity will frequently adopt and apply the statute of limitations which controls analogous proceedings at law." Ebbert v. Plymouth Oil Co., 34 A.2d 493, 495 (Pa. 1943). This is especially true in situations, such as an accounting, where the cause of action is not exclusively cognizable in equity. In such cases, "[e]quity takes jurisdiction only when the accounts are mutual or complicated, or when discovery is needed and material to the relief." Id.
On August 14, 2009, the defendants provided the plaintiffs with an accounting for the six years prior to the commencement of the current litigation. Ex. DD; see also Kaufman Aff. at ¶ 27. The plaintiffs, however, demand an accounting for the entire period in which Mr. Kaufman acted as Nominee. To the extent that this request falls outside of the period for which the Kaufman defendants have already provided an accounting, the plaintiffs' request is not timely. The plaintiffs first demanded an accounting in their letter of January 18, 2001. The limitations period on their accounting claim, therefore, ran on January 18, 2007. This action was filed on November 27, 2007, over 10 months after the limitations period had run.
Even if the plaintiffs are correct and the statute of limitations does not apply to an action in equity for an accounting, the plaintiffs' request for an accounting is barred by the doctrine of laches. Because statutes of limitations are not applicable in actions in equity under Pennsylvania law, a defendant must raise the defense of laches to bar an equitable claim as untimely. In re Mushroom Transportation Co., 382 F.3d 325, 337 (3d Cir. 2004). Unlike statutes of limitations, the doctrine of laches does not depend upon the passage of time alone. United Nat'l Ins. Co. v. J.H. France Refractories Co., 668 A.2d 120, 124-25 (Pa. 1995). Instead, a court must find (1) a delay arising from the plaintiff's failure to exercise due diligence, and (2) prejudice to the defendant resulting from the delay. Stilp v. Hafer, 718 A.2d 290, 293 (Pa. 1998).
In this case, the first prong of the laches inquiry, delay arising from the failure to exercise due diligence, is satisfied because the plaintiffs filed this action after the applicable statute of limitations had run. An applicable statute of limitations can be used as guidance in determining whether an action was timely under the first prong of the laches inquiry.United Nat'l Ins. Co., 668 A.2d at 125. As already explained, this action was brought outside the limitations period. The plaintiffs provide no explanation for the delay, and the Court must conclude that such delay arose from the plaintiffs' failure to exercise due diligence and bring their claims in a timely manner.
To establish the second prong of laches, prejudice, a party must show that some change in the condition or relations of the parties occurred during the period in which the plaintiff unreasonably failed to act. Leedom v. Thomas, 413 A.2d 649 (Pa. 1977). Prejudice can arise through the death of the principal participants in the transactions complained of, the death of witnesses or witnesses to the transactions, or by reason of the original transactions having become so obscured by time as to render the ascertainment of the exact facts impossible. In re Wallace's Estate, 149 A. 473, 475 (Pa. 1930); Kern v. Kern, 892 A.2d 1, 10 (Pa. Super. 2006). A change of circumstances barring relief has also been held to occur when evidence has been lost, or is more difficult to procure. McGrann v. Allen, 140 A. 552, 579 (Pa. 1928).
In this case, witnesses have died and evidence has been lost due to the passage of time. Lee Appel, plaintiff Rita Appel's husband and predecessor in interest, who was represented by Mr. Bloom during the 2000-2001 correspondence, has died. Leonard Appel, plaintiff Nanette Appel-Bloom's brother and predecessor in interest and the party who first consulted Mr. Bloom about issues concerning the property, has also died. Other witnesses' memories have faded with time and age. Plaintiff Ronald Appel, who first began questioning Mr. Kaufman's management of the property in 1997, has developed memory problems. See Appel Dep. at 84:24-85:11. Mr. Bloom's deposition reflects that his memory of relevant facts also appears to have faded with time. See Bloom Dep. at 15:11-20; 30:2-22; 31:12-32:6.
The plaintiffs, however, argue that, according to a Pennsylvania Superior Court case, Kehoe v. Gilroy, 467 A.2d 1 (Pa. Super. 1983), the Court may not find prejudice or delay in this action. Kehoe concerned a suit brought by the beneficiaries of a trust against the estate of a deceased trustee for failure to pay the trust income due to the beneficiaries after the death of the trustee. The trial court granted the defendants' preliminary objection that the doctrine of laches applied to the beneficiaries' claims. On appeal, the Superior Court reversed, finding that (1) there was no clear showing that the defendants repudiated the trust or when the plaintiffs would have learned of such repudiation, and (2) there was no showing of prejudice because the defendants had not shown a change in the condition or relations of the parties during the period in which the plaintiffs failed to act.
Kehoe is inapplicable here. The Superior Court's opinion inKehoe focused on the insufficiency of the record at such an early stage of the litigation, and the failure of the defendants to establish the factual details of both delay and prejudice. In this case, however, there is an adequate factual record of both the circumstances of delay and the prejudice that resulted from that delay.
D. Declaration that Deeds and Mortgage Are Void
The plaintiffs seek a declaration invalidating: (1) the 1983 Quitclaim deed, (2) the 1999 deed from Mr. Kaufman to the Kaufman Corporation, (3) the Aries mortgage, and (4) the assignment of the Aries mortgage to Wells Fargo. The plaintiffs' declaratory claims, however, are barred by the two-year statute of limitations for actions in fraud.
In the Court's Memorandum and Order of March 29, 2009, deciding the defendants' motion to dismiss, the Court stated that, according to the United States Court of Appeals for the Third Circuit's opinion in Algrant v. Evergreen Valley Nurseries Ltd. Partnership, a two-year statute of limitations for fraud likely applied to the plaintiffs' declaratory claims. 126 F.3d 178, 184-85 (3d Cir. 1997) (holding that, because declaratory relief based on common law fraud was barred to the same extent as legal relief for such fraud, 42 Pa. C.S. § 5524(7) applied to a declaratory claim brought by holders of securities). The Court of Appeals in Algrant held that, "when plaintiffs' claims are barred by a statute of limitations applicable to a concurrent legal remedy, then a court will withhold declaratory judgment relief in an independent suit essentially predicated upon the same cause of action." Id. The Court, however, did not definitively decide the issue, because the plaintiffs' knowledge of Wells Fargo's role in the allegedly fraudulent scheme was not supported by evidence.
The Court now decides that Algrant applies to the plaintiffs' declaratory claims and the plaintiffs' declaratory claims are subject to the two-year statute of limitations for fraud under 42 Pa. C.S. § 5524(7). The plaintiffs' claims in this case are for a declaratory judgment that, based upon the alleged fraud of Mr. Kaufman, the Aries mortgage is void. As the Third Circuit held inAlgrant, the two-year statute of limitations for fraud applies to the plaintiffs' declaratory claims.
The plaintiffs, however, cite to Kean v. Forman, 752 A.2d 906 (Pa. Super. 2000), to argue for a general rule that, if a mortgage is void, it will always be void, despite the passage of time. The Superior Court's decision in Kean, however, was not so broad. In Kean, the plaintiff, the owner of the subject property, brought an action to quiet title because the defendant, a non-property owner, held a mortgage the clouded the plaintiff's title on the property. The Superior Court found actions to quiet title "cannot be subject to a statute of limitations, since the possessor's interest in the property is clouded by the questioned mortgage each day that it remains." Id. at 908. Kean, therefore, was not an action for declaratory relief, but was specifically a quiet title action. The opinion is silent as to the applicability of statutes of limitations to declaratory actions.
The plaintiffs also argue that, even if the statute of limitations applies, they were unaware of their causes of action because they were unaware of the Quitclaim deed, the deed transferring title to the Kaufman Corporation, and the Aries mortgage until they received copies thereof from their local counsel on October 27, 2008. Before that time, the plaintiffs argue, they were not aware of the existence of such documents or that Wells Fargo was a potential defendant.
The plaintiffs, however, raised questions concerning both Mr. Kaufman's status as Nominee and the 1999 mortgage in the 2000-2001 correspondence. Any lack of knowledge of these specific documents stems from the plaintiffs' failure to exercise reasonable diligence concerning Mr. Kaufman's management of the property, such as the execution of a title search. The plaintiffs do not dispute that the documents in question have been available in the public record since, at the latest, June of 1999. Nor do they dispute that both Ronald Appel and Mr. Bloom were experienced lawyers who knew that such documents were available by conducting a title search on the property. The plaintiffs and Mr. Bloom had a responsibility to exercise reasonable diligence to uncover any claims they may have had resulting from Mr. Kaufman's alleged fraudulent acts, including the documents that seek to invalidate. They cannot use their failure to diligently research the details of their claims as a reason to toll the applicable limitations period.
The plaintiffs further argue that, because their claims allege no wrongdoing by Wells Fargo and are based purely on the alleged fraudulent acts of the Kaufman defendants, their claims against Wells Fargo have no limitations period. The only reason to declare the Aries mortgage void, however, would be that the mortgage was fraudulently created by Mr. Kaufman. That claim is time-barred. There is no claim against Wells Fargo that is independent of the plaintiffs' fraud claims against the Kaufman defendants.
E. Partition
The Court grants summary judgment for the Kaufman defendants on the plaintiffs' partition claims.
The Court has already held that the restraint on partition in the Agreement is for a valid and reasonable purpose. Paragraph 3 of the Agreement provides that "[t]he parties hereto . . . expressly covenant and agree that none of them shall at any time bring or prosecute any action, suit or proceeding for the partition of said real property or for a judicial sale thereof without the prior written consent of all of the parties to this agreement." Ex. C.
The plaintiffs argue, as they did in response to the Kaufman defendants' motion to dismiss, that if the agreement creates an indefinite postponement of the right to partition, it constitutes an unlawful restraint on alienation. Hyatt v. Hyatt, 417 A.2d 726 (Pa. Super. Ct. 1980). The Court addressed this argument in its Memorandum and Order dated March 12, 2009, and stated that, under Pennsylvania law, partition rights may be restricted until the purpose for which the property was acquired had been fulfilled.Marchand v. Marsh, 280 Pa. 292 (1924); Appeal of Latshaw, 15 A. 676 (1888); Fuhrmann v. Doll, 451 A.2d 520 (Pa. Super. Ct. 1982). In this case, the 99 year lease was the clear purpose of the parties' agreement. The parties to the agreement, therefore, created a valid and reasonable restraint on the right of partition until the 99 year lease had been fulfilled.
The Court, however, did not dismiss the plaintiffs' partition claims because the plaintiffs "have alleged wrongdoing by a party to the Agreement and have previously expressed suspicions that the original Nominees may have had some improper interest in the finances of the property's tenant at the time of the original contract." Appel v. Kaufman, No. 08-392, 2009 WL 666793, *4 (E.D.Pa. Mar. 12, 2009). The Court stated that it would consider the plaintiffs' partition claims "[i]f the plaintiffs are able to successfully pursue their claims for breach of fiduciary duty and fraud." Id. The plaintiffs, however, are unable to do so. Those claims are barred by the two-year statute of limitations for fraud.
The plaintiffs also argue that the Kaufman defendants have no standing to defend against their partition claims. The Court finds no merit to that argument.
The plaintiffs also argue that, because the partition claim is an individual claim, and not a class action, and because all of the owners must actually be joined in the action and, if any of the tenants were to opt out of the partition claim, the Court would lose jurisdiction over the partition claims, the Court is without jurisdiction to make any order respecting the partition claims. The fact that all of the tenants must agree to partition under the agreement, however, has nothing to do with the Court's jurisdiction. It simply means that, under the agreement, unless all of the tenants agree to partition, the property may not be partitioned. The Court certainly has the jurisdiction both to (1) determine what the agreement says and (2) determine if the plaintiffs' partition claims are valid under the agreement. The citations provided by the plaintiffs in support of their argument are inapplicable. Those citations support the unrelated proposition that, although an action for partition may be brought by any one or more co-tenants, all other co-tenants must be joined as defendants. Lohmiller v. Weidenbaugh, 649 A.2d 578, 580 (Pa. 1983); Pa. R. Civ. P. § 1553. The citations say nothing about the Court's jurisdiction over the plaintiffs' partition claims.
An appropriate order follows separately.
ORDER
AND NOW, this 28th day of July, 2010, upon consideration of the Motion of Gerald S. Kaufman and Gerald S. Kaufman Corp. Seeking Summary Judgment Dismissing Plaintiffs' Claims (Docket No. 163); Wells Fargo Bank, N.A. f/k/a Norwest Bank of Minnesota's Motion for Summary Judgment on Count III of the Plaintiff's Amended Complaint (Docket No. 162); the respective briefs in opposition and in reply thereto; the Affidavit of Cyrus Bloom on Behalf of Plaintiffs Pursuant to Fed.R.Civ.P. 56(f); the defendants reply thereto; and for the stated in a memorandum of law bearing today's date; IT IS HEREBY ORDERED that the defendants' motions for summary judgment are GRANTED as follows:
1. Judgment is granted for the defendants Gerald S. Kaufman, Carol F. Kaufman and the Gerald S. Kaufman Corporation (the "Kaufman defendants") and against the plaintiff on all counts of the plaintiffs' amended complaint; and
2. Judgment is granted for the defendant Wells Fargo Bank, N.A. f/k/a Norwest Bank of Minnesota and against the plaintiffs on count III of the plaintiffs' amended complaint.
It is FURTHER ORDERED that the plaintiffs' request to continue defendants Gerald Kaufman and the Gerald S. Kaufman Corporation's motion for summary judgment is DENIED.
It is FURTHER ORDERED that the Kaufman defendants are to inform the Court as to how they wish to proceed on their outstanding counterclaim on or before August 13, 2010.