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Martin v. Pascarella & Gill P.C.

Superior Court of Rhode Island

March 24, 2017

ISABEL BARBEITOS MARTIN, Individually and in her capacity as Executrix of The ESTATE OF MICHAEL J. MARTIN Plaintiff,
v.
PASCARELLA & GILL P.C.; STEPHEN E. PASCARELLA, SR., CPA; STEPHEN E. PASCARELLA, II, CPA; and LISA GILL, CPA, Defendants.

         Providence County Superior Court

          For Plaintiff: William M. Russo, Esq.

          For Defendant: Kevin J. Holley, Esq., Richard A. Van Tienhoven, Esq.

          DECISION

          SILVERSTEIN, J.

         Before the Court is the Defendants'-Pascarella & Gill P.C., Stephen E. Pascarella, Sr., CPA, Stephen E. Pascarella, II, CPA, and Lisa Gill, CPA (collectively, Defendants)-Rule 12(b)(6)[1] Motion to Dismiss Plaintiff Isabel Barbeitos Martin's (Plaintiff) Complaint. Jurisdiction is pursuant to G.L. 1956 § 8-2-14.

         I Facts and Travel

         In May of 2012, Michael Martin (Michael)[2] passed away; he was survived by his wife, Isabel Barbeitos Martin-the Plaintiff in this matter-and two sons. Compl. at ¶ 15. Prior to his death, Michael was a shareholder in two closely-held corporations: Lanmar Corporation (Lanmar) and Landry & Martin Oil Co., Inc. (Landry & Martin) (collectively, the Martin Corporations). Id. at ¶¶ 7, 13. Michael was a shareholder in the Martin Corporations along with two members of his immediate family: his father, Bernard Martin (Ben), and his brother, Christopher Martin (Chris). Id. at ¶ 7. Lanmar, a commercial real estate company, issued ninety-eight shares owned in the following manner: Ben, 50 shares; Michael, 24.5 shares; and Chris, 23.5 shares. Id. at ¶¶ 8, 11. Landry & Martin, a full service oil company, issued 100 shares divvied up in the following manner: Ben, 43.5 shares; Michael, 28.5 shares; and Chris, 28 shares. Id. at ¶¶ 10, 12. Together, as of December 31, 2011, the Martin Corporations were valued in excess of twenty-six million dollars. Id. at ¶¶ 9-10.[3]

         In August of 2011, Michael was diagnosed with terminal cancer. Id. at ¶ 14. Around that time, in order to arrange his financial affairs, Michael reached out to Pascarella & Gill, P.C. (Pascarella & Gill)-an accounting firm with which the Martin Corporations had a forty-yearlong relationship. Id. at ¶¶ 16, 34. Pascarella & Gill is a professional corporation operated by three certified public accountants: Stephen E. Pascarella, Sr. (Stephen Sr.); Stephen E. Pascarella, II (Stephen II); and Lisa Gill (Lisa). Id. at ¶¶ 2-5. Michael turned to Pascarella & Gill for the purpose of determining the value of his respective shares in the Martin Corporations based on two Buy-Sell Agreements that Michael, Ben, and Chris, as shareholders, entered into with the Martin Corporations in early 2000. Id. at ¶¶ 19-20, 35.

         In the early months of 2000, Ben and Michael discussed with Stephen Sr. their interest in entering into a buy-sell agreement that would require the Martin Corporations, in the event that one of the shareholders passed away, to purchase the deceased shareholder's shares. Id. at ¶ 17. Stephen Sr. prepared two Buy-Sell Agreements, one for Lanmar and one for Landry & Martin. Id. at ¶ 18. Ben, Michael, and Chris signed the Buy-Sell Agreements on or about March 14, 2000 and April 20, 2000, respectively. Id. at ¶¶ 19-20. The Buy-Sell Agreements required the Martin Corporations to purchase a deceased shareholder's shares in the event he died. Id. at ¶¶ 17, 19-21. In both Buy-Sell Agreements there are identical purchase price provisions which detail how the purchase price of the deceased shareholder's shares would be determined. Id. at ¶¶ 19-20. Those purchase price provisions provide that:

"The purchase price for each share of stock sold hereunder shall be determined by the independent public accountants regularly engaged to examine the books of the Corporation. The determinations required hereby shall conform to generally accepted accounting principles applied on a basis consistent with that applicable to the financial statements of the Corporation for the fiscal year then ended." Id.

         From the time the Buy-Sell Agreements were signed in 2000, through the time when Michael passed away in 2012, Pascarella & Gill's accountants were the "independent public accountants regularly engaged to examine the books of the [Martin] Corporation[s]." Id. at ¶¶ 19-20, 22.

         By 2003, to fund a potential buy-out of Michael's shares in accordance with the Buy-Sell Agreements, the Martin Corporations had purchased $1.5 million of life insurance policies. Id. at ¶¶ 25-26. Sometime around October of 2003, Stephen Sr. advised Michael about how the buy-out would work under the Buy-Sell Agreements and that such a buy-out would be funded, in part, by proceeds of the life insurance policies. Id. at ¶ 27. In August of 2004, Stephen Sr. provided Michael with an outline of the purchase price determination for his shares in addition to providing Michael with estate planning advice. Id. at ¶ 28.

         Fast forward to 2011: Michael, having received the terminal disease diagnosis, sought a determination of the purchase price of his shares pursuant to the Buy-Sell Agreements' purchase price provisions. Id. at ¶¶ 34-35. Pascarella & Gill determined that the purchase price for Michael's shares in Lanmar was $4, 087, 790. Id. at ¶¶ 35, 38. Similarly, Pascarella & Gill determined that the purchase price for Michael's shares in Landry & Martin was $355, 595. Id. at ¶ 44. However, at some point after Michael received those calculations, Ben, Stephen Sr., Stephen II, and Lisa discussed the notion that the value of Michael's shares in Lanmar ought to be discounted by 35% to represent what was called "Built-in Capital Gain."[4] Id. at ¶ 39. Though the Buy-Sell Agreements' purchase price provisions made no mention of such a "Built-in Capital Gain, " Ben and Defendants still sought to discount the value of Michael's shares. Id. at ¶¶ 40-41. This allegedly occurred even after Lisa admitted to Michael's family attorney that the purchase price provisions would have to be amended to include any "Built-in Capital Gain." Id. at ¶ 42.

         Shortly after Michael passed away in August of 2012, Stephen Sr., Lisa, and Ben met with Plaintiff, her two sons, and her family attorney to discuss the purchase price of Michael's shares in the Martin Corporations. Id. at ¶ 45. At this meeting, in addition to having discounted the value of Michael's shares via the "Built-in Capital Gain, " see id. at ¶¶ 39-43, 46, Stephen Sr. and Lisa, acting in part at Ben's direction, explained to Plaintiff that the Martin Corporations would deduct additional amounts from the value of Michael's shares. Id. at ¶ 46. Stephen Sr. and Lisa characterized those amounts as loans on which Michael supposedly owed repayment to the Martin Corporations. Id. at ¶¶ 46-47. According to Stephen Sr. and Lisa's determinations, the loans totaled $502, 073-a debt to be off-set against the purchase price for Michael's shares. Id. at ¶ 47. Through those off-sets and the 35% "Built-in Capital Gain, " Michael's shares in the Martin Corporations were significantly devalued. Id. at ¶¶ 47, 49.

         Thereafter, Plaintiff sued the Martin Corporations in this Court contesting the valuation of Michael's shares. See id. at ¶ 36. The Court found in her favor and held that the shares ought to have been valued at the amount Defendants originally provided to Michael in 2011 using the Buy-Sell Agreements' purchase price provision: $4, 087, 790 for shares in Lanmar and $355, 595 for shares in Landry & Martin.[5] On December 29, 2014, Plaintiff brought the present lawsuit, seeking damages incurred as a result of Defendants' allegedly wrongful determination of the purchase price of Michael's shares in the Martin Corporations. Plaintiff asserted five claims against Defendants: (a) breach of contract; (b) negligence; (c) breach of fiduciary duty; (d) aiding and abetting a breach of fiduciary duty; and (e) tortious interference with contract. Id. at ¶¶ 63-96. Defendants subsequently moved to dismiss Plaintiff's Complaint. Each party has submitted memoranda in support of their respective positions, including supplemental and second supplemental memoranda.

         II Standard of Review

         "'[T]he sole function of a motion to dismiss is to test the sufficiency of the complaint[.]'" Audette v. Poulin, 127 A.3d 908, 911 (R.I. 2015) (quoting Ho-Rath v. R.I. Hosp., 115 A.3d 938, 942 (R.I. 2015)). In testing the complaint's sufficiency, the Court's "review is confined to the four corners of that pleading, " id. (citation omitted), and the Court "'assumes the allegations contained in the complaint to be true and views the facts in the light most favorable to the plaintiff[].'" R.I. Emp't Sec. All., Local 401 v. State, Dep't of Emp't & Training, 788 A.2d 465, 467 (R.I. 2002) (hereinafter R.I. Emp't) (per curiam) (quoting St. James Condo. Ass'n v. Lokey, 676 A.2d 1343, 1346 (R.I. 1996)). Put another way, "'[w]hen ruling on a Rule 12(b)(6) motion, the [Court] must look no further than the complaint, assume that all allegations in the complaint are true, and resolve any doubts in a plaintiff's favor.'" Pellegrino v. R.I. Ethics Comm'n, 788 A.2d 1119, 1123 (R.I. 2002) (quoting R.I. Affiliate, ACLU v. Bernasconi, 557 A.2d 1232, 1232 (R.I. 1989)). Accordingly, a motion to dismiss "should not be granted 'unless it appears to a certainty that the plaintiff[] will not be entitled to relief under any set of facts which might be proved in support of [her] claim.'" R.I. Emp't, 788 A.2d at 467 (internal alterations omitted) (quoting St. James Condo Ass'n, 676 A.2d at 1346).

         III Discussion

         In their several memoranda supporting their Motion to Dismiss, Defendants set forth numerous arguments, many of which directly relate to the five counts contained in Plaintiff's Complaint. However, Defendants also assert a host of arguments on a more general level, including a defense based on principles of agency law, dismissal for failure to join indispensable parties, and the affirmative defense of claim preclusion. Before turning to Defendants' arguments with respect to the five counts in Plaintiff's Complaint, the Court will first address Defendants general contentions regarding agency, failure to join indispensable parties, and claim preclusion.

         With respect to agency, Defendants reason that, as accountants in the employ of the Martin Corporations, they were acting as agents of a disclosed principal and therefore cannot be held liable for their actions. In support of this position, Defendants cite a case from our Supreme Court for the proposition that "'an agent acting on behalf of a disclosed principal is not personally liable to a third party for acts performed within the scope of his authority.'" Kennett v. Marquis, 798 A.2d 416, 418 (R.I. 2002) (quoting Cardente v. Maggiacomo Ins. Agency, Inc., 108 R.I. 71, 73, 272 A.2d 155, 156 (1971)). According to Defendants, various allegations in the Complaint state that they were acting "under direction from Ben" or were directed by Ben and the Martin Corporations when they discounted the value of Michael's shares using both the so-called "Built-in Capital Gain" deduction and the loan offsets. See, e.g., Compl. at ¶¶ 41, 48. Essentially, Defendants argue that Ben and the Martin Corporations, as disclosed principals to Michael, the third party, are liable for the actions of their agents, Defendants. However, even assuming an agency relationship was formed here, there are several exceptions to the agency defense, such as when the agent performs: (1) "unauthorized acts outside the scope of the agency"; (2) "acts to which the agent has bound himself or herself-either expressly or impliedly-under a contract"; or (3) "acts within the scope of a duty that is otherwise independent of the agency relationship." Kennett, 798 A.2d at 419 (citations omitted).

         If, as alleged, Defendants determined the value of Michael's shares in a manner contrary to their duties-contractual or otherwise-as certified public accountants hired by the Martin Corporations, then Defendants acted beyond the scope of their authority and a defense based in agency law fails. See id. Based on the allegations in Plaintiff's Complaint to that effect, and considering the deference with which this Court must review Plaintiff's allegations, see R.I. Emp't, 788 A.2d at 467, Defendants' agency argument is unavailing. To find otherwise could contort agency law to provide an absolute bar to accountants who raise the defense that they were simply following orders even when their actions were beyond the scope of their authority.

         Next, Defendants argue that Plaintiff's Complaint should be dismissed wholesale for Plaintiff's failure to join indispensable parties. This argument is rooted in the same line of reasoning as Defendants' agency defense. Under Rule 19(a) of our Rules of Civil Procedure,

"A person who is subject to service of process shall be joined as a party in the action if (1) in the person's absence complete relief cannot be accorded among those already parties, or (2) the person claims an interest relating to the subject of the action and is so situated that the disposition of the action in the person's absence may: (i) as a practical matter impair or impede the person's ability to protect that interest; or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of the person's claimed interest."

         Our "[Supreme] Court has defined an indispensable party as one 'whose interests could not be excluded from the terms or consequences of the judgment . . . as where the interests of the absent party are inextricably tied in to the cause . . . or where the relief really is sought against the absent party alone.'" Rosano v. Mortg. Elec. Registration Sys., Inc., 91 A.3d 336, 340 (R.I. 2014) (quoting Root v. Providence Water Supply Bd., 850 A.2d 94, 100 (R.I. 2004)).

         Here, Defendants argue that Ben, Chris, and the Martin Corporations are indispensable parties to Plaintiff's lawsuit because their "interests could not be excluded from the terms or consequences of [a] judgment" in this proceeding. See id. However, Plaintiff can obtain the complete relief she seeks from Defendants in this lawsuit without joining Ben, Chris, and the Martin Corporations. If Defendants seek indemnity from Ben, Chris, or the Martin Corporations, that is for them to decide and does not serve as a proper basis for dismissal for failure to join indispensable parties.[6] Accordingly, the Court declines to dismiss Plaintiff's Complaint for failure to join Ben, Chris, and the Martin Corporations.

         In addition, Defendants further argue that res judicata, or claim preclusion, [7] bars Plaintiff from bringing the present lawsuit. "Claim preclusion prohibits the 'relitigation of all the issues that were tried or might have been tried in the original suit.'" Lennon v. Dacomed Corp., 901 A.2d 582, 590 (R.I. 2006) (quoting E.W. Audet & Sons, Inc. v. Fireman's Fund Ins. Co. of Newark, N.J., 635 A.2d 1181, 1186 (R.I. 1994)). Here, as in Lennon, 901 A.2d at 590, Defendants seek to preclude Plaintiff's current lawsuit based on Plaintiff's prior lawsuit against Ben, Chris, and the Martin Corporations-a lawsuit that was voluntarily dismissed with prejudice.[8] A voluntary dismissal that has been "designated 'with prejudice' [] will be accorded preclusive effect in a subsequent proceeding if the following three requirements are fulfilled: (1) the parties are the same or in privity with the parties of the previous proceeding; (2) an identity of issues in both proceedings; and (3) a valid final judgment on the merits has been entered in the previous proceeding." Id. at 591 (citations omitted). Defendants argue that all three of those elements are met, and claim preclusion should bar Plaintiff's Complaint; Plaintiff disagrees.

         Generally, claim preclusion is a defense that "shall [be] set forth affirmatively" "[i]n [a] pleading to a preceding pleading." Super. R. Civ. P. 8(c) (including res judicata among a list of affirmative defenses). However, although claim preclusion is an affirmative defense often raised in an answer, many courts have found that, where circumstances permit, affirmative defenses may be addressed on a Rule 12(b)(6) motion to dismiss. See, e.g., Diaz-Buxo v. Trias Monge, 593 F.2d 153, 155 (1st Cir. 1979) (collecting cases); see also 5 Wright & Miller, Federal Practice and Procedure, Civil 3d § 1277 at 634 n.12 (2004) (collecting cases). While our Supreme Court has yet to directly address the interplay between claim preclusion as a Rule 8(c) affirmative defense and a motion to dismiss brought pursuant to Rule 12(b)(6), it has discussed a Rule 12(b)(6) motion to dismiss based on a Rule 8(c) statute-of-limitations affirmative defense. See Barrette v. Yakavonis, 966 A.2d 1231, 1234 (R.I. 2009). In Barrette, the Court explained that "'[i]f the complaint discloses on its face that the claim is barred by the statute of limitations, the defense may be raised on a motion to dismiss under Rule 12(b)(6).'" Id. (quoting Kent, R.I. Civil Practice § 9:5 (2006)). In so explaining, our Supreme Court also cited the venerable Wright & Miller, noting that:

"Under the normal rules of pleading, the statute of limitations is an affirmative defense and must be raised in the answer. Since Rule 9(f) makes allegations of time material, however, the defense of the statute may be raised on a motion to dismiss under Rule 12(b)(6) when it is apparent from the face of the complaint that the time limit for bringing the claim for relief has passed." Id. (quoting 5A Wright & Miller, Federal Practice and Procedure, Civil 3d § 1308 at 340 (2004)).

         Thus, our Supreme Court found that a complaint "will [not] withstand a motion to dismiss based on a statute-of-limitations defense merely because it contains satisfactory notice of the substance of the claim" when the complaint clearly shows that the claim contained therein is time-barred. Id.

         Based on our Supreme Court's reasoning in Barrette, this Court finds that while the affirmative defense of claim preclusion may be raised on a Rule 12(b)(6) motion to dismiss, such a motion will not be granted unless "the complaint discloses on its face" that the elements of claim preclusion are satisfied. See id. Such a finding is consistent with the Rhode Island Supreme Court's well-settled instruction that "'the sole function of a motion to dismiss is to test the sufficiency of the complaint[.]'" Audette, 127 A.3d at 911 (quoting Ho-Rath, 115 A.3d at 942). Moreover, several federal courts that have discussed the interaction between claim preclusion under Rule 8(c) and motions to dismiss under Rule 12(b)(6) have found that claim preclusion-unlike the statute-of-limitations defense-is best addressed after the motion to dismiss stage.[9] See, e.g., Houbigant, Inc. v. Dev. Specialists, Inc., 229 F.Supp.2d 208, 220 (S.D.N.Y. 2002) (denying the defendant's motion to dismiss "on res judicata grounds . . . as premature" in light of "the general rule that a res judicata defense is to be considered only after it is pleaded in a defendant's answer"); Putzier v. Ace Hardware Corp., No. 13 C 2849, 2016 WL 1337295, at *19 (N.D. Ill. Mar. 30, 2016) (declining to apply claim preclusion on a motion to dismiss even though the defendant "put forth a persuasive argument that the prior judgments [it] obtained . . . may eventually preclude some of the [p]laintiffs' claims" because the "complaint simply does not admit the facts necessary to conclusively establish a res judicata defense"). Wright & Miller's treatise is similarly supportive of such an approach: "[because] the facts necessary to establish an affirmative defense generally must be shown by matter outside the complaint, the defense technically cannot be adjudicated on a motion under Rule 12." 5 Wright & Miller, Federal Practice and Procedure, Civil 3d § 1277 at 629 (2004).

         Applying that rule to the case at hand, based solely on a review of the allegations contained in Plaintiff's Complaint, the Court finds that it is not appropriate to grant Defendants' Motion to Dismiss based on the affirmative defense of claim preclusion. Simply put, other than some passing references to Plaintiff's prior lawsuit against Ben, Chris, and the Martin Corporations, e.g., Compl. at ¶ 36, and allegations evidencing that Defendants served as accountants for the Martin Corporations, Plaintiff's Complaint does not disclose on its face each of the elements of claim preclusion. See Putzier, 2016 WL 1337295, at *19; see also Barrette, 966 A.2d at 1234. This is distinct from the complaint at issue in Barrette. There, the Court could clearly determine the date from when the statute of limitations ran for purposes of applying the statute-of-limitations affirmative defense; here, however, claim preclusion is not self-evident from the face of the Complaint. Compare Barrette, 966 A.2d at 1234, with 5 Wright & Miller, Federal Practice and Procedure, Civil 3d § 1277 at 643 (2004) ("The statute of limitations defense is unusual in that . . . its effectiveness may well appear on the face of the complaint. Most of the affirmative defenses referred to in Rule 8(c) are less self-evident, however, and usually do not give rise to a motion addressed to the viability or sufficiency of the complaint.").

         For example, the issues raised in this Complaint appear different from those in Plaintiff's previous lawsuit. In her previous lawsuit, Plaintiff sought from this Court a determination of the purchase price for Michael's shares. In this lawsuit, however, Plaintiff raises a different issue: but for Defendants' alleged misconduct-which resulted in the improper determination of the purchase price for Michael's shares-she would not have had to bring the first lawsuit against Ben, Chris, and the Martin Corporations. From the face of the Complaint, it is unclear whether the factual allegations set forth conclusively establish that there was an identity of issues between Ben, Chris, and the Martin Corporations in the previous lawsuit and Defendants in the present matter. Such a lack of clarity is precisely why this Court cannot, on this Rule 12(b)(6) Motion to Dismiss, determine whether Defendants have affirmatively shown that claim preclusion applies. Therefore, based on this jurisdiction's liberal pleading rules, see Konar v. PFL Life Ins. Co., 840 A.2d 1115, 1118 (R.I. 2004), the standard of review with respect to Defendants' Rule 12(b)(6) Motion to Dismiss, see Audette 127 A.3d at 911, ...


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