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A trial court was wrong to award a plaintiff his job back, even when all indications showed that he was unfairly forced out of a closely held corporation, a Philadelphia Superior Court panel ruled last week in Santoro v. Morse. The case was considered by an en banc panel including President Judge Joseph A. Del Sole, President Judge Emeritus Stephen J. McEwen and Judges James R. Cavanaugh, Justin M. Johnson, Michael T. Joyce, Correale F. Stevens, John L. Musmanno, Maureen Lally-Green and Debra B. Todd. The plaintiff in the case, Peter Santoro, became a 50 percent shareholder with Paul Morse in Cable Technologies International, which supplied new and refurbished cable television equipment to wireless and cable television companies nationwide. The pair founded CTI with a third business partner, who withdrew from the corporation in 1991. Santoro, who had previously worked part-time for CTI, went full-time at CTI that year. Morse continued his full-time schedule at CTI. Despite Santoro and Morse’s 50-50 arrangement, the relationship began to sour, according to the court. Morse testified that in 1993, he offered to buy out Santoro’s share of CTI — an offer that he said was accepted — and that he became the sole owner of CTI. Santoro said he never accepted the buyout offer. In March 1994, Morse went further, making a deal to acquire another company, paying for it with $250,000 in CTI checks and signing on the deal as “Paul E. Morse Jr., President, Cable Technologies International Inc.” He did not seek or obtain Santoro’s consent. That November, Morse incorporated the new company and became the sole shareholder. In 1995, again without seeking Santoro’s consent, Morse transferred a parts business of CTI’s to the new corporation but never paid CTI compensation. He also decided to pay Santoro $160,000 less than his own compensation at CTI. There were many inadequacies of the corporate model at CTI, according to the court. No corporate minutes were ever maintained, no shares were ever issued, and no individual was ever elected an officer or director. In addition, from 1986 to 1997, no corporate meetings were ever held and Morse made most of the business decisions. But Morse’s behavior eventually cost Santoro his job and put his house at risk, according to the court. In 1997, Morse increased CTI’s credit line, apparently without Santoro’s consent, which was guaranteed by Mr. and Mrs. Santoro and Mr. and Mrs. Morse and secured by the couples’ residential mortgages. Morse then purchased 50,000 converters, apparently for his new corporation. Profits from the $5 million in revenue of the converters were never attributed to CTI. Later in 1997, Morse relocated CTI to a building owned by his 22-year-old daughter and informed Santoro that he was no longer employed by CTI. Santoro did not have keys to the new building. Santoro’s request for repayment of a shareholder loan he made to CTI was denied. He sued Morse and the two corporations and won a preliminary injunction in February 2001. Following a hearing, the trial court restored Santoro’s job, allowed him unfettered access to the offices and books of both CTI and Morse’s second corporation, ordered an accounting of CTI and placed all stock in the second corporation in a constructive trust on behalf of CTI, pending trial. Morse appealed. JOB REINSTATEMENT Although the panel acknowledged that it sounded as if Santoro had a strong case, it said that a preliminary injunction hearing was not the proper setting to award him his CTI job or back pay. “While the record created by the parties … paints a compelling picture of outrageous overreaching and usurpation of corporate assets and opportunities by [Morse], we are constrained to agree that in the absence of a stipulation converting the preliminary injunction hearing into a hearing on a permanent injunction, the relief granted by the trial court was overly broad,” wrote Del Sole. “While we agree with [Santoro] that there were more than reasonable grounds for the ruling of the trial court, [Santoro] is not entitled in a proceeding for a preliminary injunction, to the relief that may be ultimately awarded in the civil trial,” Del Sole said. “Thus, we are constrained to vacate that portion of the injunction which restored [Santoro] as an employee and awarded lost wages and benefits, not because there were no reasonable grounds to support the order, but because the relief awarded exceeded the proper scope of relief in a proceeding for a preliminary injunction.” If Santoro were ultimately found to be a 50 percent shareholder of CTI, such issues could await resolution at trial, the panel said. PROPER RELIEF But the court was correct to impose a constructive trust, used in place of appointing a custodian, the panel said. The trial court, “in the exercise of its broad custodial powers,” the panel said, ordered the constructive trust to preserve the assets of CTI pending trial. The trial court’s orders for an accounting of CTI and Morse’s other corporation, as well as access to the books, were proper under the Business Corporation Law, the court said. The law provides for the right of a shareholder to examine the corporate books for any proper purpose and for the court of common pleas to “summarily order” such relief to a shareholder wrongfully denied such access. Morse argued that the trial court erred in making a determination of Santoro’s ownership rights in CTI. But the panel said that Santoro was merely showing that he had a reasonable likelihood of success on the merits. Principles of claim and issue preclusion are inapplicable to a preliminary injunction hearing, the panel said, since the ownership issue will be litigated at trial.

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