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When U.S. District Judge Herbert J. Hutton of the Eastern District of Pennsylvania handed down a one-page order that tossed out Warden v. McLelland — a hotly contested dispute between two brothers over ownership and control of a pharmaceutical company — the 3rd U.S. Circuit Court of Appeals revived the case and ordered Hutton to write an opinion setting forth his legal reasoning. The court said appellate review was impossible “without the district court first performing its function in its entirety.” But Hutton’s 43-page opinion didn’t impress the court much at all. Now the 3rd Circuit has revived the case once again after finding that Hutton’s opinion “was a minimally modified version of one of defendants’ legal memoranda.” In other words, the judge didn’t do his own writing. And instead of viewing the facts in the light most favorable to the plaintiffs, the appellate court found that Hutton “adopted defendants’ version of the facts.” In a remark that suggests the court was frustrated, U.S. Circuit Judge Anthony J. Scirica wrote: “Rather than seeking further clarification, we turn to the merits of the appeal.” But in a footnote, Scirica said the court had also decided not to take the case away from Hutton. “Despite plaintiffs’ request for reassignment to another district judge on remand, we are confident the able trial judge will give this difficult and important case the attention it demands,” Scirica wrote. Turning to the merits of the appeal, Scirica found that the plaintiffs had valid claims under RICO and breach of trust, as well as derivative corporate claims for breach of fiduciary duty. The plaintiffs in the suit are trustees of a trust established for the benefit of David Berwind, who himself is one of the trustees. The David Berwind Trust was established in 1963 by David’s father, Charles Berwind, who created similar trusts for each of David’s three siblings. The principal asset of each trust was stock in Berwind Corp. Each trust had three trustees — the beneficiary, an attorney and Graham Berwind, one of the four children. But 30 years later, disputes erupted between David and Graham that culminated in a “squeeze-out merger” that forced David’s trust to give up its corporate holdings and led to the current RICO suit. According to the suit, Graham Berwind was the most directly involved in the operation of the family business. His original trust had also received a somewhat larger share of stock — 53,200 shares, compared to 45,600 for each of his siblings’ trusts. After Charles Berwind died in 1972, Graham Berwind began to consolidate ownership of Berwind Corp. by buying out the shares held by the two other siblings’ trusts. A few years later, the David Berwind Trust sold half of its shares to the corporation. Because Graham Berwind was a trustee of each trust, he was required to get approval for the transactions from the Orphans’ Court of Montgomery County. In the late 1970s, Berwind Corp. acquired Colorcon Inc., a pharmaceutical coatings manufacturer, and renamed it Berwind Pharmaceutical Services Inc. Berwind Group Partners, a trust partnership established for the benefit of Graham Berwind and his family, held 83.6 percent of the shares in BPSI. The David Berwind Trust received the remaining 16.4 percent. In 1985, the David Berwind Trust sold its remaining shares in Berwind Corp. to Berwind Group Partners. As a result, the BPSI shares were the last remaining holdings in any of the Berwind companies still held by the David Berwind Trust. In the suit, David claims that Graham set his sights on total control of BPSI and wouldn’t take no for an answer. In 1993, the suit says, Graham Berwind made the first of several attempts to buy his brother’s trust’s stock in BPSI, offering $29 million. Four years later, he offered $53 million. On both occasions, David Berwind refused because Graham Berwind had allegedly provided insufficient financial information to assess the value of the stock. Soon after, Graham Berwind said he was resigning as trustee of the David Berwind Trust. But David claims his brother never truly resigned and, in reality, remained a trustee, and continues in this capacity. In 1999, the suit says, Graham Berwind’s attempt to obtain full control of BPSI intensified. Berwind Corp.’s president, Edward Kosnik, sent David Berwind a letter threatening that if David Berwind continued to reject his brother’s offers, “we are prepared to start a process that will result in our ownership of 100 percent of BPSI at a price to be determined by us and our financial adviser.” The letter warned that “this will be a costly, time-consuming and legalistic process that we would prefer to avoid, but one that we are prepared to undertake, if necessary.” In response, David Berwind claims he hired lawyers and tried to negotiate the sale. But the suit says the sale never went through because every attempt to get access to necessary financial information was rebuffed. In November 1999, David’s trust filed suit in U.S. District Court. But just six days after the complaint was served on the defendants, BPSI’s board of directors approved a “squeeze-out” merger in which the company emerged as a corporation wholly owned by Berwind Group Partners. The David Berwind Trust was offered a note worth $82.8 million and the right to seek judicial appraisal of the fair value of its shares. An appraisal hearing was initiated in Philadelphia Common Pleas Court and is still proceeding. In the RICO suit, David Berwind’s lawyer, Steven L. Friedman of Dilworth Paxson, contends that Graham Berwind illegally transferred the value of BPSI to the companies he controlled in an effort to deplete the value of the David Berwind Trust’s holdings. Five of the 13 counts in the suit are derivative claims brought on behalf of BPSI. The other eight are brought on behalf of the David Berwind Trust. The suit says Graham Berwind breached his duty of loyalty to the David Berwind Trust and violated RICO with schemes to defraud the trust; that the BPSI directors breached their fiduciary duty of loyalty to the corporation; and that the directors diverted corporate opportunities. The suit also says Graham Berwind and his associate Bruce McKenney, who was also named as a trustee of the David Berwind Trust, breached their duties to the trust owed by virtue of their positions as trustees. Graham Berwind’s lawyer, Marc J. Sonnenfeld of Morgan Lewis & Bockius, argued that the breach of trust claims failed as a matter of law because Graham Berwind and McKenney were not trustees at the relevant times, as they had resigned. Scirica disagreed, saying that since the plaintiffs claim that the two had not effectively resigned as trustees — and since the court must accept the allegations as true — the defense argument failed. Legally, the most significant aspect of Scirica’s decision is the prediction that the Pennsylvania Supreme Court will adopt � 7.01(d) of the American Law Institute’s Principles of Corporate Governance — a ruling that was critical to allowing the plaintiffs’ derivative claims. So far, Scirica said, Pennsylvania has adopted several sections of the ALI principles, including those that require the shareholder to first make a demand on the board of directors to pursue the action before filing a derivative claim; and one that says the plaintiff in a derivative suit must be a shareholder, both at the time of the alleged wrongdoing and continuing to judgment. But Scirica said the Pennsylvania Supreme Court invited lower courts to consider adopting other sections. Since then, Scirica found, several Philadelphia Common Pleas judges have adopted � 7.01(d) which allows for an exemption from the demand requirement. Scirica predicted that if the Pennsylvania courts were to consider a case like the David Berwind Trust’s, it would adopt � 7.01(d). “BPSI is a closely held corporation. Were Pennsylvania to adopt section 7.01(d), the District Court here would have discretion to treat this case as an individual action, exempt from the procedural requirements for derivative actions,” Scirica wrote. “Because the David Berwind Trust was the only minority shareholder, there is no apparent reason that doing so would invite multiple actions, materially prejudice the interests of creditors or the corporation, or interfere with a just recovery. Therefore, this case would seem to be a good candidate for such treatment, were section 7.01(d) to apply,” Scirica wrote. Scirica was joined in the opinion by Senior U.S. Circuit Judge Max Rosenn and visiting U.S. District Judge Yvette Kane of the Middle District of Pennsylvania.

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