Hill v. Ofalt, PICS Case No. 14-0225 (Pa. Super. Feb. 5, 2014) Olson, J. (32 pages)

SUPERIOR COURT

The Legal Intelligencer

CIVIL PROCEDURE

Standing • Amendment of Complaint • Preliminary Objections • Shareholder Derivative Action

Hill v. Ofalt, PICS Case No. 14-0225 (Pa. Super. Feb. 5, 2014) Olson, J. (32 pages)

Trial court erred by not permitting appellant to file amended complaint to assert derivative claims against corporation rather than on his individual behalf. Vacated in part and remanded.

Parties formed a Pennsylvania corporation (Milestone) to create and operate a new restaurant as equal partners. On behalf of Millstone, the parties jointly obtained two loans totaling $300,000, which they both personally guaranteed. The loans were used to purchase necessary equipment and to lease and renovate corporate premises.

Appellant alleged that after turning the business over to appellee, as originally contemplated, appellee wasted, diverted and stole corporate assets, mismanaged the corporation, usurped corporate opportunities, failed to remit the corporation's required federal, state and local tax withholding to the appropriate taxing authorities and caused the corporation and restaurant to fail.

Appellant filed a complaint on his individual behalf and named appellee and Milestone as defendants. The complaint sought declaratory relief and alleged breach of contract, breach of fiduciary duty, unjust enrichment and conversion, and requested a constructive trust.

The trial court sustained appellee's preliminary objection in the nature of a demurrer as to all counts in the complaint. It held that appellant did not have standing to institute a direct action for individual damages, but rather, that appellant's action was more appropriate as a shareholder's derivative suit. The court dismissed appellant's complaint, but did not act upon appellant's motion to amend it.

On appeal, appellant argued that he had standing to institute a direct action against appellee because he was individually harmed by appellees' actions. Alternatively, he argued that he was entitled to bring a direct action against appellee because Milestone is a closely held corporation. The Superior Court vacated in part and remanded.

Under 15 Pa.C.S. §1717, only the corporation and a shareholder may bring a lawsuit and claim that a director breached the standard of care owed to the corporation. Further, a shareholder does not have standing to institute a direct suit for a harm that is peculiar to the corporation and only indirectly injurious to the shareholder. Rather, such a claim belongs to, and is an asset of, the corporation.