Orchard v. Covelli

• Citation: 590 F. Supp. 1548
• Decision Date: 06 July 1984
• Docket Number: Civ. A. No. 78-72 ERIE,81-149 ERIE.
• Parties: Robert ORCHARD, Plaintiff, v. Albert COVELLI d/b/a 4316 Buffalo Road, Erie, Pennsylvania, and 4316 Buffalo Road, Inc., Defendant. Robert ORCHARD, Plaintiff, v. Albert COVELLI, individually, and t/d/b/a 4316 Buffalo Road, Erie Pennsylvania, and 4316 Buffalo Road, Inc. 4319 Peach Street, Inc., t/d/b/a 4319 Peach Street, Erie, Pennsylvania, 2170 East Lake Road, Inc. 909 Peninsula Drive, Inc., 1311 Broad Street, Inc., 2650 26 Street, Inc. and 1115 Sassafras, Inc., Girard, Pennsylvania, John T. Milligan, Secretary of the Corporations, Defendants.
• Court: U.S. District Court — Eastern District of Pennsylvania

590 F. Supp. 1548

Robert ORCHARD, Plaintiff, v. Albert COVELLI d/b/a 4316 Buffalo Road, Erie, Pennsylvania, and 4316 Buffalo Road, Inc., Defendant.

Robert ORCHARD, Plaintiff, v. Albert COVELLI, individually, and t/d/b/a 4316 Buffalo Road, Erie Pennsylvania, and 4316 Buffalo Road, Inc. 4319 Peach Street, Inc., t/d/b/a 4319 Peach Street, Erie, Pennsylvania, 2170 East Lake Road, Inc. 909 Peninsula Drive, Inc., 1311 Broad Street, Inc., 2650 26 Street, Inc. and 1115 Sassafras, Inc., Girard, Pennsylvania, John T. Milligan, Secretary of the Corporations, Defendants.

Civ. A. Nos. 78-72 ERIE, 81-149 ERIE.

United States District Court, W.D. Pennsylvania.

July 6, 1984.

COPYRIGHT MATERIAL OMITTED

Wayman, Irvin & McAuley, Pittsburgh, Pa., for plaintiff.

John G. Gent, Erie, Pa., for defendant.

WEBER, District Judge.

I. INTRODUCTION

This is a removed action filed by a minority shareholder of a closely-held corporation, Robert Orchard, seeking various forms of legal and equitable relief. The lawsuit parallels a family dispute over the ownership and control of a number of McDonald Corporation fast food restaurants located in and about Erie, Pennsylvania, and now owned in the majority by the defendant Albert Covelli.

Tolstoi once wrote that "happy families are all alike; every unhappy family is unhappy in its own way." We sense that Tolstoi was less familiar with the American modern law of closely-held corporations from which we note an alarming similarity in the demise of such entities where the survival of a business association is so perilously tied to the continuing vitality of intimate personal relationships. Many lawsuits arising from disputes among shareholders in closely-held corporations are characterized by the parties' inability to separate the business and personal aspects of their relationship. We find ourselves struck by the unavailability or inadequacy of identifiable legal remedies to aid minority shareholders in redressing abuses by majority shareholders equipped with unfettered power over the management of the close corporation. We bind ourselves to a careful balance of equities in fashioning appropriate relief under the present circumstances. The task of this court has been complicated by the nature of the past dealings between the parties and by factors which are peculiar to the scope and terms of franchise agreements. We are constrained to note here that the weight of our responsibility has not been lightened by the manner in which plaintiff's counsel presented his case.

As a result of our review of the evidence and applicable law, supplemented by detailed legal memoranda filed by the parties, we find that the vast majority of Mr. Orchard's claims are without merit and that the law does not recognize a right to recovery. Yet our analysis is predicated on the fact that majority shareholders stand in a fiduciary relationship with minority interest holders. In this light we find that the plaintiff Orchard is entitled to relief as a result of a systematic "freeze-out" orchestrated by the defendant Covelli. We are convinced that there existed a clear intent on the part of the majority shareholder to use seemingly legitimate means to exclude Mr. Orchard from his benefit and interest in the various franchises.

After a non-jury trial which culminated extensive discovery and pursuant to the Federal Rules of Civil Procedure Rule 52(a) we make the following findings of fact.

II. FINDINGS OF FACT

1. Robert Orchard, the minority shareholder, and Albert Covelli, the majority shareholder, together, are the only shareholders of some seven corporations operating McDonald's fast food restaurants in Erie, Pennsylvania.

2. From 1962 to 1977 these two men worked closely to develop these restaurants into a viable, profitable business. Covelli had operated a number of McDonald's restaurants in and around Canton, Ohio for several years. Orchard had no previous experience in the fast food industry but had become interested in the ownership of a McDonald Franchise after several conversations with his brother-in-law Covelli. Under an agreement the two men decided to become partners with each receiving 50% of the Canton Store.

3. In 1964, Covelli was approached by a group of investors (hereinafter referred to as "the Chicago Group") interested in purchasing three McDonald's restaurants then operating in Erie, Pennsylvania. Covelli proposed to Orchard that he join in the purchase of these Erie stores and ultimately the three parties agreed to joint participation in the restaurants at Peach Street, Peninsula Drive, and East Lake Road.

4. Under the joint participation agreement each of the three Erie restaurants was separately incorporated with each corporation bearing the name of the location of the restaurant it represented, i.e. Peach Street, Inc., Peninsula Drive, Inc., and East Lake Road, Inc.

5. The corporations held three principal assets:

(i) Leasehold interest, in the buildings and lands which served as the sites of the restaurants;

(ii) Fixed assets in the form of equipment and cooking utensils necessary for the operation of a fast food restaurant;

(iii) A franchise for a term of twenty years from McDonald's corporation authorizing the operation of a fast food restaurant.

6. Shares in the corporations were divided between the participants in the joint venture as follows:

(i) Chicago group — 45% (ii) Albert Covelli — 40% (iii) Robert Orchard — 15%

7. The following officers' positions were established:

(i) President — Albert Covelli — he was charged with general supervision of operations and was required to travel frequently from Canton, Ohio, to Erie. At the outset Covelli did not receive a salary but he did receive a travel allowance.

(ii) Vice-President—Robert Orchard—he was charged with responsibility for the day to day operation of the restaurants. He received a salary of $10,400 per year per restaurant. Orchard was required to move from Canton, Ohio to Erie.

8. By 1975, the joint venture had opened three additional McDonald's franchises, West 26th Street, Inc., Broad Street, Inc. and Sassafras Street, Inc. with identical shareholder participation as in the original three corporations.

9. By 1975, the compensation for the officers was as follows:

(i) Covelli—$16,600 per year/per restaurant or $96,000;

(ii) Orchard — $10,400 per year/per restaurant or $62,400.

10. In 1975, McDonald Corporation became interested in a new location at 4316 Buffalo Road, Erie, Pennsylvania (hereinafter "Buffalo Road Restaurant"). Orchard assisted with the selection of the site for the franchise. Unbeknownst to Orchard the Chicago Group did not have an interest in the Buffalo Road restaurant. Orchard's ownership interest in the Buffalo Road Restaurant remained the same (15%), Covelli's interest increased from 40% to 85%. Although the Buffalo Road Restaurant was not formally incorporated until 1979, Orchard and Covelli generally treated the Buffalo Road Restaurant as a de facto corporation.

11. The Buffalo Road Restaurant was located in the franchise territory of the East Lake Road restaurant. In January, 1975, Orchard and Covelli as officers of the East Lake Road restaurant executed a waiver in order to allow the Buffalo Road restaurant to operate within the exclusive licensed territory of the East Lake Road Restaurant.

12. In 1977, Albert Covelli and his attorney, also the attorney for the corporation, John Milligan, commenced negotiations with the Chicago Group in order to buy out the latter's interest in all the Erie McDonald restaurants. During the period of these negotiations the Chicago Group was not told about the existence of the Buffalo Road restaurant. In February of 1977, the shareholders of the six Erie restaurants authorized Covelli to enter into negotiations aimed at purchasing the stock held by the Chicago group. As a director for the six corporations, Orchard was aware of and authorized the negotiation which led to this stock redemption.

13. In May of 1977, the Chicago Group entered into a stock redemption agreement covering its holdings in all six Erie corporations. The formula for redemption provided that the Chicago Group was to receive fifty cents for each dollar of gross sales recorded by these stores in the fiscal year ending February 28, 1977.

14. As a result of this redemption the interests in the various corporations changed as follows:

(i) Covelli's interest increased from 40% to 73%;

(ii) Orchard's interest increased from 15% to 27.5%.

15. Orchard was not a party to the negotiations for the buy-out of the Chicago Group. After a review of the terms of the buy-out agreement, he requested to be bought out on the same terms as the Chicago Group. At this time both Covelli and Orchard had become dissatisfied with their business relationship.

16. Covelli prepared a proposed stock redemption agreement covering Orchard's holdings in all six original Erie McDonald's restaurants. The agreement provided for the purchase of Orchard's stock on the same formula as that used in redeeming the stock of the Chicago Group. Under this formula Orchard was to receive approximately $319,000 for his interests in these corporations. The agreement also contained a covenant not to compete.

17. The proposed redemption agreement provided Orchard no consideration for his interest in the Buffalo Road restaurant. Negotiations over the stock redemption reached an impasse on the issue of compensation for the Buffalo Road restaurant.

18. When Orchard refused to give up his interest in the Buffalo Road restaurant for no consideration, Covelli made known his intention to remove Orchard from any responsible position in the corporation.

19. On August 18, 1977, Mr. Milligan, on behalf of the Erie McDonald's corporations informed Orchard that his employment was terminated.

20. At the annual shareholders meeting held in March, 1978, Covelli as majority shareholder voted to remove Orchard from the Board of Directors of the...