Hill v. Ronald J. Ofalt, Ronald J. Ofalt, Jr., & the Milestone Rest. Co.

• Decision Date: 05 February 2014
• Citation: 85 A.3d 540,2014 PA Super 17
• Parties: Thomas HILL, Appellant v. Ronald J. OFALT, Ronald J. Ofalt, Jr., and The Milestone Restaurant Company, Inc., Appellees.
• Court: Pennsylvania Superior Court

85 A.3d 540

2014 PA Super 17

Thomas HILL, Appellant

v.Ronald J. OFALT, Ronald J. Ofalt, Jr., and The Milestone Restaurant Company, Inc., Appellees.

Superior Court of Pennsylvania.

Submitted July 9, 2013.

Filed Feb. 5, 2014.

Richard S. Bishop, Kingston, for appellant.

Paul J. LaBelle, Scranton, for appellees.

BEFORE: MUNDY, OLSON and STRASSBURGER,^* JJ.

OPINION BY OLSON, J.:

Appellant, Thomas Hill, appeals from the order entered on July 13, 2012 that sustained preliminary objections in the nature of a demurrer, which were filed by Ronald J. Ofalt, Sr. and Ronald J. Ofalt, Jr. (hereinafter collectively “Appellees” or “the Ofalts”). The order also dismissed Appellant's complaint. We vacate in part and remand.

Since the current lawsuit was dismissed in response to preliminary objections in the nature of a demurrer, we base the following factual recitation upon the well-pleaded facts contained within Appellant's complaint. See Burgoyne v. Pinecrest Cmty. Ass'n, 924 A.2d 675, 679(Pa.Super.2007) (“[w]hen reviewing the dismissal of a complaint based upon preliminary objections in the nature of a demurrer, we treat as true all well-pleaded material, factual averments and all inferences fairly deducible therefrom”).

In late 2006 or early 2007, Appellant and Appellee Ronald J. Ofalt, Jr. (hereinafter “Appellee Ofalt, Jr.”) entered into an oral agreement to form a Pennsylvania corporation named Milestone Restaurant Company, Inc. (hereinafter “Milestone”).¹ “Milestone's [principal] purpose was the creation and operation of [a new Clarks Summit, Pennsylvania] restaurant/bar known as ‘Milestone Ranch.’ ” Appellant's Complaint, 1/4/12, at ¶¶ 6–7. Appellant and Appellee Ofalt, Jr. further agreed: that they would be “equal 50/50 partners in Milestone;” that Appellant would “provide some of the start-up capital to open Milestone Ranch and [Appellant] would use his restaurant expertise and the good trade credit he established through [his ownership and operation of the] State Street Grill to get Milestone Ranch up and running;” and, that after Milestone Ranch was “up and running,” Appellee Ofalt, Jr. “would run the day-to-day operations of the business.” Id. at ¶¶ 9–10. In accordance with their agreement, Milestone was incorporated under the laws of Pennsylvania and, following incorporation, Appellant and Appellee Ofalt, Jr. became “the sole officers, directors[,] and shareholders of Milestone.” Id. at ¶¶ 4 and 9.

In early 2007, Appellant and Appellee Ofalt, Jr. “jointly procured[,] on behalf of Milestone[,] a [$250,000.00] loan from Peoples National Bank as well as a [$50,000.00 Small Business Association] loan.” Id. at ¶ 11. Appellant and Appellee Ofalt, Jr. personally guaranteed both loans. Id. Milestone then used the money to “purchase the necessary equipment, furnishings, computer system and[,] supplies needed for the restaurant” and to lease and renovate certain property located at 200 Johnson Road in Clarks Summit. Id. The 200 Johnson Road property was intended to serve both as the space for the Milestone Ranch restaurant and as “guest rooms[,] located on the second floor of the premises[,] that were to be rented out to provide additional income to Milestone, and thereby, to [Appellant and Appellee Ofalt, Jr.].” Id. at ¶ 12.

Milestone Ranch opened in August 2007 and, for the next four months, Appellant “worked on almost a full time basis at Milestone to help set up the restaurant and bar, train the staff[,] and provide [Appellee] Ofalt, Jr. with the necessary assistance, guidance[,] and tools needed to launch” the venture. Id. at ¶ 13. In January 2008, Appellant “turned over the helm of the Milestone Ranch to [Appellee] Ofalt, Jr. and [Appellant] went back to running State Street Grill, as the parties originally contemplated and agreed.” Id. at ¶ 14.

However, after Appellee Ofalt, Jr. assumed control over Milestone Ranch, Appellee Ofalt, Jr. “began unlawfully using [the] business as a ‘cash cow’ to benefit himself, his family[,] and friends.” Id. at ¶ 17. Appellee Ofalt, Jr.'s improper actions included: “frequently providing his friends, family ... [,] and acquaintances with free alcoholic beverages and food;” attempting to conceal the free beverages and food by “voiding” the transactions on the computer system; “pocket[ing]” money from Milestone Ranch's outside bar; withdrawing funds from Milestone and “diverting them to either himself or others, including his father, [Appellee Ronald J.] Ofalt, Sr.” [ (hereinafter “Appellee Ofalt, Sr.”) ]; frequently staying in the apartments above the restaurant “rent free” and “allowing others to [ ] stay in [the] apartments for either no charge or by paying [Appellee Ofalt, Jr.] directly without accounting to Milestone for said rents;” and, “deducting from Milestone's employees' bi-weekly paychecks what he portrayed as the required federal, state[,] and local tax withholdings”—but then failing to remit the withholdings to the appropriate taxing authorities. Id. at ¶¶ 17–22.

The above actions and omissions: forced Milestone Ranch to close in March 2010; caused Milestone to “fall in arrears to [the] taxing authorities [in] an amount in excess of [$250,000.00];” caused the Pennsylvania Department of Revenue to impose a lien against both Appellant and Milestone in the amount of $79,000.00; caused Milestone to default on both the Peoples National Bank and Small Business Association loans—both of which Appellant personally guaranteed; and, exposed Milestoneand Appellant to debts in excess of $500,000.00. Id. at ¶¶ 22–26.

On January 4, 2012, Appellant filed a complaint—on his individual behalf—and named Appellee Ofalt, Jr., Appellee Ofalt, Sr., and Milestone as defendants. ² The six-count complaint asserted the following direct claims:

1) a claim for declaratory relief (against Appellee Ofalt, Jr.), requesting that the trial court declare: a) that Appellee Ofalt, Jr. is “solely and exclusively responsible for any and all unsatisfied debts and obligations incurred by” Milestone and b) that Appellee Ofalt, Jr. is “liable over to [Appellant] for any and all sums paid by [Appellant] in satisfaction or partial satisfaction of any such debts or obligations associated with Milestone Ranch;”

2) breach of contract (against Appellee Ofalt, Jr.), based upon the allegation that Appellee Ofalt, Jr. “wrongfully detained, misappropriated, ... and/or diverted” funds from Milestone, Milestone Ranch, and Appellant;

3) breach of fiduciary duty (against Appellee Ofalt, Jr.), based upon the allegation that Appellee Ofalt, Jr. failed to: a) faithfully and loyally conduct the business of Milestone; b) conserve and protect the assets of Milestone; c) avoid self-dealing and the misappropriation and waste of assets belonging to Milestone; and, d) “act toward the deal with [Appellant] with the utmost fidelity, loyalty, diligence, prudence, honesty, care[,] and good faith;”

4) unjust enrichment (against the Ofalts and Milestone), based upon the averment that the three defendants all “received significant economic benefits from Milestone/Milestone Ranch for which [they] have not provided any corresponding compensation or other benefits to” Appellant and that the three defendants would be unjustly enriched if they were allowed to retain the benefits without providing adequate compensation to Appellant;

5) conversion (against the Ofalts and Milestone), based upon the averment that the three defendants knew or should have known that Appellant had an interest in Milestone and that the three defendants knowingly misappropriated, wasted, and converted the “assets and opportunities of Milestone/Milestone Ranch for their own use and benefit ... [without] compensating [Appellant] for [the] same;”

6) request for a constructive trust (against Appellee Ofalt, Jr.), based upon the averment that Appellee Ofalt, Jr. “utilized the assets and opportunities of Milestone/Milestone Ranch for purposes inconsistent with his agreement with [Appellant],” and requesting that the trial court enter an order “declaring that title to all assets of Milestone/Milestone Ranch be held in constructive trust for, and delivered to [Appellant], and that Milestone be thereafter terminated and dissolved.”

Id. at ¶¶ 28–60.

On May 25, 2012, the Ofalts filed preliminary objections to Appellant's complaint. The preliminary objections asserted the following grounds for relief: 1) legal insufficiency of the pleading as to all counts in the complaint, as Appellant erroneously filed an individual action—as opposed to a shareholder's derivative action—for injuries that were suffered by the corporation; 2) legal insufficiency of the pleading as to the “breach of fiduciary duty” claim, as Appellee Ofalt, Jr. did not owe Appellant any fiduciary duty; 3) insufficient specificity of the pleading as to the “breach of fiduciary duty” claim, as the complaint failed to state the source or basis of the alleged fiduciary duty that Appellee Ofalt, Jr. owed to Appellant; 4) statute of limitations bar as to the conversion claim against Appellee Ofalt, Sr.; ³ 5) legal insufficiency of the pleading as to the conversion claim against Appellee Ofalt, Sr., as “there is no allegation that [Appellee] Ofalt, Sr. knew or should have known that [his] actions were improper;” 6) and, insufficient specificity of the pleading as to the conversion claim against Appellee Ofalt, Sr., as the complaint failed to specify what property was converted. The Ofalts' Preliminary Objections, 5/25/12, at 1–9.

On July 13, 2012, the trial court entered an order, which sustained the Ofalts' preliminary objection in the nature of a demurrer as to all counts in the complaint. As the trial court held, Appellant did not have standing to institute a direct action for individual damages. Rather, the trial court held, Appellant's action was “more appropriate as a shareholder's derivative suit.” ⁴ Trial Court Order, 7/13/12, at 1. The trial court's July 13, 2012 order also dismissed Appellant's...