Korman Corp. v. Franklin Town Corp.

• Decision Date: 20 June 1984
• Docket Number: 1624
• Citation: 34 Pa. D. & C.3d 495
• Parties: Korman Corporation v. Franklin Town Corporation
• Court: Pennsylvania Commonwealth Court

34 Pa. D. & C.3d 495

Korman Corporation v. Franklin Town Corporation

No. 1624

Common Pleas Court of Philadelphia County, Pennsylvania

June 20, 1984

March term, 1983

Barry E. Ungar, for plaintiff.

Andrew Woltzman Drucker, for defendants.

Richard Z. Freeman, Jr., for defendants.

OPINION

Preliminary objections to complaint.

TAKIFF J.

This action in equity was commenced by plaintiff, a minority shareholder of Franklin Town Corporation, in March, 1983. In its amended complaint, plaintiff alleges that defendants, majority shareholders of Franklin Town, have exercised their control and domination over the affairs of the corporation in pursuit of their own selfish interest and gain, thereby breaching the fiduciary duties which they owe both to the corporation and to plaintiff directly as a minority stockholder. Defendants filed extensive preliminary objections to plaintiff's amended complaint to which plaintiff appropriately responded. Plaintiff also filed preliminary objections of its own seeking to strike a portion of defendants' preliminary objections. ^[1] The matters were fully briefed and oral argument was held before this court on September 2, 1983. Shortly thereafter, counsel for the respective parties advised the court that continued efforts were being exerted by all involved to seek an amicable resolution of this dispute. We, accordingly, notified counsel that our consideration of the open motions would be deferred pending the completion of settlement discussions. We have recently been advised that the parties were unable to amicably resolve their differences. Consequently, the previously deferred matters are now ripe for adjudication.

PLAINTIFF'S PRELIMINARY OBJECTIONS

Plaintiff's preliminary objections are meritorious and can be disposed of easily. In paragraphs 19-21 of their preliminary objections, defendants raise the affirmative defense of estoppel to plaintiff's claims. Plaintiff correctly asserts, however, that this defense, as all affirmative defenses, must be raised in a responsive pleading under the heading " New Matter" and cannot appropriately be asserted by way of preliminary objections. Pa.R.C.P. 1030. See 2 Goodrich-Amram 2d § 1030:1.2 at 287-88 (1976); McKeever v. Mercaldo, 3 D.& C. 2d 188, 191 (1954); Ditkosky v. Schreiber Trucking Co., 82 D.& C. 385, 388-89 (1951). Accordingly, we sustain plaintiffs' preliminary objections in the nature of a motion to strike and strike paragraphs 19-21 of defendants' preliminary objections.

DEFENDANTS' PRELIMINARY OBJECTIONS

Five of defendants' preliminary objections are in the nature of a demurrer to the various counts of plaintiff's amended complaint. ^[2] A demurrer is a severe dispository procedure which should be sustained only in the clearest of cases and only after the moving party has satisfied certain stringent standards. A demurrer admits as true all relevant facts sufficiently pleaded in the complaint and all inferences fairly and reasonably deducible therefrom. Gekas v. Shapp, 469 Pa. 1, 364 A.2d 691 (1976); Buchanan v. Brentwood Federal Savings and Loan Association, 457 Pa. 135, 320 A.2d 117 (1974); Vitteck v. Washington Broadcasting Co., 256 Pa.Super 427, 389 A.2d 1197 (1978). In passing upon a demurrer, the court cannot consider factual matters collateral to the complaint but must limit itself only to such matters as appear therein. International Union of Operating Engineers v. Linesville Constr. Co., 457 Pa. 220, 322 A.2d 353 (1974); Muia v. Fazzini, 416 Pa. 377, 205 A.2d 856 (1965). A demurrer will be sustained only if " upon the facts averred, the law says with certainty that no recovery is permitted." Clevenstein v. Rizzuto, 439 Pa. 317, 401, 266 A.2d 623, 625 (1970). See also King v. United States Steel Corp., 432 Pa. 140, 143-44, 247 A.2d 563, 565 (1968). All doubts, if any exist, should be resolved in favor of overruling the demurrer. With these principles in mind, we now turn to an examination of the factual averments found in plaintiff's complaint. FACTS

Defendant Franklin Town Corporation is a Pennsylvania corporation organized on August 18, 1972 and engaged in the development and management of real estate in center city Philadelphia. Complaint paragraph 2. Defendants SmithKline Beckman Corporation, Adwin Realty Company and Butcher & Singer, Inc. are majority shareholders of Franklin Town and allegedly exercise complete control over its corporate affairs. Complaint paragraph 9. Plaintiff, The Korman Corporation, a minority shareholder of Franklin Town, ^[3] claims that the majority shareholders have conducted the affairs of Franklin Town in a manner calculated to further their own selfish interests and gain, without regard and in violation of the rights of the minority shareholders. Complaint para. 10. Specifically, plaintiff alleges that defendants, by virtue of their control and domination over the affairs of Franklin Town, have contrived a plan to unlawfully increase their own interest and dilute plaintiff's ownership interest in the corporation by, inter alia, increasing Franklin Town's outstanding stock over fourfold and issuing the additional shares of stock to themselves for no consideration. ^[4] Complaint paragraph 11. Plaintiff further alleges that defendants have breached their fiduciary duties to the minority shareholders and to the corporation itself by:

" (a) causing Franklin Town to engage in transactions with other entities in which the majority shareholders have an interest to the detriment of the interests of minority shareholders and of Franklin Town; [and]

(b) failing to disclose to Korman information material to its ownership interest, and failing to provide Korman with information which was necessary to a full understanding of proposed corporate action including, inter alia, the action proposed in the Notice of Annual Stockholders Meeting. . . . Complaint para. 12.

In Count I of the amended complaint, plaintiff asserts a direct claim against the majority shareholders for violation of their fiduciary duties owed to it as a minority shareholder and requests the following relief: a declaration that the issuance to defendants of the additional 400,000 shares of Franklin Town is unlawful or, in the alternative, if such shares have been issued, an order directing defendants to return such shares to Franklin Town for cancellation; an injunction prohibiting the defendants from acquiring any additional stock of Franklin Town except on payment of such consideration as shall be approved by this court; an order requiring the defendants to account for all gains and benefits which they obtained as a result of self-dealing and diversion of corporate opportunities; and an award of damages, including punitive damages and attorneys' fees. In Count II, plaintiff, individually, seeks to enjoin Franklin Town from permitting itself to be used in the manner proposed by the defendants, and in Count III, plaintiff asserts a claim derivatively on behalf of Franklin Town and requests relief identical to that which is sought in Count I.

PROPRIETY OF PRIVATE CAUSE OF ACTION

In their preliminary objections, defendants initially assert that Count I of plaintiff's amended complaint should be dismissed since, as a matter of law, claims against majority shareholders for breach of fiduciary duty must be brought derivatively on behalf of the corporation and may not be raised in a private action by a minority shareholder. Defendants contend that the injury alleged here is not personal to plaintiff, but rather corporate in nature, and, therefore, redress for the perceived wrong must be brought in the name of the corporation, the real party in interest, and not by plaintiff who, at most, suffers only indirectly as a result of the allegedly wrongful conduct. Under these circumstances, defendants argue, the law is clear that a private action may not be maintained and, therefore, it is requested that we sustain the demurrer and dismiss Count I of the complaint. After review of the relevant authorities and the arguments ably briefed by counsel, we conclude that plaintiff has sufficiently set forth a direct cause of action in Count I of its complaint and, accordingly, we overrule defendants' initial preliminary objection.

As a preliminary matter, it is helpful to examine the specia duties and obligations which the law has placed upon the defendants by virtue of their status as majority stockholders.

Both the directors of a corporation and its majority shareholders stand as fiduciaries toward the corporation and the minority shareholders. As fiduciaries, they are bound to act in the interests of the corporation and the remaining shareholders and are prohibited from pursuing any narrow self-interest in dealing with the property of the minority shareholders. Box v. Northrop Corp. 459 F.Supp. 540 (S.D.N.Y. 1978). The fiduciary obligation owed by the majority to the remaining shareholders is one of utmost good faith and loyalty. See Donahue v. Rodd Electrotype Co., 328 N.E.2d 505 (Mass. 1975); Jones v. H. F. Ahmanson & Co., 1 Cal.3d 93, 81 Cal.Rptr. 592, 460 P.2d 464 (1969). As the United States Supreme Court noted in Pepper v. Litton, 308 U.S. 295 (1939):

" He who is in such a fiduciary position cannot serve himself first and his cestuis second. He cannot manipulate the affairs of his corporation to their detriment and in disregard of the standards of common decency and honesty. He cannot by the intervention of a corporate entity violate the ancient precept against serving two masters. He cannot by the use of the corporate device avail himself of privileges normally permitted outsiders in a race of creditors. He cannot utilize his inside information and his strategic position for his own preferment. He cannot violate rules of fair play by doing...