Schupack v. Covelli

• Decision Date: 05 May 1981
• Docket Number: Civ. A. No. 80-66 Erie.
• Citation: 512 F. Supp. 1310
• Parties: Rae SCHUPACK, individually and Rae Schupack on behalf of herself and all other stockholders of 2170 East Lake Road, Inc., Plaintiff, v. Albert COVELLI, Robert Orchard, 2170 East Lake Road, Inc., and McDonald's Corporation, Defendants.
• Court: U.S. District Court — Eastern District of Pennsylvania

512 F. Supp. 1310

Rae SCHUPACK, individually and Rae Schupack on behalf of herself and all other stockholders of 2170 East Lake Road, Inc., Plaintiff, v. Albert COVELLI, Robert Orchard, 2170 East Lake Road, Inc., and McDonald's Corporation, Defendants.

Civ. A. No. 80-66 Erie.

United States District Court, W. D. Pennsylvania.

May 5, 1981.

Wallace J. Knox, Erie, Pa., for plaintiff.

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

Robert Millner, Chicago, Ill., Barbara Malett, Erie, Pa., Shelby Yastrow, Oak Brook, Ill., for defendant McDonald Corp.

Alfred G. Yates, Jr., Pittsburgh, Pa., for defendant Orchard.

MEMORANDUM OPINION

WEBER, Chief Judge.

The plaintiff in this action, Rae Schupack, was at one time a minority shareholder in 2170 East Lake Road, Inc., a corporation which was exclusively licensed by McDonald's Corporation to operate McDonald's Fast Food Restaurants in the Erie, Pennsylvania, area. In May of 1977, the plaintiff and other minority shareholders of 2170 East Lake Road, Inc., entered into a stock redemption agreement. Under the terms of this agreement eight (8) minority shareholders of 2170 East Lake Road, Inc. were to receive a total of $108,000 in return for their interests in the corporation.

The plaintiff now challenges the validity of this stock redemption, alleging that it violated state and federal securities' laws and Pennsylvania's common law of corporations. The plaintiff's complaint in this action proceeds in six counts. The first four counts contain individual claims by the plaintiff against Albert Covelli and Robert Orchard, the majority shareholders in 2170 East Lake Road, Inc. In her fifth and sixth counts the plaintiff sues derivatively on behalf of all other shareholders of the corporation against Orchard, Covelli, 2170 East Lake Road, Inc. and McDonald's Corporation.

Although these counts all proceed against different defendants on different theories of liability the gravamen of the complaint in each count is the same. Basically, the plaintiff alleges that the stock redemption was improper because, at the time of redemption, the minority shareholders were not informed that Orchard and Covelli were individually operating a McDonald's restaurant within the exclusive licensed territory of 2170 East Lake Road, Inc.

Presently there are two motions to dismiss pending in this matter. The first of these motions, filed by defendant Covelli, seeks dismissal of Count 5 of the plaintiff's complaint. In that count the plaintiff brings a shareholder's derivative suit against defendants Orchard, Covelli and 2170 East Lake Road, Inc. In its motion the defendant alleges that this derivative action should be dismissed for two reasons. First, the plaintiff does not fairly and adequately represent the interest of the other shareholders. Second, the plaintiff's derivative action was not timely brought and is barred by the equitable doctrine of laches.

The second motion pending in this case, also filed by defendant Covelli, is a motion to dismiss the plaintiff's complaint or, in the alternative, direct that the plaintiff's father, Eli Schupack, be added as an additional plaintiff. This motion proceeds under Fed.R.Civ.P. 17 (real party in interest) and 19 (parties necessary for just adjudication), and alleges that Mr. Schupack controls this litigation and, therefore, should be added as a party plaintiff. For the reasons stated below we feel that neither of these motions are well founded. Accordingly we deny defendant Covelli's motions to dismiss.

The requirement that the representative plaintiff in a shareholder derivative suit fairly and adequately represents the shareholder class is set forth in Rule 23.1 of the Fed.R.Civ.P., which states "the derivative action may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of the shareholders ... in enforcing the rights of the corporation or association." In determining what constitutes fair and adequate representation we recognize at the outset that Rule 23.1 does not require "that derivative action plaintiffs have the support of a majority of the shareholders or even that they be supported by all the minority shareholders." Nolen v. Shaw-Walker Co., 449 F.2d 506, 508 (6th Cir. 1971). See Shulman v. Ritzenberg, 47 F.R.D. 202 (D.C.Cal. 1969). The true measure of adequacy of representation under Rule 23.1 is not how many shareholders does the plaintiff represent. Rather it is how well does this representative plaintiff advance the interest of other similarly situated shareholders. See, Annot. 15 A.L.R. Fd. 954, 958; Shulman v. Ritzenberg, supra.

This qualitative evaluation of the adequacy of representation is frequently expressed as a two part test. First, does the representative plaintiff vigorously and conscientiously prosecute the action? Second, are the interests of the representative plaintiff in any way antagonistic to the interests of the class he purports to represent? See G. A. Enterprises v. Leisure Living Communities, Inc., 66 F.R.D. 123 (D.Mass.1974), aff'd 517 F.2d 24 (1st Cir. 1975); Sweet v. Birmingham, 65 F.R.D. 551 (S.D.N.Y.1975). In this case there is no argument that the plaintiff is not vigorously pursuing this action. Therefore, the question becomes one of conflict of interests between the representative plaintiff and the shareholder class. On this question the defendant bears the burden of proof. See, Smallwood v. Pearl Brewing Co., 489 F.2d 579, 592-93 n. 15 (5th Cir. 1974).

We are convinced that the defendant has not met this burden. The evidentiary materials accompanying the defendant's motion demonstrate that the plaintiff did not consult with the other minority shareholders prior to bringing this action; that in 1977 the plaintiff's father did contact some minority shareholders and was told...