Schupack v. Covelli, Civ. A. No. 80-66 Erie.

• Decision Date: 30 September 1980
• Docket Number: Civ. A. No. 80-66 Erie.
• Citation: 498 F. Supp. 704
• Parties: Rae SCHUPACK, Individually and Rae Schupack on behalf of herself and all other stockholders of 2170 East Lake Road, Inc., v. Albert COVELLI, Robert Orchard, 2170 East Lake Road, Inc., and McDonald's Corporation.
• Court: U.S. District Court — Eastern District of Pennsylvania

498 F. Supp. 704

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

Civ. A. No. 80-66 Erie.

United States District Court, W. D. Pennsylvania.

September 30, 1980.

Wallace J. Knox and Paul F. Curry, Erie, Pa., for plaintiff.

John Gent, Erie, Pa., for Covelli.

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

Frederic S. Lane and Robert B. Millner, Chicago, Ill., Shelby Yastrow, Oakbrook, Ill., Barbara Malett, Erie, Pa., for McDonald Corp.

OPINION AND ORDER

WEBER, Chief Judge.

This case arises out of a stock redemption agreement executed in May of 1977. At that time the Plaintiff, Rae Schupack, was a stockholder in 2170 East Lake Road, Inc., a firm which was exclusively licensed by McDonald's Corporation to operate McDonald's fast food restaurants in the Erie Pennsylvania area. Robert Orchard and Albert Covelli were the majority shareholders of 2170 East Lake Road, Inc. Under the terms of the stock redemption agreement, ten minority shareholders of 2170 East Lake Road, Inc., including the Plaintiff, agreed to sell their stock back to the corporation at a total purchase price of $108,000. Moreover, the redemption agreement provided that the Second National Bank of Warren, Warren, Ohio, would act as escrow agent, holding the stock pending complete payment by the corporation.

In May of 1980 the Plaintiff filed in this Court a six count complaint against 2170 East Lake Road, Inc., McDonald's, Orchard and Covelli alleging that this stock redemption violated state and federal securities laws and Pennsylvania's common law of corporations. Although the Plaintiff's complaint proceeds under a number of distinct theories, basically what it alleges is that the stock redemption was improper because, at the time of redemption, the Plaintiff was not informed that McDonald's had franchised Orchard and Covelli individually to operate a McDonald's restaurant within the exclusive licensed territory of 2170 East Lake Road, Inc.

Presently there is before this Court a motion by defendant McDonald's to strike and dismiss Count VI of this complaint. In this count the Plaintiff sues derivatively on behalf of 2170 East Lake Road, Inc. against McDonald's Corporation, charging that McDonald's violated its franchise agreement with 2170 by granting a separate franchise to Orchard and Covelli. In its motion to strike McDonald's argues that the Plaintiff lacks standing to bring a shareholders' derivative action because she is not presently a shareholder in 2170 East Lake Road, Inc. We disagree. Accordingly we deny McDonald's motion to strike Count VI of this complaint.

The requirement that one have a present possessory interest in the stock of a corporation in order to sue derivatively on its behalf is a basic fundamental of corporation law. See e. g., 19 Am.Jur.2d, Corporations, § 559; 18 C.J.S. Corporations, § 566; Sum.Pa.Jur., Corporations, § 237 and cases cited therein. The rationale behind this standing requirement is quite simply the belief that only a party with an on-going proprietory interest in the corporation will adequately represent the corporation's interests in a derivative action. See e. g., Cohen v. Beneficial Industrial Loan Corp., 337 U.S. 541, 547-550, 69 S.Ct. 1221, 1226-1227, 93 L.Ed. 1528 (1949); Kauffman v. Dreyfus Fund, Inc., 434 F.2d 727, 735-736 (3d Cir. 1970), cert. denied, 401 U.S. 974, 91 S.Ct. 1190, 28 L.Ed.2d 323 (1971). Moreover, this standing requirement is also implicit in the Federal Rules of Civil Procedure, which state that derivative actions may be "brought by one or more shareholders ...." Fed.Rules Civ.Proc., Rule 23.1.

It is important to note, however, that one need not have legal title to stock in order to satisfy this standing requirement. Quite the contrary, it is clear that an equitable shareholder possesses a sufficient proprietory interest in the corporation to sue on its behalf. See e. g., In re The Pittsburgh and Lake Erie Railroad Company Securities and Antitrust Litigation, Appeal of Objactor Irving Trust Co., 543 F.2d 1058, 1067 (3d Cir. 1976), (Pledgee of stock has standing to sue derivatively); Scott v. Multi-Amp Corp., 386 F.Supp. 44 (D.C.N.J. 1974).

In this case the Plaintiff asserts that it is such an equitable shareholder of stock of 2170 East Lake Road, Inc. for two reasons.

First the Plaintiff argues that the Defendants fraudulently failed to disclose McDonald's separate dealings with Orchard and Covelli at the time of the original stock redemption. Since this stock redemption agreement was fraudulently entered into, the Plaintiff contends that she is entitled to rescission of that agreement and the return of the stock. Therefore, under the Plaintiff's theory, this right to rescission gives her equitable ownership of the stock.

We recognise that there is a division of authority on the question of whether a right to rescission is sufficient to establish an equitable ownership of stock. Compare, Orenstein v. Compusamp, Inc., 19 F.R. Serv.2d 466 (S.D.N.Y.1974) with Willcox v. Harriman Securities Corp., 10 F.Supp. 532 (S.D.N.Y.1933). See generally, 19 Am.Jur. 2d., Corporations, § 567. We feel, however, in this case that the better reasoned position is that taken by ...