Hill v. Ofalt
85 A.3d 540
| Pa. Super. Ct. | 2014Background
- Hill and Ofalt Jr. formed Milestone Restaurant Company (closely held, 50/50) to open Milestone Ranch; both became officers/directors/shareholders and personally guaranteed bank and SBA loans.
- Milestone operated Aug 2007–Mar 2010; Hill assisted start-up and then returned to his other restaurant while Ofalt Jr. ran day-to-day operations.
- Hill alleged Ofalt Jr. misappropriated funds, gave away goods, pocketed cash, failed to remit payroll taxes, and allowed rent-free occupancy, causing Milestone’s failure, large tax liens, loan defaults, and exposure of Hill (as guarantor) to creditor claims.
- Hill sued individually (naming Ofalt Jr., Ofalt Sr., and Milestone) asserting declaratory relief, breach of contract, breach of fiduciary duty, unjust enrichment, conversion, and a constructive trust claim.
- Trial court sustained defendants’ demurrer, dismissed Hill’s complaint as lacking standing for direct claims (should be derivative), and denied leave to amend; Hill appealed.
- Superior Court affirmed that Hill’s claims were derivative and not properly brought as individual direct claims, but vacated the dismissal insofar as the court refused leave to amend and remanded for Hill to file derivative claims on behalf of Milestone.
Issues
| Issue | Plaintiff's Argument (Hill) | Defendant's Argument (Ofalts) | Held |
|---|---|---|---|
| Whether Hill may maintain individual (direct) claims for alleged wrongs by Ofalt Jr. | Hill claims he suffered direct, personal harms (tax liens, creditor actions, guarantor exposure) and thus has standing to sue individually; also invokes ALI §7.01(d) for closely held corp. | The injuries are corporate in nature and any shareholder harm is derivative; statutory scheme limits enforcement of director duties to the corporation or derivative suit. | Held: Claims are derivative; Hill lacks standing to pursue them individually. |
| Whether Ofalt Jr. owed Hill a fiduciary duty giving rise to direct claims | Hill contends closely held, equal-share relationship supports fiduciary obligations between shareholders. | Ofalts argue no fiduciary duty to Hill individually was pleaded; precedent recognizing fiduciary duties concerns majority/minority freeze-out contexts, not equal 50/50 partners. | Held: No adequately pleaded individual fiduciary duty; cases cited do not control here. |
| Whether ALI Principles §7.01(d) allows conversion of derivative claims into direct recovery for closely held corps | Hill argues courts (and PA Supreme Court via Cuker) would permit direct recovery under ALI §7.01(d) in closely held contexts. | Defendants argue §7.01(d) conflicts with PA statutory law (15 Pa.C.S. §1717) and cannot be used to circumvent derivative standing rules. | Held: Court might accept some procedural aspects of ALI guidance (e.g., demand excusal) but will not adopt §7.01(d)’s substantive grant allowing direct individual recovery that conflicts with PA law. |
| Whether trial court abused discretion by denying leave to amend to add derivative claims (add Milestone as plaintiff) | Hill requested leave to amend to assert derivative claims and add Milestone as plaintiff to pursue corporate causes of action. | Defendants opposed sustaining the demurrer but did not show amendment would be futile or time-barred. | Held: Trial court abused its discretion in refusing leave to amend; remand for opportunity to amend and prosecute derivative claims. |
Key Cases Cited
- Burgoyne v. Pinecrest Cmty. Ass'n, 924 A.2d 675 (Pa. Super. 2007) (standard for treating facts as true on demurrer review)
- Lugo v. Farmers Pride, Inc., 967 A.2d 963 (Pa. Super. 2009) (preliminary objections in the nature of a demurrer: scope and standard)
- Reifsnyder v. Pittsburgh Outdoor Advertising Co., 173 A.2d 319 (Pa. 1961) (shareholder may not bring direct action for injuries peculiar to the corporation)
- Fishkin v. Hi-Acres, Inc., 341 A.2d 95 (Pa. 1975) (distinguishing direct vs. derivative shareholder claims)
- Ferber v. American Lamp Corp., 469 A.2d 1046 (Pa. 1983) (majority shareholders owe duties to protect minority shareholders; freeze-out context)
- Cuker v. Mikalauskas, 692 A.2d 1042 (Pa. 1997) (PA Supreme Court adopted portions of ALI governance principles for derivative litigation procedure)
- Mid-State Fertilizer Co. v. Exchange National Bank, 877 F.2d 1383 (7th Cir. 1989) (analysis why guarantors/creditors cannot bring direct suits for corporate injuries)