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ORCHARD v. COVELLI

July 6, 1984

ROBERT ORCHARD, Plaintiff
v.
ALBERT COVELLI d/b/a 4316 BUFFALO ROAD, ERIE, PENNSYLVANIA, and 4316 BUFFALO ROAD, INC., Defendant; ROBERT ORCHARD. Plaintiff v. ALBERT COVELLI, individually, and t/d/b/a 4316 BUFFALO ROAD, Erie Pennsylvania, and 4316 BUFFALO ROAD, INC. 4319 PEACH STREET, INC. t/d/b/a/ 4319 PEACH STREET, Erie, Pennsylvania, 2170 EAST LAKE ROAD, INC. 909 PENINSULA DRIVE, INC., 1311 BROAD STREET, INC., 2650 26 STREET, INC. and 1115 SASSAFRAS, INC., Girard, Pennsylvania, JOHN T. MILLIGAN, Secretary of the Corporations, Defendants


Weber, D.J.


The opinion of the court was delivered by: WEBER

[EDITOR'S NOTE: The following court-provided text does not appear at this cite in 590 F. Supp.]

ORDER

 In accordance with the enclosed findings of fact and conclusions of law contained in the accompanying Opinion, the following is hereby ORDERED:

 1) Judgment is entered in favor of the plaintiff Orchard and against the defendant Albert Covelli, 4316 Bufflo Road, Inc., 4319 Peach Street, Inc., 2170 East Lake Road, Inc., 909 Peninsula Drive, Inc., 1311 Broad Street, Inc.; 2650 26 Street, Inc., and 1115 Sassafras Inc. in the amount of $535,690 as fair compensation for any and all interest held in the seven original above-named McDonald's Corporations and in satisfaction of all claims asserted against the above defendants;

 2) Plaintiff's claim against John T. Milligan, Secretary of the Corporation is dismissed with prejudice;

 3) Any amounts presently owed by any or all of these corporations to the Chicago Group by the terms of the original buy-out shall be paid by the defendant Covelli.

 I. INTRODUCTION

 This is a removed action filed by a minority shareholder of a closely-held corporation, Robert Orchard, seeking various forms of legal and equitable relief. The lawsuit parallels a family dispute over the ownership and control of a number of McDonald Corporation fast food restaurants located in and about Erie, Pennsylvania, and now owned in the majority by the defendant Albert Covelli.

 Tolstoi once wrote that "happy families are all alike; every unhappy family is unhappy in its own way." We sense that Tolstoi was less familiar with the American modern law of closely-held corporations from which we note an alarming similarity in the demise of such entities where the survival of a business association is so perilously tied to the continuing vitality of intimate personal relationships. Many lawsuits arising from disputes among shareholders in closely-held corporations are characterized by the parties' inability to separate the business and personal aspects of their relationship. We find ourselves struck by the unavailability or inadequacy of identifiable legal remedies to aid minority shareholders in redressing abuses by majority shareholders equipped with unfettered power over the management of the close corporation. We bind ourselves to a careful balance of equities in fashioning appropriate relief under the present circumstances. The task of this court has been complicated by the nature of the past dealings between the parties and by factors which are peculiar to the scope and terms of franchise agreements. We are constrained to note here that the weight of our responsibility has not been lightened by the manner in which plaintiff's counsel presented his case.

 As a result of our review of the evidence and applicable law, supplemented by detailed legal memoranda filed by the parties, we find that the vast majority of Mr. Orchard's claims are without merit and that the law does not recognize a right to recovery. Yet our analysis is predicated on the fact that majority shareholders stand in a fiduciary relationship with minority interest holders. In this light we find that the plaintiff Orchard is entitled to relief as a result of a systematic "freeze-out" orchestrated by the defendant Covelli. We are convinced that there existed a clear intent on the part of the majority shareholder to use seemingly legitimate means to exclude Mr. Orchard from his benefit and interest in the various franchises.

 II. FINDINGS OF FACT

 1. Robert Orchard, the minority shareholder, and Albert Covelli, the majority shareholder, together, are the only shareholders of some seven corporations operating McDonald's fast food restaurants in Erie, Pennsylvania.

 2. From 1962 to 1977 these two men worked closely to develop these restaurants into a viable, profitable business. Covelli had operated a number of McDonald's restaurants in and around Canton, Ohio for several years. Orchard had no previous experience in the fast food industry but had become interested in the ownership of a McDonald Franchise after several conversations with his brother-in-law Covelli. Under an agreement the two men decided to become partners with each receiving 50% of the Canton Store.

 3. In 1964, Covelli was approached by a group of investors (hereinafter referred to as "the Chicago Group") interested in purchasing three McDonald's restaurants then operating in Erie, Pennsylvania. Covelli proposed to Orchard that he join in the purchase of these Erie stores and ultimately the three parties agreed to joint participation in the restaurants at Peach Street, Peninsula Drive, and East Lake Road.

 4. Under the joint participation agreement each of the three Erie restaurants was separately incorporated with each corporation bearing the name of the location of the restaurant it represented, i.e. Peach Street, Inc., Peninsula Drive, Inc., and East Lake Road, Inc.

 5. The corporations held three principal assets:

 
(i) Leasehold interest, in the buildings and lands which served as cites of the restaurants;
 
(ii) Fixed assets in the form of equipment and cooking utensils necessary for the operation of a fast food restaurant;
 
(iii) A franchise for a term of twenty years from McDonald's corporation authorizing the operation of a fast food restaurant.

 6. Shares in the corporations were divided between the participants in the joint venture as follows:

 
(i) Chicago group - 45%;
 
(ii) Albert Covelli - 40%;
 
(iii) Robert Orchard - 15%

 7. The following officers' positions were established:

 
(i) President - Albert Covelli - he was charged with general supervision of operations and was required to travel frequently from Canton, Ohio, to Erie. At the outset Covelli did not receive a salary but he did receive a travel allowance.
 
(ii) Vice-President - Robert Orchard - he was charged with responsibility for the day to day operation of the restaurants. He received a salary of $10,400 per year per restaurant. Orchard was required to move from Canton, Ohio to Erie.

 8. By 1975, the joint venture had opened three additional McDonald's franchises, West 26th Street, Inc., Broad Street, Inc. and Sassafras Street, Inc. with identical shareholder participation as in the original three corporations.

 9. By 1975, the compensation for the officers was as follows:

 
(i) Covelli - $16,600 per year/per restaurant or $96,000;
 
(ii) Orchard - $10,400 per year/per restaurant ...

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