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ORCHARD v. COVELLI

January 26, 1987

ROBERT ORCHARD, individually and ROBERT ORCHARD, on behalf of himself and all other stockholders,
v.
ALBERT COVELLI, JOSEPHINE COVELLI, SYLVESTRO COVELLI, a/k/a SAM COVELLI, JOHN T. MILLIGAN, McDONALD'S CORPORATION, PEACH ST., INC., PENNINSULA DRIVE, INC., 2170 EAST LAKE ROAD, INC., 1311 BROAD STREET, INC., 2650 TWENTY-SIXTH STREET, INC., and 1115 SASS., INC.



The opinion of the court was delivered by: WEBER

 This case has a considerable prior history beginning with C.A. 78-72 Erie and C.A. 81-149 Erie and the facts are set forth in the opinion covering that case published in Orchard v. Covelli, et al, 590 Fed Supp 1548 (W.D. Pa 1984) affd, 802 F.2d 448 (3rd Cir. 1986.

 The parties in that action were the same as here, except for McDonald's which was not named.

 We have essentially three diverse interests here, and for simplicity in this opinion we will designate the plaintiff as Orchard, McDonald's as McDonald's, and all other defendants collectively as Covelli, the name of the principle defendant and controlling stockholder in the various defendant corporations.

 Plaintiff Orchard in those actions alleged that the Covelli defendants (a) misappropriated corporate assets and opportunities, (b) breached an oral contract to give Orchard a 50% interest, (c) breached an oral contract of employment, and (d) breached a fiduciary duty to Orchard as a minority stockholder.

 The case proceeded through extensive discovery and was ready for trial when both the present plaintiff and the present defendants, including McDonalds, were named defendants in a suit brought by former stockholder (The Chicago Group) whose interests had been previously bought out. Schupack v. Covelli, Orchard and McDonalds, 498 F. Supp. 704 (W.D.PA. 1980). Based on information developed in the earlier suit the Chicago Group alleged that they had been defrauded in the buy-out. Further action in the earlier suit was stayed until the resolution of the Chicago Group suit, which was settled after a non-jury trial. The non-jury trial of the earlier suits proceeded and resulted in an opinion and order of this court on July 6, 1984; (see Orchard v. Covelli, 590 Fed Supp 1548), which found for Orchard in the sum of $535,690 "as fair compensation for any and all interest held in the various corporations and in satisfaction of all claims asserted against the above named defendants." After denial of defendants post-trial motions for new trial or to amend judgment plaintiff appealed.

 On May 23, 1984, Orchard, on behalf of himself and all other stockholders filed the present action of C.A. 84-158 Erie by separate counsel, albeit the same counsel that represented the Chicago group in the above mentioned action at C.A. 80-66 Erie. Defendants moved to stay further proceedings in this action until the resolution of the appeals in C.A. 78-72 Erie and C.A. 81-149 Erie. This motion was granted.

 The Court of Appeals affirmed the Order of this Court of July 6, 1984, on September 11, 1986 and Orchard moved for payment of the proceeds which had been deposited in Court, and the judgment was satisfied.

 We now have motions on behalf of all defendants to dismiss the present action. The motion of McDonald's is grounded on estoppel because it was not a party to the prior action; the motion of all other defendants is based on collateral estoppel and res judicata.

 I. The McDonald's Motion

 Plaintiff insists that the present suit against McDonald's is based on arbitrary termination of franchises which plaintiff, Orchard, held jointly with defendant Albert Covelli. Actually, no franchises were terminated; they expired, but the plaintiff Orchard was not named in the renewal franchises for the enterprises.

 While McDonald's was not a party to the prior litigation, it was necessary for the court to determine the allegations that defendant had misappropriated corporate assets by failing to secure from McDonald's extensions of the prior franchises in the names of both Orchard and Covelli, but received the renewal in Covelli's name only. In order to determine this issue it was necessary for this court to receive evidence on the McDonald's franchise agreements, their terms, McDonald's conditions for issuing and renewing, McDonald's offer to renew in Covelli's name alone, and Covelli's action or failure to act in exercising the option to renew. See finding of fact Nos. 25, 26, 27, and 28, 590 F.Supp pp 1552-53. We came to the conclusion of law that McDonald's was under no legal obligation to renew the original franchises. (p. 1554). These findings of fact and conclusion of law were necessary to determine the issue between Orchard and Covelli of usurpation of a corporate opportunity.

 
The evidence indicated McDonald's gave consideration to renewing the franchises with Orchard as a shareholder. There is evidence of McDonald's dissatisfaction with Orchard's performances as manager. McDonald's was aware at the time of renewal that Orchard was not participating in the operation of any Erie restaurants. McDonald's had a policy not to grant franchises to entities which were not fully owneroperated. It had learned from Milligan that Orchard acquired a franchise in a restaurant of a competing restaurant chain, contrary to the express conditions of the Erie franchises. See e.g. Martino v. McDonald's System, Inc., 598 F.2d 1079 (7th Cir. 1979).

 As a consequence McDonald's refused to renew the franchises in the name of the corporation in which Orchard had an interest and thereafter specifically refused Covelli's request to be allowed to assign the leases to these corporations. Under the circumstances, the corporations in which Orchard had an interest had no right of renewal enforceable against McDonald's, and McDonald's decision to invest Covelli with ...


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