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A.E.V., Inc. v. M.L. Harrold, Inc.

Superior Court of Pennsylvania

March 3, 2014



Appeal from the Order entered December 21, 2012 in the Court of Common Pleas of Allegheny County Civil Division at No(s): GD-10-009062




A.E.V., Inc. (Save On Beer I) and Nello DeSantes (Appellants, collectively) appeal from the order entered December 21, 2012, dismissing their complaint with prejudice upon the grant of preliminary objections filed by M.L. Harrold, Inc. (Save On Beer II) and Mary Lynn Harrold (collectively Appellees). We affirm.

The underlying facts, taken from the complaint at issue, are as follows.
Mr. DeSantes, after a career in retail grocer[y] management focusing on large stores operating as part of a consolidated group, or chain, of stores, began to work in the beer distribution industry in the late 1980s. He apprenticed as a manager in a beer distributorship that was among those introducing modern sales and marketing practices to an industry that continued to rely on small, independent stores long after nearly every other retail segment had developed chains of stores.
Mr. DeSantes in 1990 opened Save On Beer I, which featured a large selling floor with wide isles, shopping carts, and prominently displayed prices; an unusually extensive selection of beers; a broad inventory of sodas, snacks, utensils, and other party-related items; a prominent location along a busy arterial roadway; and other distinctive elements.
After observing the success of Save On Beer I and refining his business concept, Mr. DeSantes concluded that the "Save On Beer" concept would be successful in the growing and demographically desirable community comprising northern Allegheny County and southern Butler County. Mr. DeSantes was aware that other beer distributorships had begun to form chains in which groups of individual stores -- almost invariably owned by family members or friends -- engaged jointly in advertising, purchasing, pricing, management (sometimes through shared consultants) and other elements of operation.
Mr. DeSantes approached his lawyer, Louis Caputo Sr., in 1993 to obtain legal advice concerning lawful expansion of the implementation of his Save on Beer business concept by development of a Save On Beer distributorship in northern Allegheny County or southern Butler County. Mr. Caputo advised his clients, Save On Beer I and Mr. DeSantes, that state regulatory provisions made Mr. DeSantes personally ineligible to own a second beer distributorship, but that Mr. DeSantes could introduce his business concept and name to another community through a distributorship that reported different ownership.
Mr. DeSantes suggested his sons [ ] as candidates for ownership of the second Save On Beer distributorship, to be located in southern Butler County or northern Allegheny County. Mr. Caputo advised Mr. DeSantes that [his] sons should not become stockholders, officers, or directors of Save On Beer II. Mr. Caputo advised Mr. DeSantes that a second Save On Beer distributorship should be owned by someone unrelated to Mr. DeSantes.
After discussion, and relying on Mr. Caputo's legal advice, Mr. DeSantes and Mr. Caputo determined that Ms. Harrold, an entry-wage retail cashier at Save On Beer I with whom Mr. DeSantes had developed an intimate relationship, would be a suitable candidate to be proposed to the Pennsylvania Liquor Control Board ([LCB]), as owner of the second Save On Beer distributorship Mr. DeSantes proposed to establish. Ms. Harrold and Mr. DeSantes agreed, under Mr. Caputo's legal guidance, that Ms. Harrold would serve as stockholder, officer, director and [LCB]-approved manager of Save On Beer II; that Ms. Harrold would be proposed to the [LCB] as owner, officer, director and manager of Save On Beer II; that Mr. DeSantes and/or Save On Beer I would fund the development of Save On Beer II; and that Mr. DeSantes would be co-owner (on a "50-50" basis) of Save On Beer II.
While traveling in an automobile in or toward the Town of McCandless after departing Mr. Caputo's law office in 1993, Mr. DeSantes and Ms. Harrold formed an oral agreement with respect to the development, funding, and operation of Save On Beer II. Mr. DeSantes and Ms. Harrold agreed that Mr. DeSantes would provide management services and substantial funding enabling Ms. Harrold to develop and operate Save On Beer II while Ms. Harrold would work at [Save On Beer II] on a day-to-day basis under Mr. DeSantes' guidance and provide additional funding. Mr. DeSantes and Ms. Harrold agreed that they would own Save On Beer II in equal shares and share in any profits equally. Mr. DeSantes and Ms. Harrold shook hands in the automobile to confirm their "50-50" deal, then visited the Shadowood Lounge along McKnight Road in the Town of McCandless to celebrate their agreement and to toast their new business venture.
After agreeing to terms for development and operation of Save On Beer II, Mr. DeSantes and Ms. Harrold met with Mr. Caputo to arrange incorporation of Save On Beer II, naming Ms. Harrold as stockholder, officer[, ] and director of the corporation.
Mr. DeSantes and/or Save On Beer I (at Mr. DeSantes' direction) invested hundreds of thousands of dollars and substantial effort and skill in Save On Beer II…. In particular, Mr. DeSantes and/or Save On Beer I (at Mr. DeSantes' direction) provided payments or things of value to [Ms.] Harrold and/or Save On Beer [II] that included, [inter alia, an extensive list of cash or check payments to Appellees or their creditors, as well as provision of equipment, inventory, and services].
It was commonly known among vendors, professional advisors, employees, and competitors of Save On Beer I and Save On Beer II, and among others, that Mr. DeSantes was the principle [sic] investor, organizer and operator of Save On Beer II. Ms. Harrold chafed against statements or conduct by vendors and others that reflected the perception that Mr. DeSantes was the sole decision-maker for and owner of Save On Beer II. She responded to those circumstances by telling people that ["]half of this store is mine.["] Ms. Harrold regularly instructed vendors to send to Save On Beer I for payment invoices relating to inventory delivered to and services performed for Save On Beer II. Ms. Harrold and Mr. DeSantes referred to one another as "partner" when discussing the business of Save On Beer II. [However, d]uring and after years of providing capital and other things of value worth hundreds of thousands of dollars to Save On Beer II and/or Ms. Harrold, Mr. DeSantes neither requested nor received any repayment, dividend, return of capital or other thing of value from Ms. Harrold or Save On Beer II.
Beginning in the mid-2000s, Save On Beer I experienced a business decline (consequent in part to the demographic trends that had inclined Mr. DeSantes to diversify the Save On Beer concept's footprint by establishing a location in Marshall Township). Throughout 2007 and 2008, Mr. DeSantes informed Ms. Harrold of Save On Beer I's business decline and requested payments, associated with Mr. DeSantes' economic interest in Save On Beer II, from Ms. Harrold and/or Save On Beer II for the purpose of improving Save On Beer I's finances and operations.
In early 2008, Ms. Harrold and/or Save On Beer II paid at least [$17, 000.00] ("Partial Repayment") to Mr. DeSantes and/or Save On Beer I consequent to Mr. DeSantes' request for payments. Responding to Ms. Harrold's request, Mr. DeSantes and or Save On Beer I provided an information and inexhaustive accounting reflecting investment by Mr. DeSantes and/or Save On Beer I in Ms. Harrold and/or Save On Beer II, which investment was greater by multiples than the amount of the Partial Repayment[ ]. Ms. Harrold claimed that the then-current financial circumstances of Ms. Harrold and/or Save On Beer II made it difficult or impossible to provide any additional payments beyond the Partial Repayment to Mr. DeSantes and/or Save On Beer I[ ].
Throughout 2008 and 2009, Mr. DeSantes and/or Save On Beer I continued to request from Ms. Harrold and/or Save On Beer II payments arising from his ownership interest in Save On Beer II and an accounting of Save On Beer II's business and accounts. While continuing to discuss the relevant issues with Mr. DeSantes and his son Timothy, Ms. Harrold and Save On Beer II failed to provide additional payments or the requested accounting. … Ms. Harrold and Save On Beer II have refused to make any additional payment, beyond the Partial Repayment[ ], to Mr. DeSantes and/or Save On Beer I.

Second Amended Complaint, 8/9/2012, at ¶¶ 8-42 (paragraph numbers omitted; some paragraph formatting modified).

Appellants initiated the instant action against Appellees by writ of summons filed on May 3, 2010. Appellants filed a complaint in December 2011, and Appellees' preliminary objections thereto were sustained. Appellants filed an amended complaint in April 2012; preliminary objections were again sustained. Appellants filed their second amended complaint on August 9, 2012, alleging the facts quoted above and stating the following counts: (1) an action for appointment of a custodian and an accounting; (2) breach of fiduciary duties; (3) conversion; (4) breach of contract; (5) breach of implied contract; (6) breach of contract (loan agreement); (7) breach of implied contract (implied loan agreement); and (8) unjust enrichment/quantum meruit.

On September 13, 2012, Appellees filed preliminary objections to the second amended complaint stating, inter alia, a demurrer to all counts based upon the illegality of the alleged contract. Following briefing of the issues by the parties, the trial court entered an order on December 21, 2012, sustaining the preliminary objections[1] and dismissing the complaint in its entirety with prejudice. Appellants timely filed a notice of appeal. Both Appellants and the trial court complied with Pa.R.A.P. 1925.

Appellants present the following multi-part question on appeal.

Does Pennsylvania law authorize dismissal of the entirety of a complaint, for illegality and on preliminary objections:

a. without a determination of whether the relevant legal provisions (in this case, subsections of the Pennsylvania Liquor Code) are prohibitory or instead merely regulatory; b. where the complaint avers with specificity that the plaintiffs
(i) obtained legal advice from a lawyer expert in the relevant law;
(ii) suggested and preferred a cour[se] of conduct that would have been lawful; and
(iii) adopted a different cour[se based upon] the legal advice of an expert;
(c) where the complaint contains non-contract claims; and
(d) where the complaint describes with specificity conduct of defendants that is equally as culpable as, [or] more culpable than, the conduct of the plaintiffs[?]

Appellants' Brief at 3.

We begin with our standard of review.

Our standard of review of an order of the trial court overruling or granting preliminary objections is to determine whether the trial court committed an error of law. When considering the appropriateness of a ruling on preliminary objections, the appellate court must apply the same standard as the trial court.
Preliminary objections in the nature of a demurrer test the legal sufficiency of the complaint. When considering preliminary objections, all material facts set forth in the challenged pleadings are admitted as true, as well as all inferences reasonably deducible therefrom. Preliminary objections which seek the dismissal of a cause of action should be sustained only in cases in which it is clear and free from doubt that the pleader will be unable to prove facts legally sufficient to establish the right to relief. If any doubt exists as to whether a demurrer should be sustained, it should be resolved in favor of overruling the preliminary objections.

Liberty Mut. Ins. Co. v. Domtar Paper Co., 77 A.3d 1282, 1285 (Pa.Super. 2013) (quoting Feingold v. Hendrzak, 15 A.3d 937, 941 (Pa.Super. 2011)).

Here, the trial court sustained the demurrer and dismissed the complaint upon a determination that the agreement that formed the basis of Appellants' claims was illegal. In determining whether this ruling was erroneous, we examine the relevant law.

A contract is illegal if either its formation or its performance is criminal, tortious, or otherwise opposed to public policy. The illegality must appear from the plaintiff's statement of his cause of action. The test for determining whether a contract should be denied enforcement because of illegality was concisely stated [as follows]: If, from the plaintiff's own stating or otherwise, the cause of action appears to arise ex turpi causa or the transgression of a positive law of this country, there the court says he has no right to be assisted.

Contractor Industries v. Zerr, 359 A.2d 803, 805 (Pa.Super. 1976) (quotations and citations omitted). "An agreement that cannot be performed without violating a statute is illegal and will not be enforced. However, it must appear that the subject of the agreement is specifically proscribed by statute." Fitzpatrick v. Shay, 461 A.2d 243, 247 (Pa.Super. 1983).

In support of its illegality position, Appellees point to the following statutes.

§ 4-436. Application for distributors', importing distributors' and retail dispensers' licenses
Application for distributors', importing distributors' and retail dispensers' licenses, or for the transfer of an existing license to another premises not then licensed or to another person, shall contain or have attached thereto the following information and statements:
(a) The name and residence of the applicant and how long he has resided there, and if an association, partnership or corporation, the residences of the members, officers and directors for the period of two years next preceding the date of such application.
(c) Place of birth of applicant, and if a naturalized citizen, where and when naturalized, and if a corporation organized or registered under the laws of the Commonwealth, when and where incorporated, with the names and addresses of each officer and director, all of whom shall be citizens of the United States; if the application is for a distributor's or importing distributor's license and the applicant therefor is a corporation, the application shall also contain a statement of facts showing the qualifications of the corporation, as hereinbefore required, together with the names and addresses of all stockholders.
(e) That the applicant is not, or in case of a partnership or association, that the members or partners are not, and in the case of a corporation, that the officers and directors are not, in any manner pecuniarily interested, either directly or indirectly, in the profits of any other class of business regulated under this article, except as hereinafter permitted.
(f) That applicant is the only person in any manner pecuniarily interested in the business so asked to be licensed, and that no other person shall be in any manner pecuniarily interested therein during the continuance of the license, except as hereinafter permitted.

47 P.S. § 4-436.

§ 4-438. Number and kinds of licenses allowed same licensee
(b) No person shall possess or be issued more than one distributor's or importing distributor's license.

47 P.S. § 4-438.

§ 4-443. Interlocking business prohibited
(b) No distributor or importing distributor and no officer or director of any distributor or importing distributor shall at the same time … directly or indirectly, own any stock of, or have any financial interest in, or be the owner, proprietor or lessor of, any place covered by any other malt or brewed beverage or liquor license.
(f) No distributor, importing distributor or retail dispenser shall in anywise receive, either directly or indirectly, any credit, loan, moneys or the equivalent thereof from any other licensee, or from any officer, director or firm member of any other licensee, or from or through a subsidiary or affiliate of another licensee, or from any firm, association or corporation, except banking institutions, in which another licensee or any officer, director or firm member of another licensee has a substantial interest or exercises a control of its business policy, for equipping, fitting out, payment of license fee, maintaining and conducting, either in whole or in part, an establishment or business operated under a distributor's, importing distributor's or retail dispenser's license….

47 P.S. § 4-443.

Comparing the allegations of the complaint to the laws cited above, it is clear that Appellants are seeking to enforce an illegal contract. Knowing full well that Save On Beer I could not obtain a second license to distribute beer, Mr. DeSantes sought out a puppet to use as the reported owner on the license application for Save On Beer II. Although the law prohibits him from having any financial interest in a second distributorship, he was the off-the-books owner of 50% of Save On Beer II. Despite the prohibition of his lending or giving money to Ms. Harrold or Save On Beer II to run that business, Mr. DeSantes and Save On Beer I did so and now ask to be repaid. We are not persuaded by Appellants' argument that the relevant statutes are merely regulatory and not prohibitory. The cases Appellants rely upon to support the argument are clearly distinguishable. Those cases involve contracts with legal subject matter; the only illegality was the failure to obtain a requisite permit. See, e.g., Rittenhouse v. Barclay White Inc., 625 A.2d 1208, 1211 (Pa.Super. 1993) ("Here, as Larchwood had not obtained a permit for multiple occupancy of the property, BWI's occupancy of the residence was in violation of the Whitemarsh Township building code. Nonetheless, the lease is not void for illegality. An agreement will be considered void for illegality only where it cannot be performed without violating a statute. In the instant action, the lease was not, by its terms, per se illegal.") (citations and quotation marks omitted); Contractor Industries, 359 A.2d at 807 ("[I]t is apparent that the contract between appellant and appellee was not illegal. The parties contracted for the installation of a swimming pool; neither the subject matter of the contract, nor its performance, was illegal. … Presumably, had appellant applied for a permit to construct a swimming pool in her front yard, it would have been denied, and this litigation would have been averted."); Meneice v. Camp Kadimah Co., 43 A.2d 621, 622 (Pa.Super. 1945) ("The act does not prohibit the building of a swimming pool; it merely requires that a permit be obtained. The statute is regulatory and not prohibitive. The legislative intent looks rather to the operation of a public swimming pool than to the construction of a pool. While it may be illegal to operate a public swimming pool that does not conform to the regulations of the Department of Health, the mere construction of a pool neither violates the statute nor is it against public policy.").

Here, the entire point of the alleged contract or business arrangement was to subvert the Liquor Code. The contract could not have been performed without violating the statutes. Hence Appellants' regulatory-versus-prohibitive argument is meritless.

Because his claim to be an owner of Save On Beer II is based upon a contract that was void ab initio, Mr. DeSantes has no standing to seek the appointment of a custodian and an accounting, see 15 Pa.C.S. § 1767(a) ("[U]pon application of any shareholder, the court may appoint one or more persons to be custodians of and for any business corporation….") (emphasis added). Further, there is no longer any foundation for the fiduciary duty claim, and there is no basis for the conversion claim which is premised upon his 50% ownership of Save On Beer II. See Second Amended Complaint, 8/9/2012, at ¶¶ 57-58.

We also hold that the trial court did not err in dismissing Appellants' non-contract claims based upon the facts alleged in the second amended complaint. The claims for implied contract and quantum meruit are claims in equity. See, e.g., Durst v. Milroy General Contracting, Inc., 52 A.3d 357, 360 (Pa.Super. 2012) ("'Quantum meruit is an equitable remedy….'"). The trial court acted within its discretion in concluding that Mr. DeSantes and Save On Beer I are not entitled to equitable relief because of their unclean hands.[2]

Appellants' allegations of reliance on counsel do not change our analysis, as they do not alter the fact that Appellants offered up a third party to the LCB as the sole owner of Save On Beer II because they knew that their involvement in the business of Save On Beer II was prohibited by law. Mr. DeSantes did not seek advice on how to own legally a second, interlocking business; rather, he sought advice on how to trick the LCB into believing that he was not violating the law.

Nor are we persuaded by Appellants' argument that the trial court erred in failing to weigh the relative culpability of the parties. Appellants are correct that there is precedent for allowing the less-culpable party to recover based upon an illegal agreement. They cite for this proposition Peyton v. Margiotti, 156 A.2d 865, 868 (Pa. 1959), in which our Supreme Court applied the doctrine of "disparate confidences" to prevent an attorney from taking advantage of his client. Appellants' Brief at 15. The Court described the principle as follows: "When the parties to a contract against public policy or otherwise illegal are not in pari delicto, or equally guilty, and when public policy is considered as advanced by allowing either, or at least the more excusable of the two, to sue, relief may be granted." Id. at 868 (quotation omitted).

Appellants make no argument as to how they are less culpable than Appellees. More importantly, they offer no public policy which would be advanced by allowing them to proceed with their claims. The illegality of the business arrangement is obvious from the facts pled by Appellants in their complaint, and allowing Appellants to recover would thwart, not advance, public policy.

Where a contract is found to be against public policy it cannot, under any circumstances, be made the basis of a cause of action. The law when appealed to will have nothing to do with it, but will leave the parties just in the condition in which it finds them. If they have fully executed their unlawful contract, the law will not disturb them in the possession of what each has acquired under it. If one has executed in whole or in part, the law turns a deaf ear when he pleads for its aid to compel the other to do as much…. Gramby v. Cobb, 422 A.2d 889, 892 (Pa.Super. 1980) (quoting Dippel v. Brunozzi, 74 A.2d 112, 114 (Pa. 1950)).

Whether the contract violates the law or public policy, the result is the same: Pennsylvania courts want no part of it. We have no hesitation in concluding that the trial court did not err in leaving these parties where it found them and refusing to allow our courts to be used to resolve this dispute.

Order affirmed.

Judgment Entered.

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