Shareholder cannot assert individual claim against the corporation and/or a corporate officer if claim is dependent upon and/or derivative to the corporation’s injuries.

The plaintiff brought an individual action against the defendant and Milestone Ranch (the corporation for which the plaintiff and the defendant were the sole shareholders, directors and officers) alleging that he sustained damages from the defendant’s unlawful operation of the corporation and failure to properly withhold federal, state and local taxes from the corporation’s employees. As the result of the defendant’s conduct, the corporation closed, fell into arrears with the tax authorities and the Department of Revenue, and defaulted on its loans, which the plaintiff had personally guaranteed. The trial court sustained the defendant’s preliminary objections to the complaint, which asserted, among other things, that it was legally insufficient as the plaintiff filed an individual action and not a shareholder’s derivative action. In upholding the dismissal of the complaint, the Superior Court found that an individual shareholder, including one of a closely held corporation, does not have standing to institute an action for individual damages unless those damages are independent of any injury to the corporation. Despite being personally responsible for the defaulted loans and the tax arrears, the court found that the plaintiff’s claims were still dependent upon and derivative to the corporation’s injury; and, therefore, the Plaintiff had to file a derivative action. However, the court held that, under Pennsylvania Rule of Civil Procedure 1033, previously and as amended in 2014, the trial court should have granted the plaintiff the opportunity to file an amended complaint to add the corporation as a plaintiff and assert a shareholder’s derivative action.

Case Law Alerts, 2nd Quarter, April 2014