Common Pleas Court Allows Sole Shareholder to Assert Non-Derivative Claim for Injuries Sustained Directly by Corporation

A recent decision by the Court of Common Pleas of Philadelphia County found that a limited liability company was a real party in interest for purposes of asserting a damages claim on behalf of the corporation of which it was the sole shareholder. In J. Love, LLC v. Kassem, No. 01337, 2013 Phila. Ct. Com. Pl. LEXIS 354 (C.P. Philadelphia Cty. Sept. 5, 2013), the plaintiff LLC asserted various causes of action against its landlord arising out of the alleged breach of a ten-year commercial lease agreement. Included among the damages sought by the plaintiff LLC were lost profits resulting from the closure of the night club that had been operated on the leased premises. Although the plaintiff LLC had signed the lease, the club was actually operated in the name of a separate corporation of which the plaintiff LLC again was the sole shareholder. Over the objection of the landlord, the court held that the plaintiff LLC had standing as the real party in interest to seek damages on behalf of the non-party corporation. In resolving this issue, the court found persuasive the testimony of an accountant, who testified that the losses of the non-party corporation were borne by the plaintiff LLC since it was the sole shareholder of the corporation. Consequently, the court held that it was of no moment that the corporation was not a party to the lawsuit, as the plaintiff LLC was able to recover damages in its own name that the corporation had sustained directly.

A brief comment on the court’s approach to the “real party in interest” issue is warranted.

In concluding that the plaintiff LLC could recover damages for the corporation, the court clearly took an expansive view of the “real party in interest” requirement. This view is interesting, however, because it is difficult to reconcile with the oft-stated legal proposition that “a corporation … is normally regarded as a legal entity separate and distinct from its shareholders.” Ashley v. Ashley, 393 A.2d 637, 641 (Pa. 1978). Indeed, insofar as a cause of action is an asset of the corporation, the argument can be made that allowing the shareholder to prosecute and recover on the cause of action in its own name results in an improper commingling of assets if there has not been a valid assignment for consideration.

To appreciate the force of this argument, simply imagine a scenario in which the corporation was in bankruptcy. Under these circumstances, the debtor almost certainly could not circumvent a recovery on behalf of the bankruptcy estate to the detriment of its creditors by claiming that the shareholder was the real party in interest vis-à-vis the injury sustained by the corporation. Or, even more fundamentally yet, if a shareholder has standing to sue in its own name because it sustains a compensable, indirect injury when the corporation is injured, then the direct vs. derivative dichotomy in corporate litigation would be completely eviscerated. See generally Pa. R.C.P. 1506 (Stockholder’s Derivative Action); see also Scanlin v. TD Waterhouse, Inc., 4:05-CV-02458, 2006 U.S. Dist. LEXIS 86849 (M.D. Pa. Nov. 30, 2006) (“The derivative injury rule bars plaintiff from seeking relief for such injury based merely on his sole shareholder status. To hold otherwise would fail to recognize the legitimate separate legal existence of [the corporation].”). Accordingly, although the court’s approach in Love was no doubt practical in the context of a single-shareholder corporation, the approach seems to raise issues when taken to its logical conclusion.

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