67 Mass. App. Ct. 29 | Mass. App. Ct. | 2006
The plaintiff, Kevin O’Brien, owner of forty-eight percent of the stock of Summer Hill Estates, Inc., a closely held corporation (Summer Hill or the corporation), brought this action for breach of fiduciary duty
The defendants filed a timely notice of appeal. They argue essentially that the evidence was insufficient to warrant a finding that they breached fiduciary responsibilities in light of the parties’ understandings and the circumstances regarding the project for which the corporation was formed. They assert also that the judge erred in admitting certain expert testimony and that the damages awarded by the jury were speculative. We agree with the defendants that, on this record, their decision to sell the corporation’s assets at a profit of $300,000 (a profit equal to 300 percent of the cash invested in the enterprise) could not be found to be a breach of fiduciary duty to the minority stockholder, and we accordingly reverse the judgment. Our determination regarding the sufficiency of the evidence regarding liability makes it unnecessary to consider the other appellate issues.
1. Facts. Viewing the record in the light most favorable to the plaintiff, the jury could have found the following. The plaintiff, an experienced builder of single-family homes and residential subdivisions, learned of a subdivision of approximately sixty undeveloped lots on ninety-five acres in Dracut. The property was owned by Twin Hills Development Corporation (Twin Hills), the principals of which were Vincent and Domenic Shelzi. Although Twin Hills had obtained local approval to commence construction on the lots, the company’s financial difficulties precluded such a venture. The corporation
The plaintiff investigated the situation and, in 1996, contacted defendant John H. Pearson, Jr., to discuss acquisition of the subdivision with financing by Pearson.
A negotiation to this end was successful, and the note and mortgage were obtained from the bank for $100,000 provided by Palm. The plaintiff, Pearson, and Palm created the corporation (Summer Hill), and the note and mortgage became the corporation’s assets. While the mortgage covered only nine of the subdivision’s sixty lots, the parties were optimistic that the location of the nine covered lots at the only entrance to the subdivision would give them an advantage in their efforts to acquire the property. They proceeded to enter into a letter agreement on March 16, 1998, spelling out their respective roles once the subdivision had been purchased. Thus, it was agreed that the plaintiff would run the project and be in charge of construction of the subdivision roads and the residences on the individual lots.
Following formation of the corporation and the parties’ written agreement of March 16, 1998, the defendants, aided by their consultant (Joel Kahn), engaged in discussions with the Shelzis regarding possible acquisition of the property. The defendants requested that the plaintiff not participate, ostensibly so that, given the fact that he had a relationship of sorts with the Shelzi family, he could be brought in as the “good guy” if it would facilitate negotiations. Discussions continued through April, 1998, but the defendants did not at any time during that period make an actual offer to purchase. On May 6, 1998, Kahn wrote to the defendants that the Shelzis had informed him that they were prepared to pursue negotiations with another potential buyer. Kahn stated also that they (the Shelzis) would sell the property to Summer Hill in return for a release of the debt, a payment of $250,000, and an agreement that would permit their father to remain in his house on the property (or an equivalent). Kahn reported in addition that he had discouraged any expectation that Summer Hill would pay that kind of money and that he had discussed with them the possibility that, if another buyer did not materialize in four months, the property be conveyed to Summer Hill in lieu of foreclosure. At the same time, it was clear from Kahn’s memorandum that the defendants were willing to consider as an alternative receiving a payment of some kind on the promissory note they had acquired from Wakefield Savings Bank and abandoning their plans to obtain the subdivision for future development.
The situation was altered considerably on May 18, 1998, when Twin Hills (the Shelzis’ corporation) signed an offer to purchase agreement with Premier Homes, Inc., whereby Premier Homes agreed to acquire the subdivision for $947,000 (subject to certain conditions and contingencies). Despite this, discus
On January 22, 1999, Twin Hills sold the subdivision to Premier Homes, apparently for $640,000 (although the offer to purchase had identified a purchase price of $947,000). On January 27, 1999, at a special meeting of the stockholders of Summer Hill, the defendants sought approval of their proposal to cancel the promissory note and discharge the mortgage in return for a payment by Twin Hills of $400,000. The plaintiff objected, thereby denying the defendants the two-thirds vote necessary to effect a transfer of the note and mortgage (all of the assets of the corporation). See G. L. c. 156B, § 75, as amended by St. 1986, c. 186, § 2 (see now G. L. c. 156D, § 12.02
2. Discussion. The essence of the plaintiff’s claim is that the parties agreed to use the promissory note and mortgage obtained from Wakefield Savings Bank as leverage with which to acquire the Twin Hills subdivision for development purposes. The closely held corporation, Summer Hills, was formed for this purpose. According to the plaintiff, it was never the parties’ intention merely to purchase a promissory note and mortgage and then resell it, even at a substantial profit. Rather, the corporate objective was acquisition and development of the subdivision and, to the extent that the defendants chose to minimize their risk by agreeing to discount and sell the note rather than pursue the corporate purpose, they breached their fiduciary obligation to the minority stockholder.
The principles governing relationships among stockholders in closely held corporations are easily stated in the abstract, although they may be difficult to apply in some circumstances. Such corporations have been likened to partnerships, thereby creating a heightened level of fiduciary duty among the participants. There is an obligation on the part of each stockholder to exercise the “utmost good faith and loyalty” to each other stockholder, a duty more exacting than that imposed on officers and directors in publicly traded corporations. See Donahue v. Rodd Electrotype Co. of New England, Inc., 367 Mass. 578, 593-594 (1975). Stockholders in a close corporation “may not act out of avarice, expediency or self-interest in derogation of their duty of loyalty to the other stockholders and to the corporation.” Id. at 593. The more intense fiduciary duty imposed in the circumstances is designed to prevent the unique
The majority must, however, still be permitted to run the company, and they may defend against a claim that they have breached their fiduciary duty to the minority by showing that their actions were guided by a legitimate business purpose. See Wilkes v. Springside Nursing Home, Inc., 370 Mass. 842, 851 (1976). Thus, the majority is given considerable discretion to make business judgments, even though such judgments may be adverse to minority interests. Ibid. At the same time, the minority may challenge the majority’s business judgments by showing that the corporate objective could have been achieved in alternative ways less harmful to the minority position. Id. at 851-852.
The plaintiff claims that the defendants violated these principles to his detriment, and the defendants contend that the evidence is insufficient to support such a result. The trial judge focused on the issue with precision in connection with the defendants’ motions for judgment notwithstanding the verdict or for a new trial, and provided a comprehensive and accurate statement of the evidence on which the jury could have relied. Emphasizing the parties’ written agreement of March 16, 1998, and related testimony regarding the parties’ intentions, as well as the defendants’ statutory violation in selling the note and mortgage without a two-thirds vote of the stockholders, the judge concluded both that the evidence was legally sufficient to support the verdict and that the verdict was not so greatly against the weight of the evidence as to require that there be a new trial. We are not persuaded that the evidence was sufficient to justify a finding of breach of fiduciary duty on the part of the defendants.
The question here differs considerably from what is ordinarily present in cases of breach of fiduciary duty in closely held
To prevail on this argument, it was incumbent on the plaintiff to show that the defendants as majority stockholders had in fact committed themselves to such an undertaking when the corporation was formed. He offered as evidence of the defendants’ commitment the letter agreement executed on March 16, 1998, by the three principals.
The plaintiff points to the letter agreement as establishing that the defendants had already committed themselves to an acquisition of the subdivision from the Shelzis and were now arranging for the various rights and responsibilities of the principals once the property was in fact obtained. We do not believe that the letter agreement can reasonably be construed in such a fashion. The parties entered into the agreement at a time when their ability to acquire the subdivision was highly uncertain. While they had obtained the Twin Hills promissory note and the accompanying mortgage (on nine of the approximately sixty lots), they were a considerable distance from actually owning the property, and in fact were just preparing to commence negotiations with the Shelzis on the subject. That their views regarding the potential value of the property might be shared by others who would compete with them to acquire the asset was certainly a possibility. The face value of the promissory note could have been of slight comfort, given that Twin Hills (the maker of the note) was in bankruptcy and the Shelzis (the guarantors) were threatening personal bankruptcies in the event that substantial claims were made under their guarantee.
Furthermore, the interpretation of the letter agreement that the plaintiff advances requires a finding that the defendants
As the defendants observe, such an arrangement would certainly be unusual and would result in a minority stockholder becoming legally empowered to compel the majority to contribute additional capital to the corporate enterprise when the minority stockholder is not obligated to contribute even a pro rata share. As we have indicated, nothing in the letter agreement suggests that the defendants had accepted such an arrangement; rather, the letter provides for the respective responsibilities of the parties if and when the property has been acquired, with the agreement stating expressly that the defendants shall be responsible to continue financing the venture only “as long as the project is economically feasible.”
We conclude, therefore, that the letter agreement of March 16, 1998, could not by itself permit a finding that the defendants violated a binding commitment to acquire the subdivision and that they thereby breached a fiduciary duty to the minority stockholder. Thus, we look elsewhere in the record to determine whether other evidence justifies such a finding, and we remain unconvinced. The plaintiff testified to considerable discussion and inquiry, prior to the letter agreement, regarding the project’s feasibility, all obviously contingent upon the parties’ ability to acquire the property from the Shelzis. He acknowledged that the discussions were focused, at least in part, on the economic feasibility of the project (“We were trying to find out if it was cost effective to acquire the property”). He acknowledged that, when he commenced discussions on the subject with Pearson in 1996, Pearson did not commit to the project regardless of cost, and the plaintiff pointed to the March 16, 1998, letter agreement as demonstrating that the commitment came about subsequently. He conceded, however, that the letter agreement
In a related argument, the plaintiff suggests that the defendants breached their fiduciary obligations by not pursuing acquisition of the property more aggressively. The argument appears to be that the defendants could have made the Shelzis an offer that was reasonable to both sides, but that the defendants failed to do so. The evidence does not support the proposition. The agreement on which the plaintiff relies was executed, and the corporation was formed, in March, 1998. By early May, 1998, the Shelzis were demanding a release of the secured debt plus $250,000 in return for the subdivision. The plaintiff does not suggest that the defendants should have agreed to that proposal. Rather, he argues that they could have acquired the property for release of the debt and $90,000 (an amount equal to the cash eventually received by the Shelzis in the transaction with Premier Homes). This requires considerable speculation. There was no showing that the Shelzis were willing to sell to Summer Hill for such an amount. Furthermore, the sale to Premier Homes generated cash that the Shelzis used in part to pay $150,000 in back real estate taxes; thus, the Shelzis would presumably have demanded at least that amount in addition to the $90,000 posited by the plaintiff, therefore requiring an outlay by the defendants of $240,000.
On May 18, 1998, Twin Hills committed to a purchase of the subdivision by Premier Homes, effectively ending any realistic opportunity for Summer Hill to obtain the property. Further efforts by the defendants to convince the Shelzis to sell to them would not only have required an offer of at least the value of that made by Premier Homes, but could well have exposed the defendants and Summer Hill to charges of tortious interference. The defendants at this point appear to have done all that was reasonably possible, specifically, deal with the Shelzis to determine an appropriate discounted value of the promissory note and, alternatively, accept a deed to the property in lieu of foreclosure in the event that the contemplated sale to Premier
The judge identified as a second basis for the jury’s verdict evidence that the defendants sold the note and mortgage (i.e., all of the corporation’s assets) notwithstanding the absence of a two-thirds vote of the stockholders. At the time in question (January 27, 1999), G. L. c. 156B, § 75, as amended by St. 1986, c. 186, § 2 (see note 8, supra), provided that a corporation “may . . . authorize ... by vote of two-thirds of the shares of each class of stock outstanding and entitled to vote thereon, the sale, lease or exchange of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions as it deems expedient. . . .” There is no dispute that the promissory note and the mortgage on nine lots constituted all or substantially all of Summer Hill’s assets. Nor, despite the defendants’ contention otherwise, does there appear to be much doubt that the defendants violated G. L. c. 156B, § 75, by selling those assets by vote of only fifty-two percent of the outstanding shares. The question is whether, in the circumstances, that violation is enough to warrant a finding that the defendants breached a fiduciary duty to the plaintiff.
Addressing this question at the hearing on the defendants’ motion for directed verdict, the trial judge stated: “I simply don’t see that it’s a breach of fiduciary duty, even if it is a violation of the statute .... There is no self-dealing here, there is no action taken that is not in the interest of the corporation, as a corporation.” We agree. We are aware of no decision that equates automatically a violation of G. L. c. 156B, § 75, or its successor, with a breach of fiduciary duty. Nor does the evidence in the present case permit such a finding. There was no wrongful diversion of corporate assets, see Pupecki v. James Madison Corp., 376 Mass. 212, 213-215 (1978), or other fraud
We agree as well with the assessment of the trial judge, expressed in his statement of reasons for denying the defendants’ posttrial motions, that, apart from the letter agreement of March 16, 1998, and the violation of G. L. c. 156B, § 75, other claims of breach that emerged in the evidence were insufficient to support the verdict. This includes any suggestion by the defendants that they might challenge whether the plaintiff was in fact a forty-eight percent stockholder of Summer Hill. To the extent that there was such a challenge, which is uncertain, it would not by itself warrant the jury’s finding. In the final analysis, this record did not permit the jury to conclude that this plaintiff, who invested no cash in the enterprise, who can point to no specific agreement by the defendants to acquire the subdivision regardless of circumstances, and who ultimately realized a return of close to $150,000 (his pro rata share of the corporate profit) in a period of less than one year after formation of the corporation, had been a victim of the kind of majority wrongdoing for which damages are awarded. See Donahue v. Rodd Electrotype Co. of New England, Inc., 367 Mass. at 588-589, 593-594.
3. Disposition. The amended judgment is reversed, and the case is remanded to the Superior Court for entry of a new judgment awarding the plaintiff forty-eight percent of escrowed proceeds from Summer Hill’s sale of the promissory note and mortgage, plus a pro rata share of any interest earned.
So ordered.
The plaintiff initially sought injunctive relief, a declaratory judgment, and damages, his original objective being to set aside the transaction in question. When that proved impossible, he limited his case at trial to one for damages for breach of fiduciary duty.
The actual party in interest is Neis Palm, Margaret Palm’s husband, although it was Margaret Palm who was elected a director of the corporation. The parties agree that, for purposes of this case, Neis and Margaret Palm are interchangeable.
The evidence is in conflict regarding which side brought the idea to the other. For purposes of this analysis, we adopt the version of the plaintiff.
The plaintiff was eligible for increased compensation for the work he performed for the corporation, as well as his share of any profits due him as a stockholder.
The defendants maintain that the $400,000 figure that they agreed to accept was reasonable because Twin Hills, the corporate maker of the promissory note, was in a Chapter 11 bankruptcy; a bankruptcy judge had valued the note’s collateral at $432,000; and, while the Shelzis had personally guaranteed the note, they had threatened personal bankruptcies should there be an attempt to enforce the obligation.
The plaintiff admitted at trial that his conditions rendered his offer less valuable than the transaction that was available with the Shelzis.
By St. 2003, c. 127, §§ 22-24, corporations previously subject to G. L. c. 156B became subject, effective July 1, 2004, to G. L. c. 156D, inserted by
Examples include refusing to declare dividends, draining off corporate earnings with exorbitant compensation to majority stockholder-officers, “sweetheart” stock purchase transactions favoring the majority, depriving the minority of employment opportunities in the company, selling assets at an inadequate price to majority shareholders, and refusing to purchase minority shares at prices comparable to those paid to the majority. Donahue, supra at 588-589.
The plaintiff did not assert a contract claim under the agreement. Whether the agreement is legally enforceable as an independent contract is not dispositive with respect to an analysis regarding an alleged breach of fiduciary duty. An agreement such as this, a company policy, or an understanding among stockholders may have bearing on the questions whether a duty existed and, if so, whether it was breached. See A.W. Chesterton Co. v. Chesterton, 128 F.3d 1, 6-7 (1st Cir. 1997). The answers turn, of course, upon the terms of such agreement, policy, or understanding.
Apart from the plaintiff’s claim that the defendants were obligated to acquire the subdivision, and that nothing else would do, there is no intimation in the record of any fraud, self-dealing, or other impropriety with respect to the defendants’ decision to accept $400,000 for the promissory note. Indeed, the defendants, who would retain fifty-two percent of any profit, had every incentive to exact the highest available price.
In light of this conclusion, it is not necessary to consider the defendants’ argument that the sole remedy for a violation of G. L. c. 156B, § 75, is found in G. L. c. 156B, § 76 (providing for demand by dissenting stockholder for appraisal of, and payment for, his shares).