Beninati, et al. v. Borghi, et al. (Lawyers Weekly No. 12-086-17)

1
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
CIVIL ACTION
NO. 12-1985 BLS2
Consolidated with
NO. 13-1772 BLS2
ELIZABETH BENINATI and JOSEPH MASOTTA,
Plaintiffs,
vs.
STEVEN BORGHI, et al.
Defendants
MEMORANDUM OF DECISION AND ORDER
ON VARIOUS MOTIONS
This is an action primarily derivative in nature brought on behalf of fourteen limited liability companies that operate health clubs under the trade name “Work out World” in the New England area (collectively, WOW New England or WOW). Following a jury waived trial, this Court on July 9, 2014 issued findings and rulings that ultimately resulted in a $ 4.1 million award of damages to the plaintiffs on those counts against the defendants alleging breach of fiduciary duty (the July 2014 Decision). As to the count against the defendant Harold Dixon alleging a violation of G.L.c. 93A §11, this Court ruled that he could not be held liable under that statute as a matter of law. The plaintiffs appealed from that ruling. In a rescript opinion dated October 24, 2016, the Appeals Court affirmed the judgment in all respects except for this Court’s ruling on the 93A claim against Dixon. Beninati v. Borghi, 90 Mass.App.Ct. 556 (2016). It remanded the case for further proceedings.
The case is now before the Court on two sets of motions. The first set of motions addresses the question of Dixon’s liability under G.L.c. 93A. As to that issue, plaintiffs have
2
moved for further findings and more specifically ask this Court to conclude that the 93A violation was willful and knowing, warranting multiple damages. Dixon has filed an opposition and has further asked to supplement the trial record. The second set of motions concerns the extent to which the defendants Steven and Linda Borghi should be required to contribute to the damages award on the non-93A claims. These motions also raise the question of whether and to what extent this Court can or should take steps to prevent the Borghis, as members of WOW England, from sharing in the award of 93A damages. This Court will discuss each set of motions in turn.
A. Liability of Dixon under G.L.c. 93A
The fact findings underlying this Court’s July 2014 Decision were extensive. They detailed a course of conduct whereby Dixon, a businessman with no prior experience in the fitness industry, allied himself with the defendants Steven and Linda Borghi, both members of WOW New England, to open a chain of competing health clubs in the same geographic area operated through Dixon-controlled entities (collectively, Blast). Dixon accomplished this, with the Borghis’ assistance, by misappropriating WOW’s confidential information, using WOW’s resources, and engaging in other activity that promoted the interest of Blast at the expense of WOW New England. Based on these findings, this Court concluded that this provided ample factual basis for an award of damages against Dixon for breach of fiduciary duty: although, unlike the Borghis, he was not himself a member of WOW New England and thus would not otherwise have any fiduciary obligations to those entities, he had aided and abetted the Borghis in breaching their obligations and therefore was jointly and severally liable to the plaintiffs for the damages that flowed from that breach. As to the 93A claim, however, this Court concluded that, because the Borghis themselves could not be held liable under that
3
statute (Chapter 93A being inapplicable to intra-corporate disputes), neither could Dixon. It was on this point that the Appeals Court disagreed and reversed. The Appeals Court noted that, having erroneously determined that Chapter 93A was inapplicable, this Court had not attempted to asses Dixon’s level of culpability under Chapter 93A. It therefore remanded the matter “for a determination whether Dixon and the Blast defendants violated c.93A and, if so, whether single or multiple damages are warranted.” 90 Mass.App.Ct. at 567. The Appeals Court left undisturbed this Court’s fact findings and otherwise affirmed my rulings in the case.
In opposing plaintiffs’ request for entry of judgment against him on the 93A count, Dixon makes several arguments as to why the elements of a 93A claim have not been established. First, he contends that his actions were not sufficiently egregious to constitute the kind of unfair and deceptive conduct prohibited by G.L.c. 93A §2. This Court disagrees. Contrary to Dixon’s contention that all he gained was a “head start,” this Court found that Dixon aided and encouraged the Borghis in misappropriating WOW New England club membership data, revenue information, reports that analyzed the demographics of the WOW New England membership base, employee training manuals, payroll data, and a list of the clubs’ vendors. Dixon accomplished this by infiltrating WOW New England under the guise of being a consultant; he knew of the Borghis’ fiduciary obligations to other WOW members, who were left in the dark about Dixon’s role until it was too late. Dixon also used WOW assets to open up competing clubs, piggybacked on WOW advertising and marketing efforts, and used his knowledge of the arrangement by which WOW New England obtained permission to use the WOW name in order to obtain unfair advantages for himself and his companies. All of these facts were laid out in the Court’s July 2014 Decision. If that was not clear enough, the Court was explicit in a later decision on plaintiff’s Motion for Reconsideration, stating that ‘Dixon’s
4
conduct was – standing alone – unfair and deceptive as defined by G.L.c. 93A §2.” See page 8 of Memorandum of Decision and Order on various Post-trial Motions, dated October 17, 2014 (the October 2014 Decision). This Court continues to adhere to this conclusion.
Dixon’s second argument is that the Court’s fact findings fail to demonstrate that WOW New England suffered some “loss of money or property” within the meaning of G.L.c. 93A §11. Instead, they show only that Blast unfairly benefited; this unfair benefit (it is argued) is not enough to trigger the statute. This Court concludes that Dixon reads too much into that phrase; that is, he construes Section 11 to be more restrictive in its reach than it actually is. Although it is certainly true that Dixon unfairly benefited from his wrongful acts, that benefit also came at WOW New England’s expense. Precisely what monetary loss WOW New England sustained may be difficult to quantify, but that does not mean that Chapter 93A is inapplicable.
The Appeals Court recognized as much in Specialized Tech.Res. Inc. v. JPS Elastomeric Corp., 80 Mass.App. Ct. 841, (2011) in upholding a judge’s Chapter 93A award of damages against a defendant who, like Dixon, had misappropriated plaintiff’s confidential information. Although the Court acknowledged that the plaintiff’s monetary loss was difficult to determine with any specificity, it was fair to infer that the plaintiff suffered some loss of sales when it faced competition from another entity using plaintiff’s trade secrets. The same can be inferred here. “Having satisfied the requirement that it demonstrate some monetary loss, the use of disgorgement of profits to compensate [the plaintiff] for the defendant’s misuse of the trade secret was entirely appropriate.” 80 Mass.App.Ct. at 850. In other words, damages that are based on the benefit that defendant received could be awarded on a claim brought under Section 11 once the threshold requirement of some monetary harm (however imprecise) was established.
5
That threshold requirement was met in the instant case.1
Dixon argues more generally that this Court must separately analyze each and every act by Dixon, and assess the particular damages attributable to that specific act rather than simply use the same $ 4.1 million figure as the basis for a damages award. This Court disagrees. In its July 2014 decision, this Court carefully analyzed the evidence presented at trial and concluded that plaintiffs had proved that the defendants caused harm to WOW New England in an amount totaling $ 4.1 million. Dixon’s conduct when considered as a whole amounted to unfair and deceptive conduct within the meaning of 93A and supports the same $ 4.1 million damages award. In short, there is no basis to award anything less than that same amount on the 93A claim.
Third, Dixon contends that that the conduct at issue did not occur in the course of “trade of commerce” as required by G.L.c. 93A §11. The basis for this position is Dixon’s claim that Blast and WOW New England are not separate and distinct entities engaged in arm’s length transactions but are intertwined by virtue of their overlapping ownership and control. Although maintaining that this is “another, different argument” from the one that Dixon made before the Appeals Court as to why he could not be held liable under 93A, this Court agrees with the plaintiffs that it is in fact the same. Clearly, the Appeals Court would not have rejected this Court’s conclusion on the 93A count and remanded for further findings regarding the nature of the conduct at issue if Chapter 93A were inapplicable.
1 This Court also finds it significant that the Appeal Court — which had this Court’s fact findings before it — did not give any indication that Section 11 relief was not available because WOW New England suffered no “loss of money or property” within the meaning of the statute. If this were indeed a problem, then the failure to meet this requirement would have been another way for the Appeals Court to affirm this Court’s conclusion that Chapter 93A did not apply.
6
What the Appeals Court could not decide and quite properly remanded to this Court to determine was whether this Court regarded Dixon’s conduct as “unfair” or deceptive” and if so, whether the damages award should be multiplied. The fact findings that this Court made in its July 2014 Decision amply support the conclusion not only that Dixon’s conduct was unfair and deceptive but also that it was intentional and willful, justifying an award of multiple damages. Plaintiffs have accurately cited those portions of the trial record that support this conclusion. See Memorandum in Support of Further Findings at pages 4 through 7, together with Appendix submitted in support. To the extent that such evidence consisted of witness testimony, this Court finds that testimony to be credible.2
In reaching the conclusion that multiple damages are warranted, this Court has not considered Dixon’s affidavit, where he claims to have lost millions on the Blast business. That affidavit was submitted in support of Defendant’s Motion to Supplement the Record, which is Denied. This Court’s award of damages is factually supported and is not subject to revision based on events taking place after the trial was over, nor does this Court have any desire to reopen the evidence.
As to whether to double or treble the damages, this Court concludes that doubling the damages is sufficiently punitive at the same time that it is proportional to the wrongdoing at issue. In so concluding, this Court takes into account the fact that Dixon was acting in concert with the Borghis. Had it not been for the Borghis’ willful breach of their own fiduciary obligations, Dixon would not have had the access he did to WOW New England confidential information or have been able to use that information as effectively had he been acting on his own. Certainly, Dixon is culpable, but the Borghis – who put their own self-interest ahead of
2 This Court also finds and concludes that Dixon’s violations of Chapter 93A should be imputed to CapeCapital, LLC and Auburndale Fitness, LLC, for the reasons stated at pages 8 through 9 of Plaintiff’s Memorandum.
7
their fiduciary obligations — are no less responsible for the harm that was inflicted on WOW New England.
B. The Borghis’ Contribution Obligation on the Common Law Count and their Ability to Share in any 93A Award to WOW
The second set of issues – raised by way of two motions–pertains to the Borghis. The first motion, entitled “Harold Dixon’s Motion for Entry of Judgment for Contribution from Defendant Steven and Linda Borghi,” asks this Court to reaffirm what I thought I had already decided — namely, that the Borghis are responsible for fifty percent of the judgment entered in favor of WOW New England on December 30, 2014. That judgment was on the common law claim for breach of fiduciary duty. In order to forestall the accumulation of interest of that judgment, Dixon sought leave to pay the full amount of that judgment, plus accumulated interest; obtaining that leave, he paid $ 4,806,631 into the court on February 11, 2015. Dixon now seeks to recover contribution from the Borghis in accordance with G.L.c. 231B §§1(b) and 3(b) (permitting one tortfeasor to enforce his right of contribution in the same action which gave rise to the judgment against both). He also seeks to “clarify” the Borghis’ pro rata share. The Borghis not only oppose Dixon’s request but cross move to dismiss the contribution claim on the grounds that it is barred by a general release (the Release) contained in an earlier agreement of the parties. This Court discussed the impact of this Release first.
The Release appears in the last of a series of agreements that restructured the relationship between the Borghis and Dixon. The first agreement was entered into when it was clear that litigation among the parties was imminent. The final agreement was executed before the trial took place. The result of these agreements was that Steven Borghi went from holding a majority position in Blast, which ran sixty clubs nationwide, to being the owner of a small handful of those clubs. See July 2014 Decision at pages 31-32. Although not particularly relevant to the
8
Court’s ultimately rulings on the legal claims before me, it seemed clear that this was an attempt on Dixon’s part to distance himself from the Borghis.
The agreement relevant to the motion now before this Court is the Purchase and Redemption Agreement dated July 22, 2013 (the P&R Agreement). Subsection 7(d) of the P&R Agreement states that the Blast entities (including Dixon) discharge Steven Borghi and his affiliates (described as the “Borghi Released Parties”) from any actions, claims, or causes of action “whether known or unknown, contingent or otherwise, which [Blast]…had, has or may have had at any time based upon events, agreements, actions or occurrences occurring in the past until and including the Closing Date against the Borghi Released Parties…” Such claims included “any claims which relate to or arise out of [Blast’s] prior relationship” with the Borghi Released Parties…” In Subsection 7(a) of the P&R Agreement, Borghi agreed to do the same as to any claims he or related entities had or may have had against Blast.
The jury waived trial began in October 2013. Following this Court’s July 2014 decision finding the Borghis and Dixon jointly and severally liable to WOW New England on the claim of breach of fiduciary duty, Dixon asked this Court to apportion damages among the defendants as permitted by G.L.c. 231B. Oral arguments on this request (and on other post-trial motions) was held on October 7, 2014 (the October 2014 Hearing). The Borghis’ counsel argued at that hearing that, because Steven Borghi had no interest in certain Blast clubs as a consequence of the P&R Agreement, he should not be liable for a certain portion of the damages. At no time did counsel suggest that the P&R Agreement absolved the Borghis from any and all liability to Dixon in contribution in the event that Dixon paid the judgment first. In a Memorandum of Decision and Order dated October 17, 2014 (the October 2014 Decision) this Court determined that Dixon’s pro rata share of the damages award of $ 4.112,376 was fifty percent, with the
9
Borghis responsible for the remaining fifty percent. Dixon sought and obtained leave to pay the full judgment plus accumulated interest, totaling $ 4,806,631 into Court. The Chapter 93A claim against Dixon was dismissed on the grounds that the statute did not apply as a matter of law.
For the next year, the parties litigated their appeal from this judgment: plaintiffs complained of this Court’s 93A ruling, and the Borghis cross appealed as to this Court’s decision upholding a vote by WOW members to remove the Borghis from their management positions. The Borghis did not appeal this Court’s ruling allocating responsibility among the parties for payment of the judgment. The first time the Borghis raised the P&R Agreement’s Release was in response to the motion for contribution now before this Court.
Dixon argues – quite persuasively – that the Release does not bar the contribution claim since it was executed prior to the time that the claim accrued. But see Sword & Shield Restaurant, Inc. v. Amoco Oil Co., 11 Mass.App.Ct. 832 (1981) (holding that release with similar language barred joint tortfeasor claim for contribution even though claim did not become ripe until the joint tortfeasor paid more than his share of a judgment). Moreover, the Borghis’ construction of the Release would lead to nonsensical results: there is no right of contribution until one joint tortfeasor pays more than his fair share of a judgment but, because mutual releases were executed, whoever paid the judgment first (whether voluntarily or involuntarily) would necessarily give up his right to seek contribution against the other. At the very least, the Release is ambiguous, and would require the Court to hear evidence regarding the parties’ intent. That is not necessary, however, since I conclude that Dixon’s second argument regarding waiver is dispositive on this issue.
A release is an affirmative defense that should be raised at the earliest opportunity. See Rule 8(c), Mass.R.Civ.P.; see also Sharon v City of Newton, 437 Mass. 99, 103 (2002) (the
10
omission of an affirmative defense from an answer generally constitutes a waiver of that defense). Here, the Borghis could have raised the issue of the Release at multiple junctures in the post trial process but did not. The most obvious time would have been at the October 2014 Hearing concerning apportionment of damages pursuant to G.L.c. 231B. At that hearing, the Court was asked to allocate responsibility among the defendants in a manner that was consistent with the purposes of that statute as applied to the facts of the case before me. At no time in their pleadings or during oral argument did the Borghis’ counsel mention the mutual Releases and how they might affect any right of contribution of one defendant against another. Indeed, the Borghis’ counsel – appearing to acknowledge that Dixon did have some right of contribution — sought only to minimize the amount of the Borghis’ pro rata percentage. If the mutual Releases had been raised, then clearly Dixon would have acted differently than he did: no one would have rushed in to pay the full amount of the judgment — or permitted the plaintiffs to execute on the judgment– until and unless this Court had fully resolved the issues as to the Releases’ impact on any contribution right. The Borghis’ Motion to Dismiss Dixon’s claim for contribution is therefore Denied and Dixon’s Motion of Entry of Judgment of Contribution is Allowed.
Dixon also asks that I “clarify” my decision as to the amount of the Borghis’ pro rata contribution. Specifically, he argues that he should be entitled to recover an additional amount of contribution from Steven Borghi to account for the fact that, as a member of WOW New England, Steven Borghi will receive 37.93 percent of the net recovery to WOW on the common law claim of breach of fiduciary duty. The so-called “windfall” that Steven Borghi would receive as result of that judgment was necessarily known to all parties well before the October 2014 Hearing: as Dixon concedes, it is well settled that, in a derivative action such as this one where one shareholder alleges that another shareholder breached his fiduciary duties to the
11
corporation, the wrongdoer shareholder both pays damages and participates in the recovery through his continued ownership in the corporation. Not only did Dixon’s counsel not raise this issue at the October 2014 Hearing but he then joined in submitting a proposed judgment for this Court to sign following this Court’s October 2014 Decision. That proposed judgment – which this Court adopted — by its terms does not limit Borghi’s subsequent proportionate participation in the recovery in any way. This Court sees no reason to amend that judgment at this late date. Dixon’s Motion for Clarification of Judgment Concerning Pro Rata Contribution from the Borghis is therefore Denied.
As to whether Steven Borghi should, together with other WOW members, share in the 93A award,3 that issue has been raised in a timely fashion and in fact seems to have been anticipated by the Appeals Court when it reversed this Court on its 93A ruling. Specifically, the Appeals Court stated in a footnote to its opinion:
We recognize the irony that Steven, as a shareholder of WOW New England, may stand to benefit from any additional damages that Dixon and the Blast defendants are required to pay. Any such inequity is a matter between erstwhile partners Steven and Dixon, and the trial judge is free to take the equities into account in fashioning any remedy under c. 93A.
90 Mass.App.Ct. at 567, n. 11. Notwithstanding the Appeals Court’s suggestion to the contrary, Dixon would not appear to have any legal recourse against Steven Borghi, for the additional damages that Dixon will be required to pay WOW on the 93A count: the Borghis cannot be held jointly and severally liable (and thus cannot be required to contribute to the 93A award pursuant to G.L.c. 231B) because Chapter 93A does not as a matter of law apply to them.
3 Plaintiffs are recovering compensatory damages on the common law count, and on that count, this Court can and does take into account the Borghis’ conduct by requiring them to contribute to the damages pursuant to G.L.c. 231B. Plaintiffs are not entitled to double recovery. Thus, what is at issue on the 93A count is that amount over and above compensatory damages that WOW New England will receive in damages by virtue of this Court’s decision to award double damages.
12
As the Appeals Court went on to say, however, this Court can take steps that it believes are necessary to address the inequity that would result if Steven Borghi were to receive almost 40 percent of a 93A award that is based on conduct in which Borghi himself was an active participant.
Plaintiffs join with Dixon in offering the best suggestion as to how to deal with this unique situation – a suggestion that this Court adopts. In entering judgment on the 93A count, this Court will direct that WOW New England shall not permit Borghi to benefit in any way from that amount of damages that WOW receives pursuant to 93A over and above the compensatory damages awarded on the common law count. See fn. 3, supra. Thus, If WOW New England decides to split the award among WOW members as a distribution to each of them according to their percentage ownership, then Steven Borghi would not be entitled to receive any distribution.4 At the same time, other members of WOW should not receive more than their fair share; thus, to prevent an undeserved windfall to them, this Court must reduce the amount that Dixon has to pay to WOW by the percentage of Steven Borghi’s membership interest – that is, by 37.93 percent. This Court recognizes that this means that WOW itself will receive less than it would have received had Steven Borghi not participated with Dixon in the conduct that forms the basis for the 93A claim. But then Dixon would not have been able to do what he did without Steven Borghi either. Moreover, this Court’s approach seems the only way to prevent Steven Borghi from affirmatively benefiting from his misconduct without overcompensating other WOW members. It is also worth noting that WOW New England will receive the substantial benefit of being relieved of its obligation to pay attorney’s fees. Those fees are now Dixon’s
4 As this Court understands it, a distribution is indeed the way that WOW intends to handle the proceeds from this case. As to how the Borghis will be excluded from benefiting from any recovery on the 93A claim if WOW chooses to use the award in some other way, this Court will leave that to WOW to figure out.
13
financial responsibility and to the extent that WOW has already paid the fees, it will be entitled to be reimbursed for them by Dixon.
CONCLUSION AND ORDER
For all the foregoing reasons, this Court rules as follows:
1. Defendants’ Motion to Supplement the Record is DENIED;
2. Defendant Harold Dixon’s Motion for Entry of Judgment for Contribution from Defendants Steven and Linda Borghi is ALLOWED;
3. Steven and Linda Borghi’s Cross-Motion to Dismiss Dixon’s Contribution Claim is DENIED;
4. Defendant Harold Dixon’s Motion for Clarification of Judgment Concerning Pro Rata Contribution from the Borghis is DENIED;
5. Plaintiffs’ Motion for Further Findings and Entry of Judgment is ALLOWED, and it is hereby ORDERED that judgment enter on Count XXV of the Second Amended Complaint against Harold Dixon, CapeCapital, LLC and Auburndale Fitness Group Investment, LLC (together with any other Blast entities identified as defendants in that count) in an amount twice the compensatory damages, together with attorney’s fees, pursuant to G.l.c. 93A §11. The parties shall submit a proposed form of judgment on or before July 21, 2017 in line with this opinion.
____________________________________
Janet L. Sanders
Justice of the Superior Court
Dated: June 30, 2017
14

read more

Posted by Stephen Sandberg - July 6, 2017 at 9:40 pm

Categories: News   Tags: , , , ,

Commonwealth v. Jordan (Lawyers Weekly No. 11-085-17)

NOTICE:  All slip opinions and orders are subject to formal revision and are superseded by the advance sheets and bound volumes of the Official Reports.  If you find a typographical error or other formal error, please notify the Reporter of Decisions, Supreme Judicial Court, John Adams Courthouse, 1 Pemberton Square, Suite 2500, Boston, MA, 02108-1750; (617) 557-1030; SJCReporter@sjc.state.ma.us

16-P-1251                                       Appeals Court

COMMONWEALTH  vs.  MICHAEL AARON JORDAN.[1]

No. 16-P-1251.

Suffolk.     May 9, 2017. – July 6, 2017.

Present:  Agnes, Massing, & Lemire, JJ.

Cellular Telephone.  Practice, Criminal, Motion to suppress, Warrant, Affidavit.  Constitutional Law, Search and seizure, Probable cause.  Search and Seizure, Warrant, Affidavit, Probable cause.  Probable Cause.

Indictments found and returned in the Superior Court Department on February 20, 2015.

read more

Posted by Stephen Sandberg - July 6, 2017 at 6:05 pm

Categories: News   Tags: , , , ,

Commonwealth v. Martin (Lawyers Weekly No. 11-084-17)

NOTICE:  All slip opinions and orders are subject to formal revision and are superseded by the advance sheets and bound volumes of the Official Reports.  If you find a typographical error or other formal error, please notify the Reporter of Decisions, Supreme Judicial Court, John Adams Courthouse, 1 Pemberton Square, Suite 2500, Boston, MA, 02108-1750; (617) 557-1030; SJCReporter@sjc.state.ma.us

15-P-403                                        Appeals Court

COMMONWEALTH  vs.  DEQUAN MARTIN.

No. 15-P-403.

Suffolk.     April 1, 2016. – July 6, 2017.

Present:  Meade, Wolohojian, & Maldonado, JJ.

Marijuana.  Practice, Criminal, Motion to suppress.  Threshold Police Inquiry.  Probable Cause.  Search and Seizure, Threshold police inquiry, Exigent circumstances, Probable cause, Pursuit, Emergency.  Constitutional Law, Search and seizure, Investigatory stop, Probable cause.

read more

Posted by Stephen Sandberg - July 6, 2017 at 2:31 pm

Categories: News   Tags: , , , ,

NTV Management, Inc. v. Lightship Global Ventures, LLC, et al. (Lawyers Weekly No. 12-080-17)

1
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss SUPERIOR COURT
CIVIL ACTION
NO. 2016-0327-BLS1
NTV MANAGEMENT, INC.
vs.
LIGHTSHIP GLOBAL VENTURES, LLC and KENT PLUNKETT
MEMORANDUM OF DECISION AND ORDER ON
DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT DISMISSING THE COMPLAINT AND PLAINTIFF’S CROSS-MOTION FOR SUMMARY JUDGMENT ON COUNT I OF ITS COMPLAINT
This case arises out of a Consulting and Advisory Services Agreement (the Agreement) between the plaintiff, NTV Management, Inc. (NTV) and the defendant Lightship Global Ventures, LLC (Lightship). The defendant, Kent Plunkett, founded a company, Salary.Com, Inc., which, following a series of acquisitions, became a division of IBM. Plunkett and a colleague formed Lightship for the purpose of reacquiring Salary.Com from IBM. The Agreement, while containing some one-off terms, was in effect a non-exclusive brokerage agreement pursuant to which NTV would be due a commission if it found financing for the acquisition and a lesser fixed sum for introducing “at least ten qualified sources of capital.” Lightship did acquire Salary.com, but not with equity or debt partners introduced to the deal by NTV. NTV, nonetheless, alleges that it is due fees under the Agreement and damages for a variety of other wrongful conduct on the part of the defendants. It has pled its complaint in seven counts: breach of contract, breach of the covenant of good faith and fair dealing, promissory estoppel, unjust enrichment, deceit, a violation of Chapter 93A, violations of the Uniform Fraudulent Transfer Act, and a count to reach and apply stock or assets of Salary.com (although curiously it has not
2
named Salary.com, or the entity that presently owns it, as a defendant).
Apparently, concerned about matching NTV’s imaginative pleading measure for measure, the defendants have asserted five counterclaims against NTV: breach of a duty of confidentiality, breach of contract, defamation, misrepresentation, and tortious interference with contractual or business relations. These counterclaims are not the subject of a motion now before the court.
The case is before the court on the defendants’ motion for summary judgment dismissing all the claims asserted against them, and NTV’s cross-motion for summary judgment on part of its breach of contract claim. For the reasons that follow, the defendants’ motion is Allowed, in part, and Denied, in part, and NTV’s motion is Denied.
FACTS
Based on the summary judgment record, the following facts are undisputed or viewed in the light most favorable to the non-moving party.
Salary.com was founded by Plunkett in 1999. It became a public company in 2007, and then was acquired by a firm called Kenexa, Inc. in 2010. In 2012, Kenexa was acquired by IBM, after which Salary.com was operated as a division of that company or an IBM affiliate. In 2014, IBM informed Plunkett that it was interested in selling Salary.com. Also, in 2014, Plunkett and another former colleague at Salary.com formed Lightship for the purpose of attempting to acquire Salary.com from IBM. Lightship signed a Non-Disclosure Agreement with IBM which limited Lightship’s ability to disclose confidential information concerning Salary.com to others, including that IBM was actively seeking to dispose of this asset. As is typical in these kinds of potential transactions, IBM set up a data room where confidential information concerning
3
Salary.com could be reviewed by Lightship and potential investors who would finance the acquisition. The information available to potential investors did not include financial statements specific to Salary.com because it was operated by IBM as division of a larger enterprise. In February, 2015, Lightship and IBM entered into an agreement that gave Lightship the exclusive right, for a period of time, to negotiate a purchase agreement for Salary.com. Lightship had previously entered into an investment banking relationship with the firm Stifel Nicolaus & Co. (Stifel) to assist it in the proposed acquisition.
Through Stifel, a number of potential investors were identified who signed NDAs with Lightship, were informed of the acquisition target, and given access to the data room. A number of potential investors presented Lightship with term sheets for an acquisition of Salary.com. In early 2015, a private equity firm called Genstar Capital signed an agreement with Lightship that gave it an exclusive right to try and negotiate a transaction with IBM. Genstar retained a firm, Alvarez and Marsal, to analyze Salary.com’s earnings and prepare a report. This report was Genstar’s property. Genstar, however, failed to reach terms acceptable to IBM. Thereafter, a firm called Symphony Technology Group (Symphony) entered a similar agreement with Lightship, but it also failed to reach agreement with IBM. In July, 2015, Stifel informed Lightship that it would no longer represent it in connection with a Salary.com transaction.
In July, 2015, a mutual acquaintance, Steven Sandler, introduced Plunkett to a principal of NTV. NTV was then a newly formed organization which was planning to raise a venture capital fund, although it did not yet have any investors. After discussions, Lightship and NTV agreed to enter into an investment banking relationship in which NTV would seek to find investors willing to finance the acquisition of Salary.com. After some negotiations, their relationship was memorialized in the Agreement which was executed on August 5, 2015. As
4
relevant to this case, the Agreement contained the following provisions.
The term of the Agreement was six months, but it could be terminated by either party on 14 days notice. Section 4 of the agreement had standard confidentiality terms. It also provided that: “NTV further agrees to abide by all terms and conditions of the NDA entered into between IBM and Lightship.” This meant that NTV should not disclose the name of the target, Salary.com, or any of its data, to a potential investor identified by NTV until the investor had signed an NDA.
Most of provisions of the Agreement relevant to this case are found in a document entitled Scope of Work (SOW) that was an exhibit to the Agreement and made a part of it. The SOW described the services that NTV was going to provide Lightship as follows:
NTV will endeavor to source capital and structure financing transactions from agreed-upon target investors and/or lenders. NTV will facilitate and participate in meetings and due diligence with capital sources, structuring and negotiating terms, and closing financing for the Acquisitions as [Lightship’s] advisor.
With respect to fees potentially due NTV, the SOW provided:
[Lightship] will pay to NTV as transaction fees (collectively, “Fees”) at closing in cash the a [sic] success fee (the Success Fee”) equal to the greater of 3% of the value of the capital that NTV introduces to the project that is invested or $ 330,000. In the event a deal is consummated by management with investment or financial sponsorship other than parties introduced by NTV, but not including sources contacted and/or introduced by NTV, (ie: not a strategic buyer acquiring substantially all of the business other than incentive interests for and direct investment by management where such strategic partner and not management controls) and no success fee is earned, then NTV shall be entitled to a $ 330,000 advisory fee in consideration of its team’s effort, services, time, and opportunity costs associated with working with management, preparing materials, communication with potential sources of capital, and other services, provided NTV shall have introduced at least 10 qualified sources of capital and remained engaged with [Lightship] and available to provide advice and support. It is understood and agreed by the parties that: . . . (ii) NTV expects to introduce and facilitate investment from third party sources collectively able to finance all levels of the transactions (i.e., both equity and debt) and [Lightship] has agreed as to each level of the capital structure for which NTV has one or more sources of capital willing and able to provide financing that [Lightship] has agreed that the Company will close with such investor(s) introduced and facilitated by NTV and not with other investors who might offer such financing on
5
substantially the same terms; provided that if [Lightship] determines reasonably and in good faith that accepting financing from one or more of such investors would not be in the best interests of the Company and its management and shareholders (but specifically excluding as an interest of the Company avoidance of fees otherwise payable), [Lightship] shall not be required to close with such investor(s). If third parties not introduced by NTV shall offer better terms than parties introduced by NTV, then NTV will have the opportunity, within five days after notification to match such terms.
As is evident from the terms quoted above, NTV’s agreement with Lightship was not exclusive. If Lightship purchased Salary.com with investors that NTV had not introduced to the deal, it would not be due a Success Fee. NTV might still, however, be due an advisory fee of $ 330,000, if it met the preconditions to the award of that fee described in the SOW.
NTV sent a brief email to 28 potential sources of capital describing the transaction in very general terms. While the parties dispute whether Plunkett approved all of these possible investors as qualified sources of capital before the email was sent, for the purposes of this motion, the court assumes that he did. Of these 28 email recipients, 12 expressed interest in looking more closely at the deal. NTV sent these potential investors a 12 page power point presentation that provided additional information about the proposed transaction, but did not identify the target, although a recipient might have been able to deduce its identity. Lightship admits that NTV scheduled meetings or calls between 7 of these responders and Plunkett. NTV asserts that it had three others ready to speak with Plunkett: Vector Capital, Princeton Capital and Silicon Valley Bank, but the meetings did not take place. These three investors will be addressed further in the “Discussion” section of this memorandum.
Of the potential investors contacted by NTV, only 4 executed NDAs. None of the potential investors contacted by NTV presented Lightship with a proposed term sheet for a Salary.com transaction. NTV’s representatives testified at deposition that all of the investors it approached wanted audited or detailed financial statements for Salary.com, which did not exist
6
because it was operated as a division of a larger group.
In August, 2015, Plunkett also began discussions with other investment banking firms, including Moorgate Capital Partners (Moorgate), with a view to finding investors to finance a Salary.com acquisition. Several potential investors signed NDAs, performed due diligence in the IBM data room, and submitted term sheets. In October, Lightship began to focus on two potential investors, one of which—H.I.G. Capital (HIG)—was introduced by Moorgate. On November 3, 2015, Lighthouse and HIG entered into an Agreement providing HIG with a period of exclusivity in which to try and negotiate a purchase with IBM, as had been the case with Genstar and Symphony. HIG was offering to provide only the equity layer of financing, so the debt component would still be necessary even if HIG were more successful than Genstar or Symphony in reaching an agreement with IBM for the purchase of Salary.com. The terms of the debt financing would, of course, have to be acceptable to HIG, which would be contributing the equity at risk in the independent Salary.com enterprise.
Lightship did not provide a copy of the November 3rd letter to NTV; nor was it required to do so. It is, however, undisputed that not long thereafter NTV was aware that HIG was negotiating with IBM for the purchase of Salary.com. In a November 22-23, 2015 email exchange between representatives of a potential debt investor, Ares Management (Ares), introduced to the deal by NTV, and NTV, Ares wrote to NTV: “We were potentially interested at 2-3X EBITDA leverage, but that was so far below HIG’s ask that we didn’t do much work. If that’s interesting, let us know.” In fact, by November 17, 2015, NTV was threatening to sue Lightship for having entered into the agreement with HIG. On December 14, 2015, Lightship sent NTV a letter stating that it was terminating the Agreement on 14 days notice.
HIG was still negotiating with IBM on December 29, 2015. It closed the transaction on
7
December 31, 2015, the last day that IBM was willing to move forward at HIG’s offering price. The debt was provided by Prudential. The financing included $ 17 million of equity from HIG and $ 55 million of debt from Prudential, which included $ 10 million of operating capital. The actual terms of the acquisition are not provided in the summary judgment record, but it appears that the acquirer was a new company (the proverbial Newco) owned in undisclosed percentages by HIG, Plunkett, and other members of Salary.com management. At one time, spread sheets showing the sources and uses of funds to be provided HIG and a still unidentified debt financier included a $ 330,000 fee going to NTV, although that fee was not included in the final closing documents and no fee was paid to NTV.
DISCUSSION
Standard for Review
Summary judgment will be granted when there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Mass. R. Civ. P. 56(c); Cassesso v. Commissioner of Corr., 390 Mass. 419, 422 (1983). To prevail on its summary judgment motion, the moving party must affirmatively demonstrate the absence of a triable issue, and that the summary judgment record entitles it to a judgment as a matter of law. Pederson v. Time, Inc., 404 Mass. 14, 16-17 (1989). “[A]ll evidentiary inferences must be resolved in favor of the [nonmoving party].” Boyd v. National R.R. Passenger Corp., 446 Mass. 540, 544 (2006).
The nonmoving party, however, cannot defeat a motion for summary judgment by merely asserting that facts are disputed. Mass. R. Civ. P. 56(e); LaLonde v. Eissner, 405 Mass. 207, 209 (1989). Rather, to defeat summary judgment, the nonmoving party must “go beyond the pleadings and by [its] own affidavits, or by the depositions, answers to interrogatories, and admissions on file, designate specific facts showing that there is a genuine issue for trial.”
8
Kourouvacilis v. General Motors Corp., 410 Mass. 706, 714 (1991). “Conclusory statements, general denials, and factual allegations not based on personal knowledge [are] insufficient.” Cullen Enters., Inc. v. Massachusetts Prop. Ins. Underwriting Ass’n, 399 Mass. 886, 890 (1987), quoting Madsen v. Erwin, 395 Mass. 715, 721 (1985).
Breach of Contract and Breach of the Covenant of Good Faith and Fair Dealing
NTV asserts that Salary.com breached the Agreement by failing to pay the 3% commission, or alternatively failing to pay the $ 330,000 advisory fee. The court will first address the claims asserting a breach for failure to pay the commission.
NTV argues that Lightship breached the Agreement by failing to tell NTV that it was talking to other investment banking firms. However, the Agreement was clearly not exclusive. Indeed, it contemplated what might happen if the transaction closed with investors not introduced by NTV. Lightship was under no obligation to inform NTV concerning other firms it was using to raise capital. NTV also complains that Lightship began focusing on HIG in October and signed an exclusivity arrangement with HIG on November 3, 2015. Never having introduced a potential investor that even submitted a term sheet to Lightship, NTV could not have been surprised that Lightship focused on a potential equity investor that did its due diligence, met with management, and submitted terms on which it would attempt to close a transaction with IBM. NTV also complains that HIG received a copy of the Alvarez and Marsal report; however, it paid Genstar for it. There is no evidence in the summary judgment record that Lighthouse would not have entered into negotiations with an investor generated by NTV, if any such investor presented a term sheet for a proposed transaction.
More specifically, NTV contends that there exists a triable issue of fact concerning whether MTV is due the 3% fee “under the lost opportunity doctrine.” This doctrine, however,
9
addresses the question of how lost profits may be proven when they are the consequence of a breach of contract or business tort. It is not a separate means of establishing a breach of contract or a tort. This doctrine simply has no application to this case. See, e.g., Herbert A. Sullivan, Inc. v. Utica Mutual Ins. Co., 439 Mass. 387, 413 (2003) (“An element of uncertainty is permitted in calculating damages . . . This is particularly the case in business torts, where the critical focus is on the defendant’s conduct.”) (emphasis supplied).
NTV argues that an investor that it introduced to the deal, Ares, “might” have “matched the terms that Prudential eventually offered on December 18, 2015.” There are two problems with this argument: one legal and one factual.
First, the Agreement provides: “If third parties not introduced by NTV shall offer better terms than parties introduced by NTV, then NTV will have the opportunity, within five days after notification to match such terms.” NTV never introduced a party to Lightship that offered to enter into a transaction, debt or equity, on any terms, and that includes Ares. Clearly, the contract envisions that a qualified investor introduced by NTV who had made an offer would be given a brief period to attempt to match or exceed a better offer made by another investor. It does not mean that NTV had the right to find a third-party that had never presented an offer sheet who might, on five days-notice, decide to invest more than $ 50 million on terms better than those offered by an investor prepared to close. There is no way to determine if an investor’s terms are better than those produced by an NTV introduced party, where the NTV party never submitted anything to compare.
Additionally, there is no evidence that Ares could possibly close on financing by December 31, 2015, the date by which IBM required the transaction be complete. The December 17, 2015 email from Ares to which NTV points expresses only a vague willingness to
10
talk to NTV about the deal. A previous November 23, 2015 email exchange between Ares and NTV shows that Ares had direct contact with HIG about this transaction, but HIG was looking for debt on terms that were of no interest to Ares. There is no evidence that HIG’s position ever changed. Indeed, Lightship submitted an affidavit from a managing director at Ares who attested that he had a good working relationship with HIG from other deals, he looked at material sent to him by HIG and spoke to HIG about it, and then told HIG that Ares would pass. NTV offers no evidence to contradict this affidavit. The summary judgment record contains no evidence creating a triable issue on the question of whether Ares would have presented matching or better terms than Prudential, if offered the opportunity to do so in late December, 2015. NTV’s speculation that this might have happened is insufficient.
NTV’s claims for breach of the implied covenant of good faith and fair dealing as it relates to the claim for the commission fails for similar reasons. There is simply no evidence that NTV brought the Salary.com transaction to the attention of any potential investor who might have provided financing for this transaction on better terms than HIG and Prudential. Even assuming that there is evidence in the summary judgment record that Plunkett was not responsive to requests to meet with an NTV sourced investor, a debatable proposition, there is no evidence that any such investor was actually prepared to invest.1
Turning to the advisory fee, the Agreement states: “In the event a deal is consummated by management with investment or financial sponsorship other than parties introduced by NTV, . . .
1 A brief reference to Silicon Valley Bank is made in the opposition in this regard; however, again defendants have submitted an affidavit from a Managing Director of this firm in which he points out that Silicon Valley was Salarly.com’s banker when it was an independent company, and he knew about the proposed transaction, but never met with Plunkett or anyone else associated with the Salary.com deal and never proposed any terms on which Silicon Valley would invest. NTV has not offered any deposition testimony or other evidence from Silicon Valley suggesting that it was ready to close on a Salary.com transaction by December 31, 2015. For these reasons, there can be no 93A claim premised on a refusal to pay the 3% commission because there is no evidence that NTV generated a potential investor actually interested in financing the acquisition.
11
then NTV shall be entitled to a $ 330,000 advisory fee in consideration of its team’s effort, services, time, and opportunity costs associated with working with management, preparing materials, communication with potential sources of capital, and other services, provided NTV shall have introduced at least 10 qualified sources of capital and remained engaged with [Lightship] and available to provide advice and support.” With respect to this fee, Lightship maintains that NTV failed to “introduce[] at least 10 qualified sources of capital and remained engaged with [Lightship] and available to provide advice and support.” It concedes, for purposes of its motion for summary judgment, an introduction to 7 potential investors, but contends that there is no evidence in the record supporting the last 3, viz: Vector Capital, Princeton Capital and Silicon Valley Bank (SVB).
In response, NTV first argues that the Agreement could be read to mean that all NTV had to do was “introduce” potential investors to the deal, i.e., let them know it was out there; it did not have to actually introduce them to Lightship. On this proposed interpretation, sending a brief email very broadly describing the deal to 28 firms fulfilled its obligation. The court does not find that this is a reasonable interpretation of the Agreement. The Agreement contemplated that NTV would find at least 10 qualified sources of capital sufficiently interested in the opportunity that they would want to meet with the principals of Lightship, i.e., be introduced to Lightship. Clearly, sending a cold email to investors, most of whom did not even respond, was not what the parties understood would be sufficient to earn $ 330,000. Moreover, sending a follow-up email that attached a power point providing some additional information, but still without identifying Salary.com as the target, was also inadequate.
As to the three investors, in dispute: Vector, Princeton, and SVB, Lightship argues that: (i) Stifel had already contacted Vector when it was still acting as Lightship’s investment banker;
12
(ii) Princeton was not an acceptable source of capital because one if its managers had sought to oust Plunkett as CEO of Salary.com a decade earlier; and (iii) SVB could not be introduced to this transaction because SVB was Salary.com’s banker when it was an independent company and Plunkett had already discussed the deal with SVB. The court finds these arguments insufficient to support dismissal of this claim by summary judgment. If Vector and SVB had previously passed on the Salary.com/Lightship transaction, but were willing to re-engage because of NTV’s efforts, a jury could find that they were introduced, or at least ready and willing to be introduced, to Lighthouse regarding their possible participation in the acquisition within the meaning of the Agreement. As to Princeton, there is evidence in the summary judgment record that Plunkett approved either directly or by inference this firm as an acceptable source of capital when it reviewed the original list of 28 firms to which NTV sent its initial email describing the transaction. The jury could also choose not to believe Plunkett regarding his reason for not meeting with Princeton or find that reason insufficient under the Agreement. While it may be that the literal terms of the Agreement have not been fulfilled if Plunkett or other members of Salary.com team never met with these three firms; however, a breach of the covenant of good faith and fair dealing might be might be demonstrated with evidence that Plunkett avoided meeting with potential investors who NTV had contacted and developed to the point that they wanted to engage with the Salary.com team to discuss the acquisition.
Additionally, there is evidence that at one point the $ 330,000 advisory fee was included in a spread sheet generated by Lighthouse as a transaction expense to be paid at closing. This is certainly not conclusive evidence that the fee was due, as there are other explanations as to why it might be included in an early draft of a closing document. It is, nonetheless, some evidence that Lighthouse believed that NTV had earned this fee.
13
Accordingly, summary judgment is denied with respect to so much of Counts I, II and VI as are based on a failure to pay the advisory fee.2 NTV’s motion for summary judgment on this claim is also denied, as NTV has only shown that there are disputed issues of fact material to the claim, not that it is entitled to judgment as a matter of law.
Deceit
NTV alleges a claim for Deceit/Negligent Misrepresentation in Count V. The only allegedly false statement identified in the complaint with any specificity is that Lighthouse represented to NTV that it had an agreement with IBM that gave it an exclusive right to negotiate a purchase of Salary.com, but failed to tell NTV that the agreement had expired. Even if this allegation were true, the summary judgment record establishes that IBM continued to negotiate the terms of the Salary.com purchase with Lighthouse and its equity partner HIG through the end of 2015, closing the transaction on December 31, 2015. This is not a case in which NTV was misled into expending substantial resources in assisting Lighthouse only to have IBM sell to another buyer. A necessary element of a claim of deceit is damages, and NTV has not alleged that it suffered any damage in reliance on this allegedly material misrepresentation. See Kilroy v. Barron, 326 Mass. 464, 465 (1950) (plaintiff must have relied upon the representation as true and “acted upon it to its damage.”)
Remaining Claims
In its opposition to the defendant’s motion for summary judgment, NTV raises no argument in support of its claims for promissory estoppel, unjust enrichment, fraudulent transfer, or its claims to reach and apply debt or other interests due either defendant from some other
2 Count VI alleges the violation of Chapter 93A. The court finds this claim to be quite weak. Nonetheless, there exist circumstances in which a breach of the covenant of good faith and fair dealing will support a Chapter 93A claim and it therefore declines to dismiss this Count to the extent it is related to the advisory fee. See, e.g., Massachusetts Employers Ins. Exchange v. Propac-Mass., Inc., 420 Mass. 39 (1995).
14
third-party, not named as a defendant in this action, nor could it. Those claims are dismissed.
ORDER
For the foregoing reasons, the defendants’ motion for summary judgment is ALLOWED, in part, and DENIED, in part, as follows: all Counts of the complaint are dismissed except so much of Counts I, II and VI as allege claims based upon Lighthouse’s refusal to pay the advisory fee. Plaintiff’s motion for summary judgment is DENIED.
____________________
Mitchell H. Kaplan
Justice of the Superior Court
Dated: May 31, 2017

read more

Posted by Stephen Sandberg - July 4, 2017 at 8:51 am

Categories: News   Tags: , , , , , , ,

Walker, et al. v. Boston Medical Center Corp., et al. (Lawyers Weekly No. 12-081-17)

1

COMMONWEALTH OF MASSACHUSETTS

SUFFOLK, ss SUPERIOR COURT

CIVIL ACTION

  1. 2015-01733-BLS1

KAMYRA WALKER and another,1

1 Anne O’ Rourke

2 MDF Transcription, LLC and Richard J. Fagan.

on behalf of themselves and other similarly situated

vs.

BOSTON MEDICAL CENTER CORP. and others 2

MEMORANDUM OF DECISION AND ORDER ON

DEFENDANT BOSTON MEDICAL CENTER CORP.’S

MOTION FOR SUMMARY JUDGMENT

In March 2014, defendant Boston Medical Center, Corp. (BMC) learned that another health care provider had inadvertently accessed a BMC patient’s medical information on a website maintained by defendant MDF Transcriptions, LLC (MDF), a medical transcription company used by both BMC and thisother provider.  It sent a letter to all its patients who had records that had been transcribed by MDF informingthem that there might have been unauthorized access to their medical information. After receiving this letter, the plaintiffs Kamyra Walker and Anne O’Rourke,filedthisputative classaction against BMC, MDF, and Richard Fagan, MDF’s owner and manager.  They assertthat the defendants are liableto them, and all other similarly situated BMC patients,for failing to ensure that their medical information was kept confidential.  The case is before the court on BMC’smotionfor summary judgment. BMCargues, among other things, that the plaintiffs lack standing to maintain the claims asserted2

read more

Posted by Stephen Sandberg - July 4, 2017 at 5:18 am

Categories: News   Tags: , , , , , , ,

FBT Everett Realty, LLC v. Massachusetts Gaming Commission (Lawyers Weekly No. 12-082-17)

COMMONWEALTH OF MASSACHUSETTS

SUFFOLK, ss SUPERIOR COURT

CIVIL ACTION

  1. 2016-03481-BLS1

FBT EVERETT REALTY, LLC

vs.

MASSACHUSETTS GAMING COMMISSION

MEMORANDUM OF DECISION AND ORDER ON

DEFENDANT’S MOTION TO DISMISS FBT EVERETT, LLC’S COMPLAINT

PURSUANT TO MASS. R CIV. P. 12(b)(1) AND 12(b)(6)

Plaintiff FBT Everett Realty, LLC (FBT) entered into an Option Agreement with Wynn MA, LLC (Wynn), an affiliate of Wynn Resorts, pursuant to which Wynn acquired the option to purchase a parcel of land in Everett, Massachusetts owned by FBT (the Everett Parcel), if Wynn was awarded a casino license by the defendant Massachusetts Gaming Commission (the Commission).  In this action, FTP alleges that it suffered losses as result of the Commission’s tortious interference with that Option Agreement.  Its Complaint pleads a single count of intentional interference with contract in which it claims that, as a result of unlawful pressure exerted on Wynn by the Commission, Wynn insisted that FBT renegotiate the purchase price of the Everett Parcel, reducing that purchase price from $ 75 million to $ 35 million.  The case is now before the court on the Commission’s motion to dismiss FBT’s complaint pursuant to Mass. R. Civ. P. 12(b)(1) and 12(b)(6).  In particular, the Commission contends that it is a “public employer” under § 1 of the Massachusetts Tort Claims Act (G. L. c. 258, §§ 1 et seq., the MTCA), and, therefore, under § 10(c) it is immune from suits for intentional torts, including intentional interference with contractual relations.  For the reasons that follow, the motion is 2

read more

Posted by Stephen Sandberg - July 4, 2017 at 1:43 am

Categories: News   Tags: , , , , , , ,

Philadelphia Indemnity Insurance Company v. National Union Fire Insurance Company of Pittsburgh, PA (Lawyers Weekly No. 12-083-17)

1
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
CIVIL ACTION
NO. 2016-00045 BLS1
PHILADELPHIA INDEMNITY INSURANCE COMPANY
vs.
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA
MEMORANDUM OF DECISION AND ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT
Plaintiff Philadelphia Indemnity Insurance Company (PIIC) and defendant National Union Fire Insurance Company (National Union) each issued insurance policies to North Suffolk Mental Health Associated, Inc. (North Suffolk). PIIC issued a Commercial General Liability (CGL) policy; and National Union issued a Workers’ Compensation and General Liability (Workers’ Comp.) policy. In a case filed in the Middlesex Superior Court in 2011, captioned Estate of Stephanie Moulton v. Nicholas Puopolo, et al. (the Underlying Action), the plaintiff estate brought suit against eighteen directors of North Suffolk (the Director Defendants) asserting claims arising out of the work related death of Ms. Moulton, a North Suffolk employee. The Director Defendants tendered the claim to both PIIC and National Union. PIIC defended the claim (under a reservation of right) and National Union declined coverage. The Director Defendants’ motion to dismiss the Underlying Action was eventually allowed, after appeal to the Supreme Judicial Court (SJC). See Estate of Moulton v. Puopolo, 467 Mass. 478 (2014) (Moulton). In this action, PIIC has filed suit against National Union asserting claims for
2
declaratory judgment and equitable subordination and seeking to recover the cost of its successful defense of the Underlying Action. The case is now before the court on the parties’ cross-motions for summary judgment. For the reasons that follow, National Union’s motion is ALLOWED, and PIIC’s motion is DENIED.
ADDITIONAL FACTS
The following additional facts are undisputed.
Ms. Moulton was an employee of North Suffolk, a charitable corporation that provides mental health and rehabilitation services. She was assaulted and killed by a patient while performing her job. As explained in Moulton, her estate (the Estate) filed the Underlying Action against the directors of North Suffolk and others. It alleged claims for willful, wanton, reckless, malicious and grossly negligent conduct and, also, as to the Director Defendants, breach of fiduciary duty. The complaint alleged that the Director Defendants “effectuated” policies and failed to “effectuate” other policies that caused Ms. Moulton’s death. Id. at 480. They “moved to dismiss the complaint chiefly on the grounds that, with respect to the wrongful death action, they are immune from suit, as Ms. Moulton’s employer, under the exclusive remedy provision, G.L.c. 152, § 24 of the Workers’ Compensation Act (act), and, with respect to the breach of fiduciary duty claim, they owed Moulton no such duty.” Id. The Superior Court denied the motion to dismiss; the director defendants sought interlocutory review under the doctrine of present execution; and the case was transferred to the SJC.
As relevant to this case, the SJC found that: “The complaint, fairly read, alleges that the Director Defendants, acting qua directors rather than in any other capacity, set and enforced misguided and wrongful corporate policies that resulted in Mouton’s death while in the course of
3
her employment. There is no allegation that the directors undertook any action without a formal board meeting or vote, . . . to the extent that the complaint alleges that Moulton’s death arose from the adoption of or failure to adopt corporate policies, it alleges conduct by the charitable corporation that could have been occasioned only by the vote of its directors acting collectively as a board.” Id. at 488-489. It then held that, “we conclude that the director defendants were Moulton’s employer for purposes of the exclusivity provision of the act. As Moulton’s employer, the director defendants are therefore immune from suit for workplace injuries due to actions taken by the board.” Id. at 490-491.1
The Worker’s Comp. Policy
The National Union Workers’ Comp. policy was in effect when the Moulton claim was asserted. It is a standard form of Worker’s Comp. policy issued in Massachusetts. It has two coverage parts. Part One provides for payment of any benefits “required of you by the workers compensation law;” and that National Union has “the right and duty to defend at our expense any claim, proceeding or suit against you for benefits payable by this insurance. . . . We have no duty to defend a claim, proceeding or suit that is not covered by this insurance.”
Part Two provides Employers’ Liability Insurance. As explained by the SJC in HDH Corporation v. Atlantic Charter Ins. Co., 425 Mass. 433, (1997) (Atlantic Charter), the seminal decision addressing the coverage provided under a workers’ compensation policy, discussed at greater length infra: “Part Two, the employers’ liability portion of the insurance policy, is intended to provide coverage in the rare circumstance in which an employee who has affirmatively opted out [of the workers’ compensation benefits system at the time of hire] brings a tort action for personal injuries.” Id. at 439 n.11.
1 The SJC also held that, “as Moulton’s employer, the director defendants, acting as a board, had no fiduciary duty to her.” Id. at 493.
4
The declarations page of the Workers’ Comp. policy identifies North Suffolk as the named insured. There are no policy provisions or endorsements that broaden the definition of named insured to include directors, officers, or employees.
DISCUSSION
PIIC first argues that since, in Moulton, the SJC held that “the director defendants were Moulton’s employer for purposes of the exclusivity provision of the act,” they might also be insureds under the Workers’ Comp. policy, even though the policy terms do not extend coverage to them; or, at least, there is a “possibility” that they would be held to be insureds in a declaratory judgment action addressing coverage issues under the Workers’ Comp. policy. PIIC next argues that there then also exists a “possibility” that the claims asserted by the Estate in the Underlying Action were covered under either Part One or Part Two of the Workers’ Comp. policy coverage provisions. PIIC then goes on to cite Billings v. Commerce Ins. Co., 458 Mass. 194, 200-201 (2010) for the long established principle that: “In order for the duty of defense to arise, the underlying complaint need only show through general allegations, a possibility that the liability claim falls within the insurance coverage.” (Emphasis supplied.) According to PIIC, given this possibility of coverage, National Union had a duty to defend the Director Defendants in the Underlying Action.
The court finds it doubtful that the SJC’s holding that, under the “so-called exclusivity provision of the act,” the directors of a corporation cannot be sued for work place injuries in the Superior Court, when they were alleged to have done nothing more than vote on corporate policies, could be interpreted to mean that the directors were additional insureds under a workers’ compensation policy. However, the court declines to address that argument. This is
5
because the SJC’s decision in Atlantic Charter clearly establishes that National Union’s Workers’ Comp. policy did not provide coverage for the claims asserted by the Estate in the Underlying Action.
Claims Asserted under Part One of the Workers’ Comp. Policy
In Atlantic Charter, an employee sued its former employer HDH Corporation (HDH) for personal injuries arising from her allegedly wrongful termination; her husband also asserted claims for loss of consortium. HDH tendered the claim to its workers’ compensation carrier, Atlantic Charter, which declined coverage. The case went to arbitration and the plaintiff employee recovered. HDH then sued Atlantic Charter, claiming coverage under Part One of the policy. The SJC explained the extent of coverage provided under Part One of a workers’ compensation policy as follows:
The terms of Part One of the policy clearly limit defense and indemnity of the employer to claims for benefits required by the workers’ compensation statute. However, the employee brought a civil action seeking monetary damages, and made no claim for workers’ compensation benefits. Indeed, no matter what the allegations of the complaint, as a matter of law, workers’ compensation benefits cannot be recovered by instituting a civil action. A claim for benefits must be brought before the department and adjudicated through the statutorily prescribed workers’ compensation system. See Neff v. Commissioner of the Dep’t of Indus. Accs., 421 Mass. 70, 74 (1995) (describing procedural course for the adjudication of workers’ compensation dispute through the Department of Industrial Accidents). See also Alecks’ Case, 301 Mass. 403, 404 (1938) (under the workers’ compensation statute, an employee “acquires a right to compensation for personal injury as provided in that act, to be enforced by claim against the insurer filed with the Industrial Accident Board…. [T]he policy of the act is to deprive [the employee] of all right of action in tort against his employer for damages for an injury within the scope of the [workers’] compensation act”).
The record demonstrates that a claim for benefits was never initiated by the employee, as mandated by G.L. c. 152, § 10. Accordingly, Atlantic is correct that it had no duty to defend the civil action because the complaint did not state a claim that could result in liability which Atlantic would be obligated to pay under any reasonable interpretation of Part One of the policy. See, e.g., Jimmy’s Diner, Inc. v. Liquor Liab. Joint Underwriting Ass’n of Mass., 410 Mass. 61, 65 (1991).
425 Mass. at 433.
6
In Atlantic Charter, the SJC also explained the important public policy considerations underlying the legislation that it was interpreting:
Public policy also supports our decision. The fundamental purpose of the workers’ compensation system is to make funds more readily available to injured employees. Accordingly, the Commonwealth requires all employers to provide workers’ compensation benefits to their employees. See G.L. c. 152, § 25A. As amici point out, the cost of mandatory workers’ compensation insurance is a significant aspect of the business climate of the Commonwealth. Recent legislative reforms have sought to lower the insurance rates employers must pay to provide the security of workers’ compensation benefits to their employees. See St.1991, c. 398. Requiring workers’ compensation insurers to defend civil actions outside the workers’ compensation system would represent an unwarranted expansion of coverage historically understood as provided under this mandatory form of insurance, a result which would increase insurance costs for employers, and could gut the legislative scheme for workers’ compensation. See, e.g., La Jolla Beach & Tennis Club, Inc., supra at 44, 36 Cal.Rptr.2d 100, 884 P.2d 1048.
Id. at 440.
In the present case, Moulton’s estate made no claim to recover workers’ compensation benefits2; indeed, it did not sue North Suffolk, but rather its directors, in an obvious and unsuccessful attempt to recover damages and not the benefits provided under the act.3 PIIC’s argument that the SJC’s decision in Moulton overruled the express holding in Atlantic Charter that Part One of a workers’ compensation policy only provides coverage for workers’
2 The workers’ compensation act has long been held to provide the exclusive remedy by which the estate of deceased employee can recover from his employer. See McDonnell v. Berkshire St. Ry. Co., 243 Mass. 94, 95
(1922) (“The employer who is insured under the workmen’s compensation act is relieved of all
statutory liability, including that for death of an employee under the employers’ liability act”);
Cozzo v. Atlantic Refining Co., 299 Mass. 260, 262 (1938) (“Nor can an action at law be
maintained against such employer [i.e., one who is insured under the workers’ compensation law] to recover for the death of an employee resulting from such injury [i.e., one arising out of and in
the course of his employment],” citing G. L. c. 152, 68); Ferriter v. Daniel O’Connell’s Sons,
Inc., 381 Mass. at 528 (“We acknowledge that G. L. c. 152, 1[4] and 68, bar a deceased
employee’s dependents from recovering under G. L. c. 229, 2 and 2B, for loss of consortium,
as against an employer covered by G. L. c. 152”).
3 In Peerless Ins. Co. v. Hartford Ins. Co., 48 Mass. App. Ct. 561 (2000), decided shortly after Atlantic Charter, the Appeals Court addressed a coverage dispute between an employer’s general liability insurer and its workers’ compensation insurer very much like the dispute presented by this case. There the estate of a deceased employee sued the employer. The workers compensation carrier denied coverage and the general liability carrier defended the claim. The Appeals Court held that because the estate could not bring a claim against the employer for workers compensation benefits or for wrongful death, the workers’ compensation carrier had no duty to defend and no obligations to the general liability carrier.
7
compensation benefits, and those benefits can only be claimed in the Department of Industrial Accidents, simply does not parse. In holding that the Estate could not bring an action against the Director Defendants based on allegations that they had voted to adopt corporate policies that allegedly contributed to Ms. Moulton’s death, the SJC was clearly not expanding the coverage provided by workers’ compensation policies. It was also not seeking to “gut” the public policy considerations underlying the statutory scheme, which were intended to reduce the costs of this mandatory insurance coverage, by saddling workers compensation insurers with potential additional costs unrelated to the employee benefits mandated by the act. Indeed, in Moulton, the SJC was not addressing insurance at all. It was only concerned with whether the Director Defendants were subject to suit at common law by an injured employee.
In a somewhat round about argument, PIIC suggests that the Appeals Court’s decision in Norfolk & Dedham Mutual Fire Ins. Co. v. Cleary Consultants, Inc., 81 Mass. App. Ct. 40 (2011) (Norfolk & Dedham) supports its position. In furtherance of its arguments that the claims asserted in the Underlying Action were not covered, National Union quoted the following sentence from Atlantic Charter: “Indeed, no matter what the allegations of the complaint, as a matter of law, workers’ compensation benefits cannot be recovered by instituting a civil action.” 425 Mass. at 439. PIIC argues that in Norfolk & Dedham, the Appeals Court noted that an insurer that provided coverage for slander, libel, and invasion of privacy could not disclaim coverage just because these common law claims were asserted together with claims for sexual harassment before the Massachusetts Commission Against Discrimination (MCAD). In fact, in that case, the Appeals Court held that those claims could be asserted as part of a claim for sexual harassment, because they are compensable under an award for emotional distress. The Court did go on to comment that even if the claims were “viewed as a misguided effort to adjudicate
8
claims of slander and invasion of privacy in an improper forum, that would not affect Norfolk’s duty to defend. An insurer’s obligation to defend is not limited to valid claims; it extends even to claims potentially dismissible for lack of subject matter jurisdiction.” 81 Mass. App. Ct. at 48-49. This comment, of course, has no bearing on the statutory scheme for workers’ compensation benefits, in which a workers compensation policy insures only those benefits provided by the act, benefits that can only be awarded by the Department of Industrial Accidents. Obviously, a covered claim filed in the wrong court still gives rise to a duty to defend. An insurer could not disclaim a duty to defend because a plaintiff mistakenly filed an action in federal court, when there was no federal jurisdiction, but the policy covered the injury alleged in the complaint. A worker’s compensation insurer does not have a duty to defend a claim filed in Superior Court for damages that are expressly not covered under the workers’ compensation system.
Claims Asserted under Part Two of the Workers’ Comp. Policy
At oral argument, PIIC acknowledged that its principle argument that the “possibility” of coverage existed and this triggered National Union’s duty to defend was based on Part One of the coverage provisions. It nonetheless also asserted that a duty to defend arose under Part Two. Here, PIIC does not argue that Moulton overturned that part of Atlantic Charter in which the SJC stated that: “Part Two, the employers’ liability portion of the insurance policy, is intended to provide coverage in the rare circumstance in which an employee who has affirmatively opted out brings a tort action for personal injuries.” Rather, PIIC argues that the Estate’s amended complaint “included claims for funeral expenses, as well as for wrongful death and pain and suffering without reference to the Wrongful Death Act, and did not indicate whether Moulton’s parents were dependent upon her for financial support. Those claims arguably fell within the
9
scope of claims subject to G.L. c. 152, §§ 33, 31 and/or 32, respectively, but were presumably intended to circumnavigate the Workers’ Compensation statute entirely and therefore [because there was no allegation that Moulton had waived her rights to workers’ compensation benefits] left open the question whether Moulton had preserved her common law rights in lieu of accepting Worker’s Compensation benefits.” In consequence, until it could be established that Ms. Moulton had not affirmatively opted out of workers’ compensation coverage when she began work at North Suffolk, the possibility that claims asserted in the amended complaint were covered by the Workers’ Comp. policy existed.
However, in Moulton, the SJC summarily dismissed the suggestion that an employer/defendant had to assert non-waiver of workers’ compensation benefits as an affirmative defense. It explained that the statute (G.L. c. 152, § 24) expressly provides that the employee “shall be held to have waived his right of action at common law,” if he does not provide a written notice that he is claiming his right to opt out at the beginning of his employment. Therefore, non-waiver is not an affirmative defense, but rather it is the plaintiff that must allege in the complaint that the “right to payment under the act” was waived. 467 Mass. at 484 n. 12. This was not pled in the Estate’s amended complaint (nor could it be,) and therefore the complaint alleged no facts even suggesting a claim covered by workers’ compensation insurance. “When the allegations in the underlying complaint lie expressly outside the policy coverage and its purpose, the insurer is relieved of the duty to investigate and defend the claimant.” Herbert A. Sullivan, Inc. v. Utica Mut. Ins. Co., 439 Mass 387, 394-395 (2003) (Internal citations and quotations omitted.)
Moreover, the issue now before the court is not whether the Estate stated a cause of action against the Director Defendants that could possibly survive a motion to dismiss. This is a
10
coverage case between two insurers. PIIC issued a comprehensive general liability policy to its insured, North Suffolk. It is claiming a right to equitable subrogation or contribution from National Union in its capacity as North Suffolk’s workers’ compensation carrier. Its rights to recover against National Union are no greater than North Suffolk’s rights to demand that National Union defend the Underlying Action. Clearly, North Suffolk could not demand coverage based on the absence of an allegation that Ms. Moulton had affirmatively opted out of her rights for workers’ compensation benefits, knowing full well that she had not.
ORDER
For the foregoing reasons, National Union’s motion for summary judgment is ALLOWED and PIIC’s moiton for summary judgment is DENIED. Final judgment shall enter dismissing the complaint.
_______________________
Mitchell H. Kaplan Justice of the Superior Court
Dated: June, 13 2017

read more

Posted by Stephen Sandberg - July 3, 2017 at 10:06 pm

Categories: News   Tags: , , , , , , , , , ,

McEvoy v. Savings Bank Life Insurance Co. of Massachusetts (Lawyers Weekly No. 12-084-17)

1
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
CIVIL ACTION
NO. 2017-1961 BLS1
LESLIE V. McEVOY, individually and on behalf of a class of similarly situated persons,
vs.
SAVINGS BANK LIFE INSUARNCE CO. OF MASSACHUSETTS
MEMORANDUM OF DECISION AND ORDER PLAINTIFF’S MOTION FOR A PRELIMINARY INJUNCTION
The plaintiff Leslie V. McEvoy alleges that she holds a participating whole life insurance policy issued by the defendant Savings Bank Life Insurance Co. (SBLI).1 In this action, she seeks to enjoin all SBLI’s policyholders from voting on a proposed conversion of SBLI from a stock life insurance company to a mutual life insurance company. The case came before the court on June 27, 2017 on the plaintiff’s motion for a preliminary injunction enjoining the vote until additional disclosures concerning the plan of conversion demanded by her were made to SBLI’s other 480,000 policyholders. In her complaint, the plaintiff alleges that the vote on the plan of conversion is to occur at a Special Meeting of policyholders scheduled for that purpose on June 28, 2017. It appears, however, that voting has actually been underway for weeks. While the meeting was scheduled for 11:00 AM on June 28, 2017, and policyholders present at the meeting who had not previously voted could vote at that time, voting opened on May 19, 2017 and could be accomplished by mail, phone call, or on the internet, so long as the votes were
1 It appears that the plaintiff owns two policies, each in the face amount of $ 1,000, although was is pledged to a division of the State of New Hampshire.
2
received in time to be counted by the time of the meeting. As a result, the majority of votes cast in this election may well have been received by SBLI management before the annual meeting. In consequence, from a practical perspective a motion brought before the court on the afternoon of June 27th to preliminarily enjoin the vote that was to be completed and tallied the following morning was not timely.
The proposed conversion of SBLI into a mutual insurance company calls for the SBLI shareholders, 30 Massachusetts banks or banks that had acquired Massachusetts banks, to receive $ 57.3 million in return for their shares in SBLI. This sum is to be financed through the issuance of Surplus Notes. While SBLI and its financial advisers have been working for some time on the sale of these Surplus Note to certain financial institutions, at oral argument the court was informed that the closing on that transaction was still two or three weeks away. In theory, therefore, the court could still issue a mandatory preliminary injunction voiding the vote, which would of course preclude any possibility that SBLI could issue the Surplus Notes on the schedule now contemplated, and ordering that revised informational materials be sent to policyholders and a new vote undertaken. The court declines to enter such an extraordinary order and, accordingly, DENIES the motion for a preliminary injunction.
Generally, it is this court’s practice to issue a comprehensive memorandum of decision when addressing a motion for preliminary relief in a case of this nature. However, in this case it appears that speed is more important than a carefully crafted explanation of the court’s reasoning, so that the plaintiff may consider any other opportunities for the relief she requested. Accordingly, what follows is a summary statement of court’s reasoning.
3
DISCUSSION
Background
The history of how Louis D. Brandeis originally devised and promoted the establishment of SBLI and it then came to be reorganized on multiple occasions by the Massachusetts Legislature is set out in prior decisions, including Goldstein v. Savings Bank Life Ins. Co. of Massachusetts, 435 Mass. 760 (2002) and, on remand, the Superior Court’s decision on Cross-Motions for Summary Judgment dated July 3, 2008 (Gants, J.) (Goldstein). Its unique status as the only life insurance company previously required to conform to both G.L. c. 175 and G.L. c. 178A has been noted by the SJC. Id. at 770. Indeed, the conflicts inherent in an entity that owes obligations to shareholders and policyholders has been the catalyst for much prior litigation. It appears that more recent events have increased the shareholder banks’ desire to liquidate their interests in SBLI. First, they no longer sell a material number of SBLI policies or annuity contracts and therefore no longer have a business interest in the insurer. More critically, recent adoption of the so-called Basel III capital rules increased the risk weighting for non-publicly traded equity securities owned by banks, like the shares of SBLI, from 100% to 400%. In consequence, SBLI’s bank shareholders must increase the capital held against their investment in SBLI by a factor of four.
Following meetings with financial, actuarial and legal advisors, the plan to convert SBLI to a mutual insurance company wholly owned by its policyholders by having SBLI purchase all shares was adopted by the interested parties as the most expedient means for the shareholders to exit, while permitting SBLI to continue to serve the purpose for which it was founded–providing
4
secure, low-cost life insurance. The plan was unanimously approved by SBLI’s nine member board of directors. While these directors are elected by the shareholder banks, five of the members are independent. The shareholders then voted to approve the conversion. The plan also had to be approved by the three member Policyholders Advisory Board (PAB), a statutorily mandated body established by the Legislature in connection with a 2010 reorganization of SBLI, whose mission is to protect the interests of policyholders and promote SBLI’s purpose. The current chair of the PAB is a former Massachusetts Commissioner of Insurance. The PAB unanimously approved the plan of conversion in October, 2016, and, following its review of a fairness opinion prepared by the actuarial firm Milliman, Inc. that opined that the conversion was fair to policyholders on an actuarial basis, once again in January, 2017. The plan of conversion still, however, required the approval of the Commissioner of Insurance. See G.L. c. 175, § 19D(2). After nearly four months of review, by letter dated May 25, 2017, the Commissioner also approved the plan, subject to conditions not relevant to the pending motion. Among the findings that the Commissioner was required to make in order to approve the conversion is that the plan is “not prejudicial to the policyholders of such company or to the insuring public.” Id.
With respect to this finding, the Commissioner noted that SBLI management was of the view that participating policyholders and the shareholders have an interest in SBLI’s surplus, while the staff of the Division of Insurance is of the view that only the shareholders have an interest in the surplus. The $ 57.3 million to be paid to the shareholders represented an amount substantially less than the percentage of the surplus that SBLI attributed to the shareholders.
Of particular note to the pending motion, the Commissioner observed that the annual costs of the interest to be paid on the $ 57.3 million of Surplus Notes, plus the creation of reserves necessary to repay the Notes on maturity (something in the nature of a sinking fund), exceeds the
5
amount of the dividends currently being paid to shareholders. However, because of the new Basel III requirements, pursuant to which the bank shareholders will have to increase their capital in respect of the shares by a multiple of four, their cost of holding SBLI shares will also increase by a factor of four. In consequence, shareholder dividends could be expected to increase by the same factor, an amount which would not violate statutory limitations on dividends that shareholder owned life insurance companies may issue. At that point, the amount of annual dividends paid to the banks would substantially exceed the interest and reserve expenses associated with the new Surplus Notes.
The last step in the plan of conversion is a vote to approve the plan of conversion by the policyholders; a majority of policyholders who vote is required for approval. According to the Chair of the PAB, the Commissioner reviewed and approved the disclosures sent to the policyholders soliciting their votes for the plan of conversion (hereafter referred to as the Notice).
Analysis of the Claims
It is important to note that the issue before the court on this motion for a preliminary injunction is not whether the plan of conversion is good, bad, or indifferent, as it affects the interests of policyholders, including those that have participating policies and receive annual dividends, as well as those that hold policies that do not provide a right to annual dividends. Rather, the question is whether any disclosures in the Notice are materially misleading, either by what they say or omit to say. It is also notable that the plaintiff’s complaint does not allege a breach of fiduciary duty by SBLI Board or the PAB. This case, as presently pled, is solely about the nature of the disclosures.
6
The parties have not provided the court with any case that addresses the standard to apply in assessing the disclosures that should be made to policyholders when a stock insurance company is converted to a mutual company. The parties have both relied on a Superior Court decision—Silverman v. Liberty Mut. Ins. Co., 13 Mass. L.Rptr. 303 (2001) (Gants, J.)—to define the standard. That case, however, addressed the demutualization of an insurance company. In consequence, in that situation the policyholders clearly owned all of surplus and held voting rights, both of which they would be conceding in a demutualization. This case presents the reverse situation, further complicated by the unique structure of SBLI. Policyholders will be acquiring all voting rights and full ownership of any surplus available for distribution to equity holders on liquidation. The policyholders will obviously not receive any cash in this transaction, nor will they be required to pay for the shares that will be acquired by SBLI, although the value of the entity which they will then own will certainly be affected by the amount paid to the departing shareholders. Nonetheless, Silverman provides a useful guide. There Justice Gants wrote:
A mutual insurer has a duty to provide its policyholders with full and honest disclosure of material facts relating to a transaction that requires policyholder approval. .. .An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. . . . The standard contemplates a showing of substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information available.” (Internal citations and quotations omitted.)
It is, perhaps, worthy to note that this description of the law of disclosure was borrowed from securities cases in which the person receiving the disclosure was truly an investor primarily concerned with a monetary return on the investment. Here, the recipients of the information are policyholders who purchased a life insurance policy (or annuity contract) specifically designed to
7
be low cost and secure, in the sense that if a claim was made for insurance benefits or redemption it would be paid. Only those policyholders that owned participating policies had any expectation of dividends (which would be modest), and no expectation that SBLI would ever be liquidated and the policyholder receive some part of surplus.
With these standards in mind, the court turns to the areas of disclosure in the information sent to policyholders soliciting their votes (hereafter the Notice) that the plaintiff alleges were materially misleading.
The NOLs
The plaintiff’s first claim of “egregiously” misleading disclosure involves so-called NOLs. SBLI has $ 219 million in Net Operating Losses (NOLs) that could be used to offset future profits of the company for federal income tax purposes. SBLI management’s financial forecast assumes that SBLI will be in a position to begin making use of these NOLs, subject to certain restrictions, in 2021. The Notice discloses that: “If the Internal Revenue Service . . . determines that the Conversion constitutes a change of control . . . SBLI’s ability to utilize these NOLs will be limited.” The Notice went on to explain that SBLI believes that the Conversion would not constitute a change in control, but the IRS might take a different position. The Notice fairly disclosed the value of the NOLs to SBLI and that the conversion places them at risk. The Notice appropriately takes no position on the likelihood of IRS audit in the years 2021 and subsequent when SBLI hopes to begin to be able to make use of the NOLs or the ultimate outcome of any dispute with the IRS concerning “change of control” and how that would limit SBLI’s to use the NOLs to offset taxable income. It appears that the plaintiff’s real argument as it relates to the NOLs is not the disclosure, but rather whether the conversion is too risky because this contingent asset might be forfeit. That risk is, however, is sufficiently disclosed.
8
The Piper Jaffray Fairness Opinion
The plan of conversion calls for the shareholders to receive $ 500 for each Class A share (the voting shares, of which there are only one for each shareholder) and $ 128 for each Class B share. As part of the conversion process, the shareholders received a fairness opinion from the investment banking firm Piper Jaffray to the effect that the plan was fair to shareholders. The Piper Jaffray opinion was not included in the Notice sent to the policyholders. The Notice provided a copy of the Milliman opinion, which addresses the fairness of the conversion to the policyholders from an actuarial point of view.
The plaintiff argues that the failure to include the Piper Jaffray opinion was materially misleading because Piper Jaffray arrived at a number of values for a Class B share, one of which was based on a discounted cash flow analysis that yielded share values of $ 85.10 to $ 92.87. However, another version of the cash flow analysis provided values of $ 174.64 to $ 191.30. Under the Piper Jaffray analyses any changes in operational results that result in changes in cash flow produce very substantial changes in projected share values because Piper Jaffray was using discount rates of 14% to 18% based on a capital asset pricing model which was undoubtedly affected by the SBLI’s modest size, as well as the completely illiquid nature of a share of SBLI stock. This court questions whether a discounted cash flow analysis of after-tax cash flows theoretically available to equity holders of SBLI is particularly useful to a shareholder or a policyholder.2 However, from a policyholder’s perspective it would have little to do with a
2 Piper Jaffray noted that the illiquidity of an investment in SBLI “is the result of SBLI’s unique ownership structure, in which ownership is restricted to Massachusetts-chartered savings banks and acquirers thereof. Based on academic research, institutional studies, market, examples of discounts on illiquid securities, and Piper Jaffray’s professional experience, Piper Jaffray has applied an illiquidity discount of 30%, and such discount is incorporated in the numerical results for all of the valuation methodologies enumerated below.”
9
policyholder’s principal concerns: will SBLI be able to pay any claims, issue a dividend if the policy is participating, or redeem the policy if it is a whole life policy.
According to SBLI, the Commissioner recommended against inclusion of the Piper Jaffray opinion in the Notice. The court can understand why. While a shareholder bank voting in favor of the plan of conversion must have support for its decision, because it has fiduciary obligations to its own shareholders, it is unclear how this information will materially assist a policyholder in addressing the impact of the conversion on policyholders’ interests. The PAB withheld its final approval of the plan until it received an opinion from Milliman, one of the largest actuarial firms in the world, that the conversion was fair to policyholders from an actuarial point of view.
The Costs of the Surplus Note
The plaintiff complains about a failure to disclose the costs to SBLI of the Surplus Notes. Frankly, the court does not fully understand the plaintiff’s argument in this respect. The Notice includes pro formas that assume completion of the conversion and clearly show that $ 57.3 million of Surplus Notes will be issued and that they will bear interest at 6% a year, which is a rate in excess of that which management asserts it will have to offer to sell the Notes. The pro formas also reflect approximately $ 6.5 million of transaction related expenses. It is self-evident that the Notes will have to be repaid on maturity.
The court does believe that the Notice could have been more clear in comparing the annual cost associated with the debt service on the Notes and the creation of a reserve (similar to a sinking fund) to repay the Notes on maturity with the current amount of the dividends being paid to the shareholders, which is much less. The assumption that makes the conversion
10
attractive to policyholders, and was important to the Commissioner, is that the SBLI Board, which is controlled by the shareholders, will vote to increase the dividends as a consequence of the very substantial increased capital requirements that the banks will incur with respect to their SBLI shares as a result of Basel III. It seems that this is the most relevant information that a policyholder, at least a participating policyholder hoping for dividends, would want. The court believes that this could have been more clearly stated in the Notice, but does not find what is stated materially misleading.
The Dilution of Participating Shareholders Interest in Surplus
The plaintiff argues that the Notice should disclose that participating policyholders will suffer dilution of their dividend rights. The court finds that this argument is simply in error. There is nothing in the conversion that will transform non-participating policies into policies that will be entitled to dividends.
The Quoted Passage from Goldstein
The plaintiff argues that it was misleading to quote a passage from Goldstein which reads: “this Court declares as a matter of law that the precise percentage of original surplus that is attributable to stockholder equity is 37.5 percent.” The quote is found in that part of the Notice that describes SBLI’s historic method of accounting for its surplus following a 1992 reorganization. There, the Notice explains that beginning with the 2001 financial statements, the amount of surplus attributable to the shareholders has been based on the assumption that the shareholders’ interest in the surplus following the 1992 reorganization was 37.5% or approximately $ 39.5 million. The Notice comments that this assumption was “affirmed” by that
11
statement from the Goldstein opinion quoted above. The use of the word “affirmed” is perhaps a bit much, but it is not materially misleading. Moreover, the plaintiff has not argued that $ 57.3 million is more than the shareholders’ interest in the surplus. For its part, the Division of Insurance believes that the shareholders would be entitled to all of the surplus if SBLI liquidated. Arguably, a plan of conversion that allowed the shareholders to withdraw all of their ownership in the surplus on the sale of their shares to SBLI would be fair from a monetary point of view.
Miscellaneous
The plaintiff makes a number of arguments that appear to assert mismanagement of SBLI. Whether those complaints are valid cannot inform the question of whether the Notice is materially misleading. If the conversion succeeds, the policyholders will have voting control over SBLI and can replace management.
* * *
In sum, the court finds that the plaintiff is not likely to succeed on the merits of her claim that: “The Notice prominently and falsely states to Policyholders that ‘the premiums, benefits, values, guarantees and dividend rights of your insurance policies or annuity contracts WILL NOT be reduced, changed, or affected in any way as a result of the Conversion.’” It appears to this court that this statement read in the context of the entire Notice is not materially misleading. The policies will not be affected. The policyholder claims will be superior to claims made under the Surplus Notes. Dividend rights afforded participating policyholders are also not directly affected, although undoubtedly indirectly affected by the future profitability of SBLI, but as to that, the expenses and risks associated with the issuance of the Notes are generally disclosed.
12
Irreparable Injury
To succeed on a motion for a preliminary injunction, the moving party bears the burden of showing: (1) a likelihood of success on the merits of its claim; (2) that it will suffer irreparable harm if injunctive relief is not granted; and (3) that its harm, if injunctive relief is denied, outweighs any harm that would be suffered by the party enjoined, if the injunction issued. See Boston Police Patrolmen’s Ass’n, Inc. v. Police Dept. of Boston, 446 Mass. 46, 49-50 (2006); Packaging Indus. Group. Inc. v. Cheney, 380 Mass. 609, 616-617 (1980).
In this case, weighing the harm that would be inflicted on not only SBLI, but also potentially on all of the 480,000 other policyholders of SBLI, if the injunction issues, against plaintiff’s alleged harm, suggests to the court that it would be highly improvident to enter an injunction effectively delaying this transaction for an indefinite period, if not putting the entire conversion at risk. The court does not yet know whether the policyholders voted to approve the plan of conversion. If they did not, the motion is moot. If they did, the costs of vacating the results of the vote, revising the Notice, and beginning the process anew could be enormous. In addition to which, further delay could well increase the interest rates required to place the Surplus Notes in the current environment of generally rising interest rates (the Federal Reserve Bank increased rates again only two weeks ago). Potentially, an injunction could make institutional investors now interested in buying the Notes wary.
It appears to the court, that most purchasers of SBLI policies are primarily concerned with the premium cost and security of their policies, rather than their interest in SBLI’s surplus in the unlikely event of SBLI’s liquidation. Eliminating the bank shareholders, who are not policyholders and no longer market SBLI policies or annuity contracts, but nonetheless have
13
voting control over SBLI and fiduciary duties to their own constituencies will be beneficial to policyholders. SBLI could then be managed exclusively for the benefit of the policyholders that will own it. The court cannot help but note that the only plaintiff in this case owns only two $ 1,000 policies, one of which she pledged. Given the nature of the allegedly misleading statements about which the plaintiff complains and the potential of undoing this transaction that most policyholders may well find favorable (even if the Piper Jaffray opinion were attached to the Notice), or, at least, making it far more costly, the court declines to enter the extraordinary relief requested.
Moreover, the underlying theme of the plaintiff’s complaint is that this conversion was intended to unfairly further the interests of the shareholders at the expense of the policyholders. While there is no claim for breach of fiduciary duty against the SBLI Board asserted, that is the underlying subtext. All of the shareholders who will be receiving cash for their shares are Massachusetts banks or acquirers of Massachusetts banks. If the conversion results in the unlawful transfer of value from the policyholders to the shareholders, there are other claims that could, at least in theory, be asserted.
The court finds that the potential harm that would arise from the entry of a preliminary injunction undoing the vote and undoubtedly the issuance of the Surplus Notes outweighs the potential irreparable harm that would result from its entry.
14
ORDER
For the foregoing reasons, the plaintiff’s motion for a preliminary injunction is DENIED.
____________________
Mitchell H. Kaplan
Justice of the Superior Court
Dated: June 30, 2017

read more

Posted by Stephen Sandberg - July 3, 2017 at 6:32 pm

Categories: News   Tags: , , , , , , , ,

Marks v. M.C. LLC (Lawyers Weekly No. 12-079-17)

1
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
CIVIL ACTION
NO. 16-02775 BLS I
LISA MARKS, on behalf of herself and all others similarly situated,
v.
M.C. LLC d/b/a JIFFLY LUBE MASSACHUSESTTS and JIFFY LUBE INTERNATIONAL, INC.
MEMORANDUM OF DECISIONS AND ORDER ON THE DEFENDANTS’ MOTIONS TO DISMISS
This case came before the court on the defendants’ motion to dismiss the first amended class action complaint. The gravamen of the individual plaintiff’s claim is that she brought her 2011 Hyundai Sonata to a Jiffy Lube operated by defendant M.C. LLC (JL) in Beverly, MA for an oil change. After changing her oil, JL affixed a sticker to her windshield that indicated that her car would be due for the next oil change in 5000 miles. The plaintiff alleges that this is misleading because the owner’s manual “prescribes that normal oil change service/maintenance is to be performed every 7,500 miles.” The plaintiff alleges that defendant Jiffy Lube International, Inc. (JL International), the franchiser for JL’s stores, is jointly liable with JL because it “has power and control over the oil change services offered at [JL’s] locations.”
JL has provided the court with the entire owner’s manual for the plaintiff’s Hyundai and pointed out that the manual actually states that the oil should be changed at 7,500 miles under normal maintenance conditions and 3,750 miles under severe usage conditions. More specifically, it states that: “If any of the following conditions apply follow Maintenance Under Severe Usage Conditions.” It then lists nine conditions, including driving for a prolonged period
2
in cold temperatures and driving in areas where salt or other corrosive materials are being used: two conditions that presumably would apply to cars being driven in Massachusetts. JL argues that because the plaintiff has not alleged that she does not generally drive in these two conditions, she has not stated a claim that the 5,000 mile oil change interval recommended by JL is misleading because it is more frequent than that set out in the owner’s manual.
The court finds JL’s argument persuasive. However, it also finds that the plaintiff should be given an opportunity to allege that she drives the car in a manner which would suggest that the proper oil change interval is 7,500 miles and, therefore, as to her inconsistent with the recommendation found in the manual.
JL International argues that the claims against it must be dismissed because no claim is stated against JL and also because the conclusory allegation regarding its ability to control the manner in which JL conducts oil changes is insufficient to state a claim against a franchisor for vicarious liability for selecting the oil change interval under established law. See, e.g., Lind v. Domino’s Pizza LLC, 87 Mass. App. Ct. 650, 655-659 (2015) (where the Appeals Court held that vicarious liability on the part of a franchisor exists only when the franchisor “controlled or had the right to control the specific policy or practice that resulted in in harm to [plaintiff]”). While the court agrees that the plaintiff’s allegations of control are generic, it also notes that it would be very difficult, if not impossible, for the plaintiff to know the degree to which JL International has control or influence over the oil change interval placed on the service stickers by franchisees. Accordingly, it will deny JL International’s motion to dismiss, to the extent it does not rely on the grounds asserted by JL, unless it provides the plaintiff with all documents, if any exist, that relate to any instructions or recommendations that JL International provided to JL concerning the oil change interval to be affixed to customers’ cars.
3
ORDER
For the foregoing reasons, the defendants’ motion to dismiss is ALLOWED, provided, however, that the plaintiff may have 60 days from the date of this order to file an amended complaint addressing the pleading issue discussed above. The defendant JL International’s separate motion to dismiss on the grounds that vicarious liability has not been adequately pled is denied, unless it provides the plaintiff with any documents that relate to instructions or recommendations that JL International provided to JL concerning the oil change interval to be affixed to customers’ cars within 30 days of the date of this order, in which case the plaintiff may replead its allegations regarding vicarious liability.
____________________
Mitchell H. Kaplan
Justice of the Superior Court
Dated: May 31, 2017

read more

Posted by Stephen Sandberg - July 3, 2017 at 2:58 pm

Categories: News   Tags: , , , ,

Mullins v. Colonial Farms Ltd., et al. (Lawyers Weekly No. 12-077-17)

1
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
CIVIL ACTION
NO. 2013-04375 BLS1
JOSEPH R. MULLINS, on behalf of nominal defendants CMJ MANAGEMENT COMPANY and CMJMC, INC.
vs.
COLONIAL FARMS LTD., & others1
FINDINGS OF FACT AND CONCLUSIONS OF LAW FOLLOWING JURY WAIVED TRIAL ON DAMAGES
INTRODUCTION
As reflected in the court’s earlier Memorandum of Decision and Order on the Parties’ Cross-Motions for Summary Judgment (the Decision, capitalized terms shall have the same meaning in this memorandum as in the Decision), it is undisputed that, at Corcoran’s direction, the Partnerships ceased making payment of the Incentive Management Fees to CMJ Management under the Supplemental Agreements in January, 2010. Further, the termination of these payments would constitute a breach of each of the Supplemental Agreements, unless Corcoran (on behalf of the Partnerships) proved at trial that (i) Corcoran, Jennison and Mullins had all agreed that the Supplemental Agreements were to be cancelled as part of the transaction in which each of them repurchased their interests in the Partnerships from Paine Webber in 1999, and (ii) this cancellation was not reflected in the 1999 transaction documents as a consequence of a mutual mistake. Following a jury trial, on March 1, 2017, the jury answered the single
1 Fawcett’s Pond Apartments Company (Fawcett), Holbrook Apartments Company (Holbrook) Marvin Gardens Associates (Marvin) Quaker Meadows Apartments Company (Quaker), Joseph E. Corcoran, and Gary A. Jennison and CMJ Management Company and CMJMC, Inc., nominal defendants.
2
question put to them in a special verdict slip concerning the existence of such a mutual mistake2: “NO.” The parties had previously agreed that if the jury found that no mutual mistake had occurred, they would submit the question of how much should have been paid to CMJ Management by the Partnerships to the court for its decision, jury-waived.
The court heard evidence on this issue on March 3, 2016 (as a supplement to the evidence presented during the jury trial). Three witnesses testified and an additional six exhibits were admitted in evidence. Thereafter, the parties submitted proposed findings of fact and conclusions of law.
FINDINGS OF FACT/CONCLUSIONS OF LAW
Findings and Conclusions Addressing the Manner in which the Incentive Management Fees are Calculated During Years in which there were no Regulatory/Loan Restrictions on Distributions
The Supplemental Agreements for four of the Partnerships—Colonial, Marvin, Quaker, and Fawcett all provided that, “to the extent funds are available for [their] payment”:
The Incentive Management Fee shall be an annual, non-cumulative fee payable out of cash available therefor . . . in an amount equal to, for each year, 40% of the amount, if any, by which Cash Flow for such year exceeds one half of the maximum amount of distributable cash flow allowed by [the Federal and state regulator and the lender].3
The limitations on the amount of cash that a Partnership could distribute existed as long as it had a loan backed by a state or federal agency for the purpose of fostering the development of affordable housing projects. Fawcett paid off its loan in 2003 and the other three partnerships paid off their loans in 2012. The first question to be decided is the method for calculating the amount of Incentive Management Fees due CMJ Management for years in which there was no
2 The question was: “Have Joseph Corcoran and the Five Partnerships proved by full, clear, and decisive evidence that Joseph Corcoran, Joseph Mullins and Gary Jennison agreed that the Supplemental Management Agreements would terminate and the incentive management fees end as part of the Paine Webber buy-out and it was a mistake that the Paine Webber buy-out documents did not reflect their agreement?”
3 Each of the Partnerships was regulated by HUD, however, the state regulating body differed depending on the state in which the development was located. Holbrook had a different formula for calculating Incentive Management Fees, and there is no dispute concerning the amount of the fees due CMJ Management from Holbrook.
3
lender limitation on the amount of cash that could be distributed to the Partnerships’ owners. This question is principally a question of law because it requires the court to address the meaning of a provision in a contract. Where the court is basing its decision on any factual finding it will make this clear.
Most of the background facts that provide the context for this question are undisputed and set out in the Decision. Briefly stated, in 1983, Paine Webber purchased a limited partnership interest in each of the Partnerships from Corcoran, Mullins, and Jennison and became the principal equitable owner of each.4 As part of that transaction, each Partnership entered into a Supplemental Agreement with CMJ Management that provided for the payment of Incentive Management Fees. The court finds, as a matter of fact, that CMJ Management provided no additional services to the Partnerships under the Supplemental Agreements. Rather, these Supplemental Agreements were a means to achieve the financial terms of the deal that had been negotiated with Paine Webber. The Supplemental Agreements provided a mechanism for CMJ Management to receive supplemental cash distributions, i.e., supplements to the minimal cash that Corcoran, Mullins and Jennison would receive as deminimus owners of the Partnerships which were now principally owned by Paine Webber, if the cash available for and distributed each year exceeded certain base amounts. In 1999, Corcoran, Mullins and Jennison bought out Paine Webber’s interests in the Partnerships, returning ownership of the Partnerships to that which it was before 1983. As noted above, in 2003 and 2012 the agency backed loans to the Partnerships were retired.
While the agency backed loans were in place, a formula in the loan documents and related government regulations determined “the maximum amount of distributable cash flow” for
4 Paine Webber purchased 95% of the ownership interests in four Partnerships and 85% of one Partnership.
4
each Partnership based upon the economic performance of the Partnership, as established in its annual audited financial statements. The term “Cash Flow” as used in the Supplemental Agreements is defined in the Partnership Agreements. According to the provision of the Supplemental Agreements quoted above, in any given year in which the economic performance of a Partnership permitted cash to be distributed under the loan documents, the Incentive Management Fee paid in that year could be no greater than 20% of cash distributed: “40% of the amount, if any, by which Cash Flow for such year exceeds one half of the maximum amount of distributable cash flow allowed” under the loan documents. In consequence, if for any reason “Cash Flow” was less than the maximum amount that could be distributed under the loan agreements5, the Incentive Management Fees would be less than 20% of the total cash distributed in that year.
It is clear that once the agency backed loans were paid in full, there no longer was a “maximum amount of distributable cash flow allowed” by any lender. Mullins argues that this means that the Incentive Management Fee then simply became 40% of all Cash Flow, i.e., the incentive fee was due on the first dollar available for distribution by a Partnership. Clearly, that is not what the Supplemental Agreement says. It is also inconsistent with the premise underlying the purpose of the Supplemental Agreements, that is, that Incentive Management Fees would kick in only after Paine Webber, as the principal owner of the Partnerships, had first received some minimum return on its investment.6
5 This could happen if, for example, the general partner of the Partnership (in each case CMJ) decided to set aside reserves for capital expenditures greater than what was required by the loan documents. See par. 4.1.2.2 of the Partnership Agreements.
6 Mullins points out that there was one year (2003) before this dispute erupted in which Fawcett made a distribution after the agency backed loan had been paid off and in that distribution the Incentive Management Fee was applied to the entire sum distributed. There was no evidence that any of the principals had any input into the decision to make the distribution in that manner, or, indeed that it was in an amount that the principals even noticed. The court did not find this 2003 distribution instructive in interpreting the Supplemental Agreements.
5
Mullins next argues that a fixed amount measured by what the “maximum amount of distributable cash flow allowed” by the lenders had been in years prior to the loans’ repayment should be established for each Partnership. The court does not believe that those amounts have been entered in evidence. But more to the point, it is clear that no language that would support the creation of a fixed sum to be paid before the Incentive Management Fee is due is found in the Supplemental Agreements. The court would have to rewrite the Supplemental Agreements to reach that result, and it is not permitted “to suppose a meaning [to a contract] that the parties have not expressed.” Rogaris v Albert, 431 Mass. 833, 835 (2000).
Corcoran argues that the Supplemental Agreement is unambiguous in providing that, when there are no loans outstanding that require a lender to set the “maximum amount of distributable cash flow allowed,” the “maximum amount of distributable cash flow allowed” is simply all the Cash Flow that a Partnership has available to distribute.7 That is, however, not what the Supplemental Agreement actually says, but rather an interpretation of it. It is also generally the interpretation that the court adopts as reasonable and consistent with evidence of what the real parties in interest to the Supplemental Agreements intended when they drafted them in 1983.
A contract provision can be facially ambiguous or ambiguous as applied to a certain set of circumstances. See Robert Ind. Inc. v. Spencer, 362 Mass 751, 753 (1973). In this case, it seems doubtful that when the Supplemental Agreements were drafted any particular thought was given to the question of whether they would still be in force when the agency backed loans were retired. They were drafted in 1983 as contracts between the Partnerships and CMJ Management,
7 Corcoran argues that, at least, this is true while the Partnerships are still subject to Section 8 contracts with HUD which provide for housing assistance payments to the Partnerships. The court does not find the existence of Section 8 contracts of value in its interpretation of the Supplemental Agreements, as those contracts do not place limitations on distributions, only the agency backed loans did that.
6
but their purpose was to address the economics of the deal between Corcoran, Mullins, and Jennison, on the one hand, and Paine Webber, on the other. The court doubts that the parties contemplated that whey would remain in force after Paine Webber was bought out or the agency backed loans paid off. Therefore, the Supplemental Agreements do not unambiguously address how the Incentive Management Fees would be calculated when ownership returned to Corcoran, Mullins and Jennison and the loans were no longer in effect. Nonetheless, that is what happened.
There is, however, a reasonable interpretation of the Incentive Management Fee language in the Supplemental Agreements that addresses these circumstances. While the loans were still in effect, as explained above, the maximum amount of Cash Flow that could be paid as an Incentive Management Fee was 20% of cash distributed in any year. That happened whenever all cash that could be distributed under the distribution restrictions in the loans was also “Cash Flow,” as defined in the Partnership Agreements, and distributed to the owners of the Partnership and CMJ Management as distributions to equity holders and Incentive Management Fees. The court finds that the only reasonable interpretation of the Supplemental Agreements is that if the loans no longer restricted the amount of cash that could be distributed, the Incentive Management Fee would be 20% of Cash Flow available for distribution, as the Supplemental Agreements provided for no situations in which Incentive Management Fees could ever exceed that ceiling. Stated differently, this interpretation is consistent with all extrinsic evidence concerning the intent of the parties when the Supplemental Agreements were negotiated in 1983, at which time the real parties in interest were Paine Webber and CMJ Management (owned by Corcoran, Mullins and Jennison) and these incentive fees were limited to no more than 20% of cash distributed. See Robert Industries Inc. v. Spencer, 362 Mass. at 754 (“When the written agreement, as applied to the subject matter, is in any respect uncertain or equivocal in meaning, all the circumstances of
7
the parties leading to its execution may be shown for the purpose of elucidating, but not of contradicting or changing its terms. Smith v. Vose & Sons Piano Co., 194 Mass. 193, 200, 80 N.E. 527; Goldenberg v. Taglino, 218 Mass. 357, 359, 105 N.E. 883. See Restatement 2d: Contracts (Tent. draft No. 5, March 31, 1970), §§ 235, 236 (Tent. draft No. 6, March 31, 1971), §§ 240, 241.”).
Findings of Fact and Conclusions of Law relating to the Calculation of Cash Flow under the Supplemental Agreements
Under the definition of “Incentive Management Fees” contained in each Supplemental Agreement (quoted above), the calculation of that fee in any given year begins with a determination of “Cash Flow” for the Partnership. Cash Flow is a capitalized term in the Supplemental Agreements, and, therefore, according to the terms of those Agreements, defined in the Partnership Agreements. While the definition of Cash Flow is multi-faceted and spread over several paragraphs of the Partnership Agreements, the parties’ dispute concerning the calculation of Cash Flow arises out of only one clause found in Section 4.1.2.2. As relevant to this dispute, it provides: “In determining Cash Flow for any year, there shall be subtracted the following items which were not otherwise excluded or deducted from partnership income for such year in calculating Partnership Profits and Losses, . . . , (iii) other reasonable payments to the Partnership reserve accounts determined by the Operating General Partner, . . .”
Because this dispute again requires an interpretation of contract language, it involves mixed questions of law and fact. Nonetheless, here certain findings of fact are required before the Partnership Agreements provision quoted above can be applied to the circumstances presented by this dispute.
8
Factual Findings Relating to Reserve Issue
All of the buildings in CMJ’s portfolio are thirty to thirty-five years old. There are approximately 3700 units in those buildings; the five Partnerships constitute approximately 510 units of that total number. On average, during the period 2013 through 2017, $ 2,400 to $ 2,500 in capital expenditures have or will be spent on each unit in the portfolio. These expenditures are required for basic maintenance because of the age of buildings. Additionally, the subsidies provided by HUD are based on market rates for comparable units, so improvements to interior finishes and amenities increase HUD payments to the Partnerships.
Fawcett, in particular, required substantial work. As reflected in a 2007 internal memo prepared by a CMJ manager before the matters in dispute in this litigation arose, all of the siding and windows needed replacement. This was due, in part, to the manner in which Fawcett was constructed, where the siding was nailed directly to the sheet rock allowing moisture to invade and create substantial damage. This 2007 memo states that as a result of the capital needs of this project, there would likely be no cash available for distribution over the next ten years. The memo actually recommended that the project be sold. Nonetheless, the Project was not sold and the following distributions were made from Fawcett to its Partners during the years in question: 2012-$ 343,049; 2013-$ 132,195, and 2015-$ 212,605. Not only are the fact of these distributions inconsistent with the 2007 memo, the distributions are also inconsistent with credible testimony concerning the capital needs of and expenditures made for the Fawcett project. There is a suggestion in certain financial exhibits that at least some of the cash distributed came from the release of funds held in a restricted account. Then, in 2016, $ 877,000 was spent on capital
9
improvements, which included a substantial sum provided by Fawcett’s owner. No reserves for improvements were ever accounted for on Fawcett’s financial statements.
The first year that Colonial, Marvin, and Quaker were no longer subject to restrictions on cash distributions because of agency backed loans was 2013. The chart below shows the so-called Surplus Cash available at the end of each of these three years according to Mullins calculations. The parties agree that Surplus Cash is determined according to a formula used in determining the amount of cash available for distribution under the agency backed loans and the starting place for determining Cash Flow under the Partnership Agreements. They also agree on these figures (reflected in Mullins’ damages exhibit) except for the year 2015, for reasons that will be discussed further below.
2013
2014
2015
Colonial
$ 310,571
$ 480,011
$ 872,574
Marvin
$ 364,548
$ 369,538
$ 573,436
Quaker
$ 232,691
$ 792,031
$ 1,327,874
In fiscal year 2015 (as reflected in the audited financial statements for each Partnership), the Partnerships recorded capital reserves as follows: Colonial-$ 655,653; Marvin-$ 388,544; and Quaker-$ 797,531. The Partnerships transferred these sums to reserve accounts, and therefore they would not have been included in Surplus Cash, if the accounting policies followed in prior years had bee applied. Nonetheless, the table does not reflect the establishment of these reserves in 2015. Rather, the establishment of these reserves was not accounted for by Mullins at all.
Corcoran offered in evidence exhibit 216, which spread the reserves established for the three Partnerships in 2015 over three years (2013, 2014, and 2015). However, that allocation was performed in 2015 (or perhaps later). During 2013 and 2014, these sums were not reflected
10
in the audited financial statements, segregated from unrestricted cash, nor reflected in any subsidiary ledger, book or account maintained by CMJ Management.
Conclusions of Law Relating to Reserve Issue
Colonial, Marvin, and Quaker
With respect to Colonial, Marvin, and Quaker, Corcoran argues that Cash Flow, by definition is reduced by “reasonable payments to the Partnership reserve accounts determined by the Operating General Partner.” He then maintains that there is nothing in the Partnership Agreement that precludes the Operating General Partner from allocating reserve amounts retrospectively over prior years and then calculating Surplus Cash, retrospectively, as if these accounts had actually been created in those prior years. The court disagrees. As the court understands the accounting policies consistently employed by the Partnerships, if cash was reserved for capital needs, it would be transferred to a reserve account and therefore not be reflected in Surplus Cash. As result, it would also not be included in Cash Flow. Under generally accepted accounting principles this is part of the annual process of closing the Partnership’s books of account and preparing the financial statements for a fiscal year. Additionally, the Partnership Agreement provides that Cash Flow shall be determined on an annual basis and distributed as Incentive Management Fees on an annual basis.
Moreover, in this case, the Partnerships did not identify these reserves in some manner of internal ledger not accounted for in the audited financials or disclose their existence in footnotes to the audited financials.
There is simply no justification for including these after-the-fact declaration of reserves in the calculation of Cash Flow for 2013 and 2014. The court finds that Mullins proposed
11
calculation of Cash Flow (which avoids double counting by assuming that all of 2013’s Cash Flow had been distributed in determining 2014 Cash Flow) is fair and appropriate.
2015 is, however, more complicated. Reserves were taken in those years and reported in the Partnerships’ audited financial statements. Given the age of these facilities and the evidence entered, the court cannot find that these amounts were unreasonable. Furthermore, the cash required to establish the reserves was accumulated in the Partnerships’ and might well have been intended for capital improvements, even if not properly accounted for, as it had not been distributed and accumulated in a cash account. The court has spent much time trying to find a damages analysis that approaches this issue in an equitable manner. It concludes that, for each of the three Partnerships, in year 2015, the Incentive Management Fee should be Surplus Cash (as calculated by Mullins), less the reserves established according to the audited financial statements for that year, times 20%.8
With respect to Fawcett, the court finds such financial statements as have been provided, documents, and testimony confusing, if not contradictory. On the one hand, there is credible evidence that Fawcett was expending substantial sums on necessary maintenance including replacement of all of the siding and all of the windows. It credits the testimony that $ 877,000 was spent on capital improvements in 2016, and that included additional capital invested by Corcoran. On the other hand, each year Fawcett reported some surplus cash. Finally, it appears that in three years substantial cash was distributed to the owner, and in one of those years distributions far exceeded Surplus Cash. The court concludes that the Incentive Management
8 The court’s calculations reflect the following, but they should be checked: Colonial-$ 43,384; Marvin-$ 37,178; Quaker-$ 106,068.
12
Fee for the years in question should be the amount of distributions to the owner times 20%.9 Interest to accrue from the date of each distribution.
G. L. c. 156D, § 7.46
G.L. c. 156D, § 7.46 provides, in relevant part: “On termination of the derivative proceeding the court may: (1) order the corporation to pay the plaintiff’s reasonable expenses, including counsel fees, incurred in the proceeding if it finds that the proceeding has resulted in a substantial benefit to the corporation.” Mullins asks that the court make such a finding and then exercise its discretion to award him the legal fees he incurred in prosecuting this case.
Under § 7.46, the award of expenses to a plaintiff who succeeds in a derivative claim is clearly discretionary with the court. As the parties to this case recognized, and the jury was instructed at the outset of the trial, this was a dispute between Mullins and Corcoran10. While the Supplemental Agreement was between CJM Management and the Partnerships, it was from its inception understood to be a vehicle for distributing cash generated by the operation of the Partnerships to Corcoran, Mullins and Jennison (as the owners of CMJ Management), which would otherwise be distributed to the owners of the Partnerships (principally Paine Webber when the Supplemental Agreements were negotiated and executed in 1983). As noted above, CMJ Management performed no additional services for its Incentive Management Fees. As was clear from the evidence, because Corcoran, Mullins and Jennison did not pay any attention to the Supplemental Agreements when Paine Webber was bought out in 1999, they continued in force, and the jury so held. The award to CMJ Management in this case will then be distributed to Corcoran, Mullins and Jennison, as required under Section 4(c)(1) of the 1987 Agreement. It is
9 The court’s calculation is $ 137,569.80.
10 Jennison seemed to be a bystander, although his economic interests are the same as Mullins.
13
Mullins and Jennison who will personally, substantially benefit from the judgment entered in this law suit and Corcoran who will be personally disadvantaged. The court declines to award litigation expenses to Mullins.
ORDER
The court orders that Mullins prepare a chart of damages, including accrued prejudgment interest, consistent with this Memorandum of Decision and an accompanying proposed form of Final Judgment and file it with the court within fourteen days of this order. Corcoran shall file a pleading within seven days of the Mullins filing indicating if he has any objections to the Mullins proposed form of Final Judgment. These filings should not be used to reargue any positions. All arguments previously raised are preserved for purposes of appeal. Rather, the pleadings are intended to insure that the amount of damages and accrued prejudgment interest awarded is consistent with the findings and rulings set out herein.
_______________________
Mitchell H. Kaplan
Justice of the Superior Court
Dated: May 2, 2017

read more

Posted by Stephen Sandberg - July 1, 2017 at 2:08 am

Categories: News   Tags: , , , , , ,

« Previous PageNext Page »