Holyoke Mutual Insurance Company in Salem, et al. v. Vibram USA, Inc. (Lawyers Weekly No. 12-031-17)

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COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
CIVIL ACTION
NO. 15-2321 BLS1
HOLYOKE MUTUAL INSURANCE COMPANY IN SALEM and MARYLAND CASUALTY COMPANY
vs.
VIBRAM USA, INC.
MEMORANDUM OF DECISION AND ORDER
ON CROSS-MOTIONS FOR SUMMARY JUDGMENT ON RECOUPMENT AND RECOVERY OF DEFENSE COSTS
INTRODUCTION
This action arises out of a coverage dispute between the plaintiff insurance companies, Holyoke Mutual Insurance Company in Salem (Holyoke)1 and Maryland Casualty Company (Maryland) (individually an Insurer, and collectively the Insurers), and the defendant, Vibram USA, Inc. (Vibram). Each of the insurers issued commercial general liability policies to Vibram (or its affiliate) (the Policies).2 An action was filed against Vibram in the United States District Court for the Western District of Washington at Tacoma captioned: Tefere Abebe Bikila, and others, v. Vibram, case no. 3:15-cv-05082-RBL (the Underlying Action). Vibram asserted coverage under the Policies and tendered defense of the Underlying Action to the Insurers. The
1 Holyoke has been replaced as a plaintiff in this action by its successor, Country Mutual Insurance Company. For consistency, the court will continue to refer to it as Holyoke in this Memorandum of Decision and Order.
2 Holyoke issued policies to Vibram for several years, while Maryland issued policies to an affiliate of Vibram,Vibram Five Fingers, LLC. It is not necessary to distinguish between Vibram and its affiliate for the purposes of this motion, and the court will refer to them collectively as Vibram. Additionally, for purposes of this motion the relevant policy language in all of the policies is identical, and is it also unnecessary to distinguish among policy years. The court will therefore simply refer to the Holyoke and Maryland policies collectively as the Policies.
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Insurers each sent a “reservation of rights” letter to Vibram in which they agreed to provide its defense to the claims asserted in the Underlying Action, but also maintained that coverage did not exist under the Policies and reserved their rights to bring a declaratory judgment action and seek reimbursement for defense costs advanced. The Insurers then filed this declaratory judgment action seeking a declaration that the claims asserted against Vibram in the Underlying Action are not covered under the Policies; Vibram counterclaimed for a declaration that they are. In a Memorandum of Decision and Order on Cross-Motions for Summary Judgment and Partial Summary Judgment originally issued on August 17, 2016 (the Decision), this court held that the Policies do not provide coverage for the claims asserted against Vibram in the Underlying Action and, accordingly, there is no duty to defend.
The case is now before the court on cross-motions for summary judgment addressing the issues of recoupment of defense costs advanced or, conversely, recovery of defense costs incurred before the court rendered the Decision but left unpaid—issues of first impression in Massachusetts. The Insurers contend that since the claims asserted in the Underlying Action were not insured under the Policies, they are entitled to recoup the defense costs that they previously paid Vibram. Vibram, in turn, maintains that it is entitled to recover defense costs already incurred, but still unpaid, as of the date the Decision issued. For the reasons that follow, each party’s motion is allowed, in part, and denied, in part.
ADDITIONAL BACKGROUND
None of the facts necessary to resolve these cross-motions are in dispute.
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Because the Insurers sent reservation of rights letters to Vibram, Vibram exercised its right to control its defense of the Underlying Action and retained its own counsel.3 Vibram’s counsel kept the Insurers informed concerning the status of the Underlying Action and forwarded copies of pleadings to them. By August 17, 2016, the date the Decision issued, Vibram had sent the Insurers invoices for defense costs totaling $ 1,272,212.57 and the Insurers had collectively reimbursed Vibram $ 667,901.71—$ 472,216.80 from Holyoke and $ 195,684.91 from Maryland. Vibram last received a payment from the Insurers on July 18, 2016. Neither Insurer informed Vibram why it did not pay the full amount of the invoices.4
As relevant to the issues raised by the pending motions, the Policies provide that the Insurers “will pay those sums that the insured becomes legally obligated to pay as damages because of ‘personal and advertising injury’ to which this insurance applies. We have the right and duty to defend the insured against any ‘suit’ seeking those damages. However, we will have no duty to defend the insured against any ‘suit’ seeking damages for personal and advertising injury’ to which this insurance does not apply.” The Policies also state that the Insurers “will pay, with respect to any claim we investigate or settle, or any ‘suit’ against any insured we defend: . . . All expenses we incur . . . .”
DISCUSSION
Recoupment
In Metro. Life Ins. Co. v. Cotter, 464 Mass. 623 (2013) (Cotter), the Supreme Judicial Court (SJC) was called upon to decide if a disability insurer could recoup from its insured benefit
3 See, e.g., Northern Sec. Ins. Co. Inc. v. Another 1, 78 Mass. App. Ct. 691, 694-695 (2011).
4 At oral argument, counsel for the Insurers stated that invoices were still being processed for payment when the Decision issued, and the Insurers elected to withhold payment.
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payments made under a reservation of rights after a court determined that the insured’s benefits claim was not covered. In considering that claim for recoupment, the SJC noted that, with respect to liability policies:
We have not addressed whether an insurer may seek reimbursement for the costs of a defense undertaken pursuant to a unilateral reservation of rights. We note that other jurisdictions are split as to the validity of such claims. See Perdue Farms, Inc. v. Travelers Cas. & Sur. Co., 448 F.3d 252, 258 (4th Cir.2006), and cases cited (“jurisdictions differ on the soundness of an insurer’s right to reimbursement of defense costs”).
Based on the theory that insurers are in the business of analyzing and allocating risk, and thus in a better position to do so, courts in some jurisdictions have declined to allow liability insurers to bring reimbursement claims for the costs of defense. See Texas Ass’n of Counties County Gov’t Risk Mgt. Pool v. Matagorda County, 52 S.W.3d 128, 135 (Tex.2000). See, e.g., Excess Underwriters at Lloyd’s, London v. Frank’s Casing Crew & Rental Tools, Inc., 246 S.W.3d 42, 45–47 (Tex.2008) ( “imposing an extra-contractual reimbursement obligation places the insured in a highly untenable position”); United States Fid. v.United States Sports Specialty, 270 P.3d 464, 470–471 (Utah 2012) (“The right of an insurer to recover reimbursement from its insured distorts the allocation of risk unless it has been specifically bargained for”).
Id. at 641 n.21. This question is squarely before this court in this case.
While acknowledging that there are divergent views on the right of recoupment in cases such as this, in which a court has entered a declaratory judgment that none of the claims alleged in the complaint are covered under the Policies, the Insurers maintain that the majority of jurisdictions permit recoupment. Perhaps, the most frequently cited case for the proposition that defense costs advanced under a reservation of rights may be recovered is Buss v. Superior Court, 16 Cal. 4th 35 (Cal.App. 1997). In a more recent decision, the California Supreme Court reaffirmed its holding in Buss with the following comments:
As Buss explained, the duty to defend, and the extent of that duty, are rooted in basic contract principles. The insured pays for, and can reasonably expect, a defense against third party claims that are potentially covered by its policy, but no more. Conversely, the insurer does not bargain to assume the cost of defense of claims that are not even potentially covered. To shift these costs to the insured does not upset the contractual
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arrangement between the parties. Thus, where the insurer, acting under a reservation of rights, has prophylactically financed the defense of claims as to which it owed no duty of defense, it is entitled to restitution. Otherwise, the insured, who did not bargain for a defense of noncovered claims, would receive a windfall and would be unjustly enriched.
. . .
As Buss further noted, “[n]ot only is it good law that the insurer may seek reimbursement for defense costs as to the claims that are not even potentially covered, but it also makes good sense. Without a right of reimbursement, an insurer might be tempted to refuse to defend an action in any part — especially an action with many claims that are not even potentially covered and only a few that are — lest the insurer give, and the insured get, more than they agreed. With such a right, the insurer would not be so tempted, knowing that, if defense of the claims that are not even potentially covered should necessitate any additional costs, it would be able to seek reimbursement.”
Though these comments were made in the context of “mixed” actions [including covered and uncovered claims], they apply equally here. An insurer facing unsettled law concerning its policies’ potential coverage of the third party’s claims should not be forced either to deny a defense outright, and risk a bad faith suit by the insured, or to provide a defense where it owes none without any recourse against the insured for costs thus expended. The insurer should be free, in an abundance of caution, to afford the insured a defense under a reservation of rights, with the understanding that reimbursement is available if it is later established, as a matter of law, that no duty to defend ever arose.
Scottsdale Ins. Co. v. MV Transportation, 36 Cal. 4th 643, 655 (Cal.App. 2005) (Internal citations and quotations omitted). In this case, the Insurers make the same arguments that the California Supreme Court describes in Scottsdale.
Vibram, however, points the court to a recent, unreported decision of the United States District Court in Massachusetts that reaches an opposite conclusion: Welch Foods Inc. v. Nat’l Union Fire Ins. Co., No. 09-12087-RWZ 2011 WL 576600 (D. Mass. Feb. 9, 2011). In that case, like this one, the District Court found that claims in an underlying action were not covered by the liability policy and then addressed the insurer’s claim for recoupment of defense costs paid under a reservation of rights. The District Court acknowledged the holding and reasoning of Buss, but rejected the California Supreme Court’s opinion in favor of a more recent decision by the
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Pennsylvania Supreme Court, American & Foreign Ins. Co. v. Jerry’s Sport Center, Inc., 2 A.3d 526 (2010) (Jerry’s), which appears to be the most frequently cited case by those courts that have recently held that under these circumstances there is no right to recoup.
In Jerry’s, the Pennsylvania Supreme Court began with an exhaustive review of the competing lines of cases permitting and rejecting claims for recoupment of defense costs by liability insurers. Id. at 536-537. It then reflected on the very broad duty to defend (broader than the duty to indemnify) that exists under Pennsylvania, a duty that it describes in very much the same way as Massachusetts appellate courts describe the duty that liability carriers owe their insureds under Massachusetts law. See Id. at 540-541, compare Decision at 5-6. The Court then found that the answer to the question before it: is the insurer entitled to recover defense costs advanced before it obtained a declaratory judgment of no coverage, lay in the language of the policy itself:
We agree with Insured that whether a complaint raises a claim against an insured that is potentially covered is a question to be answered by the insurer in the first instance, upon receiving notice of the complaint by the insured. Although the question of whether the claim is covered (and therefore triggers the insurer’s duty to defend) may be difficult, it is the insurer’s duty to make that decision. See Shoshone First Bank, 2 P.3d at 516 (holding that the insurer must make the decision about whether there is a duty to defend). Insurers are in the business of making this decision. The insurer’s duty to defend exists until the claim is confined to a recovery that the policy does not cover. . . .Where a claim potentially may become one which is within the scope of the policy, the insurance company’s refusal to defend at the outset of the controversy is a decision it makes at its own peril. . . .
In some circumstances, an insurance company may face a difficult decision as to whether a claim falls, or potentially falls, within the scope of the insurance policy. However, it is a decision the insurer must make. If it believes there is no possibility of coverage, then it should deny its insured a defense because the insurer will never be liable for any settlement or judgment. See Shoshone, 2 P.3d at 510 (stating that where an insurer believes there is no coverage, it should deny a defense at the beginning). This would allow the insured to control its own defense without breaching its contractual obligation to be defended by the insurer. If, on the other hand, the insurer is uncertain about coverage, then it should provide a defense and seek declaratory judgment about coverage. Id.
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In a declaratory judgment action to determine whether a claim is covered, the court resolves the question of coverage. . . . The court’s role in the declaratory judgment action is to resolve the question of coverage to eliminate uncertainty. If the insurer is successful in the declaratory judgment action, it is relieved of the continuing obligation to defend. The court’s resolution of the question of coverage does not, however, retroactively eliminate the insurer’s duty to defend the insured during the period of uncertainty.
. . .
An examination of the insurance contract between the parties reveals that under the policy, [the Insurer] was obliged to pay damages because of bodily injury, and had the “right and duty to defend the insured against any ‘suit’ seeking those damages.” . . . . The policy further provided that it had no duty to defend the insured against any suit seeking damages for bodily injury to which the insurance does not apply. Pursuant to the contractual language, therefore, [the Insurer] had the right and the duty to defend covered claims for bodily injury against Insured, and no duty to defend non-covered claims.
It was not immediately apparent whether the claim against Insured for bodily injury was or was not covered. It was immediately apparent, however, that the claim might potentially be covered. . . . Facing uncertainty about coverage, [the Insurer] appropriately activated its right and met its duty to defend under the policy when it was presented with a claim that may or may not have been covered. At the same time, [the Insurer] appropriately exercised its right to seek a declaration that it had no duty to defend.
The trial court’s subsequent declaratory judgment determination that the claim was not covered relieved [the Insurer] of having to defend the case going forward, but did not somehow nullify its initial determination that the claim was potentially covered. . . .
We therefore reject [the Insurer’s] attempt to define its duty to defend based on the outcome of the declaratory judgment action. The broad duty to defend that exists in Pennsylvania encourages insurance companies to construe their insurance contract broadly and to defend all actions where there is any potential coverage. . . .
Where the insurance contract is silent about the insurer’s right to reimbursement of defense costs, permitting reimbursement for costs the insurer spent exercising its right and duty to defend potentially covered claims prior to a court’s determination of coverage would be inconsistent with Pennsylvania law. It would amount to a retroactive erosion of the broad duty to defend in Pennsylvania by making the right and duty to defend contingent upon a court’s determination that a complaint alleged covered claims, and would therefore narrow Pennsylvania’s long-standing view that the duty to defend is broader than the duty to indemnify.
. . .
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Moreover, [the Insurer’s] contractual obligation to pay for the defense arose as a consequence of the rules of contract interpretation. It is undisputed that the policy did not contain a provision providing for reimbursement of defense costs under any circumstances. Thus, the right [the Insurer] attempts to assert in this case, the right to reimbursement, is not a right to which it is entitled based on the policy
Id. at 541-544.
This court, like the District Court in Welch, finds that the Pennsylvania Supreme Court’s decision in Jerry’s comports with Massachusetts law. In Massachusetts, the insurer’s duty to defend arises when the underlying complaint “show[s] only a possibility that the liability claim falls within the insurance coverage. There is no requirement that the facts alleged in the complaint specifically and unequivocally make out a claim within the coverage.” Sterilite Corp. v. Continental Cas. Co., 17 Mass.App.Ct. 316, 319 (1983). Even in cases in which the insurer may believe that coverage is unlikely under the terms of the policy, it has financial incentives to provide a defense. If it is determined in a separate action brought by the insured (or the insurer) that coverage existed, the insurer will be responsible for paying the insured’s costs of establishing a right to a defense, even if the denial of coverage was made in good faith. See Hanover Ins. Co. v. Golden, 436 Mass. 584, 588 (Mass. 2002). Of course, a bad faith refusal to provide a defense could constitute a violation of chapter 93A and expose the insurer to multiple damages. See Boston Symphony Orchestra, Inc. v. Commercial Union Ins. Co., 406 Mass. 7 (Mass. 1989) and Boyle v. Zurich American Ins. Co., 472 Mass. 649, 661 (2015). In consequence, when in doubt, an insurer has an economically sound and self-interested reason to provide a defense under a reservation of right until the coverage issue can be resolved.
With those basic tenets of Massachusetts law in mind, we turn to the language of the contracts that define the parties’ rights and obligations, in this case the Policies. See, e.g., Hakim v. Massachusetts Insurers’ Insolvency Fund, 424 Mass. 275, 280 (1997) (“The interpretation of
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an insurance contract is no different from the interpretation of any other contract, and we must construe the words of the policy in their usual and ordinary sense.”) There is simply nothing in the Policies that provides a right to recoup defense costs that the Insurers have advanced because they concluded that it was in their economic interest to do so. The court rejects the argument relied upon in Buss and its progeny that to deny recovery of defense costs will give insureds more than they bargained for, i.e., partial payment for the cost of defending claims that were not covered by the policies that they purchased. The court finds the reasoning of Jerry’s more persuasive: “In some circumstances, an insurance company may face a difficult decision as to whether a claim falls, or potentially falls, within the scope of the insurance policy. However, it is a decision the insurer must make.” Jerry’s, 2 A.3d at 543.
In this case, if the Insurers had refused to provide a defense, they would have incurred no liability to Vibram because the claims in the Underlying Action were not within the coverage provided. However, they determined in the exercise of their considered judgment that it was better to provide a defense and file an action for declaratory judgment. “It is undisputed that the [the Policies] did not contain a provision providing for reimbursement of defense costs under any circumstances. Thus, the right [the Insurers] attempt[] to assert in this case, the right to reimbursement, is not a right to which [they are] entitled based on the [Policies].” Id. at 544. Knowing that there is a risk that they would decide to provide a defense in cases in which they were uncertain as to whether a claim was covered because the claim was novel or the law unclear, the Insurers could have addressed the right of recoupment in their Policies; they didn’t. The court ought not insert a policy provision that the parties did not agree upon.
In Jerry’s, the Pennsylvania Court addressed two other arguments advanced by the Insured in this case. First, a reservation of rights letter cannot create additional rights for the
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Insurer not found in the contract. “[P]ermitting reimbursement by reservation of rights, absent an insurance policy provision authorizing the right in the first place, is tantamount to allowing the insurer to extract a unilateral amendment to the insurance contract.” Id. and cases there cited. The court finds this reasoning consistent with existing Massachusetts precedent.
In Joint Underwriting Ass’n v. Goldberg, 425 Mass. 46 (1997), the insurer defended its insured under a reservation of rights. After a jury returned an adverse verdict against the insured in the underlying action and while appeals were pending, the insurer settled the underlying action. It then sought reimbursement for the cost of the settlement. The SJC held that even if the claims asserted against its insured in the underlying action were not covered, the insurer had no right to recover. The reservation of rights letter did not provide a right of recovery, it only permitted the insurer to defend without waiving its right to deny an obligation to cover an adverse judgment. While the insured’s personal counsel had urged the insurer to settle, no agreement was ever reached that the insured would reimburse the insurer. The SJC noted that the insurer had settled the claims to protect its own interests, as it was concerned about liability under chapter 93A that could, in theory, treble damages, if its refusal to settle were found unreasonable. As the insurer had no contractual right to reimbursement, it had no basis to demand it.
The instant case obviously does not involve a claim to recover an amount paid by an insurer in settlement of a claim, but Goldberg does stand for the general proposition that when an insurer provides payments that benefit the insured, but also avoid a perceived risk of exposure to even greater loss to the insurer, the reservation of rights letter does not support a claim for reimbursement. A right to reimbursement must be found in a contract.
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In Jerry’s, the Pennsylvania Supreme Court also rejected the insurer’s claim that it was entitled to recoupment under a theory of unjust enrichment. 2 A.2d at 545. In this case, the Insurers point to the SJC’s decision in Cotter and the careful consideration that the SJC gave to the disability insurer’s argument that it could recover benefit payments under an equitable claim for restitution. Although, in Cotter, the SJC rejected the disability insurer’s claim, the Insurers argue that liability policies are different and the Restatement (Third) of Restitution and Unjust Enrichment, § 35(1) supports their right of recovery.5
In Cotter, the SJC addressed the insurer’s equitable claim as follows:
“A quasi contract or a contract implied in law is an obligation created by law ‘for reasons of justice, without any expression of assent and sometimes even against a clear expression of dissent.’ ” Salamon v. Terra, 394 Mass. 857, 859 (1985), quoting 1 A. Corbin, Contracts § 19 (1963). “Restitution is an equitable remedy by which a person who has been unjustly enriched at the expense of another is required to repay the injured party.” Keller v. O’Brien, 425 Mass. 774, 778 (1997), citing Salamon v. Terra, supra. “The fact that a person has benefited from another ‘is not of itself sufficient to require the other to make restitution therefor.’ … Restitution is appropriate ‘only if the circumstances of its receipt or retention are such that, as between the two persons, it is unjust for [one] to retain it.’ ” Keller v. O’Brien, supra, quoting Restatement of Restitution § 1 comment c (1937), and citing National Shawmut Bank v. Fidelity Mut. Life Ins. Co., 318 Mass. 142, 146 (1945).
A determination of unjust enrichment is one in which “[c]onsiderations of equity and morality play a large part.” Salamon v. Terra, supra. A plaintiff asserting a claim for unjust enrichment must establish not only that the defendant received a benefit, but also that such a benefit was unjust, “a quality that turns on the reasonable expectations of the parties.” Global Investors Agent Corp. v. National Fire Ins. Co., 76 Mass.App.Ct. 812, 826 (2010), quoting Community Builders, Inc. v. Indian Motorcycle Assocs., Inc., 44 Mass.App.Ct. 537, 560 (1998). “The injustice of the enrichment or detriment in quasi-contract equates with the defeat of someone’s reasonable expectations.” Salamon v. Terra, supra. The party seeking restitution has the burden of proving its entitlement thereto. J.A. Sullivan Corp. v. Commonwealth, 397 Mass. 789, 796 (1986); Hayeck Bldg. & Realty Co. v. Turcotte, 361 Mass. 785, 789 (1972), citing Andre v. Maguire, 305 Mass. 515, 516 (1940).
5 In Cotter, the SJC appeared to adopt the principles set out in Restatement (Third) of Restitution and Unjust Enrichment, § 35(1) and found that Goldberg did not preclude the possibility that an insurer could recover payments made under a reservation of right, but as explained below held that the insurer must still prove that retention of the payments would be unjust.
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We have allowed claims for restitution in circumstances involving fraud, bad faith, violation of a trust, or breach of a duty; in “business torts” such as unfair competition and claims for infringement of trademark or copyright; and in some circumstances, as here, in disputes arising from quasicontractual relations. See Keller v. O’Brien, supra at 778–779. In order to prevail on its claim for reimbursement of disability insurance benefits it paid to Cotter under a reservation of rights, MetLife must establish not only that Cotter received a benefit, which is not disputed, but also that such a benefit was unjust.
Cotter, 464 Mass. at 644. The court found that Cotter’s retention of the disability benefit payments was not unjust.
Clearly, the facts of Cotter, in which the insurer sought to recover benefit payments made to an individual, were more compelling for the insured than those of the present case, which involves a commercial dispute between an insurer and a large company. Nonetheless, liability policies are also sold to individuals (e.g., auto and homeowners policies) and small family businesses, as well as to manufacturing companies like Vibram. In order to prove that it is unjust for an insured to retain defense costs advanced in respect of a third-party claim under a reservation of rights, an insurer must do more than prove that a court ultimately held that the claims were uncovered. Otherwise, the insurer is, in effect, using equitable principles to insert a reimbursement provision into the liability policy that does not exist. If a policy holder demands coverage of a third-party claim that is clearly not covered under the policy, the insurer can reject it. If a policy holder engaged in misrepresentations or other wrongful conduct (for example, acting in concert with a third-party claimant to make an uncovered claim appear covered), retention of defense costs might well be “unjust.” However, a good faith demand for a defense under a liability policy, which the insurer decides is likely enough to be valid that it will tender a defense under a reservation of rights, does not make retention of those defense costs unjust. Claims of unjust enrichment ought not be used to imply rights that the parties have not included
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in the written contract that defines their relationship and covers the subject matter in dispute. See Kennedy v. B.A. Gardetto, Inc. 306 Mass. 212 (1940).
Recovery of Unpaid Defense Costs
Vibram seeks to recover expenses for defense of the Underlying Action incurred up to the date that the court held that the claims asserted in the Underlying Action were not covered by the Policies. It argues that in all cases in which a defense is provided under a reservation of rights, the duty to defend continues “until a declaratory judgment of no coverage is entered and that it does not retroactively disappear, even if no coverage is found.” Vibram asserts that Metropolitan Property & Casualty Ins. Co. v. Morrison, 460 Mass.352 (2011) (Morrison) established this principle. The court disagrees. Rather, Morrison teaches that the duty to defend ends when there is no longer any chance that the facts alleged in an underlying action can support a covered claim. That will often, but certainly not always, be when a declaratory judgment resolves a coverage dispute.
Morrison involved claims allegedly covered by a homeowner’s insurance policy. Briefly stated, the policy holders’ son (covered under the policy) had injured a police officer while resisting arrest. The son pled guilty to various criminal charges, and the police officer filed suit against the son alleging negligent and reckless conduct. The insurer, Metropolitan, disclaimed any obligation to provide indemnity or a defense, but did bring a declaratory judgment action seeking to establish no coverage. The son did not answer the police officer’s complaint, and a default judgment entered against him in the underlying personal injury action. On appeal, the coverage issue turned on (1) an interpretation of a policy provision that excluded coverage for
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bodily injury resulting from intentional and criminal acts and (2) whether the entry of a default judgment in the underlying personal injury action, before a judgment of no coverage entered in the declaratory judgment action, established that the police officer’s injury was the result of negligence, as alleged in the complaint, and therefore a covered claim.
The SJC began by restating the well-established principle that the “insurer’s duty to defend is independent from, and broader than, its duty to indemnify.” Id. at 351. It then went on to explain that “the duty to defend is determined based on the facts alleged in the complaint, and on facts known or readily knowable by the insurer . . . . However, 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 or defend the claimant.” Id. (internal quotations and citations omitted). Or, stated somewhat differently, when the allegations of the complaint do not “roughly sketch a claim covered by a liability policy,” there is no duty to defend. Id.
In support of its position, Vibram quotes the following statement from Morrison: “‘a declaratory judgment of no coverage, either by summary judgment or after trial, does not retroactively relieve the primary insurer of the duty to defend; it only relieves the insurer of the obligation to continue to defend after the declaration.’ 14 G. Couch, Insurance, supra at s. 200: 48, at 200-65 to 200-66.” Id. at 352. Vibram, however, omits the very next sentence in the opinion: “Where material facts as to the duty to indemnify are in dispute, an insurer has a duty to defend until the insurer establishes that no potential for coverage exists. Id. at 200-21.” Id. In other words, where it can be established that there is no coverage under the policy because there are no material facts necessary to determine the coverage issue in dispute, or because, even assuming all of the allegations in the underlying complaint are true, no coverage exists, there is no duty to defend. Indeed, in Morrison, the SJC remanded the case to the Superior Court to
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determine whether Metropolitan owed its insured “a duty to defend at the time of the default judgment.” The SJC instructed the trial judge to determine whether by that point the facts establishing no coverage were already known and undisputed. Clearly, the SJC was teaching that this was the time at which the duty to defend terminated, even if Metropolitan did not obtain its declaratory judgment until later.
Moreover, the rationale underlying the decision in Jerry’s, and other similar cases, would be impaired if a duty to defend arose whenever an insured asserted a disputed right to coverage. In those cases, the courts held that the insurer had no right to recoup defense costs when a declaratory judgment entered that established that a third-party complaint did not assert a covered claim, because it was initially up to the insurer to decide whether to, in effect, hedge its bets and provide a defense when it was unsure of coverage: “In some circumstances, an insurance company may face a difficult decision as to whether a claim falls, or potentially falls, within the scope of the insurance policy. However, it is a decision the insurer must make. If it believes there is no possibility of coverage, then it should deny its insured a defense because the insurer will never be liable for any settlement or judgment.” Jerry’s, 3 A.2d at 542. If an insurer is bound to provide a defense whenever there is any chance that a policy might be interpreted to provide coverage, because of a dispute about policy terms not alleged facts, the predicate for following the principle outlined in Jerry’s is missing.
The court has found a single case in which a court ruled that a dispute concerning a question of law, resolved in favor of the insured, could nonetheless give rise to a duty to defend. In Hugo Boss Fashions, Inc. v. Federal Ins. Co., 252 F.3d 608 (2001), the insurer rejected its insured’s claims of coverage for a trademark infringement case filed against it and declined to provide a defense. The insured brought a declaratory judgment action seeking to establish
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coverage and, while it was pending, settled the underlying trademark suit. The coverage case preceded to trial before a jury, which returned a verdict for the insured, both as to coverage and a duty to defend, and judgment entered for the insured. On appeal, the Second Circuit Court of Appeals reversed the District Court’s judgment that the trademark suit was a covered claim. It held that the policy was unambiguous, as the term “trademarked slogans” had a specific meaning and, in consequence, the policy did not cover the underlying claim.
In a split decision the Court of Appeals, nonetheless, found a duty to defend. It held that “there are situations in which a legal uncertainty as to insurance coverage gives rise to (an at least temporary) duty to defend.” Id. at 622. (Emphasis in original) The majority explained that there was sufficient “legal uncertainty (what does “trademarked slogan” mean)” to require the insurer “to undertake a defense of Hugo Boss until the uncertainty surrounding the term was resolved.” Id. In other words, although it concluded that the term “trademarked slogan” had only one reasonable meaning, the possibility that a court might find it ambiguous gave rise to a duty to defend.
Justice Sotomayor (then an associate justice of the Second Circuit) dissented from this latter holding. She concluded that the majority’s discussion of the duty to defend “finds no basis in New York law.” Id. at 626. She went on to explain that:
The majority errs in confusing two types of uncertainty. The first is cognizable under New York law, the second is not. The first concerns the period during which the underlying action is pending when the insurer must defend the insured against any allegations that, if proven, would result in indemnification. This type of uncertainty is a well-established element of New York insurance law and is unquestioned here. The majority attempts to read a second category of “uncertainty” into New York law, however, concerning how a court might rule on the scope of policy terms. No such “uncertainty” is recognized under New York law apart from that arising from an “ambiguous” policy term.
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Id. at 627. Anticipating to some extent the reasoning that the Pennsylvania Supreme Court adopted in Jerry’s, Justice Sotomayor’s dissent went on to point out:
In order to determine its duties under a policy, insurers are, as a matter of course, called upon to survey the relevant law and scrutinize the language of the policy to judge whether its terms are unambiguous. Insurers may err in their judgment concerning the unambiguity of a policy term but are given strong incentives to decide these questions correctly. If they do not, they can be forced to defend a costly coverage action or, if the finding of unambiguity was so far off the mark that “no reasonable [insurance] carrier would, under the given facts, be expected to assert it,” Sukup v. State, 227 N.E.2d 842, 844 (N.Y. 1967), insurers can face even greater liabilities for breaching their duty of good faith.
All of this assumes that we entrust insurers with the initial decision concerning whether policy terms are unambiguous. In the case of a policy that uses a legal term of art, this inquiry requires a determination of whether that term of art is unambiguous. . . . And yet, the majority wants to deny Federal the opportunity to reach the same conclusion we have reached. It is difficult to understand why we should discourage Federal or any other insurer from making such determinations that are, in any case, subject to review and even sanction if erroneous.
Id. at 628-629 (Emphasis supplied).
Turning to the present case, first, this court’s coverage Decision did not turn on whether some term of art used in the Policies was potentially ambiguous. The precise question before the court: would a liability policy providing coverage for an Advertising Injury cover a claim based on the unauthorized use of a famous person’s name to sell a product, in this case a shoe, had not previously been decided in Massachusetts, or very many other courts. However, this court’s Decision did not turn on whether any particular term of art used in the Policies was potentially ambiguous, but rather applied legal precedent to the interpretation of a series of policy provisions.
Additionally, the reasoning of Justice Sotomayer’s dissent appears far more compelling with respect to the issues raised here than the majority opinion. In the first instance, it is for the insurer to decide whether any of the allegations in the complaint, if proved, could support a claim
18
covered by the policy. If it declines to provide a defense, it faces potential liabilities that will likely exceed the cost of the defense. However, if it elects not to defend the third-party claim, and its decision was correct as a matter of law, how could there ever have been a duty to defend?
The case now before the court does provide an additional confounding fact. The Insurers initially did agree to advance defense costs, but had not paid all outstanding invoices when the Declaratory Judgment of no coverage issued. Whether the insurer stopped paying because it became more convinced of the validity of its coverage position or because it was just slow in processing invoices does not appear to raise a disputed issue of fact material to this case. The relevant question is whether having initially agreed to pay for Vibram’s defense, while prosecuting this declaratory judgment action, the Insurers are bound to continue to advance defense costs until this case is resolved. On the record before this court, it concludes that they are not.
While not perfectly analogous, the court notes that in Herbert A Sullivan, Inc. v. Utica Mutual Ins. Co., 439 Mass. 387, 395 (2003), the insurer initially provided a defense to its insured under a general liability policy because one count of a multicount complaint alleged negligence. However, after the plaintiff in the underlying action amended its complaint and eliminated the negligence count, the insurer no longer had a duty to defend. The court finds that there is nothing inherent in an insurer’s initial decision to provide a defense that precludes it from changing its mind, even while the declaratory judgment action is still pending.
The court can envision cases in which an insured may have relied on the insurer’s initial decision and adopted a course of action in responding to the third-party claim such that it would suffer damage if the insurer discontinued the defense before the declaratory judgment action was resolved. For example, this might arise in situations in which the insurer is not only advancing
19
defense costs but actively providing the defense. However, this is not such a case. Upon receipt of the reservation of rights letter, Vibram exercised its right to retain its counsel of choice and to control its own defense, which given the amount of fees generated in a rather brief time was robust. There are no facts in the summary judgment record suggesting that the Insurers should be equitably estopped from discontinuing the advancement of defense costs, if the Policies permit them to do so. The court finds that, on these facts, the Insurers were permitted to change their mind with respect to advancing defense costs, as they were under no contractual obligation to pay them. The insured has neither a contractual or equitable claim for payment of unpaid costs of defense incurred up to the date the Decision issued.6
ORDER
For the foregoing reasons, the Insurers’ motion for summary judgment is DENIED, to the extent that it seeks to establish a right to recoup defense costs previously advanced,and otherwise ALLOWED; and Vibram’s motion for summary judgment is DENIED, to the extent it seeks to establish a right to recover any additional defense costs from the Insurers, and otherwise ALLOWED. Final judgment shall enter dismissing the counterclaims and declaring that the plaintiff insurance companies do not have a duty to defend the defendant Vibram in the
6 Vibram argues that the provision in the Policies that states “[the Insurers] will pay, with respect to any claim we investigate or settle, or any ‘suit’ against any insured we defend: . . . All expenses we incur . . . .” requires payment of all defense costs through the date the Decision issued. Clearly, this policy term only provides that when the Insurers defend a claim they have to pay all costs that they incur. Presumably, when an insured receives a reservation of rights letter and elects to control its own defense, that provision requires reimbursement of all defense expenses incurred by the insured, at least all reasonable expenses. But, it does not create an independent duty to defend a claim, or pay for the defense of a claim, that the Insurers have decided not to defend. The duty to defend is determined under other policy provisions.
20
Underlying Action or indemnify it for any loss sustained in respect thereto. No party shall recover damages, and each party shall bear its own costs.
_______________________
Mitchell H. Kaplan
Justice of the Superior Court
Dated: March 20, 2017

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Posted by Stephen Sandberg - April 6, 2017 at 5:20 am

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Commonwealth v. Ackerman (Lawyers Weekly No. 10-054-17)

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

SJC-11983

COMMONWEALTH  vs.  SARAH C. ACKERMAN.

April 5, 2017.

Supreme Judicial Court, Superintendence of inferior courts.  Evidence, Medical record, Blood alcohol test.  Constitutional Law, Confrontation of witnesses.  Motor Vehicle, Operating under the influence.  Practice, Criminal, Confrontation of witnesses, Interlocutory appeal.

The defendant, Sarah C. Ackerman, appeals from a judgment of a single justice of the county court allowing the Commonwealth’s petition pursuant to G. L. c. 211, § 3.  We affirm.

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Posted by Stephen Sandberg - April 6, 2017 at 1:45 am

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Commonwealth v. Gulla (Lawyers Weekly No. 10-053-17)

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

SJC-11361

COMMONWEALTH  vs.  ROBERT GULLA.

Middlesex.     January 10, 2017. – April 5, 2017.

Present:  Gants, C.J., Botsford, Lenk, Hines, & Budd, JJ.[1]

Homicide.  Constitutional Law, Assistance of counsel, Fair trial.  Practice, Criminal, Assistance of counsel, Argument by counsel, Instructions to jury, Capital case.

Indictments found and returned in the Superior Court Department on March 4, 2010.

The cases were tried before Thomas P. Billings, J., and a motion for a new trial, filed on October 29, 2014, was heard by him.

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Posted by Stephen Sandberg - April 5, 2017 at 10:11 pm

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Commonwealth v. Sanchez (Lawyers Weekly No. 10-052-17)

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

SJC-11360

COMMONWEALTH  vs.  BENJAMIN SANCHEZ.

Hampden.     December 9, 2016. – April 5, 2017.

Present:  Gants, C.J., Botsford, Lenk, Hines, & Gaziano, JJ.[1]

Homicide.  Burning a Dwelling House.  Abuse Prevention.  Evidence, Expert opinion, Admissions and confessions, Voluntariness of statement.  Witness, Expert.  Constitutional Law, Confrontation of witnesses, Waiver of constitutional rights, Admissions and confessions, Voluntariness of statement.  Practice, Criminal, Capital case, Confrontation of witnesses, Waiver, Admissions and confessions, Voluntariness of statement, Postconviction relief.

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Posted by Stephen Sandberg - April 5, 2017 at 6:36 pm

Categories: News   Tags: , , , ,

State Board of Retirement v. Finneran, et al. (Lawyers Weekly No. 10-051-17)

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

SJC-12069

STATE BOARD OF RETIREMENT  vs.  THOMAS M. FINNERAN & others.[1]

Suffolk.     December 8, 2016. – April 5, 2017.

Present:  Gants, C.J., Botsford, Lenk, Hines, Gaziano, & Budd, JJ.[2]

Retirement.  State Board of Retirement.  Public Employment, Forfeiture of retirement benefits.  Constitutional Law, Excessive fines clause.  Practice, Civil, Action in nature of certiorari.

Civil action commenced in the Supreme Judicial Court for the county of Suffolk on December 4, 2015.

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Posted by Stephen Sandberg - April 5, 2017 at 3:01 pm

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Turner Construction Company v. MJ Flaherty Company (Lawyers Weekly No. 12-028-17)

1
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
CIVIL ACTION
NO. 13-2308
TURNER CONSTRUCTION COMPANY
vs.
MJ FLAHERTY COMPANY
MEMORANDUM OF DECISION AND ORDER ON
PLAINTFF’S MOTION FOR SUMMARY JUDGMENT and PLAINTIFF’S MOTION TO STRIKE THE EXPERT REPORT OF JACK GRANT
INTRODUCTION
This case arises out of a subcontract between the plaintiff, Turner Construction Company (Turner), and the defendant MJ Flaherty Company (Flaherty). Turner was the general contractor on the construction of a 23 story commercial building at 157 Berkeley Street and certain related remodeling of an adjacent building for Liberty Mutual Insurance Company (the Project). Flaherty entered into a subcontract with Turner to perform the HVAC work on the Project (the Subcontract). The initial value of the Subcontract was $ 12,462,252. Turner brought this action against Flaherty to recover damages that it alleges that it suffered when Flaherty failed to complete its work on the Project and Turner had to hire another subcontractor to complete the HVAC work.1
Flaherty has asserted counterclaims against Turner. Some of these claims are based on Turner’s failure to pay Flaherty for all of the work that it performed. Here, the amount in dispute
1 Turner’s complaint also includes allegations concerning subcontracts that Turner entered into with Flaherty on two other projects, a new building at University of Massachusetts at Lowell and a Liberty Mutual Conference Center. Turner alleges that Flaherty also failed to complete these projects causing it damage; however, the focus of this litigation appears to be the 157 Berkeley Project. It seems that Flaherty is no longer in business.
2
is complicated by the fact that in early 2013 several sub-subcontractors and material suppliers to Flaherty were not being paid and began to file notices of contract in anticipation of asserting mechanics’ liens on the Project. In response, Turner entered into a series of agreements with Flaherty pursuant to which it issued checks to Flaherty for subcontracted work that were made jointly payable to Flaherty and the vendors to insure that they were being paid out of the sums Turner was disbursing to Flaherty.
Flaherty, however, also has alleged that as a result of the manner in which Turner ran the Project, Flaherty was so adversely affected that the value of Flaherty as a going concern was adversely impacted and this resulted in a $ 6.4 million reduction in Flaherty’s “new worth.” This is, of course, a paradigm claim for consequential damages. This claim is the subject of the motion now before the court.
It would be an extraordinary understatement to say that this case has a tortured procedural history. Turner has filed two previous motions for summary judgment that the court was unable to decide on their merits because they were premature or otherwise not properly before the court. It is treating this motion as a motion for partial summary judgment seeking dismissal of so much of the counterclaims as assert claims for consequential damages, and, to that extent, Turner’s motion for summary judgment is ALLOWED.
ADDITIONAL FACTS
There are only a few additional facts that need be recited in connection with Flaherty’s claim for consequential damages.
As is typical of subcontracts for large, commercial building projects, the Subcontract contained a clause eliminating Flaherty’s right to recover consequential damages.
3
Notwithstanding and term or provision herein to the contrary, Subcontractor expressly waives and releases all claims or rights to recover lost profit (except for profit on work actually performed), recovery of overhead (including home office overhead), and any other indirect damages, costs or expenses in any way arising out of or related to the Agreement, including the breach thereof by Contractor, delays, charges, acceleration, loss of efficiency or productivity disruptions and interference with the performance of the work.
A number of change orders were issued for the HVAC work which increased the project price by something in excess of 20%. Flaherty asserts, and for purposes of this motion it is accepted as true, that Turner’s project schedule was very aggressive. Additionally, changes to the schedule and project sequencing “negatively impacted . . . Flaherty’s manner and method of performance and this increased Flaherty’s costs” and made the project much more difficult for Flaherty to perform.
DISCUSSION
Summary Judgment
Flaherty contends that the project changes were cumulatively of such a scope and consequence that they caused “ a Cardinal Change or Abandonment of the [Subcontract].”
As will be seen, whether a question of fact exists concerning whether Turner caused a cardinal change in the Subcontract, or the Subcontract was abandoned, need not be decided to conclude that the limitation on consequential damages set out in the Subcontract continues to be binding on Flaherty.
At oral argument, the court noted that, before this case, it had never encountered the concept of cardinal change in a contract, and the few cases that Flaherty cited in support of this doctrine were federal government contracting cases. The court questioned whether the doctrine would be applied by Massachusetts courts to private contracts. In a post-hearing supplemental brief, Flaherty directed the court to Superior Court Judge Lloyd MacDonald’s (now retired)
4
excellent and comprehensive decision: Certified Power Systems, Inc. v. Dominion Energy Brayton Point, LLC, 2012 WL 384600 (Jan. 3, 2012). In that case, J. MacDonald described this doctrine as follows:
The Court was unable to find a Massachusetts case that referred directly to the cardinal change doctrine. However, it is referred to be commentators on Massachusetts law and the concept embodies familiar contract principals.
A cardinal change is a change outside the general scope of the contract which constitutes such a substantial deviation that it alters the nature of the bargain and constitutes a material breach. . . . (cardinal change is drastic and fundamental modification in the work which requires contractor to perform duties materially different from those originally bargained for.)
Although a cardinal change generally represents a large increase in one party’s contract burdens, there is no precise formula for determining whether a change is within the scope of the contract or a cardinal change. . . . Each case must be analyzed on its own facts and circumstances giving fair consideration to the magnitude and quality of the changes ordered and their cumulative effect on the project as a whole. . . . Numerous changes, none of which individually may be deemed cardinal, may create a cardinal change when considered as a whole.
(Internal citations and quotations omitted for simplicity). This court finds this reasoning persuasive and concludes that, under Massachusetts law, the cardinal change doctrine may be applied to a private construction contract when the facts warrant it. It is, however, worth noting that, in Certified Power Systems, Inc., Judge MacDonald concluded that change orders that increased the subcontract price by more than 50% did not constitute a cardinal change: “the enlarged work crew, the insistence on substantial overtime as a means to recover schedule and the winter conditions together presented a markedly different contract environment from what CPS reasonably anticipated. However, the essence of the work required by the Subcontract remained the same. Further, the change order procedure of the Subcontract provided a structure for the orderly accommodation of the altered conditions without undue disruption.”
It seems likely that Judge MacDonald’s conclusions will apply to the present case as
5
well, but the court’s decision on consequential damages does not rest on that factual conclusion. As Judge MacDonald notes, if a cardinal change were established that might constitute a material breach of the Subcontract. However, proof of a breach of contract on the part of Turner would not be a basis for the court to write a new subcontract for the parties that did not include any limitation on consequential damages. Proof of a cardinal change constituting a breach would permit recovery of direct damages occasioned by that breach.
Indeed, none of the cases that Flaherty has submitted that mention cardinal change or contract abandonment, touch on the issue of consequential damages or even suggest a theory that would support a contract based (or any other claim) for consequential damages.
Flaherty submitted to the court copies of several cases that address the concepts of cardinal change or contract abandonment without any analysis of how these cases apply to its version of the facts underlying its dispute with Turner. The cases that seem closest to the issue presented by the instant case are those in which the court concluded that the contracting parties had departed so significantly from the terms of their contract that the plaintiff was entitled to recover the fair value of its services instead of under the contract, i.e., a quantum meruit recovery.
For example, in J.J. Jones Const. Co. v. Lehrer McGovern Bovis, Inc., 83 P.3d 1009 (Nev. 2004), the court considered the claims of a subcontractor asserted under theories of abandonment and cardinal change, applying Nevada law. “Generally, contract abandonment occurs when both parties depart from the terms of the contract by mutual consent. The consent may be express, or it may be implied by the parties’ actions, such as when the acts of one party inconsistent with the contract’s existence are acquiesced in by the other.”2 Id. at 1019-1020
2 The court does not see any evidence of contract abandonment in this case, as it appears that Turner and Flaherty continued to make use of the change order process until Flaherty stopped working. However, the state of the
6
(internal citations and quotations omitted). The Nevada court then went on to consider the cardinal change doctrine. It commented that although this doctrine was generally applied only in government contracting cases, it would be recognized under state law. “[A] cardinal change occurs when the work is so drastically altered that the contractor effectively performs duties that are materially different from those for which the contractor originally bargained. The contractor must prove facts with specificity that support its allegations that a cardinal change occurred.” Id. (internal citations and quotations omitted). The court went on to note that “the evidence required to demonstrate the occurrence of cardinal change is similar to that required by the contract-abandonment theory.” Id. at 1021. It then concluded that, under either theory, the measure of recovery for the subcontractor was the true value of the services performed, i.e., quantum meruit. See also O’Brien & Gere Technical Services, Inc. v. Fru-Con/Fluor Daniel Joint Venture, 380 F.3d 447 (8th Cir. 2004) (applying a theory of abandonment under Missouri law and allowing recovery for the reasonable value of the services performed); C. Norman Peterson Co. v. Container Corp. of Am., 172 Cal. App. Ed 628 (1985) (finding evidence sufficient to establishment abandonment of contract under California law and permitting recovery of the reasonable value of services on a quantum meruit basis).
None of this group of cases provides support for a claim for indirect, consequential damages under a theory of cardinal change or contract abandonment.3 Rather, they apply traditional concepts of equitable relief to situations in which a contract should be set aside because the work performed was different than the work bargained for under the contract. In
summary judgment record is such that the court cannot reach that conclusion as a matter of law.
3 Many of the cardinal change cases to which Flaherty has directed the court are completed inapposite. These are cases in which the plaintiff is a disappointed bidder for a publicly bid contract and argues that, under the cardinal change doctrine, the contract was so amended after it was awarded that it is a different contract than that which was publicly bid and that the plaintiff was never given the opportunity to bid on it. See, e.g., Cardinal Maint. Serv. V. United States, 63 Fed.Cl. 98 (2004) (determining that a series of changes amounted to a cardinal change and therefore a violation of public bidding laws).
7
each case, the court concludes that the party performing the work should be given the opportunity to recover the fair value of its labors. The same concepts apply under Massachusetts law. See, e.g., Bosewell v. Zephyr Lines, Inc. 414 Mass. 241, 250 (1993).
To the contrary, under Massachusetts law, clauses in construction contracts limiting the right to recover consequential damages have long been recognized and enforced as an appropriate means to “limit the expense and unpredictability of construction contract litigation.” Costa v. Brait Builders Corp., 463 Mass. 65, 78 n. 22 (2004). Indeed, the SJC has reflected on the utility of such clauses as means to protect against claims just like those that Flaherty attempts to assert in this case: “Some of the consequential damages claimed by the plaintiff here, including his going out of business, . . . , may provide a case in point.” Id.
In consequence, Flaherty’s claims for indirect or consequential damage fail, as a matter of law, even if he there is evidence to support a theory of cardinal change or contract abandonment in the summary judgment record.
Motion to Strike Expert Testimony
Because the single issue actually before the court on the motion for summary judgment does not turn on whether there is evidence in the summary judgment record that would support claims of cardinal change, the court need not address Turner’s motion to strike the John Grant Report. However, a few comments on the report may prove useful as the parties prepare for trial.
In his report, Grant offers the opinion: “When all of the above Project Information, Circumstances, and Events are considered as a whole, it is JCCMI’s fair and reasonable professional conclusion that there was a Cardinal Change in Flaherty’s Scope of Work and accordingly an Abandonment of the Contract.” That is not an opinion that an expert may render
8
in this case. His opinion offers a conclusion on a mixed question of law and fact to be addressed by a court or, perhaps, a jury on proper instructions on the law. Grant may have expert testimony that would be useful for a fact finder in making that decision, but that will be determined by the trial judge on pretrial motions or during trial.
Moreover, at present, the court does not believe that the issue of cardinal change, much less contract abandonment, can be presented without testimony from witnesses who performed or observed the work being done by Flaherty and can provide competent evidence of the effect that Project changes had on Flaherty, if they had any at all. Having reviewed, as best it can, the Grant Report., the court finds many of the opinions expressed to be in the nature of a description of how the changes might have affected Flaherty. Perhaps, some of what Grant has to say might serve as corroboration of testimony from percipient witnesses concerning how the changes actually affected Flaherty’s work on the Project. Again, the admissibility of any of the opinions expressed in the Report, and whether the report is sufficient to prove cardinal change without a percipient witness, are matters for the trial judge to decide.
ORDER
For the foregoing reasons, Turner’s motion for Summary Judgment is ALLOWED to the following extent: Flaherty’s counterclaims for consequential or indirect damages are dismissed. The court makes no ruling on Turner’s Motion to Strike the Expert Report of Jack
9
Grant. This is without prejudice to Turner’s right to file pretrial motions concerning the admissibility of testimony based on the Report or to object to such testimony at trial.
_______________________
Mitchell H. Kaplan
Justice of the Superior Court
Dated: March 7, 2017

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Posted by Stephen Sandberg - April 4, 2017 at 9:08 pm

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Turner Construction Company v. MJ Flaherty Company (Lawyers Weekly No. 12-028-17)

1
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
CIVIL ACTION
NO. 13-2308
TURNER CONSTRUCTION COMPANY
vs.
MJ FLAHERTY COMPANY
MEMORANDUM OF DECISION AND ORDER ON
PLAINTFF’S MOTION FOR SUMMARY JUDGMENT and PLAINTIFF’S MOTION TO STRIKE THE EXPERT REPORT OF JACK GRANT
INTRODUCTION
This case arises out of a subcontract between the plaintiff, Turner Construction Company (Turner), and the defendant MJ Flaherty Company (Flaherty). Turner was the general contractor on the construction of a 23 story commercial building at 157 Berkeley Street and certain related remodeling of an adjacent building for Liberty Mutual Insurance Company (the Project). Flaherty entered into a subcontract with Turner to perform the HVAC work on the Project (the Subcontract). The initial value of the Subcontract was $ 12,462,252. Turner brought this action against Flaherty to recover damages that it alleges that it suffered when Flaherty failed to complete its work on the Project and Turner had to hire another subcontractor to complete the HVAC work.1
Flaherty has asserted counterclaims against Turner. Some of these claims are based on Turner’s failure to pay Flaherty for all of the work that it performed. Here, the amount in dispute
1 Turner’s complaint also includes allegations concerning subcontracts that Turner entered into with Flaherty on two other projects, a new building at University of Massachusetts at Lowell and a Liberty Mutual Conference Center. Turner alleges that Flaherty also failed to complete these projects causing it damage; however, the focus of this litigation appears to be the 157 Berkeley Project. It seems that Flaherty is no longer in business.
2
is complicated by the fact that in early 2013 several sub-subcontractors and material suppliers to Flaherty were not being paid and began to file notices of contract in anticipation of asserting mechanics’ liens on the Project. In response, Turner entered into a series of agreements with Flaherty pursuant to which it issued checks to Flaherty for subcontracted work that were made jointly payable to Flaherty and the vendors to insure that they were being paid out of the sums Turner was disbursing to Flaherty.
Flaherty, however, also has alleged that as a result of the manner in which Turner ran the Project, Flaherty was so adversely affected that the value of Flaherty as a going concern was adversely impacted and this resulted in a $ 6.4 million reduction in Flaherty’s “new worth.” This is, of course, a paradigm claim for consequential damages. This claim is the subject of the motion now before the court.
It would be an extraordinary understatement to say that this case has a tortured procedural history. Turner has filed two previous motions for summary judgment that the court was unable to decide on their merits because they were premature or otherwise not properly before the court. It is treating this motion as a motion for partial summary judgment seeking dismissal of so much of the counterclaims as assert claims for consequential damages, and, to that extent, Turner’s motion for summary judgment is ALLOWED.
ADDITIONAL FACTS
There are only a few additional facts that need be recited in connection with Flaherty’s claim for consequential damages.
As is typical of subcontracts for large, commercial building projects, the Subcontract contained a clause eliminating Flaherty’s right to recover consequential damages.
3
Notwithstanding and term or provision herein to the contrary, Subcontractor expressly waives and releases all claims or rights to recover lost profit (except for profit on work actually performed), recovery of overhead (including home office overhead), and any other indirect damages, costs or expenses in any way arising out of or related to the Agreement, including the breach thereof by Contractor, delays, charges, acceleration, loss of efficiency or productivity disruptions and interference with the performance of the work.
A number of change orders were issued for the HVAC work which increased the project price by something in excess of 20%. Flaherty asserts, and for purposes of this motion it is accepted as true, that Turner’s project schedule was very aggressive. Additionally, changes to the schedule and project sequencing “negatively impacted . . . Flaherty’s manner and method of performance and this increased Flaherty’s costs” and made the project much more difficult for Flaherty to perform.
DISCUSSION
Summary Judgment
Flaherty contends that the project changes were cumulatively of such a scope and consequence that they caused “ a Cardinal Change or Abandonment of the [Subcontract].”
As will be seen, whether a question of fact exists concerning whether Turner caused a cardinal change in the Subcontract, or the Subcontract was abandoned, need not be decided to conclude that the limitation on consequential damages set out in the Subcontract continues to be binding on Flaherty.
At oral argument, the court noted that, before this case, it had never encountered the concept of cardinal change in a contract, and the few cases that Flaherty cited in support of this doctrine were federal government contracting cases. The court questioned whether the doctrine would be applied by Massachusetts courts to private contracts. In a post-hearing supplemental brief, Flaherty directed the court to Superior Court Judge Lloyd MacDonald’s (now retired)
4
excellent and comprehensive decision: Certified Power Systems, Inc. v. Dominion Energy Brayton Point, LLC, 2012 WL 384600 (Jan. 3, 2012). In that case, J. MacDonald described this doctrine as follows:
The Court was unable to find a Massachusetts case that referred directly to the cardinal change doctrine. However, it is referred to be commentators on Massachusetts law and the concept embodies familiar contract principals.
A cardinal change is a change outside the general scope of the contract which constitutes such a substantial deviation that it alters the nature of the bargain and constitutes a material breach. . . . (cardinal change is drastic and fundamental modification in the work which requires contractor to perform duties materially different from those originally bargained for.)
Although a cardinal change generally represents a large increase in one party’s contract burdens, there is no precise formula for determining whether a change is within the scope of the contract or a cardinal change. . . . Each case must be analyzed on its own facts and circumstances giving fair consideration to the magnitude and quality of the changes ordered and their cumulative effect on the project as a whole. . . . Numerous changes, none of which individually may be deemed cardinal, may create a cardinal change when considered as a whole.
(Internal citations and quotations omitted for simplicity). This court finds this reasoning persuasive and concludes that, under Massachusetts law, the cardinal change doctrine may be applied to a private construction contract when the facts warrant it. It is, however, worth noting that, in Certified Power Systems, Inc., Judge MacDonald concluded that change orders that increased the subcontract price by more than 50% did not constitute a cardinal change: “the enlarged work crew, the insistence on substantial overtime as a means to recover schedule and the winter conditions together presented a markedly different contract environment from what CPS reasonably anticipated. However, the essence of the work required by the Subcontract remained the same. Further, the change order procedure of the Subcontract provided a structure for the orderly accommodation of the altered conditions without undue disruption.”
It seems likely that Judge MacDonald’s conclusions will apply to the present case as
5
well, but the court’s decision on consequential damages does not rest on that factual conclusion. As Judge MacDonald notes, if a cardinal change were established that might constitute a material breach of the Subcontract. However, proof of a breach of contract on the part of Turner would not be a basis for the court to write a new subcontract for the parties that did not include any limitation on consequential damages. Proof of a cardinal change constituting a breach would permit recovery of direct damages occasioned by that breach.
Indeed, none of the cases that Flaherty has submitted that mention cardinal change or contract abandonment, touch on the issue of consequential damages or even suggest a theory that would support a contract based (or any other claim) for consequential damages.
Flaherty submitted to the court copies of several cases that address the concepts of cardinal change or contract abandonment without any analysis of how these cases apply to its version of the facts underlying its dispute with Turner. The cases that seem closest to the issue presented by the instant case are those in which the court concluded that the contracting parties had departed so significantly from the terms of their contract that the plaintiff was entitled to recover the fair value of its services instead of under the contract, i.e., a quantum meruit recovery.
For example, in J.J. Jones Const. Co. v. Lehrer McGovern Bovis, Inc., 83 P.3d 1009 (Nev. 2004), the court considered the claims of a subcontractor asserted under theories of abandonment and cardinal change, applying Nevada law. “Generally, contract abandonment occurs when both parties depart from the terms of the contract by mutual consent. The consent may be express, or it may be implied by the parties’ actions, such as when the acts of one party inconsistent with the contract’s existence are acquiesced in by the other.”2 Id. at 1019-1020
2 The court does not see any evidence of contract abandonment in this case, as it appears that Turner and Flaherty continued to make use of the change order process until Flaherty stopped working. However, the state of the
6
(internal citations and quotations omitted). The Nevada court then went on to consider the cardinal change doctrine. It commented that although this doctrine was generally applied only in government contracting cases, it would be recognized under state law. “[A] cardinal change occurs when the work is so drastically altered that the contractor effectively performs duties that are materially different from those for which the contractor originally bargained. The contractor must prove facts with specificity that support its allegations that a cardinal change occurred.” Id. (internal citations and quotations omitted). The court went on to note that “the evidence required to demonstrate the occurrence of cardinal change is similar to that required by the contract-abandonment theory.” Id. at 1021. It then concluded that, under either theory, the measure of recovery for the subcontractor was the true value of the services performed, i.e., quantum meruit. See also O’Brien & Gere Technical Services, Inc. v. Fru-Con/Fluor Daniel Joint Venture, 380 F.3d 447 (8th Cir. 2004) (applying a theory of abandonment under Missouri law and allowing recovery for the reasonable value of the services performed); C. Norman Peterson Co. v. Container Corp. of Am., 172 Cal. App. Ed 628 (1985) (finding evidence sufficient to establishment abandonment of contract under California law and permitting recovery of the reasonable value of services on a quantum meruit basis).
None of this group of cases provides support for a claim for indirect, consequential damages under a theory of cardinal change or contract abandonment.3 Rather, they apply traditional concepts of equitable relief to situations in which a contract should be set aside because the work performed was different than the work bargained for under the contract. In
summary judgment record is such that the court cannot reach that conclusion as a matter of law.
3 Many of the cardinal change cases to which Flaherty has directed the court are completed inapposite. These are cases in which the plaintiff is a disappointed bidder for a publicly bid contract and argues that, under the cardinal change doctrine, the contract was so amended after it was awarded that it is a different contract than that which was publicly bid and that the plaintiff was never given the opportunity to bid on it. See, e.g., Cardinal Maint. Serv. V. United States, 63 Fed.Cl. 98 (2004) (determining that a series of changes amounted to a cardinal change and therefore a violation of public bidding laws).
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each case, the court concludes that the party performing the work should be given the opportunity to recover the fair value of its labors. The same concepts apply under Massachusetts law. See, e.g., Bosewell v. Zephyr Lines, Inc. 414 Mass. 241, 250 (1993).
To the contrary, under Massachusetts law, clauses in construction contracts limiting the right to recover consequential damages have long been recognized and enforced as an appropriate means to “limit the expense and unpredictability of construction contract litigation.” Costa v. Brait Builders Corp., 463 Mass. 65, 78 n. 22 (2004). Indeed, the SJC has reflected on the utility of such clauses as means to protect against claims just like those that Flaherty attempts to assert in this case: “Some of the consequential damages claimed by the plaintiff here, including his going out of business, . . . , may provide a case in point.” Id.
In consequence, Flaherty’s claims for indirect or consequential damage fail, as a matter of law, even if he there is evidence to support a theory of cardinal change or contract abandonment in the summary judgment record.
Motion to Strike Expert Testimony
Because the single issue actually before the court on the motion for summary judgment does not turn on whether there is evidence in the summary judgment record that would support claims of cardinal change, the court need not address Turner’s motion to strike the John Grant Report. However, a few comments on the report may prove useful as the parties prepare for trial.
In his report, Grant offers the opinion: “When all of the above Project Information, Circumstances, and Events are considered as a whole, it is JCCMI’s fair and reasonable professional conclusion that there was a Cardinal Change in Flaherty’s Scope of Work and accordingly an Abandonment of the Contract.” That is not an opinion that an expert may render
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in this case. His opinion offers a conclusion on a mixed question of law and fact to be addressed by a court or, perhaps, a jury on proper instructions on the law. Grant may have expert testimony that would be useful for a fact finder in making that decision, but that will be determined by the trial judge on pretrial motions or during trial.
Moreover, at present, the court does not believe that the issue of cardinal change, much less contract abandonment, can be presented without testimony from witnesses who performed or observed the work being done by Flaherty and can provide competent evidence of the effect that Project changes had on Flaherty, if they had any at all. Having reviewed, as best it can, the Grant Report., the court finds many of the opinions expressed to be in the nature of a description of how the changes might have affected Flaherty. Perhaps, some of what Grant has to say might serve as corroboration of testimony from percipient witnesses concerning how the changes actually affected Flaherty’s work on the Project. Again, the admissibility of any of the opinions expressed in the Report, and whether the report is sufficient to prove cardinal change without a percipient witness, are matters for the trial judge to decide.
ORDER
For the foregoing reasons, Turner’s motion for Summary Judgment is ALLOWED to the following extent: Flaherty’s counterclaims for consequential or indirect damages are dismissed. The court makes no ruling on Turner’s Motion to Strike the Expert Report of Jack
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Grant. This is without prejudice to Turner’s right to file pretrial motions concerning the admissibility of testimony based on the Report or to object to such testimony at trial.
_______________________
Mitchell H. Kaplan
Justice of the Superior Court
Dated: March 7, 2017

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ABM Industry Groups, LLC v. Palmarozzo, et al. (Lawyers Weekly No. 12-035-17)

COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT.
1784CV00819-BLS2
____________________
ABM INDUSTRY GROUPS, LLC
v.
JOSEPH PALMAROZZO and COMPASS FACILITY SERVICES, INC.
____________________
MEMORANDUM AND ORDER DENYING PLAINTIFF’S
MOTION FOR A PRELIMINARY INJUNCTION
ABM Industry Groups, LLC, seeks a preliminary injunction that would enforce restrictive covenants signed by Joseph Palmarozzo while he was working for ABM as a branch manager. ABM provides janitorial and building maintenance services at larger facilities and projects. It is a large, publicly-traded company that generates roughly $ 5 billion in annual revenues. Palmarozzo left ABM in December 2016 to become the general manager at Compass Facility Services, Inc., a much smaller company that generates around $ 15 million in annual revenues by providing janitorial services at relatively small facilities. Palmarozzo overseas CFS’s operations; he has no responsibility for and no role in sales. ABM seeks an order that would bar Palmarozzo from working for CFS, compel Palmarozzo to comply with the non-competition and non-solicitation covenants in his ABM employment contract, and bar him from using or divulging any confidential information belonging to ABM.
The Court will DENY the motion for a preliminary injunction because ABM has not proved that it will likely succeed in proving that its non-competition agreement with Mr. Palmarozzo is enforceable or that Palmarozzo has violated his non-solicitation or non-disclosure agreements.
1. Legal Standards.
1.1. Motions for Preliminary Injunction. “A preliminary injunction is an extraordinary remedy never awarded as of right.” Winter v. Natural Res. Def. Council, Inc., 555 U.S. 7, 24 (2008). To the contrary, “the significant remedy of a preliminary injunction should not be granted unless the plaintiffs had made a clear showing of entitlement thereto.” Student No. 9 v. Board of Educ., 440 Mass. 752, 762 (2004). “Trial judges have broad discretion to grant or deny injunctive relief.” Lightlab Imaging, Inc. v. Axsun Technologies, Inc., 469 Mass. 181, 194 (2014).
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A plaintiff is not entitled to preliminary injunctive relief if it cannot prove that it is likely to succeed on the merits of its claim. See, e.g., Fordyce v. Town of Hanover, 457 Mass. 248, 265 (2010) (vacating preliminary injunction on this ground); Wilson v. Commissioner of Transitional Assistance, 441 Mass. 846, 858-859 (2004) (same). Nor may a plaintiff obtain a preliminary injunction without proving that it will suffer irreparable harm in the absence of such an order, and that such harm to the plaintiff from not granting the preliminary injunction would outweigh any irreparable harm that defendants are likely to suffer if the injunction issues. See, e.g., American Grain Products Processing Institute v. Department of Pub. Health, 392 Mass. 309, 326-329 (1984) (vacating preliminary injunction on this ground); Nolan v. Police Comm’r of Boston, 383 Mass. 625, 630 (1981) (same). “The public interest may also be considered in a case between private parties where the applicable substantive law involves issues that concern public interest[s].” Bank of New England, N.A. v. Mortgage Corp. of New England, 30 Mass. App. Ct. 238, 246 (1991). Under Massachusetts law, “[a] covenant not to compete contained in a contract for personal services” is only enforceable to the extent that it is consistent with the public interest. All Stainless, Inc. v. Colby, 364 Mass. 773, 778 (1974).
1.2. Non-Compete and Non-Solicitation Agreements. An employee’s agreement not to compete with his or her employer by soliciting away customers or potential customers may be enforced under Massachusetts law only to the extent necessary to protect the employer’s legitimate business interests—which include guarding against the release or use of trade secrets or other confidential information, or other harm to the employer’s goodwill, but do not include merely avoiding lawful competition—and to the extent it is reasonable in scope in terms of the activities it restricts, the geographic limitations it imposes on those activities, and the length of time it is in effect. See New England Canteen Services, Inc. v. Ashley, 372 Mass. 671, 673-676 (1977); All Stainless, 364 Mass. at 778-780.
The employer has the burden of proving that the agreement protects legitimate business interests and thus is enforceable. New England Canteen Services, supra, at 675; Folsum Funeral Service, Inc. v. Rodgers, 6 Mass. App. Ct. 843 (1978) (rescript).
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“Protection of the employer from ordinary competition … is not a legitimate business interest,” however, “and a covenant not to compete designed solely for that purpose will not be enforced.” Marine Contractors, Inc. v. Hurley, 365 Mass. 280, 287-288 (1974); accord, e.g., Boulanger v. Dunkin’ Donuts, Inc., 442 Mass. 635, 641 (2004), cert. denied, 544 U.S. 922 (2005).
Thus, “[a]n employer may prevent his employee, upon termination of his employment, from using, for his own advantage or that of a rival and to the harm of his employer, confidential information gained by him during his employment; but he may not prevent the employee from using the skill and general knowledge acquired or improved through his employment.” Abramson v. Blackman, 340 Mass. 714, 715-16 (1960); accord, e.g., Richmond Bros., Inc. v. Westinghouse Broadcasting Co., Inc., 357 Mass. 106, 111 (1970); Woolley’s Laundry v. Silva, 304 Mass. 383, 387 (1939). “The ‘right (of an employee) to use (his) general knowledge, experience, memory and skill’ promotes the public interest in labor mobility and the employee’s freedom to practice his profession and in mitigating monopoly.” Dynamics Research Corp. v. Analytic Sciences Corp., 9 Mass. App. Ct. 254, 267 (1980), quoting J. T. Healy & Son v. James A. Murphy & Son, 357 Mass. 728, 740 (1970); accord Club Aluminum Co. v. Young, 263 Mass. 223, 226-227 (1928).
A contractual covenant restraining competition by a former employee “will be enforced ‘only to the extent that is reasonable and to the extent that it is severable for the purposes of enforcement.’ ” Blackwell v. E-M. Helides, Jr., Inc., 368 Mass. 225, 229 (1975), quoting All Stainless, supra, at 778.
2. Relief Sought against Mr. Palmarozzo. ABM is not entitled to preliminary injunctive relief against Mr. Palmarozzo because it has not met its burden of proving that it is likely to succeed on its claims that Palmarozzo breached his non-competition, non-solicitation, or non-disclosure covenants.
2.1. Sufficiency of Consideration and Suggestion of Duress. At the outset, the Court notes that it is not convinced by Palmarozzo’s arguments that his employment agreement with ABM is unenforceable for lack of consideration and because it was signed under duress. Nonetheless, the Court concludes that ABM has
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not met its burden of proving it is entitled to preliminary injunctive relief, as discussed in the following sections.
The written employment agreement that Palmarozzo accepted in 2015 was supported by adequate consideration, even though Palmarozzo had already been working for ABM for many years as an at-will employee and was not given any additional compensation in exchange for agree to non-competition, non-solicitation, and non-disclosure covenants.
Continued at-will employment is sufficient consideration to support a non-compete agreement in Massachusetts, just as it is sufficient consideration to support other contractual terms. Economy Grocery Stores Corp. v. McMenamy, 290 Mass. 549, 552 (1935) (covenant not to compete signed eighteen months after defendant began working for plaintiff as at-will employee “was not void for lack of consideration” because “it implied … a promise on the part of the plaintiff to employ the defendant” thereafter); accord Sherman v. Pfefferkorn, 241 Mass. 468, 473 (1922); see also Smith v. Graham Refrigeration Products Co., Inc., 333 Mass. 181, 186 (1955) (agreement to forego salary until employer’s financial condition improved); Horner v. Boston Edison Co., 45 Mass. App. Ct. 139, 143 (1998) (release of claims).
Since Palmarozzo was employed at will by ABM, his employer “”could modify [the] terms [of employment] or ‘terminate … [the employment] at any time for any reason or for no reason at all,’ with limited exceptions, such as public policy considerations.” York v. Zurich Scudder Investments, Inc., 66 Mass. App. Ct. 610, 614 (2006) (enforcing change of incentive compensation terms for sales person employed at will), quoting Gram v. Liberty Mut. Ins. Co., 384 Mass. 659, 668 n. 6 (1981).
The fact that Palmarozzo was told he could not continue to work for ABM if he did not sign the agreement does not show that the contract is voidable on the grounds of economic duress. See United Shoe Machinery Co. v. La Chapelle, 212 Mass. 467, 477 (1912) (same as to assignment of rights in shoe machinery made by employee in exchange for continued employment). A contract entered into under physical or economic duress that “deprives the victim of his unfettered will” is voidable. Cabot Corp. v. AVX Corp., 448 Mass. 629, 637 (2007). However, “[t]he assertion of duress must be proved by evidence that the duress resulted from defendant’s wrongful and
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oppressive conduct and not by plaintiff’s necessities.” Id. at 638, quoting International Underwater Contrs., Inc. v. New England Tel. & Tel. Co., 8 Mass. App. Ct. 340, 342 (1979), and W.R. Grimshaw Co. v. Nevil C. Withrow Co., 248 F.2d 896, 904 (8th Cir. 1957). Merely urging another party to accept a deal that is less generous than they would like, and threatening not to do business with them if they do not, is not economic duress even if the demand is made of someone in difficult financial circumstances. See Boston Medical Center v. Secretary of Executive Office of Health and Human Services, 463 Mass. 447, 464 & 468-469 (2012); Cabot Corp., 448 Mass. at 638-639.
2.2. Non-Competition Agreements. Although Palmarozzo’s employment agreement is an enforceable contract, the Court concludes that ABM has not shown that it is likely to succeed in proving that the non-competition covenant is enforceable, because ABM has not met its burden of proving that enforcing the covenant will protect against misuse of confidential information or loss of goodwill. It appears that ABM’s “purpose in attempting to enforce the covenant is to protect itself from ordinary competition. This it cannot do.” New England Canteen Services, 372 Mass. at 676.
2.2.1. No Confidential Information. There is no evidence and ABM does not claim that Palmarozzo copied and took with him any information belonging to ABM.
ABM is not entitled to enforce the non-competition covenant on the ground that Palmarozzo came to know the identities of some of ABM’s clients and their janitorial needs and requirements. An employee is free to carry away his own memory of customers’ names, needs, and habits and use that information, even to serve or to solicit business from those very customers. Such “remembered information” is not confidential because the information itself, as distinguished from an employer’s compilation of such information into a list or database, is known to the customers and thus not kept secret by the employer. American Window Cleaning Co. of Springfield, Mass. v. Cohen, 343 Mass. 195, 199 (1961); accord Angell Elevator Lock Co. v. Manning, 348 Mass. 623, 625 (1965); Woolley’s Laundry, 304 Mass. at 391-392; May v. Angoff, 272 Mass. 317, 320 (1930).
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Similarly, although ABM asserts that Palmarozzo has knowledge of “ABM’s marketing plans, business strategies, pricing structures, and fees,” it has not met its burden of proving that any of that sort of information known to Palmarozzo was kept confidential, rather than shared with customers and potential customers in the regular course of ABM’s business. Prices that ABM actually quotes to or charges its customers are not confidential and provide no basis for enforcing a non-competition agreement. American Window Cleaning, 343 Mass. at 199 (remembered information as to employer’s prices is not confidential). ABM also “has no proprietary interest” in merchandising techniques, strategies, or methods that are disclosed to potential customers and thus are not kept confidential. National Hearing Aid Centers, 2 Mass. App. Ct. at 290; accord United Tool & Indus. Supply Co. v. Torrisi, 356 Mass. 103, 106 (1969).
Finally, ABM asserts that Palmarozzo has knowledge of “other proprietary and confidential systems, process, and procedures.” That sort of conclusory assertion is insufficient to demonstrate that ABM is entitled to a preliminary injunction enforcing the non-competition covenant. As ABM conceded at oral argument, there is nothing confidential about the manner in which ABM provides janitorial services to its clients.
2.2.2. No Threat to Goodwill. Nor does it appear likely that ABM will succeed in proving that Palmarozzo’s non-competition agreement is needed to protect ABM’s good will with its customers. “Good will” is “a company’s positive reputation in the eyes of its customers or potential customers. Good will is generated by repeat business with existing customers or by referrals to potential customers.” North American Expositions Co. Ltd. P’ship v. Corcoran, 452 Mass. 852, 869 (2009) (internal citations omitted).
In the past ten years ABM and CFS have both bid on the same job only once, and only one former ABM customer has switched and hired CFS to do its janitorial work instead.
The evidence demonstrates that Palmarozzo had nothing to do with ABM’s loss of one customer to CFS after Palmarozzo stopped working for ABM. The customer that switched is known as MediTech. ABM presented an affidavit asserting that it received a letter from that client stating that MediTech cancelled its contract with
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ABM after learning “confidential information relating to ABM’s workforce and business strategies” from Palmarozzo, who had been MediTech’s contact at ABM. That assertion is false because it grossly mischaracterizes what MediTech actually wrote. Defendants provided a copy of this letter. The letter states that MediTech canceled its contract because ABM had been reducing the number of hours that ABM employees spent cleaning MediTech’s facilities, ABM did so without notifying MediTech, and ABM did not adjusting its monthly rates to account for this reduction in labor hours. The letter makes clear that MediTech tried to speak with Palmarozzo after realizing all of this, but was told that Palmarozzo had recently left the company. In sum, MediTech cancelled its contract because ABM’s own business practices had obliterated the goodwill had previously established with MediTech, not because Palmarozzo helped CFS steal the client away.
The Court credits Defendants’ undisputed evidence that Palmarozzo is not and will not be involved in any sales efforts by CFS, and that in any case CFS and ABM almost never compete for the same customers because ABM’s janitorial services business focuses on accounts that are much too large for CFS to handle. Under these circumstances, it seems unlikely that whatever good will that ABM may have with its remaining customers will be harmed if Palmarozzo continues to work for CFS.
2.3. Non-Solicitation Agreement. ABM is not entitled to a preliminary injunction enforcing the non-solicitation covenant because it has not met its burden of proving that it is likely to succeed in proving that Palmarozzo ever breached it. See generally Fordyce, 457 Mass. at 265. The Court assumes without deciding that ABM is entitled to enforce Palmarozzo’s covenant not to solicit any ABM client that Palmarozzo worked with and was responsible for while he was employed by ABM. But ABM has not shown that Palmarozzo ever breached this covenant or is likely to do so in the future. The Court credits the undisputed evidence that Palmarozzo will play no role in any sales efforts by CFS. And, as discussed above, it finds that Palmarozzo had nothing to do with the decision by one customer to cancel its contract with ABM in January 2017 and hire CFS to provide janitorial services instead.
2.4. Non-Disclosure Agreement. Although the parties’ non-disclosure agreement remains in force and Palmarozzo remains bound by it, ABM is not entitled
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to a court order enforcing this confidentiality provision because—as discussed above—it has not shown that it is likely to succeed on its claim that Palmarozzo has violated or will violate his obligation not to disclose confidential information belonging to ABM.
3. Relief Sought against Compass Facility Services. Finally, ABM is also not entitled to any preliminary injunctive relief against CFS. ABM claims that CFS tortiously interfered with its contractual relations with Palmarozzo and engaged in unfair and deceptive practices in violation of G.L. c. 93A. ABM has not shown that it is likely to succeed on either of these claims.
The tortious interference claim against CFS is likely to fail because ABM has been unable to muster any evidence that Palmarozzo breached his employment agreement with ABM, as discussed above. See generally Weiler v. PortfolioScope, Inc., 469 Mass. 75, 84 (2014) (proof that defendant knowingly induced third party to break contract is element of claim for tortious interference with contractual relations); JNM Hospitality, Inc. v. McDaid, 90 Mass. App. Ct. 352, 354-355 & 357 (2016) (where landlord did not breach lease, third party cannot be liable for intentionally interfering with lease to detriment of tenant). CFS was free to compete for MediTech’s business so long as it did not do so “through improper motive or means.” Brewster Wallcovering Co. v. Blue Mountain Wallcoverings, Inc., 68 Mass. App. Ct. 582, 608-609 (2007) (reversing jury finding that defendant tortuously interfered with customer relationships).
The claim against CFS under Chapter 93A is likely to fail for the same reason. Since ABM’s claim under c. 93A is based solely on and thus “is wholly derivative of” its claims for breach of contract and tortious interference with contractual relations, and ABM has not shown it is likely to succeed in proving that Palmarozzo ever breached his employment agreement, ABM is unlikely to succeed in proving its claim under c. 93A. See Pembroke Country Club, Inc. v. Regency Savings Bank, F.S.B., 62 Mass. App. Ct. 34, 40-41 (2004) (ordering judgment in favor of defendant); accord, e.g., Macoviak v. Chase Home Mortgage Corp., 40 Mass. App. Ct. 755, 760, rev. denied, 423 Mass. 1109 (1996) (c. 93A claim “necessarily fail[s]” where it “is solely
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based upon … underlying claim for common law” tort and that tort claim fails as a matter of law).
ORDER
Plaintiff’s motion for a preliminary injunction is DENIED.
March 30, 2017
___________________________
Kenneth W. Salinger
Justice of the Superior Court

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Aiguier v. Financial Industry Regulatory Authority, Inc., et al. (Lawyers Weekly No. 12-029-17)

1
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
CIVIL ACTION
NO. 16-02491 BLS I
DUSTIN AIGUIER
v.
FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC., CUSTOMER 1-W, CUSTOMER 1-H, CUSTOMER 2, CUSTOMER 3, CUSTOMER 4-W, and
CUSTOMER 4-H
and
THE SECURITIES DIVISION OF THE OFFICE OF THE SECRETARY OF STATE, intervener
MEMORANDUM OF DECISION AND ORDER ON THE DEFENDANTS’ MOTIONS TO DISMISS
INTRODUCTION
This case, once again, raises the issue of whether, or pursuant to what standard, the Superior Court may adjudicate a claim made by a registered representative of a securities broker-dealer that he is entitled to have records of customer complaints expunged from the data bases maintained by defendant Financial Industry Regulatory Authority, Inc. (FINRA). Plaintiff Dustin Aiguier was formerly a registered representative of New York Life Securities LLC (NYLife). While with NYLife, four complaints were lodged against him by six of his customers (including two sets of spouses) (collectively, the Customers). The plaintiff has filed a complaint which he styles: “Amended Petition for an Order of Expungement of Customer Dispute Information from the Central Registration (CRD System)” (the Complaint). In addition to FINRA, the Complaint also names the Customers as defendants (although the plaintiff seeks no relief with respect to them). The Securities Division of the Office of the Secretary of the
2
Commonwealth has intervened in this action as a defendant on the ground that it is a primary regulator of the securities industry in Massachusetts and is responsible for protecting the public’s interest in access to information concerning customer complaints. The case is now before the court on all of the defendants’ motions to dismiss the Complaint. They move for dismissal asserting that: (a) the Superior Court lacks subject matter jurisdiction (Mass.R.Civ.P. 12(b)(1)) and (b) the Complaint fails to state a claim on which relief may be granted (Mass.R.Civ.P. 12(b)(6)). For the reasons that follow, their motions are allowed.
FACTUAL BACKGROUND
The court will begin by summarizing the relevant factual allegations in the Complaint, assumed to be true for purposes of this motion, as well as relevant information contained in attachments to the Complaint, to the extent necessary to address the issues raised by the defendants’ motions. It will then describe the regulatory framework relevant to this dispute.
The Plaintiff’s relationship to NYLife and the Customer Complaints
The plaintiff was a registered representative of NYLife until June 3, 2015, when he was discharged. Four written complaints against him were submitted to NYLife by his customers, each involved the sale of annuities. NYLife settled each of the claims without an arbitration proceeding being commenced. As required by FINRA rules, it reported the claims and settlements to FINRA, and a description of each claim and the settlement, as well as the plaintiff’s response to each claim, are available to the public on FINRA’s BrokerCheck website. The complaints are reported in BrokerCheck in the following order: the first was received on September 10, 2015 and settled for $ 40,229.37; the second was received on August, 13, 2015
3
and settled for $ 95,961.16; the third was received on July 28, 2015 and settled for $ 12,286.78; and the fourth was received on January 1, 2013 and settled for $ 8,500.
After the plaintiff left NYLife, its representatives solicited customer complaints against him. Three of these complaints were the result of this solicitation, which was in some way related to a pyramid scheme engaged in by a NYLife management employee.
The disclosures regarding the first three claims and settlements are false and misleading.1 As to the fourth, the plaintiff followed all rules and procedures in the sales process, NYLife found that he had not engaged in any wrong doing, and the settlement was made in the interest of good customer relations.
FINRA
FINRA is a private, not-for-profit corporation organized under the laws of Delaware. It is a self-regulatory organization (SRO) registered with the Securities and Exchange Commission (the SEC). Under federal securities law, as an SRO, it plays a central role in the regulation of the securities industry. As applicable to this case, FINRA is required to “establish and maintain a system for collecting and retaining registration information” for representatives of broker-dealers. See 15 U.S.C. §§78o-3(i)(1)(A) and (i)(5). In forms approved by the SEC, FINRA collects, among other items, “information about registered personnel, including customer complaints . . . .” See SEC Release No. 34-71959, 79 Fed. Reg. 22734 (Apr. 17, 2014); see also Desiderio v. Nat’l Ass’n Sec. Dealers, 191 F.3d 198, 201 (2nd Cir. 1999) (“the SEC . . . must approve all [FINRA’s] rules and regulations”). The complaints are recorded in an electronic
1 There is an allegation in the Complaint that a manager at NYLife “improperly recognizes revenues prematurely and then reverses them subsequently.” The court has difficulty understanding how this allegations ties to the plaintiff’s allegations that three of the claims are false and misleading. The complaint contains additional allegations concerning records and reports that allegedly establish that the Customer claims are false or misleading, but these allegations are not material to any issue raised by the motions to dismiss.
4
database called the Central Registration Depository (CRD) which FINRA maintains in compliance with federal securities law and an agreement with the state securities regulators in all 50 states. The federal securities law requires that this complaint information, as well as other data, be available to the public. See 15 U.S.C. § 78o-3(i)(1)(B) (“A registered securities association shall . . . establish and maintain a . . . a readily accessible electronic or other process, to receive and promptly respond to inquiries regarding . . . registration information on its members and their associated persons.”). FINRA fulfills this obligation with an on line internet resource which it calls BrokerCheck. The four customer complaints lodged against the plaintiff, as well as information concerning the reason that NYLife discharged him, are available to the public on BrokerCheck together with the plaintiff’s response to each complaint.
FINRA has promulgated Rule 2080, which addresses the means by which information concerning a broker that exists in the CRD may be expunged. It states, in relevant part:
(a) Members or associated persons seeking to expunge information from the CRD system arising from disputes with customers must obtain an order from a court of competent jurisdiction directing such expungement or confirming an arbitration award containing expungement relief.
(b) Members or associated persons petitioning a court for expungement relief or seeking judicial confirmation of an arbitration award containing expungement relief must name FINRA as an addition party and serve FINRA with all appropriate documents unless this requirement is waived pursuant to subparagraph (1) or (2) below.
(1) Upon request, FINRA may waive the obligation to name FINRA as a party if FINRA determines that the expungement relief is based on affirmative judicial or arbitral finding that:
(A) The claim allegation or information is factually impossible or clearly erroneous;
(B) The registered person was not involved in the alleged investment related sales practice violation, forgery, theft, misappropriation or conversion of funds; or
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(C) The claim, allegation or information is false.
(2) If the expungement relief is based on judicial or arbitral findings other than those described above, FINRA, in its sole discretion and under extraordinary circumstances, also may waive the obligation to name FINRA as a party if it determines that:
(A) The expungement relief and accompanying findings on which it is base are meritorious; and
(B) The expungement would have no material adverse effect on investor protection, the integrity of the CRD system or regulatory requirements.
FINRA has also promulgated Rules 12805 and 13805 which set out the manner in which an arbitration panel is to address matters of expungement that are brought before it. These Rules direct the panel to:
(a) Hold a recorded hearing session (by telephone or in person) regarding the appropriateness of expungement. This paragraph will apply to cases, . . . , even if a customer did not request a hearing on the merits;
(b) In cases involving settlements, review settlement documents and consider the amount of payments made to any party and any other terms and conditions of a settlement;
(c) Indicate in the arbitration award which of the Rule 2080 grounds for expungement serve(s) as the basis for its expungement order and provide a brief written explanation of the reason(s) for its finding that one or more Rule 2080 grounds for expungement applies to the facts of the case;
(d) Assess all forum fees for the hearing session in which the sole topic is the determination of the appropriateness of the expungement request against the parties requesting expungement relief.
See September 2015, FINRA Notice to Arbitrators and Parties on Expanded Expungement
Guidance.
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DISCUSSION
The defendants argue that the Superior Court does not have jurisdiction to adjudicate the plaintiff’s claim. The complaint does not allege the basis for the court’s jurisdiction. It also does not indicate whether the plaintiff’s claim arises under the common law or a state or federal statute or regulation. Rather, following the factual allegations, the Complaint simply asks that the “Court enter an order pursuant to FINRA Rule 2080 expunging Disclosure” of the four Customer complaints against him that are disclosed in BrokerCheck. This seems to presume that this court has subject matter jurisdiction under Rule 2080 to adjudicate a dispute between the plaintiff and FINRA. It does not.
This court addressed this same issue in Hundley v. Financial Industry Regulatory Authority, Inc., CA No. 14-2523-BLS 1 (Sup.Ct., May 15, 2015). In that case the court noted that Rule 2080 was only a procedural directive that told a registered representative to obtain an order from a court of competent jurisdiction, but not the basis on which such a court would adjudicate a dispute between a registered representative and another party concerning whether the registered representative was entitled to expungement.2 Subpart (b) of Rule 2080 only explains the circumstances under which the associated person should, or need not, name FINRA as a party to the case, but offers no guidance as to who the adverse party would be in addition to FINRA, which is only the custodian of records created by the broker-dealer. In Hundley, this court provided the following explanation of why Rule 2080 cannot be the basis for jurisdiction in the Superior Court.
2 Indeed, Rule 2080 seems to assume that, in many instances, arbitrators or a court would have already adjudicated the grounds for expungement before the court order referenced in this rule is sought. See Section (b)(1) “Upon request, FINRA may waive the obligation to name FINRA as a party if FINRA determines that the expungement relief is based on affirmative judicial or arbitral finding that . . . “ and Section (b)(2) “If the expungement relief is based on judicial or arbitral findings other than those described above, . . . .”
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It seems doubtful that FINRA, a private Delaware corporation, could promulgate a rule for its members that had the effect of directing a state court to hold a particular kind of hearing or to make particular types of findings in aid of the administration of FINRA’s data base. Indeed, in cases such as the one before the court where the customer lost interest in pursuing his claim after expressing his displeasure with Hundley to his employer, it is difficult to see how this court could adjudicate the issues necessary to make the type of findings that the arbitration panel is directed to make in Rule 12805. Rule 12805 authorizes the panel to consider a representative’s request for expungement even when the complaining customer has not filed a claim, in order to provide a forum in which a broker could request relief in the nature of expungement [even when the customer was uninterested in the proceeding]. This rule seems to envision an abbreviated telephone hearing, adequate under some circumstances to rule on a request for expungement. The Superior Court generally sits to adjudicate disputes between adverse parties and relies on the adversary system for the presentation of cases. What would the Superior Court do if FINRA waived Hundley’s obligation to name it as a defendant? Could it allow Hundley to file a complaint in which there is no party defendant? Or perhaps Hundley should be required to name his customer as a defendant even though all the customer did was complain to SAI about Hundley’s conduct more than six years ago?
In the present case, NYLife settled with the customers after investigating the claims and no arbitration proceeding was begun. Nonetheless, the result is the same. The customers have no financial interest in the outcome of the claims the plaintiff asserts in the Complaint and may well be disinterested in whether BrokerCheck reports their complaints against him or not. Indeed, the Complaint does not purport to state a claim against any Customer or request any relief from the Customers. The court finds no basis on which they can be included as defendants in this case. It appears that NYLife has paid for an attorney to represent them and move for dismissal of the Complaint, but the court has grave concerns about naming a person as a defendant in a case in which no claim is asserted against him/her, thereby putting that person to the potential expense of retaining counsel to explain the nature of the proceeding and what if anything he/she must do in response to being served with a summons and complaint.
In Hundley, this court then went on to comment on a decision by a Federal District Court in a similar case:
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In In the Matter of Lickless, 2011 WL 2471022 (N.D. Cal., June 22, 2011) the broker filed a complaint in a California state court seeking expungement of information concerning him in the CRD. FINRA removed the case to Federal court. The District Court, however, concluded that “[t]here is nothing in the [Securities] Act, rules or regulations that provide substantive criteria as to when expungement is appropriate. . . .While FINRA Rule 2080 addresses expungement, it only sets forth procedures, not a substantive duty.” Id. at 4. Therefore, the District Court held that the complaint for expungement raised no question of Federal law, and it remanded the case to the California state court for lack of Federal jurisdiction. This court agrees with the Federal court’s conclusion: Rule 2080 creates no legal obligation or duty for the court to enforce.
Since Lickless was decided, three other Federal District Courts have also concluded that Rule 2080 does not create either Federal jurisdiction or give rise to a question of Federal law and therefore, as courts of limited jurisdiction, they lacked jurisdiction to hear cases in which registered representatives sought expungement of customer complaints. See Spalding v. FINRA, 2013 WL 1129396 (N.D. Ga., Mar. 19, 2013); Doe v. FINRA, 2013 WL 6099270 (C.D. Ca., Nov. 19, 2013); Flowers v. FINRA, 2015 WL 9487450 (S.D. Ca., Sept. 24, 2015). While the Massachusetts Superior Court is a court of general jurisdiction, each of these cases supports this court’s view that Rule 2080 does not create any substantive rights for a court to enforce or a private cause of action in which a registered representative could bring an action against some unidentified party, in addition to FINRA, so that his right to expungement could be adjudicated in an adversary proceeding. The court does not have subject matter jurisdiction to decide a case putatively brought under Rule 2080.
Although not mentioned in the Complaint, at oral argument the plaintiff stated that he was not proceeding under a right established by Rule 2080 (or any other statute), but rather under the Superior Court’s general equitable jurisdiction. In Hundley, the court addressed this possible basis for jurisdiction as well, even though it was not raised by the plaintiff in that case. It began by noting, that, in Lickless, after the Federal District Court remanded the case to the California Superior Court, that court dismissed it. The plaintiff registered representative appealed, and the
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Court of Appeal reversed. See Lickliss v. Financial Industry Regulatory Authority, 208 Cal App. 4th 1125 (2012). Again, in Hundley, this court considered the implications of that opinion:
The Court of Appeal held that Lickliss did not only invoke Rule 2080 in requesting expungement, but also the court’s equitable powers. It noted, as had the Federal court, that Rule 2080(b)(1) is a procedural rule that governs when FINRA may waive the requirement that it be a party to court proceedings for expungement. The Court of Appeal commented that the facts alleged in the complaint supported Lickliss’ contention that the customer complaints against him were very old and stale. It then held as follows: “Exercising that right [to seek expungement] under a rule that provides no substantive criteria for delivering the remedy of expungement, Lickliss called upon the court’s inherent equitable powers to weigh the equities favoring expungement against the detriment to the public should expungement be granted. This is enough to pass demurrer.” Id. at 1135. There does not appear to be any record of what happened to Lickliss’ case thereafter.
As it did in Hundley, this court does not find that, under Massachusetts law, a court of general jurisdiction has the inherent equitable authority “to weigh equities favoring expungement against the detriment to the public should expungement be granted.” Indeed, the court has found no Massachusetts case in which a court has ordered expungement of a record maintained by a private entity. If FINRA had created a specific right to expungement in its rules, and then refused to expunge records when a registered representative allegedly had met all of the criteria for expungement, the registered representative might well be able to state a claim in the nature of breach of contract that could be adjudicated in a state court. As explained above, Rule 2080 does not do that.
If the court treats FINRA as if it were a government agency (it is certainly heavily regulated by the SEC), the court’s authority to order expungement, in the absence of a statute expressly prescribing that remedy is very limited. In Vacaro v. Vacaro, 425 Mass. 153 (1997), the Supreme Judicial Court addressed the question of whether a probation record recording the entry of a chapter 209A restraining order could be expunged on the motion of the defendant, when the order was vacated. The SJC reviewed the statutory scheme that required retention of c.
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209A records, but limited public access to them. It then explained that expungement was generally available only in two circumstances: (1) when the statutes that direct that certain records be kept also grant a court the power to expunge them (Id. at 157); and (2) when the government’s retention of a record violates a person’s due process rights.3 As noted, there is no statute, regulation or FINRA rule that directs expungement, rather Rules 2080, 12805, and 13805 only provide a mechanism for arbitration of a registered representative’s request that records be expunged.
Turning to the due process argument, the plaintiff is unable to establish that FINRA (if it constitutes a government actor in this regard) has violated the plaintiff’s due process rights. FINRA is not alleged to have taken any action in this case other than posting on BrokerCheck information that was provided to it by NYLife that reflects that the plaintiff’s customers made written complaints against him and NYLife settled the claims. FINRA played no role in the assertion of the complaints or their resolution. There is no allegation that FINRA took some action to cause NYLife to discharge the plaintiff or to prevent him from acting as a registered representative for some other broker-dealer. At worst, the posting of this information on a publicly available database might impair the plaintiff’s reputation among potential customers. However, proving an injury to reputation is insufficient to establish a due process violation under either the United States Constitution or Article 12 of the Massachusetts Declaration of Rights. As the SJC explained in Vacaro: “The United States Supreme Court has held that a person’s
3 Expungement of Chapter 209A orders has also been ordered where the wrong person was identified as the party defendant. See Commonwealth v. Alves, 86 Mass. App. Ct. 210 (2014). However, in the Complaint, the plaintiff alleges that the Customers were his customers at NYLife. Expungement has also been ordered where a restraining order entered as a result of a fraud on the court. See Commonwealth v. Adams, 65 Mass. App. Ct. 725 (2006). No court has played any role in the posting of the Customer complaints on BrokerCheck. It may also be noted that in the Appeals Court’s recent decision J.S.H. v. J.S., No. 15-P-1607 (March 1. 2017), the Court held that the “argument that the records should be expunged because there was insufficient legal or factual basis for the c. 258 order to have issued is without merit.” Slip Op. 4. That is, at best, what the plaintiff alleges in this case, i.e., the Customer complaints did not have any merit.
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reputation is not a protected liberty interest under the Fourteen Amendment to the United States Constitution unless ‘a right or status previously recognized by state law [is] distinctly altered or extinguished.’ Paul v. Davis, 424 U.S. 693, 711 (1976).” Id. at 160; see also n. 8 (“This analysis is referred to as the ‘stigma plus’ test for determining whether an injury to an individual’s reputation constitutes a deprivation of [protected] liberty or property interest.”). The SJC held that it would follow the teaching of Paul “in deciding whether art. 12 has been violated.” Id. at 161.
At oral argument, the plaintiff argued that he can meet the “stigma plus” test because he is now a registered representative of another broker-dealer, but subject to special supervision under a consent order that he entered into with the Securities Division. The plaintiff’s argument answers itself. He is subject to special conditions under a “consent order” that he agreed to enter into in connection with an adjudicatory proceeding before the Securities Division of the Office of the Secretary of State conducted pursuant to G.L. c. 110A, § 207A, with rights of appeal to the Superior Court under G.L. c. 30A, § 14. Even if that proceeding and consent order are related to any of the Customer complaints reported in BrokerCheck, he is not subject to any limitations in his work as a registered representative because they were reported in BrokerCheck. Indeed, he would have had to disclose those complaints when he applied for association with a new broker-dealer on Form U4 whether or not they were available to the public on BrokerCheck. And, if he wished to litigate the validity of any Customer complaint in that proceeding, he had a forum affording him due process in which to do so.
At argument, the plaintiff also placed great reliance on Police Comm’r of Boston v. Municipal Court of Dorchester Dist., 374 Mass. 640 (1978), but the case is not helpful to him. In that case, the SJC held that “a Juvenile Court [has the power] to issue appropriate orders
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[including expungement] ancillary to their existing statutory and common law jurisdiction.” Id. at 661 and n. 15. It explained that “where a juvenile proceeding has been terminated due to the absence of any evidence of delinquency, expungement would seem justified. . . . The power of a court in such circumstances is not dependent on its possession of general equity powers, but is an incident of and ancillary to the court’s original jurisdiction.” Id. at 662. (Internal citatations omitted, emphasis added) Police Comm’r of Boston does not support the plaintiff’s contention that the Superior Court has some free standing equitable jurisdiction to adjudicate a case in which a party claims that, on balance, equities favor the expungement of a record maintained by a state agency where no statute provides a right to seek expungment under identified standards and there is no due process violation associated with their retention.
Moreover, the plaintiff has an adequate remedy at law. Under FINRA rules 12805 and 13805, the plaintiff has the right to demand arbitration of his claim that the records of the Customer complaints should be expunged. In such an arbitration the adverse party would be NYLife, an entity with an obvious interest in contesting the allegations concerning its conduct averred in the Complaint, but which is not a defendant in this case. A review of the Complaint clearly demonstrates that the party against whom all of the plaintiff’s factual allegations are directed is NYLife, which allegedly solicited three of the Customers to lodge complaints against the plaintiff in connection with a vaguely described pyramid scheme perpetrated by the manager of its Boston office. Of course, the plaintiff cannot name NYLife as a defendant in this action because his application to be a registered representative of NYLife on Form U4, the uniform application for securities industry registration, includes a provision in which the applicant “agrees to arbitrate any dispute, claim or controversy that may arise between me and my firm, or a customer.” A court ought not reach to find equity jurisdiction to adjudicate a claim against
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FINRA, which is only the record custodian, as a means to circumvent the arbitration provisions that govern the resolution of claims that the plaintiff asserts against NYLife.4
Accordingly, this court holds that it does not have jurisdiction in equity to consider the plaintiff’s claim for expungement. And, even if equitable jurisdiction existed, the facts alleged, if true, would not support an order of expungement, and, therefore, the Complaint fails to state a claim.
ORDER
For the foregoing reasons, the defendants’ motions to dismiss are ALLOWED. Final Judgment shall enter dismissing the Complaint.
______________________
Mitchell H. Kaplan
Justice of the Superior Court
Dated: March 10, 2017
4 It may be noted that the plaintiff served the manager of NYLife with a subpoena to appear at a deposition on October 13, 2016, before the Amended Petition for Expungement was even filed on November 2, 2016, well knowing that FINRA would move to dismiss it. The court entered an order that the deposition not go forward until after the motion to dismiss was heard.

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Posted by Stephen Sandberg - April 4, 2017 at 10:24 am

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Taylor v. Moskow, et al. (Lawyers Weekly No. 12-030-17)

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COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
CA No. 15-3649-BLS1
JANE E. TAYLOR, Trustee and Beneficiary of the Jane E. Taylor GST Exempt Trust and the Jane E. Taylor Non-Exempt Trust Derivatively on behalf of COOLIDGE PROPERTIES, LLC and STEARNWOOD PROPERTIES, LLC
vs.
JAMES M. MOSKOW, and others
MEMORANDUM OF DECISION AND ORDER ON
DEFENDANTS’ MOTION FOR ATTORNEYS’ FEES, COSTS, AND EXPENSES
This case is before the court on the defendants’ motion for attorneys’ fees, costs, and expenses under G.L. c. 231, § 6F and G.L. c. 156C, § 57. It follows the court’s order dismissing the case, under M.R.Civ.P 56, because it was clear, on the undisputed facts, that the case was filed well after the expiration of the three year statute of limitations governing claims for breach of fiduciary duty. The untimeliness of this action is explained in two prior decisions: (1) the summary judgment decision entered on June 10, 2016 and (2) an earlier decision, entered on February 5, 2016, in which the court dismissed the plaintiff’s complaint with leave to replead, if the plaintiff could address the shortcomings in her complaint after adequate investigation and in good faith.
As described in greater detail in the two prior decisions, this litigation is, in essence, a dispute between Jane Taylor and her brother James Moskow. The parties’ grandfather acquired two apartment buildings in Brookline which were owned, during the period relevant to this case,
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by two limited liability companies: Coolidge Properties, LLC and Stearnwood Properties, LLC (the LLCs). Taylor and Moscow came to own interests in these LLCs, over time, both directly and through trusts. Moscow, for some period, was the manager of the LLCs. As expressly permitted by their operating agreements, the LLCs contracted with companies that Moscow owned to provide property management and leasing services. Taylor has, apparently for many years, believed that Moscow’s companies were paid too much for services that they provided to the LLCs; although, the complaints and amended complaints filed in this case never actually allege the basis for Taylor’s belief that payments to Moscow’s companies were not at market rates.
As noted in the prior decisions, this case represents the fourth time that Taylor has sued Moscow over these payments. The prior three cases were filed in Federal Court. All were dismissed because Taylor was suing individually for claims that could only be asserted derivatively on behalf of the LLCs. When the Federal Court litigation was unsuccessful, she filed this case on July 6, 2015; in it she purports to assert her claims derivatively on behalf of the LLCs.
The defendants moved to dismiss on a variety of grounds. Oral argument on that motion was convened on February 3, 2016. At that argument, the court reviewed with Taylor’s counsel many of the apparent shortcomings in her derivative complaint; among them was the fact that the payments from the LLCs to her brother’s companies, which are the subject of her complaint, were made between January, 2009 and November, 2011. Moreover, emails and correspondence between Taylor’s accountant and Moscow, and then Taylor’s attorney and Moscow’s attorney, in December, 2011 and January, 2012, appeared to make clear that Taylor’s concern with the amount of the payments was already very much at issue at that time. These emails and
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correspondence demonstrate that Moscow sent bookkeeping ledgers for the LLCs to the accountant in 2011, and Taylor’s attorney (who was then the partner of Taylor’s present counsel of record) was already then aggressively alleging that the LLCs had overpaid for services and demanding more documents. The court expressed its doubt that Taylor’s action was timely filed. It, nonetheless, allowed Taylor to replead, but only if she could, in good faith, allege facts that would support a finding that the cause of action accrued after July 6, 2012.1
Thereafter, Taylor, through her counsel, filed two more amended complaints and an affidavit purportedly addressing the timeliness issue; however none of them contained any factual allegations that, when viewed in the light most favorable to Taylor, could support a finding that her cause of action accrued after January, 2012, if not months earlier. There were also two more hearings at which Taylor’s attorney, in effect, acknowledge that it appeared that the case was untimely, but asked for more time to review documents and speak with his client. The court granted these requests, but repeatedly expressed its concerns regarding Taylor’s good faith in pursuing claims which clearly appeared to be time barred and the time and expense to which Moscow was being put. It warned that filing documents that lacked any factual foundation could lead to sanctions.
Finally, the court dismissed Taylor’s claims. Because the court referenced emails and correspondence to and from Taylor’s lawyer and accountant in December, 2011 and January, 2012, in its decision, the court treated the motion to dismiss as a motion for summary judgment. It issued its memorandum of decision and order on June 10, 2016.
1 The court also expressed its concern that Taylor’s accountants and lawyers had the LLCs’ financial records since late 2011, and there was no evidence that anyone had reviewed them to determine whether the amounts paid her brother’s companies were in excess of the amounts that would have been paid to unrelated parties for management and leasing services.
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Although not necessary for the resolution of this motion, the court notes that in August, 2016, represented by new counsel, Taylor moved for leave to file an appeal of the court’s judgment of dismissal more than thirty days after judgment entered. That motion was denied. Taylor then sought relief in the Appeals Court under Mass.R.App.P 14(b), and that was denied, as was a motion for reconsideration of the denial. Taylor has apparently appealed the denial of her Rule 14(b) motion.
DISCUSSION
This case is a paradigm example of the type of litigation that G.L. c. 231, § 6F was intended to address. The court finds that Taylor’s efforts to continue this action in the face of correspondence and emails between her accountant and lawyer and Moscow (and his attorney), the authenticity of which cannot be challenged, which (a) addressed exactly the same issues as those raised in this litigation, and (b) were exchanged three and one half years before this case was filed, “were wholly insubstantial, frivolous and not advanced in good faith.” See Hahn v. Planning Board of Stoughton, 403 Mass. 332, 337 (1988) (Examples of an absence of good faith are claims that were “interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.”)
Moscow notes that, including the Federal Court litigation and counting amended complaints, Taylor has filed eight complaints against Moscow, none of which has survived a motion to dismiss. He asks to recover all of his attorneys’ fees and expenses incurred in connection with this litigation. The court finds that request overbroad.
The Federal Court litigation was never dismissed on its merits, but rather because Taylor was asserting claims in her own name that could only be asserted by the LLCs. It is true that Taylor’s initial Superior Court complaint seemed to assert that it was a breach of fiduciary duty
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for Moscow to cause the LLCs to contract with companies affiliated with him, although related party contracts of this kind were expressly permitted by their operating agreements. Nonetheless, inferentially, the complaint also alleged that the fees paid were excessive. Although, it may well be that Taylor had no reasoned basis for believing that, the court clearly cannot make such a finding on the record before it. It dismissed Taylor’s complaint because it was manifestly untimely. The court does not find that filing a complaint six months after the expiry of the period of limitations constitutes a basis to award fees under § 6F.
However, at the February 5, 2016 hearing on the motion to dismiss, the court directed Taylor’s counsel to the fact that the LLC’s payments to the Moscow companies had ended more than three and a half years before this complaint was filed. It appeared that the amount of the payments were already the subject of heated exchanges with Taylor’s accountants and lawyers in December, 2011, and counsel’s former partner appeared already to have the LLCs financial records at that time. In its written decision allowing the motion to dismiss, the first grounds for dismissal (among several others) set out in the decision was the statute of limitations. While granting leave to replead, the court cautioned counsel that Taylor should only file an amended complaint after careful investigation, and if facts supporting a delay in the accrual date of the claim for breach of fiduciary duty could be alleged in good faith. It is clear that Taylor continued to file amended complaints and affidavits seeking to prolong this litigation without any good faith basis for doing so.
Accordingly, all of the attorneys’ fees incurred by Moscow after February 5, 2016, to the date judgment entered dismissing this case, may be recovered. And, the court finds that the time expended and hourly rates shown on the billing records submitted in support of this motion were
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reasonable. The court awards $ 45,153.50 to Moscow for fees and expenses incurred for this period.
The court also holds that Moscow may recover the fees and expenses incurred in preparing this § 6F motion. The court finds that the reasoning of Stratos v. Department of Pub. Welfare, 387 Mass. 312, 325 (1982), in which the SJC awarded fees incurred in moving for an award of attorneys’ fee under 42 U.S.C. § 1988, is equally applicable to motions filed under § 6F. See also Haddad v. Wal-Mart Stores, Inc. (No. 2), 455 Mass 1024 (2010) ( Under G.L. c. 151B, § 9, plaintiff was entitled to an award of “reasonable attorney’s fees for work required in order to recover her attorney’s fees.”) The court finds that $ 5,345.00, which does not include hours spent at the hearing on the § 6F motion or in preparing a supplemental memorandum requested by the court, is reasonable.2
Taylor argues that even if a § 6F award were otherwise appropriate, under the circumstances presented by this case, it should be denied as untimely. A final judgment dismissing this case was entered on June 14, 2016 and this § 6F motion was not filed, under Rule 9A, until December 28, 2016, although, it appears that the motion was served on Taylor’s attorney on November 30, 2016.
In Powell v. Stevens, 92 Mass. App. Ct. 87, 92 n.7 (2007), the Appeals Court observed: “[6F] contemplates a separate evidentiary hearing held promptly after the relevant finding, order, verdict, ruling, or judgment, as is inferable from the language of the statute, which, although not requiring the motion to be made within a particular time, does require the judge to state specific facts and reasons on which any finding that the claims were wholly insubstantial, frivolous, and
2 In his motion, Moscow also requested fees incurred in addressing Taylor’s efforts to obtain leave to file a late appeal in the Appeals Court. At oral argument, Moscow’s attorneys acknowledged that such fees could only be awarded by the Appeals Court and withdrew that part of the motion.
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not advance in good faith is based. . . . [T]he necessary time for such a hearing procedure comes immediately after the primary event of a verdict, ruling, or order. At that moment, the total circumstances of the case are full and fresh in the mind of the judge. The hearing can proceed efficiently and in continuity with the underlying proceeding. The judge can enter the required findings promptly.” In this case, Moscow waited approximately five months to bring his § 6F motion. In general, this delay appears longer than necessary and not in keeping with the teaching of Powell. However, under the circumstances presented by this case, the delay has neither prejudiced Taylor nor burdened the court. The court will therefore not deny the motion as untimely.
No evidentiary hearing was necessary to rule on this § 6F motion. The evidence establishing that the statute of limitations had run well before the case was filed was documentary: the emails and correspondence generated between December, 2011 and January, 2012, described above. For her part, Taylor provided no countervailing evidence supporting any theory delaying the date on which the claim of breach of fiduciary duty accrued. The court also remembered its admonitions to Taylor’s lawyer about the consequences of prolonging the case without a good faith, factual basis to do so. The court’s memory was aided by Moscow submitting transcripts of the hearings concerning this issue. Finally, during the period August through November, 2016, Moscow was engaged in responding to Taylor’s unsuccessful efforts to obtain leave to file an untimely appeal from this court’s judgment dismissing her case.3
3 Having awarded fees under G.L. c. 231, § 6F, the court has not considered Moscow’s arguments that he is also entitled to fees under G.L. 156C, § 57.
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ORDER
For the foregoing reasons, Defendants’ motion for an award of attorney’s fees, costs and expenses under G.L. c. 231, § 6F is ALLOWED in the amount of $ 50,498.50. Final Judgment for the defendants and against Jane Taylor in that amount shall enter.
_________________________
Mitchell H. Kaplan
Justice of the Superior Court
Dated: March 10, 2017

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Posted by Stephen Sandberg - April 4, 2017 at 6:50 am

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