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12‑P‑261                                        Appeals Court

MILTON C. WEILER, JR.  vs.  PORTFOLIOSCOPE, INC., & others.^[1]

No. 12‑P‑261.

Suffolk.     October 10, 2012.  ‑  February 1, 2013.

Present:  Grasso, Fecteau, & Agnes, JJ.

Secured Transactions.  Uniform Commercial Code, Secured creditor, Secured transaction, Good faith.  Corporation, Stock.  Contract, Performance and breach, Implied covenant of good faith and fair dealing, Interference with contractual relations.  Conversion.  Consumer Protection Act, Unfair or deceptive act.  Uniform Fraudulent Transfer Act.

Civil action commenced in the Superior Court Department on February 17, 2009.

The case was heard by Margaret R. Hinkle, J.

Keith P. Carroll for the defendants.

Curtis Clark Pfunder for the plaintiff.

FECTEAU, J.  This is an appeal by the defendants, PortfolioScope, Inc. (PortfolioScope), Kevin B. Kimberlin, and Joseph T. Whelihan, from a judgment in favor of Milton C. Weiler, Jr., after a jury-waived trial in the Superior Court.^[2]  The principal question in this case arises from the application of a stock option purchase and sale agreement between PortfolioScope and Weiler.  The defendants do not challenge the judge’s decision that PortfolioScope breached the agreement with the plaintiff to pay five percent of the proceeds from a settlement related to a pending lawsuit between PortfolioScope and iFlex Solutions Limited (the iFlex litigation).  The total damages, as found by the judge, were $ 471,000.^[3]  The judge determined that the agreement gave Weiler priority of payment over a secured creditor of PortfolioScope, Kevin Kimberlin Partners, L.P. (KKP), an investment company directed by the defendant Kimberlin.  The defendants contend that a misinterpretation of the agreement coupled with a misapplication of secured transactions principles resulted in the judge’s erroneous conclusions that:  (1) PortfolioScope breached the covenant of good faith and fair dealing with Weiler; (2) Kimberlin knowingly and intentionally interfered with PortfolioScope’s performance under Weiler’s contracts; (3) all defendants converted funds properly belonging to Weiler; (4) all defendants violated G. L. c. 93A, § 11, awarding Weiler double damages and attorney’s fees; (5) all defendants violated G. L. c. 109A, the Uniform Fraudulent Transfer Act (UFTA); and (6) all defendants conspired against Weiler.  We agree with the defendants and reverse.

1.  Background.  In the 1980′s, Weiler developed certain financial portfolio software, in conjunction with forming two entities known as Computer Aided Decisions (CAD) and CAD Research.  In 2000, Spencer Trask & Co. (Spencer Trask), a venture capital firm effectively controlled by Kimberlin, acquired Weiler’s entities and thereafter merged them into PortfolioScope, with Weiler receiving consideration in the form of cash and stock options in the new entity.^[4]  Weiler was president and chief operating officer of PortfolioScope from January, 2000, until May, 2002.  After he resigned those positions, he was retained as an independent consultant to PortfolioScope through the period in question.

Due to significant financial difficulties, by 2001 PortfolioScope had obtained a series of loans and had executed various financing agreements, the net effect of which rendered KKP a creditor of PortfolioScope.  Although the value of PortfolioScope assets continued to decline, PortfolioScope anticipated a sizable recovery in connection with a claim that it maintained against iFlex Solutions, Ltd., for the theft of trade secrets of PortfolioScope’s software (the iFlex litigation).

In 2001, Weiler sold his stock options to PortfolioScope in exchange for various percentages of certain expected revenue streams, including proceeds relating to the iFlex litigation, after legal fees were paid.  When PortfolioScope settled the iFlex litigation, however, Kimberlin, as the principal of KKP, directed that PortfolioScope wire the entirety of the resulting proceeds to a Spencer Trask brokerage account and to Weiler’s successor as a senior executive of PortfolioScope, the defendant Whelihan.

The defendants aver that each transfer of proceeds from the iFlex settlement made by PortfolioScope was lawful and at the direction of a secured creditor in satisfaction of a prior debt.  Moreover, they argue that as a debtor, PortfolioScope had no authority to give Weiler a priority claim over that of a secured creditor^[5] even if PortfolioScope was thereby unable to otherwise satisfy the legitimate claims of other creditors, such as Weiler.  While the defendants’ actions exposed PortfolioScope to a breach of its contract with Weiler, their actions did not otherwise subject the defendants to liability.  We summarize the facts as found by the judge.

In early 2000, an entity closely affiliated with Spencer Trask acquired both CAD entities and Weiler’s software, eventually combining the entities and changing their name to PortfolioScope.  Ninety-five percent of the ownership of Spencer Trask is effectively controlled by Kimberlin, through “a very complex web of identities.”^[6]  At the relevant times, Kimberlin was Spencer Trask’s chairman of the board and only director.^[7]  Kimberlin also is the general partner of KKP.^[8]

In 2001, PortfolioScope started to experience financial difficulty; at that time, its only assets were the “Global Portfolio Valuation” software designed by Weiler and certain claims for theft of trade secrets.  In July, 2001, PortfolioScope executed a demand note in favor of Wachovia Bank, N.A. (Wachovia), for the amount of $ 4.01 million, together with a security agreement in all of PortfolioScope’s property, including deposit accounts and cash.^[9]  To further secure the performance of PortfolioScope, this note was guaranteed by KKP, in whose favor PortfolioScope executed a security agreement.  This security agreement expressly stated that PortfolioScope, as a debtor, had no authority to further encumber the collateral in which KKP maintained a security interest.^[10]  In July, 2002, having paid PortfolioScope’s indebtedness to Wachovia in full, KKP acquired by assignment all of Wachovia’s rights and interests in connection with PortfolioScope’s obligations under the note and security agreement.^[11]  By the time PortfolioScope settled the iFlex litigation in 2008, PortfolioScope’s indebtedness to KKP amounted to between $ 7 and $ 8 million.^[12]

In January, 2002, Weiler resigned as PortfolioScope’s president, and the defendant Whelihan took over the position.  On February 13, 2002, Weiler and PortfolioScope entered into a stock option purchase and sale agreement (agreement), which was amended on October 21, 2002 (amendment).^[13]  The effect of the agreement is at the heart of this controversy.  The agreement requires that PortfolioScope shall pay Weiler, in exchange for Weiler’s sale of his options to PortfolioScope, five percent of its net proceeds received in connection with the iFlex litigation.  As used in the agreement, the terms “net proceeds” or “net recovery” mean gross proceeds less legal fees due PortfolioScope’s counsel.

On October 21, 2008, the iFlex litigation was settled in principle, with PortfolioScope to receive a lump-sum payment of $ 10 million, which was received by its law firm on November 7, 2008.  After deducting legal fees in the approximate amount of $ 1.8 million, the firm wired the net recovery of approximately $ 8.2 million to PortfolioScope on November 12, 2008;^[14] at Kimberlin’s direction, Whelihan then transferred more than $ 7.7 million of the settlement proceeds to Spencer Trask.^[15]

Furthermore, on November 17, 2008, at the direction of Kimberlin, Whelihan disbursed $ 500,000 of the iFlex proceeds to himself, through a wire to a money market fund in his wife’s name.^[16]  Weiler was not paid, nor was he informed by Kimberlin or Whelihan of their actions; instead, as found by the judge, he was “misled . . . for weeks about his payment, preventing him . . . from taking other action to secure payment.”  However, the judge specifically found that Weiler was not a secured creditor of PortfolioScope.

2.  Discussion.  The judge concluded that Weiler had a preferred claim on five percent of the actual settlement proceeds from the iFlex litigation, by virtue of the agreement.  As a result, the judge ruled that the transfer of the settlement proceeds by the defendants to others without paying Weiler from those funds amounted not only to a breach of contract by PortfolioScope, but also violated its covenant of good faith and fair dealing, UFTA, and c. 93A, and constituted tortious acts, including conversion and improper interference with contractual rights.

The defendants contend that the agreement did not give Weiler a preferred claim on the actual settlement proceeds but rather an unsecured general claim against PortfolioScope; consequently, they argue that Weiler’s claim for five percent of the actual settlement proceeds was not superior to the security interest of KKP and that the judge’s decision to the contrary was a combination of a misinterpretation of the contract and a misapplication of the law of secured transactions.  As it has overarching importance to the resolution of most aspects of this controversy, we begin with the interpretation of the contract.

a.  The contract.  The interpretation of a contract raises only a question of law.  Cody v. Connecticut Gen. Life Ins. Co., 387 Mass. 142, 146 (1982).  The application of contract language to known facts also presents a question of law.  Kelleher v. American Mut. Ins. Co., 32 Mass. App. Ct. 501, 503 (1992).  “In interpreting a contract, [t]he objective is to construe the contract as a whole, in a reasonable and practical way, consistent with its language, background, and purpose.  The words of a contract must be considered in the context of the entire contract rather than in isolation.”  Rubin v. Murray, 79 Mass. App. Ct. 64, 75-76 (2011) (quotations and citations omitted).  See MacDonald v. Hawker, 11 Mass. App. Ct. 869, 873 (1981), quoting from Crimmins & Pierce Co. v. Kidder Peabody Acceptance Corp., 282 Mass. 367, 375 (1933) (“The intent of the parties must be gathered from a fair construction of the contract as a whole and not by special emphasis upon any one part”).

In connection with her interpretation, and as pertinent to the issue, the judge relied on the following language from the agreement:

“[T]he [c]ompany shall pay to Weiler as follows:  [f]ive percent of the net proceeds (or net recovery) to the [c]ompany in connection with any claims by the [c]ompany against Citicorp (and its affiliates) [the iFlex litigation] related to copyright infringement and/or theft of confidential information and trade secrets.  The term net proceeds or net recovery as used in this [s]ection shall mean gross proceeds less legal fees of the [c]ompany’s counsel.  (Emphasis added)”

From this, the judge concluded that “under the plain language of the . . . agreement, PortfolioScope was required to pay Weiler [five percent] of the $ 10 million (the ‘gross proceeds’), less the legal fees.  The . . . agreement does not mention any creditor, secured or unsecured, having priority over Weiler except counsel.”

Whether the judge erred in interpreting this contract, and in her determination of the defendants’ liability on all claims other than breach of contract, depends upon the resolution of two subsidiary issues:  first, did the agreement give Weiler an enforceable claim against the actual settlement proceeds rather than a general claim against PortfolioScope’s assets; and second, if Weiler’s claim is enforceable, did it take priority over KKP’s security interest in the same.^[17]  We conclude that the language of the agreement does not support an affirmative finding on either issue.

The plaintiff contends that the plain and unmistakable meaning of the agreement was that he would be paid from the actual settlement proceeds.  We, however, do not view the language as conveying such intent.  Examining this particular payment obligation as part of the larger agreement and not in isolation, our view is that this payment was simply one of several parts of the consideration due Weiler for the sale of his stock options back to the company — a context that has not been afforded its proper place in the judge’s analysis.  Even if this view of the contract is not mandated, there is no plainly worded intention to give Weiler five percent of the actual settlement proceeds.  While this might lead to a discussion in which the apparent ambiguity is resolved, it is unnecessary to do so here given another compelling basis for our conclusion.

The defendants contend, and the judge found, that Weiler’s rights in the settlement proceeds were only those of an unsecured general creditor of PortfolioScope.^[18]  Moreover, as between Weiler and PortfolioScope, and apart from the security interest of KKP, there is no dispute that the iFlex cause of action was the property of PortfolioScope.  When PortfolioScope’s rights in the litigation were transformed by settlement and liquidated into cash, the proceeds, while still the property of PortfolioScope, became subject to any valid security interests therein, thus requiring a determination as to which party, KKP or Weiler, maintained priority of payment.

The judge found and ruled that KKP had, with respect to PortfolioScope, a valid and enforceable security interest in, inter alia, “all proceeds of any assets and cash, up to the full amount of the guarantees given by KKP.”^[19]  These rights were initially established by the security agreement and UCC statement filed in January, 2001, and subsequently purchased by KKP, which then perfected its security interest by filing a financing statement in August, 2009.  Because Weiler had no rights as a statutory lienholder or as a secured party, the judge interpreted the agreement as granting Weiler an assignment or ownership interest in five percent of the actual settlement funds.  The judge ruled that the assignment to Weiler of five percent of the settlement proceeds had priority over the secured interest of KKP in the same.  We do not view the agreement as contemplating or expressing this intent.

While “[n]o particular form of words or of conduct is necessary to constitute . . . an assignment[,] ‘[a] valid assignment may be made by any words or acts which fairly indicate an intention to make the assignee the owner of a claim.’”  Kagan v. Wattendorf & Co., 294 Mass. 588, 596 (1936), quoting from Cosmopolitan Trust Co. v. Leonard Watch Co., 249 Mass. 14, 19 (1924).  The agreement utilized no words demonstrating an intent to give Weiler an ownership interest in either the cause of action or the resulting proceeds.

Moreover, this result fails to account for PortfolioScope’s lack of authority to encumber collateral previously securitized in favor of KKP.  An assignee can acquire only the rights that the assignor had the right and authority to give.  See Chartrand v. Chartrand, 295 Mass. 293, 296 (1936) (“An assignment is a transfer in whole or in part of the rights of the assignor”).  See also Grise v. White, 355 Mass. 698, 701 (1969).  Pursuant to section 9 of KKP’s security agreement (see note 10, supra), PortfolioScope maintained no authority to assign any rights with respect to the collateral.  For a priority dispute to have been properly resolved in Weiler’s favor, therefore, KKP must have subordinated its security interest in the settlement proceeds to the interest of Weiler; Weiler does not aver this to be the case, nor does the record otherwise support such a finding.  See G. L. c. 106, § 1-209 (“An obligation may be issued as subordinated to payment of another obligation of the person obligated, or a creditor may subordinate his right to payment of an obligation by agreement with either the person obligated or another creditor of the person obligated”).

Furthermore, even assuming that the agreement operated as an assignment and that PortfolioScope was within the scope of its authority in so granting an assignment to Weiler, Weiler’s rights in the proceeds still cannot take priority over the rights of KKP in the same; the resolution of priority conflicts is governed by the general rule “first in time, first in right”.^[20]  See Middlesex Sav. Bank v. Johnson, 777 F. Supp. 1024, 1027 (D. Mass. 1991).  See also H. Lemelman, Manual on Uniform Commercial Code § 9:65 (revised 3d ed. 2012) (“Subject to certain special rules with regard to ‘proceeds’ (§ 9-102(a)(64)) of particular types of collateral, . . . [G. L. c. 106,] § 9-322(b)(1) continues the earlier rule found in former [G. L. c. 106,] § 9-312(6).  Even though a security interest cannot attach until the debtor has rights in the collateral, under § 9-203, § 9-322(b)(1) provides that the timing of the priority in the original collateral will determine the priority in the ‘proceeds’ thereof”).  The security interests acquired by KKP were created prior to any rights or interests that Weiler had as a putative assignee.  Therefore, since Weiler was an unsecured creditor, whatever the nature of his interest in the settlement proceeds, it was not superior to KKP’s prior security interest in those same assets.

b.  Covenant of good faith and fair dealing.  The judge ruled that PortfolioScope breached the covenant of good faith and fair dealing when it paid Whelihan $ 515,000 from the settlement proceeds, finding Whelihan to be “neither a secured creditor nor otherwise entitled to these funds.”^[21]  She concluded that “[t]here is simply no tenable argument that the [five percent] agreement permitted PortfolioScope to make any payment to Whelihan before paying Weiler.”  To remain consistent with her view of the contract, the judge was required to conclude that the payment to Whelihan was not a payment directed by KKP, a secured creditor, to be paid by PortfolioScope as KKP’s debtor, but rather a payment made at the unfettered discretion of PortfolioScope to satisfy some interest of its own.  This was error.  See, e.g., G. L. c. 106, § 9-405(a) (upon receipt of notification that an amount due has been assigned, “the account debtor may discharge its obligation by paying . . . the assignee and may not discharge the obligation by paying the assignor”).

c.  Interference with contractual relations by Kimberlin.  The judge ruled that Kimberlin intentionally interfered with Weiler’s right to receive five percent of the settlement proceeds when he “authoriz[ed] Whelihan’s receipt of $ 515,000 of the proceeds, and Weiler has shown that Kimberlin’s interference was with improper means and ill motive.”

“To prevail on a claim of tortious interference with a contract, a plaintiff must establish (1) he had a contract with a third party; (2) the defendant knowingly induced the third party to break that contract; (3) the defendant’s interference, in addition to being intentional, was improper in motive or means; and (4) the plaintiff was harmed by the defendant’s actions.  Where the defendant is a corporate official acting in the scope of his corporate responsibilities, a plaintiff has a heightened burden of showing the improper motive or means constituted ‘actual malice,’ that is, ‘a spiteful, malignant purpose, unrelated to the legitimate corporate interest.’”  Psy-Ed Corp. v. Klein, 459 Mass. 697, 715-716 (2011), quoting from Blackstone v. Cashman, 448 Mass. 255, 260-261 (2007) (quotations and citation omitted).

As explained in Blackstone, in observing that the term “individual official” was not expressly defined in connection with the application of “the actual malice standard,” it was not intended that “individual official[s] of the employer” be narrowly construed; instead, cases have “treat[ed] the term expansively[,]” applying this more burdensome standard not only to high level corporate officers, but directors involved in management, as well, including shareholder-directors actively involved in management.  Blackstone, supra at 266.  See King v. Driscoll, 418 Mass. 576, 587 (1994).  Furthermore, Blackstone provides: “nothing in these precedents requires a defendant to make a threshold showing of day-to-day involvement in order to be treated as a ‘corporate official’ entitled to the protections of the actual malice standard when his actions are ‘directed toward corporate purposes.’”  Blackstone, supra (citation omitted).

Here, Kimberlin’s role as chairman of the board and sole director of Spencer Trask evinced his pervasive control of the ownership of that company which in turn owned ninety percent of PortfolioScope — thereby triggering the application of the actual malice standard in assessing whether Kimberlin tortiously interfered with Weiler’s rights under the agreement.  Indeed, the judge found that Kimberlin had authority to resolve, on behalf of PortfolioScope, the iFlex litigation by agreeing to the $ 10 million dollar settlement.  Under these circumstances, Weiler bore the burden of proving actual malice on the part of Kimberlin.  He did not do so, nor did the judge hold him to that standard.

Even if it cannot be said that Kimberlin actively engaged in the management of PortfolioScope, reversal is still required.  In authorizing Whelihan to wire money to an account in his wife’s name, Kimberlin did not induce PortfolioScope to break a contract with Weiler; rather, Kimberlin’s direction to Whelihan constituted an action well within the purview of KKP’s authority as a priority creditor.  Under the instant circumstances, this is not tortious interference with the agreement.  “Because the defendant’s purpose was the legitimate advancement of its own economic interest, that motive is not ‘improper’ for purposes of a tortious interference claim.  That the plaintiff may have suffered a loss as a consequence of the defendant’s pursuit of its own interest is a by-product of a competitive marketplace; it does not render the defendant’s effort tortious.”  Pembroke Country Club, Inc. v. Regency Sav. Bank, F.S.B., 62 Mass. App. Ct. 34, 39 (2004) (citation omitted).

d.  Conversion against all defendants.  The judge concluded “that the defendants, acting in concert, converted Weiler’s rightful portion of the iFlex settlement to their own use.”  “Conversion consists of a wrongful exercise of dominion or control over the personal property of another.”  Cahaly v. Benistar Property Exch. Trust Co., 68 Mass. App. Ct. 668, 679 (2007), S.C., 451 Mass. 343 (2008).  As discussed above, neither the iFlex cause of action nor the proceeds from its settlement were the property of Weiler, and therefore, the defendants could not properly be considered as having converted them.

e.  Violation of G. L. c. 93A, § 11.  In assessing c. 93A, § 11, liability the judge determined that Kimberlin and Whelihan misled, hindered, and delayed Weiler from taking steps to insure or secure his right to payment from the settlement proceeds.^[22]  We do not disagree with the judge’s conclusions that the defendants’ actions, from the time that the settlement proceeds were collected until the time that Weiler filed suit, were intended to delay Weiler and lead him into a false sense of security, especially given the advantage that the defendants had in their knowledge of the security interests of KKP.^[23]  Such conduct can amount to unfair and deceptive actions.  “Failure to disclose a material fact that causes a party to act differently with respect to a transaction than it otherwise would have has been held sufficient to support a finding of c. 93A liability in a business context.”  Brewster Wallcovering Co. v. Blue Mountain Wallcoverings, Inc., 68 Mass. App. Ct. 582, 607 n.57 (2007), and collected cases.

However, the dispute here arose out of a private transaction between PortfolioScope and Weiler in his role as a former employee and options holder of the company.  See Psy-Ed Corp. v. Klein, 459 Mass. at 719 (dispute between the defendant, a former employee and shareholder of the plaintiff company who, by counterclaim, alleged a violation of G. L. c. 93A, § 11, and the plaintiff involving, inter alia, a settlement agreement in which the plaintiff reacquired all of the defendant’s shares in the company in exchange for certain payments, was not commercial in nature where “despite the complex entanglement of the parties . . . , the context in which they were operating was a single business enterprise”).  See also Grand Pac. Fin. Corp. v. Brauer, 57 Mass. App. Ct. 407, 416 n.7 (2003), and cases cited (noting cases “holding G. L. c. 93A inapplicable to disputes involving a single entity, such as a partnership or close[] corporation”); Zimmerman v. Bogoff, 402 Mass. 650, 651, 662-663 (1988) (two shareholders in close corporation); Szalla v. Locke, 421 Mass. 448, 451-452 (1995) (partnership); Newton v. Moffie, 13 Mass. App. Ct. 462, 466-468 (1982) (partners in management of trust property).

Moreover, in this case there is a complete absence of “the distinguishing mark for G. L. c. 93A applicability, i.e., interactive business transactions but with independent business entities.”  Grand Pac. Fin. Corp. v. Brauer, supra.  “The development of the statute . . . suggests that the unfair or deceptive acts or practices prohibited are those that may arise in dealings between discrete, independent business entities, and not those that may occur within a single company.”  Manning v. Zuckerman, 388 Mass. 8, 12 (1983).  As was stated in Lantner v. Carson, 374 Mass. 606, 607-608 (1978), “as broadly and expansively as the statute applies to the regulation of business practices, G. L. c. 93A is not available where the transaction is strictly private in nature, and is no way undertaken in the ordinary course of a trade or business” (citation omitted).

The agreement and any breach thereof constitute “‘an internal business dispute,’ . . . outside the ‘conduct of any trade or commerce’ within the meaning of G. L. c. 93A.”^[24]  Cacciola v. Nellhaus, 49 Mass. App. Ct. 746, 756 (2000), quoting from Kurker v. Hill, 44 Mass. App. Ct. 184, 191 (1998).  Thus, G. L. c. 93A, § 11, does not apply here.^[25]

f.  Violation of the Uniform Fraudulent Transfer Act.  Weiler claimed that PortfolioScope’s transfers, at Kimberlin’s direction, to Spencer Trask and Whelihan were fraudulent; the judge agreed, concluding that the payments were made with actual intent to hinder, delay, or defraud Weiler, citing G. L. c. 109A, § 5 (UFTA).^[26]  While acknowledging that the payment of one creditor in preference over another is not fraudulent, even if such payment renders it impossible for the debtor to pay other creditors, the judge nevertheless ruled that PortfolioScope did not act in good faith, but rather paid KKP to benefit Kimberlin and Whelihan, insiders of PortfolioScope, at Weiler’s expense.

In determining that the transfers at issue were fraudulent, the judge emphasized the following facts:  the transfers were made to PortfolioScope insiders; the transfers involved substantially all of PortfolioScope’s assets, rendering it insolvent; Kimberlin and Whelihan attempted to conceal the transfers from Weiler, repeatedly delaying any response to Weiler’s demands for the money owed to him under the agreement; KKP did not perfect its security interest until after Weiler commenced litigation, never disclosing to Weiler the preferred position of a secured creditor that prevented payment to him; and PortfolioScope received no value in exchange for the transfers to Whelihan.  The judge explicitly did not credit the defendants’ uncorroborated assertion that PortfolioScope owed Whelihan payment for past services.

However, as discussed above, the transfers were made at the instruction of KKP, a secured creditor and holder of a demand note.  The transfers were made with fair consideration, since PortfolioScope received the full value of the transferred amounts credited to its debt.  Moreover, the transfers to KKP did not render PortfolioScope insolvent:  there was a judicial hold placed upon a portion of the iFlex settlement funds pursuant to a related proceeding against PortfolioScope.