Opinion
21-P-161
12-06-2021
LAU MASSACHUSETTS BUSINESS TRUST & others v. James C. BENDER, cotrustee, & another.
MEMORANDUM AND ORDER PURSUANT TO RULE 23.0
The counterclaim defendants (defendants), the closely held Lau Massachusetts Business Trust (Lau trust) and its officers and directors, appeal from a judgment, after a jury trial, in favor of minority shareholder the Eugenie L. Bender Revocable Trust - Marital Share (Bender trust), on direct and derivative claims for breach of fiduciary duty and breach of the implied covenant of good faith and fair dealing. They also appeal from posttrial rulings in favor of the Bender trust. Concluding that the Bender trust has derivative standing, that the judge did not abuse his discretion in allowing an equitable allocation of the derivative recovery, and that the damages award is supported by the evidence, we affirm.
The Bender trust owned about ten percent of the Lau trust.
1. Judgment notwithstanding the verdict or new trial. a. Standard of review. "The denial of a motion for judgment n.o.v. presents a question of law reviewed under the same standard used by the trial judge." Dakin v. OSI Restaurant Partners, LLC, 100 Mass. App. Ct. 92, 95 (2021). "In reviewing the denial of a motion for judgment notwithstanding the verdict ... the question is whether ‘anywhere in the evidence, from whatever source derived, any combination of circumstances could be found from which a reasonable inference could be drawn in favor of the plaintiff.’ " Beliveau v. Ware, 87 Mass. App. Ct. 615, 616 (2015), quoting Zaniboni v. Massachusetts Trial Court, 81 Mass. App. Ct. 216, 217 (2012). In doing so, "we view the evidence presented in the light most favorable to the plaintiff and disregard the evidence favorable to the defendant." Salvi v. Suffolk County Sheriff's Dep't, 67 Mass. App. Ct. 596, 598 (2006). The decision on a motion for remittitur, Clifton v. Massachusetts Bay Transp. Auth., 445 Mass. 611, 623 (2005), or a motion for a new trial "rests in the sound discretion of the judge and we disturb this ruling only if there has been an abuse of that discretion." O'Brien v. Pearson, 449 Mass. 377, 384 (2007).
b. Derivative standing. The defendants argue that the derivative damages verdict must be set aside because the defendants’ mid-litigation, unilateral redemption of the Bender trust's shares stripped the Bender trust of standing to bring derivative claims. In general, "a party who loses his interest in a corporate entity loses standing to pursue derivative claims," even where the loss of interest is involuntary. Billings v. GTFM, LLC, 449 Mass. 281, 291 (2007). Accord Mendelsohn v. Leather Mfg. Corp., 326 Mass. 226, 237 (1950). There is, however, an exception where the plaintiff has a right in equity because the involuntary redemption was fraudulent. Billings, supra at 292-293. The Supreme Judicial Court has not determined whether any fraudulent redemption suffices for the exception, or only fraud "specifically aimed at eliminating derivative claims." Id. at 293 n.25.
The defendants did not challenge the Bender trust's derivative standing at trial. Although they raised the issue at the summary judgment stage, they did not do so again until after a judgment was entered against them. We assume, without deciding, that the issue was preserved.
We need not resolve this unanswered question, because the trial judge found that the "tactical and unlawful" "forced redemption was a litigation tactic, was not in good faith, and violated the Lau defendants’ fiduciary duties." This built on the jury's determination that the redemption was a violation of the Lau trust's fiduciary duty.
Both determinations were well supported by the record. Testimony at trial revealed that, although the defendants purportedly redeemed the shares because the Bender trust failed to provide evidence that it had filed a subchapter S election, the Bender trust had filed the election and the defendants never asked for proof of that election. The price offered for the shares was $6,936, grossly less than the value of the shares, which was in excess of one million dollars. See Demoulas v. Demoulas Super Mkts., Inc., 424 Mass. 501, 553 (1997) (in transaction found to be breach of fiduciary duty, discrepancy between price and value indicative of wrongdoing). When the plaintiffs suggested a meeting to discuss alternative ways of meeting the defendants’ concerns, the defendants ignored their request.
Contrary to the claim of the defendants, nothing in Billings even suggests that former shareholders, like the Bender trust here, with a right in equity created by a fraudulent transfer are required to seek the remedy of restoration of their relationship with those who defrauded them to maintain their derivative claims. Rather, Billings instructs that former shareholders with an equitable interest retain their derivative claims, at least where, as here, their shareholder interests were extinguished through a fraudulent redemption intended to eliminate those derivative claims. See Billings, 449 Mass. at 292-294 & n.25. Accordingly, the judge properly denied the defendants’ motion for a judgment notwithstanding the verdict or, in the alternative, a new trial and remittitur, based on derivative standing.
c. Damages for investment decisions. A plaintiff who proves a breach of fiduciary duty may recover damages reflecting "the loss of those advantages ... that [the plaintiff] would have been able to attain or enjoy" were it not for "the defendants’ breach or interference." One to One Interactive, LLC v. Landrith, 76 Mass. App. Ct. 142, 148 (2010). We apply a "highly deferential" standard of review in "assessing the evidence supporting a jury's award of damages," Spinosa v. Tufts, 98 Mass. App. Ct. 1, 10 (2020), "affirm[ing] ... [the award] unless the court below committed an abuse of discretion ... amounting to an error of law." 468 Consulting Group, LLC v. Agritech, Inc., 99 Mass. App. Ct. 758, 769 (2021).
Where the parties advance competing methods of calculating damages, "[t]he sole issue before us in deciding whether to uphold the jury's damage award is whether [the plaintiff] presented sufficient evidence to permit the jury to find that the amount of ... [damages] had been proven to a reasonably approximate certainty." Brewster Wallcovering Co. v. Blue Mountain Wallcoverings, Inc., 68 Mass. App. Ct. 582, 611 n.65 (2007). "[A]n element of uncertainty as to the amount of damages does not bar their recovery." Coady v. Wellfleet Marine Corp., 62 Mass. App. Ct. 237, 245 (2004), quoting Stuart v. Brookline, 412 Mass. 251, 256-257 (1992).
Here, the parties provided conflicting expert testimony regarding the derivative damages caused by the defendants’ mismanagement, with each side's expert explaining what data that expert included in, and omitted from, the analysis. The jury heard evidence that dividends received should be considered and evidence that they should be ignored, as the defendants "effectively spent everything."
That "[the defendants’] theoretically correct position [did] not ... win the day" is not grounds for reversal. Brewster Wallcovering Co., 68 Mass. App. Ct. at 610-611 & n.65 (affirming damages award despite skepticism as to whether "[expert's] explanation made economic sense" and without determining if "[expert's] calculations ... were correct). Contrast Bernier v. Bernier, 449 Mass. 774, 787 (2007) (trial judge erred in adopting valuation of husband's expert witness because method "would clearly produce an arbitrary result"). The trier of fact was "entitled to make a reasoned choice from the differing opinions of the experts" and "to accept the testimony of [the plaintiff's] expert financial analyst." Rubin v. Murray, 79 Mass. App. Ct. 64, 78-79 (2011). In the end, the trust's consolidated financial statements showed that the net assets over liabilities of the trust decreased from $30,514,829 on December 31, 2011, to $13,942,124 on December 31, 2018, in a time period where the trust paid out no more than $5,038,915 in equity distributions, redemptions, and repurchases. Damages of $11.5 million were abundantly supported by the evidence at trial, and thus the trial judge acted within his discretion in denying judgment notwithstanding the verdict, or a new trial and remittitur.
2. Equitable relief for the derivative judgment. "Courts have broad equitable powers to fashion remedies for breaches of fiduciary duty in a close corporation." Brodie v. Jordan, 447 Mass. 866, 871 (2006). "[E]quitable remedies are flexible tools to be applied with the focus on fairness and justice." Michaud v. Forcier, 78 Mass. App. Ct. 11, 16 (2010), quoting Demoulas v. Demoulas, 428 Mass. 555, 580-581 (1998). We review the "choice of a particular remedy ... for abuse of discretion." Rubin, 79 Mass. App. Ct. at 80, quoting Brodie, 447 Mass. at 871.
Although derivative damages account for wrongs to the corporation, they are awarded "for the benefit of all the stockholders in the company." Crowley v. Communications for Hosps., Inc., 30 Mass. App. Ct. 751, 767 (1991). A judge may compel payments to shareholders "[i]f the defendants have denied the plaintiff any return on her investment while ‘drain[ing] off the corporation's earnings’ for themselves." Brodie, 447 Mass. at 874, quoting Donahue v. Rodd Electrotype Co. of New England, Inc., 367 Mass. 578, 588-589 (1975). Accord Rubin, 79 Mass. App. Ct. at 69, 80-81 (upholding remedy requiring defendants to pay to corporation sum of money that would be redistributed among shareholders). This is especially true where the defendant, "as a shareholder ... may stand to benefit" from the damages award. Beninati v. Borghi, 90 Mass. App. Ct. 556, 567 n.11 (2016).
Because the defendants emphasize that they do not challenge the allowance of a pro rata distribution of derivative damages to minority shareholders other than the Bender trust, our review is confined to whether the inclusion of the Bender trust was within the judge's discretion. See Smith v. Kelley, 484 Mass. 111, 127 (2020).
Of course, "the remedy for a breach of fiduciary duty must be proportional to the breach," "neither grant[ing] the minority a windfall nor excessively penaliz[ing] the majority." Brodie, 447 Mass. at 871, 873. The remedy should "place the injured party in the same position as he would have been but for the breach," O'Brien, 449 Mass. at 389, not "in a significantly better" one. Brodie, supra at 871-872.
The defendants continue to rely on their fraudulent redemption of the Bender trust's interest to argue that the Bender trust cannot share in the award to the Lau trust. This is simply another way of trying to circumvent the teaching of Billings that a fraudulent redemption undertaken to deprive a plaintiff of its derivative claims is ineffective. Because of the defendants’ fraud, the Bender trust retained its derivative claims through its right in equity, including its equitable right to share in the remedy. Any other conclusion would mean that the defendants’ fraud successfully extinguished the Bender trust's derivative claim.
The defendants’ claim that the Bender trust is receiving a windfall is without merit. The jury calculated that the Bender trust's shares were worth $1,269,288 in September 2016. Those shares, however, would have been worth substantially more had it not been for the defendants’ mismanagement of the Lau trust in violation of their fiduciary duty. Limiting the Bender trust's recovery to $1,269,288 would result in a substantial shortfall in damages. Thus, a ten percent share of the derivative damages award will not give the Bender trust "a higher ... value from the court than [it] could ever have realized as a continuing shareholder." Bernier, 449 Mass. at 788, quoting Delaware Open MRI Radiology Assocs. v. Kessler, 898 A.2d 290, 328 (Del. Ct. Ch. 2006). On the contrary, it will imitate the financial growth that the Bender trust and other minority shareholders "reasonably expected, but [have] not received." Brodie, 447 Mass. at 871.
Similarly, even had the defendants requested that the jury distinguish between the damages before and after September 2016, there would be no basis to limit the Bender trust's recovery to damages prior to the fraudulent redemption. No equitable principle supports the defendants’ view that they can unilaterally cut off a shareholder's derivative recovery by fraudulently redeeming the shares for the purpose of extinguishing those derivative claims. That the Bender trust now is willing to accept the defendants’ unlawful dissolution of their relationship does not require the Bender trust to accept it nunc pro tunc to a time of the defendants’ choosing. Accordingly, the judge acted within his discretion in ordering a payout that will fully compensate the Bender trust for the defendants’ multiple breaches of their fiduciary duty.
The Bender trust requests an award of attorney's fees and costs relating to this appeal. Pursuant to G. L. c. 156D, § 7.46, "[o]n termination of the derivative proceeding the court may ... order the corporation to pay the plaintiff's reasonable expenses, including counsel fees, incurred in the proceeding if it finds that the proceeding has resulted in a substantial benefit to the corporation." See Crowley, 30 Mass. App. Ct. at 767 (ordering payment of plaintiff's attorneys using funds from derivative damages award). Attorney's fees are warranted in this case because the Bender trust is defending an $11.5 million derivative damages award that will be distributed to minority shareholders, thus conferring a substantial benefit to the Lau trust. Accordingly, the Bender trust may file an application for appellate attorney's fees and expenses within fourteen days of the issuance of the rescript, and the defendants shall have fourteen days within which to respond. See id. See also Fabre v. Walton, 441 Mass. 9, 10-11 (2004) (describing procedure on award of appellate attorney's fees and costs).
Corrected and amended judgment on the jury verdict dated July 10, 2020, affirmed.