Opinion
16-P-495
03-31-2017
ATLANTIC CAPES FISHERIES, INC. & another v. Francis J. TAPPER.
MEMORANDUM AND ORDER PURSUANT TO RULE 1:28
After a jury-waived trial, judgment entered holding Top Quality Seafood and Shellfish, LLC (Top Quality), liable in the amount of $2,064,455 for surf clam products and scallops purchased from Atlantic Capes Fisheries, Inc. (ACF). ACF and its wholly owned subsidiary, Fairtide Acquisitions, LLC (FAL), have now appealed, claiming that the trial judge erred by refusing to hold Francis J. Tapper, a founder and owner of Top Quality, jointly and severally liable for Top Quality's debt pursuant to a provision in a contract (Tapper agreement) entitling him to purchase surf clams and other products from ACF/FAL at preferred pricing. We disagree and conclude that the provision at issue does not create a joint and several liability because it unambiguously confers a benefit (preferred pricing) on Tapper, not a payment obligation. Thus, to the extent that ACF/FAL acquiesced to Tapper's assignment of that benefit and chose to sell products to Top Quality at preferred pricing, neither of which it was obligated to do, there is no basis in the provision for holding Tapper personally liable for payment of Top Quality's debt. As we further conclude that the trial judge did not abuse his discretion by declining to extend the terms of the restrictive covenants under the Tapper agreement until Top Quality's debt is paid, or err in holding Tapper liable for only those costs and attorney's fees incurred by ACF/FAL in seeking to enforce compliance with those restrictive covenants, the judgment is affirmed.
For convenience, we refer to the plaintiffs collectively as "ACF/FAL."
According to the trial court docket, Tapper and Top Quality also filed notices of appeal. For his part, Tapper has abandoned his appeal and appeared here solely in response to ACF/FAL's appeal. As for Top Quality, ACF/FAL informs us that it subsequently filed for bankruptcy protection. While no formal notice of a bankruptcy filing appears in the record, no appeal from Top Quality is before us.
Background . The facts pertinent to the issues on appeal are not in dispute. ACF is in the business of harvesting and marketing various seafood products, with a focus on surf clams and sea scallops. In 2010, ACF, through its subsidiary FAL, purchased all of the assets of Fairtide Shellfish, Ltd. (FSL), a New Bedford based surf clam shucking business where Tapper had been employed for approximately twelve years. At the time of the sale, Tapper chose not to work for ACF/FAL but, rather, to start his own seafood business. To that end, he proceeded to negotiate the Tapper agreement with ACF/FAL and FSL, pursuant to which he was allowed to operate a seafood business for surf clam products so long as those products were purchased from ACF/FAL. Tapper entered into and executed the Tapper agreement, which is dated December 21, 2010, in his personal capacity. Top Quality, which Tapper formally organized as a Massachusetts limited liability corporation on July 9, 2010, and of which he was both a member and a manager, was neither a party nor a signatory.
Tapper also held an option on a thirty-three percent ownership interest in FSL and, pursuant to a separate written agreement with FSL's owner, was paid $230,000 out of the proceeds from the sale to ACF/FAL.
FAL was described at trial as a "tax disregarded" subchapter S corporation created to act as ACF's nominee relative to the purchase of FSL's assets. FAL was a primary party to the Tapper agreement, while ACF executed it for the purpose of guaranteeing FAL's performance. The trial judge concluded, and the parties do not dispute, that ACF was an intended beneficiary of the promises made by Tapper, as well as the party that would be selling product to Tapper, under the agreement.
Under the Tapper agreement, certain of FSL's assets were transferred to Tapper, while ACF/FAL and Tapper exchanged five year "noncompetes" and other restrictive covenants. At issue here are the following covenants contained in § 3(b) of the agreement:
"Tapper or any entity to which he is affiliated agrees that for the five year term of the non-compete he shall not shuck [F]ederal or [S]tate surf clams, shuck [F]ederal or [S]tate bait clams, purchase fresh or frozen surf clam shellfish, ocean quahogs or surf clam shucked products for sale or distribution to any of his customers from anyone other than [ACF/FAL]. ... [ACF/FAL] shall sell to Tapper ... those [S]tate and [F]ederal surf clams and ocean quahogs and, fresh and frozen shucked meat and bait clam products at prevailing market price charged to the similarly sized customers of [ACF/FAL]" (emphasis supplied).
After the sale to ACF/FAL and the execution of the Tapper agreement, Tapper began to operate Top Quality as a seafood business. Over the next approximately four and one-half years, Top Quality purchased an estimated $15 million worth of seafood product from ACF/FAL. ACF/FAL's invoices for these transactions were directed to Top Quality, and Top Quality was identified as the debtor on ACF/FAL's internal ledger. Further, it was Top Quality that paid ACF/FAL for the purchases.
During 2012, Top Quality began falling behind in its payments and by the end of 2013 already owed ACF/FAL approximately $1.6 million. In late 2014, ACF/FAL's lender, which had been expressing ongoing concerns regarding Top Quality's persistent receivable, urged ACF/FAL to secure a personal guaranty from Tapper. When ACF/FAL approached Tapper with that request, however, he demurred.
In April of 2015, ACF/FAL initiated the present action, claiming that Top Quality and Tapper were jointly and severally liable under the Tapper agreement for a receivable that had by then grown to nearly $1.9 million. ACF/FAL also claimed that Tapper and Top Quality were violating the restrictive covenants in the Tapper agreement by shucking surf clams in competition with ACF/FAL and purchasing surf clam shellstock and shucked surf clam meats from third parties. After a hearing, a first judge issued a preliminary injunction, prohibiting further violations of the restrictive covenants. Following expedited discovery, the case proceeded to trial before a second judge, resulting in the judgment that is now on appeal.
Discussion . 1. Tapper's liability for Top Quality's debt . ACF/FAL first argues that the trial judge erred by concluding that Tapper was not jointly and severally liable with Top Quality under § 3(b) of the Tapper agreement for the $2,064,455 that Top Quality owed for unpaid product. "Because the interpretation of the terms of a contract or agreement is a pure question of law, we exercise de novo review over this issue." Buchanan v. Contributory Retirement Appeal Bd ., 65 Mass. App. Ct. 244, 247 n.5 (2005). Our task is not a heavy one, however, because, as ACF/FAL concedes, the relevant terms of § 3(b) are unambiguous. The parties, therefore, are bound by the plain and ordinary meaning of those terms, see Siebe, Inc . v. Louis M. Gerson Co ., 74 Mass. App. Ct. 544, 550 (2009), which provide no basis for holding Tapper personally liable for Top Quality's debt.
The judgment consisted of $1,763,826 owed for surf clams and surf clam products, $143,456 for fresh scallops, and $157,173 for frozen scallops.
Tapper agreed in the first sentence of § 3(b) that for the five year noncompete period he (1) would not shuck Federal or State surf and bait clams, and (2) would purchase fresh or frozen surf clam shellfish, ocean quahogs, or surf clam shucked products for sale or distribution to his customers only from ACF/FAL. In return, ACF/FAL agreed in the second sentence of § 3(b) to "sell to Tapper ... those [S]tate and [F]ederal surf clams and ocean quahogs ..., fresh and frozen shucked meat and bait clam products at prevailing market prices charged to the similarly sized customers of [ACF/FAL]" (emphasis supplied). In short, the second sentence of § 3(b) confers a benefit on Tapper, namely, preferred pricing from ACF/FAL to the extent that he chooses to sell any of the restricted products to his customers. It does not impose an obligation on Tapper to purchase any of those products. Nor does it impose an obligation on ACF/FAL to sell the restricted products, at preferred pricing or otherwise, to any other person or entity. Finally, nothing in the clear and unequivocal language of § 3(b) suggests that Tapper agreed to be personally liable for any resulting debts if ACF/FAL chose to sell the products at preferred pricing to another person or entity, including Top Quality.
While the first sentence of § 3(b) provides that "Tapper or any entity to which he is affiliated agrees [to the stated restrictions]," (emphasis supplied), no entity to which Tapper was affiliated, including Top Quality, was a party to the Tapper agreement. Counsel for ACF/FAL conceded at oral argument that Tapper was the sole party bound by the noncompete provision of the agreement.
Nonetheless, ACF/FAL maintains that Tapper effectively assigned to Top Quality his right to preferred pricing under § 3(b), but that there was not a corresponding novation between Tapper and ACF/FAL relieving Tapper of the obligation to pay for any products that Top Quality purchased pursuant to that right. See Pagounis v. Pendleton , 52 Mass. App. Ct. 270, 273 (2001) ( "Without the agreement of the parties to an extinguishment of the prior contract and to a substitution of the new contract, there can be no novation"). That assertion, however, assumes that an obligation to pay arises under the pertinent provisions of § 3(b). It does not. Again, the second sentence of § 3(b) confers a benefit, not an obligation, on Tapper. The consideration for that benefit is Tapper's agreement to be bound by the restrictive covenants in the first sentence. That is the full extent of the contractual exchange in those two sentences. See Northrup v. Brigham , 63 Mass. App. Ct. 362, 367 (2005) (essential elements of a contract are "offer, acceptance, and an exchange of consideration or meeting of minds"). Neither of those sentences nor, for that matter, any other provision in the Tapper agreement speaks to, or creates, an obligation to pay for product. Thus, even if Tapper did assign his preferred pricing rights, there was no corresponding need for a novation.
Any obligation to pay only arose when the parties engaged in subsequent transactions. For example, if Tapper had personally ordered and received any of the restricted products from ACF/FAL, he would have become liable to pay at the time of each transaction. As it was, it was Top Quality, not Tapper, that ordered and received such products. Indeed, ACF/FAL, for approximately four and one-half years, voluntarily (1) took orders from and delivered product to Top Quality, not Tapper; (2) invoiced Top Quality, not Tapper; (3) identified Top Quality, not Tapper, as the debtor on its internal ledger; and (4) received payments from Top Quality, not Tapper. Only in late 2014, after four years of these exclusive dealings with Top Quality, did ACF/FAL, at the urging of its lender, approach Tapper requesting that he provide a personal guaranty. Tapper, however, refused. We therefore see no basis for holding Tapper jointly and severally liable with Top Quality for Top Quality's failure to pay its invoices from ACF/FAL.
The Statute of Frauds requires a signed writing "[t]o charge a person upon a special promise to answer for the debt, default or misdoings of another." See G. L. c. 259, § 1.
2. Equitable extension of the restrictive covenants . At the close of evidence, ACF/FAL requested that the trial judge exercise his equitable powers to extend the term of the restrictive covenants in the Tapper agreement until such time as Top Quality's debt was paid. The trial judge declined to do so and held that the restrictive covenants would expire on schedule at the end of the five year period, on December 21, 2015. ACF/FAL now claims this was error. Again, we disagree.
We assume without deciding that, under appropriate circumstances, a court has the equitable authority to extend the term of a restrictive covenant when the restricted party is in breach. With that said, such a decision, involving "imposition of equitable remedies," would rest with the trial judge, subject to review only for an abuse of discretion. Cavadi v. DeYeso , 458 Mass. 615, 624 (2011), quoting from Demoulas v. Demoulas , 428 Mass. 555, 589 (1998). The trial judge here cited several reasons for his decision, including that (1) the five year term was already on the outside limit of what is reasonable for a restrictive covenant, (2) ACF/FAL sat on its rights for three years while Top Quality's debt continued to grow, and (3) ACF/FAL failed to secure a personal guaranty from Tapper. The trial judge's reasoning was sound, and we see no abuse of discretion.
ACF/FAL has not cited any cases, and we are not aware of any Massachusetts appellate cases, approving of such an exercise of equitable authority. But cases from other jurisdictions suggest that that authority may exist. See, e.g., Levitt Corp . v. Levitt , 593 F.2d 463, 469 (2d Cir. 1979) ; Overholt Crop Ins. Serv. Co . v. Travis , 941 F.2d 1361, 1372 (8th Cir. 1991) ; Dunning v. Tallman , 244 Neb. 1, 10 (1993).
3. Tapper's liability for attorney's fees . In the Tapper agreement, the parties agreed that "the substantially prevailing party" in any action necessary to enforce the agreement would be entitled to recover reasonable costs and attorney's fees. As a "substantially prevailing party," at least in part, ACF/FAL submitted an application seeking $48,247.92 in costs and fees. The trial judge found the amount of the request reasonable and ordered (1) Tapper to pay the twenty-five percent ($12,061.98) attributable to ACF/FAL's claim for breach of the restrictive covenants, and (2) Top Quality to pay the remaining seventy-five percent ($36,185.94) attributable to the claim for the $2,064,455 in unpaid invoices. Now, ACF/FAL argues that Tapper should have been held liable for the full $48,247.92. As we have already concluded, however, Tapper is not jointly and severally liable for the $2,064,455 in unpaid invoices. In other words, ACF/FAL did not prevail against Tapper on that claim. Accordingly, it is not entitled under the plain language of the Tapper agreement to recover the costs and fees incurred in connection with that claim from Tapper.
ACF/FAL has not disputed the twenty-five percent and seventy-five percent attribution of costs and fees between the two claims. In addition, because Top Quality has not pursued its appeal, we have no occasion to decide whether ACF/FAL was entitled to fees from Top Quality pursuant to the Tapper agreement.
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Judgment affirmed.