Opinion
No. 95-0392B
March, 1998
FINDINGS OF FACT, RULINGS OF LAW AND ORDER ON CLAIMS FOR DECLARATORY JUDGMENT INTRODUCTION
This case arises from disputes among six brothers regarding the ownership and management of a family business established by their father. The brothers and their various business entities have filed numerous claims, counterclaims, and third party claims, among which are claims for declaratory judgment establishing the ownership of the stock in the Felix A. Marino Co., Inc. ("FAMCO"). Those claims, and only those claims, were tried before me, jury-waived, on February 9-13, 1998. After consideration of all evidence presented, memoranda of law, and arguments of counsel, I make the following findings of fact, conclusions of law, and order.
FINDINGS OF FACT
1. Felix A. Marino and his wife,.Ann Frances Marino, were the parents of nine children, six sons and three daughters.
2. Sometime substantially prior to 1973, Felix established a business performing paving of roads and related services. He operated the business as a sole proprietorship. His business became successful, in part due to unique paving formulas he developed.
To avoid confusion, I will refer to the various members of the Marino family involved in this case by their first names.
3. Felix's hope and expectation, beginning from the establishment of the business and continuing through the end of his life, was that the business would be operated as a family business, that all six of his sons (but not his daughters), would join him in the business and make their living through it, and that ultimately his six sons would share ownership of the business equally.
4. Felix was effective and successful in the operational aspects of the business, but was neither sophisticated in nor attentive to matters of record keeping, corporate structure and form, financial arrangements, and the like, nor was he inclined to follow professional advice on a regular basis in these areas. His sons have largely followed the same pattern.
5. The six sons of Felix and Ann Frances Marino, and their dates of birth, are as follows: Robert, 9/15/45; Mark, 6/24/50; Frederick ("Fred"), 11/29/53; Peter, 11/23/55; David, 11/25/57; Stephen, 4/19/61.
6. Each of Felix's sons began working in the business during his youth, and joined the business on a full-time basis upon completion of his schooling. Each son began working as a laborer, and thereafter assumed progressively increasing supervisory and management responsibility. Each began at a relatively low rate of pay, and received increases thereafter.
7. As of late 1972, the two oldest sons, Robert and Mark, then ages 27 and 22, were employed full-time in the business. Robert had been working full-time since 1968; Mark had joined full-time in 1972. The four younger sons, then ages 19, 17, 15, and 10, were still students. At that time Felix consulted with Attorney Timothy Davern and Accountant Clarence Hammond regarding estate planning. He expressed to them his intention that his six sons eventually share equally in ownership of the business. With the advice of Davern and Hammond, Felix decided to incorporate the business as a first step toward implementing this intention.
8. A second step in the tentative plan formulated at that time among Felix, his attorney, and his accountant, was the adoption of a "buy/sell agreement," under which the corporation would agree to purchase Felix's shares from his estate upon his death. The effect of that arrangement would be that full ownership of the corporation would pass to those of Felix's sons who held shares in the corporation at the time of Felix's death.
9. Attorney Davern prepared draft articles of organization. In accord with his usual practice, he included in his draft a provision, captioned "Restrictions on Sale of Common Stocks," making any transfer of stock subject to a right in the corporation of first refusal, at a price to be set by arbitration. Davern sent the draft articles and related documents to Felix for his review. In response, Felix instructed Davern to delete the stock transfer restriction, and Davern did so.
10. On March 6, 1973, Davern filed with the secretary of state articles of organization, signed by Felix, Robert and Mark as incorporators, establishing the Felix A. Marino Co., Inc. ("FAMCO"). The original articles of organization, as submitted to the secretary of state, designated the corporation's directors as Felix, Robert, and Mark, and its officers as Felix, President and Treasurer, Robert, Vice President, and Mark, Clerk.
11. Upon its incorporation, FAMCO issued 100 shares of stock: 52 shares to Felix, and 24 shares each to Robert and Mark. No record exists of any stock certificates reflecting these shares, and it is unclear whether any stock certificates ever existed. From the time of its incorporation until 1992, FAMCO did not hold formal directors or shareholders meetings. It made decisions by consensus among whichever family members were active in the business at the time, without formal recording or ratification.
12. The articles of organization, as executed by the incorporators and filed with the secretary of state, contained no restrictions on the transfer of stock. The corporation never adopted any such restriction thereafter. Except as indicated in paragraph 54 hereof, the shareholders never entered into any agreement among themselves regarding transfer of stock.
13. The "buy/sell agreement" contemplated in Felix's initial discussions with his accountant and attorney was never adopted. Although Attorney Davern considered such an agreement advisable, and made that view known to Felix, Felix never directed him to draft such a document, and he never did so.
14. Attorney Davern continued to provide legal services to Felix and FAMCO through approximately 1978 or 1979. At times during that period he engaged in further discussions with Felix and his accountant regarding estate planning and related matters, but Felix did not during that period take any further steps to implement any estate plan.
15. Felix's third son, Frederick, began working for FAMCO full-time in 1975. Peter, the fourth son, began working for FAMCO full-time in 1978. David, the fifth son, joined in approximately 1979, and Stephen, the sixth, joined in 1980 or 1981.
16. Sometime in the mid- to late-1970's, Felix and some of his sons met with a representative of the estate planning department of Shawmut Bank to discuss possible means of reallocating ownership of FAMCO during Felix's lifetime. Among the possibilities discussed was an arrangement whereby Felix would transfer his stock to his sons but would remain as chairman and retain veto power over decisions of the directors. Robert raised objections to that proposal. No plan was adopted or implemented at that time.
17. By 1981, the value of FAMCO had increased substantially, so that any transfer of its stock would have significant tax consequences. At about that time, Felix identified a business opportunity involving the distribution of a new product for use in sealing pavement cracks ("rejuvenation"), to be applied by the use of a pressurized dispenser Felix had developed. Felix and his sons then formulated a plan to transfer part of the value of FAMCO to the sons through the establishment of other corporations, to be owned by the sons, that would do business with FAMCO. With Felix's assent and support, Robert undertook to form the first of these entities, which would focus on the business of rejuvenation. He engaged attorney Michael Barry for this purpose, and provided Attorney Barry with information and instructions.
18. On September 23, 1981, Maribro Company, Inc., was incorporated by the filing of articles of organization with the secretary of state. Robert and his family members intended the name as a short version of "Marino brothers." Robert was the sole incorporator. The directors were Robert, Frederick, Mark, Felix and Peter. Robert was President, Frederick was Treasurer, and Mark was Clerk. No evidence was presented that anyone contributed any capital to Maribro; I infer that no one other than FAMCO did so. Upon its incorporation, Maribro issued 100 shares of stock: 70 to Robert, and 10 each to Mark, Frederick, and Peter. On instructions from Robert, Attorney Barry prepared the first four stock certificates to reflect the issuance of these shares. However, the certificates were never signed by the officers or delivered to the shareholders. Between 1981 and 1984, Maribro functioned as a shell corporation. It had no employees and virtually no assets, but performed contracts through subcontracts with FAMCO, using FAMCO's personnel and equipment. Robert and Mark, both of whom remained employed full-time with FAMCO, performed the functions necessary to Maribro's corporate operations, and Robert submitted tax returns on its behalf, listing himself as 70% owner.
19. In late 1981 or early 1982, FAMCO purchased workers' compensation insurance through broker Paul Balboni. Thereafter, Balboni undertook to sell life insurance to the principals of FAMCO. He met with Felix, Robert, and Mark. They discussed creation of a stock redemption plan, under which the corporation would purchase insurance on the lives of its shareholders, for use in the purchase of their shares from their estates upon their death, under a buy/sell agreement. They also discussed a cross-purchase agreement, under which the shareholders would purchase insurance on each other's lives, for use to buy each other's stock upon death. They also discussed "key man" insurance — that is, insurance owned by the corporation on the lives of its key personnel, for use to replace the capacity of those personnel to obtain credit, bring in business, and the like. Balboni repeatedly recommended the adoption of a stock redemption agreement or cross-purchase agreement, and urged Felix to consult an attorney to prepare documents to establish such arrangements. Felix never did so, and no such documents were ever drafted or executed. Through Balboni, FAMCO purchased insurance, payable to the corporation, on the lives of Felix, Robert, and Mark, in 1982, 1984, and 1988. Balboni noted the purposes of the insurance on the applications, variously, as "key man," "future buy-out," and "stock red." His notations reflected his understanding, at various times, of Felix's yet-unrealized intentions to make some arrangements for the use of the insurance proceeds for the eventual purchase or transfer of his shares.
Mark, who was at that time keeping FAMCO's books, noted "Key Man Ins. Felix, Robert, Mark," on a 1984 premium check. I find, contrary to Robert's argument, that Mark did so at the time he wrote the check, based on his knowledge at that time that no agreement existed for the purchase of stock, so that insurance proceeds received upon the death of any of the principals would be available for use at the discretion of the corporation.
20. Early in 1985, Robert secured an opportunity with the City of Baltimore to demonstrate the FAMCO pavement sealing process under a "Test and Evaluation" contract. The contract was in the amount of $700,000 for the first year, with the opportunity to renew for subsequent years. Felix preferred to keep FAMCO's business in Eastern Massachusetts. Accordingly, Felix and Robert agreed that Robert would pursue the Baltimore opportunity through Maribro, and that Maribro would also take on primary responsibility for business FAMCO had been conducting in Connecticut. Robert at that time ceased regular work for FAMCO, and began devoting the bulk of his time to Maribro, working primarily in Baltimore. He continued to provide some consulting services to FAMCO, and continued to draw a salary and benefits from FAMCO. Mark remained at FAMCO, but continued to maintain Maribro's books and records at FAMCO's Peabody offices. At Felix's direction, Stephen, the youngest brother, joined Robert to work for Maribro in Baltimore, but after several weeks he became homesick and returned to FAMCO. The Baltimore contract was extended for 1996, with funds committed for that year in the amount of $900,000.
Prior to that time, Peter had taken primary responsibility for FAMCO's Connecticut operations.
He also continued to provide his personal credit, along with that of other family members, for the benefit of FAMCO. On November 27, 1985, Robert and his wife, along with Felix, Ann Frances, and Mark, all signed as indemnitors a General Agreement of Indemnity, under which the National Grange Mutual Insurance Company provided FAMCO with bonding insurance required for municipal contracts.
21. In accord with his and Felix's intention that Maribro would take over FAMCO's work in Connecticut, Robert undertook to establish a Connecticut corporation, with the intention to merge Maribro into that corporation. On June 10, 1985, Robert filed documents with the Connecticut secretary of state to establish Marino Brothers of New England, Inc. Sometime thereafter, Robert learned that Connecticut officials had rejected his filing because the name of the corporation was too similar to that of a pre-existing entity. Accordingly, he later changed the name of the corporation to Marino Brothers of NE, Inc. These two Connecticut corporations, in sequence, were in all relevant respects the successors to Maribro. Felix and his other sons viewed Maribro and its successors, to the extent they had an awareness of the successors, as effectively part of FAMCO. They continued to consider the principal purpose of Maribro and its successors to be to effectuate a long-term transfer of value from Felix, as the principal owner FAMCO, to Robert, Mark, Fred, and Peter, who owned, respectively, 70%, 10%, 10%, and 10% of Maribro. Robert, however, who was devoting the bulk of his time to the Baltimore and Connecticut contracts, was increasingly coming to view Maribro and its successors as his own enterprise, independent of FAMCO.
Hereinafter, the Court will refer to the Connecticut corporation, whatever it may have been called at the particular time in issue, as "Marino Brothers."
22. In connection with the work in Baltimore, Maribro needed financing for trucks and other equipment. Accordingly, Robert consulted Eric Loth, a loan officer at Shawmut Merchants Bank in Salem. Loth referred Robert to accountant William Toth for the purpose of preparing audited financial statements of Maribro, to support its application for financing. Toth referred Robert to attorney Ansel Chaplin for advice and assistance regarding corporate matters.
23. On May 29, 1985, Shawmut Bank of Boston and Marino Brothers of New England, Inc., entered into a Master Equipment Lease Agreement. Robert, his wife Joyce, and Mark signed the agreement as personal guarantors of Marino Brothers of New England Inc.'s obligations under the lease.
It appears that this date was actually some 12 days before Marino Brothers first obtained corporate existence. Nevertheless, the documents name that entity as lessee.
24. In early 1986, Robert consulted with attorney Chaplin and accountant Toth in connection with plans to merge Maribro into Marino Brothers. The result Robert sought to achieve, for which he engaged their help, was a single Connecticut corporation, of which he would be sole owner. For this purpose, attorney Chaplin advised Toth, in a letter dated March 20, 1986, to "get a written disclaimer from each of Bob's brothers that he has no equity interest in the Connecticut corporation, and claims none." Chaplin further advised Toth to "ask each brother to confirm that he has no claim against that business for salary, other compensation or loans" and to "get similar representations as to Maribro." Pursuant to Chaplin's advice, Robert and Toth drafted three identical letters, for signature by each of Mark, Frederick, and Peter, each dated March 21, 1986 and addressed to "Bob". Each letter read:
This will confirm to you that I have no ownership or other equity interest in Marino Brothers of New England, Inc., Marino Brothers of N.E., Inc or Maribro Co., Inc. nor do I have an option or other claims to acquire such interest.
25. Robert presented these letters to his brothers Mark, Fred, and Peter for signature, and discussed the matter with each of them, in separate conversations between March 21, 1986, and May of 1986. He told each of them that he would give up his ownership interest in FAMCO in return for their giving up their ownership interest in Maribro and its successor. As thus proposed, the exchange was consistent with implementation of the overall goal that each of the brothers ultimately own an equal share of the family business; Robert would become sole owner of Marino Brothers, and his 24% share of FAMCO would become available for distribution among the other brothers. No specific time was identified in these discussions for Robert's performance of his side of the exchange, nor did the discussions identify with any precision the manner in which he would do so — that is, whether by transferring his shares to the corporation, or directly to one or more of the brothers. Although no writing was ever prepared or executed reflecting Robert's undertaking, each of the brothers signed the letter disclaiming interest in Maribro and its successor.
Peter and Fred each testified to their conversations with Robert on this subject in March and May, respectively, and I credit their testimony. Mark did not testify. I infer from the testimony of Fred and Peter, and from the surrounding circumstances, that Robert's conversation with Mark was in the same time frame and was substantively the same as those with Fred and Peter.
Robert indicated a desire to review the tax implications of the transfer before taking any further action.
26. On March 26, 1986, Robert effectuated the merger and name change by filing Articles of Merger with both the Massachusetts and Connecticut secretaries of state. Maribro then issued a stock certificate, undated, numbered "1", signed by Robert, purporting to show the issuance of 100 shares of stock in Maribro to Robert. Noted at the top of the certificate, by Ansel Chaplin as Acting Clerk, is "CANCELLED effective March 26, 1986 by merger into Marino Brothers of N.E., Inc." Thereafter, Marino Brothers of NE, Inc. issued 100 shares of stock to Robert.
27. In approximately 1986, while Robert was devoting his full- or nearly full-time to Marino Brothers, Fred assumed the duties of president of FAMCO. Mark continued to serve as its treasurer and to maintain its books and records, and Peter, David and Stephen held various operational roles. Felix continued to exercise leadership, but increasingly left day-to-day responsibilities to his sons. The allocation of roles among the five sons working for FAMCO was adopted by consensus among the brothers, with approval from Felix. No formal corporate votes or meetings occurred, nor were the changes reflected in filings with the secretary of state. FAMCO continued to file annual reports reflecting no change in the officers or directors since the original articles of incorporation.
28. In 1987, Baltimore put its contract for road maintenance out to bid. Marino Brothers was unsuccessful. Although it continued for a time to service contracts in Connecticut, the loss of its principal source of business substantially reduced its operations and its income. Robert returned to work at FAMCO full-time in October, 1987. Thereafter, FAMCO sub-leased equipment from Marino Brothers, and serviced the Connecticut contracts through the use of that equipment. The equipment sub-leases, in the amount of some $17,000 per month, became Marino Brothers' principal source of income.
29. Beginning in early 1987, Felix consulted Attorney Jacob Segal for assistance with estate planning. As a temporary measure, pending the adoption of a comprehensive plan and preparation of documents to implement such a plan, Segal drafted for Felix a simple will leaving his entire estate to his wife, Ann Frances, and naming her as executor. Felix executed that will on March 13, 1987. In further discussions with Segal over the next year or so, Felix and several family members considered various alternative proposals, all of which were directed toward the ultimate goal of distributing ownership of the family business equally among the six sons, while minimizing gift and estate taxes. At times in these discussions Robert raised objections to the plans proposed. Felix never adopted any of the alternatives discussed, and never revised his will.
30. In late 1987 and 1988, Felix and his sons discussed with accountant Toth the possibility of a merger between FAMCO and Marino Brothers, to be followed by a reallocation of the stock in the resulting entity. The goal discussed, as always, was equal ownership of the business among the six sons. Toth presented various mechanisms for accomplishing this result, in light of applicable tax considerations. Robert raised objections, noting tax concerns. The merger and reallocation did not occur.
31. Throughout all of these discussions, all of the brothers were aware that, as a result of the letters signed by Fred, Mark, and Peter in 1986, Robert was sole owner of Marino Brothers. They also all were aware that Robert had not yet implemented his promised transfer of his stock in FAMCO, and continued to own 24% of FAMCO. All of the brothers viewed these discussions as part of the process of determining the precise mechanism by which Robert would fulfill his promise, and all viewed Robert's fulfillment of that promise as part of realization of the larger goal of reallocating ownership in the family business (including whatever corporate entities might continue to exist) in such a way as to transfer Felix's ownership to the six sons, and to allocate ownership among them equally. None of the brothers ever demanded that Robert implement the transfer at any particular time, and Robert never denied that he was obligated to make the transfer or that he would do so in accord with whatever overall plan might ultimately be adopted by agreement among Felix and all six sons.
32. At various time in the late 1980's, Robert received advice from accountant Toth to the effect that favorable tax treatment of equipment leases between Marino Brothers and FAMCO depended on the level of Robert's ownership interest in FAMCO. In response to that advice, and for the purpose of the preparation of corporate tax returns, Robert at times gave Toth inconsistent information as to his ownership in FAMCO. At one point in late 1989, at a time when the proposed merger and resulting six-way division of FAMCO was under active discussion, Robert told Toth that he owned 1/6th of FAMCO.
33. In 1989, FAMCO retained accountant David Pierce to prepare an analytical review of FAMCO. The resulting report, authored by Pierce's employee, Diane Teed, recommended a list of changes, including the adoption of financial controls to monitor cash flow, and review of insurance policies to address tax consequences. The report noted the tax advantages of having insurance policies payable to shareholders, rather than to the corporation, with cross-purchase agreements in place to require the use of proceeds for the purchase of the stock of a deceased shareholder. Despite this advice, FAMCO continued to carry the insurance policies previously in effect, and no agreement was adopted regarding the purchase of shares upon the death of a shareholder.
34. In approximately the late 1980's FAMCO began to experience financial difficulties, the source of which was not apparent to the family members. Among the possible causes of the problem that were discussed, the one that gained the most currency among the brothers other than Robert was the theory that equipment leases and other transactions between FAMCO and Marino Brothers were structured in such a way as to drain resources from FAMCO. The other brothers accused Robert of, in effect, stealing from FAMCO. Felix came to believe this view. Robert became estranged from his father and most of his brothers, particularly Frederick.
35. By 1991, FAMCO's financial difficulties were so severe that it could no longer afford to support all of the family members. Felix ceased drawing a salary, and the salaries of all the brothers were reduced. As of the beginning of 1992, FAMCO ceased paying Robert any salary, and he left FAMCO's employ. Robert has not provided services to FAMCO since that time. He collected unemployment benefits briefly, and resumed soliciting business through Marino Brothers. Within a few months, Marino Brothers was doing sufficient business to provide Robert with full-time work and a full salary. Soon thereafter, Peter left FAMCO and joined Robert at Marino Brothers. Robert and Peter both continued to receive health insurance benefits from FAMCO temporarily.
36. By late 1991, Felix was seriously ill, and was seriously concerned about the state of his affairs. He consulted attorney Davern. Davern, based on his discussions with Felix, drafted a set of documents designed to accomplish what he understood to be Felix's intention to transfer ownership of the family business to the six sons in equal shares. In an effort to minimize tax consequences, the transfer was to be treated as having occurred in stages over the years in which no corporate meetings had actually occurred, to be reflected in meeting minutes and shareholder ratifications that would be approved nunc pro tunc. The transactions to be accomplished in this manner included FAMCO's purchase of Marino Brothers' assets and assumption of its debts, dissolution of that corporation, and a series of transfers of FAMCO's stock. The net result was to be a single corporation, owned by the six brothers in equal shares, with Felix retaining no ownership.
37. In April 1992, at a time when Felix was ill, and known by all to be near death, Felix and all six sons met at Felix's home to discuss and execute the documents drafted by Davern. Robert raised objections, disputes arose, and the documents were not executed. Soon thereafter, Felix and the sons other than Robert proposed to Robert various methods of resolving the disputes. No resolution occurred.
38. On May 6, 1992, Felix died. Under his will as in effect since March of 1987, his entire estate, including his 52% share of FAMCO's stock, passed to his wife, Ann Frances. No agreement among FAMCO's shareholders, or between Felix and FAMCO, and no provision of FAMCO's by-laws restricted the estate's transfer of the stock to Ann Frances, or her disposition of it. On November 13, 1992, the Essex Probate Court allowed the probate of his will. For purposes of estate tax returns, Ann Frances obtained an independent appraisal of the value of the stock. Based on that appraisal, she listed the stock as having a value of $300,000.
39. Upon Felix's death, FAMCO received approximately $400,000 in proceeds of the insurance policies it had held on his life. Fred, who was then acting as FAMCO's president, applied those funds to debts and other pressing needs of FAMCO, which was suffering extreme financial distress.
40. FAMCO did not offer to purchase Felix's shares from his estate, nor did any of the brothers or anyone else propose that it do so, or assert that it had a duty to do so, or that Felix's estate had a duty to sell the shares to FAMCO.
41. On June 10, 1992, FAMCO filed with the secretary of state an annual report for the fiscal year ending March 31, 1992. The report listed Fred as President, David as Treasurer, Mark as Clerk, and Fred, Mark, David and Stephen as Directors. On September 30, 1992, FAMCO filed with the secretary of state a Certificate of Change of Directors or Officers, showing these same appointments. These roles were assigned by consensus among the four brothers then working at FAMCO, without any formal meeting of shareholders or directors.
42. On October 21, 1992, FAMCO, Ann Frances, and Mark entered into an agreement for the transfer of the shares then held by Ann Frances and Mark, totaling 76 of the 100 shares then outstanding. They agreed that Ann Frances and Mark would surrender all of their shares to FAMCO, which would then issue 76 new shares to be distributed equally among the four brothers then working for FAMCO: Mark, Fred, David and Stephen. On December 1, 1992, in accord with that agreement, FAMCO issued stock certificates, signed by Fred as President and David as Treasurer, showing the issuance of nineteen shares each to those four brothers.
43. As of early 1992, the finances of FAMCO had deteriorated to the point that it was unable to meet its debt obligations. In a letter dated January 26, 1993, Shawmut Bank informed FAMCO that unless it met its obligations under notes to Shawmut within forty-five days, the bank would accelerate the full balance under the notes. Shawmut also asserted rights against Felix's estate, based on personal guarantees Felix had given, secured by his personal assets, other than FAMCO stock. On February 3, 1992, Fred faxed a letter to Robert informing him of the situation, and requesting "whatever financial assistance that you may personally be capable of rendering, in an attempt to protect Mom's estate." The letter asserted that both Fred and Mark had loaned FAMCO "substantial amounts of money," and that "you currently hold 24 shares and will continue to do so unless an agreement can be reached promptly." The letter went on to demand payment of certain "long overdue invoices" amounting to some $15,000, and to indicate that health insurance benefits for Robert and Peter would be discontinued. It ended by saying that "[w]e implore you to resolve these difficult and obscure issues and prevent needless further harm to all parties." Robert responded with a letter, faxed on the same date, asserting that "the apparent calling of loans appears to be negligence on your part." He demanded payment to Marino Brothers of some $77,000 in "substantially overdue invoices," and directed that any "future interaction between ourselves personally or as companies" be addressed through Attorney Chaplin.
44. In late February, 1993, Fred learned that the criminal division of the Internal Revenue Service was engaged in an investigation of FAMCO, and Mark admitted to Fred that he had, over a period of years, converted substantial funds of FAMCO to his own use for purposes related to his gambling activities. Fred shared this information with the other brothers working at FAMCO, but not with Robert, and directed them not to disclose the matter to Robert. Mark resigned from his positions at FAMCO, but continued to provide needed information and assistance in its efforts to reconstruct financial records. His salary was discontinued, but he was permitted to retain health insurance benefits and the use of a vehicle for some months. Mark retained his 19 shares of FAMCO, which was the only asset in which he had any significant equity.
45. FAMCO retained the services of Joseph Ryan, an attorney, accountant, and former IRS agent, for advice in connection with the IRS investigation. FAMCO also continued to consult with attorney Davern, and engaged Attorney Robert Berluti. Among FAMCO's goals at that time was to obtain the means of paying amounts owed to the IRS, to avoid public disclosure of Mark's conduct, and to resolve on-going disputes between FAMCO and Marino Brothers. The plans devised to meet these goals included the eviction of Marino Brothers from real estate owned by FAMCO, the sale of that real estate, retrieval of certain vehicles used by Marino Brothers of which FAMCO claimed ownership, and continued non-disclosure of Mark's conduct beyond the four brothers then working at FAMCO.
46. FAMCO filed with the secretary of state a Certificate of Change of Directors or Officers of Domestic Business Corporations dated March 2, 1993, showing Fred as President, David as Treasurer, Stephen as Clerk, and Fred, David and Stephen as Directors.
47. In April of 1993, Robert and his wife notified National Grange Mutual Insurance Company that they were withdrawing their personal indemnity for FAMCO. Fred and his wife, David, and Stephen and his wife then provided their personal indemnity in substitution.
48. In June of 1993, Peter left Marino Brothers and returned to FAMCO.
49. Robert first learned of the criminal investigation through a letter to Attorney Chaplin, dated July 23, 1993, from Attorney Berluti, on behalf of FAMCO. The letter reported that the IRS had "uncovered" the removal of more than one million dollars from FAMCO, and that "[t]o date, only one person is under investigation or in any way implicated." It did not identify the "one person." The letter went on to indicate that FAMCO was "actively pursuing the missing funds," and in that connection had identified "a substantial and unaccounted sum of money . . . in a Shawmut Bank account entitled `Marino Brothers,'" which Robert had removed "upon learning that this account had been discovered." The letter demanded an explanation and documentation of those funds, as well as documentation regarding.vehicle leases and transfers and other matters in dispute between the two companies. Robert interpreted Berluti's letter as accusing him of theft from FAMCO.
50. On August 29, 1993, all of the brothers were present at their mother's home after a mass in memory of their father. Robert took that opportunity to demand information from Stephen, who then informed Robert of the disclosures Mark had made.
51. Upon learning of Stephen's disclosure to Robert, the other brothers removed Stephen from the positions of Clerk and director of FAMCO, reduced his role in the management of FAMCO, and denied him certain benefits that the other brothers received. After several months of feeling marginalized, in March of 1994 Stephen left FAMCO and began working with Robert at Marino Brothers.
52. On October 20, 1993, Mark and FAMCO entered into an agreement to resolve FAMCO's claims against Mark arising from his conversion of funds from FAMCO. The agreement recited that "full restitution . . . would exceed $2,000,000." The parties agreed that Mark would make restitution, that FAMCO would "accept payments based upon [Mark]'s ability," and that "the full equity" in his home would be paid to FAMCO. Pursuant to the agreement, on December 4, 1993, Mark and his wife gave FAMCO a mortgage on their home.
53. Through a letter from Attorney Davern to Attorney Chaplin dated April 14, 1994, FAMCO informed Robert of a meeting of FAMCO's shareholders to be held on April 21, 1994. The subject matter of the meeting, as described in the letter, was to consider the issuance of new stock in order to raise funds needed to pay tax liabilities, estimated in the letter at over three million dollars.
54. Robert did not attend the meeting. Instead, on April 21, 1994, the day of the meeting, he filed in the Supreme Judicial Court a petition to dissolve FAMCO, pursuant G.L.c. 156B, § 99 (b). The Supreme Judicial Court transferred the action to this Court, where it was assigned docket number 94-869-B. On April 25, 1994, the parties to that action entered into a stipulation, filed with the Court in that case, agreeing that no stock in FAMCO would be transferred or issued without prior notice through counsel.
55. In the fall of 1994, FAMCO was again in need of cash. Fred and Mark entered into an agreement under which Fred would purchase Mark's nineteen shares of stock in FAMCO, for a total price of $150,000, with $50,000 to be paid upon the transfer, and the remainder to be paid in five annual instalments of $20,000 each, with interest at the prime rate. The agreement required Mark to pay those proceeds to FAMCO as part of his restitution. Fred discussed the agreement with Peter and David, neither of whom was financially able to participate in the transaction. Pursuant to the stipulation filed in No. 94-869-B, Fred provided Robert and Stephen with notice, through counsel. Neither raised objection or sought to purchase the shares. On December 6, 1994, Mark transferred the stock to Fred. The first $50,000 was paid to FAMCO at that time, and three installments have since been paid to FAMCO.
56. On November 8, 1994, this Court (O'Toole, J.) granted summary judgment to the defendants in no. 94-869-B on the ground that the pleadings and affidavits showed no deadlock, within the meaning of G.L.c. 156B, § 99 (b), among the record shareholders of the corporation. The Court noted the existence of a controversy between the parties regarding the right to ownership of stock in the corporation, based on Robert's claim that the transfer of Felix's shares had been in conflict with a claimed buy/sell agreement, but ruled that resolution of that claim was beyond the scope of an action for dissolution under that statute.
57. Soon after that ruling, FAMCO brought this action seeking, among other relief, declaratory judgment as to ownership of its stock. By the filing of an amended complaint on June 13, 1997, Fred and David joined as plaintiffs, seeking a declaration as to their stock ownership.
58. During the time this action has been pending, FAMCO and Marino Brothers have competed in the same business, at times bidding on the same public contracts. In the context of that competition, on a number of occasions between 1994 and 1997, Robert sent letters to municipalities and to law enforcement authorities protesting the award of contracts to FAMCO on various grounds, and asserting that FAMCO was operating in violation of the prevailing wage law. These letters stimulated enforcement action under that law, which led to litigation culminating a ruling of the SJC that, contrary to FAMCO's position, the prevailing wage law applies to its work in maintaining and repairing pavement. See Felix A. Marino Co., Inc. v. Commissioner of Labor and Industries, 426 Mass. 458 (1997). That ruling has a significantly adverse financial effect on FAMCO.
CONCLUSIONS OF LAW
1. An actual controversy has arisen, within the meaning of G.L.c. 231A, § 1, between Robert and Stephen, on one side, and Fred and David on the other, as to the.ownership of stock in FAMCO. Based on a set of interrelated theories involving the claimed existence of a buy/sell agreement with respect to Felix's shares, and claimed duties of FAMCO's officers and directors with respect to Mark's shares, Robert contends that he is entitled to sole ownership of FAMCO. Stephen supports this contention, despite its seemingly adverse impact on his interests. Fred and David contend, in opposition, that each of them, along with Stephen, received a valid gift of 19 shares from their mother and Mark after their father's death, and that Fred owns 19 additional shares through his purchase from Mark. They further contend that Robert should be compelled to fulfill his promise to relinquish the 24 shares originally issued to him, so that those shares would revert to the corporation, with the result that the 76 shares held among them and Stephen would be the only outstanding shares. There can be no question that resolution of this controversy will substantially affect the interests of each of Robert, Stephen, Fred, and David. Accordingly, each of them has standing to litigate his claim for declaratory judgment with respect to ownership of FAMCO's stock.
2. Ann Frances Marino inherited 52 shares of stock in FAMCO from her husband. No agreement of any kind, between or among any parties, and no provision of FAMCO's by-laws, restricted her transfer of those shares, or imposed any duty on her, on Felix's estate, or on FAMCO with respect to the disposition of those shares. She had full authority to dispose of those shares as she chose. Similarly, as of 1992 Mark Marino owned 24 shares of FAMCO's stock, with full power to dispose of those shares, free of any restraint. Their joint gift of her 52 shares, along with five of Mark's shares, to Fred, David, and Stephen, was fully effective to transfer ownership of those shares. As a result of that gift, Mark, Fred, David, and Stephen each came to own 19 shares. Each of the latter three continues to own those shares through the present.
3. Mark's theft from FAMCO gave FAMCO a cause of action against Mark for money damages. By pursuing that cause of action, FAMCO could have obtained a judgment against Mark that would have been enforceable through the seizure of any assets he held, including his stock in FAMCO. The existence of the cause of action, however, did not automatically divest Mark of his shares, or effect their transfer to the corporation. Those exercising the powers of FAMCO's officers and directors — that is Fred, David, and at various times Peter and/or Stephen — had a fiduciary duty to the corporation to take such action with respect to its claim against Mark as they, in the good faith exercise of their business judgment, considered in the best interest of the corporation. See generally, Donahue v. Rodd Electrotype Co. of New England, Inc., 367 Mass. 578, 593 (1975). To the extent that Robert claims a failure on their part to do so, he has not met his burden of proving such failure. In light of Mark's limited assets and ability to raise funds, they could, and the evidence indicates that they did, reasonably believe that the forbearance agreement was likely to yield at least as high a level of restitution as would be obtained by liquidating the claim and attempting to collect on a judgment. Seizure of Mark's stock to collect a judgment would not have benefitted FAMCO unless the stock could have been sold, and there is no evidence that it would have been marketable to anyone other than the brothers themselves, particularly in the context of the IRS investigation, or that any of the brothers was capable of or interested in purchasing it at the time of the forbearance agreement. When Fred eventually did purchase it, he provided each of the brothers, including Robert, an opportunity to protest, or to seek to participate, and none did. His determination of the price based on the appraisal at the time of Felix's death was reasonable in the circumstances. The net effect of the purchase was to provide FAMCO with needed cash then, along with an income stream over subsequent years, in an amount that, to the extent the evidence shows, was at least as high as could have been obtained through any other means of disposing of that asset. The evidence provides no basis for setting aside the transfer of Mark's shares to Fred. Thus, Fred owns those 19 shares, along with the 19 given to him by his mother and Mark in 1992, for a total of 36. David and Stephen each continue to own the 19 given to him. Together, Fred, David and Stephen own a total of 76 shares in FAMCO.
His claim in this respect focusses on Fred, who acted as president, and who eventually purchased Mark's shares. It appears to apply to a lesser extent to David. Peter is not a party to this action, and Stephen has adopted Robert's position.
The evidence was that an independent appraiser valued Felix's 52 shares at $300,000 in 1992, at a time when the corporation was known to be in financial distress, but before Mark's thefts were known. The transfer from Mark to Fred in late 1994, at a price of $150,000, was for 19 shares, less than half of Felix's 52. At the time of the transfer, the corporation had a large, known debt to the IRS, which it was unable to pay, and its claim against Mark appeared largely uncollectible. Robert's theory that the value of the stock at that time would have been higher than it was upon Felix's death ignores these facts, and is unsupported by any evidence.
4. Robert's agreement in 1986 to relinquish his 24 shares in FAMCO, in return for his three brothers' disclaimers of their interest in Maribro and its successors, was a contract for the sale of securities, subject to the statute of frauds,. G.L.c. 106, § 8-319. See G.L.c. 106, § 2-106 (defining "sale" as "passing of title from the seller to the buyer for a price." See generally, Maurer v. E.A. Gralia Constr. Co., 37 Mass. App. Ct. 403, 406-407 (1994) (addressing question of whether an interest in a joint business venture was a "security" for purposes of § 8-319).
There were actually three agreements, made in each of the three discussions in which Robert presented the disclaimer to one of the three brothers for signature. Of those three brothers, only Fred appears in this action seeking to enforce the agreement against Robert, although David's position in this action might be viewed as an effort to enforce interests he might claim to have as a third party beneficiary. The distinction between one agreement and three, and the question of whether David has any enforceable rights, are of no practical significance, since enforcement of Robert's contractual obligation to Fred will effectively enforce his promises to all three.
That statute provides, in pertinent part:
A contract for the sale of securities is not enforceable by way of action or defense unless:
(a) there is some writing signed by the party against whom enforcement. is sought . . .;
(b) delivery of a certificated security or transfer instruction has been accepted, . . . or payment has been made, but the contract is enforceable under this provision only to the extent of the delivery, registration or payment . . . .
The statute of frauds does not bar enforcement of the contract against Robert, however, because, in executing the disclaimers, Fred, Mark and Peter fully performed their side of the agreement — that is, they paid the full price to which the parties agreed. Prior to those disclaimers, each of those three owned a ten percent share of Maribro, and was entitled to the same share of its successors. As of March, 1986, Maribro and/or its successor had substantial value due to the Baltimore contracts. The agreement between Robert and each of his three brothers was, in essence, that each of them would transfer that value to Robert, in return for his transfer of his 24 shares in FAMCO. The three did exactly what they agreed to do, by signing the disclaimers. That constitutes payment for the sale of his shares, and avoids the statute of frauds. See Hall v. Horizon House Microwave Inc., 24 Mass. App. Ct. 84, 90 (1987); Maurer, 37 Mass. App. Ct. at 405 (payment for the securities cancels the application of the statute of frauds). See also Young v. Reed, 6 Mass. App. Ct. 18, 20-21 (1978).
5. Robert claims that enforcement of the 1986 agreement is barred by the six year statute of limitations, G.L.c. 260, § 2. Under that statute, an action in contract is barred unless brought within six years of the time the cause of action accrues. A cause of action in contract accrues at the time of the breach. Barber v. Fox, 36 Mass. App. Ct. 525, 527 (1994); Frank Cooke, Inc. v. Hurwitz, 10 Mass. App. Ct. 99, 106 (1980). A party cannot be said to have breached a contract until that party has repudiated it or has failed to perform when performance is due. Barber, 36 Mass. App. Ct. at 527; Cavanagh v. Cavanagh, 33 Mass. App. Ct. 240, 244 (1992); see Warren v. Ball, 341 Mass. 350, 351-354 (1960); Zytka v. Dmochowski, 302 Mass. 63, 66 (1938); Young v. Reed, 6 Mass. App. Ct. at 22.
If a contract is silent as to the time set for performance, then performance is due within in a reasonable time. Warren v. Ball, 341 Mass. at 352-354 (1960); Barber, 36 Mass. App. Ct. at 528; Charles River Park, Inc. v. Boston Redev. Auth., 28 Mass. App. Ct. 795, 814 (1990). Where a timely demand is a prerequisite for a claim of breach, a demand is timely if it occurs within a reasonable time. Barber, supra. What is reasonable "depends on the nature of the contract, the probable intention of the parties as indicated by it, and the attendant circumstances." Charles River, 28 Mass. App. Ct. at 814; See Powers, Inc. v. Wayside, Inc. of Falmouth, 343 Mass. 686, 691 (1962); Zytka v. Dmochowski, 302 Mass. at 67; Young v. Reed, 6 Mass. App. Ct. at 22.
Here, Robert, Mark, Fred and Peter agreed that, in return for each of the latter three transferring to Robert something of substantial value to each, he in turn would take action that would have the effect of making his FAMCO shares available for distribution among his brothers, so as to facilitate the six-way equal ownership of the overall family business that all the brothers understood to be their, and their father's, common goal. The agreement left open the time and the precise manner of Robert's performance, to be determined later. Implicit, however, was the understanding that all the brothers and their father would have further discussions about those matters, that they would ultimately reach agreement, and that Robert would act in accord with such agreement. In accord with this implicit understanding, from soon after the disclaimers were signed, right up to the time of Felix's death, the family members did actively discuss various proposed mechanisms for merging the corporations and reallocating their ownership. Although Robert's objections appear to have been the primary obstacle to agreement, there is no evidence that, at any time prior to the February, 1993, exchange of correspondence, he ever refused to continue the discussions, or in any other way unequivocally repudiated his obligation. Under these circumstances, Robert's failure to perform, and the brothers' failure to demand Robert's performance, was reasonable as long as either the discussions continued, or it reasonably appeared that the discussions would continue. The discussions continued until Felix's death, and until February, 1993, the brothers could reasonably believe that further discussions would proceed. At that point, when Robert responded to a request for financial assistance to FAMCO with the direction that all further communications go through his attorney, it was or should have been apparent to all that Robert refused to recognize any further obligation. His repudiation was then unequivocal, and the cause of action accrued. This action was brought well within six years of that date. Thus, the statute of limitations does not bar enforcement.
6. The legal effect of the promise Robert made to his three brothers in 1986 is that, since that time, he has held his 24 shares of FAMCO in trust for the benefit of those brothers, subject to an obligation to transfer the shares to them, or to their designee(s), or to FAMCO, as they might direct at such time as all the brothers would reach agreement about the mechanism for an equal distribution of interests in the family business among all six brothers. See Young v. Reed, 6 Mass. App. Ct. at 22. See also Barry v. Covich, 332 Mass. 338, 342-343 (1955); Barber v. Fox, 36 Mass. App. Ct. at 529. Because of intervening events that the parties could not have foreseen at that time, it is now clear that no such agreement will be made. To allow that fact to excuse Robert's performance of the agreement would be to permit him to be unjustly enriched, at the expense of his brothers. Under these circumstances, equity requires that the Court impose a resolution that will be as close as possible to that originally contemplated by the parties to the agreement. Transfer to FAMCO of the 24 shares originally issued to Robert will achieve that result.
ORDER
For the reasons stated, it is hereby ORDERED that judgment enter on the parties' claims for declaratory judgment as follows:
It is hereby adjudged and declared that:
1. The 24 shares of stock in the Felix A. Marino Company, Inc. that were originally issued to Robert S. Marino are the property of the Felix A. Marino Company, Inc.
2. Robert S. Marino presently holds no shares of stock in the Felix A. Marino Company, Inc.
3. The 52 shares of stock in the Felix A. Marino Company, Inc. that were originally issued to Felix A. Marino, and the 24 shares of stock in the Felix A. Marino Company, Inc. that were originally issued to Mark L. Marino, remain outstanding, and are presently held as follows:
Frederick W. Marino: 36 shares
David P. Marino: 19 shares
Stephen F. Marino: 19 shares
4. The Felix A. Marino Company, Inc. is authorized to issue any instruments or other documents that may be necessary to record or demonstrate the ownership of its stock as declared herein.
_____________________________ Judith Fabricant Justice of the Superior Court
March, 1998