Opinion
MICV2011-04451-F
10-20-2014
Robert S. Gatof v. Northland Investment Corporation [1] No. 128393
DENNIS J. CURRAN, Associate Justice.
MEMORANDUM OF DECISION AND ORDER ON PLAINTIFF-IN-COUNTERCLAIM NORTHLAND INVESTMENT CORPORATION'S MOTION FOR PARTIAL SUMMARY JUDGMENT
DENNIS J. CURRAN, Associate Justice.
This case arises from a dispute over a contract signed by Robert S. Gatof and his then-employer, Northland Investment Corporation, in which he agreed not to compete, among other things, against Northland. In this motion, Northland moves for summary judgment on three of the seven counts in its counterclaim alleging breach of contract (Count I), breach of the duty of loyalty (Count IV), and a declaration of constructive trust (Count VII).
It should be noted that in its papers, as well as those of Mr. Gatof, Northland fails to discuss Count VII, the request for an imposition of a constructive trust, and instead argues that it is entitled to a declaratory judgment that it properly terminated Mr. Gatof for cause and is entitled to repurchase Mr. Gatof's stock in Northland at a forty percent reduction in price. This argument actually supports Count VIII in the First Amended Counterclaim of Defendant Northland Investment Corporation and Plaintiff-in-Counterclaim Lawrence R. Gottesdiener, at p. 18. Therefore, the court denies Northland's motion for summary judgment on Count VII which requests the imposition of a constructive trust. The arguments presented in support and opposition to summary judgment on Count VIII are addressed at the end of this decision.
For the following reasons, Northland's motion for partial summary judgment is DENIED.
FACTUAL BACKGROUND
The following facts are taken from the summary judgment record and the Consolidated Statements of Material Fact the parties filed under Superior Court Rule 9A(b)(5), and will be recited in the light most favorable to Mr. Gatof, the non-moving party. See Attorney Gen. v. Bailey, 386 Mass. 367, 371, 436 N.E.2d 139 (1982).
I. Northland's Formation and Mr. Gatof's Involvement in Northland
Mr. Robert S. Gatof and Mr. Lawrence W. Gottesdiener formed Essex Partners, Inc. in 1991 in order to acquire, own, and operate multi-family dwellings. Rule 9A Consolidated Statements of Material Fact at par. 1. In 1996, Essex, whose only shareholders, directors, and officers, were Messrs. Gator and Gottesdiener, acquired and merged with Northland, taking its name. Id. at pars. 2, 4. In a series of deals, Mr. Gatof sold many of his shares in Northland to Mr. Gottesdiener, reducing his interest to approximately ten percent. Id. at pars. 3-6, 9. By agreement, Mr. Gatof became President and Chief Operating Officer in 2000. Id. at par. 7. The agreement, which detailed compensation and benefits for the positions, also contained restrictive covenants and included non-competition and non-disclosure provisions. Id.
In 2004, Mr. Gatof, by letter agreement, left the position of Chief Operating Officer. Id. at par. 8. However, his role as President remained unchanged until a new president was appointed in 2007. Consolidated Facts at par. 8. Under that agreement, Mr. Gatof was entitled to compensation for five years and other benefits for ten years. Id. at par. 11. Restrictions in the agreement limited the investments Mr. Gatof could make outside of Northland, which prohibited investments and business opportunities with its competitors. Id. at pars. 12-16.
After the agreement, Mr. Gatof remained responsible for maintaining Northland's relationships with certain investors, including Jonathan Rosen and Jeff Baumann, for the duration of his contract. Id. at par. 41.
II. Mr. Gatof's Communications With and Concerning Messrs. Rosen and Baumann
In April of 2007, Mr. Gatof left a message for Mr. Rosen mentioning a potential Taymil purchase in Randolph, Massachusetts. Id. at pars. 42, 134. Mr. Gatof later emailed Mr. Rosen the details of the Taymil deal and indicated he was going to invest and it would be a good deal. Id. at pars. 42, 135. Taymil never requested that Mr. Gatof contact Mr. Rosen regarding the investment. Consolidated Facts at par. 42. Mr. Gatof never disclosed to Northland that he informed Mr. Rosen about the Taymil investment. Id. at par. 43.
Mr. Gatof gave Mr. Baumann's contact information to Kevin Ball, a former Northland executive and founder of Commerce Capital Partners, LLC in order for Mr. Ball to get in touch with Mr. Baumann about potentially investing in a Commerce Capital deal. Id. at pars. 45, 48, 97-98, 123. Mr. Gatof later spoke directly to Mr. Baumann and indicated that he intended to invest $100,000 in the deal. Id. at pars. 49, 125. Mr. Gatof then contacted Mr. Ball and told him to act surprised when Mr. Baumann contacted him. Id. at par. 49. Mr. Baumann never invested in the Commerce Capital deal. Id. at pars. 50, 128. Mr. Gatof also recommended Mr. Baumann to Mr. Astrove as a potential Taymil investor. Consolidated Facts at 50.
III. Mr. Gatof's Communications with Mr. Astrove
In February of 2008, Mr. Gatof asked Steven Rosenthal, then President and Chief Executive Officer of Northland, if investors were going to be told that no distributions would be made in 2008 following a reorganization of Northland's investments. Id. at pars. 51, 53, 55. Mr. Gatof later forwarded the e-mail exchange with Mr. Rosenthal, including investor information and the plan for distributions in 2008, to Mr. Astrove. Id. at pars. 57-58.
After he was alerted that his advisory fee would end, under the terms of the Letter Agreement, Mr. Gatof e-mailed Mr. Astrove that Northland was in " dire financial straits" because it could no longer pay his fee. Id. at pars. 60-61, 149-50.
In 2010, while Northland was negotiating a foreclosure with one of its lenders, Mr. Gatof forwarded an e-mail from Northland's general counsel concerning details about those negotiations to Mr. Astrove. Id. at par. 62.
In July of 2010, Mr. Rosenthal contacted Mr. Gatof to discuss Citizens Bank's decision to cut off the line of funding to Northland. Id. at par. 74. Mr. Gatof then forwarded an e-mail from Mr. Rosenthal to Mr. Astrove, which requested that Mr. Gatof get in touch with Mr. Astrove about finding a new line of credit to replace Citizens's. Consolidated Facts at par. 74.
In March of 2011, Mr. Gatof prepared an analysis of his Northland stock value and sent it to Mr. Astrove, ahead of a potential sale of the stock to Northland or Mr. Gottesdiener. Id. at pars. 63, 162-63. The analysis detailed columns and rows of data that contained information about Northland, its assets, holdings, and other financial information. Id. at par. 63.
IV. Northland's Termination of the Letter Agreement
Northland eventually negotiated to refinance the Citizens's line with a new line of credit from Citibank. Id. at par. 75. Mr. Gatof, as a member of Northland's board, would not consent to the new line. Id. Northland then removed Mr. Gatof from the board so it could complete the Citizens refinancing deal. Id. at pars. 76, 110.
In October of 2011, Mr. Gatof received a letter from Northland's general counsel informing him that he had been terminated without cause on June 30, 2009. Consolidated Facts at par. 77.
On December 8, 2011, Mr. Gottesdiener informed Mr. Gatof that Northland would be investigating whether he had breached his covenant not to compete with Northland. Id. At the end of the investigation, Northland terminated Mr. Gatof for cause under the terms of the Letter Agreement. Id.
DISCUSSION
I. Standard of Review
Summary judgment will be granted where, viewing the evidence in the light most favorable to the non-moving party (here, Mr. Gatof), all material facts have been established, and the moving party is entitled to judgment as a matter of law. Cabot Corp. v. AVX Corp., 448 Mass. 629, 636-37, 863 N.E.2d 503 (2007). In deciding summary judgment motions, the court may consider pleadings, depositions, answers to interrogatories, admissions on file, and affidavits. Polaroid Corp. v. Rollins Envtl. Servs., 416 Mass. 684, 696, 624 N.E.2d 959 (1993), citing Conley v. Massachusetts Bay Transp. Auth., 405 Mass. 168, 173, 539 N.E.2d 1024 (1989). While the court views the evidence in the light most favorable to the non-moving party, it does not weigh the evidence, determine witness credibility, or make its own findings of fact. Attorney Gen. v. Bailey, 386 Mass. at 370-71.
II. Mr. Gatof's Alleged Breach of the Letter Agreement
In order to succeed on a breach of contract claim, Northland must demonstrate that a valid agreement existed, that Northland was ready, willing, and able to perform, that Mr. Gatof failed or will fail to perform, and that Northland suffered damages as a result of the breach. See Singarella v. City of Boston, 342 Mass. 385, 387, 173 N.E.2d 290 (1961). Here, the validity of the Letter Agreement is not disputed by the parties, nor is there any indication in the papers that the parties dispute that Northland has performed, or was ready, willing, and able to perform required by the Letter Agreement.
i. Solicitation of Messrs. Baumann and Rosen
Northland alleges that Mr. Gatof solicited investments from Messrs. Baumann and Rosen on behalf of Commerce Capital and Taymil, respectively, a violation of the Letter Agreement between Mr. Gatof and Northland.
The Letter Agreement states, in pertinent part, that Mr. Gatof:
. . . shall not, without prior written consent of the company . . . either individually or on behalf of or through any third party, solicit, divert or appropriate or attempt to solicit, divert, or appropriate, for the purpose of competing with the Company . . . which is engaged in a similar business as the Company, any investors or institutional partners of the Company . . .Exhibit 9, at par. 4(b)(ii).
Regarding Mr. Baumann, the record indicates Mr. Gatof gave Mr. Baumann's name and contact information to Mr. Ball as a potential investor and encouraged him to send Mr. Baumann information regarding a deal and mention Mr. Gatof. See exhibit 34, at pp. 78:5-80:1; exhibit 40. Mr. Ball attempted to solicit an investment in the Commerce Capital project from Mr. Baumann. See exhibit 34, at p. 81:3-8. Mr. Gatof called Mr. Baumann some time later and during their conversation, Mr. Baumann indicated he was considering investing $100,000 in that project. See exhibit 1B, at p. 494:4-9.
Mr. Gatof highlights that it was, in fact, Mr. Ball who reached out to Mr. Baumann and gave him details of the Commerce Capital deal. See exhibit 34, at pp. 80:12-81:8. Mr. Gatof further suggests that in any conversation he had with Mr. Baumann he merely indicated that he intended to invest and did not discuss details of that deal. See exhibit 34, at p. 497:5-20. Finally, Mr. Gatof avers that he did not reach out to Mr. Baumann to ask him to invest in the Commerce Capital project, nor were his communications with Mr. Baumann for the purposes of competing with Northland. Second Affidavit of Robert S. Gatof (Revised), at pars. 8-9.
With regard to Mr. Rosen, the record shows that Mr. Gatof attempted to call Mr. Rosen to tell him about a deal with Taymil. See exhibit 32. Mr. Gatof then e-mailed Mr. Rosen and gave him details of the investment opportunity. See exhibit 32. The e-mail also stated that if Mr. Rosen wanted more information that he should contact Mr. Gatof, that he intended to invest in the deal, and that it would be a good deal. See exhibit 32. The record indicates Mr. Astrove never asked Mr. Gatof to pass information to Mr. Rosen regarding Taymil's deal in Randolph. See Second Affidavit of Robert S. Gatof (Revised), at par. 3; Second Affidavit of Steven R. Astrove, at par. 1. Additionally, Mr. Gatof averred that he never intended this exchange be for the purposes of competing with Northland. Second Affidavit of Robert S. Gatof (Revised), at par. 4.
Mr. Gatof's specific conduct in each of these instances are not in dispute. However, Northland has presented no evidence in the record, other than the conduct of Mr. Gatof, to suggest the purpose of his communications and/or referrals was to compete with Northland. Mr. Gatof, on the other hand, has offered specific evidence that his communications and/or referrals were not for the purposes of competing with Northland. Therefore, viewing the facts in the light most favorable to Mr. Gatof (as we must at this procedural stage), it would be inappropriate to find as a matter of law that he breached the Letter Agreement.
ii. Disclosure of Confidential Information to Mr. Astrove
Northland alleges Mr. Gatof made various disclosures of confidential information to Mr. Astrove. The Letter Agreement placed express prohibitions on the disclosures Mr. Gatof could make to those outside the company. The Letter Agreement only establishes a non-exclusive list of confidential information that could not be disclosed. See exhibit 9, at par. 5.
" You shall at all times . . . maintain in confidence and shall not . . . use, except in the course of your duties for the Company, disclose or give to others any trade or business secret or confidential or proprietary information of the Company or of any third party which was disclosed to or developed by you during the course of performing services for, or receiving training from, the Company, and is not generally available to the public, including but not limited to information and facts concerning business plans, customers, future customers, suppliers, licensors, licensees, partners, investors, affiliates or others, financial information, sales prospects, client lists." Exhibit 9, at par. 5.
However, in order to succeed on a breach of contract claim, Northland must also demonstrate that it sustained damages as a result of the breach. See Singarella, 342 Mass. at 387. " The damages that may be awarded on a claim for breach of contract are those that are the direct, natural result of the breach, and were considered by the parties when the contract was made as the probable result of such breach." MeadWestvaco Corp. v. Worcester New Bond LLC, 25 Mass. L. Rptr. 364 at *6 (Mass.Super. 2009), quoting Weeks v. Calnan, 39 Mass.App.Ct. 933, 934, 658 N.E.2d 173 (1995) (internal quotations omitted). Northland has not alleged, nor is it apparent from the record, that any damages directly result from Mr. Gatof's alleged confidential disclosures.
Instead, Northland claims that it is entitled to a return of all compensation and benefits paid to Mr. Gatof after the date he violated agreement. However, a review of the record and especially the Agreement indicates that a violation of the protected information provision may result in termination of the compensation and benefits received by Mr. Gatof, not a forfeiture of those already received. See exhibit 9, at par. 2(a). The record reveals that both Northland and Gatof considered that a breach of the Letter Agreement might occur, yet also concluded that termination, and not repayment of any already paid compensation or benefits, would be the appropriate punishment. See exhibit 9, at par. 2(a).
Northland also claims it is entitled to costs and attorneys fees in order to enforce the contract under paragraph 7(h) of the Letter Agreement. However, a reading consistent with that provision would allow only for such costs and fees to be paid in the event that Mr. Gatof were deemed to have breached the contract. See exhibit 9, par. 7(h). Since Northland has yet to prevail in this action, it would be premature to rule that it is entitled to these expenses and fees.
In short, because Northland has not shown it is entitled to any recoverable damages as a result of Mr. Gatof violating any provisions of the Letter Agreement, it is not entitled to summary judgment as a matter of law on its breach of contract claim (Count I).
III. Mr. Gatof's Alleged Breach of his Fiduciary Duties
In a close corporation, shareholders owe to the other shareholders a duty of utmost good faith and loyalty. Donahue, 367 Mass. at 593, quoting Cardullo v. Landau, 329 Mass. 5, 8, 105 N.E.2d 843 (1952) (internal quotations omitted). However, " [w]hen a director's contested action falls entirely within the scope of a contract between the director and the shareholders, it is not subject to question under fiduciary duty principles." Chokel v. Genzyme Corp., 449 Mass. 272, 278, 867 N.E.2d 325 (2007), citing Blank v. Chelmsford Ob/Gyn, P.C., 420 Mass. 404, 408, 649 N.E.2d 1102 (1995). Therefore, where the conduct was " contemplated by the terms of the parties' written agreements [courts] have declined to find liability for breach of fiduciary duty." Selmark Assocs., Inc. v. Ehrlich, 467 Mass. 525, 537, 5 N.E.3d 923 (2014). Though where the conduct complained of is not entirely within that governed by the agreement, a claim of breach of fiduciary duty may still succeed. Id.
It is clear from the record that there are never more than three shareholders, see exhibit 44, at p. 202:7-9, there is significant shareholder involvement in management, see exhibit 3, and no ready market for stock. See exhibit 45. See Donahue v. Rodd Electrotype Co. of New England, Inc., 367 Mass. 578, 586, 328 N.E.2d 505 (1975).
In Selmark, the employment agreement had expired some time before the conduct giving rise to the action, see Selmark, 467 Mass. at 538-39, but here, the Letter Agreement was still in effect at the time of the alleged conduct. See exhibit 9. Similarly, in Merriam v. Demoulas Super Mkts., Inc., the Supreme Judicial Court held that the shareholders' actions fell entirely within the scope of an agreement, and therefore they were not bound by fiduciary duty, even if the shareholders' actions would have constituted a breach of fiduciary duty. Merriam, 464 Mass. 721, 726-29, 985 N.E.2d 388 (2013).
The record is clear that the Letter Agreement focuses on ensuring that Mr. Gatof did not compete with, disclose information, or solicit from Northland. See exhibit 9. Northland's breach of fiduciary duty claim is based upon allegations that Mr. Gatof usurped corporate opportunities from Northland and that he assisted, advised, and invested in Taymil. See First Amended Complaint of Defendant Northland Investment Corporation and Plaintiff-in-Counterclaim Lawrence R. Gottesdiener, at pp. 14-15. The alleged usurpation of Northland's corporate opportunities and investment, support, and advice to Taymil can effectively be described as competition with Northland. Mr. Gatof's alleged conduct falls precisely within the scope of the Letter Agreement, particularly since the agreement covers Mr. Gatof's rights and responsibilities regarding competing with Northland. The agreement broadly prohibits " associat[ing] in any manner with, engag[ing] in or hav[ing] a financial interest in any business which is directly or indirectly competitive with the business of [Northland]." See exhibit 9, at par. 4(b)(i); exhibit 2A, at p. 117:15-18. It therefore directly encompasses the challenged conduct and precludes Northland from pursuing breach of fiduciary duty claims against Mr. Gatof. See Merriam, 464 Mass. at 726-29; Chokel, 449 Mass. at 278; Blank, 420 Mass. at 404.
Therefore, because Mr. Gatof's alleged conduct falls squarely within the scope of the Letter Agreement, it precludes Northland's claim for breach of fiduciary duty and it is not entitled to judgment as a matter of law on its breach of fiduciary duty claim (Count IV).
IV. Northland's Request for Declaratory Relief
See supra, note 3.
Northland's request rests on the basis that a breach of fiduciary duty amounts to fraud, or at the very least dishonesty, which would allow it to terminate Mr. Gatof for cause and trigger the discounted repurchase price. Since the breach of fiduciary duty claim has been precluded by the Letter Agreement, such grounds cannot support Northland's request for a declaration that it terminated Mr. Gatof for cause. Additionally, even if the basis of Northland's request were to lie in the breach of contract, the fact that the court has not entered judgment on this issue precludes those grounds for serving as a basis to support this claim. Therefore, Northland is not entitled to judgment as a matter of law on its request for a declaration that it terminated Mr. Gatof for cause and thereby entitled to a discount on its repurchase of his Northland stock.
ORDER
For these reasons, the defendant Northland's motion for partial summary judgment is DENIED.