Opinion
17-P-1566
03-27-2019
JOSEPH R. MULLINS v. COLONIAL FARMS LTD., & others.
NOTICE: Summary decisions issued by the Appeals Court pursuant to its rule 1:28, as amended by 73 Mass. App. Ct. 1001 (2009), are primarily directed to the parties and, therefore, may not fully address the facts of the case or the panel's decisional rationale. Moreover, such decisions are not circulated to the entire court and, therefore, represent only the views of the panel that decided the case. A summary decision pursuant to rule 1:28 issued after February 25, 2008, may be cited for its persuasive value but, because of the limitations noted above, not as binding precedent. See Chace v. Curran, 71 Mass. App. Ct. 258, 260 n.4 (2008).
MEMORANDUM AND ORDER PURSUANT TO RULE 1:28
Ostensibly, this case presents a fee dispute between, on the one hand, five partnerships owning five separate residential housing developments, and, on the other, the company managing all of those properties. The partnerships and the beneficial interests in the management company are, however, all owned in varying proportions by long-time business partners Joseph R. Mullins, Joseph E. Corcoran, and Gary A. Jennison (or their family members). Mullins and Corcoran have been embroiled in litigation for many years in this and several other matters.
Here, Mullins sued derivatively on behalf of CMJ Management Company, a Massachusetts business trust, and its sole trustee, CMJMC, Inc. Through Mullins, CMJ and CMJMC obtained a judgment against the partnerships in excess of $3 million, representing unpaid "supplemental" management fees, together with prejudgment interest. The judgment also declared that the contracts requiring payment of the disputed fees are valid and binding.
Although neither party discusses the issue, we assume that both CMJ and CMJMC were properly named as derivative plaintiffs notwithstanding that CMJ is a business trust. See Halebian v. Berv, 457 Mass. 620, 622-623 & n.4, 626 (2010); Tracy v. Curtis, 10 Mass. App. Ct. 10, 11-12 (1980).
Mullins appeals derivatively from a Superior Court judge's entry of summary judgment dismissing CMJ and CMJMC's count for breach of fiduciary duty against Corcoran and Jennison. He also appeals in his own name from the judge's denial of his request that CMJ and CMJMC pay his attorney's fees pursuant to G. L. c. 156D, § 7.46. The partnerships appeal from the entry of summary judgment against them on their defenses of lack of consideration and implied condition subsequent. They also appeal from the pretrial denial of their motion to amend their answer to add a third defense of subsequent oral agreement. We affirm.
Background. Colonial Farms Ltd. (Colonial) owns a housing development in Modesto, California; Fawcett's Pond Apartments Company (Fawcett's) owns a housing development in Barnstable, Massachusetts; Holbrook Apartments Company (Holbrook) owns a housing development in Holbrook, Massachusetts; Marvin Garden Associates (Marvin) owns a housing development in Cotati, California; and Quaker Meadows Apartments Company (Quaker) owns a housing development in Lynn, Massachusetts. All of these residential real estate developments are managed by CMJ, whose sole trustee is CMJMC.
We recite the facts as set forth in the judge's decision, supplemented by other uncontested facts found in the record. Miramar Park Ass'n v. Dennis, 480 Mass. 366, 369 (2018).
Prior to 1983, Mullins, Corcoran, and Jennison held the beneficial interest in Colonial, Marvin, and Quaker -- with Corcoran holding a sixty percent share and Mullins and Jennison owning twenty percent each. Corcoran, alone, held the beneficial interest in Fawcett's and Holbrook. Each of the five partnerships was a party to a management agreement with CMJ (or its predecessor), by which CMJ managed the housing developments for a fee that was either a percentage of collections or a specific dollar amount, depending on the partnership. Each of Mullins, Corcoran, and Jennison (or their respective family members or family trusts) own a third of CMJ. Additionally, each of Mullins, Corcoran, and Jennison is one of three directors in CMJMC.
In December, 1988, the entity that had been known as CMJ Management Company, Inc. was converted to CMJ. CMJMC was formed and named CMJ's sole trustee in January, 1989.
In June, 1983, an affiliate of Paine Webber purchased a majority interest in each of the five partnerships. In the negotiations for that deal, Paine Webber agreed that the partnerships would pay an "incentive management fee" to CMJ if certain minimum cash flows were maintained. To that end, each of the partnerships entered into a supplemental management agreement with CMJ, providing for payment of the incentive management fee. According to the judge, the incentive management fees were a way to increase compensation to Mullins, Corcoran, and Jennison from the Paine Webber deal without increasing the price Paine Webber was to pay.
Paine Webber/CMJ Properties, L.P., a Delaware limited partnership.
By their express terms, the supplemental management agreements memorializing the obligation to pay incentive management fees were terminable only after termination of the underlying management agreements -- which has never occurred. The partnerships all paid the incentive management fees without incident from 1983 to 1999.
In 1999, Paine Webber demanded that its interest in the partnerships be bought out. Each of Mullins, Corcoran, and Jennison contributed proportionally to buying out Paine Webber and returning the ownership interests in the partnerships to their pre-1983 state. Accordingly, after the buyout, Corcoran owned one hundred percent of Fawcett's and Holbrook together with sixty percent of Colonial, Marvin, and Quaker, while Mullins and Jennison owned twenty percent each of Colonial, Marvin, and Quaker. After the buyout, from 1999 to 2010, the five partnerships continued to pay the incentive management fees to CMJ as required by the supplemental management agreements, just as they had done from 1983 to 1999. Thus, even though the parties' ownership interests in the partnerships were returned to their pre-1983 state, the value of those interests had shifted in a way that favored Mullins and Jennison because of the added cash flow out of the partnerships to CMJ (of which Mullins and Jennison each own one third).
In 2000, however, Holbrook and Fawcett's temporarily paid their management fees to another management company owned by Corcoran and Jennison. The fees were transferred back to CMJ in the following year.
In 2010, Corcoran directed the partnerships to stop paying the incentive management fees. Beginning on June 12, 2013, Mullins demanded that Corcoran and Jennison meet with him in their capacity as directors of CMJMC for the purpose of authorizing CMJMC to take all steps necessary to recover the discontinued fees. Neither Corcoran nor Jennison formally responded to Mullins's overtures.
By this time, according to the judge, "Corcoran and Mullins had been suing each other for many years and were not speaking, except through their lawyers."
Mullins then brought breach of contract actions on behalf of CMJ and CMJMC against each of the partnerships (counts I through V). He also sued Corcoran and Jennison for breach of fiduciary duty. The partnerships each asserted counterclaims for money paid by mistake (count I); money had and received (count II); unjust enrichment (count III); reformation and cancellation (count IV); and breach of contract (count V).
The complaint also sought a declaration that the incentive management fees continue to be owed going forward.
The parties cross-moved for summary judgment, with Mullins moving on all of the plaintiffs' counts and for dismissal of the partnerships' counterclaims, and with the partnerships moving for judgment on their counts for money had and received, unjust enrichment, and breach of contract. Jennison and Corcoran moved for summary judgment dismissing the count against them for breach of fiduciary duty.
After hearing the motions, the judge rejected the partnerships' defenses of lack of consideration and implied condition subsequent, but determined a genuine and material question of fact existed as to whether the parties' contractual arrangement should be reformed based on mutual mistake, on the theory that the parties had agreed at the time of the Paine Webber buyout to discontinue the incentive management payments but failed to memorialize that agreement in completing the transactions. Additionally, the judge dismissed Mullins's derivative claim for breach of fiduciary duty against Corcoran and Jennison.
In January, 2017, the partnerships served a motion for leave to amend their answer and counterclaims, seeking to include a separate defense of "subsequent oral agreement." That motion was denied at a pretrial conference on January 11, 2017. The case proceeded to a trial in February, 2017 on the partnerships' mutual mistake theory. After trial, the jury rejected the partnerships' mutual mistake theory. By agreement, the parties then submitted to the judge the question of how much CMJ should have been paid by the partnerships since the time Corcoran ordered the payments discontinued. In his findings and rulings on that issue, the judge rejected Mullins's claim for attorney's fees pursuant to G. L. c. 156D, § 7.46. Final judgment entered against each partnership in a separate amount of damages pertaining to that partnership (the calculation of which is not in question). The final judgment also declared that the supplemental management agreements are all "valid and binding contracts," dismissed the derivative claim for breach of fiduciary duty, and dismissed all five of the partnerships' counterclaims.
Discussion. The judge's entry of summary judgment on certain claims and defenses is reviewed de novo. Merrimack College v. KPMG LLP, 480 Mass. 614, 619 (2018). We view the evidence in the light most favorable to the party against whom judgment has entered. Miramar Park Ass'n v. Dennis, 480 Mass. 366, 376-377 (2018). Summary judgment is appropriate "where there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law." Id. at 376.
1. Lack of consideration. The partnerships contend that CMJ was already required to perform all activities necessary to manage the five housing developments at the time of the Paine Webber purchase, and thus, CMJ took on no additional duties in exchange for payment of the incentive management fees. Accordingly, they argue, the supplemental management agreements fail for lack of consideration.
The supplemental management agreements each state on their face that they are made in "consideration of the mutual covenants and conditions set forth herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged." The contracts all go on to state numerous covenants and conditions. Accordingly, consideration for each of the contracts is manifest on its face. See Finegan v. Prudential Ins. Co. of America, 300 Mass. 147, 153 (1938).
The judge assumed without deciding, however, that no additional services were performed under the supplemental management agreements. He found nonetheless that consideration existed because, at the time Paine Webber bought into the partnerships, CMJ was unwilling to keep providing management services unless the partnerships paid the incentive management fee. This is manifestly true -- Corcoran, Mullins, and Jennison controlled CMJ, had the power to withhold CMJ's performance, and apparently insisted on the incentive management fee as a requirement of the Paine Webber deal. Accordingly, consideration existed. See Swartz v. Lieberman, 323 Mass. 110, 112-113 (1948) (promise to pay increased amount to secure continued performance is binding). See also Marine Contrs. Co. v. Hurley, 365 Mass. 280, 286 (1974) ("The requirement of consideration is satisfied if there is either a benefit to the promisor or a detriment to the promisee"). There is no basis in law or logic for the suggestion that such consideration, existing at the time of contract formation, was somehow erased many years later because the parties' circumstances changed. Summary judgment correctly entered as to the partnerships' lack of consideration theory.
The partnerships argue that, even if they received consideration in the form of continued performance by CMJ, there was no benefit flowing in the opposite direction to CMJ because CMJ was not a party to the transactions by which Paine Webber acquired its interests in the partnerships. The partnerships cite no authority for their claim that a benefit under one contract cannot suffice as consideration for another contract. To the contrary, "[t]he leading authorities on the law of contracts all reject the notion that consideration to support a promise must flow only from the promisee." Marine Contrs., 365 Mass. at 286.
The Colonial and Marvin supplemental management agreements are governed by California law. The parties, however, point to no material difference between the law of California and that of Massachusetts as to any topic discussed herein. Accordingly, we rely on Massachusetts law.
2. Implied condition subsequent. Next, the partnerships contend that Paine Webber's continued ownership was a contractual condition implied in the supplemental management agreements, the absence of which excused the partnerships from performance as of the date of the 1999 buyout.
"In order for performance to depend on the occurrence of a condition, the condition must be expressed, unless a court implies the existence of the condition from the circumstances of the contract." Rizika v. Donovan, 45 Mass. App. Ct. 159, 164 (1998). "Such an implication may arise 'if the intent of the parties to create one is clearly manifested in the contract as a whole.'" Id., quoting Massachusetts Mut. Wholesale Elec. Co. v. Danvers, 411 Mass. 39, 46 (1991).
The only expression of the parties' intent related to discontinuance of the incentive management fee found in the contracts is in the provision stating that the supplemental management agreements may be terminated upon notice only after termination of the corresponding management contract with CMJ. Moreover, the undisputed evidence does not show that Mullins, Corcoran, and Jennison assumed Paine Webber would maintain its interest in the partnerships for all time -- it shows only that they simply did not consider the question, one way or the other. Here, the contract as a whole does not manifest any intention to condition performance on the continuing involvement of Paine Webber. See Rizika, 45 Mass. App. Ct. at 164. Accordingly, the judge was correct to refrain from giving the parties' agreements a meaning the parties did not express. See Rogaris v. Albert, 431 Mass. 833, 835 (2000).
Mullins points out that documents produced in discovery show Paine Webber specifically contemplated that it would hold its interests in the partnerships for twenty years or fewer, but the cited evidence does not show Corcoran, Mullins, and Jennison had this information in 1983, at the time of contract formation.
3. The partnerships' motion to amend. Finally, the partnerships argue that the judge abused his discretion by denying their motion to amend their answer to add the defense of subsequent oral agreement. Mullins responds that the judge was well within his discretion to deny the motion because allowing it would have been prejudicial.
See Schinkel v. Maxi-Holding, Inc., 30 Mass. App. Ct. 41, 47 (1991) ("It is open to parties to modify a written agreement by a later agreement not in writing").
A party may amend its pleading by leave of court, which "shall be freely given when justice so requires." Mass. R. Civ. P. 15 (a), 365 Mass. 761 (1974). Sharon v. Newton, 437 Mass. 99, 102 (2002). "Although leave to amend is within the discretion of the judge, leave should be granted unless there appears some good reason for denying the motion." Goulet v. Whitin Mach. Works, Inc., 399 Mass. 547, 549 (1987). Such good reasons include undue delay, bad faith, and undue prejudice to the party opposing the motion. Id. at 549-550. Additionally, when trial is imminent, "a judge may give weight to the public interest in the efficient operation of the trial list and to the interests of other parties who are ready for trial." Id., at 550, quoting Castellucci v. United States Fid. & Guar. Co., 372 Mass. 288, 292 (1977).
The partnerships first served their motion to amend their answer (and filed a notice of intent to file the same) on January 11, 2017, which was the same day as the scheduled final pretrial conference in the case (and more than six months after the judge issued his summary judgment decision denying Mullins's motion). As of that time, the case was scheduled for trial on February 14, 2017. Counsel for Mullins brought the existence of the motion to the judge's attention during the conference. The judge denied the motion, citing the delay in raising a new defense that should have been dealt with at the summary judgment stage.
The judge also distinguished the partnerships' new defense from that on which they had avoided summary judgment, commenting that the material disputed facts had placed any discussion of the supplemental management agreements squarely in the context of the Paine Webber buyout. "And I don't think that it's a standalone issue as to whether or not there was a subsequent oral agreement to end the -- the supplemental management agreements, it was whether this point was discussed by the parties in connection with the Paine Webber buyout, but was mistakenly not included in the voluminous deal documents that had to be done to accomplish that buyout . . . ."
The denial of a motion to amend is reviewed for abuse of discretion, Brown v. Savings Bank Life Ins., 93 Mass. App. Ct. 572, 587 (2018), a "demanding standard." Audubon Hill S. Condominium Ass'n v. Community Ass'n Underwriters of America, Inc., 82 Mass. App. Ct. 461, 472 (2012). An abuse of discretion exists where the judge "made 'a clear error of judgment in weighing' the factors relevant to the decision, such that the decision falls outside the range of reasonable alternatives." L.L. v. Commonwealth, 470 Mass. 169, 185 n.27 (2014) (citations omitted). Here, the judge's denial of the motion was well within the range of reasonable alternatives. We note, additionally, that counsel for the partnerships supplied no explanation as to why the partnerships' new defense could not have been pleaded at the outset of the case or, at a minimum, at around the time summary judgment motions were being prepared. See DiVenuti v. Reardon, 37 Mass. App. Ct. 73, 77 (1994). Accordingly, the judge's decision was well within his discretion.
4. Fiduciary duty. Through Mullins, CMJ and CMJMC appeal from the entry of summary judgment for Corcoran and Jennison on the count against them for breach of fiduciary duty. The complaint alleged that Corcoran and Jennison both breached their duties to CMJ and CMJMC by refusing Mullins's derivative demands. Mullins also argued at summary judgment that Corcoran breached his fiduciary duties to CMJ and CMJMC by causing the partnerships to stop paying the incentive management fee in the first place.
The judge presumed without deciding that any fiduciary duties owed by Corcoran and Jennison to CMJMC as directors of that corporation were also owed by them to CMJ as close shareholders in that business trust. We do the same, and apply the law of fiduciary duty governing closely held corporations, and by analogy, partnerships, to the parties' roles in CMJ. See Brigade Leveraged Capital Structures Fund Ltd. v. PIMCO Income Strategy Fund, 466 Mass. 368, 369 n.4 (2013) (business trust operates in similar fashion to corporation); Swartz v. Sher, 344 Mass. 636, 639 (1962) (a business trust "is in many respects similar to a corporation").
Mullins also contends that a genuine issue of fact exists as to whether Corcoran and Jennison breached their fiduciary duties merely by refusing to meet with him. While it is true as a general matter that corporate directors have a duty to "be present, so far as rationally practicable, at stated meetings of the board and of its committees," Medford Trust Co. v. McKnight, 292 Mass. 1, 5 (1935), Mullins admits that he, alone, could not initiate a CMJMC board meeting because such a meeting must be called by two directors. Accordingly, Jennison and Corcoran did not fail to attend a directors' meeting. Mullins supplies no authority for the proposition that failure to meet with another director upon his unilateral request constitutes a breach of a corporate director's duty. And, even if there are some contexts in which a failure to communicate with other shareholders could indicate a breach of duty, see O'Brien v. Pearson, 449 Mass. 377, 385-386 (2007), such a situation is not presented here.
The judge allowed Corcoran and Jennison's motion on the ground that CMJ's declaration of trust allows for dealings between CMJ and other entities (such as the partnerships) in which CMJ's shareholders and trustees have interests, and provides that such self-dealing shall not "affect the validity of any such contract or disqualify any [s]hareholder, [t]rustee, officer or employee [of CMJ] from voting upon or executing the same or create any liability or accountability to [CMJ] or its [s]hareholders."
In the context of this case, the fiduciary duty claim was appropriately resolved in Corcoran and Jennison's favor on the undisputed facts. A provision in a corporation's articles of organization, corporate bylaws, or stockholder's agreement can alter stockholders' fiduciary duties to one another in a close corporation. See Fronk v. Fowler, 456 Mass. 317, 331-332 (2010); Donohue v. Rodd Electrotype Co. of New England, 367 Mass. 578, 598 n.24 (1975). In the case of a business trust, the declaration of trust is "a contract between the trustees of the trust and the shareholders that defines the rights of the trust's shareholders." Brigade Leveraged Capital Structures Fund Ltd. v. PIMCO Income Strategy Fund, 466 Mass. 368, 373-374 (2013). See Merriam v. Demoulas Super Mkts., Inc., 464 Mass. 721, 727 (2013).
And, although "[s]hareholders in a close corporation owe each other a fiduciary duty of the 'utmost good faith and loyalty,'" Merriam, 464 Mass. at 726, quoting O'Brien v. Pearson, 449 Mass. 377, 383 (2007), "we have encouraged parties in close corporations to negotiate for rights, protections, and procedures that define the scope of their fiduciary duty in foreseeable situations." Merriam, supra. See Fronk, 456 Mass. at 332, quoting Evangelista v. Holland, 27 Mass. App. Ct. 244, 248-249 (1989) ("'Questions of good faith and loyalty do not arise when all the stockholders in advance enter into an agreement' regarding those duties").
We agree with the motion judge that in this case the parties defined the scope of their duties in such a way as to preclude liability to one another based on taking a position adverse to CMJ concerning a contract between CMJ and one or more of the partnerships. "[W]here the parties have defined in a contract the scope of their rights and duties in a particular area, good faith action in compliance with that agreement will not implicate a fiduciary duty." Merriam, 464 Mass. at 727.
Admittedly, "[a] claim for breach of fiduciary duty may arise . . . where the agreement does not entirely govern the shareholder's actions." Merriam, 464 Mass. at 727. Here, however, Mullins's position is squarely at odds with the express language of the declaration of trust.
The summary judgment record reveals no basis for any claim that Corcoran's position on the status of the supplemental management agreements was not based in good faith. Accordingly, Corcoran's refusal to instruct the partnerships to pay the fees and his (and Jennison's) refusal to initiate litigation against the partnerships could not constitute a breach of fiduciary duty.
Mullins argues in his reply brief that because CMJ is the operating general partner (or controls the operating general partner) of Quaker, Colonial, and Marvin, Jennison and Mullins could have acted together to cause at least those three partnerships to pay the incentive management fee notwithstanding Corcoran's view on the subject. This argument is made without citation to legal authority, and without any discussion as to whether it would have been legally permissible, even if technically possible, for Mullins and Jennison to cause the partnerships to pay such funds over the majority owner's objection. Thus, we decline to consider it. See Mass. R. A. P. 16 (a) (4), as amended, 367 Mass. 921 (1975).
5. Mullins's attorney's fees. Finally, Mullins appeals from the judge's denial of his request for attorney's fees to be paid out of CMJ's recovery pursuant to the Massachusetts Business Corporations Act (MBCA), G. L. c. 156D. Under § 7.46(1) of the MBCA, upon termination of a derivative action a court "may" order the corporation to pay the plaintiff's reasonable counsel fees incurred in a derivative proceeding "if it finds that the proceeding has resulted in a substantial benefit to the corporation."
CMJ is a trust and not a corporation. However, the parties do not argue that the MBCA does not apply here. See notes 3 and 15, supra. See also Halebian v. Berv, 457 Mass. at 621-623 & n.4.
The use of the word "may" in § 7.46 makes clear that an award of fees in a derivative action is within the discretion of the judge. See Beninati v. Borghi, 90 Mass. App. Ct. 556, 567-568 (2016) (construing nearly identical language in the Massachusetts Limited Liability Act, G. L. c. 156C). Moreover, the discretionary nature of fee awards under § 7.46 is entirely consistent with the law on derivative proceedings that pre-existed the statute. See Martin v. F.S. Payne Co., 409 Mass. 753, 759 (1991); Palmer v. Murphy, 42 Mass. App. Ct. 334, 342 n.12 (1997). Accordingly, a fee determination in this context is reviewed for an abuse of discretion, and reversed only if the judge's decision is clearly erroneous. Beninati, 90 Mass. App. Ct. at 568.
In a derivative action, "[a] party may recover such fees only for those claims benefitting the corporation and not for direct claims benefitting the party personally." Beninati, 90 Mass. App. Ct. at 568. The MBCA specifically requires a finding of "substantial benefit" to the corporation. See G. L. c. 176D, § 7.46. See also Dynan v. Fritz, 400 Mass. 230, 247 (1987). Here, the judge found the supplemental management agreements were, from their inception, "understood to be a vehicle for distributing cash generated by the operation of the [p]artnerships to Corcoran, Mullins and Jennison . . . which would otherwise be distributed to the owners of the [p]artnerships." Further, he found the award to CMJ will be distributed directly to Corcoran, Mullins, and Jennison under their 1987 agreement. Mullins and Jennison benefit personally from the outcome in this case, while Corcoran is disadvantaged, and there is no particular benefit to CMJ or CMJMC. We see no abuse of discretion in the denial of Mullins's fee petition.
In his brief, Mullins requests an award of attorney's fees and costs associated with this appeal pursuant to G. L. c. 156D, § 7.46. For the reasons discussed here and in the judge's findings and rulings dated May, 2017, we decline to make such an award.
As to Mullins's assertion that his fees should be shared by Jennison personally, the relevant statute does not allow for such an award -- it only permits a court to require the corporate entity on whose behalf suit is brought to pay the plaintiff's fees. See G. L. c. 156D, § 7.46. We are not persuaded that any other authority cited by Mullins supplies a basis for a fee award against Jennison in his personal capacity. See Bournewood Hosp., Inc. v. Massachusetts Commn. Against Discrimination, 371 Mass. 303, 308 (1976) ("attorney's fees are not ordinarily recoverable in the absence of statute, court rule, enforceable contract or stipulation providing therefor").
Mullins and Jennison have both included in their briefs a request for an award of costs pursuant to Mass. R. A. P. 26, as amended, 378 Mass. 925 (1979). An order shall enter awarding Jennison his costs to be taxed against Mullins, since Mullins was the appellant with respect to entry of summary judgment on the fiduciary duty claim and with respect to the denial of Mullins's fee petition. See Mass. R. A. P. 26 (a) (where judgment affirmed, costs taxed against appellant). An order shall also enter awarding Mullins his costs to be taxed against the partnerships (not Jennison), since the partnerships were the appellant with respect to the summary judgment decision on their defenses and the denial of their motion to amend. See id.
Judgment affirmed.
By the Court (Agnes, Shin & Singh, JJ.),
The panelists are listed in order of seniority.
/s/
Clerk Entered: March 27, 2019.