Opinion
21-P-122
01-26-2022
Jennifer BRINING, individually and as trustee, v. John J. DONOVAN & others.
MEMORANDUM AND ORDER PURSUANT TO RULE 23.0
Jennifer Brining, a shareholder of SendLater, Inc., also known as SendItLater (SIL), a now defunct Internet startup, brought the underlying derivative action against SIL's former managing director, John J. Donovan. After a bench trial, a Superior Court judge entered a special verdict for Brining on her claims of breach of fiduciary duty, fraud, and unjust enrichment and found that Brining and SIL's shareholders sustained damages of $1,571,770. On Brining's postverdict motion for additional equitable relief, the judge entered an order prohibiting Securenet Holdings, LLC (Securenet), a company that the judge found was owned by Donovan, from sharing in the award. The judge also ordered that the award be distributed to SIL's remaining shareholders on a pro rata basis determined by dollars invested, rather than by number of shares held. Donovan appeals, arguing that the judge applied the wrong burdens of proof, miscalculated damages, and erred in imposing equitable remedies. We affirm.
1. Burdens of proof. Courts subject self-dealing transactions by corporate directors to " ‘vigorous scrutiny,’ placing upon the directors the burden of proving both the good faith of the transaction and ‘its inherent fairness from the viewpoint of the corporation.’ " Crowley v. Communications for Hosps., Inc., 30 Mass. App. Ct. 751, 757 (1991), quoting Winchell v. Plywood Corp., 324 Mass. 171, 177 (1949). Here, prior to any witnesses being called, the judge found that Brining met her initial burden of identifying self-dealing transactions made by Donovan and thus concluded that, under Crowley, the burden shifted to Donovan to justify those transactions. Donovan argues that this was error and prejudicial because it led the "judge to largely change the order in which the evidence was adduced." We disagree.
As an initial matter, the special questions, to which Donovan did not object, were framed in terms of whether Brining proved each of her claims by a preponderance of the evidence. Therefore, by returning a verdict in Brining's favor, the judge must have found that Brining met that burden. And as far as the order in which the evidence was adduced, Donovan points to nothing that occurred during trial that prejudiced him. It does not appear that the witnesses were called in any particular order such that it affected the verdict. Indeed, Donovan himself testified last.
In any event, we agree with how the judge read and applied Crowley. Brining submitted an exhibit, relied on by the judge, identifying at least sixty separate transactions -- totaling more than $2,000,000 -- in which funds were distributed from SIL's account to Donovan's personal account. Donovan's contention that Brining was also obliged to prove at the outset that the transactions were wrongful cannot be squared with Crowley, which places the burden on the defendant. See 30 Mass. App. Ct. at 757. Although Donovan notes that Crowley involved "compensation issues," he offers no principled reason why it would not apply in the circumstances of this case. We discern neither error nor prejudice.
2. Calculation of damages. In two conclusory sentences, Donovan argues that the judge erred by not including certain offsets when calculating damages. Even assuming this is adequate appellate argument, see Mass. R. A. P. 16 (a) (9), as appearing in 481 Mass. 1628 (2019), it does not entitle Donovan to relief. In an answer to a special question, the judge expressly found that Donovan had not met his burden of proving that offsets were warranted. Donovan has not shown, or even attempted to show, that there was no evidence to reasonably support this conclusion. See Spinosa v. Tufts, 98 Mass. App. Ct. 1, 10-11 (2020).
3. Equitable remedies. We discern no abuse of discretion in the judge's imposition of equitable remedies. See Demoulas v. Demoulas, 428 Mass. 555, 589 (1998). Contrary to Donovan's suggestion that recovery in a derivative suit always belongs to the corporation, the judge was within his equitable authority to order direct relief to the shareholders. See Samia v. Central Oil Co., 339 Mass. 101, 123-125 (1959). Cf. Demoulas, supra at 591 ("The judge had broad powers to determine the appropriate relief," and "general principle" that "courts ordinarily will not get involved in matters of corporate governance ... does not undermine a court's ability to fashion a remedy for closely-held corporations"). Also, Donovan points to no evidence supporting his assertion that SIL has a number of creditors, whose claims, he says, should take priority over those of the shareholders.
The judge was likewise within his discretion to preclude Securenet from sharing in the recovery. When a fiduciary breaches his duty of loyalty, a judge has the discretion to craft a remedy that will "deny any profit to the wrongdoer and prevent his unjust enrichment." Demoulas v. Demoulas Super Mkts. Inc., 424 Mass. 501, 556 (1997). Here, the judge explained that "[p]rohibiting Mr. Donovan from sharing in the [recovery] through his interest in Securenet will help to ensure that his misconduct does not redound to his own financial benefit." Although Donovan challenges the factual premise of this ruling, claiming that his wife Linda and Securenet's managing member Hugh Collins were Securenet's actual owners, he has not shown that the judge clearly erred. See FOD, LLC v. White, 99 Mass. App. Ct. 407, 412 (2021). The only evidence Donovan cites is a document identifying Linda as Securenet's "Registered Agent." The document says nothing about ownership, and the trial testimony, as Brining details in her brief, supports the judge's finding that Donovan himself owned Securenet. Donovan fails to demonstrate clear error.
Nor did the judge err by allowing Brining's request for pro rata distribution based on the dollar amount of each shareholder's investment, and not the number of shares each owned. The judge found that distribution on this basis would be "a more equitable and more accurate means of compensating all SIL investors ... for their actual, out-of-pocket losses" because Donovan's wrongdoing "undeniably distorts the relative share percentages of SIL's various investors." While not challenging the substance of this ruling, Donovan argues that the judge erred by imposing a remedy that "diluted" the interests of the other shareholders, who were not parties to the case. But Donovan fails to explain how he has standing to raise this argument. See Slama v. Attorney Gen., 384 Mass. 620, 624 (1981), quoting Barrows v. Jackson, 346 U.S. 249, 255 (1953) ("[o]rdinarily, one may not claim standing ... to vindicate the constitutional rights of some third party"). Moreover, the argument overlooks the very nature of a derivative action, which is, by definition, an action asserted by the plaintiff on the corporation's behalf. Under Mass. R. Civ. P. 23.1, 365 Mass. 768 (1974), a "derivative action may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of the shareholders or members similarly situated in enforcing the right of the corporation or association." At no point during the pendency of this action did Donovan, or any SIL shareholder, move to disqualify Brining from serving as a representative plaintiff. Thus, even assuming Donovan has standing, it is too late for him to claim that the interests of the other shareholders were not adequately protected.
The record reflects that on December 1, 2016, soon after Brining filed her original complaint, an attorney for SIL sent a letter to all SIL shareholders notifying them of Brining's demand that SIL file a lawsuit against Donovan for breach of fiduciary duty. The letter also states that, in the event SIL did not do so by December 5, 2016, Brining intended to amend her complaint to raise derivative claims on behalf of SIL.
Finally, Donovan contends that Brining was not entitled to any equitable remedies because she did not specifically pray for them in her complaint. But the complaint contains a general prayer for relief, which gave the judge the discretion to impose equitable remedies that were not "fatal[ly] inconsisten[t]" with the complaint's specific prayers for relief. Powers, Inc. v. Wayside, Inc. of Falmouth, 343 Mass. 686, 694 (1962). There was no such inconsistency and, consequently, no abuse of discretion.
Judgment affirmed.