Opinion
No. 15–P–974.
10-31-2016
Stephen F. KERN v. INCOME RESEARCH & MANAGEMENT & others.
MEMORANDUM AND ORDER PURSUANT TO RULE 1:28
The plaintiff, Stephen F. Kern, filed a five-count complaint against his former employer, Income Research & Management (IRM), and its principals, John A. Sommers, John A. Sommers, Jr., and William A. O'Malley, asserting, inter alia, breach of contract and breach of fiduciary duty. He appeals from the dismissal of counts IV and V (respectively, restitution and breach of fiduciary duty) on summary judgment and asserts error in special verdict questions submitted to the jury on the remaining counts. After trial, the plaintiff moved for a new trial, which motion was denied; he also appeals from that denial. We refer to the facts as they pertain to the issues on appeal.
The five counts were (I) breach of contract and the covenant of good faith and fair dealing, (II) breach of a 2004 written contract, (III) promissory estoppel, (IV) restitution, and (V) breach of fiduciary duty.
Count II was also dismissed on summary judgment. In ruling on the motion for a new trial, the trial judge characterized the issues that were tried as follows. “As a result of the pretrial work, the following claims proceeded to trial: 1) breach of an enforceable oral agreement in 2002 regarding phantom equity; 2) promissory estoppel with respect to the 2002 alleged promise; and 3) breach of two written employment agreements (2000 Offer Letter and 2004 Employment and Restricted Share Agreement) by reason of the circumstances surrounding termination of the plaintiff's employment.”
At the time of trial, counsel made clear that the counts that remained for trial pertained to IRM and not to the individual defendants.
The plaintiff does not raise any separate arguments pertaining to the denial of his motion for a new trial.
IRM, a closely held corporation, is engaged in money management for institutional and individual clients. Kern was hired in 2000 as a portfolio manager, focusing on mortgage-backed securities. The underlying dispute is centered principally on communications between the parties relating to so-called “phantom equity” to be awarded either as a form of compensation (according to the defendants), or as an ownership substitute intended to foster continued employee loyalty (according to Kern).
“Phantom equity” is a colloquial but imprecise term generally used to describe a return based on the value of a business, but not derived from actual ownership.
Summary judgment. The conversations and other communications provided by the record are not a model of clarity. Our de novo review, Miller v. Cotter, 448 Mass. 671, 676 (2007), leads us to conclude that the motion judge ruled correctly that (1) the integration clause in the 2004 written employment agreement (agreement) applies to employment compensation but not to ownership interests, and (2) the language relating to the parties' communications about phantom equity can be variously interpreted to fall into either category, leaving a genuine dispute of material fact requiring resolution at trial of counts I and III.
While the dismissal of count II is not identified as an issue on appeal, to the extent that Kern infers that the defendants breached the agreement by offering Kern actual equity in the firm on the condition that he relinquish his claim to phantom equity and that this condition violated his employment contract because the agreement states that any offer of shares to employees must be made at the appraised value of the stock, this suggestion need not detain us. As the motion judge pointed out, the stipulation of a specific method to determine the sale price does not prevent the company from placing other conditions on the offer.
Count IV is a claim for restitution based on an oral contract. The motion judge determined that the contract claim set forth in count I disposed of this count, and we agree. Restitution is an equitable remedy based on the notion of unjust enrichment. Santagate v. Tower, 64 Mass.App.Ct. 324, 329–330 (2005). The plaintiff's claim to damages for a failure to receive phantom equity or the value represented thereby is based on his contractual claim, and not on a separate theory of recovery.
Count V is a claim of breach of fiduciary duty against the individual defendants. The judge ruled that the claim for breach of contract supersedes this claim as well. The plaintiff points to several decisions, including the recent case of Selmark Assocs. v. Ehrlich, 467 Mass. 525 (2014), asserting error in the judge's ruling that the breach of fiduciary duty cannot be alleged where the underlying obligation is contractual. Selmark acknowledges that “the presence of a contract will not always supplant a shareholder's fiduciary duty.” Id. at 537, quoting from Merriam v. Demoulas Super Mkts., Inc., 464 Mass. 721, 727 n.14 (2013). However, the cited exception is “[w]hen the contract does not entirely govern the ... actions challenged by the plaintiff, a claim for breach of fiduciary duty may still lie.” Selmark, supra at 537–538. Here pertinent, Selmark reaffirms the basic principle that “when 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 care principles.” Id. at 537, quoting from Chokel v. Genzyme Corp ., 449 Mass. 272, 278 (2007). The plaintiff's attempt to equate the parties' dispute over the meaning of “phantom equity” with a circumstance in which the contract did not fully govern the award of that benefit (however defined) is unpersuasive, and the reliance on Selmark thus unavailing. There was no error in the dismissal of count V.
Jury verdict slips. Question one. The plaintiff complains that the jury should have been asked whether an oral contract for phantom equity existed through implication and, if so, whether the terms of that contract were those alleged by Kern. The plaintiff complains that the judge limited the jury's inquiry to the accuracy of Kern's interpretation of the promises that were made to him. We discern no error. The record supports the judge's ruling that the plaintiff's claim of an oral contract was based on a “very specific promise” made to him by an IRM principal in a particular meeting in April of 2002. That promise was characterized by Kern, both in his pleadings and evidence, as the transformation of a mechanism used to provide an annual bonus into an ownership facsimile that would operate independently of his employment status and that contained two inseparable features: an annual entitlement to two and one-half percent of each year's predistribution net earnings, and two and one-half percent of the proceeds if the firm were sold. See note 11, infra.
The jury answered “NO” to the following:
“2002 Oral Contract Claim
1. Has Plaintiff Stephen Kern proved by a preponderance of the evidence that the parties entered into an enforceable oral contract in 2002 that granted him 2 1/2% of IRM's pre-distribution earnings every year from that point forward, and 2 1/2% of IRM's value if the firm were ever sold?”
We note first that a judge has broad discretion in the area of special jury questions. See Price v. Cole, 31 Mass.App.Ct. 1, 5 (1991) (“Both as to whether special questions shall be put to a jury and the form and content of those questions, the trial judge has wide discretion”). The judge's submission to the jury reflected the theory of the case presented by the plaintiff and, consequently, also addressed the contentions advanced by IRM in rebuttal. The plaintiff's subsequent request to allow the jury to find that Kern was entitled to benefits or awards was neither pleaded nor tried, and was properly denied. We agree with the judge that “[t]he trial record did not demonstrate any reason for implying consent to try a different, unpleaded claim.” See Jensen v. Daniels, 57 Mass.App.Ct. 811, 814–816 (2003).
Question six. The plaintiff complains that question six was “tainted” by the structure of question one. The legal principle cited for this assertion is the general rule that termination of employment is improper when it is based on a motive to deny certain vested (or soon to vest) ownership interests. From this tenet Kern argues that because the jurors were limited by the language of question one to finding the provisions of an oral contract specifically set forth in that question, they were less likely to agree that other or additional vested interests may have been the motive behind Kern's termination. As question one was properly formulated, it correctly placed other special questions in the context of the evidence before the jury.
The jury answered “NO” to the following:
“Written Contract Claim
6. Has Plaintiff Stephen Kern proved by a preponderance of the evidence that IRM breached the terms and conditions of his employment, as reflected in the March 2000 Offer Letter and the 2004 Employment and Restricted Share Agreement between the parties, when it terminated his employment?”
Form of questions one and nine. The plaintiff additionally complains that questions one and nine were “improperly compound,” in that they only allowed for an affirmative response if the jury found that Kern had been promised both annual payments and a share of proceeds in the event the company was sold. As stated, supra, the detailed description of the promises submitted to the jury for their consideration matches the allegations of the complaint. There was no error.
Question nine was:
“Promissory Estoppel Claim
9. Did IRM make a promise in 2002 to grant Stephen Kern 2 1/2% of IRM's pre-distribution earnings every year from that point forward, and 2 1/2% of IRM's value if the firm were ever sold, as an incentive for Mr. Kern to stay with the company?”
Kern's complaint alleged that one of the principals told him “that the phantom equity [he was] receiving was no longer just a bonus, but the financial equivalent [to him] of equity in IRM. He assured [him] that, besides receiving annually a portion of the company's pre-distribution earnings equal to the percentage of their phantom equity ownership interest, [he] would receive [a] phantom equity percentage share of the purchase price if the company were ever sold. Based in large part on that promise, Mr. Kern did not explore other, more promising options at that time, but remained with IRM, and has made a substantial contribution to its success since then.” (Emphasis added.)
Response to jury question during deliberations. The jury posed the following question during their deliberations: “If ‘mutuality’ is required for a contract to exist, how can there be ever ambiguity in a contract? That is, doesn't mutuality mean there is no ambiguity?” In response the judge referred the jury to portions of her initial charge describing the elements of contract formation, terms, and ambiguity. The judge's response, careful and balanced, was not an abuse of her considerable discretion. Commonwealth v. Robinson, 449 Mass. 1, 8 (2007).
The portions of the charge to which the judge referred were taken directly from the Massachusetts Superior Court Civil Practice Jury Instructions (Mass. Cont. Legal Educ.3d ed.2014).