Opinion
21-P-437
04-07-2022
GARY M. MACKOUL, personal representative, [1] & another[2] v. CHARLES A. BIRBARA & others.[3]
Summary decisions issued by the Appeals Court pursuant to M.A.C. Rule 23.0, as appearing in 97 Mass.App.Ct. 1017 (2020) (formerly known as 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 23.0 or 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 23.0
The plaintiffs, Gary M. MacKoul and his brother, Matthew M. MacKoul, as the personal representatives of the estates of their parents, George E. MacKoul and Jeannette MacKoul, respectively, commenced this shareholder derivative action against Beechwood Inn, Inc. (Beechwood); Charles A. Birbara, Beechwood's president and a member of its board of directors; Janet Birbara, the majority shareholder of Beechwood; and the Sedler Corporation (Sedler), a company which is owned and operated by Charles. Count one of the operative verified third amended complaint seeks a corporate accounting of Beechwood and is asserted against all the defendants. Count two alleges a breach of fiduciary duty and is asserted against Janet and Charles Birbara (collectively, the Birbaras) and Sedler. The claims stem from a $125,000 investment in Beechwood that George made in 1991. The plaintiffs allege that over the past two decades, the Birbaras and Sedler have engaged in self-dealing, mismanagement, and fraudulent acts for their own personal advantage and to the disadvantage of Beechwood and its minority shareholders, including George.
Because the plaintiffs share a last name, we use their first names to avoid confusion.
Beechwood is a nominal defendant in this case.
Charles and Janet Birbara are husband and wife. Where necessary, we use their first names to avoid confusion.
To the extent the plaintiffs argue that they have brought direct claims against the defendants, they are incorrect. Both counts of the complaint allege derivative claims.
The Birbaras and Sedler filed motions to dismiss the complaint for lack of subject matter jurisdiction and failure to state a claim upon which relief can be granted pursuant to Mass. R. Civ. P. 12 (b) (1) and (6), 365 Mass. 754 (1974). Following a nonevidentiary hearing, during which Beechwood moved orally to join the Birbaras' motion to dismiss, a judge of the Superior Court concluded that the plaintiffs lacked standing because they failed to allege that either estate had an ownership interest in Beechwood. As a result, the judge allowed the defendants' motions, and because the lack of standing was fatal to the claims at issue and the plaintiffs had failed to correct deficiencies in their pleadings of which they had been on notice for over a year, the complaint was dismissed with prejudice. We affirm.
The Birbaras' motion also asserted that the complaint should be dismissed for failure to comply with Mass. R. Civ. P. 23.1, 365 Mass. 768 (1974), and because the claims are barred by the applicable statutes of limitations. Given his conclusion that the plaintiffs do not have standing, the motion judge did not address these two alternative grounds for dismissal. We likewise see no need to address these arguments because we reach the same conclusion as the motion judge on the issue of standing.
Although the judge's memorandum of decision and order specifically addressed the arguments advanced by the Birbaras, the judge also concluded that the "same logic" would apply to Beechwood and Sedler and entered judgment in their favor.
Background.
"We recite the pertinent facts alleged in the complaint, taking as true its factual allegations, and drawing all reasonable inferences in the plaintiffs' favor." International Bhd. of Elec. Workers Local No. 129 Benefit Fund v. Tucci, 476 Mass. 553, 554 (2017). On June 27, 1986, Angela Scola & Co., Inc. (ASC), entered into a ground lease with the Worcester Business Development Corporation (WBDC) to develop property owned by WBDC at 363 Plantation Street in Worcester (the property) by renovating an existing hotel and constructing a new hotel (the project). About a year later, on October 20, 1987, ASC assigned its interest in the ground lease to Beechwood/Worcester Limited Partnership (BWLP), who, in turn, entered into a $6.5 million construction loan agreement with Shawmut Worcester County Bank, N.A. (Shawmut) for the project. A year later, on October 4, 1988, BWLP borrowed an additional $2 million from Shawmut to complete the project. Construction of the new hotel, known as the Beechwood Inn, was completed in 1989. Thereafter, BWLP, as lessee of the ground lease with WBDC, entered into a sublease with Beechwood.
A ground lease is defined as "[a] long-term (usu[ally] 99-year) lease of land only. Such a lease typically involves commercial property, and any improvements built by the lessee usu[ally] revert to the lessor." Black's Law Dictionary 1067 (11th ed. 2019).
Shawmut Bank, N.A., later acquired the interests of Shawmut Worcester County Bank, N.A., by way of merger.
In 1991, Charles, a licensed physician in the Commonwealth of Massachusetts, persuaded his friend and patient, George, to invest $125,000 in Beechwood. As noted, Charles was a director and the president of Beechwood and Janet was the majority shareholder. In exchange for his investment, George received twenty-five stock certificates, which represented a 2.5 percent ownership interest in the company. George was a director and the treasurer of Beechwood from 1991 until his resignation from both positions in 2009. He was eighty-five years old at that time.
Meanwhile, around the same time that George made his investment, BWLP defaulted on its loan obligations to Shawmut, pursuant to which BWLP owed Shawmut approximately $9,080,744. On July 17, 1991, Shawmut filed suit and recorded a writ of attachment against BWLP for the outstanding balance of the loans. On September 3, 1992, Charles, who had personally guaranteed the Shawmut loans, formed Sedler and served as its president, treasurer, secretary, director, and sole shareholder. Shortly thereafter, on September 18, 1992, BWLP assigned its interest in the ground lease to Sedler, which entered into a refinancing agreement with Shawmut. At this point, Beechwood became obligated to pay rent to Sedler, and, since Beechwood became a guarantor for the new loan that Sedler obtained from Shawmut, Charles was shielded from personal liability. BWLP was subsequently dissolved on December 11, 1992.
Several years later, on or about November 1, 1996, WBDC conveyed the property to Sedler for $800,000. The defendants failed to give Beechwood's shareholders written notice of the impending sale, thereby depriving them of the opportunity to bid on the property, which, according to the plaintiffs' third amended complaint, is currently valued at $8,787,995. The defendants also failed to inform Beechwood's shareholders that Charles was the sole owner and operator of Sedler, which, the plaintiffs allege, was engaged in self-interested transactions as reflected by its 1992 financing arrangement with Shawmut and its lease agreement with Beechwood.
Based on information from the city of Worcester tax assessment office, the plaintiffs claim that the replacement value of the two buildings on the property is $17,221,211.
At the time suit was filed, the annual rent that Sedler collected from Beechwood was $1.08 million, which the plaintiffs claim is "excessive."
George died on April 4, 2016. The plaintiffs allege that upon George's death, his ownership interest in Beechwood was transferred to Jeannette, who, in turn, "by operation of law," became a shareholder of Beechwood. Jeannette died on October 30, 2018.
Discussion.
Because the judge concluded that the plaintiffs lacked standing as a matter of law, our review is de novo. Indeck Maine Energy, LLC v. Commissioner of Energy Resources, 454 Mass. 511, 516 (2009).
"Standing is an issue of subject matter jurisdiction that is properly challenged by way of a motion to dismiss under rule 12 (b) (1)." Indeck Maine Energy, LLC, 454 Mass. at 516. Shareholder derivative actions are governed by the Massachusetts Business Corporation Act, which, in pertinent part, provides as follows: "A shareholder may not commence or maintain a derivative proceeding unless the shareholder . . . was a shareholder of the corporation at the time of the act or omission complained of or became a shareholder through transfer by operation of law from one who was a shareholder at that time . . . ." G. L. c. 156D, § 7.41. In addition, a plaintiff who commences a derivative suit must remain a shareholder throughout the litigation. This "continuing ownership requirement," although not expressly stated in the statute, has been recognized by our case law. See Billings v. GTFM, LLC, 449 Mass. 281, 291 n.21 (2007). See also Schaeffer v. Cohen, Rosenthal, Price, Mirkin, Jennings & Berg, P.C., 405 Mass. 506, 513 (1989) (plaintiff lost standing to assert derivative claim after selling her stock in company); Mendelsohn v. Leather Mfg. Corp., 326 Mass. 226, 237 (1950) (plaintiff's right to bring derivative suit terminated when he ceased to be shareholder).
The plaintiffs claim that they have established standing because George was a Beechwood shareholder when the defendants diverted and misappropriated corporate profits and opportunities, as described above, and George's shares in Beechwood were transferred to Jeannette upon his death. The flaw in this argument is that it has no support in the record. As the motion judge aptly observed, "[t]he plaintiffs provide[d] no factual allegation and/or information as to what happened to the twenty-five stock certificates between April [4, ] 2016 [when George died] and October 30, 2018 [when Jeannette died]. In addition, the plaintiffs provide[d] no factual allegations or information to establish that the equity interest, that is the twenty-five stock certificates[, ] are presently owned by the Estate of George MacKoul and/or the Estate of [Jeannette] MacKoul."
Furthermore, the plaintiffs' argument in response to the motion judge's point that the complaint fails to establish that either estate had an equity interest in Beechwood is unavailing. The plaintiffs assert that either George's estate or Jeannette's estate must own the twenty-five stock certificates, and, therefore, at least one of the two plaintiffs has standing. While we must draw all reasonable inferences in favor of the plaintiffs, we cannot speculate as to who owned the twenty-five stock certificates between the time George died on April 4, 2016, and Jeannette's death on October 30, 2018. See Iannacchino v. Ford Motor Co., 451 Mass. 623, 636 (2008) (plaintiff must provide "factual 'allegations plausibly suggesting (not merely consistent with)' an entitlement to relief" (citation omitted)). In sum, because the plaintiffs' third amended complaint contains no facts on which we can infer that they can meet the "continuing ownership requirement," we conclude that the plaintiffs lack standing and the motion judge properly dismissed the complaint pursuant to rule 12 (b) (1).
The complaint was properly dismissed under rule 12 (b) (6) for the same reason. Where, as here, the plaintiffs lack standing, the complaint fails to state a claim upon which relief can be granted. We also reject the plaintiffs' claim that the Birbaras and Sedler lacked standing to file a motion to dismiss. Clearly, as named defendants in a lawsuit, they were entitled to challenge the action against them apart from any position that Beechwood might advance. General Laws c. 156D, § 7.44, on which the plaintiffs rely, is not to the contrary. Section 7.44 permits dismissal of a derivative action by the court on motion by the corporation under certain circumstances, none of which are present here.
The plaintiffs next argue that it was error to dismiss the complaint with prejudice where, as here, the dismissal was based upon the lack of subject matter jurisdiction. "Although dismissals for lack of subject matter jurisdiction are ordinarily without prejudice because they typically do not involve an adjudication on the merits, in cases where a lack of standing is also fatal to the merits of the plaintiff[s'] claim[s], as here, dismissal must be with prejudice." Rental Prop. Mgt. Servs. v. Hatcher, 479 Mass. 542, 547 (2018) . Here, the plaintiffs' claims for an accounting and breach of fiduciary duty require that they have an ownership interest in Beechwood, and the failure to allege facts to establish that status is fatal to the merits of both claims. See Abate v. Fremont Inv. & Loan, 470 Mass. 821, 828, 836 (2015) (dismissal of try title action with prejudice appropriate where determination of standing "effectively negate[d]" merits of plaintiff's claim).
Additionally, in this case, as the motion judge explained, the plaintiffs failed to correct deficiencies in the pleadings after being put on notice multiple times that they must do so. This failure provided an independent basis for dismissing the complaint with prejudice. See Friedman v. Globe Newspaper Co., 38 Mass.App.Ct. 923, 924 (1995), citing Mmoe v. Commonwealth, 393 Mass. 617, 621 (1985).
The Birbaras and Beechwood have requested an award of their appellate attorney's fees and costs. Those requests are denied.
Judgment affirmed.
The panelists are listed in order of seniority.