Opinion
No. 00-1033-H.
April 9, 2009, Apirl 13, 2009.
FINDINGS OF FACT, RULINGS OF LAW, AND ORDER FOR JUDGMENT
Manilal Gada was an accountant who in 1993 conceived the hotel venture that is the subject of this lawsuit. He recruited several of the present parties to join him as investors, mismanaged the hotel, and took his life in 1998, leaving his fellow investors with a failing enterprise. The parties' subsequent attempts to revive the hotel operation led to the present dispute.
Specifically, plaintiff Saryu Patel brings this shareholder derivative action against fellow shareholders, directors, and officers of the two close corporations which Gada created, Zeba Group, Inc., and Abba Group, Inc. Patel alleges that defendants improperly transferred the assets of both corporations — a Days Inn hotel located in New Bedford, Massachusetts, and the accompanying liquor license — to defendant Satish Sharma's wholly-owned company, defendant Emerald Partnership, Ltd. After a jury-waived trial, the Court makes the following findings, rulings, and order for judgment.
BACKGROUND
Plaintiff's initial complaint asserted direct claims against defendants. Those claims were dismissed by the Court (Giles, J.) in an order dated October 23, 2000, with leave to file as a shareholder derivative suit (except as to original counts I and XII, which were dismissed with prejudice). On November 10, 2000, plaintiff filed her First Amended Complaint, in which she refers to the case as a "direct and derivative action," First Amended Complaint at 1. In the motion accompanying the First Amended Complaint, plaintiff avers that, "in compliance with the [October 23, 2000] Order, Plaintiff attaches the within First Amended Complaint, which adds an alternate derivative count on behalf of the Zeba Group, Inc. corporation." Plaintiff's Motion for Leave to Amend Complaint, at 1.
To the extent that the First Amended Complaint contains direct claims previously dismissed by the Court, those claims will not be considered. Plaintiff does not appear to contend otherwise. Indeed, in her Trial Memorandum filed in response to the Court's August 2, 2006 Pre-Trial Order, plaintiff's "Statement of Claims to be Tried" lists her capacity, as to each claim, as a plaintiff suing "on behalf of ZEBA and ABBA."
Count I (Breach of Fiduciary Duty); Count II (Breach of Duty of Good Faith and Loyalty); Count III (Conversion); Count IV (Fraud); Count VI (Misrepresentation); Count VII (Negligence); Count IX (Unjust Enrichment); Count X (Constructive Trust)
Plaintiff does, in one instance, appear to assert a direct claim when she states that defendants Kunj Sharma, Shirley Wu, Anand Salooja, Louis Del Monico, Jenny Li, and Sunny Salooja breached their fiduciary duty not only to ZEBA and ABBA, but also to her "as a minority shareholder in a closely held corporation." Plaintiff's Trial Memorandum, at 2. The Court's order of October 23, 2000, at 6, expressly dismissed plaintiff's direct claim of breach of fiduciary duty. The Court will consider plaintiff's status as a shareholder in closely held corporations in determining the duties which shareholders owed to each other and to the corporations.
FINDINGS OF FACT
On the basis of the credible evidence and reasonable inferences therefrom, the Court finds as follows.
1. The Parties and Other Participants in the Hotel Venture
The parties and others involved in the hotel venture that underlies this action differed widely in their respective degrees of business sophistication in general, and hotel management experience in particular.
Plaintiff Saryu Patel (Patel or plaintiff) was born in Kampala, Uganda, and lives in Boston. In 1980 she moved to the United States with her husband and had two children. She first resided in Massachusetts, and was widowed in July 1988. Patel has a B.A. degree from study in India. She also attended the University of Houston. She had known Manilal Gada (Gada) since before her husband's death.
Gada was a certified public accountant who, as set forth in detail below, in 1993 recruited clients and friends to invest in the purchase of the New Bedford Days Inn hotel (hotel). He ran the hotel from 1993 to 1998 with his daughter, Reshma Gada.
Defendant Satish Sharma (Sharma) is president and the sole shareholder of defendant Emerald Partnership, Ltd. (Emerald). He is president of what remains of Zeba Group, Inc. (Zeba), and Abba Group, Inc. (Abba). His principal occupation, however, is medicine: he is a cardiologist, practices in Rhode Island, and teaches at Brown University Medical School. He attended medical school in India, and trained at Boston-area hospitals. He has been married for more than twenty-five years to defendant Kunj Sharma, also a physician (Kunj Sharma).
Sharma's business interests include ownership of twenty-two duplex residential buildings in Massachusetts and Rhode Island, and ownership interests in two hotels, one located in Portsmouth, Rhode Island, which he purchased in 1995, and one which he purchased thereafter in Gloucester, Massachusetts. He had not had experience with hotels before his banker suggested the Portsmouth investment, and the broker for that transaction thereafter suggested the Gloucester investment.
Sharma first met Gada in the late 1980's, after which Gada became Sharma's and Kunj Sharma's accountant.
Defendant Anand Salooja (Salooja) came to the United States in 1983, having obtained a masters in mechanical engineering in India, and a doctorate in England. After initially being in the restaurant and laundromat businesses in the U.S., he invested in a motel through Pramukh Corporation, and, with his wife, owned and operated a motel in Rhode Island. He was thereafter a hotel consultant. He met Gada in 1983, after arriving in the U.S., and retained Gada as his accountant.
Defendant Sunny Salooja came to the United States in 1973. She is a respiratory therapist at Pawtucket Memorial Hospital. She is the sister of defendant Anand Salooja, and of Tejinder Salooja, a physician who died in April 1999.
Defendant Sandra Cheng (Cheng) is Vice President of Support Services for a Providence real estate firm. She has held that position for five years.
Cheng, defendant Shirley Wu (Wu), and Jenny Li (Li) are sisters. Cheng met Gada at his office in 1992 or 1993. Wu was introduced to Gada by Kunj Sharma, who was a friend of Cheng. Gada hired Wu in October 1992. She was his only employee, and had secretarial, bookkeeping, and other duties. In 1996, Wu asked Cheng to loan money to Gada. Wu is currently Emerald's accountant.
Sonal Patel is Patel's daughter. She received a BA degree from Boston University in 1995. In July 1998, Gada hired her as the hotel's front desk manager and bus tour coordinator. After Gada's death, she sent the daily night audits to Rupal Patel and K.C. Patel, who entered the information into the hotel's accounting system.
Defendant Louis Del Monico and his son, defendant Domenic Del Monico, retained Gada as their tax accountant in the 1980's, and were friends of Gada's. Gada recruited Louis to invest in Zeba's purchase of the hotel. For approximately eighteen months following that purchase in 1993, Gada hired Domenic, who did not invest in the venture, to analyze and make recommendations regarding the hotel's restaurant operation.
2. The Purchase of the Days Inn Hotel
In 1993, Gada approached several of his clients, including Kunj Sharma, with an investment proposal. (Her husband Satish Sharma was in India at the time.) Gada told her that he planned to form a closely-held corporation to purchase the hotel from RECOLL Management Corporation, which was liquidating that and other properties held by the FDIC through bank and other foreclosures.
Gada's plan was to create two corporations which would own and operate the hotel; he explained to Wu that it was safer to own the liquor license and restaurant in a corporation separate from the corporation which owned the hotel.
On November 22, 1993, Gada formed Zeba, a Massachusetts corporation, to own and operate the hotel. Trial Exhibit 1 (hereafter, "Ex. __").
The initial shareholders of Zeba were Gada (thirty shares), Salooja (twenty five), Patel (thirty), Louis Del Monico (twenty), Kunj Sharma (ten), Mukund Shah (Shah) (ten) and Wu (twenty). Ex. 3. On January 3, 1994, Wu transferred thirteen of her shares to her sister Jenny Li, and retained the remaining seven shares.
The initial officers of Zeba were Gada (president and treasurer), and Salooja (clerk). The initial directors were Gada and Salooja. Immediately following incorporation, Patel was elected as a third director. Ex. 4.
On the same day that it was incorporated, Zeba's directors and shareholders authorized Zeba to purchase the hotel from the FDIC for $2,550,000, and to finance the purchase by a mortgage for 75% of the purchase price. Ex. 6. Zeba's shareholders voted to approve the purchase. Ex. 7.
On December 20, 1993, Gada formed Abba Group, Inc. (Abba) for the specific purpose of owning the hotel's liquor license in a separate corporation. Ex. 12. The initial shareholders, officers, and directors of Abba were identical to those, respectively, of Zeba. Ex. 12, 16. Immediately after incorporation, Patel was added as a director of Abba. Ex. 14. The directors and shareholders of Abba approved Abba's lease of the restaurant and lounge of the hotel for $5,000 per month, and transfer of the hotel's liquor license from Zeba to Abba. Ex. 15, 16.
Gada invited Kunj Sharma to invest $50,000 in the venture. She accepted, and paid for her shares in Zeba from her and Sharma's joint funds.
At the end of December 1993, Gada, Wu, Li, and Patel attended an FDIC auction, at which Gada successfully bid for the hotel.
Patel gave Gada $50,000 at the auction, which he needed to qualify to bid for the hotel. She invested $150,000 in all, none of which she considered to be a loan. Salooja invested $87,500 in all, for which he received 25 shares of Zeba.
After Zeba acquired the hotel, Patel and Gada negotiated the license agreement between Zeba and Days Inn of America, Inc. (Days Inn franchisor).
3. Subsequent Status of Zeba and Abba Shareholders and their Purported Proxies
At no time was Satish Sharma a shareholder in either Abba or Zeba.
Sunny Salooja alleges, in her answer and counterclaim in this action, page 12, that she "was never and is not now a shareholder in either Zeba or Abba." Based on the evidence at trial, the Court concurs with that statement. She believed, based on statements to her by Anand, that their brother Tejinder had loaned Gada money, and that following Tejinder's and Gada's deaths, Anand would see to it that repayments of the loans would come to her. She had no knowledge of Zeba or Abba. Nor do the corporate records of either company reflect that Gada's thirty shares were ever validly transferred to Sunny Salooja. See Zeba By-Laws (Ex. 2), Section 3.
"(a) Transfers of shares of the Corporation shall be made on the share records of the Corporation only by the holder of record thereof, in person or by his duly authorized attorney . . . (b) The Corporation shall be entitled to treat the holder of record of any share or shares as the absolute owner thereof for all purposes and . . . shall not be bound to recognize any legal, equitable or other claim to, or interest in, such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise expressly provided by law."
While the Court may reasonably infer that ownership of Gada's shares passed to unspecified heir(s), there is no credible evidence that they were ever transferred to Sunny.
Following Gada's death, Domenic Del Monico obtained an oral proxy from his father, Louis. Domenic Del Monico Deposition (Del Monico Dep.), at 27, 38. Domenic testified that his father transferred his shares to him after Gada's death, but that he as clerk was not aware of his duties, and was not sure whether anyone had ever made a formal record of the transfer. Id. at 40. Domenic testified that the transfer had not occurred by the November 28, 1998 shareholders meeting, but that by the July 24, 2000 meeting, his father had "signed the shares over to me . . ." Id. at 74.
Cheng attended meetings of the shareholders of Zeba and Abba on behalf of Li after Gada's death, pursuant to successive powers of attorney which Li executed on December 20, 1994, and June 11, 1999. Ex. 117. To the extent that the latter power of attorney constituted an appointment of Cheng as proxy for Li, the proxy contained no stated effective period, and therefore expired, under the terms of the Zeba and Abba by-laws (e.g., Ex. 2, Art. II, Sec. 6(c)), eleven months later on May 11, 2000.
4. Deterioration of the Hotel Under Gada's Management
Sharma had little to do with Zeba or the hotel venture before 1998, attending at most one shareholders meeting at the hotel with his wife in 1996 or 1997. He attended that meeting because he was concerned that his wife's investment of their joint funds in Gada's venture appeared to be producing no profits or appreciation, and Gada was providing little information about the hotel operations beyond annual K-1's.
During that period, Sharma knew some of the Zeba shareholders and others involved in the hotel, including Gada, his daughter Reshma Gada, Salooja (whom he knew socially), and Salooja's brother, Tejinder. Sharma met Patel at the shareholders meeting in 1996 or 1997.
For a time prior to 1997, Salooja assisted Gada in the management of the hotel. In 1997, Salooja stopped working at the hotel, having "had enough of that place." Salooja had found the experience very difficult, and was disappointed not to be able to "put the place in order." In his view, whole systems at the hotel seemed to be broken.
On February 18, 1997, Gada filed a personal chapter 7 voluntary bankruptcy petition in the United States Bankruptcy Court for the District of Rhode Island (Providence) No. 1:97-BK-10656. Gada obtained a discharge in bankruptcy on May 29, 1997 and the proceeding was terminated on May 7, 1998. Ex. 125.
Also in 1997, Gada hired Peter R. Hicks and Hicks Management Group to obtain a workout of the outstanding indebtedness to the FDIC for the mortgage on the hotel.
Hicks has a law degree and a masters degree. In or about the late 1990's, through his company, he became involved in the business of working out FDIC loans. Pursuant to the retainer agreement executed between Gada and Hicks, Ex. 94, Hicks was to be paid a fee the calculation of which depended on the type of workout obtained. Hicks testified that if he obtained a settlement of the FDIC mortgage in the amount of $750,000, and if the outstanding sum then due FDIC under its mortgage totaled approximately $2,200,000, his fee under ¶ 1(a)(1) of the retainer agreement would total $300,000. Id.
On or about April 13, 1998, Hicks sent to Gada a draft workout proposal to be presented to the FDIC. In that draft, Hicks memorialized a long list of necessary repairs and improvements, as reported to him largely by Gada, including: replace existing exterior locks with keyless entry locks, replace existing doors with steel doors, replace existing light fixtures, refurbish public area restrooms, replace existing exterior handrail system, replace existing plumbing fixtures and vanity sinks in guest rooms, replace existing case goods, replace existing carpet, replace existing drapes, replace existing televisions, replace existing box-springs and mattresses.
All of the above-listed repairs, in Hicks' view, were required by the Days Inn franchisor in accordance with failed inspection reports issued by the franchisor to the hotel. In his proposal, Hicks also itemized repairs and improvements to be made to the hotel (again, largely as reported by Gada) in order for the hotel to remain competitive, including: install self contained heating/air conditioning units (121 rooms), upgrade landscaping, rehabilitate existing parking lot, refurbish exterior signage, repair and replace existing laundry equipment, replace existing wall coverings, replace carpeting in restaurant, and replace lounge chairs. Ex. 94.
5. Patel Takes Over Management of the Hotel
Over the spring and summer of 1998, Gada hired a number of Patel's immediate and extended family members to work at the hotel, including her daughter Sonal, to assist in operations; her brother-in-law K.C. Patel, and her niece, Rupal Patel, to handle accounting; and another niece, Sneha Patel, to manage the front desk and reservations. Gada hired other Patel relations for housekeeping and maintenance duties. All were on the hotel's payroll.
By August of 1998, the hotel and restaurant were in dire physical and financial condition. Patel observed that the restaurant needed carpeting and repair, and the whole restaurant needed to be renovated (i.e., new carpeting, paint, furniture, and electrical work). Moreover, Gada disclosed to Patel that Zeba had been in default of its mortgage payments for "a couple of years" — Gada had stopped paying the FDIC — and that taxes were outstanding. He also told her that he intended to let the hotel slide into foreclosure.
Patel protested, and told Gada that she would not permit him to lose her and her family's investment in the hotel. When she demanded to see the hotel's financial records, he refused.
In August 1998, Manilal Gada turned over to Patel the management and operation of the hotel, including the restaurant. When she took over management of the hotel, Zeba had little or no money in the bank.
Patel and Sonal Patel lived at the hotel for free during the period in which they managed it.
6. Patel's Proposed September 1, 1998 Option Agreement
In July 1998 Gada visited Sharma at the latter's house. Gada was distressed. He told Sharma that the hotel was not doing well, and that he had taken numerous loans for the project over the years. Sharma was aware that his wife Kunj Sharma had written checks (out of their joint funds) to Gada as loans for ZEBA between 1995 and 1998, but was unaware of other loans. Kunj Sharma's loans to ZEBA were evidenced by cancelled checks, but were not otherwise evidenced by promissory notes or other documents.
Gada then showed Sharma and Kunj Sharma a two-page option agreement which he asked her to sign as a shareholder. The option agreement granted Patel an option to purchase the assets of Zeba and Abba, but not the liabilities, for consideration totaling $1,535,000, as follows: payoff of the FDIC mortgage in the amount of $700,000; payoff of $100,000 to Peter Hicks for his fee as a consultant in negotiating a workout agreement with the FDIC; and a note of $735,000, payable over ten years, interest free for the first three years, with interest at six percent per annum thereafter. Ex. 45, para. 5(c)
The agreement required, upon execution thereof, immediate transfer of management of the hotel to Gada and Patel's brother-in-law, and closing of the restaurant and banquet facilities. The agreement also required that no workout be concluded with the FDIC without Patel's express written consent.
Gada told the Sharmas that plaintiff was "blackmailing" him into presenting the option agreement to Kunj Sharma and the other Zeba and Abba shareholders, and that he was seeking to attempt to collect shareholder signatures representing fifty-one percent of the outstanding shares of Zeba and Abba. He said that plaintiff had confronted him with allegations of criminal misconduct regarding the hotel's finances, and that unless he secured the shareholders' authorization to enter the option agreement, plaintiff would see to it that he or his daughter would go to jail. At that point, only Gada and Wu had signed the option agreement. Kunj Sharma declined to sign.
Several weeks later, Gada called Sharma and reported that he had attempted to commit suicide. Sharma visited Gada at his office, and noted that Gada was "really depressed," having been unsuccessful in persuading any other shareholders to sign the option agreement. Gada told Sharma that the only way he could "save himself" was to sell the hotel to Patel.
Salooja had similarly been approached by Gada, in the late summer of 1998, with regard to signing the option agreement. Neither Salooja nor any other shareholder except Gada and Wu signed Patel's proposed option agreement.
In the late summer or early fall of 1998, Gada told Patel that, in the event of his death, he had life insurance policies that would provide funds to repay Zeba, Abba, and the shareholders. He told Wu that if anything happened to him, she would be taken care of through his life insurance proceeds. In fact, although at one point Tejinder Salooja had been designated a beneficiary of a life insurance policy for Gada, Gada changed the designation so that his daughter Reshma became sole beneficiary.
Gada committed suicide in October 1998. There is no evidence of any life insurance proceeds available to repay Zeba, Abba, or the shareholders.
7. The November 28, 1998 Zeba and Abba Shareholders Meeting
Following Gada's death, the shareholders of Zeba and Abba gathered at the hotel for a shareholder meeting. Ex. 88. Present were Sharma, purportedly as proxy for his wife, representing 10 shares; Wu (7 shares); Cheng as proxy for Li (13 shares); Patel (30 shares); Salooja (25 shares); Reshma Gada, listed in the minutes simply as "Reshma Gada (30 shares);" and Domenic Del Monico. At that time, Domenic held no proxy from his father Louis Del Monico, and so was not in a position to vote Louis' 20 shares. Del Monico Dep., at 63.
The only shareholder of record not appearing in person or by purported proxy was Shah, representing 10 shares. Shah did not appear at this meeting, nor did he appear or participate in any manner thereafter. Whether or not he remained a shareholder, or had converted his shares to a loan, remained an open question in the minds of the remaining shareholders. The Court finds that he remained a shareholder at least through the summer of 2000.
The shareholders met on November 28 out of concern about Gada's suicide, and about information that he had looted cash from the hotel's operations over several years. In addition, the hotel had many outstanding bills, and had received a notice, dated November 9, 1998, that the hotel had failed an inspection conducted by the Days Inn franchisor on October 14, 1998. The notice demanded corrective action, failing which the franchise might be terminated. Ex. 58.
The minutes of the meeting reflect that Patel reported on the operations and management of the hotel, including the failed inspection report. Sonal Patel gave a report of financial operations for August, September, and October 1998, compared to the same months a year previously. Both reported on steps to reduce costs, and Sonal undertook to complete a budget for 1999, and to institute a profit and loss statement beginning January 1999. Patel reported that taxes of $130,000 were unpaid for 1997, that the same amount would be due for 1998, and that no tax returns been prepared for Abba for 1996 and 1997.
On motion by Salooja, the following were unanimously elected officers of Zeba and Abba: Sharma, president; Patel, vice-president; Domenic Del Monico, secretary; Wu, treasurer. Ex. 88. Del Monico undertook to provide the original agreement with Hicks regarding a workout with the FDIC on Zeba's outstanding mortgage loan for the hotel, and it was agreed that Zeba and Abba should pursue negotiations with the FDIC.
8. The December 12, 1998 Zeba and Abba Shareholders Meeting
Zeba's and Abba's shareholders met next on December 12, 1998. Present were Sharma, Wu, Cheng, Patel, Salooja, Reshma Gada, and Domenic Del Monico. After the minutes were approved, Sharma opened for discussion the proposal to continue negotiations with the FDIC through Hicks. Patel proposed dealing directly with the FDIC, through her attorney who she said had already "made contact" with the FDIC. Reshma reported that the FDIC mortgage had a ten-year term at 9 7/8 %, and that the last monthly payment (between $17,000 and $18,000 per month) had been made in October 1996. After discussion, the consensus was to continue negotiations with the FDIC through Hicks, and to attempt to persuade Hicks to lower his fees. Sharma undertook that responsibility.
The discussion then turned to potential funding to pay off the mortgage, assuming that a deal could be struck with the FDIC. A conventional loan seemed unlikely; other options included a short term bridge loan, sale of the property outright for cash or a note, or raising cash from existing or new shareholders. Del Monico agreed to investigate the process for obtaining loan approval.
Several shareholders noted that it would be difficult to obtain any financing until all of Zeba's creditors — including those shareholders and others whom Gada had persuaded to loan money to Zeba — could be identified. Salooja cited a document by Gada stating that outstanding loans totaled $600,000. Salooja was to bring the list of creditors to the next meeting.
9. The January 9, 1999 Zeba and Abba Shareholders Meeting
On January 9, 1999, Sharma, Wu, Cheng, Patel, Salooja, and Del Monico met. They approved the preceding meeting's minutes. There was little progress to report on the action items from the December meeting.
Sharma reported that Hicks was considering working for a reduced fee. Del Monico reported on conversations with mortgage brokers, which were discouraging: terms were short, interest rates high. Salooja "provided a list of creditors that was prepared by Mani Gada," Ex. 52, but there was no consensus about how to deal with it.
Patel discussed generally the financial condition of the hotel, stating that the restaurant was losing money, and that she and her staff were working on year-end taxes and a new payroll system. Neither she nor Sonal (who did not attend) presented the profit and loss statement or 1999 budget which Sonal had been asked to prepare. (One reason for the delay was the lack of financial records for the period prior to August 1998, when Patel took over management of the hotel.) In any event, it was voted that "current management set up budgets and actuals for the new year 1999," which were deemed "imperative if we are going to accurately assess the financial condition of the property." Ex. 52.
Patel agreed to prepare income and expense statements, and to produce cancelled checks and a list of monies owed to the hotel.
10. The February 5, 1999 Zeba and Abba Shareholders Meeting
Attending were Sharma, Wu, Cheng, Patel, Salooja, and Del Monico. Sharma reported that he had signed a fee agreement with Hicks, who was optimistic that he could achieve a workout with the FDIC, but needed income and expense statements for 1998, and the Abba tax return for 1997. Patel responded that she could not locate cancelled checks for January through May 1998. Salooja stated that the FDIC would require a ten percent deposit upon signing of any workout agreement.
Salooja reported that he had talked to most of the parties on the creditors list and should have more complete analysis at the next meeting. Patel reported on Zeba's and Abba's monthly payroll and revenue figures, and outstanding taxes of $130,000 for 1998, and $83,000 for 1999.
11. The Days Inn Franchisor Notices
The second notice from the Days Inn franchisor to the hotel is marked Ex. 57 and is dated February 16, 1999. The notice references the previous November 9, 1998 notice, and demands a detailed written improvement plan to be approved by Dan Olsen, Director of Quality Assurance, Days Inn franchisor. Once again, the franchisor threatened termination of the franchise in the event compliance was not obtained.
The third franchisor notice to the hotel, marked Ex. 56, is addressed to Patel and dated March 10, 1999. In this notice, Olsen states that the hotel "has now failed two consecutive quality assurance evaluations, and the reservation system has been suspended." The notice states that the suspension of the reservation system will remain until an acceptable improvement plan is submitted.
By letter dated April 13, 1999, Olsen notified Patel of a long list of inspection deficiencies and repairs which were required to be made, including: install approved electronic locks on all guest room entry doors, replace panel entry doors with steel encased doors, replace and/or modify railings, replace all vinyl chairs, replace guest room carpet, replace/refinish case goods, and replace box springs and mattresses. Ex. 131. The letter proposed a schedule for items to be completed by May 15, 1999, and by August 1, 1999, and requested that a signed copy be returned to Olsen accompanied by an "executed contract for the installation of the electronic locks."
Patel signed and acknowledged receipt of a failed quality assurance inspection on June 8, 1999. Ex. 55.
12. The April 10, 1999 Zeba Shareholders Meeting
On April 10, 1999, Zeba's shareholders met. (Except for Patel and Sharma, any additional attendees are unnamed in the minutes, Ex. 49) Patel reported that Jayesh Parikh had provided a canceled check evidencing a loan to Zeba of $57,000. Sharma reported that Mukesh Patel had filed suit against Zeba for $110,000, based on alleged canceled checks amounting to $100,000 in loans to Zeba. Sharma also reported receiving an alleged agreement between Shah and Zeba to convert Shah's ten Zeba shares to a loan. Sharma undertook to consult an attorney to determine whether Shah "is a Stockholder or a Creditor." Ex. 49.
At the meeting, the "FDIC Agreement" compromising the outstanding debt, was ratified. The minutes further note that Sharma
sent a check for the nonrefundable deposit of 10% ($75,000) to FDIC. It was agreed that all Stockholders would reimburse Satish based on the percentage of stock owned by them. The remaining amount ($675,000) is payable by June 11, 1999. Peter Hicks suggested retaining counsel to review the paperwork for the final agreement with FDIC. Satish will work on this.
Ex. 49. Sharma also agreed to order a title examination on the hotel "to determine if there are any other outstanding liens against the property." Id.
13. The April 10, 1999 Zeba Directors Meeting
On the same day, there was a meeting of Zeba's directors, who approved and ratified the actions voted on that date by the shareholders. Ex. 50.
14. The May 8, 1999 Zeba and Abba Shareholders Meeting
On May 8, 1999, Sharma, Patel, Wu, Cheng, and Del Monico attended a meeting focusing on pointed questions to Patel about expenses and her family members working at the hotel. Patel disclosed, in answer to a question, that she was receiving a salary of $600 per week, and that the previous October she had paid herself $14,000 in "back salary," after which she "went on the payroll." Ex. 48. Asked why she had not previously informed the shareholders of that payment, she stated that she deserved it for all the time she had devoted to the hotel. Sharma repeated his earlier requests for financial reports of payroll, and income and expenses.
15. The June 5, 1999 Zeba and Abba Shareholders Meeting
On June 5, 1999, Sharma, Patel, Salooja, and Del Monico met. By this time Patel and the remaining shareholders were on a clear collision course over her operation of the hotel, and its future. Once again, she failed to produce the monthly profit and loss statements she had been requested to provide from the beginning of 1999, nor did she provide any payroll figures as requested. She and the shareholders quarreled over her management performance, and she told Sharma that she would "walk out at any time" if they were not satisfied with her management of the property. Ex. 47.
Sharma reviewed the status of his efforts to raise the $675,000 due six days hence, on June 11, under the FDIC workout agreement. The loan for which he had applied could not be completed by then, and he requested that the shareholders raise the funds themselves, in the form of a short-term (30-day) loan, at 12%, until permanent financing was in place. He stated that the only alternative would be a bridge loan with an private investor, probably at 16% plus points.
The shareholders "agreed" that raising the funds internally was the best approach; Sharma pledged $200,000, and Salooja, $100,000. Del Monico said he was unable to pledge money at that time. Patel agreed that the group should not use outside funds, but declined to pledge money herself, and suggested that Sharma obtain an outside loan after all. When Sharma responded that if he was unable to secure such a loan the FDIC might foreclose, Patel said, in essence, so be it.
Salooja then asked Patel if she was interested in purchasing the hotel. She said that she was, and that she thought $1.3 million or at most $1.4 million would be a fair price for a property "with a lot of problems." During the June 5, 1999 shareholder meeting, Patel offered to purchase the hotel for $1.4 million.
Sharma identified the following options to pursue: sell the hotel for more than $1.4 million; raise funds from a private investor; or allow the FDIC to foreclose. He stated that he would continue working on the first two options.
16. The June 22, 1999 Zeba and Abba "Shareholder/Directors Meeting"
On June 22, 1999, Sharma, Patel, Salooja, Wu, Cheng, and Del Monico attended a Zeba and Abba "Shareholder/Directors Meeting." Ex. 46.
After unanimous approval of the minutes of the June 5, 1999 meeting, Sharma reported on his efforts to obtain a bridge loan to fund the remaining $675,000 due the FDIC under the settlement negotiated by Hicks. The FDIC had extended the payment date until July 7; if payment were not made by that date, the settlement would be void, the $75,000 deposit would be lost, and the hotel property would be disposed of by bulk sale. Sharma said that Hicks had two or three interested investors, but that the amount of the loan would exceed $1 million (the investors insisted on a loan which would not only pay off the FDIC but also outstanding liens — roughly $160,000 in real estate taxes, $110,000 to Mukesh Patel, and $80,000 to Phoenix Leasing — so that they would have a first mortgage on the property) at 16% interest plus ten points.
Sharma offered the following alternative: he would borrow from friends the amount by which his and Salooja's pledged contributions fell short of the $675,000 required, but those friends insisted on lending the money to him on his personal guaranty, not to Zeba. Sharma said that he was willing to accept that risk, and personally loan the proceeds to Zeba, at15% interest plus 4 points, taking back a first mortgage, subordinated to the existing liens. Upon motion, Sharma's proposal was unanimously accepted. There was neither mention nor approval at the meeting of further security for the loan, in the form of a security agreement and assignment of rents.
Sharma next stated that he would seek to negotiate a further reduction in Hick's original $350,000 fee, from the $221,000 already negotiated.
There followed a discussion about the hotel's failure, on June 8, of the third Days Inn franchisor inspection; among the deficiencies not addressed were railings, lack of electronic locks, cleanliness, uniforms and name tags. As a result, the central reservation system had been shut off on June 14, causing, by Patel's estimate, a loss of 18-20 room reservations per night.
Although she presented financials and accounts payable reports for April and May, Patel once again presented no payroll figures, prompting Sharma and Cheng to remonstrate with her about her management of the hotel and the failures to pass the Days Inn inspections. In response, Patel stated that she had made her previous offer to purchase the property for $1.4 million because of the hotel's problems and liens, as a result of which, she told her fellow shareholders, "your shares are worth nothing." A motion by Cheng to change management, endorsed by Patel, was unanimously approved. The group then authorized Sharma to install new management as soon as possible, recruit a general manager, and oversee the transition. Ex. 46.
While Patel, during her management of the hotel from August 1998 to June 1999, failed either to satisfy the Days Inn franchisor or to make the hotel profitable, she managed the operation in good faith under trying circumstances. Nor does the Court find any self-dealing by Patel which in any material respect damaged the operations of the hotel or either corporation.
17. Sharma Takes Over Management of the Hotel
Immediately upon assuming management of the hotel, Sharma wrote to Dan Olsen at the Days Inn franchisor, by letter dated July 8, 1999, following a telephone discussion of July 7, 1999 between the two. In that letter, Sharma informed Days Inn that Zeba had approved a change of management of the hotel and that Dilip Bhatt had been appointed as a new acting general manager. Sharma assured Days Inn that Zeba was committed to correcting the quality problems of the hotel and determined to do so as soon as possible: "Specifically, most of the minor problems have been fixed . . . The contract for electronic lock installation has been signed (a copy was faxed to you last week). We are trying to get a date of installation in September '99 from the vendor. . . . We are putting a top priority on the railing and hope to get it fixed within a few weeks. New carpeting has been ordered for the restaurant." (Electronic locks and new railings were principal concerns of the Days Inn franchisor.) The letter closed in part as follows: "In summary, I would strive to bring this facility to an acceptable or higher standard of quality in the very near future. We would keep you informed of the progress so that another inspection may be scheduled once the improvements are completed. In the mean time, we would appreciate it very much if you would consider opening the reservation system as soon as possible so that we do not continue to lose significant revenues during this, our peak season."
18. Payoff of the $675,000 Due to the FDIC
On August 30, 1999, a bank check was drawn payable to the FDIC for $675,000, on Kunj Sharma's account, and with the memo notation: "Mtg [mortgage] payoff/Zeba Group Inc." Ex. 146. The check fulfilled Sharma's commitment, accepted at the June 22, 1999 meeting, to loan to Zeba the $675,000 payoff amount.
Sharma's loan was documented on September 20, 1999, by means of a promissory note from Zeba to Sharma in the amount of $675,000, at an interest rate of 15%, due and payable on September 1, 2000. Ex. 19. The note was secured by a mortgage from Zeba to Sharma, plus an Assignment of Rents and Security Agreement, all dated September 20, 1999. Ex. 20, 21 and 22.
Of the $675,000 invested by S. Sharma in the mortgage, $475,000 came from Sharma and his friends, and $200,000 came from Salooja. Sharma was required to repay Salooja at the rate of 16% over two years.
After Sharma paid off the FDIC mortgage loan, he held the only secured debt on the hotel, and the immediate danger of foreclosure was eliminated.
19. Transfer of $375,000 to Zeba Savings Account
On September 29, 1999, Sharma opened a Zeba savings account with Bank of Boston, into which he transferred $375,000 from Zeba's single operating account at Citizens Bank, Ex. 93. The transfer left approximately $60,000 in the latter account, sufficient to allow the hotel to continue operating. The $375,000 had accumulated largely as a result of peak summer revenues at the hotel. Sharma made the transfer in an effort to insulate those funds prior to his planned transfer of the hotel from Zeba to his own company, Emerald.
20. The November 29, 1999 Asset Purchase Agreement
On November 29, 1999, Sharma, as president of Zeba, and Wu, as treasurer, executed an "Asset Purchase Agreement" for the purchase of the hotel and liquor license by Emerald . Ex. 27. Sharma also executed the agreement as president of Emerald.
Emerald is a Massachusetts corporation duly organized on November 18, 1996. Ex. 70. The former name of Emerald was Emerald Motel, Inc. Ex. 72. The name was changed on November 24, 1999. Id. At all relevant times, Sharma has been Emerald's owner and sole shareholder.
On or about November 29, 1999, at Sharma's behest, Salooja, Cheng, and Sharma signed an "Action by Written Consent of the Board of Directors of Zeba," purportedly approving the Asset Purchase Agreement. Ex. 24.
On or about November 29, 1999, at Sharma's behest, Salooja, Wu, Cheng "for Jenny Li," Kunj Sharma and Domenic Del Monico signed an "Action by Written Consent of the Shareholders of Zeba," purportedly approving the Asset Purchase Agreement. Ex. 25.
The shareholders and directors signed the consents authorizing the transfer of the hotel from Zeba to Emerald because they were concerned that the liabilities of Zeba be satisfied, and, at least for some, because of the fear that if not satisfied those liabilities might become their individual obligations.
Exhibit A to the Asset Purchase Agreement lists the specific assets to be conveyed to Emerald, including all real estate including the land and buildings thereon, all personal property used directly or indirectly in connection with the operation of the hotel including all equipment, fixtures, furnishings, business machines, security agreements, inventory, supplies, restaurant fixtures, supplies and inventory, all pending contracts, licenses and permits used directly or indirectly in connection with the operation of Zeba's commercial hotel business and all accounts receivable, claims, rights and causes of action which Zeba may have. Ex. 27.
Exhibit B to the Asset Purchase Agreement lists the liabilities which Emerald assumed thereunder, including taxes owed to the city of New Bedford, the $675,000 mortgage loan to Sharma, fees due to Hicks ($180,000), Mukesh Patel's lawsuit ($110,000), the Phoenix equipment lease and accounts payable, and the following loans: from Tejinder Salooja ($187,000), from Kunj Sharma ($90,000), and from Wu ($50,000). The total of liabilities which Emerald assumed under Ex. B was $1,863,625.
The Asset Purchase Agreement states, at para. 1.3 ("Purchase Price and Payment"): "In consideration of the sale by [Zeba] to [Emerald] of the Subject Assets, subject to the assumption by [Emerald] of the Liabilities . . ., [Emerald] agrees that at the closing it will assume liabilities in the amount of [$1,863,625], as identified on Exhibit B, appended hereto."
As Patel alleges in her proposed findings of fact, Wu received repayment of her $50,000 loan (proposed finding no. 252); Kunj Sharma was never repaid her $90,000 loan (no. 254); Hicks was paid less than the $180,000 fee listed (no. 257; in fact, he was paid $130,000). On June 28, 2000, Emerald paid the balance due the city of New Bedford ($215,488.58). Ex. 84.
Exhibit G to the Asset Purchase Agreement lists all licenses and franchises transferred pursuant to the agreement including, in the title thereof "(liquor license, Days Inn franchise)." The licenses and franchises included: "any and all right title and interest to a liquor license issued in connection with the operation of the New Bedford Days Inn," any and all rights in the Days Inn franchise agreement, and any and all right to the hotel's innholders license. There was, however, no vote of Abba shareholders to transfer the liquor license to Emerald.
21. The July 24, 2000 Zeba Shareholder Meeting
At some time prior to June 25, 2000, attorney Scott C. Baer, "acting at the request of Kunj B. Sharma and Sunny Salooja, being holders of at least ten . . . percent of the outstanding shares of the corporation," sent notice "to all shareholders of Zeba Group, Inc." of a special meeting on that date to consider ratification of "the transfer of the hotel to Emerald Partnership, Ltd., which occurred previously December, 1999, effective nunc pro tunc. Said transfer, if approved, would involve the transfer of the corporation's principal asset to Emerald." Ex. 30.
The meeting occurred on July 24, 2000. Present were Sharma, Kunj Sharma, Domenic DelMonico, Patel, Sonal Patel, Anand Salooja, and attorney Gary Berkowitz (for Sharma). Sharma had with him two documents purporting to appoint him proxy for, and signed respectively by, Wu (seven shares) and Cheng, as "attorney in fact" for Li (13 shares). Ex. 78. Salooja had with him a document purporting to appoint him as proxy for, and signed by, his sister Sunny, for an unspecified number of shares. Id. Neither Sharma or Salooja complied with the requirement of the Zeba By-Law, Art. II, sec. 6(c), that the proxies be "exhibited to the Secretary at the meeting . . ."
At the meeting, the following purported votes were cast, and recorded in a "Vote of Stockholders of Zeba Group, Inc.," in favor of ratifying the actions of Sharma (president) and Wu (treasurer) "in connection with the sale of all or substantially all of the corporation's property and assets" to Emerald (Ex. 34): 30
Domenic DelMonico 20 K. Sharma 10 S. Sharma "for Shirley Wu" 7 S. Sharma "for Jenny Li" 13 A. Salooja 25 A. Salooja "for Sunny Salooja" Total 10522. Emerald's Management of the Hotel, and Sharma's Investment Therein
Sharma has invested well in excess of $4 million in the hotel operation, since Emerald took transfer of Zeba's assets and liabilities in November 1999, as follows: $645,000
Sharma personally guaranteed the loan, and subordinated his September 20, 1999 mortgage to Citizens Union's mortgage. Emerald used approximately $350,000 to pay outstanding liabilities it had assumed in the Asset Purchase Agreement and subsequent debts of Emerald for the hotel operation, and used the remainder to finance major renovations of the hotel.
See Ex. 85, explicated by Chalk Ex. U.
See Ex. 143.
In addition, Sharma settled a lawsuit brought by Days Inn Worldwide, Inc. (Days Inn franchisor) in the Massachusetts Federal District Court on November 3, 2000 (see complaint, Ex. 132), for liquidated damages under the 1994 license agreement (attached thereto) and other damages. Although the hotel's multiple failed Days Inn inspections over the preceding two years was a basis for the lawsuit, the factor which precipitated the franchisor's December 15, 1999 notice of termination of the license agreement, and ultimately the lawsuit, was Zeba's failure to notify and obtain authorization by the Days Inn franchisor for its transfer of the hotel to Emerald, an event which "automatically terminated the License Agreement." Complaint, Ex. 32, para. 33. Sharma ultimately settled the lawsuit by paying the Days Inn franchisor $80,000 cash, and giving a note in the amount of $281,000. Under the settlement, Emerald became the new franchisee, and the franchisor agreed to waive the note if the hotel were operated successfully for one year. As of October 2007 Sharma remained personally liable on the $280,000 note, because the hotel had not yet regained good standing status with the Days Inn franchisor.
In the summer of 2000, Emerald hired Komal Kataria, formerly known as Komal Patel, as head of housekeeping for the hotel. In 2003 she was promoted to front office manager, a position she held at the time of trial.
On December 13, 2000, Sharma, as "sole director" of Emerald, signed a resolution of Emerald at a special meeting on that date as follows: "1. Liquor license will be transferred from Abba Group, Inc. To Emerald Partnership LTD. 2. Komal Patel will be designated as the new Manager." Ex. 33.
In October 2003 Emerald hired Anoop Kataria (Kataria), Komal Kataria's husband, as the hotel's general manager. Kataria observed from the outset conditions in need of repair or updating, including a defective HVAC system for individual rooms, defective roof-top HVAC system, worn and dated carpeting, insufficient televisions, and lack of internet connection.
Emerald undertook numerous repairs and renovations at the hotel, funded largely by Sharma. For example, Emerald replaced the room HVAC system with individual HVAC units for approximately 100 of the rooms, at a cost of about $200,000. Emerald also replaced roof-top HVAC units with new units at a cost of approximately $75,000. Emerald replaced carpeting in twelve individual rooms at a cost of about $350 per room, installed new cable television in the individual rooms through a lease from Comcast costing $2,600 per month over seven years, and installed a high-speed internet connection, required by the Days Inn franchisor, at a cost of about $28,000.
The Days Inn franchisor has continued to inspect the hotel on a quarterly basis, and requires several repairs which are as yet incomplete, including replacing the porte cochere for the entranceway to the hotel (approximately $100,000), removing and replacing the hotel's high rise sign ($125,000), completing the HVAC replacement, repairing and/or replacing the walkway and parking lot ($80,000), and completing repair of the pool ($100,000).
In addition to the repairs required by the Days Inn franchisor, the hotel needs new landscaping, replacement carpeting, and exterior painting.
The investments by Sharma, and repairs, maintenance, and renovations made by Emerald, as enumerated above, were reasonable and necessary expenditures, made in good faith, for the purposes of regaining the Days Inn franchise and enhancing the hotel's prospects for eventual profitability.
RULINGS OF LAW
Before addressing each of the counts against defendants, the Court makes the following rulings which are pertinent to all of those counts.
I. General Rulings
A. The November 29, 1999 Shareholders' Consent, authorizing the Asset Purchase Agreement, was invalid.
It is clear that the November 29, 1999 "Action by Written Consent of the Shareholders of Zeba," purportedly approving the Asset Purchase Agreement (November 1999 Shareholders' Consent), did not constitute a valid shareholder approval of that agreement.
The statute controlling the conduct of Zeba's and Abba's governance at the time, G.L. c. 156B, § 75, provided that a corporation "may . . . authorize, at a meeting duly called for the purpose, by vote of two-thirds of the shares of each class of stock outstanding and entitled to vote thereon, the sale, lease or exchange of all or substantially all of its property and assets . . ." The only exception to the two-thirds rule allowed by the statute is a provision in the articles of organization allowing "a vote of less than two-thirds but not less than a majority . . ." Neither Zeba's nor Abba's articles of organization contain such a provision.
Rather, the corporations' respective by-laws adopt the statutory two-thirds requirement by general reference to statutory exceptions: "Except as otherwise provided by statute or by the Certificate of Incorporation, any corporate action, other than the election of directors to be taken by vote of the shareholders, shall be authorized by a majority of votes cast at a meeting of shareholders by the holders of shares entitled to vote thereon." Article II, Section 6(a).
Thus, for the November 29, 1999 shareholders' consent to be valid, the affirmative vote of two-thirds, or 97, of the 145 shares outstanding shares was required. The November 1999 Shareholders' Consent was signed by Salooja (25 shares), Wu (7 shares), Cheng "for Jenny Li" (13 shares), Kunj Sharma (10 shares), and Domenic Del Monico (20 shares), for a total of 75 shares. Even assuming that all 75 shares were validly voted, the total falls short of a two-thirds vote.
Moreover, the statute required that notice of the meeting "shall be given to each stockholder of record . . .," a requirement purposely avoided by Sharma in his failure to notify Patel.
B. The July 24, 2000 Zeba shareholder vote ratifying the transfer of the hotel to Emerald Partnership was invalid.
The July 24, 2000 vote by Zeba shareholders to ratify the transfer of the hotel to Emerald Partnership, pursuant to the Asset Purchase Agreement, was likewise invalid. Although the number of shares recorded in favor of ratification was 105, and so exceeded the 97 shares required to meet the two-thirds requirement of c. 156B, § 75, the number of validly voted shares fell below 97.
As found by the Court, the following individuals voted their purported shares in favor of ratification, as follows:30
Domenic DelMonico 20 K. Sharma 10 S. Sharma "for Shirley Wu" 7 S. Sharma "for Jenny Li" 13 A. Salooja 25 A. Salooja "for Sunny Salooja" Total 105The Court has found that neither Sharma nor Salooja complied with the requirement of the Zeba By-Law, Art. II, sec. 6(c), that the proxies be "exhibited to the Secretary at the meeting . . ." Moreover, the purported proxy from Sunny Salooja to Anand Salooja, dated July 20, 2000, leaves blank the space for writing in the number of shares subject to the proxy (Ex. 78).
More important, the Court has found that Sunny Salooja was at no time a shareholder in either Zeba or Abba; accordingly, she was not, as Sharma maintains, a transferee of Manilal Gada's 30 shares. Thus, her proxy to her brother Anand was of no effect.
Defendants counter that plaintiff is precluded from challenging Sunny's ownership of Gada's 30 shares because the First Amended Complaint alleges that she is a shareholder. G.L. c. 231, § 87 provides that "pleadings shall not be evidence on the trial, but the allegations therein shall bind the party making them." See Adiletto v. Brockton Cut Sole Corp., 322 Mass. 110, 112 (1947)("[f]indings contrary to facts admitted in pleadings cannot be made"). Later appellate decisions indicate that there can be exceptions to this rule. See Provincetown Chamber of Commerce, Inc. v. Grace, 14 Mass. App.-Ct. 903, 904 (1982) (allegation of fact bound plaintiff in counterclaim as an admission, at least where its effect was "not mitigated by anything else in the complaint.");Wasserman v. Tonelli, 343 Mass. 253, 257 (1961) (admission of mixed fact and law, without more, "will conclude the issue," while pure admission of law will not bind party).
Here, plaintiff alleges, in paragraph 22 of her First Amended Complaint, that "[d]efendant Sunny Salooja is an individual whose address is unknown to the plaintiff. The plaintiff is informed, believes and hereby avers that the said defendant is a shareholder in ZEBA and ABBA." In paragraph 41, plaintiff alleges: "Upon information and belief, the late Manilal Gada's shares of stock in ZEBA and ABBA were transferred to Tej Salooja and then, upon Tej Salooja's death, to defendant Sunny Salooja." Both averments are made not as statements of fact, but of information and belief: literally, the fact which plaintiff is averring is that she is informed and believes that Sunny Salooja is a shareholder. The allegation is therefore a qualified, rather than absolute, statement of fact, signaling that discovery is required to confirm the allegation. The allegations of paragraphs 22 and 41 thus differ from other allegations of the complaint, which are stated without qualification, as are the allegations cited in the cases upon which defendants rely.
Because the plaintiff's allegations regarding Sunny Salooja's status as shareholder are stated with the qualification noted, mitigating their effect, and because defendants have contested the allegation, the Court concludes that Patel is not bound thereto under c. 231, § 87, and that the Court is not foreclosed from making a finding on the issue based on the evidence.
Sharma argues that, even if the ratification vote did not muster the two-thirds necessary under c. 156B, § 75, the vote was nevertheless valid under c. 156D, § 8.31(d), which provides that a transaction constituting a conflict of interest for a director may be ratified if it receives "the vote of a majority of the shares entitled to be counted . . . [excluding] shares owned by or voted under the control of a director who has a direct or indirect interest in the transaction . . ." The comment to that section notes that the section "deal[s] with various facets of the duty of loyalty . . . [and has] no counterpart[] in" c. 156B (unlike Section 75 of the latter, which does have a counterpart in c. 156D, § 12.02(e)). In any event, c. 156D, enacted in 2004 and modeled on the American Bar Association's Model Business Corporation Act, "shall apply to domestic corporations having capital stock as were established before July 1, 2004 and which were, on June 30, 2004, subject to chapter 156B . . ." St. 2003, c. 127, sec. 22.
The Court concludes that c.156D does not apply retroactively to the actions of Zeba's and Abba's shareholders in 2000. See In re: Parkway Professional Bldg., Inc., 64 Mass. App.-Ct. 1111 (2005) (unpublished opinion)("We reject the claim that G.L. c. 156D, § 14.30 ["Grounds for Judicial Dissolution"], has retroactive application. The legislation explicitly provides that its effective date was July 1, 2004. . . . We generally will construe a statute 'to operate retroactively only where the Legislature evidences a clear intent to alter existing contract rights.' Nationwide Mut. Ins. Co. v. Commissioner of Ins., 397 Mass. 416, 421 (1986)."
Even if the statute were retroactive, the number of votes eligible to be counted under c. 156D, § 8.31(d), and validly cast for ratification at the July 24, 2000 Zeba shareholders meeting falls far short of even the majority which that statute requires. That is because the statute excludes from shares entitled to be counted shares "voted under the control of a director [Sharma] who has a direct or indirect interest in the transaction . . .," id. (i.e., the 20 shares which Sharma voted under purported proxies from Wu and Li, and arguably, although not necessarily, the 10 shares which Kunj Sharma voted). When those 20 or 30 excludable shares are added to 30 shares invalidly voted by Anand Salooja as proxy for Sunny Salooja, the total of 105 votes cast for ratification is reduced to, at best, 55, considerably short of the majority (i.e., greater than 50% of 145, or 73) necessary even under c. 156D.
II. Rulings as to Specific Claims
A. Count I: Breach of Fiduciary Duty; Count II: Breach of Good Faith/Fair Dealing
Count II, against putative shareholders Kunj B. Sharma, Shirley Wu, Anand P. Salooja, Louis Del Monico (through Domenic Del Monico) Jenny Li (through Sandra Cheng), and Sunny Salooja (see Plaintiff's Trial Memorandum, at 2), is indistinguishable from Count I against those same parties and, as has plaintiff (see Plaintiff's Post-Trial Memorandum and Conclusions of Law, at 13-37), the Court will treat the two counts as one.
Plaintiff asserts Count I against defendants Sharma, Wu, and Domenic Del Monico, as they are officers, directors, and shareholders of Zeba and Abba, and against Kunj Sharma, Wu, Anand Salooja, Louis Del Monico, Li, and Sunny Salooja, as putative shareholders. She claims, on behalf of Zeba and Abba, that the defendants breached their fiduciary duties in two ways: (1) by causing or allowing the transfer of all of the assets of Zeba, and the principal asset of Abba (i.e., the liquor license)(collectively, hotel assets) to Emerald, in violation of statutory and by-law requirements; and (2) doing so out of self-interest, rather than in compliance with their fiduciary duty.
The two theories of liability both arise out of the claim of breach of fiduciary duty, but they are distinct. As the Supreme Judicial Court stated in a different context in Blackstone v. Cashman, 448 Mass. 255, 267 (2007) (citations omitted):
The issue in Blackstone was whether Cashman, one of two directors of a company, was a "corporate official" for purposes of the tort of intentional interference with advantageous relations, when he acts in furtherance of a legitimate corporate purpose. Id. at 266-267.
It is a basic principle of our corporate law that a director has a fiduciary relationship with the corporation. . . . This relationship includes duties of loyalty and of care — that is, of "reasonable intelligence" in the oversight of corporate business." See Spiegel v. Beacon Participations, Inc., 297 Mass. 398, 410-411 (1937) (listing duties) See also Production Mach. Co. V. Howe, 327 Mass. 372, 377 (1951) (director obliged "reasonably to protect the interests of the corporation"). . . . The degree to which a director involves himself in day-to-day corporate affairs has little bearing on the nature or extent of his duties. See, e.g., Demoulas v. Demoulas Super Mkts., Inc., 424 Mass. 501, 528-543 (1997) (in suit alleging violation of fiduciary duties, propriety of various directors' actions analyzed without regard to their very different levels of participation in company business.) . . . In sum, a corporate director, whatever the frequency of his involvement in day-to-day operations, has an important interest in and responsibility for the conduct of business by the company's corporate officers.
Here, plaintiff's first theory of breach of fiduciary duty has as much to do with breach of the duty of care as of the duty of loyalty. Putting it another way, a director so careless as to allow the assets of the corporation to be transferred without any compliance with statutory and by-law provisions may be held to have violated his or her fiduciary duty, regardless of whether that director also acted out of disloyalty. While the Court has already concluded that the Asset Purchase Agreement was invalid, and was not validly ratified, the problem for plaintiff is that, to the extent that Count I is based on what is essentially a negligence theory (whether against directors or shareholders), the burden of proving causation and damages remains on her — yet at trial she proved neither causation nor damages arising out of defendants' negligent (or, for that matter, self-dealing) conduct.
Plaintiff's failure to present such evidence is perhaps unsurprising in view of her prayers for relief: she seeks not money damages (other than attorney fees on behalf of the corporations, if her claims prevail) but equitable relief, i.e., rescission or imposition of a constructive trust. Plaintiff's Post-Trial Memorandum and Conclusions of Law, at 43-52; Plaintiff, Saryu A. Patel's Request For Findings of Fact and Rulings of Law, at 77-79. Her prayers for relief thus shape the Court's consideration of the claims upon which those prayers are based — for example, on her claim for breach of fiduciary duty, plaintiff in effect offers proof of the conduct of defendant officers, directors, and shareholders as evidence of the invalidity of the transfer of assets, not as a basis for independent money damages. Because (1) the Court has found against defendants and for plaintiff on the issue of the validity of the transfer; (2) the only relief which plaintiff seeks (under any count) are the equitable remedies of rescission or constructive trust; and (3) among all defendants, only Emerald, the current holder the hotel assets, and Sharma, Emerald's owner, control the assets upon which either rescission or constructive trust could be imposed, the Court need not consider further plaintiff's claims against individuals other than Sharma and Emerald.
This is true even as to Count I where, as explained below, any defendant shown to be a self-dealing fiduciary, not just Sharma, bears the burden of justifying the transaction as fair to the corporations. Even if the non-Sharma defendants were to fail in carrying that burden, they do not own or control the assets wrongfully transferred, and thus neither rescission nor constructive trust can meaningfully be imposed on them.
Thus, the Court considers Count I only as to Sharma. It cannot be disputed that Sharma, an officer and director, owed a fiduciary duty to plaintiff and her fellow shareholders in Zeba and Abba. Plaintiff seeks to prove that Sharma breached his duty by acting out of self-interest, and not in the best interests of Zeba and Abba. Plaintiff correctly argues that, even if Sharma acted with the best of intentions, he nevertheless was on both sides of the Asset Purchase Agreement, and therefore was engaged in a self-dealing transaction. SeeJohnson v. Witkowski, 30 Mass.App.-Ct. 697, 710 (1991).
The Supreme Judicial Court, in Demoulas v. Demoulas Super Markets, Inc., 424 Mass. 501, 528 (1997), stated the standard by which a defendant's conduct in such circumstances is measured on a theory of director self-dealing:
The directors of a corporation stand in a fiduciary relationship to the corporation. Durfee v. Durfee Canning, Inc., 323 Mass. 187, 196 (1948). They owe to the corporation both a duty of care and, more significantly for this case, a paramount duty of loyalty. "They are bound to act with absolute fidelity and must place their duties to the corporation above every other financial or business obligation. . . . They cannot be permitted to serve two masters whose interests are antagonistic." Spiegel v. Beacon Participations, Inc., 297 Mass. 398, 410-411 (1937)
As in this case, Demoulas involved closely-held corporations, and presented facts similar in important respects to those here: "[t]he essence of the plaintiff's complaint is that . . . Telemachus [director and officer of defendant corporation DSM] and the members of his family have exploited Telemachus's control over DSM and Valley to transfer assets and divert business opportunities away from those corporations . . . into other businesses that were solely owned by Telemachus's branch." Id. at 505.
After trial without jury, the judge found both that defendants had wrongfully appropriated corporate opportunities, and, of more relevance here, "that 'self-dealing' transactions had occurred in which defendants who had fiduciary duties to DSM and Valley transferred assets from those corporations to other defendant-owned companies, for less than fair value." Id. at 528. On appeal, the court, applying what it referred to as the "corporate opportunity doctrine," agreed with the trial judge's conclusion that the defendants "participated in, or benefited from," improper self-dealing transactions, to the detriment of the corporations. Id.
The corporate opportunity doctrine is one of "fundamental fairness:"
"the true basis of the governing doctrine rests fundamentally on the unfairness in the particular circumstances of a director, whose relation to the corporation is fiduciary, 'taking advantage of an opportunity [for his personal profit] when the interests of the corporation justly call for protection. This calls for the application of ethical standards of what is fair and equitable . . . [in] particular sets of facts.'"
Id. at 529 (citation omitted).
Where the evidence establishes that a director or shareholder has engaged in self-dealing, the corporate opportunity doctrine shifts the burden to the "fiduciary who acquires a corporate . . . opportunity, or who engages in self-dealing, 'to prove that his or her actions were intrinsically fair, and did not result in harm to the corporation or partnership.'" Id. at 530 (citation omitted). The court sums up the fiduciary's burden, and the consequences if the fiduciary fails to meet that burden, as follows:
In short, to meet a fiduciary's duty of loyalty, a director or officer who wishes to take advantage of a corporate opportunity or engage in self-dealing must first disclose material details of the venture to the corporation, and then either receive the assent of disinterested directors or shareholders, or otherwise prove that the decision is fair to the corporation. Otherwise, the officer or director acts in violation of his fiduciary duties, and whatever gain or advantage that he acquires may be held for the benefit of the corporation so as to deny him any benefit or profit.
Id. at 532-533. The court makes clear that fairness will save even self-dealing disclosed to and approved by self-interested directors: "where a . . . self-dealing transaction is disclosed to the corporation, but the decision on it is made by self-interested directors, the burden is on those who benefit from the venture to prove that the decision was fair to the corporation." Id. at 531.
For present purposes, the Court assumes that Ex. 24, "Action by Written Consent of the Board of Directors," reflects such disclosure and approval.
While such self-interested transactions are "subject to careful scrutiny," Johnson v. Witkowski, supra, 30 Mass.App.-t. at 700, the Court does not agree with plaintiff that the court in Johnson raised the fiduciary's burden of proving fairness to the level of clear and convincing evidence. Rather, the Court will apply the preponderance standard.
With that background, the Court returns to the claims in Count I against Sharma. At the outset, Sharma objects that the First Amended Complaint fails to name him among the defendants in Count I. Nevertheless, that complaint does include Sharma in the counts alleging conversion, fraud, misrepresentation, negligence, unjust enrichment, and constructive trust; it also contains numerous allegations of fact directly against Sharma (e.g., he is alleged, as an officer and director of Zeba and Abba, to have, inter alia, caused the invalid transfer of the hotel assets to Emerald). Moreover, the plaintiff's Trial Memorandum, submitted before trial in accordance with the Court's Pre-trial Order, in the "Statement of claims to be tried," lists Sharma as one of the "Corporate Officers/Directors" against whom Count I is to be tried.
Sharma was thus on notice, from the allegations in the complaint and the plaintiff's statement of claims to be tried, both of plaintiff's intention to try Count I as against him, and of the allegations against him upon which that claim was based. His own assumption that he was subject to the claim for breach of fiduciary duty is evidenced in several of his pre-trial filings referred to in Plaintiff's Post-Trial Memorandum and Conclusions of Law, at 30-33. Finally, the trial was conducted on Count I as to Sharma. To the extent that the amendment proposed by plaintiff, id. at 34, is appropriate to conform the pleadings to the pre-trial history of the case and the evidence at trial, see G.L. c. 231, § 51, such an amendment is hereby allowed.
Plaintiff's claim of breach of fiduciary duty against Sharma is based upon his assumption of control over Zeba and Abba in the summer of 1999, and his causing those entities to transfer the hotel assets (see Exhibit A to the Asset Purchase Agreement) to his own company, Emerald, later that year. As the Court has already concluded, the Asset Purchase Agreement was invalid because the requirements of both Zeba's by-laws, and of statute, were not fulfilled.
Because plaintiff has proved that Sharma, while an officer and director of Zeba and Abba, caused the hotel to be transferred to Emerald, of which he was president and sole shareholder, plaintiff has satisfied her burden of proving that Sharma engaged in self-dealing while he was an officer and director of Zeba. Under Demoulas, 424 Mass. at 531, the burden shifts to Sharma to prove that the consideration for the transfer of the hotel assets to Emerald was fair to Zeba and Abba.
In considering Sharma's evidence of fairness, the Court rejects his argument that "the decision to sell the Hotel to Emerald is afforded the deference of the business judgment rule." Post-Trial Memorandum of Defendants Sharma and Emerald, at 6. Where interested transactions are at issue, the business judgment rule does not apply. Starr v.Fordham, 420 Mass. 178, 184 (1995); Johnson v. Witkowski, 30 Mass. App.-t. 697, 711-712, rev. denied, 411 Mass. 1104 (1991).
Sharma addresses the fairness of the asset transfer in his Post-Trial Memorandum, at 8-11. In support of his argument that Emerald paid fair consideration for the hotel, Sharma notes his August, 1999 payment of $675,000 (secured by a note and mortgage from Zeba), pursuant to the FDIC workout agreement which allowed the hotel to avoid foreclosure, and Emerald's assumption of the following debts, booked in the indicated amounts: real estate taxes ($180,000), accounts payable ($317,000), Hicks' fee ($180,000), pending litigation ($110,000 claimed), Phoenix Leasing invoice ($64,000), and loans due to Dr. Tej Salooja ($187,000), Kunj Sharma ($90,000), and Shirley Wu ($50,000). He points out that the hotel had failed three inspections by the Days Inn franchisor; that the franchisor had consequently denied the hotel access to the Days Inn central reservation system; and that extensive and costly renovations were necessary to bring the hotel back up to franchisor requirements and to regain use of the reservation system. He argues that Emerald's assumption of liabilities in the total amount of $1,863,625, in the circumstances, was a fair and reasonable purchase price for the hotel assets.
Plaintiff argues that the fairness of the purchase price is undercut by subsequent reductions or settlements of some of the debts which Emerald assumed. The Court is persuaded on the evidence, however, that the debts and amounts thereof listed in the Asset Purchase Agreement were bona fide at the time that agreement was executed. Moreover, the Court has found that Sharma's and Emerald's expenditures on the hotel operation following the transfer were reasonable, necessary, and made in good faith.
Sharma also cites plaintiff's own statements of the value of Zeba's and Abba's value, in particular her offers to purchase the hotel in 1998 for $1,535,000 (the proposed option agreement) and, at the June 5, 1999 shareholders meeting, for $1,400,000 (which plaintiff then characterized as a fair price for a hotel "with a lot of problems"). Her statements at the June 22, 1999 shareholders and directors meeting regarding her June 5 offer are particularly telling. As found above, plaintiff stated that she had made her offer "because of the hotel's problems and liens, as a result of which, she told her fellow shareholders, 'your shares are worth nothing.'"
Plaintiff's statements regarding the value of the hotel operation are highly significant: at the time she offered to purchase it in June 1999, she had been managing the hotel for nearly a year, and was probably the person most knowledgeable about the hotel's operations, finances, needed renovations and likely costs thereof, and prospects. Moreover, she made those statements to her fellow shareholders, to whom she owed a fiduciary duty. Thus, she is presumed to have spoken in utmost good faith.
Taking plaintiff at her word, she was proposing to pay Zeba and Abba $1,400,000 for the hotel — a purchase price which, when offset by Zeba's outstanding debt of more than $1,500,000, plus loans to Tej Salooja, Kunj Sharma, and Shirley Wu totaling $337,000 (see Asset Purchase Agreement, Ex. B), would have left the corporations with no significant assets and several hundred thousand dollars of unpaid debt.
Plaintiff 's earlier proposal, in the September 1, 1998 Option Agreement, was to purchase the assets of Zeba and Abba, but not the liabilities, for $1,535,000, a portion of which was to be used to pay off the FDIC mortgage and Peter Hicks fee.
In view of plaintiff's statements; the circumstances and history of the hotel's operations in 1998 and 1999; the certainty of the need for immediate investment of substantial cash for upgrading the hotel, and the lack of any reasonable prospect that financing would be forthcoming; and the hotel operation's long-standing and intractable indebtedness, the Court concludes that, prior to the asset transfer, Zeba and Abba shares were indeed "worth nothing," and that Sharma has carried his burden of proving that the shareholders and their corporations received fair and reasonable consideration for the assets listed in Exhibit A to the Asset Purchase Agreement.
The Court's conclusion is not altered by plaintiff's contention regarding the disputed $395,000, at least $375,000 of which Sharma segregated in a separate Zeba account prior to the transfer. Whether those funds had accumulated under her management, or had not accumulated until the end of the summer season (as the Court has found), the purchase price paid by Emerald exceeded plaintiff's offer.
Accordingly, judgment will enter in favor of defendants as to Counts I and II.
B. Count III: Conversion
Plaintiff claims that she "maintains the present action on behalf of ZEBA and ABBA corporations for Satish Sharma and Emerald's wrongful conversion of its sole assets, to wit, the Hotel and Liquor License." That claim is based on "the fact that the transfer of [those assets] were never subject to a proper transfer, either in November 1999 nor July 2000 . . ." Plaintiff's Post-Trial Memorandum and Conclusions of Law, at 37. In addition, "even setting aside the illegal transfer," plaintiff contends that the transfer of those assets by Sharma "and the other defendant officers, directors and shareholders of ZEBA and ABBA [i.e., Kunj B. Sharma, Shirley Wu, Anand P. Salooja, Louis Del Monico, Domenic Del Monico, Jenny Li, Sandra Cheng, and Sunny Salooja] in violation of their fiduciary duties constitutes a conversion of the Hotel and Liquor License from its proper owners ZEBA and ABBA corporations." Id.
"One who intentionally or wrongfully exercises acts of ownership, control or dominion over personal property to which he has no right of possession at the time is liable for the tort of conversion." Abington Nat'l Bank v. Ashwood Homes, 19 Mass. App.-t. 503, 507 (1995). To prove her claim for conversion, plaintiff must prove (1) that defendants intentionally or wrongfully exercised acts of ownership, control or dominion over personal property, thereby depriving the rightful owner of its use and enjoyment; (2) that the personal property belonged to Zeba or Abba; (3) that defendants had no right at the time to possess the property; and (4) the value of the personal property converted.
Plaintiff concurs with the foregoing; see Plaintiff's Request for Rulings of Law, para. 60 ("[t]he fair measure of damages for conversion includes the fair market value of the property at the time of conversion, and interest thereon from the date of conversion," citingGeorge v. Coolidge Bank Trust Co., 360 Mass. 635, 640-643 (1971)).
Here, even assuming that plaintiff has established that, as to such personal property as may be listed in Exhibit A to the Asset Purchase Agreement, including the liquor license, defendants Sharma and Emerald converted such property to their own use, plaintiff offered at trial no evidence of the "fair market value of the property at the time of conversion." Accordingly, the claims for conversion fail.
C. Count IV: Fraud; Count VI: Misrepresentation
Counts IV and VI are functional equivalents in the circumstances of this case, and plaintiff so treats them (see Plaintiff's Post-Trial Memorandum and Conclusions of Law, at 37-39).
"In order to establish a claim of fraud, a plaintiff must show 'that the defendant made a false representation of a material fact with knowledge of its falsity for the purpose of inducing the plaintiff to act thereon, and that the plaintiff relied upon the representation as true and acted upon it to his damage.'" Stolzoff v. Waste Systems Intern., Inc., 58 Mass.App.-t. 747, 759 (2003). Whether the measure of damages is the "usual rule, at least in appropriate cases, . . . that the injured party receives benefit of the bargain damages," or (more likely in this case) "the pecuniary loss [of the opportunity to make a profit] actually suffered as a result of the misrepresentation, rather than the 'loss' claimed from disappointed expectation," Twin Fires Inv., LLC v. Morgan Stanley Dean Witter Co., 445 Mass. 411, 425-426 (2005), the burden is on plaintiff to prove the loss. Having failed to offer any evidence of potential lost profits to Zeba or Abba, plaintiff has failed to prove the element of damages.
In any event, the Court concludes that plaintiff has not proved that Sharma made any misrepresentation to Zeba and Abba, as opposed to plaintiff personally. Plaintiff argues, in her Post-Trial Memorandum and Conclusions of Law, at 39, that Sharma failed to inform them in advance "that he had executed a Mortgage, Note and Assignment of Rent and Security Agreement to himself . . ." While any such failure to speak might support plaintiff's claim of breach of fiduciary duty, addressed above, it does not amount to a misrepresentation. The same applies with regard to Sharma's alleged failures to inform Zeba and Abba's shareholders that he had transferred "all of the funds out of Zeba's accounts to Emerald prior to the execution of the Asset Purchase Agreement," id. (nor has the Court so found; rather, Sharma segregated $375,000 in a separate Zeba account prior to the execution of the Asset Purchase Agreement). Finally, the Court has not found that Sharma "misrepresented the amount of debt owed by ZEBA and overinflated its acquisition price." Id. Rather, as found above, Sharma has carried his burden of proving that Emerald paid fair consideration for the asset transfer.
In fact, Sharma disclosed at the June 22, 1999 shareholders meeting that he would require security for his $675,000 loan to Zeba to pay off the remaining sum due under the FDIC workout.
D. Count VII: Negligence
Plaintiff's claim for negligence suffers from the lack of proof of damages previously discussed, and fails for that reason.
E. Count IX: Unjust Enrichment
"Three elements must be established in order that a plaintiff may establish a claim based on unjust enrichment. These elements are: 1) A benefit conferred upon the defendant by the plaintiff; 2) An appreciation or knowledge by the defendant of the benefit; and 3) The acceptance or retention by the defendant of the benefit under such circumstances as to make it inequitable for the defendant to retain the benefit without payment of its value." 12 Williston on Contracts § 1479 (3d ed. 1957).
Plaintiff employs the claim here as an alternative theory supporting her claim for breach of fiduciary duty: "When a corporate fiduciary obtains a gain or advantage through a violation of his duty of loyalty, a court may properly order restitution of the gain so as to deny any profit to the wrongdoer and prevent unjust enrichment." Plaintiff's Post-Trial Memorandum and Conclusions of Law, at 40. As noted above, however, Sharma has carried his burden of proof as to the fairness of the transaction about which plaintiff complains. Accordingly, plaintiff has failed to prove the third element of unjust enrichment.
F. Plaintiff's Request for Relief: Rescission or, Alternatively, Constructive Trust
Having failed to prevail on her derivative claims against defendants, plaintiff has failed to support her prayers for relief, either in the form of rescission of the asset transfer reflected in the Asset Purchase Agreement, or constructive trust as pled in Count X. Her claim for attorneys fees likewise fails.
To the extent that the parties' respective requests for findings and rulings are inconsistent with the foregoing, they are denied.
ORDER FOR JUDGMENT
For the reasons stated above, it is hereby ORDERED that judgment shall enter for defendants as to all claims.