Selmark Associates, Inc. vs. Evan Ehrlich
Case Details
- Citation
- 467 Mass. 525
- Procedural Posture — the stage the case had reached
- appeal
- State
- Massachusetts
- Circuit
- 1st Circuit
Related Laws
No specific laws identified for this ruling.
Claim Types
Outcome
Jury verdict for plaintiffs on breach of fiduciary duty claim ($240,000 damages); jury verdict for defendant on breach of fiduciary duty counterclaim ($221,408 damages) and breach of contract counterclaim ($1,537,163 damages), but appellate court vacated breach of contract damages and remanded for new trial; defendant's G.L. c. 93A claim reversed and dismissed.
Excerpt
Selmark Associates, Inc. vs. Evan Ehrlich. Worcester. November 7, 2013. March 14, 2014. Present: Ireland, C.J., Spina, Cordy, Botsford, Gants, Duffly, & Lenk, JJ. Corporation, Close corporation, Board of directors, Stockholder. Damages, Breach of fiduciary duty, Breach of contract. Contract, Performance and breach. Fiduciary. Consumer Protection Act, Unfair or deceptive act, Availability of remedy, Transactions between partners, Employment. Practice, Civil, Instructions to jury, Injunctive relief, Special questions to jury. Injunction. Employment, Termination. In a civil action involving shareholders and directors of close corporations, the judge did not err in denying a motion for judgment notwithstanding the verdict on the defendant’s counterclaim alleging breach of fiduciary duty, where the record contained ample evidence from which the jury could infer that, in terminating the defendant from his employment, the moving parties (a close corporation that was a majority shareholder of the close corporation in which the defendant was a minority shareholder and that employed him; and the principal owner of the majority shareholder close corporation) violated the duty of utmost good faith and loyalty owed to the defendant as a minority shareholder [536-540]; further, a purported contest of the award of damages on this claim did not rise to the level of acceptable appellate argument [540], In a civil action involving shareholders and directors of close corporations, the judge did not err in denying a motion for judgment notwithstanding the verdict on the defendant’s counterclaim alleging breach of contract when he was terminated from his employment with the close corporation of which he was a minority shareholder, where ample evidence was presented from which the jury could have found that the defendant acquired the stock required to permit conversion of his interest in that close corporation to an interest in a second close corporation (the majority shareholder in the close corporation that employed the defendant), and that the refusal to allow him to do so was a breach of the agreement permitting such conversion [540-542]; however, this court remanded the matter for further proceedings on the issue of the award of damages on the claim of breach of contract [542-546]. In a civil action involving shareholders and directors of close corporations, the judge, in instructing the jury, did not err in declining to inform them that fiduciary duties can be displaced by contract, where the instructions adequately and correctly covered the applicable legal principles of breach of contract and breach of fiduciary duty; further, the jury were not forced to decide legal questions without guidance from the trial judge; finally, the special verdict questions that the jury were asked to answer did not conflate different theories of recovery. [546-549] In a civil action involving shareholders and directors of close corporations, the judge erred in entering judgment in favor of the defendant on his claim of unfair or deceptive acts or practices in violation of G. L. c. 93A, and in awarding double damages, attorney’s fees, and costs, where the claims raised stemmed from or concerned a single venture of which all the parties were a part, and G. L. c. 93A does not apply to employment and shareholder relationships. [549-551] In a civil action involving shareholders and directors of close corporations, alleging, inter alia, that the defendant committed a breach of his fiduciary duty in soliciting the principals of one of the close corporations at issue for a rival after the defendant’s employment with the other close corporation at issue had been terminated, the judge did not err in declining to instruct on the defendant’s right to compete or in denying his motion for judgment notwithstanding the verdict. [551-553] In a civil action involving shareholders and directors of close corporations, the judge did not err in declining to award multiple damages on the defendant’s claim of breach of contract [553]; further, the judge did not abuse his discretion in declining to expand the scope of posttrial injunctive relief [553]. Civil action commenced in the Superior Court Department on April 22, 2008. The case was tried before John S. McCann, J., and motions for posttrial relief were heard by him. The Supreme Judicial Court granted an application for direct appellate review. Ronald W. Dunbar, Jr., for the plaintiffs. Robert D. Cohan for the defendant. On behalf of Marathon Sales, Ltd. Botsford, J. This case is, like many, factually intense. On appeal, however, the primary legal issues raised concern the duties fellow shareholders and directors of close corporations owe to each other in a context where contractual agreements exist defining in part their relationship; also raised are questions about damages. For the reasons discussed hereafter, we affirm the jury verdict in favor of Selmark Associates, Inc. (Selmark), and Marathon Sales, Ltd. (Marathon), on their breach of fiduciary duty claim against Evan Ehrlich. We also affirm the verdict in favor of Ehrlich on his breach of fiduciary duty counterclaim against Selmark and David Elofson. We conclude that, as the jury found, Ehrlich is entitled to recover on his breach of contract counterclaim, but we vacate the award of damages and remand the case to the Superior Court for a new trial on the issue of contractual damages. Additionally, we conclude that Ehrlich is not entitled to recover under G. L. c. 93A, and his c. 93A counterclaim must be dismissed. 1. -Background. What follows is a summary of the factual background of the case, taken from the evidence at trial. We reserve for later discussion additional facts relevant to the issues raised on appeal. Selmark and Marathon are both closely held Massachusetts corporations that operate as what the sales industry calls manufacturer’s representative companies. Both provide outsourced sales support to compánies manufacturing electronic components that lack their own sales staff; these manufacturers are Marathon’s and Selmark’s customers or “principals.” Andrea Terenzi established Marathon in 1980 and remained its owner and sole shareholder until the transactions at issue in this case. In 1997, Terenzi hired Ehrlich as a salesperson for Marathon and the two had a verbal agreement under which, if all went well, Ehrlich would have an option to become an owner and manager of Marathon. Ehrlich proved to be a high-performing salesperson and maintained a good relationship with Terenzi. As Terenzi’s retirement approached, Terenzi was looking for a successor and a way to sell his company, and wanted Ehrlich to have an ownership interest in it. This led to nearly two years of negotiations among Terenzi, Ehrlich, and Selmark for the sale of Marathon. At the time, Selmark was owned by Elofson and Clifton Snuffer, both former Selmark sales managers who purchased the business from Elofson’s father on his retirement in 1993. On or about September 14, 2001, Ehrlich entered into a series of written agreements (collectively, the agreements) providing for the gradual sale of Marathon by Terenzi to Selmark and Ehrlich. The agreements comprise four contracts referred to as follows: (i) stock purchase and redemption agreement (purchase agreement); (ii) employment agreement; (iii) conversion agreement; and (iv) stock agreement. a. The agreements. We set forth the essential terms of each agreement: i. Purchase agreement. The purchase agreement detailed the terms of sale of Marathon to Selmark and Ehrlich. It provided for the gradual acquisition of Marathon stock by the two purchasers through monthly payments to Terenzi, pursuant to two promissory notes.- Upon full payment to Terenzi, Selmark would own fifty-one per cent of the Marathon stock, and Ehrlich the remaining forty-nine per cent. Under the terms of the purchase agreement Marathon bore primary responsibility for the monthly payments to Terenzi. However, if Marathon’s monthly cash flow was insufficient to pay, Ehrlich and Selmark, as separate coguarantors, were responsible for the monthly shortfall. Section 5 of the purchase agreement detailed the procedures in the event of a shortfall and the steps to be taken by Terenzi to notify Ehrlich and Selmark of their respective payment obligations. Specifically, section 5 provided for the parties to conduct a semiannual review of Marathon’s monthly cash flow on March 1 and September 1 of each year and, in the event of a shortfall in the previous six months, Terenzi was to notify Ehrlich and Selmark by sending a “shortfall notice” pursuant to the notice provisions of Section 24 of the purchase agreement. If either Selmark or Ehrlich did not make the payment for which it or he was responsible within the required time frame, Terenzi could declare default on the nonpayor by sending a default notice. The nondefaulting party then had the option to cure the default by making the payment due from the defaulting party and acquiring the Marathon stock attributable to that payment for itself. If a default occurred and was not cured, the purchase agreement allowed Terenzi to recover all Marathon stock, including that which was previously purchased. ii. Employment agreement. The employment agreement was attached to the purchase agreement, and was between Ehrlich and Marathon. The agreement provided for an initial fifteen-month term, until December 31, 2002, with extension possible on the written agreement of the parties. Under the employment agreement’s terms, Ehrlich became the vice-president of Marathon and potentially a director, and could only be terminated for cause. If the agreement was not extended, at the conclusion of the initial contract term, the agreement would terminate and Ehrlich would be required to resign as an officer and director of Marathon. iii. Conversion agreement. Under the conversion agreement, Ehrlich had the option, once he and Selmark fully paid off Ter-enzi for the purchase of Marathon, to convert what would then be Ehrlich’s forty-nine per cent interest in Marathon into a twelve and one-half per cent ownership interest in Selmark. If Ehrlich exercised this option, Selmark would then acquire full ownership of Marathon. The conversion agreement also required that, upon conversion, Selmark offer Ehrlich an employment agreement that would provide “for compensation, bonuses, expense payments, and benefits consistent with his percentage ownership of [Selmark].” Independent of employment, upon conversion, Ehrlich was to become an officer of Selmark and member of its board of directors. iv. Stock agreement. The stock agreement, attached to the conversion agreement, would become operative if and when Ehrlich paid Terenzi his full share of the Marathon purchase price pursuant to the terms of the purchase agreement, and opted to exercise his right to convert Marathon stock for Sel-mark stock under the conversion agreement. Upon those events happening, the stock agreement, a contract between Ehrlich and Selmark, would govern Ehrlich’s rights as a minority stockholder of the company. The stock agreement provided both parties with the opportunity to end the business relationship through the sale of Ehrlich’s stock, subject to certain financial penalties for the party exercising this right. Specifically, Selmark would possess a “call right” pursuant to which, on the occurrence of certain conditions, the company could purchase all of Ehrlich’s stock. If Selmark were to exercise this call right, Ehrlich would receive a premium purchase price of 110 per cent of the “stock purchase value.” Similarly, Ehrlich possessed a “put right,” where, at any time, he could sell, and Selmark would be obligated to purchase, all of his Selmark stock. However, if Ehrlich chose to exercise his put right, he would only receive ninety per cent of the stock purchase value. b. Subsequent events. After the agreements were executed, Marathon and Selmark remained separate entities, but presented themselves as Selmark to the outside world. Marathon moved into the Selmark office space, but maintained separate bank accounts and tax returns. The two companies used each other’s sales forces to sell one another’s product lines, and they did not compete with each other. Ehrlich’s business card identified him as vice-president of Selmark even though in fact he was an employee and vice-president of Marathon pursuant to the employment agreement. Ehrlich’s employment agreement expired by its terms on December 31, 2002, because the parties had not agreed to extend it in writing. Nevertheless, after that date Ehrlich remained an employee of Marathon and retained his position as vice-president. In 2003, Terenzi retired from Marathon, and Ehrlich began to report directly to Elofson. Ehrlich received no complaints from Elofson about his job performance. Ehrlich brought in new business, and was consistently the number two (second only to Elofson) producer of commission income among all Selmark and Marathon sales representatives. In July of 2007, Ehrlich notified Elofson that he intended to accelerate his final payments to Terenzi and complete the payment due on his forty-nine percent share of Marathon stock by December, 2007. According to Elofson, Ehrlich’s announcement prompted Elofson to contemplate the future of Selmark, and then to conclude that he did not see Ehrlich as a successor or want him involved in the future of the business. On October 26, 2007, Ehrlich and Elofson met at a local hotel, purportedly to discuss the details of the Marathon payoff. At that meeting, Elofson informed Ehrlich that his employment with Marathon was terminated, effective immediately, and presented Ehrlich with a termination letter. The letter contained an offer by Sel-mark to purchase Ehrlich’s forty-nine per cent ownership interest in Marathon for the same price he would have received had he converted his Marathon shares into Selmark stock and Sel-mark then exercised its call rights pursuant to the stock agreement. The letter also informed Ehrlich that, due to decreased cash flow, Marathon would have insufficient funds to complete its payments to Terenzi and that Ehrlich was responsible for forty-nine per cent of the shortfall. As he was driving home from that meeting, while speaking to his family on his cellular telephone that was paid for by Marathon, Ehrlich’s telephone service was disconnected. That same day, Elofson also sent a letter to all the Selmark and Marathon principals, notifying them of Ehrlich’s termination and characterizing it as a “failed relationship.” After his termination, Ehrlich received approximately $25,000 in severance from Selmark, but did not cash in his Marathon stock under the terms offered in the termination letter. He remained a minority shareholder of Marathon, but had no access to, or involvement in, the business workings of the company. In November, 2007, Ehrlich took a job as a salesperson with Tiger Electronics (Tiger), a competing manufacturer’s representative company., At Tiger, Ehrlich contacted, and met with, several Marathon principals, attempting to solicit their business. After Ehrlich met with a company known as PKG, PKG terminated its relationship with Marathon and became a Tiger principal. Following his termination, Ehrlich did not believe that Marathon had insufficient funds to make its remaining payments to Terenzi. He expressed these doubts to Terenzi but assured him that, if it were proven that Marathon had insufficient funds, he would honor his commitment to pay. Although Selmark paid its portion of the outstanding amount due to Ter-enzi on a monthly basis after Ehrlich was terminated, Ehrlich did not. Selmark completed its remaining payments to Terenzi by May, 2008, so that the only outstanding balance owed was Ehrlich’s portion. In the fall of 2008, Terenzi and his attorney sent a series of messages via electronic mail (e-mail) to Ehrlich, Elofson, and their counsel, demanding payment. Terenzi, however, never sent a shortfall notice or default notice as prescribed by the purchase agreement. On February 2, 2009, Selmark sent the remaining payment to Terenzi to “cure” what it characterized as Ehrlich’s “default.” Three days later, on February 5, after he learned of Selmark’s payment, Ehrlich wired the same amount to Terenzi’s attorney. Terenzi accepted payment from Ehrlich, and never cashed Selmark’s check. On June 1, 2009, Ehrlich sent Elofson notice of his intention to exercise his conversion rights pursuant to the conversion agreement, and requested issuance of his twelve and one-half per cent stock interest in Selmark. Through counsel, Selmark notified him that he was not entitled to convert because Selmark had “cured [Ehrlich’s] default of his obligations” pursuant to the purchase agreement. Selmark then claimed for itself the portion of stock attributable to the amount on which Ehrlich allegedly had defaulted, and Ehrlich never acquired the forty-nine per cent interest in Marathon necessary to exercise his conversion rights. c. Procedural history. On April 22, 2008, Selmark and Marathon filed a complaint, alleging that by soliciting and acquiring Marathon principals for Tiger, Ehrlich committed a breach of his fiduciary duties to Marathon. In response, Ehrlich asserted thirteen counterclaims against Selmark, Marathon, and Elofson (collectively, the Selmark parties)., The case was tried before a jury in 2011. The jury returned their verdict by answering special questions. They found that Ehrlich committed a breach of his fiduciary duty to Selmark and Marathon, and awarded $240,000 in damages. As for Ehrlich’s counterclaims against the Selmark parties, the jury found that Selmark and Elofson (but not Marathon) committed a breach of contract with Ehrlich, and awarded Ehrlich $1,537,163 in damages. Additionally, they found Selmark and Elofson (but not Marathon) committed a breach of their fiduciary duties to Ehrlich, and awarded $221,408 in damages. The jury determined that all the Selmark parties engaged in unfair or deceptive acts or practices in violation of G. L. c. 93A, again awarding $221,408 in damages. The trial judge later doubled the c. 93A damages and pursuant to c. 93A, § 11, awarded attorney’s fees and costs. After the verdict, the trial judge allowed Ehrlich’s motion for injunctive relief to preserve the assets of Selmark and Marathon pending appeal. Ehrlich later moved to amend his motion to include in the preservation order Elofson’s corporate and personal assets; the judge denied the motion to amend. Judgment entered on October 13, 2011. Ehrlich subsequently filed a motion for judgment notwithstanding the verdict (judgment n.o.v.) and the Selmark parties filed a joint motion for judgment n.o.v., and a motion to amend judgment by remittitur or, in the alternative, a motion for new trial. After rehearing, both parties’ posttrial motions were denied on January 4, 2012. The parties cross-appealed; we granted Ehrlich’s application for direct appellate review. 2. Discussion, a. The Selmark parties’ appeal. On appeal, the Selmark parties focus first on Ehrlich’s successful counterclaims for breach of fiduciary duty and breach of contract, raising issues that concern the appropriate legal principles governing the merits of these claims as well as the damages awarded for each; they also argue that the trial judge’s jury instructions on these claims were fatally flawed by omissions as well as erroneous statements of the law, errors that were compounded by use of a defective special verdict questionnaire. Finally, they challenge the judgment for Ehrlich on his G. L. c. 93A claim, arguing that it must be reversed because c. 93A is inapplicable in this case. We consider these issues separately, beginning with the breach of fiduciary duty claim. Before doing so, however, it is important to review the apparent basis of the jury’s findings on Ehrlich’s breach of fiduciary du
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