Opinion
14-P-826
05-07-2015
EUGENE F. O'NEILL, JR. v. TIMOTHY SCOTT O'NEIL & others.
NOTICE: Summary decisions issued by the Appeals Court pursuant to its rule 1:28, as amended by 73 Mass. App. Ct. 1001 (2009), are primarily directed to the parties and, therefore, may not fully address the facts of the case or the panel's decisional rationale. Moreover, such decisions are not circulated to the entire court and, therefore, represent only the views of the panel that decided the case. A summary decision pursuant to rule 1:28 issued after February 25, 2008, may be cited for its persuasive value but, because of the limitations noted above, not as binding precedent. See Chace v. Curran, 71 Mass. App. Ct. 258, 260 n.4 (2008).
MEMORANDUM AND ORDER PURSUANT TO RULE 1:28
The plaintiff, Eugene F. O'Neill, Jr., appeals pro se from a Superior Court judge's entry of summary judgment for the defendants on statute of limitations grounds. We affirm.
Background. The material facts necessary to resolve this appeal are undisputed. The plaintiff and the five defendants each owned one-sixth shares of Ceralta Technologies, Inc. (Ceralta), a Delaware corporation. On May 30, 2010, the defendants, as directors of Ceralta, voted to approve the sale of a wholly owned subsidiary, Sage Laboratories, Inc. (Sage), to Spectrum Microwave, Inc. (Spectrum), for $6.3 million. On June 11, 2010, the defendants, as majority shareholders of Ceralta, ratified the sale. The plaintiff was present at the shareholder meeting and objected to the sale. Spectrum acquired Sage for $6,338,315.32 on June 18, 2010.
Summary judgment is appropriate where there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. We review a grant of summary judgment de novo. HipSaver, Inc. v. Kiel, 464 Mass. 517, 522 (2013).
In his complaint, filed on June 17, 2013, plaintiff alleged that the defendants ignored the marketing recommendations of the investment banking firm they had retained, resulting in the sale of Sage to Spectrum at a price far below market value. The defendants hastily agreed to the sale, he further alleged, to force him out of Ceralta. In his two-count complaint, the plaintiff claimed that by agreeing to the sale, the defendants breached the fiduciary duty they owed him as controlling shareholders of a close corporation (count one) and as directors of a close corporation (count two).
Discussion. The parties agree that this case is governed by Delaware law and that the applicable limitations period is three years, as provided by Del. Code Ann. tit. 10, § 8106 (2009). Thus, whether the plaintiff's complaint was timely filed depends on whether his causes of action for breach of fiduciary duty accrued when the defendant directors and stockholders voted to approve the sale on May 30, 2010, and June 11, 2010, respectively, or when the sale closed on June 18, 2010. The Superior Court judge determined that the causes of action accrued on the dates of the votes and entered summary judgment for the defendants on that ground. We agree.
More precisely, under Delaware law, actions in equity such as the fiduciary duty claims asserted here are time barred only by the equitable doctrine of laches. The statutory limitations period, however, creates a presumptive time bar that will apply in the absence of unusual or mitigating circumstances. See Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 319 (Del. 2004); Atlantis Plastics Corp. v. Sammons, 558 A.2d 1062, 1064 (Del. Ch. 1989).
Under Delaware law, a cause of action accrues "at the time of the wrongful act, even if the plaintiff is ignorant of the cause of action." Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 319 (Del. 2004). The wrongful acts -- the breaches of fiduciary duty -- that the plaintiff alleges are the defendant directors' approval and the defendant shareholders' ratification of the sale. These actions occurred more than three years before the plaintiff filed his complaint.
The plaintiff nonetheless contends that the date that the sale was consummated, and not the dates of the alleged wrongful acts, should be determinative, because only then did he incur the "special injury" for which he seeks legal redress. He suggests that any lawsuit would have been dismissed as premature before that point.
As an initial matter, the Delaware Supreme Court disavowed the "special injury" test, which the Delaware courts sometimes used to distinguish between a "direct" and a "derivative" suit, in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1035 (Del. 2004). Nonetheless, we understand the plaintiff to be arguing that he did not suffer any cognizable injury, "susceptible of being remedied in a legal tribunal," Newkirk v. W. J. Rainey, Inc., 76 A.2d 121, 123 (Del. Ch. 1950), until the sale to Spectrum was complete. We disagree.
To determine when a cause of action accrues under Delaware law, "the determinative issue is 'when the specific acts of alleged wrongdoing occur[red], not when their effect is felt.'" Welch, Saunders, & Voss, Folk on the Delaware General Corporation Law § 327.03[A] at 13-80 (6th ed. 2014), quoting from Schreiber v. Bryan, 396 A.2d 512, 516 (Del. Ch. 1978). "It is not required that all the damages resulting from the act shall have been sustained at that time, and the running of the statute is not postponed by the fact that the actual or substantial damages do not occur until a later date." Kaufman v. C. L. McCabe & Sons, Inc., 603 A.2d 831, 834 (Del. 1992), quoting from 51 Am. Jur. 2d, Limitation of Actions § 135. Thus, a cause of action for an insurance agent's negligent procurement of coverage, resulting in lack of coverage of the plaintiff policy holders, accrued when the plaintiffs accepted delivery of the insufficient policy, not when the property was later damaged by fire. Kaufman v. C. L. McCabe & Sons, supra.
In Marvel Entertainment Group, Inc., 273 B.R. 58, 73-74 (Bankr. D. Del. 2002), where the defendants entered into an allegedly unfavorable tax sharing agreement, the cause of action for breach of fiduciary duty accrued when they entered into the contract, and not when payments under the contract later became due. "[T]he cause of action accrued when the contract fixed the parties' rights . . . and not when an allegedly harmful legal obligation arose under the contract." Id. at 74. Likewise, in Bridgeport Holdings Inc. Liquidating Trust, 388 B.R. 548, 560-562 (Bankr. D. Del. 2008), the court held that four specific actions of the defendant officers and directors leading up to an asset sale, alleged to be below market value and in breach of their fiduciary duties, triggered the statute of limitations, even though the actions occurred before the sale was finalized.
The Supreme Court of South Carolina, in Menezes v. W. L. Ross & Co., 403 S.C. 522 (2013), performed a thorough review of Delaware law and likewise concluded that "under Delaware law, a shareholder's claim for breach of fiduciary duty accrues at the time the corporate directors or officers breach their fiduciary duty. In the merger context, this includes a board of directors fixing merger terms inconsistent with their fiduciary role." Id. at 546. The Menezes court discussed an unpublished decision of the Delaware Chancery Court, in which investors sued fund managers for breach of fiduciary duty when, as the result of the managers' alleged mismanagement of the funds, their value decreased. Id. at 543, citing Albert vs. Alex. Brown Mgmt. Servs., Del. Ch., No. 762-N, slip op. at 1 (June 29, 2005). In response to the plaintiffs' assertion that they could not have filed suit before actually suffering a loss, the chancellor responded, "Whether or not the plaintiffs could have sued for damages is not dispositive as to whether the claim accrued, since, as soon as the alleged wrongful act occurred, the plaintiffs could have sought injunctive relief." Menezes, supra, quoting from Albert, supra at 18.
The plaintiff in the present case stated at the hearing on the summary judgment motion that he retained an attorney before the sale was consummated and considered filing for injunctive relief, but chose not to because the attorney's fees were prohibitive.
Analogously, to determine whether a plaintiff has standing to bring a derivative suit, which requires stock ownership before the cause of action accrues, Delaware law holds that the time of the wrongful act, and not when its effects are felt, is dispositive. Thus, in Dieter v. Prime Computer, Inc., 681 A.2d 1068 (Del. Ch. 1996), which the Superior Court judge relied on, the plaintiffs, putative shareholder class representatives, alleged that the defendants entered into a detrimental merger agreement. Even though the plaintiffs purchased their shares before the challenged merger occurred, the court held that the plaintiffs were not appropriate class representatives because they became shareholders only after the board of directors had approved the terms of merger. "It is not the [m]erger that constitutes the wrongful act of which [p]laintiffs complain; it is the 'fixing of the terms of the transaction.'" Id. at 1072 (citation omitted). See 7547 Partners v. Beck, 682 A.2d 160, 162-163 (Del. 1996) (where plaintiffs claimed that directors breached their fiduciary duties by authorizing issuance of shares to themselves in a private placement, plaintiffs lacked standing because they did not hold stock when the defendants allegedly misused inside information to authorize the transaction; plaintiffs were "challenging the terms of the [Private Placement] rather than the technicality of its consummation"); Newkirk v. W. J. Rainey, Inc., 76 A.2d at 123 (wrongful act occurred when defendants diverted three corporate opportunities to purchase stock, not when the merger was subsequently consummated).
In this case, the terms of the transaction became fixed when the directors and shareholders approved the asset sale. If the defendants breached their fiduciary duties, this is when the breach occurred and the causes of action accrued. The plaintiff's complaint was untimely.
Against these authorities, the plaintiff cites Dofflemyer v. W. F. Hall Printing Co., 558 F. Supp. 372, 379 (D. Del. 1983), and Kaufman v. Albin, 447 A.2d 761 (Del. Ch. 1982). The defendant directors approved an allegedly unfavorable merger transaction in Dofflemyer, and an unfavorable tender offer in Kaufman. The respective courts held that the plaintiffs' causes of action for breach of fiduciary duty accrued when the transactions were completed, not at some earlier point triggered by the directors' wrongful actions leading up to these transactions. In both cases, however, the transactions were effected by votes of the shareholders, which fixed the terms of the transactions. Here, by contrast, the alleged wrongful conduct concerned an asset sale, the terms of which were fixed by the directors' vote and the shareholders' ratification, even though the transaction was not complete. To the extent Dofflemyer and Kaufman support the plaintiff's claim, we conclude that the weight of authority, and current Delaware law, supports the defendants. See Menezes, 403 S.C. at 535 (suggesting that Delaware law divides between an older line of cases holding that "a claim for breach of fiduciary duty accrues only after a party is injured in the form of actual damages, and the later subset that view the breach itself as sufficient injury to support a claim").
Conclusion. The plaintiff's causes of action for breach of fiduciary duty accrued outside the limitations period. The Superior Court judge correctly allowed the defendants' motion for summary judgment.
As the plaintiff had contemporaneous, actual knowledge of the defendants' allegedly wrongful acts, no unusual or mitigating circumstances prevent the operation of the equitable doctrine of laches in this case. See Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d at 319.
Judgment affirmed.
By the Court (Fecteau, Wolohojian & Massing, JJ.),
The panelists are listed in order of seniority.
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Clerk Entered: May 7, 2015.