Opinion
Civil Action No. 00-10295-00
January 9, 2001
Robert C. Gerrard, Davis, Malm D'Agostine, P.C., Boston, MA for Plaintiff.
John F. Batter, III, Hale Dorr; Sara Jane Shanahan, David j. Cervany Hale and Dorr, Boston, MA for Defendant.
MEMORANDUM AND ORDER
INTRODUCTION
This is a dispute between two siblings, which has its genesis in the formation of a personnel staffing company over thirty years ago. Plaintiff Joan Powers ("Powers") brings this action against her brother, Thomas F. Ryan ("Ryan"), and his newest personnel staffing company, Oxford Global Resources, Inc. ("Oxford"), claiming that she is entitled to a 10 percent ownership interest in Oxford in accordance with a 1967 agreement between Powers and Ryan. Specifically, she alleges that (1) Ryan breached the contractual agreement (Count I); (2) each defendant breached a fiduciary duty owed to her (Counts II and III); and (3) Ryan and Oxford wrongfully possess Plaintiff's shares in Oxford and hold them in constructive trust (Counts IV and V) Oxford moves to dismiss the two counts against it. After a hearing, the motion to dismiss Count III is DENIED, and the motion to dismiss Count IV is ALLOWED .
The Court is applying Massachusetts law under the significant relationship test. Demoulas v. Demoulas Super Markets, Inc., 424 Mass. 501, 511, 677 N.E.2d 159, 169 (1997) Although Delaware is the place of incorporation, it has no other nexus to this dispute.
FACTUAL BACKGROUND
The Amended Complaint alleges the following facts. In 1967, Powers and Ryan's parents died, leaving the sister and brother $5,000 apiece. Ryan told Powers of his plan to create a personnel staffing enterprise and requested financial assistance. In return for Powers's investment of her inheritance in Ryan's endeavor, Ryan promised Powers a 10 percent interest in his personnel staffing enterprise. On May 8, 1968, Ryan organized Thomas F. Ryan, Inc. ("TFR"), and a year later Powers received a certificate dated May 5, 1969, recognizing her ownership of five hundred shares in TFR.
From August 1967 through 1973, Powers lived abroad with her husband, who was in the United States Air Force. During this time, Ryan expanded his personnel staffing enterprise to include as many as ten other related personnel entities. Ryan continually told Powers that the business was having problems, and on May 17, 1971, TFR filed for bankruptcy. Ryan did not tell Powers that TFR had been dissolved, despite Powers's continuing inquiries about the business.
On the day that TFR filed for bankruptcy, Ryan's lifelong friend, James G. Hanning, executed Articles of Incorporation for a new personnel staffing entity called Career Builders, Inc., which had the same corporate purpose as TFR. Two days later, Career Builders was incorporated with Hanning as the president. However, Hanning remained in the construction business and served only nominally as president of Career Builders. In contrast, Ryan was actively involved with Career Builders' business. Also in 1971, Ryan organized a personnel staffing entity known as Personnel Management Services, Inc. of Peabody, Massachusetts. A Dun Bradstreet report described Personnel Management Services as the predecessor of Oxford. In 1976, Ryan purchased Career Builders from Hanning and became President and Treasurer of the company. Shortly thereafter, Career Builders' board of directors, per Ryan's request, issued one thousand shares of its stock to Powers, unbeknownst to her.
Ryan's personnel staffing enterprise continued to expand over the years. He incorporated an entity named Perry White Associates in Texas in 1977, for which Powers served as the registered agent, and organized Oxford Associates, Incorporated on July 24, 1984, which since has become Oxford Global Resources, Inc.
Meanwhile, in Massachusetts in May 1978, Career Builders changed its name to Perry White and Associates, Inc., which later changed its title to Perry-White Associates, Inc. Then in May 1988, Ryan requested that Powers cash out her shares in Perry-White for $2,000.00. Powers's understanding at the time was that Perry-White was merely a subsidiary of Thomas F. Ryan, Inc., and she was not aware that she possessed any shares in Perry-White. Therefore, she complied with Ryan's request, because she believed that this was a reorganizing move by her brother. In November 1988, a resolution was made to dissolve the Massachusetts Perry-White, and it was legally dissolved in 1993. Powers remained uninformed that TFR and Perry-White were dissolved.
In May 1994, Powers attended a party at Ryan's home, whereupon she discovered that Ryan had become wealthy and his personnel staffing enterprise was far more successful than she had been led to believe. In response to a letter from Powers requesting her 10 percent share of Ryan's enterprise, Ryan refused to recognize the 1967 agreement. Instead, Ryan wrote powers a letter stating that "that company is closed and your investment is over with." Am. Compl. at 13. Ryan and Powers continued to exchange letters, and on April 29, 1996, Ryan wrote, "[Y]our original investment was returned to you, and you did receive dividends during that operation from the business that was started in 1967 and closed in 1988." Id. at 14.
DISCUSSION
Powers argues that (1) a fiduciary relationship initially arose when she entrusted her $5,000 inheritance to her brother to invest in his career placement enterprise; (2) TFR became Powers's fiduciary when her brother incorporated TFR and transferred her capital to it; and (3) Oxford owes Powers a fiduciary duty, since as a successor corporation, it assumed TFR's fiduciary relationship to Powers.
1. A Fiduciary Duty Owed by Ryan
Under three separate theories, Powers has alleged sufficient facts to support a claim that Ryan owed her a fiduciary duty when he took her $5,000 to form a corporation. First, promoters of a corporation owe each other a fiduciary duty, which can survive the formation of the corporation. Wilson v. Jennings, 344 Mass. 608, 613-15, 184 N.E.2d 642, 646 (1962) (holding that if the parties who were corporate promoters "arranged for a permanent equal participation [in corporate operations], and undertook the obligation of disclosure to one another of relevant information, a fiduciary relationship arose" that was not necessarily merged into the corporate documents); 13 C.A. Peairs, Jr., Massachusetts Practice: Business Corporations § 223, at 425 (2d ed. 1971) ("As among the promoters inter sese there exists initially the relationship of participants in a joint venture: not a partnership, but with a somewhat similar fiduciary obligation to one another, and typically with at least some mutual agency powers. This relationship is probably usually merged into those of the corporation formed, but may endure longer if the parties so agree or intend.")
Second, the complaint has alleged sufficient facts to support a claim that Ryan owed Powers a fiduciary duty upon receiving Powers's money because of the special relationship of trust between the two, as demonstrated by Powers's investment of her full inheritance in Ryan's plans, and the disparity in their commercial expertise. Broomfield v. Kosow, 349 Mass. 749, 758, 212 N.E.2d 556, 561 (1965) (holding that a constructive trust is warranted where plaintiff trusted and confided in defendant, who used "the influence springing from that trust and confidence to obtain personal advantage at the expense of" the plaintiff); Geo. Knight Co., Inc. v. Watson Wyatt Co., 170 F.3d 210, 216 (1st Cir. 1999) ("[T]rust and confidence reposed in a party possessing a great disparity of knowledge or expertise in a commercial setting, while ordinarily not enough standing alone to give rise to fiduciary obligations, may produce such obligations if the trust and confidence is knowingly betrayed by that party for the purpose of securing some benefit to itself.")
Third, as a shareholder, officer, and director of a close corporation, Ryan owed Powers a duty of loyalty. Demoulas, 424 Mass, at 528-29, 677 N.E.2d at 179 ("In the case of a close corporation, which resembles a partnership, duties of loyalty extend to shareholders, who owe one another substantially the same duty of utmost good faith and loyalty in the operation of the enterprise that partners owe to one another, a duty that is even stricter than that required of directors and shareholders in corporations generally.").
2. Claim of a Fiduciary Duty Owed by a Corporation
The case law is less settled on whether a corporation owes a fiduciary duty to a shareholder. A stockholder's tights between herself and the corporation are, generally speaking, contractual in nature. Crocker v. Waltham Watch Co., 315 Mass. 397, 402, 53 N.E.2d 230, 233 (1944). Moreover, a "wholly unformed corporation" [cannot] be bound by a "pre-natal contract." Hushion v. McBride, 296 Mass. 4, 7, 4 N.E.2d 443, 445 (1936). As Plaintiff concedes, no Massachusetts case recognizes a fiduciary duty owed by a corporation to a shareholder.
Although Plaintiff urges this Court to consider case law from other states which recognizes such a duty, see e.g., Schneider v. Union Oil Co. of Cal., 86 Cal.Rptr. 315, 318 (Cal.Ct.App. 1970) (holding that "the relationship of a corporation to its stockholders is a fiduciary one in the nature of a trusteeship"), this request ignores a basic tenet long followed by the First Circuit that a court sitting in diversity should not break new legal ground. Williams v. Monarch Mach. Tool Co., 26 F.3d 228, 232 (1st Cir. 1994) ("We have warned, time and again, that litigants who reject a state forum. in order to bring suit in federal diversity jurisdictions cannot expect that new trails will be blazed." (internal quotation marks omitted; citations omitted)) . This request to recognize such a duty is an even greater stretch here, because Plaintiff has never been a shareholder of Oxford and Oxford has not violated any independent duty owed to Plaintiff. Accordingly, absent a duty arising under doctrines of successor or vicarious liability, the Court concludes that Oxford does not owe a fiduciary duty to Powers as a putative shareholder.
However, Plaintiff argues that under the doctrine of successor liability, Oxford is liable for any breach of fiduciary duty owed by TFR to her. See general Ed Peters Jewelry Co., Inc. v. CJ Jewelry Co., Inc., 124 F.3d 252, 266 (1st Cir. 1997) (holding that two of the tests for successor liability are whether the new corporation is a "mere continuation" of the old and whether the old corporation "transferred its assets with the actual fraudulent intent to avoid, hinder, or delay its creditors") . Under Massachusetts law, a minority shareholder may bring a suit for breach of fiduciary duty against both the majority shareholders and the corporation without bringing a stockholder's derivative suit. See Horizon House-Microwave, Inc. v. Bazzy, 21 Mass. App. Ct. 190, 196, 486 N.E.2d 70, 74 (1985) (involving two brothers, one a minority shareholder and the other the majority shareholder). Although Horizon is vague about the source of the duty owed by the corporation, some courts have imposed such a duty vicariously on a close corporation for the wrongful acts of majority shareholders. See generally William Meade Fletcher, Fletcher Cyclopedia of the Law of Private Corporations § 5742, at 47 (perm. ed., rev. vol. 1993) ("Some courts have expressly denied that there is any fiduciary relationship between a corporation and its shareholders, although such a duty may be imposed on a corporation vicariously through its officers, directors, or majority shareholders.")
The Amended Complaint alleges sufficient facts to support an inference that Oxford is a successor corporation to TFR and may be liable for any breach of fiduciary duty by TFR to Powers. Relying on the Hushion rationale, the Court rejects Plaintiff's theory that TFR is liable for any pre-natal fiduciary obligation owed by Ryan to his sister. However, under Horizon, to the extent Ryan, as a majority shareholder, director, or officer of TFR, breached a fiduciary duty to Plaintiff, TFR is vicariously liable. Plaintiff has alleged that Ryan brought TFR into bankruptcy as a sham to elude creditors and that this was a breach of fiduciary duty. While this alternative claim of breach of fiduciary duty in paragraph 65 of the Amended Complaint is sketchy, drawing all inferences in favor of the non-moving party, the Court DENIES the motion to dismiss Count III.
As the First Circuit noted in Ed Peters Jewelry Co., 124 F.3d at 267 n. 15, the successor liability doctrine proves problematic in the context of bankruptcy proceedings. Nonetheless, that issue has not been well-briefed here with respect to TFR's bankruptcy in 1971, and I decline to address it.
3. Constructive Trust
With respect to Count IV, Plaintiff contends that if Ryan breached a fiduciary duty to Powers by failing to issue her stock in Oxford, a constructive trust is an appropriate remedy. See Demoulas v. Demoulas, 428 Mass. 555, 572, 703 N.E.2d 1149, 1164 (1998) (making shares of corporate stock subject to a constructive trust where the owners of the stock (the children) did not establish they were bona fide purchasers). While not disputing that a constructive trust may be an appropriate remedy, Oxford claims that the constructive trustee should be Ryan, who owns 100 percent of the shares. Because Plaintiff concedes that Ryan owns 100 percent of the stock in the corporation, he is the appropriate constructive trustee of those shares to avoid unjust enrichment. Barry v. Covich, 332 Mass. 338, 342, 124 N.E.2d 921, 924 (1955) ("A constructive trust may be said to be a device employed in equity, in the absence of any intention of the parties to create a trust, in order to avoid the unjust enrichment of one party at the expense of the other where the legal title to the property was obtained by fraud or in violation of a fiduciary relation. . . ."); cf. Southern Pac. Co. v. Bogert, 250 U.S. 483, 492 (1919) (holding that in a dispute among shareholders over ownership of corporate stock, the corporation is "in no way interested and would not be even a proper. party.") Count IV is dismissed.
ORDER
The motion to dismiss is DENIED for Count III and ALLOWED for Count IV.