Opinion
No. 00-1973
February 15, 2002
MEMORANDUM OF DECISION AND ORDER ON MOTION FOR PARTIAL SUMMARY JUDGMENT
INTRODUCTION
This action arises from a contract dispute in connection with a real estate development project. The plaintiff, RT Gilbane Corp ("Gilbane"), alleges that it was entitled to payment for services pursuant to an oral contract with the defendant Neighborhood House, LLC ("Neighborhood"), a corporation formed for the purpose of developing the property in issue. The contract, according to Gilbane, provided for it to receive a monthly project management fee and expenses. Gilbane alleges that it performed the services as agreed, and submitted invoices according to the contract, but remains unpaid. Neighborhood, according to Gilbane, abandoned the project for which it had engaged Gilbane, and instead sold the property, at a price far below its market value, to the defendant Nativity Preparatory School ("Nativity"). The sale to that charitable entity, Gilbane alleges, rendered Neighborhood insolvent, and resulted in substantial tax benefits to Neighborhood's individual shareholders, the defendants John, Robert and James Knowles.
Based on these allegations, Gilbane claims damages against Neighborhood on theories of breach of contract, quantum meruit, unjust enrichment, and promissory estoppel. Gilbane also asserts claims for damages against Neighborhood and the three Knowles brothers on a theory of breach of fiduciary duty, and against Neighborhood and John Knowles pursuant to G. L. c. 93A. Finally, Gilbane seeks to set aside the sale to Nativity as a fraudulent transfer. Presently before the Court are motions for summary judgment on behalf of all defendants as to the fraudulent transfer counts, on behalf of Robert and James Knowles as to the fiduciary duty claim. For the reasons that will be explained, the defendants' motions will be allowed.
BACKGROUND
The record presented in connection with the present motions provides the following background. The Knowles brothers formed Neighborhood House as a Limited Liability Company on April 6, 1998, for the purpose of acquiring and developing real estate in Jamaica Plain for use by non-profit entities at below market rents. The three brothers, each of whom provided a capital contribution of $140,000, were and remain the sole members of the Company. Although the Company's LLC Agreement gives each member management authority, Robert and James Knowles left primary responsibility for its actual management to their brother John, who is known as Joe.
pursuant to Superior Court Rule 9A(b)(5) cast the brothers' purpose statementss in somewhat different light, but do not reveal any genuine factual dispute on this point. It appears that the brothers intended to and did obtain substantial tax benefits, by means of deductions for charitable contributions, but did not intend otherwise to profit from the endeavor.
On April 8, 1998, Neighborhood purchased the property that is the subject of this dispute at a price of $380,000, leaving $40,000 of its original capital for operating costs. Neighborhood then began efforts to assemble financing for rehabilitation of the property. In May of 1999, Joe Knowles approached Gilbane "to obtain its assistance on the Rehabilitation Project." The terms of the oral agreement under which Gilbane became involved are in dispute; in contrast to Gilbane's contention that it was to receive fees and expenses, Neighborhood contends that payment to Gilbane was contingent on success in securing financing for and completing the rehabilitation and leasing of the property. It is undisputed that Gilbane knew of the charitable purpose of the project from the outset of its involvement. Through the remainder of 1999, Gilbane spent substantial time and incurred expenses in activities related to the project. The record does not indicate the time spent or expenses incurred by the Knowles brothers or others.
The materials submitted leave some doubt as to precisely what services Gilbane was to provide, but it appears that securing financing was at least a significant part of Gilbane's role. The Amended Complaint alleges that Gilbane "was retained . . . to provide professional project development and management services."
Prior to the Spring of 2000, the anticipated anchor tenant for the property was the City of Boston, for the use of the Greater Eggleston Community High School. At that time, however, the City declined to finalize the proposed lease and withdrew its support for the rehabilitation. A few months earlier, Neighborhood had received an inquiry on behalf of Nativity Preparatory School, a non-profit organization that provides tuition-free education to students from low-income families. Neither Neighborhood nor the Knowles brothers had any previous relationship with Nativity. When negotiations with the City ended, Joe Knowles undertook to negotiate on behalf of Neighborhood with Nativity for the sale of the property at a price below its then appraised value of $900,000. On April 19, 2000, Neighborhood and Nativity entered into a purchase and sale agreement at a price of $125,000, with closing scheduled for September of that year. Neighborhood intended that the sale would effectively terminate its operations.
The parties assert somewhat differing reasons for the City's loss of interest, but this dispute does not appear to be material to the present motions.
As of the date of the purchase and sale agreement, Neighborhood's assets consisted of the property and $7,288.61 in cash. Its only significant debt at that time consisted of Gilbane's unpaid and disputed invoices, totaling $103,672.63. As of the date of the purchase and sale agreement, no litigation was pending or explicitly threatened against Neighborhood, although Joe Knowles and Richard Gilbane had exchanged less than amicable communications regarding the issue of Gilbane's claimed right to payment.
Gilbane learned of the purchase and sale agreement upon its execution, from news media coverage as well as other sources. It filed this action on April 24, 2000, naming only Neighborhood as defendant. Gilbane did not seek to prevent the sale to Nativity or to place an attachment on the property, but did seek a preliminary injunction to prevent Neighborhood from transferring or dissipating the proceeds of the sale, to the extent of its claim of $103,672.63. After hearing on that request, the Court entered the following order:
Richard Gilbane testified at his deposition that prior to April 24, 2000, he had a conversation with Nativity's director in which he informed Nativity of Gilbane's outstanding claim against Neighborhood for payment for services in connection with the property, and made a statement to the effect that Nativity should reserve funds for payment of the claim. Gilbane also testified that he was aware Nativity planned substantial renovations to the property. Nevertheless, Gilbane did not name Nativity it its original complaint.
Balancing this court's finding that plaintiff has little likelihood of success on the merits with this court's determination that, in the unlikely event of a recovery, plaintiff has shown that defendant will likely have no assets to satisfy any judgment unless funds are escrowed, this court orders that $32,417.39 from any sale of defendant's property is to be placed in escrow pending the resolution of this case. In all other respects, plaintiff's motion for preliminary injunction is denied.
The record does not explain this figure. It appears to relate to Gilbane's claimed out-of-pocket costs, as distinct from fees for its services.
The sale to Nativity closed on September 14, 2000. Promptly thereafter, Nativity began preparing to renovate the property for use as a school, engaging a project manager, general contractor, and architect for that purpose. Over the succeeding year, Nativity incurred some four and half million dollars in expenses in connection with the property.
Nativity's net payment to Neighborhood at the closing, after adjustments not specified in the record and credit for a ten thousand dollar deposit previously paid, was $94,356.48. Of that, $32,417.39 was placed in escrow, pursuant to the Court's order. After the closing, Neighborhood's assets consisted of the sale proceeds and some $3,347.81 in remaining cash. Its debts had increased, since that time, by the amount of attorney's fees and expenses it had incurred in the defense of this action. On September 18, and October 11, 2000, Neighborhood made payments to its attorneys for services in connection with this case in the amounts, respectively, of $36,010.58 and $32,500, leaving some $6,152.51 in cash as Neighborhood's sole remaining assets. Payment of small expenses thereafter brought that amount down to $5,208.17 as of the end of 2000.
The purchase price changed from the $125,000 set in the purchase and sale agreement to $111,833.33. The record does not explain this change.
Gilbane has not suggested any disproportion between these payments and the value of the services rendered.
In tax returns for the year 2000, filed in early 2001, each of the Knowles brothers reported a charitable contribution arising from the sale, apparently based on the difference between the sale price and the value of the property apportioned among the brothers. The amount of the deductions was $258,330 for each of James and Robert, and $30,271 for Joe. The record does not explain the difference between these figures, nor does the record indicate the amount of any tax savings achieved by the brothers as a result of these deductions.
On May 10, 2001, Gilbane filed its Amended Verified Complaint. It added the Knowles brothers and Nativity as defendants, and for the first time asserted its claim that the sale to Nativity was a fraudulent transfer. Upon filing the amended complaint, Gilbane did not press any request for preliminary relief against Nativity. In their present motions, the defendants contend that the fraudulent transfer claims lack evidentiary support and are barred by laches. Robert and James Knowles also contend that no claim lies against them for breach of fiduciary duty, since they engaged in no conduct that could form the basis for individual liability.
DISCUSSION
This Court grants summary judgment where there are no genuine issues of material fact and where the record entitles the moving party to judgment as a matter of law. See Mass.R.Civ.P. 56 (c); Cassesso v. Commissioner of Correction , 390 Mass. 419, 422 (1983); Community National Bank v. Dawes, 369 Mass. 550, 553 (1976). The moving party bears the burden of establishing that there is no issue of material fact on every relevant issue. See Pederson v. Time, Inc., 404 Mass. 14, 16-17 (1989). A party moving for summary judgment who does not bear the burden of proof at trial may demonstrate the absence of a genuine dispute of material fact for trial either by submitting affirmative evidence negating an essential element of the non-moving party's case, or by showing that the non-moving party has no reasonable expectation of proving an essential element of its case at trial. Flesner v. Technical Communications Corp., 410 Mass. 805, 809 (1991); Kourouvacilis v. General Motors Corp., 410 Mass. 706, 716 (1991).
Once the moving party establishes the absence of a triable issue by either of these methods, the party opposing the motion must respond with evidence of specific facts establishing the existence of a genuine dispute. Pederson v. Time, 404 Mass. 14, 17 (1989). The opposing party may not rest on the allegations of the pleadings, or rely on "bare assertions and conclusions regarding [his or her own] understandings, beliefs, and assumptions." Key Capital Corp. v. M S Liquidating Corp., 27 Mass. App. Ct. 721, 728 (1989). Mere contradictions of factual allegations, without evidentiary support, are insufficient to raise questions of material fact sufficient to defeat a summary judgment motion. Madsen v. Erwin, 395 Mass. 715, 721 (1985), quoting Olympic Junior, Inc. v. David Crystal, Inc., 463 F.2d 1141, 1146 (3rd Cir. 1972) (noting that conclusory statements, denials, and allegations are insufficient to raise material issues of fact). The opposing party's obligation, rather, is to demonstrate the existence of admissible evidence sufficient to meet the burden of proof on the issues raised by the motion.
In deciding motions for summary judgment, the Court may consider pleadings, depositions, answers to interrogatories, admissions on file and affidavits. The Court reviews the evidence in the light most favorable to the nonmoving party, but does not weigh evidence, assess credibility or find facts. See Dawes, 369 Mass. at 553; Mass.R.Civ.P. 56(c); Colley v. Benson, Young Downs Insurance Agency, Inc., 42 Mass. App. Ct. 527, 528; see also Kelley v. Rossi, 395 Mass. 659, 663 (1985). In cases "where notice, intent, or state of mind questions are at issue" summary judgment is often, but not always, inappropriate. See Brunner v. Stone Webster Engineering Corp., 413 Mass. 698, 705 (1992) (further citations omitted).
I. The Fraudulent Transfer Claims, Counts VI, VII, and VIII.
Gilbane rests its fraudulent transfer claims on three provisions of the Massachusetts Uniform Fraudulent Transfer Act, G.L.c. 109A, §§ 5(a)(1), 5(a)(2), and 6(a). Section 5(a)(1) provides that a transfer is fraudulent if made "with actual intent to hinder, delay, or defraud any creditor of the debtor." Section 5(a)(2) provides that a transfer is fraudulent if the debtor makes the transfer "without receiving a reasonably equivalent value in exchange," and the debtor:
(i) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
(ii) intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due.
Section 6(a) provides that a transfer is fraudulent as to a creditor whose claim precedes the transfer:
if the debtor made the transfer . . . without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at the that time or the debtor became insolvent as a result of the transfer or obligation.
Application of these provisions to the undisputed facts appearing in the record presently before the Court compels the conclusion that the fraudulent transfer claims must fail.
As to section 5(a)(1), the record provides no direct evidence of any actual intent to hinder, delay, or defraud, nor are the circumstances such as that a reasonable jury could infer such intent. See Palmer v. Murphy, 42 Mass. App. Ct. 334, 345 (1997 ("`Actual intent' is usually proven circumstantially and inferentially"). Section 5(b) identifies eleven factors to be considered in evaluating intent. Of these, factors (1), (2), (3), (6), (7), and (11) unequivocally weigh against the proposed inference: the transfer was at arms length, between unrelated parties, involved no retention or re-transfer, and was fully disclosed, even publicized. Nor did the debtor abscond or conceal anything. The other seven factors listed require somewhat more discussion, but ultimately also weigh against any finding of intent.
Gilbane points to Richard Gilbane's deposition testimony to certain statements by Joe Knowles that it seeks to characterize as such direct evidence. Examination of the testimony cited reveals that it does not support that characterization.
Gilbane attempts to characterize Neighborhood's payments to its attorneys as concealment of those funds. Nothing in the record suggests that Neighborhood ever attempted to conceal those payments.
As to factor (4), suit had been filed prior to the closing, but not prior to the purchase and sale agreement, when Neighborhood became contractually bound to make the transfer, subject to enforcement by specific performance. See McCarthy v. Tobin, 429 Mass. 84, 89 (1999). Nor had any explicit threat of suit been made prior to that date. Communications between Gilbane and Neighborhood had been such that Neighborhood might reasonably have anticipated litigation if the dispute could not be resolved otherwise, but the record does not indicate that efforts at resolution had been exhausted.
Item (5) also does not weigh in favor of the proposed inference, in the unusual circumstances presented here. The transfer was of substantially all of Neighborhood's assets, but such a transfer was entirely consistent with Neighborhood's intention to conclude its business, which had consisted solely of efforts to develop this single piece of property for charitable uses.
Item (8) is the factor on which Gilbane relies most heavily: the consideration for the transfer was not "reasonably equivalent to the value of the asset transferred," at least insofar as "value" is understood as market value. Although that circumstance might be strongly suggestive of fraudulent intent in other contexts, it is not so here, where everyone involved understood from the outset that the overall purpose of the project was to provide the use of the property for charitable purposes at below market cost.
As will be seen, the Court finds no need to address Nativity's argument that evaluation of the "value" it gave for the transfer, for this purpose, can properly include non-monetary value in the form of its fulfillment of the Knowles brothers' charitable purpose. In this regard, the Court notes that although the Knowles brothers appear to have placed charitable goals ahead of other considerations, Neighborhood is a business corporation, not a charity. It seems unlikely that the legislature, and the drafters of the uniform act, would have used the word "value" in such an unusual sense, at least in relation to a business corporation.
Factors (9) and (10) are closely related in this context. Neighborhood was clearly not insolvent at the time of the purchase and sale agreement. It arguably became so between that date and the date of the closing — assuming the validity of Gilbane's contract claim in its entirety — but not as a result of the transfer in issue. Rather, Neighborhood became insolvent, if at all, only as a result of this lawsuit, which triggered its incurring of debts to its attorneys for its defense.
In the same vein, with respect to factor (10), Neighborhood did incur substantial debts beginning shortly after the purchase and sale agreement and continuing through the date of the closing, but again only as a result of this litigation; the record reflects no other debts of any significance incurred after the purchase and sale agreement. These factors, again considered in the unusual context presented here, do not support the inference proposed. The undisputed facts establish that Neighborhood structured the transfer in such a manner as to retain sufficient funds to pay Gilbane's claim in its entirety. What it did not do was to retain enough both to defend itself in litigation of the disputed claim, and then, if unsuccessful, also to pay it. No rule of law or equity required it to do so, and its conduct in this regard does not support an inference of intent to defraud. The eleven factors listed at section 5(b) are not exclusive; the statute explicitly authorizes consideration of other facts as well. But the plaintiff cites nothing that has not already been considered.
The same analysis compels the conclusion that § 5(a)(2) is similarly inapplicable, since neither of its alternative requirements are met. The record establishes that Neighborhood entered into the purchase and sale agreement without any intention or expectation to engage in any business or transaction other than consummation of the sale; to the contrary, its intention, which it has since carried out, was to terminate its business by disposing of its only property. Similarly, the only debt that Neighborhood incurred at any time close to either the agreement or the closing, and the only debt it even arguably could reasonably have expected to incur, was the cost of its defense in this case. For the same reason already discussed with respect to § 5(b)(10), that debt does not suffice to bring the transfer within the provision of § 5(a)(2)(ii); no authority supports the proposition that a purported debtor facing a disputed claim is obligated, absent court order, to reserve funds sufficient not only to pay the claim but also to defend litigation arising from it.
Section 6(a) requires little additional discussion; although the consideration received was concededly less than market value, Neighborhood was not insolvent at the time it became contractually bound, and became so, if at all, not as a result of the transfer, but only as a result of this litigation. Accordingly, Gilbane's fraudulent transfer claims fail on the undisputed facts as presented in the summary judgment record, and all defendants are entitled to judgment as a matter of law on counts VI, VII, and VIII. II. The Fiduciary Duty Claim Against James and Robert Knowles . Count V of the amended complaint alleges that Neighborhood and Gilbane "were joint venturers in the Project to secure financing, renovate and develop the Property," and as a result of that relationship Neighborhood and each of its "managers" "owed fiduciary duties" to Gilbane. Each of the Knowles brothers, it alleges, breached those duties by "intentionally failing to pay Gilbane," by "terminating the project without consulting Gilbane," by "intentionally selling the Property without consulting Gilbane, for an amount substantially less than its fair market value," and by "intentionally failing to distribute the proceeds of the sale to Gilbane."
The Court need not reach the defenses of laches and estoppel, but notes that at least the laches theory has considerable strength on the undisputed facts, and that equitable defenses are expressly made applicable to actions under the Uniform Fraudulent Transfer Act by c. 109A, § 11. Compare Srebnick v. Lo-Law Transit Management, Inc., 29 Mass. App. Ct. 45, 48 (1990) (laches not available as defense to common law, non-statutory tort claim).
Robert and James Knowles seek dismissal of this count as against them on the ground that their role was merely that of corporate officers, having no individual responsibility or liability to a third party dealing with the corporation. Whatever duty Neighborhood may have had to Gilbane, they contend, the undisputed facts establish no breach for which they could have personal liability, since they delegated operation of Neighborhood House to their brother Joe, and played no role in any of the conduct alleged.
In response, Gilbane relies on statements of Joe Knowles referring to Gilbane as a "partner" in the development project; on this basis, it seeks to characterize the relationship among the three brothers and Gilbane as a partnership, with each partner owing fiduciary duties to all others. As to these defendants' alleged breach, Gilbane does not cite any evidence that either Robert or James played any active role. He relies, rather on their formal status as members of Neighborhood House "who were authorized to act on Neighborhood House's behalf," and on their receipt of tax benefits resulting from the transfer.
These contentions are insufficient to support a claim of breach of fiduciary duty. However the relationship between Gilbane and Neighborhood might characterized, nothing in the evidence offered would support a finding of any fiduciary relationship between Gilbane and Robert or James Knowles. Nor would their theoretical authority to participate in the management of Neighborhood substitute for actual conduct as a basis for individual liability. Compare Zimmerman v. Bogoff, 402 Mass. 650, 657-659 (1988) (affirming finding of liability against individual shareholder in close corporation based on individual conduct in actual exercise of control). Accordingly, Robert and James Knowles are entitled to judgment as a matter of law on count V.
CONCLUSION AND ORDER
For the reasons stated, the Motion for Partial Summary Judgment by Neighborhood House LLC, John H. Knowles, Jr., Robert Knowles and James Knowles, and Defendant Nativity Preparatory School's Motion For Summary Judgment are ALLOWED.