Opinion
C.A. No. 00-10558-NG
May 9, 2003
AMENDED MEMORANDUM AND ORDER RE: CROSS MOTIONS FOR SUMMARY JUDGMENT
This Memorandum and Order replaces the Memorandum and Order issued April 17, 2003 [document #101], which contained a typographical error.
The United States ("the government") on behalf of the Small Business Administration ("SBA"), initiated this action to recover over $300,000 in debt and equity investments in defendant Micro Precision Technologies, Inc. ("MPT-NH"), a New Hampshire corporation. The parties have filed cross-motions for summary judgment on two counts of the government's amended complaint: Count I (breach of fiduciary duty) and Count V (breach of guaranty). The government's motion also seeks summary judgment on Counts VI and VII (foreclosure and voting of MPT-NH stock pursuant to the alleged breach of guaranty). For the reasons set forth below, the government's motion [document #66] is DENIED and the Chens' motion [document #72] is GRANTED in PART and DENIED in PART.
I. BACKGROUND
I previously outlined the facts involved in this action in a Memorandum and Order dated January 31, 2001, granting in part and denying in part an earlier government motion for summary judgment [document #22]. I will not repeat that factual summary here.
After the first round of summary judgment motions, on November 28, 2001, the government filed an amended complaint. In February of 2002, MPT-NH entered bankruptcy and the case was stayed. In May of 2002, the case was re-opened for proceedings on the individual claims against the Chens. The parties then filed the summary judgment motions that are presently before me.
II. LEGAL ANALYSIS A. Summary Judgment Standard
Summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). "A factual dispute is material if it `affects the outcome of the litigation,' and genuine if manifested by `substantial' evidence `going beyond the allegations of the complaint.'" Pignons S.A. de Mecanique de Precision v. Polaroid Corp., 657 F.2d 482, 486 (1st Cir. 1981). In ruling on a summary judgment motion, the court "must view the record and draw inferences most favorable to the opposing party." Id.
B. "Freeze Out" Fiduciary Duty Claim (Count I)
The gravamen of the government's claim is that the Chens' actions in dissolving the Massachusetts Microprecision corporate entity ("MPT-MA") amounted to a "freeze out" of MECCO's minority shareholder interests. The parties' summary judgment motions hinge on whether this claim is barred by the statute of limitations. Since it is clear from the record that the SBA knew or should have known of the facts underlying this cause of action by August of 1994 at the very latest, I conclude that the government's claim is time-barred.
Under Massachusetts law, "freeze out" claims sound in tort. See Houle v. Low, 407 Mass. 810, 813 (1990) (holding that "`freeze out' is a tort claim" for statue of limitations purposes) (citing Kirley v. Kirley, 25 Mass. App. Ct. 651, 654-55 (1988)). The three-year statute of limitations for tort actions thus applies under 28 U.S.C. § 2415(b). See Deisenroth v. Numonics Corp., 997 F. Supp. 153, 156 (D.Mass. 1998) (Saris, J.) (holding that freeze-out claim by minority shareholder in close corporation sounds in tort and is barred by three-year statute of limitations). Therefore, if the government's claim accrued prior to March 23, 1997 (three years' prior to filing of the original complaint in this case), it is time-barred.
The record shows that the principal alleged "freeze-out" actions occurred long before 1997: the Chens incorporated MPT-NH in 1993 and dissolved MPT-MA in May of 1994. Arguably, however, the statue of limitations would be tolled if the Chens had fraudulently concealed these actions.
Relying on the declaration of SBA Analyst Johnson, the government asserts that notice of the re-incorporation and dissolution transactions "were not transmitted to MECCO, the Receiver, or SBA prior to discovery in this case." Her assertion apparently is based on the lack of "notice" documents in the MECCO files now in SBA's possession as receiver. As a result, Johnson states, "SBA did not have actual knowledge of the dissolution of MPT-MA until September 24, 1999."
Defendants counter with a memorandum dated October 3, 1993, from Dr. Chen informing investors that "MPT will be incorporated under the same name in the State of New Hampshire and dissolved as a Massachusetts corporation." Dr. Chen states in an affidavit that he directed his "clerical staff" to mail this memo to investor addresses on a mailing list (including MECCO), consistent with standard practice. The parties' assertions collide in a host of factual disputes over Dr. Chen's credibility and the completeness and handling of MECCO and SBA files.
Happily, I need not enter this factual thicket because several documents from SBA's files demonstrate conclusively that SBA's representation — that it did not know of MPT-MA dissolution until September 24, 1999 — is incorrect. First, a letter dated June 23, 1999 from Deborah Barrett of SBA clearly indicates that, at that point in time, SBA already knew that MPT-MA had been dissolved. By itself, of course, this revelation merely casts doubt on the credibility of Johnson's declaration without decisively resolving the statute of limitations issue — whether the government knew of the change by March 23, 1997.
Another document, however, puts the issue to rest. The record is uncontested that the SBA performed a corporate records search in August of 1994 which showed that MPT was incorporated in New Hampshire and had only security interests (i.e., no business entity) in Massachusetts. Clearly, then, the government knew or certainly should have known of the facts underlying the freeze-out claim by August of 1994 and the claim consequently is time-barred. Defendant's Motion for Summary Judgment is therefore GRANTED with Respect to Count I while the Plaintiff's Motion is DENIED with Respect to Count I.
C. Guaranty Claim (Count V)
The government seeks to collect certain amounts from the Chens individually based a personal guaranty that they executed. Specifically, the Chens guaranteed: 1) principal plus accrued and unpaid interest on the debenture (outstanding unpaid interest of $118,847.12); 2) principal redemption for preferred stock (capped at $39,231); 3) accrued and unpaid dividends on the preferred stock ($43,560) and 4) attorneys' fees and costs of collection. Again, the parties' summary judgment arguments revolve around the statute of limitations. After examining the issues, I conclude that much, but not necessarily all, of the government's claim is time-barred.
The government's baseline position is that the six-year statute of limitations for contract actions in 28 U.S.C. § 2415(a) begins to run when the government acquires a claim, rather than when the underlying cause of action first becomes actionable. In terms of sheer numbers, at least, this appears to be a "majority" position among courts which have addressed the question. See e.g., United States v. Melbinger, No. 92-C-1685, 1992 WL 350722 (N.D.Ill. Nov. 20, 1992) (collecting cases). Since the government acquired the guaranty claim, at the earliest, upon its appointment as receiver in June of 1994, it would be timely under this reading of § 2415(b).
However, other courts have held, persuasively in my view, that the accrual "clock" does not recycle when the government acquires an underlying cause of action that already has accrued. The lengthy and thoughtful analysis in FDIC v. Belli, 981 F.2d 838 (5th Cir. 1993), for example, is convincing. As the Belli court observed, the putative "majority" position — that the limitations period recycles upon government acquisition of a claim — necessarily presumes that the term "accrues," as used in § 2415(b), is ambiguous, and could mean either when "the actionable event occurs" or when "the cause of action is assigned to the government." Id. at 840 (internal citation omitted).
The First Circuit has not taken a definitive position. See FDIC v. Consol. Mortgage and Finance Corp., 805 F.2d 14, 17 n. 4 (1st Cir. 1986) (explaining that, prior to FIRREA, if "the applicable local statute of limitations has not yet cut off a bank's claim when the FDIC may sue at least within the period remaining under the local limitations statute and, possibly, within six years from acquisition under 28 U.S.C. § 2415 (1983), although the precise application of the latter remains undecided").
In our view, however, the term "accrues" does not admit of such an ambiguous construction. Neither the [plaintiff] nor the opinions on which it relies point to authority for the proposition that a transfer from one party to another of a cause of action that has already accrued somehow effects a new accrual for purposes of § 2415(a). To the contrary, the ordinary usage of the term "accrues" is that a cause of action "accrues" when "it comes into existence." Assignment of a cause of action that has already accrued does not ordinarily re-commence the limitations period.
Although we will consider at greater length 12 U.S.C. § 1821(d)(14)[the "FIRREA" statute governing actions brought by FDIC as a receiver], it is worth noting here that this provision reinforces our understanding of § 2415(a). In § 1821(d)(14)(A), Congress adopted a statute of limitations that runs from "the date the claim accrues" (emphasis added). In the next subsection, however, Congress specified that the limitations period begins to run on the later of: (i) the date of the appointment of the Corporation as conservator or receiver; or (ii) the date on which the cause of action accrues.
12 U.S.C. § 1821(d)(14)(B). Section 1821(d)(14) supports our reading of the word "accrues" in two ways. First, it shows that Congress knows how to clearly specify that a statute of limitations runs from the time that a government entity is appointed receiver. . . . The absence of similar language in § 2415(a) suggests a contrary meaning. Second, in § 1821(d)(14)(B)(ii), Congress uses the word "accrues" in a manner inconsistent with the [plaintiff's] reading of the word "accrues" in § 2415(a); to apply the [plaintiff's] proposed definition of "accrues" to subsection (ii), above, would render subsection (i) irrelevant.
. . .
[T]he text and legislative history of § 1821(d)(14) do not support the conclusion that it clarifies, rather than changes, § 2415(a). First, the new language in FIRREA is inconsistent with the reading that the [plaintiff] asks us to attach to § 2415(a); Congress's use of the term "accrues" in FIRREA suggests that the term does not refer to the moment in which a private party assigns a cause of action to the FDIC. Second, the scant legislative history of this section indicates that it was meant to modify existing law by lengthening the limitations period applicable to the FDIC.
Id. at 840-41 (internal citations omitted). Cf. Resolution Trust Corp. v. Gladstone, 895 F. Supp. 356, 374 (D.Mass. 1995) (Gertner, J.) (recognizing that FIRREA statute of limitations begins to run only when FDIC acquires a claim that is not already time-barred and that in general FIRREA was designed to expand the government's ability to pursue claims). Thus, any claims that accrued more than six years prior to the complaint in this case — March 23, 1994 — are time-barred.
For purposes of determining accrual of claims with respect to amounts or installments due at different times, the government correctly points out that the statute of limitations runs separately from each due date. See Berezin v. Regency Savings Bank, 234 F.3d 68,73 (1st Cir. 2000) ("[i]f an obligation is payable in installments, the statute of limitations begins to run against the recovery of each installment from the time it becomes due"). The language of the guaranty in this case indicates that its obligations attach jointly, severally, and concurrently with the underlying obligations. The statute of limitations with respect to claims under the guaranty therefore runs from the date each underlying obligation came due.
The language of the guaranty instrument in this case, which does not require a demand for payment as a prerequisite to liability, defeats the government's argument that its guaranty claim did not accrue until the government purportedly made a demand for payment under the guaranty on May 10, 1999. (This demand, while made on the Chens personally, contained a conclusory demand for a sum certain without making express reference to the guaranty.) The cases on which the government relies are cases where the guaranty at issue included a demand requirement. See, e.g., U.S. v. Lorince, 773 F. Supp. 1082, 1085 (N.D.Ill. 1991) (collecting cases). Here, in contrast, liability under the guaranty attaches immediately in tandem with the underlying obligations.
Based on this legal framework, any claim based on guaranty of the debenture clearly is time-barred because it matured and was payable in full on March 1, 1994, more than six years prior to the complaint in this case. I am unable, at this time, to make determinations with respect to the other underlying obligations because the parties have not clearly argued precisely when those amounts (or portions of those amounts) each came due.
The government also argues that MPT's acknowledgment of its underlying debt (which defeated the statute of limitations defense to the debenture claim against MPT in the first round of summary judgment) is personally attributable to the Chens because they treated MPT as an "alter-ego." This is a thin reed analytically, however, because even if the Chens as individuals acknowledged the existence of MPT's corporate debt, it does not follow that in so doing they acknowledged their personal liability under a separate instrument — the personal guaranty. Moreover, the single published case that SBA relies upon in support of this theory, FDIC v. Consolidated Mortgage and Finance Corp., 805 F.2d 14 (1st Cir. 1986) involved guarantor liability under Puerto Rican statutory law. The other unpublished case, U.S. v. Erlich, 1999 WL 294739 (E.D.N.Y. 1999) involved a partner's liability as guarantor of the debts of a partnership.
Thus, with respect to Count V, both parties' motions for Summary Judgment are DENIED. The Chens have no guaranty liability for the debenture and determination of their liability, if any, with respect to other obligations must await further clarification of the record.
D. Stock Foreclosure and Voting (Counts VI and VII)
Based on the alleged breach of guaranty, the government seeks a declaratory judgment entitling it to foreclose upon and to exercise voting rights in shares of MPT-NH stock owned by the Chens. The government's motion is DENIED with respect to those counts. First, presumably, if the Chens pay off any surviving guaranty obligations that are eventually reduced to judgment, the government's foreclosure right would not even vest. Second, without deciding whether or not the pending bankruptcy case actually bars proceeding on these counts, I would decline, in the exercise of my discretion and in deference to the bankruptcy court's resolution of related issues, to address them at this time.
III. CONCLUSION.
For the foregoing reasons, the government's Motion for Summary Judgment [document #66] is DENIED while the Chens' Motion for Summary Judgment [document #72] is GRANTED IN PART AND DENIED IN PART.
SO ORDERED.