Massachusetts School of Law

MASSACHUSETTS SCHOOL OF LAW

BUSINESS ASSOCIATIONS SHORTFORM

SPRING SEMESTER 2016

Professor Andrej Thomas Starkis

i Table of Contents

Table of Contents...... ii Table of Cases...... v Agency Cases...... 1 Health Care Services Group v. Royal Healthcare...... 1 Robichaud v. Athol Credit Union...... 6 Elliott v. Great Nat’l Life Ins. Co...... 9 Hoddeson v. Koos Bros...... 12 Rowen & Blair El. Co. v. Flushing Operating Corp...... 16 Perkins v. Rich...... 20 Demian, Ltd. v. Charles A. Frank Assoc...... 24 Ell Dee Clothing Co. v. Marsh...... 28 Resnick v. Abner B. Cohen Advertising, Inc...... 31 Williams v. Investors Syndicate...... 33 Grinder v. Bryans Road Bldg. & Supply Co...... 35 Insurance Co. of North America v. Miller...... 40 Southern Farm Bureau Cas. Ins. Co. v. Allen...... 53 Sutton Mutual Ins. Co. v. Notre Dame Arena, Inc...... 56 Georgia-Pacific Corp. v. Great Plains Bag Co...... 60 Lane Mtg. Co. v. Crenshaw...... 64 King v. Driscoll...... 78 Pine River State Bank v. Mettille...... 85 DeVoe v. Cheatham...... 92 National Recruiters, Inc. v. Cashman...... 95 Safety-Kleen v. McGinn...... 100 Maryland Metals, Inc. v. Metzner...... 102 BBF, Inc. v. Germanium Power Devices Corp...... 110 Cullen v. BMW...... 114 Davila v. Yellow Cab Co...... 118 Boyd v. Crosby Lumber & Mfg. Co...... 126 Marvel v. U.S...... 131 Good v. Berrie...... 134 Cowan v. Eastern Racing Ass’n...... 136 Doody v. John Sexton & Company...... 141 Mullen v. Horton...... 143 Gizzi v. Texaco...... 152 Drumond v. Hilton Hotel Corp...... 155 Ramos v. Preferred Medical...... 158 Partnership & Other Entities...... 162 Trans-America Construction v. Comerica Bank...... 162 H20’C Ltd v. Brazos...... 166 Young v. Jones...... 173 Owen v. Cohen...... 176 ii Page v. Page...... 180 Long v. Lopez...... 183 National Biscuit Company, Inc. v. Stroud...... 189 Meinhard v. Salmon...... 192 Day v. Sidley & Austin...... 197 Clevenger v. Rehn...... 203 Collins v. Lewis...... 212 Monin v. Monin...... 216 Lawlis v. Kightlinger & Gray...... 219 Jewel v. Boxer...... 225 Bassan v. Investment Exchange Corp...... 230 Holzman v. De Escamilla...... 235 First American Title v. Lawson...... 237 Corporation Cases...... 248 Louis K. Liggett Co. v. Lee...... 248 Frigidaire Sales Corp. v. Union Properties, Inc...... 251 Ingalls v. Standard Gypsum...... 254 Olympus America v. 5th Avenue Photo...... 261 Kingfield Wood v. Hagan...... 262 Sea-Land Services, Inc. v. Pepper Source...... 268 Walkovszky v. Carlton...... 274 My Bread Baking Co. v. Cumberland Farms, Inc...... 279 Kinney Shoe Corp. v. Polan...... 283 Silicone Gel Breast Implants Prod. Liab. Lit...... 287 Commissioner v. RLG, Inc...... 293 Goodwin v. Agassiz...... 300 Shlensky v. Wrigley...... 303 Kamin v. American Express Co...... 307 Joy v. North...... 310 Graham v. Allis-Chalmers Mfg. Co...... 317 Sinclair Oil Corp. v. Levien...... 321 Lewis v. S. L. & E., Inc...... 326 Wheelabrator Technologies, Inc. Shareholders Lit...... 331 Energy Resources Corp., Inc. v. Porter...... 337 Juergens v. Venture Capital Corp...... 341 Boston Athletic Ass’n v. Int’l Marathons, Inc...... 344 Smith v. Van Gorkom...... 350 Stroh v. Blackhawk Holding Corp...... 373 McQuade v. Stoneham...... 377 Clark v. Dodge...... 382 Ringling Bros.Barnum & Bailey v. Ringling...... 385 Galler v. Galler...... 391 Ramos v. Estrada...... 398 Walta v. Gallegos...... 403 Cain v. Cain...... 414 Smith v. Atlantic Properties, Inc...... 421

iii Wilkes v. Springside Nursing Home, Inc...... 427 Merola v. Exergen...... 433 Anderson v. Wilder...... 437 Pinebrook Properties v. Brookhaven Lake Property...... 448 Appendix...... - 1 - Massachusetts General Laws...... - 1 - CHAPTER 108A. PARTNERSHIPS...... - 1 - CHAPTER 109. LIMITED PARTNERSHIP...... - 20 - CHAPTER 156C LIMITED LIABILITY COMPANY ACT...... - 43 - CHAPTER 156D BUSINESS CORPORATIONS...... - 74 -

iv Table of Cases Cases Anderson v. Wilder...... 438 Bassan v. Investment Exchange Corp...... 230 BBF, Inc. v. Germanium Power Devices Corp...... 111 Boston Athletic Ass’n v. Int’l Marathons, Inc...... 344 Boyd v. Crosby Lumber & Mfg. Co...... 126 Cain v. Cain...... 414 Clark v. Dodge...... 383 Clevenger v. Rehn...... 203 Collins v. Lewis...... 212 Commissioner v. RLG, Inc...... 293 Cowan v. Eastern Racing Ass’n...... 137 Cullen v. BMW...... 114 Davila v. Yellow Cab Co...... 119 Day v. Sidley & Austin...... 197 Demian, Ltd. v. Charles A. Frank Assoc...... 24 DeVoe v. Cheatham...... 92 Doody v. John Sexton & Company...... 141 Drumond v. Hilton Hotel Corp...... 155 Ell Dee Clothing Co. v. Marsh...... 29 Elliott v. Great Nat’l Life Ins. Co...... 9 Energy Resources Corp., Inc. v. Porter...... 338 First American Title v. Lawson...... 238 Frigidaire Sales Corp. v. Union Properties, Inc...... 252 Galler v. Galler...... 392 Georgia-Pacific Corp. v. Great Plains Bag Co...... 60 Gizzi v. Texaco...... 152 Good v. Berrie...... 134 Goodwin v. Agassiz,...... 300 Graham v. Allis-Chalmers Mfg. Co...... 318 Grinder v. Bryans Road Bldg. & Supply Co...... 35 H20’C Ltd v. Brazos...... 166 Health Care Services Group v. Royal Healthcare...... 1 Hoddeson v. Koos Bros...... 12 Holzman v. De Escamilla...... 236 Ingalls v. Standard Gypsum...... 254 Insurance Co. of North America v. Miller...... 40 Jewel v. Boxer...... 225 Joy v. North...... 311 Juergens v. Venture Capital Corp...... 341 Kamin v. American Express Co...... 307 King v. Driscoll...... 78 v Kingfield Wood v. Hagan...... 263 Kinney Shoe Corp. v. Polan...... 284 Lane Mtg. Co. v. Crenshaw...... 64 Lawlis v. Kightlinger & Gray...... 219 Lewis v. S. L. & E., Inc...... 326 Long v. Lopez...... 183 Louis K. Liggett Co. v. Lee...... 249 Marvel v. U.S...... 131 Maryland Metals, Inc. v. Metzner...... 103 McQuade v. Stoneham...... 377 Meinhard v. Salmon...... 192 Merola v. Exergen...... 434 Monin v. Monin...... 217 Mullen v. Horton...... 143 My Bread Baking Co. v. Cumberland Farms, Inc...... 280 National Biscuit Company, Inc. v. Stroud...... 189 National Recruiters, Inc. v. Cashman...... 95 Olympus America v. 5th Avenue Photo...... 261 Owen v. Cohen...... 177 Page v. Page...... 180 Perkins v. Rich...... 20 Pine River State Bank v. Mettille...... 85 Pinebrook Properties v. Brookhaven Lake Property...... 449 Ramos v. Estrada...... 398 Ramos v. Preferred Medical...... 158 Resnick v. Abner B. Cohen Advertising, Inc...... 31 Ringling Bros.Barnum & Bailey. v. Ringling...... 385 Robichaud v. Athol Credit Union...... 6 Safety-Kleen v. McGinn...... 100 Sea-Land Services, Inc. v. Pepper Source...... 269 Shlensky v. Wrigley...... 303 Silicone Gel Breast Implants Prod. Liab. Lit...... 287 Sinclair Oil Corp. v. Levien...... 322 Smith v. Atlantic Properties, Inc...... 421 Smith v. Van Gorkom...... 351 Southern Farm Bureau Cas. Ins. Co. v. Allen...... 53 Stroh v. Blackhawk Holding Corp...... 373 Sutton Mutual Ins. Co. v. Notre Dame Arena, Inc...... 57 Trans-America Construction v. Comerica Bank...... 163 Walkovszky v. Carlton...... 274 Walta v. Gallegos...... 404 Wheelabrator Technologies, Inc. Shareholders Lit...... 332 Wilkes v. Springside Nursing Home, Inc...... 427 Williams v. Investors Syndicate...... 33 Young v. Jones...... 173

vi Agency Cases

Health Care Services Group v. Royal Healthcare 276 F.Supp.2d 255

United States District Court, D. New Jersey.

HEALTHCARE SERVICES GROUP, INC., Plaintiff, v. ROYAL HEALTHCARE OF MIDDLESEX, LLC; and Middlesex County Improvement Authority, Defendants. Middlesex County Improvement Authority, Defendant/Third Party Plaintiff, v. Surbhi Tarkas; Amjad Chowdry; and Greenwich Insurance Company, Third-Party Defendants.

Aug. 13, 2003.

OPINION

WALLS, District Judge.

Plaintiff Healthcare Service Group, Inc. ("HCSG" or "Plaintiff") moves for summary judgment in its breach of contract claim against defendant Middlesex County Improvement Authority ("MCIA"). * * * Plaintiff's motion for summary judgment is granted; * * *

FACTS AND PROCEDURAL BACKGROUND

The Roosevelt Care Center (the "Center") is a 530-bed long-term healthcare facility located in Edison, New Jersey. MCIA owns and holds a license to operate the Center. On March 13, 2000, MCIA entered into an Agreement for Interim Management and Administration (the "Management Agreement") of the Center with Royal Healthcare of Middlesex, LLC ("Royal"). Surbhi Tarkas ("Tarkas") and Amjad Chowdry ("Chowdry") were the principals of Royal. At various times, Tarkas and Chowdry also owned, operated or managed other long- term care facilities in New Jersey. Pursuant to the Management Agreement, Royal managed, administered, operated and maintained the Center, and MCIA paid Royal operating expenses in the monthly amount of $2.3 million. * * *

On April 1, 2000, Royal entered into a Service Agreement and a Food Service Agreement (the "Service Agreements") at the Center with Plaintiff. The MCIA consented to Royal's retention of HCSG as a subcontractor. From April 1, 2000 through September 30, 2000, Plaintiff 1 managed the housekeeping and laundry departments at the Center, and provided food services. Royal was to pay Plaintiff $114,632 per month for these services. Plaintiff also provided similar services to other long-term care facilities owned, operated or managed by Tarkas and Chowdry-- Progressive Nursing Center; Meadowview Nursing Center; Royal Healthgate Nursing and Rehabilitation; Cliffside Health Care Center; Freehold Rehabilitation & Nursing Center; and Regal Manor Health Care Center. At the time Plaintiff negotiated the Agreements at the Center with Tarkas and Chowdry, the accounts at the other long-term care facilities were delinquent. When the Service Agreements terminated on September 30, 2000, Plaintiff requested a copy of the Management Agreement.

Plaintiff alleges that Royal failed to pay all of the invoices due under the Service Agreements at the Center. On January 9, 2001, Royal executed a promissory note (the "Note") for $342,311.52--the amount due to Plaintiff under the two agreements. The Note required payments on January 25, February 25, March 25, April 25, May 25 and June 25, 2001, with a specified interest rate of 8 percent per year, and provides for reimbursement to Plaintiff of all costs, expenses and reasonable attorneys' fees. Royal failed to make any payments under the Note and, on July 11, 2001, Plaintiff filed its complaint against Royal and MCIA seeking $342,311.52, attorneys' fees, and costs. On March 12, 2002, default judgment was entered against Royal, ordering Royal to pay Plaintiff $342,311.52, plus interest at the rate of 8 percent, along with costs, expenses, and reasonable attorneys' fees. Plaintiff now moves for summary judgment against Defendant MCIA.

STANDARD FOR SUMMARY JUDGMENT

Summary judgment is appropriate where the moving party establishes that "there is no genuine issue as to any material fact and that [it] is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). A factual dispute between the parties will not defeat a motion for summary judgment unless it is both genuine and material. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). A factual dispute is genuine if a reasonable jury could return a verdict for the non-movant and it is material if, under the substantive law, it would affect the outcome of the suit. Id. at 248, 106 S.Ct. at 2510. The moving party must show that if the evidentiary material of record were reduced to admissible evidence in court, it would be insufficient to permit the non-moving party to carry its burden of proof. See Celotex v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986).

Once the moving party has carried its burden under Rule 56, "its opponent must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986). The opposing party must set forth specific facts showing a genuine issue for trial and may not rest upon the mere allegations or denials of its pleadings. See Sound Ship Building Corp. v. Bethlehem Steel Co., 533 F.2d 96, 99 (3d Cir.1976), cert. denied, 429 U.S. 860, 97 S.Ct. 161, 50 L.Ed.2d 137 (1976). At the summary judgment stage the court's function is not to weigh the evidence and determine the truth of the matter, but rather to determine whether there is a 2 genuine issue for trial. See Anderson, 477 U.S. at 249, 106 S.Ct. at 2510. In doing so, the court must construe the facts and inferences in the light most favorable to the non-moving party. See Wahl v. Rexnord, Inc. 624 F.2d 1169, 1181 (3d Cir.1980).

DISCUSSION

A. Plaintiff's Motion for Summary Judgment

HCSG managed the housekeeping and laundry departments at the Center, and provided food services. In exchange, Royal paid Plaintiff $114,632 per month. Because MCIA authorized Royal to manage, administer, operate and maintain the Center, and permitted Royal to retain subcontractors to perform these duties, HCSG insists that Royal acted with MCIA's authority when Royal hired HCSG. Both parties agree that MCIA owns the Center and holds the Certificate of Need, the license necessary to operate the Center. Consequently, MCIA is legally responsible for the Center's management and operation. MCIA reserved the right to control and direct Royal's activities at the Center, and could terminate Royal for any failure to comply with the Management Agreement. Section 2.2 of the Management Agreement reads:

The MCIA, as the holder of the Certificate of Need, is responsible for the overall conduct of Roosevelt Care Center and compliance with all Applicable Laws. By executing this Agreement, the MCIA has engaged Royal, and Royal has accepted such engagement, to manage, administer, operate and maintain Roosevelt Care Center as the MCIA's agent, on the MCIA's behalf and for the MCIA's account.

Management Agreement, at § 2.2 (emphasis added). Section 9.5 further addresses the relationship of the parties:

Except as otherwise explicitly provided herein, or by Applicable Laws, no party to this Agreement shall have any responsibility whatsoever with respect to services which are to be provided or contractual obligations that are to be assumed by any other party and nothing in this Agreement shall be deemed to constitute any party a partner, joint venture participant, agent or legal representative of any other party or to create any fiduciary relationship between or among the parties.

Management Agreement, at § 9.5 (emphasis added). While this section attempts to limit MCIA's liability to third-parties, the statement "Except as otherwise explicitly provided herein" serves to retain the meaning of Section 2.2, which states "MCIA has engaged Royal, and Royal has accepted such engagement, to manage, administer, operate and maintain Roosevelt Care Center as the MCIA's agent, on the MCIA's behalf and for the MCIA's account." However, Section 9.18 states:

Royal shall not subcontract any portions of the Interim Management Services required to be provided under the terms of this Agreement without the prior written consent of the MCIA.... Royal shall (notwithstanding such subcontract) be fully responsible to the MCIA for all acts and omissions of its subcontractors, agents, persons or organizations engaged by Royal to furnish any services under a direct or indirect contract with Royal to the same extent that Royal 3 is responsible for its own acts and omissions. Nothing in this Agreement shall create or be construed to create any contractual relationship between the MCIA and any such subcontractor, agent, person or organization.

Management Agreement, at § 9.18 (emphasis added). While Royal's decision to retain HCSG as a subcontractor was subject to the approval of MCIA, the MCIA denies that the Management Agreement created an agency relationship.

Plaintiff argues that Royal acted as MCIA's agent when Royal retained HCSG as a subcontractor and entered into the Service Agreements. When Royal failed to pay HCSG's invoices, Royal signed a Note for $342,311.52--the amount due to Plaintiff under the Service Agreements. Because Royal has failed to make any payments under the Note, and the Court has entered default judgment against Royal, HCSG seeks to recover the principal amount due and owing for its services, as well as costs, expenses and reasonable attorney's fees from MCIA.

HCSG seeks to hold MCIA liable for Royal's default because, at all times, Royal acted as MCIA's agent. HCSG insists that MCIA is liable as the principal for the acts of its agent. Both HCSG and MCIA agree with the central tenet of agency law: an agency relationship exists when a principal permits an agent to act on his behalf, "with the principal controlling and directing the acts of the agent." Sears Mortgage Corp. v. Rose, 134 N.J. 326, 337, 634 A.2d 74 (1993) (citations omitted). The actual authority a principal gives to its agent may be express or implied. Automated Salvage Transport, Inc. v. NV Koninklijke KNP BT, 106 F.Supp.2d 606, 617 (D.N.J.1999). Express authority specifies "minutely" what the agent may do. Id. (citations omitted). Implied authority permits an agent "to undertake all transactions necessary to fulfill the duties required of an agent in exercise of express authority." Id. (citations omitted). Absent express or implied authority, a party can be an agent based upon the apparent authority manifested by acts of the principal. Sears Mortgage Corp., 134 N.J. at 338, 634 A.2d 74.

Plaintiff argues that the Management Agreement clearly sets forth an implied agency relationship between Royal and MCIA. By entering into the Management Agreement, Plaintiff contends that MCIA engaged Royal to manage, administer, operate and maintain the Center "as MCIA's agent," "for MCIA's account," and "on MCIA's behalf." Management Agreement, at § § 2.1-2.3. However, MCIA argues that other provisions of the Management Agreement set forth that Royal was not MCIA's agent. Specifically, Section 9.18 states "Nothing in this Agreement shall create, or be construed to create, any contractual relationship between the MCIA and any such subcontractor, agent, person or organization." Management Agreement, at § 9.18. While the Management Agreement does not set forth Royal's duties "minutely," the Court concludes that Royal had implied authority to enter into the Service Agreements on MCIA's behalf with HCSG pursuant to the Management Agreement.

"Implied authority may arise as a necessary or reasonable implication in order to effectuate other authority expressly conferred and embraces authority to do whatever acts are incidental to, or are necessary, usual, and proper to accomplish or perform, the main authority expressly delegated to the agent." 3 Am.Jur.2d § 72, at 486. New Jersey's Supreme Court states that an examination of implied authority rests upon "the nature or extent of the function to be performed, the general course of conducting the business, or from particular circumstances in the 4 case." Sears Mortgage Corp., 134 N.J. at 338, 634 A.2d 74, quoting Carlson v. Hannah, 6 N.J. 202, 212, 78 A.2d 83 (1951).

Royal acted with MCIA's authority when it retained HCSG as a subcontractor. In the Management Agreement, MCIA authorized Royal "to manage, administer, operate, and maintain the Roosevelt Care Center," and to employ subcontractors. Management Agreement, at § 2.2, and § 2.4. Sections 9.5 and 9.18 are not relevant because HCSG asserts neither a third-party beneficiary nor a direct contract claim against MCIA. Royal's retention of HCSG as a subcontractor was within the scope of the Management Agreement, and the Court concludes that Royal had implied authority to enter into the Service Agreements with HCSG at the Center.

MCIA argues that it is not liable for Royal's default because HCSG relied on Royal's apparent authority to enter into the Service Agreements, and was utterly indifferent as to MCIA's role. In a relationship based upon apparent authority, a party may be an agent "by virtue of apparent authority based on manifestations of that authority by the principal. Of particular importance is whether a third party has relied on the agent's apparent authority to act for a principal." Sears Mortgage Corp., 134 N.J. at 338, 634 A.2d 74 (citations omitted). However,

[W]here the facts show that the third person in dealing with the putative agent is utterly indifferent to the existence of a principal, and rather indicates that the dealings are with the putative agent as a principal, no liability can be fashioned against one who later may appear by circumstance to be in a possible position of "apparent or ostensible" principal.

N. Rothenberg & Son v. Nako, 49 N.J.Super. 372, 382, 139 A.2d 783 (App.Div.1958) (citation omitted).

Before HCSG entered into the Service Agreements with Royal to provide food services at the Center and manage its housekeeping and laundry departments, it provided similar services to other long-term care facilities owned, operated or managed by Tarkas and Chowdry, the principals of Royal. These long-term care facilities were: Progressive Nursing Center; Meadowview Nursing Center; Royal Healthgate Nursing and Rehabilitation; Cliffside Health Care Center; Freehold Rehabilitation & Nursing Center; and Regal Manor Health Care Center (collectively, "Professional Healthcare"). In April 2000, when Plaintiff negotiated the Service Agreements at the Center with Tarkas and Chowdry, Plaintiff knew that the accounts at Progressive Nursing Center, Meadowview Nursing Center, Cliffside Healthcare Center, and Freehold Rehabilitation & Nursing Center were delinquent. Specifically, Professional Healthcare owed Plaintiff in excess of $130,000.00. Further, Plaintiff did not perform a credit background check on Royal or on Professional Healthcare before entering into the Service Agreements.

Because Plaintiff had already developed a business relationship with Tarkas, Chowdry and Professional Healthcare, MCIA argues that Plaintiff would have entered into the Service Agreements at the Center regardless of MCIA's status as Royal's principal. "Plaintiff was aware of the risk in dealing with Royal and chose to proceed to contract with Royal notwithstanding such risk. It cannot now look to the MCIA to recover its loss." Def. Opposition Br., at 6-7. The issue of reliance would be relevant if HCSG's agency claim were based on apparent authority. 5 The Court has already determined that the agency relationship between MCIA and Royal was based on actual authority granted in the Management Agreement, and rejects MCIA's argument.

MCIA also argues that the default judgment entered against Royal in Plaintiff's favor was an election of remedies, so Plaintiff is barred from seeking judgment against MCIA. The election of remedies doctrine "prohibits a party, in asserting his rights, from occupying inconsistent positions 'in relation to the facts which form the basis of his respective remedies.' The purpose of the rule is to prevent double recoveries, forum shopping, and harassment of defendants by dual proceedings." Cleary v. U.S. Lines, Inc., 555 F.Supp. 1251, 1256 (D.N.J.1983) (citations omitted). Because the default judgment against Royal has not yet been satisfied, Plaintiff has not recovered anything from Royal so there is no risk of double recovery. In Moss v. Jones, 93 N.J.Super. 179, 225 A.2d 369 (App.Div.1966), the court said: "There may be several judgments against different persons for the same obligation or liability, so long as there is only one satisfaction or recovery." Id. at 184, 225 A.2d 369, citing Pennsylvania Greyhound Lines v. Rosenthal, 14 N.J. 372, 385, 102 A.2d 587 (1954) and Losito v. Kruse, 136 Ohio St. 183, 24 N.E.2d 705 (1940). Further, there is no evidence of forum shopping or dual proceedings for the purpose of harassing defendants. The Court concludes that the election of remedies doctrine does not apply: "a person injured by the negligence of an agent or servant may sue the agent or servant and the principal or master in one suit, or may proceed against them in separate suits, and the recovery of a judgment, not satisfied, against the agent or servant does not bar a separate suit against the principal or master." Id. at 185, 24 N.E.2d 705.

Given the outcome of Plaintiff's motion for summary judgment, the Court dismisses as moot MCIA's motion to amend the pretrial scheduling order to identify an expert witness out of time. The Court also denies Plaintiff's request to submit a sur-reply brief in opposition to Plaintiff's motion for summary judgment.

CONCLUSION

* * * Plaintiff's motion for summary judgment is granted;

Robichaud v. Athol Credit Union 352 Mass. 351, 225 N.E.2d 347 (1967)

Irene E. ROBICHAUD v. ATHOL CREDIT UNION 6 Supreme Judicial Court of Massachusetts, Worcester Argued March 6, 1967 Decided April 5, 1967. *352 WHITTEMORE, Justice. The plaintiff's bill in equity sought cancellation of a note and discharge of a mortgage dated March 31, 1962, written for a fifteen year term in the amount of $5,000. The alleged basis for relief was that, in connection with negotiating the loan to the plaintiff and her deceased husband, Ernest J. Robichaud, the defendant had undertaken to make arrangements for insurance to cover payment of the loan in the event of Robichaud's death and had not done so, with the result that the plaintiff had a claim offsetting the amount due under the note. The defendant's answer included a counterclaim under the note and mortgage. The evidence is reported The judge in the Superior Court found, on subsidiary findings, that the defendant entered into a contract to procure the insurance on the life of Robichaud and that the plaintiff and her husband had paid the premiums but the defendant had not procured the insurance. He ruled that the note and mortgage should be cancelled and discharged. The final decree so provided. The defendant contends that there is no evidence of such a contract between the defendant and either the plaintiff or her husband The evidence showed, in accordance with findings of the judge, an original ten year loan for $2,000 dated November 15, 1961, covered by insurance on Robichaud's life. Charges to cover the cost of the insurance were included in the statement of monthly payments and were paid. The fifteen year, $5,000 loan, to supersede the ten year loan, was negotiated in March, 1962. At the date of Robichaud's death in July, 1962, $4,000 had been advanced on the loan It was shown that the defendant had a group insurance policy issued under G.L. c. 175, s 133, permitting the insurer to cover '(c) a group of (not less than one hundred) persons who at any time are debtors of a bank * * * for a loan * * * or any balance thereof, in instalments over a *353 period of not more than ten years * * * for an amount not exceeding his individual indebtedness * * * and not exceeding ten thousand dollars * * * provided * * * that no such debtor shall be insured in such a group for a period of more than ten years on account of a debt arising out of said loan.' Robert Linehan, assistant treasurer of the defendant, testified that in March, 1962, he discussed with Robichaud the increased loan. He pointed out to Robichaud, with reference to the application form, that if the loan was to be written for ten years he could have insurance but if it was to be for a longer period 'we could not cover it with insurance.' In a day or two Robichaud told Linehan that the decision had been made to have the fifteen year loan. The papers to set up the loan **349 would have been drawn by the treasurer, his father, Joseph R. Linehan. Q. 'And if this payment book says that it was set up for $2.75 (monthly premium) for insurance, then he would have done it?' A. 'If it had been set up that way, he would have.' The first payment by the Robichauds was on April 12, 1962, as shown by the loan book. That payment was for $32.72 and included $2.75 credited in the book to insurance. The bank collected like premiums in May, June and July Joseph R. Linehan testified that the bank used for the new loan the same loan book that had been used for the $2,000 loan. Looking at the book, he said, '(W)hen the loan is put through, 7 we collect the first premium for that month. And the loan not being insured, that premium was not collected (on March 31, 1962, when the loan was made out).' He testified that the $2.75 premiums were collected through error, 'apparently (by) one of the clerks.' The plaintiff testified that when she and her husband went to the bank in March, 1962, to sign the prepared papers on the new loan and met with Joseph R. Linehan, there was no talk of insurance that she remembered. Thereafter on one occasion when making payments at the defendant's office she asked the girl who took her money to explain what every column in the book was. The girl told *354 her 'the $2.75 was my insurance.' The plaintiff said, 'I want you to make sure we have insurance because of the work he (Robichaud) has. * * * I don't want to be $5,000 in the hole if something happens.' The girl 'went to the file, * * * looked it up' and said, 'Oh yes, it's in black and white. * * * You're insured.' Robichaud was in the roofing business Mrs. Robichaud also testified that about a month before her husband was killed, and following his brother's fall from a roof and consequent death, in the course of discussing that casualty, Robichaud said, 'If anything happens to me, Irene, I know you will have the place as yours, and I know you will have a place to raise the children without worrying about paying; just the taxes, that's all.' Mrs. Robichaud and Robert Linehan agreed in their testimony that, shortly after Robichaud's death, she talked with Robert and that, after having looked at the legder card, he told her that the loan was insured. The evidence tended to show also that a few days later the elder Linehan called, bringing the folder in relation to the loan and told Mrs. Robichaud, 'You had no insurance * * * we made a mistake.' It was agreed that Mrs. Robichaud's testimony as to her two talks at the bank would be corroborated by the testimony of two witnesses, one having heard the talk with the girl at the counter and the other having been present at the talk with Robert Linehan. The judge, of course, could disbelieve the testimony that Robert Linehan had told Robichaud that the fifteen year loan could not be insured. There is, however, no evidence that the defendant undertook to make an insured loan or to procure insurance on Robichaud's life, and the finding to that effect cannot stand The evidence does, however, support the final decree. There is no dispute that the loan book and the statement of the girl at the counter represented to the borrowers that payments were due for insurance premiums and that there was insurance. We rule that it was within the apparent authority of the girl at the counter to make statements as *355 to what the items in the loan book covered. It does not appear who put the items in the book, but the book spoke for the bank. [FN1] The evidence **350 shows that there were entries not only in the book but also on the bank's ledger card. The statements of the treasurer and assistant treasurer after the death of Robichaud tended to confirm that the loan had been represented to the Robichauds as insured. The representations were of a fact susceptible of actual knowledge and proof of intent to deceive is not required. Pietrazak v. McDermott, 341 Mass. 107, 110, 167 N.E.2d 166, and cases cited. The representations were intended to be relied on by the Robichauds in making the payment for the insurance premiums claimed due and in going forward with their obligations under the contract. The evidence shows that the Robichauds did reasonably rely on the existence of insurance. We think it unnecessary that there be affirmative testimony that, except for the representation, they would have sought to reduce the term of the loan to ten years so as to have the benefit of the bank's group policy, or would have sought other insurance. See Rice v. Price, 8 340 Mass. 502, 507--508, 164 N.E.2d 891; Baglio v. New York Cent. R.R., 344 Mass. 14, 19-- 20, 180 N.E.2d 798; McLearn v. Hill, 276 Mass. 519, 524--525, 177 N.E. 617, 77 A.L.R. 1039 (estoppel); Prosser, Torts, 3d ed. s 102. The plaintiff was damaged, and may recover what she would have had if the representation had been true. Rice v. Price, supra, 340 Mass. 507, 164 N.E.2d 891 FN1. Conceivably, the error related to the use of the same loan book, with provision therein for the premium payments on the $2,000 loan of $1.10 per month. The judge found that a new book was issued. Joseph R. Linehan at first so testified, but when shown the book used for the $5,000 loan corrected himself saying, 'We used the same book. I'm sorry.' The evidence does not show when and in what circumstances the entries of $2.75 per month for supposed premium on the new loan were made. * * * *356 The final decree is to be modified (a) to delete the finding of a contract; (b) to provide that the plaintiff's claim for damages based on misrepresentations of the defendant is equal to and is offset against the defendant's counterclaim under the note and mortgage and that the note and mortgage are paid, cancelled, and discharged; and (c) to be consistent with the provisions of the foregoing clause (b). As so modified it is affirmed. The plantiff shall have costs of appeal So ordered

Elliott v. Great Nat’l Life Ins. Co. 611 S.W.2d 620 (Tex. 1981)

Supreme Court of Texas.

B. N. ELLIOTT, Petitioner, v. GREAT NATIONAL LIFE INSURANCE COMPANY, Respondent.

No. B-9194.

Jan. 14, 1981. Rehearing Denied Feb. 18, 1981.

BARROW, Justice.

B. N. Elliott brought this suit to recover the sum of $12,500 remaining unpaid on an alleged oral agreement of employment for a period of one year. Donald Spear, who was Senior Vice-President of Marketing for Great National Life Insurance Company, entered into the agreement with Elliott. The question presented is whether Spear was authorized by Great

9 National to make the agreement. The trial court rendered *621 judgment on the jury verdict for Elliott. [FN1] The court of civil appeals reversed this judgment and rendered a take-nothing judgment for Great National after concluding that there was no evidence to support the jury finding as to Spear's authority. 592 S.W.2d 404. We reverse the judgment of the court of civil appeals and remand the cause to that court for consideration of other points raised by Great National.

FN1. The jury found that on September 16, 1976, Spear and Elliott entered into an oral agreement whereby Great National employed Elliott for a period of one year. The jury also found that Spear was authorized by Great National to employ Elliott. Included in the instruction with this issue was a definition of "apparent authority."

It is well settled that in order to determine whether there is "no evidence" to support the jury finding as to Spear's authority, we must consider only the evidence and inferences from the evidence which support the jury finding and disregard all evidence and inferences to the contrary. Stodghill, et al v. Texas Empl. Ins. Ass'n, 582 S.W.2d 102 (Tex.1979); Dodd v. Twin City Fire Ins. Co., 545 S.W.2d 766 (Tex.1977). Upon considering the evidence in that light, we hold that the facts show some evidence of Spear's apparent authority to offer a one year contract of employment to Elliott.

Great National was a Texas corporation which was wholly owned by US Life Corporation, a New York-based corporation. Spear's primary responsibility at Great National was to add to the field vice-president staff. Pursuant to this delegated responsibility, Spear, who was located in the Dallas office, contacted Elliott in Atlanta, Georgia, and inquired as to his interest in a field vice-president's position with Great National.

Elliott twice flew to Dallas to interview with Great National. He also flew to New York City to attend a meeting, sponsored by Great National's parent company, of all the marketing people from the parent company's subsidiaries. Elliott believed that he was attending the meeting in order to meet the people who would make the decision as to his selection for a field vice- president's position. Each one of these trips was pursuant to Spear's request and authorization. Great National paid for each of the trips. It also paid Elliott one-twelfth of the agreed annual salary for each of the six months Elliott worked for Great National.

During the series of interviews with Spear, Elliott requested that Great National allow him to remain in Atlanta. Spear testified in this regard as follows: "Very early in our conversation, he (Elliott) indicated that he would like to remain there (Atlanta) ... and I spoke to my president about it and we declined to agree that Nick should live there."

Elliott testified that he first knew he would have to relocate to Dallas when he reported to work in the Dallas office on September 16, 1976. He testified as follows: "Q. How did you find out, then, on September 16, that you did not have an agreement? "A. Don (Spear) informed me at that time that we had not had any success at all in talking to New York and getting them to agree to leaving me remain in Atlanta and that I would have to move to Dallas." 10 The testimony of both Spear and Elliott provides evidence of a chain of communication which facilitated Great National's selection of Elliott as a field vice-president. Spear was expressly delegated to add employees such as Elliott. Spear and Elliott discussed the conditions of employment, and then Spear solicited a decision from the home office. When the decision concerning the conditions of employment was made, Spear communicated the decision to Elliott.

Great National did not limit the use of this chain of communication to a particular time or to a particular condition of employment. In fact, Elliott testified that he did not at any time discuss the terms of his employment with any employee of Great National other than Spear. It was this fact which led Elliott to believe that Spear had the authority to offer Elliott a one year term of employment: *622 "Q. As a matter of fact, you testified in your deposition a year ago that you knew during the time of these discussions that Mr. Spear did not have the authority on behalf of Great National to guarantee you a one year term of employment? "A. At that time, I didn't think he had the authority, but on September the 16th, I quickly determined that he did have the authority since he was the only person I had had dealings with. I hadn't had any dealings with anyone else and all arrangements were made through him."

In Chastain v. Cooper & Reed, 152 Tex. 322, 257 S.W.2d 422, 427 (Tex.1953), this Court said: "The doctrine of apparent authority is based on estoppel, and one seeking to charge a principal through the apparent authority of an agent to bind the principal must prove such conduct on the part of the principal as would lead a reasonably prudent person, using diligence and discretion, to suppose that the agent has the authority he purports to exercise...."

See also Douglass v. Panama, Inc., 504 S.W.2d 776 (Tex.1974).

Great National established a chain of communication by which it communicated with Elliott through Spear. In so doing, Great National permitted Spear to hold himself out as having the authority to convey Great National's offer of employment to Elliott, and therefore indicated to Elliott that Spear had the authority to communicate that offer. In this situation, we hold that there was more than a scintilla of evidence that Spear had the apparent authority to hire Elliott on behalf of Great National for a period of one year. Therefore, the holding of the court of civil appeals that there was no evidence to support the jury finding was erroneous. Martinez v. Delta Brands, Inc., 515 S.W.2d 263 (Tex.1974).

This error requires a reversal of the judgment of the court of civil appeals. Since Great National's brief in the court of civil appeals contained points not considered by that court, including factual points beyond this Court's jurisdiction, we remand the cause to the court of civil appeals. Shriro Corp. v. Ward, 570 S.W.2d 395 (Tex.1978); Custom Leasing, Inc. v. Texas Bank & Tr. Co. of Dallas, 491 S.W.2d 869 (Tex.1973).

11 The judgment of the court of civil appeals is reversed and the cause is remanded to that court.

12 Hoddeson v. Koos Bros. 47 N.J.Super. 224, 135 A.2d 702 (1957)

Robert HODDESON and Joan Hoddeson, Plaintiffs-Respondents, v. KOOS BROS., a New Jersey corporation, Defendant-Appellant.

No. A--487.

Superior Court of New Jersey. Appellate Division.

Argued Sept. 30, 1957.

Decided Oct. 30, 1957.

The opinion of the court was delivered by

JAYNE, J.A.D.

The occurrence which engages our present attention is a little more than conventionally unconventional in the common course of trade. Old questions appear in new styles. A digest of the story told by Mrs. Hoddeson will be informative and perhaps admonitory to the unwary shopper.

The plaintiff Mrs. Hoddeson was acquainted with the spacious furniture store conducted by the defendant, Koos Bros., a corporation, at No. 1859 St. George Avenue in the City of Rahway. On a previous observational visit, her eyes had fallen upon certain articles of bedroom furniture which she ardently desired to acquire for her home. It has been said that 'the sea hath bounds but deep desire hath none.' Her sympathetic mother liberated her from the grasp of despair and bestowed upon her a gift of $165 with which to consummate the purchase.

It was in the forenoon of August 22, 1956 that Mrs. Hoddeson, accompanied by her aunt and four children, happily journeyed **704 from her home in South River to the defendant's store to attain her objective. Upon entering, she was greeted by a tall man with dark hair frosted at *228 the temples and clad in a light gray suit. He inquired if he could be of assistance, and she informed him specifically of her mission. Whereupon he immediately guided her, her aunt, and the flock to the mirror then on display and priced at $29 which Mrs. Hoddeson identified, and next to the location of the designated bedroom furniture which she had described.

Upon confirming her selections the man withdrew from his pocket a small pad or paper upon which he presumably recorded her order and calculated the total purchase price to be $168.50. Mrs. Hoddeson handed to him the $168.50 in cash. He informed her the articles other 13 than those on display were not in stock, and that reproductions would upon notice be delivered to her in September. Alas, she omitted to request from him a receipt for her cash disbursement. The transaction consumed in time a period from 30 to 40 minutes.

Mrs. Hoddeson impatiently awaited the delivery of the articles of furniture, but a span of time beyond the assured date of delivery elapsed, which motivated her to inquire of the defendant the cause of the unexpected delay. Sorrowful, indeed, was she to learn from the defendant that its records failed to disclose any such sale to her and any such monetary credit in payment.

Such were the essentialities of the narrative imparted to the judge and jury in the Union County District Court, where Mrs. Hoddeson and her husband obtained a final judgment against the defendant in reimbursement of her cash expenditure. The testimony of her aunt was corroborative of that of Mrs. Hoddeson.

Although the amount of money involved is relatively inconsiderable, the defendant has resolved to incur the expense of this appeal. This Division has heretofore had occasion to state that justice is not qualified by the monetary importance of the controversy. Series Publishers, Inc. v. Greene, 9 N.J.Super. 166, 75 A.2d 549 (App.Div.1950). Obviously, the endeavor of the defendant is to elicit from us a precedential opinion concerning a merchant's liability in the exceptional *229 circumstances disclosed by the evidence to which we have already alluded, and by the supplementary evidence to which we shall presently refer.

It eventuated that Mrs. Hoddeson and her aunt were subsequently unable Positively to recognize among the defendant's regularly employed salesmen the individual with whom Mrs. Hoddeson had arranged for the purchase, although when she and her aunt were afforded the opportunities to gaze intently at one of the five salesmen assigned to that department of the store, both indicated a resemblance of one of them to the purported salesman, but frankly acknowledged the incertitude of their identification. The defendant's records revealed that the salesman bearing the alleged resemblance was on vacation and hence presumably absent from the store during the week of August 22, 1956.

As you will at this point surmise, the insistence of the defendant at the trial was that the person who served Mrs. Hoddeson was an impostor deceitfully impersonating a salesman of the defendant without the latter's knowledge.

It was additionally disclosed by the testimony that a relatively large number of salesmen were employed at the defendant's store, and that since they were remunerated in part on a sales commission basis, there existed considerable rivalry among them to serve incoming customers; hence the improbability of the unnoticed intrusion of an impersonator.

Fortifying the defense, each of the five salesmen, but not every salesman, denied that he had attended Mrs. Hoddeson on the stated occasion, and the defendant's comptroller **705 and credit manager verified the absence in the store records of any notation of the alleged sale and of the receipt of the stated cash payment.

14 The credibility of the testimony of both Mrs. Hoddeson and her aunt was thus shadowed. The trial judge transmitted to the jury for determination the simple factual issue whether Mrs. Hoddeson and her co-plaintiff had established by a preponderance of the credible evidence that the $168.50 was paid in fact to an employee of the defendant; otherwise, the defendant should be acquitted of liability.

*230 The jury resolved that controversial issue in favor of the plaintiffs. The defendant's application for a new trial was denied by the trial judge who announced: 'It is my conclusion that the evidence of the circumstances proved by the plaintiff warranted a finding by the jury that the person who received the money was an employee of the defendant.'

Does it clearly and unequivocally appear that the action of the trial judge constituted a manifest denial of justice under the law? Hartpence v. Grouleff, 15 N.J. 545, 549, 105 A.2d 514 (1954).

The ground now asserted on behalf of the defendant for a reversal of the judgment is that there was a deficit of evidence to support the conclusion that a relationship of master and servant existed between the man who served and received the money from Mrs. Hoddeson and the defendant company.

There can be no doubt that the existence of the alleged relationship, or in the alternative an estoppel by the defendant to deny its existence, was an essential element of the legal right of the plaintiff, Mrs. Hoddeson, to recover her monetary disbursement from the company. Neither is it to be doubted that such a relationship of agency, actual or apparent, can be proved by means of circumstantial evidence.

We do not hastily yield to the temptation immediately to adopt the postulate that the person who waited upon Mrs. Hoddeson was without question a humbugger unassociated with the defendant. We recognize that the jurors, pursuant to the directions of the court, weighed on the scales of reasonable probabilities the inferences anent that issue which were to them derivable from the circumstantial evidence relating on the one hand to the described behavior and deportment of the individual and on the other to the revelatory state of the defendant's records.

Perhaps in reality the jurors did not read the scales mistakenly, and so initially we pause to examine the probative *231 range of the circumstantial evidence. True, in the present case there was evidence that the person whose identity is undisclosed approached Mrs. Hoddeson and her aunt in the store, publicly exhibiting the mannerisms of a salesman; inquired if he could be of service; upon being informed of the type of the articles in which Mrs. Hoddeson was interested, he was not only sufficiently acquainted with their description, but also where in the department they were respectively on display, guiding them without hesitation to the location of the mirror and then to that of the indicated bedroom furniture; he represented that those articles were not then available in stock, which significantly the store records disclosed to be true; his prophetic representation concerning their prospective arrival in stock proved to be prescient, unless he gleaned that information from the price tag; he accurately calculated their true sales prices and 15 openly received the cash. Those activities precisely characteristic of the common experiences and practices in the trade were conspicuously pursued in market overt during a period of 30 to 40 minutes.

In the consideration of the propriety of the defendant's motion for an involuntary dismissal of the action, we are **706 not at liberty to suspect that the verified narrative of Mrs. Hoddeson, corroborated by her aunt, was purely imaginative or artfully inventive, but rather to regard it as a trustworthy revelation of the factual events to the extent of her knowledge. Gentile v. Public Service Coordinated Transport, 12 N.J.Super. 45, 49, 78 A.2d 915 (App.Div.1951).

In the study of the circumstantial evidence, its perceptible legal deficiency and inadequacy inhere in the limitations of its disclosures. Obviously it confines its information solely to the activities of the supposed salesman. It does not embrace or, indeed, touch any manifestations whatever emanating From the defendant tending to indicate Its conference of authority, actual or apparent, upon the alleged salesman.

Where a party seeks to impose liability upon an alleged principal on a contract made by an alleged agent, as here, the party must assume the obligation of proving *232 the agency relationship. It is not the burden of the alleged principal to disprove it.

Concisely stated, the liability of a principal to third parties for the acts of an agent may be shown by proof disclosing (1) express or real authority which has been definitely granted; (2) implied authority, that is, to do all that is proper, customarily incidental and reasonably appropriate to the exercise of the authority granted; and (3) apparent authority, such as where the principal by words, conduct, or other indicative manifestations has 'held out' the person to be his agent.

Obviously the plaintiffs' evidence in the present action does not substantiate the existence of any basic express authority or project any question implicating implied authority. The point here debated is whether or not the evidence circumstantiates the presence of apparent authority, and it is at this very point we come face to face with the general rule of law that the apparency and appearance of authority must be shown to have been created by the manifestations of the alleged principal, and not alone and solely by proof of those of the supposed agent. Assuredly the law cannot permit apparent authority to be established by the mere proof that a mountebank in fact exercised it.

Let us hypothesize for the purposes of our present comments that the acting salesman was not in fact an employee *233 of the defendant, yet he behaved and deported himself during the stated period in the business establishment of the defendant in the manner described by the evidence adduced on behalf of the plaintiffs, would the defendant be immune as a matter of law from liability for the plaintiffs' loss? The tincture of estoppel that gives color to instances of apparent authority might in the law operate likewise to preclude a defendant's denial of liability. It matters little whether for immediate purposes we entitle or characterize the principle of law in such cases as 'agency by estoppel' or 'a tortious dereliction of duty owed to an invited customer.' 16 That which we have in mind are the unique occurrences where solely through the lack of the proprietor's reasonable surveillance and supervision an **707 impostor falsely impersonates in the place of business an agent or servant of his. Certainly the proprietor's duty of care and precaution for the safety and security of the customer encompasses more than the diligent observance and removal of banana peels from the aisles. Broadly stated, the duty of the proprietor also encircles the exercise of reasonable care and vigilance to protect the customer from loss occasioned by the deceptions of an apparent salesman. The rule that those who bargain without inquiry with an apparent agent do so at the risk and peril of an absence of the agent's authority has a patently impracticable application to the customers who patronize our modern department stores. Vide, 2 C.J.S. Agency s 93, p. 1193.

Our concept of the modern law is that where a proprietor of a place of business by his dereliction of duty enables one who is not his agent conspicuously to act as such and ostensibly to transact the proprietor's business with a patron in the establishment, the appearances being of such a character as to lead a person of ordinary prudence and circumspection to to believe that the impostor was in truth the proprietor's agent, in such circumstances the law will not permit the proprietor defensively to avail himself of the impostor's lack of authority and thus escape liability for the consequential loss thereby sustained by the customer. * * * Let it not be inferred from our remarks that we have derived from the record before us a conviction that the defendant in the present case was heedless of its duty, that Mrs. Hoddeson acted with ordinary prudence, or that the factual circumstances were as represented at the trial.

In reversing the judgment under review, the interests of justice seem to us to recommend the allowance of a new trial with the privilege accorded the plaintiffs to reconstruct the architecture of their complaint appropriately to project for determination the justiciable issue to which, in view of the inquisitive object of the present appeal, we have alluded. We do not in the exercise of our modern *235 processes of appellate review permit the formalities of a pleading of themselves to defeat the substantial opportunities of the parties. Cf. Marschalk v. Weber, 11 N.J.Super. 16, 26, 77 A.2d 505 (App.Div.1950), certification denied 6 N.J. 569, 89 A.2d 146 (1951).

Reversed and new trial allowed.

Rowen & Blair El. Co. v. Flushing Operating Corp. 66 Mich.App. 480, 239 N.W.2d 633 (1976)

ROWEN & BLAIR ELECTRIC COMPANY, a Michigan Corporation, Plaintiff- Appellant, v. FLUSHING OPERATING CORPORATION, a New York Corporation, et al., Defendants- 17 Appellees.

Docket No. 22011.

Court of Appeals of Michigan.

Jan. 7, 1976.

Released for Publication March 23, 1976. Leave to Appeal Granted April 23, 1976.

KAUFMAN, Judge.

Plaintiff appeals a decision of the Kalamazoo County Circuit Court, which, following a bench trial, refused to impose a mechanics' lien on a building owned by defendant Flushing Operating Corporation (Flushing). We affirm.

The building in question was leased by Flushing *482 to Dutch Treat Bakers, Inc. (Dutch Treat). Dutch Treat desired to expand its operations by acquiring the property but could not finance the acquisition. As a result, Dutch Treat entered into negotiations with Flushing which decided to purchase the building and its plot of land and lease it to Dutch Treat. Flushing leased the realty to Dutch Treat on July 2, 1969, for a term of ten years, commencing October 1, 1969. During negotiations, Flushing and Dutch Treat determined that approximately $45,000 would be needed to renovate the building to serve as a wholesale bakery. As a result, the lease contained a provision for leasehold improvements: 'The landlord has agreed to expend the sum of forty-five thousand dollars ($45,000.00) for improvements to the leased property and for replacement of fixtures as may be required. The alterations, additions and improvements as made with the subject $45,000.00 shall be described in detail by the tenant and a list thereof attached to and made a part of this lease agreement as an exhibit hereto. Any alterations, additions and improvements made, whether from the funds advanced by the landlord or paid for by the tenant, as well as any fixtures, shall immediately become the property of the landlord and at the end or other termination of this lease shall be surrendered to the landlord, with the exception that the moveable personal property and moveable trade fixtures put in by the tenant at the tenant's expense may be removed on or before the expiration or termination of this lease.'

At trial, the testimony presented indicated that, at the time of signing, figures were attached to the lease estimating future repairs to be; structural, $30,000; electrical, $10,000; miscellaneous, $5,000. The list was apparently lost and could not be produced at trial.

*483 Plaintiff, one of a number of contractors hired by Dutch Treat, pursuant to an oral agreement with Dutch Treat, began electrical work on the building early in July, 1969. A letter agreement embodying the oral terms was prepared by plaintiff and sent to Dutch Treat on 18 October 9, 1969. It was not signed until April 6, 1970. In the meantime, Dutch Treat was making progress payments to plaintiff on a 'cost-plus' basis. Dutch Treat sent plaintiff's first invoice to Flushing which issues a check for $7,040.35 payable to plaintiff and Dutch Treat. This check was endorsed by Dutch Treat and turned over to plaintiff.

This was the first time that plaintiff had any knowledge of or contact with Flushing. **636 Plaintiff's employees noted Flushing's check but did not attempt to ascertain Flushing's position. They assumed that Dutch Treat owned the building.

On December 23, 1969, Flushing sent its last check for leasehold improvements to Dutch Treat because the $45,000 contractual limit had been reached through progress payments to plaintiff and the other contractors. At that time, Dutch Treat was behind in its rental payments, and Flushing, by applying the arrears to the rental payment account, used up the remainder of the account. Dutch Treat itself later made two $5,000 payments to plaintiff on March 30 and May 13, 1970.

On May 27, because of a growing indebtedness to plaintiff and the resultant pressure, officers of Dutch Treat signed a 9 per cent demand note for $40,872.48, the amount of the debt. On May 20, plaintiff had also filed a statement of account and lien with the Register of Deeds. Both Flushing and Dutch Treat were named but no notice was served on Flushing within the 10- day period prescribed by *484 M.C.L.A. s 570.6; M.S.A. s 26.286. Nor had plaintiff served the requisite notice of intention to claim a lien on Flushing within 90 days of the first furnishing of labor, M.C.L.A. s 570.1; M.S.A. s 26.281.

Plaintiff completed work on May 13, 1971, and timely filed the requisite statement with the register of deeds to establish a mechanics' lien against the property occupied by Dutch Treat. Plaintiff claimed that $39,033.50 remained unpaid. A suit to foreclose the lien was begun on May 3, 1971. After this Court reversed a summary judgment for defendant, Rowen nd Blair Electric Co. v. Flushing Operating Corp., 49 Mich.App. 89, 211 N.W.2d 527 (1973), a bench trial was held.

The trial court held that plaintiff was entitled to judgment against Dutch Treat for the full amount of the May, 1970, promissory note plus interest. However, after the suit had commenced Dutch Treat had gone bankrupt and had been liquidated. Thus, the crucial issue was the validity of plaintiff's lien against the building, still owned by Flushing. The building was then empty because several creditors had repossessed Dutch Treat's machinery.

The trial court held that the lien was valid against Flushing. It held that plaintiff's failure to give statutory notice to Flushing was not fatal because it found an agency relationship to exist between Dutch Treat and Flushing. Notice to Dutch Treat, the agent, was held to provide notice to Flushing, the undisclosed principal. Merithew v. Bennett, 313 Mich. 189, 193, 20 N.W.2d 860 (1945). The court also held that no apparent authority was present.

However, Flushing's liability was held to be limited to the extent of the authority given to Dutch Treat. The court held that such authority *485 was limited to $10,000. This was the amount allegedly specified for electrical repairs on the Flushing-Dutch Treat lease. Plaintiff had 19 already been paid $17,040.35, an amount in excess of this limit. The court further held that plaintiff had failed to carry the burden of proof which required plaintiff to demonstrate that it was owed money for work other than the electrical job.

On appeal, plaintiff raises two claims of error:

* * * Defendant Flushing contends on appeal that the trial court's finding of agency was erroneous. Flushing's claim, however, was not properly raised by a cross-appeal, GCR 1963, 807.1, and we do not consider it.

Although we have held that the trial court was in error in requiring enhancement, we affirm its decision because of our holding on plaintiff's second appellate issue. The trial court found an agency relationship between Flushing and Dutch Treat. It held that Dutch Treat's authority to contract with plaintiff was limited to $10,000.

In this case Dutch Treat was acting as a special agent to an undisclosed principal. A special agent is 'an agent authorized to conduct a single transaction or a series of transactions not involving continuity of service'. Restatement of Agency 2d, s 3, p. 15. A special agent can bind an undisclosedprincipal *490 only with contracts made within the scope of his authority. Restatement of Agency 2d, s 195A, p. 434. See also Saginaw, T. & H.R. Co. v. Chappell, 56 Mich. 190, 22 N.W. 278 (1885).

**639 The $10,000 figure was the sum estimated by Flushing and Dutch Treat as the amount required for electrical work. We do not agree that this was the correct limitation on Dutch Treat's agency. This sum was only an estimate as to how much electrical work might be done. It was apparently appended to the contract as an exhibit pursuant to a contract clause. That clause, however, required that 'The alterations, additions and improvements As made with the subject $45,000 shall be described in detail by the tenant and a list thereof attached to and made a part of this lease agreement as an exhibit hereto.' (Emphasis supplied.) The $10,000 was only an estimate, not a statement of an amount actually expended or an improvement actually made.

We find, instead, that the agency was limited to an expenditure of $45,000 for all improvements, alterations and additions. This was the figure negotiated by the parties to the lease and specifically made part of the lease. Before this amount was reached plaintiff was paid with a check from Flushing. After $45,000 was expended, Dutch Treat itself paid plaintiff $10,000. A mechanics' lien is based entirely on the contract between the parties. Sewell v. Nu Markets Inc., 353 Mich. 553, 91 N.W.2d 861 (1958). As principal and lessor, defendant Flushing's lien liability on the contract between lessee Dutch Treat and plaintiff is limited to the

20 portion made by Dutch Treat within the *491 scope of its agency. The Restatement of Agency 2d, s 195A, provides that: 'A special agent for an undisclosed principal has no power to bind his principal by contracts or conveyances which he is not authorized to make unless: (a) the agent's only departure from his authority is (i) in not disclosing his principal, or (ii) in having an improper motive, or (iii) in being negligent in determining the facts upon which his authority is based, or (iv) in making misrepresentations; or (b) the agent is given possession of goods or commercial documents with authority to deal with them.'

In the instant case, Dutch Treat's actions do not fall within either of the exceptions. The agent's departure from authority here would have been exceeding the monetary limit of that authority and not disclosing the principal. Plaintiff cannot bind defendant Flushing beyond the authority granted by Flushing to Dutch Treat. This authority expired on December 23, 1969, when the $45,000 limit was surpassed. The debts claimed by plaintiff in the instant action arose after that date. We recognize that this is an unfortunate case where, through no fault of its own, either the plaintiff or the defendant will be subject to a monetary loss. Because of Dutch Treat's bankruptcy, plaintiff's sole remedy has become the mechanics' lien. That lien is, however, an extraordinary remedy, one designed as an alternative to a suit for damages and one to be applied narrowly. Additionally, plaintiff had a demand note from Dutch Treat but failed to negotiate it. These facts present an apparent clash between the purposes of the mechanics' lien law and principles of agency law. This is not a case where defendant used an *492 agent in an attempt to circumvent the lien law. If it were, we would have no trouble applying the lien law. See Merithew v. Bennett, 313 Mich. 189, 20 N.W.2d 860 (1945).

Because the lien is completely dependent on the underlying contract, plaintiff unfortunately cannot recover from defendant. The contract was a cost-plus agreement, one to be paid as the work progressed. It was not a lump sum payment. Apparently, the other contractors were paid on a similar basis. Defendant carefully restricted Dutch Treat to $45,000 for leasehold improvements. As such, once this figure was surpassed, any liability for paying any of the contractors fell to Dutch Treat.

**640 Affirmed. No costs, neither party having prevailed in full.

Perkins v. Rich 415 N.E.2d 895

21 Appeals Court of Massachusetts, Plymouth.

Jane H. PERKINS et al [FN1]

FN1. The named plaintiff and others are elected members and members ex officio of the parish committee of the First Parish Unitarian Church of East Bridgewater.

Paul J. RICH et al; [ * * * ]

Argued Nov. 6, 1980. Decided Feb. 4, 1981.

Before BROWN, DREBEN and NOLAN, JJ.

BROWN, Judge.

This action was brought by members of the parish committee (Committee) of the First Parish Unitarian Church of East Bridgewater (Church) who sought the appointment of a temporary receiver to determine the financial status of the Church, to administer certain Church property and to manage certain Church activities. A temporary receiver was appointed on October 28, 1977, and a temporary injunction issued against all Church creditors barring them from prosecuting any claims.

The Committee brought this action because of transactions undertaken by the Church's minister, Paul John Rich, who, along with the Attorney General, [ * * * ] was named a codefendant. Two holders of mortgages of Church property, Bay State Federal Savings and Loan Association (Bay State) and Shawmut First County Bank, N.A. (Shawmut), intervened. The case was referred to a master on January 9, 1978, for the sole purpose of determining the validity of the mortgages to those banks by instruments which Rich executed on behalf of the Church. [ * * * ] On January 29, 1979, the master filed a report concluding that the mortgages were valid. On May 8, 1979, a judge of the Superior Court adopted the master's report in its entirety and entered judgment for Shawmut and Bay State. [ * * * ] The plaintiffs appeal from that judgment.

We derive our facts from the master's subsidiary findings,[FN7] which "are binding upon us unless they are clearly erroneous, mutually inconsistent, contradictory or vitiated in view of the controlling law." John F. Miller Co. v. George Fichera Constr. Corp., 7 Mass.App. ---, ------[FNa], 388 N.E.2d 1201 (1979) and cases cited. See Mass.R.Civ.P. 53(e)(2), 365 Mass. 820 (1974). The Church, a religious association founded in 1723 by St. 1723, c. 350, functioned until the mid 1960's with a relatively small membership and budget. Its by-laws, as amended in 1960, provide that a parish committee be in "general charge of all business affairs ... and property" of the Church.[FN8] 22 FN7. At the request of the parties the master made 259 special findings of fact, which were filed along with his report. The evidence is not reported.

FNa. Mass.App.Ct.Adv.Sh. (1979) 843, 844-845.

FN8. The by-laws also provide for a finance committee to supervise the Church's endowment, trusts and permanently invested funds.

In 1962, the Church hired defendant Rich to be its minister at a small salary. Rich initially performed his ministerial duties without controversy.

During the mid 1960's, possibly because of "psychological traumatization by the Vietnam War," Rich's personality as well as his perceived role in the Church underwent a significant change. Rich initiated a highly publicized anti- war ministry. With Rich at the forefront, the Church expanded from a membership of twelve families and a budget of $5,000 to a membership of over four hundred families. By 1965, Rich began to assume responsibility for the Church's financial affairs and, without formal authorization from the Committee or the Church membership, borrowed considerable amounts of money for the renovation and improvement of Church property as well as the acquisition of other property.[FN9] By 1969, Rich had assumed complete control of the Church's business and financial affairs. The Committee had ceased to meet after 1968, and "it made no effort to continue its former role as the business center of the Church." Moreover, no annual meeting of the Church membership occurred after 1969. Rich became, in effect, the sole operating officer, holding himself out as president and treasurer as well as minister. Under his direction, the Church began to embark on a new "community loosely modeled on Sturbridge/Williamsburg/Strawberry Bank concept," which would feature museums, galleries and other exhibits. The project was to be financed by the profits of a proposed large scale elderly housing development, which in turn was to be financed primarily from Federal funds. Although Rich and his family contributed over $100,000 to the Church, the program relied heavily on bank loans such as the three mortgage notes in issue here.[FN10] By 1973, expenditures for construction on Church property had amounted to over $175,000. The work included large scale construction obvious to all Church members such as: placement of a railroad car adjacent to the Church; interior renovation; extensive landscaping; two swimming pools, carpentry work, an art gallery and sculpture in the Church common; and construction of parking lots.

FN9. In 1965, the Church borrowed $78,000 from Plymouth-Home National Bank, a loan which was later guaranteed by the entire parish committee. In June, 1969, Rich, as president and treasurer, obtained a $100,000 loan from Shawmut on behalf of the Church, $78,000 of which was used to repay the outstanding Plymouth-Home National Bank loan. This loan, which has been extended or refinanced at least twenty-five times, is not involved in the present dispute.

FN10. Rich negotiated these mortgages on behalf of the Church in his capacity as president, treasurer and minister. Two mortgages were given to Bay State on October 18, 1972, and April 20, 1973, respectively, and one to Shawmut dated November 5, 1975. 23 The proposed community, however, ran into financial difficulties. Sewerage problems rendered the elderly housing project unbuildable, which in turn led to the unavailability of Federal funds. As other avenues of financing could not match the anticipated profits of the housing development, construction of the "new community" was thereby forestalled.

No action was taken by the Church membership until the summer of 1977, when it became apparent that the mortgage notes were in default. A new parish committee and finance committee were elected, and this action ensued. The Church claims that the mortgages are invalid because they were given without authorization from the Committee.

Similar to most of the other transactions negotiated during Rich's tenure, the mortgages given to Bay State and Shawmut were signed by Rich on behalf of the Church in his capacity as president and treasurer. Each bank was given a previously recorded document which purportedly established his authority to act on behalf of the "Church corporation." [FN11] The master found, however, that the banks could not in good faith rely on these documents to establish Rich's authority. Although the Church was found to be a de facto corporation, and Rich its de facto president and treasurer, Rich's lack of authority should have been apparent to the banks due to irregularities on the face of each document.[FN12] These irregularities created a duty upon the banks to inquire further as to Rich's authority, an investigation which would have revealed the true Church structure. The master further found that this would have saved the day for the Church but for the fact that reasonable and prudent inquiry by the Church would have brought about discovery of the mortgages. The Church's failure to assert its rights, once put on notice of unusually large expenditures, constituted ratification of Rich's actions.[FN13]

FN11. Bay State was given the document referred to as the "Mosher Certificate," as it was signed by one "Arthur Mosher, Clerk of Trustees." Shawmut was given the document referred to as the "Thayer Certificate," as it was attested to by "Ruth Churchill Thayer, Clerk and Secretary of Corporation."

FN12. The reference in the Mosher certificate to a vote of the trustees authorizing Rich "on behalf of the Church ... to sign and execute any notes and mortgages necessary" for mortgaging Church property was found to be incomplete on its face, as it was not apparent where the "trustees" fit into the Church structure. The master found that an investigation would have disclosed that there were no trustees in the church structure. The statement in the Thayer certificate (given to Shawmut) that Rich was "trustee" of the Church's "funds, properties, real estate ... and other holdings" was found to be inconsistent with the banks' own title reports which established the Church as legal owner. A simple business letter, the master found, could have clarified this apparent inconsistency.

FN13. The master also found the Church's inaction constituted estoppel, laches and abandonment.

The Committee (and the Attorney General) filed numerous objections to the master's report whereas the banks merely moved to have the objections struck and the report adopted in 24 its entirety. In these circumstances, the only issue before us in this appeal is whether the Committee's inaction amounted to ratification.[FN14]

FN14. The master made various findings concerning Rich's lack of authority which are now contested on appeal by the banks. One of the contested findings is that the banks could not in good faith rely on the recorded certificates purportedly establishing Rich's authority. See G.L. c. 156B, s 115. The banks, however, took no action either before the master or the trial court to contest this finding (or any finding of the master), nor did they move to recommit for additional findings. See Mass.R.Civ.P. 53(e)(2), and Rule 49(7) of the Superior Court (1967). Although arguably a conclusion of law * * *, and thus normally open for our consideration on appeal, the matter is not properly before us. * * *

The Committee claims that it did not know of the existence of the mortgages and thus that its failure to repudiate the mortgages resulted not from a ratification of the transactions, but from ignorance of essential facts. Generally, in order to establish ratification of unauthorized acts of an agent, a principal must have "full knowledge of all material facts." Combs v. Scott, 12 Allen 493, 496, 94 Mass. 493 (1866). * * * Ignorance of such facts will not lead to liability. Combs v. Scott, supra 12 Allen at 496, 94 Mass. 493. However, a qualification to this rule is that one cannot "purposefully shut his eyes to means of information within his own possession and control" (id. at 497), having only that knowledge "which he cares to have." Kelley v. Newburyport & Amesbury Horse R.R., 141 Mass. 496, 498-499, 6 N.E. 745 (1886). * * * This is especially true of the Committee, which functioned as the "business center" of the Church and had a duty to keep itself informed of Church business. * * *

Further, as found by the master, the Committee was not totally ignorant of Rich's actions. * * *. From the many indicia of the radical physical and structural changes to the church and its surroundings, it should have been obvious to the Church that "something (was) afoot." The very nature of the construction and renovation indicated that large expenditures were being made. Although Rich was far from candid in his disclosures, he did inform Church members of various projects at Church events and through annual reports and publications. The Committee, whose responsibility was to approve payment of all bills, and Church members in general, deliberately ignored these facts. * * * By not asking the simple question "What is going on?" as suggested by the master, the Committee assumed the risk of what its investigation might have disclosed. [FN15] See Restatement (Second) of Agency s 91, Comment e (1958).

FN15. The master found that an inquiry as to Rich's actions should have commenced at least by May 4, 1974, the date when the railroad car was put in place.

We thus conclude that the Committee's knowledge of substantial and costly physical changes at the Church should have provoked an investigation by the Committee which would have led to the discovery of the mortgages. In these circumstances the Committee's failure to act "will be deemed to constitute actual knowledge." Ingalls Iron Works Co. v. Ingalls, 177 F.Supp. 151, 162 (N.D.Ala.1959), aff'd. 280 F.2d 423 (5th Cir. 1960). * * * By failing to disavow the mortgages, the Church ratified the transactions, a ratification which may be inferred without a vote by the Committee. * * *

25 Accordingly, the mortgages are valid and binding upon the Church, and the judgments of the Superior Court must be affirmed.

So ordered.

Demian, Ltd. v. Charles A. Frank Assoc. 671 F.2d 720 (2nd Cir. 1981)

United States Court of Appeals, Second Circuit.

DEMIAN, LTD., Plaintiff-Appellant, v. CHARLES A. FRANK ASSOCIATES, Charles A. Frank and Jaguar International, Inc., Defendants-Appellees.

No. 113, Docket 81-7392.

Argued Oct. 23, 1981. Decided Feb. 4, 1982.

MANSFIELD, Circuit Judge:

In this diversity suit for damages for breach of a contract for services in the importation of men's leather and suede garments, plaintiff-appellant, Demian, Ltd. ("Demian"), the purchaser, appeals from a judgment of the Southern District of New York entered by Judge Charles L. Brieant in favor of the defendants Charles A. Frank Associates, Charles A. Frank and Jaguar International, Inc., New York residents and business organizations (herein collectively referred to as "Frank"), dismissing the complaint after a non-jury trial. We remand the case to the district court for further findings of fact, affirm the dismissal of Frank's counterclaim for commissions, and deny Frank's request for an award of costs, damages, and expenses, including attorneys' fees.

At all pertinent times Demian, a Pennsylvania corporation, was an importer of high grade men's leather garments for sale in the United States and Frank was a service organization with business acquaintances in the Orient. For a commission paid by American importers, Frank would locate manufacturers or sources of supply in the Far East and make arrangements for the manufacture of the goods in the Orient and their importation into the United States. To facilitate importation into the United States of goods made in Korea, Frank entered into an arrangement with K. C. Sun of Da Chong Hong Trading Co., Ltd. ("Sun") in Korea, whereby, for 50% of Frank's commission received for its services, Sun would locate Korean manufacturers and, 26 following Frank's instructions, do anything further required to effectuate the manufacture, sale and importation of goods purchased by Frank's American clients. One of these clients was Demian.

After approving samples of leather jackets to be manufactured in Korea by Koreanna Moulson, Ltd., a manufacturer located by Frank and Sun, who submitted the samples for consideration, Demian placed two *722 orders with Sun for the purchase of two styles meeting the specifications of the samples. Pursuant to arrangements made by Frank, Demian forwarded to Korea letters of credit in favor of Koreanna, to be honored upon presentation of a certificate by Sun that it had inspected the shipment of the leather jackets made by Koreanna and found them to be of merchantable quality, meeting the sample specifications.

Unfortunately Sun did not properly perform its inspection duties, issuing a certificate that released the purchase price to Koreanna against jackets that did not meet the specifications. In June 1980 Demian brought the present suit against Frank for breach of contract, alleging that in return for commission payments Frank had agreed to: "(A) Assist plaintiff in the designing of leather jackets which were to be manufactured in the Republic of Korea; "(B) Arrange for the manufacture of said jackets in the Republic of Korea; "(C) Inspect said jackets upon completion of the manufacturing to insure that they complied with the standards and specifications required by plaintiff, and in accordance with the terms of a Letter of Credit opened by plaintiff. "(D) Perform all services necessary to accomplish the importation of the jackets into the United States."

Frank entered a general denial and counterclaimed for a 5% commission "for his services."

At trial Michael Driban, President and owner of Demian, testified that, after Charles A. Frank had described his qualifications and his extensive experience in locating Oriental manufacturers, arranging for their manufacture of goods and importing garments into the United States, they entered into an arrangement under which Frank was to "oversee any program we would enter from start to finish." Frank stated: "Q What do you mean, from start to finish? "A From the placing of the orders to making sure that the work was done in time, to make sure the garments were packed in time, that every step of the production process was followed through, that the skins arrived in time to be cut, that the cutting was done in time, that the sewing was done in time, that the skins, when they arrived, were first quality, that when all was said and one (sic), the garments were inspected. Evenness of color, quality of skin, sewing details, etc., were packed, the documents were completed in a satisfactory manner, and that it went out on a ship that would ultimately get to us in time to permit us timely deliveries to our customer, which was our responsibility."

27 With respect to responsibility for inspection of goods in Korea before release of Demian's letter of credit, Driban testified that Frank advised that full responsibility would be assumed by him or, if he was not in Korea at the time of shipment, by his "man in Korea," K. C. Sun, whom Driban had never met. On cross-examination by Mr. Frank, Driban testified: "Q Did I ever represent to you as a guarantor of the factory- "THE COURT: He said yes, you sure did. Why do you keep fooling around? Answer the question. "A You told me you would be personally or someone from your office would be responsible for the final inspection of those garments. Without a certificate certifying to that effect payment would not be made to the factory."

Frank's defense was that he acted merely as a broker, without assuming responsibility other than to bring the principals together. On his deposition, however, he testified that he entered into a relationship with Mr. Sun whereby Sun would perform numerous services for him in Korea, including location of factories, help in obtaining clients, manufacture of garments, and inspection, and that "(i)f there were requirements that a particular client had that I could not do for the clients because I was not there, he would do it." (App. 45A). Frank testified: "If I gave him instructions, he following them out.... Mr. Sun was to execute what I asked him to execute." (App. 47A).

*723 At the close of the trial Judge Brieant, although he found that Frank's "services were totally useless" and he had been a malefactor who had engaged in "unconscionable" conduct, concluded: "The most the proof shows, an agent was authorized by the principal to delegate a sub-agent and in the absence of some knowledge of it at the time of appointing Sun, that Sun was an improper person to be appointed, there is no liability, no vicarious liability when a sub-agent with the permission of the principal is appointed by an agent to work for the principal, and that is really what happened here with K. C. Sun. "... there is no joint venture because, in order to have a joint venture, there must be an agreement proved to share losses and profits. "... When two persons could broker in effect like that, neither one becomes the agent for the other, and Mr. Frank does not, by the facts of this case, become the person vicariously liable for the sins and omissions or defaults or delicts (sic) of K. C. Sun, and that is what is sought to be shown here in this case." (App. 37A-38A).

Accordingly the court entered judgment dismissing the complaint. Finding that Frank's services were worthless, he also dismissed its counterclaim for commissions, without costs to either side.

DISCUSSION

We do not question the district court's finding that no joint venture existed between the parties since there is no evidence of profit or loss sharing between them, which is essential to 28 recovery on a joint venture theory. Steinbeck v. Gerosa, 4 N.Y.2d 302, 317, 175 N.Y.S.2d 1, 13, 151 N.E.2d 170 (1958); Backus Plywood Corp. v. Commercial Decal, Inc., 208 F.Supp. 687, 691 (S.D.N.Y.1962); Allen Chase & Co. v. White, Weld & Co., 311 F.Supp. 1253, 1259 (S.D.N.Y.1970); Jasper v. Bernstein, 259 App.Div. 638, 639-40, 20 N.Y.S.2d 362, 363-64 (1st Dept. 1940); Gordon Co. Inc. v. Garcia Sugars Corp., 241 App.Div. 155, 156, 271 N.Y.S. 303 (1st Dept. 1934). Under the law of agency Frank's liability to Demian for Sun's improper certification turns on whether Sun was employed as Frank's subagent to perform his duties as Demian's agent or as an independent agent of Demian for which it would assume responsibility. If Sun was Frank's subagent, Frank would be liable to Demian for the subagent's conduct. 2 Restatement (Second) of Agency, s 406. "s 406. Liability for Conduct of Subagent "Unless otherwise agreed, an agent is responsible to the principal for the conduct of a subservant or other subagent with reference to the principal's affairs entrusted to the subagent, as the agent is for his own conduct; and as to other matters, as a principal is for the conduct of a servant or other agent." Id. 252.

On the other hand, if Sun was not a subagent but a separate agent acting solely for Demian, Frank would not be liable. Restatement (Second) of Agency, ss 5, 405. s 405. Liability for Conduct of Other Agents "(1) Except as stated in Subsections (2) and (3), an agent is not subject to liability to the principal for the conduct of other agents who are not his subagents. "(2) An agent is subject to liability to the principal if, having a duty to appoint or to supervise other agents, he has violated his duty through lack of care or otherwise in the appointment or supervision, and harm thereby results to the principal in a foreseeable manner. He is also subject to liability if he directs, permits, or otherwise takes part in the improper conduct of other agents. "(3) An agent is subject to liability to a principal for the failure of another agent to perform a service which he and such other have jointly contracted to perform for the principal." Id. 251.

Here we need not speculate as to the nature of the legal theory asserted by Demian as the basis for its claim against Frank. It does not ask the court to infer from the circumstances that Sun must have *724 been Frank's subagent rather than an independent agent procured by it as a broker. It claims that Frank breached an express agreement with it to inspect the jackets upon completion of the manufacture "to insure that they complied with the standards and specifications required by plaintiff, and in accordance with the terms of the Letter of Credit opened by plaintiff." (Compl. Par. 6(C)). Under such an agreement Frank would be obligated either personally to inspect the manufactured jackets or to see to it that they were properly inspected by Sun and to issue a certificate or have Sun do so only if they conformed to the samples approved by Demian, which they admittedly did not. If Frank failed to perform these promises and allowed substandard jackets to be certified, he would under elementary principles of contract law be liable in damages to Demian regardless of any joint venture or subagency theory of liability. 29 The district court does not appear to have considered this issue of whether Frank expressly entered into an agreement with Demian to inspect properly and made no findings with respect to such an agreement. If there were no supporting evidence, we might let stand the dismissal of this claim for breach of an express contract. But here the record contains an abundance of testimony by Driban to the effect that Frank agreed to insure that Sun, whom Frank described as his "man in Korea" who followed Frank's "instructions" and who would "execute what I asked him to execute," would make a proper inspection and issue a certificate only if the jackets conformed to Demian's specifications. Nor does Judge Brieant appear to have discredited Driban as a witness. Indeed at one point he appears to have accepted Driban's testimony that Frank represented himself to be a "guarantor." Judge Brieant's characterization of Mr. Frank, on the other hand, indicates some doubt as to his reliability. The finding that Frank's services were worthless and in violation of his contractual obligations, disentitling him to a commission, is supported by the record and not clearly erroneous.

In view of these circumstances we vacate the judgment dismissing the complaint and remand the case to the district court for further proceedings, findings, and decision. We affirm Judge Brieant's denial of Frank's counterclaim and deny as frivolous Frank's claims for damages, costs, and attorney's fees under 28 U.S.C. ss 1912, 1927 and Fed.R.App.P. 38. Costs are awarded to Demian.

Ell Dee Clothing Co. v. Marsh 247 N.Y. 392, 160 N.E. 651 (1928)

Court of Appeals of New York.

ELL DEE CLOTHING CO., Inc., v. MARSH.

Feb. 14, 1928.

ANDREWS, J.

In November, 1923, the receiver of the plaintiff applied to his broker for a policy of burglary insurance to cover the stock of goods which had come into his possession. In turn, the broker passed on the application to another firm of brokers. They endeavored to place the insurance, and finally succeeded in making some arrangement with the defendant.

Mr. Marsh was the agent in New York of the 'London Lloyds.' Precisely what were his powers is not clear; but, when the application was handed to him, it was understood by all parties that a 'Lloyds' policy was to be received.

30 The application had been made out upon a form appropriate to marine insurance. On the back were printed the clauses relating to that class of risk and immaterial here. It was headed, 'Underwriters' and *395 Brokers' Emergency Agreement,' and the form was stated to be 'Provisional.' The application was said to be made by the brokers for the receiver of the Ell Dee clothing store. The amount of the insurance was to be $15,000. It was to protect against burglary for 60 days, 'at and from 189 Stanton street, New York' (where in fact the goods were located), and then follows: 'Amount under deck, $101.50.' That sum was in fact the agreed premium for the policy. Then follow the words 'Binding' and the signature 'Marsh--for Company.'

This paper was delivered to the receiver. He drew a check for $101.50, which was received by the negotiating brokers. On December 6 there was a burglary at 189 Stanton street; clothing in the receiver's hands being taken. Shortly thereafter Marsh was notified of the burglary, and about January 21 he received proofs of loss made out to 'F. A. Marsh, Representing Lloyds.'

No formal policy was ever executed by any one, and the plaintiff, having been vested with all the rights of the receiver in the subject-matter upon his discharge, brings this action to recover the loss directly of the defendant. It claims that he is personally liable upon the so-called 'binder' executed by him.

Some preliminary matters must be considered before we reach the more important question involved in this case. It is said that the plaintiff has failed to show that Mr. Marsh ever received the check for the premium. It is true. But, if the defendant considered it important and intended to rely on a missing bit of proof that might have been supplied, he should have called attention to the defect. No reference to it was made on the trial. It is said the goods supposed to be covered by the binder are not described. But the application is against burglary made by the receiver of the Ell Dee Clothing store at 189 Stanton street. This would seem to cover the personal property, held by Mr. Derby as receiver of the corporation, at that place. It is said there is here no *396 complete contract. The binder is intended to be superseded by a formal policy. Such a policy contains conditions to be performed by the assured. In its absence the nature of the risk assumed is not shown. So there is a failure to prove a meeting of the minds of the parties and a contract. A 'binder' is a present contract of insurance, issued to protect the assured temporarily while the assurer investigates the risk and determines whether or not to issue a permanent policy. Imported into it, however, are all the obligations 'according to the terms of the policy in ordinary use by the company.' Sherri v. National Surety Co., 243 N. Y. 266, 153 N. E. 70. If the form of the **653 policy is fixed by the state, then its provisions are held to be included in any binder. If there is proof that the company has adopted any particular and customary form, the same thing is true. But it is for the company to show this fact. In the absence of legislative direction, it may use such a policy as it chooses. It may adopt many or few conditions. In the absence of all testimony, there is no presumption that in its policy it has inserted any conditions precedent. If it has adopted conditions subsequent, it is for it to show that fact and that they have been broken by the assured. There is no reason why it may not simply agree to indemnify for the loss by burglary of certain goods in return for a consideration. So whether the binder is to be interpreted by itself or with the addition of implied conditions, the minds of the parties meet. And in the absence of state regulations, it is for the assurer to show 31 that conditions are implied and what they are. Such seems to be intimated in Underwood v. Greenwich Ins. Co., 161 N. Y. 413, 55 N. E. 936. There may be an exception to this rule. Some conditions may be so well understood as universally entering into insurance contracts, such as the necessity of notice and proofs of loss given to the insurer within a reasonable time, that the courts will imply them even though the binder be silent. They must, however, be few.

*397 We come, therefore, to the substantial question which we must determine. The general rule may be stated that, where one party to a written contract is known to the other to be in fact acting as agent for some known principal, he does not become personally liable whether he signs individually or as agent. Johnson v. Cate, 77 Vt. 218, 59 A. 830. On the other hand, although known to be acting for an unknown principal, he is personally liable. Knowledge of the real principal is the test, and this means actual knowledge, not suspicion. Cobb v. Knapp, 71 N. Y. 348, 27 Am. Rep. 51; Arsinger v. Macnaughton, 114 N. Y. 535, 21 N. E. 1022, 11 Am. St. Rep. 687; McClure v. Central Trust Co., 165 N. Y. 108, 58 N. E. 777, 53 L. R. A. 153; De Remer v. Brown, 165 N. Y. 410, 59 N. E. 129; Winsor v. Griggs, 5 Cush. (Mass.) 210. If this be a correct statement of the law, it determines the case before us.

London Lloyds is a voluntary association of merchants, shipowners, underwriters, and brokers, originating in the seventeenth century, and growing into a vast commercial organization. To it is due much of the law of marine insurance. In 1871 it was granted all the rights and privileges of a corporation. In its rooms an extensive insurance business is carried on. Lloyds itself, however, writes no policies. A broker for one wishing insurance posts the particulars of the proposed risk. Then each underwriting member of the association who wishes to do so subscribes his name and the share of the total desired that he wishes to take. When that total is reached, the insurance is effected. A policy, in the form approved by Lloyds is then issued, containing the names of the underwriters bound thereby and the name of their attorney in fact who handles the insurance affairs of the group. So who will become obligated on any policy is not and cannot be known until the underwriting is completed. And in each case only those who underwrite each particular policy are liable for any loss under that policy, and liable for the amount which they have underwritten. The insured contracts with each separately, *398 not with the group jointly. Fish v. Vanderlip, 218 N. Y. 29, 112 N. E. 425, Ann. Cas. 1916F, 150.

Therefore, while the binder was signed by Marsh, with the knowledge by all that he was acting as agent, who were or were to be his principals, even he did not and could not then know. Under such circumstances the agent becomes personally liable on his contract. Not only were his supposed principals unknown to either Mr. Dewey and his agents; in fact there were none. Some time in the future a group might be formed who would assume the risk. None existed when the binder was signed. And the mere knowledge by the plaintiff or its predecessors of all these facts is not, as a matter of law, sufficient to exonerate the defendant.

The judgments should be reversed, and a new trial granted, with costs to abide the event.

CARDOZO, C. J., and CRANE, LEHMAN, KELLOGG, and O'BRIEN, JJ., concur.

POUND, J., not sitting.

32 Judgment reversed, etc.

Resnick v. Abner B. Cohen Advertising, Inc . 104 A.2d 254 (D.C. 1954)

RESNICK v. ABNER B. COHEN ADVERTISING, Inc.

No. 1461.

Municipal Court of Appeals for the District of Columbia. Argued March 8, 1954. Decided April 13, 1954.

CAYTON, Chief Judge.

This action was brought against David E. Resnick for an amount due on a contract *255 signed by him as president of American Communication Co. Resnick filed an answer in which he in effect admitted that 'American Communication Co.' was not the official name of a corporation, but stated that he was only an employee of Royal Appliance Co., Inc., which was trading as American Communication Co. Plaintiff moved for summary judgment, and the trial court granted the motion on the theory that since defendant had signed the contract as president of a nonexistent company, or on behalf of an undisclosed principal, he was personally liable on the contract. Defendant appeals, contending that summary judgment should not have been granted because his answer raised questions of fact.

In this jurisdiction an agent who enters into a contract without disclosing his principal is held personally liable on it, [FN1] and he does not escape liability by purporting to act for a fictitious or nonexistent principal. [FN2] On the other hand, when his principal is fully disclosed, the agent ordinarily does not incur personal liability. [FN3] Hence the liability of appellant in the present case depends upon whether a principal existed, and if so, upon the extent to which such principal was disclosed. In determining this issue on appeal from a summary judgment, we are to be guided only by the pleadings and the contract. If they raise a material question of fact, or if they fail to establish appellant's liability as a matter of law, the summary judgment cannot stand. * * * We first note that the answer states that a corporation is trading under the name which appears in the contract. At a trial on the merits this allegation may or may not be substantiated by proof; but at present it stands uncontradicted and must be accepted as fact. It is well established that a corporation may in the absence of fraud enter into binding contracts under an assumed or trade name. [FN4] If, as defendant's answer indicates, he contracted for an existing 33 corporation, using its trade name, it cannot be said that he was representing a nonexistent or fictitious principal. * * *

[7] Likewise it cannot be held that the pleadings establish that the principal was undisclosed. In Restatement, Agency ' 4 (1933), it is said that a principal is disclosed if 'at the time of a transaction conducted by the agent, the other party thereto has notice that the agent is acting for a principal and of the principal's identity * * *.' The contract in this case appears on its face to be an ordinary contract of a corporation executed by appellant as an officer thereof. (It is signed thus: David E. Resnick, Pres. Authorized Signature American Communication Co.)

From such signature and from the allegations of the pleadings, there is no basis for saying that appellee was led to believe that Resnick was acting for himself and not for a principal.

The next question is whether there was a sufficient disclosure of the principal's identity. We have found no case in which this precise issue was presented and determined on the pleadings. Among the cases dealing with the problem there is some conflict. [FN5] But in all of them it appears that the issues *256 were developed at trial. In the Amans, Givner, and Saco Dairy cases, the trade name used was as consistent with personal ownership of the business as with agency for another, and the evidence revealed no further disclosure by the agent; so that, under the circumstances, there was no disclosure either of the agency relationship or of the principal's identity. But as we have already pointed out the evidence may develop that the contract in this case afforded sufficient notice of the existence of an agency relationship. * * *

From the cases we have cited, the law seems to be that the mere use of a trade name in a contract signed by an agent is not sufficient to show as a matter of law that the principal was disclosed. But it does not follow that solely because a trade name was used, the principal was as a matter of law undisclosed. It has been recognized that contracts may be executed in a trade name under such circumstances as to disclose the identity of the principal. [FN6] We think that such a possibility exists here. Therefore, appellant should have the opportunity to prove the extent of appellee's knowledge of the principal's identity. [FN7] It cannot be said that the pleadings exclude the possibility of such knowledge. There is nothing to show the extent of the dealings between the parties, the familiarity of appellee with the business operated as American Communication Co., or whether the name was used in good faith to describe the principal. It must be determined whether the identity of the principal was shown either by the use of its trade name or in some other manner. These are issues of fact which cannot be decided on motion for summary judgment. * * *

Appellant assigns as error the refusal of the trial court to permit him to file an amended answer and counterclaim. He also says there was error in denying a motion for leave to 34 intervene by Royal Appliance Co. We need not pass on these claims of error. We assume that with the remanding of the case for trial on the merits the trial court will exercise its discretion so as to permit such amendments by either party as will fairly develop the issues, and will also entertain any proper motion for intervention.

Reversed.

Williams v. Investors Syndicate 327 Mass. 124, 97 N.E.2d 395 (1951)

WILLIAMS v. INVESTORS SYNDICATE et al.

Supreme Judicial Court of Massachusetts, Hampden.

Argued Dec. 7, 1950.

Decided March 5, 1951.

WILLIAMS, Justice.

This is a bill in equity in which Bradford Estates, Inc., a Massachusetts corporation, and Investors *125 Syndicate, a Minnesota corporation, are joined as defendants. Hereinafter they are referred to as Bradford and Investors. It is alleged in the bill that the plaintiff obtained a 'finding' against Bradford in the District Court of Western Hampden in the sum of $3,295.89 on April 21, 1948; that on August 12, 1947, Bradford gave a mortgage to Investors on certain premises in Westfield designated as certain lots on page 130 of book of plans 25 at the registry of deeds; that Investors proposed to foreclose the mortgage on April 23, 1948; that the real estate mortgaged constituted the only asset of Bradford; that Bradford and Investors 'are, in fact if not in legal phraseology, one and the same person and that the unjust enrichment of Bradford will enure to the benefit of Investors'; that the premises in question were conveyed to Bradford by deed on June 19, 1947, for $15,000 by Robert P. Lane and Sara M. Lane; that the purchase price was provided by Investors; that 'there was a fraud and collusion between Bradford and Investors and that, as a result thereof, the plaintiff is out of pocket in the sum of $3,295.89, together with interest thereon.' The plaintiff prays that Investors be ordered to pay to the plaintiff $3,295.89 with interest and until such time as payment is made be restrained from foreclosing its mortgage. The evidence is reported and the judge has reported findings of material facts substantially as follows: that Bradford received a deed of the premises on June 19, 1947, and on the same day gave a mortgage on the land to Investors in the sum of $15,000; that 'Bradford Estates, Inc., and Investors Syndicate were, in reality, one and that Bradford Estates, Inc., was acting as a 'straw' for Investors Syndicate, and that the transactions were in fraud of creditors * * * that in August, 35 1947, the plaintiff delivered loam on **396 the above mentioned land which was in the name of Bradford Estates, Inc., for which he has not been paid, and got an execution, from the District Court of Western Hampden, which has not been satisfied * * * that the loam was utilized for the benefit of the defendant Investors Syndicate and that it has been unjustly enriched at the expense of the *126 plaintiff, and that Investors Syndicate owes the plaintiff the sum of $3,295.89.' He entered a final decree, from which Investors has appealed, ordering Investors to pay that sum to the plaintiff. The record does not show that Bradford appeared, answered, or has appealed from the decree.

We have difficulty in understanding the theory on which the plaintiff's bill is drawn. From the judge's findings he apparently regarded it as alleging that the plaintiff was entitled to recover from Investors $3,295.89 as the amount by which Investors has been unjustly enriched through the delivery of loam by the plaintiff on land which 'in reality' belonged to Investors. We first consider the case on the basis.

There are annexed to the plaintiff's bill copies of his declaration and the findings and decision of the judge in the action brought by the plaintiff against Bradford in the District Court of Western Hampden, in which action, the plaintiff alleges, he obtained a 'finding' against Bradford in the sum of $3,295.89. These copies indicate that the finding was for the value of loam sold and delivered by the plaintiff to Bradford. This declaration and the judge's findings were not introduced as evidence in the instant case. The only document in evidence pertaining to that action was an execution which recited a judgment for the plaintiff in the amount above stated. The only reference to the subject matter of that action was in a question to the plaintiff by his counsel, 'And are you the man who furnished the loam on the property on Western Avenue was developed as the Bradford Estates?' to which the plaintiff answered, 'Yes.' There was no evidence of the delivery by the plaintiff of loam on the premises described in his bill, of its value if delivered, or of the time of delivery. The judge, therefore, had no evidence to warrant his finding that Investors was enriched at the expense of the plaintiff to the extent of $3,295.89 by reason of loam delivered on land standing in the name of Bradford, and the decree for the plaintiff based on this finding cannot stand.

*127 Neither is the plaintiff entitled to a decree if the bill be interpreted as seeking to enforce against Investors a judgment obtained by the plaintiff against Bradford. As Investors is not a party to the judgment, the plaintiff cannot recover against it on the judgment in an action at law. Lonnqvist v. Lammi, 242 Mass. 574, 578, 136 N.E. 610; Jenkins Petroleum Process Co. v. Western Oil Corp., D.C., 21 F.Supp. 550. Freeman on Judgments (5th ed.) ' 1084.

We take the finding of the judge that Bradford was a 'straw' for Investors to mean that Bradford was holding the land as agent for Investors. If Investors was an undisclosed principal at the time of the loam transaction, the plaintiff, on discovering the relationship, could have proceeded on his claim for the delivery of the loam against either the agent or the principal at his election. He could not have proceeded against both jointly. Raymond v. Proprietors of Crown & Eagle Mills, 2 Metc. 319; Kingsley v. Davis, 104 Mass. 178; Weil v. Raymond, 142 Mass. 206, 213, 7 N.E. 860. See Silver v. Jordan, 130 Mass. 319; Maynard v. Fabyan, 267 Mass. 312, 315, 166 N.E. 629. He has proceeded against the agent and obtained a judgment which is unsatisfied. If Investors remained an undisclosed principal when the plaintiff commenced his action against 36 the agent Bradford, institution of the action was not conclusive of an election by the plaintiff to hold the agent rather than the principal. Gavin v. Durden Coleman Lumber Co., 229 Mass. 576, 580, 118 N.E. 897. Upon discovery of the existence of the principal he could then have proceeded against it. The plaintiff, however, has not done this but, on that interpretation of the bill which we are now considering, is seeking to enforce against the principal his judgment obtained against the agent. As was said in Old Ben Coal Co. v. Universal Coal Co., 248 Mich. 486, 491, 227 **397 N.W. 794, 795, a case similar on its facts to the instant case, 'As plaintiff's right to recovery asserted here is alternative, depending upon the doctrine of election, plaintiff cannot stand on the judgment against the agent as valid and binding and treat such judgment as a cause of action against the principal.' Investors and Bradford are separate corporate entities, and by his judgment against the latter *128 the plaintiff has acquired no equitable right against the former.

The bill should have been dismissed as against Investors.

Decree reversed with costs of this appeal.

Grinder v. Bryans Road Bldg. & Supply Co. 290 Md. 687, 432 A.2d 453 (1981)

Court of Appeals of Maryland.

Elvin GRINDER, Indiv. and Trading As Grinder Construction et al. v. BRYANS ROAD BUILDING & SUPPLY CO., INC.

No. 76.

July 15, 1981.

RODOWSKY, Judge.

The liability of an undisclosed principal has been called an "anomaly" from the standpoint of the law of contracts.[FN1] Here we focus on a particular aspect of the anomaly. Where the creditor obtains a final judgment against one of the parties to the agency relationship, after learning of the existence and identity of the principal, the creditor is precluded from obtaining judgment against the other party. This is so even if the first judgment is unsatisfied. Reexamination of this rule of law convinces us that it is unsound and should no longer be followed. We adopt the rule that, absent other defenses, the third party may ordinarily proceed against the agent, or the previously undisclosed principal, or both, until the performance is satisfied.

37 This appeal arises out of a common business situation. G. Elvin Grinder (Grinder) of Marbury, Maryland is a building contractor. He did business as an individual and traded as "Grinder Construction." Grinder maintained an open account, on his individual credit, with Bryans Road Building & Supply Co., Inc. (the Plaintiff). On May 1, 1973 G. Elvin Grinder Construction, Inc., a Maryland corporation (the *689 Company), was formed. Grinder owned 52% of the stock. On May 1, 1978 the Plaintiff sued Grinder, individually and trading as Grinder Construction, on the open account, on which the balance represented exclusively purchases made after May 1, 1973. A motion for summary judgment, with supporting affidavits and exhibits, accompanied the declaration. In his affidavit in opposition to the required summary judgment Grinder swore that the purchases were made by the Company, acting either through him as president, or through others as agents for the Company, and that all purchases were used entirely on construction projects of the Company. As a result the Plaintiff on August 15, 1978 filed an amended declaration which joined the Company as an additional defendant. On February 23, 1979 the Plaintiff moved for summary judgment against the Company, predicating its motion on the sworn admissions of Grinder, the president of the Company, in his affidavit. This motion was not opposed and summary judgment was entered against the Company in the amount of $5,912.68 on May 28, 1979.[FN2] At trial on the merits of the **455 claim against Grinder, the Plaintiff's position was that it had never been advised that the Company was making purchases, that the purchases were made on the account of Grinder, the individual, and that he was liable for the balance. Grinder testified that the Plaintiff had been advised to convert the account to a corporate account. His counsel argued that the Plaintiff was estopped to deny that the account was a corporate one because the Plaintiff had taken summary judgment against the corporation. The trial court found as a fact thatGrinder *690 had not notified the Plaintiff either that the billing on the open account should be transferred to a corporation or that Grinder's individual liability should be terminated. In its oral opinion from the bench, the trial court further found that the Company had received the assets for which the individual agent was billed, that the Plaintiff was unaware of the principal-agent relationship and that it was relying on the credit of the agent. In an application of pure legal reasoning, untainted by citation to the precedents, the trial court held that merely taking summary judgment against the principal did not estop the Plaintiff from obtaining judgment against the agent, Grinder. Judgment nisi was entered against Grinder on June 4, 1979.

Three days thereafter, Grinder filed a "motion to strike and enter judgment" which the court in effect treated as a motion for new trial under Md. Rule 567 by deferring entry of final judgment. Grinder's supporting statement of authorities referred to E. J. Codd Company v. Parker, 97 Md. 319, 55 A. 623 (1903) and thereby, for the first time, injected the concept of election into the case. In Codd the creditor, upon finding that it had been dealing with an agent, made claim against the principal in a proceeding in equity where an auditor's account was finally stated and ratified but under which no dividends were paid to the creditor. In a subsequent action by the creditor against the agent, in which the agent by special plea had set up the defense of election based upon the prior judgment against the principal, judgment went for the agent and was affirmed on appeal. This Court said (97 Md. at 325, 55 A. at 624):

38 And the general principle appears to be established that where an agent contracts in his own name, without disclosing his interest, though in fact for the exclusive benefit of another person, who is afterwards discovered, the creditor may sue either, but after he has elected whom to sue and has sued either the agent or the principal to final judgment, he cannot after that sue the other, whether the first suit has been successful or not. (Emphasis in text.)

*691 At a hearing on July 2, 1979, the trial court struck the judgment against Grinder and entered judgment in his favor against the Plaintiff for costs. The Plaintiff timely filed an order to "(e)nter an appeal to the Court of Special Appeals from the judgment entered in this action on July 2, 1979."

The intermediate appellate court, in an opinion by Judge Wilner which closely reasoned within the letter of our decisions involving the election rule, remanded without affirmance or reversal under Md. Rule 1071. Bryans Road Building & Supply Co. v. Grinder, 46 Md.App. 10, 415 A.2d 615 (1980). Relying on the language of Codd, supra, and of Hospelhorn v. Poe, 174 Md. 242, 259, 198 A. 582, 590 (1938), that court held that election does not occur until the creditor takes a final judgment against the one he chooses to hold to the exclusion of the other. It reasoned that the judgment of May 28, 1979 against the Company was not a final judgment because there were multiple claims in the case and the summary judgment **456 had not been certified as final pursuant to Md. Rule 605 a. Thus, the Plaintiff's election was still open at the point of judgment nisi against Grinder. Recognizing that neither party, nor the court, had fully appreciated the problem until both judgments had been entered, the Court of Special Appeals concluded that "it would be a triumph of legal fiction over justice for (it) to assume, as ultimately did the trial court, that (Plaintiff) made a knowing election in favor of" the judgment against the Company. 46 Md.App. at 20, 415 A.2d at 621. It therefore remanded to permit the Plaintiff to make an election.[FN3] * * *

*692 This disposition by the Court of Special Appeals leaves the Plaintiff with a judgment either against Grinder or against the corporation, but not against both. But, in its cross-petition for certiorari, which we granted, the Plaintiff argues that it should be entitled to a judgment against both. That was, of course, the original decision by the trial court. The Plaintiff preserved this argument in its brief to the Court of Special Appeals. Grinder has raised a procedural question which is directed at the remand by the Court of Special Appeals. He contends the Plaintiff's order for appeal limited review to the judgment for costs against it rendered on July 2, and that the Plaintiff could not appeal from the summary judgment against the Company because it was in the Plaintiff's favor. Without intimating whether *693 these arguments have merit or not in relation to the remand to permit an election, it is clear that the judgment of July 2 was against the Plaintiff and that the order for appeal, even if limited to it, would bring up the question whether the Plaintiff ought to be permitted to take judgment against the agent, in addition to its unsatisfied judgment against the principal. Reexamination of the election rule, at least to some degree, is therefore squarely presented.

39 There is an exception to the election rule applicable where the creditor takes judgment against the agent before knowledge of the identity of the principal, in which case the principal is not discharged and judgments against both may stand, with but one satisfaction allowed. This exception was applied as an alternative ground of decision in Wheaton Lumber Co. v. Metz, 229 Md. 78, 82, 181 A.2d 666, 669 (1962).

Our most recent holding which applies the election rule as Maryland law is Garfinkel v. Schwartzman, 253 Md. 710, 254 A.2d 667 (1969), a suit for real estate broker's commissions in which the undisclosed principal seller and his agent to sell were joined. Judgment in favor of the broker against the principal was affirmed. On the broker's cross-appeal from a directed verdict in favor of the agent we said, on the authority of Hospelhorn, that the broker had his judgment against the principal and could not recover his commissions from both. Traylor v. Grafton, 273 Md. 649, 332 A.2d 651 (1975) presented the contrast between the election rule, in force in Maryland, and the Pennsylvania rule, discussed infra, under which judgments against both principal and agent are permitted, with one satisfaction. That case involved a contract made in Pennsylvania to purchase Pennsylvania realty. Pennsylvania law applied and notice of intention to rely upon the law of Pennsylvania was given. See Md. Code (1974, 1980 Repl.Vol.), s 10-504 of the Courts and Judicial Proceedings Article.

On the foregoing review of the Maryland precedents, we could dismiss the Plaintiff's request for reexamination of the election rule because it is too deeply embedded in our law to *695 change. But a reading of these cases makes plain that we are not dealing with a rule in reliance on which people order their affairs or structure their business transactions. It is not a rule with respect to which predictability of the result of its application should remain stable in order to protect past transactions. Indeed, **458 from the standpoint of the principal and agent, the rule predicts only that an election must be made, but because the election is that of the creditor, the result of the election is not necessarily predictable. As Grinder would urge in the instant matter, the election could occur by operation of law and unintentionally from the creditor's standpoint. It is, as Judge Wilner characterized it, a "technicality." * * *

The American Law Institute's position was almost immediately attacked by Professor Maurice H. Merrill in his article, Election Between Agent and Undisclosed Principal: Shall We Follow the Restatement?, 12 Neb.L.Bull. 100 *702 (1933).[FN7] He reviewed the decisions state by state. He recognized that what one considered to be the numerical majority rule depended very much on the interpretation given to the then existing decisions. His reading of the cases for their holdings found five jurisdictions supporting the Restatement position [FN8] and four in which satisfaction of the obligation was the decisive test. [FN9] If obiter dicta **462 were included in the examination, Merrill would add ten additional states as supporting election by judgment. On the other hand, if "those courts which treat the recovery of judgment against both principal and agent in the same action as a problem of procedure rather than of substance are properly to be aligned with the opponents of the Restatement rule," then Merrill would count eleven as favoring the Pennsylvania rule and four as favoring the Restatement rule. 12 Neb.L.Bull., supra, at 117. * * *

40 The principal who acts through an agent who appears to be a principal has a liability to the third party. So does the agent. Both the undisclosed principal and the agent know that either of them may be called upon to satisfy the creditor's demand. And if the creditor proceeds to judgment against the agent without knowledge of the **464 principal's identity, he may have judgment against both.

It is only in the class of cases where a final judgment is first taken against the principal, or against the agent with knowledge of the principal's identity, that the election rule comes into play. Cases falling into this class seemingly would not occur with frequency because the agent, if sued first, would give notice to the principal to defend in order to *707 bolster the agent's position to claim indemnification, and the case should ordinarily be defended on the merits. In cases where election can become an issue, we are satisfied that adherence to Codd will create more unjust results and generate more mischief than would a change in the law to a rule that looks to one satisfaction. Under the Codd rule, if the problem arises out of separate actions, the second suit will likely have been brought because the judgment in the first action has not been satisfied. If judgment in the second action is denied solely because the law considers an election to have taken place, a just claim has necessarily been thwarted. If the creditor proceeds in an action in which both principal and agent are joined, an interlocutory judgment against one defendant, e. g., by default or through summary judgment, can become a trap. It could leave the creditor with but one possibly uncollectible judgment, unless the election rule is further eroded, as some courts have done, by a requirement that an adversary call upon the plaintiff to elect before the first judgment is taken. The need to resort to this variation strongly suggests the dissatisfaction of courts with the basic election rule. If, in a joint action, the proceedings against each defendant are in tandem and the plaintiff is entitled, under the election rule, to a judgment against either, the decision requires knowledge of relative assets. This is not ordinarily a subject of pre-trial discovery and the choice involves the risk that the judgment opted for may prove to be uncollectible, while a solvent party may be discharged, because his liability is viewed as "alternative."

We deal here with a question of whether a judge made legal theory has become outmoded. This is traditionally a matter for a state court of highest resort. Modern practitioners have no difficulty in viewing the liability of the undisclosed principal to the creditor as founded in a policy of the law which looks to the reality that the undisclosed principal, for his business purposes, has authorized the contract through his agent, even though the creditor may have intended to form a contract only with the agent.

The rule of election first enunciated by this Court in Codd is overruled. We hold that a creditor who contracts with the *708 agent for an undisclosed principal does not obtain alternative liability, that he may proceed to judgment against both, but that he is limited to one satisfaction.

JUDGMENT OF THE COURT OF SPECIAL APPEALS VACATED. CASE REMANDED TO THAT COURT FOR THE ENTRY OF A JUDGMENT REMANDING THIS CASE TO THE CIRCUIT COURT FOR CHARLES COUNTY WITH DIRECTIONS TO ENTER JUDGMENTS CONSISTENT WITH THIS OPINION. COSTS TO BE PAID BY G. ELVIN GRINDER. 41 Insurance Co. of North America v. Miller 765 A.2d 587

INSURANCE COMPANY OF NORTH AMERICA et al. v. William R. MILLER, II, et al.

Jan. 11, 2001.

Argued before BELL, C.J., and ELDRIDGE, RAKER, WILNER, CATHELL, HARRELL and LAWRENCE F. RODOWSKY, (Retired, specially assigned), JJ.

CATHELL, Judge.

This case involves an analysis of the fiduciary duty that an agent owes to its principal. Appellant, Insurance Company of North America et al. (INA), [FN1] filed a Complaint in the Circuit Court for Baltimore County against William Ray Miller, II, appellee, and North American Risk Management, Inc. (NARM), [FN2] alleging several causes of action, including conversion, breach of fiduciary duty, and negligence arising out of Miller's knowledge of, and participation in, a premium diversion scheme. Appellant filed a Motion for Partial Summary Judgment for the breach of fiduciary duty claim against Mr. Miller, which was denied by the Circuit Court. [FN3]

FN1. Insurance Company of North America is one of numerous insurance companies that make up the CIGNA Property and Casualty Companies. The plaintiffs listed on the original complaint and collectively known as the CIGNA Companies were INA, Century Indemnity Company, CIGNA Fire Underwriters Insurance Company, CIGNA Insurance Company, CIGNA Property and Casualty Insurance Company, Indemnity Insurance Company of North America, Pacific Employers Insurance Company, and Bankers Standard Insurance Company.

FN2. NARM is an insurance agency and brokerage firm duly organized and existing under the laws of the State of Maryland with its principle place of business in Annapolis, Maryland. Appellee set up NARM in early 1997, when, as we discuss, infra, the previous agency with whom appellee was associated, Hickman Agency, ceased operations. Appellee is currently the President and Chief Executive Officer of NARM.

FN3. This was an ex contractu action based upon breaches of the agency agreement. It was alleged that the breaches of fiduciary duty constituted breaches of the agency contract. 42 When the case went to trial on November 30, 1999, appellant proceeded against appellee on the claims for breach of fiduciary duty and negligence. After the evidentiary phase of the bench trial was concluded, the trial judge entered judgment in favor of NARM on all claims, and entered judgment in favor of appellee on the claims for conversion and "suit on account." Then the Circuit Court, prior to closing arguments, requested that the parties prepare trial memoranda on the relevant law concerning the fiduciary duty that an agent owes to a principal. Closing arguments took place on December 10, 1999, after which the Circuit Court entered judgment in favor of appellee on all remaining counts. Appellant filed a timely notice of appeal to the Court of Special Appeals. On our own initiative, we granted review prior to argument in the Court of Special Appeals. Appellant presents two questions to this Court:

1. Did the trial court err by ruling that Miller did not breach any fiduciary duties and was not negligent by obtaining premium financing for an insurance premium of an INA insured, and using the funds to pay another premium financing company, instead of paying the funds directly to INA for the premium due? 2. Did the trial court err by ruling that Miller was not an agent of INA for the purpose of collecting premiums and forwarding premiums to INA, and, as a result, did not breach any fiduciary duties by failing to do so?

We answer both questions in the affirmative. Under the circumstances here present, appellee was an agent of INA for the purpose of collecting and forwarding premiums, which imposed upon him a fiduciary duty to INA, which he breached by failing to forward to INA the relevant premiums and/or by not notifying INA, or timely sharing with INA his knowledge, that the premiums at issue were being improperly diverted. Additionally, appellee breached his fiduciary duty to INA when he actively participated in obtaining premium financing for an insurance premium of an INA insured, and used the funds to return to another premium financing company monies due it on a completely unrelated transaction, instead of causing the funds to be remitted directly to INA for the premium due it. We also hold that appellee's actions in the double financing scheme, at a minimum, could constitute negligence. Accordingly, we reverse the ruling of the Circuit Court for Baltimore County and shall remand the case to that court for further proceedings consistent with this opinion.

I. Facts

Appellee has been a licensed insurance agent in the State of Maryland since 1992. Appellee worked at J.L. Hickman & Company, Inc., [FN4] a Texas-based insurance brokerage, from approximately 1993 to early 1997, when the Hickman Agency went out of business. The Hickman Agency's primary line of business was writing coverage for the funeral industry. At some point prior to August 1995, appellee became the Chief Operating Officer and Executive Vice President of the Hickman Agency, and held himself out as such. He was paid a salary as an employee of the Hickman Agency and earned commissions on insurance sales generated by himself and the Hickman Agency.

FN4. John L. Hickman, an insurance agent with a Maryland license, was the owner, President, and Chief Executive Officer of J.L. Hickman & Company, Inc. J.L. Hickman 43 & Company, Inc. was known by several other names, including IFA Insurance Services and American Funeral Insurance Group (AFIG). For ease of reference, we will refer to the entity as the "Hickman Agency" throughout this opinion.

Effective August 1, 1995, the Hickman Agency entered into a CIGNA Agency Company Agreement with INA. This agreement was signed by appellee as Chief Operating Officer and Executive Vice President of the Hickman Agency. The agreement created a principal-agent relationship between INA and the Hickman Agency, respectively, from August 1, 1995 until the Hickman Agency ceased operations in early 1997. The agreement provided:

1 Our Relationship a Authority. You will act as our agent for those lines of business and those territories in which you and we[ [FN5]] are both licensed and where we specifically authorize you to do business....

FN5. The Agreement provides that "you" refers to the Hickman Agency and "we" refers to the relevant CIGNA Companies. .... 2 Your Authority and Duties .... b Collection of Premiums. .... 3 All premiums, including return premiums, which you receive are our property. You will hold such premiums as a trustee for us. This trust relationship and our ownership of the premiums will not be affected by our books showing a creditor-debtor relationship, the amount of balances at stated periods or your retention of commissions. Unless we agree otherwise in writing, you must maintain premium monies in a separate bank account and not mingle such monies with your own funds.

On at least two separate occasions, Mr. Miller acknowledged that his personal relationship with INA was that of agent and principal. At trial, Mr. Miller, through counsel, stipulated that he was an appointed agent for INA from October 1995 through the Spring of 1997. Additionally, in a third-party action filed by appellee in the Circuit Court for Baltimore County against Utica Mutual Insurance Company, case number 03-C-97-007281, he again recognized the principal-agent relationship between INA and himself and that the provisions of the agreement applied to him individually.

INA has brought this complaint against appellee for his actions and involvement in a complex double financing scheme. According to Ms. Mannino's [FN6] testimony, the Hickman Agency had three bank accounts: Account Number 346 was a money market account; Account Number 80900 was referred to as a commission account; and Account Number 722 was a trust account to which premium trust monies were to be deposited so as to be available to pay premiums to insurance carriers. These accounts were not managed properly--as discussed, infra, the premium dollars, intentionally, were not held "in trust" at the agency.

FN6. Ms. Donna Mannino, an employee of the Hickman Agency, was hired by Mr. 44 Miller in 1994 as a customer service and account representative and eventually became the office manager and Assistant Vice-President.

The Hickman Agency and appellee [FN7] were required under Maryland insurance regulations and its agreement with the CIGNA Companies to hold premium dollars paid by an insured or a premium financing company in trust for INA. [ * * * ] On redirect examination, Mr. Miller acknowledged that it was a general practice that an insurance company would expect proceeds of a premium financing agreement to be paid directly to it, without being retained by the insurance agency. The Hickman Agency's cash flow management plan involved agents, including appellee, obtaining an insurance policy for a customer and setting up an installment payment plan for the premium due with the insurance company. The agent would not always inform the insured of the installment plan. At the same time, the agent, in this case appellee, would obtain financing of the same premium amount for the insured through a premium financing company.

FN7. In the case at bar, Miller, unlike insurance agents that have limited knowledge of the practices of a brokerage, had knowledge of, and actively participated in, the breaches of fiduciary duties that occurred.

Generally, the premium financing company would pay the full amount of the premium to the Hickman Agency, with the expectation that the full amount would be paid directly to the insurance company. However, under the scheme utilized by the Hickman Agency and known to appellee, the full amount received from the premium financing company was not immediately paid over to insurance companies, including INA. Instead, the Hickman Agency would deposit the premium payment into its own bank account, and only pay the insurance company the amount of the "installment" that the insurance company believed, as a result of information furnished by the agency, was due. The insured's premiums would generally be used to repay the premium financing company over a period of time. Apparently, neither the insureds, nor the premium financing companies, nor the insurer were aware of the scheme. [FN9]

FN9. The insured might pay the entire premium to Hickman or Hickman might cause the entire premium to be financed. In either event, Hickman would only remit to the insurance company installments of the premium, diverting the main portion of the premium to its own use. Apparently, eventually, it began utilizing financed premium sums of one policy to pay installments to premium financing companies in respect to previous premium financed policies. In other words, it appears to have been a modified insurance "Ponzi scheme."

The money that improperly remained with the Hickman Agency was moved with appellee's knowledge and sometimes with his active participation out of the trust account and was apparently used to pay other expenses within the Hickman Agency. This was true for premiums paid to the Hickman Agency on INA accounts as well as accounts of other insurance companies. In other words, the premiums were held "out-of-trust." By depositing the full amount of the insured's premium advanced by the premium financing company (or the insured) into its own bank account, the Hickman Agency had the benefit of having the money (or part of it) for its own use from the time the money was received until the money was needed to pay 45 installments to the insurance company. [FN10]

FN10. For example, if a premium financing company financed $1000.00 of a policy for an insured, and paid $1000.00 to the Hickman Agency for the premium, $1000.00 would be deposited into a Hickman Agency's bank account. At the same time, the insurance company, which was led to believe that the insured was paying a premium on an installment plan, requested payment from the Agency only for the first installment of $100.00. The Hickman Agency would pay the requested $100.00, leaving $900.00 remaining in the Agency's bank account for its own use. After the second installment was remitted, Hickman would have the use of $800.00, etc.

Appellee was aware of, and actively participated in, and was in charge of, several accounts that had this "double financing" scheme in place. The evidence presented on the record demonstrates that he was responsible for signing checks and sending premium payments to INA for "installments" that INA believed were due on numerous accounts. Mr. Miller admitted, during direct examination, that "it wouldn't be necessary for the insured to stretch out payments over time with an installment plan if they had an insurance premium financing plan in place...." Ms. Suzanne DiSanti, a financial coordinator for the CIGNA Companies, testified that no "rule or regulation or policy of the CIGNA Companies allow the use of premium funds for anything other than paying CIGNA's premiums as they are due[.]" She further testified that had CIGNA known of the double financing scheme, it would not have permitted it " [b]ecause a policy would never be put on installments if it was known to be premium financed." She continued, "if we find out that a policy is premium financed and have not been told by the agent or broker, we immediately notify the underwriting department so that they can contact the agent or broker and tell them that all monies have to be paid up front and that the policy is then put back on annual pay."

INA was not paid the premium for numerous insureds with policies bound through the Hickman Agency. After the Hickman Agency collapsed in 1997, Ms. Mannino sent letters to INA on behalf of several insureds to explain that the insureds had paid the premium for their policies, and that INA should not cancel their policies even though it had not received the premium payments. [FN13] At trial, appellant introduced two examples of installment payments by the Hickman Agency to INA for installments INA believed were due, based on the improper representations to INA that the policy premiums would be paid in installments. Appellee signed the checks payable to INA for these improper installment payments. The Hickman Agency collapsed shortly thereafter and its employees tendered their resignations in March 1997.

FN13. Additional INA insureds included: Wilson Financial Group, Shrine of Remembrance, Everett Derr and Anderson Funeral Home, Berge Pappas Smith Mortuary, Miles-Dameron Funeral Home, Fairhaven Realty Associates, Trousdale Enterprises, and South Valley Funeral Escorts.

Appellee admitted that by at least as early as the latter part of 1996, he was aware that the Agency was "out-of-trust" and of the double financing scheme. He did not advise the Maryland 46 Insurance Administration or INA that the Hickman Agency was out-of-trust and he participated in the scheme until at least the end of March 1997. Prior to Ms. DiSanti's testimony, the parties agreed that the amount of money owed to INA by the Hickman Agency was $597,850.00. Ms. DiSanti's report which contained this information was entered into evidence as plaintiff's exhibit 23. The trial court did not consider the issue of damages in its opinion.

II. Discussion

In an action tried without a jury, an appellate court "will review the case on both the law and the evidence. It will not set aside the judgment of the trial court on the evidence unless clearly erroneous, and will give due regard to the opportunity of the trial court to judge the credibility of the witnesses." Md. Rule 8-131(c). However, "[t]he clearly erroneous standard for appellate review in [Maryland Rule 8-131] section (c) ... does not apply to a trial court's determinations of legal questions or conclusions of law based on findings of fact." Heat & Power Corp. v. Air Products & Chem. Inc., 320 Md. 584, 591, 578 A.2d 1202, 1205 (1990). The determination of the existence of a principal-agent relationship is, generally, a question of fact. The evidence presented in this case, however, demonstrates that Mr. Miller (1) stipulated to the fact that he was an appointed agent of INA, and (2) asserted in court memoranda in a related court proceeding that he was an "appointed agent."

Although the trial court acknowledged this stipulation, it improperly limited the scope of his agency under the relevant Maryland law surrounding such principal-agent relationships.

A. Principal-Agent Relationship

"Agency is the fiduciary relation which results from the manifestation of consent by one person [the principal] to another [the agent] that the other shall act on his behalf and subject to his control and consent by the other so to act." Green v. H & R Block, Inc., 355 Md. 488, 503, 735 A.2d 1039, 1047 (1999) quoting restatement (Second) of Agency § 1 (1958); * * * Although such a relationship is not necessarily contractual in nature, it is always consensual, * * * and its creation is to be determined by the relations of the parties as they exist under their agreements or acts. * * * The ultimate question is of intent. * * *

The record of the case sub judice provides:

Q. Can you tell us whether Mr. Miller was an appointed agent by the CIGNA Companies? MR. CONTE:[ [FN14]] Objection.

FN14. At trial, Mr. Conte was counsel for appellee and Mr. Chason was counsel for appellant.

THE COURT: Is that issue in dispute? .... MR. CONTE: That is not in dispute. Objection withdrawn. .... THE COURT: The fact that he was an agent during the time period.... 47 MR. CHASON: As of October of 1995. If counsel will stipulate to that, we can move on. THE COURT: And continuing? MR. CHASON: And continuing into 1997. .... THE COURT: You're not disputing that Miller was an agent for the CIGNA group from 1995 through 1997, is that correct? MR. CONTE: Through--until May of '97. THE COURT: From what? MR. CONTE: May of '97. MR. CHASON: That's fine. May of 1997. THE COURT: That's good. MR. CHASON: We'll take as established.[ [FN15]]

FN15. See Utica Mutual Insurance Company v. Miller, 130 Md.App. 373, 389, 746 A.2d 935, 944, cert. denied, 359 Md. 31, 753 A.2d 3 (2000), where the Court of Special Appeals stated, "[Miller] was a general agent for [INA]." Additionally, in Reliance Insurance Company v. J.L. Hickman & Company, civil action number MJG-97-3194, a case pending in the United States District Court for the District of Maryland, before Judge Marvin J. Garbis, an implied agency relationship was found to have existed between Mr. Miller and another insurance company with which Mr. Miller did not even have an agency appointment at the time of the transactions alleged in that case, which also arose out of policies issued to Gunther's Leasing.

Through counsel, both during the trial of the case at bar, and in the related third-party action, appellee made a judicial admission that he was an agent arising from the Agreement between the Hickman Agency and CIGNA. Under Maryland law, there is a prima facie presumption that an attorney has the authority to bind his client by his actions related to litigation. As we have said:

[T]here is a prima facie presumption that an attorney has authority to bind his client by his actions relating to the conduct of litigation. * * * Cf. 2 Restatement (Second), Agency, § 284, comment e (1958). This is particularly true of stipulations or admissions made in the course of a trial. The appellee contends, however, that while a client may be bound by an admission by counsel in a pending case, he is not bound in subsequent litigation, and especially where a different issue is presented. We see no reason for the distinction. It is generally recognized that admissions made by an attorney may be available, for proper evidential purposes, in other litigation. See 4 Wigmore, Evidence, § 1063 (3d ed., 1940), McCormick, Evidence, § 244, p. 520 (1954), * * *

Secor v. Brown, 221 Md. 119, 123-24, 156 A.2d 225, 227 (1959).

Mr. Miller's acknowledgment, through counsel, both during the trial proceedings in the case sub judice, and in a third-party action filed by him against Utica Mutual Insurance Company, as to the significance of the Agreement to him individually, is germane to the issue at bar. As we have said, " '[a] man shall not be allowed to blow hot and cold, to claim at one time and deny at another.' " Van Royen v. Lacey, 266 Md. 649, 652, 296 A.2d 426, 428 (1972) 48 quoting Cave v. Mills, 7 H. & W. 927. Mr. Miller was an appointed agent of the CIGNA Companies, including INA.

B. Fiduciary Relationship

The issue before us, therefore, is not whether Mr. Miller was an agent of INA but what was the scope of his agency relationship. The trial court inappropriately limited the scope of Mr. Miller's agency relationship to that of an "insurance agent" who sold insurance and ruled that his role as an insurance agent did not obligate him to ensure that premiums were forwarded to INA. Under this theory, Mr. Miller only had a duty to sell insurance and contractually bind INA, but then did not have the corresponding duty to see to the remittance of premiums to INA for insurance coverage bound. [FN16]

FN16. As we have indicated, Mr. Miller did not lack knowledge of the events that were occurring, and was an active participant in the events constituting breaches of fiduciary duty. He was a stipulated agent of INA itself, not a mere employee of Hickman. The trial court, in any event, erroneously limited the scope of "insurance agents," who have knowledge of improprieties, as we note, infra.

The scope of Mr. Miller's agency is not limited by a description of " insurance agent." As we discussed, supra, he stipulated to the fact that he was an appointed agent of INA. This relationship is not somehow limited because he is an insurance agent, rather, it is a broader relationship than that which the trial court found.

Maryland Code (1995, 1997 Repl.Vol.), section 1-101(c) of the Insurance Article provides in relevant part:

(c) Agent.--(1) "Agent" means a person that, for compensation, solicits, procures, negotiates, or makes insurance contracts, including contracts for nonprofit health service plans, dental plan organizations, and health maintenance organizations, or the renewal or continuance of these insurance contracts for persons issuing the insurance contracts. (2) "Agent" does not include: (i) an individual who performs clerical, stenographic, or similar office duties while employed by an agent or insurer, including a clerical employee, other than a clerical employee of an insurer, who takes insurance information or receives premiums in the agent's office, if the employee's compensation does not vary with the number of applications or amount of premiums; (ii) a regular salaried officer or employee of an insurer who gives help to or for a qualified agent, if the officer or employee is not paid a commission or other compensation that depends directly on the amount of business obtained; or (iii) if not paid a commission, a person that obtains and forwards information for: 1. group insurance coverage; 2. enrolling individuals under group insurance coverage; or 3. issuing certificates under group insurance coverage. .... (g) Appointment.--"Appointment" means an agreement between an agent and insurer under 49 which the agent, for compensation, may solicit, procure, negotiate, or make policies issued by the insurer.[ [FN17]]

FN17. See also Maryland Code (1995, 1997 Repl.Vol.), section 10- 103(a) of the Insurance Article which provides: (a) Agents--In general.--Except as otherwise provided in this article, before a person acts as an agent in the State, the person must obtain: (1) a certificate of qualification in the kind or subdivision of insurance for which the person intends to act as an agent; and (2) an appointment from an insurer.

Appellee meets all of the criteria to be an appointed agent outlined above. Additionally, he does not meet any of the criteria set up in subsection 1- 101(c)(2) that would exempt him from status as an agent of INA. Specifically, section 1-101 clarifies that, under Maryland's Insurance Code, an appointed agent generally has all the responsibilities and duties typically bestowed upon any agent. That imposes upon him the duty to inform his principal of any improprieties of which he has knowledge and forbids his active participation in any such improper actions. The trial court erred in attempting to limit this relationship.

The trial court's reasoning also fails to acknowledge Mr. Miller's obligations under standard Maryland insurance regulations. It is clear under the Code of Maryland Regulations (COMAR), that keeping funds "in trust" is one of the duties of insurance agents. The Code of Maryland Regulations (COMAR) 31.03.03.01 provides:

A. Every insurance agent and broker acting as such in this State who does not have the express written consent of his or its principals to mingle premium monies with his or its personal funds shall hold the premium monies separate from other funds in accordance with this regulation. B. Agents and brokers who do not make prompt remittance to principals and assureds of the funds shall deposit them in one or more appropriately identified accounts in a bank or banks authorized to do business in this State or subject to jurisdiction of this State, from which withdrawals may not be made except as hereinafter specified (any such account is hereinafter referred to as a "premium account"). .... E. Withdrawals. (1) Withdrawals from a premium account may not be made other than for the following purposes: (a) Payment of premiums to principals. (b) Transfer to an operating account of bank interest, if the principals have consented to it in writing. (c) Transfer to an operating account of commissions either actual or average. If average commissions are used, the agent or broker shall maintain on file in his office at all times a letter from each principal stating the percentage of the average commission. (d) Withdrawal of voluntary deposits. (e) Payment of return deposits to assureds. (f) Payment of return premiums to assureds in the ordinary course of business when a written agreement with the principal authorizing this practice exists. 50 (2) However, a withdrawal may not be made if the balance remaining in the premium account thereafter is less than aggregate net premiums, return premiums, and deposits received but not remitted.

These provisions, and the terms of the 1995 agreement between CIGNA and Hickman, demonstrate that Mr. Miller's duties, as an appointed agent of INA, with knowledge of what was occurring, include the duty to make or insure the remittance of payments to INA and to keep premium funds in trust. His responsibilities were not merely limited to the selling of insurance.

The trial court relied on our analysis in Kann v. Kann, 344 Md. 689, 713, 690 A.2d 509, 521 (1997), where we said:

[W]e hold that there is no universal or omnibus tort for the redress of breach of fiduciary duty by any and all fiduciaries. This does not mean that there is no claim or cause of action available for breach of fiduciary duty. Our holding means that identifying a breach of fiduciary duty will be the beginning of the analysis, and not its conclusion. Counsel are required to identify the particular fiduciary relationship involved, identify how it was breached, consider the remedies available, and select those remedies appropriate to the client's problem.

Contrary to the trial court's ruling, we hold that appellant: (1) identified the particular principal-agent fiduciary relationship created in the case at bar; (2) identified that it was breached by appellee participating in the double financing scheme, not forwarding premiums, and not informing INA that premiums were out-of-trust; (3) considered the remedies available; and (4) selected those remedies appropriate to the client's problem.

We have recently had the opportunity to expound on the duties that an agent owes, generally, to any principal in Green v. H & R Block, Inc., 355 Md. 488, 517-19, 735 A.2d 1039, 1055-56 (1999):

The duties an agent owes to his or her principal are well established. An agent has "a duty to his principal to act solely for the benefit of the principal in all matters connected with his agency." restatement (Second) of Agency § 387 (1958). We have recognized the " 'universal principle in the law of agency, that the powers of the agent are to be exercised for the benefit of the principal only, and not of the agent or of third parties. A power to do all acts that the principal could do, or all acts of a certain description, for and in the name of the principal, is limited to the doing of them for the use and benefit of the principal only, as much as if it were so expressed.' " (Emphasis in original). King v. Bankerd, 303 Md. 98, 108-09, 492 A.2d 608, 613 (1985)(quoting Adams' Express Co. v. Trego, 35 Md. 47, 67 (1872)). Moreover, an agent is under a strict duty to avoid any conflict between his or her self- interest and that of the principal: " 'It is an elementary principle that the fundamental duties of an agent are loyalty to the interest of his principal and the need to avoid any conflict between that interest and his own self- interest.' " C-E-I-R, Inc. v. Computer Dynamics Corp., 229 Md. 357, 366, 183 A.2d 374, 379 (1962) (quoting Maryland Credit v. Hagerty, 216 Md. 83, 90, 139 A.2d 230, 233 (1958)). As Professor Mechem has observed: "It is the duty of the agent to conduct himself with the utmost loyalty and fidelity to the 51 interests of his principal, and not to place himself or voluntarily permit himself to be placed in a position where his own interests or those of any other person whom he has undertaken to represent may conflict with the interests of his principal." PHILIP MECHEM, MECHEM OUTLINES AGENCY § 500, at 345 (4th ed.1952).... One of the primary obligations of an agent to his or her principal is to disclose any information the principal may reasonably want to know. See Impala Platinum v. Impala Sales, 283 Md. 296, 324, 389 A.2d 887, 903 (1978)(quoting Herring v. Offutt, 266 Md. 593, 597, 295 A.2d 876, 879 (1972)) (recognizing duty of fiduciary "to make full disclosure of all known information that is significant and material to the affairs" of the fiduciary relationship); C-E-I- R, Inc., 229 Md. at 367, 183 A.2d at 379-80 ("[T]he rule is well established that an agent is under a duty to disclose to his [principal] any information concerning the agency which the [principal] would be likely to want to know."). The obligation to disclose is strongest when a principal has a conflicting interest in a transaction connected with the agency. See restatement (Second) of Agency § 389 (1958) ("Unless otherwise agreed, an agent is subject to a duty not to deal with his principal as an adverse party in a transaction connected with his agency without the principal's knowledge.") (emphasis added). An agent's failure to disclose information material to the agency thus constitutes a breach of the principal-agent relationship. Where an agent breaches a duty to the principal and profits from the breach, the principal may maintain an action to recover those profits for her or himself. Nagel v. Todd, 185 Md. 512, 517, 45 A.2d 326, 328 (1946) (An agent "cannot make a secret profit out of any transaction with his principal."); restatement (Second) of Agency § 388 (1958) ("[A]n agent who makes a profit in connection with transactions conducted by him on behalf of the principal is under a duty to give such profit to the principal.").... [Alterations in original.]

In the case sub judice, appellee stipulated that he was an agent of INA from 1995 until May 1997. The evidence is clear that he had knowledge of what was occurring and participated in part of the scheme. As an agent, he had a fiduciary duty to INA, which he breached. See id. at 504, 735 A.2d at 1048 (" 'An agent is a fiduciary with respect to matters within the scope of his agency.' ") quoting restatement (Second) of Agency § 13 (1958). restatement (Second) of AgencyY § 13 further provides:

Among the agent's fiduciary duties to the principal is the duty to account for profits arising out of the employment, the duty not to act as, or on account of, an adverse party without the principal's consent, the duty to not compete with the principal on his own account or for another in matters relating to the subject matter of the agency, and the duty to deal fairly with the principal in all transactions between them.

The federal courts and courts of our sister states are generally in accord. See generally Frey v. Fraser Yachts, 29 F.3d 1153, 1159 (7th Cir.1994) ( " 'The chief object of the principle [of agency] is not to compel restitution where actual fraud has been committed, or unjust advantage gained, but it is to prevent the agent from putting himself in a position in which to be honest must be a strain on him, and to elevate him to a position where he cannot be tempted to betray his principal.' " (quoting Quest v. Barge, 41 So.2d 158, 164 (1949))); Chemical Bank v. Security Pac. Nat'l Bank, 20 F.3d 375, 377 (9th Cir.1994) ("The very meaning of being an agent is assuming fiduciary duties to one's principal."); Burdett v. Miller, 957 F.2d 1375, 1381 (7th Cir.1992) ( "A fiduciary duty is the duty of an agent to treat his principal with the utmost candor, 52 rectitude, care, loyalty, and good faith--in fact to treat the principal as well as the agent would treat himself."); * * *

As an agent and a fiduciary, Mr. Miller had the duty to act with the utmost loyalty and fidelity towards his principal, INA, and was required by this fiduciary relationship to give the fullest measure of service in all matters pertaining to the agency. Instead of acting with loyalty and fidelity towards INA, Mr. Miller breached his fiduciary duty in numerous ways. First, he knew that premiums were not being remitted to INA, but failed to inform INA, and did not cause the remittance of premium payments to the insurer. Second, he participated in a double financing scheme where the Hickman Agency withheld premiums from INA based on the representation to INA that the premiums were to be paid in installments, when the Agency was already in possession of the entire premium amount either from insureds or from premium financing companies on behalf of insureds. He signed company checks to INA for installments due when in fact he had obtained the entire premiums from premium financing companies (or from insureds) and kept this plan concealed from INA--actions, which clearly demonstrate his awareness and participation in this scheme. Third, when INAC requested premium funds back from the Hickman Agency, and there was no money to pay the premiums because the money was out- of-trust, Mr. Miller directed the premium financing of another account (Gunther's Leasing worker's compensation policy) expressly for the purpose of repaying the premium due INAC on an unrelated policy. Fourth, consistently throughout this relationship, Mr. Miller, who had knowledge of what was occurring, failed to disclose his, and Hickman's, conflicting actions to INA. As we have said, "[i]t is an elementary principle that fundamental duties of an agent are loyalty to the interest of his principal and the need to avoid any conflict between that interest and his own self-interest." C-E-I-R, Inc. v. Computer Dynamics Corp., 229 Md. 357, 366, 183 A.2d 374, 379 (1962) (quoting Maryland Credit v. Hagerty, 216 Md. 83, 90, 139 A.2d 230, 233 (1958)). Mr. Miller placed himself in a position where INA's interests and his interests conflicted. As we discussed, supra, one of the primary obligations of an agent to a principal is to disclose any information the principal may reasonably want to know. It is safe to say that Mr. Miller's actions were not made with INA's best interests in mind and that INA would reasonably want to have known of his actions while he was acting as its agent.

We therefore hold that the trial court erred when it ruled that appellee was not an agent of INA for the purpose of collecting and forwarding premiums, and as a result did not breach any fiduciary duties by failing to do so. To the contrary, Miller had knowledge of what was happening and actively participated in a significant portion of the improper actions. In failing to share his knowledge with INA, and by participating in the scheme, he breached his fiduciary duty to appellant.

C. The Negligence Claim

Appellant also presents the issue of whether Mr. Miller could be found negligent for his actions surrounding the double financing scheme. While we hold that Mr. Miller knowingly and intentionally breached his fiduciary duty to INA, we shall also address the issue of negligence, which was presented in the appellant's brief. The trial court ruled that Mr. Miller, as an officer of the Hickman Agency, could not be held responsible or personally liable in tort for the actions of the Hickman Agency. The trial court's ruling was primarily based on Ferguson Trenching 53 Co. v. Kiehne, 329 Md. 169, 618 A.2d 735 (1993), where we held that generally, "[o]fficers and directors of a corporation generally are insulated from personal liability for the debts of the corporation." Id. at 175, 618 A.2d at 738. In Ferguson Trenching, we were construing Maryland's construction trust statute, Maryland Code (1974, 1988 Repl.Vol., 1992 Cum.Supp.), sections 9-201 through 9-204 of the Real Property Article. Because that holding was limited to the interpretation of a specific and unrelated statute, Ferguson Trenching is, generally, inapplicable to the case at bar.

We hold that, under certain circumstances, an officer of a corporation may be held personally liable for torts of the corporation in which the officer was personally involved. As we have said:

"The general rule is that the corporate officers or agents are personally liable for those torts which they personally commit, or which they inspire or participate in, even though performed in the name of an artificial body. Of course, participation in the tort is essential to liability. If the officer takes no part in the commission of the tort committed by the corporation, he is not personally liable therefor unless he specifically directed the particular act to be done, or participated or cooperated therein. It would seem, therefore, that an officer or director is not liable for torts of which he has no knowledge, or to which he has not consented. Thus, e.g., to make an officer of a corporation liable for the negligence of the corporation there must have been upon his part such a breach of duty as contributed to, or helped to bring about, the injury; he must have been a participant in the wrongful act."

Metromedia Co. v. WCBM Maryland, Inc., 327 Md. 514, 520, 610 A.2d 791, 794 (1992) (citations omitted).

Additionally, specific to insurance agents in a negligence claim, we have said: Like conventional agents, an insurance agent must exercise reasonable care and skill in performing his duties. And if such a representative fails to do so, he may become liable to those, including his principal, who are caused a loss by his failure to use standard care.

Bogley v. Middleton Tavern, Inc., 288 Md. 645, 650, 421 A.2d 571, 573 (1980) (a case involving, among other issues, the liability of an agent of a disclosed principal); see Jones v. Hyatt Ins. Agency, Inc., 356 Md. 639, 657, 741 A.2d 1099, 1108 (1999) ("We have held that ' "an insured agent must exercise reasonable care and skill in performing his duties" ' and that the agent may become liable in tort to the principal who suffers ' "a loss by [the agent's] failure to use standard care." ' ") (alteration in original); Popham v. State Farm, 333 Md. 136, 153, 634 A.2d 28, 36 (1993) ("The principal may sue the agent, either in contract or for negligence in the performance of the duty imposed by the contract."); see also Canatella v. Davis, 264 Md. 190, 206, 286 A.2d 122, 130 (1972); Lowitt & Harry Cohen Ins. Agency, Inc. v. Pearsall Chemical, 242 Md. 245, 253, 219 A.2d 67, 72 (1966).

To establish a valid cause of action in negligence, a plaintiff must prove the existence of four elements:

"(1) that the defendant was under a duty to protect the plaintiff from injury, (2) that the 54 defendant breached the duty, (3) that the plaintiff suffered actual injury or loss, and (4) that the loss or injury proximately resulted from the defendant's breach of the duty."

Baltimore Gas & Elect. Co. v. Flippo, 348 Md. 680, 700, 705 A.2d 1144, 1153-54 (1998) quoting Rosenblatt v. Exxon, 335 Md. 58, 76, 642 A.2d 180, 188 (1994). We have already established that appellee was under a duty, as an agent and a fiduciary, to act in INA's interest. He had a special relationship that, itself, imposed such a duty. By his failure to keep his principal informed and by his active participation in the double financing scheme, appellee breached the duty. Appellee, himself, actually and actively participated and directed at least a significant part of the events constituting the breaches in issue. He was, individually, a tortfeasor. INA suffered actual injury by not receiving premiums that should have been forwarded from the Hickman Agency trust account. This loss proximately resulted from appellee's breach of duty. We therefore hold that the trial court erred when it ruled that appellee was not negligent by obtaining premium financing for an insurance premium of an INA insured, and using the funds to pay another premium financing company, instead of paying the funds directly to INA for the premium due.

Conclusion

We hold that appellee was an agent of INA for the purpose of collecting and forwarding premiums, which imposed upon him a fiduciary duty to INA, which he personally and actively breached by failing to collect and forward such premiums to INA and by failing to convey to INA his knowledge that the premiums at issue were being diverted from INA to the use of the Hickman Agency. Additionally, appellee personally and actively breached his fiduciary duty to INA when he obtained premium financing for an insurance premium of an INA insured, and used the funds to pay another premium financing company, instead of paying the funds directly to INA for the premium due. We also hold that appellee's actions in the double financing scheme could constitute negligence. Accordingly, we reverse the ruling of the Circuit Court for Baltimore County and remand the case to that court for further proceedings consistent with this opinion (the assessment and rendering of judgment as to damages). [FN18]

FN18. As we have indicated, our holding in this case is based in substantial part on the fact that the agent had actual knowledge that his principal's interests were being improperly, adversely affected and failed to notify the principal, and is based, as well, on the fact that the agent actively participated in the scheme to divert premium funds from the principal.

JUDGMENT OF THE CIRCUIT COURT FOR BALTIMORE COUNTY REVERSED, AND CASE REMANDED TO THAT COURT FOR FURTHER PROCEEDINGS CONSISTENT WITH THIS OPINION; COSTS PAID FOR BY APPELLEE.

55 Southern Farm Bureau Cas. Ins. Co. v. Allen 388 F.2d 126 (5th Cir. 1967)

United States Court of Appeals Fifth Circuit.

SOUTHERN FARM BUREAU CASUALTY INSURANCE COMPANY, Appellant, v. Mrs. Cecil Harvey (Betty) ALLEN, A Feme Sole, et al., Appellees.

No. 23824.

Dec. 18, 1967.

WISDOM, Circuit Judge:

Southern Farm Bureau Casualty Insurance Company (Southern Farm) brings this diversity suit for a declaratory judgment that an automobile liability insurance policy it had issued to George Jezisek covering a 1960 model Chevrolet was void and that Southern Farm was relieved of all liability in connection with that policy.

In October 1963 Joe Jezisek, a minor having a record of one previous accident and two 'moving' violations, traded his 1957 Pontiac for a 1960 Chevrolet. The insurance on the Pontiac, issued by Southern Farm in his father's name, had expired. The bank holding the mortgage on the Chevrolet required that the automobile be insured. Joe applied to Southern Farm for coverage through a secretary at the Jack Wattenbarger Agency in Lamb County, Texas, an agency that had handled some insurance matters for Joe's brother George E. Jezisek, who lived in Milam County. The Lamb County office forwarded the application to the Southern Farm home office in Waco. After an investigation of the applicant, Southern Farm rejected Joe's application for insurance and returned his premium.

Both Joe and George Jezisek testified that on November 8, 1963, they spoke to Mr. Wattenbarger who suggested (or approved their suggestion) that they put title to the car in George's name for insurance purposes. This they did that same day. Wattenbarger, however, denied that the conversation ever took place.

Later in the day, the brothers returned to the agency office and applied for insurance in George's name through one of the secretaries in the office. A registration receipt, shown to the secretary at the time she took the application, revealed that title was transferred on that day 'for insurance purposes'. The application showed that the car would be kept in Spade, Texas, although George lived in Milam County, several hundred miles away. The Jeziseks did not divulge that Joe would be driving the car.

The secretary forwarded the policy to Milam, where George resided. The Milam County agent, who was not aware of the transfer of title, signed the policy and sent it to the Waco office. Since George Jezisek was already an approved insured, the main office, without further

56 investigation, issued the liability policy to George Jezisek as owner of the Chevrolet. George received the policy and delivered it to Joe, who made all premium payments. Three months later Joe Jezisek, while driving his Chevrolet, was in an accident that resulted in fatal injuries to Cecil H. Allen.

Upon investigating the ownership of the automobile involved in the accident and finding that Joe Jezisek was its exclusive owner and driver, Southern Farm notified all interested parties that the policy was void ab initio and tendered to George Jezisek the amount of the paid premiums.

The trial court rendered judgment against Southern Farm in favor of the Jeziseks and the deceased's widow and *129 children on the finding that Jack Wattenbarger, Southern Farm's agent, was aware of 'the expedients which ensued in quest of the insurance needed by Joe C. Jezisek.' The court held that this knowledge was imputed to Southern Farm. Southern Farm therefore was estopped from voiding the liability policy, and the declaratory judgment was denied. We reverse.

The first issue on appeal concerns the district court's finding of fact: 'The plaintiff's agent, Wattenbarger, was in close touch by taking part and being aware of the expedients which ensued in quest of the proper insurance needed by Joe C. Jezisek to make his required compliance with law.'

Southern Farm points out that Wattenbarger would receive no commission on the policy issued to George. Also, Wattenbarger testified that he did not meet with the Jeziseks on the day the application for insurance in George's name was sent in; in fact, he emphatically denied that he ever met George Jezisek until after the accident in February 1964. By the same token, both Jeziseks were positive about having discussed the transfer of title with Agent Wattenbarger before making application later that day. Thus, despite Wattenbarger's own testimony, there is evidence in the record that would support the court's finding of fact. Accordingly, we consider that this finding is not clearly erroneous.

It is undisputed that Wattenbarger did not actually transmit to Southern Farm any suggestion of the misrepresentation involved in the application, of which he was held to have had actual knowledge. Southern Farm, therefore, had no direct notice of them. The primary issue, then, is whether the knowledge of Wattenbarger is imputed to Southern Farm to estop it from voiding the policy on the basis of the misrepresentations in the application. The district court answered this issue in the affirmative; we do not.

We turn now to Texas law to ascertain the principles governing imputation of knowledge of an insurance agent to his principal, the insurance company. For if the agent's knowledge of the falseness of a statement of a material fact in the application of insurance [FN1] is not

57 imputable to the company, then under well-established authority the company may avoid liability under the policy. [FN2]

A. If Wattenbarger had no authority to bind Southern Farm by his activity as its agent in the issuance of the policy here in issue, then any knowledge he may have obtained concerning material misrepresentations in the application could not be imputed to the company.

The rule is well settled in this state that where, as the facts show in this case, an insurance agent with authority to solicit business, to make and forward the application for insurance, to collect and transmit premium, and to deliver the policy of insurance, notice to him of any matter affecting the risk involved, and required to be placed in the application, is notice to the insurer; and the insurer will not be permitted to deny liability on the policy on account of the neglect, failure, or fraud of the agent in not informing the insurer of such matters. Washington Nat. Ins. Co. v. Brock, Tex.Civ.App.1933, 60 S.W.2d 861, 862, and cases cited therein.

*131 B. 'The authorities are uniform to the effect that a principal is not affected by notice to an agent who is acting adversely to the interests of his principal, and either for his own benefit or for the benefit of a third party.

Plaintiff had alleged collusion between Weatherby and the assured and her husband to obtain the policy on false representations * * *. It is ordinarily true that a principal is affected with notice of such facts as come to the knowledge of his agent in the course of his business. When an agent, however, ceases to act for his principal in good faith and through collusion with another, desiring through him to cheat and defraud the principal, practically enters into the service of that other for the purpose of promoting the interest of that person, or the common interest of himself and that other, in fraud of his principal, then the person who so avails himself of the services of such an agent cannot claim that his act or his knowledge in reference to matters to which the fraudulent collusion relates are binding on the person intended to be defrauded. In such a case, the agent pro hac vice becomes the agent of the person he collusively serves. * * * If a person colludes with an agent to cheat the principal, the latter is not responsible for the acts or knowledge of the agent. The rule which charges the principal with what the agent knows is for the protection of innocent third persons, and not those who use the agent, to further their own frauds upon the principal. [FN6]

FN6. 'The general rule which imputes an agent's knowledge to the principal is well established. The underlying reason for it is that an innocent third party may properly presume the agent will perform his duty and report all facts which affect the principal's interest. But this general rule does not apply when the third party knows there is no foundation for the ordinary presumption,-- when he is acquainted with circumstances plainly indicating that the agent will not advise his principal.' Mutual Life Ins. Co. v. 58 Hilton-Green, 1916, 241 U.S. 613, 623, 36 S.Ct. 676, 680, 60 L.Ed. 1202, 1211; see Ohio Millers' Mutual Ins. Co. v. Artesia State Bank, 5 Cir. 1930, 39 F.2d 400, 402; 3 C.J.S. Agency ' 262, at 196 (1936).

Whenever, as here, the party contending for the validity of a policy has himself participated in perpetrating the fraud pursuant to which the policy was issued, Texas courts have consistently denied recovery. If he cannot prove that the insurer's agent knew of the scheme-- or knew of the false representations-- then he cannot show that the insurer has sufficient knowledge to estop it from voiding the policy. If he does prove complicity of the agent in the scheme and knowledge of the misrepresentations, he has proved too much: The agent then becomes involved in collusion against his principal and knowledge of the agent will not be imputed to his principle. we hold that the latter situation existed in this case.

*133 We reverse the judgment of the district court and render judgment for the plaintiff in this action, declaring Southern Farm not liable on the policy issued on the 1960 Chevrolet in the name of George Jezisek.

Sutton Mutual Ins. Co. v. Notre Dame Arena, Inc . 108 N.H. 437, 237 A.2d 676 (1968)

SUTTON MUTUAL INSURANCE COMPANY v. NOTRE DAME ARENA, INC.

No. 5624.

Supreme Court of New Hampshire.

Argued Sept. 6, 1967. Decided Jan. 30, 1968.

LAMPTRON, Justice.

On February 6, 1966 the defendant had rented its arena for a fee of $100 to the Berlin Maroons, a local hockey team, for an afternoon game with the Manchester Black Hawks. The defendant 'simply rent(s) the facilities of the Arena for the purpose of the game' and has its own manager for the restaurant and furnishes two ice-tenders. The Maroons hire their own ticket sellers as well as police officers to maintain order and supervise what is going on in the arena.

59 The defendant has 'nothing to do in which way either of the teams play hockey' and has 'no responsibilities in that respect.'

Florence Ploude who was a spectator at this game was struck by a puck. As a result of an announcement over the public address system she was treated by Dr. Couture who was present 'watching a hockey game.' He gave her a preliminary examination on the premises and sent her **678 to a Berlin hospital for x- rays which disclosed a fractured jaw. Dr. Couture was in no way connected with the defendant and never informed 'any member of the corporation or any member of the Board of Directors of Notre Dame Arena of this accident on the premises of the arena. * * * I don't know who the Board of Directors is.'

There is no evidence that Florence Plurde or her husband Joseph, the plaintiffs in the tort actions in question, ever notified the defendant of this accident.

A few days before service of the writs in those actions, which took place on May 25, 1966, an attorney telephoned J. L. Blais, *439 Esq., secretary of the defendant corporation, to advise him that suit would be brought against the defendant and that service was to be made on him. 'No further detailed information was given to me * * * with respect to the nature of the claim, the time of the accident or the identity of the claimants.' By letter dated the day after such service of writs on him. Attorney Blais notified plaintiff of these actions and at about the same time also notified the Chairman of defendant's Board of Directors Rev. LeClerc. Mr. Blais' letter was the first notice of this accident received by the plaintiff.

Condition 9 of plaintiff's policy reads as follows: 'Notice of Accident. Whenever an accident occurs written notice shall be given by or on behalf of the insured to the company or any of its authorized agents as soon as practicable. Such notice shall contain particulars sufficient to identify the insured and also reasonably obtainable information respecting the time, place and circumstances of the accident, the names and addresses of the injured and of available witnesses.'

The purpose of such a provision is to give the insurer an opportunity to make a timely investigation of the incident and to prepare an adequate defense on behalf of the insured. 13 Couch on Insurance 2d, s. 49:321, p. 804; Annot. 18 A.L.R.2d 443, 451. This is a reasonable and valid stipulation which must be complied with by the insured in order to obligate the insurer to defend and pay under the terms of its policy. Brown v. Security Fire and Indemnity Co., 244 F.Supp. 299, 304 (D.C.Va.1965). See Fitch Company v. Continental Insurance Company, 99 N.H. 1, 3, 104 A.2d 511. A material and substantial breach of this provision by the insured destroys its right to claim indemnity under the policy. Glens Falls &c. Co. v. Keliher, 88 N.H. 253, 258, 187 A. 473; American Employers Ins. Co. v. Sterling, 101 N.H. 434, 146 A.2d 265; Lumbermens Mutual Casualty Co. v. Stamell Constr. Co., 105 N.H. 28, 192 A.2d 616; 6 Williston on Contracts (3d ed.) ss. 812, 813.

'A policy requirement that notice of the accident be given 'as soon as practicable' is commonly considered to require notice as soon as is reasonably possible' (American Employers Ins. Co. v. Sterling, 101 N.H. 434, 437, 146 A.2d 265, 267), which is generally interpreted to call for notice to be given within a reasonable time in view of all the facts and circumstances of each 60 particular case. Farmers N.B. of Ephrata v. Emp. L.A. Corp., 414 Pa. 91, *440 93, 199 A.2d 272; Hendry v. Grange Mutual Casualty Co., 372 F.2d 222, 225 (5th Cir. 1967); Cinq-Mars v. Travelers Insurance Company, 218 A.2d 467, 471 (R.I.1966); 13 Couch on Insurance 2d, s. 49:328, p. 807; 8 Appleman, Insurance Law and Practice, s 4734, p. 22; 7 Am.Jur.2d, Automobile Insurance, s. 143, pp. 470, 471. See Duggan v. Travelers Indemnity Company, 265 F.Supp. 819, 821 (D.C.Mass.1967); Segal v. Aetna Casualty & Surety Co., 337 Mass. 185, 187, 188, 148 N.E.2d 659.

The timeliness of the notice must be determined in the light of the situation existing both when the accident occurred and when the notice was given. Young v. Travelers Ins. Co., 119 F.2d 877, 880. In deciding whether notice of the accident **679 was given within a reasonable time, the following circumstances, among others, are to be considered: the length of the delay in giving notice, the reasons for it, and the probable effect of the delay on the insurer. 8 Appleman, Insurance Law and Practice, s 4734, p. 29. Thus the absence, or extent, of prejudice to the insurer caused by the delay are factors to be considered in determining whether the insured has complied with the policy condition by giving notice within a reasonable time or has committed a substantial breach thereof by failing to give notice as soon as practicable. Glens Falls &c. Co. v. Keliher, 88 N.H. 253, 261, 187 A. 473; Pawtucket Mut. Ins. Co. v. Lebrecht, 104 N.H. 465, 471, 472, 190 A.2d 420; Brown v. Security Fire and Indemnity Co., 244 F.Supp. 299, 305 (D.C.Va.1965).

The burden is on the insured to prove that notice of the accident was given as soon as practicable as required by the policy condition. Travelers Ins. Co. v. Greenough, 88 N.H. 391, 393, 190 A. 129, 109 A.L.R. 1096; Standard &c. Ins. Co., v. Gore, 99 N.H. 277, 280, 109 A.2d 566; American Fidelity Co. v. Hotel Poultney, 118 Vt. 136, 138, 102 A.2d 322; Meierdierck v. Miller, 394 Pa. 484, 147 A.2d 406; 13 Couch on Insurance 2d, s. 49:330, p. 807. 'Unless the circumstances are such that no reasonable man could find that notice was given as soon as was reasonably possible, the question of whether the policy requirements as to notice have been met is a question of fact for the Trial Court.' Pawtucket Mut. Ins. Co. v. Lebrecht, supra, 470, 190 A.2d 424.

The Trial Court properly found that Father LeClerc, Chairman of the Board of Directors of defendant, J. L. Blais, its secretary, *441 and Father Cote, its treasurer, were not present at the arena at the time of the accident and had no knowledge whatever concerning the accident until or shortly prior to service of the writs on May 25, 1966.

Dr. Danais was president of the defendant corporation and his principal duty under the By-Laws was 'to preside at all meetings of the members of the corporation.' He testified that he arrived at the arena after the accident had taken place. Somebody told him someone had been hurt. He went upstairs and saw 'the lady' and learned she had been hit by a puck and that she had been treated by Dr. Couture. There was nothing 'obvious about her appearance.' 'She was sitting on the bench there with a heavy coat, and I didn't see any marks. I did not examine her. * * * She was sitting there, and I just walked away.' He did not know she had fractured her jaw until a few days before the hearing in these proceedings.

61 Since a corporation can act only through its officers, agents and employees, it is necessarily chargeable with the knowledge of its officers and agents acting within the scope of their authority. Sawyer v. Mid-Continent Petroleum Corporation, 236 F.2d 518, 520 (10th Cir.1956); 19 Am.Jur.2d, Corporations, s. 1263, p. 669. However a corporation is not affected by the knowledge of an officer who had no duty to act upon or report it. Allstate Insurance Co. v. Culver, 100 N.H. 16, 20, 117 A.2d 330; Rice v. Taylor, 220 Cal. 629, 637, 32 P.2d 381; Restatement (Second), Agency, s. 275, comment d; 2 Pomeroy, Equity Jurisprudence (5th ed.) s. 668. The Trial Court properly found that Dr. Danais attended this hockey game not in his capacity as president of the defendant but merely as one of many spectators. The evidence failed to establish a duty on him as president of the defendant corporation to report this accident to anyone. Knowledge which might come to him as a private person and beyond the range of his official duties is not notice to the corporation. Allstate Insurance Co. v. Culver, supra; 19 Am.Jur.2d, Corporations, s. 1263, p. 670.

Father Samson was assistant treasurer of defendant corporation, general manager and supervisor of activities at the arena. He was in New York on the day of the accident and returned to Berlin late **680 that evening. He testified that he first learned 'officially' of Mrs. Plourde's injury when he was told of the recipt of a letter *442 from the insurance company by Father LeClerc. He further testified being under the impression of having heard 'vaguely' about the accident but cannot say exactly when or from whom. 'Who it was, I don't know, or how badly she got hurt, I don't know.' It never 'came to my mind' to make an investigation to determine 'whether the lady was injured, who her physician was, and who treated her, etc.' 'If I had known of the name of this person and if I had known that this person was hurt, I would have reported to the insurance company.' 'I had nothing to report. I had no information, substantial information' before he was informed that suit had been brought. The evidence did not compel a finding that Father Samson had knowledge of the accident before suit or the duty to pursue and investigate the rumors which he was under the impression of having heard. The Trial Court could properly find him justifiably ignorant of the accident until suit was instituted by the plaintiffs. Hull v. Hartford Fire Insurance Company, 100 N.H. 387, 392, 128 A.2d 210. Cf. American Employers Ins. Co. v. Sterling, 101 N.H. 434, 146 A.2d 265; American Fidelity Co. v. Schemel, 103 N.H. 190, 168 A.2d 478; Employers Liability Assur. Corp. v. New Hampton School, 103 N.H. 185, 168 A.2d 119.

The Trial Court found 'that the defendant corporation, prior to May 26, 1966, had no knowledge or reliable data as to the fact of injury, name of the injured party and/or the existence of a potential claim resulting from the accident of February 6, 1966. The Court further finds that the defendant lacked knowledcge of the essential elements of the occurrence of February 6, 1966, until May 25, 1966, or shortly before, when its agent, Mr. Blais, received a call from counsel for the Plourdes. It is further found that this lack of knowledge was not the result of or attributable to any conduct and/or actions of the defendant. On the contrary, the extenuating and surrounding circumstances were such that reasonable excuse existed for the initial delay in notifying the plaintiff until such time as the fact of injury had been disclosed to the defendant by virtue of the above-referred call to its secretary. * * * After receipt of such notice, the defendant notified the plaintiff as soon as practicable (May 26, 1966).'

62 The Trial Court further found that: 'Under all the circumstances * * * the defendant reasonably complied with the terms of Condition 9 of the policy construed as a whole. * * * This *443 notice (of May 26, 1966) was seasonable and the prior delay justifiable under all the circumstances. The intervening delay of approximately three months and twenty days was not, on the state of the record, of such duration so as to prejudice the rights of the plaintiff.'

The Trial Court's findings were warranted by the evidence. We cannot say as a matter of law that on the totality of the circumstances duly found by the Trial Court no reasonable man could conclude that notice was given as soon as practicable as required by the policy. Pawtucket Mut. Ins. Co. v. Lebrecht, 10 4 N.H. 465, 190 A.2d 420. Cf. American Employers Ins. Co. v. Sterling, 101 N.H. 434, 146 A.2d 265; American Fidelity v. Schemel, 103 N.H. 190, 168 A.2d 478.

Exceptions overruled.

All concurred.

Georgia-Pacific Corp. v. Great Plains Bag Co . 614 F.2d 757 (Patent Appeals, 1980)

United States Court of Customs and Patent Appeals.

GEORGIA-PACIFIC CORP., Appellant, v. GREAT PLAINS BAG CO., Appellee.

Appeal No. 79-544.

Jan. 24, 1980.

BALDWIN, Judge. * * *

Background

Great Plains filed an application for registration of the mark for use on paper and plastic bags on January 23, 1970, alleging a first use of September 1, 1961. The registration was issued on June 8, 1971.

Georgia-Pacific petitioned for cancellation of the mark on July 11, 1973, on the grounds that it had been and is still engaged in the manufacture and sale in interstate commerce of a variety of forestry products including, specifically, paper bags and Kraft paper; it is owner of the 63 trademark G-P, which mark has been used extensively as a portion of its corporate logo and on its various goods long prior to Great Plains' first use in 1961; it is the owner of registrations for a number of marks containing the letters G-P for use on lumber *759 and plywood. Finally, Georgia-Pacific alleged that Great Plains' mark, as used on paper and plastic bags, so resembles its own mark as applied to its goods as to be likely to cause confusion, mistake or deception regarding the source of the goods.

Great Plains averred that Georgia-Pacific was barred from bringing the cancellation proceeding by reason of laches and estoppel. It argued that since the parties had engaged in various business dealings since 1962, including the sale of Kraft paper by Georgia-Pacific to Great Plains, Georgia-Pacific knew, or should have known, of its use of the mark in its corporate logo (said logo appearing on its bags, stationery and envelopes since 1961). Georgia-Pacific's failure to object to the use of the logo and the subsequent increase in its use results in Georgia- Pacific now being estopped from asserting a likelihood of confusion between the respective marks and from asserting that it would be damaged by this registration.

Board The board found that Georgia-Pacific's use of the designation G-P has been well known in the lumber industry since the late 1940's both as an identification of the corporate entity and a trade designation identifying its marketed products.

The board admitted into evidence a survey (conducted for use in another proceeding) which tended to show that the verbal letters G-P were recognized, both by sixty percent of a group of executives from various paper purchasing companies and additionally by twenty-five percent of a group of regular readers of the Wall Street Journal, as a term representing Georgia- Pacific. Great Plains objected to admission of the survey on the basis of hearsay since without the inclusion of the interview sheets and recorded responses, the accuracy of the survey could not be verified. The individuals who conducted and designed the survey were deposed and made available for cross-examination. The board concluded that the survey should be admitted for consideration of the probative value to be attached thereto. The survey was qualified to sustain a recognition of G-P with Georgia-Pacific in the paper industry.

The board indicated that it is well settled in trademark law that the defenses of laches and estoppel are based on the concept that the owner and prior user of a mark having actual or constructive notice of another party's use of the same or similar mark for like or similar goods must be persevering. He must not sit on those rights for an exorbitant length of time and allow the subsequent user to build up a business and good will associated with such mark before taking action against that use.

To prove the defense of laches one must make a showing that the party, against which the defense is asserted, had actual knowledge of trademark use by the party claiming the defense or at least a showing that it would have been inconceivable that the party charged with laches would have been unaware of the use of the mark. Loma Linda Food Co. v. Thomson & Taylor Spice Co., 279 F.2d 522, 47 CCPA 1071, 126 USPQ 261 (1960).

64 The board indicated that circumstantial evidence appeared to be overwhelming on the concept that Georgia-Pacific must have been aware of Great Plains' use of its logo containing the letters G-P.

The board detailed the evidence by Great Plains which would show the requisite knowledge. It pointed out that a vice-president of Georgia-Pacific visited the president of Great Plains to discuss a joint venture. A large corporate logo was present on a wall behind the receptionist's desk at the time of that visit. Numerous visits by salesmen and sales managers of Georgia-Pacific to two of Great Plains' locations were catalogued. Each salesman would have had to pass a large outside sign bearing Great Plains' G-P logo. Several sales of paper were made by Georgia-Pacific to Great Plains. Great Plains picked up the paper in trucks bearing the corporate logo, paid for it using checks using the corporate logo, and confirmed several of its telephone orders using purchase orders bearing the corporate logo.

*760 Georgia-Pacific argues that Great Plains has produced evidence showing only that lower echelon employees (clerks, bookkeepers, dock workers) might have seen Great Plains' usage of the mark. Since no employee specifically charged with policing trademark infringement matters saw the usage, a corporation as large as Georgia-Pacific should not be charged with such knowledge. The board concluded that notice to a corporation via its sales personnel constitutes sufficient notice for the support of the equitable defenses of laches. Alternatively, the absence of question by the sales force concerning that mark's usage was considered as evidence that no likelihood of confusion exists.

Finally, the board considered the parties' respective marks on paper bags. Great Plains' mark, it is said, being a distinctive design mark, requires some effort to discern the letters G-P. For that reason, the board found "considerable doubt" existed that a prospective purchaser would equate the two marks or even form an association between them.

The board therefore concluded that the differences in the marks were sufficient to make the question of likelihood of confusion reasonably debatable and therefore to give effect to Great Plains' equitable defenses. Georgia- Pacific was held guilty of laches and estopped from asserting that it is and will be damaged by Great Plains' registration.

OPINION

It must be remembered that Great Plains' trademark consists of highly stylized letters and is therefore in the gray region between pure design marks which cannot be vocalized and word marks which are clearly intended to be. In re Burndy, 300 F.2d 938, 49 CCPA 967, 133 USPQ 196 (1962). Even accepting the argument that the mark could be verbalized, such is not the end of the inquiry. Verbalization of the mark must be considered within the environs of the marketplace. The testimony of Mr. Naudain, vice-president of Georgia-Pacific, Mr. Pomerantz, former president of Great Plains, and Mr. Stearley, current president of Great Plains showed them to be in general agreement that purchasers in this market are of a fairly discriminating nature. 65 * * *

The record makes it quite clear that Georgia-Pacific was the first to use its mark G-P. The only evidence supporting the argument that the mark is famous appears to be the 1972 survey produced in conjunction with another matter. That survey only produced a discernible connection between the verbalized letters G-P and Georgia-Pacific in the paper industry. However, that is not the issue. The question to be resolved is the existence of a likelihood of confusion regarding the respective trademarks, not their verbalization. Even giving this survey all possible weight, it does not appear to show the mark to be so famous as to bridge the gap between the G-P and Great Plains' stylized mark and to create confusion.

In the case at hand, Great Plains has introduced significant circumstantial proof [FN2] that on a number of occasions salesmen from Georgia-Pacific were exposed to the corporate logo during the course of their duties in selling Kraft paper to Great Plains and knew that that paper was to be *763 used in the production of bags.[FN3] Georgia-Pacific argues that only its lower echelon personnel were said to have observed Great Plains' use of the mark. We agree that knowledge of mark usage gained by bookkeepers in receiving checks and dock workers in loading Great Plains' trucks should not normally be imputed to the corporation. Their duties are not of the type that would require sensitivity of the value of their employer's marks in the marketplace. However, salespeople produce the "stuff" of which a corporation's "good will" is made. Salespeople, if they are to be effective, must be present in the marketplace and cognizant of the various factors that effect present and future sales. Product "good will" is one such factor. A corporation which employs a professional salesperson who has knowledge of an offending trademark use will have imputed to it the knowledge of that employee. Dawn Donut v. Hart's Food Stores, 267 F.2d 358, 363, 121 USPQ 430, 434 (2d Cir. 1959).

Other evidence tending to show Georgia-Pacific's "corporate" awareness of Great Plains' use of the mark include Stearley's testimony [FN4] that Great Plains sold a significant number of multi-wall bags to Georgia-Pacific and that virtually all multi-wall bags produced by Great Plains had a logo imprinted thereon. In total, over thirty transactions (including nine sales of paper) took place between 1962 and 1969.

The totality of the evidence points to the existence of constructive knowledge by Georgia-Pacific of Great Plains' use of the mark.

It is well settled that one who charges estoppel by laches must also show that it suffered or will suffer detriment as a result of inaction by the party against which laches is charged. United States v. Alex Dussel Iron Works, 31 F.2d 535 (5th Cir. 1929). Great Plains has shown that sales of its goods under the logo in question have grown from $372,000 in 1961 to about 66 $28,000,000 in 1973. It is this extent of sales over a protracted length of time without complaint from Georgia-Pacific upon which Great Plains relied to its detriment. Any change in trademark status at this point would be to the prejudice of Great Plains.

Conclusion

In sum, we hold the likelihood of confusion between the marks as applied to their respective goods unlikely and further hold that Georgia- Pacific is estopped from asserting such likelihood. Therefore, we affirm the decision of the board.

AFFIRMED.

Lane Mtg. Co. v. Crenshaw 93 Cal.App. 411, 269 P. 672 (1928)

District Court of Appeal, First District, Division 1, California.

LANE MORTG. CO. v. CRENSHAW ET AL.

Civ. 6169. [FN*]

FN* Rehearing denied. Hearing denied by Supreme Court.

Aug. 3, 1928. Rehearing Denied Sept. 1, 1928. Hearing Denied by Supreme Court Oct. 1, 1928.

PARKER, Justice pro tem.

In this action plaintiff seeks injunctive relief to secure the benefits to which it alleges itself entitled under a certain written contract. As a part of the same action plaintiff asks the court to declare the legal rights and duties of the respective parties under the said contract.

The court below denied the injunctive relief sought and declined to enter any declaratory judgment.

The plaintiff appeals from the judgment of the lower court and from the order denying its motion for a new trial.

67 The case presents two main points. We are called upon to determine whether or not the contract about which the controversy centers confers upon plaintiff a power coupled with an interest, and, further, to determine the application of the sections of our Code providing for declaratory judgments. Without attempting at this point to make any determination of either question it is readily apparent that the application of the law in each of the issues must depend to a large extent upon the facts as disclosed. Therefore we must in some detail recite the record.

In September, 1921, certain parties, called for convenience the Stolls, were the owners of a lot or parcel of land in the city of Los Angeles located at the corner of Spring and Eighth streets in said city. In passing it might be added that this property was then of great value and since that time the value has been greatly enhanced. On September 1, 1921, the Stolls, as the owners of said lot, entered into a certain agreement of lease with a corporation known as San Joaquin Valley Hotel Corporation. The terms of the lease, as they are material to the present controversy, are as follows: The period of the lease is 99 years from the date thereof and **674 the rental is $1,000 per month. The lessee, hereinafter referred to as Hotel Company, agrees to pay, in addition to the rent reserved, all rates, taxes, charges for revenue or otherwise, assessments and levies, general and special, ordinary and extraordinary, including *414 water rates, gas and electric light and power rates, lighting, street work, sanitary and safety requirements which may be charged, assessed, levied or imposed upon the land or any buildings or improvements placed thereon. It is further provided that the lands and improvements shall always be assessed in the name of the Stolls, lessors, providing such manner of assessment is permitted under the laws relating thereto. The receipts for taxes paid must be delivered to the lessors at least five days before the date whereon taxes become delinquent. The Hotel Company further agrees to commence the erection of a building on or before one year from date of possession, and to erect, furnish and complete the same with reasonable diligence at its own cost and expense, and in any event to have the same completed and ready for occupancy on or before September 1, 1926, fully paid for and free from all liens, compensation claims, or other construction claims liable to ripen into any lien on said premises; provided, however, that the obligation of the Hotel Company to complete the said building at its own cost and free from liens shall not be construed as to prevent the Hotel Company from mortgaging or otherwise hypothecating its interest in this lease or its interest in the demised premises for the purpose of obtaining money with which to pay for the erection of said building, nor shall it prevent the erection of said building in accordance with the terms of the lease by a subtenant of the Hotel Company. The building to be constructed on the property shall cover substantially the entire lot; shall be a class A reinforced concrete or steel structure, as the term "class A" is defined by the ordinances of the city of Los Angeles. It shall be a loft building with at least twelve stories and a finished basement, and shall actually cost and be reasonably worth when constructed not less than $250,000, and constructed in every respect in accordance with all laws and regulations affecting such construction in force at the time and during the construction. The Hotel Company further agrees that it will keep insured in standard solvent fire insurance companies, approved as such by the lessors, during the demised term, any and all buildings or improvements that may be built or placed upon the premises to an amount of not less than 70 *415 per cent. of the cost of said buildings or improvements, and if the Hotel Company erects a building on said premises fully complying with the requirements of what is known as a class A fireproof building, then said insurance shall not be less than 40 per cent. of the cost of said building. All policies of insurance are to be issued to both parties, as their interest may appear, and the policies themselves deposited with the Los Angeles Trust & Savings 68 Bank (hereby designated as trustee) for the purposes following, to wit: The same to be held by the trustee as additional security for the rent and the rebuilding, in the case of destruction. The Hotel Company agrees that in the event of the substantially total destruction of said premises by fire on or before September 1, A. D. 2017, immediately upon the payment of the insurance moneys received to the trustee, the Hotel Company will within 30 days thereafter advance and pay to the trustee the difference between the amount of insurance received and the sum of $250,000, which said latter sum is to constitute a trust fund for the payment of the rents under the lease as well as the rebuilding of the premises. All and every sum or sums of money which shall be received by the Hotel Company from insurance upon the building, except so much thereof as must be applied to the payment of rent due and to accrue, shall be laid out and expended by it in rebuilding or repairing said building, and in case the Hotel Company shall not have advanced the funds necessary to bring said insurance moneys up to $250,000, if said destruction occurs prior to September 1, A. D. 2017, or shall fail to restore or repair such building at the time and in the manner specified, then it shall be lawful for the lessors to declare such term ended, and the buildings on the premises shall at once be forfeited to the lessors, and any insurance money remaining in the hands of the trustee shall be paid to lessors. In case the Hotel Company neglects to insure and keep insured the buildings and improvements then the lessors may at their election procure the insurance and add the amount of the premiums to the installment of rent next due with interest at 7 per cent. per annum. The Hotel Company further agrees that the premises and building or buildings which may at any time be thereon shall be used by the lessee only and exclusively for proper *416 and legitimate purposes. And it is expressly covenanted between the parties that the Hotel Company will not use or consent to the use in any manner whatsoever of the demised premises, or any buildings or improvements thereon, nor any portion thereof, for any purpose calculated to injure the said premises or the neighboring property, nor for any purpose or use in violation of federal or state laws or ordinances of the city of Los Angeles, or for any unlawful purpose whatsoever, or for any trade, business, occupation or vocation whatever which may in anywise be unlawful. And the Hotel Company will at its own costs and charges keep the buildings, sidewalks, steps and excavations under the sidewalks in good, safe and secure condition, and will from time to time at its own expense make all structural alterations, changes, or repairs which may be **675 by law required in connection with the use, or by reason of any use to which said building is put, or by reason of its maintenance.

It is agreed that upon conditions not necessary to enumerate the lease may be assigned, and the agreement gives notice that any assignment not in strict conformity with the provisions thereof shall be null and void, and provided further that the assignee shall take subject to all conditions, covenants, agreements, and obligations to be performed by the Hotel Company. It is agreed, covenanted, and understood between the parties thereto that in case at any time default shall be made by the Hotel Company in the payment of any rent provided for upon the day the same becomes due or payable, and such default shall continue 30 days after written notice to the Hotel Company, or in case at any time default shall be made by the lessee in payment of any taxes, charges, or assessments levied or assessed against said property, and such default shall continue for 30 days after notice thereof in writing by the lessors to the Hotel Company, then in any or either event it shall be immediately lawful for the lessors at their election to declare said demised term at an end and enter into said demised premises and the buildings or improvements situated thereon or any part thereof, and, with process of law, to re-enter and remove all persons therefrom. 69 Thereafter follow provisions granting the right of re-entry on failure of Hotel Company to keep the buildings insured, *417 and providing further that such default may be cured by full compliance with these terms within six months after re-entry following default.

It is mutually covenanted and agreed that the various rights, powers, options, elections, appointments, and remedies of the lessors contained in the lease shall be construed as cumulative and no one of them as exclusive of the other or exclusive of any rights or priorities allowed by law.

This agreement and lease was duly acknowledged by the parties executing the same, being all of the parties thereto, and was recorded in the official records of Los Angeles county on November 29, 1921.

It will be readily observed that the main scheme of this lease and agreement was to improve the land by the erection of a building appropriate to the location of the lot.

On December 31, 1921, the Hotel Company made and entered into a lease and agreement with Lane Mortgage Company, a corporation, plaintiff herein. For identification this corporation will hereinafter be referred to as the Lane Company. This agreement recites the execution of the lease between Stolls and the Hotel Company, and recites further the obligation of the Hotel Company to erect a building, and also that the Hotel Company is about to commence the construction of the building in accordance with the terms of the lease. The agreement then specifically states as follows: "Whereas, said lease is valuable to the San Joaquin Valley Hotel Company, party of the first part herein, and was procured for it by the Lane Mortgage Company, party of the second part herein, and said last named company has agreed to finance the construction of said building by loaning to the party of the first part the sum of $250,000 for the purpose of erecting said building, taking as security certain bonds secured by deed of trust thereon: Now, therefore, in consideration of the premises and the procurement of the lease aforesaid and the financing of said building as aforesaid, and as part of one and the same transaction, and in further consideration of the sum of $10, the said party of the first part does hereby lease and let to the party of the second part, its successors and assigns, the entire second floor of the building to be erected on the premises above described; to have and to hold said second floor of said building for the term of 20 years *418 commencing on October 1, 1922, or from the date of the completion of said building if the same is not fully completed on said date, without further payment of rent for said term." Then follow the terms and conditions upon which the lease is given, made, and executed, viz.: (1) The second floor shall be completely finished by Hotel Company, including hall partitions, toilets, janitor rooms, lighting fixtures, etc. (2) Hotel Company during term of lease shall furnish without charge during term of lease elevator service, water, and heat. 70 (3) That no part of said building shall be leased or rented for manufacturing or other purposes during said term that will be a detriment to a high-class loft building in the financial district. (4) That tenants occupying other portions of said building during the term of this lease shall have no advertising privilege except from their names on the directory of the building and lettering on the windows, such signs and lettering to be approved by Lane Company. (5) The Hotel Company will keep the building in first-class repair and condition at its own expense, including all plumbing. (6) Lane Company to make any desirable changes on second floor and install vaults, fixtures, etc., with right to remove the same. (7) Lane Company will not permit improper use of building or use that will disturb or injure other tenants. (8) Provides for rights in case of destruction of building. (9) Provides for month to month tenancy upon holding over after expiration of term. The agreement and lease then further provides: "For the consideration aforesaid and as part of the same transaction said Hotel Company does hereby appoint and employ said Lane Mortgage Company its sole and exclusive agent **676 for the management of said building so to be erected from the completion of the same to the 1st day of October, 1942, with full power and authority to collect all rentals thereon and pay all operating expense, taxes, insurance, ground rental, interest on bonds and bonds as they mature out of the money collected, and procure or write all fire and earthquake *419 insurance agreed to be carried by the Hotel Company, and the Hotel Company agrees to carry insurance of each of said classes amounting to at least $250,000 each for the protection of the Company and the bondholders, and the Hotel Company agreed to pay the Lane Company for such services a commission of 5 per cent. of gross rentals and the regular brokerage paid insurance agents, it being understood and agreed that the agency and employment aforesaid shall be irrevocable during the time aforesaid except for willful misconduct on the part of said party of the second part, and that all supervision and agency of the Lane Company shall terminate on October 1, 1942, unless any of the bonds above referred to purchased by the said Lane Company shall be outstanding and unpaid on said date, then such agency shall remain in full force and effect until all of said bonds are paid, at which time it shall terminate and end, provided, however, that at any time during the term of the lease the Lane Company may surrender its right to manage the building and to act as agent of the Hotel Company by serving a thirty-day written notice on the Hotel Company of its election to terminate at least thirty days prior to the actual termination thereof, and said agency shall terminate and end at the time designated in the notice without in anywise interfering with or modifying the leasehold interest of the party of the second 71 part. It is further agreed as a part of the consideration aforesaid, the building to be erected shall be known as Lane Mortgage Building until October 1, 1942, and the Lane Company may maintain signs on the building displaying the name, and may at its option change the name. "The Lane Company shall render to the Hotel Company a complete report and statement of leases made, insurance placed, rents collected and disbursements at least once each month, and account for and pay to Hotel Company all moneys due it, and all leases shall be to such tenants and upon such terms as shall first be approved in writing by the Hotel Company. The ordinary expense of collecting the rents shall be borne by Lane Company, provided that if any litigation is necessary to collect rentals or enforce payment of insurance, or any other cost or expense occurs in making any such collections, the same shall be paid by the Hotel Company."

*420 This agreement, duly executed and acknowledged by the parties thereto, was recorded in the official records of Los Angeles county on January 13, 1922. Thereafter the Hotel Company proceeded with the construction of the building and the same was practically completed by it on December 2, 1922. On this last-mentioned date the Hotel Company by a written instrument assigned to Crenshaw and Smailes, defendants herein, the lease and the building on the property. This assignment was made pursuant to and in compliance with the provisions of the original lease from the Stolls to the Hotel Company. No question is raised concerning this assignment as far as it operates to divest the Hotel Company of all interest in the subject-matter of the present action. This assignment was expressly subject to a lease of the entire second floor in favor of Lane Mortgage Company for 20 years at a total rental of $10. It may be added that a number of other subleases were likewise included with the Lane Company lease and running to various persons, firms and corporations. On the same date as this assignment the defendants Smailes and Crenshaw addressed, signed, and delivered to the Hotel Company a writing in the following words: "We understand that Lane Mortgage Company has an agreement with your company to manage and collect the rentals from the building on lot 11, block 51, Huber tract, and to receive a fee therefor of five (5) per cent. of the gross rental, and also the right to call said building 'The Lane Mortgage Building,' which agreement is for a period ending October 1, 1942, and we accept assignment and conveyance of the leasehold interest and said building with full knowledge of the existence of said contract and acquiesce therein." Thereafter Smailes and Crenshaw proceeded with the completion of the building, and the same was ready for occupancy in January, 1923, at which time the various tenants, including Lane Company, entered into possession of the portions thereof leased to them. The total cost of the building was in excess of $385,000, and the court below found that the lease and buildings were of a fair market value of $1,000,000.

*421 We have then the building completed. The defendants Smailes and Crenshaw own the building and the lease, and the plaintiff Lane Company holding the second floor under its lease from the Hotel Company, and managing the building, collecting the rents, and exercising the 72 powers and rights granted to it under the agreement with and lease from the Hotel Company. Thus prefaced with a detail necessary to a complete understanding of the situation, we come to the present controversy.

The plaintiff Lane Company, in its complaint, sets up all of the facts as hereinbefore stated with additional allegations. Plaintiff alleges that it negotiated the lease between Stolls and the Hotel Company, and in sundry ways aided and assisted the Hotel Company in obtaining the lease and in the construction of the building, and for these and various other considerations received the lease and agreement between Lane Company and the Hotel Company. Generally, the gravamen of plaintiff's complaint is that soon after it took possession and assumed the management of the building the defendants Crenshaw and Smailes plotted and conspired to disregard, violate, and hold for naught plaintiff's contract. Many allegations of specific acts follow. Summed up, plaintiff alleges that defendants **677 refuse plaintiff the management of the building; that they collect the rents themselves, employ janitors and other help, assume to themselves the placing of insurance and the payment of taxes and ground rent. Likewise does plaintiff complain that defendants have ignored its right to have the building known as Lane Mortgage Building. Sufficient allegations appear to charge a complete disregard of plaintiff's claim to manage the building, collect rentals, employ help, procure insurance, etc. Plaintiff further alleges acts on the part of said defendants which are an interference with its right to the enjoyment and occupancy of the second floor of said building. Plaintiff then prays that defendants be enjoined from doing any and all of the acts complained of, and then follows this prayer: "Plaintiff further prays that the court declare the rights and duties of plaintiff and defendants in and under said instrument and agreement of December 31, 1921, and the legal rights and duties of the respective parties to this action under that contract and in the controversy disclosed by this complaint; and determine that the proper *422 construction of the said instrument and agreement requires the granting of the relief herein prayed for by plaintiff and that the plaintiff is entitled to the remedies it claims in this action."

The defendants Crenshaw and Smailes by way of answer admitted taking over the management of the building, paying taxes and ground rent, procuring insurance, etc.; in fact, contend that the right and power given plaintiff in this behalf is a mere naked agency revocable by the defendants at their pleasure. Defendants, however, deny any present or intended interference with the plaintiff's right to possession of the second floor for the 20-year term free of rental. They further allege that plaintiff has failed to properly manage the building and has been guilty of willful misconduct. They allege their full compliance with the terms of the original ground lease from Stolls to the Hotel Company, and deny any interference on their part with the right of plaintiff to have the building known as and called Lane Mortgage Building. They allege further that plaintiff's right to manage the building and collect rentals, etc., was solely to secure to it the payment of a bond issue on the building, and allege further the payment of all sums due under the issue. Defendants affirmatively allege that the contract between Hotel Company and plaintiff, in so far as the agency features are involved, was without consideration, and further plead that the consideration supporting the leasehold interest being wholly as payment or bonus for a loan was usurious. 73 After a trial upon the issues the court below made its findings of fact and entered judgment denying plaintiff any injunctive relief, and declining to enter or make any declaration of the rights of the respective parties under the Hotel Company lease to plaintiff. It will be unnecessary to detail all of the trial court's findings, but sufficient thereof may be given to amplify the respective contentions.

The court found as a fact and likewise drew its conclusion of law that the agency in favor of plaintiff set forth in said contract of December 31, 1921 (being the contract and lease agreement between the Hotel Company and Lane Company), is not coupled with any interest that plaintiff has or claims in the Lane Mortgage Building.

*423 The trial court made another finding to the effect that the attention of the court had been called to the fact that there is another action pending in the superior court of the state of California, in and for the county of Los Angeles, by and between the same parties to the present action, wherein issue is raised as to the true consideration for said contract of December 31, 1921, and the court, decreeing a finding of fact on that issue not necessary or material for a decision herein, makes no finding of fact as to the true consideration for said contract or as to whether the consideration recited in said contract of December 31, 1921, is or was the true consideration therefor.

Still further, the court finds: "That the agency created in favor of plaintiff under the contract of December 31, 1921, to manage said Lane Mortgage Building was not given or entered into for the purpose of protecting any interest plaintiff now has or claims to have in said building, and was not given for any purpose other than the protection of the indebtedness evidenced by said $200,000 (two hundred thousand dollars) bond issue made by the Hotel Company and referred to in the agreement, and which said bond issue was fully paid and discharged on or about April 1, 1923; that the termination of plaintiff's agency for the management of said building does not and will not injure, depreciate or in anywise affect any interest or interests which plaintiff has or claims to have in said building."

It may be noted-of which more hereinafter-that the court likewise declined to find upon the issue as to whether or not Lane Company had been guilty of willful misconduct, upon the expressed ground that the issue was not urged- practically a finding that the issue had been abandoned. Indeed, at the trial it was stipulated as follows: That Lane Company did all the work necessary or incident to the management of the building or incident to which it was prevented from doing by Crenshaw and Smailes, without carrying out any question of how well it was done or that defendant (sic) was not guilty in some instances of misconduct, but the actual performance is admitted.

We think the case sufficiently outlined.

74 The question of consideration, in contracts of this kind, is an important matter, and a finding should have been made if issue were joined. Defendants alleged a complete *424 lack **678 of consideration, but offered not a single iota of evidence on the question. We think the court should have found that the consideration was as recited in the instrument. We are not holding that the defendants had the right to question the actual consideration, as that question is not before us. Defendants, as noted, offered no evidence on the subject, but base their contention upon a general argument by merely stating the claim that the instrument and agreement is unsupported by any consideration.

The facts in support of the agreement and its consideration appear as follows: The instrument being in writing imports a consideration, even without a recital thereof. The recitals in the instrument are conclusively presumed to be true as between the parties thereto or their successors in interest by a subsequent title (Code Civ. Proc. ' 1962). This conclusive presumption does not apply to the recital of the consideration. However, the presumption would apply to the recital that "said lease is valuable to the Hotel Company and was procured for it by the Lane Company, and said Lane Company has agreed to finance the construction of the building by loaning $200,000 to Hotel Company for the purpose of erecting said building." The further recital in said instrument that the said services and loan by Lane Company constituted the consideration for the lease and agency are not deemed conclusive under the Code section 1962, Code of Civil Procedure. However, section 1963, Code of Civil Procedure, provides that it is a satisfactory presumption, if uncontradicted, that there was a good and sufficient consideration for the written contract. Taking these two presumptions together, the latter being wholly uncontroverted, the inequality between the two is slight. With it being conclusive that the recital is true, and an almost equally strong presumption that the contract was supported by an adequate consideration, then a strong inference arises sufficient to constitute a prima facie showing that the presumed consideration was and is as stated in the instrument. Aside from this there is direct evidence on the subject. The president of the Hotel Company who conducted the negotiations testified that there was nothing compulsory about the deal. It was a matter of negotiation. Mr. Lane proposed doing certain things under certain conditions, and Hotel Company agreed to those conditions. *425 It was necessary to do all those things in order to get the deal-the loan and the lease. Throughout the general negotiations between Crenshaw and Smailes and the Hotel Company the former dealt with the property conceding the lease and agreement with the Lane Company, and this was deemed an incumbrance in determining the value of the property. There were in evidence letters written by Lane Company to defendants Crenshaw and Smailes stating the consideration to be as recited in the instrument, and no evidence of denial or lack of acquiescence on the part of said defendants.

On the subject of consideration reference may be had to 6 Cal. Jur. ' 132 et seq.

We conclude, therefore, that not only was it error to fail to find on the question of consideration, but also that on the face of the record the finding should have been that the true consideration was as recited in the instrument. If this were not true, nevertheless, even in the absence of a finding on what constituted the actual consideration, a presumption would still remain and stand as a fact when not controverted that there was a consideration and that it was adequate.

75 It would be an idle and vexatious requirement that a new trial should be ordered on account of this lack of a finding which the record compels. Section 4 3/4 , article 6, of the state Constitution, is designed to meet such a condition, and likewise the legislation adopted to effectuate the said constitutional provision, Code of Civil Procedure, ' 956a (as added by St. 1927, p. 583). Pursuant thereto we do find that the consideration supporting the agreement between Hotel Company and Lane Company was the consideration recited therein.

In passing it may be noted that the reason assigned by the trial court for refusing to make a finding was the pendency of another action between the parties. There is not a scrap of testimony, nor a statement of counsel, nor a suggestion of any sort in the record before us of or concerning any other litigation between the parties.

Summing up the entire transaction, then, between Hotel Company and Lane Company, it may be thus narrated: The Hotel Company located a lot of land in a most prominent and promising section of the city of Los Angeles which was standing unimproved. In order to get a lease on *426 the lot the Hotel Company secures the services of the Lane Company, disclosed herein to be investment bankers. The Lane Company secured for the Hotel Company a lease for 99 years upon the condition, among others, that a building costing not less than $250,000 be erected upon the premises. As a part of the same transaction the Hotel Company agrees to give Lane Company a lease, free of rent, for 20 years on the second floor of the building to be erected, and the Lane Company agrees, in addition to its services in securing the lease, to finance the construction of the building through a bond issue of $200,000. The lease from the owners to the Hotel Company contains many conditions and restrictions. A violation of or noncompliance with these works a forfeiture of the land lease and of the building if erected. Therefore it is most obvious that whatever value or worth attached to the Lane Company lease was conditional upon compliance with the terms of the land lease. If the Hotel Company defaulted in rental, or neglected to keep the **679 premises insured, or permitted through lack of management the character or repute of the building to become unsound, or allowed the building to be used for unlawful purposes, then the lease of Lane Company was valueless. Also, if the Hotel Company should tire of its bargain with Lane, and by connivance or collusion bring about an apparent forfeiture sufficient to cause even an arranged ouster, Lane Company were left with no recourse unless advised of the facts. The history of man's dealings with his fellow man, as revealed in the reported cases, indicate that the bare lease under the conditions might have lost its worth much sooner than the expiration of the fixed term. However, after negotiating for and agreeing upon a 20-year lease, weak with all of the pitfalls and possibilities incident to the tenure of the Hotel Company, it was specifically made a part of the one and same transaction that a power should be given the Lane Company whereby it could protect and render secure and valuable the lease agreed upon. The power so given was the sole and exclusive agency to manage the building to be erected, thus giving to Lane Company the ability to protect the lease against a forfeiture of the land lease by reason of the building or any portion being used for any purpose calculated to injure the premises, *427 or by reason of any unlawful use, or through the building becoming in a state of dilapidation or unsafety. Likewise embraced within such granted power was the right to collect rentals and apply the same to the extinguishment of the various obligations resting upon the Hotel Company under the land lease, including the procuring of insurance, a compliance with which was compulsory under penalty of forfeiture. The power thus given was declared by the trial court to be a mere naked power revocable at will by the Hotel Company or 76 its successors, and not a power coupled with an interest as the term is understood in the law relating to principal and agent. In this holding the trial court was in error.

It is most difficult to frame an all-embracing definition of a power coupled with an interest. Most of the authorities on the subject seem to concede that such a power is recognized by the law, and when found to exist in any given case it is not revocable at the will of the principal and even survives his death. The question ever present is as to when such a power exists, and what conditions must be shown to manifest its existence. Many of the authorities approach the subject as though it were a thesis, and treat it in such an academic way as to be confusing. Much is said concerning what is not a power coupled with an interest, with little attempt at exactness concerning what actually constitutes the same. Some confusion arises in applying the doctrine of the older cases for the reason that the law of agency has, like other legal doctrines, undergone some change throughout the years. This is particularly so with reference to the limitations of certain powers of agency and the erstwhile presumptions attaching. Likewise certain terms current years ago at the present writing convey meanings entirely different from the then general acceptation.

The attitude of the California courts is not doubtful. Each case is determined from its own facts and the conclusions reached by a consideration of the entire instrument creating the power in question. The law of California is most fully and carefully expounded in the case of Todd v. Superior Court, 181 Cal. 406, 184 P. 684, and the application of the law as therein announced demonstrates the error of the court below. In the Todd Case the Supreme *428 Court adopts the reasoning of the early case of Hunt v. Rousmanier, 8 Wheat. 174, 5 L. Ed. 589. In this latter case the opinion of the United States Supreme Court was written by Chief Justice Marshall, and has come down through the years, remaining today the leading and accepted announcement of the legal doctrine of a power coupled with an interest.

Concretely, a power is said to be coupled with an interest when the power forms part of a contract, and is a security for money or for the performance of any act which is deemed valuable, and is generally made irrevocable in terms, or, if not so, is deemed irrevocable in law. The Supreme Court in the Todd Case, supra, quotes approvingly from Hartley's Appeal, 53 Pa. 212, 91 Am. Dec. 207, as follows: "To impart an irrevocable quality to a power of attorney in the absence of any express stipulation, and as the result of legal principles alone, there must coexist with the power an interest in the thing or estate to be disposed of or managed under the power."

We think that there is hardly a case that can be made to which these principles could have a more direct and fitting application than the case at bar. The Lane Company has a 20-year lease in the entire second floor of the 12-story building which is the subject of the power. That this is an interest there can be no question. Union Trust Co. v. Reed, 213 Mass. 199, 99 N. E. 1093; Inyo Water Co. v. Jess, 161 Cal. 516, 119 P. 934; Walther v. Sierra Ry. Co., 141 Cal. 288, 74 P. 840; Payne v. Neuval, 155 Cal. 46, 49, 99 P. 476; Friedman v. Macy, 17 Cal. 226; Dahlberg v. Haeberle, 71 N. J. Law, 514, 59 A. 92; Brickill v. Atlas Assurance Co., 10 Cal. App. 17, 101 P. 16; 16 Am. & Eng. Ency. of Law (2d Ed.) 1102. The interest does not arise only upon the 77 execution of the power, as was the situation in Hunt v. Rousmanier, supra, or Todd v. Superior Court, supra. It is a live, active, valuable interest, coupled with the power to the extent that if the power did not exist the interest would be subject to destruction or forfeiture. The lease, as hereinbefore pointed **680 out, would be totally valueless in the absence of compliance with the provisions of the original land lease. The powers granted the Lane Company in their total amount to no more than placing in the hands of the company directly the means of *429 preserving its said interest. This manifestly constitutes such a power as Chief Justice Marshall refers to in Hunt v. Rousmanier, namely, a power forming part of the contract and security for the performance of an act deemed valuable. The power in the present case was expressly made irrevocable and expressly tied to the entire transaction in the creation of the leasehold interest. We would concede that if the Lane Company merely held an agency to collect rents and retain 5 per cent. commission the agency would be revocable. But the mere fact that, incidental to the execution of the coupled power, an additional interest is created in the proceeds thus derived in no sense impairs the coupling of the power and interest theretofore existing.

Respondents insist that the agency is a mere naked power revocable at will. Their first contention, if sustained, would settle the dispute at once. They approach the problem of the connection between the power and the interest in much the same manner as was employed in the difficulties surrounding the untying of the Gordian knot. They contend first that by considering the power as separate and distinct from the interest, and not essential thereto, we have a simple agency. They then apply the accepted rule that such an agency is not coupled with an interest and therefore recovable. This contention is already determined.

Next respondents contend that because the power may, at the option of the agent, be surrendered without affecting the leasehold interest, therefore the power and interest are not coupled sufficiently to meet the requirements of the rule. Arguendo, it could as well be determined that the insertion of this obviously cautionary provision would demonstrate the intended connection, and, recognizing the existence of the jointure, thus specified the saving of an interest which the loss of the coupled power might have destroyed. However, it is not necessary to argue the point. The security for the performance of an obligation may be voluntarily surrendered without impairing the said obligation, and the fact that the power and interest may at some time be severed by the voluntary act of Lane Company in no way alters the present connection between them as herein found to exist.

*430 Much is said by respondents on the point that the Lane Company was required to execute leases in the name of and subject to the approval of the lessors of the ground, the Hotel Company. Respondent argues that under the doctrine of the cases of Hunt v. Rousmanier, supra, and Todd v. Superior Court, supra, in order that a power may be coupled with an interest the agent must have the power to act in his own name. Such is not the doctrine of either case. As stated in the Todd Case: "It is well settled *** that in order to constitute an irrevocable power of attorney there must coexist with the power a beneficial interest *** which is enforceable in the name of the attorney in fact and will survive the constituent; or the power must be given as security for the *** performance of some act of value." 78 Here the beneficial interest is enforceable in the name of the agent, meaning, necessarily the interest which the agent has, and likewise is the power given as security.

In many of the decisions we find language somewhat confusing, more through an oddity of grammatical construction than otherwise. But the main principle to be kept in mind is that the entire doctrine under discussion pertains to and is a part of the relationship of principal and agent. If we discard the element of agency entirely, then there is no need for any rule as to when an agency is irrevocable. The paramount essential of agency is the representative capacity of the agent. If there is no principal, disclosed or undisclosed, there is no agency. Therefore, when respondents contend that the power must be one that the agent exercises as a principal, the argument becomes self-destructive.

Finally, on this subject, respondents urge the equities of the case. Little need be noted on this phase of the case. Respondents took over the property from the Hotel Company with full knowledge of the Lane Company lease and agency, and the evidence discloses that this Lane Company contract was considered and allowed for in determining the value of the Hotel Company's land lease and the price to be paid for the building. The record supports the statement that at all times the respondents had in mind the cancellation of the Lane Company agency, and from the very outset were determined to terminate the same. It seems the clearest equity *431 to protect the interest of Lane Company bought and paid for as against one who advisedly purchased with knowledge thereof. The Lane Company is bound under its contract to refrain from willful misconduct in the execution of its agency, and the court below found that the issue of willful misconduct had been abandoned at the trial, a conclusion from the fact that no evidence had been adduced on the part of the defendants on that issue.

Conceding then the nature of the agency, the next question presented is as to the remedy of injunction asked by plaintiff.

Respondents' contention that injunction does not lie is based chiefly on the assumption that the agency is not a power coupled with an interest. If the contrary is conceded **681 in conformity with the holding heretofore, little is left of respondents' theory on this branch of the case.

The early case of Posten v. Rassette, 5 Cal. 467, holds squarely that injunction is a proper remedy to prevent the revocation of an agency coupled with an interest. Throughout the years following this decision has never been questioned or disturbed. While the antiquity of this authority might be an argument against its present-day application, yet it is much more recent than the case of Hunt v. Rousmanier, the leading case today on the subject of powers coupled with interest.

Respondents argue that the contract in question is not capable of specific performance for the reason that it is a contract calling for personal services. Here again the basis of respondents' contention fails. It is unnecessary to here repeat what has preceded, but the views as hereinbefore set forth likewise determine this issue. While we do not hold that the contract in question is or could be specifically enforced, deeming that unnecessary to the decision, it is a settled rule of equity that the lack of this capability does not preclude a court from decreeing 79 injunctive relief. See California Jurisprudence, 14, ' 16 et seq., with authorities there cited. We hold that the powers conferred in the contract between Hotel Company and Lane Company are actual subsisting rights so connected with the property interests transferred as to entitle plaintiff to the relief prayed for.

*432 Respondents seem to concede that if the powers granted are not coupled with an interest, even then they would have no right to revoke excepting with a liability to compensate appellant for any damage ensuing. Respondents lay much stress on the distinction between the power to revoke and the right to revoke, but the authorities cited clearly indicate that where the agency is coupled with an interest the power to revoke does not remain in the principal. In Boehm v. Spreckels, 183 Cal. 239, 191 P. 5, it is said: "There is a distinction between the power to revoke and the right to revoke an agency. Except where the agent's power is coupled with an interest, the power to revoke always exists, but the right to revoke without liability for damages depends upon circumstances."

Respondents contend that they are not interfering with or in anywise disturbing the leasehold interest by terminating the agency, and on that theory argue that necessarily the subject-matter of the present action is practically confined to the personal services involved in the agency. As hereinbefore pointed out, the value of the lease and the continuation of the enjoyment of the estate therein conferred are so intimately interwoven with the granted power that this contention of respondents needs no further discussion.

Finally, respondents argue that they do not intend to permit the original land lease to lapse or any forfeiture to occur thereunder, and that all of the fears of plaintiff are groundless. In other words, the Lane Company is as much protected without the power as with it, and there is therefore no need for equitable interference. It may as well be argued that the lease itself should be canceled for the reason that respondents would in no event disturb the possession of appellant Lane Company. From the very first connection of Crenshaw and Smailes with the property nothing but trouble has followed. The testimony discloses discord from the very first, characterized by the exchange of personal insult and vituperation and culminating in actual physical encounter. The evidence justifies the conclusion that these defendants are convinced that their best interests lie in ridding themselves of every burden fastened on the premises by the Hotel Company agreement with Lane Company. In this condition of affairs the fears of Lane Company cannot *433 be said to be imaginary or groundless. The continued forbearance of appellant would but invite further aggression.

The only remaining question presented is on the scope of sections 1060 to 1062, inclusive, of the Code of Civil Procedure, dealing with declaratory relief. The court below declined to declare the rights of the parties under the contract in question, obviously deeming such declaration unnecessary. The constitutionality of those sections having been determined, there is no need to reopen that question. Blakeslee v. Wilson, 190 Cal. 484, 213 P. 495. Under the decision of the trial court that the agency was revocable and justifying the action of defendants in revoking, it was almost imperative that the rights of the parties be determined and declared. As we have held the lower court in error in this finding, there no longer remains a 80 necessity to such a degree. As we have determined the agency irrevocable, and injunction the proper remedy to prevent acts constituting a revocation, it will result in plaintiff having the management and control of the premises, together with such other powers as are contained in the contract between Hotel Company and Lane Company.

As the record shows beyond question that an actual controversy remains and is being continuously waged, we deem it the duty of the trial court upon further hearing to specifically determine and declare the rights of the parties during the term of the lease. Such questions as the right of having the building retain the name of Lane Mortgage Building, the right to display signs thereon, the right to change the uniforms of attendants or the insignia thereon should be declared. This case presents a controversy to which declaratory relief peculiarly applies. Presenting, as it does, the unusual situation **682 of a lessee and agent in control of a valuable twelve-story building through a lease and agency covering one floor thereof, it cannot but be anticipated that the rights of the respective parties may continue to be the subject of prolonged litigation. It was just such a case that the provisions of our law regarding declaratory relief were designed to meet and accommodate. See Blakeslee v. Wilson, supra, and cases and articles cited therein. See, also, article by W. Turney Fox, professor of law, University Southern California, in Bar Association Bulletin, vol. II, No. 2, September 16, 1926, with authorities cited. Such a *434 declaration, being determinable upon findings of fact not made, cannot be made by this court, but remains for the court below upon the evidence therein presented.

In conclusion, it may appear that the holding results in the true ownership of the building being subordinated to a lesser interest and to that extent impaired. The obvious answer is that one may burden his property as he sees fit, within the law, and that the condition as it is here results solely from the acts of the parties themselves. Defendants possibly speculated upon their ability to cancel the agency, and took the property with their eyes wide open and evidently advised. Next, no injustice is apparent in view of the fact that willful misconduct on the part of Lane Company is sufficient to avoid the contract. Further, it may be noted that the original land lease was the result of the efforts of Lane Company, and it is fair to assume from the record that without the active aid of Lane Company the Hotel Company would not have secured the lease nor would they have been able to build at all. With these things in mind, the view changes somewhat.

With reference to the issues presented as against the defendant Clarke, these have become moot and need not be determined.

The judgment is reversed, with directions to the court below to proceed in accordance with the views herein expressed.

We concur: TYLER, P. J.; CASHIN, J.

81 King v. Driscoll 638 N.E.2d 488

Supreme Judicial Court of Massachusetts, Middlesex.

William F. KING v. Robert F. DRISCOLL & others. [FN1]

FN1. Albert Marchant, Michael Martin, and F.S. Payne Co.

Argued April 4, 1994. Decided Aug. 11, 1994.

LIACOS, Chief Justice.

The defendants, Robert F. Driscoll, Albert Marchant, Michael Martin, and F.S. Payne Co., appeal from that portion of a judgment of the Superior Court entered against them in the plaintiff's wrongful termination suit. The plaintiff filed a cross appeal from another part of that judgment. See p. 491 & note 5, infra. We granted the defendants' application for direct appellate review. The primary issue presented here is whether the public policy exception to the rule that at-will employees may be terminated at any time with or without cause includes termination in retaliation for an employee's participation in a shareholder derivative suit. [FN2]

FN2. The plaintiff's complaint was in four counts. Count I alleged breach of the covenant of good faith and fair dealing implied in all employment contracts as well as wrongful termination in violation of public policy. Count II alleged intentional interference with contractual relations. Count III alleged breach of the duty of utmost good faith and loyalty owed by shareholders of a close corporation to one another. Count IV alleged that the termination was in violation of the by-laws of Payne.

We recount the facts, many of which are in dispute on appeal, as found by the trial judge sitting without a jury. See Mass.R.Civ.P. 52(a), 365 Mass. 816 (1974). Payne is a closely held Massachusetts corporation which focuses on services to the elevator industry. Until 1988, it manufactured elevators and related parts. From its origin until August, 1990, all the stock of Payne was held by a small number of shareholders and Payne's upper- level management positions were occupied by individuals owning relatively large amounts of the corporation's stock. In August, 1990, Payne's stock was purchased by Northern Elevator of Toronto.

Beginning in 1954, employees of Payne who purchased Payne stock were required to enter into a "buy back" agreement which allowed Payne to repurchase the stock at the end of the employees' respective tenures at Payne. The language of the buy back agreement was ambiguous and thus Payne repurchased stock over time from departing employees at varying rates. The buy back agreement became the subject of the shareholder derivative suit relevant

82 here. See Dynan v. Fritz, 400 Mass. 230, 508 N.E.2d 1371 (1987), S.C., Martin v. F.S. Payne Co., 409 Mass. 753, 569 N.E.2d 808 (1991). The plaintiff here was one of the plaintiffs in that suit.

During the relevant time period, Edward A. Fritz, Jr., was a director, shareholder and, at one time, president of Payne. [FN3] Driscoll was a director, shareholder, and the president of Payne when the incidents leading to this lawsuit took place. Martin was an assistant to Driscoll, a director of Payne, but not a shareholder. Marchant was a director, shareholder, and an employee of Payne. King began his employment with Payne in 1958 and received various promotions until 1982 when he was elected by the directors to be vice president of Payne's manufacturing division. He remained in that position until his termination in November 1987. King was a shareholder of Payne.

FN3. Fritz is not a party to this appeal.

During the 1970's and 1980's, various power struggles transpired within Payne, mainly between Driscoll and Robert G. Dynan, another large shareholder and Payne's lead salesperson. After Fritz's retirement, the corporate infighting culminated with the ascension to the Payne presidency by Driscoll. Dynan had been a director but was not reelected in 1983. Around that time, Driscoll called for Dynan's retirement, but Dynan refused. Later, Dynan's business traveling was restricted by Driscoll and thus Dynan's effectiveness as a salesperson was diminished.

Both Dynan and Driscoll made overtures to King seeking his support in their "war." At one point, Driscoll suggested to King that King should be transferred to another division within Payne so that King could be groomed to succeed Driscoll as president. King, preferring to remain in the manufacturing division, declined. In the spring of 1984, Dynan asked King to join him in filing a derivative suit regarding the stock buy back plan, especially as it related to the buy back of Fritz's stock. King initially declined but later, concluding that the suit was in the best interests of Payne, joined as a party to the derivative action.

During 1980-1984, Payne's manufacturing division was profitable. During the pendency of the derivative action from 1985 through 1987, however, the division sustained increasing losses. The judge found that Driscoll's course of conduct during that time exhibited a purpose to undermine King's ability successfully to manage the manufacturing division and, thus, to make the division unprofitable. Among Driscoll's actions cited by the judge were charging the salaries of certain employees to the overhead of that division, halting a computer project designed to improve manufacturing efficiency, and restricting Dynan's business travel for sales purposes.

In 1986, Driscoll hired Martin as his assistant, and Martin contracted with a consulting firm to evaluate the manufacturing division. The judge found that, for various reasons including Martin's past relationship with members of the consulting firm, the firm's evaluation of the division was compromised. Although Martin resigned his employment with Payne early in 1987, he had been appointed a director and so his involvement with the corporation continued. In March, 1987, Rick Auth was hired by Driscoll as assistant to the treasurer. Auth previously had 83 been affiliated with the accounting firm that performed services for Payne.

In June 1987, a "steering committee" was formed to investigate the performance of Payne's manufacturing division. The committee was chaired by Auth. Its members were Marchant, King, two Payne managers, and Paul Oberg of the consulting firm. The majority of the committee ultimately suggested that new management was needed in the manufacturing division--that is, King should be terminated.

On November 13, 1987, at a meeting of the Payne board of directors attended by Driscoll, Martin, Marchant and Fritz, the directors voted to terminate King. Fritz abstained from this vote. At a meeting on November 30, 1987, Driscoll, in the presence of Martin, terminated King's employment. King contends that, at this meeting, Driscoll suggested that he would not be firing King if it were not for his participation in the derivative suit.

The Driscoll faction proffered several legitimate business reasons for terminating King. The group contended that King was ineffective as vice president of manufacturing and cited King's failure to prepare a five-year plan for manufacturing as requested by Driscoll, [FN4] the $250,000 loss sustained by the manufacturing division in 1986, the steering committee's recommendation, and the consulting firm's recommendation. The judge discussed and rejected each of these reasons. In addition, the judge made findings regarding the motives and conduct of Driscoll, Martin, Marchant, and Fritz which led him to his conclusion that the reasons asserted for King's termination were a pretext.

FN4. The judge found that Driscoll's request for a five-year plan amounted to a request for the impossible because of Payne's inadequate computer system, King's lack of resources to complete the plan and King's other time-consuming responsibilities. The judge found that, if King had worked on preparing a written plan, the daily functioning of the manufacturing division would have suffered. The judge further found that Driscoll knew his request was unreasonable.

The judge concluded that, on his review of the totality of the evidence, King's termination did not have a legitimate business purpose. Instead, the judge found, King was terminated in retaliation for his participation in the derivative action. Acknowledging the general rule that, as an at-will employee, King could be terminated at any time with or without cause, the judge ruled that King's termination in retaliation for participating in a derivative suit was covered by the public policy exception to the general rule. Thus, the judge concluded, King's termination was wrongful and actionable at law.

The judge also ruled that Payne, through the actions of Driscoll, Martin, and Marchant, breached the covenant of good faith and fair dealing implied in at- will employment contracts. As to King's claim of intentional interference with contractual relations, the judge concluded that Driscoll and Martin, but not Marchant, were liable for interfering with King's employment contract with Payne. In addition, the judge concluded that Driscoll and Marchant, as shareholders in a close corporation, breached the duty of utmost good faith and loyalty owed to King, another shareholder.

84 On King's claim that his termination violated an implied contract that he would be terminated only "for cause" and only after notice and a hearing as provided in Payne's by-laws, the judge ruled against King. [FN5] Payne had filed counterclaims against King for allegedly violating an implied covenant of good faith and fair dealing by his alleged failure to prevent and later account for a loss of inventory, his alleged premature installation and invoicing of a particular elevator project, and his alleged failure to rectify a problem with a certain type of elevator button used by Payne. The judge found in favor of King on these counterclaims. [FN6] The judge also awarded King attorney's fees.

FN5. It is from this ruling, and the judgment pursuant to it, that the plaintiff cross appeals.

FN6. Neither party has raised on appeal the part of the judgment relating to the counterclaims.

1. Wrongful termination claim. The defendants argue that there was insufficient evidence on which the judge could have based his finding of wrongful termination, and that, in any case, there is no public policy which would prevent an employer from terminating an employee who participates in a shareholder derivative action. Because we agree with the defendants' second argument, we need not address the first. See Wright v. Shriners Hosp. for Crippled Children, 412 Mass. 469, 472, 589 N.E.2d 1241 (1992) (whether retaliatory discharge violates public policy question of law for the judge).

As an exception to the general rule that an employer may terminate an at-will employee at any time with or without cause, we have recognized that an at-will employee has a cause of action for wrongful termination only if the termination violates a clearly established public policy. Flesner v. Technical Communications Corp., 410 Mass. 805, 810-811, 575 N.E.2d 1107 (1991) (wrongful termination where employee was terminated for cooperating with Customs officials in investigation of employer, even though employee was not required by law to cooperate) (noting, id. at 810, 575 N.E.2d 1107, quoting Smith- Pfeffer v. Superintendant of the Walter E. Fernald State Sch., 404 Mass. 145, 149, 533 N.E.2d 1368 [1989], that "redress is available for employees who are terminated 'for asserting a legally guaranteed right [e.g. filing workers' compensation claim]' "). Hobson v. McLean Hosp. Corp., 402 Mass. 413, 416- 417, 522 N.E.2d 975 (1988) (wrongful termination may be found where employee was terminated for adhering strictly to what law required). DeRose v. Putnam Management Co., 398 Mass. 205, 209-211, 496 N.E.2d 428 (1986) (termination wrongful where employee was terminated for refusing to testify falsely at trial, i.e., refusing to do what the law forbids). Cort v. Bristol-Myers Co., 385 Mass. 300, 306-307, 431 N.E.2d 908 (1982) (wrongful termination may be found where employee is terminated for refusing to provide information to employer where such request is serious or substantial interference with privacy). Gram v. Liberty Mut. Ins. Co., 384 Mass. 659, 668 n. 6, 429 N.E.2d 21 (1981), S.C., 391 Mass. 333, 461 N.E.2d 796 (1984).

This court consistently has interpreted the public policy exception narrowly, reasoning that to do otherwise would "convert the general rule ... into a rule that requires just cause to terminate an at-will employee." Smith-Pfeffer v. Superintendent of the Walter E. Fernald State Sch., supra 404 Mass. at 150, 533 N.E.2d 1368. See Wright, supra 412 Mass. at 474, 589 85 N.E.2d 1241 (where nurse reported internal problems to high-level officials within organization, reports were internal matter, which could not be basis for public policy exception); Smith- Pfeffer, supra 404 Mass. at 150- 151, 533 N.E.2d 1368 (where employee expressed disagreement with superior's management of school, even if to do so was appropriate, socially desirable conduct, termination was not wrongful because school management was an internal matter); Mello v. Stop & Shop Cos., 402 Mass. 555, 560-561, 524 N.E.2d 105 (1988) (termination of employee who reported false damage claims could not be wrongful because claims were an internal matter). See also Mistishen v. Falcone Piano Co., 36 Mass.App.Ct. 243, 245-246, 630 N.E.2d 294 (1994) (discharge of employee who threatened to reveal employer's unfair and deceptive trade practices which were not a threat to public health or safety was not wrongful because the situation did not rise to the requisite level of public importance; it was an internal matter); Yovino v. Fish, 27 Mass.App.Ct. 442, 444-445, 539 N.E.2d 548 (1989) (termination of producer of radio program who permitted program which parodied and thus offended public officials was not wrongful because no issue of freedom of speech of employee was involved).

As the above cases demonstrate, the internal administration, policy, functioning, and other matters of an organization cannot be the basis for a public policy exception to the general rule that at-will employees are terminable at any time with or without cause. In this case, the subject of the lawsuit, the price to be paid under the stock buy back program, was an internal company matter. The mere fact that a dissatisfied shareholder could litigate the matter in a court of the Commonwealth does not transform this into an external matter involving, as the plaintiff argues, public policy. Thus, assuming that King was terminated in retaliation for participation in the derivative action, we conclude that his termination did not violate any public policy.

General Laws c. 156B, § 46 (1992 ed.), conferred on King the right to participate in a derivative suit. While we often look to statutes to find pronouncements of public policy, see, e.g., Federici v. Mansfield Credit Union, 399 Mass. 592, 596-597, 506 N.E.2d 115 (1987); but see Wright, supra 412 Mass. at 477-478, 589 N.E.2d 1241 (Liacos, C.J., dissenting) (emphasizing separate common law sources of public policy determinations), it is not necessarily true that the existence of a statute relating to a particular matter is by itself a pronouncement of public policy that will protect, in every instance, an employee from termination. Even a public policy, evidenced in a particular statute, which protects employees in some instances might not protect employees in all instances. See Mistishen, supra. The statute at issue may suggest a public policy in favor of allowing shareholders to seek redress for perceived harms to the corporation. This public policy, however, which relates to the financial well being of the corporation and, by extension, its shareholders, does not rise to the level of importance required to justify an exception to the general rule regarding termination of employees at will.

It may be true generally that the financial well being of a corporation affects the economy which in turn affects the well being of the citizenry, and that, therefore, shareholder derivative actions are appropriate and socially desirable conduct. Nevertheless, such a remote effect on the public, arising in the context of a conflict over internal policy matters, does not elevate King's participation in the lawsuit to protected activity. * * *

The fact that participation in a derivative suit is a right of a shareholder employee conferred by G.L. c. 156B, § 46, also does not change our conclusion. To date, we have 86 acknowledged very few statutory rights the exercise of which would warrant invocation of the public policy exception. * * * For the exercise of a statutory right to be worthy of protection in this area we believe that the statutory right must relate to or arise from the employee's status as an employee, not as a shareholder. [FN7] Cf. Mello, supra 402 Mass. at 557, 524 N.E.2d 105 (rule of liability can be found where statute expresses Legislature's policy concerning employees' rights). The exercise of the right to file a derivative action arose from King's status as a shareholder [FN8]; his termination as an employee resulting from the exercise of that right does not automatically entitle him to seek redress. [ * * * ]

FN7. Of course, a statute itself may provide that an employer may not terminate an employee for exercising rights conferred by the statute, and in such a case, the common law public policy exception is not called into play. See Mello, supra at 555, 524 N.E.2d 105 (no common law remedy is needed where statute prescribes a remedy).

FN8. As we noted in note 2, supra, count I of the plaintiff's complaint alleged both wrongful termination in violation of public policy, and breach of the covenant of good faith and fair dealing implied in at- will employment contracts. See Fortune v. National Cash Register Co., 373 Mass. 96, 101, 364 N.E.2d 1251 (1977). Thus, count I was in two parts which were independent of each other. The judge's conclusions on each part of count I likewise were independent of each other. The defendants thoroughly argued on appeal their position as to the first part of count I, the public policy exception, but they did not argue the second part, the breach of the covenant described in Fortune. Thus, the issue of the breach of the covenant of good faith and fair dealing is not before us. Mass.R.A.P. 16(a)(4), as amended, 367 Mass. 921 (1975). Our conclusion regarding the first part of count I does not affect the judge's findings on the second part. The defendants argued their position as to count III regarding the duty owed to King as a fellow shareholder. This issue is not the same as the duty of good faith and fair dealing owed to King as an employee. In addition, the defendants argued that the evidence was insufficient to support a finding that King was terminated in retaliation for his participation in the derivative suit. Again, this argument does not relate to the issue of the duty of good faith and fair dealing owed to King as an employee. The defendants' purported argument regarding certain findings alleged to be clearly erroneous, was set forth by making reference in their brief to posttrial motions, and does not rise to the level of appellate argument. Mass.R.A.P. 16(a)(4). See Wellfleet v. Glaze, 403 Mass. 79, 80 n. 2, 525 N.E.2d 1298 (1988). On remand, the judge should recalculate damages, if any, attributable to the breach of the covenant of good faith and fair dealing owed to King as an employee. See Fortune, supra at 104-105, 364 N.E.2d 1251; Gram v. Liberty Mut. Ins. Co., 384 Mass. 659, 672, 429 N.E.2d 21 (1981); S.C., 391 Mass. 333, 461 N.E.2d 796 (1984).

2. Breach of the duty of utmost good faith and loyalty owed to King as a shareholder. Relying on Donahue v. Rodd Electrotype Co. of New England, Inc., 367 Mass. 578, 586-587, 328 N.E.2d 505 (1975), and Wilkes v. Springside Nursing Home, Inc., 370 Mass. 842, 848, 353 N.E.2d 657 (1976), the judge concluded that Driscoll and Marchant breached the duty of utmost good faith and loyalty to King when they terminated King's employment with Payne.

87 The defendants argue for reversal of this conclusion. In support thereof they offer the case of Evangelista v. Holland, 27 Mass.App.Ct. 244, 248-249, 537 N.E.2d 589 (1989). Evangelista, supra at 248-249, 537 N.E.2d 589, cites to Donahue, supra 367 Mass. at 598 n. 24, 328 N.E.2d 505, for the proposition, "Questions of good faith and loyalty do not arise when all the stockholders in advance enter into an agreement for the purchase of stock of a withdrawing or deceased stockholder." In both the Donahue and Evangelista cases, however, the controversies themselves arose from repurchase transactions of the stock of certain shareholders. Donahue, supra at 579, 328 N.E.2d 505. Evangelista, supra 27 Mass.App.Ct. at 245- 246, 537 N.E.2d 589. Thus, the courts deciding those cases were examining the duties of good faith and loyalty surrounding the repurchase transactions alone. Accordingly in Evangelista, where there was a valid repurchase agreement previously executed and there was no indication that, at the time of the execution of the agreement, the parties failed in their duties of good faith and loyalty, the court was warranted in stating that "[q]uestions of good faith and loyalty do not arise when all the stockholders in advance enter into an agreement for the purchase of stock...." Id. at 248- 249, 537 N.E.2d 589. Evangelista does not stand for the proposition that the existence of a buy back agreement completely relieves shareholders of the high duty owed to one another in all dealings among them.

In this case, contrary to the facts of Donahue and Evangelista, the allegations of breach of the duty of utmost good faith and loyalty arose from the conduct of fellow shareholders Driscoll and Marchant during the whole series of events leading up to and including the termination of the plaintiff. The plaintiff did not aver that the terms of the repurchase constituted a breach of the duty, but in essence argued that the conduct of the defendants which caused him to be terminated and, as a result, caused his stock to be repurchased constituted a breach of that duty. The judge agreed.

The only legal ground asserted by the defendants for reversal on this issue was the quoted language from Evangelista, supra. As we have discussed above, however, that case is not persuasive here. Factually, the defendants have not met their burden of showing that the findings of the judge supporting his conclusion in this matter were clearly erroneous. See Mass.R.Civ.P. 52(a); * * * The mere reference in the defendants' brief to pretrial motions, without more, will not suffice. * * * We affirm this part of the judgment.

6. Conclusion. The portion of the judgment of the Superior Court finding the defendants liable for wrongful termination in violation of public policy is reversed. * * * The remainder of the judgment is affirmed. The case is remanded for further proceedings, including recalculation of damages, in accordance with this opinion.

So ordered.

88 Pine River State Bank v. Mettille 333 N.W.2d 622 (Minn. 1983)

Supreme Court of Minnesota.

PINE RIVER STATE BANK, Appellant, v. Richard E. METTILLE, Sr., Respondent.

No. C8-82-543.

April 29, 1983.

*623 Syllabus by the Court

1. Portions of an employer's personnel handbook, adopted after employment begins, may become part of the employee's contract of employment if the requirements for formation of a unilateral contract are met.

2. Where an employment contract is for an indefinite duration, such indefiniteness by itself does not preclude job security *624 provisions in an employee handbook from becoming part of the employment contract. Consideration other than continued service by the employee is not necessary for the enforceability of such provisions.

3. Procedural restraints on termination of employees contained in the appellant bank's Employee Handbook were contractually binding on the bank, and respondent employee was wrongfully terminated contrary to the handbook provisions.

4. Trial court evidentiary rulings were not prejudicial error requiring a new trial.

Meagher, Geer, Markham, Anderson, Adamson, Flaskamp & Brennan, Robert E. Salmon, O.C. Adamson II and J. Richard Bland, Minneapolis, Lundrigan, Hendricks & Lundrigan and Wilbert E. Hendricks, Pine River, for appellant.

Van Drake & Van Drake and Stephen R. Van Drake, Brainerd, for respondent.

Heard, considered and decided by the court en banc.

SIMONETT, Justice.

An employee hired for an indefinite, at-will term claims his discharge was in breach of his employment contract as subsequently modified by an employee handbook. A jury awarded the employee damages and the employer appeals from a denial of its post-trial motions. We affirm.

89 In early 1978 respondent Richard Mettille, then unemployed, nearly 48 years of age, married and living in St. Paul, sent his resume to the appellant Pine River State Bank. After an interview, the bank offered Mettille a job at a salary of $1,000 a month or $12,000 a year. Mettille accepted, moved to Pine River, and started work as a loan officer on April 10, 1978. The employment agreement was entirely oral. Nothing was said as to the position being permanent or for any specific term. Mettille conceded that he felt free to leave the bank and to take a better job elsewhere if he wished to do so.

Mettille survived his 6-month probationary period and was shortly given the title of loan officer. His duties were to lend, procure insurance on loan collateral, file UCC financing statements, and prepare reports on student loans.

Late in 1978 the bank distributed to its employees, including Mettille, a printed Employee Handbook. The handbook had been drafted by the bank's president, E.A. Griffith, who relied heavily on a model handbook he had received at a recent seminar on employee relations sponsored by the Minnesota Bankers Association. The handbook contained information on the bank's employment policies, including such matters as working hours, time off, vacations, and sick leave. With respect to employee responsibilities, the handbook discussed such matters as punctuality, confidentiality of the work, personal appearance and conduct, and telephone courtesy. The handbook also contained sections on "job security" and "disciplinary policy." According to Griffith, the handbook was intended as a source of information for employees on bank procedures and as a guideline within the bank so that people would know when vacations would be available and how many days the employee would be allowed for vacations. Griffith testified that he never intended the handbook to become part of an employee's employment contract with the bank.

In April 1979 Mettille received his annual performance review and with it a 7% raise. Apparently, about this time he also took out a home improvement loan with the bank. The following September state bank officials conducted an unannounced examination of the Pine River State Bank, and after reviewing the loan portfolio, reported to Griffith that some "technical exceptions" existed, i.e., failures to comply with the applicable law and regulations. Griffith then ordered his own independent review of the 85 files noted in the examiner's report. This investigation disclosed that 58 of the 85 files contained "serious" technical exceptions and that Mettille was responsible for the serious technical exceptions in 57 of these 58 files. Thus, 28 files showed no vehicle certificate of title; 33 files showed *625 no insurance covering the secured collateral; 4 files showed inadequate insurance; 6 files showed failure to record financing statements properly (although here the bank disagreed with the examiner that the financing statement filings had been improper); and 4 files showed expired financing statements. Characterization of these deficiencies as "serious" was made by the bank officers, because those errors created possible loss to the bank. They testified that the defective files involved loans totaling over $600,000.

Mettille was home ill at the time of the audit by the bank examiners and the subsequent review of the files by the bank. On September 28, 1979, Mettille returned to work. The president called Mettille into his office and fired him. The parties at this time did not review the

90 list of technical exceptions. The disciplinary procedures outlined in the handbook were not followed, nor was the handbook even mentioned. Mettille was given 2 months' severance pay.

The reason for Mettille's dismissal and whether that dismissal was for good cause were sharply contested. The bank claimed that the only reason given for the dismissal was the existence of loan errors, although excessive sick leave and a reduction in force were also factors. Mettille alleged that he was fired because of a personality dispute with his superiors. He argued that no problems were discovered in the course of previous bank examinations, that the exceptions in the 1979 audit were correctable and, in fact, were corrected within a month after he was fired. He disputed that the exceptions were "serious." There was also testimony that Mettille had never received any reprimands or complaints as to his performance prior to September 1979 and that he was loyal and "tried hard." At the time of trial Mettille was still unemployed.

In November 1980 the bank sued Mettille on two notes on which he was in default. Mettille counterclaimed, alleging that the bank had breached his contract of employment by dismissing him without cause and in violation of required disciplinary procedures. The case was tried in January 1982 and the jury found: (1) that the parties had a contract under which the defendant could not be terminated without good cause; (2) that the bank terminated Mettille without good cause; and (3) that Mettille sustained damages of $27,675. The trial judge deducted from the damages award the amount owed on the notes and ordered judgment in favor of Mettille and against the bank for $24,141.07. Both parties moved for a new trial. The bank's main argument was that Mettille's employment contract was at-will and that it was free to terminate him as it did. Mettille argued that he should have been permitted to show mental anguish to recover more damages. The trial judge denied both motions. Only the bank appeals.

The issues may be broadly stated: (1) Can a personnel handbook, distributed after employment begins, become part of an employee's contract of employment? (2) If so, are job security provisions in the handbook enforceable when the contract is of indefinite duration? and (3) In this case, was the employee's summary dismissal without following the job termination procedures of the handbook a breach of contract by the employer? Other issues to be discussed briefly relate to evidentiary rulings and damages.

Whether a handbook can become part of the employment contract raises such issues of contract formation as offer and acceptance and consideration. We need first, however, to describe the Pine River State Bank's handbook. It contains, as we have said, statements on a variety of the bank's employment practices or policies, ranging from vacations and sick leave to personal conduct and appearance. Our inquiry here, however, concerns only the job security provisions. A section entitled "Performance Review" provides for at least an annual review of the employee's work. [FN1] Another *626 section entitled "Job Security" speaks in general, laudatory terms about the stability of jobs in banking. [FN2] The key section, central to this case, is entitled "Disciplinary Policy." This section provides for what appears to be a three-stage procedure consisting of reprimands for the first and second "offense" and thereafter suspension or discharge, but discharge only "for an employee whose conduct does not improve as a result of 91 the previous action taken." The section concludes with the sentence, "In no instance will a person be discharged from employment without a review of the facts by the Executive Officer." [FN3]

Generally speaking, a promise of employment on particular terms of unspecified duration, if in form an offer, and if accepted by the employee, may create a binding unilateral contract. The offer must be definite in form and must be communicated to the offeree. Whether a proposal is meant to be an offer for a unilateral contract is determined by the outward manifestations of the parties, not by their subjective intentions. Cederstrand v. Lutheran Brotherhood, 263 Minn. 520, 532, 117 N.W.2d 213, 221 (1962). An employer's general statements of policy are no more than that and do not meet the contractual requirements for an offer. Thus, in Degen v. Investors Diversified Services, Inc., 260 Minn. 424, 110 N.W.2d 863 (1961), where the employee was told he had a great future with the company and to consider his job as a "career situation," we said these statements did not constitute an offer for a lifetime employment contract.

If the handbook language constitutes an offer, and the offer has been communicated by dissemination of the handbook to the employee, [FN4] the next question is *627 whether there has been an acceptance of the offer and consideration furnished for its enforceability. In the case of unilateral contracts for employment, where an at-will employee retains employment with knowledge of new or changed conditions, the new or changed conditions may become a contractual obligation. In this manner, an original employment contract may be modified or replaced by a subsequent unilateral contract. The employee's retention of employment constitutes acceptance of the offer of a unilateral contract; by continuing to stay on the job, although free to leave, the employee supplies the necessary consideration for the offer. We have so held in Stream v. Continental Machines, Inc., 261 Minn. 289, 293, 111 N.W.2d 785, 788 (1961), and Hartung v. Billmeier, 243 Minn. 148, 66 N.W.2d 784 (1954) (employer's promise of a bonus made after the employee started working held enforceable).

FN4. Two of our cases, Cederstrand v. Lutheran Brotherhood, 263 Minn. 520, 117 N.W.2d 213 (1962), and Degen v. Investors Diversified Services, Inc., 260 Minn. 424, 110 N.W.2d 863 (1961), dealt with employee handbooks. In Cederstrand, a "control copy" of the employer's personnel policies contained a provision that employees would not be dismissed without good cause. We held, however, that since this dismissal provision did not appear in the separate manuals given to employees it was not a contractual offer to employees but merely a policy guide for supervisors. In Degen, the employer's personnel policy provided for a preliminary discussion between the employee and his immediate supervisor and for a dismissal interview with a member of the personnel department present before termination. We held that the employer's failure to follow this procedure did not create a contract for either lifetime or definite term employment. It is clear that the Pine River State Bank's handbook, both with respect to its contents and its dissemination, differs markedly from the situations in Cederstrand and Degen.

92 An employer's offer of a unilateral contract may very well appear in a personnel handbook as the employer's response to the practical problem of transactional costs. Given these costs, an employer, such as the bank here, may prefer not to write a separate contract with each individual employee. See Note, Protecting At Will Employees against Wrongful Discharge: The Duty to Terminate Only in Good Faith, 93 Harv.L.Rev. 1816, 1830 (1980). By preparing and distributing its handbook, the employer chooses, in essence, either to implement or modify its existing contracts with all employees covered by the handbook. Further, we do not think that applying the unilateral contract doctrine to personnel handbooks unduly circumscribes the employer's discretion. Unilateral contract modification of the employment contract may be a repetitive process. Language in the handbook itself may reserve discretion to the employer in certain matters or reserve the right to amend or modify the handbook provisions.

We conclude, therefore, that personnel handbook provisions, if they meet the requirements for formation of a unilateral contract, may become enforceable as part of the original employment contract.

The next issue is whether handbook provisions relating to job security require special treatment, i.e., whether they are an exception to the general rule just discussed. Put more precisely, the question is whether, in an at-will hiring, the job security provisions in a subsequently adopted employee handbook are enforceable. On this issue, the courts are split, see Sherman v. St. Barnabas Hospital, 535 F.Supp. 564, 573 (S.D.N.Y.1982) (citing cases), and our own case law is unclear.

Where the hiring is for an indefinite term, as in this case, the employment is said to be "at-will." This means that the employer can summarily dismiss the employee for any reason or no reason, and that the employee, on the other hand, is under no obligation to remain on the job. See Cederstrand v. Lutheran Brotherhood, 263 Minn. 520, 532, 117 N.W.2d 213, 221 (1962). Nor will a claim by the employee that he or she was promised "permanent" or "lifetime" employment change the at-will nature of the hiring, Skagerberg v. Blandin Paper Co., 197 Minn. 291, 266 N.W. 872 (1936), at least not in the absence of some kind of additional consideration supplied by the employee which is uncharacteristic of the employment relationship itself. Bussard v. College of St. Thomas, 294 Minn. 215, 200 N.W.2d 155 (1972).

Here the employee does not claim, nor could he, that he was promised "permanent" employment. The law is hesitant to impose this burdensome obligation on an employer in the absence of an explicit promise to that effect. See Degen v. IDS, Inc., 260 Minn. 424, 428-29, 110 N.W.2d 863, 866-67 (1963). Instead, the respondent employee is claiming that his job termination was wrongful because the job security provisions set out in the employee handbook were not followed. The appellant bank, relying on the "at- will" doctrine as expressed in our cases beginning with Skagerberg, argues that without additional consideration, the job security provisions are not enforceable. Other cases cited by the bank *628 hold that job termination restrictions, even if part of a contract for an indefinite duration from the outset, can never be enforceable. See Shaw v. S.S. Kresge, 167 Ind.App. 1, 328 N.E.2d 775 (1975).

93 This court did say, by way of dictum in Cederstrand, that parties to a contract for an indefinite duration might transform the contract into one where the employee will not be dismissed without cause, and we observed, "This is not to say that such a contract would be unenforceable." 263 Minn. at 536, 117 N.W.2d at 223. We need, therefore, to examine the three reasons given for the unenforceability of job termination restrictions in an employment contract of indefinite duration: (1) the at-will rule takes precedence over any such restrictions; (2) the restrictions ordinarily lack the requisite additional consideration; and (3) mutuality of obligation is missing.

The first argument, that because the contract specifies no duration the parties did not intend any job termination restrictions to be binding, is without merit. The argument misconstrues the at-will rule, which is only a rule of contract construction, as a rule imposing substantive limits to the formation of a contract. See Restatement (Second) of Agency, ' 442, comment a (inference that employment is at-will may be rebutted by specific terms of the agreement). The general rule is that contracts for a specified duration can nonetheless be terminated during the period of the contract if the employer has good cause. Thomsen v. Independent School District No. 91, 309 Minn. 391, 244 N.W.2d 282 (1976). When a contract is for an indefinite duration, the duration is not set, and a corollary is that either party may then terminate it at any time for any reason. Further, if the contract purports to establish "permanent employment," this will be interpreted as a contract for an indefinite period, and hence also at- will. Thus, in Bussard v. College of St. Thomas, 294 Minn. 215, 223, 200 N.W.2d 155, 161 (1972), we said, "[T]he somewhat arbitrary rule of most jurisdictions that a contract for 'permanent employment' will be construed to be terminable at the will of either party * * * is arguably too mechanical an answer to the more basic issue of ascertaining the real intent of the parties" (emphasis added). See also Note, Employment Contracts of Unspecified Duration, 42 Colum.L.Rev. 107, 120-21 (1942).

The cases which reason that the at-will rule takes precedence over even explicit job termination restraints, simply because the contract is of indefinite duration, misapply the at-will rule of construction as a rule of substantive limitation on contract formation. See, e.g., Johnson v. National Beef Packing Co., 220 Kan. 52, 551 P.2d 779 (1976); Shaw v. S.S. Kresge, 167 Ind.App. 1, 7, 328 N.E.2d 775, 779 (1975); Uriarte v. Perez- Molina, 434 F.Supp. 76 (D.C.D.C.1977). It should not be necessary for an employee to prove a contract is of "permanent" employment or for a specified term in order to avoid summary dismissal if the parties have agreed otherwise. There is no reason why the at-will presumption needs to be construed as a limit on the parties' freedom to contract. If the parties choose to provide in their employment contract of an indefinite duration for provisions of job security, they should be able to do so.

The second argument against enforceability is, at first glance, more troublesome in view of our case law. The argument is that a provision for job security in a contract of indefinite duration, whether initially promised or subsequently added, is not binding without additional, independent considerations other than services to be performed. In Skagerberg, we noted the general rule that when an employee purchases "permanent" employment with a valuable consideration that is other than and in addition to his services, the employment will be held to be continuous and to extend as long as the employee's work is adequate and there is work to be 94 done. This rule makes sense as a presumption in construing contracts. Where the "permanent" employment is purchased with additional consideration, we have better reason to believe that the parties, in discussing "permanent" employment, were referring to lifetime employment and were not, instead, simply making *629 a distinction between temporary or seasonal employment and employment which is steady or continuing although nevertheless terminable at will. See Pugh v. See's Candies, Inc., 116 Cal.App.3d 311, 326, 171 Cal.Rptr. 917, 925 (1981) (most likely explanation for the independent consideration rule is that it serves an evidentiary function, citing Bussard, supra ).

To say that a job security provision in a contract of indefinite duration is never enforceable without additional consideration is to misconstrue the additional consideration exception recognized in Skagerberg. The requirement of additional consideration, like the at- will rule itself, is more a rule of construction than of substance, and it does not preclude the parties, if they make clear their intent to do so, from agreeing that the employment will not be terminable by the employer except pursuant to their agreement, even though no consideration other than services to be performed is expected by the employer or promised by the employee. See Littell v. Evening Star Newspaper Co., 120 F.2d 36, 37 (D.C.Cir.1941); Drzewiecki v. H & R Block, Inc., 24 Cal.App.3d 695, 703-04, 101 Cal.Rptr. 169, 174 (1972). See also Restatement (Second) of Contracts ' 80, comment a (1981) (a single performance may furnish consideration for any number of promises). While language in some of our cases may suggest otherwise, our discussion of additional, independent consideration in Skagerberg, Cederstrand, Bussard and Degen was primarily in the context of the employee attempting to avoid a discharge without cause by proving (albeit unsuccessfully in those cases) "lifetime" or "permanent" employment. But none of our cases purport to hold that additional, independent consideration is the exclusive means for creating an enforceable job security provision in a contract of indefinite duration. Handbook provisions relating to such matters as bonuses, severance pay and commission rates are enforced without the need for additional, new consideration beyond the services to be performed. See DeGuiseppe, The Effect of the Employment-at-will Rule on Employee Rights to Job Security and Fringe Benefits, 10 Fordham Urban L.J. 1 (1981). We see no reason why the same may not be true for job security provisions. Accord Note, Protecting At Will Employees, supra, 93 Harv.L.Rev. at 1819-20 (employee's continued labor despite freedom to resign is ample consideration for all express or implied promises, including those relating to job security). Thus, the consideration here for the job security provision is Mettille's continued performance despite his freedom to leave. See, e.g., Carter v. Kaskaskia Community Action Agency, 24 Ill.App.3d 1056, 1059, 322 N.E.2d 574, 576 (1974). As such, the job security provisions are enforceable.

Finally, the third argument is that job security provisions lack enforceability because mutuality of obligation is lacking. Since under a contract of indefinite duration the employee remains free to go elsewhere, why should the employer be bound to its promise not to terminate unless for cause or unless certain procedures are followed? The demand for mutuality of obligation, although appealing in its symmetry, is simply a species of the forbidden inquiry into the adequacy of consideration, an inquiry in which this court has, by and large, refused to engage. See Estrada v. Hanson, 215 Minn. 353, 10 N.W.2d 223 (1943). "If the requirement of consideration is met, there is no additional requirement of * * * equivalence in the values exchanged; or * * * 'mutuality of obligation'." Restatement (Second) of Contracts ' 79 (1981). 95 We see no merit in the lack of mutuality argument; as we pointed out in Cardinal Consulting Co. v. Circo Resorts, 297 N.W.2d 260, 266 (Minn.1980), the concept of mutuality in contract law has been widely discredited and the right of one party to terminate a contract at will does not invalidate the contract. See also Hartung v. Billmeier, 243 Minn. 148, 66 N.W.2d 784 (1954); Weiner v. McGraw-Hill, Inc., 57 N.Y.2d 458, 443 N.E.2d 441, 457 N.Y.S.2d 193 (1982).

To summarize, we do not find the reasons advanced for the unenforceability of job security provisions in an at-will hiring to be persuasive. We hold, therefore, that where an employment contract is for an indefinite *630 duration, such indefiniteness by itself does not preclude handbook provisions on job security from being enforceable, whether they are proffered at the time of the original hiring or later, when the parties have agreed to be bound thereby. Supportive of the rationale for this holding are, for example, Weiner v. McGraw-Hill, supra; Carter v. Kaskaskia Community Action Agency, supra; Wagner v. Sperry Univac, 458 F.Supp. 505 (1978), aff'd without opinion, 624 F.2d 1092 (1980); Moody v. Bogue, 310 N.W.2d 655 (Ia.App.1981), as well as our own case of Cederstrand.

Not every utterance of an employer is binding. It remains true that "the employer's prerogative to make independent, good faith judgments about employees is important in our free enterprise system." Blades, Employment at Will vs. Individual Freedom: On Limiting the Abusive Exercise of Employer Power, 67 Colum.L.Rev. 1404, 1428 (1967). Properly applied, we think that the unilateral contract modification analysis appropriately accommodates the interests of the employee and the employer.

DeVoe v. Cheatham 413 So.2d 1141 (Ala. 1982)

Supreme Court of Alabama.

Richard M. DeVOE v. Robert L. CHEATHAM, et al.

80-807.

April 30, 1982.

FAULKNER, Justice.

This is an appeal from an action to enjoin Richard DeVoe from competing with his former employer by installing vinyl automobile roofs for another employer. The trial court granted the injunction. We reverse.

96 On April 30, 1979, Richard DeVoe entered into an employment contract with Pop's Vinyl Tops in Decatur, Alabama. The contract provided: "In consideration of the aftersaid Employment and the extensive training Employee shall receive in connection therewith Employee agrees that at no time while employed by Company nor within a two year period after the termination of such employeement [sic] will employee disclose any customer list or supplies to any person or firm, nor will he, within a five year period compete directly with Company or indirectly with Company in the business of selling, repairing, installing or manufacturing vinyl roofs within the areas of: Fifty mile radius of the city of Decatur, Alabama."

The contract also provided a weekly salary of $200.00. The contract did not provide a term of agreed employment, and thus was terminable at will.

DeVoe had little or no experience in installing vinyl tops. Mr. Cheatham, the owner of Pop's Vinyl Tops, taught DeVoe how to install the tops. The record indicates *1142 that DeVoe became proficient in the installation of tops, moldings and stripes on cars.

Mr. Cheatham terminated DeVoe's employment, in May, 1980, and rehired him six weeks later. Mr. Cheatham testified that he discharged DeVoe because DeVoe was overextending himself with other odd jobs. DeVoe testified that Cheatham had fired him because the company was not making enough profit to pay his salary. DeVoe voluntarily terminated his employment with Cheatham in November, 1980, and became employed by a competing vinyl top shop.

Cheatham and Pop's Vinyl Tops brought suit to enjoin DeVoe from competing. The trial court granted a preliminary injunction. On March 10, 1981, the trial judge entered a motion granting a permanent injunction for five years.

Section 8-1-1, Code 1975, provides: "(a) Every contract by which anyone is restrained from exercising a lawful profession, trade or business of any kind otherwise than is provided by this section is to that extent void. "(b) One who sells the good will of a business may agree with the buyer and one who is employed as an agent, servant or employee may agree with his employer to refrain from carrying on or engaging in a similar business and from soliciting old customers of such employer within a specified county, city or part thereof so long as the buyer, or any person deriving title to the good will from him, or employer carries on a like business therein. "(c) Upon or in anticipation of a dissolution of the partnership, partners may agree that none of them will carry on a similar business within the same county, city or town, or within a specified part thereof, where the partnership business has been transacted."

97 This statute expresses the public policy of Alabama that contracts in restraint of trade are disfavored. See Cullman Broadcasting Co. v. Bosley, 373 So.2d 830 (Ala.1979); Robinson v. Computer Servicenters, Inc., 346 So.2d 940 (Ala.1977), Hill v. Rice, 259 Ala. 587, 67 So.2d 789 (1953). The courts will not enforce the terms of such a negative covenant unless: (1) the employer has a protectable interest; (2) the restriction is reasonably related to that interest; (3) the restriction is reasonable in time and place; (4) the restriction imposes no undue hardship.

See Code 1975, ' 8-1-1; Id.

In the present case, the restriction is not enforceable because the employer, Cheatham, has no protectable interest in restraining DeVoe from working for another vinyl top business. In order to have a protectable interest, the employer must possess "a substantial right in its business sufficiently unique to warrant the type of protection contemplated by [a] noncompetition agreement." Cullman Broadcasting Co. v. Bosley, 373 So.2d at 836.

The Restatement (Second) of Contracts ' 188, Comment B (1979), explains when a promisee/employer has a sufficient interest to warrant protection: "The extent to which the restraint is needed to protect the promisee's interests will vary with the nature of the transaction. Where a sale of good will is involved, for example, the buyer's interest in what he has acquired cannot be effectively realized unless the seller engages not to act so as unreasonably to diminish the value of what he has sold. The same is true of any other property interest of which exclusive use is part of the value. ... In the case of a post-employment restraint, however, the promisee's interest is less clear. Such a restraint, in contrast to one accompanying a sale of good will, is not necessary in order for the employer to get the full value of what he has acquired. Instead, it must usually be justified on the ground that the employer has a legitimate interest in restraining the employee from appropriating valuable trade information and customer relationships to which he *1143 has had access in the course of his employment. Arguably the employer does not get the full value of the employment contract if he cannot confidently give the employee access to confidential information needed for most efficient performance of his job. But it is often difficult to distinguish between such information and normal skills of the trade, and preventing use of one may well prevent or inhibit use of the other. ... Because of this difference in the interest of the promisee, courts have generally been more willing to uphold promises to refrain from competition made in connection with sales of good will than those made in connection with contracts of employment."

If an employee is in a position to gain confidential information, access to secret lists, or to develop a close relationship with clients, the employer may have a protectable interest in preventing that employee from competing. But in the present case, DeVoe learned no more than the normal skills of the vinyl top installation trade, and he did not engage in soliciting customers. 98 There is no evidence that he either developed any special relationship with the customers, or had access to any confidential information or trade secrets. A simple labor skill, without more, is simply not enough to give an employer a substantial protectable right unique in his business. To hold otherwise would place an undue burden on the ordinary laborer and prevent him or her from supporting his or her family.

In view of the facts of this case, we find that the trial court should not have granted injunctive relief. The judgment is reversed and the cause is remanded.

REVERSED AND REMANDED.

TORBERT, C. J., and ALMON, EMBRY and ADAMS, JJ., concur.

National Recruiters, Inc. v. Cashman 323 N.W.2d 736 (Minn. 1982)

Supreme Court of Minnesota.

NATIONAL RECRUITERS, INC., Respondent, v. Daniel "Marty" CASHMAN, et al., Appellants.

No. 81-241.

Aug. 27, 1982.

WAHL, Justice.

This appeal involves four cases consolidated for trial in Hennepin County District Court. Respondent National Recruiters, Inc. (National) sought damages and an injunction to enforce a restrictive covenant against appellants, four of its former employees. National also brought actions against Career Resources, Inc.; Career Resources' president, Micah Garber; and Corporate Resources, Inc., for tortious interference with contractual relations between National and its employees. Appellant employees counterclaimed for their vested interests in National's profit-sharing plan and trust, and appellant Cashman counterclaimed for defamation of his business, trade and professional reputation. The trial court found the restrictive covenant valid and awarded National liquidated damages, denied National's claim of tortious interference, granted appellants' counterclaims for their vested interests in the profit- sharing plan and denied Cashman's defamation claim. We affirm in part, reverse in part, and remand for further proceedings.

99 National is an employment agency owned and managed by Arnold Stern. It hires recruiters who are responsible for finding applicants and filling orders from companies that are looking for employees. The recruiters work in one of four areas of specialization, making phone contact with personnel people at various companies and gathering information about available jobs. National does not have exclusive agreements with either the applicants or the companies from which it seeks job orders. Much of the information handled by the recruiters is public and readily accessible.

Appellants Bujold, Strong, Cashman and Holtzman were all employed as recruiters for National. Each had prior sales experience, and each had been unemployed for a period of time before beginning with National. Strong, Cashman and Holtzman were 51, 50 and 45 years of age respectively and were highly experienced. During the employment interview, each appellant was told of the compensation he would receive by way of commissions and bonuses and of National's pension plan. None was told that he would be required to sign a noncompetition agreement.

Appellants were told to report to work on Monday morning. After coming to work, they were told they would have 2 days to prepare for a State Licensing Examination which they took the following Wednesday. Thereafter, each was presented with a noncompetition agreement and told that he must sign the agreement in order to work for National. Bujold was given the contract sometime after he had taken the examination, Cashman and Holtzman were given the contract on Friday of their first week, and Strong was shown the contract 1 week after starting work. Each signed the noncompetition provision under protest.

*739 The noncompetition covenant consisted of an agreement not to compete for a period of 1 year within 50 miles of the Minneapolis office of National or the Minneapolis Courthouse. It provided that, upon violation of the covenant, National could seek injunctive relief to prevent further competition and could obtain liquidated damages equal to an "agreed value" for the training received. For Bujold, Holtzman and Strong, this amount was $2,500. For Cashman, this was $5,000 for the training, plus an additional $10,000 as "liquidated damages." The contracts also provided for an additional payment in the event a former employee became associated as "owner, operator, partner, officer, principal, shareholder, manager, departmental supervisor or in any other equity position in an employment agency" within 1 year after leaving National. (Emphasis in original.) The Bujold, Holtzman and Strong contracts provided for $15,000 payments and the Cashman contract for a $50,000 payment in the event of a breach of this clause.

All four appellants went to work at other employment-recruitment agencies after leaving National. Bujold, who was fired in July 1978, and Strong, who left National in 1980, went to Corporate Resources, Inc., one of the defendants in the court below. After being fired by Stern, Cashman went to Career Resources, Inc., another of the defendants in this case. Holtzman left National in January 1980 and began work in April of that year at another employment agency which he later purchased.

Bujold made three placements between 6 months and 1 year after leaving National, two of which grossed fees in the amounts of $4,300 and $2,800. Strong made one placement 100 generating a $3,440 fee after leaving National. Cashman made two placements after termination of his employment with National, one for $4,000 and another for $7,500. Holtzman was the most successful of the appellants, making two placements within the 6 months following termination, and several placements thereafter.

Stern drafted the noncompetition agreement to prevent employees from setting up a business and placing applicants whose names they had obtained while employed at National. The agreement had been modified over the years to protect against any competition that would be damaging to Stern's firm's business. National sued each of the appellants for violating terms of the noncompetition agreement and, in addition, refused to pay appellants their vested interests in National's profit-sharing plan because of the alleged breach. National contended at trial that it could suffer damages in several ways: (1) if a former employee were to make placements at a firm National also contacts, (2) if a former employee were getting job orders from a company National also contacts, or (3) if a former employee were to deal with an applicant with whom National also dealt. In the first instance, the damages would be the net profit National would have earned by making the placement; in the second and third instances, damages would be more difficult to determine.

In the course of working as employment recruiters at their new firms, appellants had occasion to call many of the same companies they had called while searching for job openings at National. However, they did not try to imply to these companies that they still worked for National and, with one exception, did not keep in contact with applicants with whom they had worked at National. The exception involved an applicant with whom Cashman had dealt. Cashman stopped dealing with the applicant and with the company that had the job opening after Stern complained to Cashman's superior.

While working for National, recruiters worked with several different forms that Stern had developed over the years. These included referral notices, acceptance letters and job-order forms. They also had access to lists of companies that had provided job orders and maintained files on the people they had contacted. Corporate Resources uses a referral notice and acceptance letter which are very similar to those used by National, but its job-order form is somewhat different.

* * * This appeal raises four issues: (1) whether the noncompetition covenant, which is part of each appellant's employment contract, is valid and enforceable; (2) whether appellants have forfeited their vested interests in National's profit-sharing plan; (3) whether Corporate Resources, Inc., or Career Resources, Inc., and its president, Micah Garber, are subject to damages for tortious interference of contractual relations between Cashman and National; and (4) whether the trial court erred in denying Cashman's defamation claim because Cashman had not proved actual damages.

1. We look upon restrictive covenants with disfavor, carefully scrutinizing them because they are agreements in partial restraint of trade. Bennett v. Storz Broadcasting Co., 270 Minn. 525, 533, 134 N.W.2d 892, 898 (1965) (citations omitted). Where such a covenant is not ancillary to the initial oral employment contract, it can be sustained only if supported by 101 independent consideration. Modern Controls, Inc. v. Andreadakis, 578 F.2d 1264 (8th Cir. 1978). Appellants in the case at bar were told of National's compensation provisions and pension plan before beginning work. They agreed to work for National and, in fact, did begin work before being presented with the noncompetition clause and told they were required to sign it. The clause was not bargained for. It was not ancillary to the employment agreement. It must be supported by independent consideration.

Was the noncompetition agreement supported by independent consideration? National argues, as did the employer in Davies & Davies Agency, Inc. v. Davies, 298 N.W.2d 127 (Minn.1980), that continued employment is sufficient consideration for a noncompetition agreement even where that agreement has not been bargained for. In Davies we required more. As to one employee, Richard Davies, who had not been shown the agreement and did not sign it until 4 months after beginning work, we found that continued employment for 10 years, advancement within the agency, and increased responsibility formed sufficient consideration to support a restrictive covenant in the employment agreement.

A second employee of the Davies Agency, Robert Buckingham, knew before beginning work that he would be required to sign a noncompetition agreement. He was not aware of the terms of the agreement and was not shown and asked to sign the agreement until 11 days after beginning work. We held that continued employment alone was not sufficient to support the covenant. *741 Unlike Richard Davies, Buckingham had not "derived substantial economic and professional benefits from the agency after signing the contract." Id. at 131. We affirmed the trial court's decision that the noncompetition agreement was without consideration and unenforceable.

"The adequacy of consideration for a noncompetition contract or clause in an ongoing relationship should depend on the facts of each case." Id. at 130. The training that appellants received and which was set forth as consideration in the written contract did not, in fact, constitute consideration for the noncompetition clause because it was part of the oral employment agreement. It was not a real advantage bargained for in consideration of signing the contract. There was no advantage which inured to appellants' benefit as a result of the signing of the noncompetition agreement.

The practice of not telling prospective employees all of the conditions of employment until after the employees have accepted the job, like the practice of requiring a lie detector test in State v. Century Camera, Inc., 309 N.W.2d 735 (Minn.1981), takes undue advantage of the inequality between the parties. Appellants and National were parties to an employment agreement after they had completed negotiations on compensation, duties, benefits and other terms of employment. See Kistler v. O'Brien, 464 Pa. 475, 347 A.2d 311 (1975). An addition to that agreement would require independent consideration. We hold the noncompetition clause invalid because it was unsupported by such additional independent consideration. Because we reverse the trial court on this issue and find the noncompetition clause invalid, we do not consider the propriety of either the liquidated-damages clause or the denial of injunctive relief.

2. National argues that its profit-sharing plan was properly amended after appellants began work to provide for a forfeiture of benefits in the event of an employee's breach of the 102 noncompetition agreement and that, by breaching the agreement, appellants forfeited their vested interests in that plan. Since we have held that the noncompetition agreement is invalid because unsupported by consideration, there can be no breach of the agreement. We affirm the trial court's determination that appellants did not forfeit their vested interests in the profit-sharing plan.

3. National's argument that Corporate Resources, Inc., Career Resources, Inc., and Micah Garber induced appellants Strong and Cashman to breach their noncompetition covenants is without merit. National did not prove a necessary element of a claim of tortious interference: that either Corporate Resources, Inc., Career Resources, Inc., or Micah Garber intentionally procured a breach of the contract. Snowden v. Sorenson, 246 Minn. 526, 532, 75 N.W.2d 795, 799 (1956). In order to prove that the two companies and Garber intentionally induced Cashman and Strong to violate their noncompetition covenant, National must show more than the mere offering of a job. We affirm the trial court's finding that there has been no tortious interference with contractual relations between National and its former employees, Cashman and Strong.

4. Cashman contends that the trial court erred in refusing to find slander per se on the basis that no actual damages were proved. In Minnesota, "[w]hen words are defamatory per se * * * punitive damages are recoverable without proof of actual damages." Anderson v. Kammeier, 262 N.W.2d 366, 372 (Minn.1977). Therefore, the question is not whether Cashman suffered actual damages but whether Stern's words were defamatory per se.

The determination of whether Stern's communication was defamatory was a question of fact for the court. [I]mputations affecting a person's conduct of business, trade, or profession are actionable without proof of special damage. The words, however, must be peculiarly harmful to the person in his business. General disparagement is insufficient. *742 It must depend on the occupation and the particular statement. In other words, the remarks must relate to the person in his professional capacity and not merely as an individual without regard to his profession.

Id. at 372.

Stern characterized Cashman to his new employer, Garber, as "nothing but a god damn loser, a no good son of a bitch." Stern testified at trial that desire, motivation, commitment to business, intelligence and maturity are critical to success in the employment agency business. To characterize Cashman as a loser was to attack those qualities which are essential to success. We find as a matter of law that the words "nothing but a god damn loser, a no good son of a bitch," applied to an employment recruiter in a conversation with that employee's subsequent employer, to be slander per se and remand this part of the case to the trial court for assessment of punitive damages.

103 We reverse the judgment of the trial court insofar as it upholds the noncompetition clause and awards damages for breach of that clause. We affirm the trial court's determination that appellants did not forfeit their vested interests in a profit-sharing plan and its finding of no tortious interference with contractual relations. We remand to the trial court only the defamation counterclaim for a determination of punitive damages. Reversed in part, affirmed in part and remanded.

Safety-Kleen v. McGinn 233 F.Supp.2d 121

United States District Court, D. Massachusetts.

SAFETY-KLEEN SYSTEMS, INC., Plaintiff, v. Michael McGINN, Defendant.

Sept. 24, 2002.

MEMORANDUM AND ORDER

LASKER, District Judge.

Safety-Kleen, Inc., a corporation providing hazardous waste collection and recycling services, moves for a preliminary and permanent injunction restraining Michael McGinn, a former Safety-Kleen employee now working for Heritage Crystal-Clean (HCC), a Safety-Kleen competitor, from working in any sales or service capacity for HCC or any other Safety-Kleen competitor for a period of one year; from working, in any capacity, for HCC or any other Safety-Kleen competitor in any geographic region in which he previously worked for Safety- Kleen, for a period of one year; from using or disclosing any of Safety-Kleen's confidential information at any time; and from soliciting any of Safety-Kleen's customers or employees for a period of one year.

Safety-Kleen's motion is denied.

McGinn was employed by Safety-Kleen from October 1984 until May 2002. In the final four-and-a-half years of his employment, he worked as District Manager for Safety-Kleen's New England district, supervising branch facilities in Vermont, New Hampshire, Maine, Massachusetts and Rhode Island. For a short period, he also supervised branches in upstate New 104 York and Erie, Pennsylvania. McGinn earlier worked as a branch manager trainer, training all new branch managers for the Central and Midwestern United States.

On May 17, 2002, McGinn notified Safety-Kleen of his resignation. In June he began working for HCC in Harrisburg, Pennsylvania, where he is developing a new HCC branch.

McGinn signed several employment agreements and restrictive covenants with Safety- Kleen during his employment. The most recent, a Non-Competition and Non-Disclosure Agreement executed on September 4, 2001, is the subject of the present action. The Agreement provides in pertinent part that McGinn will not, for a period of one year after the date of termination of his employment, (1) engage "in any business which provides products and/or services similar to those provided by the Company" within McGinn's "Geographic Area," (2) solicit business from any "person, firm, or corporation, who or which was a customer or prospect of the Company in the Geographic Area, during Employee's employment with the Company and with whom Employee had business contact while employed by the Company," or (3) disclose any of Safety-Kleen's confidential information without limitation as to time or location. "Geographic Area" is defined as "[w]ithin any county in any state in which Employee provides services for the Company during his employment, or conducts business."

The parties agree that McGinn is working for a Safety-Kleen competitor, and that Harrisburg lies outside the geographic area in which McGinn previously worked for Safety- Kleen. The principal disputes revolve around McGinn's alleged disclosure of Safety-Kleen's confidential information and his solicitation of Safety-Kleen customers in Harrisburg.

As prerequisites for preliminary injunctive relief, a plaintiff must establish that (1) it has a substantial likelihood of success on the merits, (2) there exists, absent injunctive relief, a significant risk of irreparable harm to it, (3) the balance of hardship weighs in its favor, and (4) granting the injunction will not negatively affect the public interest. TEC Engineering Corp. v. Budget Molders Supply Inc., 82 F.3d 542, 544 (1st Cir.1996).

III. A. Likelihood of success on the merits

Safety-Kleen asserts that, as New England District Manager, McGinn had access to significant confidential customer information. It further contends that at a national Safety-Kleen sales conference in April 2002, which McGinn attended, the company made a number of presentations on confidential new marketing and management strategies. Safety-Kleen makes much of the fact that McGinn attended this conference after negotiating with HCC for a position and filling out an HCC employee "start packet" that included insurance enrollment and direct deposit forms. Safety-Kleen points to the sequence of events as evidence of bad faith on McGinn's part. It argues that under the circumstances, it would be impossible for McGinn to work in a sales or service position for a Safety-Kleen competitor anywhere in the country, or solicit Safety-Kleen customers anywhere in the country, without disclosing some of the confidential information he gained during his time at Safety-Kleen. It seeks an injunction 105 restraining McGinn from working for a competitor or soliciting Safety-Kleen customers on a theory of "inevitable disclosure." See PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir.1995) (affirming grant of injunctive relief on the basis of a showing that defendant "[could not] help but rely on [plaintiff's] trade secrets as he helps plot [a competitor's] new course").

McGinn responds that PepsiCo is distinguishable from the facts of the present case and that as a matter of law, the inevitable disclosure doctrine does not apply in this case. The PepsiCo court, McGinn argues, applied an Illinois statute empowering the court to enjoin "actual or threatened misappropriation of a trade secret." 765 ILCS 1065/3(a) (emphasis added). In contrast, the Massachusetts statute, which governs in this case, requires a showing that the employee "has used" a trade secret improperly. M.G.L. Ch. 93 § 42A. Moreover, McGinn disputes the factual allegation that he acquired a significant amount of confidential information regarding customers or marketing, contending that he had little customer contact as Regional Manager and that the sales conference he attended was more of a pep rally than a substantive event. He further asserts that he had and has no hand in shaping HCC's sales or marketing initiatives. He states that his present solicitation method on behalf of HCC consists of driving down the street, "cold calling" on businesses that may be in need of HCC's services, and that he discloses no confidential Safety-Kleen information in the process. Finally, he asserts that he has not solicited any customer with whom he had contact while a Safety-Kleen employee.

Safety-Kleen has failed to show a likelihood of success on the merits of these claims. Safety-Kleen has not established the occurrence of any actual disclosure by McGinn. For the reasons cited by McGinn, Pespico is distinguishable from the present case. Regardless of how much confidential information McGinn possesses (itself a matter of dispute), Massachusetts law provides no basis for an injunction without a showing of actual disclosure.

Moreover, Safety-Kleen has failed to produce evidence that McGinn has breached the agreement by soliciting any customers with whom he was in contact while at Safety-Kleen. This is the only type of solicitation prohibited by the Agreement. For the reasons cited above, the inevitable disclosure doctrine does not apply to this case, and there is thus no legal basis for extending the scope of the Agreement in the manner requested.

B. Irreparable Harm, Balance of Hardships, and Public Interest

Since Safety-Kleen has failed to establish a likelihood of success on the merits, it is unnecessary to deal in depth with the issues of irreparable harm, the balance of hardships, and the public interest. However, on the present record, Safety-Kleen has not established that it is being harmed at all (much less irreparably). It also appears, on the present record, that the balance of hardships would favor an individual defendant, such as McGinn, whose livelihood would be seriously and adversely disrupted. The public interest in this dispute, while not adversely affected, is minimal.

The motion for a preliminary and permanent injunction is DENIED. McGinn remains under a contractual duty not to violate the terms of the Agreement. If evidence is introduced at 106 trial indicating that he has done so, this court will be prepared to impose sanctions.

It is so ordered.

Maryland Metals, Inc. v. Metzner 282 Md. 31, 382 A.2d 564 (1978)

MARYLAND METALS, INC. v. Sidney S. METZNER et al.

No. 100.

Feb. 1, 1978.

*33 LEVINE, Judge.

In this appeal we consider the extent to which officers and high-level managerial employees may, prior to termination of the employment relationship, make preparations to compete with their corporate employer without violating fiduciary obligations running to the corporation. The chancellor (Rutledge, J.), sitting in the Circuit Court for Washington County, denied the **566 request of appellant, Maryland Metals, Inc., for injunctive relief and damages against two former employees and corporations formed by them (appellees here), ruling that the individual appellees had not acted wrongfully in merely preparing to form and finance a competitive enterprise before severing their ties with appellant. Upon issuance of an order dismissing its amended bill of complaint, appellant noted an appeal to the Court of Special Appeals, but we granted certiorari in advance of oral argument in that court. We now affirm.

Appellant, located in Hagerstown, is engaged in the business of buying, processing and selling scrap metal obtained from automotive, industrial and miscellaneous sources. Prior to its incorporation in 1955, the company had been operated as a sole proprietorship by the late Harry Kerstein (Harry), who founded the business in the 1930's and later became the corporation's sole stockholder. On his death in June 1973, he was succeeded as president by his son, *34 Robert Kerstein (Robert), a graduate of the University of Pennsylvania, Wharton School of Finance.

In 1951, Harry engaged, at a starting salary of $85 per week, appellee Sidney S. Metzner (Metzner), who was then recently graduated from college with a degree in business 107 administration and had been employed by a national retail chain in its management training program. With Metzner playing a major role, the business grew and prospered in the ensuing years. On formation of the corporation in 1955, he was named secretary. By June 1974, when he resigned, Metzner had risen to the position of executive vice president and was earning in excess of $80,000 a year. In 1970, appellant employed appellee George W. Sellers, III (Sellers), on Metzner's recommendation, at a starting annual salary of $20,000. Initially Sellers occupied the position of operations manager because of his proven talents in maintaining heavy machinery. He gradually demonstrated managerial capability as well and at the time of his dismissal in late May 1974, held the position of vice president in charge of operations, earning in excess of $31,000 a year.

Rapid technological advances in the design and manufacture of scrap processing machinery contributed significantly to the genesis of this dispute. In 1966, appellant purchased at a total cost of some $400,000 a piece of equipment described in the trade as a guillotine shear. [FN1] Even as it was awaiting delivery of the shear, appellant was already studying the potential of a newer and more revolutionary machine known as a "shredder." [FN2]

*35 Between 1966 and 1973, Metzner was dispatched on several assignments to inspect shredding operations in other parts of the country. On returning from certain key inspection trips, he submitted recommendations urging the acquisition of a shredder. His last such report and recommendation was dated May 1, 1974, only four weeks before he tendered his resignation.

In September 1970, appellant's board of directors authorized Harry Kerstein to purchase a shredding machine from Newell Manufacturing Company of San Antonio, Texas, one of two leading manufacturers of **567 such machines, for the sum of $384,000. Appellant thereupon entered into a cancellable purchase agreement with Newell and also acquired an option to purchase some 40 acres of land in the Hetzler Industrial Park near Hagerstown, which was suitable for a shredding operation from both a physical and a zoning standpoint. Several weeks later, however, appellant's board of directors voted to defer purchase of the shredding machine, citing several reasons, including a downward trend in the market price for shredded scrap, which apparently proved to be temporary, and some uncertainty as to the proficiency of the machine. Consequently the order was cancelled and the option on the land allowed to expire without being exercised.

Following Harry's death in June 1973, appellant resumed its interest in a shredding operation. Once again Metzner, now assisted by Sellers, was instructed to conduct an appropriate investigation in the summer and fall of 1973, and to report the outcome of those efforts to the corporation. Metzner and Sellers complied with these instructions in some detail and urged Robert to acquire a shredder immediately.

What transpired beginning in November 1973, is the subject of some dispute in the testimony. Metzner maintains that he had a discussion with Robert in November during which he expressed his unwillingness to continue with *36 appellant unless he could own some equity in the corporation. Robert replied that this was impossible because his father, as sole 108 stockholder, had transferred his holdings to a testamentary trust. According to his testimony, Metzner then proposed that a new corporation be formed to acquire and operate a shredder in which he, Sellers and Robert (or appellant) would each own a one- third interest, with the necessary initial capital investment of some $300,000 being advanced by Robert or appellant. Robert acknowledges the substance of this discussion, but beyond this point the Metzner-Sellers version of what occurred differs in one material respect from Robert's account. Metzner testified that he then flatly advised Robert that if he would not join with Metzner and Sellers in the equal ownership of a shredder, they would purchase and operate one without his participation. This was corroborated by Sellers who had held his own independent discussion with Robert.

Conceding the first part of the discussion, Robert maintained that he never received explicit notice of any intention on the part of Metzner or Sellers to leave Maryland Metals and to start their own competing business. He testified that he had merely offered to consider the possibility of a profit-sharing plan for both Metzner and Sellers. Robert further claims to have informed them unequivocally in November that he would not consider any arrangement in which he or Maryland Metals did not own the entire shredding operation.

In the meantime Metzner and Sellers had initiated in November a series of steps preparatory to the establishment of a shredding facility independent of Maryland Metals. These measures, which we shall recount later, are the basis for the present dispute. Professing to be unaware of the preparations being made by Metzner and Sellers, Robert raised Sellers' salary in March 1974 from $25,000 to $31,200. Despite the plans being made by Sellers and Metzner in 1974, they both continued until the very last day of their employment, as they had throughout their careers, to apply their considerable talents and to work long hours in behalf of Maryland Metals.

Appellant's principal contention on appeal is that by deliberately failing to disclose in detail their preliminary arrangements to enter into competition with Maryland Metals, while serving as appellant's officers and employees, appellees committed a "gross breach of their fiduciary duty" of loyalty, thereby entitling appellant, as a matter of law, to an injunction restraining further operation of appellees' rival scrap metal processing business.

In defining the scope of the right of an employee or corporate officer to enter into competition with his former principal **568 and in delimiting the countervailing right of an employer to restrain his agent's competitive endeavors both before and after termination of employment, the law seeks to harmonize two important and ofttimes conflicting policies. The first of these policy considerations is that commercial competition must be conducted according to basic rules of honesty and fair dealing. As we stated in Edmondson Vil. Theatre v. Einbinder, 208 Md. 38, 44, 116 A.2d 377 (1955), the tendency of the law, both legislative and common, has been in the direction of enforcing increasingly higher standards of fairness or commercial morality in trade. In policing the ethics and conventions of the marketplace, courts have paid particular attention to problems associated with competition between employees and their former employers. Because corporate managerial personnel enjoy a high degree of trust and confidence in performing their assigned functions, a potential exists for serious abuse of confidentiality 109 whenever personnel attempt to aggrandize their own economic interests at the expense of the employer. Fairness dictates that an employee not be permitted to exploit the trust of his employer so as to obtain an unfair advantage in competing with the employer in a matter concerning the latter's business. Kademenos v. Equitable Life Assurance Soc. of U. S., 513 F.2d 1073, 1076 (3d Cir. 1975); Restatement (Second) of Agency s 387, Comment b (1957).

This concern for the integrity of the employment relationship has led courts to establish a rule that demands *38 of a corporate officer or employee an undivided and unselfish loyalty to the corporation. See Guth v. Loft, Inc., 23 Del.Ch. 255, 5 A.2d 503, 510 (S.Ct.1939). Thus, we have read into every contract of employment an implied duty that an employee act solely for the benefit of his employer in all matters within the scope of employment, avoiding all conflicts between his duty to the employer and his own self- interest. C-E-I-R, Inc. v. Computer Corp., 229 Md. 357, 366, 183 A.2d 374 (1962); Maryland Credit v. Hagerty, 216 Md. 83, 90, 139 A.2d 230 (1958); De Crette v. Mohler, 147 Md. 108, 115, 127 A. 639, 642 (1925) ("Experience has taught that no man can serve two masters"). And see Cumb. Coal & Iron Co. v. Parish, 42 Md. 598, 605-606 (1875) (recognizing a similar duty with respect to corporate directors and officers).

A direct corollary of this general principle of loyalty is that a corporate officer or other high-echelon employee is barred from actively competing with his employer during the tenure of his employment, even in the absence of an express covenant so providing. Ritterpusch v. Lithographic Plate, 208 Md. 592, 602, 119 A.2d 392 (1956); accord, Becker v. Bailey, 268 Md. 93, 98-99 n. 2, 299 A.2d 835 (1973); Restatement (Second) of Agency s 393 (1957); 3 W. Fletcher, Cyclopedia of the Law of Private Corporations s 856 (Perm. ed. 1975). Thus, prior to his termination, an employee may not solicit for himself business which his position requires him to obtain for his employer. He must refrain from actively and directly competing with his employer for customers and employees, and must continue to exert his best efforts on behalf of his employer. C-E-I-R, Inc. v. Computer Corp., 229 Md. at 366, 183 A.2d 374.

Once the employment relationship comes to an end, of course, the employee is at liberty to solicit his former employer's business and employees, subject to certain restrictions concerning the misuse of his former employer's trade secrets and confidential information. Ritterpusch v. Lithographic Plate, 208 Md. at 602, 119 A.2d 392; Abbott Redmont Thinlite Corporation v. Redmont, 475 F.2d 85, 89 (2d Cir. 1973).

The second policy recognized by the courts is that of safeguarding society's interest in fostering free and vigorous competition in the economic sphere. Thus, as Judge *39 Oppenheimer stated for this Court in Operations Research v. Davidson, 241 Md. 550, 575, 217 A.2d 375, 389 (1966): "(I)t is important to the free competition basic to our national development as well as to the individual rights of employees who want to go into business for themselves **569 that their spirit of enterprise be not unduly hampered." Furthermore, courts have been receptive to the view that every person has or at least ought to have the right to ameliorate his socio-economic status by exercising a maximum degree of personal freedom in choosing employment. Travenol Laboratories, Inc. v. Turner, 30 N.C.App.

110 686, 228 S.E.2d 478, 483 (1976); see Fulton Laundry Co. v. Johnson, 140 Md. 359, 362, 117 A. 753, 23 A.L.R. 420 (1922); Comment, 29 U.Chi.L.Rev. 339, 351 (1962); Note, 4 Duke B.J. 16 (1954). But see 1 R. Callmann, The Law of Unfair Competition, Trademarks and Monopolies s 1.3, at 12 (3d ed. 1967) ("The theory that the employee enjoys the right to a free and open market flagrantly ignores reality").

This policy in favor of free competition has prompted the recognition of a privilege in favor of employees which enables them to prepare or make arrangements to compete with their employers prior to leaving the employ of their prospective rivals without fear of incurring liability for breach of their fiduciary duty of loyalty. Operations Research v. Davidson, 241 Md. at 572, 217 A.2d 375; Ritterpusch v. Lithographic Plate, 208 Md. at 602, 119 A.2d 392; see also United Aircraft Corp. v. Boreen, 413 F.2d 694, 700 (3d Cir. 1969); Keiser v. Walsh, 73 App.D.C. 167, 168, 118 F.2d 13, 14 (1941) ( "an agent need not wait until he is on the street before he looks for other work"); Bancroft-Whitney Company v. Glen, 64 Cal.2d 327, 49 Cal.Rptr. 825, 839, 411 P.2d 921, 935 (1966).[FN3]

* * * "Admittedly the mere decision to enter into *40 competition will eventually prove harmful to the former employer but because of the competing interests of allowing an employee some latitude in switching jobs and at the same time preserving some degree of loyalty owed to the employer, the mere entering into competition is not enough. It is something more than preparation which is so harmful as to substantially hinder the employer in the continuation of his business. (emphasis added). Cudahy Company v. American Laboratories, Inc., 313 F.Supp. 1339, 1346 (D.Neb.1970). Moreover, while an employee is under an obligation to be candid with his employer in preparing to establish a competing enterprise, C-E-I-R, Inc. v. Computer Corp., 229 Md. at 367, 183 A.2d 374; see also Community Counselling Service, Inc. v. Reilly, 317 F.2d 239, 244 (4th Cir. 1963), he is not bound to reveal the precise nature of his plans to the employer unless he has acted inimically to the employer's interest beyond the mere failure to disclose. Cudahy Company v. American Laboratories, Inc., 313 F.Supp. at 1346; Bancroft-Whitney Company v. Glen, 64 Cal.2d 327, 49 Cal.Rptr. at 840, 411 P.2d at 936.

The right to make arrangements to compete is by no means absolute and the exercise of the privilege may, in appropriate circumstances, rise to the level of a breach of an employee's fiduciary duty of loyalty. Thus, the privilege has not been applied to immunize employees from liability where the employee has committed some fraudulent, unfair or wrongful act in the course of preparing to compete in the future. Robb v. Green, (1895) 2 Q.B. 1, 15, aff'd, (1895) 2 Q.B. 315. Examples of misconduct which will defeat the privilege are: misappropriation of trade secrets, Space Aero v. Darling, 238 Md. 93, 117, 208 A.2d 74, cert. denied, 382 U.S. 843, 86 S.Ct. 77, 15 L.Ed.2d 83 (1965); misuse of confidential information, C-E-I-R, Inc. v. Computer Corp., 229 Md. at 368, 183 A.2d 374; solicitation of employer's customers prior to cessation of employment, Ritterpusch v. Lithographic *41 Plate, **570 208 Md. at 602, 119 A.2d 392; conspiracy to bring about mass resignation of employer's key employees, Duane Jones Co. v. Burke, 306 N.Y. 172, 117 N.E.2d 237, 245 (1954); usurpation of employer's business 111 opportunity, Raines v. Toney, 228 Ark. 1170, 313 S.W.2d 802, 809-810 (1958). See generally Comment, 22 U.Chi.L.Rev. 278, 282-83 (1954).

Within these broad principles, the ultimate determination of whether an employee has breached his fiduciary duties to his employer by preparing to engage in a competing enterprise must be grounded upon a thoroughgoing examination of the facts and circumstances of the particular case. As the California Supreme Court has observed: "No ironclad rules as to the type of conduct which is permissible can be stated, since the spectrum of activities in this regard is as broad as the ingenuity of man itself." Bancroft-Whitney Company v. Glen, 64 Cal.2d at 346, 49 Cal.Rptr. at 839, 411 P.2d at 935. Accord, Operations Research v. Davidson, 241 Md. at 575, 217 A.2d 375.

Turning now to the facts in the case at hand, we consider the evidence produced at trial in a light most favorable to the prevailing party; and if substantial evidence is present to support the trial court's determination, it is not clearly erroneous and hence will not be disturbed on appeal. Maryland Rule 886. Ross v. Hoffman, 280 Md. 172, 186, 372 A.2d 582 (1977); Ryan v. Thurston, 276 Md. 390, 392, 347 A.2d 834 (1975); Delmarva Drilling Co. v. Tuckahoe, 268 Md. 417, 424, 302 A.2d 37 (1973).

As we noted earlier, appellees Metzner and Sellers met with appellant's president, Robert Kerstein, in mid-November 1973, after having recently completed a comprehensive study of shredding operations around the country on behalf of Maryland Metals. At the November meeting appellees demanded and were refused an equity participation in Maryland Metals because the company's capital stock was completely tied up in Harry Kerstein's testamentary trust. The chancellor found from the evidence that upon receiving this initial rebuff, appellees then notified Robert that if Maryland Metals was not willing to take a part in a proposed *42 shredding operation, appellees would go into business for themselves without appellant.[FN4] Shortly thereafter appellees set in motion a scheme designed to permit them to establish an independent shredding business in the event appellant decided not to participate in the venture. It is this secretive, preparatory effort which appellant claims amounted to a breach of appellees' fiduciary duty to the corporation.

Appellees' initial act was the formation of a Delaware corporation named "Conservit, Inc." on December 11, 1973, which qualified to do business in Maryland on January 14, 1974. It is undisputed, however, that appellees never utilized the Delaware corporation to conduct any business in Maryland or elsewhere. After having made contact with Henry Schloss, a prospective investor from Baltimore, and after having consulted with representatives of the Maryland Economic Development Commission late in 1973, Metzner filed a preliminary application with the Maryland National Bank on January 2, 1974, for a loan to purchase a shredding machine. The loan request was approved on March 14, 1974, in the amount of $1,300,000, but was not actually closed until August 1974, two months after Metzner had left Maryland Metals. 112 As early as December 1973, Sellers contacted representatives of the Potomac Edison Company concerning the power requirements for the proposed shredder. These **571 negotiations continued through the remainder of appellees' employment. On February 7, 1974, appellees succeeded in securing an option on the same tract of land appellant had considered acquiring in 1970. This option was exercised on June 27, 1974, at a purchase price of approximately $180,000.

*43 On February 20, 1974, Henry Schloss, on behalf of appellees, and on his own behalf, executed an agreement with Hammermills, Inc. of Iowa for the purchase of a car shredder at a price of $1,200,000. Throughout late winter and spring of 1974, appellees contacted and consulted with various municipal agencies, utility companies, construction contractors, manufacturers and engineers concerning the improvement of the contemplated shredder site and the purchase of equipment necessary to operate and maintain the proposed shredder business.

On May 22, 1974, appellant discharged Sellers, while Metzner submitted his resignation on May 28, 1974, continuing at appellant's request until June 15, 1974, when he ceased all work for Maryland Metals. A Maryland corporation was formed in July 1974 to carry on the business of the nascent enterprise. In that same month the United States Farmers Home Administration agreed to guarantee the loan from Maryland National Bank, which was finally consummated in August 1974. Appellees' shredder operation opened for business in March 1975, some nine months after Metzner had departed from appellant's employ. It is conceded that at no time during the course of their employment did appellees ever inform appellant of the details of their preparations other than to notify Robert of their intention to compete if Maryland Metals was not interested in cooperating in the proposed shredder operation. In fact there is evidence that appellants actively concealed their preparations from appellant.

In sum, from the date of Harry Kerstein's death in June 1973 to the termination of their employment in mid-1974, appellees' various activities were manifestly preparatory in nature. Since, as we have noted earlier, employees are privileged to make arrangements to compete even while they remain on their employer's payroll, it was therefore incumbent upon appellant to demonstrate that appellees had been guilty of unfair, fraudulent or wrongful conduct beyond the mere failure to disclose, which impacted on the economic interest of their former principal in some detrimental fashion.

*44 We are unable to identify any conduct of appellees from June 1973 to June 1974 that was unfair, wrongful or inimical to appellant's interest. Indicative of Metzner's allegiance to the corporation was the undisputed evidence that even in the final months and weeks of his employment, he had negotiated for the sole benefit of his employer a number of valuable contracts yielding profits totalling many thousands of dollars; indeed, Metzner actually consummated at least one of those agreements after submitting his resignation in late May. Likewise, Sellers devoted to his employer approximately 12 hours a day, six days a week during the entire period of his employment, and continued to do so until the very day of his departure. Small wonder, then, that appellant's president admittedly could find no fault with the quality of appellees' services up to the time of their departure.

113 * * *

The chancellor also found as a fact that appellees never misappropriated any trade secrets or other confidential information belonging to appellant. Whatever information appellees acquired regarding the operation and economics of automobile shredders as a result of their inspection tours of shredder sites and other research, was shown by substantial evidence to have been generally available to the public through trade and government publications. **573 This Court has long subscribed to the view that an employee enjoys a right, in competing against his former employer, to utilize general experience, knowledge, memory and skill as opposed to specialized, unique or confidential information gained as a consequence of his employment. Operations Research v. Davidson, 241 Md. at 567-69, 217 A.2d 375; see generally 2 R. Callmann, Unfair Competition, Trademarks and Monopolies s 54.2(a) (3d ed. 1968).

Finally, we cannot say that appellees were guilty of usurping a business opportunity of appellant either in purchasing the option on the Hetzler Industrial Park property or in purchasing an automobile shredder from Hammermills, Inc. As to the latter, Maryland Metals was perfectly free to purchase an identical model either before or after appellees consummated the purchase, as appellees had urged, and was therefore not deprived of any opportunity to obtain a shredder. With respect to the option property, it need only be said that appellant deliberately let its previous option on the same site expire some four years before appellees acquired their interest without making any attempt to preserve a right *47 to the location. In light of appellees' continual exhortations to enter the shredding business, appellant's procrastination and intransigence amounted to no less than an abandonment of whatever corporate opportunity might have existed in regard to the option property. See Diedrick v. Helm, 217 Minn. 483, 14 N.W.2d 913, 920, 153 A.L.R. 649 (1944); Note, 74 Harv.L.Rev. 765, 774-75 (1961).

Reduced to its essence, then, appellant's claim is that Metzner and Sellers violated their fiduciary duties by concealing the details of their preparatory activities aimed at setting up a competitive business in the future. Despite appellant's strenuous protestations, the conduct complained of is precisely what the law permits. In support of its argument, appellant points to a statement in C-E-I-R, Inc. v. Computer Corp., 229 Md. at 367, 183 A.2d at 380, where we indicated in dicta that "an agent is under a duty to disclose to his employer any information which the employer would be likely to want to know." Since appellant states predictably that it would have certainly wanted to be apprised of the specifics of appellees' preliminary arrangements, it claims that appellees were obliged to divulge this information.

In light of his factual findings, the chancellor, in our opinion, was entirely correct in dismissing appellant's amended bill of complaint. We hold that appellees' conduct here falls within the mere preparation privilege accorded employees contemplating termination of employment. Looking beyond the mere failure to disclose the details of their preparations, we have been unable to find in the record any evidence of such unfair, fraudulent or wrongful conduct on the part of appellees as would entitle appellant to relief in the form of an injunction, damages or an accounting for profits. Both Metzner and Sellers served appellant diligently for twenty-three and four years, respectively, comporting themselves with the **574 utmost good 114 faith and fidelity. Their foresighted suggestions that appellant expand into the shredder business were intended to benefit the company, not harm it. Indeed, appellees offered Maryland Metals the chance to participate in the proposed venture up to the very time of their departure. Had appellant heeded its employees' suggestions or had it previously exacted from them a covenant not to compete, it might have avoided its present dilemma. Unfortunately for appellant, it pursued neither of these options and cannot now be heard to complain.

BBF, Inc. v. Germanium Power Devices Corp . 13 Mass.App.Ct. 166, 430 N.E.2d 1221 (1982)

Appeals Court of Massachusetts, Middlesex.

BBF, INC. v. GERMANIUM POWER DEVICES CORPORATION et al.[FN1]

Argued Dec. 17, 1981. Decided Feb. 5, 1982.

*167 CUTTER, Justice.

BBF Group, Inc.[FN2] (BBF), in December, 1972, acquired by merger all the assets of Silicon Transistor Corporation (Silicon) which was engaged in the manufacture and sale of silicon and germanium transistors.[FN3] Since the merger, Silicon has continued this operation as a division of *168 BBF. Francis B. Driscoll, a defendant, was general manager of the operation from the date of BBF's acquisition of the Silicon division until his resignation in 1973. The defendant John Q. Adams, Jr., during the same period was the division's marketing manager. Mr. Oliver O. Ward, an attorney, also a defendant, had known the other individual defendants for some time, but had no connection with BBF or with Silicon.

Solitron Corporation (Solitron), a competitor of BBF, also made silicon and germanium transistors. In 1973, its then president, Ben Friedman, told James France of BBF that Solitron was interested in selling its germanium operation, a matter not then of public knowledge. In March, 1973, Friedman met with France, Driscoll, Adams, and Boruch B. Frusztajer, chief executive officer of BBF, to discuss the sale for $350,000 of Solitron's germanium operation, 115 including equipment, piece parts, inventory, and customer lists. The BBF representatives decided to investigate the operation including **1223 an on- site inspection of Solitron's plant at Riviera Beach, Florida. Driscoll, chosen to investigate,[FN4] recommended in his first report the purchase of the Solitron germanium operation. In his second report, he recommended the purchase only if there should be further negotiations.[FN5]

A meeting of the BBF representatives on May 22 was attended by France, Frusztajer (who had the power to make the final decision), Adams, and Driscoll. Frusztajer decided that, although "the acquisition of Solitron's assets would be beneficial, ... he did not think Solitron could sell its germanium operations to anyone other than ... (BBF) and *169 (that) if BBF ... bided its time Solitron would come back with a more attractive offer."

In July, 1973, Driscoll spoke to Mr. Ward about the possibility that they form their own germanium business. Late in September or in October, 1973, Mr. Ward spoke to Trevison (see note 5) at Solitron about buying Solitron's germanium assets. On October 6, November 6, and November 15, Driscoll alone, or with Adams or Mr. Ward, visited the Solitron plant. Neither Adams nor Driscoll disclosed to BBF either these visits or that they were interested in acquiring any part of Solitron's germanium assets for themselves.

Trevison of Solitron called France of BBF on October 26, 1973, to tell him that "any part of ... (Solitron's) germanium operations was now for sale." France directed Driscoll to investigate the offer. Driscoll did not follow through on France's request or divulge the interest he and his associates had in acquiring Solitron's assets for themselves. On November 7, 1973, France learned by a telephone call to Solitron that some BBF employees were visiting the Florida plant "on their own." France then met with Driscoll and Mr. Ward on November 13, 1973, and discussed Driscoll's resignation from BBF. France did not want Driscoll to return to BBF, but his resignation was made effective on November 21, 1973, to enable Driscoll to have some vacation that was due to him.

Germanium Power Devices Corporation (Germanium) was incorporated by Mr. Ward in Delaware on November 1, 1973, and was qualified to do business in Massachusetts. Mr. Ward became its president and a director at once upon its incorporation. In its behalf, Driscoll and Mr. Ward purchased for $200,000 from Solitron a part of its germanium assets including certain equipment, piece parts, and inventory. They bought no customer lists. By then Solitron had ceased to conduct germanium operations. By the time of the purchase on November 15, Driscoll had ceased to work for BBF but was still carried as a BBF employee until November 21, because of the unused vacation time.

*170 Driscoll started work with Germanium on November 19, 1973, as its production and plant manager. He acquired eleven percent of its stock. Adams resigned from BBF on November 13 and began work as Germanium's vice-president in charge of marketing. While Driscoll was still an employee of BBF in October, 1973, he approached William J. Dawson who was then BBF's maintenance manager for its germanium operations. He put Dawson in touch with Mr. Ward and on November 6, 1973, Dawson went with Driscoll to Solitron's Florida plant. 116 Dawson resigned from BBF on November 13, 1973, and went to work for Germanium on the same day. Driscoll also approached Peter J. Ulaskiewicz about joining the new venture. Ulaskiewicz was BBF's "manager of the front end of the germanium production line," charged with adjusting the ovens to suit particular germanium material and **1224 customer specification. Ulaskiewicz resigned from BBF and went to work for Germanium on November 12, 1973.

On November 3, 1973, BBF had twenty-six production employees and about twenty- five more in various related operations. By January 18, 1974, eleven of these BBF employees had become employees of Germanium.[FN6]

On January 14, 1974, this complaint was filed by BBF (in its then corporate form, see note 2, supra ) seeking relief against Germanium, Driscoll, Adams, and Mr. Ward based upon the alleged improper use by these four defendants of a corporate opportunity belonging to BBF in their acquisition of assets of Solitron and damages for injuries alleged to have been caused by the breach of the duty of loyalty owed by Driscoll and Adams to BBF and by their inducing various employees of BBF to go to work for Germanium.

1. The trial judge reached the following conclusion concerning the defendants' appropriation of a corporate opportunity owned by BBF. Driscoll and Adams owed a duty of loyalty to BBF at all times in 1973 relevant to this action. They acted unfairly toward BBF in making use of information, acquired by them in confidence, concerning the opportunity to acquire Solitron's assets. Driscoll, a BBF employee who knew that BBF remained interested in acquiring Solitron's germanium assets, discussed with Mr. Ward in July or August, 1973, the possibility of forming a new germanium company. As a consequence, Mr. Ward made various visits to the Solitron plant. Driscoll went with Dawson to the Solitron plant, participated with Mr. Ward in negotiating the purchase of part of Solitron's assets, and helped Adams and Mr. Ward to select a site for Germanium's new plant. He did not comply with France's order to investigate Solitron's revised offer of October 26, 1973. He also approached Dawson and Ulaskiewicz about working for the new corporation. Adams knew that Germanium's acquisition of Solitron's assets would be harmful to BBF. He violated his duty of loyalty by using confidential information and helping to select the new plant site. Mr. Ward knew or should have known of Driscoll's and Adam's duty of loyalty to BBF. Nevertheless, he participated with them in acquiring for Germanium some Solitron assets.

*172 On these subsidiary facts, the judge was justified in concluding that the three individual defendants and Germanium had appropriated a corporate opportunity of BBF. Accordingly, she reasonably decided that the defendants were jointly and severally subject to liability for injuries to BBF proximately caused by their actions. See American Circular Loom Co. v. Wilson, 198 Mass. 182, 206, 84 N.E. 133 (1908); Durfee v. Durfee & Canning, Inc., 323 Mass. 187, 198-199, 80 N.E.2d 522 (1948); Weismann v. Snyder, 338 Mass. 502, 504-505, 156 N.E.2d 21 (1959). See also Woolley's Laundry, Inc. v. Silva, 304 Mass. 383, 386-387, 23 N.E.2d 899 (1939); 117 Production Machine Co. v. Howe, 327 Mass. 372, 377-379, 99 N.E.2d 32 **1225 (1951); Jet Spray Cooler, Inc. v. Crampton, 361 Mass. 835, 839-841, 282 N.E.2d 921 (1972). Compare Black v. Parker Mfg. Co., 329 Mass. 105, 111-114, 106 N.E.2d 544 (1952).

The defendants contend that the Solitron offer ceased to be a confidential corporate opportunity in the autumn of 1973 when it became public knowledge that Solitron's assets were for sale. Even before that time, however, Driscoll and Adams for their own advantage had begun to use information which came to them in confidence as trusted BBF employees. Indeed, Driscoll, at the expense of BBF, had investigated the opportunity to acquire Solitron's assets and had formed the opinion that BBF in its own interest should acquire these assets or some of them. When the availability of Solitron's assets became public, he and his associates were ready to move. The defendants also place some emphasis on the fact that the assets acquired by Germanium from Solitron represented only part of the assets offered to BBF by Solitron and were "readily available from industrial suppliers." Whatever bearing these circumstances may have had on issues of causation and of the extent of damages, the judge was not required to conclude that they, by themselves, necessarily operated to relieve the defendants of liability for their misuse of Driscoll's and Adams's confidential knowledge of BBF's corporate opportunity.

Cullen v. BMW 691 F.2d 1097 (2nd Cir. 1982)

United States Court of Appeals, Second Circuit.

Thomas W. CULLEN, Jr., Plaintiff-Appellee, v. BMW OF NORTH AMERICA, INC., Defendant-Appellant.

No. 1141, Docket 82-7118.

Argued May 27, 1982. Decided Oct. 13, 1982.

LEONARD P. MOORE, Circuit Judge:

Defendant BMW of North America, Inc. ("BMW/NA") appeals from a judgment of the United States District Court for the Eastern District of New York, Honorable Edward R. Neaher, Judge, in favor of Thomas W. Cullen, Jr., in the amount of $18,000 plus interest, and from a judgment of that same court, denying defendant's motion to amend the judgment. BMW/NA is the exclusive importer and distributor in the United States of passenger cars, parts, and products 118 manufactured by Bayerische Motoren Werke, AG. On appeal, BMW/NA claims that the district court erred in finding that it had breached a duty under New York law actively to police the methods of operation of its franchisee, Bavarian Auto Sales, Inc. ("Bavarian"), and had negligently permitted Bavarian to continue as a BMW dealer. We agree with BMW/NA that it did not owe a duty to supervise the operation of Bavarian and to terminate the franchise because of its allegedly precarious financial condition. Accordingly, we reverse the judgments of the district court.

On January 24, 1979, Thomas W. Cullen, Jr., and his wife drove past the showroom of Bavarian and decided to shop for a car. Cullen selected a new 1978 BMW, Model 530i, at a price of $18,245, and placed a deposit of $245 on the vehicle. Although Cullen had originally been told that the car would not be available for seven to ten days, a Bavarian salesman called Cullen five days later, advising that the car had arrived and requesting a check for the balance of the amount of $18,000, which was cashed by Bavarian. However, Cullen never received the automobile or the return of his money. In fact, Hans Eichler, Bavarian's president and owner of a 60 percent interest in the franchise, had stolen and absconded with Cullen's money. At no time relevant to the transaction, however, did Cullen have any contact, in person, by telephone, or by mail, with any representative of BMW/NA.

Cullen subsequently commenced a civil suit against Bavarian in New York State Supreme Court, Nassau County. The suit was stayed after Eichler filed a petition in bankruptcy. Cullen also filed criminal complaints with the Queens County District Attorney and the Attorney General of the State of New York, but no indictments were issued. [FN1] In addition, Cullen brought this action based on diversity grounds against BMW/NA.

FN1. Eichler and Bavarian were indicted, however, for three counts of grand larceny in the second degree based on Eichler's conduct toward customers other than Cullen. On February 5, 1981, Eichler pleaded guilty to attempted grand larceny in the second degree.

Bavarian was operating as a franchised BMW dealer, with Eichler as its principal, when BMW/NA assumed control over the distribution of BMW automobiles in March, 1975. It continued to operate as a franchised BMW dealer until February 16, 1979 when the dealership ended. [FN2]

FN2. Bavarian and BMW/NA entered into three written franchise agreements from June, 1976 to February 16, 1979: (1) from June 1 to December 31, 1976; (2) from August 12 to December 31, 1977; and (3) from January 1 to December 31, 1978. Although no written agreement was in effect from January 1 to August 12, 1977 or from January 1 to February 16, 1979, Bavarian continued to operate as a duly franchised BMW dealer during these periods.

Pursuant to a standard operating agreement with BMW/NA, Bavarian was responsible *1099 for maintaining a prearranged line of credit with a financial institution to be used exclusively for the purchase of BMW vehicles. Bavarian, however, permitted its line of credit to 119 lapse. Prior to August, 1976, Bavarian had a line of credit with the State Bank of Long Island. On August 18, 1976, however, the bank informed BMW/NA that it had terminated its relationship with Bavarian because Eichler had advised the bank that he had arranged to handle Bavarian's credit requirements from personal resources. BMW/NA experienced difficulty, however, in receiving payment for cars and parts and placed Bavarian on a C.O.D. certified check basis, rather than open account status, in the latter part of 1976.

In June, 1977, BMW/NA received a letter from the Israel Discount Bank stating that effective June 16, 1977, Bavarian had established a line of credit for $200,000. From the latter part of 1976 through August 22, 1977, the Israel Discount Bank had paid for approximately eighty-seven vehicles purchased by Bavarian even though no formal letter of credit was in effect for most of this period. The bank also paid BMW/NA for another twenty-six vehicles between September 30, 1977 and December 27, 1977. The Israel Discount Bank continued as Bavarian's credit facility through the summer of 1978. The bank paid BMW/NA for fifty-three automobiles between January 1, 1978 and August 18, 1978. In the fall of 1978, however, the bank concluded that the dealership was experiencing financial difficulty and decided not to extend further credit. The bank's decision was in part based upon certain tax levies and other legal actions filed against the Bavarian franchise. BMW/NA was unaware, however, of any tax levies filed against Bavarian or the reasons behind the Israel Discount Bank's decision to terminate Bavarian's line of credit.

At approximately the time at which Bavarian lost its line of credit, BMW/NA began receiving an increased number of customer complaints concerning the Bavarian franchise. These complaints ranged from the issuance of checks on accounts with insufficient funds to alleged delays in return of customer deposits. Although an investigation by BMW/NA revealed that all complaints had been satisfactorily resolved and all checks were covered on representation. BMW/NA remained disturbed by Bavarian's continued failure to satisfy certain requirements of its contract with BMW/NA, such as submitting monthly financial statements, [FN3] and the increased number of checks which Bavarian had issued on accounts with insufficient funds. [FN4]

FN3. Bavarian furnished only two monthly financial statements during the several years it operated.

FN4. During 1978, checks totalling $40,000 were issued by Bavarian to BMW/NA upon accounts with insufficient funds.

Eichler attempted to reassure BMW/NA of Bavarian's financial viability, indicating that he was actively negotiating with a variety of financial institutions to obtain a line of credit. By mid-September, however, Bavarian still had not been able to secure credit funds, and BMW/NA met with Eichler to discuss the future of the franchise. After reviewing the dealership's file, BMW/NA concluded that it would be difficult to terminate the Bavarian franchise at that time, without adequate written documentation certifying the dealer's deficiencies and without providing Bavarian an opportunity to correct those deficiencies. Accordingly, BMW/NA granted Bavarian sixty days to cure all deficiencies, and BMW/NA personnel closely monitored

120 the franchise during this period. BMW/NA continued to operate as a BMW dealer and service facility and maintained the minimum number of vehicles required by its contract with BMW/NA.

At Bavarian's request, the original sixty-day period was extended until November 14, 1978. On the following day, Eichler informed BMW/NA that he had verbal approval from Citibank for credit and that he was awaiting confirmation. Although the Citibank commitment did not materialize, the Lloyd Capital Corporation ("Lloyd") advised *1100 BMW/NA by letter dated December 7, 1978, that Bavarian had established a line of credit for $400,000 exclusively for BMW automobiles. Shortly thereafter, BMW/NA allocated seven vehicles to the Bavarian dealership and drew funds pursuant to the Lloyd letter of credit. The cash drafts were refused, however, and Lloyd informed BMW/NA that the letter of credit had been withdrawn. [FN5] The seven vehicles were then removed from Bavarian and were reallocated to a nearby BMW dealer. Moreover, Friedrich Hanau, vice-president of BMW/NA, immediately wrote to Eichler, setting forth the company's position that unless Bavarian corrected its continuing deficiencies within an additional sixty days, BMW/NA would serve a notice of intent to terminate the franchise. Eichler responded on December 28, 1978, indicating that he was accelerating his efforts to obtain a line of credit, and expressing his desire to continue as a BMW dealer. In early January, 1979, however, Eichler advised BMW/NA that he desired to sell his franchise to another automobile dealer. This prospective purchaser submitted an application which BMW/NA, in early February, rejected for failing to satisfy BMW/NA's established standards for a new dealership.

FN5. Bavarian had never signed a formal agreement with Lloyd and had never paid Lloyd the $1,000 required by law to be submitted prior to the execution of the agreement.

On February 13, 1979, BMW/NA officials again met with Eichler to discuss the future of the franchise. At this meeting, BMW/NA officials learned that Eichler had accepted deposits from customers totalling approximately $100,000 and that he had used this money for his own purposes. Three days later, BMW/NA accepted Eichler's voluntary letter of resignation.

DISCUSSION

Cullen alleged at trial two theories of liability: (1) that Bavarian acted as BMW/NA's agent pursuant to principles of either actual agency or agency by estoppel; and (2) that BMW/NA negligently permitted Bavarian to continue as a BMW dealer because it had knowledge of Bavarian's precarious financial condition. [FN6] The district court rejected the first theory of liability, finding that Cullen failed to prove the essential elements supporting a theory of agency by estoppel. [FN7] The court held, however, that BMW/NA was liable for damages under the negligence theory, finding that Cullen had met his "burden of proving facts which give rise to a legal duty on the part of BMW/NA, for the protection of its franchisee's customers, to reasonably police the authorized use of the BMW name and supervise the operation of its franchise." Cullen v. BMW of North America, Inc., No. 79 C 970, slip op. at 12 (E.D.N.Y. Oct. 28, 1981). In imposing a duty on BMW/NA, the district court found that BMW/NA "was apprised of Bavarian's propensity for unscrupulous business transactions," Cullen v. BMW of North America, Inc., 531 *1101 F.Supp. 555, at 565-66 (E.D.N.Y.1982), and that as a result, "BMW/NA should have reasonably foreseen that Bavarian might have intentionally caused some financial harm to some BMW customer as a result of its original 121 negligence ...." Id. The court thus concluded that where a franchisor, such as BMW/NA, has a "reasonable opportunity to reduce the risk of foreseeable injury" caused by its franchisee, id., but fails to terminate its franchisee or take other appropriate action, the franchisor is negligent and is liable for damages suffered by the ultimate consumer.

FN6. Cullen's amended complaint alleged four separate theories of liability: (1) that Bavarian was acting as agent for BMW/NA pursuant to principles of either actual agency or agency by estoppel; (2) that BMW/NA was negligent in permitting Bavarian to continue as a dealer because it had knowledge of Bavarian's allegedly precarious financial condition; (3) that BMW/NA entered into a conspiracy with Eichler, and in fact did, defraud customers into doing business with Eichler; and (4) that BMW/NA's conduct constituted a prima facie tort. At the conclusion of discovery, BMW/NA moved for summary judgment dismissing each of Cullen's claims for relief. The district court concluded that an actual agency relationship did not exist between BMW/NA and Bavarian. It also found no evidence to support Cullen's causes of action for conspiracy to commit fraud and prima facie tort, and dismissed those claims as well. Accordingly, only the issues of negligence and agency by estoppel remained to be tried.

FN7. The court specifically pointed to Cullen's failure "to prove his reliance on Bavarian's authority to act for BMW/NA." Cullen v. BMW of North America, Inc., No. 79 C 970, slip op. at 8 (E.D.N.Y. Oct. 28, 1981) (emphasis in original). Cullen's cross- appeal from the dismissal of this claim for relief was withdrawn pursuant to a stipulation dated March 11, 1982 and filed on March 26, 1982. Accordingly, we need not address this issue on appeal.

We conclude, however, that the district court improperly determined that Cullen's injury was reasonably foreseeable, and thus erred in finding BMW/NA liable for negligent failure to police the methods of operation of its independent franchisee and to terminate the franchise because of Bavarian's precarious financial condition. "The law does not undertake to hold a person who is chargeable with a breach of duty toward another, with all the possible consequences of his wrongful act." Lowery v. Western Union Telegraph Co., 60 N.Y. 198, 201 (1875). It is thus a well-established principle that foreseeability of injury is an indispensable requisite of negligence, and that negligence exists only when there is a reasonable likelihood of danger as the result of the act complained of. Ward v. State of New York, 81 Misc.2d 583, 366 N.Y.S.2d 800 (N.Y.Ct.Cl.1975). Accordingly, an intervening act, tortious or criminal, will ordinarily insulate a negligent defendant from liability when the subsequent act could not have been reasonably anticipated by the defendant. Tirado v. Lubarsky, 49 Misc.2d 543, 268 N.Y.S.2d 54 (N.Y.Civ.Ct.), aff'd, 52 Misc.2d 527, 276 N.Y.S.2d 128 (N.Y.App.Div.1966).

Applying these principles to the instant action, we decline to hold BMW/NA negligent and liable for damages since it could not reasonably have anticipated the crimes committed by Bavarian's principal, Eichler. Although BMW/NA may have been aware of Bavarian's shaky financial condition, that knowledge alone gave BMW/NA no cause reasonably to anticipate that Eichler would either engage in any criminal activity or that he would abscond with customer funds. In fact, no amount of supervision by BMW/NA would have enabled it to foresee Eichler's thievery. Moreover, even though BMW/NA had notice that Bavarian had been the 122 subject of customer complaints, most complaints were resolved, and the record does not demonstrate that there was any dishonesty or criminal intent associated with these incidents. Furthermore, we note that the district court's finding that Bavarian was an independently owned and operated dealership is sufficient to eliminate any question of control by BMW/NA. BMW/NA had no financial interest in Bavarian, did not participate in the hiring or firing of its officers or employees, or dictate its sales practices. Accordingly, we conclude that BMW/NA, even though it had knowledge of Bavarian's precarious financial condition, was not liable to Cullen for his damages under a negligence theory since it could not have reasonably foreseen Eichler's criminal activity.

Reversed. * * *

Davila v. Yellow Cab Co. 776 N.E.2d 720

Appellate Court of Illinois, First District, Second Division.

Herman DAVILA, Plaintiff-Appellant, v. YELLOW CAB COMPANY, Defendant-Appellee.

Aug. 20, 2002.

Justice McBRIDE delivered the opinion of the court:

Plaintiff Herman Davila appeals an order of the circuit court of Cook County granting summary judgment in favor of defendant Yellow Cab Company.

In a first amended complaint, Davila alleged he was struck and injured by a taxicab owned by Yellow Cab and negligently operated by defendant Thomas Williams on October 31, 1996, in the vicinity of the intersection of LaSalle and Lake Streets in Chicago. Davila alleged that he was a State of Illinois police officer standing on Lake Street due to traffic congestion when he was struck by Williams' cab and dragged for several feet. Davila also alleged the incident caused him severe and permanent bodily injuries, pain and suffering, medical expenses, and loss of his usual occupation. Davila complained that Yellow Cab was responsible for his damages due to a principal/ agent or master/servant relationship with Williams. In a separate count, which was dismissed and is not subject to this appeal, Davila alleged that Yellow Cab had negligently entrusted Williams with the taxicab.

123 Yellow Cab answered and moved for summary judgment, contending that its written contract with Williams established he was an independent contractor and that Williams' conviction for battery, an intentional crime, in connection with the incident at Lake and LaSalle Streets established Williams was not acting within the scope of any agency or employment relationship. Yellow Cab concluded it was therefore not responsible for Williams' actions.

The trial court granted Yellow Cab's motion for summary judgment, finding that, as a matter of law, Williams was not an agent or employee of Yellow Cab, because Yellow Cab was leasing licensed cabs and there was no indication that it had a right to control Williams' operation of the cab. The trial court declined to follow Yellow Cab Co. v. Industrial Comm'n, 124 Ill.App.3d 644, 80 Ill.Dec. 96, 464 N.E.2d 1079 (1984), or Yellow Cab Co. v. Industrial Comm'n, 238 Ill.App.3d 650, 179 Ill.Dec. 691, 606 N.E.2d 523 (1992), and indicated that these cases are limited to questions of entitlement to workers' compensation benefits. In both cases, the courts rejected Yellow Cab's independent contractor argument and found the existence of an employer-employee relationship under a written agreement and facts that are substantially similar to those in the case at bar.

In this appeal, Davila argues (1) a principal/agent relationship existed or was sufficiently disputed to preclude summary judgment in Yellow Cab's favor; and (2) Yellow Cab can be held liable for tortious conduct in furtherance of its business, regardless of whether the conduct was intentional or criminal.

Summary judgment permits the trial court to determine whether any genuine issue of material fact exists, but it does not permit the trial court to try such an issue. * * * Summary judgment is encouraged in the interest of the prompt disposition of lawsuits, but it is a drastic measure which should be granted only when the pleadings, depositions, affidavits, and admissions on file, when reviewed in the light most favorable to the nonmovant, show that there is no genuine issue as to any material fact and that the moving party's right to judgment is clear and free from doubt. Pyne, 129 Ill.2d at 358, 135 Ill.Dec. 557, 543 N.E.2d 1304. " 'Summary judgment must be awarded with caution to avoid preempting litigant's right to trial by jury or the right to fully present the factual basis of a case where a material dispute may exist * * *.' [Citation.]" Schrager v. North Community Bank, 328 Ill.App.3d 696, 703, 262 Ill.Dec. 916, 767 N.E.2d 376 (2002). " 'A triable issue of fact exists where there is a dispute as to a material fact or where, although the facts are not in dispute, reasonable minds might differ in drawing inferences from those facts.' [Citation.]" Schrager, 328 Ill.App.3d at 703, 262 Ill.Dec. 916, 767 N.E.2d 376.

In cases involving summary judgment motions, we conduct a de novo review of the evidence in the record. Schrager, 328 Ill.App.3d at 702, 262 Ill.Dec. 916, 767 N.E.2d 376. " '[W]e are free to consider any pleadings, depositions, admissions, and affidavits on file at the time of the hearing regardless of whether facts contained therein were presented to the trial court in response to the motion for summary judgment.' [Citation.]" Schrager, 328 Ill.App.3d at 703, 262 Ill.Dec. 916, 767 N.E.2d 376. Reversal " 'is warranted where, on review, a material issue of fact or an inaccurate interpretation of the law exists.' [Citation.]" Schrager, 328 Ill.App.3d at 703, 262 Ill.Dec. 916, 767 N.E.2d 376.

124 We disagree with the trial court's conclusion that Yellow Cab Co. v. Industrial Comm'n, 124 Ill.App.3d 644, 80 Ill.Dec. 96, 464 N.E.2d 1079 (1984) ( Yellow Cab I ), and Yellow Cab Co. v. Industrial Comm'n, 238 Ill.App.3d 650, 179 Ill.Dec. 691, 606 N.E.2d 523 (1992) ( Yellow Cab II ), are limited to questions of entitlement to workers' compensation benefits. The standard used in determining whether an employer-employee relationship exists in a workers' compensation context is no different from the standard used in a vicarious liability context. Gunterberg v. B & M Transportation Co., 27 Ill.App.3d 732, 737-38, 327 N.E.2d 528 (1975) (standard used to determine employee or independent contractor status is not affected by whether question arises in context of workers' compensation coverage or respondeat superior); Hamilton v. Family Record Plan, Inc., 71 Ill.App.2d 39, 47-48, 217 N.E.2d 113 (1966) (determination of employee or independent contractor status is the same in workers' compensation and respondeat superior cases).

In Yellow Cab I, the court indicated that a lease agreement between Yellow Cab and a cab driver disclaiming an employer-employee relationship was not dispositive of the cab driver's status. Yellow Cab, 124 Ill.App.3d at 647, 80 Ill.Dec. 96, 464 N.E.2d 1079. See also Tansey v. Robinson, 24 Ill.App.2d 227, 234, 164 N.E.2d 272 (1960) (written contract between grocery store and delivery man not conclusive of their relationship). The nature of the relationship "depends upon the actual practice followed by the parties and, as a general rule, becomes a mixed question of law and fact to be submitted upon proper instructions to a jury." Tansey, 24 Ill.App.2d at 233-34, 164 N.E.2d 272. The question of whether a relationship of employer and employee, principal and agent, or owner and independent contractor existed depends upon the facts of a given case. Tansey, 24 Ill.App.2d at 234, 164 N.E.2d 272. "Unless those facts clearly appear, the relationship cannot become purely a question of law." Tansey, 24 Ill.App.2d at 234, 164 N.E.2d 272.

" 'No one factor may determine what [the] relationship is between parties in a given case. It may be necessary to consider a number of factors with evidentiary value, such as the right to control the manner in which the work is done, the method of payment, the right to discharge, the skill required in the work to be done, and who provides the tools, materials, or equipment. Of these factors the right to control the manner in which the work is done is the most important in determining the relationship.' " Yellow Cab II, 238 Ill.App.3d at 652, 179 Ill.Dec. 691, 606 N.E.2d 523, quoting Morgan Cab Co. v. Industrial Comm'n, 60 Ill.2d 92, 97-98, 324 N.E.2d 425 (1975).

Additionally, it is the right of control, not the fact of control, that is the principal factor in distinguishing a servant from a contractor. * * *

Accordingly, in Yellow Cab I, the court found that a number of factors established that Yellow Cab had a right to control the manner in which work was done under a 24-hour cab lease. Yellow Cab, 124 Ill.App.3d at 647, 80 Ill.Dec. 96, 464 N.E.2d 1079. All of the cabs were uniform in appearance and had the company's name and telephone number on them. Yellow Cab maintained the right to terminate or refuse to renew the 24-hour lease. The driver was not permitted to sublet the cab, was instructed to purchase his gas at the company garage, and was required to report mileage at the end of the lease period. Yellow Cab derived goodwill from the public presence of the well- maintained cabs. Roadmen filled out observation reports on the 125 condition of the cabs. Yellow Cab performed routine maintenance and repairs, and if the cab broke down within a six-county area, Yellow Cab would make the necessary repairs or tow the cab and provide another cab if one were available.

Based on these facts, the court concluded that despite the lease agreement's employment relationship disclaimer, the record clearly indicated that Yellow Cab's interest in its cabs did not cease with their leasing, but extended to their operation ( Yellow Cab, 124 Ill.App.3d at 647, 80 Ill.Dec. 96, 464 N.E.2d 1079), and that Yellow Cab was in the business of operating a fleet a cabs for public use ( Yellow Cab, 124 Ill.App.3d at 648, 80 Ill.Dec. 96, 464 N.E.2d 1079). Accordingly, there was sufficient evidence to conclude the cab driver was an employee of Yellow Cab. Yellow Cab, 124 Ill.App.3d at 648, 80 Ill.Dec. 96, 464 N.E.2d 1079.

Yellow Cab II, 238 Ill.App.3d 650, 179 Ill.Dec. 691, 606 N.E.2d 523, bears even more resemblance to the instant case, because it also involved a long-term lease, rather than the series of 24-hour leases in Yellow Cab I. The court stated:

"Unquestionably, several factors which other courts have relied upon in analyzing the control factor, such as the requirement that gasoline be purchased and repairs done at the employer's garage, use of radio assignments or control of shifts and assignments, are not present in this case. However, several of the most important factors which courts have relied upon in determining that an employer/employee relationship existed between the parties do indeed exist in the present case. Here, claimant was required to keep the vehicle in running condition, and the employer had the right to inspect the vehicle, sign and meter at a time and place the employer designated. Claimant was required to keep the employer's name upon the vehicle and could not paint it any color other than yellow. The employer was entitled to terminate the lease 'with or without cause,' a provision that suggests an employer/employee relationship. Subletting of the vehicle to any other than an employer- authorized individual (with a valid public chauffeur's license) was prohibited." Yellow Cab, 238 Ill.App.3d at 654, 179 Ill.Dec. 691, 606 N.E.2d 523.

In light of these facts, Yellow Cab II concluded that the cab company was not simply leasing vehicles, but was in the business of providing a fleet of cabs for public use. Yellow Cab, 238 Ill.App.3d at 654-55, 179 Ill.Dec. 691, 606 N.E.2d 523. The court declined to respond to Yellow Cab's assertion that it did not insist that the cab driver actually operate the vehicle as a taxicab, because this assertion contradicted the express language of the lease ("Lessee thereby and hereby leases the Automobile as a taxicab"), and the very reason for some of the lease's requirements. Yellow Cab, 238 Ill.App.3d at 654-55, 179 Ill.Dec. 691, 606 N.E.2d 523. Accordingly, the court affirmed the determination of an employer-employee relationship between Yellow Cab and the cab driver. Yellow Cab, 238 Ill.App.3d at 655, 179 Ill.Dec. 691, 606 N.E.2d 523.

In the instant case, the relationship between Yellow Cab and Williams was described in four documents. The first was entitled "Yellow Cab Company Driver Information Packet" and was given to Williams as part of his orientation to the company. During a deposition on January 8, 2001, Jeffrey Feldman, Yellow Cab's president between February 1982 and March 2000, stated that the orientation consisted of a three-hour "indoctrination addressing operations of a 126 Yellow Cab," and it was required of all Yellow Cab drivers regardless of whether they had been driving for another company or not. Feldman estimated that Yellow Cab owned 2,246 of the 5,700 cabs operating in Chicago in 1996. The second document was entitled "Terms and Conditions," and Feldman referred to this contract as a "master lease" during his January 8, 2001 deposition. The third and fourth documents were entitled "Daily Lease with Option to Buy" (a two-year contract) and "Service Agreement."

According to these documents and Feldman's deposition testimony, Williams' relationship with Yellow Cab was similar to the driver's relationship with Yellow Cab in Yellow Cab II. Although Yellow Cab did not require Williams to work any shifts or locations, Yellow Cab provided the cab, cab medallion, meter, and taxi dome light on the roof of the vehicle, and specified it was leasing the vehicle to Williams as a "taxicab." The cab was part of uniformly painted fleet of nearly half the cabs operating in Chicago in 1996, and Williams was prohibited from changing its appearance in any way. Williams was also to be the sole driver, unless Yellow Cab authorized a sublettor. Williams was instructed to issue meter-printed or hand- completed receipts bearing Yellow Cab's name, and to accept Yellow Cab coupons and charges to Yellow Cab's corporate and individual charge accounts. Williams was asked to use the cab's heater and air conditioner for the comfort of his passengers, to turn the cab's radio down or off when a passenger entered the cab, and to clean the interior of the cab often, and he was "encouraged" to use Yellow Cab's car washing facilities. Williams was required to keep the vehicle and meter in satisfactory repair and running condition, and to report any accidents to Yellow Cab's insurer.

Furthermore, Yellow Cab's influence over Williams' operation of the cab did not stop with these requests, instructions and prohibitions. Yellow Cab reserved the right to inspect the vehicle and meter at any time and place Yellow Cab designated. According to Feldman, Yellow Cab placed a bumper sticker on the back of the cab that read "How Am I Driving" and provided Yellow Cab's telephone number. Yellow Cab also reserved the right to terminate the lease under a number of circumstances, including if Williams violated "any term, provision or condition of [the Daily] Lease or the Service Agreement," or failed to follow "any applicable laws, ordinances and governmental rules and regulations."

Accordingly, we disagree with the trial court's conclusion that, "There's nothing to indicate that the cab company in any way had control over the way in which the driver did his business." We also disagree with the trial court's determination that Yellow Cab was "leasing the cab, and from there, the cab driver takes it and does whatever he wants with it," and "as to how he goes about his business, [there isn't] anything that really would even * * * raise a question of fact about whether he's an agent." Based on even fewer indications of a right to control, Yellow Cab II concluded that Yellow Cab was not simply in the business of leasing vehicles ( Yellow Cab, 238 Ill.App.3d at 654, 179 Ill.Dec. 691, 606 N.E.2d 523) and that an employer- employee relationship existed ( Yellow Cab, 238 Ill.App.3d at 655, 179 Ill.Dec. 691, 606 N.E.2d 523).

The trial court emphasized that Williams paid Yellow Cab a flat leasing fee regardless of what Williams earned while operating the taxicab, and appears to have been referring to the analysis in Metro East Cab Co. v. Doherty, 302 Ill.App.3d 402, 235 Ill.Dec. 764, 705 N.E.2d 127 947 (1999), which concluded that a cab company and driver were lessor and lessee rather than employer and employee because there was no evidence of "economic interdependence" between them. Metro East is a Fifth District opinion and therefore not binding authority in the First District. * * * We do not consider Metro East relevant, particularly when Yellow Cab I and Yellow Cab II, First District cases, involve the same cab company and substantially similar contracts and facts as the case at bar.

Based on the reasoning in Yellow Cab I and Yellow Cab II and the facts disclosed by the record, we conclude that material questions of fact exist as to whether Williams was an employee or agent of Yellow Cab on October 31, 1996, and that summary judgment on this issue was erroneous. Pyne, 129 Ill.2d at 358, 135 Ill.Dec. 557, 543 N.E.2d 1304 (summary judgment is warranted when there is no genuine issue as to any material fact and the moving party's right to judgment is clear and free from doubt); Schrager, 328 Ill.App.3d at 703, 262 Ill.Dec. 916, 767 N.E.2d 376 (triable issue of fact exists where there is a dispute as to a material fact or where reasonable minds might differ in drawing inferences from undisputed facts).

The trial court did not make any specific findings about whether Williams was acting within the scope of employment, but questioned whether Yellow Cab could be held liable for Williams' conduct after Williams was convicted of an intentional crime. * * *

More importantly, under the doctrine of respondeat superior, an employer can be held vicariously liable for the tortious acts of its employees ( Pyne, 129 Ill.2d at 359, 135 Ill.Dec. 557, 543 N.E.2d 1304), including negligent, wilful, malicious, or even criminal acts of its employees when such acts are committed in the course of employment and in furtherance of the business of the employer ( Brown v. King, 328 Ill.App.3d 717, 722, 262 Ill.Dec. 897, 767 N.E.2d 357 (2001)). "Whether or not the employee's act is intentional or merely negligent is not the defining factor. Instead, the focus is on whether or not the act was performed within the 'scope of employment'." Hargan v. Southwestern Electric Cooperative, Inc., 311 Ill.App.3d 1029, 1032, 244 Ill.Dec. 334, 725 N.E.2d 807 (2000). Thus, assuming that Williams was Yellow Cab's employee, the dispositive issue was not whether Williams acted intentionally, but whether his intentional, negligent, or even criminal acts were within the scope of employment.

The term "scope of employment" had not been precisely defined, but Illinois uses the following criteria in determining whether an act is within the scope of employment:

" '(1) Conduct of a servant is within the scope of employment if, but only if: (a) it is of the kind he is employed to perform; (b) it occurs substantially within the authorized time and space limits; (c) it is actuated, at least in part, by a purpose to serve the master, * * * * * * (2) Conduct of a servant is not within the scope of employment if it is different in kind from that authorized, far beyond the authorized time or space limits, or too little actuated by a purpose to serve the master.' " Pyne, 129 Ill.2d at 359-60, 135 Ill.Dec. 557, 543 N.E.2d 1304, quoting Restatement (Second) of Agency § 228 (1958).

The burden is on the plaintiff to show the contemporaneous relationship between the 128 tortious act and the scope of employment. * * * This relationship can be proved through circumstantial evidence. * * * "If, from the papers on file, a plaintiff fails to establish an element of the cause of action, summary judgment for the defendant is proper." * * * "Summary judgment is generally inappropriate when scope of employment is at issue." * * * "Only if no reasonable person could conclude from the evidence that an employee was acting within the course of employment should a court hold as a matter of law that the employee was not so acting." Pyne, 129 Ill.2d at 359, 135 Ill.Dec. 557, 543 N.E.2d 1304. Whether the employee's conduct was so unreasonable as to make his act an independent act of his own, rather than a mere detour or one incidental to employment, is a question of degree which depends upon the facts of the case. * * * This question should be decided by a jury, "unless the deviation is so great, or the conduct so extreme, as to take the servant outside the scope of his employment and make his conduct a complete departure from the business of the master." Bonnem, 17 Ill.App.2d at 298, 150 N.E.2d 383.

Accordingly, in Bonnem, the court concluded that a jury should decide whether an employee, on an errand for his employer to pick up an automobile part from a garage, was acting within the scope of his employment when he struck one of the garage employees with a broom. Bonnem, 17 Ill.App.2d 292, 150 N.E.2d 383. In Rubin v. Yellow Cab Co., 154 Ill.App.3d 336, 107 Ill.Dec. 450, 507 N.E.2d 114 (1987), the court held that a cab driver who did not have a passenger was clearly not acting within the scope of employment when he left the cab and allegedly assaulted another driver who had inadvertently obstructed the taxi's path. The court stated that a cab driver "is basically relegated to transporting individuals from one destination to another" and is therefore unlikely to attack a person who is neither a passenger nor connected with the cab company. Rubin, 154 Ill.App.3d at 339, 107 Ill.Dec. 450, 507 N.E.2d 114. Thus, the cab driver's assault of another driver was a deviation from the conduct generally associated with driving a cab ( Rubin, 154 Ill.App.3d at 339, 107 Ill.Dec. 450, 507 N.E.2d 114) and, therefore, outside the scope and not in furtherance of the cab company's business ( Rubin, 154 Ill.App.3d at 339-40, 107 Ill.Dec. 450, 507 N.E.2d 114).

We find, after a de novo review of the record, that material questions of fact exist as to whether Williams was acting within the scope of an employment or agency relationship when Davila was injured on October 31, 1996, because in contrast to Rubin, Williams was in the cab, transporting a passenger, when the incident occurred.

At a deposition taken on March 28, 2001, Williams described the October 31, 1996, incident as follows. At approximately 8:30 a.m., Williams picked up a fare at the East Bank Club who wished to go to Dearborn and Monroe Streets, or a few blocks further to Dearborn Street and Jackson Boulevard. Just after Williams turned from southbound LaSalle Street onto eastbound Lake Street, traffic became blocked by three armored cars attempting to maneuver into a driveway at the James R. Thompson Center. Williams sounded his horn, and a person appeared from the sidewalk or curb behind the armored cars and walked toward the cab. Within a few seconds, the person reached the cab, opened the front passenger door, took one of Williams' two licenses from a display on the right side of the dashboard, and stood next to the open door. Williams thought the person was an armored car driver. By then, the armored cars had moved, and Williams was blocking traffic. He felt threatened and uncertain about what else the person might do, and he wanted to secure the car from further intrusion. He also realized 129 that he could not drive the cab without both licenses. With the cab still in gear, Williams told the person he was going to pull to the curb. Williams then moved forward a few feet to get the person out of the doorway and closed the cab door. As Williams pulled forward, he could see the person was standing in the street and was not touching the cab in any way. He parked the cab "pretty close" to the Thompson Center driveway, or even "sticking out [of it]," and had traveled a distance of only 15 to 25 feet. Williams realized he must be dealing with a local or suburban police officer. He told his fare, "I guess you'll have to get another cab," and the passenger left without paying. Williams got out of the cab and walked to the back of it to "find out what was going on, what the problem was," and was arrested for battery.

Additionally, Williams' assertion that there was no contact between his cab and Davila was supported by (a) Williams' response to an interrogatory indicating that there was no damage to the cab, (b) 12 photographs of the cab which did not show any apparent damage, and (3) the deposition statement of Feldman, Yellow Cab's president, that "The vehicle was not damaged and was not repaired to the best of [his] knowledge."

In a September 27, 1999, deposition, Davila provided a different version of incident which nonetheless corroborated that Williams was inside the cab, transporting a passenger, at the time. Davila was sitting outside the Thompson Center in a police vehicle, when he was asked to assist a fellow officer who was directing armored vehicles into the Thompson Center's driveway. Williams' cab was directly behind the armored cars, and Williams was sounding his horn, screaming, and inching forward, ignoring the officer's instructions to wait quietly. The armored cars had blocked traffic for about 10 minutes, and Williams had been sounding his horn steadily for about two minutes when Davila approached the cab. Davila was wearing a dark blue uniform shirt and slacks, black tie, badge, State of Illinois Police patches, police radio, mace, handcuffs, and weapon, but was not wearing the uniform's "Smokey The Bear" hat. The windows of the cab were rolled up, and Williams had a passenger. Davila knocked on the front passenger door, and within one second opened it, bent down, and talked to Williams. Wiliams swore at Davila and " constantly" told Davila to "get out, get out of the cab." Davila indicated that he was going to issue a citation for "inching up and continu[ing to blow] the horn when * * * told not to." Williams' passenger never said a word. The cab was still for about a minute after Davila opened its door, but when Davila reached for Williams' identification card on the right side of the dashboard, Williams shifted from neutral to drive and stepped on the gas pedal. The armored vehicles were no longer blocking Lake Street, and Williams pulled the cab forward at five to six miles an hour. Davila got out of the cab, but held onto the door with his right hand and onto to the roof with his left hand, while running along with it. Davila was not dragged. When Williams slowed down from 15 or 18 miles per hour to almost a complete stop, Davila let go and sat down because he was in pain. Williams' cab had traveled 25 feet. Williams drove off but was stopped and arrested at Clark and Lake Streets, where Williams' passenger got out of the cab.

Although Williams and Davila gave different versions of their meeting on October 31, 1996, both indicated that Williams was in the cab, transporting a passenger at the time. An act is within the scope of employment if it (a) is of the kind the person is employed to performed, (b) occurs substantially within the authorized time and space limits, and (c) is actuated, at least in part, by a purpose to serve the master. * * * Pursuant to a lease with Yellow Cab, Williams was 130 transporting an individual from one Chicago destination to another, when the public street became blocked, and a stranger opened the cab's door and intruded into the vehicle. There is a dispute as to precisely what occurred next. We indicated, above, that there are material questions of fact as to whether Williams was Yellow Cab's agent or employee. We also find that there are material questions of fact as to whether Williams' conduct deviated so greatly from his duties as a Yellow Cab driver, or was so extreme that he was no longer performing the business of a Yellow Cab driver. * * *

Accordingly, we reverse the trial court's entry of summary judgment in Yellow Cab's favor on the issue of agency, and we remand this case for further proceedings not inconsistent with this opinion.

Reversed and remanded.

GORDON and CAHILL, JJ., concur.

Boyd v. Crosby Lumber & Mfg. Co. 250 Miss. 433, 166 So.2d 106 (1964)

Louis Fred BOYD v. CROSBY LUMBER & MANUFACTURING COMPANY.

No. 43053.

Supreme Court of Mississippi.

July 1, 1964.

*437 ETHRIDGE, Justice.

The question in this case is whether there was substantial evidence and reasonable inferences therefrom to support the decision of the Workmen's Compensation Commission that J. E. Durham, and thus Louis Fred Boyd, the appellant, was an employee of Crosby Lumber & Manufacturing Company (called Crosby), and not an independent contractor. We think there was. Reversing its attorney referee, the commission held Boyd was working under Durham for **107 Crosby, and was therefore an employee of Crosby. It remanded the claim to its attorney referee to determine the amount of compensation due claimant for his work-connected injury. The Circuit Court of Wilkinson County reversed the commission and dismissed the claim.

131 I.

We state the facts and inferences from the evidence which the commission found and was justified in finding: Boyd was forty-four years of age, married with five children. He had no education, but was a capable driver of a caterpillar tractor. Crosby owns and operates a large sawmill, and has a considerable acreage of timber land. Its crews cut the timber, but Crosby entered into short-term written contracts (for one, two, or three months) with others to load and haul its logs from the woods to the mill. Durham, the alleged independent contractor, had been engaged in this type of work for Crosby for five or six years. The haulers carried the logs cut from a designated tract of timber. *438 When the contract expired, another was entered into. Sometimes a second contract was entered into covering the same tract of timber as covered the one which had expired. This was the case in one of the instant contracts between Crosby and Durham.

The printed form of contract in question signed by Durham was in formal terms, and stated that in consideration of $1 and other considerations Durham agreed to load, haul and deliver logs of Crosby from the timber that Crosby owned, 'within two months from the date hereof from the lands described.' The logs were to be delivered to the log ramp at Crosby, Mississippi by Durham, for which Crosby agreed to pay him $17 per 1000 feet. Payments for such work were to be made twice each month. It was agreed that Crosby 'is to have no control whatever over the matter, method or means of loading, hauling, delivering or handling the said logs,' and that Crosby 'is to hold second party (Durham) responsible only as to the result of his work as agreed to herein and not as to the means by which it is accomplished.' The contract was executed by Crosby and Durham, with two witnesses.

The prices in various contracts took into consideration certain variables such as distance and terrain. Often contracts were entered into before the timber was cut. Durham had been engaged in this type of work for Crosby for five or six years, doing either all or practically all of his work for it. Another alleged independent contractor, Hightower, said he had been doing this kind of work for ten years, hauling exclusively for Crosby that entire period of time. Durham's brother did similar work for Crosby, and he 'indicated that he could breach or cease work under one of defendant's contracts any time he so desired without obligation.'

Durham was paid by Crosby by check on the first and fifteenth of each month. Hauling of the logs and related work performed by Durham was 'an integral *439 part of the defendant's business and absolutely necessary to the business as defendant depended on' him and other haulers. Crosby on various occasions caused these haulers to cease their operations when weather conditions were bad, and when the mill yard was crowded with logs. The time in which Durham and his crew could haul the logs and unload them at the mill was limited by Crosby to a period between 7:00 a. m. and 4:00 p. m. daily. Durham and other haulers were directed where and how to spot trucks for unloading, and occasionally were caused delay in their operations by having to wait in line at the mill for that purpose. Further delay sometimes was caused by Crosby when Durham and his crew were waiting for logs to be cut. Crosby's land and timbermen 'frequently inspected the premises and told claimant to stay off the little timber and not to mash it down, and sent him back to pick up single logs left behind.' Boyd knew his job well and needed no direct supervision. Crosby sold supplies to Durham and other similar 132 contractors on credit, and then held it out of their pay. For the purpose of operating the mill and expediting the hauling **108 contracts, Crosby had a repair shop where these contractors had their equipment repaired. The costs of such repairs were withheld from their pay. All of the hauling for Crosby was carried out under contracts similar to those with Durham, except that done by a crew of three men who were employed directly by the company for limited purposes.

Durham hired Boyd and two other persons, fixed their rate of pay, hours of employment, and paid them by his personal checks. He directed these men in the hauling operations. Crosby did not select Boyd or the other men working under Durham, and made no deductions from their pay for social security or income withholding taxes. On March 9, 1961, while working in the woods under Durham, Boyd received injuries for which this claim was filed.

*440 II.

An analysis of the pertinent rules and cases is necessary to show the reasons for affirmance of this award of compensation benefits. In general, it is said that the right to control, not actual control of, the details of the work is the primary test of whether a person is an independent contractor or an employee. Relevant characteristics or tests are usually listed, with all except the control test being considered merely indicia pointing one way or the other. See A.L.I., Rest. Agency 2d (1958), ' 220, p. 485; Kisner v. Jackson, 159 Miss. 424, 132 So. 90 (1931); Carr v. Crabtree, 212 Miss. 656, 55 So.2d 408 (1951); Shumpert Truck Lines v. Horne, 227 Miss. 648, 86 So.2d 499 (1956). No general rule can be stated as to the weight of these elements, over fifteen in number. Their significance varies according to the facts of each particular case. The weight to be given each of the factors pertaining to the employee-contractor question is ordinarily to be decided by the trier of facts. It is the ultimate right of control, not the overt exercise of that right, which is decisive. Probably the four principal factors under the control test, are '(1) direct evidence of right or exercise of control; (2) method of payment; (3) the furnishing of equipment; and (4) the right to fire.' 1 Larson, Workmen's Compensation Law, ' 44.

There have been a number of cases from this jurisdiction involving the employee- contractor distinction with reference to loggers and lumber haulers. In some of them the court found that the facts reflected an independent contractor relationship. Carr v. Crabtree, supra; Simmons v. Cathey- Williford & Jones Company, 220 Miss. 389, 70 So.2d 847 (1954); Stovall's Estate v. A. Deweese Lumber Co., 222 Miss. 833, 77 So.2d 291 (1955); Bardwell's Estate v. Perry Timber Co., 222 Miss. 854, 77 So.2d 708 (1955); E. L. Bruce Co. v. Hampton, 225 Miss. 242, 83 So.2d 101 (1955); Ainsworth v. Long-Bell Lumber *441 Co., 233 Miss. 38, 101 So.2d 100 (1958); Employers Liability Ins. Co. of Wisconsin v. Haltom, 235 Miss. 74, 108 So.2d 29 (1959).

In other logging cases it has applied the control test, and held that the party was an employee. Sones v. Southern Lumber Co., 215 Miss. 148, 60 So.2d 582 (1952); Marter v. Cathey-Williford-Jones Lumber Co., 225 Miss. 118, 82 So.2d 724 (1955); Employers Ins. Co. of Alabama v. Dean, 227 Miss. 501, 86 So.2d 307 (1956). In Sones the key test was whether the person 'is in fact independent, free of the will of his employer--actually and substantially free from his control.' It was noted that the control test stemmed largely from the common law rule 133 in negligence cases, dealing with vicarious liability; and 'the rule is even more liberal in compensation cases.' The servant concept at common law performed the function of delimiting the scope of a master's vicarious tort liability. In contrast, compensation law 'is concerned not with injuries by the employee in his detailed activities, but with injuries to him as a result not only of his own activities * * * but of * * * co-employees, * * *. To this issue, the right of control of details of his work has no such direct relation as it has to the issue of vicarious tort liability.' 1 Larson, ' 43.42, pp. 630-631. Further, Sones gave weight to **109 the fact that the logging job was an integral part of the overall operation.

The general rule is stated thus in 1 Larson, ' 45.22, p. 633:

'The hauling and loading of logs, ties, and the like have usually been classified as part of the employer's business, so as to bring within the act trucker-owners who are paid by quantity and who are free to hire their own assistants and, in some cases, to work on their own time. As shown above in connection with the question of extent of control of details, this is particularly true when the activities of the truckers must be integrated *442 and coordinated with the employer's overall production pattern.' Halliburton v. Texas Indemnity Ins. Co., 147 Tex. 133, 213 S.W.2d 677 (1948); Bowser v. State I.A.C., 182 Or. 42, 185 P.2d 891 (1947); Burruss v. B.M.C. Logging Co., 38 N.M. 254, 31 P.2d 263 (1934); Burchett v. Department of Labor and Ind., 146 Wash. 85, 261 P. 802, 263 P. 746 (1927); Hebert v. Gates, 50 So.2d 859 (La.App.1951); State Hwy. Comm. v. Brewer, 196 Okl. 437, 165 P.2d 612 (1946); Blaine v. Ross Lbr. Co., 224 Or. 227, 355 P.2d 461 (1960).

Wade v. Traxler Gravel Co., 232 Miss. 592, 100 So.2d 103 (1958), involving a truck owner who hauled gravel by the cubic yard, examined in depth both the control test, with reference to whether in fact the man was truly independent, and the relative nature of the work test. The commission's holding that he was an independent contractor was reversed. Wade was an employee. The fact that the hauler was paid a unit price per yard was not proof in itself he was an independent contractor. The majority of modern decisions, it was said, 'involving continuity of service give little weight to the fact that a trucker is compensated at so much per thousand feet of logs or lumber * * *.' It was further stated that 'there is a growing tendency to classify owner-drivers as employees when they perform continuous service which is an integral part of the employer's business.' (Emphasis added). Ownership of the truck was not determinative. Traxler Gravel cited with approval 1 Larson, ' 45, p. 657, to the following effect:

'The modern tendency is to find employment when the work being done is an integral part of the regular business of the employer, and when the worker, relative to the employer, does not furnish an independent business or professional service.'

The Court then concluded:

'With these facts in mind, it cannot be doubted that the work which Wade and the other truckers performed *443 constituted an integral part of the regular business 134 of the company; and we think that it cannot be said that Wade and the other truckers, relative to Traxler, were engaged in an independent business or were rendering a professional service.'

In Shumpert Truck Lines v. Horne, 227 Miss. 648, 86 So.2d 499 (1956), a truck line engaged alleged independent contractors, truck owners, to haul its freight, and Horne along with others performed this job. The court cited with approval the above statement by Larson, and said:

'In this case it is true that Shumpert did not directly employ Horne himself, but Horne was not engaged in any independent business or professional service but devoted his entire time to the business of Shumpert, delivering and picking up freight and collecting therefor, and his wages were paid out of the freight receipts of Shumpert Truck Lines. He was not an independent contractor nor was his immediate superior Harmon. To all intents and purposes, Horne was the employee of Shumpert, and Shumpert could have stopped his services as well as those of Harmon at any time.'

Mississippi Employment Security Comm. v. Plumbing Wholesale Co., 219 Miss. 724, 69 So.2d 814 (1954), although applying the control test, also considered the relative nature of the work test, the fact that the alleged independent contractor was doing the company's regular business, was an integral part of its basic operation, and was not **110 furnishing an independent business or professional service. Bush v. Dependents of Byrd, a gravel truck case, 234 Miss. 782, 108 So.2d 211 (1959), applied both the control and the relative nature of the work test and followed Traxler Gravel. See also Kahne v. Robinson, 232 Miss. 670, 100 So.2d 132 (1958).

In short, in workmen's compensation cases Mississippi decisions and the weight of authority elsewhere hold that there are two tests to be considered in *444 analyzing an employee-independent contractor question: (1) the control test; and (2) the relative nature of the work test. The latter contains these ingredients: 'the character of the claimant's work or business--how skilled it is, how much of a separate calling or enterprise it is, to what extent it may be expected to carry its own accident burden and so on--and its relation to the employer's business, that is, how much it is a regular part of the employer's regular work, whether it is continuous or intermittent, and whether the duration is sufficient to amount to the hiring of continuing services as distinguished from contracting for the completion of a particular job.' 1 Larson, ' 43.52; see Comment, Employee or Independent Contractor, 26 Miss.L.J. 250 (1955).

Appellee relies on Crosby Lumber & Manufacturing Co. v. Durham, 181 Miss. 559, 170 So. 285 (1938), and contends this is a precedent controlling here. We do not agree. D. P. Durham drove a logging truck owned by Stockstill, who executed with Crosby a contract similar in part to the present one. Durham was killed while driving this truck with defective tires. His widow sued in tort for damages. It was held that, since the evidence did not disclose exercise of any control by Crosby over Stockstill, the relation had to be determined by the contract itself, and Stockstill was an independent contractor. There were no recurring, short-term contracts over a long period of time, but only one contract for six months. In the instant case many facts reflect 135 Crosby's right of control over J. E. Durham. His status is not determined exclusively by the contract. Moreover, we have previously held that in workmen's compensation cases the contractor-employee relation involves some different criteria than does a master's liability in tort for the act of his servant. Durham was not a workmen's compensation case, and did not involve many of the issues discussed in this opinion. It was decided over a decade *445 before the act was passed. Hence, because the facts are different, and it did not involve application of the workmen's compensation act, Durham is not in point. * * *

Marvel v. U.S. 719 F.2d 1507 (10th Cir. 1983)

United States Court of Appeals, Tenth Circuit.

Fred MARVEL and Angela Marvel, d/b/a Marvel Photo, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.

No. 80-1497.

Oct. 26, 1983. Released for Publication Oct. 19, 1983.

HOLLOWAY, Circuit Judge.

Taxpayers Fred and Angela Marvel appeal from a judgment of the district court finding taxpayers liable for unpaid Federal Insurance Contribution Act (FICA), Federal Unemployment Tax Act (FUTA), and Federal withholding taxes. Taxpayers contend that the district court erred (1) in referring their case to a federal magistrate for trial without statutory or constitutional sanction, (2) in finding that certain individuals who performed services for taxpayers' business *1510 were employees rather than independent contractors, (3) in denying taxpayers' motion for summary judgment and permanent restraining order when the notices of assessment were made in taxpayers' trade name, Marvel Photo, rather than taxpayers' individual names, and (4) in assessing penalties. We affirm.

Taxpayers operated a photography business under the name of Marvel Photo for tax years 1966 through 1971. In the course of this business, taxpayers utilized the services of various individuals, some of whom worked at taxpayers' studio and some of whom worked at their own

136 homes. Taxpayers treated all of these individuals as independent contractors and did not collect or pay federal employment taxes.

In September 1974, the IRS issued assessments to Marvel Photo for unpaid FICA, FUTA, and federal withholding taxes for the period of January 1, 1966, through December 31, 1971. On November 1, 1974, the IRS issued a series of "Final Notices Before Seizure" stating that within ten days, and without further notice, any bank accounts, receivables, commissions, or other income or property belonging to taxpayers would be levied upon or seized. On November 6, 1974, taxpayers paid the employment taxes of one alleged employee, for the periods in question, and filed a claim for refund of this partial payment with the IRS. After six months elapsed without a determination of their refund claim by the IRS, taxpayers filed suit in federal district court for refund of the taxes paid and abatement of the remainder of the assessments. The Government counterclaimed for the balance of the unpaid taxes.

In conjunction with their suit, taxpayers moved for a temporary restraining order and preliminary injunction to restrain the IRS from levying on taxpayers' assets during the litigation. The district court, finding its jurisdiction to grant injunctive relief curtailed by the Anti- Injunction Act, 26 U.S.C. ' 7421(a), denied the motion, and we affirmed. Marvel v. United States, 548 F.2d 295, 301 (10th Cir.), cert. denied, 431 U.S. 967, 97 S.Ct. 2924, 53 L.Ed.2d 1062 (1977).

Prior to trial, the parties stipulated to the employment status of all but thirty-one individuals. The status of the remaining individuals was decided at trial, which, with the parties' consent, was heard before a federal magistrate with the assistance of an advisory jury.

At trial, the advisory jury found that seven individuals were employees and that the remaining twenty-four individuals were independent contractors; only the status of the seven individuals found to be employees is in dispute on this appeal. The district court adopted the magistrate's recommendations, which were in accordance with the findings of the advisory jury. The court also rejected taxpayers' motion for summary judgment and permanent injunction in which taxpayers contended that the notices of assessment to Marvel Photo were defective and therefore invalidated taxpayers' tax liability. From the adverse judgment which resulted, taxpayers brought this timely appeal. * * *

With the assistance of an advisory jury, the magistrate made findings and recommendations, which the district judge accepted, that seven of the thirty- one individuals whose employment status was in issue were employees rather than independent contractors. Taxpayers contend that the findings were clearly contrary to the record and controlling authority.

An individual is an employee for federal employment tax purposes if he has the status of employee under the usual common law rules applicable in determining the employer-employee relationship. 26 U.S.C. '' 3121(d), 3306(i), 3401(c) (1976). Guides for determining that status are found in three substantially similar sections of the Employment Tax Regulations. 26 C.F.R. '' 137 31.3121(d)-1, 31.3306(i)-1, 31.3401(c)-1 (1976). Generally, the relationship of employer and employee exists when the person for whom the services are performed has the right to direct and control the method and manner in which the work shall be done and the result to be accomplished, while an independent contractor is one who engages to perform services for another according to his own method and manner, free from direction and control of the employer in all matters relating to the performance of the work, except as to the result or the product of his work. [FN11] * * *

*1515 In reviewing the trial court's findings, we are mindful that the determination of whether an individual is an employee is a question of fact and will not be disturbed on appeal unless it is clearly erroneous. [FN12] See Hoosier Home Improvement Co. v. United States, 350 F.2d 640, 643 (7th Cir.1965). We cannot say that the trial court's findings here that the seven individuals were employees rather than independent contractors are clearly erroneous. * * *

Three of the individuals, Mike Warren, Ronnie Cooper, and Danny Allfred, were delivery boys. With respect to Mike Warren, Fred Marvel testified that he performed delivery services for the Marvels, that he used his own car and furnished his own gas, and that the Marvels did not set his hours. (III R. 77-79). However, his mother, Mae Ellen, testified that in addition to making deliveries, her son dried pictures at the studio daily from noon to five o'clock and that the Marvels reimbursed him for the cost of gasoline. (III R. 149-55). Taxpayers' assertion that Warren was an independent contractor providing only delivery services was undermined, and the trial court was justified in concluding otherwise. With respect to Ronnie Cooper and Danny Allfred, Angela Marvel testified that all the delivery boys were treated the same way, were paid on the same basis, and that control and discretion were all the same. (III R. 123). Thus, the trial court's finding that they also were employees was not without a sufficient factual basis.

Evelyn Offenbacher, an oil colorist, was also found to be an employee. Although most of the other oil colorists were determined to be independent contractors, Angela Marvel testified that Evelyn Offenbacher did other work for the Marvels in the shop such as packaging proofs and cutting strips of film. (R. III 122). Lucille Sanders Towery, Evelyn's sister, corroborated this testimony, stating that Evelyn performed work on identification pictures at the studio and occasionally did some retouching at home. (III R. 132). Based on this testimony, the finding that Evelyn Offenbacher was an employee cannot be rejected as clearly erroneous.

Lucille Sanders Towery performed retouching services for the Marvels, but unlike other retouchers, was found to be an employee. This result, however, is justified by Mrs. Towery's own testimony. Mrs. Towery stated that in addition to retouching at home she performed various duties at the studio such as taking pictures, "spotting" (removing white spots from photographs), cutting negatives, drying proofs, and working as a receptionist and telephone operator. (III R. 127-29). She explained that she had definite hours of employment for her studio work and was paid an hourly basis for that work. (III R. 129-31). Finally, she said that Angela Marvel had represented to her that Marvel Photo would take care of her taxes. (III R. 130). Once again, there was a sufficient factual basis for the trial court to find that Mrs. Towery was an employee. 138 Sue Foley, a darkroom worker, was also found to be an employee rather than an independent contractor. Taxpayers emphasize Fred Marvel's testimony that Mrs. Foley carried a key to the shop and "worked about when she wanted to." (III R. 92). When Mrs. Foley was called as a witness, however, she denied that she had a key to the shop. (IV R. 12). Moreover, her testimony makes clear that the Marvels exercised supervision and control over her work. She stated that she was paid by the hour (IV R. 7); that she worked regular hours (IV R. 13); that her hours were set by her supervisor (IV R. 13); and that she was paid for an injury that she had sustained on *1516 the job. (IV R. 8). Finally, she said it was her understanding that the Marvels would take care of her taxes. (IV R. 9). In considering this evidence, the trial court was fully justified in concluding that she was an employee rather than an independent contractor.

Perhaps taxpayers' most substantial challenge is to the finding that Betty Briggs was an employee. However, in their testimony at trial, Fred and Angela Marvel were unable to state with any certainty whether Betty Briggs worked only as an oil colorist or whether she performed office work. (III R. 118, 124-25). Fred Marvel did testify that he was not positive about Betty Briggs, but that to the best of his knowledge, all she did was oil coloring. (III R. 118). Nonetheless, because the testimony is indefinite, and because taxpayers had the burden of proof to show that the individual was an independent contractor, the assessments having been admitted in evidence, see Fidelity Bank, N.A. v. United States, 616 F.2d 1181, 1186 (10th Cir.1980); Psaty v. United States, 442 F.2d 1154, 1160 (3d Cir.1971); cf. United States v. Janis, 428 U.S. 433, 441-42, 96 S.Ct. 3021, 3025-26, 49 L.Ed.2d 1046 (1976), we cannot say that the trial court's determination was clearly erroneous.

In sum, we are satisfied that the findings challenged were not clearly erroneous and should be sustained. * * *

AFFIRMED.

Good v. Berrie 122 A. 630

Supreme Judicial Court of Maine.

GOOD v. BERRIE

Nov. 28, 1923.

139 On Motion from Supreme Judicial Court, Aroostook County, at Law.

HANSON, J.

Action on the case to recover damages for injuries to property sustained by the plaintiff in an automobile collision, which occurred at about 7 o'clock p. m. July 29, 1921. The jury returned a verdict for the plaintiff for $494.25, and the case is before us on defendant's general motion.

The plaintiff was driving his car, a Franklin five-passenger weighing about 2,300 pounds. An employee of the defendant, one Gillis, was driving the defendant's automobile, a Ford touring car, weighing about 1,900 pounds. Defendant is the owner and proprietor of a store in Houlton, selling pianos and other musical instruments, and, in February before the accident, and continuously thereto, and thereafterwards until the November following, defendant employed Mr. Gillis "to sell pianos, phonographs and other musical merchandise, to the public, out on the road as well as in the store." Gillis was to report at the store in Houlton village each night, and at the time of the accident was on his way south. The plaintiff was traveling north. The automobiles collided at a point one and one half miles from Monticello village, and in the town of Monticello. During the afternoon of the day of the collision, Gillis attended a ball game at Monticello, and later in the same afternoon attended another game at the adjoining town of Bridgewater, and was returning from the Bridgewater game when the accident occurred. The plaintiff claimed that the collision occurred on the east, or his right, side of a state road. The defendant claims that the automobiles collided on the west side of the road, defendant's lawful side of the highway.

The defense was the general issue, and consisted of two propositions: (1) That the accident was due wholly, or in part, to the negligence of the plaintiff; (2) that Gillis, at the time of the accident, was not acting in the course of his employment by the defendant, and in the course of his duty as agent of the defendant.

[1] In his charge to the jury, to which no exception was taken, the presiding justice submitted the following question:

"Was Gillis, at the time of the accident, acting in the course of his employment by the defendant, and in the course of his duty as agent of the defendant?"

The answer was, "Yes."

The issue was presented clearly under proper instruction by the presiding justice, and the jury passed upon the questions raised. We have examined the record closely, and we are not persuaded that the verdict of the jury is manifestly wrong. The defenses raised were questions for the jury under proper instructions. Whether the going to the ball games was a detour, with or without intent to do business for his master, and to use some part of the time to attend a baseball game, or whether, without business purposes of his master or himself, he had attended ball games outside his authorized territory, and was bent "on a frolic of his own," are questions which could only be answered by the jury from all the facts and circumstances in the case. It is very evident that whatever the nature of his business, if he had business aside from that on the baseball ground, he had accomplished the same, and was at the moment of the accident returning 140 by the ordinary traveled way in the direction of his master's store at Houlton. He was within the limits of the town of Monticello at the time of the collision, where he had authority to be, and to act for the defendant that day. He was apparently on the way to the home of Mr. Hoyt, with whom he had left a phonograph for trial. Somewhere, at some time that evening, he resumed the agency admitted by the defendant, and continued in his employment for several weeks after this suit was brought. When and where he resumed his agency were questions for the jury. Whether or not he was acting within the scope of his employment at the time of the collision was also a question of fact for the jury. Schulte v. Holliday, 54 Mich. 73, 19 N. W. 752. The last-named case holds that the finding of the jury is conclusive. Note to Ritchie v. Waller, 63 Conn. 155, 28 Atl. 29, 27 L. R. A. 161, 38 Am. St. Rep. 361.

In Ritchie v. Waller, supra, a servant was sent by his master with the latter's team to procure a load, and deviated from the most direct course home for the purpose of seeing about the repair of his own shoes, and the court held that such deviation was not of itself sufficient to show that he had so far departed from the execution of the master's business as to relieve the master from liability for his negligent management of the team. In reaching a conclusion the court say:

"To decide the question in a case like the present, the trier must take into account, not only the mere fact of deviation, but its extent and nature relatively to time and place and circumstances, and all the other detailed facts which form a part of and truly characterize the deviation, including often the real intent and purpose of the servant in making it. Without spending [any] more time upon this point, we think the above question is one of fact in the ordinary sense, and that the case at bar clearly falls within the class of cases where such question is strictly one of fact to be decided by the trier."

In Legace v. Belisle Bros. (R. I. 1923) 121 Atl. 395, where defendant's servant was permitted to use defendant's truck for his private business, and in returning to his regular employment digressed somewhat from his customary route, and while so doing collided with plaintiff's truck, it was held that whether the accident occurred in the course of employment was a question for the jury.

[2] The automobile used by Gillis was the property of the master, the servant in addition to his other admitted duties was the driver and as to third persons it was his legal duty to drive properly, and, when driving for the master, the master is liable for his negligent and tortious acts done in the scope of his employment.

"If a coachman, driving his master, and being ordered not to drive so fast, disobeys and thereby occasions an injury, the master is responsible, because he is still driving for his master, though driving badly." Brown v. Copley, 7 Mann. & Granger, 566, 135 E. C. L. 566, by Creswell, J.; Stickney v. Munroe, 44 Me. 195; Goddard v. Grand Trunk Railway, 57 Me. 202, 2 Am. Rep. 39; and cases cited; Young v. Maine Central R. R. Co., 113 Me. 118, 93 Atl. 48.

The defendant conceded in his testimony that if the servant procured business for him outside the limits of Monticello, he would accept the same. The servant was not called by the defendant. His testimony would have thrown some light on the issue, and would have explained 141 the reason for his visit to Bridgewater at least. It is clear that the purpose of his detour, whatever it was, had been accomplished, and that he was back in the town of Monticello and driving the master's automobile in the direction of the master's place of business, when the collision occurred. The testimony justified the jury in so finding, and further to find that the servant at the time of the collision was acting in the course of his employment, and in the course of his duty as agent of the defendant.

We think the verdict is amply sustained by the evidence.

Motion overruled.

Cowan v. Eastern Racing Ass’n 330 Mass. 135, 111 N.E.2d 752 (1953)

COWAN v. EASTERN RACING ASS'N, Inc.

Supreme Judicial Court of Massachusetts, Suffolk.

Argued Nov. 6, 1952. Decided April 7, 1953.

*136 COUNIHAN, Justice.

This is an action of tort to recover for an assault on the plaintiff by certain persons alleged to be agents or employees of the defendant when the plaintiff was a business invitee of the defendant at Suffolk Downs, a race track in Boston, owned by the defendant. The answer was a general denial, and by amendments there were special answers in the first of which the defendant denied that the assault was committed by the defendant, its agents or servants or by any one acting in behalf of the defendant, and further set up that if there was any assault on the plaintiff it was committed by two police officers of the city of Boston acting in their own defence and in the public interest; and the second set up that the defendant at the time of the assault was acting as an agent for the National War Fund, Inc., an established charitable organization, in the conduct of the racing meeting on the day of the assault and that all profits derived from such meeting were turned over to the National War Fund, Inc., and other local charitable *137 organizations without any benefit or profit to the defendant.

This action was tried to a jury together with two other actions against the police officers who were involved in the assault. [FN1] The jury returned verdicts against all three defendants.

142 FN1. Cowan v. McDonnell [Cowan v. Ingenere], Mass., 111 N.E.2d 759.

This action comes here upon exceptions of the defendant to the denial of its motion for a directed verdict; to the denial of fourteen requests for rulings; to five portions of the judge's charge; and to the admission of evidence.

* * * From evidence disclosed in the bill of exceptions considered in its aspect most favorable to the plaintiff the jury could reasonably have found the following facts: On August 11, 1945, the plaintiff, with his wife and her daughter, was in attendance at Suffolk Downs, a race track owned by the *139 defendant. They all paid the required admission fees. A racing meeting was being held under a license granted by the commission. A license had been originally issued to the defendant to conduct a racing meeting for fifty-four days beginning June 11, 1945, and ending August 11, 1945, except Sundays. Following a written request to it from the National War Fund, Inc., an established charitable organization, the defendant petitioned the commission to transfer that part of the license for the last four days of such meeting to the National War Fund, Inc., with the defendant acting as its agent. These days were from August 8 to August 11, 1945, inclusive. On August 1, 1945, the commission voted to approve the transfer of the license of the defendant for these days to the 'National War Fund, Inc.--Eastern Racing Association, Inc. Agent.' The net proceeds of these four days of racing were substantially paid to the National War **755 Fund, Inc., and certain other local charities.

The plaintiff bought a $10 ticket on a horse called 'Johnny, Jr.,' to win in the seventh race. This horse finished first by a length and the plaintiff noticed nothing wrong in the manner in which the race was run. As he went to collect on his ticket he heard loud 'hollering' and he learned that a foul had been claimed. Subsequently the race was declared official and it appeared that 'Johnny, Jr.,' was placed third so that the win ticket was of no value. The plaintiff became excited and upset, and sought information, without success, at the window where he bought the ticket, as to why his horse was disqualified. He than talked with the clerk of the scales. As 'a result of that conversation' he went across the track to the stewards' stand. To get there he had to climb over an iron fence four and one half feet in height and cross the rece track. The stand which was on the other side of the track opposite the grandstand looked as if it was 'on stilts with stairs going around and up.' It was enclosed by glass. The plaintiff walked up the circular stairway and entered a room about eighteen feet by nine feet in size. He saw there one Almy, one Conway, and one Conkling who is also called Conklin in the bill of exceptions. *140 These three men were the stewards appointed by the defendant under Rule 22 of the rules of the commission and had been acting as such during the earlier days of the meeting as well as from August 8 to August 11, 1945, inclusive. The plaintiff put his ticket on 'Johnny, Jr.,' on a table in front of Almy and asked him why that horse had been disqualified from winning. Almy told him that he would talk with him after he had finished making out a report which he was then writing. The plaintiff waited for two or three minutes and then spoke to Almy again. He made no attempt to strike anybody and there was no loud talk. While he was standing at the table talking to Almy, Conkling walked up to the plaintiff and kicted him in the 'shins.' Conkling then beckoned to the police and two officers came into the room. He said to them, 'Throw the son of a bitch out.' They were the defendants in the actions tried with this action. They grabbed the plaintiff from behind and, as he struggled to get away, they beat him many times on his head and body 143 with their billies. The plaintiff fell to the floor where he was beaten again and kicked by the police officers. The plaintiff was brutally assaulted. He suffered severe injuries, was bleeding profusely from his head, and as a result was taken to the Boston City Hospital for treatment. The police officers were part of a detail of the Boston police department on duty at Suffolk Downs under a Lieutenant O'Brien. The commission did not hire or pay the police although it could have because the commission had such power under the statute but it never exercised it. There was no direct evidence as to who hired the police but it could be fairly inferred that they were hired by the defendant because a check in payment for their services in the sum of $1,368 was drawn to the order of the police commissioner (of Boston) and signed 'Eastern Racing Assn. Inc. Agents for National War Fund, Inc.,' by its officers. This check was indorsed by the police commissioner. The three stewards in the stand were appointed by the defendant or by it at least as agent for the National War Fund, Inc., and were paid by checks of the 'Eastern Racing Assn. Inc. Agents for National War *141 Fund, Inc.' The defendant appointed and paid these stewards and had a right to discharge them.

We first consider the defendant's exception to the denial of its motion for a directed verdict. The disposition of this exception depends largely upon the application of the principle of respondeat superior, and we must therefore determine whether the steward Conkling or the police officers who were involved in the assault were at that time in the control of the defendant and acting as its agent or agents within the scope of their employment.

The principle respondeat superior is not applicable unless it could reasonably be found on the evidence together with all permissible inferences 'that the **756 relation of master and servant existed at the time the plaintiff was injured, whereby the * * * act of the servant was legally imputable to the master. The test of the relationship is the right to control. It is not necessary that there be any actual control by the alleged master to make one his servant or agent, but merely a right of the master to control. If there is no right of control there is no relationship of master and servant. If the power of control rests with the person employed, he is an independent contractor.' Khoury v. Edison Electric Illumination Co., 265 Mass. 236, 238, 164 N.E. 77, 78, 60 A.L.R. 1159.

This is the rule in this Commonwealth and is generally accepted in other jurisdictions. Restatement: Agency, ' 220. Meechem on Agency (2d ed.) ' 1863. 57 C.J.S., Master & Servant, ' 563. 35 Am. Jur., Master & Servant, ' 539. This rule is applicable although the choice of persons for the particular work is required to be made from a limited class. Restatement: Agency, ' 223.

In the Khoury case it was also said 265 Mass. at page 239, 164 N.E. at page 78, 'Although the conclusive test of the relationship of master and servant is the right to control, other factors may be considered in determining whether the right to control exists, but they are subordinate to this primary test. This court has held that the method of payment is not the decisive test. * * * Neither is the fact that * * * [one] was an employee of the defendant and had no other employment decisive, for a person *142 may be an agent or a servant as to one part of an undertaking, and an independent contractor as to other parts.' To the same effect is Wescott v. Henshaw Motor Co., 275 Mass. 82, at page 87, 175 N.E. 153, at page 155, where it is said, 'It has been frequently decided that one may be the agent or servant of another in some matters and not 144 the agent or servant in other matters.' Likewise 'it is the right to control rather than the exercise of it that is the test. * * * While engaged in the same general work, one may be at certain times and for certain purposes the servant of a party, and at other times or for other purposes an independent contractor or the servant of another.' McDermott's Case, 283 Mass. 74, 77, 186 N.E. 231, 233, and cases cited.

Where more than one conclusion is possible the question is for the jury. Marsh v. Beraldi, 260 Mass. 225, 231, 157 N.E. 347. 'The inferences which should be drawn from the evidence as to the relations of * * * [one to another] and to the defendant, were not matters of law as the defendant contends, but questions of fact to be decided by the jury under suitable instructions.' Cain v. Hugh Nawn Contracting Co., 202 Mass. 237, 239, 188 N.E. 842. It was also said in Choate v. Board of Assessors of Boston, 304 Mass. 298, at page 300, 23 N.E.2d 882, at page 884, 'The existence of the relationship of principal and agent and the authority of the latter to represent the former are questions of fact if there is evidence of an appointment by the principal and a delegation to the agent of duties to be performed by him for the principal, or if the conduct of the parties is such that an inference is warranted that one was acting in behalf of and with the knowledge and consent of another.'

In the instant case we are of opinion that one of two conclusions could be found by the jury as matter of fact on the evidence. The first one is that in determining the qualifications of horses and jockeys, corrupt riding, questionable practices such as the artificial stimulation of horses, the weights of jockeys, fouls, and the order in which horses finish, the stewards appointed and paid by the defendant had exclusive jurisdiction, and that when acting upon such matters these stewards could be found to be agents of the *143 commission or independent contractors required to be employed by the defendant under the rules of the commission. On the other hand, on the evidence the jury could reasonably find that at the time of this assault the steward Conkling was acting as an agent for the defendant even though the rules of the commission provide that the stewards appointed by the defendant shall have control over and free access to all stands.

**757 The plaintiff was a business invitee of the defendant, at least in its capacity as an agent for the National War Fund, Inc. Whether he was properly in the stewards' stand to make a complaint is of no consequence for excessive force was used to evict him. While talking to one of the stewards about the complaint, Conkling assaulted him and calling the police, by the use of opprobrious words, told them to throw the plaintiff out of the stand. A struggle ensued and a brutal assault followed. Conkling was appointed and paid by the defendant. The stand where the assault took place was owned by the defendant. Conkling apparently assumed that the plaintiff was an interloper and causing a disturbance. Conkling and the other stewards under the rules had control of the stand and presumably had authority to evict obnoxious persons from it and that was for the purpose of seeing to it that racing was orderly conducted. Proper performance of their duty in this respect could reasonably be expected to enhance the reputation of the defendant with its customers for maintaining order and advance its business which was to conduct racing for a profit. If they failed to perform their duties in this respect, the defendant could discharge them. To this extent at least it could be found that the defendant had a right to control them.

145 It is not unreasonable to assume that Conkling believed that to preserve order in the stand he had a right to call upon the police to assist him. Otherwise there was no need of the presence of the police at the stand. It is clear therefore that if Conkling assaulted the plaintiff, or if the police at his instigation were guilty of the assault, the defendant *144 could be found liable. 'An inference of responsibility on the defendant's part was by no means the only permissible inference, but we think that it was a possible one.' Hartigan v. Eastern Racing Association, Inc., 311 Mass. 368, 371, 41 N.E.2d 28, 30.

But apart from the question of agency of Conkling and the responsibility of the defendant for his conduct, we are of opinion that the question whether the police officers involved in the assault were acting as agents of the defendant was also for the jury to decide. They were paid by the defendant and they were hired by the defendant for the obvious purpose of preserving and maintaining order on the premises of the defendant during the racing meetings. The maintenance of such order, the prevention of breaches of the peace, with the possibility of ensuing riots, would serve to afford protection to and avoid damage to the physical plant used for racing, which was conceded to be owned by the defendant. In this capacity the police officers were acting not as public officers in a public place but as employees of the defendant for its private purposes on its private premises. It is also reasonable to assume that part of their duty was to prevent annoyance or injury to patrons of the defendant and to that end they could evict from any part of the premises persons who might be causing a disturbance. 'Acts habitually performed by an agent may import acquiescency by the principal and become evidence of his authority.' Hartigan v. Eastern Racing Association, Inc., 311 Mass. 368, 370, 41 N.E.2d 28, 30, and cases cited.

We are of opinion that this action was properly submitted to the jury, and the exception of the defendant to the denial of its motion for a directed verdict must be overruled.

The defendant has argued that it is not responsible for the brutal assault on the plaintiff by Conkling or the police officers because none of them was acting within the scope of his employment when they assaulted the plaintiff. There is no merit in this contention. The case of Perras v. Hi- Hat, Inc., 326 Mass. 78, 93 N.E.2d 219, cited by the defendant, is readily distinguishable. The police officers there involved in an assault were in no sense employees of the defendant. The *145 question of the use of excessive force did not arise for agency alone was considered. The correct rule is stated in Fanciullo v. B. G. & S. Theatre Corp., 297 Mass. 44, at pages 46- 47, 8 N.E.2d 174, at page 176, with cases cited this court said, 'In a place of public amusement where large numbers of people are accustomed to gather, the maintenance **758 of order may incidentally require the use of force. * * * A master not infrequently may be liable for conduct of a servant who uses means not intended or contemplated by the contract of employment.' This rule is recognized in Restatement: Agency, ' 245, 'A master who authorizes a servant to perform acts which involve the use of force against persons or things, or which are of such a nature that they are not uncommonly accompanied by the use of force, is subject to liability for a trespass to such persons or things caused by the servant's unprivileged use of force exerted for the purpose of accomplishing a result within the scope of employment.' See Hirst v. Fitchburg & Leominster Street Railway, 196 Mass. 353, 82 N.E. 10; Mason v. Jacot, 235 Mass. 521, 127 N.E. 331; Frewen v. Page, 238 Mass. 499, 131 N.E. 476, 17 A.L.R. 134; Zygmuntowicz v. American Steel & Wire Co., 240 Mass. 421, 134 N.E. 385; Hartigan v. Eastern

146 Racing Association, Inc., 311 Mass. 368, 41 N.E.2d 28; McDermott v. W. T. Grant Co., 313 Mass. 736, 49 N.E.2d 115; Schultz v. Purcell's, Inc., 320 Mass. 579, 70 N.E.2d 526.

Doody v. John Sexton & Company 411 F.2d 1119 (1st Cir. 1969)

Daniel A. DOODY, Plaintiff, Appellee, v. JOHN SEXTON & COMPANY, Defendant, Appellant No. 7233 United States Court of Appeals First Circuit May 27, 1969. COFFIN, Circuit Judge. The defendant, John Sexton & Co., a merchandising company having head offices in Chicago, and doing business in a number of states, employed plaintiff Doody in its Boston office. Taking the evidence as it developed in the district court most favorable to the plaintiff, at a conference in Chicago two of defendant's officers promised plaintiff lifetime employment in defendant's Los Angeles office if he would move to California. Plaintiff did move, but found himself out of phase with the manager there, who placed substantially different conditions upon his employment than, allegedly, he had been promised. When plaintiff complained, one of defendant's officers told him that he would have to like it or quit. Plaintiff reminded the officer of his Chicago promise and asked if he had been 'kidding'. The officer replied *1121 in the affirmative. Plaintiff quit and returned to Boston. There was evidence that his out-of-pocket loss as a result of this venture was $15,000 Plaintiff's suit in the district court was in three counts. Count 1 was for breach of contract; Count 2 for the fair value of his services; Count 3 for fraudulent misrepresentation. The court directed a verdict for the defendant on Count 1 on the ground that the officers had no real or apparent authority to promise lifetime employment, a decision which plaintiff accepts for this appeal as correct. It also directed a verdict on Count 2, also without objection by the plaintiff. It refused to direct on Count 3, and the jury found for the plaintiff in the amount of $15,000. Defendant appeals The appeal presents only two questions which give us concern. The first is what law governs the question whether the officers' promise with, as could be found, no intent to perform, was actionable. This question arises because, allegedly, what, in Massachusetts is regarded as an actionable misrepresentation of a present intention, [FN1] is not actionable in Illinois. [FN2]

147 * * * The remaining question is whether, assuming that defendant cannot be liable in contract for the unauthorized undertaking of its agents, it can be held liable in tort. Defendant says, with some appearance of plausibility, that tort liability would be illogical, and merely open the back door when the front door was closed We note first, however, that the liability that plaintiff is attempting to impose upon the defendant is not responsibility for the loss of the contract, but only for the proximate consequences of the officers' wrongful act. The officers were hiring agents, within limits, and it is common experience for a principal to be held accountable in tort for unauthorized acts of an agent not too far removed from the scope of his authority, even though, strictly, they were not authorized. In this case plaintiff does not need to rely simply on the general principle; there is a Massachusetts case closely in point. In Robichaud v. Athol Credit Union, 352 Mass. 351, 225 N.E.2d 347 (1967), a representative of the defendant lender who had authority to deal with such matters, told the borrower that his loan was covered by life insurance under defendant's group policy. In point of fact the loan was for 15 years and a Massachusetts statute did not permit insurance on loans over 10. The court held defendant liable for misrepresentation (in that case the full amount of the insurance) 'even if furnishing insurance would have been beyond the defendant's power.' 352 Mass. at 355, 225 N.E.2d at 350. The only question appeared to be the closeness of the agent's relationship to the act in question The defendant's officers in the case at bar were its president and vice president, who clearly possessed certain hiring powers. We think it could be found that plaintiff had a right to rely on their representations even though their actual authority did not extend to the point they indicated We do not consider the remaining points made by defendant concerning the conduct of the trial. They were either not preserved, or without merit, or both Affirmed.

Mullen v. Horton 700 A.2d 1377

Appellate Court of Connecticut.

Anne MULLEN v. Joseph A. HORTON et al.

Argued Jan. 28, 1997. Decided Sept. 23, 1997.

Before EDWARD Y. O'CONNELL, C.J., and HEIMAN and SCHALLER, JJ.

HEIMAN, Judge. 148 The plaintiff appeals from the trial court's rendering of summary judgment in favor of the defendants. On appeal, the plaintiff claims that the trial court improperly determined that no genuine issue of material fact exists as to whether the defendants, Missionary Oblates of Mary Immaculate, Inc., of New Hampshire and Franco-American Oblate Fathers, Inc., (Oblate institutional defendants) are vicariously liable for the defendant priest's actions under (1) the doctrine of respondeat superior or (2) the doctrine of apparent authority. [ * * * ] We agree with the plaintiff and reverse the judgment of the trial court.

The following facts are necessary for a proper resolution of this appeal. The defendant, Joseph A. Horton, was a practicing Roman Catholic priest, ordained by and an agent of the Oblate institutional defendants. Horton was also a practicing psychologist. He maintained an office at the defendant Center for Individual and Group Therapy, P.C., in Vernon (therapy center). Given Horton's vow of poverty, he gave all of the profits he derived from his psychology practice to the Oblate institutional defendants.

In 1988, Horton was assigned weekly priestly duties at Saint Matthew's Church in Tolland, where the plaintiff was a parishioner. In August, 1988, the plaintiff sought the professional care and treatment of Horton for psychological, emotional and marital problems. Specifically, she sought counseling from Horton because of his joint status as a psychologist and a Roman Catholic priest associated with her parish.

Horton provided the plaintiff with a combination of pastoral, spiritual and psychological counseling, including psychological discussions, spiritual advice and prayer. The plaintiff received counseling from Horton both at his office at the therapy center, and at his office at the Immaculata Retreat House in Willimantic, a house owned and operated by the Oblate institutional defendants. Beginning in February, 1989, Horton and the plaintiff began a sexual relationship, with sexual contact taking place during the counseling sessions. Horton continued to bill the plaintiff and her insurance company for these counseling sessions in which sexual contact occurred. Sexual contact between Horton and the plaintiff also occurred at church retreats, sponsored and run by the Oblate institutional defendants, where Horton was serving as retreat faculty. Horton and the plaintiff's sexual relations continued for approximately two and one-half years, terminating in February, 1992.

About December 16, 1993, the plaintiff filed a seven count complaint against the defendants. On October 31, 1994, the Oblate institutional defendants filed a motion for summary judgment, arguing that there was no genuine issue of material fact as to whether the Oblate institutional defendants were vicariously liable for Horton's alleged misconduct under either the doctrine of respondeat superior or the doctrine of apparent authority. Attached to their motion for summary judgment were three sworn affidavits of Oblate priests, and a portion of the plaintiff's deposition. In opposition to the motion for summary judgment, the plaintiff filed her sworn affidavit, a portion of her deposition, and an affidavit of Anne C. Pratt, a licensed Connecticut psychologist. On October 18, 1995, the trial court granted the Oblate institutional defendants' motion for summary judgment. This appeal follows.

I 149 The plaintiff first argues that the trial court improperly determined that no genuine issue of material fact exists as to whether the Oblate institutional defendants are vicariously liable for Horton's actions under the doctrine of respondeat superior. In response, the Oblate institutional defendants argue that because the laws of the Roman Catholic Church and the rules of the Oblate Order expressly prohibit priests from engaging in sexual activity, Horton's alleged sexual exploitation of the plaintiff could not be within Horton's scope of employment, nor could it be viewed as a furtherance of the Oblate institutional defendants' business. We agree with the plaintiff.

"We initially note the standard of review of a trial court decision granting a motion for summary judgment. Practice Book § 384 mandates that summary judgment shall be rendered forthwith if the pleadings, affidavits and any other proof submitted 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. A material fact is a fact that will make a difference in the result of the case.... The party seeking summary judgment has the burden of showing the absence of any genuine issue as to all material facts which, under applicable principles of substantive law, entitle him to a judgment as a matter of law ... and the party opposing such a motion must provide an evidentiary foundation to demonstrate the existence of a genuine issue of material fact.... In deciding a motion for summary judgment, the trial court must view the evidence in the light most favorable to the nonmoving party.... The test is whether a party would be entitled to a directed verdict on the same facts." (Internal quotation marks omitted.) Budris v. Allstate Ins. Co., 44 Conn.App. 53, 56-57, 686 A.2d 533 (1996). "[A] directed verdict may be rendered only where, on the evidence viewed in the light most favorable to the nonmovant, the trier of fact could not reasonably reach any other conclusion than that embodied in the verdict as directed." (Internal quotation marks omitted.) Miller v. United Technologies Corp., 233 Conn. 732, 752, 660 A.2d 810 (1995).

Thus, in order to prevail on her challenge to the summary judgment, the plaintiff must provide an evidentiary foundation to demonstrate the existence of a genuine issue of material fact as to whether the Oblate institutional defendants are vicariously liable for Horton's actions, under the doctrine of respondeat superior. "Under the doctrine of respondeat superior, [a] master is liable for the wilful torts of his servant committed within the scope of the servant's employment and in furtherance of his master's business.... A servant acts within the scope of employment while engaged in the service of the master, and it is not synonymous with the phrase during the period covered by his employment.... While a servant may be acting within the scope of his employment when his conduct is negligent, disobedient and unfaithful ... that does not end the inquiry. Rather, the vital inquiry in this type of case is whether the servant on the occasion in question was engaged in a disobedient or unfaithful conducting of the master's business, or was engaged in an abandonment of the master's business.... Unless [the employee] was actuated at least in part by a purpose to serve a principal, the principal is not liable." (Citation omitted; internal quotation marks omitted.) Glucksman v. Walters, 38 Conn.App. 140, 144, 659 A.2d 1217, cert. denied, 235 Conn. 914, 665 A.2d 608 (1995).

"When the servant is doing or attempting to do the very thing which he was directed to do, the master is liable, though the servant's method of doing it be wholly unauthorized or forbidden. If the servant's disobedience of instructions will exonerate the master, the proof, 150 easily made, virtually does away with the maxim of respondeat superior.... That the servant disobeyed the orders of the master is never a sufficient defense. It must be shown further that he ceased to act for the master and in the course of his employment." (Citation omitted; internal quotation marks omitted.) Son v. Hartford Ice Cream Co., 102 Conn. 696, 700-701, 129 A. 778 (1925).

"Ordinarily, it is a question of fact as to whether a wilful tort of the servant has occurred within the scope of the servant's employment and was done to further the master's business.... But there are occasional cases where a servant's digression from duty is so clear-cut that the disposition of the case becomes a matter of law." (Citation omitted; internal quotation marks omitted.) A-G Foods, Inc. v. Pepperidge Farm, Inc., 216 Conn. 200, 207, 579 A.2d 69 (1990).

Viewing the evidence before it in the light most favorable to the plaintiff, the trial court could have reasonably found the following. The Oblate institutional defendants employed Horton to give pastoral counseling to parishioners, in conjunction with his other priestly duties. The Oblate institutional defendants also employed Horton as a staff psychologist for the annulment tribunal and at a number of religious retreats sponsored by the Oblate institutional defendants. The Oblate institutional defendants enabled Horton to counsel both church personnel and the public at large, by giving him an office in their retreat house. The Oblate institutional defendants benefited from Horton's pastoral and psychological counseling of their parishioners and clerical personnel. They also benefited monetarily from his clinical psychology practice, because all profits derived from his practice were given to the Oblate institutional defendants pursuant to his vow of poverty. Thus, a trier of fact could reasonably find that Horton's pastoral and psychological counseling of the plaintiff was well within the scope of his employment for the Oblate institutional defendants and was in furtherance of the Oblate institutional defendants' business.

Horton's alleged sexual exploitation of the plaintiff occurred during his church sanctioned pastoral-psychological counseling sessions and while he staffed church retreats. Thus, a trier of fact could reasonably determine that Horton's sexual relationship with the plaintiff was a misguided attempt at pastoral-psychological counseling, or even an unauthorized, unethical, tortious method of pastoral counseling, but not an abandonment of church business.

Furthermore, a trier of fact could reasonably find that the sexual relations between Horton and the plaintiff directly grew out of, and were the immediate and proximate results of, the church sanctioned counseling sessions. According to the affidavit of the clinical psychologist, Anne Pratt, sexual relations often mistakenly arise out of an emotional therapeutic relationship. This is known as the transference-countertransference phenomenon. Pratt further opined in her affidavit that a transference- countertransference phenomenon arose between the plaintiff and Horton, with the emotional nature of the therapeutic relationship causing the parties to displace feelings and confuse the therapeutic relationship with an intimate sexual relationship.

The present case is similar to Glucksman v. Walters, supra, 38 Conn.App. 140, 659 A.2d 1217, and Pelletier v. Bilbiles, 154 Conn. 544, 227 A.2d 251 (1967). In Glucksman v. Walters, supra, at 142-43, 659 A.2d 1217, a part-time Young Men's Christian Association (YMCA) employee responded to a foul in a YMCA basketball game by severely assaulting the man who 151 had fouled him. We concluded that a jury could have reasonably characterized this assault as "a misguided effort" at maintaining order on the YMCA basketball court and, accordingly, we reversed a directed verdict holding the YMCA not vicariously liable for the assault on the basis of respondeat superior. Id. , at 145-48, 659 A.2d 1217.

In Pelletier v. Bilbiles, supra, 154 Conn. 544, 227 A.2d 251, an employee of a confectionery store, charged with keeping order in the store, assaulted a customer who had thrown a wrapper on the floor. Our Supreme Court held that "[t]he beating of an unruly customer ... is an extremely forceful, although misguided, method of discouraging patrons of the [store] ... from causing disturbances on the premises in the future. The fact that the specific method a servant employs to accomplish his master's orders is not authorized does not relieve the master from liability.... Also, the fact that the battery ... may have been motivated by personal animosity ... does not exonerate the defendant.... A master does not escape liability merely because his servant loses his temper while he is conducting the master's business." (Citations omitted.) Id. , at 548, 227 A.2d 251.

Here, as in Glucksman and Pelletier, the trier of fact could reasonably have found that Horton's sexual relations with the plaintiff during their pastoral-psychological counseling sessions, were a "misguided effort" at psychologically and spiritually counseling the plaintiff, rather than an abandonment of the counseling. Just as the YMCA employee's assault on the basketball court in Glucksman, and the employee's assault on the customer who had littered in Pelletier represented extreme and clearly unauthorized methods of maintaining order and thereby furthering their employers' business, Horton's engaging in sexual contact with the plaintiff during counseling sessions also could represent an extreme and clearly unauthorized method of spiritually and emotionally counseling the plaintiff and thereby furthering the church's business. "The fact that the specific method a servant employs to accomplish his master's orders is not authorized does not relieve the master from liability." Id. , at 548, 227 A.2d 251.

The Oblate institutional defendants argue that this case is governed by Gutierrez v. Thorne, 13 Conn.App. 493, 537 A.2d 527 (1988), Brown v. Housing Authority, 23 Conn.App. 624, 583 A.2d 643 (1990), cert. denied, 217 Conn. 808, 585 A.2d 1233 (1991), A-G Foods, Inc. v. Pepperidge Farm, Inc., supra, 216 Conn. 200, 579 A.2d 69, and Nutt v. Norwich Roman Catholic Diocese, 921 F.Supp. 66 (D.Conn.1995). We are unpersuaded, however, and conclude that the present case is distinguishable from these cases.

In Gutierrez v. Thorne, supra, 13 Conn.App. at 496-97, 537 A.2d 527, an employee of the commissioner of mental retardation was hired to help retarded persons living in the supervised apartment program with keeping up their apartments, grocery shopping, expense budgeting and performing other aspects of daily living. The employee entered the retarded plaintiff's apartment and repeatedly sexually assaulted her. Id. We affirmed a summary judgment in favor of the employer, the commissioner of mental retardation, holding that "it is clear that [the employee] ... was engaging in criminal conduct which had no connection to the defendant's business of providing supervision and training to mentally retarded persons regarding daily living skills. Since there were no facts before the court from which it could conclude that [the employee] was furthering the defendant's interests, the defendant's nonliability under a respondeat superior theory was properly determined as a matter of law." Id. , at 499, 537 A.2d 152 527.

In Gutierrez, unlike here, a trier of fact could not reasonably have determined that the employee's brutal rape of the retarded plaintiff in her shower was merely a negligent or misguided attempt at supervising her shopping, cleaning, budgeting and daily living. A trier of fact could not reasonably have determined that the employee's rape of the retarded plaintiff constituted merely an extreme, unauthorized and disobedient method of supervising her daily living. Rather, the employee's brutal sexual assault of the plaintiff was clearly an abandonment of his supervising duties.

In Brown v. Housing Authority, supra, 23 Conn.App. 624, 583 A.2d 643, a mechanic was driving his employer's van from one maintenance job to another when the plaintiff asked the employee to move his van, which was blocking traffic. The employee refused to move the van, and the plaintiff drove away. The employee then left his job route and followed the plaintiff's car. The employee found the plaintiff and rear-ended his car several times. The plaintiff got out of his vehicle, and the employee grabbed a hammer and struck the plaintiff in the chest. Id.

A trier of fact could not reasonably find that the Brown employee's abandonment of his maintenance mechanic job responsibilities to pursue and assault the plaintiff was a negligent or misguided effort at maintaining machines, or even an extreme method of traveling from one maintenance mechanic job to another, because "the employee necessarily abandoned his employer's business to pursue and attack the plaintiff." Glucksman v. Walters, supra, 38 Conn.App. at 148, 659 A.2d 1217. The employee's "intentional, criminal acts were in no way connected to the defendant's business." Brown v. Housing Authority, supra, 23 Conn.App. at 628, 583 A.2d 643.

The defendants and the dissent rely on A-G Foods, Inc. v. Pepperidge Farm, Inc., supra, 216 Conn. 200, 579 A.2d 69. In that case Pepperidge Farm entered into a consignment agreement with Anthony Spinelli, granting him an exclusive franchise to distribute Pepperidge Farm bakery products within a specified geographical area. Id. , at 204, 579 A.2d 69. Spinelli began defrauding certain independent grocery stores by charging the stores for goods he did not deliver. Id. Pepperidge Farm was unaware of Spinelli's scheme and never received any money as a result of it. Id. , at 205, 579 A.2d 69. Spinelli argued that Pepperidge Farm benefited from his fraud because the fraud caused a larger portion of shelf space to be devoted to Pepperidge Farm bakery products, thereby stimulating demand and increasing the likelihood of sales. See id. , at 207-08, 579 A.2d 69. The Supreme Court concluded, however, that "any possible indirect benefit Pepperidge Farm might have received by the increased shelf space was so de minimis that, as a matter of law, it [did] not support a conclusion that Spinelli acted within the scope of his employment and in furtherance of Pepperidge Farm's business." Id. , at 209, 579 A.2d 69.

A-G Foods, Inc., is distinguishable from the present case. First, Pepperidge Farm did not benefit monetarily or otherwise from Spinelli's fraudulent scheme. Here, however, the Oblate institutional defendants did benefit monetarily from Horton's misguided counseling of the plaintiff. Second, Spinelli's intricate, complicated and well thought out fraud scheme could not reasonably be characterized as a misguided or negligent attempt at furthering the distribution of Pepperidge Farm products. 153 The dissent relies heavily on Nutt v. Norwich Roman Catholic Diocese, supra, 921 F.Supp. 66. First, while a federal District Court opinion is persuasive authority, it is not binding on this court. More importantly, however, Nutt is factually distinguishable from the present case. In Nutt, a parish priest showed pornographic movies to two twelve year old altar boys. Id. , at 69-70. Then, during various out-of-town trips, the priest repeatedly sexually molested the two minor boys, for a period of over six years. Id. The federal District Court granted the Roman Catholic institutional defendants' motion for summary judgment, holding that they could not be held liable for the defendant priest's actions under a doctrine of respondeat superior. Id. , at 70- 71.

While a trier of fact could reasonably find that consensual sexual relations between two adults arising out of emotional, spiritual church sponsored counseling sessions represented a negligent and misguided effort at pastoral counseling, a trier of fact could not reasonably find that a priest's showing pornographic films to young boys and then criminally sexually molesting them in out-of-town motel rooms merely represented a negligent and misguided effort at pastoral counseling. The facts of Nutt clearly represent a situation in which the priest wholly abandoned his pastoral duties. Thus, Nutt represents one of those exceptional cases in which the servant's digression from duty is so clear cut that the disposition of the case is a matter of law. See A-G Foods, Inc. v. Pepperidge Farm, Inc., supra, 216 Conn. at 207, 579 A.2d 69.

Therefore, on close examination of the specific facts of this case in light of the relevant case law, we conclude that whether Horton's actions constituted a negligent, disobedient and unfaithful conducting of church business or a complete abandonment of church business represents an issue about which reasonable minds could differ, and thus constitutes a genuine issue of material fact. Thus, we conclude that the trial court improperly granted the Oblate institutional defendants' motion for summary judgment.

The plaintiff next argues that the trial court improperly found that no genuine issue of material fact exists as to whether the Oblate institutional defendants are vicariously liable for Horton's actions under the doctrine of apparent authority. Specifically, the plaintiff argues that the Oblate institutional defendants held Horton out to the public as a trustworthy, ethical, respectable priest-clinical psychologist, and the plaintiff relied on this representation in choosing to go to Horton for counseling and in trusting and confiding in Horton during the counseling process. Thus, under the doctrine of apparent authority, the Oblate institutional defendants should be vicariously liable for Horton's negligent, misguided and unethical behavior during his counseling sessions with the plaintiff.

In other states, the doctrine of apparent authority has been used to hold a principal, who represents that another is his servant or agent and thereby causes a third person to rely justifiably on the care or skill of such agent, vicariously liable for harm caused to the third person by the lack of care or skill of his servant or agent. See 1 Restatement (Second), Agency § 267, pp. 578-79 (1958); * * * In Connecticut, however, the doctrine of apparent authority has never been used in such a manner. Thus, because we are bound by Connecticut precedent; * * * we 154 conclude that the doctrine of apparent authority is inapplicable to this case.

The judgment is reversed and the case is remanded with direction to deny the motion for summary judgment and for further proceedings in accordance with this opinion.

In this opinion EDWARD Y. O'CONNELL, C.J., concurred.

SCHALLER, Judge, dissenting.

Although I agree with part II of the majority opinion, I disagree with the conclusion in part I. I would affirm the trial court's determination that, as a matter of law, the Oblate institutional defendants are not liable under the doctrine of respondeat superior. When the facts presented by the parties' affidavits are viewed in their proper context, it is clear that the defendant Joseph A. Horton's "digression from duty is so clear-cut that the disposition of the case becomes a matter of law." (Internal quotation marks omitted.) A-G Foods, Inc. v. Pepperidge Farm, Inc., 216 Conn. 200, 207, 579 A.2d 69 (1990).

The facts that the majority recites from the record present a partial image of the situation. There are, however, other facts and allegations by the plaintiff that are necessary to present a complete factual picture. Those allegations and facts were before the trial court for summary judgment purposes. In this regard, it is important to note that the plaintiff acknowledged the complete incompatibility and inconsistency of Horton's relationship with her vis-a-vis his role as a priest, by alleging in her complaint: "On several occasions ... Horton told the plaintiff he was going to leave the priesthood in order to continue and further their intimate relationship."

In addition, the plaintiff testified at her deposition that starting about March, 1989, and continuing until early 1992, Horton and the plaintiff had discussions about their getting married and his having to make a decision to leave the priesthood in order to marry her. In his deposition, Horton confirmed that the plaintiff had suggested that they get married and never tell anybody about their being married while he remained a priest, but he said that he could not do it that way. On a number of occasions, the plaintiff acknowledged that she and Horton engaged in sexual intercourse on occasions when she invited him into her home. She acknowledged further her active role in their romantic relationship in testifying that she purchased and provided certain materials for him to use most of the time when they engaged in sexual intercourse.

The plaintiff further admitted that during all of her relationship with Horton, she understood that it was clearly outside the scope of any Catholic priest's employment to engage in sexual relations with anyone. The plaintiff admitted that Horton's engaging in sexual relations with her was certainly not for the purpose of promoting any of the work of the Catholic Church. She further recognized that Horton, like every other Catholic priest, was under a vow to abstain from sexual activity and she had no reason to believe that he had ever been excused or relieved of that obligation to abstain from sexual activity.

Additional relevant, undisputed facts were presented by the Oblate institutional 155 defendants pertaining to Horton's activities: (1) At all times, the laws and standards of the Roman Catholic Church and the Rules of the Oblate Order, as well as each priest's personal commitment to celibacy, have expressly prohibited each priest member of the Oblate Order from engaging in any sexual activity of any kind and from seeking or maintaining any personally intimate relationship or marital relationship with any woman; (2) At all times, any and all attempted or actual sexual activity or personally intimate relationship or marital relationship, which any priest member of the Oblate Order may have sought or maintained with any woman during that time frame, would have been clearly outside the scope of any employment which that person might possibly have held as a Catholic priest or as a member of the Oblate Order; (3) During the course of the plaintiff's relationship with Horton, Horton held nonecclesiastical employment as a clinical psychologist that was not related to any program sponsored or operated by the Oblate Order, and, during that time frame, he was also free personally to contract to render priestly services for and at local parish churches, which priestly services were also not related to any program sponsored or operated by the Oblate Order.

These additional facts and admissions by the plaintiff, when considered with the facts recited in the majority opinion, present a more complete factual picture of the situation and cast doubt on the majority's characterization of the parties' long-standing intimate relationship as merely "an extreme and clearly unauthorized method of spiritually and emotionally counselling the plaintiff and thereby furthering the church's business."

Horton's participation in this consensual relationship, which was even carried on in the plaintiff's home, and which involved proposals of marriage, with Horton either concealing it and remaining in the church, or leaving the church entirely, could not reasonably be construed as simply an errant and misguided method of carrying out his counseling mission. The full factual context represents a vivid picture of an unrelated, independent, intimate, romantic relationship that both parties recognized was far beyond the permissible scope of Horton's priestly role. The fact that the parties may have met, and the relationship may have commenced, in the course of counseling is not sufficient to activate the doctrine of respondeat superior with respect to the Oblate institutions from which Horton concealed his impermissible relationship. Under these facts, Horton's action in conducting this relationship with the plaintiff represented a complete departure from his responsibilities to the Oblate institutional defendants. His long-standing, independent relationship with the plaintiff in no way furthered the interests of his employers. Like the trial court, we should be extremely hard pressed under these facts to find that the business of the Oblate institutional defendants was furthered by the activities attributed to Horton.

As the majority acknowledges, "[o]rdinarily, it is a question of fact as to whether a wilful tort of the servant has occurred within the scope of the servant's employment and was done to further his master's business.... But there are occasional cases where a servant's digression from duty is so clear- cut that the disposition of the case becomes a matter of law...." (Citations omitted; internal quotation marks omitted.) A-G Foods, Inc. v. Pepperidge Farm, Inc., supra, 216 Conn. at 207, 579 A.2d 69. This case is controlled by our Supreme Court's decision in A-G Foods, Inc. Specifically, in that case the Supreme Court upheld the trial court's determination that "any possible indirect benefit Pepperidge Farm might have received by the increased shelf space [allocated to Pepperidge Farm because of Spinelli's overstated sales] was so de minimis 156 that, as a matter of law, it does not support a conclusion that Spinelli acted within the scope of his employment and in furtherance of Pepperidge Farm's business." Id. , at 209, 579 A.2d 69. Pepperidge Farm benefited basically from Spinelli's actual sales to A-G Foods. Similarly, even though the Oblate institutional defendants may have received some monetary benefit from Horton's authorized counseling work, there is no factual showing that it benefited specifically from the activities associated with the intimate relationship that Horton carried on with the plaintiff during the same time period as the counseling activity was occurring. Furthermore, the Supreme Court in A-G Foods, Inc., determined that, even though the fraudulent transactions took place at the stores and during the hours when Spinelli was engaged in selling Pepperidge Farm merchandise, that is not sufficient to support the conclusion that he was acting within the scope of his employment. "Unless Spinelli was actuated at least in part by a purpose to serve a principal, the principal is not liable." (Internal quotation marks omitted.) Id. , at 210, 579 A.2d 69. Similarly, the facts in the present case indicate simply that Horton was motivated to serve his own interest, not that of the Oblate institutional defendants, whose most fundamental rules he violated by his conduct, and with full knowledge and acquiescence on the part of the plaintiff. The situation in A-G Foods, Inc., is directly analogous to the present situation. The speculation contained in the affidavit of one witness in this case that some sort of transference- countertransference may have occurred is no more significant a factor than the factor of the enhanced shelf space that may have resulted from Spinelli's activities.

The majority relies on Glucksman v. Walters, 38 Conn.App. 140, 144, 659 A.2d 1217, cert. denied, 235 Conn. 914, 665 A.2d 608 (1995), and Pelletier v. Bilbiles, 154 Conn. 544, 547, 227 A.2d 251 (1967), to support its interpretation of Horton's activities as merely misguided and unauthorized methods of counseling. Those cases are distinguishable. In both cases, the actions complained of represented an inappropriate and enlarged version of what would have been appropriate activity to maintain order and prevent disturbances. Neither case is persuasive. Gutierrez v. Thorne, 13 Conn.App. 493, 498-99, 537 A.2d 527 (1988), and Brown v. Housing Authority, 23 Conn.App. 624, 583 A.2d 643 (1990), cert. denied, 217 Conn. 808, 585 A.2d 1233 (1991), on the other hand, support the trial court's decision in this case. In both cases, the improper activity represented a departure from an appropriate course of conduct.

In the present case, Horton's activity was as much a departure from appropriate counseling activity as Spinelli's fraudulent sales activity was a departure in A-G Foods, Inc. Moreover, the decision in Nutt v. Norwich Roman Catholic Diocese, 921 F.Supp. 66 (D.Conn.1995) is highly persuasive. Horton's alleged actions in engaging in improper sexual activity no more furthered the interests of the Oblate institutional defendants than did that of the parish priest in Nutt. See also Tichenor v. Roman Catholic Church of Archdiocese of New Orleans, 32 F.3d 953, 960 (5th Cir.1994) ("[i]t would be hard to imagine a more difficult argument than that [Horton's] illicit sexual pursuits were somehow related to his duties as a priest or that they in any way furthered the interests of ... his employer").

I would affirm the decision of the trial court granting summary judgment in this case.

For the foregoing reasons, I respectfully dissent.

157 Gizzi v. Texaco 437 F.2d 308 (3rd Cir. 1971)

United States Court of Appeals, Third Circuit.

Augustine GIZZI, Appellant, and Anthony Giaccio v. TEXACO, INC., Appellee. Appeal of Anthony GIACCIO.

Nos. 18976, 18977.

Argued Oct. 27, 1970. Decided Jan. 20, 1971, Rehearing Denied March 8, 1971.

OPINION OF THE COURT

GERALD McLAUGHLIN, Circuit Judge.

The question posed on this appeal is whether the trial judge properly granted appellee Texaco's motion for a directed verdict in this personal injury action. Jurisdiction in the district court was based on diversity of citizenship and requisite amount in controversy.

Appellant Augustine Gizzi was a steady patron of a Texaco service station located on Route 130 and Chestnut *309 Street, Westville, New Jersey. The real estate upon which the station was situated was owned by a third party and was leased to the operator of the station, Russell Hinman. Texaco owned certain pieces of equipment and also supplied the operator with the normal insignia to indicate that Texaco products were being sold there.

In June of 1965, the station operator, Hinman, interested Gizzi in a 1958 Volkswagen van, which Hinman offered to put in good working order and sell for $400. Gizzi agreed to make the purchase and Hinman commenced his work on the vehicle. The work took about two weeks and included the installation of a new master braking cylinder and a complete examination and testing of the entire braking system. On June 18, 1965 Gizzi came to the station and paid the $400. He was given a receipt for the payment and was told that the car would be ready that evening. Gizzi returned at about six o'clock, accompanied by appellant Anthony Giaccio. They took the van and then departed for Philadelphia, Pennsylvania, to pick up and deliver some air- conditioning equipment. While driving on the Schuylkill Expressway, Gizzi attempted to stop the vehicle by applying the brakes. He discovered that the brakes did not work and, as a result, the vehicle collided with the rear end of a tractor trailer causing serious injuries to both Gizzi and Giaccio.

158 Texaco, Inc. was the only defendant named in the complaint and at trial, the testimony was all directed to the corporation's liability, the court having asked for an offer of proof on that question.

With regard to the sale of this vehicle, no actual agency existed between Texaco and Hinman. Although most of the negotiations involved in the transaction took place at the Texaco station, the record indicates that Hinman was selling the van on his own behalf, and not on behalf of Texaco. Texaco received no portion of the proceeds. The corporation was not designated the seller on the bill of sale, title to the vehicle being listed in the name of a company located in Atlantic City, New Jersey. Gizzi did receive a Texaco credit invoice as a receipt for the cash he paid. It would seem that this was an available convenience utilized by Hinman to record the transaction.

The repair work performed by Hinman was incidental to the sale of the vehicle. He offered to put the vehicle into good working order to further induce Gizzi to purchase it. Some work was done on the van after the money had been paid on June 18 and all work on the braking system was completed prior to that date.

The theory of liability advanced by appellants below was that Texaco had clothed Hinman with apparent authority to make the necessary repairs and sell the vehicle on its behalf and that Gizzi reasonably assumed that Texaco would be responsible for any defects, especially defects in those portions of the van which were repaired or replaced by Hinman. It was further contended that Gizzi entered into the transaction relying on this apparent authority, thereby creating a situation in which Texaco was estopped from denying that an agency did in fact exist.

The concepts of apparent authority, and agency by estoppel are closely related. Both depend on manifestations by the alleged principal to a third person, and reasonable belief by the third person that the alleged agent is authorized to bind the principal. The manifestations of the principal may be made directly to the third person, or may be made to the community, by signs or advertising. Restatement (Second), Agency '' 8, 8B, 27 (1957). In order for the third person to recover against the principal, he must have relied on the indicia of authority originated by the principal, Bowman v. Home Life Ins. Co. of America, 260 F.2d 521 (3 Cir. 1958); Restatement (Second), Agency 267 and such reliance must have been reasonable under the circumstances. N. Rothenberg & Son, Inc. v. Nako, 49 N.J.Super. 372, 139 A.2d 783 (App.Div.1958); *310 Hoddeson v. Koos Bros., 47 N.J.Super. 224, 135 A.2d 702 (App.Div.1957); Mattia v. Northern Ins. Co. of New York, 35 N.J.Super. 503, 114 A.2d 582 (App.Div.1955); Elger v. Lindsay, 71 N.J.Super. 82, 176 A.2d 309 (County Court 1961).

In support of their theory of liability, appellants introduced evidence to show that Texaco exercised control over the activities of the service station in question. They showed that Texaco insignia and the slogan 'Trust your car to the man who wears the star' were prominently displayed. It was further established that Texaco engaged in substantial national advertising, the purpose of which was to convey the impression that Texaco dealers are skilled in automotive servicing, as well as to promote Texaco products, and that this advertising was not limited to certain services or products. The record reveals that approximately 30 per cent of the Texaco dealers in the country engage in the selling of used cars and that this activity is known to and 159 acquiesced in by the corporation. Actually Texaco had a regional office located directly opposite the service station in question and Texaco personnel working in this office were aware of the fact that used vehicles were being sold from the station. It was further established that there were signs displayed indicating that an 'Expert foreign car mechanic' was on the premises.

Appellant Gizzi testified that he was aware of the advertising engaged in by Texaco and that it had instilled in him a certain sense of confidence in the corporation and its products.

In granting Texaco's motion for a directed verdict the court stated: 'I am convinced that as a matter of law there could not be any apparent authority on the basis of what I heard so far or what I have had the slightest glimmer that you could show, no apparent authority on the part of this operator to bind Texaco in connection with the sale of this used Volkswagon bus * * * 'In short, nobody could reasonably interpret any of these slogans or representations or indicia of control as dealing with anything more than the servicing of automobiles, and to the extent of putting gas in them and the ordinary things that are done at service stations. 'That 'Trust your car to the man who wears the star' could not possibly be construed to apply to installing new brake systems or selling used cars.' We are of the opinion that the court below erred in granting the motion. Questions of apparent authority are questions of fact and are therefore for the jury to determine. Lind v. Schenley Industries, Inc., 278 F.2d 79 (3 Cir. 1960); System Investment Corp. v. Montview Acceptance Corp., 355 F.2d 463 (10 Cir. 1966); Frank Sullivan Co. v. Midwest Sheet Metal Works, 335 F.2d 33 (8 Cir. 1964). On a motion for a directed verdict, and on appeal from the granting of such a motion, all evidence and testimony must be viewed in a light most favorable to the party against whom such motion is made and that party is entitled to all reasonable inferences that could be drawn from the evidence. Continental Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 82 S.Ct. 1404, 8 L.Ed.2d 777 (1962); Denneny v. Siegel, 407 F.2d 433 (3 Cir. 1969). While the evidence on behalf of appellants by no means amounted to an overwhelming case of liability, we are of the opinion that reasonable men could differ regarding it and that the issue should have been determined by the jury, after proper instructions from the court.

For the reasons stated herein, the order of the district court will be vacated and the case remanded for further proceedings consistent with this opinion. We do not pass on the merits of any other claims advanced on this appeal, but leave them for the consideration of the district court on the remand. * * *

Drumond v. Hilton Hotel Corp.

160 501 F.Supp. 29 (E.D. Pa. 1980)

United States District Court, E. D. Pennsylvania.

James and Verna DRUMMOND v. HILTON HOTEL CORPORATION

Civ. A. No. 79-1818.

July 3, 1980.

MEMORANDUM AND ORDER

GILES, District Judge.

Defendant, Hilton Hotel Corporation ("Hilton"), has moved for summary judgment in this action for damages. Plaintiff, Verna Drummond was injured as the result of a fall in a hotel whose trade name was the Hilton Inn. Hilton asserts that at no time did it maintain, own, control, or operate the hotel and that the record owner was the Creative Development Company ("Creative"), a wholly-owned subsidiary of the Gebco Investment Corporation ("Gebco"). A written agreement which on its face is a license/franchise agreement exists between Hilton and Creative. In that document, Hilton specifically disavows any agency relationship.

Plaintiffs resist Hilton's summary judgment motion asserting the doctrine of apparent agency. They maintain that Hilton held itself out in such a manner as to lead the general public, including hotel guests, to believe they were dealing directly with either Hilton or a servant or employee of Hilton, a hotel corporation of international reputation. Plaintiffs assert that representation of the hotel as a "Hilton Inn" estops Hilton from denying all possessory duties.

Upon careful examination of the controlling authority in this jurisdiction, this court concludes that there are material issues of fact presented regarding the existence of both a real and an apparent agency relationship between Hilton and Creative. Accordingly, for the reasons set forth below, Hilton's motion for summary judgment must be denied.

It is well-settled that summary judgment cannot be granted except on a clear showing that no genuine issue of fact exists. Bryson v. Brand Insulations, Inc., 621 F.2d 556 (3d Cir. 1980); Ely v. Hall's Motor Transit Co., 590 F.2d 62 (3d Cir. 1978). Hilton maintains that it had no ownership or control of the hotel at the time of plaintiff's accident.

Plaintiff urges that Hilton should be liable for the alleged negligent acts of Creative based on the doctrine of apparent authority as set forth in the Restatement of Agency s 267. Plaintiffs, opposing the instant motion, reference a signed agreement between Hilton and Creative which 161 purports to be a license and franchise agreement. It has a provision which attempts to deny the existence of an agency relationship and to disclaim all liabilities incurred on behalf of the hotel.

"Under Pennsylvania law, when an injury is done by an 'independent contractor," the person employing him is generally not responsible to the person injured." Drexel v. Union Prescription Centers, Inc., 582 F.2d 781, 785 (3d Cir. 1978), citing Hader v. Coplay Cement Manufacturing Co., 410 Pa. 139, 150-51, 189 A.2d 271, 277 (1963). "However, when the relationship between the parties is that of 'master-servant' or 'employer-employee' as distinguished from 'independent contractor-contractee,' the master or employer is vicariously liable for the servant's or employee's negligent acts committed within the scope of his employment." Drexel, 582 F.2d at 785, citing Smalich v. Westfall, 440 Pa. 409, 415, 269 A.2d 476, 481 (1970). The basic inquiry which the Pennsylvania courts have set forth to determine whether a given person is an employee-servant or an independent contractor is *31 whether such person is subject to the alleged employer's control or right to control with respect to his physical conduct in the performance of the services for which he was engaged.... The hallmark of an employee-employer relationship is that the employer not only controls the result of the work but has the right to direct the manner in which the work shall be accomplished; the hallmark of an independent contractee-contractor relationship is that the person engaged in the work has the exclusive control of the manner of performing it, being responsible only for the result. Drexel, 582 F.2d at 785, quoting Green v. Independent Oil Co., 414 Pa. 477, 483-84, 201 A.2d 207, 210 (1964). "Actual control over the manner of work is not essential; rather, it is the right to control which is determinative." Drexel, 582 F.2d at 785, citing Coleman v. Board of Education, 477 Pa. 414, 421-22, 383 A.2d 1275, 1279 (1978).

In Drexel, the Third Circuit observed that difficulties exist where the parties occupy the status of franchisor and franchisee. The mere existence of a franchise relationship does not necessarily trigger a finding of a master- servant relationship, nor does it automatically insulate the parties from such a relationship. Whether the control retained by the franchisor is also sufficient to establish a master-servant relationship depends in each case upon the nature and extent of such control as defined in the franchise agreement or by the actual practice of the parties. Drexel, 582 F.2d at 786. In Drexel, the defendant occupied the status of franchisor by virtue of a signed agreement. Although the franchise bore the name of the defendant, it denied all ownership and control and thus all liability for any negligence on the part of the franchisee. Notwithstanding a written provision in the agreement which stated that the liability of the defendant was strictly limited, the court concluded that other clauses in the agreement could be construed as reserving to the defendant the right to control certain facets of the franchise. For example, there were clauses requiring the franchisee to operate under the name of the defendant/franchisor, granting the defendant the right of inspection, and requiring that the franchise operate as part of a national organization securing its strength through adherence to defendant's "uniformly high standards of service, appearance, quality of equipment, and proved methods of operation." Id. 787. Such clauses prompted the court to state that it could not hold as a matter of law that a master-servant relationship did not exist.

162 In the agreement between Hilton and Creative, Hilton has the right to consult with Creative on operating problems concerning the hotel, the right to inspect the hotel to maintain the standards of the Hilton system. Creative is required to feature Hilton's name in all advertising and promotional material. The agreement does have a clause limiting Hilton's liability. Yet, as stated in Drexel, the mere fact that there is express denial of the existence of an agency relationship is not in itself determinative of the matter. Id. 786. Since such a denial of agency is not sufficient to relieve Hilton of all possible liability as a matter of law, the issue of Hilton's right to control any operations of the hotel is an issue for jury determination.

II. Plaintiff's contention that Hilton should be liable for the alleged negligent acts of Creative, irrespective of an actual agency relationship, is based on the doctrine of apparent agency as set forth by the Restatement (Second) of Agency s 267 (1975), which provides as follows: One who represents that another is his servant or other agent and thereby causes a third person justifiably to rely upon the care or skill of such apparent agent is subject to liability to the third person for harm caused by the lack of care or skill of the one appearing to be a servant or other agent as if he were such. Accord, Restatement of Agency s 267.

Plaintiffs cite Taylor v. Costa Lines, Inc., 441 F.Supp. 783 (E.D.Pa.1977), for the proposition that Pennsylvania law would adopt *32 this section of the Restatement. Hilton asserts that the Pennsylvania courts have traditionally rejected the application of this principle to tort actions. [FN1] The Third Circuit in Drexel agreed with the decision of the trial court in Taylor, and concluded that the Supreme Court of Pennsylvania would adopt s 267 or some similar principle of apparent agency. Drexel, 582 F2d at 791-94. Hilton could therefore be liable under this doctrine if the plaintiff makes a showing that Hilton represented Creative to be its servant and that plaintiff justifiably relied on such representation.

FN1. Hilton cites Janeczko v. Manheimer, 77 F.2d 205 (7th Cir. 1935) and Trautwein v. Loeb, 19 Pa.D. & C. 394 (Phila.Co.1933). These cases were specifically distinguished in Drexel, 582 F.2d at 791 n.14.

In Gizzi v. Texaco, Inc., 437 F.2d 308 (3d Cir.) (applying New Jersey law), cert. denied, 404 U.S. 829, 92 S.Ct. 65, 30 L.Ed.2d 57 (1971) while citing s 267, the court concluded that a question of apparent authority existed where a gas station was neither owned nor operated by Texaco but prominently displayed the Texaco insignia and slogan and where Texaco had engaged in national advertising, the effect of which could be found to instill confidence in Texaco gas stations. In Drexel, the Court also concluded that there were sufficient indicia of authority to raise questions of fact as to whether the elements of apparent agency had been established. Among these indicia were provisions in the franchise agreement which required the franchisee to use the name of the defendant/franchisor in all promotional and advertising materials. 582 F.2d at 795-96

163 In the instant case, plaintiffs reference to provisions in the license/franchise agreement between Hilton and Creative which require Creative to "disclose in all dealings with suppliers and persons, other than guests, that it is an independent entity and that Licensor (Hilton) has no liability for debts," and "Feature in the Hotel operation, in the guest rooms, public rooms and other public areas of the Hotel, and on the various articles therein as specified in the Operating Manual and in advertising and promotional material, the name 'Hilton' "

Therefore, this court concludes that whether Hilton held itself out to the public as the owner or operator of the Hilton Inn is a proper issue of fact for determination by a jury.

Ramos v. Preferred Medical 842 So.2d 1006

District Court of Appeal of Florida, Third District.

Angel R. RAMOS and Celina R. Ramos, individually and for an on behalf of their son, Angel Ramos, Jr., a minor, Appellants, v. PREFERRED MEDICAL PLAN, INC., Appellee.

April 16, 2003.

Before SCHWARTZ, C.J., and COPE and WELLS, JJ.

COPE, J.

Angel and Celina Ramos appeal an adverse summary judgment in a medical malpractice case. We conclude that there are disputed issues of material fact on the issue of apparent agency, and remand for further proceedings.

Plaintiffs-appellants Angel and Celina Ramos are members of Preferred Medical Plan, Inc., a health maintenance organization ("HMO"). Preferred enters into contracts with physicians to provide medical services to its members. As between Preferred and contracting physicians, the physicians are independent contractors.

Preferred's members must obtain medical services from physicians with whom Preferred has contracted. From Preferred's approved list, the plaintiffs selected Dr. Gregory Fox as their primary care physician. 164 The plaintiffs consulted Dr. Fox regarding the medical condition of their minor son, who suffered from gynecomastia. Dr. Fox referred the plaintiffs to Dr. Ignacio Fleites, a participating general surgeon, who is the chief of surgery at Westchester General Hospital. Dr. Fleites performed the surgery, and was paid by Preferred for the operation. There was a $400 co- payment for the surgery, which the plaintiffs paid to Preferred.

The plaintiffs brought suit against Dr. Fleites, Preferred, and Westchester General Hospital. They alleged that removal of the excess breast material associated with gynocomastia had been improperly performed, leaving scarring and a depression in the chest area.

So far as pertinent here, the plaintiffs alleged that Dr. Fleites was the apparent agent of Preferred. The trial court entered summary judgment in favor of Preferred, and the plaintiffs have appealed. [FN1]

FN1. Settlements were reached with the other defendants.

While this case was pending on appeal, the Florida Supreme Court announced its decision in Villazon v. Prudential Health Care Plan, Inc., 843 So.2d 842, 2003 WL 1561528 (Fla. March 27, 2003). The trial court did not have the benefit of this decision at the time it entered summary judgment, and the newly announced Villazon opinion requires reversal for further proceedings.

In Villazon, as here, an HMO entered into contracts with independent contractor physicians under which the physicians agreed to provide medical services to HMO members. The Florida Supreme Court ruled that an HMO can be held vicariously liable for the acts of an independent contractor physician if the physician is acting either (a) as the actual agent or (b) as the apparent agent of the HMO. Id. 843 So.2d at 850-51.

The present case involves only a claim of apparent agency, not a claim of actual agency. The plaintiffs assert that Dr. Fleites was the apparent agent of Preferred.

The Illinois Supreme Court has discussed the issue of apparent agency at length in Petrovich v. Share Health Plan of Illinois, Inc., 188 Ill.2d 17, 241 Ill.Dec. 627, 719 N.E.2d 756 (1999). We find the reasoning of that decision helpful here. The Petrovich decision states in part:

Because HMOs may differ in their structures and the cost-containment practices that they employ, a court must discern the nature of the organization before it, where relevant to the issues. As earlier noted, Share is organized as an independent practice association (IPA)- model HMO. IPA-model HMOs are financing entities that arrange and pay for health care by contracting with independent medical groups and practitioners. This court has never addressed a question of whether an HMO may be held liable for medical malpractice.... Courts ... should not be hesitant to apply well-settled legal theories of liability to HMOs where the facts so warrant and where justice so requires. .... 165 As a general rule, no vicarious liability exists for the actions of independent contractors. Vicarious liability may nevertheless be imposed for the actions of independent contractors where an agency relationship is established under either the doctrine of apparent authority or the doctrine of implied authority. .... We now hold that the apparent authority doctrine may ... be used to impose vicarious liability on HMOs.... Courts in other jurisdictions have likewise concluded that HMOs are subject to this form of vicarious liability.... To establish apparent authority against an HMO for physician malpractice, the patient must prove (1) that the HMO held itself out as the provider of health care, without informing the patient that the care is given by independent contractors, and (2) that the patient justifiably relied upon the conduct of the HMO by looking to the HMO to provide health care services rather than to a specific physician. Apparent agency is a question of fact.

A. Holding Out The element of "holding out" means that the HMO, or its agent, acted in a manner that would lead a reasonable person to conclude that the physician who was alleged to be negligent was an agent or employee of the HMO. Where the acts of the agent create the appearance of authority, a plaintiff must also prove that the HMO had knowledge of and acquiesced in those acts. Significantly, the holding-out element does not require the HMO to make an express representation that the physician alleged to be negligent is its agent or employee. Rather, this element is met where the HMO holds itself out as the provider of health care without informing the patient that the care is given by independent contractors. Vicarious liability under the apparent authority doctrine will not attach, however, if the patient knew or should have known that the physician providing treatment is an independent contractor. .... A plaintiff must also prove the element of "justifiable reliance" to establish apparent authority against an HMO for physician malpractice. This means that the plaintiff acted in reliance upon the conduct of the HMO or its agent, consistent with ordinary care and prudence. The element of justifiable reliance is met where the plaintiff relies upon the HMO to provide health care services, and does not rely upon a specific physician. This element is not met if the plaintiff selects his or her own personal physician and merely looks to the HMO as a conduit through which the plaintiff receives medical care.

Id. at 763-68 (emphasis added; citations omitted).

Florida's law of apparent agency is substantially identical to that expressed in the Illinois decision, except that in Florida the test for apparent agency has been stated as a three-part test where Illinois uses a two- part test. Under Florida law there is

a three-prong test under general agency law in order to determine the existence of apparent agency: first, whether there was a representation by the principal; second, whether a third party relied on that representation; and, finally, whether the third party changed position in reliance upon the representation and suffered detriment.

166 Almerico v. RLI Ins. Co., 716 So.2d 774, 777 (Fla.1998) (citations omitted); see also Villazon, 843 So.2d at 851-52 (Fla.2003).

We conclude that disputed issues of material fact remain regarding the issue of apparent agency. Under Petrovich, the first question is whether "The HMO holds itself out as the provider of health care without informing the patient that the care is given by independent contractors." 241 Ill.Dec. 627, 719 N.E.2d at 766.

Preferred's own promotional literature indicates that it operates several full-service medical centers. (R. 881). "All of your medical care will be coordinated through the medical center that you originally chose on your application. This procedure will enable your primary physician to maintain a master medical record for you in order to ensure the continuity and quality of care that you should have as a member of Preferred Medical Plan." (R. 882). The member information includes, "You MUST see your Primary Care Physician in order to be treated. If it is necessary for you to see a specialist, it will be arranged for you. You CANNOT go on your own to a specialist without a written referral from your Primary Care Doctor." (R. 885).

Consistent with these policies, the plaintiffs consulted the primary care physician, Dr. Fox, who made the referral to Dr. Fleites. Under Preferred's rules, Dr. Fox could only refer the plaintiffs to a surgeon who was one of Preferred's participating providers. Preferred paid Dr. Fleites the fee for the surgery. The plaintiffs paid the $400 co-payment to Preferred.

As outlined in the Petrovich decision, the foregoing facts would lead a reasonable person to conclude that Preferred had undertaken to be the provider of health care services and that Dr. Fleites was acting on its behalf.

The Petrovich decision also holds, however, that "[v]icarious liability under the apparent authority doctrine will not attach ... if the patient knew or should have known that the physician providing treatment is an independent contractor." Petrovich, 241 Ill.Dec. at 637, 719 N.E.2d 756.

The file contains a copy of the Preferred's Individual Medical and Hospital Services Contract. It provides in part, "The relationship between Health Plan and Participating Providers that are not Health Plan employees is an independent contractor relationship. Such Participating Providers are not agents or employees of Health Plan, nor is Health Plan, or any employee of Health Plan, an agent or employee of any such Participating Provider." As an initial matter, Preferred markets its services in English and Spanish. The promotional material quoted earlier is made available to subscribers in both languages. The plaintiffs are Spanish speaking. The Individual Medical and Hospital Services Contract is found in this record in the English language only.

Leaving aside the language issue, the contractual provision just quoted is, in any event, not clear enough to dispose of the apparent agency issue. The contract indicates that those 167 persons who are not Health Plan employees are independent contractors. The contractual provision does not advise the subscriber who is an employee and who is not.

Preferred points to the medical consent form signed by Mrs. Ramos prior to the surgery, which was performed at Westchester Hospital. The medical consent form included, "I acknowledge that all physicians and surgeons furnishing services, including all radiologists, pathologists, anesthesiologists and emergency room physicians, are independent contractors and are not employees or agents of the hospital." Mrs. Ramos is Spanish speaking. She testified that this part of the consent form was not translated for her, while other parts were. Thus, this form is not dispositive of the issue.

Preferred correctly states that the contract between Preferred and Dr. Fleites describes Dr. Fleites as an independent contractor. While that is true, it is not dispositive on the issue of apparent agency. For apparent agency purposes, the question is what the plaintiffs knew or reasonably should have known. There is no indication that the plaintiffs ever saw the contract between Preferred and Dr. Fleites or had any reason to know of its contents.

The next question for purposes of the apparent agency analysis is reliance. As explained in Petrovich, this element is met "where the plaintiff relies on the HMO to provide health care services, and does not rely upon a specific physician. This element is not met if the plaintiff selects his or her own personal physician and merely looks to the HMO as a conduit through which the plaintiff receives medical care." 241 Ill.Dec. 627, 719 N.E.2d at 768.

The summary judgment record indicates that the plaintiffs met this part of the test. The plaintiffs chose their primary care physician from Preferred's list. That physician, Dr. Fox, referred the plaintiffs to Dr. Fleites, the surgeon on Preferred's approved list. As stated in the instructions Preferred gives its patients, "If it is necessary for you to see a specialist, it will be arranged for you." (R. 885).

The final question is whether there was a change of position and detrimental reliance. Again, this element is met. The operation was performed on the minor child. For purposes of this summary judgment, the plaintiffs' factual claims of bad result and physical injury are accepted as true.

For the stated reasons, the summary judgment is reversed and the cause remanded for further proceedings.

Partnership & Other Entities

Trans-America Construction v. Comerica Bank 2003 WL 698416 (Mich.App.)

168 UNPUBLISHED OPINION. CHECK COURT RULES BEFORE CITING.

Court of Appeals of Michigan.

TRANS-AMERICA CONSTRUCTION COMPANY, Plaintiff-Appellant, v. COMERICA BANK, Defendant-Appellee, and Yvonne WALLER-JORDAN, d/b/a C.A. Waller & Associates, Lemuel A. Waller, d/b/a L.W. Services, Marcus R. Waller, Marcmond Builders, Deanna P. Waller, d/b/a Preferred Building Contractors, Defendants/Cross-Defendants, and BANK ONE MICHIGAN, Defendant, and SAMI, INC., Defendant/Cross-Plaintiff/Cross-Defendant, and NATIONAL CITY BANK OF MICHIGAN/ILLINOIS, Defendant/Cross-Plaintiff.

Feb. 28, 2003.

Before: KELLY, P.J. and WHITE and HOEKSTRA, JJ.

[UNPUBLISHED] PER CURIAM.

Plaintiff appeals as of right the trial court's order granting defendant Comerica Bank's (hereinafter "defendant") motion for summary disposition. We affirm. This appeal is being decided without oral argument pursuant to MCR 7.214(E).

I. Basic Facts and Procedural History

Plaintiff, a licensed builder but not a licensed lender, had a longstanding business relationship with Lemuel A. Waller, d/b/a L.W. Services, a building contractor. Plaintiff frequently furnished working capital to Waller to allow Waller to complete insurance repair projects.

In 1997, plaintiff provided monies to Waller to make insurance repairs to a home owned by Florence Bell and Earnest Bell. Plaintiff and Waller agreed that in addition to repaying the monies advanced, Waller would pay plaintiff fifty- percent of any profits on the project. If no profits materialized, plaintiff would receive only those funds it supplied to Waller. The parties did not execute a written agreement. Florence Bell executed a form letter requesting that the Bells' insurer, Michigan Basic Insurance Company, include Waller and plaintiff as payees on benefit checks. Plaintiff issued checks to Waller totaling $22,252.

Plaintiff later learned that Michigan Basic had issued three checks totaling $83,433.06 in connection with the Bell project. A signature purporting to be that of Pjeter Stanaj, plaintiff's 169 president, appeared on the checks. Waller had cashed the checks without plaintiff's knowledge.

Plaintiff filed suit alleging that defendant converted its property by improperly negotiating two of the three checks issued by Michigan Basic for the reason that the signature of Pjeter Stanaj was fraudulent. [FN1] Defendant moved for summary disposition pursuant to MCR 2.116(C)(10). Defendant argued that the undisputed evidence showed that plaintiff and Waller formed a partnership, and that because partners have the implied authority to endorse checks on behalf of the partnership, it could not be held liable for negotiating the checks. Defendant also argued that if plaintiff was merely a lender, its agreement with Waller was usurious, illegal, and unenforceable. In response, plaintiff argued that the evidence showed that it merely loaned funds to Waller, and that it was not Waller's partner.

FN1. Plaintiff also named as defendants other financial institutions, a party store that cashed checks on which it was named as a payee, individual members of the Waller family, including Lemuel Waller, and their business entities. The claims against these defendants, as well as cross- claims filed by various parties, were dismissed or resolved by entry of judgment, and are not relevant to the issue on appeal.

The trial court granted defendant's motion, finding that the undisputed evidence, and in particular the statements made by Stanaj, established that plaintiff and Waller were partners. The trial court did not address defendant's argument that plaintiff's agreement with Waller was usurious and unenforceable.

II. Analysis

Plaintiff argues that the trial court erred by granting defendant's motion for summary disposition. We disagree and affirm. We review a trial court's decision on a motion for summary disposition de novo. Auto Club Group Ins Co v. Burchell, 249 Mich.App 468, 479; 642 NW2d 406 (2001).

A partnership is defined as "an association of 2 or more persons, which may consist of husband and wife, to carry on as co-owners a business for profit." MCL 449.6. If parties associate themselves in such a way as to carry on a business for profit they will be deemed to have formed a partnership, regardless of their subjective intentions. Byker v. Mannes, 465 Mich. 637, 645-646; 641 NW2d 210 (2002). The burden of proof is on the party seeking to establish the existence of a partnership, Brown v. Frankenmuth Mut Ins Co, 187 Mich.App 375, 381; 468 NW2d 243 (1991), and the existence of a partnership is a question of fact. LeZontier v. Shock, 78 Mich.App 324, 333; 260 NW2d 85 (1977).

Here, the undisputed evidence showed that, as they had done in other cases, plaintiff and Waller agreed to share equally in profits from the Bell project. A party's receipt of profits from a business is prima facie evidence that the party is a partner in the business. MCL 449.7. However, an agreement to share losses is not listed as a factor that must be considered in determining whether a partnership exists. MCL 449.7.

Furthermore, no evidence supported plaintiff's assertion that it merely acted as a lender. 170 Plaintiff was not licensed as a lender as required by M.C.L. § 493.1. The parties did not sign a note or any document memorializing the transaction. Plaintiff did not charge Waller a fixed rate of interest. The amount of any profit to be gained by plaintiff depended solely on the success of the Bell project. Plaintiff did not obtain any collateral for the funds it advanced to Waller. The form letter signed by Florence Bell requesting that plaintiff and Waller be named payees on benefit checks issued by Michigan Basic did not constitute a security agreement between plaintiff and Waller. See M.C.L. § 440.9203. Stanaj testified that the funds advanced to Waller were treated as a business expense on plaintiff's tax return. Typically, a lender considers a loan to be a business asset. The trial court correctly found that the undisputed evidence showed that plaintiff and Waller formed a partnership. Byker, supra.

Each partner in a partnership is an agent of the partnership. The act of every partner for carrying on the usual business of the partnership binds the partnership, unless the partner in fact has no authority to act in the particular matter and the person with whom the partner is dealing is aware that the partner lacks authority. MCL 449.9(1). A partner who signs an agreement in his name in the context of representing the partnership binds the partnership. Omnicom of Michigan v. Giannetti Investment Co, 221 Mich.App 341, 345-346; 561 NW2d 138 (1997). Given that plaintiff and Waller formed a partnership, Waller was entitled to sign Stanaj's name on the checks from Michigan Basic. Defendant could not be liable for conversion of the checks under the circumstances. See M.C.L. § 440.3420. The trial court did not err in granting summary disposition. [ * * * ]

Affirmed.

WHITE, J. (dissenting).

I respectfully dissent. The circuit court erred in concluding that there were no genuine issues of material fact regarding whether a partnership existed between plaintiff and Waller with respect to the Bell project. Stanaj's affidavit was sufficient to create a genuine issue whether the relationship was a partnership or that of lender and borrower. Stanaj described the lender- borrower relationship and asserted that plaintiff had no involvement in the administration and control of the Bell job, and that the one-half share of the profit was to serve as interest on the loan.

MCL 449.7 provides:

*3 In determining whether a partnership exists, these rules shall apply:

* * * (4) The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment:

* * * (d) As interest on a loan, though the amount of payment vary with the profits of the business, 171 * * *

Where profits are paid as interest on a loan, the payment does not support the inference of a partnership relationship. Further, even where the inference is applicable, the receipt of profits is only prima facie evidence of a partnership, and is not conclusive. See Lobato v. Paulino, 304 Mich. 668, 675-676; 8 NW2d 873 (1943). The intent of the parties controls. Here, Stanaj's affidavit created a genuine issue whether the parties to the transaction intended the Bell project to be a joint enterprise or intended to assume a lender-borrower relationship.

I would reverse and remand for further proceedings.

H20’C Ltd v. Brazos 114 S.W.3d 397

Missouri Court of Appeals, Western District.

H20'C LTD and John T. O'Connor, Appellants, v. Blaise BRAZOS, Respondent.

Aug. 12, 2003. Rehearing Denied Sept. 30, 2003.

Before ELLIS, C.J., LOWENSTEIN and HOLLIGER, JJ.

HAROLD L. LOWENSTEIN, Judge.

John T. O'Connor and H2O'C, Ltd. (collectively Appellants) appeal from the trial court's judgment in favor of Blaise Brazos on Count I through IV of Brazos' Counterclaim against Appellants. [ * * * ] The respondent's counterclaim prayed for and the trial court declared the existence of a partnership between the parties.

OVERVIEW OF THE CASE

A brief overview and explanation of the underlying case, and the procedural snarl generated in getting to this point of the appeal is in order. Suffice it to say that deciding a fairly simple question has devolved into a lengthy quagmire and will necessarily require extended discussion. At the heart of this lawsuit is this issue: Did an ongoing and extended business 172 relationship between two scientists who together preformed consulting work on wastewater treatment projects, without benefit of any written agreement, adequately support a judgment declaring a partnership? The actual period of the business relationship (1993-97) lasted less time than it has taken to attempt to determine ownership of limited personal property and division of expenses and profits (suit was filed in March 1997 by one party to replevin assets, a counterclaim filed by the other to declare a partnership existed, wrangling over pre-trial and discovery motions, numerous continuances, a dismissal for failure to prosecute, and several prior appeals which suffered from finality problems, the case was finally argued here over five years later.)

John O'Connor and the corporation H2O'C of which he and his wife are the sole shareholders instituted suit in 1997 to replevin a microscope and other personal property with a total value of $7,061 plus business documents from Blaise Brazos who was described as "formerly an employee and later an independent contractor" of the plaintiffs. In 1999 Brazos filed this five count counterclaim against the plaintiffs which included a claim that the relationship between the parties, "... was and is a partnership in fact" under the Uniform Partnership Act adopted in Missouri.

FACTUAL AND PROCEDURAL HISTORY

O'Connor and Brazos began their association in the late 1970's or early 1980's when Brazos worked in O'Connor's lab at the University of Missouri-Columbia. O'Connor was then chairman of the department of engineering. Over the next several years, O'Connor employed Brazos to work on externally funded research projects at the university on an as-needed basis. In 1993, O'Connor and Brazos began conducting drinking water analysis for profit. In an initial project, O'Connor and Brazos were paid directly and individually. In October of 1993, O'Connor incorporated H2O'C Ltd. as a Missouri corporation with himself and his wife as the only shareholders. The corporation was formed by O'Connor to handle the money received from the consulting projects and for tax purposes. Until their business relationship ended in March 1997, O'Connor and Brazos provided consulting services on several projects, including a five-year project with Premium Standard Farms that Brazos brought in as a client to H2O'C.

O'Connor was primarily responsible for preparing the project budget with some input from Brazos, negotiating the contract, and preparing reports once the projects began. Brazos did the lab and fieldwork and provided assistance on the reports and papers that were written. During this time, no partnership agreement was signed and no partnership tax returns were filed. During their association, both Brazos and O'Connor were consulting and receiving compensation on projects that were not a part of H2O'C. From 1993 through 1996, Brazos filed his individual income tax returns listing his occupation as a sole proprietor consultant.

At trial, Brazos testified that he and O'Connor had agreed to split the revenues equally. He also said "He told me I was a partner; he allowed me to act like a partner; he encouraged me to act like a partner. I'm a partner." Further, he presented at trial the testimony of two individuals who stated that the relationship was characterized as a partnership. The first was an associate professor at the University of Missouri-Columbia who testified that at a surplus auction, which he attended as well as O'Connor and Brazos, he believed that O'Connor used the word "partner" 173 in referring to his association with Brazos. The second individual, another professor from the university and the one responsible for sending the Premium Standard Farms project to Brazos, testified that he heard O'Connor state that there was a partnership between O'Connor and Brazos. Brazos also presented evidence of a "Superior Technology Demonstration--Evaluation of Alternative Treatment Technologies" report, which provided short biographies for O'Connor and Brazos and stated that "[t]ogether, they constitute H2O'C." In addition, Brazos offered a letter written by O'Connor in which O'Connor said he was worried about Brazos purchasing a $40,000 microscope. In the letter, O'Connor stated "I've been fretting about your microscope dilemma all night. So, I thought I would write as both friend and business partner to share my thoughts." Brazos ultimately purchased the microscope with his own funds. Brazos' business cards identified him as a "Drinking Water Microbiologist." And, a paper published in Public Works Magazine, identified O'Connor as the principal of H2O'C and Brazos as a drinking water microbiologist with H2O'C.

The relationship between Brazos and O'Connor began deteriorating about the time O'Connor brought his son into the business. At that point, Brazos stated that his amount of compensation, specifically from the Premium Standard Farms project, was being reduced from that which they had agreed. Brazos testified that in July before the end of their association he confronted O'Connor and asked, "Are we in a partnership or not?" He stated that he felt like O'Connor's son had "veto power over" him. Again in January 1997, they had another conversation in which Brazos asked O'Connor, "What is our business arrangement?" After consulting with his brother, who is a CPA, Brazos began trying "to separate along financial lines." When the separation was complete, Brazos filed for unemployment. [FN2] The Division of Employment Security determined that he was not qualified for benefits because he left work voluntarily without good cause attributable to the work or the employer.

FN2. It is unclear from the record exactly when Brazos filed for unemployment benefits. The Division's denial was dated March 1997.

Following the end of their business relationship in March 1997, Appellants filed a petition (later amended) in replevin requesting the return of certain items in Brazos' possession. In January 1998, Brazos filed his Answer to the First Amended Petition. [FN3] On January 13, 1998, the trial court entered an order in which it found that Appellants were entitled to the right of possession of the items, evidently those that were the subject of Appellant's petition. This order is not contained in the record, only a transcript of the hearing.

FN3. While the docket entry does not designate this as an Answer and a Counterclaim, this court can only assume that the allegations of the later Counterclaim (which serves as the basis for the judgment) were originally asserted in this document.

Brazos then filed a First Amended Answer and Counterclaim requesting a determination of a partnership and distribution of assets. Specifically, Count I requested that the court determine that a partnership existed. Count II requested an accounting of the partnership, if one was found. Count III sought damages relating to the storage of O'Connor's personal belongings, one-half of the gross revenues, and one-half the value of the partnership property. Count IV requested damages for the conversion of personal property. Count V alleged misrepresentation 174 and sought damages for the loss of opportunity to participate in profits. * * *

After numerous continuances and the case being placed on the dismissal docket for failure to prosecute, a bench trial was held on May 1-2, 2001. The trial court issued findings of fact, conclusions of law and judgment. * * * On July 25, 2002, the judgment was filed. In that judgment, the trial court found that a partnership did exist and that O'Connor and Brazos had agreed to split gross profits "50-50." The court's judgment in favor of Brazos on Counts I through IV, awarded damages in the amount of $55,036.81 plus interest representing Brazos partnership interest and $300.00 in damages for conversion of his personal property. The trial court entered judgment in favor of Appellants on Count V, loss of business opportunity, having concluded that this claim was abandoned at trial. This third appeal is addressed.

STANDARD OF REVIEW

This court's review of a case tried without a jury is governed by the principles of Murphy v. Carron, 536 S.W.2d 30 (Mo. banc 1976). This court will affirm the judgment of the trial court unless there is no substantial evidence to support it, it is against the weight of the evidence, or it erroneously declares or applies the law. Id. at 32; Fischer v. Brancato, 937 S.W.2d 379, 380 (Mo.App.1996). An appellate court "reviews the evidence in the light most favorable to the prevailing party, giving it the benefit of all reasonable inferences and disregarding the other party's evidence except as it supports the judgment." Meyer v. Lofgren, 949 S.W.2d 80, 82 (Mo.App.1997). This court defers to the trial court in determining the credibility of witnesses. See id.

ARGUMENT

In their first point on appeal, Appellants assert that the trial court erred in finding that a partnership existed. They say that Brazos failed to prove the existence of a partnership by clear, convincing and cogent evidence.

In Meyer v. Lofgren, 949 S.W.2d 80 (Mo.App.1997), this court addressed the statutory and judicial definitions of partnership:

A partnership is statutorily defined as "an association of two or more persons to carry on as co- owners a business for profit." § 358.060.1.... A partnership has been judicially defined as a contract of two or more competent persons to place their money, effects, labor and skill, or some or all of them, in lawful commerce or business and to divide the profits and bear the loss in certain proportions. The partnership agreement need not be written but may be expressed orally or implied from the acts and conduct of the parties ..., with the intent of the parties serving as the primary criterion for determining whether such a relationship exists.

Id. (internal quotations and citations omitted). The intent necessary to find a partnership is not the intent to form a partnership, but the intent to enter a relationship that legally constitutes a partnership. Id. The law does not presume the existence of a partnership, and Brazos, as the party 175 seeking to establish the existence of a partnership, has the burden to prove its existence by clear, cogent and convincing evidence. Nesler v. Reed, 703 S.W.2d 520, 523 (Mo.App.1985). The Supreme Court of Missouri has discussed this standard in Grissum v. Reesman, 505 S.W.2d 81, 86 (Mo. banc 1974).

As we now construe the phrase, it really means that the court should be clearly convinced of the affirmative of the proposition to be proved. This does not mean that there may not be contrary evidence. The word 'cogent' adds little, if anything; it means impelling, appealing to one's reason, or convincing.

"Indicia of a partnership relationship includes a right to a voice in management of the partnership business, a share of the profits of the partnership business, and a corresponding risk of loss and liability to partnership creditors." Morrison v. Labor and Indus. Relations Com'n, 23 S.W.3d 902, 909 (Mo.App.2000) (emphasis added).

Since there is no written partnership agreement in this case, the agreement or existence of a partnership, or lack thereof, may be implied by the conduct of the parties. Grissum v. Reesman, 505 S.W.2d 81, 86 (Mo. banc 1974). The conduct of the parties does not support a finding that a partnership existed. O'Connor and Brazos' first association came when Brazos worked in O'Connor's lab on externally funded research projects. Brazos would do the work and be compensated through the research funds. This relationship changed when O'Connor left the university and the projects on which he and Brazos worked involved consulting projects. Brazos argues that during this time, they became partners.

Neither Brazos' nor O'Connor's actions were consistent with the establishment of a partnership. In his counterclaim, Brazos alleges that he and O'Connor formed a partnership and that the establishment of H2O'C "in no way affected the partnership relationship." In fact, he testified that he considered himself one partner and H2O'C or the O'Connor family the other partner. H2O'C was incorporated just after Brazos alleges that the partnership began. Yet, H2O'C was the primary entity that handled all aspects of the consulting services. For example, all of the contracts for the projects named H2O'C, and not Brazos and O'Connor individually or as partners, as a party; the payments resulting from the contracts were paid to H2O'C; Brazos received compensation through H2O'C; he had no interest in H2O'C; and all advertisements and papers were completed in the name of H2O'C. No evidence suggests that a partnership existed separate from H2O'C.

Brazos claims, as evidence of a partnership, that he and O'Connor split the gross profits equally, and each bore his own expenses. While the decision to divide profits may be prima facie evidence of a partnership, assuming there was a division of the profits, "the sharing of profits 'is far from conclusive, and this is particularly true where the parties, although agreeing to divide profits, do not agree to share any possible losses." Nesler, 703 S.W.2d at 525. In Van Hoose v. Smith, 355 Mo. 799, 198 S.W.2d 23, 27 (1947), the Supreme Court noted that "it is not sufficient to create a partnership that the parties were to share the profits of a given enterprise or transaction. They must also have agreed, that is, intended to share the losses and to become partners." Although a specific agreement to share losses may, in some instances, be implied, * * * the implication or presumption may be overcome by evidence to the contrary, * * * Here, the 176 presumption of an agreement to share in the losses is rebutted by Brazos' testimony--there is utterly no evidence that O'Connor and Brazos agreed or intended to share in any loss. Brazos testified that he did not intend to match any losses and that O'Connor "never agreed to match any losses" that he incurred. While Brazos may claim that no losses occurred during the business that would require him to contribute, the fact that there was no agreement or intention to share in the losses is evidence of the nonexistence of a partnership relationship. * * * It is unreasonable to assume that O'Connor agreed to share equally with Brazos the gross revenues (as opposed to gross profits) and then for O'Connor to absorb personally any loss or expenses that may have resulted from the partnership. Rather, it is more likely that O'Connor was merely compensating Brazos for work performed on the consulting contracts based upon Brazos' work on the project, which will be addressed below.

Further, the testimony at trial was that this was a sharing of gross revenues, not net income. As noted above, Brazos testified that the agreement was to pay their own expenses, and it appears that most of the overhead was paid by O'Connor. The fact that expenses were not born by the partnership further refutes the existence of a partnership since this fact suggest that there was no true sharing of profits in this case. The Eastern District in Binkley v. Palmer, 10 S.W.3d 166, 172 (Mo.App.1999), held that "[g]ross revenues are not profits and an agreement to pay a percentage of gross revenues is not the sharing of profits." There, the court noted that "Missouri courts have defined 'profit' as the benefit of or the advantage remaining after all costs, charges and expenses have been deducted from income." Id. Brazos' own evidence supports that this was not a true sharing of profits that would evidence a partnership.

Moreover, no inference of a partnership is drawn where a share of the profits was received by an employee in payment of wages. Section 358.070(4)(b). [FN5] See also Nesler, 703 S.W.2d at 525. Here, O'Connor prepared budgets for each of the projects based upon the amount of work he expected to expend. Brazos' compensation was based upon these amounts. He even testified that the "division of the profits" in the initial contract was a "division of what we considered to be compensation for our work and our expenses." Thus, it is clear that he was being paid for services rendered on each project. Brazos' received compensation from H2O'C in which taxes, social security and unemployment was withheld. He also received W-2 forms from the corporation. While testimony from Brazos' brother indicates that it is not unusual for a partner to consider himself an employee and receive W-2 forms, there is no evidence that any other "sharing of profits" occurred apart from this compensation for services. Further, Brazos' individual income taxes during this time list his occupation as a sole proprietor and consultant. Finally, and likely the most significant indication that a partnership did not exist, when his association with O'Connor ended, he filed an unemployment claim with the Division of Employment Security. This was after consultation with his brother who was an accountant. He did not petition the court at that time to dissolve the partnership and enter an accounting to distribute the assets of the partnership, but chose instead to seek unemployment benefits.

FN5. Section 358.070(4)(b) states that "The receipt by a person of a share of the profits of a business is prima facie evidence that the is a partner in the business, but no such inference shall be drawn in if such profits were received in payment: ... (b) As wages of an employee...."

177 Apart from his assertion that there was a sharing of profits, Brazos has failed to point to an intention or agreement to become partners, * * * or to enter into a relationship that legally constitutes a partnership, * * * Brazos has provided no indication that a discussion occurred between him and O'Connor concerning an intent or agreement to create a partnership to perform the consulting work. * * * Brazos testified that he questioned O'Connor about their relationship several times before the March 1997 break-up. If there was an agreement to enter into a partnership, then Brazos would have had no question about the relationship. Brazos may have wanted to be a partner, but the evidence does not support a co- ownership of a business. * * * The overwhelming evidence is that H2O'C was the business entity involved in the consulting services and O'Connor exercised control over the business enterprise. Brazos has provided no evidence of a "definite and specific agreement" to enter into a partnership or to conduct business as partners. Shea v. Helling, 826 S.W.2d 419, 421 (Mo.App.1992) (quoting Brotherton v. Kissinger, 550 S.W.2d 904, 907 (Mo.App.1977)).

Likewise, as indicated above, there is no evidence that Brazos had a voice in the management of the business. Brazos did not have any say in the decision to bring O'Connor's son into the business. While he contributed to the budget preparation, it was O'Connor who negotiated the contracts and submitted the final budget. Because each of the contracts were executed in the name of H2O'C, Brazos, who stated that he did not have any interest in H2O'C, did not have the authority to enter into contracts on its behalf. It does not appear from the testimony that he had any control over the financial aspects of the relationship. While he may have had authority to order items needed for the project, he had no ability to disperse funds to pay for those items since they were paid through H2O'C, nor was there any other separate partnership account from which Brazos could disperse funds to pay partnership expenses. * * *

Brazos' asserts that he was held out as a partner. He also states that in advertisements/papers to thousands of people he was represented as being a partner. In one, a brief biography of each is given with the statement "[t]ogether, they constitute H2O'C." In another both are pictured with brief statements about their expertise. Both of these, however, concern H2O'C. There is no indication of a partnership separate from H2O'C. Further, neither Brazos' business cards nor any advertisement stated specifically that he was a partner. They only suggest that he was working with H2O'C. Even if this court were to assume that "holding out" as a partner was sufficient to establish the existence of a partnership, the facts alleged by Brazos do not sufficiently establish a holding out as this court discussed in Meyer v. Lofgren, 949 S.W.2d 80 (Mo.App.1997). In Meyer, announcements were printed announcing that Meyer had joined the accounting firm as a "partner in charge of personal financial planning" and business cards indicated that she was a "partner of the firm." Meyer, 949 S.W.2d at 83.

Brazos also provides other evidence of a partnership. He claims that (1) both brought "unique talents" to the alleged partnership, (2) he purchased a microscope for use in the business, (3) he brought in the Premium Standard Farms project, and (4) he purchased a home based on the representations that their association would continue and that space was needed for a laboratory and for storage. None of this necessarily suggests the existence of a partnership.

While the talents of O'Connor and Brazos are different, this court cannot ignore the disparity in professional and educational background. This court is not saying that a partnership 178 can only exist where the experience of the parties are similar, yet this evidence further supports that O'Connor was the principal in this enterprise. Their relationship began when Brazos worked on O'Connor's externally funded research projects. While Brazos may have supplied talents or skills distinct from those of O'Connor, some of those tasks were completed by others who were treated as independent contractors of H2O'C.

Second, Brazos purchased the microscope with his own money, even after O'Connor stated that it was not necessary for their business. Brazos testified that this was an instrument that he felt he had to have since it was how he earned his living, and there was evidence that Brazos conducted consulting apart from H2O'C. O'Connor offered to pay rent for the microscope.

Furthermore, when he purchased the house, O'Connor completed a verification of employment for the mortgage. The fact that he used part of his home for storage or lab space does not necessarily support the existence of a partnership. Nor does the fact that he brought a project to H2O'C. Although Brazos claims that he could have completed the project without the involvement of O'Connor, by his own testimony there were certain aspects of the project that he could not complete by himself.

The conduct of the parties in this case does not evidence the existence of a partnership. There was no true sharing of the profits. More importantly, under the facts here there was absolutely no evidence of any agreement or even thought given to sharing in the losses of the partnership or in assuming the burden of the partnership expenses. Nor was there evidence of a specific intention to enter into a partnership relationship. Brazos did not participate in the management of the partnership. He had no authority to issue checks or enter into contracts on behalf of the partnership. Thus, there is no indicia of a partnership relationship. * * *

This case does not rule out the establishment of sufficient evidence to support declaration of a partnership in the absence of a written agreement so long as there is agreement of the parties on sharing of profits, losses and ownership of partnership assets. * * * In the case at bar, credibility issues aside, there was no evidence of any agreement on sharing of losses, for example, so the declaration of partnership must fail. Brazos' evidence failed to prove the existence of a partnership by clear, cogent and convincing evidence. There was no substantial evidence in support of the judgment of the trial court. Having determined that a partnership did not exist, the court need not address Appellants' remaining points. Since the parties do not challenge the entry of damages in the amount of $300 for conversion of personal property under Count IV, that portion of the judgment will be affirmed.

The judgment of the trial court is reversed and the cause remanded to the trial court to enter judgment finding that no partnership existed and awarding damages in favor Brazos under Count IV in the amount of $300.

All concur.

179 Young v. Jones 816 F.Supp. 1070 (D. S.C. 1992)

Robert H. YOUNG and EDX Holdings, Inc., Plaintiffs, v. Raymond JONES, William Ruth, Alfred Martin, General Bennett, Tom Whelan, Claude Surface, Con Fecher, Ed Hughes, Helen Cork, William Eaxley, Tom Ruhf, George Strickland, Ann Grossheusch, Cathy McGill, other possible officers and directors of Hilton Head Bank and Trust, N.A., after July 1988, not yet ascertained, the Federal Deposit Insurance Corporation in its corporate capacity, and Price Waterhouse, Defendants. Civ. A. No. 2:92-0308-1. United States District Court, D. South Carolina, Beaufort Division. Oct. 16, 1992. ORDER HAWKINS, Chief Judge. This matter is before the court on three motions. * * * As background, this suit arises from an investment transaction. Plaintiffs are investors from Texas who deposited over a half-million dollars in a South Carolina bank and the funds have disappeared. PW-Bahamas issued an unqualified audit letter regarding the financial statement of Swiss American Fidelity and Insurance Guaranty (SAFIG). Plaintiffs aver that on the basis of that financial statement, they deposited $550,000.00 in a South Carolina bank. Other defendants, not involved in the motions herein, allegedly sent the money from the South Carolina Bank to SAFIG. The financial statement of SAFIG was falsified. The plaintiffs' money and its investment potential has been lost to the plaintiffs and it is for these losses that the plaintiffs seek to recover damages. * * *

Plaintiffs' allege that an unqualified audit letter concerning a financial statement of an association, SAFIG, was issued by a Bahamian accounting office. The letterhead identified the Bahamian accounting firm only as "Price Waterhouse." The audit letter also bore a Price Waterhouse trademark and was signed "Price Waterhouse." 180 Plaintiffs assert that it was foreseeable to the accounting firm that issued the letter that third-parties would rely upon the financial statement, the subject of the audit letter. According to the plaintiffs, the stamp of approval created by Price Waterhouse's audit letter of SAFIG's financial statement lent credence to the defrauders' claims so that plaintiffs were induced to invest to their detriment. * * * Plaintiffs assert that PW-Bahamas and PW-US operate as a partnership, i.e., constitute an association of persons to carry on, as owners, business for profit. In the alternative, plaintiffs contend that if the two associations are not actually operating as partners they are operating as partners by estoppel. Defendants PW-US and PW-Bahamas flatly deny that a partnership exists between the two entities and have supplied, under seal, copies of relevant documents executed which establish that the two entities are separately organized. Counsel for plaintiffs admits that he has found nothing which establishes that the two entities are partners in fact. The evidence presented wholly belies plaintiffs claims that PW-Bahamas and PW-US are operating as a partnership in fact. Thus, the court finds that there is no partnership, in fact, between PW- Bahamas and PW- US. Then, plaintiffs make a double-edged argument that PW-US is a partner by estoppel of PW-Bahamas. On the one hand, the argument is that if the two partnerships are partners by estoppel, then the court has personal jurisdiction over PW-Bahamas, as PW-US's partner by estoppel, because PW-US has at least "minimum contacts" with South Carolina. On the other hand, the argument for estoppel seems to be that if the two partnerships are partners by estoppel then PW-US can be held liable for the negligent acts of its partner PW-Bahamas, so the claim against PW-Bahamas operates as a claim against PW-US. Therefore, the court will review the evidence that plaintiffs have presented on the issue of partnership by estoppel on both the Rule 12(b)(2) motion presented by PW- Bahamas and the Rule 12(b)(6) motion presented by PW-US. As a general rule, persons who are not partners as to each other are not partners as to third persons. S.C.Code Ann. ' 33-41-220 (Law.Co-op 1976). However, a person who represents himself, or permits another *1076 to represent him, to anyone as a partner in an existing partnership or with others not actual partners, is liable to any such person to whom such a representation is made who has, on the faith of the representation, given credit to the actual or apparent partnership. S.C.Code Ann. ' 33-41-380(1). This exception to the general rule for liability by partners by estoppel is statutorily created under the Uniform Partnership Act in the version adopted by the State of South Carolina. Generally, partners are jointly and severally liable for everything chargeable to the partnership. S.C.Code Ann. ' 33-41-370. In South Carolina, a partnership is an entity separate and distinct from the individual partners who compose it. South Carolina Tax Comm. v. Reeves, 278 S.C. 658, 300 S.E.2d 916 (1983). Therefore, plaintiffs' argument is that if the court would find that PW-Bahamas and PW-US are partners by estoppel, PW-US would be jointly and severally liable with PW-Bahamas for everything chargeable to the partnership of the two firms. Moreover, if the two partnerships are partners by estoppel, the individual partners of PW-US would then be jointly and severally liable for the negligent acts of the PW-Bahamas partnership.

181 Plaintiffs maintain that Price Waterhouse holds itself out to be a partnership with offices around the world. According to the plaintiffs, the U.S. affiliate makes no distinction in its advertising between itself and entities situated in foreign jurisdictions. The foreign affiliates are permitted to use the Price Waterhouse name and trademark. Plaintiffs urge the conclusion of partnership by estoppel from the combination of facts that Price Waterhouse promotes its image as an organization affiliated with other Price Waterhouse offices around the world and that it is common knowledge that the accounting firm of Price Waterhouse operates as a partnership. Plaintiffs offer for illustration that PW-Bahamas and PW-US hold themselves out to be partners with one another, a Price Waterhouse brochure, picked up by plaintiffs' counsel at a litigation services seminar, that describes Price Waterhouse as one of the "world's largest and most respected professional organizations." The brochure states: "[O]ver 28,000 Price Waterhouse professionals in 400 offices throughout the world can be called upon to provide support for your reorganization and litigation efforts." Plaintiffs assert that assurances like that contained in the brochure cast Price Waterhouse as an established international accounting firm and that the image, promoted by PW- US, is designed to gain public confidence in the firm's stability and expertise. However, the plaintiffs do not contend that the brochure submitted was seen or relied on by them in making the decision to invest. In addition, plaintiffs point to nothing in the brochure that asserts that the affiliated entities of Price Waterhouse are liable for the acts of another, or that any of the affiliates operate within a single partnership. To bolster their argument, Plaintiffs sought to discover certain documents filed in a 1980 suit, entitled Cross v. Price Waterhouse, which resulted in a September 27, 1982, order. The court in Cross allegedly found that the U.S. partnership of Price Waterhouse was vicariously liable for negligence of the Bahamas firm of Price Waterhouse. Defendant PW-US supplied copies of the relevant Cross documents which showed that the order of Judge Pratt was later vacated. Furthermore, PW-US informs the court that during the period in question in the Cross case, there were licensing agreements between the U.S. partnership and the Bahamian partnership for use of the name and trademark on which the decision was based. Such licensing agreements are no longer in existence. PW-US points out that the South Carolina statute, which was cited by plaintiffs in support of their argument for partnership by estoppel, speaks only to the creation of liability to third-persons who, in reliance upon representations as to the existence of a partnership, "[give] credit" to that partnership. S.C.Code Ann. ' 33-41-380(1) (Law.Co-op 1976). There is no evidence, neither has there been an allegation, that credit was extended on the basis of any representation of a partnership existing between PW-Bahamas and the South Carolina members of the *1077 PW-US partnership. There is no evidence of any extension of credit to the either PW-Bahamas or PW-US, by plaintiffs. Thus, the facts do not support a finding of liability for partners by estoppel under the statutory law of South Carolina. Further, there is no evidence that plaintiffs relied on any act or statement by any PW-US partner which indicated a the existence of a partnership with the Bahamian partnership. Finally, there is no evidence, nor is there a single allegation that any member of the U.S. partnership had anything to do with the audit letter complained of by plaintiffs, or any other act related to the investment transaction. 182 The court cannot find any evidence to support a finding of partners by estoppel. Therefore, the allegations of negligence against PW-Bahamas cannot serve to hold individual members of the PW-US partnership in the suit. Without PW-US' contacts with the forum, there are insufficient contacts with South Carolina for PW-Bahamas to reasonably expected to have been haled into court here. For the reasons hereinabove stated, the court hereby grants the plaintiff's motion to amend the complaint to join the U.S. partners of Price Waterhouse who reside in South Carolina. Further, the court hereby grants PW-Bahamas' motion to dismiss for lack of personal jurisdiction. Further, the court dismisses the three South Carolina partners of PW-US, and those yet ascertained, for failure to state a claim against them upon which relief can be granted. IT IS SO ORDERED.

Owen v. Cohen 19 Cal.2d 147, 119 P.2d 713 (1941)

OWEN v. COHEN. L. A. 17917. Supreme Court of California. Dec. 5, 1941. In Bank. CURTIS, Justice. This is an action in equity brought for the dissolution of a partnership and for the sale of the partnership assets in connection with the settlement of its affairs. On or about January 2, 1940, plaintiff and defendant entered into an oral agreement whereby they contracted to become partners in the operation of a bowling-alley business in Burbank, California. The parties did not expressly fix any definite period of time for the duration of this undertaking. For the purpose of securing necessary equipment, plaintiff advanced the sum of $6.986.63 to the partnership, with the understanding that the amount so contributed was to be considered a loan to the partnership and was to be repaid to the plaintiff out of the prospective profits of the business as soon as it could reasonably do so. Defendant owned an undivided one-half interest in a bowling-alley *149 establishment in Burbank and the partnership purchased the other one-half interest for the sum of $2,500, of which amount $1,250 183 was paid in cash and the balance of $1,250 was evidenced by the partners' promissory note. As part of this transaction plaintiff assumed payment of the sum of $4,650 owing on a trust deed on the property, title to which he took in his own name. The partnership also purchased alleys and other requisite furnishings, and as part payment therefor the two partners executed promissory notes in the total sum of $4,596, secured by a chattel mortgage on said equipment. Plaintiff and defendant opened their partnership bowling-alley on March 15, 1940. From the day of its beginning until the institution of the present action on June 28, 1940--a period of approximately three and one-half months-- the business was operated at a profit. During this time the partners paid off a part of the capital indebtedness and each took a salary of $50 per week. However, shortly after the business was begun differences arose between the partners with regard to the management of the partnership affairs and their respective rights and duties under their agreement. This continuing lack of harmonious relationship between the partners had its effect on the monthly gross receipts, which, though still substantial, were steadily declining, and at the date of the filing of this action much of the partnership indebtedness, including the aforementioned loan made by plaintiff, remained unpaid. On July 5, 1940, in response to plaintiff's complaint and upon order to show cause, the court appointed a receiver to take charge of the partnership business, which ever since has been under his control and management. As the result of the trial of this action the court found that the partners 'did not agree upon any definite term for the continuance of said partnership, nor upon any particular undertaking to be accomplished; that the said partnership was a partnership at will'. From this finding the court concluded that plaintiff was entitled to a dissolution under section 2425, subdivision (1)(b), of the Civil Code. The court further found that the parties disagreed 'on practically all matters essential to the operation of the partnership business and upon matters of policy in connection therewith'; that the defendant had 'committed breaches of the partnership agreement' and had 'so conducted himself in affairs relating *150 to the business' that it was 'not reasonably practicable to carry on the partnership business with him'. From this finding it was concluded that the partnership was dissoluble by court decree in accordance with the provisions of section 2426 of the Civil Code. Pursuant to these findings of fact and conclusions of law, the trial court rendered a decree adjudging the partnership dissolved and ordering the assets sold by the receiver. It was further decreed that the proceeds of such sale and of the receiver's operation of the business on hand upon the consummation of such sale be applied, after allowance for the receiver's fees and expenses, to payment of the partnership debts, including the amount of $6,986.63 loaned by plaintiff to the business; that one-half of the remainder of the proceeds be paid to plaintiff, together with the additional sum of $100.17 for his costs; and that defendant be given what was left. It was also provided that in bidding at the sale of the partnership assets, either party might use, in lieu of cash, credit to the extent of any sums which would accrue to him out of the proceeds; and that if the money derived from such sale proved to be insufficient to pay plaintiff's costs, a personal judgment to the extent of the deficiency was to be rendered against defendant. It is from this decree that the defendant has appealed. The principal question presented for consideration is whether or not the evidence warrants a decree of dissolution of **715 the partnership. Defendant's objection to the finding that the partnership was one at will is fully justified by the uncontradicted evidence that the partners at the inception of their undertaking agreed that all obligations incurred by the 184 partnership, including the money advanced by plaintiff, were to be paid out of the profits of the business. While the term of the partnership was not expressly fixed, it must be presumed from this agreement that the parties intended the relation should continue until the obligations were liquidated in the manner mutually contemplated. These circumstances negative the existence of a partnership at will, dissoluble at the election of a member thereof (Mervyn Investment Company v. Biber, 184 Cal. 637, 194 P. 1037), and demonstrate conclusively that the assailed finding is without support in the record. However, our determination of this issue does not necessitate a reversal of the decree, for other facts found by the court relating to defendant's breach of *151 the partnership agreement amply justify the decision rendered. In such event the law is settled beyond question that the finding which does not conform to the evidence becomes immaterial and may be disregarded. It is not necessary to enter into a detailed statement of the quarrel between the partners. Whether the disharmony was the result of a difference in disposition or to other causes, the effect is the same. Most of the acts of which complaint is made are individually trivial, but from the aggregate the court found, and the record so indicates, that the breach between the partners was due in large measure to defendant's persistent endeavors to become the dominating figure of the enterprise and to humiliate plaintiff before the employees and customers of the bowling-alley. In this connection plaintiff testified that defendant declined to do any substantial amount of the work required for the successful operation of the business; that defendant informed him that he (defendant) 'had not worked yet in 47 years and did not intend to start now'; and that he (plaintiff) 'should do whatever manual work he could do on the premises, but that he (defendant) would act as manager and wear the dignity'. The record also discloses that during the preparation and before the opening of the bowling-alley establishment, defendant told a mutual acquaintance that plaintiff would not be there very long. Corroborative of this evidence is plaintiff's testimony that a few weeks prior to the filing of this action, when he had concluded that he and defendant could not reconcile their differences, he asked defendant to make an offer either to buy out his (plaintiff's) interest in the business or to sell to him (plaintiff); that defendant replied, in effect, that when he was ready to sell to plaintiff, he would set the price himself and it would cost plaintiff plenty to get rid of him. In addition, there is considerable evidence demonstrating that the partners disagreed on matters of policy relating to the operation of the business. One cause of dispute in this connection was defendant's desire to open a gambling room on the second floor of the bowling-alley property and plaintiff's opposition to such move. Another was defendant's dissatisfaction with the agreed salary of $50 per week fixed for each partner to take from the business and his desire to withdraw additional amounts therefrom. This constant dissension over money affairs culminated in defendant's*152 appropriation of small sums from the partnership's funds to his own use without plaintiff's knowledge, approval or consent. In justification of his conduct defendant claimed that on each occasion he set aside a like amount for plaintiff. This extenuating circumstance, however, does not serve to eliminate from the record the fact that monetary matters were a continual source of argument between the partners. Defendant urges that the evidence shows only petty discord between the partners, and he advances, as applicable here, the general rule that trifling and minor differences and grievances which involve no permanent mischief will not authorize a court to decree a dissolution of a partnership. 20 R.C.L. 958, par. 182. However, as indicated by the same section in Ruling Case Law and previous sections, courts of equity may order the dissolution of a partnership where 185 there are quarrels and disagreements of such a nature and to such extent that all confidence and cooperation between the parties has been destroyed or where one of the parties by his misbehavior materially hinders a proper conduct of the partnership business. It is not only large affairs which produce trouble. The continuance of overbearing and vexatious petty treatment of one partner by another frequently is more serious in its disruptive character than would be larger differences which would be discussed and, **716 settled. For the purpose of demonstrating his own preeminence in the business one partner cannot constantly minimize and deprecate the importance of the other without undermining the basic status upon which a successful partnership rests. In our opinion the court in the instant case was warranted in finding from the evidence that there was very bitter, antagonistic feeling between the parties; that under the arrangement made by the parties for the handling of the partnership business, the duties of these parties required cooperation, coordination and harmony; and that under the existent conditions the parties were incapable of carrying on the business to their mutual advantage. As the court concluded, plaintiff has made out a cause for judicial dissolution of the partnership under section 2426 of the Civil Code: '(1) On application by or for a partner the court shall decree a dissolution whenever: * * * '(c) A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business, *153 '(d) A partner wilfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself in matters relating to the partnership business that it is not resonably practicable to carry on the business in partnership with him, * * * '(f) Other circumstances render a dissolution equitable.' Defendant next questions the propriety of that portion of the decree which provides for the payment of plaintiff's loan to the business, to-wit, the sum of $6,986.63, from the proceeds realized upon the sale of the partnership assets. It is his contention that since the partners agreed that the amount so contributed was to be repaid from the profits of the business, which the evidence established to be a profitable enterprise, the court's order directing the discharge of this partnership obligation in a manner violative of the express understanding of the parties is unjustifiable. Mervyn Investment Company v. Biber, supra. That a party to a contract may absolutely limit his right to receive a sum of money from a specified source is indisputable. Lynch v. Keystone Consolidated Mining Company, 163 Cal.690, 123 P.968; Martin v. Martin, 5 Cal.App.2d 591, 43 P.2d 314. But defendant's argument based upon this settled precept is of no avail here, for his abovedescribed conduct, creative of a condition of disharmony in derogation of the best interests of the partnership, constituted ground for the court's decree of dissolution and its order directing the sale of the assets for the purpose of forwarding the settlement of the partnership affairs. Defendant, whose persistence in the commission of acts provocative of dissension and disagreement between the partners made it impossible for them to carry on the partnership business, is in no position now to insist on its continued operation. These circumstances not only render the assailed provision of the decree invulnerable to defendant's objection, but also establish its complete accord with established principles of equity jurisprudence.

186 * * * The judgment is affirmed. GIBSON, C. J., SHENK, J., EDMONDS, J., HOUSER, J., CARTER, J., and TRAYNOR, J., concurred.

Page v. Page 55 Cal.2d 192, 359 P.2d 41, 10 Cal.Rptr. 643 (1961)

George B. PAGE, Appellant, v. H. B. PAGE, Respondent. L. A. 25644. Supreme Court of California, In Bank. Jan. 27, 1961. TRAYNOR, Justice. Plaintiff and defendant are partners in a linen supply business in Santa Maria, California. Plaintiff appeals from a judgment declaring the partnership to be for a term rather than at will. The partners entered into an oral partnership agreement in 1949. Within the first two years each partner contributed approximately $43,000 for the purchase of land, machinery, and linen needed to begin the business. From 1949 to 1957 *194 the enterprise was unprofitable, losing approximately $62,000. The partnership's major creditor is a corporation, wholly owned by plaintiff, that supplies the linen and machinery necessary for the day-to-day operation of the business. This corporation holds a $47,000 demand note of the partnership. The partnership operations began to improve in 1958. The partnership earned $3,824.41 in that year and $2,282.30 in the first three months of 1959. Despite this improvement plaintiff wishes to terminate the partnership. The Uniform Partnership Act provides that a partnership may be dissolved 'By the express will of any partner when no definite term or particular undertaking is specified.' Corp.Code, s 15031, subd. (1)(b). The trial court found that the partnership is for a term, namely, 'such reasonable time as is necessary to enable said partnership to repay from partnership profits, indebtedness incurred for the purchase of land, buildings, laundry and delivery equipment and linen for the operation of such business. * * *' Plaintiff correctly contends that this finding is without support in the evidence. Defendant testified that the terms of the partnership were to be similar to former partnerships of plaintiff and defendant, and that the understanding of these partnerships was that 'we went into partnership to start the business and let the business operation pay for itself, put in 187 so much money, and let the business pay itself out.' There was also testimony that one of the former partnership agreements provided in ***645 **43 writing that the profits were to be retained until all obligations were paid. Upon cross-examination defendant admitted that the former partnership in which the earnings were to be retained until the obligations were repaid was substantially different from the present partnership. The former partnership was a limited partnership and provided for a definite term of five years and a partnership at will thereafter. Defendant insists, however, that the method of operation of the former partnership showed an understanding that all obligations were to be repaid from profits. He nevertheless concedes that there was no understanding as to the term of the present partnership in the event of losses. He was asked: '(W)as there any discussion with reference to the continuation of the business in the event of losses?' He replied, 'Not that I can remember.' He was then asked, 'Did you have any understanding with Mr. Page, your brother, the plaintiff in this action, as to how the obligations were to be paid if there were losses?' He *195 replied, 'Not that I can remember. I can't remember discussing that at all. We never figured on losing, I guess.' Viewing this evidence most favorably for defendant, it proves only that the partners expected to meet current expenses from current income and to recoup their investment if the business were successful. Defendant contends that such an expectation is sufficient to create a partnership for a term under the rule of Owen v. Cohen, 19 Cal.2d 147, 150, 119 P.2d 713. In that case we held that when a partner advances a sum of money to a partnership with the understanding that the amount contributed was to be a loan to the partnership and was to be repaid as soon as feasible from the prospective profits of the business, the partnership is for the term reasonably required to repay the loan. It is true that Owen v. Cohen, supra, and other cases hold that partners may impliedly agree to continue in business until a certain sum of money is earned (Mervyn Investment Co. v. Biber, 184 Cal. 637, 641-642, 194 P. 1037), or one or more partners recoup their investments (Vangel v. Vangel, 116 Cal.App.2d 615, 625, 254 P.2d 919), or until certain debts are paid (Owen v. Cohen, supra, 19 Cal.2d at page 150, 119 P.2d at page 714), or until certain property could be disposed of on favorable terms (Shannon v. Hudson, 161 Cal.App.2d 44, 48, 325 P.2d 1022). In each of these cases, however, the implied agreement found support in the evidence. In Owen v. Cohen, supra, the partners borrowed substantial amounts of money to launch the enterprise and there was an understanding that the loans would be repaid from partnership profits. * * * In each of these cases the court properly held that the partners impliedly promised to continue the partnership for a term reasonably required to allow the partnership to earn sufficient money to accomplish the understood objective. * * * In the instant case, however, defendant failed to prove any facts from which an agreement to continue the partnership for a term may be implied. The understanding to which defendant testified was no more than a common hope that the partnership earnings would pay for all the 188 necessary expenses. Such a hope does not establish even by implication a 'definite term or particular undertaking' as required ***646 **44 by section 15031, subdivision (1)(b) of the Corporations Code. All partnerships are ordinarily entered into with the hope that they will be profitable, but that alone does not make them all partnerships for a term and obligate the partners to continue in the partnerships until all of the losses over a period of many years have been recovered. Defendant contends that plaintiff is acting in bad faith and is attempting to use his superior financial position to appropriate the now profitable business of the partnership. Defendant has invested $43,000 in the firm, and owing to the long period of losses his interest in the partnership assets is very small. The fact that plaintiff's wholly-owned corporation holds a $47,000 demand note of the partnership may make it difficult to sell the business as a going concern. Defendant fears that upon dissolution he will receive very little and that plaintiff, who is the managing partner and knows how to conduct the operations of the partnership, will receive a business that has become very profitable because of the establishment of Vandenberg Air Force Base in its vicinity. Defendant charges that plaintiff has been content to share the losses but now that the business has become profitable he wishes to keep all the gains. There is no showing in the record of bad faith or that the improved profit situation is more than temporary. In any event these contentions are irrelevant to the issue whether the partnership is for a term or at will. Since, however, this action is for a declaratory judgment and will be the basis for future action by the parties, it is appropriate to point out that defendant is amply protected by the fiduciary duties of co-partners. Even though the Uniform Partnership Act provides that a partnership at will may be dissolved by the express will of any partner (Corp.Code, s 15031, subd. (1) (b)), this power, like any other power held by a fiduciary, must be exercised in good faith. *197 We have often stated that 'partners are trustees for each other, and in all proceedings connected with the conduct of the partnership every partner is bound to act in the highest good faith to his copartner, and may not obtain any advantage over him in the partnership affairs by the slightest misrepresentation, concealment, threat, or adverse pressure of any kind. * * * A partner at will is not bound to remain in a partnership, regardless of whether the business is profitable or unprofitable. A partner may not, however, by use of adverse pressure 'freeze out' a co-partner and appropriate the business to his own use. A partner may not dissolve a partnership to gain the benefits of the business for himself, unless he fully compensates his co- partner for his share of the prospective business opportunity. In this regard his fiduciary duties are at least as great as those of a shareholder of a corporation. In the case of In re Security Finance Co., 49 Cal.2d 370, 376-377, 317 P.2d 1, 5 we stated that although shareholders representing 50 per cent of the voting power have a right under Corporations Code, s 4600 to dissolve a corporation, they may not exercise such right in order 'to defraud the other shareholders (citation), to 'freeze out' minority shareholders (citation), or to sell the assets of the dissolved corporation at an inadequate price (citation).' ***647 Likewise in the instant case, plaintiff has the power to dissolve the partnership by express notice to defendant. If, however, it is proved that plaintiff acted in bad faith and violated 189 his fiduciary duties by attempting to appropriate to his own use the new prosperity of the partnership without adequate compensation to his co-partner, the dissolution would be wrongful and the plaintiff would be liable as provided by subdivision (2)(a) of Corporations Code, s 15038 (rights of partners upon wrongful dissolution) for violation of the *198 implied agreement not to exclude defendant wrongfully from the partnership business opportunity. The judgment is reversed. GIBSON, C. J., McCOMB, PETERS, WHITE, and DOOLING, JJ., and WOOD, J. pre tem., concur.

Long v. Lopez 115 S.W.3d 221

Court of Appeals of Texas, Fort Worth.

Wayne A. LONG, Appellant, v. Sergio LOPEZ, Appellee.

Aug. 21, 2003.

Panel B: HOLMAN, GARDNER, and WALKER, JJ.

OPINION

DIXON W. HOLMAN, Justice.

Appellant Wayne A. Long sued Appellee Sergio Lopez to recover from him, jointly and severally, his portion of a partnership debt that Appellant had paid. After a bench trial, the trial court ruled that Appellant take nothing from Appellee. We reverse and render, and remand for calculation of attorney's fees in this suit and pre- and post-judgment interest.

BACKGROUND Formation and operation of the partnership

Appellant testified that in September 1996, Appellant, Appellee, and Don Bannister entered into an oral partnership agreement in which they agreed to be partners in Wood Relo ("the partnership"), a trucking business located in Gainesville, Texas. Wood Relo located loads for and dispatched approximately twenty trucks it leased from owner-operators.

Appellant said that in forming this partnership, the three individuals signed and filed with the county clerk on September 3, 1996 an assumed name certificate stating they were doing business as Wood Relo, a "General Partnership." This certificate was admitted into evidence at 190 trial. Appellant testified that the three partners agreed to share equally one-third of the profits and losses of the partnership. All three partners were authorized to sign checks on Wood Relo's bank account. [FN1] Appellee testified, however, that even though they signed the assumed name certificate and the bank ownership form, in his opinion there was no partnership agreement among the three men.

FN1. It was noted at trial that the bank's "Business Account Agreement" states in the section designated "Ownership of Account" that Wood Relo is a "Corporation--For Profit," even though one of the possible boxes that could have been checked is "Partnership." Appellant testified that this was a mistake and that when the three partners signed the bank ownership card, they did not notice that the wrong box was checked; he stated that Wood Relo is definitely not a corporation.

The trial court found that Appellant, Appellee, and Bannister formed a partnership, Wood Relo, without a written partnership agreement. [FN2] In his brief on appeal, Appellee does not contest these findings.

FN2. See Tex.Rev.Civ. Stat. Ann. art. 6132b-1.01(12) (Vernon Supp.2003) (" 'Partnership agreement' means any agreement, written or oral, of the partners concerning a partnership."); id. art. 6132b-2.02(a) ( "[A]n association of two or more persons to carry on a business for profit as owners creates a partnership, whether the persons intend to create a partnership and whether the association is called a 'partnership,' 'joint venture,' or other name.").

Appellant testified that to properly conduct the partnership's business, he entered into an office equipment lease with IKON Capital Corporation ("IKON") on behalf of the partnership. The lease was a thirty-month contract under which the partnership leased a telephone system, fax machine, and photocopier at a rate of $577.91 per month. The lease agreement was between IKON and Wood Relo; the "authorized signer" was listed as Wayne Long, who also signed as personal guarantor.

Appellant stated that all three partners were authorized to buy equipment for use by the partnership. He testified that the partners had agreed that it was necessary for the partnership to lease the equipment and that on the day the equipment was delivered to Wood Relo's office, Appellant was the only partner at the office; therefore, Appellant was the only one available to sign the lease and personal guaranty that IKON required.

Appellant and Appellee both acknowledged that around March of 1997, the disintegration of a key business relationship between Wood Relo and another company caused Wood Relo to become unable to carry out its business. Appellant testified that Bannister, the third partner, "decided to ... pull up stake and go home," quitting the partnership. Later, Bannister filed for personal bankruptcy. Appellant testified that when Bannister left Wood Relo, the partnership still had "quite a few" debts to pay, including the IKON lease.

The claim by IKON

191 In April 1997, when the partnership closed its Gainesville office due to decreased business, the IKON office equipment was moved to an office the parties were using in Sherman. Appellant testified that he and Appellee worked with IKON to negotiate a settlement for IKON to repossess the equipment, but IKON would not do so. Eventually, IKON did repossess all the leased equipment. Appellant testified that he received a demand letter from IKON, requesting payment by Wood Relo of overdue lease payments and accelerating payment of the remaining balance of the lease. IKON sought recovery of past due payments in the amount of $2,889.55 and accelerated future lease payments in the amount of $11,558.20, for a total of $14,447.75, plus interest, costs, and attorney's fees, with the total exceeding $16,000. Appellant testified that he advised Appellee that he had received the demand letter from IKON.

Ultimately, IKON filed a lawsuit against Appellant individually and d/b/a Wood Relo, but did not name Appellee or Bannister as parties to the suit. Through his counsel, Appellant negotiated a settlement with IKON for a total of $9,000. An agreed judgment was entered in conjunction with the settlement agreement providing that if Appellant did not pay the settlement, Wood Relo and Appellant would owe IKON $12,000.

After settling the IKON lawsuit, Appellant's counsel sent a letter to Appellee and Bannister regarding the settlement agreement, advising them that they were jointly and severally liable for the $9,000 that extinguished the partnership's debt to IKON, plus attorney's fees. At trial, Appellant said Appellee then called him, very upset, saying that he refused to pay anything. Appellant claimed that he told Appellee about the default on the IKON lease before the lawsuit was filed; however, Appellee testified he did not know of the default until Appellant sent a letter to him informing him that the settlement had already occurred. [FN3]

FN3. Appellant has subsequently paid the agreed settlement in full, and IKON has released its judgment.

In response to Appellant's original petition, Appellee filed a general denial, but did not file a verified plea denying the existence of the partnership.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

After ruling that Appellant take nothing from Appellee, the trial court made the following findings of fact and conclusions of law:

FINDINGS OF FACT 1. Plaintiff and Defendant were two of the three partners in a partnership. 2. The third partner is in bankruptcy. 3. Plaintiff signed a contract with a third party for the partnership and individually as a guarantor. 4. The partnership did not have a written partnership agreement. 5. The partnership defaulted on the payments dues [sic] under the contract with the said third party. 6. The third party sued Plaintiff after the default. 7. Defendant was not sued by the third party, and was not brought into the lawsuit by the 192 Plaintiff. 8. Defendant was not aware of the lawsuit by the third party. 9. Plaintiff settled the lawsuit with the third party without consulting Defendant or obtaining Defendant's agreement. 10. Plaintiff sued Defendant for 1/3 of the amount for which the Plaintiff settled the lawsuit brought by the third party.

CONCLUSIONS OF LAW 1. A partner does not have authority to act for a partnership unless it is apparent authority or authority granted to them by a written partnership agreement. 2. When Plaintiff settled the lawsuit with the third party, and without bringing Defendant into the lawsuit, or consulting the Defendant, the Plaintiff was not acting for the partnership, because he had no apparent authority with respect to lawsuits. 3. Plaintiff takes nothing as to Defendant in the present lawsuit. [Emphasis added.]

TEXAS REVISED PARTNERSHIP ACT

The trial court determined that Appellant was not entitled to reimbursement from Appellee because Appellant was not acting for the partnership when he settled IKON's claim against the partnership. The court based its conclusion on the fact that Appellant had no "apparent authority with respect to lawsuits" and had not notified Appellee of the IKON lawsuit.

Authority to act for partnership

To the extent that a partnership agreement does not otherwise specify, the provisions of the Texas Revised Partnership Act govern the relations of the partners and between the partners and the partnership. Tex.Rev.Civ. Stat. Ann. art. 6132b-1.03(a). Under the Act, each partner has equal rights in the management and conduct of the business of a partnership. Id. art. 6132b- 4.01(d). With certain inapplicable exceptions, all partners are liable jointly and severally for all debts and obligations of the partnership unless otherwise agreed by the claimant or provided by law. Id. art. 6132b-3.04. A partnership may be sued and may defend itself in its partnership name. Id. art. 6132b-3.01(1). Each partner is an agent of the partnership for the purpose of its business; unless the partner does not have authority to act for the partnership in a particular matter and the person with whom the partner is dealing knows that the partner lacks authority, an act of a partner, including the execution of an instrument in the partnership name, binds the partnership if "the act is for apparently carrying on in the ordinary course: (1) the partnership business." Id. art. 6132b-3.02(a)(1). If the act of a partner is not apparently for carrying on the partnership business, an act of a partner binds the partnership only if authorized by the other partners. Id. art. 6132b-3.02(b)(1).

The extent of authority of a partner is determined essentially by the same principles as those measuring the scope of the authority of an agent. * * * As a general rule, each partner is an agent of the partnership and is empowered to bind the partnership in the normal conduct of its business. Tex.Rev.Civ. Stat. Ann. art. 6132b3.02(a). Generally, an agent's authority is presumed to be coextensive with the business entrusted to his care. * * * An agent is limited in his authority to such contracts and acts as are incident to the management of the particular business 193 with which he is entrusted. * * *

Winding up the partnership

A partner's duty of care to the partnership and the other partners is to act in the conduct and winding up of the partnership business with the care an ordinarily prudent person would exercise in similar circumstances. Tex.Rev.Civ. Stat. Ann. art. 6132b-4.04(c). During the winding up of a partnership's business, a partner's fiduciary duty to the other partners and the partnership is limited to matters relating to the winding up of the partnership's affairs. * * *

Appellant testified that he entered into the settlement agreement with IKON to save the partnership a substantial amount of money. IKON's petition sought over $16,000 from the partnership, and the settlement agreement was for $9,000; therefore, Appellant settled IKON's claim for 43% less than the amount for which IKON sued the partnership.

Both Appellant and Appellee testified that the partnership "fell apart," "virtually was dead," and had to move elsewhere. Appellant testified that, because of the demise of the partnership operations, the company for which the partnership was acting as an agent had reworked its system, resulting in the partnership no longer being able to make any profit. The inability of the partnership to continue its trucking business was an event requiring the partners to wind up the affairs of the partnership. See Tex.Rev.Civ. Stat. Ann. art. 6132(b) 8.01(b)(2). It was no longer capable of operating its business, and had moved its operations to Sherman, where the partners could begin to dispose of the partnership's property.

The Act provides that a partner winding up a partnership's business is authorized, to the extent appropriate for winding up, to perform the following in the name of and for and on behalf of the partnership:

(1) prosecute and defend civil, criminal, or administrative suits; (2) settle and close the partnership's business; (3) dispose of and convey the partnership's property; (4) satisfy or provide for the satisfaction of the partnership's liabilities; *227 (5) distribute to the partners any remaining property of the partnership; and (6) perform any other necessary act.

Id. art. 6132b-8.03(b).

Appellant accrued the IKON debt on behalf of the partnership when he secured the office equipment for partnership operations, and he testified that he entered into the settlement with IKON when the partnership was in its final stages and the partners were going their separate ways. Accordingly, Appellant was authorized by the Act to settle the IKON lawsuit on behalf of the partnership. See id. art. 6132b-8.03(b)(2), (4), (6).

APPELLEE'S LIABILITY FOR THE IKON DEBT 194 If a partner reasonably incurs a liability in excess of the amount he agreed to contribute in properly conducting the business of the partnership or for preserving the partnership's business or property, he is entitled to be repaid by the partnership for that excess amount. Tex.Rev.Civ. Stat. Ann. art. 6132b-4.01(c). A partner may sue another partner for reimbursement if the partner has made such an excessive payment. Id. art. 6132b-4.06(b)(2)(A).

With two exceptions not applicable to the facts of this case, all partners are liable jointly and severally for all debts and obligations of the partnership unless otherwise agreed by the claimant or provided by law. See id. art. 6132b-3.04. Because Wood Relo was sued for a partnership debt made in the proper conduct of the partnership business, and Appellant settled this claim in the course of winding up the partnership, he could maintain an action against Appellee for reimbursement of Appellant's disproportionate payment. See id. arts. 6132b- 4.01(c), -4.06(b)(2)(A).

ATTORNEY'S FEES

Appellant sought to recover the attorney's fees expended in defending the IKON claim, and attorney's fees expended in the instant suit against Appellee. Testimony established that it was necessary for Appellant to employ an attorney to defend the action brought against the partnership by IKON; therefore, the attorney's fees related to defending the IKON lawsuit on behalf of Wood Relo are a partnership debt for which Appellee is jointly and severally liable. As such, Appellant is entitled to recover from Appellee one- half of the attorney's fees attributable to the IKON lawsuit. The evidence established that reasonable and necessary attorney's fees to defend the IKON lawsuit were $1725. [FN8] Therefore, Appellant is entitled to recover from Appellee $862.50.

FN8. Appellant's attorney testified that Appellant paid $2700 in attorney's fees to defend and settle the IKON suit. However, the itemization and invoices introduced into evidence by Appellant clearly indicate that $975 of the $2700 is attributable to the preparation and filing of the instant suit against Appellee. Accordingly, that amount is not included in the attorney's fees that directly relate to defending the IKON suit.

Appellant also seeks to recover the attorney's fees expended pursuing the instant lawsuit. See Tex. Civ. Prac. & Rem.Code Ann. § 38.001(8) (authorizing recovery of attorney's fees in successful suit under an oral contract); see also Atterbury v. Brison, 871 S.W.2d 824, 828 (Tex.App.-Texarkana 1994, writ denied) (holding attorney's fees are recoverable by partner under section 38.001(e) because action against other partner was founded on partnership agreement, which was a contract). We agree that Appellant is entitled to recover reasonable and necessary attorney's fees incurred in bringing the instant lawsuit. Because we are remanding this case so the trial court can determine the amount of pre- and post-judgment interest to be awarded to Appellant, we also remand to the trial court the issue of the amount of attorney's fees due to Appellant in pursuing this lawsuit against Appellee for collection of the amount paid to IKON on behalf of the partnership.

CONCLUSION 195 We hold the trial court erred in determining that Appellant did not have authority to act for Wood Relo in defending, settling, and paying the partnership debt owed by Wood Relo to IKON. Appellee is jointly and severally liable to IKON for $9,000, which represents the amount Appellant paid IKON to defend and extinguish the partnership debt. [ * * * ] We hold that Appellee is jointly and severally liable to Appellant for $1725, which represents the amount of attorney's fees Appellant paid to defend against the IKON claim. We further hold that Appellant is entitled to recover from Appellee reasonable and necessary attorney's fees in pursuing the instant lawsuit. * * *

We reverse the judgment of the trial court. We render judgment that Appellee owes Appellant $5362.50 (one-half of the partnership debt to IKON plus one-half of the corresponding attorney's fees). We remand the case to the trial court for calculation of the amount of attorney's fees owed by Appellee to Appellant in the instant lawsuit, and calculation of pre- and post- judgment interest.

National Biscuit Company, Inc. v. Stroud 249 N.C. 467, 106 S.E.2d 692 (1959)

NATIONAL BISCUIT COMPANY, Inc. v. C. N. STROUD and Earl Freeman, trading as Stroud's Food Center. No. 100 Supreme Court of North Carolina. Jan. 28, 1959 *468 **693 The case was heard in the Superior Court upon the following agreed statement of facts: On 13 September 1956 the National Biscuit Company had a Justice of the Peace to issue summons against C. N. Stroud and Earl Freeman, a partnership trading as Stroud's Food Center, for the nonpayment of $171.04 for goods sold and delivered. After a hearing the Justice of the Peace rendered judgment for plaintiff against both defendants for $171.04 with interest and costs. Stroud appealed to the Superior Court: Freeman did not. In March 1953 C. N. Stroud and Earl Freeman entered into a general partnership to sell groceries under the name of Stroud's Food Center. Thereafter plaintiff sold bread regularly to the partnership. Several months prior to February 1956 the defendant Stroud advised an agent of plaintiff that he personally would 196 not be responsible for any additional bread sold by plaintiff to Stroud's Food Center. From 6 February 1956 to 25 February 1956 plaintiff through this same agent, at the request of the defendant Freeman, sold and delivered bread in the amount of $171.04 to Stroud's Food Center. Stroud and Freeman by agreement dissolved the partnership at the close of business on 25 February 1956, and notice of such dissolution was published in a newspaper in Carteret County 6-27 March 1956. The relevant parts of the dissolution agreement are these: All partnership assets, except an automobile truck, an electric adding machine, a rotisserie, which were assigned to defendant Freeman, and except funds necessary to pay the employees for their work the week before the dissolution and necessary to pay for certain supplies purchased the week of dissolution, were assigned to Stroud. Freeman assumed the outstanding liens against the truck. Paragraph five of the dissolution agreement is as follows: 'From and after the aforesaid February 25, 1956, Stroud will be responsible for the liquidation of the partnership assets and the discharge of partnership liabilities without demand upon Freeman for any contribution in the discharge of said obligations.' The dissolution agreement was made in reliance on Freeman's representations that the indebtedness of the partnership was about $7,800 and its accounts receivable were about $8,000. The accounts receivable at the close of business actually *469 amounted to $4,897.41. Stroud has paid all of the partnership obligations amounting to $12,014.45, except the amount of $171.04 claimed by plaintiff. To pay such obligations Stroud exhausted all the partnership assets he could reduce to money amounting to $4,307.08, of which $2,028.64 was derived from accounts receivable and $2,278.44 from a sale of merchandise and fixtures, and used over $7,700 of his personal money. Stroud has left of the partnership assets only uncollected accounts in the sum of $2,868.77, practically all of which are considered uncollectible. Stroud has not attempted to rescind the dissolution agreement, and has tendered plaintiff, and still tenders it, one-half of the $171.04 claimed by it. **694 From a judgment that plaintiff recover from the defendants $171.04 with interest and costs, Stroud appeals to the Supreme Court. PARKER, Justice. C. N. Stroud and Earl Freeman entered into a general partnership to sell groceries under the firm name of Stroud's Food Center. There is nothing in the agreed statement of facts to indicate or suggest that Freeman's power and authority as a general partner were in any way restricted or limited by the articles of partnership in respect to the ordinary and legitimate business of the partnership. Certainly, the purchase and sale of bread were ordinary and legitimate business of Stroud's Food Center during its continuance as a going concern. Several months prior to February 1956 Stroud advised plaintiff that he personally would not be responsible for any additional bread sold by plaintiff to Stroud's Food Center. After such notice to plaintiff, it from 6 February 1956 to 25 February 1956, at the request of Freeman, sold and delivered bread in the amount of $171.04 to Stroud's Food Center. 197 In Johnson v. Bernheim, 76 N.C. 139, this Court said: 'A and B are general partners to do some given business; the partnership is, by operation of law, a power to each to bind the partnership in any manner legitimate to the business. If one partner go to a third person to buy an article on time for the partnership, the other partner cannot prevent it by writing to the third person not to sell to him on time; or, if one party attempt to buy for cash, the other has no right to require that it shall be on time. And what is true in regard *470 to buying is true in regard to selling. What either partner does with a third person is binding on the partnership. It is otherwise where the partnership is not general, but is upon special terms, as that purchases and sales must be with and for cash. There the power to each is special, in regard to all dealings with third persons at least who have notice of the terms.' There is contrary authority. 68 C.J.S. Partnership s 143, pp. 578- 579. However, this text of C.J.S. does not mention the effect of the provisions of the Uniform Partnership Act. The General Assembly of North Carolina in 1941 enacted a Uniform Partnership Act, which became effective 15 March 1941. G.S. Ch. 59, Partnership, Art. 2. G.S. s 59-39 is entitled 'Partner Agent of Partnership as to Partnership Business', and subsection (1) reads: 'Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership, unless the partner so acting has in fact no authority to act for the partnership in the particular matter, and the person with whom he is dealing has knowledge of the fact that he has no such authority.' G.S. s 59-39(4) states: 'No act of a partner in contravention of a restriction on authority shall bind the partnership to persons having knowledge of the restriction.' G.S. s 59-45 provides that 'all partners are jointly and severally liable for the acts and obligations of the partnership.' G.S. s 59-48 is captioned 'Rules Determining Rights and Duties of Partners.' Subsection (e) thereof reads: 'All partners have equal rights in the management and conduct of the partnership business.' Subsection (h) hereof is as follows: 'Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners; but no act in contravention of any agreement between the partners may be done rightfully without the consent of all the partners.' **695 Freeman as a general partner with Stroud, with no restrictions on his authority to act within the scope of the partnership business so far as the agreed statement of facts shows, had under the Uniform Partnership Act 'equal rights in the management and conduct of the partnership business.' Under G.S. s 59-48(h) Stroud, his co-partner, could not restrict the power and authority of Freeman to buy bread for the partnership as a going concern, for such a purchase was an 'ordinary matter connected with the partnership business,' for the purpose of its business and within its scope, because in the very nature of things Stroud was not, and could not be, a majority of the *471 partners. Therefore, Freeman's purchases of bread from plaintiff for Stroud's Food Center as a going concern bound the partnership and his co- partner Stroud. The quoted provisions of our Uniform Partnership Act, in respect to the particular facts here, are in accord with the principle of law stated in Johnson v. Bernheim, supra; same case 86 N.C. 339.

198 In Crane on Partnership, 2d Ed., p. 277, it is said: 'In cases of an even division of the partners as to whether or not an act within the scope of the business should be done, of which disagreement a third person has knowledge, it seems that logically no restriction can be placed upon the power to act. The partnership being a going concern, activities within the scope of the business should not be limited, save by the expressed will of the majority deciding a disputed question; half of the members are not a majority.' Sladen, Fakes & Co. v. Lance, 151 N.C. 492, 66 S.E. 449, is distinguishable. That was a case where the terms of the partnership imposed special restrictions on the power of the partner who made the contract. At the close of business on 25 February 1956 Stroud and Freeman by agreement dissolved the partnership. By their dissolution agreement all of the partnership assets, including cash on hand, bank deposits and all accounts receivable, with a few exceptions, were assigned to Stroud, who bound himself by such written dissolution agreement to liquidate the firm's assets and discharge its liabilities. It would seem a fair inference from the agreed statement of facts that the partnership got the benefit of the bread sold and delivered by plaintiff to Stroud's Food Center, at Freeman's request, from 6 February 1956 to 25 February 1956. See Blackstone Guano Co. v. Ball, 201 N.C. 534, 160 S.E. 769. But whether it did or not, Freeman's acts, as stated above, bound the partnership and Stroud. The judgment of the court below is Affirmed. RODMAN, J., dissents.

Meinhard v. Salmon 249 N.Y. 458, 164 N.E. 545 (1928)

MEINHARD v. SALMON et al. Court of Appeals of New York. Dec. 31, 1928. *461 CARDOZO, C. J. On April 10, 1902, Louisa M. Gerry leased to the defendant Walter J. Salmon the premises known as the Hotel Bristol at the northwest corner of Forty-Second street and Fifth avenue in the city of New York. The lease was for a term of 20 years, commencing May 1, 1902, and ending April 30, 1922. The lessee undertook to **546 change the hotel building for

199 use as shops and offices at a cost of $200,000. Alterations and additions were to be accretions to the land. Salmon, while in course of treaty with the lessor as to the execution of the lease, was in course of treaty with *462 Meinhard, the plaintiff, for the necessary funds. The result was a joint venture with terms embodied in a writing. Meinhard was to pay to Salmon half of the moneys requisite to reconstruct, alter, manage, and operate the property. Salmon was to pay to Meinhard 40 per cent. of the net profits for the first five years of the lease and 50 per cent. for the years thereafter. If there were losses, each party was to bear them equally. Salmon, however, was to have sole power to 'manage, lease, underlet and operate' the building. There were to be certain preemptive rights for each in the contingency of death. The were coadventures, subject to fiduciary duties akin to those of partners. King v. Barnes, 109 N. Y. 267, 16 N. E. 332. As to this we are all agreed. The heavier weight of duty rested, however, upon Salmon. He was a coadventurer with Meinhard, but he was manager as well. During the early years of the enterprise, the building, reconstructed, was operated at a loss. If the relation had then ended, Meinhard as well as Salmon would have carried a heavy burden. Later the profits became large with the result that for each of the investors there came a rich return. For each the venture had its phases of fair weather and of foul. The two were in it jointly, for better or for worse. When the lease was near its end, Elbridge T. Gerry had become the owner of the reversion. He owned much other property in the neighborhood, one lot adjoining the Bristol building on Fifth avenue and four lots on Forty-Second street. He had a plan to lease the entire tract for a long term to some one who would destroy the buildings then existing and put up another in their place. In the latter part of 1921, he submitted such a project to several capitalists and dealers. He was unable to carry it through with any of them. Then, in January, 1922, with less than four months of the lease to run, he approached the defendant Salmon. The result was a new lease to the Midpoint Realty Company, which is owned and controlled by Salmon, a lease covering the *463 whole tract, and involving a huge outlay. The term is to be 20 years, but successive covenants for renewal will extend it to a maximum of 80 years at the will of either party. The existing buildings may remain unchanged for seven years. They are then to be torn down, and a new building to cost $3,000,000 is to be placed upon the site. The rental, which under the Bristol lease was only $55,000, is to be from $350,000 to $475,000 for the properties so combined. Salmon personally guaranteed the performance by the lessee of the covenants of the new lease until such time as the new building had been completed and fully paid for. The lease between Gerry and the Midpoint Realty Company was signed and delivered on January 25, 1922. Salmon had not told Meinhard anything about it. Whatever his motive may have been, he had kept the negotiations to himself. Meinhard was not informed even of the bare existence of a project. The first that he knew of it was in February, when the lease was an accomplished fact. He then made demand on the defendants that the lease be held in trust as an asset of the venture, making offer upon the trial to share the personal obligations incidental to the guaranty. The demand was followed by refusal, and later by this suit. A referee gave judgment for the plaintiff, limiting the plaintiff's interest in the lease, however, to 25 per cent. The limitation was on the theory that the plaintiff's equity was to be restricted to one-half of so much of the value of the lease as was contributed or represented by the occupation of the Bristol site. Upon cross-appeals to the Appellate Division, the judgment was modified so as to enlarge the 200 equitable interest to one-half of the whole lease. With this enlargement of plaintiff's interest, there went, of course, a corresponding enlargement of his attendant obligations. The case is now here on an appeal by the defendants. Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest *464 loyalty. Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the 'disintegrating erosion' of particular exceptions. Wendt v. Fischer, 243 N. Y. 439, 444, 154 N. E. 303. Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court. The owner of the reversion, Mr. Gerry, had vainly striven to find a tenant who would favor his ambitious scheme of demolition and **547 construction. Beffled in the search, he turned to the defendant Salmon in possession of the Bristol, the keystone of the project. He figured to himself beyond a doubt that the man in possession would prove a likely customer. To the eye of an observer, Salmon held the lease as owner in his own right, for himself and no one else. In fact he held it as a fiduciary, for himself and another, sharers in a common venture. If this fact had been proclaimed, if the lease by its terms had run in favor of a partnership, Mr. Gerry, we may fairly assume, would have laid before the partners, and not merely before one of them, his plan of reconstruction. The pre-emptive privilege, or, better, the pre-emptive opportunity, that was thus an incident of the enterprise, Salmon appropriate to himself in secrecy and silence. He might have warned Meinhard that the plan had been submitted, and that either would be free to compete for the award. If he had done this, we do not need to say whether he would have been under a duty, if successful in the competition, to hold the lease so acquired for the *465 benefit of a venture than about to end, and thus prolong by indirection its responsibilities and duties. The trouble about his conduct is that he excluded his coadventurer from any chance to compete, from any chance to enjoy the opportunity for benefit that had come to him alone by virtue of his agency. This chance, if nothing more, he was under a duty to concede. The price of its denial is an extension of the trust at the option and for the benefit of the one whom he excluded. No answer is it to say that the chance would have been of little value even if seasonably offered. Such a calculus of probabilities is beyond the science of the chancery. Salmon, the real estate operator, might have been preferred to Meinhard, the woolen merchant. On the other hand, Meinhard might have offered better terms, or reinforced his offer by alliance with the wealth of others. Perhaps he might even have persuaded the lessor to renew the Bristol lease alone, postponing for a time, in return for higher rentals, the improvement of adjoining lots. We know that even under the lease as made the time for the enlargement of the building was delayed for seven years. All these opportunities were cut away from him through another's intervention. He knew that Salmon was the manager. As the time drew near for the expiration of the lease, he would naturally assume from silence, if from nothing else, that the lessor was willing to extend it for a term of years, or at least to let it stand as a lease from year to year. Not impossibly the lessor would have done so, whatever his protestations of unwillingness, if Salmon had not given

201 assent to a project more attractive. At all events, notice of termination, even if not necessary, might seem, not unreasonably, to be something to be looked for, if the business was over the another tenant was to enter. In the absence of such notice, the matter of an extension was one that would naturally be attended to by the manager of the enterprise, and not neglected altogether. At least, there was nothing in the situation to give warning to any one that while the lease was still in being, there *466 had come to the manager an offer of extension which he had locked within his breast to be utilized by himself alone. The very fact that Salmon was in control with exclusive powers of direction charged him the more obviously with the duty of disclosure, since only through disclosure could opportunity be equalized. If he might cut off renewal by a purchase for his own benefit when four months were to pass before the lease would have an end, he might do so with equal right while there remained as many years. Cf. Mitchell v. Read, 61 N. Y. 123, 127, 19 Am. Rep. 252. He might steal a march on his comrade under cover of the darkness, and then hold the captured ground. Loyalty and comradeship are not so easily abjured. * * * We have no thought to hold that Salmon was guilty of a conscious purpose to defraud. Very likely he assumed *468 in all good faith that with the approaching end of the venture he might ignore his coadventurer and take the extension for himself. He had given to the enterprise time and labor as well as money. He had made it a success. Meinhard, who had given money, but neither time nor labor, had already been richly paid. There might seem to be something grasping in his insistence upon more. Such recriminations are not unusual when coadventurers fall out. They are not without their force if conduct is to be judged by the common standards of competitors. That is not to say that they have pertinency here. Salmon had put himself in a position in which thought of self was to be renounced, however hard the abnegation. He was much more than a coadventurer. He was a managing coadventurer. Clegg v. Edmondson, 8 D. M. & G. 787, 807. For him and for those like him the rule of undivided loyalty is relentless and supreme. Wendt v. Fischer, supra, Munson v. Syracuse, etc., R. R. Co., 103 N. Y. 58, 74, 8 N. E. 355. A different question would be here if there were lacking any nexus of relation between the business conducted by the manager and the opportunity brought to him as an incident of management. Dean v. MacDowell, 8 Ch. Div. 345, 354; Aas v. Benham, [1891] 2 Ch. 244, 258; Latta v. Kilbourn, 150 U. S. 524, 14 S. Ct. 201, 37 L. Ed. 1169. For this problem, as for most, there are distinctions of degree. If Salmon had received from Gerry a proposition to lease a building at a location far removed, he might have held for himself the privilege thus acquired, or so we shall assume. Here the subject-matter of the new lease was an extension and enlargement of the subject-matter of the old one. A managing coadventurer appropriating the benefit of such a lease without warning to his partner might fairly expect to be reproached with conduct that was underhand, or lacking, to say the least, in reasonable candor, if the partner were to surprise him in the act of signing the new instrument. Conduct subject to that reproach does not receive from equity a healing benediction. *469 A question remains as to the form and extent of the equitable interest to be allotted to the plaintiff. The trust as declared has been held to attach to the lease which was in the name of the defendant corporation. We think it ought to attach at the option of the defendant Salmon to the shares of stock which were owned by him or were under his control. The difference may be important if the lessee shall wish to execute an assignment of the lease, as it ought to be free to do with the consent of the lessor. On the other hand, an equal division of the shares might lead

202 to other hardships. It might take away from Salmon the power of control and management which under the plan of the joint venture he was to have from first to last. The number of shares to be allotted to the plaintiff should, therefore, be reduced to such an extent as may be necessary to preserve to the defendant Salmon the expected measure of dominion. To that end an extra share should be added ot his half. Subject to this adjustment, we agree with the Appellate Division that the plaintiff's equitable interest is to be measured by the value of half of the entire lease, and not merely by half of some undivided part. A single building covers the whole area. Physical division is impracticable along the lines **549 of the Bristol site, the keystone of the whole. Division of interests and burdens is equally impracticable. Salmon, as tenant under the new lease, or as guarantor of the performance of the tenant's obligations, might well protest if Meinhard, Claiming an equitable interest, had offered to assume a liability not equal to Salmon's, but only half as great. He might justly insist that the lease must be accepted by his coadventurer in such form as it had been given, and not constructively divided into imaginery fragments. What must be yielded to the one may be demanded by the other. The lease as it has been executed is single and entire. If confusion has resulted from the union of adjoining parcels, the trustee who consented to the *470 union must bear the inconvenience. Hart v. Ten Eyck, 2 Johns. Ch. 62. * * * *472 The judgment should be modified by providing that at the option of the defendant Salmon there may be substituted for a trust attaching to the lease a trust attaching to the shares of stock, with the result that one-half of such shares together with one additional share will in that event be allotted to the defendant Salmon and the other shares to the plaintiff, and as so modified the judgment should be affirmed with costs. ANDREWS, J. (dissenting). * * * Were this a general partnership between Mr. Salmon and Mr. Meinhard, I should have little doubt as to the correctness of this result, assuming the new lease to be an offshoot of the old. Such a situation involves questions of trust and confidence to a high degree; it involves questions of good, will; many other considerations. As has been said, rarely if ever may one partner without the knowledge of the other acquire for himself the renewal of *477 a lease held by the firm, even if the new lease is to begin after the firm is dissolved. Warning of such an intent, if he is managing partner, may not be sufficient to prevent the application of this rule. We have here a different situation governed by less drastic principles. I assume that where parties engage in a joint enterprise each owes to the other the duty of the utmost good faith in all that relates to their common venture. Within its scope they stand in a fiduciary relationship. * * * What then was the scope of the adventure into which the two men entered? Y It seems to me that the venture so inaugurated had in view a limited object and was to end at a limited time. There was no intent to expand it into a far greater undertaking lasting for many years. The design was to exploit a particular lease. Doubtless in it Mr. Meinhard had an equitable interest, but in it alone. This interest terminated when the joint adventure terminated.

203 There was no intent that for the benefit of both any advantage should be taken of the chance of renewal--that the adventure should be continued beyond that date. Mr. Salmon has done all he promised to do in return for Mr. Meinhard's undertaking when he distributed profits up to May 1, 1922. Suppose this lease, nonassignable without the consent of the lessor, had contained a renewal option. Could Mr. Meinhard have exercised it? Could he have insisted that Mr. Salmon do so? Had Mr. Salmon done so could he insist that the agreement to share losses still existed, or could Mr. Meinhard have claimed that the joint adventure was still to continue for 20 or 80 years? I do not think so. The adventure by its express terms ended on May 1, 1922. The contract by its language and by its whole import excluded *479 the idea that the tenant's expectancy was to subsist for the benefit of the plaintiff. On that date whatever there was left of value in the lease reverted to Mr. Salmon, as it would had the lease been for thirty years instead of twenty. Any equity which Mr. Meinhard possessed was in the particular lease itself, not in any possibility of renewal. There was nothing unfair in Mr. Salmon's conduct. * * * The judgment of the courts below should be reversed and a new trial ordered, with costs in all courts to abide the event. **553 POUND, CRANE, and LEHMAN, JJ., concur with CARDOZO, C. J., for modification of the judgment appealed from and affirmance as modified. ANDREWS, J., dissents in opinion in which KELLOGG and O'BRIEN, JJ., concur. Judgment modified, etc.

Day v. Sidley & Austin 394 F.Supp. 986 (D. D.c. 1975)

J. Edward DAY, Plaintiff, v. SIDLEY & AUSTIN et al., Defendants. Civ. A. No. 74-1112. United States District Court, District of Columbia. May 29, 1975. MEMORANDUM OPINION PARKER, District Judge. This case involves a dispute between a former senior partner of Sidley & Austin (S&A), a Chicago law firm, and some of his fellow partners. The controversy centers around the merger between that firm and another Chicago firm, Liebman, Williams, Bennett, Baird and Minow 204 (Liebman firm), and the events subsequent to the merger which ultimately led to plaintiff's resignation. Plaintiff seeks damages claiming a substantial loss of income, damage to his professional reputation and personal embarrassment which resulted from his forced resignation. The matter is now before the Court on defendants' motion for summary judgment. After consideration of the pre-and post-hearing memoranda of counsel, answers to interrogatories, affidavits, and oral arguments, this Court concludes that defendants' motion for summary judgment should be granted. On July 1, 1974, plaintiff J. Edward Day filed a complaint in the Superior Court for the District of Columbia against Sidley & Austin itself, *988 and 12 named partners (members of the firm's executive committee) alleging breach of fiduciary duty, breach of contract, fraud and misrepresentation, conspiracy, wrongful dissolution or ouster of co-partner and breach of partnership agreement. Thereafter, the individual defendants who had then been served filed a petition for removal in the United States District Court for the District of Columbia. [FN1] Federal jurisdiction is conferred by reason of diversity of citizenship and the amount in controversy exceeding $10,000. 28 U.S.C. ' 1332. On October 8, 1974, this Court denied plaintiff's request for a remand to the Superior Court and quashed service on those individual defendants who had been served with Superior Court process after removal had become effective. Service against the partnership itself was quashed. [FN2] As of this date, plaintiff has served eleven of the individual defendants. As an initial response to the motion for summary judgment plaintiff asserts that the motion should be denied because it is premature since 'extensive discovery' is contemplated including depositions to supplement the interrogatories that have already been answered. In Washington v. Cameron, 133 U.S.App.D.C. 391, 411 F.2d 705 (1969), the district court was reversed for precipitously granting defendant's summary judgment motion on the basis of an ex parte administrative determination of fact, before plaintiff had had a chance to conduct any discovery. The caution and restraint dictated by Cameron was clearly warranted by its facts, the record and the state of the pleadings. Such an approach is not mandated by the record in this proceeding. Here, the plaintiff has conducted discovery by way of interrogatories, has filed several personal affidavits, and defendants have submitted key documents such as the Partnership Agreements of Sidley & Austin and the Memorandum of Understanding governing the proposed merger of S&A and the Liebman firm. The partnership agreements and other essential undisputed facts and relevant documents present questions of law and the Court sees no reason why the motion for summary judgment is untimely. See E. P. Hinkel & Co. v. Manhattan Co., 506 F.2d 201 (D.C.Cir. 1974). The Factual Background The basic and material facts in this controversy may be briefly detailed. Mr. Day was first associated with Sidley & Austin in 1938. His legal career was interrupted by World War II service in the Navy and by his tenure with both the Illinois state government and as Postmaster General of the United States. Upon leaving the federal government, he was instrumental in establishing a Washington office for the firm in 1963. As a senior underwriting partner, he was entitled to a certain percentage of the firm's profits, and was also privileged to vote on certain matters which were specified in the partnership agreement. He was never a member of the executive committee, however, which managed the firm's day-to-day

205 business. He remained an underwriting partner with Sidley & Austin from 1963 until his resignation in December 1972. At some time between February 1972 and July 12, 1972, S&A's executive committee explored the idea of a possible merger between that firm and the Liebman firm. S&A partners who were not on the executive committee were unaware of the proposal until it was revealed at a special meeting of its underwriting *989 partners on July 17, 1972. At that meeting, each partner present, including plaintiff, voiced approval of the merger idea and favored pursuing further that possibility in such manner as the executive committee of S&A might think proper or advisable, with the understanding that any proposed agreement would first be submitted to all partners for their consideration before any binding commitments were made. The merger was further discussed at meetings of the underwriting partners held on September 6, September 22, September 26 and September 28. The plaintiff received timely notice of the meetings but did not attend. The final Memorandum of Understanding dated September 29, 1972 and the final amended Partnership Agreement, dated October 16, 1972 were executed by all S&A partners, including plaintiff. The Memorandum incorporated a minor change requested by plaintiff. At a meeting of the executive committee of the combined firm on October 16, 1972, it was decided that the Washington offices and the Washington office committees of the two predecessor firms would be consolidated. The former chairmen of the Washington office committees of the two firms were appointed co-chairmen of the new Washington Office Committee. [FN3] In late October of 1972, the new Washington Office Committee recommended to the Management Committee that a combined Washington Office be set up at 1730 Pennsylvania Avenue, thus eliminating the old S&A Washington office in the Cafritz Building. A decision was then made to move to the new location despite plaintiff's objections. Mr. Day resigned from Sidley & Austin effective December 31, 1972 claiming that the changes which occurred after the merger in the Washington Office-- the appointment of co- chairmen and the relocation of the office-- made continued service with the firm intolerable for him. Plaintiff has made certain allegations which are not conceded by defendants. As to these matters, plaintiff's allegations have been given the benefit of all reasonable doubts and inferences. [FN4] Mr. Day contends that he had a contractual right to remain the sole chairman of the Washington Office, and that the maintenance of this status was a condition precedent for his rejoining the firm in 1963 and opening the Washington office. According to plaintiff, the decision to appoint co-chairmen was made prior to the merger and defendants' concealment of that decision was a material omission and without that prior information his vote of approval for the merger would not have been given. He further alleges that certain active misrepresentations about the results of the proposal also had the effect of voiding the approval of the merger. These other alleged misrepresentations were:

206 (1) that no Sidley partner would be worse off in any way as a result of the merger, including positions on committees; (2) that two senior partners of the Liebman firm would soon be leaving law practice; *990 (3) that the merged firm would drop representation of a certain Liebman client whose interests might conflict with some Sidley clients; (4) that the merger with Liebman would be advantageous to the Sidley partners and would add to the standing and prestige of the firm; (5) that all aspects of the merger had been exhaustively investigated by defendants; and (6) that there were good, sound, objective reasons which made the merger highly desirable. Plaintiff also alleges that the fact that the Liebman firm had been shopping around for a merger partner for 10 years was concealed. Events after the merger, allegedly void because of the mentioned omissions and misrepresentations, inevitably led to plaintiff's resignation. The loss of his status as sole chairman of the Washington office was viewed by plaintiff as a humiliating experience, especially as it was accompanied by harassment by the defendants. Day points to the method of handling the relocation of the consolidated firm as the most obvious manifestation of the defendants' intent to force his resignation. In an affidavit submitted by plaintiff, he asserts that the process of approving the office move entailed a series of meetings held and decisions made without consulting him, all in derogation of his former status as the final decision maker for the S&A Washington office. Defendants do not concede that misrepresentations or omissions tainted the approval of the merger, nor do they admit engaging in harassment techniques intended to force plaintiff to resign. The thrust of defendants' argument for summary judgment is that plaintiff's factual allegations are not material because they fail to state a cause of action. Defendants contend that any possible taint of plaintiff's vote in favor of the merger is of no consequence because only a majority, and not unanimous consent, was required for the merger under the provisions of the partnership agreements. Defendants also contend that any diminution of status as perceived by plaintiff cannot have any legal consequences because he had no vested contractual right to remain the sole chairman. They rely on the terms of the partnership agreements to support this defense. Under the agreements, the Executive Committee had the authority to govern the composition of all other firm committees and no special provisions had been made as to plaintiff's vested right in the Washington office. An analysis of the adequacy of each of plaintiff's causes of action follows. Fraud * * * The key misrepresentation which forms the basis of plaintiff's complaint is that no Sidley partner would be worse off as a result of the merger. Plaintiff interpreted this to mean that he would continue to serve as the sole chairman of the Washington Office and that he would wield the commanding authority regarding such matters as expanding office space. It was the change in plaintiff's status at the Washington Office which directly precipitated his resignation. 207 This misrepresentation regarding plaintiff's status cannot support a cause of action for fraud, however, because plaintiff was not deprived of any legal right as a result of his reliance on this statement. The 1970 S&A Partnership Agreement, [FN7] to which plaintiff was a party, sets forth in some detail the relationships among the partners and the structure of the firm. No mention is made of the Washington Office or plaintiff's status therein, whereas special arrangements are specified for certain other partners. If chairmanship of the Washington Office was of the importance now claimed, the absence of such a provision from the partnership agreement requires a measured explanation which Mr. Day does not supply. Plaintiff's allegations of an unwritten understanding cannot now be heard to contravene the provisions of the Partnership Agreement which seemingly embodied the complete intentions of the parties as to the manner in which the firm was to be operated and managed. Nor can plaintiff have reasonably believed that no changes would be made in the Washington Office since the S&A Agreement gave complete authority to the executive committee to decide questions of firm policy, [FN8] which would clearly include establishment of committees and the appointment of members and chairpersons. Having read and signed the *992 1970 and 1972 S&A Partnership Agreements which implicitly authorized the Executive Committee to create, control or eliminate firm committees, plaintiff could not have reasonably believed that the status of the Washington Office Committee was inviolate and beyond the scope and operation of the Partnership Agreements. Thus, since plaintiff had no right to remain chairman of the Washington Office, a misrepresentation regarding his chairmanship does not form the basis for a cause of action in fraud. Breach of Contract, Conspiracy and Wrongful Dissolution or Ouster of Partner As shown above, plaintiff had no contractual right to maintain his authority over the Washington Office, and therefore he has not made out a case for breach of contract. Since he did not have a legal right to maintain his status in the firm, the conspiracy charge [FN9] amounts to no more than an internal power sweep, executed and permitted under the provisions of the partnership agreement for which there is no legal remedy. Similarly, there was no wrongful dissolution or ouster of plaintiff from the partnership because the merger of the two firms was authorized under the terms of the S&A partnership agreement. By the terms of the agreement, the executive committee was entrusted with 'all questions of Firm policy.' [FN10] Additionally, partners could be admitted and severed from the firm and the partnership agreement could be amended by majority approval by the partners. [FN11] The merger of S&A with the Liebman firm could be considered either as the admission of new partners or the making of a new or amended agreement, and thus majority approval was all that was required, and a post facto change in plaintiff's vote would be of no effect. Plaintiff contends that the merger was such a fundamental change in the nature of the partnership that unanimous approval was required and that had he known the personal consequences of the merger, he would have exercised a 'veto' and the events which forced him to resign would not have occurred. This theory, however, runs counter to the prevailing law of partnership. Generally, common law and statutory standards concerning relationships between partners can be overridden by an agreement reached by the parties themselves. [FN12] The Uniform Partnership Act (adopted both in Illinois and the District of Columbia) [FN13] specifically provides that statutory rules governing the rights and duties of the partners are 'subject to any agreement between them.' [FN14] 208 Nr do the cases cited by plaintiff support the proposition that unanimous consent is needed for the merger of partnerships. In McCallum v. Asbury, 238 Or. 257, 393 P.2d 774 (1964), a partner sued to dissolve a partnership of medical doctors. Plaintiff challenged the amendment of the agreement by majority vote which provided for management by an executive committee. The court held that a majority could approve this change, even though the agreement provided that all partners were to have an equal share in management. Likewise, Fortugno v. Hudson Manure Co., 51 N.J.Super. 482, 144 A.2d 207 (1958), affords little support. Fortugno basically held that a partner could not be effectively changed into a stockholder in a corporation without his consent. In that case, there had been no prior contract that the partnership agreement could be amended by majority vote. The S&A Agreement, however, dealt specifically with incorporation of the firm, providing that incorporation would be effective if approved by three-fourths of the partners. Merger was a less dramatic change than incorporation, which would have eliminated the partnership entity. It cannot reasonably be argued, therefore, that the merger fell outside the purview of the Agreement, requiring unanimous consent for its approval. Amendments to the Agreement and admission of partners required only majority approval, and plaintiff's proposed 'veto power' is nothing more than an expressed hope, incompatible with and contrary to the overall scheme and provisions of the S&A Agreement. Breach of Fiduciary Duty Plaintiff also alleges that defendants breached their fiduciary duty by beginning negotiations on a merger with the Liebman firm without consulting the other partners who were not on the Executive Committee and by not revealing information regarding changes that would occur as a result of the merger, such as the co-chairmen arrangement for the Washington office. An examination of the case, law on a partner's fiduciary duties, however, reveals that courts have been primarily concerned with partners who make secret profits at the expense of the partnership. [FN15] Partners have a duty to make a full and fair disclosure to other partners of all information which may be of value to the partnership. 1 Rowley on Partnership ' 20.2, at 512- 13 (2d ed. 1960). The essence of a breach of fiduciary duty between partners is that one partner has advantaged himself at the expense of the firm. Id. The basic fiduciary duties are: 1) a partner must account for any profit acquired in a manner injurious to the interests of the partnership, such as commissions or purchases on the sale of partnership property; 2) a partner cannot without the consent of the other partners, acquire for himself a partnership asset, nor may he divert to his own use a partnership opportunity; and 3) he must not compete with the partnership within the scope of the business. See Crane & Bromberg, Law of Partnership, ' 68, at 389-91 (1968). A typical case of breach of fiduciary duty and fraud between partners cited by plaintiff is Bakalis v. Bressler, 1 Ill.2d 72, 115 N.E.2d 323 (1953). There, a defendant partner has surreptitiously purchased the building which housed the partnership's business and was collecting rents from the partnership for his own profit. What plaintiff is alleging in the instant case, however, concerns failure to reveal information regarding changes in the internal structure of the firm. No court has recognized a fiduciary duty to disclose this type of information, the concealment of which does not produce any profit for the offending partners nor any financial *994 loss for the partnership as a whole. Not only was there no financial gain for defendants, but the remaining partners did not acquire any more power within the firm as the result of the alleged 209 withholding of information from plaintiff. They were already members of the executive committee and as such had wideranging authority with regard to firm management. Thus plaintiff's claim of breach of fiduciary duty must fail. What this Court perceives from Mr. Day's pleadings and affidavits is that he may be suffering from a bruised ego but that the facts fail to establish a legal cause of action. As an able and experienced attorney, it should have been clear that the differences and misunderstandings which developed with his former partners were business risks of the sort which cannot be resolved by judicial proceedings. Mr. Day, a knowledgeable, sophisticated and experienced businessman and a responsible member of a large law firm, bound himself to a well-defined contractual arrangement when he executed the 1970 [FN16] Partnership Agreement. The contract clearly provided for management authority in the executive committee and for majority approval of the merger with the Liebman firm. Even if plaintiff had voted against the merger, he could not have stopped it. Furthermore, the Partnership Agreement, to which he freely consented denies the existence of a contractual right to any particular status within the firm for plaintiff. If plaintiff's partners did indeed combine against him, it is clear that their alleged activities did not amount to illegality, and that any personal humiliation or injury was a risk that he assumed when he joined with others in the partnership. Accordingly it is this 29th of May, 1975 Ordered that defendants' motion for summary judgment is granted and the complaint in this proceeding is dismissed with prejudice. * * *

Clevenger v. Rehn 2003 WL 718412 (Neb.App.)

NOTICE: THIS OPINION IS NOT DESIGNATED FOR PERMANENT PUBLICATION AND MAY NOT BE CITED EXCEPT AS PROVIDED BY NEB. CT.R. OF PRACT. 2E.

Court of Appeals of Nebraska.

Sandra K. CLEVENGER, Appellee and Cross-Appellant, v. Vicky L. REHN, Appellant and Cross-Appellee.

Mar. 4, 2003.

SIEVERS and INBODY, Judges.

SIEVERS, Judge.

Sandra K. Clevenger brought suit against Vicky L. Rehn, seeking dissolution of their partnership, an accounting, and damages, and Rehn counterclaimed for the same. The district 210 court for Red Willow County, Nebraska, entered judgment in favor of Clevenger and against Rehn in the amount of $9,468, finding that their partnership "effectively terminated" on February 19, 1999, and that Rehn continued the business thereafter as a sole proprietorship. The trial court's judgment was based on Clevenger's accountant's opinion of the value of the parties' capital accounts at the end of February 1999. Rehn appeals, and we reverse, because while the partnership dissolved in February, it was not wound up or terminated until later.

FACTUAL BACKGROUND

In early to mid-August 1998, Clevenger and Rehn, who are sisters, began work on opening an antique shop in McCook, Nebraska, which shop would include a "lunchroom" or "tearoom." They decided to form an equal partnership, sharing "equal responsibilities [and] equal profits" in a business called The Porcelain Rose Tearoom (Porcelain Rose). While they prepared a written "Partnership Agreement," it was never signed by either party.

By the end of August 1998, Clevenger and Rehn started attending antique auctions and craft fairs in order to buy supplies and inventory for the Porcelain Rose. Around this same time period, the parties also opened a Porcelain Rose bank account at AmFirst National Bank (bank) in McCook. Clevenger initially contributed $300 to the account, and Rehn contributed $230. Expenses started to mount, so Clevenger decided to cash in an IRA worth approximately $5,000, and she deposited the entire amount in the Porcelain Rose account.

On November 15, 1998, Clevenger and Rehn entered into an agreement for a lease until mid-August of the following year with McCook Townhouse, Inc. (Townhouse). Clevenger and Rehn agreed to rent two small rooms on the main floor of the Townhouse building for their business. The front room was the sales room, where the parties sold homemade crafts, figurines, woodwork, gifts, baskets, and antiques, and the back room was where the parties provided "two dinner hours a day five days a week" in a room with four tables for four people each.

In addition to purchasing inventory for the business, the parties contributed some of their own antiques and crafts. Clevenger also provided utensils, pans, and cookbooks, and she purchased a deep freeze, a buffet, a kitchen sink, faucets, and other miscellaneous items for the kitchen out of her own personal bank account. On February 2, 1999, the sales portion of the Porcelain Rose opened. A little over a week later, on February 11, the parties realized that they were going to have to borrow some money in order to continue operating the business, so they jointly borrowed $5,034 from the bank, and the bank deposited the entire amount in the Porcelain Rose account.

On February 16, 1999, the tearoom section of the Porcelain Rose opened. Approximately 2 days later, on February 18, Clevenger and Rehn got into an argument at the shop regarding who was going to be the cook and who was going to be the "out front" person dealing with the customers. Clevenger, "rather than fight with [Rehn] in front of the customers," walked out of the kitchen on two separate occasions that day to have "a couple of cigarettes" and to "cool off." Clevenger testified that after work, she went home and talked with her husband about getting out of the partnership altogether.

211 The next day, on February 19, 1999, when Clevenger came back to work at approximately 8:30 a.m., both parties were still upset about the previous day's argument, so Clevenger decided to leave and stated to Rehn, "I'm going home." Clevenger testified that as she left, she took her cookbooks, the master inventory sheet, and her smokeless ashtray. Rehn testified that Clevenger did not come back that day, so Rehn and a waitress at the Porcelain Rose served lunch.

Rehn testified that during the day on which Clevenger walked out, the wind was blowing "really hard," and it blew the front door of the shop back and into an antique trunk situated at the front of the store. This caused the key, which was in the door, to snap off. Rehn and her husband subsequently replaced the locks that evening. Clevenger testified that later on that night, she returned to the shop and found that the locks had been changed and that she could not obtain entry into the store. Clevenger testified that on February 21, 1999, she came back to the store with her husband to obtain various store receipts and to ask for a key. Rehn denied that Clevenger asked for a key on that day or any other. Clevenger also testified that she intended on returning to work after she left on February 19, because she "had an interest in the business." This testimony is apparently designed to assign some sort of "blame" for Clevenger's departure from the Porcelain Rose.

On February 22, 1999, Rehn closed the Porcelain Rose bank account and transferred the entire balance, $3,096.83, to her personal account to prevent Clevenger from incurring any additional liabilities. A few days later, Rehn transferred the entire balance to a new Porcelain Rose account. Around this same time period, Clevenger and Rehn attempted to resolve their differences regarding the partnership. Both parties obtained legal representation, and after initial negotiations, a meeting was held with both parties and their counsel. While some of Clevenger's personal items were returned to her at this meeting, the record reflects that a resolution which would equate to a termination of the partnership was not obtained. Clevenger also testified that she received a letter from Rehn around this same time period, wherein Rehn offered to buy out Clevenger's portion of the business; however, nothing resulted from it.

On April 29, 1999, Clevenger received by mail a letter entitled "Statement of Dissolution," which stated in pertinent part:

Vickie [sic] Rehn, a partner in The Porcelain Rose, a general partnership consisting of Vickie [sic] Rehn, Murray Rehn and Sandra Clevenger, with its place of business in Red Willow County, Nebraska, hereby makes this statement of dissolution and confirms that the aforementioned partnership dissolved effective February 19, 1999, and is winding up its business.

The letter was signed by Rehn and dated April 29, 1999. A day later, on April 30, a "Notice" was published in the McCook Gazette newspaper, which stated:

Notice To Whom It May Concern: Vicky Rehn and Sandra Clevenger ceased operating The Porcelain Rose Tea Room as Partnership effective 2/19/99. The Porcelain Rose Tea Room has been operated as a sole proprietorship by Vicky Rehn since that date. Sandra Clevenger has no authority to act on behalf of Vicky Rehn DBA The 212 Porcelain Rose Tea Room effective 2/19/99.

Rehn testified that the notice in the newspaper was placed on the advice of her attorney to protect her from Clevenger's buying items on the business account. As will be detailed later, under partnership law, the two documents are inconsistent with each other. Approximately a month later, on May 31, 1999, Rehn shut down the Porcelain Rose and transported most of the shop inventory to her garage for storage, where it remained as of the trial date. Some of the fixtures apparently remain at the Townhouse building.

LAWSUIT AND TRIAL

On November 4, 1999, Clevenger filed a petition in the Red Willow County District Court seeking (1) dissolution of the Porcelain Rose partnership; (2) payment equal to Clevenger's capital contribution to the partnership; (3) one- half share of all partnership profits and inventory; (4) an accounting of all dealings and transactions of the partnership; and (5) sale of any remaining partnership property, with the proceeds to be divided equally between the parties. Rehn answered and counterclaimed for essentially the same relief.

Trial was had on August 11, 2000. Clevenger testified that after she walked out of the store on February 19, 1999, she had absolutely no involvement in the Porcelain Rose; she paid no bills, sold no merchandise, purchased no inventory, obtained no profits, and withdrew no money from the business account, but she felt she still had an interest in the Porcelain Rose. She also testified that Rehn solely retained the entire shop inventory after February 19, and therefore Clevenger should be entitled to approximately $10,000 after the dissolution and termination of the partnership.

Robert C. McChesney, a certified public accountant, testified on behalf of Clevenger. McChesney stated that on February 28, 1999, the total asset value of the Porcelain Rose was $20,803, of which $17,550 was in supplies and inventory, and the balance was cash in the bank. McChesney further stated that Clevenger's equity in the partnership as of that date was $9,468 and that Rehn's was $6,335. McChesney made a special point of making it clear that he was not opining that Rehn should pay Clevenger $9,468--which incidentally is the amount of the trial court's judgment in Clevenger's favor against Rehn. On cross- examination, McChesney testified that his totals did not take into consideration any "winding up" of the partnership. McChesney's valuation came from his review of materials provided by the parties and their attorneys, and he cut off the valuation as of the end of February and did not take into consideration what happened thereafter with the business.

Rehn testified that she did not think that Clevenger permanently left the business partnership on February 19, 1999. Rehn stated, "I didn't think that [Clevenger] could walk away from it. We had a loan, we had bills, we had insurance, we had inventory, [and] we had food that was perishable."

On cross-examination, Rehn testified that after February 19, 1999, she continued serving meals, ordered more inventory, and continued to make merchandise sales for the Porcelain Rose. She further testified that she obtained the assistance of her cousin and another sister to help run 213 the shop. Rehn continued to pay rent as well as make the monthly loan payments to the bank. Her undisputed evidence was that she had reduced the loan balance from $5,000 in February to $2,748 as of the date of trial, August 11, 2000.

Ron Smith, a certified public accountant, testified on behalf of Rehn. Smith's valuation used many of the same documents as did McChesney, as well as the valuation prepared by McChesney, but he ran his calculation out to August 31, 1999, the end of the partnership's first fiscal year, even though no business had been conducted after May 31. In Smith's testimony, Rehn's capital account in the partnership was $4,695, whereas Clevenger's capital account was a negative $3,016. Smith testified that he took into consideration the cost of goods and sales and that his capital account figures included the contributions of the parties as well as the "statement of revenues and expenses," which revealed that for the fiscal year ending August 31, the Porcelain Rose lost $19,640. McChesney did not address whether the partnership was making or losing money.

On October 5, 2000, the trial court made the following orders and findings:

1. [Clevenger] and [Rehn] formed a partnership known as the "Porcelain Rose." [Clevenger] and [Rehn] each contributed time and property to the partnership. [Clevenger] also contributed monies consisting of a few hundred dollars and an additional $5,000.00 from an I.R.A. [Rehn] contributed a few hundred dollars and the parties obtained a loan of $5,000.00 from the AmFirst Bank. 2. The parties opened for business on February 2, 1999 and on February 19, 1999, [Clevenger] walked out of the business effectively terminating the partnership. [Rehn] continued to operate the business until 5/31/99 and closed the business on that date. 3. [Rehn] published a notice of the partnership termination, showing that the partnership terminated on 2/19/99 and was operated as a sole proprietorship since that date (see Ex. 5). 4. The other evidence presented shows that [Rehn] continued to produce food items and inventory for resale after 2/19/99 and the court is convinced that [Rehn] intended to operate the business as a sole proprietorship and not just wind down the affairs of a business that ran only for a short period of time. 5. The court finds based upon the evidence that the partnership terminated as of 2/19/99 and that is the date to be used for determining each part[y's] share. 6. The expert for [Clevenger] valued the business as of 2/19/99, the expert for [Rehn] valued the business as of 8/31/99, a date that appears to have little, if any, relevance to any significant date for [Clevenger] or [Rehn]. 7. The court finds, based upon the evidence presented, that the partnership should be valued at the date of 2/19/99 and the partnership's shares determined as of that date. 8. [Clevenger]'s expert did just that and in his opinion the value of [Clevenger]'s interest as of 2/19/99 was $9,468.00. 9. The court enters judgment in favor of [Clevenger] and against [Rehn] in the amount of $9,468.00 plus interest at the rate of 7.241% per annum until paid in full. The costs of the action are taxed to [Rehn]. The court orders each party to pay his or her own attorney fees.

214 ANALYSIS When Did Porcelain Rose Partnership "Terminate"?

In Rehn's first four assignments of error, she argues that the trial court erred in finding that the general partnership between Clevenger and Rehn in the Porcelain Rose "terminated" on February 19, 1999. Specifically, Rehn asserts that after Clevenger left the store on February 19, the Porcelain Rose partnership dissolved; however, the partnership was not terminated until the "winding up" of the partnership affairs was completed. After our de novo review, we agree. Our reasoning follows.

Partnerships are formed by the mutual agreement of all partners, and may be altered, modified, or dissolved by like agreement. 59A Am.Jur.2d Partnership § 823 (1987). * * * In the present case, Clevenger and Rehn orally agreed to form the Porcelain Rose as an equal partnership in which they would each work, and they would share equally.

The first step in the analysis of this case involves the dissolution of the Porcelain Rose. Under Nebraska law, the term "dissolution" does not signify the end of a partnership's legal existence. Essay v. Essay, supra. Dissolution, according to Neb.Rev.Stat. § 67-329 (Reissue 1996), is simply a change in the relationship of the partners "caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business." This is clearly an apt description of the Clevenger's departure from the Porcelain Rose, regardless of reason or fault, and we do not need to fix blame for this situation in order to decide the case. Upon dissolution, the partnership is not terminated but continues until the winding up of partnership affairs is completed. Essay v. Essay, supra. See, also, Bass v. Dalton, 218 Neb. 379, 381, 355 N.W.2d 225, 227 (1984) ("dissolution of a partnership is but a preparatory step to its termination; a partnership continues after dissolution.") Neb.Rev.Stat. § 67-331 (Reissue 1996) of the Uniform Partnership Act (UPA), as enacted in Nebraska, provides the following: "Dissolution [of a partnership] is caused: (1) Without violation of the agreement between the partners ... (b) By the express will of any partner when no definite term or particular undertaking is specified ....)"

The evidence reveals that there was no definite term or particular undertaking specified in the oral partnership agreement, or even in the unsigned written agreement, which would have restricted either Clevenger or Rehn from dissolving the partnership at will. Therefore, based upon our de novo review, and using the uncontroverted facts of this case, the partnership between Clevenger and Rehn in the Porcelain Rose dissolved on February 19, 1999.

We find that after February 19, 1999, Clevenger ceased to be associated with the business and did not carry her share of the workload as she had agreed to do. Thus, there was a change in the relationship of the partners, which in legal terms is a dissolution.

One of the keys to this appeal is the fact the terms "dissolution," "winding up," and "termination," as employed by the Nebraska UPA, are not synonyms and have different meanings. * * * Dissolution neither terminates the partnership nor completely ends the authority of the partners. See Essay v. Essay, supra. The order of events to end a partnership as a business entity is (1) dissolution, (2) winding up, and (3) termination. * * * It is not until "termination," 215 after the "winding up" of the partnership is completed, that the partnership's legal existence ends and authority of the partners is extinguished. See id. Therefore, the trial court's finding that the partnership was "effectively terminated" on February 19, 1999, does not accurately reflect partnership law, because there was simply no evidence that the partnership was also wound up on that date. In fact, the evidence shows that the two parties got together with their attorneys several weeks after Clevenger's departure and tried to resolve the outstanding issues (i .e., wind up), but they were unsuccessful.

The Nebraska UPA refers to "winding up" in several sections, but neither Nebraska case law nor the Nebraska UPA defines the term "winding up" of partnership affairs; but it is a concept which we think largely "speaks for itself." Winding up is the process by which the business affairs of the partnership are brought to an end, which would involve such things as paying creditors, collecting accounts payable, disposing of inventory and the property used in the business, including converting such to cash and then dividing any remaining property or cash among the partners, or if there were no equity, arranging for the payment of the debts of the partnership. * * * All of these things needed to be done when Clevenger left on February 19, 1999. The district court's decision fails to recognize this reality. Because the record reveals, and our holding confirms, that the Porcelain Rose partnership dissolved on February 19, under Nebraska law, both Clevenger and Rehn were entitled to an accounting at that time. See, Neb.Rev.Stat. § 67-343 (Reissue 1996); Walker v. Walker, supra. Obviously, resort to the court for such accounting occurs when the parties cannot do on their own what the law requires to be done to end the legal entity that is a partnership.

It appears that Clevenger was of the mistaken impression that if she "bowed out" of the business, that Rehn would simply "buy her out" as of February 19, 1999, when Clevenger "quit" the Porcelain Rose partnership. However, the winding up of a partnership is not that simple, unless the remaining partner agrees to such, which did not happen. Moreover, it appears to us that the trial judge's decision rests in no small part on the notice published in late April, in which Rehn said that as of February 19, she was operating the Porcelain Rose as a sole proprietorship. But, in the notice sent to Clevenger at the same time, Rehn said she was winding up. But, again, a partnership does not terminate (and convert into another legal entity such as a sole proprietorship) unless it has first been wound up and terminated. Thus, the notice of April 30 was of no real meaning unless the Porcelain Rose partnership had been wound up, which it obviously had not. To the extent that Rehn thought the business was now hers, that notion was as faulty as Clevenger's thought that if she abandoned the enterprise, Rehn would have to "buy her out." By the time of trial, Rehn's testimony was that she was winding up during the time after February 19 until the closing on May 31. At trial, Rehn made no claim that the business was being operated as a sole proprietorship after February 19. The fact that after February 19, Rehn purchased more inventory and food supplies for the store, continued merchandise sales, obtained the help of her cousin and her sister to assist, including serving meals, is simply evidence that the business had not terminated, and we take it simply as evidence of the windup process. Admittedly, she changed the locks on the business and created a new business bank account and transferred funds to it from the old partnership account, but these things to us simply show that Rehn (as is likewise true of Clevenger) was unaware of the legal ramifications of the entity which the parties created and did not know how to legally end what the parties had started. Rehn closed the Porcelain Rose on May 31, and the remaining inventory of the partnership ended up in her 216 garage--where it remained as of the time of trial. The trial court's decision fails to expressly resolve the question of the disposition of the inventory, although by implication, we suspect that the judge intended that it be awarded to Rehn.

There is no set period of time within which a winding up must be accomplished. See Schoeller v. Schoeller, 497 S.W.2d 860, 867 (Mo.App.1973) ("dissolved partnerships may continue in business for a short, long or indefinite period of time, so long as the rights of creditors are not jeopardized and so long as none of the partners insist on a winding up and final termination of the partnership business"). In Centerre Bank of Kansas City v. Angle, 976 S.W.2d 608 (Mo.App.1998), the plaintiff also brought an action, inter alia, for dissolution of a partnership and an accounting. The Missouri Court of Appeals stated: "Where ... the partnership business was wound up rather than continued, then each partner's net interest is determined upon the winding up of the partnership and 'the accounting must encompass the life of the partnership down to and including the winding up of the business.' " (Emphasis supplied.) 976 S.W.2d at 618-19 (quoting Stein v. Jung, 492 S.W .2d 139 (Mo.App.1973)).

In the instant case, the trial judge based his decision on the testimony of McChesney (Clevenger's certified public accountant) that as of the end of February 1999, the parties' equity was $9,468 for Clevenger and $6,335 for Rehn. But, these figures have no meaning if the partnership had not been wound up then. Having concluded that the trial court's finding that the partnership was terminated as of February 19 was wrong, we obviously reject the use of McChesney's accounting. Thus, we turn to the testimony of Rehn's accountant Smith, and we recall that Smith relied on essentially the same "pile of paper" generated by the parties as did McChesney, albeit it was updated to reflect what happened after Clevenger left.

We point out that we have no illusion, nor should the parties, that "perfect justice and equity" will be accomplished here. We are constrained by a confusing record, the nature of this small business which was a family partnership (which has now resulted in two sisters no longer speaking to each other, despite living within several houses of each other), and the less than precise nature of the records, as well as highly uncertain valuations of numerous miscellaneous small items of merchandise brought by the parties into the business or purchased for use in it. Finally, while two accountants testified, and it is clear that they each prepared a written report, their reports were not offered in evidence, and we are somewhat handicapped by their absence. Nonetheless, by using our powers of de novo review in an equitable case, we believe the case can be resolved.

The trial court was critical of Smith's valuations, saying that his date of August 31, 1999, had "little, if any, relevance to any significant date" for either party. We disagree. Smith said that he ran his calculation out to this date because it was the end of the partnership's first fiscal year, explaining that he did so even though nothing really happened after the business closed for good on May 31. We find this makes perfect sense, given that the parties were never able to wind up the partnership or properly accomplish (e .g., by agreement as part of a wind up) a conversion of the business to a sole proprietorship, even though Rehn might have mistakenly thought she had done so, or used that term upon the advice of her former counsel.

Because Smith's final figures are unchallenged by Clevenger (other than being on an 217 irrelevant date), we need not detail his methodology, except that we understand his testimony to be that he used much of the same data as did McChesney, but Smith factored in the expenses and receipts for March, April, and May, 1999, and he produced and relied upon a "statement of revenues and losses"--showing a loss of $19,640. Unless the partnership was dissolved, wound up, and terminated on February 19, 1999, this is a loss which the parties must share and Clevenger cannot avoid. The trial court's judgment in favor of Clevenger ignores this fundamental principle of partnerships by finding that the Porcelain Rose partnership was "effectively terminated" on February 19, a finding that of necessity means that the trial judge concluded that there had been a winding up on that date--a finding which is completely at odds with the record.

Clearly, both Clevenger and Rehn requested a judicial accounting. Pursuant to Neb.Rev.Stat. § 67-337 (Reissue 1996), the parties to a partnership may obtain an accounting by the court. The trial court, in this case, rendered only a monetary judgment, said nothing about an accounting, and did not deal with whether the remaining inventory should be sold, and if so, how and what should be done with the proceeds.

OUR ACCOUNTING

Smith puts Clevenger's capital account at a negative $3,016 and Rehn's at a positive $4,695 as of August 31, 1999, which accounting we assume reflects the loss the partnership ultimately incurred, the inventory and fixtures remaining in Rehn's possession, and the fact that at the outset, the parties made disparate contributions. We are forced to make such assumptions because both Smith and McChesney testified to conclusionary capital account figures without objection and without any offer into evidence of their reports. To complete the accounting, we must add the two capital accounts together, which produces a positive $1,679 ($4,695 minus a negative $3,016). Clevenger testified that "it was going to be a partnership, an equal partnership, with equal responsibilities, equal profits. The whole thing, it was split in half." Thus, we split "it" in half and treat both parties equally. Thus, there is a positive $1,679 left, which presumably is represented by the inventory and fixtures, meaning that in this equal partnership, each party is entitled to $839.50--but only in theory. There is no money left in the partnership, and they agreed to share profits, and losses, equally. Any money must come from either the conversion of the fixtures and the inventory to cash, an agreed-upon division of the property, or a forced liquidation under the supervision of the court. In settling upon our resolution of this case, we recall the holdings of Janke v. Chace, 1 Neb.App. 114, 115, 487 N.W.2d 301, 302 (1992):

Where a situation exists which is contrary to the principles of equity and which can be redressed within the scope of judicial action, a court of equity will devise a remedy to meet the situation.... *10 A court of equity which has acquired jurisdiction of a matter for any purpose will retain jurisdiction for the purpose of administering complete relief with respect to the subject matter.... Equity looks through forms to substance; a court of equity goes to the root of a matter and is not deterred by forms.... Where a court dealing in equity has property or money under its jurisdiction, it has power to appropriately direct its application in order to carry out justice. 218 Thus, in keeping with the teachings of Janke v. Chace, supra, we devise a remedy which follows. First, we reverse the trial court's judgment because it does not reflect partnership law or the evidence. Next, the inventory in Rehn's garage and the fixtures at the Townhouse building, where space was leased for the business and where some items still remain, shall be disposed of by sale-- relief both parties requested and which was unaddressed by the district court either at trial or upon remand.

Recognizing the reality that this failed small business partnership is "broke," we provide that if within 30 days of our mandate, the parties have agreed upon, and completed, a division of the inventory and other property on their own and have filed mutual satisfactions of judgment, the sale shall not occur. See Parker v. Parker, 1 Neb.App. 187, 492 N.W.2d 50 (1992) (discussing remedy of forced disposition of married couple's antiques versus voluntary resolution after mandate). But, if the parties have not completely resolved the disposition of the inventory and fixtures between themselves within the time given and filed mutual satisfactions of judgment, then the trial court shall within 10 days appoint an appropriate special master, who shall collect the property and sell it at open auction within 75 days of our mandate, upon the typical conditions determined by the master for the sale and disposal of personal property, such as in estate sales of household goods. The parties may buy anything they wish at the auction, but only under the advertised conditions of sale.

The master shall within 14 days of the sale file his or her written accounting of the costs of sale, the fees the master proposes to charge, and the remaining balance of sale proceeds, if any, which shall be applied to the taxable court costs of this action to wind up the partnership (which shall not include attorney fees for either party), after which the remaining balance, if any, of the proceeds shall be paid over in equal shares to the parties, for which they shall each file a satisfaction of judgment.

CONCLUSION

For the reasons set forth above, after our de novo review, we hold that the Porcelain Rose partnership did not dissolve, wind up, and terminate on February 19, 1999, as found by the district court. We reverse the judgment in favor of Clevenger and against Rehn in the amount of $9,468. The remaining partnership property must be disposed of before this accounting can be completed, which must happen to complete the wind up and bring about termination of this partnership. The proceeds of such liquidation shall be used as we detailed above. We also reverse the trial court's order requiring each party to pay one- half of the outstanding bank indebtedness, understanding that under the facts, such order is unnecessary and meaningless. That said, the matter is remanded to the district court for further proceedings in accordance with our opinion.

REVERSED AND REMANDED WITH DIRECTIONS.

HANNON, Judge, participating on briefs.

219 Collins v. Lewis 283 S.W.2d 258 (Texas 1955)

Carr P. COLLINS et al., Appellants, v. John L. LEWIS et al., Appellees. No. 12831. Court of Civil Appeals of Texas, Galveston. Oct. 13, 1955. Rehearing Denied Nov. 3, 1955. HAMBLEN, Chief Justice. This suit was instituted in the District Court of Harris County by the appellants, who, as the owners of a fifty per cent (50%) interest in a partnership known as the L-C Cafeteria, sought a receivership of the partnership business, a judicial dissolution of the partnership, and foreclosure of a mortgage upon appellees' interest in the partnership assets. Appellees denied appellants' right to the relief sought, and filed a cross- action for damages for breach of contract in the event dissolution should be decreed. Appellants' petition for receivership having been denied after a hearing before the court, trial of the issues of dissolution and foreclosure, and of appellees' cross-action, proceeded before the court and a jury. At the conclusion of such trial, the jury, in response to special issues submitted, returned a verdict upon which the trial court entered judgment denying all relief sought by appellants. The facts are substantially as follows: In the latter part of 1948 appellee John L. Lewis obtained a commitment conditioned upon adequate financial backing from the Brown-Bellows-Smith Corporation for a lease on the basement space under the then projected San Jacinto Building for the purpose of constructing and operating a large cafeteria therein. Lewis contacted appellant Carr P. Collins, a resident of Dallas, proposing that he (Lewis) would furnish the lease, the experience and management ability for the operation of a cafeteria, and Collins would furnish the money; that all revenue of the business, except for an agreed salary to Lewis, would be applied to the repayment of such money, and that thereafter all profits would be divided equally between Lewis and Collins. These negotiations failed to materialize because of the inability of Lewis to conclude satisfactory terms with the building owners. Thereafter, in 1949, negotiations along substantially the same terms were reopened, and culminated in the execution between the building owners, as lessors, and Lewis and Collins, as lessees, of a lease upon such basement space for a term of 30 years. Thereafter Lewis and Collins entered into a partnership agreement to endure throughout the term of the lease contract. This agreement is in part evidenced by a formal contract between the parties, but both litigants concede that the complete agreement is ascertainable only from the 220 verbal understandings and exchanges of letters between the principals. It appears to be undisputed that originally a corporation had been contemplated, and that the change to a partnership was made to gain the advantages which such a relationship enjoys under the internal revenue laws. The substance of the agreement was that Collins was to furnish all of the funds necessary to build, equip, and open the cafeteria for business. Lewis was to plan and supervise such construction, and, after opening for business, to manage the operation of the cafeteria. As a part of his undertaking, he guaranteed that moneys advanced by Collins would be repaid at the rate of at least $30,000, plus interest, in the first year of operation, and $60,000 per year, plus interest, thereafter, upon default of which Lewis would surrender his interest to Collins. In addition Lewis guaranteed Collins against loss to the extent of $100,000. In the partnership agreement fifty per cent interest therein is reflected to be owned by Collins and certain members of his family, in stated proportions, and the other fifty per cent is reflected to be owned by Lewis and members of his family. However, in their conduct of the business of the partnership, it is conceded by all litigants that Lewis and Collins completely controlled the respective equal fifty per cent interests in the business to the same extent *260 as if the actual ownership were so vested. For the purpose of this opinion, they are treated as if that were in fact the case. Immediately after the lease agreement had been executed Lewis began the preparation of detailed plans and specifications for the cafeteria. Initially Lewis had estimated, and had represented to Collins, that the cost of completing the cafeteria ready for operation would be approximately $300,000. Due to delays on the part of the building owners in completing the building, and delays in procuring the equipment deemed necessary to opening the cafeteria for business, the actual opening did not occur until September 18, 1952, some 2 1/2 years after the lease had been executed. The innumerable problems which arose during that period are in part reflected in the exchange of correspondence between the partners. Such evidence reflects that as to the solution of most of such problems the partners were in entire agreement. It further reflects that such disagreements as did arise were satisfactorily resolved. It likewise appears that the actual costs incurred during that period greatly exceeded the amount previously estimated by Lewis to be necessary. The cause of such increase is disputed by the litigants. Appellants contend that it was brought about largely by the extravagance and mismanagement of appellee Lewis. Appellees contend that it resulted from inflation, increased labor and material costs, caused by the Korean War, and unanticipated but necessary expenses. Whatever may have been the reason, it clearly appears that Collins, while expressing concern over the increasing cost, and urging the employment of every possible economy, continued to advance funds and pay expenses, which, by the date of opening for business, had exceeded $600,000. Collins' concern over the mounting costs of the cafeteria appears to have been considerably augmented by the fact that after opening for business the cafeteria showed expenses considerably in excess of receipts. Upon being informed, shortly after the cafeteria had opened for business, that there existed incurred but unpaid items of cost over and above those theretofore paid, Collins made demand upon Lewis that the cafeteria be placed immediately upon a profitable basis, failing which he (Collins) would advance no more funds for any purpose. There followed an exchange of recriminatory correspondence between the parties, Collins on the one hand charging Lewis with extravagant mismanagement, and Lewis on the other hand charging Collins with unauthorized interference with the management of the business. Futile attempts were made by Lewis to obtain financial backing to buy Collins' interest in the business.

221 Numerous threats were made by Collins to cause Lewis to lose his interest in the business entirely. This suit was filed by Collins in January of 1953. The involved factual background of this litigation was presented to the jury in a trial which extended over five weeks, and is reflected in a record consisting of a transcript of 370 pages, a statement of facts of 1,400 pages, and 163 original exhibits. At the conclusion of the evidence 23 special issues of fact were submitted to the jury. The controlling issues of fact, as to which a dispute existed, were resolved by the jury in their answers to Issues 1 to 5, inclusive, in which they found that Lewis was competent to manage the business of the L-C Cafeteria; that there is not a reasonable expectation of profit under the continued management of Lewis; that but for the conduct of Collins there would be a reasonable expectation of profit under the continued management of Lewis; that such conduct on the part of Collins was not that of a reasonably prudent person acting under the same or similar circumstances; and that such conduct on the part of Collins materially decreased the earnings of the cafeteria during the first year of its operation. In their briefs the litigants make widely divergent claims relative to the factual conclusions properly to be drawn from the evidence, as well as the legal effect thereof. This Court has been able to resolve such differences only by a most detailed examination of the entire record. From that examination we conclude not only that there is ample support for the findings of the jury which we consider *261 to be controlling, but further that upon the entire record, including such findings, the trial court entered the only proper judgment under the law, and that that judgment must be in all things affirmed. Appellants present seven asserted points of error. Points one to four, inclusive, present appellants' contention that the trial court erred in refusing to dissolve the partnership. Points five to seven, inclusive, present their contention that the trial court erred in refusing to foreclose appellant Collins' lien upon the appellees' interest in the partnership. As we understand appellants' position relative to their points one to four, they contend that there is no such thing as an indissoluble partnership; that it is not controlling or even important, in so far as the right to a dissolution is concerned, as to which of the partners is right or wrong in their disputes; and finally, that whenever it is made to appear that the partners are in hopeless disagreement concerning a partnership which has no reasonable expectation of profit, the legal right to dissolution exists. In support of these contentions appellants cite numerous authorities, all of which have been carefully examined. We do not undertake to individually distinguish the authorities cited for the reason that in no case cited by appellants does a situation analogous to that here present exist, namely, that the very facts upon which appellants predicate their right to a dissolution have been found by the jury to have been brought about by appellant Collins' own conduct, in violation of his own contractual obligations. We agree with appellants' premise that there is no such thing as an indissoluble partnership only in the sense that there always exists the power, as opposed to the right, of dissolution. But legal right to dissolution rests in equity, as does the right to relief from the provisions of any legal contract. The jury finding that there is not a reasonable expectation of profit from the L-C Cafeteria under the continued management of Lewis, must be read in connection with their findings that Lewis is competent to manage the business of L-C Cafeteria, and that but for the conduct of Collins there would be a reasonable expectation of profit therefrom. In our view those are the controlling findings upon the issue of dissolution. It was Collins' obligation to furnish the money; Lewis' to furnish the management, guaranteeing a stated 222 minimum repayment of the money. The jury has found that he was competent, and could reasonably have performed his obligation but for the conduct of Collins. We know of no rule which grants Collins, under such circumstances, the right to dissolution of the partnership. The rule is stated in Karrick v. Hannaman, 168 U.S. 328, 18 S.Ct. 135, 138, 42 L.Ed. 484, as follows: 'A court of equity, doubtless, will not assist the partner breaking his contract to procure a dissolution of the partnership, because, upon familiar principles, a partner who has not fully and fairly performed the partnership agreement on his part has no standing in a court of equity to enforce any rights under the agreement.' It seems to this Court that the proposition rests upon maxims of equity, too fundamental in our jurisprudence to require quotation. The basic agreement between Lewis and Collins provided that Collins would furnish money in an amount sufficient to defray the cost of building, equipping and opening the L-C Cafeteria for operation. As a part of the agreement between Lewis and Collins, Lewis executed, and delivered to Collins, a mortgage upon Lewis' interest in the partnership 'until the indebtedness incurred by the said Carr P. Collins * * * has been paid in full out of income derived from the said L-C Cafeteria, Houston, Texas.' The evidence shows that a substantial portion of the money used to build, equip and open the cafeteria was borrowed by Collins from the First National Bank in Dallas. The bank credit was admittedly extended upon Collins' financial responsibility. In the mechanics of arranging for such credit, however, Collins prepared and requested Lewis and his family to execute notes in the total sum of $175,000 payable *262 to the First National Bank in Dallas on demand. Lewis expressed concern at creating an obligation payable on terms which he felt unable to meet, whereupon Collins addressed a signed letter to Lewis, Containing language as follows: '* * * If you are apprehensive because of the fear that there might be a foreclosure of these notes or a failure to renew these notes for a sufficient period of time to liquidate them at a rate of not more than $2,500 per month the first year and $5,000 per month the second year, I can assure you that the notes will be renewed as often as is necessary to protect you on that point. I have never had in mind any arrangement other than that the notes would be carried for an indefinite time. * * * My arrangement with you in regard to this financing would be binding on my estate or until the obligation was fully discharged.' Collins testified that after execution and delivery of the notes to him by Lewis, he endorsed them and guaranteed their payment to the bank. At about the time this suit was instituted, the First National Bank in Dallas made demand upon Lewis for payment of the notes described, thus maturing the liability of Collins upon his endorsement of the notes. The failure of Lewis to pay such notes on demand constitutes the default, by reason of which Collins seeks foreclosure of his mortgage on Lewis' interest in the partnership. We are unable to agree with appellants in this contention, and must overrule their points presenting it. Regardless of the legal relationship between Lewis and the First National Bank in Dallas, created by the notes described, Lewis' obligation to Collins is limited to repaying money advanced by Collins at the minimum rate of $30,000 the first year and $60,000 per year thereafter. Only upon default of that obligation does the right of foreclosure ripen. There is testimony in the record to the effect that Collins, as a director and stockholder in the Dallas Bank had induced the bank to make demand for payment in order to effect foreclosure. That proof appears to us to be entirely immaterial to the determination of the rights of these litigants. The proof is undisputed that the bank, after maturing the notes, took no further steps to effect collection. Aside from that, however, as we construe the partnership agreement, it was Collins'

223 obligation to furnish all money needed to build, equip and open the cafeteria for business. With particular reference to the notes, it was Collins' obligation to protect Lewis against any demand for payment so long as Lewis met his obligation of repaying money advanced by Collins at the rate agreed upon. Failure on Collins' part to protect Lewis on his obligation to the bank would constitute a breach of contract by Collins. Collins' right to foreclose, therefore, depends upon whether or not Lewis has met his basic obligation of repayment at the rate agreed upon. Appellees contend, we think correctly, that he has, in the following manner: the evidence shows that Collins advanced a total of $636,720 for the purpose of building, equipping and opening the cafeteria for business. The proof also shows that Lewis contended that the actual cost exceeded that amount by over $30,000. The litigants differed in regard to such excess, it being Collins' contention that it represented operating expense rather than cost of building, equipping and opening the cafeteria. The jury heard the conflicting proof relative to these contentions, and resolved the question by their answer to Special Issue 20, whereby they found that the minimum cost of building, equipping and opening the cafeteria for operation amounted to $697,603.36. Under the basic agreement of the partners, therefore, this excess was properly Collins' obligation. Upon the refusal of Collins to pay it, Lewis paid it out of earnings of the business during the first year of its operation. Thus it clearly appears that Lewis met his obligation, and the trial court properly denied foreclosure of the mortgage. In their brief, appellants repeatedly complain that they should not be forced to endure a continuing partnership wherein there is no reasonable expectation of profit, which they say is the effect of the trial *263 court's judgment. The proper and equitable solution of the differences which arise between partners is never an easy problem, especially where the relationship is as involved as this present one. We do not think it can properly be said, however, that the judgment of the trial court denying appellants the dissolution which they seek forces them to endure a partnership wherein there is no reasonable expectation of profit. We have already pointed out the ever present inherent power, as opposed to the legal right, of any partner to terminate the relationship. Pursuit of that course presents the problem of possible liability for such damages as flow from the breach of contract. The alternative course available to appellants seems clearly legible in the verdict of the jury, whose services in that connection were invoked by appellants. Judgment affirmed.

Monin v. Monin 785 S.W.2d 499 (Ky. 1989) 313 Charles MONIN, Individually and as a Partner in Monin Bros., Appellant, v. Joseph E. MONIN, Individually and as a Partner in Monin Bros., and Sonny Monin, Inc., Appellees.

224 No. 88-CA-753-MR. Court of Appeals of Kentucky. Oct. 13, 1989. Discretionary Review Denied by Supreme Court April 18, 1990. McDONALD, Judge. This is a partnership case. The parties, Charles Monin and Joseph Monin (a/k/a Sonny), are brothers who formed a partnership in 1967 for the purpose of hauling milk. In 1984 the relationship between Charles and Sonny deteriorated such that Sonny no longer desired to continue the partnership. Some efforts were made to resolve their affairs, to no avail. In July, 1984, Sonny notified Charles of his intention to dissolve the partnership, and the next day wrote to Dairymen Incorporated (DI) to notify them that he was canceling the partnership's contract with DI effective October 16, 1984, the annual renewal date of the hauling contract. Sonny also informed DI he wanted to apply for the right to haul milk for DI after the expiration of the partnership's contract. On September 24, 1984, Charles and Sonny executed an agreement to resolve their business arrangement. The document entitled "Partnership Sales Agreement" provided that *500 they would hold a private auction between themselves for all the assets of the partnership "including equipment, and milk routes." As the contract with DI required approval of any sale or transfer of the milk hauling agreement, the sales agreement provided that such approval from DI would be sought and the sales agreement would be "null and void" if approval from DI was not forthcoming. The agreement also contained a covenant not to compete. Charles was the successful bidder at the auction, having bid $86,000. On the same day as the auction, September 27, 1984, DI called a producers meeting at which time those present voted not to approve Charles as their hauler. Instead they voted to have Sonny haul their milk. Sonny accepted the offer and has since hauled milk for DI as Sonny Monin, Inc. As a result Sonny ended up with the major asset of the partnership, the milk hauling contract, at no cost to him. On February 11, 1985, Charles commenced this action in the Nelson Circuit Court alleging that Sonny violated his fiduciary duty to the partnership and that he had tortiously interfered with the partnership's contractual relations with clients and customers. A bench trial was conducted in December, 1986. In its judgment for Sonny the trial court reasoned as follows: When Charles was the high bidder at $86,000.00, the value of the partnership assets, including milk routes, was established as far as Charles was concerned. Sonny had no further say in establishing a value for such assets. When the producers and D.I. rejected Charles as a milk hauler, the value of the partnership assets became adjusted from $86,000.00 to $22,000.00 (the value of the milk hauling equipment). When the producers voted for Sonny to haul their milk, they were not voting on a partnership matter. They were voting on Sonny's individual application. Furthermore, they were privileged to vote for some third person to haul their milk.

225 In summary, the affairs of the Monin Brothers partnership were finally settled on September 27, 1984. As a result of the actions of that date, the assets of the partnership were finally valued at $22,000.00. When Charles was rejected as the D.I.'s milk hauler on that date, the partnership had no interest in the milk routes and neither partner had any claim to same as part of their partnership interests. We conclude the trial court's reasoning is flawed in that it ignores Sonny's duties to the partnership with respect to the most valuable asset of that entity, the milk hauling contract. As stated in Van Hooser v. Keenon, Ky., 271 S.W.2d 270, 273 (1954), "[T]here is no relation of trust or confidence known to the law that requires of the parties a higher degree of good faith than that of a partnership. Nothing less than absolute fairness will suffice." (emphasis added.) Importantly, that decision holds that a partner's fiduciary duties extend beyond the partnership "to persons who have dissolved partnership, and have not completely wound up and settled the partnership affairs." Sonny's continuing duty was especially applicable here as he agreed to sell his interest to Charles so Charles could continue the partnership business. See 59A Am.Jur.2d Partnership ' 431 (2nd Ed.1987). Nothing in the Uniform Partnership Act (KRS Chapter 362) changes the high degree of good faith partners must maintain in their relations with one another. See Marsh v. Gentry, Ky., 642 S.W.2d 574 (1982). Thus, when Sonny failed to withdraw his application with D.I. for the milk routes after agreeing to allow Charles to buy his interest in those routes and continue the partnership business, Sonny obviously breached his duties to the partnership. As the court found, the value of the partnership assets dropped from $86,000 to $22,000 when Sonny was awarded the contract by D.I. While it is possible D.I. would not have awarded the contract to Charles even if Sonny had withdrawn his name from contention, there is no evidence that any other person or entity was available or willing to take over the route. The law is clear that one partner cannot benefit at the expense of the partnership. Van Hooser, supra. Sonny, by agreeing to sell *501 his share of the assets to Charles and by actively pursuing those same assets from D.I., positioned himself such that whatever D.I. did, he could not lose. Understandably, Charles believes he was abused by the obvious conflict of interest. Thus, the trial court's dismissal of Charles's breach of fiduciary duty claim is reversed and remanded for entry of judgment in favor of Charles. We do not believe a new trial on damages is required; nor do we believe Charles is entitled to an accounting from Sonny for profits made since 1984. The value of the asset at issue was determined by the parties at or very near the time of Sonny's breach of duty to the partnership ($86,000 minus $22,000, or $64,000), and that should form the measure of damages to which Charles is entitled. Finally, the trial court's findings concerning the tortious interference with contractual relations are supported by substantial evidence and will not be disturbed. CR 52.01. The evidence of Sonny's behind-the-back efforts to convince producers not to work with or accept Charles as their hauler was conflicting, and the trial court, as fact finder, could believe Sonny's version of the facts on that claim. Accordingly, the judgment of the Nelson Circuit Court is reversed and remanded for entry of a new judgment consistent with this opinion. HOWARD, J., concurs.

226 EMBERTON, J., dissents. EMBERTON, Judge, dissenting. I respectfully dissent. I cannot agree with the majority that Sonny's actions constitute a breach of his fiduciary obligation to Charles. Evidence indicates that numerous efforts toward resolution of the problem--which efforts appeared to be made in good faith by Sonny--were summarily rebuffed by Charles. There is no evidence but that both parties were genuinely bidding at the September 27 private auction. Both understood that the successful bidder won equipment, the routes and the other assets only if DI approved the new contract. Upon polling the affected producers, only 1 out of 12 indicated a preference for Charles. In fact, evidence was strong that most of the producers would not allow Charles to haul their milk; that the DI field representative stated DI could not work with Charles; and, that drivers stated they would quit before driving for Charles. The trial court, having heard the evidence, found that none of such positions taken by DI, or by the producers, were the result of actions taken (or statements made) by Sonny. DI, having such information, made a decision in its own best interest--not as a result of influence from Sonny. I find nothing in the record to support a reversal of the trial court's decision. I would affirm.

Lawlis v. Kightlinger & Gray 562 N.E.2d 435 (Ind. 1990)

Gerald L. LAWLIS, Appellant (Plaintiff Below), v. KIGHTLINGER & GRAY, an Indiana Partnership; Robert J. Wampler; John N. Thompson; John T. Lorenz; Donald L. Dawson; Ronald A. Hobgood; Mark William Gray; and Peter G. Tamulonis, Appellees (Defendants Below). No. 73A04-9002-CV-101. Court of Appeals of Indiana, Fourth District. Nov. 14, 1990. Rehearing Denied Dec. 13, 1990. CONOVER, Judge. * * * 227 The partnership for many years has practiced law in Indianapolis and Evansville under various firm names. Lawlis initially became an associate of the partnership in 1966 but resigned after three years to join the staff of Eli Lilly and Company as an attorney. In early 1971, the partnership offered Lawlis a position as a general partner and Lawlis accepted. He signed his first partnership agreement as a general partner in 1972. That agreement remained effective until a new one was executed by the partners, including Lawlis, in 1984. Both these agreements provided for partnership compensation based upon a unit system, i.e., partners participated in the profits according to the number of units assigned to them each year by the partnership. Lawlis became a senior partner in 1975 and continued to practice law with the firm without interruption until 1982. In that year, Lawlis became an alcohol abuser, and due to that affliction did not practice law for several months in early 1983 and in mid 1984. During each of these periods, he sought treatment for his alcoholism. (R. 11). Lawlis did not reveal his problem with alcohol to the partnership until July of 1983 when he disclosed it to the partnership's Finance Committee. When he did so, it "promptly contacted and met as a group with a physician who had expertise in the area of alcoholism." It then drafted "a document entitled 'Program Outline' which set forth certain conditions for Lawlis' continuing relationship with the Partnership." (R. DeTrude Aff., p. 4 & 12-13). That document, signed by *438 Lawlis in August, 1983, contained the following understanding: "3. It must be set out and clearly understood that there is no second chance." (R. Lawlis Aff., Exh. B-1). By March, 1984, Lawlis had resumed the consumption of alcohol. Lawlis again sought treatment, and the firm gave Lawlis a second chance. Its Finance Committee then decided Lawlis would be required to meet specified conditions in order for his relationship with the partnership to continue. These conditions included meetings with specialists selected by the partnership, treatment and consultation regarding his problem, and the obtaining of favorable reports from the specialist as to the likelihood of a favorable treatment outcome. Lawlis was told he would be returned to full partnership status if he complied with the conditions imposed. He has not consumed any alcoholic beverages since his second treatment in an alcoholic clinic in March, 1984. Two written partnership agreements embodying primarily the same provisions were in effect in 1982 and thereafter, executed in 1972 and 1984, respectively. Lawlis executed both agreements and each annual addendum thereto along with all the other partners of the firm. Under the 1984 agreement, the senior partners by majority vote were to determine (a) the units each partner annually received, (b) the involuntary expulsion of partners, and (c) the involuntary retirement of partners. (R. 24-26). As Lawlis battled his problem, his units of participation yearly were reduced by the annual addendum to the partnership agreement. Because he had not consumed alcohol since his second trip to a clinic and had been congratulated by senior partner Wampler, a member of the Finance Committee, and several others as to his "100% turn around," Lawlis felt "a substantial restoration of my previous status was past due." So believing, he met with the Finance Committee on October 1, 1986, and proposed his units of participation be increased from his then 60 to 90 units in 1987. On October 23, 1986, Wampler told Lawlis the firm's Finance Committee was going to recommend Lawlis's relationship as a senior partner be severed no later than June 30, 1987. Two days later, all the firm's files were removed from Lawlis's office. The severance 228 recommendation was presented at the 1986 year-end senior partners meeting. All except Lawlis voted to accept the Finance Committee's recommendation. At that time, as the Finance Committee also had recommended, Lawlis was assigned one unit of participation for the first six months of 1987 to a maximum total value of $25,000 on a weekly draw. This arrangement permitted Lawlis to retain his status as a senior partner to facilitate transition to other employment and to give him continuing insurance coverage. Lawlis refused to sign the 1987 addendum containing those provisions and retained counsel to represent his interests. In consequence, he was expelled by a seven to one vote of the senior partners at a meeting held on February 23, 1987. (Lawlis cast the lone dissenting vote.) Article X of the 1984 agreement requires a minimum two-thirds vote of the senior partners to accomplish the involuntary expulsion of a partner. (R. 28). Lawlis filed suit for damages for breach of contract. From the entry of an adverse summary judgment, Lawlis appeals. * * * Lawlis first claims [FN1] his notification by Wampler on October 23, 1986, that the Finance Committee would recommend his severance as a partner coupled with the removal of all partnership files from his office two days later constituted an IND. CODE 23-4-1-29 dissolution of the partnership. At that time, he posits he ceased "to be associated in the carrying on as distinguished from the winding up of the business." Deeming such expulsion wrongful because not authorized by a two-thirds vote of the senior partners at that time, Lawlis asserts he has a claim for damages against the partners under IC 23-4-1-38(a)(2) for dissolution in contravention of the partnership agreement. We disagree. FN1. The partnership asserts parol evidence is not admissible because the partnership agreement evidences an intent to have that writing provide the complete information regarding governance of the partnership, i.e., the contract is integrated. This is an important issue because all of Lawlis's claims are dependent upon parol evidence. However, this partnership agreement is not integrated because it contains no true integration clause. Such clauses express the parties' intention that all prior negotiations, representations, previous communications, and the like are either withdrawn, annulled, or merged into the final written agreement. Although an integration clause is a valuable drafting technique when all the parties involved intend such a clause be included in their contract, see Franklin v. White (1986), Ind., 493 N.E.2d 161, 166, no such language appears in the partnership agreement here at issue. Thus, parol evidence is admissible. It is readily apparent Wampler merely told Lawlis what the Finance Committee proposed to do in the future. No dissolution occurred on that account. That the firm's files were removed from Lawlis's office two days later is immaterial. After their removal, Lawlis still participated in the partnership's profits through a weekly draw even though he evidently had nothing to do. Finally, the undisputed facts clearly demonstrate there was a meeting of the minds he would remain a senior partner after October 23, 1986. The partnership continued to treat Lawlis as a senior partner after that date. The Finance Committee's memorandum of November 25, 1986, regarding Lawlis's partnership status, proposed for 1987 he be given a weekly draw on one unit of participation until June 30, 1987, at which time his relationship with the firm would terminate, unless he withdrew earlier. Further, that committee's minutes for its December 23, 229 1986 meeting regarding the change in letterhead show Lawlis's name was not to be removed from the letterhead, it was to be placed at the bottom of the list of partners. Also, Lawlis considered himself to be a senior partner after October 26, 1986. He refused as a senior partner to sign the proposed 1987 addendum "which implemented the decisions made by the Finance Committee concerning Lawlis," Appellant's Brief, p. 8; (R. at Exhibit 1, Lawlis Aff., p. 5), and cast the lone dissenting vote on his expulsion at the meeting of the senior partners held on February 23, 1987. Article X of the partnership agreement provides: Expulsion of a Partner A two-thirds ( 2/3 ) majority of the Senior Partners, at any time, may expel any partner from the partnership upon such *440 terms and conditions as set by said Senior Partners.... (Emphasis supplied). Only a partner could refuse to sign the proposed 1987 addenda after its tender by the firm to Lawlis for signature, and only a senior partner could vote on the Finance Committee's proposal to expel a partner under the partnership agreement. The undisputed facts disclose Lawlis remained a senior partner of the firm until he was expelled as such by vote of the senior partners on February 23, 1987. Further, the time a dissolution occurs under these circumstances is clearly defined by statute. The Indiana Uniform Partnership Act at IC 23-4- 1-31 says: Sec. 31. Dissolution is caused: (1) Without violation of the agreement between the partners, ... (d) By the expulsion of any partner from the business bona fide in accordance with such a power conferred by the agreement between the partners. Lawlis was expelled in accordance with the partnership agreement on February 23, 1987. Thus, dissolution occurred on that date, not when he was notified of the proposal to expel him. Lawlis has no claim for damages under IC 23-4-1- 38(a)(2). Lawlis next argues his expulsion contravened the agreement's implied duty of good faith and fair dealing because he was expelled for the "predatory purpose" of "increasing [the firm's] lawyer to partner ratio," as evidenced by the Finance Committee's proposal contained in its November 25, 1986, memo to partners regarding the 1986 year end meeting. The partnership, however, posits Indiana does not recognize a duty of good faith and fair dealing in the context of an at will relationship. It would be a simple matter to extrapolate the principle that an employer may terminate an at will employee for any cause or no cause without liability and apply it to the roughly comparable at will business relationship we find here, namely, the relationship existing between the partnership as an entity and its individual partners. The Indiana Uniform Partnership Act, however, prevents us from so doing. As noted above, when a partner is involuntarily expelled from a business, his expulsion must have been "bona fide" or in "good faith" for a dissolution to occur without violation of the partnership agreement. IC 23- 4-1-31(1)(d). Said another way, if the power to involuntarily expel partners granted by a partnership agreement is exercised in bad faith or for a "predatory

230 purpose," as Lawlis phrases it, the partnership agreement is violated, giving rise to an action for damages the affected partner has suffered as a result of his expulsion. Lawlis finds a predatory purpose in the Finance Committee's November 25, 1986, memo to the partners by quoting portions of the memo's section "4. FIVE YEAR PLAN, Firm Growth and Financial Goals." He states: The five-year plan stated that, "The goal is to increase the top partners to at least $150,000 within the next two to three years.... In order to achieve the goal, we need to continue to improve our lawyer to partner ratio." R. at Exhibit 1, Lawlis Affidavit, Exhibit B-3. Appellant's Brief, at 17. From that quote Lawlis reasons: Obviously, the easiest way for the Partnership to improve its lawyer to partner ratio, and thus increase the top partners' salaries, was to eliminate a senior partner. Lawlis' position in the Partnership had been weakened by his absences due to illness. The remaining partners knew this and pounced upon the opportunity to devour Lawlis' partnership interest. Appellant's Brief, at 18. The undisputed facts demonstrate the total inaccuracy of the final sentence quoted from appellant's brief. From the time Lawlis's addiction to alcohol became known to the partnership's Finance Committee, it sought to assist and aid him through his medical crisis, even though he was taking substantial amounts of time off from his work to attempt cures in sanatoriums and had concealed the fact *441 of his alcoholism from his partners for many months. The firm permitted him to continue drawing on his partnership account even though he became increasingly unproductive in those years, as reflected by the continuing yearly drop in the number of units assigned him. After signing the Program Outline in August, 1983, which structured his business life by providing among other things for the monitoring of his work product by the firm for a period of one year, recommending he attend Alcoholics Anonymous meetings, setting the specific times he would arrive at and remain in the office, and containing a provision "3. ... there is no second chance," Lawlis "resumed the consumption of alcohol" in March, 1984. (R. Lawlis Aff., at & 16). Instead of expelling Lawlis at that time, the partnership acting through its Finance Committee continued to work with Lawlis by drawing up yet another set of conditions he was to meet to remain with the firm. Clearly, these undisputed facts present no "predatory purpose" on the firm's part, nor does the Finance Committee's Five Year Plan when that proposal is read in full. [FN2] * * * In essence, the proposal was to change the manner in which the firm valued its performance, and to obtain more production, i.e., billable hours from the attorney associates working for the firm in its various departments to achieve its goal of increased income to the partners. There is no proposal that the number of partners be reduced to accomplish the Five Year Plan's stated goals, nor any reasonable inference arising therefrom to that effect. Also, in the same memo at 1. PARTNER STATUS, A. Senior Partners, the Finance Committee, instead of recommending Lawlis's immediate expulsion as a method of increasing its lawyer to partner ratio, proposed he remain a partner for a maximum total of an additional eight 231 months to give him time to find other employment and retain insurance coverage while so engaged. During that period it proposed he be permitted one participation unit upon which to draw up to $25,000 while he sought other employment. Such proposal again clearly negates a partnership "predatory purpose" for Lawlis's expulsion. Thus, there is no "genuine" issue as to whether the partnership acted in good faith when it expelled Lawlis because it can be foreclosed by reference to the undisputed facts here. Perry, 433 N.E.2d, at 46. Lawlis next claims the partnership breached the fiduciary duty owed to him as a partner in the firm by expelling him for the predatory purpose of increasing partner income, but acknowledges that fiduciary duty is "intertwined with the duty of good faith and fair dealing." We discuss the good faith issue at length below in connection with our discussion of constructive fraud. Lawlis next argues the firm's act of expelling him was constructively fraudulent *442 because it constituted a breach of the fiduciary duty owed between partners which requires each to exercise good faith and fair dealing in partnership transactions and toward co-partners. Given v. Cappas (1985), Ind.App., 486 N.E.2d 583, 590. While we agree with Lawlis's bald statement of that concept, it has no application to the facts of this case. The fiduciary relationship between partners to which the terms "bona fide" and "good faith" relate ... concern the business aspects or property of the partnership and prohibit a partner, to-wit a fiduciary, from taking any personal advantage touching those subjects. Plaintiffs' claims do not relate to the business aspects or property rights of this partnership. There is no evidence the purpose of the severance was to gain any business or property advantage to the remaining partners. Consequently, in that context, there has been no showing of breach of the duty of good faith toward plaintiffs.... Plaintiffs contend there was substantial evidence indicating the individual partner's breach of fiduciary duties they owed to plaintiffs as members of the bar. In view of our holding that the executive committee had the right to expel plaintiffs without stating a reason or cause pursuant to the Partnership Agreement, there was no breach of any fiduciary duty. (Emphasis supplied). Holman v. Coie (1974), 11 Wash.App. 195, 522 P.2d 515, 523-524. Holman concerned the expulsion of two partners from a law firm for no stated cause, but there was evidence a political speech by one of them had disgruntled the chief executive of one of the firm's major clients, the Boeing Corporation. Substantially the same consideration present in Holman, i.e., potential damage to partnership business, is present in this case. * * * All the parties involved in this litigation were legally competent and consenting adults well educated in the law who initially dealt at arm's length while negotiating the partnership agreements here involved. At the time the partners negotiated their contract, it is apparent they believed, as in Holman, the "guillotine method" of involuntary severance, that is, no notice or hearing, only a severance vote to terminate a partner involuntarily need be taken, would be in the best interests of the partnership. Their intent was to provide a simple, practical, and above all, a

232 speedy method of separating a partner from the firm, if that ever became necessary for any reason. We find no fault with that approach to severance. Where the remaining partners in a firm deem it necessary to expel a partner under a no cause expulsion clause in a partnership agreement freely negotiated *443 and entered into, the expelling partners act in "good faith" regardless of motivation if that act does not cause a wrongful withholding of money or property legally due the expelled partner at the time he is expelled. Used in this context, "good faith" means ... a state of mind indicating honesty and lawfulness of purpose: belief in one's legal title or right: belief that one's conduct is not unconscionable ...: absence of fraud, deceit, collusion, or gross negligence.... Webster's Third New International Dictionary, G. & C. Merriam and Co., 1976. Clearly, the senior partners acted in the belief they had the legal right to do so under the partnership agreement, as they did. That they recommended a step- down severance over six months rather than the "guillotine" severance permitted them under the agreement demonstrates a compassionate, not greedy, purpose. If we were to hold otherwise, we would be engrafting a "for cause" requirement upon this agreement when such was not the intent of the parties at the time they entered into their agreement. Mere lapse of time, however long, does not alter that initial intent. Lawlis's constructive fraud argument is without merit. * * * Affirmed. MILLER, P.J., concurs. GARRARD, J., concurs in result.

Jewel v. Boxer 156 Cal.App.3d 171, 203 Cal.Rptr. 13 (1984)

Howard H. JEWEL et al., Plaintiffs and Appellants, v. Stewart N. BOXER et al., Defendants and Respondents. A017873. Court of Appeal, First District, Division 5, California. May 22, 1984. Hearing Denied Aug. 22, 1984. KING, Associate Justice. 233 In this case we hold that in the absence of a partnership agreement, the Uniform Partnership Act requires that attorneys' fees received on cases in progress upon dissolution of a law partnership are to be shared by the former partners according to their right to fees in the former partnership, regardless of which former partner provides legal services in the case after the dissolution. The fact that the client substitutes one of the former partners as attorney of record in place of the former partnership does not affect this result. Howard H. Jewel and Brian O. Leary appeal from a judgment, after dissolution of the former law partnership of Jewel, Boxer and Elkind, allocating post- dissolution fees on a quantum meruit basis. We reverse the judgment and remand the cause for allocation based upon the respective interests in the former partnership. On December 2, 1977, the law firm of Jewel, Boxer and Elkind was dissolved by mutual agreement of its four partners--Howard H. Jewel, *175 Stewart N. Boxer, Peter F. Elkind, and Brian O. Leary. The partners formed two new firms: Jewel and Leary, and Boxer and Elkind. Three associates employed by the old firm were employed by Boxer and Elkind. The partners in the old firm not only lacked an agreement about the allocation of fees from active cases upon a dissolution of the partnership but, contrary to the sound legal advice they undoubtedly always gave their partnership clients, they had no written partnership agreement. The absence of a written partnership agreement was an invitation to litigation upon a dissolution of the partnership. On the date of dissolution the former partnership had numerous active cases. Boxer, Elkind, and the three associates had handled most of the active personal injury and workers' compensation cases; the rest, as well as other kinds of cases, had been handled by Jewel and Leary. Shortly after dissolution, each former partner sent a letter to each client whose case he had handled for the old firm, announcing the dissolution. **16 Enclosed in the letter was a substitution of attorney form, which was executed and returned by each client retaining the attorney who had handled the case for the old firm. [FN1] The new firms represented the clients under fee agreements entered into between the client and the old firm. FN1. Neither party challenged at trial or on appeal the authority of a former partner to execute a substitution of attorney on behalf of the dissolved partnership. At issue here is the proper allocation of attorneys' fees received from these cases, some of which were still active at trial. Jewel and Leary filed a complaint for an accounting of these fees, contending they were assets of the dissolved partnership. In a nonjury trial the court first determined that the partnership interests in income of the old firm were 30% for Jewel, 27% each for Boxer and Elkind, and 16% for Leary. The court then allocated the disputed fees among the old and new firms by considering three factors: the time spent by each firm in the handling of each case, the source of each case (always the old firm), and, in the personal injury contingency fee cases, the result achieved by the new firm. The court assigned a value of 25% to the source factor, and thus allocated 25% of the total fees to the old firm for this factor. In the personal injury cases the court assigned values of 20%, 30%, and 40% for the result factor, depending on when the cases were settled or if they were tried. Remaining percentages (35% to 55% in the personal injury cases and 75% in the other cases) were allocated in accordance with the amount of attorney time expended upon the case before and after dissolution. Under this formula, Jewel and Leary was determined to owe $115,041.16 234 to the old firm, and *176 Boxer and Elkind was determined to owe $291,718.60 to the old firm. The court rendered judgment in these amounts, plus interest at the legal rate from the date of receipt of each fee on the amount due the old firm. Although we reverse the judgment, we cannot do so without expressing admiration for the laudable efforts of the learned trial judge who masterfully developed a formula geared to achieving a just and equitable result for each party. Under the Uniform Partnership Act (Corp.Code, ' 15000 et seq.), a dissolved partnership continues until the winding up of unfinished partnership business. (Corp.Code, ' 15030.) No partner (except a surviving partner) is entitled to extra compensation for services rendered in completing unfinished business. [FN2] (Corp.Code, ' 15018, subd. (f).) Thus, absent a contrary agreement, any income generated through the winding up of unfinished business is allocated to the former partners according to their respective interests in the partnership. FN2. As used in this opinion extra compensation means receipt by a former partner of the dissolved partnership of an amount of compensation which is greater than would have been received as the former partner's share of the dissolved partnership. The trial court in the present case recognized these principles, but followed a Texas decision which cited no supporting authority but held that the rule precluding extra compensation for post-dissolution services should not apply to a law partnership, because fees are generated by a former partner's post- dissolution time, skill, and labor. (Cofer v. Hearne (Tex.Civ.App.1970) 459 S.W.2d 877, 879.) The trial court also cited Fracasse v. Brent (1972) 6 Cal.3d 784, 100 Cal.Rptr. 385, 494 P.2d 9, which held that a client has an absolute right to discharge an attorney employed under a contingent fee contract and the attorney is entitled only to the reasonable value of the services rendered before discharge. Jewel and Leary contend that the court erred in failing to adhere to the rule precluding extra compensation, and should have allocated all post-dissolution fees from the old firm's unfinished cases to the four former partners according to their respective percentage interests in the old firm. Boxer and Elkind argue that the substitutions of attorneys transformed the old firm's unfinished business into new **17 firm business and removed that business from the purview of the Uniform Partnership Act, with the old firm thereafter, under Fracasse v. Brent, supra, limited to a quantum meruit recovery for services rendered before discharge. The decision in Cofer v. Hearne, supra, was plainly wrong. [FN3] The Uniform Partnership Act unequivocally prohibits extra *177 compensation for post-dissolution services, with a single exception for surviving partners. (Corp.Code, ' 15018, subd. (f).) The definition of "business" in the Uniform Partnership Act as including "every trade, occupation, or profession" (Corp.Code, ' 15002) precludes an exception for law partnerships. (Resnick v. Kaplan (1981) 49 Md.App. 499, 434 A.2d 582, 588.) FN3. The source of the court's error in Cofer v. Hearne might have been the court's reliance on decisions that predated the Uniform Partnership Act. (459 S.W.2d at pp. 879- 880.) Accordingly, several courts in other states have held that after dissolution of a law partnership, income received by the former partners from cases unfinished at the time of dissolution is to be allocated on the basis of the partners' respective interests in the dissolved partnership, not on a quantum meruit basis. (Resnick v. Kaplan, supra, 434 A.2d at p. 587;

235 Frates v. Nichols (Fla.App.1964) 167 So.2d 77, 81; see also Kreutzer v. Wallace (Fla.App.1977) 342 So.2d 981, 982-983.) The decision in Resnick v. Kaplan, supra, is closely analogous to the present case. Resnick, a former partner in a dissolved law partnership, opened his own office and continued to represent clients of the former firm in cases for which he had been responsible before dissolution. The other partners continued to represent other clients of the old firm. (Id., 434 A.2d at pp. 584-585.) In an ensuing action for an accounting, the trial court allocated all fees collected in these cases among the former partners according to their percentage interests in the former partnership. The appellate court affirmed, stating that the Uniform Partnership Act "conferred no right upon either side to compensation for services rendered in this winding up process, [citation] and, in the absence of any provision in the partnership document, it was correctly held that the aggregate of the fees collected should be allocated according to the percentages specified in the agreement for the distribution of profits and losses." (Id., at p. 587.) The court rejected the argument that different rules should apply to professional partnerships, citing the Uniform Partnership Act's express applicability to the professions. (Id., at p. 588; see Corp.Code, ' 15002.) The court in Resnick also rejected an argument made by Boxer and Elkind in the present case (and asserted by the court below in citing Fracasse v. Brent ), that clients have an absolute right to the attorney of their choice. The Resnick court recognized this right of clients, but said "it does not mean, as appellant contends, that the fees thereafter earned by the partner chosen by the client are not subject to division in accordance with the partnership agreement." (Id., at p. 588.) A similar conclusion was reached recently in Rosenfeld, Meyer & Susman v. Cohen (1983) 146 Cal.App.3d 200, 219, 194 Cal.Rptr. 180, in which two partners handling a large antitrust suit for a law partnership left the firm and contracted with the client to take the case with them. The court held that even though the client had *178 the right to the attorneys of its choice, that right was irrelevant to the rights and duties between the former partners with regard to income from unfinished partnership business. The reasoning in Resnick and Rosenfeld on this point is sound: the right of a client to the attorney of one's choice and the rights and duties as between partners with respect to income from unfinished business are distinct and do not offend one another. Once the client's fee is paid to an attorney, it is of no concern to the client how that fee is allocated among the attorney and his or her former partners. Boxer and Elkind seek to distinguish the Rosenfeld holding, contending it is limited to circumstances where the departing former partners act in bad faith. It is true that Rosenfeld involved causes of **18 action for breach of a fiduciary duty, interference with contractual relations, and conspiracy to interfere with contractual relations; however, its holding should not be limited to bad faith claims. * * * There are sound policy reasons for applying the rule against extra compensation to law partnerships. The rule prevents partners from competing for the most remunerative cases during the life of the partnership in anticipation that they might retain those cases should the partnership dissolve. It also discourages former partners from scrambling to take physical possession of files and seeking personal gain by soliciting a firm's existing clients upon dissolution. Boxer and Elkind argue that application of the rule in the present context will discourage continued representation of clients by the attorney of their choice, as former partners will not want to perform all of the post-dissolution work on a particular case while receiving only a portion of the 236 income generated by such work. Of course, this is all the former partners would have received had the partnership not dissolved. Additionally, the former partners will receive, in addition to their partnership portion of such income, their partnership share of income generated by the work of the other former partners, without performing any post- dissolution work in those cases. On balance, the allocation of fees according to each partner's interest in the former partnership should not work an undue hardship as to any partner where each partner completes work on the partnership's cases which are active upon its dissolution. As previously indicated, the trial court's attempt to achieve an equitable result was laudable. At first glance, strict application of the rule against extra compensation might appear to have unjust results (**19 e.g., where a former partner obtains a highly remunerative case just before dissolution, and nearly all work is performed after dissolution). But undue hardship should be prevented by two basic fiduciary duties owed between the former partners. First, each former partner has a duty to wind up and complete the unfinished business of the dissolved partnership. This would prevent a partner from refusing to furnish any work and imposing this obligation totally on the other partners, thus unfairly benefiting from their efforts while putting forth none of his or her own. Second, no former partner may take any action with respect to unfinished business which leads to purely personal gain. (Rosenfeld, Meyer & Susman v. Cohen, supra, 146 Cal.App.3d at pp. 216-217, 194 Cal.Rptr. 180; see Smith v. Bull, supra, 50 Cal.2d at p. 304, 325 P.2d 463; Resnick v. Kaplan, supra, 434 A.2d at p. 587.) Thus the former partners are obligated to ensure that a disproportionate burden of completing unfinished business does not fall on one former partner or one group of former partners, unless the former partners agree otherwise. It is unlikely that the partners, in discharging their mutual fiduciary duties, will be able to achieve a distribution of the burdens of completing unfinished business that corresponds precisely to their respective interests in the partnership. But partners are free to include *180 in a written partnership agreement provisions for completion of unfinished business that ensure a degree of exactness and certainty unattainable by rules of general application. If there is any disproportionate burden of completing unfinished business here, it results from the parties' failure to have entered into a partnership agreement which could have assured such a result would not occur. The former partners must bear the consequences of their failure to provide for dissolution in a partnership agreement. In short, the trial court's allocation of post-dissolution income to the old and new firms on a quantum meruit basis constituted error. The appropriate remedy is to remand the cause for post-trial proceedings to allocate such income to the former partners of the old firm in accordance with their respective percentage interests in the former partnership. [FN5] This will also allow the trial court to allocate fees received since the trial. FN5. None of the litigants asserted a cause of action for breach of the former partners' fiduciary duties to each other. Under the provisions of the Uniform Partnership Act, the former partners will be entitled to reimbursement for reasonable overhead expenses (excluding partners' salaries) attributable to the production of post-dissolution partnership income; in other words, it is net post-dissolution income, not gross income, that is to be allocated to the former partners. Y A reimbursement of reasonable **20 and necessary overhead expenses attributable to the winding up of partnership business is certainly an equitable result. When partners fail to have a partnership agreement

237 which determines how and to what extent such reimbursement*181 should take place, they have no cause to complain about the law supplying an equitable resolution of the issue. * * * The judgment is reversed and the cause is remanded for further proceedings consistent with this opinion. LOW, P.J., and HANING, J., concur. Hearing denied; MOSK, and BROUSSARD, JJ., did not participate.

Bassan v. Investment Exchange Corp . 83 Wash.2d 922, 524 P.2d 233 (1974)

Morton E. BASSAN et al., Appellants, M. L. Grout, Plaintiff, v. INVESTMENT EXCHANGE CORPORATION, a Washington corporation, and Auburn West Associates, a Washington limited partnership, Respondents, James L. Charlton et al., Defendants. No. 42921. Supreme Court of Washington, En Banc. June 20, 1974. UTTER, Associate Justice. The appellants are limited partners in Auburn West Associates, and the respondent Investment Exchange *923 Corporation is the sole general partner. This action was brought for an accounting and dissolution upon the theory that the general partner had, in purchasing land and selling it to Auburn West Associates, derived profits without the consent of the limited partners in breach of its fiduciary relationship. The cause was tried to the court which dismissed the action after hearing the evidence. The controlling issue in this case is whether the partners consented to the profit made by the general partner in the sale of the Murakami property to the partnership. We find an absence of such consent in the record and reverse the trial court. In 1964 Investment Exchange Corporation, a Washington corporation, formed Auburn West Associates as a limited partnership. The purpose of the partnership as stated in the articles of partnership was

238 (to) initially acquire, for investment, improve and hold for lease or resale, a tract of real property. The General Partner presently is the owner of interests in said real property. To additionally acquire from the General Partner such other adjacent and contiguous tracts as, in the sole determination of the General Partner, will enhance the Partnership properties and objectives. The general partner was given broad discretion in the articles to manage the affairs of the partnership and they acknowledged the right of all partners, including the general partner, to engage in and/or possess an interest in other business ventures of every nature, and description, independently or with others, including but not limited to the ownership, financing, leasing, operation, management, syndication, brokerage and/or development of real property; . . . They also gave the general partner the right to have an interest in or be employed by another business which might deal with the partnership. The articles provided that the general partner might devote such of its time as in its discretion it deemed necessary *924 to the partnership affairs and business, and that it should be reimbursed by the partnership for all the costs and expenses which it incurred in connection therewith, in addition to its respective share of the profits of the partnership. **236 The partnership articles provided that 100 units of the partnership, consisting of 40 units as general partner and 60 units as limited partner totaling $100,000, should be given to the general partner as partial payment of the purchase price of the original piece of real property, the purchase price being $593,000. That price was greater than the acquistion cost to the general partner. Each of the appellants owned one or more limited partnership units. The remaining 29 limited partners did not elect to join in the action. The general partner annually mailed out a financial statement to the limited partners. These financial statements advised the limited partners of the price the partnership paid for the real estate purchased from the general partner. The limited partners were represented at the partnership council meetings by plaintiff Milton Grout and others. The last transaction upon which the appellants claimed a right to receive the benefit of the profit made by the general partner was the Murakami property. All claims by the limited partners except that one were held barred by the statute of limitations. The general partner had formed a real estate subsidiary and informed the limited partnership it intended to utilize this corporation as sales and purchase agent for partnership property. The court found the articles of limited partnership and prospectus had authorized the real estate subsidiary to retain commissions on sales and purchases. This subsidiary received a $24,500 commission from Murakami in the sale of the property in addition to the markup of $167,500 by the general partner. The court found that in the issuance of the prospectus, the publication of financial statements and in its dealings with the appellant and its conduct of partnership affairs, the *925 general partner made no false or fraudulent representations and did not engage in any improper

239 conduct. It found no breach in its fiduciary obligations to the limited partners inasmuch as the price charged for the Murakami parcel was fair and the amount of profit made by the general partner was reasonable. There is no substantial dispute regarding the facts in this case and all of the claims prior to the Murakami transaction are barred by the statute of limitations. The validity of this transaction is our only concern in this appeal. Under the Washington Uniform Limited Partnership Act, the general partner has all the rights and powers, and is subject to all the restrictions and liabilities, of a partner in a partnership without limited partners. RCW 25.08.090. He is therefore accountable to the limited partners as a fiduciary. Homestake Mining Co. v. Mid-Continent Exploration Co., 282 F.2d 787 (10th Cir. 1960). The Washington Uniform Partnership Act requires every partner to 'account to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the . . . conduct . . . of the partnership . . .' RCW 25.04.210(1). The partnership agreement does not provide consent by the limited partners to the general partner for a profit on the sale of the Murakami property to the partnership. The articles contain no provision setting forth the price to be paid for this property nor any method for determining such a price. Partners may include in the partnership articles practically any agreement they wish and if the asserted self-dealing was actually contemplated and specifically authorized with a method for determining, in advance, the amount of the profit it would not, ipso facto, be impermissible and deemed wrongful. Riviera Congress Assoc. v. Yassky, 48 Misc.2d 282, 264 N.Y.S.2d 624 (1966). Here, however, the partnership agreement is silent as to any formula to determine the general partner's profit. *926 The prospectus, from which it could be argued most earlier purchases by the partnership **237 from the general partner were contemplated, does not mention the Murakami piece. It also fails to set forth a formula to determine the general partner's profit in either the anticipated purchases or in any future transactions by the general partner on behalf of the partnership. The articles of limited partnership merely state that five parcels, the Henack, Nelson, Coast No. 2, Belus and Coast No. 1 were to be acquired at a cost of $593,000 from the general partner. The prospectus disclosed that the general partner intended, as well, to acquire the Davis parcel for $50,000 but the articles and prospectus do not specifically describe any other anticipated acquisitions. Neither the articles nor prospectus disclose the actual amount of the profit to be made by Investment Exchange Corporation in their resale of properties to the Auburn West Associates partnership. The only source of information to the limited partners on the profits by the general partner was an accounting footnote in the 1964 partnership financial statement issued after the limited partners had invested funds in the partnership, indicating that property acquired by Auburn West Associates for $642,342 had previously cost the general partner $459,000. The only other report indicating the amount of profit to the general partner was found in a prospectus required by the Securities and Exchange Commission. This indicated that from May 1964 through December 1965, prior to the Murakami purchase, Auburn West Associates had acquired eight parcels of property from Investment Exchange Corporation for $749,250 which property had cost Investment Exchange Corporation $488,221.

240 An investigation of the separate transactions prior to the Murakami purchase showed no consistent percentage of profit taken by the general partner on these transactions. Of those parcels described in the prospectus to be acquired by the general partner, the highest profit received was $67,000 on a piece sold for $182,000 (the Henack parcel). The smallest was a $20,000 profit on a price sold for $180,000 *927 to the partnership (the Belus parcel). Of those properties not described in the prospectus, and purchased subsequent to those described in the prospectus, the highest profit was $80,000 on a piece sold for.$108,750 to the partnership (the Layos parcel) and the lowest was $24,000 on a piece sold to the partnership for $50,000 (the Davis parcel). The trial court found an understanding did exist that the general partner would acquire property and sell it to the partnership at a fair price and would realize a profit on the transaction. It did not and could not find that a formula existed or was agreed upon explicitly or inferentially that established a basis upon which the exact amount of this profit was to be determined. The limited partners, therefore, could only consent after the fact to whatever profit the general partner determined it should have as to a particular transaction. Because of this, although the limited partners may have consented after the fact to specific profits taken on previous transactions, this could not imply consent to the Murakami transaction because the limited partners could not know what the profit to Investment Exchange Corporation was until after the sale closed. No consent may be implied from the conduct of the limited partners regarding Murakami after they were informed of the profits. The formal action of Investment Exchange Corporation adopting the $167,500 profit was on November 15, 1969, and suit was brought on November 26, 1969 by appellants. Where consent is lacking, the general partner is held under RCW 25.04.210, as a trustee, to account to the partnership for any profits derived by it. That standard, by the terms of the statute, is not whether the general partner acted fairly and reasonably, but whether it acted as a fiduciary. The benefit of this standard is nowhere more apparent than in a limited **238 partnership of this nature. The articles give the general partner the authority to conduct 'any and all of the business of the Partnership . . .' Once the *928 limited partner has joined the partnership he has no effective voice in the decision-making process. He must, then, be able to rely on the highest standard of conduct from the general partner. Any deviation from this must be clearly stated in terms that would give the limited partner the option of deciding whether or not, in the first instance, to join the partnership. The duty of loyalty resulting from a partner's fiduciary position is such that the severity of a partner's breach will not be questioned. The question is only whether there has been any breach at all. Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545 (1928). This is to be distinguished from questions related to the use of business judgment of a partner in partnership affairs. Here the degree of care required is one of reasonableness, or in some jurisdictions, of good faith. Bohrer v. Drake, 3o Minn. 408, 23 N.W. 840 (1885); Cf. J. E. Crosbie, Inc. v. King, 192 Okl. 53, 133 P.2d 543 (1943); Note, Fiduciary Duties of Partners, 48 Iowa L.Rev. 902 (1963). This is the standard the trial court apparently applied. This case does not involve the issue of whether the general partner is entitled to make a profit for use of its expertise. Compensation may be provided for the general partner by specific 241 consent of the parties. There is also no issue about the general partner's right to be reimbursed for its expenses. Article 8, section 2 of the partnership articles provides that the general partner shall be reimbursed for all the costs and expenses it incurs in the devotion of its time to the partnership business. Investment Exchange Corporation did not act in a fiduciary capacity regarding the profits it obtained in the Murakami transaction. Consent was not given by the appellants as to the profit taken in that transaction and Investment Exchange Corporation should be held accountable to the partnership for the profits it there realized. This will result in the establishment of a common fund for the benefit of the partnership. The expense of *929 legal services, including counsel fees, is a proper charge against the common fund so preserved or protected. Weiss v. Bruno, Wash., 523 P.2d 915 (1974); In re Estate of Wheeler, 71 Wash.2d 789, 797, 431 P.2d 608 (1967). The judgment is reversed and remanded to the trial court to determine counsel fees. HALE, C.J., and FINLEY, STAFFORD, WRIGHT and BRACHTENBACH, JJ., concur. ROSELLINI, Associate Justice (dissenting.) The majority in this case has overturned the finding of the trial court that it was the understanding and agreement of the parties to the limited partnership agreement that the general partner would buy land and would resell it to the partnership at a reasonable profit to itself. In doing so, it has not made so bold as to assert that there was no substantial evidence to support this finding. The trial court found that this agreement, while not expressed in the articles of limited partnership, was established by the evidence showing the course of dealing between the general partner and the limited partners over a period of years. The court specifically found that, prior to purchasing their units of limited partnership, each of the appellants was advised and understood that the general partner had sold and would sell property to the partnership and in connection with such sales had made and would make a profit. It found that, prior to purchasing his units, each partner was informed and understood that contiguous properties could and would be purchased and that, in connection with said sales of property by the general partner **239 to the partnership, the general partner would make a profit. * * * The most recent transaction upon which the appellants claimed a right to receive the benefit of the profit made by the general partner involved the acquisition of a tract of land known as the Murakami property. The trial court found that a number of events which occurred subsequent to the acquisition of this land by the general partner, and prior to its sale to the partnership, substantially increased its value. The court found that it was sold to the partnership for a sum which was $138,000 below its fair market value. The court further found that Auburn West Associates has made and will make a substantial profit on the Murakami property and upon all of the property transferred to the partnership by the general partner. It found that the limited partners have received back nearly all of their initial $10,000 in capital from proceeds of sales and condemnation, all of the debts of the partnership have been paid and there remain approximately 50 acres of property worth approximately $25,000 per acre.

242 The majority does not pretend that any of these findings is unsupported by the evidence. Rather, it rests its reversal of the trial court upon an implied holding either (1) that partners are not bound under an agreement that the general or managing partner may make a fair and reasonable profit on a transaction with the partnership, unless the agreement spells out the method of determining the amount of such profit, or (2) that the terms of an agreement may not be established by the course of dealing between the parties. No authority is cited for either proposition and I am convinced that if any such authority exists, it is contrary to the general principles of contract law, and to those which *931 this court has applied in determining the rights and obligations of parties who have entered into contracts of partnership. * * * RCW 25.04.210 provides: (1) Every partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from *932 any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property. The statute embodies the general rule applicable to partners that a partner may nor derive a Secret personal profit out of the business or transactions of the firm. * * * As the trial court found, the fact that the appellants acquiesced in all transactions prior to the Murakami sale, after receiving full disclosure of the facts, indicates that they considered the price fair in each instance and that the transaction was conducted in accordance with the understanding of the parties. By this course of conduct, the parties manifested their agreement. That agreement governed the Murakami transaction as well as the previous transactions, according to established principles of contract law. In Shell Oil Co. v. Wright, 167 Wash. 197, 202, 9 P.2d 106 (1932), we said: There can be no question that an unexecuted contract, even though in writing, may be modified by agreement of both parties, and that, when so modified and acted upon by the parties, it will be given the same effect as if the modification was part of the original contract. Tingley v. *935 Fairhaven Land Co., 9 Wash. 34, 36 P. 1098 (1894); La Plante v. Hubbard, 125 Wash. 621, 217 P. 20 (1923); Hunters Cattle Co. v. Carstens Packing Co., 129 Wash. 377, 225 P. 68 (1924); Inman v. Roche Fruit Co., 162 Wash. 235, 298 P. 342 (1931). It is not denied by the majority that the articles of partnership provided no method of compensating the general partner for its expertise and efforts in acquiring the properties for the partnership, and that unless the general partner could make a profit on the sale of properties to the partnership, its services would be bestowed gratuitously. It suggests no reason why the general partner would have been willing to give the partnership the benefit of these services without compensation. * * *

243 The trial court correctly applied the law to the undisputed facts of this case. They show that it was the understanding of the partners that the general partner would use its expertise and its facilities to acquire properties which the limited partners acting individually would have been unable to acquire and upon which they could realize a profit either from development, lease or resale; that it would sell those properties to the partnership at a fair price which would allow them to make such a profit and that this was the course of dealing throughout the life of the partnership. The conclusion that the partnership was bound to *937 pay the price charged by the general partner, which was below the fair market value, was compelled by the applicable law. The judgment should be affirmed. HUNTER and HAMILTON, JJ., concur.

Holzman v. De Escamilla 86 Cal.App.2d 858, 195 P.2d 833 (1948)

HOLZMAN v. DE ESCAMILLA et al. Civ. 3671. District Court of Appeal, Fourth District, California. July 23, 1948. *859 MARKS, Justice. This is an appeal by James L. Russell and H. W. Andrews from a judgment decreeing they were general partners in Hacienda Farms, Limited, a limited partnership, from February 27, to December 1, 1943, and as such were liable as general partners to the creditors of the partnership. Early in 1943, Hacienda Farms, Limited, was organized as a limited partnership (Secs. 2477 et seq., Civil Code) with Ricardo de Escamilla as the general partner and James L. Russell and H. W. Andrews as limited partners. The partnership went into bankruptcy in December, 1943, and Lawrence Holzman was appointed and qualified as trustee of the estate of the bankrupt. On November 13, 1944, he brought this action for the purpose of determining that Russell and Andrews, by taking part in the control of the partnership business, had become liable **834 as general partners to the creditors of the partnership. The trial court found in favor of the plaintiff on this issue and rendered judgment to the effect that the three defendants were liable as general partners. The findings supporting the judgment are so fully supported by the testimony of certain witnesses, although contradicted by Russell and Andrews, that we need mention but a small part 244 of it. We will not mention conflicting evidence as conflicts in the evidence are settled in the trial court and not here. De Escamilla was raising beans on farm lands near Escondido at the time the partnership was formed. The partnership continued raising vegetable and truck crops which were marketed principally through a produce concern controlled by Andrews. The record shows the followng testimony of de Escamilla: 'A. We put in some tomatoes. 'Q. Did you have a conversation or conversations with Mr. Andrews or Mr. Russell before planting the tomatoes? A. We always conferred and agreed as to what crops we would put in.* * * 'Q. Who determined that it was advisable to plant watermelons? A. Mr. Andrews. * * * 'Q. Who determined that string beans should be planted? A. All of us. There was never any planting done--except the first crop that was put into the partnership as an asset by myself, there was never any crop that was planted or contemplated in planting that wasn't thoroughly discussed and agreed upon by the three of us; particularly Andrews and myself.' De Escamilla further testified that Russell and Andrews *860 came to the farms about twice a week and consulted about the crops to be planted. He did not want to plant peppers or egg plant because, as he said, 'I don't like that country for peppers or egg plant; no, sir,' but he was overruled and those crops were planted. The same is true of the watermelons. Shortly before October 15, 1943, Andrews and Russell requested de Escamilla to resign as manager, which he did, and Harry Miller was appointed in his place. Hacienda Farms, Limited, maintained two bank accounts, one in a San Diego bank and another in an Escondido bank. It was provided that checks could be drawn on the signatures of any two of the three partners. It is stated in plaintiff's brief, without any contradiction (the checks are not before us) that money was withdrawn on twenty checks signed by Russell and Andrews and that all other checks except three bore the signatures of de Escamilla, the general partner, and one of the other defendants. The general partner had no power to withdraw money without the signature of one of the limited partners. Section 2483 of the Civil Code provides as follows: 'A limited partner shall not become liable as a general partner, unless, in addition to the exercise of his rights and powers as a limited partner, he takes part in the control of the business.' The foregoing illustrations sufficiently show that Russell and Andrews both took 'part in the control of the business.' The manner of withdrawing money from the bank accounts is particularly illuminating. The two men had absolute power to withdraw all the partnership funds in the banks without the knowledge or consent of the general partner. Either Russell or Andrews could take control of the business from de Escamilla by refusing to sign checks for bills contracted by him and thus limit his activities in the management of the business. They required him to resign as manager and selected his successor. They were active in dictating the crops to be 245 planted, some of them against the wish of Escamilla. This clearly shows they took part in the control of the business of the partnership and thus became liable as general partners. Tyler v. Wilson, 58 Cal.App.2d 583, 137 P.2d 33. Judgment affirmed. BARNARD, P. J., concurs.

First American Title v. Lawson 827 A.2d 230

Supreme Court of New Jersey.

FIRST AMERICAN TITLE INSURANCE COMPANY, Plaintiff-Appellant, v. Edward LAWSON, Jr., Esq., Wheeler, Lawson & Snyder, L.L.P., Summit Bank, Adam M. Slater, Jill L. Slater, K. Hovnanian at Wayne VII, Inc., Kenneth E. Wheeler, Esq. and Craig J.J. Snyder, Esq., Defendants. Lawyers Title Insurance Corporation, Plaintiff-Appellant, v. Wheeler, Lawson & Snyder, L.L.P., Kenneth C. Wheeler, Esq., Edward Lawson, Jr., Esq., Craig J.J. Snyder, Esq. and Sean G. Mason, Defendants. Certain Underwriters at Lloyd's, London, Plaintiff-Respondent, v. Edward Lawson, Jr., Esq., Kenneth E. Wheeler, Esq., Craig J.J. Snyder, Esq. and Wheeler, Lawson & Snyder, L.L.P., Defendants, and K. Hovnanian at Wayne VII, Inc., First American Title Insurance Company and Lawyers Title Insurance Corporation, Interested Parties.

Argued March 3, 2003. Decided July 17, 2003.

The opinion of the Court was delivered by

VERNIERO, J.

This case presents difficult questions concerning an attorney's exposure to uninsured liability while practicing in a law firm organized as a limited liability partnership. The firm's coverage also is at stake. Specifically, the firm's managing partner knowingly had made material misrepresentations when he applied to an insurer for malpractice coverage on behalf of the firm and its members. The Appellate Division concluded that such misrepresentations entitled the insurer to consider the firm's coverage void ab initio, that is, to treat that coverage as if it had never existed for any of the firm's attorneys or for the firm itself. We reverse in part, and affirm in part. We hold that the firm's policy is void in respect of the firm as an entity and any 246 defalcating partner, but not in respect of any innocent partner.

The record in this case is extensive. We summarize only the procedural history and facts that are relevant to our disposition. The parties do not dispute those facts.

Edward Lawson, Jr. obtained his New Jersey law license in 1992. Kenneth E. Wheeler was licensed to practice law in Connecticut and in the District of Columbia, but was not licensed in New Jersey. Lawson and Wheeler formed a law partnership in late 1996 or early 1997. In the spring or summer of 1997, Craig J.J. Snyder joined the firm, which then became Wheeler, Lawson & Snyder, L.L.P. Snyder drew up a formal partnership agreement between the parties and registered the firm as a limited liability partnership with the New Jersey Secretary of State. During all times relevant to this action, Snyder was licensed to practice law in New York and maintained the firm's Manhattan office. Unlike Lawson and Wheeler, Snyder performed little or no work in the firm's New Jersey office, which was located in Guttenberg.

According to Lawson's deposition testimony, Wheeler acted as a closing attorney for several real estate transactions in New Jersey, even though he was not licensed to practice here. Consistent with that testimony, Wheeler acted as Lawson's own attorney in a closing involving residential real estate in Mahwah in January 1999.

Lawson further testified that he had "delegated" to Wheeler the authority to open and maintain the firm's bank accounts and to maintain the firm's account ledgers. Wheeler purportedly "knew everything that was going on with the books [.]" In that regard, the firm's "check writing system ... [and] the on- line banking system [were] on [Wheeler's] computer." Lawson also indicated that Wheeler "did most, if not all, of the arrangements with the banks" in respect of distributing real-estate closing checks, regardless of which attorney actually had handled the particular transaction. All three partners apparently had signatory authority over the firm's business account. In a certification, however, Snyder indicates that he "never transferred any funds to, from, or within the [f]irm's New Jersey business or trust accounts." The record indicates that only Wheeler and Lawson issued checks from the firm's trust account. Lawson considered Wheeler the firm's managing partner.

In late 1997 or early 1998, Lawson discovered that Wheeler had been transferring money improperly from various client accounts, including that of Lawson's widowed mother, into other client accounts and into the firm's business account. When Lawson confronted Wheeler with that discovery, Wheeler responded that the monies were necessary to pay the firm's expenses. Rather than halt the practice, Lawson joined Wheeler in what became essentially

a "kiting" scheme whereby monies from one client trust account would be transferred to pay the obligations of another client. Monies were also being transferred from client trust accounts to the law firm's business account to pay expenses of the law firm, including partners' draws. On occasion, Lawson also used client trust account funds, including those of his mother, for his own personal use. By all accounts, Snyder was neither privy, nor a party, to this scheme.

247 [ First American Title Ins. Co. v. Lawson, 351 N.J.Super. 407, 414, 798 A. 2d 661 (App.Div.2002).]

On behalf of the firm and its members in December 1997, Wheeler applied for professional liability insurance through Jamison Special Risk, Inc. (Jamison), a domestic broker for Certain Underwriters for Lloyd's of London (Underwriters). Wheeler provided information required by the application and verified the application as a whole. For that purpose, Wheeler used a CNA application form instead of a form designed specifically for Underwriters.

In completing the application, Wheeler confronted the following three-part question:

After inquiry, is any attorney in your firm aware of: a. Any professional liability claims made against the firm or any member of the firm within the past 12 months? b. Any acts, error or omissions in professional services that may reasonably be expected to be the basis of a professional liability claim? c. Have all claims and/or incidents been reported to CNA?

Wheeler checked the box marked "NO" for questions a and b and did not check an answer for question c.

On April 30, 1998, Wheeler signed a warranty statement asserting to Underwriters that the information on the CNA application was accurate and that the insurer could rely on it. Based on that application and statement, Underwriters subscribed a professional liability policy on the firm's behalf, beginning April 19, 1998, and expiring April 19, 1999. The policy defines "Insured" to include the firm as the "Named Insured" and "any lawyers who are partners in the Named Insured ... but solely for Acts on behalf of the Named Insured[.]" The insurer also issued a certificate of insurance, dated May 8, 1998, naming the Clerk of this Court as certificate holder.

The firm facilitated financing for the policy by entering into an agreement with Imperial Premium Finance, Inc. (Imperial). Under that agreement, the firm designated Imperial as its attorney-in-fact, granting it the right to cancel the policy if the firm did not pay the required premiums. When it did not receive a payment of premium due in December 1998, Imperial purportedly mailed the firm a notice of intent to cancel the policy. The cancellation eventually occurred as of January 16, 1999. Jamison, Underwriters' broker, wrote to Wheeler offering to reinstate the policy should Imperial receive the firm's payment of premium and a renewed warranty statement.

At about the same time, this Court's Office of Attorney Ethics (OAE) notified the firm that the OAE would be conducting an audit of the firm's books. The OAE acted as a result of three grievances that it had received concerning the firm's handling of certain real estate transactions. That notice is dated January 8, 1999.

On January 22, 1999, presumably after the firm had received the audit notice, Wheeler executed the new warranty. In so doing, he affirmed:

248 I am not aware of any claims being made during the past five years against the firm or any of its past or present owners, partners, shareholders, corporate officers or employees or predecessors in business. I am also not aware of any circumstances or any allegations or contentions as to any incident, which may result in a claim being made against the firm or any of its past or present owners, partners, shareholders, corporate officers or employees or its predecessors in business.

Wheeler delivered the warranty to Jamison by faxing it on January 26, 1999.

On that same day, the OAE sought the temporary suspension of Lawson from the practice of law. This Court suspended Lawson about a week later, In re Lawson, 157 N.J. 79, 722 A. 2d 1288 (1999), and ultimately disbarred him. In re Lawson, 165 N.J. 201, 755 A. 2d 1167 (2000).

As a result of the numerous defalcations, First American Title Insurance Company (First American) and Lawyers Title Insurance Corporation (Lawyers Title) (collectively, the title insurers) each paid claims to various individuals. The title insurers in turn sought recovery from the firm and its partners. More specifically, First American initiated this action by filing a verified complaint *133 alleging that Lawson, as counsel to certain buyers, did not pay $339,212 due to a seller of real property. First American also named the firm as a defendant. It filed a second complaint reasserting the prior claims and adding claims that Lawson had failed to satisfy an outstanding mortgage in the approximate amount of $97,285 in another real estate closing in which he represented the buyer. In the second complaint (which eventually was consolidated with the first complaint), First American included Lawson's two partners, Wheeler and Snyder, as individual defendants.

Similarly, Lawyers Title brought a complaint against the firm and against Wheeler, Lawson, and Snyder individually. That complaint alleges that certain clients of Lawson, who were purchasers of real property, deposited $143,763 into a client trust account. It asserts that the check that Lawson had issued from that account to pay off a prior mortgage on the property was returned for insufficient funds. Lawyers Title further alleges that Lawson failed to record a mortgage as representative for another purchaser of real property.

Apparently unaware of the firm's legal problems, Jamison notified Wheeler in February 1999, that the firm's policy had been reinstated. Snyder thereafter sent Jamison a notice of insurance claim regarding the above matters. The carrier denied those claims.

Underwriters then filed a declaratory judgment action alleging that the firm's policy "was cancelled as of January 16, 1999" and that the purported reinstatement "was void by reason of the material misrepresentation set forth in the Warranty[.]" After Underwriters had filed that action, Lawyers Title amended its complaint, asserting additional counts against both the firm and its individual partners. First American amended its complaint to assert that the firm's limited liability partnership status should be declared void for failure to maintain professional liability insurance as required by our Rules of Court.

Snyder answered Underwriters' complaint and asserted certain affirmative defenses, including that he "never supervised, condoned or encouraged [Lawson] to commit any of the acts 249 alleged in the complaint." Snyder also filed a cross-claim for contribution from, and indemnification by, Lawson and filed a counterclaim against Underwriters for coverage under the firm's policy. Underwriters answered Snyder's counterclaim by denying his claims for coverage and asserting certain separate defenses, including that the policy was cancelled as of January 16, 1999, and was not reinstated validly. Underwriters' answer further asserts that the policy excluded coverage for "claims arising out of criminal conduct or activity, as well as claims arising out of any dishonest, fraudulent, malicious or intentional acts."

The three actions eventually were consolidated. First American, Lawyers Title, and Underwriters filed respective motions seeking summary judgment. The trial court consolidated the parties' motions and disposed of them by orders issued in July 2001 and September 2001.

Although it concluded that the firm's policy did not insure against Lawson's and Wheeler's "criminal and/or dishonest conduct," the trial court found that the policy did cover the firm's liability as a separate legal entity distinct from that of its individual partners. The court concluded that the firm's insurance with Underwriters was not void and had not been cancelled properly. It thus granted summary judgment in favor of the title insurers and against Underwriters, indicating that the former entities were "entitled to coverage under [Underwriters'] policy for their respective damages to be determined at a subsequent hearing[.]"

The Appellate Division granted leave to appeal on behalf of Underwriters and reversed the trial court's determination in a reported decision. First American, supra, 351 N.J.Super. at 412, 417 n. 2, 798 A. 2d 661. The panel held that the above facts rendered the policy void for all purposes. Id. at 426, 798 A. 2d 661. In view of that conclusion, the Appellate Division did not resolve any issue that was dependent on the policy's existence, such as whether Underwriters properly had cancelled the policy in accordance with its contractual terms and applicable statutory law. Ibid. First American and Lawyers Title moved separately before this Court for leave to appeal, and we granted both motions. 174 N.J. 357, 807 A. 2d 191 (2002).

To resolve this appeal, we must analyze the interplay between two established bodies of law. The first set of rules, arising in the corporate field, establishes the parameters of liability for individual partners of a limited liability partnership. The second, arising under insurance law, permits an insurer to rescind coverage when an insured, in applying for that coverage, has misrepresented a material fact. Because the parties' dispute centers on the conduct of attorneys, we also must consider our Rules of Court that seek to protect consumers of legal services by mandating that New Jersey attorneys maintain adequate insurance in certain circumstances. This case ultimately requires us to strike an appropriate balance in applying those sometimes competing tenets.

We briefly review the law governing limited liability partnerships. At all times relevant to this action, those rules were codified under the Uniform Partnership Law, N.J.S.A. 42:1-1 to -49 (UPL or Law). In December 2000, the Legislature repealed and replaced the UPL with the 250 Uniform Partnership Act, N.J.S.A. 42:1A-1 to -56, L. 2000, c. 161 (UPA or Act). Because the parties do not dispute that the UPL was in effect when this action's underlying facts arose, we focus our analysis on that statute rather than on the current UPA.

The UPL states, in relevant part:

c. Subject to subsection d. of this section, a partner in a limited liability partnership is not liable, either directly or indirectly, by way of indemnification, contribution, assessment or otherwise, for debts, obligations and liabilities of or chargeable to the partnership, whether in tort, contract or otherwise, arising from negligence, omissions, malpractice, wrongful acts, or misconduct committed while the partnership is a limited liability partnership and in the course of the limited liability partnership business by another partner or an employee, agent, or representative of the limited liability partnership. d. Subsection c. of this section shall not affect the liability of a partner in a limited liability partnership for his own negligence, omissions, malpractice, wrongful acts, or misconduct, or that of any person under his direct supervision and control.

[ N.J.S.A. 42:1-15, L. 1995, c. 96, § 3.]

The UPL also incorporates agency principles to the law governing partnerships. The statute provides:

Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership, unless the partner so acting has in fact no authority to act for the partnership in the particular matter, and the person with whom he is dealing has knowledge of the fact that he has no such authority.

[N.J.S.A. 42:1-9.1, L. 1919, c. 212, § 9.]

Harmonizing the meaning of the above provisions, two principles emerge under the UPL. First, any partner can execute any instrument, such as an application for insurance requiring the payment of premiums, and in so doing can bind the partnership as a whole in the ordinary course of its business. Thus, any one partner can incur general business indebtedness on the partnership's behalf. Second, when a firm is a limited liability partnership, a special rule exists to shield partners from incurring liability arising solely from the wrongful acts of fellow partners. Although they remain liable for their own personal misconduct, partners of a limited liability partnership are not responsible for the professional negligence or wrongful acts of other partners.

The law is well settled that equitable fraud provides a basis for a party to rescind a contract. * * * "In general, equitable fraud requires proof of (1) a material misrepresentation of a presently existing or past fact; (2) the maker's intent that the other party rely on it; and (3) detrimental reliance by the other party." Liebling v. Garden State Indem., 337 N.J.Super. 447, 251 453, 767 A. 2d 515 (App.Div.), certif. denied, 169 N.J. 606, 782 A. 2d 424 (2001). Rescission voids the contract ab initio, meaning that it is considered "null from the beginning" and treated as if it does not exist for any purpose. Black's Law Dictionary 1568 (7th ed.1999). Within the context of an insurance contract,

a representation by the insured, whether contained in the policy itself or in the application for insurance, will support the forfeiture of the insured's rights under the policy if it is untruthful, material to the particular risk assumed by the insurer, and actually and reasonably relied upon by the insurer in the issuance of the policy.

[ Allstate Ins. Co. v. Meloni, 98 N.J.Super. 154, 158-59, 236 A. 2d 402 (App.Div.1967).]

In evaluating an insurance application that calls for subjective information, there is an additional inquiry, i.e., whether the insured knew that the information was false when completing the application. * * * Examples of subjective information include when an insurer asks an insured to indicate a belief about the status of his or her health, ibid., or when, as here, an insurer asks whether an applicant "is aware of any circumstances which may result in a claim being made against the firm[.]" First American, supra, 351 N.J.Super. at 419, 798 A. 2d 661. "[A] subjective question will not constitute equitable fraud if the question is directed toward probing the knowledge of the applicant and determining the state of his mind and ... the answer is a correct statement of the applicant's knowledge and belief [.]" Ledley, supra, 138 N.J. at 636, 651 A. 2d 92 (internal quotation marks and citation omitted).

In applying the foregoing tenets, our threshold inquiry focuses on Wheeler's responses recorded on the insurance application form and his statements contained in the two warranties. Wheeler obviously knew that his April 30, 1998, warranty was false based on his own conduct in engaging in the unauthorized practice of law and in misappropriating client funds in concert with Lawson. Further, on January 22, 1999, with knowledge of his and Lawson's defalcations and with presumed knowledge of the impending OAE audit, Wheeler executed a new warranty. It falsely represents that he was "not aware of any circumstances or any allegations or contentions as to any incident, which may result in a claim being made against the firm or any of its ... partners[.]"

Under those circumstances, the Appellate Division correctly found "that no reasonable factfinder could conclude anything other than that Wheeler knew his [answers and statements] to be false." First American, supra, 351 N.J.Super. at 420, 798 A. 2d 661. We also agree that the other prongs of the equitable-fraud test have been satisfied insofar as Wheeler is concerned.

[T]here [is no] question, in our view, that Wheeler's failure to disclose constituted a material misrepresentation, as found by the trial judge himself, and one that was detrimentally relied upon by [Underwriters]. It seems clear that the very nature of the omission was such as to "naturally and reasonably influence the judgment of the underwriter in making the contract at 252 all, or in estimating the degree or character of the risk, or in fixing the rate of the premium." It is equally clear that [Underwriters] would not have subscribed to the policy had Wheeler's criminal and fraudulent activities been known.

[ Id. at 420, 798 A.2d 661 (internal citations omitted).]

The thornier question concerns whether and to what extent Wheeler's misrepresentations should result in a forfeiture of coverage. Resolution of that question requires four distinct inquiries: whether coverage should be rescinded in respect of (1) Wheeler, (2) Lawson, (3) the firm as an entity, and (4) Snyder. We will address each inquiry separately and in that order.

We have no difficulty discerning the consequences of Wheeler's misrepresentations in respect of Wheeler himself. Our case law provides Underwriters with the clear right to rescind Wheeler's coverage in the face of his blatant and direct misrepresentations. We disagree with the title insurers that the exclusive remedy for such fraud is cancellation of the policy that would take effect only prospectively. As the Appellate Division properly observed, rescission is an equitable remedy that "operates as a matter of law, not contract. It lies within the inherent discretion of the court." Id. at 423, 798 A.2d 661. We therefore conclude that Wheeler's misconduct entitles Underwriters to consider the policy void insofar as that individual is concerned.

Similarly, the carrier is entitled to rescind coverage in respect of Lawson. Lawson's role in furnishing the misinformation to Underwriters is not as clear or direct as Wheeler's role. Lawson's conduct in misappropriating client funds, however, was so intertwined with that of Wheeler's, that we are left with the unmistakable conclusion that Lawson knew or should have known that the forms submitted to the carrier contained false or misleading information. Cf. Palisades Safety & Ins. Ass'n v. Bastien, 175 N.J. 144, 151, 814 A. 2d 619 (2003) (holding that husband's material misrepresentation to carrier voided wife's personal injury protection (PIP) benefits in part because she had occupied "unique position to be aware of" husband's actions). There are no questions concerning either Lawson or Wheeler for a jury to resolve; thus, the policy is void in respect of both individuals.

We next consider whether Underwriters is entitled to rescind coverage in respect of the firm as an entity. There, the analysis is not as straightforward. One complicating factor is that prior New Jersey cases that have permitted rescission have concerned individual insureds, or sole- practitioner entities, rather than multi-person firms like the entity in this case. See, e.g., Gallagher v. New England Mut. Life Ins. Co. of Boston, 19 N.J. 14, 114 A. 2d 857 (1955) (concerning two life insurance policies); Liebling, supra, 337 N.J.Super. 447, 767 A. 2d 515 (pertaining to sole legal practitioner); Booker v. Blackburn, 942 F.Supp. 1005 (D.N.J.1996) (focusing on professional-liability insurance for single-member engineering firm).

We are persuaded that we should extend the holding of those cases to the firm as a whole. Because he was the firm's managing partner, Wheeler occupied a special status as the person chiefly responsible for the application process. Permitting the firm's coverage to survive Wheeler's defalcations would, in essence, condone the use of a partnership entity as a subterfuge for fraudulent conduct. This is not a case in which a lone attorney in a multi-person firm 253 knowingly had supplied the managing partner with false information that the partner merely forwarded to the carrier without knowledge of its falsity. Rather, two of the firm's three partners had engaged in wrongful conduct and the managing partner, himself a wrongdoer, had concealed that conduct when applying for the firm's policy. On those facts, the carrier is entitled to rescind its coverage of the firm as an entity.

The remaining issue concerning Snyder's coverage is the most difficult. Many of the same concepts that support voiding the policy in respect of Wheeler, Lawson, and the firm as a whole also support voiding it in respect of Snyder. Snyder, however, in no way participated in the fraudulent conduct of his fellow partners. Lawson testified that Snyder did not engage in any misappropriation and had no knowledge of any improprieties or that the firm was foundering. Further, Lawson did not inform Snyder of the grievances filed with the OAE or that the OAE had demanded an audit. Snyder also was a distant partner in the sense that he did not share offices with Lawson and Wheeler, but instead conducted his practice in a separate Manhattan office that he alone maintained. Because he did not issue checks from the firm's New Jersey accounts, Snyder presumably was unfamiliar with the firm's trust-account ledger or with similar records that Wheeler maintained as managing partner.

Those facts require us to consider Snyder an innocent partner for purposes of balancing the equities attendant in these circumstances. Further, by organizing the firm as a limited liability partnership, Snyder had every reason to expect that his exposure to liability would be circumscribed in accordance with the Uniform Partnership Law. Stated differently, voiding Snyder's coverage solely because of his partners' wrongful conduct potentially would expose Snyder to uninsured liability in a manner inconsistent with his expectations under the UPL. (We express no opinion regarding Snyder's actual liability to any party, or regarding whether any allegation against Snyder is excluded from coverage in accordance with the policy's contractual terms. Our sole task is to determine whether the policy itself is void as a matter of law as applied to Snyder.)

Moreover, voiding the policy in respect of Snyder would mean that he no longer would possess coverage for any of his actions in unrelated matters, including simple malpractice, that might have occurred during the period of anticipated coverage. Thus, applying the rule of law advocated by Underwriters could leave members of the public, whom Snyder had represented throughout that period, unprotected even though the insured himself committed no fraud. In our view, that harsh and sweeping result would be contrary to the public interest. More specifically, it would be inconsistent with the policies underlying our Rules of Court that seek to protect consumers of legal services by requiring attorneys to maintain adequate insurance in this setting. Cf. Fisher v. New Jersey Auto. Full Ins. Underwriting Ass'n, 224 N.J.Super. 552, 557-58, 540 A. 2d 1344 (App.Div.1988) (allowing PIP benefits for innocent third parties even when underlying insurance policy otherwise is void due to policyholder's misrepresentations).

We thus conclude that the equities do not warrant rescission of Snyder's coverage. We reiterate that our holding is confined solely to that narrow legal question. The Court does not suggest an opinion in respect of the scope of that coverage or any other issue as it might relate to the policy's existence insofar as Snyder is concerned. Understandably, the Appellate Division found no need to review any question regarding Snyder given its original disposition. 254 Accordingly, we remand the matter to the Appellate Division to consider any issue that it might deem appropriate for resolution in view of this opinion.

Lastly, we acknowledge that rescinding the policy in respect of Lawson, Wheeler, and the firm as an entity, but not in respect of Snyder, encompasses a certain degree of line drawing. Unlike the dissent, however, we are convinced that our disposition is consistent with rescission as an equitable remedy, which properly depends on the totality of circumstances in a given case and resides within a court's discretion. See Intertech Assocs., Inc. v. City of Paterson, 255 N.J.Super. 52, 59, 604 A. 2d 628 (App.Div.1992) (observing that "[e]ven where grounds for rescission exist ... the remedy is discretionary"). Here, those circumstances include our concern for the public, which distinguishes this matter from the more typical contract case. As the trial court succinctly observed: "Equitable relief does not mean automatic relief." We view the underlying policy as being sufficiently divisible in respect of each individual partner so that partial rescission is a permissible remedy on the facts before us. Thus, to the extent that we have drawn certain boundaries in disposing of this appeal, the competing equities have required it. As for future disputes, we do not share the dissent's optimism that innocent attorneys and consumers of legal services would be adequately protected absent our carefully designed holding.

The judgment of the Appellate Division is affirmed in part and reversed in part. The matter is remanded to that court to consider those issues, if any, that it might deem appropriate for resolution consistent with this opinion. We do not retain jurisdiction.

LaVECCHIA, J., dissenting.

I would affirm the Appellate Division decision for the reasons expressed in the persuasive opinion authored by Judge Parrillo. I add only the following comments.

Distilled, this case is about whether plaintiff title insurers must bear full responsibility on a risk those companies, in fact, agreed to insure or whether their respective liabilities may be lightened by requiring a malpractice insurer to provide coverage under a policy it would not have issued but for the insured's misrepresentations in its application. I am loath to join a result that could be perceived as tolerating fraudulent procurement of insurance. The majority grants what amounts to partial rescission of a professional liability policy that, in my view, should be deemed void ab initio as procured based on fraudulent representations. Allowing coverage for even one of the three attorneys comprising the law firm that misrepresented on the application for insurance ignores the critical fact that the insurer never would have issued a policy covering the firm and its partners but for the deceit of one partner (who stole money from clients), the complicity of a second partner, and the indifference of a third partner.

Rescission is appropriate where a material misrepresentation is made with the intent that it will be relied upon, and the misrepresentation is, in fact, relied upon to one's detriment. Jewish Ctr. of Sussex County v. Whale, 86 N.J. 619, 624-25, 432 A. 2d 521 (1981); 2 Couch on Insurance § 31:81 (3d ed. 1995 & Supp.2003). Although that is precisely what happened in this 255 case, the majority stops short of rescinding the entire insurance policy, as would normally occur when a contract of insurance is declared void ab initio, and instead orders partial rescission of the contract. See Mass. Mun. Wholesale Elec. Co. v. Town of Danvers, 411 Mass. 39, 577 N.E. 2d 283, 292-93 (1991) (stating general rule that "[a] contract which is void ab initio, or void from the beginning, may not be enforced" and noting that "[j]udicial or equitable doctrines cannot breathe life into such a contract" given that "courts treat the contract as if it had never been made"); see also Remsden v. Dependable Ins. Co., 71 N.J. 587, 589, 367 A. 2d 421 (1976) (stating material misrepresentations in application justify rescission of policy ab initio ).

It is generally accepted that partial rescission is appropriate as a remedy only where a contract is divisible, the basis for rescission does not affect the whole contract, and the facts of a case warrant such relief. 2 Couch on Insurance, supra, § 31:69; see also County of Morris v. Fauver, 153 N.J. 80, 97, 707 A. 2d 958 (1998) (stating "[o]nly where a contract is severable into different transactions may one of those separate transactions be avoided"); Bonnco Petrol, Inc. v. Epstein, 115 N.J. 599, 612, 560 A. 2d 655 (1989) (acknowledging rule that "a contract is not to be partially rescinded"). This case does not present an opportunity for application of partial rescission, however seductive that result may be. We do not have a divisible contract. The subject policy covered a law firm comprised of three partners. The misrepresentations concerning potential professional liability claims, made during the application process, were made on behalf of the entire firm. That three attorneys, acting on behalf of the firm, were insured under the policy does not render the policy divisible into different transactions.

Even if the policy were divisible as to each named insured, total rescission is still warranted where the fraud goes to procurement of the entire contract. 2 Couch on Insurance, supra, § 31:68 (stating that "the ground for rescission may be such as to affect the validity of all parts of the contract, whether divisible or not, in which case a decree rescinding the entire contract is of course proper"). Cf. ibid. (noting that "where two policies are issued upon a single application which is fraudulent, both policies may be rescinded"). The basis for rescission here-- material misrepresentations concerning potential claims on the application for a claims-made professional liability insurance policy--most assuredly affected the validity of the entire contract. Accord Home Indem. Co. v. Toombs, 910 F.Supp. 1569 (N.D.Ga.1995) (rescinding legal malpractice policy as to entire firm based on material misrepresentation in application).

As an inherently discretionary remedy, rescission is awarded on a case-by-case basis. * * * I leave for another day whether equity would not allow rescission of professional liability insurance policies in other settings. Query whether rescission would be allowed where a partner in a firm was guilty of malfeasance and successfully concealed his misdeeds from other partners who were responsible for procuring insurance and who undertook to inform themselves generally about the firm's work, including the safeguarding of client trust fund accounts. There, and in other settings, the equities might be poised differently than they are here. I trust that in future cases the fact-sensitive equitable analysis required for rescission would protect the overwhelming majority of conscientious law firms and attorneys licensed to practice in this State. But traditional rules of contract rescission do not support the partial rescission that the majority orders here. The Appellate Division rightly concluded that this is a classic case for rescinding coverage in favor of the defrauded insurance company.

256 For affirmance in part; reversal in part; remandment--Chief Justice PORITZ and Justices COLEMAN, LONG, VERNIERO, ZAZZALI and ALBIN--6.

For affirmance--Justice LaVECCHIA--1.

Corporation Cases

Louis K. Liggett Co. v. Lee 288 U.S. 517, 53 S.Ct. 481 (1933)

LOUIS K. LIGGETT CO. et al. v. LEE, Comptroller of State of Florida, et al. [FN*] FN* For conforming opinion of Supreme Court of Florida, see 149 So. 8. No. 301. Supreme Court of the United States Argued Jan. 12--13, 1933. Decided March 13, 1933. Mr. Justice ROBERTS delivered the opinion of the Court. * * * Whether the corporate privilege shall be granted or withheld is always a matter of state policy. If granted, the privilege is conferred in order to achieve an end which the state deems desirable. It may be granted as a means of raising revenue; or. in order to procure for the community a public utility, a bank, or a desired industry not otherwise obtainable; or the reason for granting it may be to promote more generally the public welfare by providing an instrumentality of business which will facilitate the establishment and conduct of new and large enterprises deemed of public benefit. Similarly, if the privilege is denied, it is denied because incidents of like corporate enterprise are deemed inimical to the public welfare and it is desired to protect the community from apprehended harm * * * Second. The prevalence of the corporation in America has led men of this generation to act, at times, as if the privilege of doing business in corporate form were inherent in the citizen; and has led them to accept the evils attendant upon the free and unrestricted use of the corporate mechanism as if these evils were the inescapable price of civilized life, and, hence, to be borne 257 with resignation. Throughout the greater part of our history a different view prevailed. Although the value of this instrumentality in commerce and industry was fully recognized, incorporation for business was commonly denied long after it had been freely granted for religious, educational, and charitable purposes. [FN2] by corporations. So at first the corporate of encroachment upon the liberties and opportunities of the individual. Fear of the subjection of labor to capital. Fear of monopoly. Fear that the absorption of capital by corporations, and their perpetual life, might bring evils similar to those which attended mortmain. [FN3] *549 There was a sense of some insidious menace inherent in large aggregations of capital, particularly when held by corporations. So at first the corporate privilege was granted sparingly; and only when the grant seemed necessary in order to procure for the community some specific benefit otherwise unattainable. The later enactment of general incorporation laws does not signify that the apprehension of corporate domination had been overcome. The desire for business expansion created an irresistible demand for more charters; and it was believed that under general laws embodying safeguards of universal application the scandals and favoritism incident to special incorporation could be avoided. The general laws, which long embodied severe restrictions upon size and upon the scope of corporate activity, were, in part, an expression of the desire for equality of opportunity. [FN4] * * * *550 (a) Limitation upon the amount of the authorized capital of business corporations was long universal. [FN5] The maximum limit frequently**491 varied with the kinds of business to be carried on, being dependent apparently upon the supposed requirements of the efficient unit. Although the statutory limits were changed from time to time, this principle of limitation was long retained. Thus *551 in New York the limit was at first $100,000 for some businesses and as little as $50,000 for others. [FN6] Until 1881 the maximum for business corporations in New York was $2,000,000; and until 1890, $5,000,000. [FN7] In Massachusetts the limit was at first $200,000 for some businesses and as little as $5,000 for others. [FN8] Until 1871 the maximum for mechanical and manufacturing corporations was *552 $500,000; and until 1899 $1,000,000. [FN9] The limit of $1,000,000 was retained for some businesses until 1903. [FN10] * * * (b) Limitations upon the scope of a business corporation's powers and activity were also long universal. At first, corporations could be formed under the general laws only for a limited number of purposes--usually those which required a relatively large fixed capital, like transportation, banking, and insurance, and mechanical, mining, *555 and manufacturing enterprises. [FN27] Permission to incorporate for 'any lawful purpose' [FN28] was not common until 1875; and until that time the duration of corporate franchises was generally limited to a period of 20, 30, or 50 years. [FN29] All, or a majority, of the incorporators or directors, or both, were required to be residents of the incorporating state. [FN30] The powers which the corporation might exercise in carrying out its purposes were sparingly conferred and strictly construed. Severe limitations were imposed on the amount of indebtedness, bonded or otherwise. [*556 FN31] The **493 power to hold stock in other corporations was not conferred or implied. [FN32] The holding company was impossible. * * *

258 *557 (c) The removal by the leading industrial states of the limitations upon the size and powers of business corporations appears to have been due, not to their conviction that maintenance of the restrictions was undesirable in itself, but to the conviction that it was futile to insist upon them; because local restriction would be circumvented by foreign incorporation. Indeed, local restriction seemed worse than futile. Lesser states, eager for the revenue [FN33] derived from the traffic in charters, had removed safeguards from their own incorporation laws. [FN34] *558 Companies were early formed to provide charters for corporations in states where the cost was lowest and the laws least restrictive. [FN35] The **494 states joined in advertising *559 their wares. [FN36] The race was one not of diligence but of laxity. [FN37] Incorporation under such laws was possible; and the great industrial States yielded in order not to *560 lose wholly the prospect of the revenue and the control incident to domestic incorporation. * * * Thus the Massachusetts revision of 1903 was precipitated by the fact that 'the possibilities of incorporation in other states have become well known, and have been availed of to the detriment of this Commonwealth.' [FN49] * * * Third. Able, discerning scholars [FN50] have pictured for us the economic and social results of thus removing all limitations upon the size and activities of business corporations *565 and of vesting in their managers vast powers once exercised by stockholders--results not designed by the states and long unsuspected. They show that size alone gives to giant corporations a social significance not attached ordinarily to smaller units of private enterprise. Through size, corporations, once merely an efficient tool employed by individuals in the conduct of private business have become an institution--an institution which has brought such concentration of economic power that so-called private corporations are sometimes able to dominate the state. The typical business corporation of the last century, owned by a small group of individuals, managed by their owners, and limited in size by their personal wealth, is being supplanted by huge concerns in which the lives of tens or hundreds of thousands of employees and the property of tens or hundreds of thousands of investors are subjected, through the corporate mechanism, to the control of a few men. Ownership has been separated from control; and this separation has removed many of the checks which formerly operated to curb the misuse of wealth and power. And, as ownership of the shares is becoming continually more dispersed, the power which formerly accompanied ownership is becoming increasingly concentrated in the hands of a few. The changes thereby wrought in the lives of the workers, of the owners and of the general public, are so fundamental and far-reaching as to lead these scholars to compare the evolving 'corporate system' with the feudal system; and to lead other men of insight and experience to assert that this 'master institution of civilised life' is committing it to the rule of a plutocracy. [FN51] * * * The data submitted in support of these conclusions indicate that in the United States the process of absorption *566 has already advanced so far that perhaps two-thirds of our industrial wealth has passed from individual possession to the ownership of large corporations whose shares are dealt in on the stock exchange; [FN52] that 200 nonbanking corporations, each with assets in excess of $90,000,000, control directly about one-fourth of all our national wealth, and 259 that their influence extends far beyond the assets under their direct control; [FN53] that these 200 corporations, while nominally controlled by about 2,000 directors, are actually dominated by a few hundred persons [FN54]--the negation of industrial democracy. Other writers have shown that, **497 coincident with the growth of these giant corporations, there has occurred a marked concentration of individual wealth; [FN55] and that the resulting disparity in *567 incomes is a major cause of the existing depression. [FN56] Such is the Frankenstein monster which states have created by their corporation laws. [FN57] * * * My vote is for affirmance I am authorized to state that Mr. Justice STONE concurs in this opinion.

Frigidaire Sales Corp. v. Union Properties, Inc . 88 Wash.2d 400, 562 P.2d 244 (1977)

FRIGIDAIRE SALES CORPORATION, Petitioner, v. UNION PROPERTIES, INC., et al., Respondents No. 44262 Supreme Court of Washington, En Banc April 7, 1977 HAMILTON, Associate Justice. Petitioner, Frigidaire Sales Corporation, sought review of a Court of Appeals decision which held that limited partners do not incur general liability for the limited partnership's obligations simply because they are officers, directors, or shareholders of the corporate general partner. Frigidaire Sales Corp. v. Union Properties, Inc., 14 Wash.App. 634, 544 P.2d 781 (1975). We granted review, and now affirm the decision of the Court of Appeals The facts of the case are adequately set out in the Court of Appeals opinion, and only a cursory summation need be repeated here. Petitioner entered into a contract with Commercial Investors (Commercial), a limited partnership. Respondents, Leonard Mannon and Raleigh Baxter, were limited partners of Commercial. Respondents were also officers, directors, and shareholders of Union Properties, Inc., the only general partner of Commercial. Respondents controlled Union Properties, and through their control of *402 Union Properties they exercised the day-to-day control and management of Commercial. Commercial breached the contract, and petitioner brought suit against Union Properties and respondents. The trial court concluded that respondents did not incur general liability for Commercial's obligations by reason of their control of Commercial, and the Court of Appeals affirmed 260 We first note that petitioner does not contend that respondents acted improperly by setting up the limited partnership with a corporation as the sole general partner. Limited partnerships are a statutory form of business organization, and parties creating a limited partnership must follow the statutory requirements. In Washington, parties may form a limited partnership with a corporation as the sole general partner. See RCW 25.04.020 and RCW 25.04.060(3); RCW 25.08.010 and RCW 25.08.070(2)(a) Petitioner's sole contention is that respondents should incur general liability for the limited partnership's obligations under RCW 25.08.070, [FN1] because they exercised the *403 **246 day-to-day control and management of Commercial. Respondents, on the other hand, argue that Commercial was controlled by Union Properties, a separate legal entity, and not by respondents in their individual capacities. * * * Petitioner cites Delaney v. Fidelity Lease Ltd., 526 S.W.2d 543 (Tex.1975), as support for its contention that respondents should incur general liability under RCW 25.08.070 for the limited partnership's obligations. That case also involved the issue of liability for limited partners who controlled the limited partnership as officers, directors, and shareholders of the corporate general partner. The Texas Supreme Court reversed the decision of the Texas Court of Civil Appeals and found the limited partners had incurred general liability because of their control of the limited partnership. See Delaney v. Fidelity Lease Ltd., 517 S.W.2d 420 (Tex.Civ.App.1974), Rev'd, 526 S.W.2d 543 (Tex.1975) We find the Texas Supreme Court's decision distinguishable from the present case. In Delaney, the corporation and the limited partnership were set up contemporaneously, and the sole purpose of the corporation was to operate the limited partnership. The Texas Supreme Court found that the limited partners who controlled the corporation were obligated to their other limited partners to operate the corporation for the benefit of the partnership. "Each act was done then, not for the corporation, but for the partnership." Delaney v. Fidelity Lease Ltd., 526 S.W.2d 543, 545 (Tex.1975), quoting from the dissenting opinion in Delaney v. Fidelity Lease Ltd., 517 S.W.2d 420, 426 (Tex.Civ.App.1974). This is not the case here. The pattern of operation of Union Properties was to investigate and conceive of real estate investment opportunities and, when it found such opportunities, to cause the creation of limited partnerships with Union Properties acting as the general *404 partner. Commercial was only one of several limited partnerships so conceived and created. Respondents did not form Union Properties for the sole purpose of operating Commercial. Hence, their acts on behalf of Union Properties were not performed merely for the benefit of Commercial. * * * However, we agree with our Court of Appeals analysis that this concern with minimum capitalization is not peculiar to limited partnerships with corporate general partners, but may arise anytime a creditor deals with a corporation. See Frigidaire Sales Corp. v. Union Properties, Inc., supra 14 Wash.App. at 638, 544 P.2d 781. Because our limited partnership statutes permit parties to form a limited partnership with a corporation as the sole general partner, this concern about minimal capitalization, standing by itself, does not justify a finding that the limited partners incur general liability for their control of the corporate general partner. See A. Bromberg, **247 Crane and Bromberg on Partnership s 26 at 146--47 (1968). If a corporate 261 general partner is inadequately capitalized, the rights of a creditor are adequately protected under the 'piercing-the-corporate-veil' doctrine of corporation law. * * * Furthermore, petitioner was never led to believe that respondents were acting in any capacity other than in their corporate capacities. The parties stipulated at the trial that respondents never acted in any direct, personal capacity. When the shareholders of a corporation, who are also the corporation's officers and directors, conscientiously keep the affairs of the corporation separate from their personal affairs, and no fraud or manifest injustice is perpetrated upon third persons who deal with the corporation, the corporation's separate entity should be respected. * * * For us to find that respondents incurred general liability for the limited partnership's obligations under RCW 25.08.070 would require us to apply a literal interpretation of the statute and totally ignore the corporate entity of Union Properties, when petitioner knew it was dealing with that corporate entity. There can be no doubt that respondents, in fact, controlled the corporation. However, they did so only in their capacities as agents for their principal, the corporate general partner. Although the corporation was a separate entity, it could act only through its board of directors, officers, and agents. Beall v. Pacific Nat'l Bank, 55 Wash.2d 210, 347 P.2d 550 (1959); See RCW 23A.08.340 and RCW 23A.08.470. Petitioner entered into the contract with Commercial. Respondents signed the contract in their capacities as president and secretary-treasurer of Union Properties, the general partner of Commercial. In the eyes of the law it was Union Properties, as a separate corporate entity, which entered into the contract with petitioner and controlled the limited partnership *406 Further, because respondents scrupulously separated their actions on behalf of the corporation from their personal actions, petitioner never mistakenly assumed that respondents were general partners with general liability. * * * Petitioner knew Union Properties was the sole general partner and did not rely on respondents' control by assuming that they were also general partners. If petitioner had not wished to rely on the solvency of Union Properties as the only general partner, it could have insisted that respondents personally guarantee contractual performance. Because petitioner entered into the contract knowing that Union Properties was the only party with general liability, and because in the eyes of the law it was Union Properties, a separate entity, which controlled the limited partnership, there is no reason for us to find that respondents incurred general liability for their acts done as officers of the corporate general partner The decision of the Court of Appeals is affirmed WRIGHT, C.J., and ROSELLINI, STAFFORD, UTTER, HOROWITZ, BRACHTENBACH and DOLLIVER, JJ., concur.

Ingalls v. Standard Gypsum 70 S.W.3d 252 262 Court of Appeals of Texas, San Antonio.

Mitchell INGALLS, Appellant, v. STANDARD GYPSUM, L.L.C., Standard Gypsum Corporation, McQueeney Gypsum Company and Temple-Inland Forest Products Corporation, Appellees.

Dec. 26, 2001. Rehearing Overruled Dec. 26, 2001.

Sitting: ALMA L. LÓPEZ, Justice, CATHERINE STONE, Justice, KAREN ANGELINI, Justice.

ON APPELLANT'S MOTION FOR REHEARING AS TO APPELLEE TEMPLE FOREST AND APPELLEE'S UNOPPOSED MOTION TO CLARIFY JUDGMENT

KAREN ANGELINI, Justice.

We deny the motion for rehearing filed by Mitchell Ingalls and grant the motion to clarify the judgment filed by Standard Gypsum L.L.C. ("Standard Gypsum"), Standard Gypsum Corporation ("the corporation"), McQueeney Gypsum Company ("McQueeney"), and Temple- Inland Forest Products Corporation ("Temple- Inland"). We withdraw our opinion and judgment issued on November 21, 2001 and substitute the following in its place. This is an appeal from a summary judgment entered in favor of Standard Gypsum L.L.C., Standard Gypsum Corporation, McQueeney, and Temple-Inland. We affirm the judgment in part and reverse and remand in part.

BACKGROUND

Temple-Inland and McQueeney formed the limited liability company, Standard Gypsum, in accordance with the Texas Limited Liability Company Act. Tex.Rev.Civ. Stat. Ann. art. 1528n (Vernon Supp.2001). Thus, Temple-Inland and McQueeney are the two members of Standard Gypsum, as defined by the Texas Limited Liability Company Act. Additionally, Temple-Inland and Standard Gypsum entered into a written management agreement ("Agreement") in which Temple- Inland agreed to "manage and operate [Standard Gypsum's plant in McQueeney, Texas] in a manner which is consistent with [Temple-Inland's] management and operation of its own gypsum wallboard manufacturing facilities." Temple- Inland also agreed to procure and maintain, at Standard Gypsum's expense, adequate workers' compensation insurance covering all plant employees.

On February 2, 1997, Mitchell Ingalls was injured in the course and scope of his employment while working at Standard Gypsum's plant. Ingalls' arm caught in a machine at the 263 plant, requiring amputation of his arm. Ingalls filed suit against McQueeney and Temple- Inland, alleging that they were negligent for failing to provide a guard around the machine and for failing to place the emergency button closer to the machine.

McQueeney and Temple-Inland moved for summary judgment. They both argued that because they are members of Standard Gypsum, they are also "employers" under the Texas Workers' Compensation *255 Act and thus, immune from suit pursuant to the exclusive-remedy provision. As an alternative theory, Temple- Inland argued that, along with Standard Gypsum, it is Ingalls' "co-employer," because it had the right to control him at the time of the accident in accordance with the written Agreement. [FN1] The trial court granted summary judgment in favor of both Temple-Inland and McQueeney.

FN1. McQueeney did not urge the "co-employer" theory.

STANDARD OF REVIEW

We review a summary judgment de novo. * * * We will uphold a summary judgment only if the record establishes that there is no genuine issue of material fact, and that the movant is entitled to judgment as a matter of law on a ground set forth in the motion. * * * If a defendant moves for summary judgment, it must disprove at least one of the elements of the plaintiff's cause of action, or, alternatively, prove each element of an affirmative defense. * * * In determining whether there is a disputed issue of material fact precluding summary judgment, evidence favorable to the non-movant will be taken as true. * * * Every reasonable inference must be indulged in favor of the non-movant and any doubts resolved in its favor. * * *

EXCLUSIVE-REMEDY PROVISION OF THE TEXAS WORKERS' COMPENSATION ACT

Under the Texas Workers' Compensation Act, "[r]ecovery of workers' compensation benefits is the exclusive remedy of an employee covered by workers' compensation insurance coverage or a legal beneficiary against the employer or an agent or employee of the employer for the death of or a work- related injury sustained by the employee." Tex. Labor Code Ann. § 408.001(a) (Vernon 1996) (emphasis added). The Texas Workers' Compensation Act defines an employer as "a person who makes a contract of hire, employs one or more employees, and has workers' compensation insurance coverage." [ * * * ] Id. § 401.011(18) (Vernon Supp.2001). While an employee cannot sue his employer, he can sue a "third party" for damages incurred as a result of "an injury or death that is compensable under this subtitle." Id. § 417.001 (Vernon Supp.2001). Ingalls argues that McQueeney and Temple-Inland are third parties under the Texas Workers' Compensation Act. McQueeney and Temple-Inland argue that they should be considered employers.

A. Dual Employment

Temple-Inland argues that it is a "co-employer," along with Standard Gypsum, under the Texas Workers' Compensation Act, because it had the right to control the details of Ingalls' work. Under the "joint" or "co-" employment doctrine, a "person may be the servant of two employers at one time as to one act if the service to one does not involve an abandonment of the service to 264 the other." Ely v. Gen. Motors Corp., 927 S.W.2d 774, 777 (Tex.App.-Texarkana 1996, writ denied) (citing Restatement (Second) of Agency § 226 (1958)); * * * The Texas Supreme Court has implicitly acknowledged the joint employment doctrine in the context of workers' compensation. See Insurors Indem. & Ins. Co. v. Pridgen, 148 Tex. 219, 223 S.W.2d 217, 217- 19 (1949) (suggesting possibility of co-employer relationship). The First Court of Appeals has done likewise. See Gen. Accident Fire & Life Assurance Corp. v. Callaway, 429 S.W.2d 548, 549-51 (Tex.App.-Houston [1st Dist.] 1968, no writ) (upholding jury finding that plaintiff was injured in course and scope of joint employment for two companies). And, the Fourteenth Court of Appeals has expressly recognized the joint employment doctrine in the context of workers' compensation. Brown, 921 S.W.2d at 843-44.

Temple-Inland attached the written Agreement to its motion for summary judgment as proof of its position that it had the right to control the details of Ingalls' work. The written agreement states that Temple-Inland agrees to

[h]ire, train, promote, discharge, and supervise the work of all employees necessary for the operation of the Business, and provide such employees with human resources support and employee development services. Such employees may be on [Standard Gypsum's] payroll or [Temple-Inland's] payroll, but [Temple- Inland] shall not be liable to [Standard Gypsum] or others for any act or omission on the part of such employees unless the [Temple-Inland] has failed to use reasonable diligence in their hiring, discharge, or supervision, except that the General Manager of the Business shall be on [Temple-Inland's] payroll and, at [Temple- Inland's] expense, [Temple-Inland] shall pay for such General Manager's salary and benefits. [Temple-Inland] shall not at any time enter into any agreement with any employee for a period in excess of one year or for compensation in excess of $60,000 per year without [Standard Gypsum's] consent. [Temple-Inland] shall procure and maintain (at [Standard Gypsum's] expense) adequate workmen's compensation insurance covering all of the employees.

Additionally, Temple-Inland agrees to

[a]rrange at [Standard Gypsum's] expense for compliance with all statutes, ordinances, laws, rules, regulations, orders, and determinations affecting or issued in connection with the Business by any governmental authority having jurisdiction thereof. [Temple-Inland] shall not, without [Standard Gypsum's] consent, make any alterations or repairs so ordered or so required, if not included in the Annual Plan, but if any such alterations or repairs are not made because of [Standard Gypsum's] failure to give its written consent after request therefor, then [Standard Gypsum] shall hold [Temple-Inland] harmless from any liability that may arise by reason of the failure to make such alterations or repairs. Notwithstanding the foregoing, in case of an emergency or if failure promptly to comply with an order or to cure any violation shall expose [Standard Gypsum] or [Temple-Inland] to the imminent danger of criminal liability, then in such event [Temple-Inland] shall cause such order or violation to be complied *257 with or cured without awaiting [Standard Gypsum's] consent. Unless otherwise directed by [Standard Gypsum], [Temple-Inland] shall, at [Standard Gypsum's] expense, protest or litigate to final decision in any appropriate court or forum any violation, order, rule, or regulation affecting the Business.

265 * * * In his affidavit, Ingalls states that his checks were paid from Standard Gypsum's bank account, that his immediate supervisor was Trombley, and that Trombley was the only person who instructed him on how to perform his duties. Trombley states in his affidavit that he was an employee of Standard Gypsum and that he was Ingalls' supervisor.

In response to the affidavits produced by Ingalls, Temple-Inland filed an additional affidavit by Dix Brown, the production manager for Standard Gypsum at the time of the incident. Brown declares in his affidavit that Trombley did not have access to the terms of the written Agreement, nor to the internal workings of payroll information. Further, he states that Joe Brown, who was paid by Temple-Inland, was the General Manager of the plant at the time of Ingalls' accident.

The admissible summary judgment evidence submitted by the parties is consistent. For example, everyone agrees that Ingalls' supervisor was Trombley, a Standard Gypsum employee. The fact that Trombley was Ingalls' supervisor does not create a fact issue regarding Temple- Inland's right to control Ingalls pursuant to the written Agreement. Generally, the right of control and direction is a question of contract between the general employer and special employer. * * * The written Agreement clearly gave Temple-Inland the authority to control Standard Gypsum's employees. Ingalls argues that because the written Agreement specifies that Temple-Inland "shall not be liable to [Standard Gypsum] or others for any act or omission on the part of such employees unless [Temple-Inland] has failed to use reasonable diligence in their hiring, discharge, or supervision," Temple-Inland cannot be considered his employer. Based on this language, Ingalls argues that Temple- Inland is not liable under respondeat superior to third parties for Ingalls' acts and as such, cannot be considered his employer. A third party, however, could indeed maintain a cause of action against Temple-Inland under the theory of respondeat superior for Ingalls' acts. A contract between Temple-Inland and Standard Gypsum would not absolve Temple-Inland of liability to a third party, as the third party would not be bound by the contract. Thus, we interpret the provision to be an indemnification clause between Temple- Inland and Standard Gypsum, not a provision that would absolve Temple-Inland of tort liability to third parties.

The summary judgment evidence shows that at the time of the incident, Ingalls was serving two masters, Temple-Inland and Standard Gypsum, and that his service to one "did not involve abandonment of the service to the other." Restatement (Second) of Agency § 226 (1958). The non-hearsay portions of the affidavits submitted by Ingalls do not create a fact issue regarding the relationship between Standard Gypsum, Temple-Inland, and plant employees. As Temple-Inland and Standard Gypsum were Ingalls' co-employers, the trial court did not err in granting summary judgment in favor of Temple-Inland.

B. Members of Limited Liability Companies

McQueeney and Temple-Inland [FN3] argue that, as members of a limited liability company, they should be considered "employers" of Standard Gypsum's employees for purposes of workers' compensation. This is an issue of first impression. However, there are three cases which provide guidance: Lawler v. Dallas-Statler-Hilton Joint Venture, 793 S.W.2d 27 (Tex.App.-Dallas 1990, writ denied), Sims v. Western Waste Indus., 918 S.W.2d 682 (Tex.App.- 266 Beaumont 1996, writ denied), and Alice Leasing Corp. v. Castillo, 53 S.W.3d 433 (Tex.App.-San Antonio 2001, pet. denied).

FN3. Temple-Inland advances this argument as an alternate ground for affirmance. However, as we have affirmed the judgment as to Temple-Inland on the co-employer issue, our resolution of this issue only affects the summary judgment as to McQueeney.

1. Lawler and Alice Leasing: Joint Ventures and Partnerships

McQueeney and Temple-Inland rely substantially on Lawler. In Lawler, the plaintiff, a maid supervisor, was injured while working at the Dallas Hilton Hotel, for which she collected workers' compensation benefits. 793 S.W.2d at 28. The Dallas Hilton Hotel was owned by Dallas Statler Hilton Joint Venture. Id. The joint venture, in turn, was owned by Hilton Hotel Corp. and Prudential Insurance Co. Id. Under a lease and management agreement, the Hilton Hotel Corp. managed the hotel on behalf of the joint venture. Id. The plaintiff sued Hilton Hotel Corp., Prudential Insurance Co., and the joint venture for negligence. Id. All three claimed that they were immune from liability under the Texas Workers' Compensation Act as the plaintiff's "employers." The Fifth Court of Appeals likened a joint venture to a partnership and noted that where a partnership is an employer, the individual partner is also an employer and not an employee as contemplated by the Texas Workers' Compensation Act. Id. at 31. The court also noted that some states had applied the aggregate theory to partnerships, reasoning that the partnership is an association of persons who are viewed as co-owners. Id. at 34. Other states have adopted an entity theory, concluding that a partnership is an entity in itself rather than an aggregate of its members. Id. The distinction between the two theories is that under the aggregate theory, a plaintiff is barred from bringing an action against a partner where the partnership is the employer. Id. at 33. In contrast, under the entity theory, "the employee of a partnership is not an employee of an individual partner and can recover against such partner, as a third party, for negligent injury incident to employment." Id. (citation omitted). While the court observed that Texas appears to be predominantly an entity theory state, "there are still aggregate features" to the Uniform Partnership Act. See id. at 34 (noting that for example, the partnership act provides for joint and several liability). Thus, the court concluded,

the better rule in cases involving claims by employees against employers is the majority rule that the individual partners or joint venturers are also employers of the partnership's or joint venturer's employees. Although in most other areas Texas is predominantly an entity theory state, it is not inconsistent with the [Uniform Partnership Act] or case law to apply the aggregate theory to the employment relationship.

Id. Furthermore, the court emphasized that its holding was consistent with the theory and practice of workers' compensation law. Id.

With the enactment of the Workers' Compensation Act, the Texas legislature made workers' compensation the exclusive remedy which an employee has against his subscribing employer unless other remedies are expressly provided for.... In consideration of the same legislative intent, we conclude that a partner or joint venturer is also an employer of the partnership's or joint venture's employees.... We refuse to thwart the clear legislative intent of the workers' 267 compensation exclusive remedy provision by arbitrarily favoring the entity theory of partnership in this instance. For the above reasons, we hold that an individual partner or an individual member of a joint venture is an employer of the partnership's or joint venture's employees for purposes of the Texas workers' compensation law.

Id. (citations omitted).

Recently, however, we noted in Alice Leasing Corp. v. Castillo, that Lawler had been overruled by statute. 53 S.W.3d 433, 443 (Tex.App.-San Antonio 2001, pet. denied). We emphasized that since Lawler issued, the Legislature unequivocally embraced the entity theory of partnership law in 1993. Id. The Texas Revised Partnership Act defines a partnership as "an entity distinct from its partners." Id. Thus, we concluded that Lawler had been overruled by statute and "cannot support Alice Leasing's position that the aggregate theory should be applied here." Id. Therefore, even if we were to conclude that a limited liability company is comparable to a partnership or joint venture, Temple-Inland and McQueeney cannot rely on Lawler.

2. Sims: Parent Corporations and Their Subsidiaries

In Sims v. Western Waste Industries, the plaintiff was an employee of Western Waste Industries of Texas ("WWIT"), working as a "bumper" on a garbage truck, when he injured his leg. 918 S.W.2d 682, 683 (Tex.App.- Beaumont 1996, writ denied). He sued Western Waste Indus., Inc. ("WWI"), the parent corporation of his employer. Id. WWI was allegedly involved in the design, manufacture, and marketing of the truck involved in the plaintiff's accident. Id. WWI argued that it was the "alter ego" of WWIT, the "real" employer of the plaintiff, and was entitled to assert immunity under the Texas Workers' Compensation Act. Id. The Ninth Court of Appeals did not agree. It noted that parent and subsidiary corporations are separate and distinct legal entities. Id. at 684. If they were considered to be the same entity, "would an employee be an employee of all subsidiaries and parents and would everyone under the corporate 'umbrella' be immune from suit as a third party under [w]orkers' [c]ompensation?" Id. at 686. Nothing in the Texas Workers' Compensation Act indicates that this was the intent of the legislature. Id.

Partners in a partnership and members of a joint venture are held responsible by law for the acts and omissions of the partnership or joint venture. The benefit of immunity being "all for one and one for all" is accompanied by the obligation of liability being the same. However, parent and subsidiary corporations, absent exceptional circumstances and when it is in the interest of equity to do so, are not held accountable for the acts of the other; this is a primary motivation for incorporation. We are not persuaded that the legislature ever intended parent corporations, who deliberately chose to establish a subsidiary corporation, to be allowed to assert immunity under the Texas Workers' Compensation Act by reverse piercing of the corporate veil they themselves established. WWI has accepted the benefits of establishing a subsidiary corporation in Texas and will not be allowed to disregard that entity now that it is their gain to do so. We hold that Texas law does not permit a parent corporation to assert the alter ego theory of piercing the corporate veil of their subsidiary and thereby assert [w]orkers' [c]ompensation immunity as a defense to suit by the subsidiary's employee.

Id. Ingalls relies heavily on Sims, arguing that the limited liability shield provided to members of 268 an LLC is the key consideration for treating members of an LLC the same as parents of a corporation with regard to the exclusive-remedy provision. We agree.

Like the Texas Business Corporation Act, the Texas Limited Liability Company Act shields its members from liability. Article 4.03 of the Texas Limited Liability Company Act provides that "[e]xcept as and to the extent the regulations specifically provide otherwise, a member or manager is not liable for the debts, obligations or liabilities of a limited liability company including under a judgment decree, or order of a court." Tex.Rev.Civ. Stat. Ann. art. 1528n, § 4.03 (Vernon Supp.2001). Moreover, "[a] member of a limited liability company is not a proper party to proceedings by or against a limited liability company, except where the object is to enforce a member's right against or liability to the limited liability company." Id. § 4.03(C).

In Sims, the court of appeals emphasized that the parent corporation could not argue that it was not liable for the actions of its subsidiary and then argue that it was the same entity for purposes of workers' compensation. 918 S.W.2d at 686. McQueeney and Temple-Inland are likewise arguing that while they benefit from limited liability under the Texas Limited Liability Company Act, they should be *261 considered "employers" for purposes of workers' compensation. The key distinction in this case, however, is that the parent corporation in Sims was being sued for products liability, i.e. an independent tort. The parent corporation was not being sued solely because it was the owner of the subsidiary. Implicit in the Sims opinion is the requirement that the parent of the corporation commit some independent tort separate and apart from the employment relationship. Even Ingalls has conceded that a passive shareholder of a corporation should not be considered a "third party" under the Texas Workers' Compensation Act solely on the basis of being an "owner" of the corporation. As the trial court granted summary judgment solely on the basis of McQueeney being a member of an LLC without considering whether it had allegedly committed an independent tort, we reverse the trial court's judgment with respect to McQueeney and remand for further proceedings consistent with this opinion.

CONCLUSION

In conclusion, we affirm the judgment of the trial court with respect to Temple-Inland, Standard Gypsum, L.L.C., and Standard Gypsum Corporation. With respect to McQueeney, we reverse and remand to the trial court for further proceedings consistent with this opinion.

Olympus America v. 5 th Avenue Photo 756 N.Y.S.2d 702 269 Civil Court, City of New York, New York County.

OLYMPUS AMERICA, INC., Plaintiff, v. 5TH AVENUE PHOTO INC. et al., Defendants.

Sept. 6, 2002.

LUCY BILLINGS, J.

Defendant Bouskila moves to dismiss the complaint against him. He maintains that plaintiff has no claim against him individually for a corporate obligation based on a contract between plaintiff and the corporate defendant. C.P.L.R. § 3211(a)(7).

Plaintiff concedes that defendant Bouskila never personally guaranteed payment under plaintiff's alleged contract with defendant 5th Avenue Photo Inc. When Bouskila entered the contract acting on the corporation's behalf, however, 5th Avenue Photo Inc. had been dissolved as of June 26, 1996, pursuant to the New York State Secretary of State's proclamation, for failure to pay state franchise taxes for 1992-96. N.Y. Tax Law § 203-a. By February 1997, defendant had paid the delinquent taxes, but did not obtain an annulment of the dissolution to reactivate the corporation's official status until April 2, 2002. The transactions with plaintiff that are the subject of this action occurred during 1999-2000.

Had defendants neither paid the delinquent taxes nor filed the certificate of payment to annul the dissolution, Bouskila, the corporation's chairman and president, would be liable for contractual obligations entered during the period of the dissolution, even if the corporation later was reinstated. * * * To permit an officer of a dissolved corporation who has been conducting business in a nonexistent corporate name then, after the fraud is uncovered, to shift personal liability to the corporation by paying the tax arrears would do nothing to discourage the fraud and abuse. * * * To encourage this practice would subvert any incentive, until the fraud is discovered, to pay the tax arrears in order to conduct business in the corporate name legitimately.

To escape personal liability, defendant Bouskila relies on authority that validates transactions during a corporation's dissolution once the corporation is reinstated. * * * This authority permits a corporation to assert its rights or claims, rather than to substitute its liability for an individual's. Permitting a dissolved corporation to establish a property interest or recover payment of a debt owed does not encourage the avoidance of liability. Recovery on corporate claims usually will shore up the corporation's financial condition. Where an officer of a dissolved corporation is attempting to substitute the corporation's liability for a debt for his liability when the corporation's financial viability may be uncertain, however, the avoidance of liability is a significant consideration that the law discourages.

The question here is whether payment of the tax arrears before conducting business and incurring the alleged obligation to plaintiff changes the allocation of liability: whether a 270 corporation that was dissolved for nonpayment of taxes and then cured the delinquency, but not the dissolution, has the capacity to enter a contract. * * * Bouskila contends that by paying the taxes, the corporation was reactivated to de facto corporate status, enabling it to conduct business and enter contracts, and thus relieving him of any personal liability for acting on the corporation's behalf.

Recognizing a corporation's de facto status while still in tax arrears is a disincentive to payment of the taxes. Such recognition after payment of the taxes, however, ignores only the paperwork requirements for reinstatement. * * *

In both situations, where the taxes have not been paid and where they have been paid, the creditor believes it is dealing with a corporation and is relying on its ability to pay. Where the taxes have not been paid, the ability to pay creditors likely is weak and the creditor's reliance misplaced. Where the taxes have been paid, financial trouble and the potential for fraudulent avoidance of financial obligations are less likely. * * *

For all these reasons, a delinquent corporation may not enjoy de facto status, but a non- delinquent corporation that simply has failed to file a certificate for reinstatement does enjoy de facto status. * * * Payment of the back taxes reinstates the corporation to a functional, de facto status. * * *

Since defendant Bouskila contracted with plaintiff in the dissolved corporation's name after it cured its tax delinquency, the corporation had the functional capacity to enter the contract as a de facto corporation. Bouskila, according to his uncontradicted affidavit, believed in good faith that the corporation had taken the necessary steps for reinstatement. * * * Therefore Bouskila is not subject to individual liability on the contract. * * * This defense requires dismissal of the complaint against him. C.P.L.R. § 3211(a)(7).

Kingfield Wood v. Hagan 827 A.2d 619

Supreme Court of Rhode Island.

KINGFIELD WOOD PRODUCTS, INC. v. Thomas HAGAN et al.

July 1, 2003.

Present: WILLIAMS, C.J., FLANDERS, and GOLDBERG, JJ.

271 OPINION

PER CURIAM.

This case came before the Supreme Court on May 6, 2003, pursuant to an order directing all parties to appear and show cause why the issues raised by this appeal should not be summarily decided. After hearing the arguments of counsel and considering the memoranda of the parties, we conclude that cause has not been shown. Accordingly, we shall decide the appeal at this time.

The plaintiff, Kingfield Wood Products, Inc. (Kingfield or plaintiff), is seeking payment of $79,180.92, plus interest and costs, against the defendants, Thomas Hagan (Hagan) and John Teeden, a/k/a Jack Teeden (Teeden and collectively defendants), in their individual capacity, on a book account for goods sold and delivered to Dorette Co., also known and referred to as Dorette, Inc. (Dorette). A justice of the Superior Court entered summary judgment against both defendants for the full amount of the book account. They now appeal.

Dorette was in the business of producing customized taphandles for dispensing draft beer, and Kingfield, a Maine corporation, was the source of its wood supply. The evidence disclosed that the current indebtedness was incurred by Dorette between September 2000 and April 2001. After its demands for payment were unsatisfied, Kingfield filed suit in Superior Court. Based upon its discovery that Dorette's corporate charter and been revoked by the Rhode Island Secretary of State, Kingfield looked to Hagan and Teeden personally for satisfaction of Dorette's outstanding indebtedness. The record disclosed that Dorette's corporate charter had been revoked in 1989 and had not been reinstated. [ * * * ] Accordingly, Kingfield looked to impose liability on the individual defendants for the debt of a nonexistent corporate entity.

By his own admission, Hagan was Dorette's president, secretary, and treasurer and its sole shareholder. Teeden's position within Dorette's business structure is a hotly contested issue. Both Hagan and Teeden contend that since his initial start with the company in 1986, Teeden worked as a salaried employee with no managerial responsibilities or ownership interest in Dorette. Teeden contends that as a mere employee, he bears no personal liability for the debt incurred by his corporate employer. [FN2] However, the evidence also disclosed that Teeden held himself out as vice president of Dorette, both in his dealings with Kingfield and on his business cards.

FN2. Teeden worked for "Dorette, Inc." before Hagan acquired the business; according to defendants, Teeden remained a salesman before and after Dorette changed hands.

In his defense to personal liability, Hagan contended that Dorette was a fictitious trade name of his Massachusetts corporation, Ben Braddock Co., Inc. (Braddock), which purchased Dorette in 1986. According to Hagan, he should be protected from personal liability for Dorette's debts because at all relevant times Braddock was a corporation in good standing in the Commonwealth of Massachusetts. However, Braddock's certificate to do business in Rhode Island was revoked in 1989, reinstated later that year, and again revoked in 1997. When Kingfield contracted with defendants in 2000 and 2001, Braddock was not authorized to do 272 business in this state, although its certificate was reinstated on March 21, 2001. Furthermore, Braddock has never registered Dorette as a fictitious trade name. [FN3] The record supports Kingfield's claim that at no time was it aware of Braddock or its alleged affiliation with Dorette. All purchase orders and billing statements between the parties referred solely to Dorette, and Braddock played no role in the parties' business dealings.

FN3. The only discernable connection between Braddock and Dorette are Braddock's use of Dorette's Pawtucket, Rhode Island, address as its corporate headquarters in its annual corporation report filed with the Commonwealth of Massachusetts, and weekly paychecks to Teeden marked as issued by "Ben Braddock d/b/a Dorette Co."

Upon commencement of suit, defendants filed a motion to dismiss, or in the alternative, a motion for summary judgment based upon their contention that they were not the proper parties. The hearing justice concluded that the revocation of Dorette's corporate charter exposed defendants to personal liability and that Hagan and Teeden were properly named as defendants. The hearing justice denied the defendants' motions for summary judgment.

Thereafter, Kingfield's motion for summary judgment was granted and Teeden's cross- motion for summary judgment was denied; the defendants were declared personally liable for Dorette's indebtedness and ordered to pay plaintiff $79,180.92, plus interest and costs. The hearing justice reasoned that since no corporate entity existed at the time the debt was incurred and because the evidence failed to connect Braddock to Dorette in any meaningful way, defendants were acting individually in their business dealings with Kingfield.

The trial justice also rejected Teeden's contention that he was a mere employee of Dorette. Rather, the trial justice determined that Teeden, as "vice president" of Dorette, was a party to the business transactions. Moreover, plaintiff produced a document setting forth a payment schedule from Dorette to Kingfield that was signed by both Hagan and Teeden. [ * * * ] The defendants filed separate notices of appeal.

Before this Court, Hagan again argues that Dorette was a fictitious trade name of Braddock, a Massachusetts corporation in good standing, and that he therefore cannot be held personally liable for its unpaid corporate debts. He urges this Court to recognize that the mere failure to register a trade name does not invalidate reliance on the corporate form, nor does it impose individual liability on an officer of the corporation. Hagan alleges that Dorette was not registered as Braddock's trade name because of an error by his former counsel, and that he was under the erroneous belief that its name had been registered. Although conceding that Kingfield was unaware that Dorette was a fictitious trade name for Braddock, Hagan argues that as the sole shareholder, director and officer, he should not have been made personally liable for corporate debt simply because the correct name of the corporation, Braddock, had not been disclosed to its creditors. Finally, Hagan reiterates that at no time was Teeden anything other than a disinterested employee.

Teeden argues that summary judgment was granted inappropriately because there remain legitimate issues of material fact with respect to his status, namely, whether he was an employee or principal of Dorette or Braddock, and whether he may be subject to personal liability for his 273 activities as an employee. He assigns error to the hearing justice's reliance on evidence that his name was attached to a schedule for debt repayment to Kingfield.

Standard of Review

We review the grant of summary judgment on a de novo basis and are therefore bound by the same rules and standards as those employed by the trial justice. * * * "To oppose a motion for summary judgment successfully, a party need only provide the trial justice with evidence that, when viewed in the light most favorable to that party, establishes the existence of a genuine issue of a material fact." Ferro v. Volkswagen of America, Inc., 588 A.2d 1047, 1049 (R.I.1991) (citing Super.R.Civ.P. 56 and Peoples Trust Co. v. Searles, 486 A.2d 619, 620 (R.I.1985)).

Background

This Court previously has recognized that individuals who enter into contracts on behalf of non-existent corporate entities are personally liable for the debt that is incurred. In DBA/Delaware Systems Corp. v. Greenfield, 636 A.2d 1318 (R.I.1994) (per curiam), summary judgment for the plaintiff on a promissory note that was executed by the defendants on behalf of a nonexistent corporation was upheld by this Court. Based on the undisputed fact that no such corporation existed at the time of the execution of the promissory note, and based on our determination that G.L.1956 § 7-1.1-136 [FN5] precluded the defense of a de facto corporation, the defendants were held personally liable for the indebtedness they incurred. Greenfield, 636 A.2d at 1319. This rationale also has been applied to cases in which the charter of a one-time legitimate corporation has been revoked. Unlike the orderly dissolution of a corporation in which the principals are shielded from personal liability for actions taken during the winding up period, * * * when a corporation's charter has been revoked, the principals of that corporation are exposed to liability and enter into contracts at their peril. See Pepin v. Donovan, 581 A.2d 717, 717 (R.I.1990) (per curiam) (principal officer of a corporation who continued to do business under the corporate name after the corporation's charter was revoked was personally liable for automobile excise taxes owed to the city of Warwick). In Harris v. Turchetta, 622 A.2d 487 (R.I.1993), creditors were awarded judgment for back rent against the individual principals who continued to conduct corporate business after the charter had been revoked. This Court rejected the defendants' argument that the business was a de facto corporation and that the corporate shield should insulate them from liability. Id. at 489.

FN5. General Laws 1956 § 7-1.1-136 provides as follows: "Unauthorized assumption of corporate powers.--All persons who assume to act as a corporation without authority so to do are jointly and severally liable for all debts and liabilities incurred or arising as a result of that action."

Further, officers and directors who operate a corporation during the interval between reinstatement and revocation of a corporate charter are not relieved from individual liability for any debts that are incurred; efforts at reinstatement have no bearing on liability for indebtedness occurring during the period of revocation. Harris, 622 A.2d at 489. In this instance, a broad spectrum of creditors is protected, including private creditors and municipalities seeking payment for delinquent taxes. In Pepin, 581 A.2d at 718, we held that to discourage fraud and 274 abuse, the retroactive reinstatement of a corporate charter does not provide relief from personal liability to individuals for acts occurring during the period of revocation.

Clearly, the revocation of a corporate charter has potentially grave implications for those who continue to operate the business. Financial obligations that are incurred during this period are not to be entered into lightly, for the law will protect the party victimized by these activities and will impose individual liability on those responsible for the debts.

Fictitious Trade Name

As noted, Hagan contends that he is not personally liable for Dorette's corporate debt because Dorette was operating as a fictitious trade name at the time Kingfield contracted with it. Hagan also owned Braddock, a Massachusetts corporation that was in good standing at the time of the sale. The plaintiff responds that it would be inequitable to permit Braddock to serve as a corporate shield against the personal liability of the defendants because Braddock also is insolvent and Kingfield was unaware of its existence until defendants responded to this litigation. Further, Kingfield argues that defendants were unable to produce any documentation relative to Braddock's relationship with Dorette.

Kingfield also contends that even if Dorette were found to be a fictitious trade name for Braddock, notwithstanding its failure to register the trade name, Braddock had lost its right to conduct business in Rhode Island. Consequently, Kingfield argues, neither Braddock nor Dorette were corporations in the eyes of the state at the time the goods were sold, and defendants therefore acted in their individual capacities and are personally liable for the debts.

We are of the opinion that no factual issues exist with respect to Hagan's admitted status as principal, officer and sole shareholder of Dorette. It is evident that Dorette's corporate charter had been revoked during the time in which Kingfield contracted with Dorette. Therefore, the finding that Hagan was held personally liable to Kingfield for the debts that he incurred was proper.

Nor are we persuaded that Braddock has any relevance to this case. Hagan has failed to demonstrate that Dorette was in any cognizable way affiliated with, or owned by Braddock or that Dorette served as Braddock's fictitious trade name. The party opposing summary judgment has the burden of producing "competent evidence [of] the existence of a disputed material issue of fact * * * and cannot rely upon mere allegations or denials in the pleadings, mere conclusions, or mere legal opinions." Star-Shadow Productions, Inc. v. Super 8 Sync Sound System, 730 A.2d 1081, 1083 (R.I.1999) (per curiam) (quoting Hale v. Marshall Contractors, Inc., 667 A.2d 1252, 1254 (R.I.1995)). In the case before the Court, no evidence has been brought forth to demonstrate that Dorette was in any way a fictitious trade name for Braddock. Significantly, at no time during the dealings between the parties was Kingfield alerted to this alleged corporate identity. We are satisfied that even if defendants genuinely intended Dorette to operate as a fictitious trade name, the failure to comply with the provisions of § 7-1.1- 7.1 [FN6] and record the fictitious business name is fatal to Hagan's argument. Additionally, we conclude that Hagan has presented insufficient evidence of the existence of the Dorette-Braddock corporate relationship to warrant an inquiry into whether any common-law trade name exists. See 275 National Lumber & Building Materials Co. v. Langevin, 798 A.2d 429, 433n.3 (R.I.2002) (per curiam) (corporation that had registered a trade name and used it continuously can maintain an infringement action at common law).

FN6. Section 7-1.1-7.1(a) provides: "Fictitious business name.--(a) Any corporation organized and existing under the laws of any state or territory of the United States may transact business in this state under a fictitious name, provided that it files a fictitious business name statement in accordance with this section prior to the time it commences to transact the business under the fictitious name."

Furthermore, the evidence disclosed that Braddock was not legally entitled to transact business in Rhode Island because its certificate had been revoked. Thus, it follows that an alter- ego entity acting in Braddock's stead also was barred from operating in Rhode Island. To hold otherwise would result in the absurd circumstance of unauthorized foreign corporations continuing business within the state under fictitious trade names. This result would nullify the intended purpose of regulating corporate business to protect creditors and consumers alike. Braddock appears to have been raised as a last ditch effort to avoid individual liability; its affiliation with Dorette became relevant only after Kingfield moved for summary judgment. The reality is that Kingfield delivered goods while neither Braddock nor Dorette were authorized to do business in the state and, hence, Kingfield is legally entitled to look to Hagan for satisfaction of the outstanding invoices. Hagan's appeal is denied and dismissed.

Teeden's Employment Status

In contrast with Hagan, who did not contest the assertion that he was both a principal and officer of Dorette and Braddock, Teeden flatly denies that he had any role other than that of salaried employee for "Braddock d/b/a Dorette Co." To support its argument that Teeden was part owner and officer for Dorette, plaintiff argues that it relied on the representations made at the time of the sale that Teeden was as an officer for Dorette and that Dorette was a viable corporation. Additionally, Kingfield refers to an article in the Providence Journal that referred to Teeden as "vice president and chief executive officer" and "co-owner." [FN7]

FN7. Although this evidence further clouds the question of Teeden's position within Dorette, it is neither persuasive nor dispositive of the issue; the nature of the "evidence" and the inability to verify the source of the statement contained in the newspaper significantly weaken its probative value.

The question of individual liability for the business dealings of a revoked corporation depends on the status of the employee. His or her title in the organization and position within the corporate structure are relevant considerations. Similarly, the level of decision-making and control of the business also are important. In Harris, 622 A.2d at 490, the wife of the owner of a corporation that ceased to exist was held to be personally liable for corporate debt based upon her participation in managing the enterprise. The wife held the office of vice president and treasurer and testified that she worked on the restaurant's books. Consequently, she was found to be a principal of the business. In light of Harris, the test for individual liability is the level of 276 responsibility with respect to the affairs of the business and whether this service was of sufficient significance to characterize that person as a principal of the corporation. This determination is fact-driven, although no one factor is dispositive. It requires an evaluation of the title held by the person and his or her behavior with respect to the affairs of the business.

Our careful review of the record on appeal has convinced us that Teeden has demonstrated that a genuine issue of material fact exists about his relationship with Dorette and the role he assumed throughout Kingfield's business dealings with Dorette. Resolution of this question is necessary for the fact-finder. Although the evidence established that Teeden held himself out as vice president of Dorette, the level of responsibility and authority he assumed within the company has not been proven. We cannot assume on the face of the record that Teeden's conduct rendered him a principal of the corporation; to support an inference that he was a principal his activities must be substantial and of a sufficient duration. "The duty of a Superior Court justice in passing upon a motion for summary judgment is issue finding rather than issue resolution." General Motors Acceptance Corp. v. Johnson, 746 A.2d 122, 124 (R.I.2000) (per curiam). Based on the record before us, we conclude that the hearing justice erred in holding that Teeden was a principal of the corporation such that he was personally responsible for its debt. Accordingly, Teeden's appeal is sustained.

Based on the foregoing, the judgment of the Superior Court is affirmed in part and vacated in part. The appeal of the defendant Hagan is denied and dismissed and the judgment against him is affirmed. The defendant Teeden's appeal is sustained and the judgment against him is vacated. This case is remanded to the Superior Court for further proceedings in accordance with this opinion.

Justice FLAHERTY did not participate.

Sea-Land Services, Inc. v. Pepper Source 941 F.2d 519 (7th Cir.1991)

SEA-LAND SERVICES, INC., Plaintiff-Appellee, v. The PEPPER SOURCE, Caribe Crown, Inc., Gerald Marchese doing business as Jamar Corporation, et al., Defendants-Appellants. No. 90-2589. United States Court of Appeals, Seventh Circuit.

277 Argued April 17, 1991. Decided Aug. 20, 1991. BAUER, Chief Judge. This spicy case finds its origin in several shipments of Jamaican sweet peppers. Appellee Sea-Land Services, Inc. ("Sea-Land"), an ocean carrier, shipped the peppers on behalf of The Pepper Source ("PS"), one of the appellants here. PS then stiffed Sea-Land on the freight bill, which was rather substantial. Sea-Land filed a federal diversity action for the money *520 it was owed. On December 2, 1987, the district court entered a default judgment in favor of Sea-Land and against PS in the amount of $86,767.70. But PS was nowhere to be found; it had been "dissolved" in mid- 1987 for failure to pay the annual state franchise tax. Worse yet for Sea- Land, even had it not been dissolved, PS apparently had no assets. With the well empty, Sea- Land could not recover its judgment against PS. Hence the instant lawsuit. In June 1988, Sea-Land brought this action against Gerald J. Marchese and five business entities he owns: PS, Caribe Crown, Inc., Jamar Corp., Salescaster Distributors, Inc., and Marchese Fegan Associates. [FN1] Marchese also was named individually. Sea-Land sought by this suit to pierce PS's corporate veil and render Marchese personally liable for the judgment owed to Sea-Land, and then "reverse pierce" Marchese's other corporations so that they, too, would be on the hook for the $87,000. Thus, Sea-Land alleged in its complaint that all of these corporations "are alter egos of each other and hide behind the veils of alleged separate corporate existence for the purpose of defrauding plaintiff and other creditors." Count I, & 11. Not only are the corporations alter egos of each other, alleged Sea-Land, but also they are alter egos of Marchese, who should be held individually liable for the judgment because he created and manipulated these corporations and their assets for his own personal uses. Count III, && 9-10. (Hot on the heels of the filing of Sea-Land's complaint, PS took the necessary steps to be reinstated as a corporation in Illinois.) FN1. This last defendant is a partnership. Because Sea-Land served only one partner-- Marchese--the district court did not consider or enter judgment on Sea-Land's claims against this entity. See Sea-Land Services, Inc. v. The Pepper Source, No. 88 C 4861, slip op. at 2 n. 2, 1990 WL 91497, 1990 U.S. Dist. LEXIS 7676 (N.D.Ill. June 22, 1990) ("Dist.Ct.Op."). Thus, for all practical purposes, the entity of Marchese Fegan Associates is out of this case, and henceforth our references to "the defendants" do not include this entity. In early 1989, Sea-Land filed an amended complaint adding Tie-Net International, Inc., as a defendant. Unlike the other corporate defendants, Tie-Net is not owned solely by Marchese: he holds half of the stock, and an individual named George Andre owns the other half. Sea-Land alleged that, despite this shared ownership, Tie-Net is but another alter ego of Marchese and the other corporate defendants, and thus it also should be held liable for the judgment against PS. Through 1989, Sea-Land pursued discovery in this case, including taking a two- day deposition from Marchese. In December 1989, Sea-Land moved for summary judgment. In that motion--which, with the brief in support and the appendices, was about three inches thick--Sea- Land argued that it was "entitled to judgment as a matter of law, since the evidence including deposition testimony and exhibits in the appendix will show that piercing the corporate veil and

278 finding the status of an alter ego is merited in this case." Marchese and the other defendants filed brief responses. In an order dated June 22, 1990, the court granted Sea-Land's motion. The court discussed and applied the test for corporate veil-piercing explicated in Van Dorn Co. v. Future Chemical and Oil Corp., 753 F.2d 565 (7th Cir.1985). Analyzing Illinois law, we held in Van Dorn that a corporate entity will be disregarded and the veil of limited liability pierced when two requirements are met: [F]irst, there must be such unity of interest and ownership that the separate personalities of the corporation and the individual [or other corporation] no longer exist; and second, circumstances must be such that adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice. 753 F.2d at 569-70 (quoting Macaluso v. Jenkins, 95 Ill.App.3d 461, 50 Ill.Dec. 934, 938, 420 N.E.2d 251, 255 (1981)) (other citations omitted). See also Main Bank of Chicago v. Baker, 86 Ill.2d 188, 205, 56 Ill.Dec. 14, 21, 427 N.E.2d 94, 101 (1981) (Illinois Supreme Court stating the test in *521 essentially the same terms); Pederson v. Paragon Pool Enterprises, 214 Ill.App.3d 815, 158 Ill.Dec. 371, 373, 574 N.E.2d 165, 167 (1st Dist.1991) (recent veil-piercing case applying essentially the same test). As for determining whether a corporation is so controlled by another to justify disregarding their separate identities, the Illinois cases, as we summarized them in Van Dorn, focus on four factors: "(1) the failure to maintain adequate corporate records or to comply with corporate formalities, (2) the commingling of funds or assets, (3) undercapitalization, and (4) one corporation treating the assets of another corporation as its own." 753 F.2d at 570 (citations omitted). See also Main Bank, 427 N.E.2d at 102; Pederson, 214 Ill.App.3d at 820, 158 Ill.Dec. at 374, 574 N.E.2d at 168. Following the lead of the parties, the district court in the instant case laid the template of Van Dorn over the facts of this case. Dist.Ct.Op. at 3- 12. The court concluded that both halves and all features of the test had been satisfied, and, therefore, entered judgment in favor of Sea- Land and against PS, Caribe Crown, Jamar, Salescaster, Tie-Net, and Marchese individually. These defendants were held jointly liable for Sea-Land's $87,000 judgment, as well as for post- judgment interest under Illinois law. From that judgment Marchese and the other defendants brought a timely appeal. Because this is an appeal from a grant of summary judgment, our review is de novo. Thus, our task is to examine the evidence for ourselves, apply the same standard as the district court (namely, the Van Dorn test), and determine whether there is no genuine issue of material fact and whether Sea-Land is entitled to judgment as a matter of law. Bank Leumi Le-Israel, B.M. v. Lee, 928 F.2d 232, 234 (7th Cir.1991) (citing, inter alia, Fed.R.Civ.P. 56(c)). The first and most striking feature that emerges from our examination of the record is that these corporate defendants are, indeed, little but Marchese's playthings. Marchese is the sole shareholder of PS, Caribe Crown, Jamar, and Salescaster. He is one of the two shareholders of Tie-Net. Except for Tie-Net, none of the corporations ever held a single corporate meeting. (At the handful of Tie-Net meetings held by Marchese and Andre, no minutes were taken.) During his deposition, Marchese did not remember any of these corporations ever passing articles of incorporation, bylaws, or other agreements. As for physical facilities, Marchese runs all of these 279 corporations (including Tie-Net) out of the same, single office, with the same phone line, the same expense accounts, and the like. And how he does "run" the expense accounts! When he fancies to, Marchese "borrows" substantial sums of money from these corporations--interest free, of course. The corporations also "borrow" money from each other when need be, which left at least PS completely out of capital when the Sea-Land bills came due. What's more, Marchese has used the bank accounts of these corporations to pay all kinds of personal expenses, including alimony and child support payments to his ex-wife, education expenses for his children, maintenance of his personal automobiles, health care for his pet--the list goes on and on. Marchese did not even have a personal bank account! (With "corporate" accounts like these, who needs one?) And Tie-Net is just as much a part of this as the other corporations. On appeal, Marchese makes much of the fact that he shares ownership of Tie-Net, and that Sea-Land has not been able to find an example of funds flowing from PS to Tie-Net to the detriment of Sea-Land and PS's other creditors. So what? The record reveals that, in all material senses, Marchese treated Tie- Net like his other corporations: he "borrowed" over $30,000 from Tie-Net; money and "loans" flowed freely between Tie-Net and the other corporations; and Marchese charged up various personal expenses (including $460 for a picture of himself with President Bush) on Tie-Net's credit card. Marchese was not deterred by the fact that he did not hold all of the stock *522 of Tie-Net; why should his creditors be? [FN2] FN2. We note that the record evidence in this case, if true, establishes that for years Marchese flagrantly has disregarded the tax code concerning the treatment of corporate funds. Yet, when we inquired at oral argument whether Marchese currently is under investigation by the IRS, his counsel informed us that to his knowledge he is not. Marchese also stated in his deposition that he never has been audited by the IRS. If these statements are true, and the IRS has so far shown absolutely no interest in Marchese's financial shenanigans with his "corporations," how and why that has occurred may be the biggest puzzles in this litigation. In sum, we agree with the district court that their can be no doubt that the "shared control/unity of interest and ownership" part of the Van Dorn test is met in this case: corporate records and formalities have not been maintained; funds and assets have been commingled with abandon; PS, the offending corporation, and perhaps others have been undercapitalized; and corporate assets have been moved and tapped and "borrowed" without regard to their source. Indeed, Marchese basically punted this part of the inquiry before the district court by coming forward with little or no evidence in response to Sea-Land's extensively supported argument on these points. That fact alone was enough to do him in; opponents to summary judgment motions cannot simply rest on their laurels, but must come forward with specific facts showing that there is a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-50, 106 S.Ct. 2505, 2510-11, 91 L.Ed.2d 202 (1986). See also Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 1355, 89 L.Ed.2d 538 (1986) ("[O]pponent [to summary judgment motion] must do more than simply show that there is some metaphysical doubt as to the material facts."); Fed.R.Civ.P. 56(e). Regarding the elements that make up the first half of the Van Dorn test, Marchese and the other defendants have not done so. Thus, Sea- Land is entitled to judgment on these points.

280 The second part of the Van Dorn test is more problematic, however. "Unity of interest and ownership" is not enough; Sea-Land also must show that honoring the separate corporate existences of the defendants "would sanction a fraud or promote injustice." Van Dorn, 753 F.2d at 570. This last phrase truly is disjunctive: Although an intent to defraud creditors would surely play a part if established, the Illinois test does not require proof of such intent. Once the first element of the test is established, either the sanctioning of a fraud (intentional wrongdoing) or the promotion of injustice, will satisfy the second element. Id. (emphasis in original). Seizing on this, Sea-Land has abandoned the language in its two complaints that make repeated references to "fraud" by Marchese, and has chosen not to attempt to prove that PS and Marchese intended to defraud it--which would be quite difficult on summary judgment. [FN3] Instead, Sea-Land has argued that honoring the defendants' separate identities would "promote injustice." FN3. For a discussion of facts that support a finding of intent to defraud, see Torco Oil Co. v. Innovative Thermal Corp., 763 F.Supp. 1445, 1451-52 (N.D.Ill.1991). But what, exactly, does "promote injustice" mean, and how does one establish it on summary judgment? These are the critical, troublesome questions in this case. To start with, as the above passage from Van Dorn makes clear, "promote injustice" means something less than an affirmative showing of fraud--but how much less? In its one-sentence treatment of this point, the district court held that it was enough that "Sea-Land would be denied a judicially-imposed recovery." Dist.Ct.Op. at 11-12. Sea-Land defends this reasoning on appeal, arguing that "permitting the appellants to hide behind the shield of limited liability would clearly serve as an injustice against appellee" because it would "impermissibly deny appellee satisfaction." Appellee's Brief at 14-15. But that cannot be what is meant by "promote injustice." The prospect of an unsatisfied judgment looms in every veil- piercing action; why else would a plaintiff bring such an action? Thus, if an unsatisfied judgment is enough for the *523 "promote injustice" feature of the test, then every plaintiff will pass on that score, and Van Dorn collapses into a one-step "unity of interest and ownership" test. Because we cannot abide such a result, we will undertake our own review of Illinois cases to determine how the "promote injustice" feature of the veil- piercing inquiry has been interpreted. In Pederson, a recent case from the Illinois court of appeals, the court offered the following summary: "Some element of unfairness, something akin to fraud or deception or the existence of a compelling public interest must be present in order to disregard the corporate fiction." 214 Ill.App.3d at 821, 158 Ill.Dec. at 375, 574 N.E.2d at 169. (The court ultimately refused to pierce the corporate veil in Pederson, at least in part because "[n]othing in these facts provides evidence of scheming on the part of defendant to commit a fraud on potential creditors [of the two defendant corporations]." Id. at 823, 158 Ill.Dec. at 376, 574 N.E.2d at 170.) The light shed on this point by other Illinois cases can be seen only if we examine the cases on their facts. Perivoliotis v. Pierson, 167 Ill.App.3d 259, 118 Ill.Dec. 186, 521 N.E.2d 254 (1988), was a complicated adverse possession case that addresses briefly the meaning of the "injustice" requirement. The issue in the case was whether an individual (Woulfe) could possess a strip of land adversely to a corporation (TomDon) that held title to the land, when Woulfe was the president and one of only two shareholders (the other, his wife) of TomDon. The court held 281 that, because TomDon was merely Woulfe's alter ego, Woulfe could not possess the land "adversely." In so holding, the court stated that "the running of the prescriptive period against a corporation's property during a period when the corporation's principal owner and president mistakenly possessed the encroachment area in his individual capacity defies common sense and is the type of 'injustice' that would justify piercing the corporate veil." Id. 118 Ill.Dec. at 188, 521 N.E.2d at 256. Gromer, Wittenstrom & Meyer, P.C. v. Strom, 140 Ill.App.3d 349, 95 Ill.Dec. 149, 489 N.E.2d 370 (1986), was another unfortunately complicated case in which our issue was addressed. Basically, three individuals, W, M, and S, were partners. All three signed a note agreeing to be jointly and severally liable for a debt owed to a bank. S left the partnership and it dissolved. W & M then formed a new corporation, W & M Co., of which they were the sole shareholders. W & M Co. paid off the bank and became the assignee of the note, and then promptly sued S for collection on the note. Putting to one side the rather abstruse procedural posture of the case, suffice it to say that W & M Co. won at the trial level and appealed. On appeal, S claimed that the court should pierce the corporate veil and recognize W & M Co. for what it really was--his former partners and cosigners on the note; the reason being that cosigners cannot payoff a note and then take judgment on the note against another cosigner. The appellate court agreed and vacated the judgment: We believe that these facts and arguments sufficiently indicate that to recognize [W & M Co.] as an entity separate from its shareholders would be to sanction an injustice. Where such an injustice would result and there is such unity of interest between the corporation and the individual shareholders that the separate personalities no longer exist, the corporate veil must be pierced. Id. 95 Ill.Dec. at 153, 489 N.E.2d at 374 (citations omitted). In B. Kreisman & Co. v. First Arlington Nat'l Bank of Arlington Heights, 91 Ill.App.3d 847, 47 Ill.Dec. 757, 415 N.E.2d 1070 (1980), the appellate court reversed the trial court's refusal to pierce the veil. Defendant corporation stiffed plaintiff for the bill on some restaurant equipment, so plaintiff sued for a mechanics lien. Plaintiff won at trial, but the trial court would not pierce the defendant corporation's veil and also hold liable the individual who was the "dominant force" controlling the defendant corporation. Noting that the equipment, though never paid for, was used by the defendant corporation for several years, the appellate court stated, "Under these circumstances we believe the corporate veil should be pierced to require [the 'dominant individual'] to be personally liable; *524 to say otherwise would promote an injustice and permit her to be unjustly enriched at plaintiff's expense." Id. 47 Ill.Dec. at 760, 415 N.E.2d at 1073 (citations omitted). * * * Generalizing from these cases, we see that the courts that properly have pierced corporate veils to avoid "promoting injustice" have found that, unless it did so, some "wrong" beyond a creditor's inability to collect would result: the common sense rules of adverse possession would be undermined; former partners would be permitted to skirt the legal rules concerning monetary obligations; a party would be unjustly enriched; a parent corporation that caused a sub's liabilities and its inability to pay for them would escape those liabilities; or an intentional 282 scheme to squirrel assets into a liability-free corporation while heaping liabilities upon an asset- free corporation would be successful. Sea-Land, although it alleged in its complaint the kind of intentional asset- and liability-shifting found in Van Dorn, has yet to come forward with evidence akin to the "wrongs" found in these cases. Apparently, it believed, as did the district court, that its unsatisfied judgment was enough. That belief was in error, and the entry of summary judgment premature. We, therefore, reverse the judgment and remand the case to the district court. On remand, the court should require that Sea-Land produce, if it desires summary judgment, evidence and argument that would establish the kind of additional *525 "wrong" present in the above cases. For example, perhaps Sea-Land could establish that Marchese, like Roth in Van Dorn, used these corporate facades to avoid its responsibilities to creditors; or that PS, Marchese, or one of the other corporations will be "unjustly enriched" unless liability is shared by all. Of course, Sea-Land is not required fully to prove intent to defraud, which it probably could not do on summary judgment anyway. But it is required to show the kind of injustice to merit the evocation of the court's essentially equitable power to prevent "injustice." It may well be that, after more of such evidence is adduced, no genuine issue of fact exists to prevent Sea-Land from reaching Marchese's other pet corporations for PS's debt. Or it may be that only a finder of fact will be able to determine whether fraud or "injustice" is involved here. In any event, the record as it currently stands is insufficient to uphold the entry of summary judgment. REVERSED and REMANDED with instructions

Walkovszky v. Carlton 18 N.Y.2d 414, 223 N.E.2d 6, 276 N.Y.S.2d 585 (1966)

John WALKOVSZKY, Respondent, v. William CARLTON, Appellant, et al., Defendants. Court of Appeals of New York. Nov. 29, 1966. *416 FULD, Judge. This case involves what appears to be a rather common practice in the taxicab industry of vesting the ownership of a taxi fleet in many corporations, each owning only one or two cabs. ***587 The complaint alleges that the plaintiff was severely injured four years ago in New York City when he was run down by a taxicab owned by the defendant Seon Cab Corporation and negligently operated at the time by the defendant Marchese. The individual defendant, Carlton, is claimed to be a stockholder of 10 corporations, including Seon, each of which has but two 283 cabs registered in its name, and it is implied that only the minimum automobile liability insurance required by law (in the amount of $10,000) is carried on any one cab. Although seemingly independent of one another, these corporations are alleged to be 'operated * * * as a single entity, unit and enterprise' with regard to financing, supplies, repairs, employees and garaging, and all are named as defendants.[FN1] The plaintiff asserts that he is also entitled to hold their stockholders personally liable for the damages sought because the multiple corporate structure constitutes an unlawful attempt 'to defraud members of the general public' who might be injured by the cabs. FN1 The corporate owner of a garage is also included as a defendant. *417 The defendant Carlton has moved, pursuant to CPLR 3211(a)7, to dismiss the complaint on the ground that as to him it 'fails to state a cause of action'. The court at Special Term granted the motion but the Appellate Division, by a divided vote, reversed, holding that a valid cause of action was sufficiently stated. The defendant Carlton appeals to us, from the nonfinal order, by leave of the Appellate Division on a certified question. The law permits the incorporation of a business for the very purpose of enabling its proprietors to escape personal liability (see, e.g., Bartle v. Home Owners Co-op., 309 N.Y. 103, 106, 127 N.E.2d 832, 833) but, manifestly, the privilege is not without its limits. Broadly speaking, the courts will disregard the corporate form, or, to use accepted terminology, 'pierce the corporate veil', whenever necessary 'to prevent fraud or to achieve equity'. (International Aircraft Trading Co. v. Manufacturers Trust Co., 297 N.Y. 285, 292, 79 N.E.2d 249, 252.) In determining whether liability should be extended to reach assets beyond those belonging to the corporation, **8 we are guided, as Judge Cardozo noted, by 'general rules of agency'. (Berkey v. Third Ave. Ry. Co., 244 N.Y. 84, 95, 155 N.E. 58, 61, 50 A.L.R. 599.) In other words, whenever anyone uses control of the corporation to further his own rather than the corporation's business, he will be liable for the corporation's acts 'upon the principle of Respondeat superior applicable even where the agent is a natural person'. (Rapid Tr. Subway Constr. Co. v. City of New York, 259 N.Y. 472, 488, 182 N.E. 145, 150.) Such liability, moreover, extends not only to the corporation's commercial dealings (see, e.g., Y; Mangan v. Terminal Transp. System, 247 App.Div. 853, 286 N.Y.S. 666, mot. for lv. to app. den. 272 N.Y. 676, 286 N.Y.S. 666.) In the Mangan case (247 App.Div. 853, 286 N.Y.S. 666, mot. for lv. to app. den. 272 N.Y. 676, 286 N.Y.S. 666, supra), the plaintiff was injured as a result of the negligent operation of a cab owned and operated by one of four corporations affiliated with the defendant Terminal. Although the defendant was not a stockholder of any of the operating companies, both the defendant and the operating *418 companies were owned, for the most part, by the same parties. The defendant's name (Terminal) was conspicuously displayed on the sides of all of the taxis used in the enterprise and, in point of fact, the defendant actually serviced, inspected, repaired and dispatched them. These facts were deemed to provide sufficient cause for piercing the corporate veil of the operating company--the nominal owner of the cab which injured the plaintiff--and holding the defendant liable. The operating companies were simply instrumentalities for carrying on the business of the defendant without imposing upon it financial and other liabilities incident to the actual ownership and operation of the cabs. * * *

284 In the case before us, the plaintiff has explicitly alleged that none of the corporations 'had a separate existence of their own' and, as indicated above, all are named as defendants. However, it is one thing to assert that a corporation is a fragment of a larger corporate combine which actually conducts the business. (See Berle, The Theory of Enterprise Entity, 47 Col.L.Rev. 343, 348--350.) It is quite another to claim that the corporation is a 'dummy' for its individual stockholders who are in reality carrying on the business in their personal capacities for purely personal rather than corporate ends. (See African Metals Corp. v. Bullowa, 288 N.Y. 78, 85, 41 N.E.2d 366, 469.) Either circumstance would justify treating the corporation as an agent and piercing the corporate veil to reach the principal but a different result would follow in ***589 each case. In the first, only a larger Corporate entity would be held financially responsible Y while, in the **9 other, the stockholder would be personally liable.Y Either the stockholder is conducting the business in his individual capacity or he is not. If he is, he will be liable; if he is not, then it does not matter-- insofar as his personal liability is concerned--that the enterprise is actually being carried on by a larger 'enterprise entity'. (See Berle, The Theory of Enterprise Entity, 47 Col.L.Rev. 343.) At this stage in the present litigation, we are concerned only with the pleadings and, since CPLR 3014 permits causes of action to be stated 'alternatively or hypothetically', it is possible for the plaintiff to allege both theories as the basis for his demand for judgment. In ascertaining whether he has done so, we must consider the entire pleading, educing therefrom "whatever can be imputed from its statements by fair and reasonable intendment."Y Reading the complaint in this case most favorably and liberally, we do not believe that there can be gathered from its averments the allegations required to spell out a valid cause of action against the defendant Carlton. The individual defendant is charged with having 'organized, managed, dominated and controlled' a fragmented corporate entity but there are no allegations that he was conducting business in his individual capacity. Had the taxicab fleet been owned by a single corporation, it would be readily apparent that the plaintiff would face formidable barriers in attempting to establish personal liability on the part of the corporation's stockholders. The fact that the fleet ownership has been deliberately split up among many corporations does not ease the plaintiff's burden in that respect. The corporate form may not be disregarded merely because the assets of the corporation, together with the mandatory insurance coverage of the vehicle which struck the plaintiff, are insufficient to assure him the recovery sought. If Carlton were to be held individually liable on those facts alone, the decision would apply ***590 equally to the thousands of cabs which are owned by their individual drivers who conduct their businesses through corporations organized pursuant to section 401 of the Business Corporation Law, Consol.Laws, c. 4 and carry the minimum insurance required by subdivision 1 (par. (a)) of section 370 of the Vehicle and Traffic Law, Consol.Laws, c. 71. These *420 taxi owner- operators are entitled to form such corporations (cf. Elenkrieg v. Siebrecht, 238 N.Y. 254, 144 N.E. 519, 34 A.L.R. 592), and we agree with the court at Special Term that, if the insurance coverage required by statute 'is inadequate for the protection of the public, the remedy lies not with the courts but with the Legislature.' It may very well be sound policy to require that certain corporations must take out liability insurance which will afford adequate compensation to their potential tort victims. However, the responsibility for imposing conditions on the privilege of incorporation has been committed by the Constitution to the Legislature (N.Y. Const., art. X, s 1) and it may not be fairly implied, from any statute, that the Legislature intended, without the 285 slightest discussion or debate, to require of taxi corporations that they carry automobile liability insurance over and above that mandated by the Vehicle and Traffic Law.[FN2] FN2 There is no merit to the contention that the ownership and operation of the taxi fleet 'constituted a breach of hack owners regulations as promulgated by (the) Police Department of the City of New York'. Those regulations are clearly applicable to individual owner-operators and fleet owners alike. They were not intended to prevent either incorporation of a single-vehicle taxi business or multiple incorporation of a taxi fleet. **10 This is not to say that it is impossible for the plaintiff to state a valid cause of action against the defendant Carlton. However, the simple fact is that the plaintiff has just not done so here. While the complaint alleges that the separate corporations were undercapitalized and that their assets have been intermingled, it is barren of any 'sufficiently particular(ized) statements' (CPLR 3013; see 3 Weinstein-Korn-Miller, N.Y. Civ.Prac., par. 3013.01 et seq., pp. 30--142 et seq.) that the defendant Carlton and his associates are actually doing business in their individual capacities, shuttling their personal funds in and out of the corporations 'without regard to formality and to suit their immediate convenience.' (Weisser v. Mursam Shoe Corp., 2 Cir., 127 F.2d 344, 345, 145 A.L.R. 467, supra.) Such a 'perversion of the privilege to do business in a corporate form' (Berkey v. Third Ave. Ry. Co., 244 N.Y. 84, 95, 155 N.E. 58, 61, 50 A.L.R. 599, supra) would justify imposing personal liability on the individual stockholders. (See African Metals Corp. v. Bullowa, 288 N.Y. 78, 41 N.E.2d 466, supra.) Nothing of the sort has in fact been charged, and it cannot reasonably or logically be inferred from the happenstance that the business of Seon *421 Cab Corporation may actually be carried on by a larger corporate entity composed ***591 of many corporations which, under general principles of agency, would be liable to each other's creditors in contract and in tort.[FN3] FN3 In his affidavit in opposition to the motion to dismiss, the plaintiff's counsel claimed that corporate assets had been 'milked out' of, and 'siphoned off' from the enterprise. Quite apart from the fact that these allegations are far too vague and conclusory, the charge is premature. If the plaintiff succeeds in his action and becomes a judgment creditor of the corporation, he may then sue and attempt to hold the individual defendants accountable for any dividends and property that were wrongfully distributed (Business Corporation Law, ss 510, 719, 720). In point of fact, the principle relied upon in the complaint to sustain the imposition of personal liability is not agency but fraud. Such a cause of action cannot withstand analysis. If it is not fraudulent for the owner- operator of a single cab corporation to take out only the minimum required liability insurance, the enterprise does not become either illicit or fraudulent merely because it consists of many such corporations. The plaintiff's injuries are the same regardless of whether the cab which strikes him is owned by a single corporation or part of a fleet with ownership fragmented among many corporations. Whatever rights he may be able to assert against parties other than the registered owner of the vehicle come into being not because he has been defrauded but because, under the principle of Respondeat superior, he is entitled to hold the whole enterprise responsible for the acts of its agents. In sum, then, the complaint falls short of adequately stating a cause of action against the defendant Carlton in his individual capacity.

286 The order of the Appellate Division should be reversed, with costs in this court and in the Appellate Division, the certified question answered in the negative and the order of the Supreme Court, Richmond County, reinstated, with leave to serve an amended complaint. KEATING, Judge (dissenting). The defendant Carlton, the shareholder here sought to be held for the negligence of the driver of a taxicab, was a principal shareholder and organizer of the defendant corporation which owned the taxicab. The corporation was one of 10 organized by the defendant, each containing *422 two cabs and each cab having the 'minimum liability' insurance coverage mandated by section **11 370 of the Vehicle and Traffic Law. The sole assets of these operating corporations are the vehicles themselves and they are apparently subject to mortgages. [FN*] FN* It appears that the medallions, which are of considerable value, are judgment proof. (Administrative Code of City of New York, s 436--2.0.) From their inception these corporations were intentionally undercapitalized for the purpose of avoiding responsibility for acts which were bound to arise as a result of the operation of a large taxi fleet having cars out on the street 24 hours a day and engaged in public transportation. ***592 And during the course of the corporations' existence all income was continually drained out of the corporations for the same purpose. The issue presented by this action is whether the policy of this State, which affords those desiring to engage in a business enterprise the privilege of limited liability through the use of the corporate device, is so strong that it will permit that privilege to continue no matter how much it is abused, no matter how irresponsibly the corporation is operated, no matter what the cost to the public. I do not believe that it is. Under the circumstances of this case the shareholders should all be held individually liable to this plaintiff for the injuries he suffered. (See Mull v. Colt Co., D.C., 31 F.R.D. 154, 156; Teller v. Clear Serv. Co., 9 Misc.2d 495, 173 N.Y.S.2d 183.) At least, the matter should not be disposed of on the pleadings by a dismissal of the complaint. 'If a corporation is organized and carries on business without substantial capital in such a way that the corporation is likely to have no sufficient assets available to meet its debts, it is inequitable that shareholders should set up such a flimsy organization to escape personal liability. The attempt to do corporate business without providing any sufficient basis of financial responsibility to creditors is an abuse of the separate entity and will be ineffectual to exempt the shareholders from corporate debts. It is coming to be recognized as the policy of law that shareholders should in good faith put at the risk of the business unincumbered capital reasonably adequate for its prospective liabilities. If capital is illusory or trifling compared with the business to be done and the risks *423 of loss, this is a ground for denying the separate entity privilege.' (Ballantine, Corporations (rev.ed., 1946), s 129, pp. 302--303.) * * * *425 The policy of this State has always been to provide and facilitate recovery for those injured through the negligence of others. The automobile, by its very nature, is capable of causing servere and costly injuries when not operated in a proper manner. The great increase in the number of automobile accidents combined with the frequent financial irresponsibility of the individual driving the car led to the adoption of section 388 of the Vehicle and Traffic Law

287 which had the effect of imposing upon the owner of the vehicle the responsibility for its negligent **13 operation. It is upon this very statute that the cause of action against both the corporation and the individual defendant is predicated. In addition the Legislature, still concerned with the financial irresponsibility of those who owned and operated motor vehicles, enacted a statute requiring minimum liability coverage for all owners of automobiles. The important public policy represented by both these statutes is outlined in section 310 of the Vehicle and Traffic Law. That section provides that: 'The legislature is concerned over the rising toll of motor vehicle accidents and the suffering and loss thereby inflicted. The legislature determines that it is a matter of grave concern that motorists shall be financially able to respond in damages for their negligent acts, so that innocent victims of motor vehicle accidents may be recompensed for the injury and financial loss inflicted upon them.' The defendant Carlton claims that, because the minimum amount of insurance required by the statute was obtained, the corporate veil cannot and should not be pierced despite the fact that the assets of the corporation which owned the cab were 'trifling compared with the business to be done and the risks of loss' which were certain to be encountered. I do not agree. The Legislature in requiring minimum liability insurance of $10,000, no doubt, intended to provide at least some small fund for recovery against those individuals and corporations who just did not have and were not able to raise or accumulate assets sufficient to satisfy the claims of those who were injured as a result of their negligence. It certainly could not have intended to shield those individuals who organized corporations, ***595 with the specific intent of avoiding responsibility to the public, where the operation of the corporate enterprise yielded profits sufficient to purchase additional insurance. Moreover, it is reasonable *426 to assume that the Legislature believed that those individuals and corporations having substantial assets would take out insurance far in excess of the minimum in order to protect those assets from depletion. Given the costs of hospital care and treatment and the nature of injuries sustained in auto collisions, it would be unreasonable to assume that the Legislature believed that the minimum provided in the statute would in and of itself be sufficient to recompense 'innocent victims of motor vehicle accidents * * * for the injury and financial loss inflicted upon them'. The defendant, however, argues that the failure of the Legislature to increase the minimum insurance requirements indicates legislative acquiescence in this scheme to avoid liability and responsibility to the public. In the absence of a clear legislative statement, approval of a scheme having such serious consequences is not to be so lightly inferred. * * * The defendant contends that a decision holding him personally liable would discourage people from engaging in corporate enterprise. *427 What I would merely hold is that a participating shareholder of a corporation vested with a public interest, organized with capital insufficient to meet liabilities which are certain to arise in the ordinary course of the corporation's business, may be held personally responsible for such liabilities. Where corporate income is not sufficient to cover the cost of insurance premiums above the statutory minimum or where initially adequate finances dwindle under the pressure of competition, bad ***596 times or extraordinary and unexpected liability, obviously the shareholder will not be held liable (Henn, Corporations, p. 208, n. 7). 288 The only types of corporate enterprises that will be discouraged as a result of a decision allowing the individual shareholder to be sued will be those such as the one in question, designed solely to abuse the corporate privilege at the expense of the public interest. For these reasons I would vote to affirm the order of the Appellate Division. DESMOND, C.J., and VAN VOORHIS, BURKE and SCILEPPI, JJ., concur with FULD, J. KEATING, J., dissents and votes to affirm in an opinion in which BERGAN, J., concurs. Order reversed, etc

My Bread Baking Co. v. Cumberland Farms, Inc . 353 Mass. 614, 233 N.E.2d 748 (1968)

MY BREAD BAKING CO. v. CUMBERLAND FARMS, INC. et al. [FN1] FN1. Cumberland Farms Dairy Stores, Inc., Cape Cod Farms, Inc., Narragansett Food Stores, Inc., Central Food Stores, Inc., and Commonwealth Dairy Stores, Inc. are the codefendants. Supreme Judicial Court of Massachusetts, Bristol. Argued Jan. 4, 1968. Decided Feb. 5, 1968. *615 CUTTER, Justice. The remaining count in this action alleges conversion of certain property by Cumberland Farms, Inc. (C.F. Inc.). There was a substantial verdict for the plaintiff (My Bread) against C.F. Inc. and also a verdict for each codefendant (fn. 1). The case is before us on C.F. Inc.'s exception to the judge's refusal to direct a verdict for it. The facts are stated in their aspect most favorable to My Bread. In August, 1960, Byron Haseotes discussed with Joseph Duchaine, 'the sole proprietor' of My Bread, the sale of the latter's bakery products in 'Cumberland Farms' retail dairy stores. Haseotes was the secretary and treasurer and a stockholder of C.F. Inc., of each codefendant, and of fifteen other corporations. After August, 1960, My Bread began selling its bakery products in the retail dairy stores, and provided bakery racks for use in this operation. The racks were delivered by My Bread directly to the local store in which they were used. [FN2] In September, 1963, when the business arrangement with My Bread was terminated, My Bread sought the return of the racks. It was prevented by the local store managers, acting on the instructions of Haseotes, from recovering 289 them from all but a few of the **750 'Cumberland Farms' stores. Title to the racks remained in My Bread at all times. FN2. These racks consisted of a check-out counter on which the store cash register was placed, a gondola, and a bakery rack. *616 In August, 1960, the capital stock of C.F. Inc. and of each codefendant was owned by Haseotes, his parents, his brothers, and his sisters. There was no joint financing of these corporations. The officers and directors of each corporation were the same. The sole business of the codefendants 'was the operation of chains of (small) retail dairy stores * * * in Massachusetts * * *.' C.F. Inc. did not operate retail stores. [FN3] It conducted 'a bottling * * * plant which processed and packaged milk and other diary products and * * * (sold) its dairy products at * * * wholesale * * * to the * * * five' codefendants. Haseotes testified that in August, 1960, C.F. Inc. did not sell dairy products to all of the 'Cumberland Farms' stores in which My Bread was to sell its bakery products. In 1962 or 1963, however, it began to do so. All of the defendants used the trade name 'Cumberland Farms.' Persons dealing with all of these corporations treated them as 'Cumberland Farms.'

FN3. Each of the codefendants operated stores in a specified area in Massachusetts or Rhode Island. Each corporation 'designated its various stores by numbers in a series. Thus, for example, stores operated by Commonwealth Dairy Stores, Inc. each had a store number from 300 to 399 * * *. These store numbers were used in * * * correspondence between the parties.' From 1960 to 1963, C.F. Inc. had a peddler's license for the sale of milk in the New Bedford area. It owned trucks and delivered milk in 1960 and 1961 in connection with sales of milk to the store operating corporations by the processing plants. C.F. Inc. never owned any stock interest in the five codefendants, nor did those corporations own any stock in it. The advertising of all six corporations was purchased in separate transactions and always used the trade name 'Cumberland Farms.' [FN4] In August, 1960, the Haseotes family dairy businesses were operated out of headquarters in Woonsocket. Processing and bottling were then done in two plants, one in Woonsocket and the other in Boston. Prior to the alleged conversion, the Woonsocket and Boston plants were consolidated in a new plant in Canton, and each defendant corporation moved its principal office to that *617 plant. Thereafter the 'same business manager operated all the businesses from the Canton address.' Haseotes 'participated in the operation of all the corporations and it was his decision where money was to go in the various corporations.' FN4. The telephone operator at the consolidated Canton plant usually answered the telephone by saying 'Cumberland Farms' except when a caller called on a line for one of the Haseotes family's real estate corporations. In August, 1963, Haseotes as sales manager of C.F. Inc., signed and sent out circular memoranda concerning the sale of bread (including My Bread products) in 'Cumberland Farms' stores. These were on C.F. Inc. letterhead and were addressed to a large number of retail stores or store managers in mandatory language, using such terms as 'must' and stating policies 'to be strictly adhered to.' There was in evidence a loaf which had on its wrapper the name 'Cumberland Farms' and a notation that it was distributed by 'Cumberland Farms, Inc. of Boston.'

290 Haseotes testified that, in his dealings with My Bread, he never acted on behalf of C.F. Inc. because that corporation did not operate retail stores, nor did it have any control over the store operating corporations. One of My Bread's officers, however, testified that he 'always dealt with * * * Haseotes as 'Cumberland Farms',' although he did on occasion on Haseotes's request make out checks [FN5] to **751 other corporations. He also obtained certificates of insurance which included the names of several of the Haseotes corporations. FN5. From August, 1960, through September, 1963, My Bread made payments in connection with the sale of its products in 'Cumberland Farms' dairy stores. From November 29, 1962, to August 10, 1963, some five checks (totaling $9,477) from My Bread payable to C.F. Inc. were delivered livered to and cashed by C.F. Inc. These moneys were deposited in C.F. Inc.'s account and then were withdrawn and applied to the appropriate store operating corporation account. On other occasions, My Bread checks were made payable to the various codefendant corporations by name. 1. C.F. Inc. contends that the conversions of the bakery racks were 'committed by the local store managers, employed by the (codefendant) store- operating corporations,' that there was no evidence that these managers were agents for C.F. Inc. so as to make that corporation liable for their acts, and that the codefendant corporations must each be treated as distinct and separate from C.F. Inc. and each *618 other. The issue, of course, is whether there was evidence which, on any theory of law, would warrant the jury in finding C.F. Inc. liable for the conversions. C.F. Inc. thus seeks to have us apply the principle that corporations are generally to be regarded as separate from each other and from their respective stockholders (see Marsch v. Southern New England R.R., 230 Mass. 483, 498, 120 N.E. 120) where there is no occasion 'to look beyond the corporate form for the purpose of defeating fraud or wrong, or for the remedying of injuries.' See e.g. M. McDonough Corp v. Connolly, 313 Mass. 62, 65--66, 46 N.E.2d 576, 579. [FN6] The general principle is not of unlimited application. A corporation or other person controlling a corporation and directing, or participating actively in (see Refrigeration Discount Corp. v. Catino, 330 Mass. 230, 234--236, 112 N.E.2d 790), its operations may become subject to civil or criminal liability on principles of agency or of causation. See Commonwealth v. Abbott Engr., Inc., 351 Mass. 568, 579--580, 222 N.E.2d 862. See also Rock-Ola Mfg. Corp. v. Music & Television Corp., 339 Mass. 416, 422--423, 159 N.E.2d 417. This may sometimes occur where corporations are formed, or availed of, to carry out the objectives and purposes of the corporations or persons controlling them. See Rice V. Price, 340 Mass. 502, 511--512, 164 N.E.2d 891; Centmont Corp. v. Marsch, 68 F.,2d 460, 464-- 465 (1st Cir.), cert. den. 291 U.S. 680, 54 S.Ct. 530, 78 L.Ed. 1068. See also Finnish Temperance Soc. Sovittaja v. Finnish Socialistic Publishing Co., 238 Mass. 345, 354--356, 130 N.E. 845; Henry F. Michell Co. v. Fitzgerald, 353 Mass. ---, ------, [FNa] 231 N.E.2d 373. The circumstances in which one corporation, or a person controlling it, may become liable for the acts or torts of an affiliate or a subsidiary *619 under common control have been frequently discussed. [FN7] Although **752 common ownership of the stock of two or more corporations together with common management, standing alone, will not give rise to liability on the part of one corporation for the acts of another corporation or its employees, additional facts may be such as to permit the conclusion that an agency or similar relationship exists between the entities. Particularly is this true (a) when there is active and direct participation by the representatives of one corporation, apparently exercising some form of pervasive control, in the activities of another and there is some fraudulent or injurious consequence of the intercorporate relationship, 291 or (b) when there is a confused interminingling of activity of two or more corporations engaged in a common enterprise with substantial disregard of the separate nature of the corporate entities, or serious ambiguity about the manner and capacity in which the various corporations and their respective representatives are acting. In such circumstances, in imposing liability upon one or more of a group of 'closely identified' corporations, a court 'need not consider with nicety which of them' ought to be held liable for the act of one corporation 'for which the plaintiff deserves payment.' See W. W. Britton, Inc. v. S. M. Hill Co., 327 mass. 335, 338--339, 98 N.E.2d 637, 639. * * * It may be, as one commentator suggests (see Peairs, Business Corporations ss 8-- 10, esp. at p. 33), that Massachusetts has been somewhat more 'strict' than other jurisdictions *620 in respecting the separate entities of different corporations. Nevertheless, our law concerning disregarding the corporate fiction has been stated, in cases already cited, essentially in the same general terms employed in decisions elsewhere (fn. 7). Where there is common control of a group of separate corporations engaged in a single enterprise, failure (a) to make clear which corporation is taking action in a particular situation and the nature and extnet of that action, or (b) to observe with care the formal barriers between the corporations with a proper segregation of their separate businesses (see Acton Plumbing & Heating Co. v. Jared Builders, Inc., 368 Mich. 626, 628--630, 118 N.W.2d 956), records, and finances, may warrant some disregard of the separate entitles in rare particular situations in order to prevent gross inequity. 2. On the evidence the jury could reasonably have reached the following conclusions. (a) Haseotes was responsible by an order to the local stores for a highhanded, inexcusable refusal by employees of the various retail stores to return My Bread's racks to it at the termination of the bread sale arrangement. (b) Although no one of the codefendant operating store corporations was a subsidiary of C.F. Inc. (in the sense that C.F. Inc. owned the whole or a part of its stock), all the defendant corporations (including C.F. Inc.) were under the full stock control of the Haseotes family and were operated as a closely coo rdinated single enterprise. Haseotes himself could be found to have been a dominant **753 figure in the whole 'Cumberland Farms' enterprise. (c) The basic common enterprise was the processing, distribution, and sale of milk and dairy products. C.F. Inc., on the evidence, could reasonably be regarded as to the principal corporation of the enterprise and the codefendants as its affiliates or satellites so that, when one thought of 'Cumberland Farms,' one would naturally think of C.F. Inc. (d) Because all the corporations were operated ambiguously from the same headquarters as part of a single enterprise, the jury could reasonably infer that Haseotes, in furtherance of the interests of C.F. Inc. in the distribution of its products, *621 was intervening actively in the conduct of the satellite corporations. (e) Haseotes without (so far as this record shows) clear indication of the capacity in which (and the corporations for which) he was acting, dealt in 1960 with Duchaine of My Bread for 'Cumberland Farms' in a very confused manner. Although My Bread's representatives probably knew of the existence of the separate corporations, they might reasonably think (absent a clear indication by Haseotes that he was acting for the retail store corporations and not for C.F. Inc.) that My Bread, with

292 respect to the general wholesale distribution of bread, was dealing with C.F Inc. That was the corporation which was engaged, for the whole 'Cumberland Farms' enterprise, in the general wholesale distribution of milk and other dairy products. It would have been the logical corporation to arrange to purchase bread at wholesale for distribution through the 'Cumberland Farms' stores. (f) The bill of exceptions reveals no basis for an inference that any of the codefendants was inadequately capitalized, a ground frequently relied upon, when taken with other factors, as permitting disregard of a corporate entity. See e.g. Mull v. Colt Co., Inc., 31 F.R.D. 154, 158--166 (S.D.N.Y). Cf. Hanson v. Bradley, 298 Mass. 371, 380--381, 10 N.E.2d 259; Eskimo Pie Corp. v. Whitelawn Dairies, Inc., 266 F.Supp. 79, 82 (S.D.N.Y.); Walkoszky v. Carlton, 18 N.Y.2d 414, 420-- 421, 276 N.Y.S.2d 585, 223 N.E.2d 6. The jury could properly infer (because of Haseotes's actions, the general corporate situation, and Haseotes's failure to dispel ambiguities) that Haseotes in all matters connected with the My Bread arrangement was acting for C.F. Inc. and that the satellite companies in following Haseotes's orders concerning the bread racks (fn. 2) were caused to act by C.F. Inc. and were acting as its agents. See Mueller v. Seaboard Commercial Corp., 5 N.J. 28, 33--35, 73 A.2d 905. See also Wallach v. Hadley Co., 331 Mass. 699, 701, 122 N.E.2d 355. The jury could reasonably decide that C.F. Inc., through Haseotes, brought about and was liable for the conversions. A directed verdict was properly refused. Exceptions overruled

Kinney Shoe Corp. v. Polan 939 F.2d 209 (1991)

KINNEY SHOE CORPORATION, a New York corporation, Plaintiff-Appellant, v. Lincoln M. POLAN, Defendant-Appellee. No. 90-2466. United States Court of Appeals, Fourth Circuit. Argued March 6, 1991. Decided July 17, 1991. As Amended Aug. 26, 1991. OPINION CHAPMAN, Senior Circuit Judge: 293 Plaintiff-appellant Kinney Shoe Corporation ("Kinney") brought this action in the United States District Court for the Southern District of West Virginia against Lincoln M. Polan ("Polan") seeking to recover money owed on a sublease between Kinney and Industrial Realty Company ("Industrial"). Polan is the sole shareholder of Industrial. The district court found that Polan was not personally liable on the lease between Kinney and Industrial. Kinney appeals asserting that the corporate veil should be pierced, and we agree. I. The district court based its order on facts which were stipulated by the parties. In 1984 Polan formed two corporations, Industrial and Polan Industries, Inc., for the purpose of re- establishing an industrial manufacturing business. The certificate of incorporation for Polan Industries, Inc. was issued by the West Virginia Secretary of State in November 1984. The following month the certificate of incorporation for Industrial was issued. Polan was the owner of both corporations. Although certificates of incorporation were issued, no organizational meetings were held, and no officers were elected. In November 1984 Polan and Kinney began negotiating the sublease of a building in which Kinney held a leasehold interest. The building was owned by the Cabell County Commission and financed by industrial revenue bonds issued in 1968 to induce Kinney to locate a manufacturing plant in Huntington, West Virginia. Under the terms of the lease, Kinney was legally obligated to make payments on the bonds on a semi-annual basis through January 1, 1993, at which time it had the right to purchase the property. Kinney had ceased using the building as a manufacturing plant in June 1983. The term of the sublease from Kinney to Industrial commenced in December 1984, even though the written lease was not signed by the parties until April 5, 1985. On April 15, 1985, Industrial subleased part of the building to Polan Industries for fifty percent of the rental amount due Kinney. Polan signed both subleases on behalf of the respective companies. Other than the sublease with Kinney, Industrial had no assets, no income and no bank account. Industrial issued no stock certificates because nothing was ever paid in to this corporation. Industrial's only income was from its sublease to Polan Industries, Inc. The first rental payment to Kinney was made out of Polan's personal funds, and no further payments were made by Polan or by Polan Industries, Inc. to either Industrial or to Kinney. Kinney filed suit against Industrial for unpaid rent and obtained a judgment in the amount of $166,400.00 on June 19, 1987. A writ of possession was issued, but because Polan Industries, Inc. had filed for bankruptcy, Kinney did not gain possession for six months. Kinney leased the building until it was sold on September 1, 1988. Kinney then filed this action against Polan individually to collect the amount owed by Industrial to Kinney. Since the amount to which Kinney is entitled is undisputed, the only issue is whether Kinney can pierce the *211 corporate veil and hold Polan personally liable. The district court held that Kinney had assumed the risk of Industrial's undercapitalization and was not entitled to pierce the corporate veil. Kinney appeals, and we reverse. II.

294 We have long recognized that a corporation is an entity, separate and distinct from its officers and stockholders, and the individual stockholders are not responsible for the debts of the corporation. See, e.g., DeWitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co., 540 F.2d 681, 683 (4th Cir.1976). This concept, however, is a fiction of the law " 'and it is now well settled, as a general principle, that the fiction should be disregarded when it is urged with an intent not within its reason and purpose, and in such a way that its retention would produce injustices or inequitable consequences.' " Laya v. Erin Homes, Inc., 352 S.E.2d 93, 97-98 (W.Va.1986) (quoting Sanders v. Roselawn Memorial Gardens, Inc., 152 W.Va. 91, 159 S.E.2d 784, 786 (1968). Piercing the corporate veil is an equitable remedy, and the burden rests with the party asserting such claim. DeWitt Truck Brokers, 540 F.2d at 683. A totality of the circumstances test is used in determining whether to pierce the corporate veil, and each case must be decided on its own facts. The district court's findings of facts may be overturned only if clearly erroneous. Id Kinney seeks to pierce the corporate veil of Industrial so as to hold Polan personally liable on the sublease debt. The Supreme Court of Appeals of West Virginia has set forth a two prong test to be used in determining whether to pierce a corporate veil in a breach of contract case. This test raises two issues: first, is the unity of interest and ownership such that the separate personalities of the corporation and the individual shareholder no longer exist; and second, would an equitable result occur if the acts are treated as those of the corporation alone. Laya, 352 S.E.2d at 99. Numerous factors have been identified as relevant in making this determination. [FN*] * * * *212 The district court found that the two prong test of Laya had been satisfied. The court concluded that Polan's failure to carry out the corporate formalities with respect to Industrial, coupled with Industrial's gross undercapitalization, resulted in damage to Kinney. We agree It is undisputed that Industrial was not adequately capitalized. Actually, it had no paid in capital. Polan had put nothing into this corporation, and it did not observe any corporate formalities. As the West Virginia court stated in Laya, " '[i]ndividuals who wish to enjoy limited personal liability for business activities under a corporate umbrella should be expected to adhere to the relatively simple formalities of creating and maintaining a corporate entity.' " Laya, 352 S.E.2d at 100 n. 6 (quoting Labadie Coal Co. v. Black, 672 F.2d 92, 96-97 (D.C.Cir.1982)). This, the court stated, is " 'a relatively small price to pay for limited liability.' " Id. Another important factor is adequate capitalization. "[G]rossly inadequate capitalization combined with disregard of corporate formalities, causing basic unfairness, are sufficient to pierce the corporate veil in order to hold the shareholder(s) actively participating in the operation of the business personally liable for a breach of contract to the party who entered into the contract with the corporation." Laya, 352 S.E.2d at 101-02 In this case, Polan bought no stock, made no capital contribution, kept no minutes, and elected no officers for Industrial. In addition, Polan attempted to protect his assets by placing them in Polan Industries, Inc. and interposing Industrial between Polan Industries, Inc. and Kinney so as to prevent Kinney from going against the corporation with assets. Polan gave no explanation or justification for the existence of Industrial as the intermediary between Polan 295 Industries, Inc. and Kinney. Polan was obviously trying to limit his liability and the liability of Polan Industries, Inc. by setting up a paper curtain constructed of nothing more than Industrial's certificate of incorporation. These facts present the classic scenario for an action to pierce the corporate veil so as to reach the responsible party and produce an equitable result. Accordingly, we hold that the district court correctly found that the two prong test in Laya had been satisfied In Laya, the court also noted that when determining whether to pierce a corporate veil a third prong may apply in certain cases. The court stated: When, under the circumstances, it would be reasonable for that particular type of a party [those contract creditors capable of protecting themselves] entering into a contract with the corporation, for example, a bank or other lending institution, to conduct an investigation of the credit of the corporation prior to entering into the contract, such party will be charged with the knowledge that a reasonable credit investigation would disclose. If such an investigation would disclose that the corporation is grossly undercapitalized, based upon the nature and the magnitude of the corporate undertaking, such party will be deemed to have assumed the risk of the gross undercapitalization and will not be permitted to pierce the corporate veil. Laya, 352 S.E.2d at 100. The district court applied this third prong and concluded that Kinney "assumed the risk of Industrial's defaulting" and that "the application of the doctrine of 'piercing the corporate veil' ought not and does not [apply]." While we agree that the two prong test of Laya was satisfied, we hold that the district court's conclusion that Kinney had assumed the risk is clearly erroneous Without deciding whether the third prong should be extended beyond the context of the financial institution lender mentioned *213 in Laya, we hold that, even if it applies to creditors such as Kinney, it does not prevent Kinney from piercing the corporate veil in this case. The third prong is permissive and not mandatory. This is not a factual situation that calls for the third prong, if we are to seek an equitable result. Polan set up Industrial to limit his liability and the liability of Polan Industries, Inc. in their dealings with Kinney. A stockholder's liability is limited to the amount he has invested in the corporation, but Polan invested nothing in Industrial. This corporation was no more than a shell--a transparent shell. When nothing is invested in the corporation, the corporation provides no protection to its owner; nothing in, nothing out, no protection. If Polan wishes the protection of a corporation to limit his liability, he must follow the simple formalities of maintaining the corporation. This he failed to do, and he may not relieve his circumstances by saying Kinney should have known better III. For the foregoing reasons, we hold that Polan is personally liable for the debt of Industrial, and the decision of the district court is reversed and this case is remanded with instructions to enter judgment for the plaintiff REVERSED AND REMANDED WITH INSTRUCTIONS

296 Silicone Gel Breast Implants Prod. Liab. Lit. 887 F.Supp. 1447 (N.D. Ala. 1995)

In re SILICONE GEL BREAST IMPLANTS PRODUCTS LIABILITY LITIGATION No. CV 92-P-10000-S United States District Court, N.D. Alabama, Southern Division April 25, 1995 *1449 OPINION Bristol-Myers Squibb Summary Judgment POINTER, Chief Judge. Under submission after appropriate discovery, extensive briefing, and oral argument is the motion for summary judgment filed by defendant Bristol- Myers Squibb Co. Bristol is the sole shareholder of Medical Engineering Corporation, a major supplier of breast implants, but has never itself manufactured or distributed breast implants. Bristol asserts that the evidence is insufficient for the plaintiffs' claims to proceed against it, whether through piercing the corporate veil or under a theory of direct liability. The parties agree that, with discovery substantially complete, this motion is ripe for decision. For the reasons stated below, the court concludes that Bristol is not entitled to summary judgment. * * * III. FACTS For purposes of Bristol's summary judgment motion, the court treats the following facts as established, either because they are not in genuine dispute or because they are supported by evidence viewed in the light most favorable to the plaintiffs. MEC was incorporated in Wisconsin in 1969, with its principal place of business in Racine. It was an independent, privately-held corporation manufacturing a variety of medical and plastic surgery devices, including breast implants. *1450 In 1982, after an extensive due diligence review that included information regarding capsular contracture, rupture, and gel bleed, Bristol, a Delaware corporation, purchased MEC's stock for $28 million through a series of mergers and corporate reorganizations. Bristol created a wholly-owned subsidiary, Lakeside Engineering, Inc., a Delaware corporation, which created MEC Acquisition Corporation, a Wisconsin corporation. After MEC merged into MEC Acquisition (extinguishing MEC Acquisition), it then merged into Lakeside, and the surviving corporation changed its name to Medical Engineering Corporation. Since this series of transactions in 1982, MEC, a Delaware corporation with a principal place of business in Racine, Wisconsin, has been a wholly-owned subsidiary of Bristol, operated by Bristol as part of its Health Care Group. 297 In 1988 Bristol expanded its breast implant business by purchasing from the Cooper Companies two other breast-implant manufacturers, Natural Y Surgical Specialties, Inc. and Aesthetech Corporation. Though executed in the name of MEC and the Cooper Companies, the purchase was negotiated between Bristol and the Cooper Companies, and the purchase price of $8.7 million was paid from a Bristol account (though charged to MEC). The due diligence review, which indicated potential hazards and possible liability relating to polyurethane- coated breast implants, was conducted jointly by MEC and Bristol. Documents reflect that MEC has had, at least in form, a board of three directors, generally consisting of the Bristol Vice President then serving as President of Bristol's Health Care Group, another Bristol executive, and MEC's president. Bristol's Health Care Group President, who reported to Bristol's president or chairman, could not be outvoted by the other two MEC board members. Several of the former MEC presidents did not recall that MEC had a board, let alone that they were members; and one of these stated that he did not attend, call, or receive notice of board meetings in his five years of service because he had a designated Bristol officer to contact. The few resolutions that were adopted by MEC's board were apparently prepared by Bristol officials. MEC prepared "significant event" reports for Bristol's Corporate Policy Committee. These reports included information on breast implant production, such as publicity, testing, expenses, lawsuit settlements, and backorders caused by sterilization difficulties. Neither Bristol managers nor MEC Presidents recall any orders or recommendations being issued by Bristol as a result of these reviews. Bristol also required MEC to prepare and submit a five-year plan for its review. MEC submitted budgets for approval by Bristol's senior management. For this submission, MEC filled out a series of standard Bristol forms that included information on projected sales, profits and losses, cash flow, balance sheets, and capital requirements. Bristol had the authority to modify this budget, though it rarely, if ever, actually did so. Cash received by MEC was transferred to an account maintained by Bristol. This money was credited to MEC, but the interest earned was credited to Bristol. Bristol was MEC's banker, providing such loans as it determined MEC needed. Bristol required MEC to obtain its approval for capital appropriations, [FN1] though most, if not all, of these requests were approved. FN1. The evidence reflects, for example, that MEC sought this approval before purchasing a laboratory sink costing $4600. Bristol set the employment policies and wage scales that applied to MEC's employees. Before hiring a top executive or negotiating the salary, MEC was required to seek Bristol's approval. Before hiring a vice president of MEC, MEC's president and his superior at Bristol interviewed the candidate. Key executive employees were rated on the Bristol schedule. Bristol set a target for salary increases below the key executive level and approved those for employees above that level. Key executives of MEC received stock options for Bristol *1451 stock. MEC employees could participate in Bristol's pension and savings plans Bristol provided various services to MEC. Zimmer International, another Bristol subsidiary, distributed MEC breast implants but did not receive any benefit for doing so. Bristol's corporate development group assisted MEC in seeking out new product lines. Bristol's scientific experts researched the hazards of breast implants and polyurethane foam. Bristol 298 provided funds for MEC to conduct sales contests. Bristol funded tests on breast implants. Another Bristol subsidiary, ConvaTec, assisted MEC in developing its premarket approval application (PMAA) regarding breast implants for the FDA. In addition to this assistance, Bristol hired an outside laboratory to verify ConvaTec's analysis. Bristol also conducted post- market surveillance at the request of the FDA Some of Bristol's in-house counsel acted as MEC attorneys. These attorneys advised MEC on virtually every aspect of its business including budgets, price increases, new product development, package inserts, liability, compliance with FDA regulations, and negotiated settlements with individuals claiming damages from breast implants. They also developed the system for handling complaints about MEC products. They reviewed all breast implant promotional materials and responses to allegations of harm and liability Bristol's Technical Evaluation and Service Department ("TESD") performed auditing and review functions for MEC once or twice a year. They performed all Good Manufacturing Practices (GMP) audits at MEC. These audits were designed to ensure consistent quality of MEC's products. Bristol expected MEC to comply with any manufacturing deficiencies TESD found. A number of the conditions listed as needing corrective action regarded breast implants. TESD also audited MEC's sterilization and lab companies Bristol's public relations department issued statements regarding the allegations of TDA production and cancer in rats implanted with polyurethane implants. Bristol's corporate communication department prepared question and answer scripts for MEC employees for use in responding to questions about breast implant safety. Bristol's public affairs department developed a strategic plan to address concerns about the MEME implant and to respond to questions and concerns about the safety of breast implants in general. Bristol's press releases consistently represented that Bristol was researching breast implant safety. For example, in a release dated July 9, 1991, Bristol stated that tests underway would "confirm the well-established safety profile of polyurethane coated breast implants" and that Bristol completed testing which showed that earlier findings concerning the production of TDA from the breakdown of polyurethane were the result of inappropriate testing conditions. In a statement dated July 24, 1991, Bristol represented that numerous other studies were being undertaken to assure the public and the FDA of the safety of polyurethane coated breast implants Bristol's name and logo were contained in the package inserts and promotional products regarding breast implants, apparently as a marketing tool to increase confidence in the product. Bristol's name was used in all sales and promotional communications with physicians MEC posted a profit every year between 1983 and 1990. Total sales increased from approximately $14 million in 1983 to $65 million in 1990. Bristol never received dividends from MEC. Bristol prepared consolidated federal income tax returns but MEC prepared its own Wisconsin tax forms. Bristol also purchased insurance for MEC under its policy. This insurance has a face value of over $2 billion Bristol's executive vice president suspended MEC's sales of polyurethane coated breast implants on April 17, 1991, and determined not to submit a PMAA for the implants to the FDA. MEC ceased its breast implant business in 1991 and later that year MEC ceased all operations by selling its urology division. This sale could not have occurred without Bristol's approval, and proceeds from the sale were turned over to Bristol, which then executed a low-interest demand 299 note for $57,518,888 payable *1452 to MEC. MEC's only assets at this time are this demand note and its indemnity insurance. IV. ANALYSIS The various theories of recovery made by plaintiffs against Bristol can be generally divided between those involving "corporate control" and those asserting direct liability. The corporate control claims deal with piercing the corporate veil to abrogate limited liability and hold Bristol responsible for actions of MEC. The direct liability theories include strict products liability, negligence, negligent failure to warn, negligence per se for not complying with FDA regulations, misrepresentation, fraud, and participation. A. "Corporate Control" Claims The potential for abuse of the corporate form is greatest when, as here, the corporation is owned by a single shareholder. The evaluation of corporate control claims cannot, however, disregard the fact that, no different from other stockholders, a parent corporation is expected-- indeed, required--to exert some control over its subsidiary. Limited liability is the rule, not the exception. Anderson v. Abbott, 321 U.S. 349, 362, 64 S.Ct. 531, 537, 88 L.Ed. 793 (1944). However, when a corporation is so controlled as to be the alter ego or mere instrumentality of its stockholder, the corporate form may be disregarded in the interests of justice. So far as this court has been able to determine, some variation of this theory of liability is recognized in all jurisdictions An initial question is whether veil-piercing may ever be resolved by summary judgment. Ordinarily the fact-intensive nature of the issue will require that it be resolved only through a trial. Summary judgment, however, can be proper if, as occurred earlier in this litigation with respect to claims against Dow Chemical and Corning, the evidence presented could lead to but one result. Because the court concludes that a jury (or in some jurisdictions, the judge acting in equity) could--and, under the laws of many states, probably should--find that MEC was but the alter ego of Bristol, summary judgment must be denied The totality of circumstances must be evaluated in determining whether a subsidiary may be found to be the alter ego or mere instrumentality of the parent corporation. Although the standards are not identical in each state, all jurisdictions require a showing of substantial domination. Among the factors to be considered are whether: $ the parent and the subsidiary have common directors or officers $ the parent and the subsidiary have common business departments $ the parent and the subsidiary file consolidated financial statements and tax returns $ the parent finances the subsidiary $ the parent caused the incorporation of the subsidiary $ the subsidiary operates with grossly inadequate capital $ the parent pays the salaries and other expenses of the subsidiary $ the subsidiary receives no business except that given to it by the parent $ the parent uses the subsidiary's property as its own 300 $ the daily operations of the two corporations are not kept separate $ the subsidiary does not observe the basic corporate formalities, such as keeping separate books and records and holding shareholder and board meetings. United States v. Jon-T Chemicals, Inc., 768 F.2d 686, 691-92 (5th Cir.1985), cert. denied 475 U.S. 1014, 106 S.Ct. 1194, 89 L.Ed.2d 309 (1986) The fact-finder at a trial could find that the evidence supports the conclusion that many of these factors have been proven: two of MEC's three directors were Bristol directors; MEC was part of Bristol's Health Care group and used Bristol's legal, auditing, and communications departments; MEC and Bristol filed consolidated federal tax returns and Bristol prepared consolidated financial reports; Bristol operated as MEC's finance company, providing loans for the purchase of Aesthetech and Natural Y, receiving interest on MEC's funds, and requiring MEC to make requests for capital appropriations; *1453 Bristol effectively used MEC's resources as its own by obtaining interest on MEC's money and requiring MEC to make requests for capital appropriations to obtain its own funds; some members of MEC's board were not aware that MEC had a board of directors, let alone that they were members; and the senior Bristol member of MEC's board could not be out-voted by the other two directors. These facts, even apart from evidence that might establish some of the other factors listed above, would provide significant support for a finding at trial that MEC is Bristol's alter ego Bristol contends that a finding of fraud or like misconduct is necessary to pierce the corporate veil. Despite Bristol's contentions to the contrary, Delaware courts--to which Bristol would have this court look--do not necessarily require a showing of fraud if a subsidiary is found to be the mere instrumentality or alter ego of its sole stockholder. See Geyer v. Ingersoll Publications Co., 621 A.2d 784, 793 (Del.Ch.1992), Mabon, Nugent & Co. v. Texas American Energy Corp., 16 Del.J.Corp.L. 829, 838, 1990 WL 44267 (Del.Ch.1990), and Skouras v. Admiralty Enterprises, Inc., 386 A.2d 674, 681 (Del.Ch.1978). In addition, many jurisdictions that require a showing of fraud, injustice, or inequity in a contract case do not in a tort situation. See Jon-T Chemicals, 768 F.2d at 692. A rational distinction can be drawn between tort and contract cases. In actions based on contract, "the creditor has willingly transacted business with the subsidiary" although it could have insisted on assurances that would make the parent also responsible. Id. at 693. In a tort situation, however, the injured party had no such choice; the limitations on corporate liability were, from its standpoint, fortuitous and non-consensual There is, however, evidence precluding summary judgment even in jurisdictions that require a finding of fraud, inequity, or injustice. This conclusion is not based merely on the evidence that, even accepting Bristol's contentions regarding the amount of insurance available to MEC, MEC may have insufficient funds to satisfy the potential risks of responding to, and defending against, the numerous existing and potential claims of the plaintiffs. Equally significant is the fact that Bristol permitted its name to appear on breast implant advertisements, packages, and product inserts to improve sales by giving the product additional credibility. Combined with the evidence of potentially insufficient assets, this fact would support a finding that it would be inequitable and unjust to allow Bristol now to avoid liability to those induced to believe Bristol was vouching for this product

301 Because the evidence available at a trial could support--if not, under some state laws, perhaps mandate--a finding that the corporate veil should be pierced, Bristol is not entitled through summary judgment to dismissal of the claims against it. B. Direct Liability Claims There is an additional reason why Bristol is not entitled to summary judgment. Under the law in most jurisdictions, it may also be subject to liability under at least one of the direct liability claims made by plaintiffs; namely, the theory of negligent undertaking pursuant to Restatement (Second) of Torts ' 324A. That section provides: One who undertakes, gratuitously or for consideration, to render services to another which he should recognize as necessary for the protection of a third person or his things, is subject to liability to the third person for physical harm resulting from his failure to exercise reasonable care to [perform] [FN2] his undertakings, if FN2. Section 324A uses the word "protect" instead of "perform." This appears to be a typographical error. See Hill v. United States Fidelity and Guaranty Co., 428 F.2d 112, 115 n. 5 (5th Cir.1970), cert. denied, 400 U.S. 1008, 91 S.Ct. 564, 27 L.Ed.2d 621 (1971). (a) his failure to exercise reasonable care increases the risk of harm, or (b) he has undertaken to perform a duty owed by the other to the third person, or (c) the harm is suffered because of a reliance of the other or the third person upon the undertaking. Under this theory, frequently applied in connection with safety inspections by insurers or with third-party repairs to equipment *1454 or premises, a duty that would not otherwise have existed can arise when an individual or company nevertheless undertakes to perform some action. Glanzer v. Shepard, 233 N.Y. 236, 135 N.E. 275 (1922). The potential liability for failure to use reasonable care in such circumstances extends to persons who may reasonably be expected to suffer harm from that negligence. Doctrinally, a cause of action under ' 324A does not involve an assertion of derivative liability but one of direct liability, since it is based on the actions of defendant itself. The existence of a parent-subsidiary relationship, while not required, is obviously no defense to such a claim. * * * By allowing its name to be placed on breast implant packages and product inserts, Bristol held itself out as supporting the product, apparently to increase confidence in the product and to increase sales. Bristol also issued press releases stating that polyurethane-coated breast implants were safe. Having engaged in this type of marketing, it cannot now deny its potential responsibility under ' 324A. * * * Plaintiffs have asserted various other direct liability claims against Bristol in addition to those under ' 324A. Having concluded that, because of genuine disputes relating to corporate

302 control issues and relating to potential liability under ' 324A, Bristol is not entitled to summary judgment, the court declines to address such alternative causes of action. V. CONCLUSION By separate order, Bristol's motion for summary judgment will be denied. As with other orders denying summary judgment, this decision is interlocutory and does not *1455 constitute a holding that Bristol is liable to the plaintiffs. ORDER For the reasons stated in the accompanying opinion, defendant Bristol-Myers Squibb's Motion for summary judgment is hereby DENIED

Commissioner v. RLG, Inc. 755 N.E.2d 556

Supreme Court of Indiana.

COMMISSIONER, Indiana DEPARTMENT OF ENVIRONMENTAL MANAGEMENT, Appellant (Plaintiff Below), v. RLG, INC. and Lawrence Roseman d/b/a Spring Landfill and Lawrence Roseman, et al., Appellee (Defendant Below).

Sept. 24, 2001.

ON PETITION TO TRANSFER

BOEHM, Justice.

We hold that under some circumstances, including those here, an individual associated with a corporation may be personally liable under the responsible corporate officer doctrine for that corporation's violations of the Indiana Environmental Management Act, whether or not the traditional doctrine of piercing the corporate veil would produce personal liability.

Factual and Procedural Background

On August 26, 1993, the Indiana Department of Environmental Management (IDEM) initiated action against RLG, Inc. and Lawrence Roseman for violations of the Indiana Environmental Management Act at RLG's Spring Valley Landfill in Wabash, Indiana. [FN1] IDEM sought preliminary and permanent injunctive relief as well as civil penalties. In response, RLG negotiated agreements to remedy the violations and to close the landfill and provide a post 303 closure plan, all by specified dates. [FN2] In return, IDEM agreed to drop its claim for other relief, including civil penalties. In March 1994, an environmental scientist inspected the landfill and found that the initial violations had not been remedied, and also that the subsequent agreements had been breached. In May 1994, the trial court found that RLG had failed to comply with the agreements in several respects and granted IDEM's motion for prejudgment possession and a temporary restraining order. RLG was found in contempt and ordered to pay $5,000 per day as a civil penalty until it complied with the agreements. In July 1994, IDEM filed a second amended complaint with an additional count seeking to impose personal liability on Roseman based upon his status as the sole corporate officer of RLG. Roseman filed answers to IDEM's interrogatories that disclosed that RLG was insolvent.

FN1. An August 1993 affidavit signed by an inspector for IDEM lists RLG's violations as the following: (1) litter over the site, Ind. Admin. Code tit. 329, r. 2-14-4 (repealed 1996); (2) failure to submit statistical analysis concerning groundwater data, I.A.C. 2-16- 5; (3) presence of organics in the groundwater at the site, I.A.C. 2- 16-2(a); (4), failure to submit an adequate groundwater sampling and analysis plan, I.A.C. 2-16-2(a); and (5) failure to submit a closure plan, I.A.C. 2-15.

FN2. The agreements RLG entered into in February of 1994 included the obligations to "locat[e] active leachate seepage points at the Site," "initiate winterizing patches ... to address the active leachate seepage points," "initiate erosion controls ... necessary to effectively remediate or prevent off-site migration of cover soils at the Site," and "to initiate discussion with IDEM regarding hydrogeological issues."

After RLG failed to answer the second amended complaint, a default judgment was entered against it and civil penalties were assessed at $5,000 per day from the date of the temporary restraining order for a total of $3,175,000. IDEM was also granted access to the landfill to undertake remediation. In June 1999, after a bench trial on the issue of Roseman's personal liability for civil penalties, judgment was entered in favor of Roseman. At Roseman's request the trial court entered findings of fact and conclusions of law. These included: "There is no evidence the defendant Larry Roseman ever acted in an individual capacity personally with respect to the activities which surrounded the management and operation of RLG, Inc." or "in activities surround[ing] the environmental regulations." Further, "[a]s a matter of law, ... defendant Larry Roseman [is not] personally liable [for] acts done as a corporate officer for defendant RLG, Inc." and is not "personally liable for the corporate debts of defendant." The Court of Appeals agreed with the trial court, holding that the importance of the corporate *559 structure and a lack of evidence of Roseman's individual involvement in the environmental violations precluded personal liability for the acts of RLG. Comm'r, Indiana Dep't of Envtl. Mgmt. v. RLG, Inc., 735 N.E.2d 290, 299 (Ind.Ct.App.2000).

Standard of Review

On appeal from a negative judgment, this Court does not reverse the judgment of the trial court unless it is contrary to law. * * * This Court considers the evidence in the light most favorable to the appellee and will reverse the judgment only if the evidence leads to but one conclusion and the trial court reached an opposite conclusion. Id. 304 I. Theories of Individual Liability

In general, a corporate officer or employee is not individually liable for the corporation's actions, and an office or corporate status, even a very senior one, does not in itself expose an individual to personal liability. However, three distinct doctrines bear on potential individual liability under Indiana environmental management laws. In overview, an individual, though acting in a corporate capacity as an officer, director, or employee, may be individually liable either as a responsible corporate officer, as a direct participant under general legal principles, or under specific statutes or provisions. These doctrines can apply to both criminal and civil liability, though their application in either context varies with the circumstances. Of course, if the corporation is financially responsible, and the terms of its indemnification of officers and employees are met, individual liability for civil penalties may be largely academic. But the law has developed these bases of individual responsibility to heighten attention to compliance and also to remove the ability of fly-by-night operators to escape reimbursing the public cost of irresponsible operations.

A. The Responsible Corporate Officer Doctrine

The responsible corporate officer doctrine stems from a 1943 United States Supreme Court case in which the Court interpreted the Federal Food, Drug, and Cosmetic Act, 21 U.S.C. § § 301-92 (1938), to permit criminal liability to be imposed on any person within a corporation "responsible" for introducing an adulterated or misbranded drug into interstate commerce. United States v. Dotterweich, 320 U.S. 277, 64 S.Ct. 134, 88 L.Ed. 48 (1943). "[An] offense is committed ... by all who do have such a responsible share in the furtherance of the transaction which the statute outlaws...." Id. at 284, 64 S.Ct. 134. The Court reasoned, "[T]he only way in which a corporation can act is through the individuals who act on its behalf." Id. at 281, 64 S.Ct. 134. This liability was justified on the basis that the Food, Drug, and Cosmetic Act "touch[es] phases of the lives and health of people which, in the circumstances of modern industrialism, are largely beyond self-protection." Id. at 280, 64 S.Ct. 134.

In United States v. Park, 421 U.S. 658, 673-74, 95 S.Ct. 1903, 44 L.Ed.2d 489 (1975), the Supreme Court, drawing on Dotterweich, concluded that the government establishes a prima facie violation of the Food, Drug, and Cosmetic Act as a responsible corporate officer when:

it introduces evidence sufficient to warrant a finding by the trier of the facts that the defendant had, by reason of his position in the corporation, responsibility and authority either to prevent in the first instance, or promptly to correct, the violation complained of, and that he failed to do so.

The responsible corporate officer doctrine has been applied to public welfare offenses if "a statute is intended to improve the common good and the legislature eliminates the normal requirement for culpable intent, resulting in strict liability for all those who have a responsible share in the offense." Matter of Dougherty, 482 N.W.2d 485, 489 (Minn.Ct.App.1992).

Although it originated as a criminal law doctrine, the responsible corporate officer 305 doctrine has been applied to civil liability under a number of federal statutes. See United States v. Northeastern Pharm. & Chem. Co., 810 F.2d 726, 743-44 (8th Cir.1986) (addressing personal liability under Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA)); United States v. Hodges X-Ray, Inc., 759 F.2d 557, 560-61 (6th Cir.1985) (assessing a violation of the Radiation Control for Health and Safety Act (RCHSA): "The fact that a corporate officer could be subjected to criminal punishment upon a showing of a responsible relationship to the acts of a corporation that violate health and safety statutes renders civil liability appropriate as well."); United States v. Conservation Chem. Co., 660 F.Supp. 1236, 1245-46 (N.D.Ind.1987) (president and principal stockholder of corporation operating hazardous waste facility in Gary, Indiana may be personally liable for violation of Resource Conservation and Recovery Act (RCRA)).

Similarly, several states have adopted the responsible corporate officer doctrine as appropriate under state legislation addressing public safety, in particular, disposal of hazardous waste. Matter of Dougherty, 482 N.W.2d at 488-90 (Minnesota's hazardous waste laws are public welfare statutes and subject to the responsible corporate officer doctrine); State ex rel. Webster v. Mo. Resource Recovery, Inc., 825 S.W.2d 916, 924-26 (Mo.Ct.App.1992) (applying doctrine to Missouri's Hazardous Waste Management Law); State, Dep't of Ecology v. Lundgren, 94 Wash.App. 236, 971 P.2d 948, 951-53 (1999) (sole shareholder of corporation that operated sewage treatment plant is personally liable for violation of Washington's Water Pollution Control Act); State v. Rollfink, 162 Wis.2d 121, 475 N.W.2d 575, 576 (1991) (corporate officer may be held personally liable for violations of Wisconsin's solid and hazardous waste laws if the "officer is responsible for the overall operation of the corporation's facility which violated the law").

B. Individual Liability as a Participant

As a matter of general criminal law, an individual who participates in a criminal violation is criminally responsible even if acting in a corporate capacity. See Doyle v. State, 468 N.E.2d 528, 542 (Ind.Ct.App.1984), trans. denied. The same is true of civil tort liability. See Civil Rights Comm'n v. County Line Park, Inc., 738 N.E.2d 1044, 1050 (Ind.2000) ( "[A corporate] officer is personally liable for the torts in which she has participated or which she has authorized or directed.").

C. Statutory Liability under Environmental Management Laws

Under Indiana Code section 13-30-6-4, "A responsible corporate officer may be prosecuted for a violation of section 1, 2, or 3 of this chapter in accordance with IC 35-41-2-4." The criminal code section to which this refers is the general "aiding and abetting" statute, which provides that one who aids a crime commits that crime. Under these provisions, aiding or directing a crime, if done "intentionally or knowingly" is sufficient to support criminal responsibility under Indiana Code sections 13- 30-6- 4 and 35-41-2-4. See Tobar v. State, 740 N.E.2d 109, 112 (Ind.2000). The landfill violations would have constituted a violation of Indiana Code section 13-30-6-1. Statutory civil liability is more expansive than criminal liability. Unlike the criminal liability provision in the environmental management laws, the provision imposing civil liability has no "mens rea" requirement of knowledge or willfulness. Indiana 306 Code section 13-30-4-1 imposes civil liability on "a person who violates" environmental management laws. A "person," for purposes of environmental management laws, includes "an individual, a partnership, a copartnership, a firm, a company, a corporation...." Ind.Code § 13- 11-2-158 (1998). Both general legal principles and the language of the statute support the conclusion that an individual acting for a corporation participating in a violation of a statute listed in Indiana Code section 13-30-4-1 may be individually liable for civil penalties under that section, and, if acting with the requisite mens rea, may be criminally responsible for violations of Indiana Code sections 13-30- 6-1 through 3. As elaborated in Part II, Roseman is individually liable under all three of the theories discussed in this section.

II. Roseman's Liability

A. Roseman as a Responsible Corporate Officer

The Court of Appeals determined that it was unnecessary either to adopt or reject the responsible corporate officer doctrine because the court found the evidence inadequate to establish Roseman as a responsible party under Park, as formulated in Dougherty. RLG, 735 N.E.2d at 299. We disagree. Roseman was the sole shareholder of RLG, Inc., which operated the Spring Valley Landfill. As Indiana corporate law allows in a company with only one shareholder, Roseman was the single director. From RLG's inception in 1988, Roseman served as its only corporate officer, holding the offices of president, secretary, and treasurer. As is typical of a single shareholder corporation, only Roseman appears in the corporate minutes in any capacity.

These factors, individually or collectively, are not enough to establish individual liability under the responsible corporate officer doctrine. It is not Roseman's status as officer, director, or sole shareholder of RLG that is determinative under this theory. Each of these in itself may be sufficiently removed from the relevant corporate activities that the individual is not a "responsible corporate officer" despite high corporate office. Rather it is Roseman's direction of and involvement in operating the landfill, his representation to IDEM that he was the responsible party, and his actual role in the corporation's activities that are critical.

Matter of Dougherty, 482 N.W.2d 485, 490 (Minn.Ct.App.1992), formulated the standard of a responsible corporate officer as:

(1) the individual must be in a position of responsibility which allows the person to influence corporate policies or activities; (2) there must be a nexus between the individual's position and the violation in question such that the individual could have influenced the corporate actions which constituted the violations; and (3) the individual's actions or inactions facilitated the violations.

This is a fair restatement of the responsible corporate officer doctrine as articulated in United States v. Park, 421 U.S. 658, 673-74, 95 S.Ct. 1903, 44 L.Ed.2d 489 (1975). Roseman meets all these criteria. He plainly had a position that allowed him to influence RLG's policies and functions. Indeed, he dominated the corporation. He also designated himself as the responsible party in the solid waste permit application, establishing the necessary nexus between 307 his position and environmental compliance. Finally, his acts facilitated the violation.

The facts of this case are analogous to Dougherty, where the Minnesota Court of Appeals based responsible corporate officer liability on findings that the defendant "was in a position of responsibility as president and primary emergency coordinator," that the violations were within his "sphere of influence," that he "was the primary contact with all regulatory bodies concerning hazardous waste," and that he "failed to prevent the violations and take proper corrective action once the violations occurred." Dougherty, 482 N.W.2d at 490. Here there is no subordinate or intermediate officer principally responsible for compliance, and Roseman was directly involved in at least some corporate activities. Either may be sufficient, and in concert they demonstrate that Roseman had both the responsibility and authority to prevent the IEMA violations in the first instance and to correct the violations once they were brought to his attention. Cf. Park, 421 U.S. at 673-74, 95 S.Ct. 1903. In any event, Roseman's voluntary assumption of the role of responsible party is also sufficient. When Roseman signed IDEM's character disclosure statement, he did not cite the corporation's activities to demonstrate its capacity to operate a proposed landfill. Rather he pointed to his own individual experience as "Director" of a landfill for three years as fulfilling the requirement of experience of the "applicant". Thus, by his own admission, he was the party responsible for the landfill's operations, and held himself out as the responsible party in obtaining the permit.

B. Roseman's Individual Participation and Statutory Liability

Corporate status was not Roseman's only involvement in the IEMA violations. According to Jim Ritchie, who operated a bulldozer and backhoe at the landfill from April 1990 until April 1991, Roseman was at the landfill site approximately five days per month, and Roseman ordered the landfill's manager and Ritchie to "landfill garbage outside of the permitted landfill contours." This was evidence of Roseman's direct participation in the environmental violation.

Equally important, the environmental laws require that there be a "Responsible Party" incident to the permitting of a landfill. [FN3] When RLG filled out IDEM's "Waste Facility Character Disclosure Statement" in 1991, Roseman listed RLG in Section D as the "Responsible Party," but signed his own name as the "Applicant/Responsible Party." Section D2 of that form also requires the applicant or responsible party to list his, her, or its experience in managing the type of waste for which the permit was sought. Significantly, Roseman listed his individual three years of experience as director of Spring Valley Landfill as supplying the "Responsible Party's" experience in waste management at the contemplated site. Finally, once the violations became the subject of court order, Roseman, who had sole, ultimate control over RLG, did not act to correct them.

FN3. "Responsible Party" for purposes of Indiana Code section 13- 19-4 (formerly section 13-7-10.2), the section under which Roseman filed for a solid waste permit, means: (1) an officer, a corporation director, or a senior management official of a corporation, partnership, limited liability company, or business association that is an applicant; or (2) an individual, a corporation, a limited liability company, a partnership, or a business 308 association that owns, directly or indirectly, at least a twenty percent (20%) interest in the applicant. Ind.Code § 13-11-2-191(a) (1998).

The trial court's findings did not address Ritchie's affidavit describing Roseman's direct involvement in placing the garbage outside the permitted area, or the fact that Roseman represented himself, not RLG, to be the "Responsible Party" with three years experience as director of the landfill. All of these are documented and essentially indisputable. The Court of Appeals observed that "[t]he evidence discloses [only] that Roseman conducted himself as a corporate officer." RLG, 735 N.E.2d at 299. But that circumstance addresses only the piercing of the corporate veil and does not in itself eliminate liability under Indiana statute or the responsible corporate officer doctrine. Finally, Ritchie's uncontradicted affidavit established that Roseman directly supervised at least some of the landfill's daily unlawful waste disposal activities. This undisputed evidence of Roseman's active involvement in the violations is also sufficient to impose personal liability.

III. Personal Liability and Piercing the Corporate Veil

Roseman argues that an important cornerstone of Indiana law is respect for the corporate form, and that he may not be held personally liable unless RLG disregarded corporate structure and served as a mere instrumentality for his own business sufficient to pierce the corporate veil. We do not agree that Roseman's liability depends on piercing the corporate veil. In general, that doctrine holds individuals liable for corporate actions based on the failure to observe corporate formalities. Aronson v. Price, 644 N.E.2d 864, 867 (Ind.1994). The corporate veil is pierced only where it is clear that the corporation is merely a shell for conducting the defendant's own business and where the misuse of the corporate form constitutes a fraud or promotes injustice. Id. Unlike the responsible corporate office doctrine, or specific statutory liability, veil piercing is not dependent on the nature of the liability. In contrast, Roseman's liability here is essentially based on his individual participation in the violations, their character as violations of laws affecting public health, and specific statutory liability. The responsible corporate officer doctrine is distinct from piercing the corporate veil, and explicitly expands liability beyond veil piercing. See United States v. Dotterweich, 320 U.S. 277, 282, 64 S.Ct. 134, 88 L.Ed. 48 (1943) ("If the [FDCA] were construed [to limit liability to the corporation], the penalties of the law could be imposed only in the rare case where the corporation is merely an individual's alter ego."). The same is plainly true of statutory liabilities. We agree that the record in this case does not support piercing the corporate veil. Roseman is entitled to the benefit of corporate limited liability even if he owned all of the shares of RLG and was its only officer and director. A corporate officer is not liable simply because of his position within the corporation. United States v. Park, 421 U.S. 658, 674, 95 S.Ct. 1903, 44 L.Ed.2d 489 (1975). A corporate officer may, however, be held personally liable if he was actively involved in the activity that violates the statute. United States v. Conservation Chem. Co., 733 F.Supp. 1215, 1221 (N.D.Ind.1989). For the reasons discussed in Part II, Roseman is also liable under Indiana's Environmental Management Act.

Conclusion

309 For all these reasons, we conclude that Roseman may be held personally liable for civil penalties for the violations committed at the Spring Valley Landfill and the resulting remediation costs. The judgment of the trial court is reversed and remanded for entry of judgment in favor of IDEM and against Roseman in the amount of the default judgment of $3,175,000.

SHEPARD, C.J., and DICKSON, SULLIVAN, and RUCKER, JJ., concur.

Goodwin v. Agassiz 283 Mass. 358, 186 N.E. 659 (1933)

GOODWIN v AGASSIZ et al Supreme Judicial Court of Massachusetts, Suffolk June 29, 1933. RUGG, Chief Justice. A stockholder in a corporation seeks in this suit relief for losses suffered by him in selling shares of stock in Cliff Mining Company by way of accounting, rescission of sales, or redelivery of shares. The named defendants are MacNaughton, a resident of Michigan not served or appearing, and Agassiz, a resident of this commonwealth, the active party defendant The trial judge made findings of fact, rulings, and an order dismissing the bill. There is no report of the evidence. The case must be considered on the footing that the findings are true. The facts thus displayed are these: The defendants, in May, 1926, purchased through brokers on the Boston stock exchange seven hundred shares of stock of the Cliff Mining Company which up to that time the plaintiff had owned. Agassiz was president and director and MacNaughton a director and general manager of the company. They had certain knowledge, material as to the value of the stock, which the plaintiff did not have. The plaintiff contends that such purchase in all the circumstances without disclosure to him of that knowledge was a wrong against him. That knowledge was that an experienced geologist had formulated in writing in March, 1926, a theory as to the possible existence of copper deposits under conditions prevailing in the region where the property of the company was located. That region was known as the mineral belt in Northern Michigan, where are located mines of several copper mining companies. Another such company, of which the defendants were officers, had made extensive geological surveys of its lands. In consequence of recommendations resulting from that survey, exploration was started on property of the Cliff Mining Company in 1925. That exploration was ended *360 in May, 1926, because completed unsuccessfully, and the equipment was removed. The defendants discussed the geologist's **660 theory shortly after it was formulated. Both felt that the theory had value and should be tested, but they agreed that, before starting to test it, options should be obtained by 310 another copper company of which they were officers on land adjacent to or nearby in the copper belt, that if the geologist's theory were known to the owners of such other land there might be difficulty in securing options, and that that theory should not be communicated to any one unless it became absolutely necessary. Thereafter, options were secured which, if taken up, would involve a large expenditure by the other company. The defendants both thought, also that, if there was any merit in the geologist's theory, the price of Cliff Mining Company stock in the market would go up. Its stock was quoted and bought and sold on the Boston Stock Exchange. Pursuant to agreement, they bought many shares of that stock through agents on joint account. The plaintiff first learned of the closing of exploratory operations on property of the Cliff Mining Company from an article in a paper on May 15, 1926, and immediately sold his shares of stock through brokers. It does not appear that the defendants were in any way responsible for the publication of that article. The plaintiff did not know that the purchase was made for the defendants and they did not know that his stock was being bought for them. There was no communication between them touching the subject. The plaintiff would not have sold his stock if he had known of the geologist's theory. The finding is express that the defendants were not guilty of fraud, that they committed no breach of duty owed by them to the Cliff Mining Company, and that that company was not harmed by the nondisclosure of the geologist's theory, or by their purchases of its stock, or by shutting down the exploratory operations The contention of the plaintiff is that the purchase of his stock in the company by the defendants without disclosing to him as a stockholder their knowledge of the geologist's theory, their belief that the theory was true, had value, *361 the keeping secret the existence of the theory, discontinuance by the defendants of exploratory operations begun in 1925 on property of the Cliff Mining Company and their plan ultimately to test the value of the theory, constitute actionable wrong for which he as stockholder can recover The trial judge ruled that conditions may exist which would make it the duty of an officer of a corporation purchasing its stock from a stockholder to inform him as to knowledge possessed by the buyer and not by the seller, but found, on all the circumstances developed by the trial and set out at some length by him in his decision, that there was no fiduciary relation requiring such disclosure by the defendants to the plaintiff before buying his stock in the manner in which they did The question presented is whether the decree dismissing the bill rightly was entered on the facts found The directors of a commercial corporation stand in a relation of trust to the corporation and are bound to exercise the strictest good faith in respect to its property and business. ... The contention that directors also occupy the position of trustee toward individual stockholders in the corporation is plainly contrary to repeated decisions of this court and cannot be supported. In Smith v. Hurd, 12 Metc. 371, 384, 46 Am. Dec. 690, it was said by Chief Justice Shaw: 'There is no legal privity, relation, or immediate connexion, between the holders of shares in a bank, in their individual capacity, on the one side, and the directors of the bank on the other. The directors are not the bailees, the factors, agents or trustees of such individual stockholders.' ... In Blabon v. Hay, 269 Mass. 401, 407, 169 N. E. 268, 271, occurs this language with reference to sale of stock in a corporation by a stockholder to two of its directors: 'The fact that the defendants were directors created no fiduciary relation between them and the plaintiff in the matter of the sale of his stock.' 311 *362 The principle thus established is supported by an imposing weight of authority in other jurisdictions. ... A rule holding that directors are trustees for individual stockholders with respect to their stock prevails in comparatively few states; but in view of our own adjudications it is not necessary to review decisions to that effect. ... While the general principle is as stated, circumstances may exist requiring that transactions between a director and a stockholder as to stock in the corporation be set aside. The knowledge naturally in the possession of a director as to the condition of a corporation places upon him a peculiar obligation to observe every requirement of fair dealing when directly buying or selling its stock. Mere silence does not usually amount to a breach of duty, but parties may stand in such relation to each other that an equitable responsibility arises to communicate facts. Wellington v. Rugg, 243 Mass. 30, 35, 136 N. E. 831. Purchases and sales of stock dealt in on the stock exchange are commonly impersonal affairs. An honest director would be in a difficult situation if he could neither buy nor sell on the stock exchange shares of stock in his corporation without first seeking out the other actual ultimate party to the transaction and disclosing to him everything which a court or jury might later find that he then knew affecting the real or speculative value of such shares. Business of that nature is a matter to be governed by practical rules. Fiduciary *363 obligations of directors ought not to be made so onerous that men of experience and ability will be deterred from accepting such office. Law in its sanctions is not coextensive with morality. It cannot undertake to put all parties to every contract on an equality as to knowledge, experience, skill and shrewdness. It cannot undertake to relieve against hard bargains made between competent parties without fraud. On the other hand, directors cannot rightly be allowed to indulge with impunity in practices which do violence to prevailing standards of upright business men. Therefore, where a director personally seeks a stockholder for the purpose of buying his shares without making disclosure of material facts within his peculiar knowledge and not within reach of the stockholder, the transaction will be closely scrutinized and relief may be granted in appropriate instances .... The applicable legal principles 'have almost always been the fundamental ethical rules of right and wrong.' Robinson v. Mollett, L. R. 7 H. L. 802, 817 The precise question to be decided in the case at bar is whether on the facts found the defendants as directors had a right to buy stock of the plaintiff, a stockholder. Every element of actual fraud or misdoing by the defendants is negatived by the findings. Fraud cannot be presumed; it must be proved. Brown v. Little, Brown & Co., Inc., 269 Mass. 102, 117, 168 N. E. 521, 66 A. L. R. 1284. The facts found afford no ground for inferring fraud or conspiracy. The only knowledge possessed by the defendants not open to the plaintiff was the existence of a theory formulated in a thesis by a geologist as to the possible existence of copper deposits where certain geological conditions existed common to the property of the Cliff Mining Company and that of other mining companies in its neighborhood. This thesis did not express an opinion that copper deposits would be found at any particular spot *364 or on property of any specified owner. Whether that theory was sound or fallacious, no one knew, and so far as appears has never been demonstrated. The defendants made no representations to anybody about the theory. No facts found placed upon them any obligation to disclose the theory. A few days after the thesis expounding the theory was brought to the attention of the defendants, the annual report by the directors of the Cliff Mining Company for the calendar year 1925, signed by Agassiz for the directors, was issued. It did not cover the time when the theory was formulated. The report described the status of the operations under the exploration which had been begun in 1925. At 312 the annual meeting of the stockholders of the company held early in April, 1926, no reference was made to the theory. It was then at most a hope, possibly an expectation. It had not passed the nebulous stage. No disclosure was made of it. The Cliff Mining Company was not harmed by the nondisclosure. There would have been no advantage to it, so far as appears, from a disclosure. The disclosure would have been detrimental to the interests of another mining corporation in which the defendants were directors. In the circumstances there was no duty on the part of the defendants to set forth to the stockholders at the annual meeting their faith, aspirations and plans for the future. Events as they developed might render advisable vadical changes in such views. Disclosure of the theory, if it ultimately was proved to be erroneous or without foundation in fact, might involve the defendants in litigation with those who might act on the hypothesis that it was correct. The stock of the Cliff Mining Company was bought and sold on the stock exchange. The identity of buyers and seller of the stock in question in fact was not known to the parties and perhaps could not readily have been ascertained. The defendants caused the shares to be bought through brokers on the stock exchange. They said nothing to anybody as to the reasons actuating them. The plaintiff was no novice. He was a member of the Boston stock exchange and had kept a record of sales of Cliff Mining Company stock. He acted upon his own judgment in *365 selling his stock. He made no inquiries of **662 the defendants or of other officers of the company. The result is that the plaintiff cannot prevail Decree dismissing bill affirmed with costs.

Shlensky v. Wrigley 95 Ill.App.2d 173, 237 N.E.2d 776 (1968)

William SHLENSKY, on Behalf of and as a Representative of Chicago National League Ball Club (Inc.), Plaintiff-Appellant, v. Philip K. WRIGLEY, William Wrigley, William J. Hagenah, Jr., George F. Getz, Philip H. Erbes, Gilbert H. Scribner, Arthur E. Meyerhoff, John Holland, Jack Brickhouse and Chicago National League Ball Club (Inc.), Defendants-Appellees Gen. No. 51750 Appellate Court of Illinois, First District, Third Division April 25, 1968. SULLIVAN, Justice. This is an appeal from a dismissal of plaintiff's amended complaint on motion of the defendants. The action was a stockholders' derivative suit against the directors for negligence and mismanagement. The corporation was also made a defendant. Plaintiff sought damages 313 *175 and an order that defendants cause the installation of lights in Wrigley Field and the scheduling of night baseball games. Plaintiff is a minority stockholder of defendant corporation, Chicago National League Ball Club (Inc.), a Delaware corporation with its principal place of business in Chicago, Illinois. Defendant corporation owns and operates the major league professional baseball team known as the Chicago Cubs. The corporation also engages in the operation of Wrigley Field, the Cubs' home park, the concessionaire sales during Cubs' home games, television and radio broadcasts of Cubs' home games, the leasing of the field for football games and other events and receives its share, as visiting team, of admission moneys from games played in other National League stadia. The individual defendants are directors of the Cubs and have served for varying periods of years. Defendant Philip K. Wrigley is also president of the corporation and owner of approximately 80% Of the stock therein Plaintiff alleges that since night baseball was first played in 1935 nineteen of the twenty major league teams have scheduled night games. In 1966, out of a total of 1620 games in the major leagues, 932 were played at night. Plaintiff alleges that every member of the major leagues, other than the Cubs, scheduled substantially all of its home games in 1966 at night, exclusive of opening days, Saturdays, Sundays, holidays and days prohibited by league rules. Allegedly this has been done for the specific purpose of maximizing attendance and thereby maximizing revenue and income The Cubs, in the years 1961--65, sustained operating losses from its direct baseball operations. Plaintiff attributes those losses to inadequate attendance at Cubs' home games. He concludes that if the directors continue to refuse to install lights at Wrigley Field and schedule *176 night baseball games, the Cubs will continue to sustain comparable losses and its financial condition will continue to deteriorate **778 Plaintiff alleges that, except for the year 1963, attendance at Cubs' home games has been substantially below that at their road games, many of which were played at night Plaintiff compares attendance at Cubs' games with that of the Chicago White Sox, an American League club, whose weekday games were generally played at night. The weekend attendance figures for the two teams was similar; however, the White Sox week-night games drew many more patrons than did the Cubs' weekday games Plaintiff alleges that the funds for the installation of lights can be readily obtained through financing and the cost of installation would be far more than offset and recaptured by increased revenues and incomes resulting from the increased attendance Plaintiff further alleges that defendant Wrigley has refused to install lights, not because of interest in the welfare of the corporation but because of his personal opinions 'that baseball is a 'daytime sport' and that the installation of lights and night baseball games will have a deteriorating effect upon the surrounding neighborhood.' It is alleged that he has admitted that he is not interested in whether the Cubs would benefit financially from such action because of his concern for the neighborhood, and that he would be willing for the team to play night games if a new stadium were built in Chicago Plaintiff alleges that the other defendant directors, with full knowledge of the foregoing matters, have acquiesced in the policy laid down by Wrigley and have permitted him to dominate 314 the board of directors in matters involving the installation of lights and scheduling of night games, even though they knew he was not motivated *177 by a good faith concern as to the best interests of defendant corporation, but solely by his personal views set forth above. It is charged that the directors are acting for a reason or reasons contrary and wholly unrelated to the business interests of the corporation; that such arbitrary and capricious acts constitute mismanagement and waste of corporate assets, and that the directors have been negligent in failing to exercise reasonable care and prudence in the management of the corporate affairs. The question on appeal is whether plaintiff's amended complaint states a cause of action. It is plaintiff's position that fraud, illegality and conflict of interest are not the only bases for a stockholder's derivative action against the directors. Contrariwise, defendants argue that the courts will not step in and interfere with honest business judgment of the directors unless there is a showing of fraud, illegality or conflict of interest. The cases in this area are numerous and each differs from the others on a factual basis. However, the courts have pronounced certain ground rules which appear in all cases and which are then applied to the given factual situation. * * * In Davis v. Louisville Gas & Electric Co., 16 Del.Ch. 157, 142 A. 654, a minority shareholder sought to have the directors enjoined from amending the certificate of incorporation. The court said on page 659: 'We have then a conflict in view between the responsible managers of a corporation and an overwhelming majority of its stockholders on the one hand and a dissenting minority on the other--a conflict touching matters of business policy, such as has occasioned innumerable applications to courts to intervene and determine which of the two conflicting views should prevail. The response which courts make to such applications is that it is not their function to resolve for corporations questions of policy and business management. The directors are chosen to pass upon such questions and their judgment Unless shown to be tainted with fraud is accepted as final. The judgment of the directors of corporations enjoys the benefit of a presumption that it was formed in good faith and was designed to promote the best interests of the corporation they serve.' (Emphasis supplied) Similarly, the court in Toebelman v. Missour-Kansas Pipe Line Co., D.C., 41 F.Supp. 334, said at page 339: *179 'The general legal principle involved is familiar. Citation of authorities is of limited value because the facts of each case differ so widely. Reference may be made to the statement of the rule in Helfman v. American Light & Traction Company, 121 N.J.Eq. 1, 187 A. 540, 550, in which the Court stated the law as follows: 'In a purely business corporation * * * the authority of the directors in the conduct of the business of the corporation must be regarded as absolute when they act within the law, and the court is without authority to substitute its judgment for that of the directors."

315 Plaintiff argues that the allegations of his amended complaint are sufficient to set forth a cause of action under the principles set out in Dodge v. Ford Motor Co., 204 Mich. 459, 170 N.W. 668. In that case plaintiff, owner of about 10% Of the outstanding stock, brought suit against the directors seeking payment of additional dividends and the enjoining of further business expansion. In ruling on the request for dividends the court indicated that the motives of Ford in keeping so much money in the corporation for expansion and security were to benefit the public generally and spread the profits out by means of more jobs, etc. The court felt that these were not only far from related to the good of the stockholders, but amounted to a change in the ends of the corporation and that this was not a purpose contemplated or allowed by the corporate charter. * * * There must be fraud or a breach of that good faith which directors are bound to exercise **780 toward the stockholders in order to justify the courts entering into the internal affairs of corporations. This is made clear when the court refused to interfere with the directors decision to expand the business. * * * Plaintiff in the instant case argues that the directors are acting for reasons unrelated to the financial interest and welfare of the Cubs. However, we are not satisfied that the motives assigned to Philip K. Wrigley, and through him to the other directors, are contrary to the best interests of the corporation and the stockholders. For example, it appears to us that the effect on the surrounding neighborhood might well be considered by a *181 director who was considering the patrons who would or would not attend the games if the park were in a poor neighborhood. Furthermore, the long run interest of the corporation in its property value at Wrigley Field might demand all efforts to keep the neighborhood from deteriorating. By these thoughts we do not mean to say that we have decided that the decision of the directors was a correct one. That is beyond our jurisdiction and ability. We are merely saying that the decision is one properly before directors and the motives alleged in the amended complaint showed no fraud, illegality or conflict of interest in their making of that decision While all the courts do not insist that one or more of the three elements must be present for a stockholder's derivative action to lie, nevertheless we feel that unless the conduct of the defendants at least borders on one of the elements, the courts should not interfere. The trial court in the instant case acted properly in dismissing plaintiff's amended complaint We feel that plaintiff's amended complaint was also defective in failing to allege damage to the corporation. * * * There is no allegation that the night games played by the other nineteen teams enhanced their financial position or that the profits, if any, of those teams were directly related to the number of night games scheduled. There is an allegation that the installation of lights and *182 scheduling of night games in Wrigley Field would have resulted in large amounts of additional revenues and incomes from increased attendance and related sources of income. Further, the cost of installation of lights, funds for which are allegedly readily available by financing, would be

316 more than offset and recaptured by increased revenues. However, no allegation is made that there will be a net benefit to the corporation from such action, considering all increased costs. Plaintiff claims that the losses of defendant corporation are due to poor attendance at home games. However, it appears **781 from the amended complaint, taken as a whole, that factors other than attendance affect the net earnings or losses. For example, in 1962, attendance at home and road games decreased appreciably as compared with 1961, and yet the loss from direct baseball operation and of the whole corporation was considerably less. The record shows that plaintiff did not feel he could allege that the increased revenues would be sufficient to cure the corporate deficit. The only cost plaintiff was at all concerned with was that of installation of lights. No mention was made of operation and maintenance of the lights or other possible increases in operating costs of night games and we cannot speculate as to what other factors might influence the increase or decrease of profits if the Cubs were to play night home games. * * * Plaintiff's allegation that the minority stockholders and the corporation have been seriously and irreparably damaged by the wrongful conduct of the defendant directors is a mere conclusion and not based on well pleaded facts in the amended complaint. Finally, we do not agree with plaintiff's contention that failure to follow the example of the other major league clubs in scheduling night games constituted negligence. Plaintiff made no allegation that these teams' night schedules were profitable or that the purpose for which night baseball had been undertaken was fulfilled. Furthermore, it cannot be said that directors, even those of corporations that are losing money, must follow the lead of the other corporations in the field. Directors are elected for their business capabilities and judgment and the courts cannot require them to forego their judgment because of the decisions of directors of other companies. Courts may not decide these questions in the absence of a clear showing of dereliction of duty on the part of the specific directors and mere failure to 'follow the crowd' is not such a dereliction. For the foregoing reasons the order of dismissal entered by the trial court is affirmed. Affirmed. DEMPSEY, P.J., and SCHWARTZ, J., concur.

Kamin v. American Express Co. 86 Misc.2d 809, 383 N.Y.S.2d 807 (1976)

Howard P. KAMIN and Robert J. Kamin, Plaintiffs, v. AMERICAN EXPRESS COMPANY, a New York Corporation, et al., Defendants Supreme Court, New York County, New York, Special Term, Part I 317 March 17, 1976. EDWARD J. GREENFIELD, Justice: In this stockholders' derivative action, the individual defendants, who are the directors of the American Express Company, move for an order dismissing the complaint for failure to state a cause of action pursuant to CPLR 3211(a)(7), and alternatively, for summary judgment pursuant to CPLR 3211(c) The complaint is brought derivatively by two minority stockholders of the American Express Company, asking for a declaration that a certain dividend in kind is a waste of *811 corporate assets, directing the defendants not to proceed with the distribution, or, in the alternative, for monetary damages. The motion to dismiss the complaint requires the Court to presuppose the truth of the allegations. It is the defendants' contention that, conceding everything in the complaint, no viable cause of action is made out After establishing the identity of the parties, the complaint alleges that in 1972 American Express acquired for investment 1,954,418 shares of common stock of Donaldson, Lufken and Jenrette, Inc. (hereafter DLJ), a publicly traded corporation, at a cost of $29.9 million. It is further alleged that the current market value of those shares is approximately $4.0 million. On July 28, 1975, it is alleged, the Board of Directors of American Express declared a special dividend to all stockholders of record pursuant to which the shares of DLJ would be distributed in kind. Plaintiffs contend further that if American Express were to sell the DLJ shares on the market, it would sustain a capital loss of $25 million, which could be offset against taxable capital gains on other investments. Such a sale, they **810 allege, would result in tax savings to the company of approximately $8 million, which would not be available in the case of the distribution of DLJ shares to stockholders. It is alleged that on October 8, 1975 and October 16, 1975, plaintiffs demanded that the directors rescind the previously declared dividend in DLJ shares and take steps to preserve the capital loss which would result from selling the shares. This demand was rejected by the Board of Directors on October 17, 1975 It is apparent that all the previously-mentioned allegations of the complaint go to the question of the exercise by the Board of Directors of business judgment in deciding how to deal with the DLJ shares. The crucial allegation which must be scrutinized to determine the legal sufficiency of the complaint is paragraph 19, which alleges: '19. All of the defendant Directors engaged in or acquiesced in or negligently permitted the declaration and payment of the Dividend in violation of the fiduciary duty owed by them to Amex to care for and preserve Amex's assets in the same manner as a man of average prudence would care for his own property.' Plaintiffs never moved for temporary injunctive relief, and did nothing to bar the actual distribution of the DLJ shares. The dividend was in fact paid on October 31, 1975. Accordingly, that portion of the complaint seeking a direction not to *812 distribute the shares is deemed to be moot, and the Court will deal only with the request for declaratory judgment or for damages Examination of the complaint reveals that there is no claim of fraud or self- dealing, and no contention that there was any bad faith or oppressive conduct. The law is quite clear as to what is necessary to ground a claim for actionable wrongdoing. 318 'In actions by stockholders, which assail the acts of their directors or trustees, courts will not interfere unless the powers have been illegally or unconscientiously executed; or unless it be made to appear that the acts were fraudulent or collusive, and destructive of the rights of the stockholders. Mere errors of judgment are not sufficient as grounds for equity interference, for the powers of those entrusted with corporate management are largely discretionary.' Leslie v. Lorillard, 110 N.Y. 519, 532, 18 L.E. 363, 365. * * * More specifically, the question of whether or not a dividend is to be declared or a distribution of some kind should be made is exclusively a matter of business judgment for the Board of Directors. '* * * Courts will not interfere with such discretion unless it be first made to appear that the directors have acted or are about to act in bad faith and for a dishonest purpose. It is for the directors to say, acting in good faith of course, when and to what extent dividends shall be declared * * * The statute confers upon the directors this power, and the minority stockholders are not in a position to question this right, so long as the directors are acting in good faith * * *' Liebman v. Auto Strop Co., 241 N.Y. 427, 433--4, 150 N.E. 505, 506. * * * Thus, a complaint must be dismissed if all that is presented is a decision to pay dividends rather than pursuing some other course of conduct. Weinberger v. Quinn, 264 App.Div. 405, 35 N.Y.S.2d 567, affd. 290 N.Y. 635, 49 N.E.2d 131. A complaint which alleges merely that some course of action other than that pursued by the Board of Directors would have been more advantageous gives rise to no cognizable cause of action. Courts have more than enough to do in adjudicating legal rights and devising remedies for wrongs. The directors' room rather than the courtroom is **811 the appropriate forum for thrashing out purely business questions *813 which will have an impact on profits, market prices, competitive situations, or tax advantages. * * * It is not enough to allege, as plaintiffs do here, that the directors made an imprudent decision, which did not capitalize on the possibility of using a potential capital loss to offset capital gains. More than imprudence or mistaken judgment must be shown. 'Questions of policy of management, expediency of contracts or action, adequacy of consideration, lawful appropriation of corporate funds to advance corporate interests, are left solely to their honest and unselfish decision, for their powers therein are without limitation and free from restraint, and the exercise of them for the common and general interests of the corporation may not be questioned, although the results show that what they did was unwise or inexpedient.' Pollitz v. Wabash Railroad Co., 207 N.Y. 113, 124, 100 N.E. 721, 724. Section 720(a)(1)(A) of the Business Corporation Law permits an action against directors for 'the neglect of, or failure to perform, or other violation of his duties in the management and 319 disposition of corporate assets committed to his charge.' This does not mean that a director is chargeable with ordinary negligence for having made an improper decision, or having acted imprudently. The 'neglect' referred to in the statute is neglect of duties (i.e., malfeasance or nonfeasance) and not misjudgment. To allege that a director 'negligently permitted the declaration and payment' of a dividend without alleging fraud, dishonesty or nonfeasance, is to state merely that a decision was taken with which one disagrees Nor does this appear to a be a case in which a potentially valid cause of action is inartfully stated. The defendants have moved alternatively for summary judgment and have submitted affidavits under CPLR 3211(c), and plaintiffs likewise have submitted papers enlarging upon the allegations of the complaint. The affidavits of the defendants and the exhibits annexed thereto demonstrate that the objections raised by the plaintiffs to the proposed dividend action were carefully considered and unanimously rejected by the Board at a special meeting called precisely for that purpose at the plaintiffs' request. The minutes of the special meeting indicate that the *814 defendants were fully aware that a sale rather than a distribution of the DLJ shares might result in the realization of a substantial income tax saving. Nevertheless, they concluded that there were countervailing considerations primarily with respect to the adverse effect such a sale, realizing a loss of $25 million, would have on the net income figures in the American Express financial statement. Such a reduction of net income would have a serious effect on the market value of the publicly traded American Express stock. This was not a situation in which the defendant directors totally overlooked facts called to their attention. They gave them consideration, and attempted to view the total picture in arriving at their decision. While plaintiffs contend that according to their accounting consultants the loss on the DLJ stock would still have to be charged against current earnings even if the stock were distributed, the defendants' accounting experts assert that the loss would be a charge against earnings only in the event of a sale, whereas in the event of distribution of the stock as a dividend, the proper accounting treatment would be to charge the loss only against surplus. While the chief accountant for the SEC raised some question as to the appropriate accounting treatment of this transaction, there was no basis for any action to be taken by the SEC with respect to the American Express financial statement The only hint of self-interest which is raised, not in the complaint but in **812 the papers on the motion, is that four of the twenty directors were officers and employees of American Express and members of its Executive Incentive Compensation Plan. Hence, it is suggested, by virtue of the action taken earnings may have been overstated and their compensation affected thereby. Such a claim is highly speculative and standing alone can hardly be regarded as sufficient to support an inference of self-dealing. There is no claim or showing that the four company directors dominated and controlled the sixteen outside members of the Board. Certainly, every action taken by the Board has some impact on earnings and may therefore affect the compensation of those whose earnings are keyed to profits. That does not disqualify the inside directors, nor does it put every policy adopted by the Board in question. All directors have an obligation, using sound business judgment, to maximize income for the benefit of all persons having a stake in the welfare of the corporate entity. See, Amdur v. Meyer, 15 A.D.2d 425, 224 N.Y.S.2d 440, appeal dismissed 14 N.Y.2d 541, 248 N.Y.S.2d 639, 198 N.E.2d 30. What we have here as revealed *815 both by the complaint and by the affidavits and exhibits, is that a disagreement exists between two minority stockholders and a unanimous Board of Directors as to the best way to handle a loss already incurred on an investment. The directors are 320 entitled to exercise their honest business judgment on the information before them, and to act within their corporate powers. That they may be mistaken, that other courses of action might have differing consequences, or that their action might benefit some shareholders more than others presents no basis for the superimposition of judicial judgment, so long as it appears that the directors have been acting in good faith. The question of to what extent a dividend shall be declared and the manner in which it shall be paid is ordinarily subject only to the qualification that the dividend be paid out of surplus (Business Corporation Law Section 510, subd. b). The Court will not interfere unless a clear case is made out of fraud, oppression, arbitrary action, or breach of trust. * * * In this case it clearly appears that the plaintiffs have failed as a matter of law to make out an actionable claim. Accordingly, the motion by the defendants for summary judgment and dismissal of the complaint is granted.

Joy v. North 692 F.2d 880 (2nd Cir.1982)

Athalie Doris JOY, Plaintiff-Appellant, v. Nelson L. NORTH, et al., Defendants, Nelson L. North, et al., Defendants-Appellees No. 1050, Docket 81-7729 United States Court of Appeals, Second Circuit Argued April 23, 1982 Decided Nov. 4, 1982. RALPH K. WINTER, Circuit Judge: This is an appeal from a grant of summary judgment for defendants by the District Court for the District of Connecticut, Eginton, Judge, dismissing a derivative action against certain directors and officers of Citytrust upon a recommendation of a special litigation committee and placing that report under seal. 519 F.Supp. 1312 (D.Conn.1981) We reverse BACKGROUND In October of 1977, Dr. Athalie Doris Joy brought this shareholder's derivative suit on behalf of Connecticut Financial Services Corporation (now Citytrust Bancorp, Inc.) against its 321 wholly-owned banking subsidiary, Citytrust, [FN1] and the officers and directors of Citytrust. Both corporations are incorporated in Connecticut. The complaint alleged diversity of citizenship, common law breach of trust and of fiduciary duty as well as violations of the National Bank Act, 12 U.S.C. ' 84 (1976), which limits aggregate loans to a single person or entity to 10% of a bank's combined stockholder equity and capital. The allegations concern loans made by Citytrust to the Katz Corporation ("Katz") for construction of an office building in a redevelopment area of Norwalk, Connecticut. Plaintiff seeks a $6 million recovery plus interest and attorney's fees. FN1. Citytrust became a federal bank on June 30, 1971. It became a state bank again on January 1, 1977. The underlying transactions need only be briefly summarized at this point. In 1967, Citytrust entered into a 20-year term lease agreement for approximately 9% of an office building which Katz was planning to build in Norwalk. Katz, then a respected developer, signed a $4 million construction mortgage for a one-and-a-half year term on January 12, 1971. Although the mortgage was written through and recorded in the name of Citytrust, Chase Manhattan Bank provided the bulk of the financing, $3.5 million, with Citytrust participating to the extent of $500,000. At this time, Katz had already borrowed, largely in unsecured form, an additional $250,000 from Citytrust to finance construction of the office building. As the building neared completion in early 1972, Katz had drawn down the full value of the $4 million mortgage. At its expiration in June, 1972, the Chase mortgage *883 was replaced by a $4.5 million mortgage by First National City Bank, with Citytrust both issuing the mortgage and participating to the extent of $90,000. Meanwhile, Katz continued to receive unsecured loans from Citytrust. By December, 1972, that unsecured debt reached $900,000, for a total of $990,000 in Citytrust loans related to the building In June, 1973, with the building only half rented, the First National City mortgage was extended for a year. Katz's unsecured debt to Citytrust had by now climbed to $1,840,000. In November, in conjunction with the issuance of yet another loan to Katz, Citytrust obtained a blanket second mortgage on the building and on other Katz properties to secure what was now a total loan balance of $2,140,000. Shortly thereafter, the First National City mortgage was extended to August, 1975, and Citytrust lent Katz another $300,000. Just prior to this extension of credit, the National Bank Examiners classified the Katz loans In April, 1975, a refinancing plan was completed with Lincoln National Life Insurance Company providing a $6 million loan to a Katz-related partnership which had taken title to the building. The loan was secured by a first mortgage on the building and was used to consolidate Katz's debt. As a condition of the new financing, Citytrust was required to take a 30-year master lease on the still largely unrented building at a rental equaling the mortgage payments to Lincoln National, in effect guaranteeing Katz's $6 million obligation to Lincoln. In addition to undertaking the master lease, Citytrust had by now extended $2,665,000 in loans to Katz In May, 1975, the National Bank Examiners classified $2 million of the Katz loans as doubtful and required a charge off of $665,000. On August 18, 1976, in an apparent effort to salvage what was left of its position, Citytrust's Board of Directors authorized loans which exceeded the 10% federal statutory limit. After these loans were consummated, Katz's total indebtedness to Citytrust reached $3,545,000. On October 20, 1976, Citytrust charged off the $2 million remaining on the second mortgage. 322 On June 13, 1977, the Katz-related partnership relinquished title to the building to Citytrust in exchange for a release from its obligation to Lincoln National and a release of personal guarantees previously assumed by members of the Katz family. Citytrust thus directly assumed the $6 million Lincoln National mortgage. In October, 1977, Second Nutmeg Financial purchased the building for $9,600,000 which consisted of its assumption of the $6 million Lincoln National mortgage and a $3,600,000 note to Citytrust secured by a second mortgage. There is an indication in the District Court record that an affiliate of Second Nutmeg which later acquired the building has defaulted and Citytrust once again owns it, along with the concurrent obligations. There is no indication that rental income is now adequate to meet those obligations, and we appear free to assume that the other Katz properties covered by the second mortgage are not of any significant value. * * * Nine months later, the Committee issued a Report recommending that the suit be discontinued as to 23 defendants, 20 of whom were outside directors of either Citytrust or Connecticut Financial Services and three of whom were either officers or directors or both. (The 23 will hereafter be referred to as the "outside defendants"). The Committee concluded there was "no reasonable possibility" that the outside defendants would be found liable. Its Report also recommended that settlement be considered with regard to seven defendants who were the senior officers most directly involved in the Katz loans. (These seven will hereafter be referred to as the "inside defendants"). As to them, the Committee found there was a "possibility" that one or more might be found to have been negligent. * * * When plaintiff declined to withdraw the action as to the outside defendants, the corporation filed a motion to dismiss the case as to them. * * * After discovery, Judge Eginton granted the defendants' motion for summary judgment, the protective order remaining in force. Concluding that no dispositive Connecticut case or statute exists, Judge Eginton referred to the weight of authority in cases reported elsewhere. He held that Connecticut law permits the use of a Burks committee and that the business judgment rule limits judicial scrutiny of its recommendations to the good faith, independence and thoroughness of the Committee. 519 F.Supp. at 1325. He resolved these issues favorably to the Committee and, therefore, entered summary judgment in favor of the 23 outside defendants. Plaintiff appeals from the ruling. We reverse as to both the grant of summary judgment and the sealing of the Committee report. [FN4] * * * DISCUSSION * * * Appellees assert that, since a board of directors can delegate all its powers to a committee, Conn.Gen.Stat.Ann. ' 33-318(a) (West 1982), a special litigation committee of independent directors can decide whether a derivative action should be dismissed or continued. They further argue that, when an appropriate motion is made, courts must defer to the

323 committee's recommendation under the so-called business judgment rule, even though the delegation of power is made by directors who are defendants in the action. Judge Eginton adopted that position and limited his inquiry to the Committee's good faith, independence and thoroughness. Appellees also assert that the Committee Report in question may be kept under seal, any public use being in violation of the District Court's order. Appellant claims an absolute right to maintain a derivative action once begun and challenges the protective order on constitutional and non-constitutional grounds An examination of these claims requires a discussion of some underlying principles of corporate law. Our opinion first addresses the nature and function of the business judgment rule, which played a large role in persuading the District Court to dismiss this action. It turns then to the legal oddity known as the derivative action, thought by many to be an endangered species as a consequence of the evolution of special litigation committees. * * * A. The Liability of Corporate Directors and Officers and the Business Judgment Rule While it is often stated that corporate directors and officers will be liable for negligence in carrying out their corporate duties, all seem agreed that such a statement is misleading. See generally, Lattin, Corporations, 272-75 (1971). Whereas an automobile driver who makes a mistake in judgment as to speed or distance injuring a pedestrian will likely be called upon to respond in damages, a corporate officer who makes a mistake in judgment as to economic conditions, consumer tastes or production line efficiency will rarely, if ever, be found liable for damages suffered by the corporation. See generally, Symposium, Officers' and Directors' Responsibilities and Liabilities, 27 Bus.Lawyer 1 (1971); Fever, Personal Liabilities of Corporate Officers and Directors, 28-42 (2d ed. 1974). Whatever the terminology, the fact is that liability is rarely imposed upon corporate directors or officers simply for bad judgment and this reluctance to impose liability for unsuccessful business decisions has been doctrinally labelled the business judgment rule. Although the rule has suffered under academic criticism, see, e.g., Cary, Standards of Conduct Under Common Law, Present Day Statutes and the Model Act, 27 Bus.Lawyer 61 (1972), it is not without rational basis First, shareholders to a very real degree voluntarily undertake the risk of bad business judgment. Investors need not buy stock, for investment markets offer an array of opportunities less vulnerable to mistakes in judgment by corporate officers. Nor need investors buy stock in particular corporations. In the exercise of what is genuinely a free choice, the quality of a firm's management is often decisive and information is available from professional advisors. Since shareholders can and do select among investments partly on the basis of management, the business judgment rule merely recognizes a certain voluntariness in undertaking the risk of bad business decisions *886 Second, courts recognize that after-the-fact litigation is a most imperfect device to evaluate corporate business decisions. The circumstances surrounding a corporate decision are not easily reconstructed in a courtroom years later, since business imperatives often call for quick decisions, inevitably based on less than perfect information. The entrepreneur's function is to encounter risks and to confront uncertainty, and a reasoned decision at the time made may seem a wild hunch viewed years later against a background of perfect knowledge

324 Third, because potential profit often corresponds to the potential risk, it is very much in the interest of shareholders that the law not create incentives for overly cautious corporate decisions. Some opportunities offer great profits at the risk of very substantial losses, while the alternatives offer less risk of loss but also less potential profit. Shareholders can reduce the volatility [FN5] of risk by diversifying their holdings. In the case of the diversified shareholder, the seemingly more risky alternatives may well be the best choice since great losses in some stocks will over time be offset by even greater gains in others. [FN6] Given mutual funds and similar forms of diversified investment, courts need not bend over backwards to give special protection to shareholders who refuse to reduce the volatility of risk by not diversifying. A rule which penalizes the choice of seemingly riskier alternatives thus may not be in the interest of shareholders generally. * * * Whatever its merit, however, the business judgment rule extends only as far as the reasons which justify its existence. Thus, it does not apply in cases, e.g., in which the corporate decision lacks a business purpose, see Singer v. Magnavox, 380 A.2d 969 (Del.Supr.1977), is tainted by a conflict of interest, Globe Woolen v. Utica Gas & Electric Co., 224 N.Y. 483, 121 N.E. 378 (1918), is so egregious as to amount to a no-win decision, Litwin v. Allen, 25 N.Y.S.2d 667 (N.Y.Co.Sup.Ct.1940), or results from an obvious and prolonged failure to exercise oversight or supervision, McDonnell v. American Leduc Petroleums, Ltd., 491 F.2d 380 (2d Cir.1974); Atherton v. Anderson, 99 F.2d 883 (6th Cir.1938). Other examples may occur. * * * We turn now to the contents of the Special Litigation Committee's Report. We emphasize that this recitation is the Committee's version of the facts. The record suggests that a trial might reveal sharply differing versions of the same events from various witnesses as well as sharply differing inferences drawn from that testimony According to the Report, Nelson L. North was Citytrust's Chief Executive Officer and Norman Schaff, Jr. was its Chief Lending Officer during the period in question. The management of Citytrust was completely dominated by North. Bank officers who did not temper themselves to his regime had a short tenure at the bank. North also exercised strong control over the activities of the Board of Directors. Board members were given neither materials nor agendas prior to meetings and requests for long range planning documents were left unanswered. North's control is illustrated by the fact that contrary to the recommendation of Citytrust's outside auditors, the bank's Audit Committee was not composed solely of outside directors but instead counted among its members Mr. North and one other officer. Minutes of the Audit Committee between 1971 and 1974 are largely incomplete Mr. North apparently brought the initial proposal for the Katz loan to Citytrust. From 1971 to 1976, North's son was employed by Katz, and he apparently deemed this a sufficient conflict of interest to preclude his voting on the Katz transactions in Executive Committee meetings. This fastidiousness appears to have been limited to the formality of voting, for the Report strongly suggests that North was deeply involved in the Katz transactions, although the full degree of his involvement is left uncertain. The Report also adds that Mr. North has destroyed his records

325 Katz appears to have been experiencing financial difficulties as early as 1971. Chase Manhattan in fact opposed financing the Katz building in part because of a $1.6 *895 million shortfall between the building cost and available lending; it was North who persuaded Chase to make the initial mortgage loan. By 1972, Katz was falling behind in its loans and by December of that year owed Citytrust $990,000 with respect to the building. The Report concludes that by then Citytrust was effectively a joint venturer with Katz in the building, sharing the risk of loss but entitled at best only to interest and principal if things went well. There is also some indication that a portion of the unsecured advance made by Citytrust was being applied to the Chase mortgage Notwithstanding the increasingly evident peril in Citytrust's transactions with Katz, no appraisals of the buildings were undertaken until 1976, and no rentability study until 1974. Although Katz had suggested that a public offering would alleviate the situation, no professional review of the preliminary prospectus was undertaken. From 1972 through 1973, only one meeting of the Board of Directors or Executive Committee considered the Katz loans. The Senior Loan Committee did meet on the Katz matter late in 1972 and may have adopted a very cautious attitude toward further credit extension. Despite this, and despite the absence of Executive Committee and Board support, senior management extended almost a million dollars in loans to Katz between 1972 and 1973 From 1973 through 1974, the number of Board meetings at which the Katz loans were considered increased to five. This is roughly contemporaneous with the recommendation of the outside auditors that a 50% special fund be set up for the Katz loans and the National Bank Examiners' classification of the total outstanding Katz indebtedness as substandard. It is, as the Report notes, "unsettling" that neither Schaff nor Citytrust's Comptroller recall being advised of the recommendation as to the special reserve. Moreover, it is not established that the Directors were advised of this recommendation By late 1974, the Katz loans were so clearly a problem that they were extensively considered by the Board and the Executive Committee. In fact, the Report notes that these loans were discussed at a minimum of 25 Board and Executive Committee meetings. Nevertheless, when, on August 18, 1976, the Board was presented with the request to go over the 10% limit, there was no prior mention of the issue on the agenda nor was opinion of counsel presented to the Board or even sought. Indeed, copies of the Comptroller's letter suggesting that Directors might wish to consult their personal counsel were not distributed to the Board The Report estimates a loss of $5.1 million to Citytrust. As stated earlier, there is an indication in the record that since the Report was issued, the new owner has defaulted and Citytrust again owns the building. If so, $5.1 million may be considerably less than the actual loss. In any event, a loss exceeding 10% of shareholder equity seems quite likely The Report contains the opinion of two experts. One concluded that the impact on morale of bank personnel, on the image of Citytrust among the banking public, upon persons who might be asked to become directors and upon potential new customers would offset even a recovery of $5.5 million. [FN12] The other reached a different conclusion, stating that a recovery of even $2 million would be worth pursuing notwithstanding speculation about the public impact. It stated that this opinion would stand whether or not the outside directors continue as defendants, "as long as the insurance carrier is obligated through the 'D and O

326 policy'." This last phrase might have given the Committee some pause since the letter requesting the opinion indicated that the insurance carrier had raised a question as to its liability. * * * As to the claims of breach of fiduciary duty, the Committee recommended that the suit be discontinued as to the outside defendants because there is "no reasonable possibility" that they might be found liable. As to the others, it concluded merely that there is a possibility that a finding of negligence could be rendered against any one or more of the senior loan officers who participated in the Katz Corporation loans. Although it is emphasized that there is no evidence whatsoever of any self-dealing or of any deliberate impropriety, there is some indication that the most prudent lending principles were not adhered to during the evolution of those loans. Applying the standard of review set out above to the Committee's recommendation, we look first to potential liability generally without regard to which defendants are responsible. As to that liability, we find that plaintiff's chances of success are rather high. The loss to Citytrust resulted from decisions which put the bank in a classic "no win" situation. The Katz venture was risky and increasingly so. By continuing extensions of substantial amounts of credit the bank subjected the principal to those risks although its potential gain was no more than the interest it could have earned in less risky, more diversified loans. In a real sense, there was a low ceiling on profits but only a distant floor for losses. It is so similar to the classic case of Litwin v. Allen, supra (bank purchase of bonds with an option in the seller to repurchase at the original price, the bank thus bearing the entire risk of a drop in price with no hope of gain beyond the stipulated interest) that we cannot agree with the Committee's conclusion that only a "possibility of a finding of negligence" exists The issue as to which defendants are responsible is less clear. The Committee concluded that there is "no reasonable possibility" of the outside defendants being found liable because they had neither information nor reasonable notice of the problems raised by the Katz transactions. We note first that members of the inside defendants may contradict that version and, if so, a possibility of liability in the outside group exists. Moreover, lack of knowledge is not necessarily a defense, if it is the result of an abdication of directional responsibility. McDonnell, supra; Atherton, supra. Directors who willingly allow others to make major decisions affecting the future of the corporation wholly without supervision or oversight may not defend on their lack of knowledge, for that ignorance itself is a breach of fiduciary duty. The issue turns in large part upon how and why these defendants were left in the dark. See Graham v. Allis Chalmers Mfg. Co., 41 Del.Ch. 78, 188 A.2d 125 (1963). An individual analysis of each outside defendant's role may show that some are blameless or even that they all were justified in not acting before they did, but neither is an inexorable conclusion on the basis of the present record The Report concluded as to the inside defendants that there was a "possibility" of liability. This conclusion is a considerable understatement and not entirely consistent with the Report's finding as to the outside defendants. The outsiders' best defense may well be that the inside group actively concealed the Katz problem. Given the fact that exoneration of the outside defendants may show culpability of the insiders and our conclusion that the probability of liability somewhere is high, we think the exposure of the inside group is considerably more than 327 a "possibility." Nor do we agree that "there is no evidence whatsoever" of deliberate impropriety. Not only is there the problem of North's apparently inconsistent behavior with respect to the appropriateness *897 of his participation in the considerations of Katz transactions, but his failure to keep the Board of Directors informed may well entail more than a negligent omission A precise estimate of potential damages is not possible since the trier must determine at what point liability begins. We think, however, that on the present record, a trier might easily find liability extending back to early 1972 or before (assuming no statute of limitations problem), resulting in a return of several million dollars to Citytrust, or perhaps 10% or more of the shareholder equity. This far exceeds the potential cost of the litigation to the corporation CONCLUSION Applying the analysis described above, we conclude that the probability of a substantial net return to the corporation is high. We reject, therefore, the recommendation of the Special Litigation Committee. The grant of summary judgment is reversed, the protective order is vacated, and the case is remanded. * * *

Graham v. Allis-Chalmers Mfg. Co. 41 Del.Ch. 78, 188 A.2d 125 (1963)

John P. GRAHAM and Yvonne M. Graham, on behalf of themselves and the other shareholders of Allis-Chalmers Manufacturing Company who may be entitled to intervene herein, Plaintiffs Below, Appellants, v. ALLIS-CHALMERS MANUFACTURING COMPANY et al., Defendants Below, Appellees Supreme Court of Delaware Jan. 24, 1963. WOLCOTT, Justice. This is a derivative action on behalf of Allis-Chalmers against its directors and four of its non-director employees. The complaint is based upon indictments of Allis-Chalmers and the four non-director employees named as defendants herein who, with the corporation, entered pleas of guilty to the indictments. The indictments, eight in number, charged violations of the Federal anti-trust laws. The suit seeks to recover damages which Allis-Chalmers is claimed to have suffered by reason of these violations

328 The directors of Allis-Chalmers appeared in the cause voluntarily. The non- director defendants have neither appeared in the cause nor been served with process. Three of the non- director defendants are still employed by Allis- Chalmers. The fourth is under contract with it as a consultant The complaint alleges actual knowledge on the part of the director defendants of the anti- trust conduct upon which the indictments were based or, in the alternative, knowledge of facts which should have put them on notice of such conduct However, the hearing and depositions produced no evidence that any director had any actual knowledge of the anti-trust activity, or had actual knowledge of any facts which should have put them on notice that anti-trust activity was being carried on by some of their company's employees. The plaintiffs, appellants here, thereupon shifted the theory of the case to the proposition that the directors are liable as a matter of law by reason of their failure to take action designed to learn of and prevent anti-trust activity on the part of any employees of Allis- Chalmers By this appeal the plaintiffs seek to have us reverse the Vice Chancellor's ruling of nonliability of the defendant directors upon *81 this theory, * * * Allis-Chalmers is a manufacturer of a variety of electrical equipment. It employs in excess of 31,000 people, has a total of 24 plants, 145 sales offices, 5000 dealers and distributors, and its sales volume is in excess of $500,000,000 annually. The operations of the company are conducted by two groups, each of which is under the direction of a senior vice president. One of these groups is the Industries Group under the direction of Singleton, director defendant. This group is divided into five divisions. One of these, the Power Equipment Division, produced the products, the sale of which involved the anti- trust activities referred to in the indictments. The Power Equipment Division, presided over by McMullen, non-director defendant, contains ten departments, each of which is presided over by a manager or general manager The operating policy of Allis-Chalmers is to decentralize by the delegation of authority to the lowest possible management level capable of fulfilling the delegated responsibility. Thus, prices of products are ordinarily set by the particular department manager, except that if the product being priced is large and special, the department manager might confer with the general manager of the division. Products of a standard character involving repetitive manufacturing processes are sold out of a price list which is established by a price leader for the electrical equipment industry as a whole Annually, the Board of Directors reviews group and departmental profit goal budgets. On occasion, the Board considers general questions concerning price levels, but because of the complexity of the company's operations the Board does not participate in decisions fixing the prices of specific products The Board of Directors of fourteen members, four of whom are officers, meets once a month, October excepted, and considers a previously *82 prepared agenda for the meeting. Supplied to the Directors at the meetings are financial and operating data relating to all phases of the company's activities. The Board meetings are customarily of several hours duration in which all the Directors participate actively. Apparently, the Board considers and decides matters 329 concerning the general business policy of the company. By reason of the extent and complexity of the company's operations, it is not practicable for the Board to consider in detail specific problems of the various divisions The indictments to which Allis-Chalmers and the four non-director defendants pled guilty charge that the company and individual non-director defendants, commencing in 1956, conspired with other manufacturers and their employees to fix prices and to rig bids to private electric utilities and governmental agencies in violation of the anti-trust laws of the United States. None of the director defendants in this cause were named as defendants in the indictments. Indeed, the Federal Government acknowledged that it had uncovered no probative evidence which could lead to the conviction of the defendant directors The first actual knowledge the directors had of anti-trust violations by some of the company's employees was in the summer of 1959 from newspaper stories that TVA proposed an investigation of identical bids. Singleton, in charge of the Industries Group of the company, investigated but unearthed nothing. Thereafter, in November of 1959, some of the company's employees were subpoenaed before the Grand Jury. Further investigation by the company's Legal Division gave reason to suspect the illegal activity and all of the subpoenaed employees were instructed to tell the whole truth **129 Thereafter, on February 8, 1960, at the direction of the Board, a policy statement relating to anti-trust problems was issued, and the Legal Division commenced a series of meetings with all employees of the company in possible areas of anti-trust activity. The purpose and effect of these steps was to eliminate any possibility of further and future violations of the antitrust laws As we have pointed out, there is no evidence in the record that the defendant directors had actual knowledge of the illegal anti-trust actions of the company's employees. Plaintiffs, however, point *83 to two FTC decrees of 1937 as warning to the directors that anti-trust activity by the company's employees had taken place in the past. It is argued that they were thus put on notice of their duty to ferret out such activity and to take active steps to insure that it would not be repeated The decrees in question were consent decrees entered in 1937 against Allis- Chalmers and nine others enjoining agreements to fix uniform prices on condensors and turbine generators. The decrees recited that they were consented to for the sole purpose of avoiding the trouble and expense of the proceeding None of the director defendants were directors or officers of Allis-Chalmers in 1937. The director defendants and now officers of the company either were employed in very subordinate capacities or had no connection with the company in 1937. At the time, copies of the decrees were circulated to the heads of concerned departments and were explained to the Managers Committee In 1943, Singleton, officer and director defendant, first learned of the decrees upon becoming Assistant Manager of the Steam Turbine Department, and consulted the company's General Counsel as to them. He investigated his department and learned the decrees were being complied with and, in any event, he concluded that the company had not in the first place been guilty of the practice enjoined

330 Stevenson, officer and director defendant, first learned of the decrees in 1951 in a conversation with Singleton about their respective areas of the company's operations. He satisfied himself that the company was not then and in fact had not been guilty of quoting uniform prices and had consented to the decrees in order to avoid the expense and vexation of the proceeding Scholl, officer and director defendant, learned of the decrees in 1956 in a discussion with Singleton on matters affecting the Industries Group. He was informed that no similar problem was then in existence in the company Plaintiffs argue that because of the 1937 consent decrees, the directors were put on notice that they should take steps to ensure that no employee of Allis-Chalmers would violate the anti- trust laws. *84 The difficulty the argument has is that only three of the present directors knew of the decrees, and all three of them satisfied themselves that Allis-Chalmers had not engaged in the practice enjoined and had consented to the decrees merely to avoid expense and the necessity of defending the company's position. Under the circumstances, we think knowledge by three of the directors that in 1937 the company had consented to the entry of decrees enjoining it from doing something they had satisfied themselves it had never done, did not put the Board on notice of the possibility of future illegal price fixing Plaintiffs have wholly failed to establish either actual notice or imputed notice to the Board of Directors of facts which should have put them on guard, and have caused them to take steps to prevent the future possibility of illegal price fixing and bid rigging. Plaintiffs say that as a minimum in this respect the Board should have taken the steps it took in 1960 when knowledge of the facts first actually came to **130 their attention as a result of the Grand Jury investigation. Whatever duty, however, there was upon the Board to take such steps, the fact of the 1937 decrees has no bearing upon the question, for under the circumstances they were notice of nothing Plaintiffs are thus forced to rely solely upon the legal proposition advanced by them that directors of a corporation, as a matter of law, are liable for losses suffered by their corporations by reason of their gross inattention to the common law duty of actively supervising and managing the corporate affairs. Plaintiffs rely mainly upon Briggs v. Spaulding, 141 U.S. 132, 11 S.Ct. 924, 35 L.Ed. 662 From the Briggs case and others cited by plaintiffs, e g., Bowerman v. Hamner, 250 U.S. 504, 39 S.Ct. 549, 63 L.Ed. 1113; Gamble v. Brown, 4 Cir., 29 F.2d 366, and Atherton v. Anderson, 6 Cir., 99 F.2d 883, it appears that directors of a corporation in managing the corporate affairs are bound to use that amount of care which ordinarily careful and prudent men would use in similar circumstances. Their duties are those of control, and whether or not by neglect they have made themselves liable for failure to exercise proper control depends on the circumstances and facts of the particular case *85 The precise charge made against these director defendants is that, even though they had no knowledge of any suspicion of wrongdoing on the part of the company's employees, they still should have put into effect a system of watchfulness which would have brought such misconduct to their attention in ample time to have brought it to an end. However, the Briggs case expressly rejects such an idea. On the contrary, it appears that directors are entitled to rely on the honesty and integrity of their subordinates until something occurs to put them on suspicion that 331 something is wrong. If such occurs and goes unheeded, then liability of the directors might well follow, but absent cause for suspicion there is no duty upon the directors to install and operate a corporate system of espionage to ferret out wrongdoing which they have no reason to suspect exists The duties of the Allis-Chalmers Directors were fixed by the nature of the enterprise which employed in excess of 30,000 persons, and extended over a large geographical area. By force of necessity, the company's Directors could not know personally all the company's employees. The very magnitude of the enterprise required them to confine their control to the broad policy decisions. That they did this is clear from the record. At the meetings of the Board in which all Directors participated, these questions were considered and decided on the basis of summaries, reports and corporate records. These they were entitled to rely on, not only, we think, under general principles of the common law, but by reason of 8 Del.C. ' 141(f) as well, which in terms fully protects a director who relies on such in the performance of his duties In the last analysis, the question of whether a corporate director has become liable for losses to the corporation through neglect of duty is determined by the circumstances. If he has recklessly reposed confidence in an obviously untrustworthy employee, has refused or neglected cavalierly to perform his duty as a director, or has ignored either willfully or through inattention obvious danger signs of employee wrongdoing, the law will cast the burden of liability upon him. This is not the case at bar, however, for as soon as it became evident that there were grounds for suspicion, the Board acted promptly to end it and prevent its recurrence *86 Plaintiffs say these steps should have been taken long before, even in the absence of suspicion, but we think not, for we know of no rule of law which requires a corporate director to assume, with no justification whatsoever, that all corporate employees are incipient law violators who, but **131 for a tight checkrein, will give free vent to their unlawful propensities We therefore affirm the Vice Chancellor's ruling that the individual director defendants are not liable as a matter of law merely because, unknown to them, some employees of Allis- Chalmers violated the anti-trust laws thus subjecting the corporation to loss. * * * The judgment of the court below is affirmed.

Sinclair Oil Corp. v. Levien 280 A.2d 717 (Del. 1971)

SINCLAIR OIL CORPORATION, Defendant Below, Appellant, v. Francis S. LEVIEN, Plaintiff Below, Appellee Supreme Court of Delaware 332 June 18, 1971. WOLCOTT, Chief Justice. This is an appeal by the defendant, Sinclair Oil Corporation (hereafter Sinclair), from an order of the Court of Chancery, 261 A.2d 911 in a derivative action requiring Sinclair to account for damages sustained by its subsidiary, Sinclair Venezuelan Oil Company (hereafter Sinven), organized by Sinclair for the purpose of operating in Venezuela, as a result of dividends paid by Sinven, the denial to Sinven of industrial development, and a breach of contract between Sinclair's wholly-owned subsidiary, Sinclair International Oil Company, and Sinven Sinclair, operating primarily as a holding company, is in the business of exploring for oil and of producing and marketing crude oil and oil products. At all times relevant to this litigation, it owned about 97% Of Sinven's stock. The plaintiff owns about 3000 of 120,000 publicly held shares of Sinven. Sinven, incorporated in 1922, has been engaged in petroleum operations primarily in Venezuela and since 1959 has operated exclusively in Venezuela Sinclair nominates all members of Sinven's board of directors. The Chancellor found as a fact that the directors were not independent of Sinclair. Almost without exception, they were officers, directors, or employees of corporations in the Sinclair complex. By reason of Sinclair's domination, it is clear that Sinclair owed Sinven a fiduciary duty. Getty Oil Company v. Skelly Oil Co., 267 A.2d 883 (Del.Supr.1970); Cottrell v. Pawcatuck Co., 35 Del.Ch. 309, 116 A.2d 787 (1955). Sinclair concedes this The Chancellor held that because of Sinclair's fiduciary duty and its control over Sinven, its relationship with Sinven must meet the test of intrinsic fairness. The *720 standard of intrinsic fairness involves both a high degree of fairness and a shift in the burden of proof. Under this standard the burden is on Sinclair to prove, subject to careful judicial scrutiny, that its transactions with Sinven were objectively fair. Guth v. Loft, Inc., 23 Del.Ch. 255, 5 A.2d 503 (1939); Sterling v. Mayflower Hotel Corp., 33 Del.Ch. 293, 93 A.2d 107, 38 A.L.R.2d 425 (Del.Supr.1952); Getty Oil Co. v. Skelly Oil Co., supra Sinclair argues that the transactions between it and Sinven should be tested, not by the test of intrinsic fairness with the accompanying shift of the burden of proof, but by the business judgment rule under which a court will not interfere with the judgment of a board of directors unless there is a showing of gross and palpable overreaching. Meyerson v. El Paso Natural Gas Co., 246 A.2d 789 (Del.Ch.1967). A board of directors enjoys a presumption of sound business judgment, and its decisions will not be disturbed if they can be attributed to any rational business purpose. A court under such circumstances will not substitute its own notions of what is or is not sound business judgment We think, however, that Sinclair's argument in this respect is misconceived. When the situation involves a parent and a subsidiary, with the parent controlling the transaction and fixing the terms, the test of intrinsic fairness, with its resulting shifting of the burden of proof, is applied. Sterling v. Mayflower Hotel Corp., supra; David J. Greene & Co. v. Dunhill International, Inc., 249 A.2d 427 (Del.Ch.1968); Bastian v. Bourns, Inc., 256 A.2d 680 (Del.Ch.1969) aff'd. Per Curiam (unreported) (Del.Supr.1970). The basic situation for the application of the rule is the one in which the parent has received a benefit to the exclusion and at the expense of the subsidiary

333 Recently, this court dealt with the question of fairness in parent-subsidiary dealings in Getty Oil Co. v. Skelly Oil Co., supra. In that case, both parent and subsidiary were in the business of refining and marketing crude oil and crude oil products. The Oil Import Board ruled that the subsidiary, because it was controlled by the parent, was no longer entitled to a separate allocation of imported crude oil. The subsidiary then contended that it had a right to share the quota of crude oil allotted to the parent. We ruled that the business judgment standard should be applied to determine this contention. Although the subsidiary suffered a loss through the administration of the oil import quotas, the parent gained nothing. The parent's quota was derived solely from its own past use. The past use of the subsidiary did not cause an increase in the parent's quota. Nor did the parent usurp a quota of the subsidiary. Since the parent received nothing from the subsidiary to the exclusion of the minority stockholders of the subsidiary, there was no self-dealing. Therefore, the business judgment standard was properly applied A parent does indeed owe a fiduciary duty to its subsidiary when there are parent- subsidiary dealings. However, this alone will not evoke the intrinsic fairness standard. This standard will be applied only when the fiduciary duty is accompanied by self-dealing--the situation when a parent is on both sides of a transaction with its subsidiary. Self-dealing occurs when the parent, by virtue of its domination of the subsidiary, causes the subsidiary to act in such a way that the parent receives something from the subsidiary to the exclusion of, and detriment to, the minority stockholders of the subsidiary We turn now to the facts. The plaintiff argues that, from 1960 through 1966, Sinclair caused Sinven to pay out such excessive dividends that the industrial development of Sinven was effectively prevented, and it became in reality a corporation in dissolution From 1960 through 1966, Sinven paid out $108,000,000 in dividends ($38,000,000 *721 in excess of Sinven's earnings during the same period). The Chancellor held that Sinclair caused these dividends to be paid during a period when it had a need for large amounts of cash. Although the dividends paid exceeded earnings, the plaintiff concedes that the payments were made in compliance with 8 Del.C. s 170, authorizing payment of dividends out of surplus or net profits. However, the plaintiff attacks these dividends on the ground that they resulted from an improper motive--Sinclair's need for cash. The Chancellor, applying the intrinsic fairness standard, held that Sinclair did not sustain its burden of proving that these dividends were intrinsically fair to the minority stockholders of Sinven Since it is admitted that the dividends were paid in strict compliance with 8 Del.C. s 170, the alleged excessiveness of the payments alone would not state a cause of action. Nevertheless, compliance with the applicable statute may not, under all circumstances, justify all dividend payments. If a plaintiff can meet his burden of proving that a dividend cannot be grounded on any reasonable business objective, then the courts can and will interfere with the board's decision to pay the dividend Sinclair contends that it is improper to apply the intrinsic fairness standard to dividend payments even when the board which voted for the dividends is completely dominated. In support of this contention, Sinclair relies heavily on American District Telegraph Co. (ADT) v. Grinnell Corp., (N.Y.Sup.Ct.1969) aff'd. 33 A.D.2d 769, 306 N.Y.S.2d 209 (1969). Plaintiffs were minority stockholders of ADT, a subsidiary of Grinnell. The plaintiffs alleged that Grinnell, realizing that it would soon have to sell its ADT stock because of a pending anti-trust action, caused ADT to pay excessive dividends. Because the dividend payments conformed with 334 applicable statutory law, and the plaintiffs could not prove an abuse of discretion, the court ruled that the complaint did not state a cause of action. Other decisions seem to support Sinclair's contention. In Metropolitan Casualty Ins. Co. v. First State Bank of Temple, 54 S.W.2d 358 (Tex.Civ.App.1932), rev'd. on other grounds, 79 S.W.2d 835 (Sup.Ct.1935), the court held that a majority of interested directors does not void a declaration of dividends because all directors, by necessity, are interested in and benefited by a dividend declaration. See, also, Schwartz v. Kahn, 183 Misc. 252, 50 N.Y.S.2d 931 (1944); Weinberger v. Quinn, 264 A.D. 405, 35 N.Y.S.2d 567 (1942) We do not accept the argument that the intrinsic fairness test can never be applied to a dividend declaration by a dominated board, although a dividend declaration by a dominated board will not inevitably demand the application of the intrinsic fairness standard. Moskowitz v. Bantrell, 41 Del.Ch. 177, 190 A.2d 749 (Del.Supr.1963). If such a dividend is in essence self- dealing by the parent, then the intrinsic fairness standard is the proper standard. For example, suppose a parent dominates a subsidiary and its board of directors. The subsidiary has outstanding two classes of stock, X and Y. Class X is owned by the parent and Class Y is owned by minority stockholders of the subsidiary. If the subsidiary, at the direction of the parent, declares a dividend on its Class X stock only, this might well be self-dealing by the parent. It would be receiving something from the subsidiary to the exclusion of and detrimental to its minority stockholders. This self-dealing, coupled with the parent's fiduciary duty, would make intrinsic fairness the proper standard by which to evaluate the dividend payments Consequently it must be determined whether the dividend payments by Sinven were, in essence, self-dealing by Sinclair. The dividends resulted in great sums of money being transferred from Sinven to Sinclair. However, a proportionate share of this money was received by the minority shareholders of Sinven. Sinclair received nothing from Sinven to the exclusion of its *722 minority stockholders. As such, these dividends were not self-dealing. We hold therefore that the Chancellor erred in applying the intrinsic fairness test as to these dividend payments. The business judgment standard should have been applied We conclude that the facts demonstrate that the dividend payments complied with the business judgment standard and with 8 Del.C. s 170. The motives for causing the declaration of dividends are immaterial unless the plaintiff can show that the dividend payments resulted from improper motives and amounted to waste. The plaintiff contends only that the dividend payments drained Sinven of cash to such an extent that it was prevented from expanding The plaintiff proved no business opportunities which came to Sinven independently and which Sinclair either took to itself or denied to Sinven. As a matter of fact, with two minor exceptions which resulted in losses, all of Sinven's operations have been conducted in Venezuela, and Sinclair had a policy of exploiting its oil properties located in different countries by subsidiaries located in the particular countries From 1960 to 1966 Sinclair purchased or developed oil fields in Alaska, Canada, Paraguay, and other places around the world. The plaintiff contends that these were all opportunities which could have been taken by Sinven. The Chancellor concluded that Sinclair had not proved that its denial of expansion opportunities to Sinven was intrinsically fair. He based this conclusion on the following findings of fact. Sinclair made no real effort to expand Sinven. The excessive dividends paid by Sinven resulted in so great a cash drain as to effectively deny to Sinven any ability to expand. During this same period Sinclair actively pursued a 335 company-wide policy of developing through its subsidiaries new sources of revenue, but Sinven was not permitted to participate and was confined in its activities to Venezuela However, the plaintiff could point to no opportunities which came to Sinven. Therefore, Sinclair usurped no business opportunity belonging to Sinven. Since Sinclair received nothing from Sinven to the exclusion of and detriment to Sinven's minority stockholders, there was no self-dealing. Therefore, business judgment is the proper standard by which to evaluate Sinclair's expansion policies Since there is no proof of self-dealing on the part of Sinclair, it follows that the expansion policy of Sinclair and the methods used to achieve the desired result must, as far as Sinclair's treatment of Sinven is concerned, be tested by the standards of the business judgment rule. Accordingly, Sinclair's decision, absent fraud or gross overreaching, to achieve expansion through the medium of its subsidiaries, other than Sinven, must be upheld Even if Sinclair was wrong in developing these opportunities as it did, the question arises, with which subsidiaries should these opportunities have been shared? No evidence indicates a unique need or ability of Sinven to develop these opportunities. The decision of which subsidiaries would be used to implement Sinclair's expansion policy was one of business judgment with which a court will not interfere absent a showing of gross and palpable overreaching. Meyerson v. El Paso Natural Gas Co., 246 A.2d 789 (Del.Ch.1967). No such showing has been made here Next, Sinclair argues that the Chancellor committed error when he held it liable to Sinven for breach of contract In 1961 Sinclair created Sinclair International Oil Company (hereafter International), a wholly owned subsidiary used for the purpose of coordinating all of Sinclair's foreign operations. All crude purchases by Sinclair were made thereafter through International On September 28, 1961, Sinclair caused Sinven to contract with International whereby Sinven agreed to sell all of its *723 crude oil and refined products to International at specified prices. The contract provided for minimum and maximum quantities and prices. The plaintiff contends that Sinclair caused this contract to be breached in two respects. Although the contract called for payment on receipt, International's payments lagged as much as 30 days after receipt. Also, the contract required International to purchase at least a fixed minimum amount of crude and refined products from Sinven. International did not comply with this requirement Clearly, Sinclair's act of contracting with its dominated subsidiary was self- dealing. Under the contract Sinclair received the products produced by Sinven, and of course the minority shareholders of Sinven were not able to share in the receipt of these products. If the contract was breached, then Sinclair received these products to the detriment of Sinven's minority shareholders. We agree with the Chancellor's finding that the contract was breached by Sinclair, both as to the time of payments and the amounts purchased Although a parent need not bind itself by a contract with its dominated subsidiary, Sinclair chose to operate in this manner. As Sinclair has received the benefits of this contract, so must it comply with the contractual duties Under the intrinsic fairness standard, Sinclair must prove that its causing Sinven not to enforce the contract was intrinsically fair to the minority shareholders of Sinven. Sinclair has 336 failed to meet this burden. Late payments were clearly breaches for which Sinven should have sought and received adequate damages. As to the quantities purchased, Sinclair argues that it purchased all the products produced by Sinven. This, however, does not satisfy the standard of intrinsic fairness. Sinclair has failed to prove that Sinven could not possibly have produced or someway have obtained the contract minimums. As such, Sinclair must account on this claim Finally, Sinclair argues that the Chancellor committed error in refusing to allow it a credit or setoff of all benefits provided by it to Sinven with respect to all the alleged damages. The Chancellor held that setoff should be allowed on specific transactions, e.g., benefits to Sinven under the contract with International, but denied an over all setoff against all damages claimed. We agree with the Chancellor, although the point may well be moot in view of our holding that Sinclair is not required to account for the alleged excessiveness of the dividend payments We will therefore reverse that part of the Chancellor's order that requires Sinclair to account to Sinven for damages sustained as a result of dividends paid between 1960 and 1966, and by reason of the denial to Sinven of expansion during that period. We will affirm the remaining portion of that order and remand the cause for further proceedings.

Lewis v. S. L. & E., Inc . 629 F.2d 764 (2nd Cir. 1979)

Donald E. LEWIS, Plaintiff-Appellant, v. S. L. & E., INC., Alan E. Lewis, Leon E. Lewis, Jr., and Richard E. Lewis, Defendants-Appellees. LEWIS GENERAL TIRES, INC., Plaintiff-Intervenor-Appellee, v. Donald E. LEWIS, Defendant-Appellant No. 893, Docket 79-7767 United States Court of Appeals, Second Circuit Argued March 20, 1979 Decided July 22, 1980. KEARSE, Circuit Judge: This case arises out of an intra-family dispute over the management of two closely-held affiliated corporations. Plaintiff Donald E. Lewis ("Donald"), a shareholder of S.L. & E., Inc. ("SLE"), appeals from judgments entered against him in the United States District Court for the 337 Western *766 District of New York, Harold P. Burke, Judge, after a bench trial of his derivative claim against directors of SLE, and of a claim asserted against him by the other corporation, Lewis General Tires, Inc. ("LGT"), which intervened in the suit. The defendants Alan E. Lewis ("Alan"), Leon E. Lewis, Jr. ("Leon, Jr."), and Richard E. Lewis ("Richard"), are the brothers of Donald; they were, at pertinent times herein, directors of SLE and officers, directors and shareholders of LGT. Donald charged that his brothers had wasted the assets of SLE by causing SLE to lease business premises to LGT from 1966 to 1972 at an unreasonably low rental. LGT was permitted to intervene in the action, and filed a complaint seeking specific performance of an agreement by Donald to sell his SLE stock to LGT in 1972. The district court held that Donald had failed to prove waste by the defendant directors, and entered judgment in their favor. The court also awarded attorneys' fees to the defendant directors and to SLE, and granted LGT specific performance of Donald's agreement to sell his SLE stock On appeal, Donald argues that the district court improperly allocated to him the burden of proving his claims of waste, and that since defendants failed to prove that the transactions in question were fair and reasonable, he was entitled to judgment. Donald also argues that the awards of attorneys' fees were improper. We agree with each of these contentions, and therefore reverse and remand I For many years Leon Lewis, Sr., the father of Donald and the defendant directors, was the principal shareholder of SLE and LGT. LGT, formed in 1933, operated a tire dealership in Rochester, New York. SLE, formed in 1943, owned the land and complex of buildings at 260 East Avenue in Rochester. This property was SLE's only significant asset. Prior to 1956 LGT occupied SLE's premises without benefit of a lease; the rent paid was initially $200 per month, and had increased over the years to $800 per month by 1956, when additional parcels were added. On February 28, 1956, SLE granted LGT a 10-year lease on the newly expanded property ("the Property"), for a rent of $1200 per month, or $14,400 per year. Under the terms of the lease, SLE was responsible for payment of real estate taxes on the Property, while all other current expenses were to be borne by the tenant, LGT.[FN1] FN1. It appears that SLE was also responsible for payments due on a mortgage on the Property. In addition, LGT charged SLE for the costs of certain capital improvements, such as the major structural repairs to the principal building's facade, carried out in 1969. In 1962, Leon Lewis, Sr., transferred his SLE stock, 90 shares in all, to his six children (defendants Richard, Alan and Leon, Jr., plaintiff Donald, and two daughters, Margaret and Carol), giving 15 shares to each.[FN2] At that time Richard, Alan and Leon, Jr., were already shareholders, officers and directors of LGT. Contemporaneously with their receipt of SLE stock, all six of the children entered into a "shareholders' agreement" with LGT, under which each child who was not a shareholder of LGT on June 1, 1972 would be required to sell his or her SLE shares to LGT, within 30 days of that date, at a price equal to the book value of the SLE stock as of June 1, 1972.[FN3] FN2. SLE had 150 shares outstanding, and each child thus received a ten percent interest. At the same time LGT purchased the remaining 60 outstanding shares from the elder Lewis's business partner, Henry Etsberger.

338 FN3. The agreement specified procedures by which the book value, and hence the price of the shares, would be determined. LGT's lease on the SLE property expired on February 28, 1966. At that time the directors of SLE were Richard, Alan, Leon, Jr., Leon, Sr., and Henry Etsberger; these five were also the directors of LGT. In 1966 Alan owned 44% of LGT, Richard owned 30%, Leon, Jr., owned 19%, and Leon, Sr., owned 7%. From 1967 to 1972 Richard owned 61% of LGT and Leon, Jr., owned the remaining 39%. When the lease expired *767 in 1966, no new lease was entered into. LGT nonetheless continued to occupy the property and to pay SLE at the old rate, $14,400 per year. According to the defendants' testimony at trial, there was never any thought or discussion among the SLE directors of entering into a new lease or of increasing the rent. Richard testified: "We never gave consideration to a new lease." From all that appears, the defendant directors viewed SLE as existing purely for the benefit of LGT. Richard testified, for example, that although real estate taxes rose sharply during the period 1966- 1971, from approximately $7,800 to more than $11,000, to be paid by SLE out of its constant $14,400 rental income, raising the rent was never mentioned. He testified that SLE was "only a shell to protect the operating company (LGT)." When this suit was commenced there had not been a formal meeting of either the shareholders or the directors of SLE since 1962. Richard, Alan and Leon, Jr., had largely ignored SLE's separate corporate existence [FN4] and disregarded the fact that SLE had shareholders who were not shareholders of LGT and who therefore could not profit from actions that used SLE solely for the benefit of LGT. FN4. For example, Richard's testimony includes the following statements: Q Mr. Lewis, you have always looked at these two corporations as being one and the same, haven't you, Lewis General Tires and S.L. & E.? A Yes. I never really got into S.L. & E. at all. (Tr. 6/21/78, at 972-73.) I don't think I ever looked at an operating statement of S.L. & E. seriously. (Id. at 991.) I had very little to do with S.L. & E. (Tr. 7/28/78, at 80.) Alan testified that at no time after 1964 did he participate in any discussions of any increase in rent for SLE. (Id. at 160, 164.) And Leon, Jr., testified, "I didn't have anything to do with running S.L. & E. . . . ." (Id. at 230.) Neither Donald nor his sisters ever owned LGT stock. As the June 1972 date approached for the required sale of their SLE stock to LGT, Donald apparently came to believe that SLE's book value was lower than it should have been. He sought SLE financial information from Richard, who had been president of SLE since 1967.[FN5] Richard refused to provide information. Donald therefore refused to sell his SLE shares in 1972,[FN6] and commenced this shareholders' derivative action in the district court in August 1973, basing jurisdiction on diversity of citizenship.[FN7] The sole claim raised in the complaint was that the defendant directors [FN8] had wasted the assets of SLE by "grossly undercharging" LGT for the latter's occupancy and use of the Property. * * *

339 FN5. It does not appear that SLE paid salaries to any of its officers or directors. FN6. Donald's sisters Carol and Margaret sold their SLE shares to LGT in 1972 and 1973 respectively. Alan, who had sold his LGT stock in 1967, sold his SLE stock to LGT in 1972. FN7. When suit was commenced, plaintiff was a citizen of Ohio, Alan was a citizen of Florida and all of the other individual defendants were citizens of New York. SLE is a New York corporation and has its principal place of business in New York. FN8. Leon E. Lewis, Sr., also was originally named as a defendant in this action. When he died in 1975 his executor was substituted as a defendant; subsequently the parties stipulated to dismissal of the executor. Etsberger died in about 1969, and his estate was not named as a defendant. * * * There ensued an eight-day bench trial, at which plaintiff sought to prove, by the testimony of several expert witnesses, that the fair rental value of the Property was greater than the $14,400 per year that SLE had been paid by LGT. Defendants sought to show that the rental paid was reasonable, by offering evidence concerning the financial straits of LGT, the cost to LGT of operating the Property, the general economic decline of the East Avenue neighborhood, and rentals paid on two other properties in that neighborhood. LGT presented expert testimony that the value of plaintiff's stock as of June 1972, assuming a successful defense of the derivative claims, was $15,650. * * * II Turning first to the question of burden of proof, we conclude that the district court erred in placing upon plaintiff the burden of proving waste. Because the directors of SLE were also officers, directors and/or shareholders of LGT, the burden was on the defendant directors to demonstrate that the transactions between SLE and LGT were fair and reasonable. * * * Under normal circumstances the directors of a corporation may determine, in the exercise of their business judgment, what contracts the corporation will enter into and what consideration is adequate, without review of the merits of their decisions by the courts. The business judgment rule places a heavy burden on shareholders *769 who would attack corporate transactions. * * * But the business judgment rule presupposes that the directors have no conflict of interest. When a shareholder attacks a transaction in which the directors have an interest other than as directors of the corporation, the directors may not escape review of the merits of the transaction. At common law such a transaction was voidable unless shown by its proponent to be fair, and reasonable to the corporation.[FN11] BCL s 713, in both its current and its prior versions, carries forward this common law principle, and provides special rules for scrutiny of a transaction between the corporation and an entity in which its directors are directors or officers or have a substantial financial interest.

340 * * * The current version of s 713,[FN12] which became effective on September 1, 1971, and governs at least so much of the dealing between SLE and LGT as occurred after that date, expressly provides that a contract between a corporation and an entity in which its directors are interested may be set aside unless the proponent of the contract "shall establish affirmatively that the contract or transaction was fair and reasonable as to the corporation at the time it was approved by the board . . . ." s 713(b). Thus when the transaction is challenged in a derivative action against the interested directors, they have the burden of proving that the transaction was fair and reasonable to the corporation. Cohen v. Ayers, supra. FN12. BCL s 713 (McKinney Supp.1979) provides in pertinent part: (a) No contract or other transaction between a corporation and one or more of its directors, or between a corporation and any other corporation, firm, association or other entity in which one or more of its directors are directors or officers, or have a substantial financial interest, shall be either void or voidable for this reason alone or by reason alone that such director or directors are present at the meeting of the board, or of a committee thereof, which approves such contract or transaction, or that his or their votes are counted for such purpose: (1) If the material facts as to such director's interest in such contract or transaction and as to any such common directorship, officership or financial interest are disclosed in good faith or known to the board or committee, and the board or committee approves such contract or transaction by a vote sufficient for such purpose without counting the vote of such interested director or, if the votes of the disinterested directors are insufficient to constitute an act of the board as defined in section 708 (Action by the board), by unanimous vote of the disinterested directors; or (2) If the material facts as to such director's interest in such contract or transaction and as to any such common directorship, officership or financial interest are disclosed in good faith or known to the shareholders entitled to vote thereon, and such contract or transaction is approved by vote of such shareholders. (b) If such good faith disclosure of the material facts as to the director's interest in the contract or transaction and as to any such common directorship, officership or financial interest is made to the directors or shareholders, or known to the board or committee or shareholders approving such contract or transaction, as provided in paragraph (a), the contract or transaction may not be avoided by the corporation for the reasons set forth in paragraph (a). If there was no such disclosure or knowledge, or if the vote of such interested director was necessary for the approval of such contract or transaction at a meeting of the board or committee at which it was approved, the corporation may avoid the contract or transaction unless the party or parties thereto shall establish affirmatively that the contract or transaction was fair and reasonable as to the corporation at the time it was approved by the board, a committee or the shareholders. The same was true under the predecessor to s 713(b), former s 713(a)(3), which was in effect prior to September 1, 1971. * * *

341 During the entire period 1966-1972, Richard, Alan and Leon, Jr., were directors of both SLE and LGT; [FN14] there were no SLE directors who were not also directors of LGT. Richard, Alan and Leon, Jr., were all shareholders of LGT in 1966, and from 1967 to 1972 Richard and Leon, Jr., were the sole shareholders of LGT. Under BCL s 713, therefore, Richard, Alan and Leon, Jr., had the burden of proving that $14,400 was a fair and reasonable annual rent for the SLE property for the period February 28, 1966 through June 1, 1972. FN14. Alan ceased to be a director in November 1972; Leon, Jr., ceased to be a director in 1977. Richard remains a director. Our review of the record convinces us that defendants failed to carry their burden. At trial, there was no direct testimony as to what would have been a fair rental during the relevant period, i. e., 1966 to 1972, and the evidence that was introduced fell far short of establishing that $14,400 was a fair annual rental value for those years Quite clearly Richard, Alan and Leon, Jr., had made no effort to determine contemporaneously what rental would be fair during the years 1966-1972. Their view was that the rent should simply cover expenses and that SLE existed for the benefit of LGT. * * * We conclude, therefore, that defendants failed to prove that the rental paid by LGT to SLE for the years 1966-1972 was fair and reasonable. Thus, Donald is not required to sell his SLE shares to LGT without such upward adjustment in the June 1, 1972, book value of SLE as may be *773 necessary to reflect the amount by which the fair rental value of the Property exceeded $14,400 in any of the years 1966-1972. * * * We remand to the district court (a) for the entry of judgment in favor of SLE against Richard, Alan and Leon, Jr., jointly and severally, in such amount as the district court shall determine to be equal to the amounts by which the annual fair rental value of the Property exceeded $14,400 in the period February 28, 1966-June 1, 1972, (b) for an accounting as to the value of Donald's SLE shares as of June 1, 1972, in light of such judgment, (c) for an order, following such accounting, of specific performance of the shareholders' agreement, and (d) for such other proceedings as are not inconsistent with this opinion.

Wheelabrator Technologies, Inc. Shareholders Lit . 663 A.2d 1194 (Del. 1995)

In re WHEELABRATOR TECHNOLOGIES, INC. SHAREHOLDERS LITIGATION Civ. A. No. 11495 Court of Chancery of Delaware,

342 New Castle County Submitted: March 3, 1995 Decided: May 16, 1995. Revised: May 18, 1995 OPINION JACOBS, Vice Chancellor. This shareholder class action challenges the September 7, 1990 merger (the "merger") of Wheelabrator Technologies, Inc. *1196 ("WTI") into a wholly-owned subsidiary of Waste Management, Inc. ("Waste"). The plaintiffs are shareholders of WTI. The named defendants are WTI and the eleven members of WTI's board of directors at the time the merger was negotiated and approved. [FN1] FN1. Three of the eleven individual director defendants, Paul M. Montrone, Rodney C. Gilbert, and Paul M. Meister, were all members of WTI's management. Four directors, Dean L. Buntrock, William P. Hulligan, Phillip B. Rooney, and Donald F. Flynn were officers of Waste Management. The remaining four directors, Michael D. Dingman, Gerald J. Lewis, Thomas P. Stafford, and Edward Montgomery, were outside directors. The plaintiffs claim that WTI and the director defendants breached their fiduciary obligation to disclose to the class material information concerning the merger. The plaintiffs also claim that in negotiating and approving the merger, the director defendants breached their fiduciary duties of loyalty and care. The defendants deny that they breached any duty of disclosure. They further contend that because the merger was approved by a fully informed shareholder vote, that vote operates as a complete defense to, and extinguishes, the plaintiffs' fiduciary claims This is the Opinion of the Court on the defendants' motion for summary judgment. For the reasons elaborated below, the Court concludes that: (1) the plaintiffs have failed to adduce evidence sufficient to defeat summary judgment on their duty of disclosure claim, and that (2) the fully informed shareholder vote approving the merger operated to extinguish the plaintiffs' duty of care claims, but not their duty of loyalty claim. Accordingly, the defendants' summary judgment motion is granted in part and denied in part I. PROCEDURAL BACKGROUND On April 5, 1990, the plaintiffs commenced these class actions (which were later consolidated) challenging the then-proposed merger with Waste. * * * The first remaining claim is Count I of the complaint, which alleges that the defendants violated their duty to disclose all material facts related to the merger in the proxy statement issued in connection with the transaction. More specifically, plaintiffs allege that (i) the proxy statement falsely represented that the merger negotiations lasted one week, whereas in fact agreement on all essential merger terms had been reached on the first day; (ii) the proxy statement disclosed that WTI's negotiators had successfully extracted concessions from Waste, whereas in fact Waste had dictated the merger terms to WTI; and (iii) the proxy statement disclosed that WTI's board had carefully considered the merger agreement before approving and 343 recommending it to shareholders, whereas in fact the board did not consider the matter carefully before it acted Count III alleges that the defendants breached their duty of care by failing adequately to investigate alternative transactions, neglecting to consider certain nonpublic information regarding certain of Waste's potential legal liabilities, failing to appoint a committee of independent directors to negotiate the merger, and failing adequately to consider the merger terms Count IV alleges that the defendants breached their duty of loyalty, in that a majority of WTI's eleven directors had a conflict of interest that caused them not to *1197 seek or obtain the best possible value for the company's shareholders in the merger On December 30, 1992, the defendants filed the pending summary judgment motion seeking dismissal of these claims. Following discovery and briefing, that motion was argued on March 3, 1995 II. RELEVANT FACTS WTI, a publicly held Delaware corporation headquartered in New Hampshire, is engaged in the business of developing and providing refuse-to-energy services. Waste, a Delaware corporation with principal offices in Illinois, provides waste management services to national and international commercial, industrial, and municipal customers In August 1988, Waste and WTI entered into a transaction (the "1988 transaction") to take advantage of their complementary business operations. In the 1988 transaction, Waste acquired a 22% equity interest in WTI in exchange for certain assets that Waste sold to WTI. The two companies also entered into other agreements that concerned WTI's rights to ash disposal, the purchase of real estate for future refuse-to-energy facilities, and other business development opportunities. As a result of the 1988 transaction, Waste became WTI's largest (22%) stockholder and was entitled to nominate four of WTI's eleven directors Over the next two years, Waste and WTI periodically discussed other ways to reduce perceived inefficiencies by coordinating their operations. Those discussions intensified in December 1989, when Waste acquired a refuse-to- energy facility in West Germany. That acquisition raised concerns that the four Waste designees to WTI's board of directors might have future conflicts of interest if WTI later decided to enter the West German market Prompted by these and other concerns, Waste began, in December 1989, to consider either acquiring a majority equity interest in WTI or, alternatively, divesting all of its WTI stock. After several discussions, both companies agreed that Waste would increase its equity position in WTI. On March 22, 1990, Waste proposed a stock-for-stock, market-to-market (i.e. no premium) exchange in which Waste would become WTI's majority stockholder. WTI declined that proposal, and insisted on a transaction in which its shareholders would receive a premium above the current market price of their shares The following day, March 23, 1990, representatives of WTI and Waste met in New York City. Accompanying WTI's representatives were members of WTI's investment banking firm, Lazard Freres. At that meeting, Waste's representatives expressed Waste's interest in acquiring an additional 33% of WTI, thereby making Waste the owner of 55% of WTI's outstanding shares. The parties ultimately agreed on that concept. They also agreed to structure the 344 transaction as a stock-for-stock merger that would be conditioned upon the approval of a majority of WTI's disinterested stockholders, i.e., a majority of WTI's stockholders other than Waste. Waste agreed to pay a 10% premium for the additional shares required to reach the 55% equity ownership level. Finally, it was agreed that the merger would involve no "lockup," breakup fees, or other arrangements that would impede WTI from considering alternative transactions During the following week, additional face-to-face meetings and telephone conversations took place between the two companies' representatives. Those negotiations resulted in five "ancillary agreements" that gave WTI certain funding and business opportunity options, as well as licenses to use certain Waste-owned intellectual property. [FN2] FN2. The ancillary agreements included: (1) $50 million in funding to construct additional WTI refuse-to-energy facilities, (2) an option for WTI to purchase a 15% interest in Waste's international subsidiary at a 15% discount from the market price, (3) an option for WTI to acquire 100% of Waste's medical waste disposal business at a 15% discount from the market price, (4) licenses to WTI for various intellectual property owned by Waste, and (5) a "Master Intercorporate Agreement" providing WTI with options on services ranging from the presentation of corporate opportunities to cash management and insurance support. On March 30, 1990, agreement on the final merger exchange ratio was reached. The parties agreed that WTI shareholders would receive 0.574 shares of WTI stock plus 0.469 *1198 shares of Waste stock for each of their pre-merger WTI shares That same day, March 30, 1990, WTI's board of directors held a special meeting to consider the merger agreement. All board members attended except the four Waste designees, who had recused themselves. Also present were WTI's "in- house" and outside counsel, and representatives of Lazard Freres and Solomon Brothers. The WTI board members reviewed copies of the draft merger agreement and materials furnished by the investment bankers concerning the financial aspects of the transaction. The directors also heard presentations from the investment bankers and from legal counsel, who opined that the transaction was fair. A question and answer session followed The seven board members present then voted unanimously to approve the merger and to recommend its approval by WTI's shareholders. After that vote, the four Waste-designated board members joined the meeting, and the full board then voted unanimously to approve and recommend the merger On July 30, 1990, WTI and Waste disseminated a joint proxy statement to WTI shareholders, disclosing the recommendation of both boards of directors that their shareholders approve the transaction. At a special shareholders meeting held on September 7, 1990, the merger was approved by a majority of WTI shareholders other than Waste * * * IV. THE DISCLOSURE CLAIM Delaware law imposes upon a board of directors the fiduciary duty to disclose fully and fairly all material facts within its control that would have a significant effect upon a stockholder

345 vote. Stroud v. Grace, Del.Supr., 606 A.2d 75, 85 (1992) (citing Rosenblatt v. Getty Oil Co., Del.Supr., 493 A.2d 929, 944-45 (1985)). * * * Finally, the plaintiffs contend that the proxy disclosure that the WTI Board had "carefully considered the financial, business and tax aspects" of the merger was materially misleading. In fact, plaintiffs argue, the WTI board had deliberated for only three hours before voting to approve and recommend the merger to WTI shareholders This argument also lacks evidentiary support. The assertion that the WTI board could not have considered the merger proposal carefully rests upon an unsupported inference from one fact: the three hour length of the March 30, 1990 board meeting. Given the other undisputed facts of record, that inference is unreasonable and does not create a triable fact issue. First, the board meeting was attended by WTI's investment bankers and outside counsel who made presentations and thereafter answered the board members' questions. Second, the proxy statement describes in detail the various factors that the board considered in deciding whether to approve and recommend the merger. (See Proxy Statement at 31-32). The plaintiffs offer no evidence that that description was in any way inaccurate. Third, Waste and WTI had had a close business relationship for over two years before the merger, during which time many discussions concerning the future of that relationship had taken place. It is reasonable to (and I do) infer that WTI's directors already had, and were able to draw upon, a substantial working knowledge of Waste during the March 30, 1990 meeting * * * For the foregoing reasons, summary judgment will be granted dismissing the remaining duty of disclosure claim V. THE FIDUCIARY DUTY CLAIMS In rejecting the disclosure claim, the Court necessarily has determined that the merger was approved by a fully informed vote of a majority of WTI's disinterested stockholders. * * * A. The Duty of Care Claim As noted, the plaintiffs concede that if the WTI shareholder vote was fully informed, the effect of that informed vote would be to extinguish the claim that the WTI board failed to exercise due care in negotiating and approving the merger. Given the ratification holding of Smith v. Van Gorkom, Del.Supr., 488 A.2d 858, 889-90 (1985), that concession is not surprising. In Van Gorkom, the defendant directors argued that the shareholder vote approving a challenged merger agreement "had the legal effect of curing any failure of the board to reach an informed business judgment in its approval of the merger." Id. at 889. Accepting that legal principle (but not its application to the facts before it), the Supreme Court stated: The parties tacitly agree that a discovered failure of the Board to reach an informed business judgment constitutes a voidable, rather than a void, act. Hence, the merger can be sustained, notwithstanding the infirmity of the Board's actions, if its approval by majority vote of the shareholders is found to have been based on an informed electorate. 346 Id. at 889 Accordingly, summary judgment dismissing the plaintiffs' due care claim will be granted. That leaves for decision the legal effect of the informed shareholder vote on the duty of loyalty claims alleged in Count IV of the complaint B. The Duty of Loyalty Claim * * * The ratification decisions that involve duty of loyalty claims are of two kinds: (a) "interested" transaction cases between a corporation and its directors (or between the corporation and an entity in which the corporation's directors are also directors or have a financial interest), and (b) cases involving a transaction between the corporation and its controlling shareholder Regarding the first category, 8 Del.C. ' 144(a)(2) pertinently provides that an "interested" transaction of this kind will not be voidable if it is approved in good faith by a majority of disinterested stockholders. Approval by fully informed, disinterested shareholders pursuant to ' 144(a)(2) invokes "the business judgment rule and limits judicial review to issues of gift or waste with the burden of proof upon the party attacking the transaction." Marciano v. Nakash, Del.Supr., 535 A.2d 400, 405 n. 3 (1987). The result is the same in "interested" transaction cases not decided under ' 144: Where there has been independent shareholder ratification of interested director actions, the objecting stockholder has the burden of showing that no person of ordinary sound business judgment would say that the consideration received for the options was a fair exchange for the options granted. Michelson, 407 A.2d at 224 (quoting Kaufman v. Shoenberg, Del.Ch., 91 A.2d 786, 791 (1952), at 791); see also Gottlieb v. Heyden Chem. Corp., Del.Supr., 91 A.2d 57, 59 (1952); and Citron v. E.I. Du Pont de Nemours & Co., 584 A.2d 490, 501 (citing authorities reaching the same result in mergers involving fiduciaries that were not controlling stockholders) The second category concerns duty of loyalty cases arising out of transactions between the corporation and its controlling stockholder. Those cases involve primarily parent-subsidiary mergers that were conditioned upon receiving "majority of the minority" stockholder approval. In a parent- subsidiary merger, the standard of review is ordinarily entire fairness, with the directors having the burden of proving that the merger was entirely fair. Weinberger v. UOP, Inc., 457 A.2d 701, 703. But where the merger is conditioned upon approval by a "majority of the minority" stockholder vote, and such approval is granted, the standard of review remains entire fairness, but the burden of demonstrating that the merger was unfair shifts to the plaintiff. Kahn v. Lynch Communication Sys., Del.Supr., 638 A.2d 1110 (1994); Rosenblatt v. Getty Oil Co., 493 A.2d 929, 937-38 (1985); Weinberger, at 710; Citron, at 502. That burden-shifting effect of ratification has also been held applicable in cases involving mergers with a de facto controlling stockholder, [FN6] and in a case involving a transaction other than a merger. [FN7] * * * C. The Appropriate Review Standard and Burden of Proof Having determined what effect shareholder ratification does not have, the Court must now determine what effect it does have. The plaintiffs argue that their duty of loyalty claim is 347 governed by the entire fairness standard, with ratification operating only to shift the burden on the fairness issue to the plaintiffs. That is incorrect, because this merger did not involve an interested and controlling stockholder In both Kahn and Stroud, the Supreme Court determined that the effect of a fully informed shareholder vote was to shift the burden of proof within the entire fairness standard of review. Kahn, 638 A.2d at 1117; Stroud, 606 A.2d at 90. Critical to the result in those cases was that the transaction involved a de facto (Kahn, supra) or de jure (Stroud, supra) controlling stockholder. That circumstance brought those cases within the purview of the ratification doctrine articulated in Rosenblatt, supra, Bershad v. Curtiss-Wright-Corp., Del.Supr., 535 A.2d 840 (1987), and Citron v. E.I. Du Pont de Nemours & Co., supra, all involving mergers between a corporation and its majority stockholder-parent. The participation of the controlling interested stockholder is critical to the application of the entire fairness standard because, as Kahn and Stroud recognize, the potential for process manipulation by the controlling stockholder, and the concern that the controlling stockholder's continued presence might influence even a fully informed shareholder vote, justify the need for the exacting judicial scrutiny and procedural protection afforded by the entire fairness form of review In this case, there is no contention or evidence that Waste, a 22% stockholder of WTI, exercised de jure or de facto control over WTI. Therefore, neither the holdings of or policy concerns underlying Kahn and Stroud are implicated here. Accordingly, the review standard applicable to this merger is business judgment, with the plaintiffs having the burden of proof. [FN8] * * * The final question concerns the proper application of that review standard to the facts at bar. Because no party has yet been heard on that subject, that issue cannot be determined on this motion. Its resolution must await further proceedings, which counsel may present (if they so choose) on a supplemental motion for summary judgment. * * * For the foregoing reasons, the defendants' motion for summary judgment (1) is granted as to the disclosure claim, (2) is granted as to the duty of care claim, and (3) is denied as to the duty of loyalty claims. Counsel shall submit an appropriate implementing form of order.

Energy Resources Corp., Inc. v. Porter 14 Mass.App.Ct. 296, 438 N.E.2d 391 (1982)

ENERGY RESOURCES CORPORATION, INC. v. James H. PORTER et al. [FN1] 348 FN1. Energy & Environmental Engineering, Inc. Appeals Court of Massachusetts, Middlesex. Argued April 22, 1982. Decided Aug. 5, 1982. KASS, Justice. From 1976 to 1979, James H. Porter was vice-president and chief scientist of Energy Resources Corporation, Inc. (ERCO). On October 5, 1979, he resigned and organized Energy & Environmental Engineering, Inc. (EEE). The first business EEE undertook was a research project, to be done in collaboration with Howard University, for the United States Department of Energy concerning a *297 method of burning high sulfur coal which would produce little air pollution. ERCO complains that Porter diverted a corporate opportunity, violated his employment agreement with ERCO and misappropriated trade secrets. A Superior Court judge sitting without a jury heard the case and entered judgment for the defendants We have the benefit of excellent findings of fact by the judge. Mass.R.Civ.P. 52(a), 365 Mass. 816 (1974). On those findings we rely for the factual setting of the case, with some fleshing out on the basis of undisputed matter in the record ERCO is a science and engineering company, located in Cambridge, which provides products and services in energy and environmental fields. Among its areas of investigation was staged fluidized bed combustion of coal. By that process, coal mixed with limestone could be burned so as to capture sulfur as a solid, rather than allowing it to escape into the atmosphere as a gas. To the end of developing a commercially efficient coal-fired furnace which harnessed that process, ERCO operated a fluidized bed combustor pilot plant and a full- scale fluid bed combustor test facility Porter had come to ERCO from the Massachusetts Institute of Technology, from which he held a doctoral degree and where he had been an associate professor in the department of chemical engineering. Fluidized bed combustion was a subject to which Porter had given attention at M. I. T. and about which he had written as early as 1963. At ERCO, research and development concerning application of the fluidized bed combustion process was under Porter's general direction. As to royalties earned by ERCO from his inventions, Porter, under his employment agreement, was to receive 18% in addition to his annual salary (which was $52,000 in 1979) In December, 1977, Porter went to Washington, D. C., to deliver a paper on fluidized bed combustion at a fifth annual meeting on that subject sponsored by the United States Environmental Protection Agency and the Department of Energy (DOE). While in Washington Porter looked up two *298 colleagues at Howard University, Professors Cannon and Jackson, with whom he had been earlier acquainted. Cannon is chairman of the department of chemical engineering at Howard and Jackson is director of its fossil fuel laboratory **393 This encounter led in due course to a joint proposal to DOE by Howard and ERCO for a development grant involving staged fluidized bed combustion of coal. Jackson had told Porter that DOE would be favorably disposed to a proposal from a "minority institution." Howard,

349 traditionally, has a black student body, and Cannon and Jackson are black. So is Porter. Howard was to be the primary applicant and ERCO would be the subcontractor. ERCO's participation was approved by other executives of ERCO. During the first five months of 1979, Cannon, Jackson and Porter worked on the submission to DOE; Porter wrote most of the technical section. The draft proposal listed ERCO as a proposed subcontractor and included biographical information about ERCO personnel, notably, of course, about Porter In early May, 1979, during the course of a ride from Washington National Airport to DOE, Jackson advised Porter of a change of heart about working with ERCO. Jackson had become apprehensive that ERCO would claim the entire enterprise as its idea and that because "we are just little black people at a black university everybody was going to believe them." Moreover, Jackson said, he didn't want to be a part of something that might be seen as "blacks serving as sort of fronts for white firms getting minority money." Finally, he thought that in the long run more money would flow from DOE if there were a minority subcontractor in the picture. Porter attempted to persuade Jackson to continue to work with ERCO During the conversation at DOE which followed, Jackson broached the subject of dealing with a subcontractor other than ERCO and was told by a DOE official that the key man was Porter, whether he was at ERCO or elsewhere. Cannon and Jackson came up to Cambridge a week *299 later to see Porter at M. I. T. and suggested that if he were to form his own company, they would be pleased to substitute it for ERCO in the proposal to DOE. Porter agreed to do so. Cannon and Jackson deleted references to ERCO and substituted EEE, a corporation to be formed by Porter. Thereafter, although he continued to work at ERCO, Porter cut himself off from the Howard submission to DOE. "I knew I was in a ticklish position, sought advice of counsel and decided it best I just not do anything on that proposal." About three weeks later, Richard H. Rosen, the president of ERCO, Robert S. Davis, an executive vice-president, and Porter met for a routine review of pending ERCO projects. At that meeting Rosen asked Porter, "How about the Howard proposal?" Porter responded, "We're not going to get that." Rosen and Davis made no further inquiry and went on to the next item of business. Davis asked Porter about the Howard proposal on a later occasion and, once again, was told, without further elaboration, that ERCO wasn't going to get a subcontract from Howard Toward the end of September or the beginning of October, 1979, DOE awarded a grant to Howard and on or about October 5, 1979, Porter resigned his offices at ERCO on one day's notice. He told Davis and Rosen that his reason for leaving was to organize a corporation which would work in the area of computerized cars. Rosen, still unaware of Porter's participation in the Howard project, hired Porter as an independent consultant to ERCO for a period of sixty days 1. The corporate opportunity. None of the parties debates that exploitation of the fluidized bed combustion process was squarely within ERCO's corporate activity and that, without more, an officer of ERCO had a fiduciary duty not to divert that opportunity for his own benefit. See Durfee v. Durfee & Canning, Inc., 323 Mass. 187, 198-199, 80 N.E.2d 522 (1948); BBF, Inc. v. Germanium Power Devices Corp., 13 Mass.App. 166, 172, 430 N.E.2d 1221 (1982), and cases cited. Indeed, Porter used his time as an employee of ERCO and the time of other employees of ERCO, as well as certain graphics, *300 in preparing a draft of the submission to DOE which ultimately reeled in a grant. Contrast Lincoln Stores, Inc. v. Grant, 309 Mass. 417, 421-422, 34 N.E.2d **394 704 (1941); Black v. Parker Mfg. Co., 329 Mass. 105, 112-113, 106 N.E.2d 544 (1952) 350 Porter's defense is that the staged fluidized bed combustion project with Howard ceased being a corporate opportunity for ERCO when Jackson refused to deal with ERCO. When a corporation is unable to avail itself of an opportunity, its employee, officer or director is free to exploit it. Miller v. Miller, 301 Minn. 207, 225, 222 N.W.2d 71 (1974); 3 Fletcher, Cyclopedia of The Law of Private Corporations ' 862.1 (rev. perm. ed. 1975). [FN2] It was a defense which the trial judge thought convincing: "[N]o amount of persuasion," he wrote, "could alter Dr. Jackson's resolve that the subcontractor be a minority concern." Porter was not to be asked for "performance of fiduciary duty even to the point of futility." The difficulty with the judge's reasoning is that the unalterability of Jackson's resolve can by no means be certain so long as Porter, by keeping Jackson's position and his reasons for it a secret, never afforded ERCO a chance to test it. Had Porter told ERCO about Howard University's desire (as manifested by Jackson) to deal with a subcontractor controlled by persons who were black, the matter might have taken a variety of turns. Other officers of ERCO might have persuaded Jackson and Cannon--or others at Howard--that the status of Porter with ERCO was such that their unease about ERCO was not warranted. It might have been possible to organize a corporation in which Porter had a majority position and ERCO had a minority position. These are but two of many possibilities. FN2. The inability asserted is often a lack of financial capacity by the corporation. See, e.g., Durfee v. Durfee & Canning, Inc., 323 Mass. at 202, 80 N.E.2d 522. For the reason that the firmness of a refusal to deal cannot be adequately tested by the corporate executive alone, it has not been favored as a defense unless the refusal has first been disclosed to the corporation. Without full disclosure it is too difficult to verify the unwillingness to deal and too *301 easy for the executive to induce the unwillingness. * * * Although the defense of a refusal to deal has not been squarely confronted in Massachusetts cases, similar defenses of corporate inability to exploit an opportunity have had a cool reception. In Durfee v. Durfee & Canning, Inc., 323 Mass. at 200-202, 80 N.E.2d 522, the credit weakness of the corporation did not permit Canning, who was a director and principal officer, to turn to his own account the purchase of gasoline which would have been advantageous to the corporation. Production Mach. Co. v. Howe, 327 Mass. 372, 375-378, 99 N.E.2d 32 (1951), required disclosure of the availability of a line of business that, although new to the corporation, was within its manufacturing capacity. "Breach of the duty [to protect the interests of the corporation] could be found although no corruption, dishonesty, or bad faith was involved." Id. at 378, 99 N.E.2d 32. In Cain v. Cain, 3 Mass.App. 467, 476-477, 334 N.E.2d 650 (1975), we required the defendant to inform the corporation of which he was a director and treasurer that the loss of certain business was imminent. * * * We conclude that before a person invokes refusal to deal as a reason for diverting a corporate opportunity he must unambiguously disclose that refusal to the corporation to which he owes a duty, together with a fair statement of the reasons for that refusal. Porter's statement, "We're not going to get that," fell far short of that standard. Indeed, Porter went beyond nondisclosure. He acted secretively and even on the occasion of his departure from ERCO masked his true reason for leaving. 351 * * * The judgment is reversed and the case is remanded to the Superior Court for assessment of damages based on a computation of EEE's net profits from the DOE grant. The court should disallow as deductions from EEE's gross profits fees and expenses incident to the DOE project which ERCO would not have had to incur, and distributions to Porter in excess of $52,000 per year. Nondeductible expenses shall include, but shall not be limited to, EEE's legal fees in **396 connection with its incorporation and this litigation So ordered BROWN, Justice (concurring) I continue to be amazed at the role often played by counsel in circumstances such as here *304 presented. It appears that the advice given [FN1] was either unwise or of questionable competence, or both, especially if one has in mind that the client has stated on the record that "I knew I was in a ticklish position, [and] sought advice of counsel." When lawyers have the opportunity to keep their clients at least at the moral level of the market place, they have a public duty to avail themselves of it. After a great deal of court time and massive legal fees, this court has now stated what should have been obvious at the outset: a fiduciary's silence is equivalent to a stranger's lie. FN1. Counsel of record on appeal was not involved in this matter prior to the commencement of the litigation.

Juergens v. Venture Capital Corp. 1 Mass.App.Ct. 274, 295 N.E.2d 398 (1973)

Walter M. JUERGENS v. VENTURE CAPITAL CORPORATION et al Appeals Court of Massachusetts, Middlesex Argued Nov. 13, 1972 Decided May 2, 1973. **399 KEVILLE, Justice. This is a bill in equity in which the plaintiff (Juergens) seeks to establish a debt of of the corporate defendant (Venture Capital) and to reach and apply in satisfaction of that debt the obligations of two individual defendants to Venture Capital. The case is here on Juergens' appeal from the trial judge's decree dismissing the bill Since we have before us the judge's findings of fact and a transcript of the evidence, all questions of law, fact and discretion are open for our decision. From the evidence we *275 can 352 find facts not expressly found by the judge. If convinced that he was plainly wrong, we can find facts contrary to his findings. Lowell Bar Ass'n v. Loeb, 315 Mass. 176, 178, 52 N.E.2d 27 Venture Capital was organized in April, 1969 for the purpose of engaging in the business of loaning money and providing venture capital for other corporations. Its articles of organization contained broad powers for the performance of all acts incidental to these purposes. Maurice Shear (Shear) was the promoter of Venture Capital. In February, 1969 he was president of the Industrial Bank and Trust Company. Juergens was a customer of the bank. Shear was engaged in obtaining subscribers to capital stock of the corporation which he planned to form. He invited Juergens to become one of the original subscribers. Juergens agreed to subscribe to shares of the corporation. On or about February 24, 1969, Juergens executed written subscription agreements for 35,000 shares and gave Shear checks payable to Venture Capital totaling $26,000. Venture Capital received the proceeds of the checks. Juergens received his stock certificate on or about February 12, 1970. Approximately twenty other persons became subscribers to the original shares. Shortly after its formation, Venture Capital began to do business and made two loans to the individual defendants, one for $120,000, and the other for $23,000 In the latter part of 1969, Juergens became concerned about the fact that there had been no public offering of the shares of Venture Capital. He had been told by Shear in their initial discussions that it was expected that there would be a public offering of shares. Juergens received evasive explanations from Shear as to the status of the corporation and the public issuance of shares. He told Shear that he wanted his money back Beginning in January, 1970, Juergens made numerous telephone calls to Shear. Shear told him that he would get his money in April. Juergens telephoned Shear in April, demanded the return of his money and threatened suit unless he obtained the refund. Shear promised that he would send him a check for $26,000 if Juergens returned the *276 stock certificate properly endorsed. Juergens mailed his stock certificate to the corporation but in return received a check for only $10,000. He inquired about payment of the balance of $16,000. Shear told him that it would be paid in June, 1970. In June Shear gave him an evasive answer as to why payment could not be made at that time. Juergens here seeks to recover the unpaid balance of $16,000. Balance sheets prepared by a certified public accountant from the corporate records at the direction of the board of directors and addressed to them for periods ending September 30, 1970, and November 30, 1970, each carry a liability entry 'Common Stock Refunds Payable $16,000.00.' The entries pertain to the refund claimed by Juergens. The balance sheets also show a capital surplus of $131,450 and an excess of assets over liabilities of at least $140,000 In June, 1970 Shear also told Juergens that he would be reimbursed by Venture Capital for the interest charges on the loan which he had taken out with Industrial Bank and Trust Company in order to finance the purchase of his shares. We agree with the judge that there was no consideration for this promise **400 Shear was not only Venture Capital's promoter, he was its principal stockholder owning at least fifty-three percent of the outstanding shares. He was president, treasurer and one of three directors. The others were his attorney and his secretary. The latter was present at all times in the corporation's office; telephone calls relating to the corporation came through her; she kept the corporate checkbook and checks were made out under her direction

353 Under the by-laws, as president, Shear was designated as chief executive officer. The bylaws also provided that the president 'subject to the direction of the Board of Directors, shall have general charge of the business, affairs and property of the Corporation and general supervision of its officers and agents.' Shear actively managed all the corporation's business; and the other directors permitted him to exercise complete control over and management of all corporate affairs *277 The sole meeting of the board of directors was held in April, 1969. At that meeting the directors adopted a plan under which Shear, as president was given exclusive authority to offer for sale, sell and issue stock of the corporation. He handled the sale of all the corporate stock which was sold, negotiated the only two loans made by the corporation, and prior to November 30, 1970, made refunds to thirteen shareholders who requested a return of their money in exchange for their share certificates. All who requested refunds were paid except Juergens The by-laws provided that 'The Treasurer (Shear) shall . . . (d) Render to the President or the Board of Directors whenever requested, a statement of the financial condition of the Corporation and of all his transactions as Treasurer; and render a full financial report at the annual meeting of the stockholders if called upon to do so.' On March 6, 1971, there was a special meeting of stockholders in lieu of the annual meeting. The three directors were present and Shear presided. The entire financial picture of the corporation was brought before the meeting. A vote authorized the treasurer to repurchase for ten cents a share all of the capital stock of the corporation which had been issued for ten cents a share except for those shares issued to Shear. Juergens' subscription was for 25,000 shares at $1.00 a share and 10,000 shares at ten cents a share We concur with the judge that it may be inferred that the board of directors knew in the latter part of 1970 that Juergens had returned his stock certificate to the corporation in April, 1970, and received $10,000 in return. The facts warrant a further inference that in the latter part of 1970 the directors either knew or should have known that Shear had committed the corporation to the payment to Juergens of the $16,000 carried on its balance sheets as a liability, and that they had actual knowledge of the agreement not later than the stockholders' meeting held on March 6, 1971 The judge concluded that Shear had no authority to bind the corporation by his agreement with Juergens, and that the board of directors did not ratify that agreement. We *278 agree that the facts do not support the plaintiff's assertion that there was express or implied authority for Shear's act. There remain for consideration, however, the questions whether Shear had apparent authority, and whether the corporation, through the failure of its board of directors to disaffirm Shear's commitment to Juergens, was obliged to honor it. It is our view that there was a combination of apparent authority and ratification. There being no charter prohibition, Venture Capital, in the circumstances, could purchase its own stock. G.L. c. 156B, s 9(m). Through the extensive corporate authority in which he was clothed, coupled with that which he exercised without objection from the corporation, including his customary practice of granting refunds to all stockholders seeking to turn in their shares--we think **401 that Venture Capital conferred upon Shear apparent authority to bind it to the agreement with Juergens. Conde Nast Press, Inc. v. Cornhill Publishing Co., 255 Mass. 480, 485, 152 N.E. 240; H. H. Brown Shoe Co. v. H. C. Brown Co. Inc., 258 Mass. 343, 347, 155 N.E. 22; Lonergan v. Highland Trust Co., 287 Mass. 550, 557--558, 192 N.E. 34; Arkansas Valley Feed Mills v. Fox DeLuxe Foods, 171 F.Supp. 354 145, 160--161 (W.D.Ark.), aff'd 273 F.2d 804 (8th Cir.); Kaplan v. Reid Bros. Inc., 104 Cal.App. 268, 271, 285 P. 868 The corporation could not avoid its obligation to Juergens by asserting lack of knowledge on the part of its directors. Shear's knowledge of the transaction was constructive notice to the corporation. Beacon Trust Co. v. Souther, 183 Mass. 413, 415--417, 67 N.E. 345; Sarna v. American Bosch Magneto Corp., 290 Mass. 340, 343, 195 N.E. 328; Air Technical Dev. Co. Inc. v. Arizona Bank, 101 Ariz. 70, 73, 416 P.2d 183; Fletcher Cyc. Corporations (Perm. ed.) s 809, p. 75 Moreover, it was the duty of the directors to keep themselves informed about the conduct of the business. Lonergan v. Highland Trust Co., 287 Mass. 550, 558, 192 N.E. 34; Ingalls Iron Works Co. v. Ingalls, 177 F.Supp. 151, 163 (N.D.Ala.). Knowledge of the agreement was available to the directors and imputable to them in the latter part of 1970. F. M. Davies & Co. v. Porter, 248 F. 397, 400--401, (8th Cir.). To avoid responsibility, Venture Capital through its directors *279 should have disavowed the agreement promptly. Boice-Perrine Co. v. Kelley, 243 Mass. 327, 330--331, 137 N.E. 731; Crane Co. v. Park Constr. Co. Inc., 356 Mass. 13, 16, 247 N.E.2d 591; Restatement 2d: Agency, s 99. In failing promptly to disavow the agreement, in retaining Juergen's certificate (see Ryan v. Charles E. Reed & Co., 266 Mass. 293, 302, 165 N.E. 396 and Wilkins v. Waldo Lumber Co., 130 Me. 5, 13, 153 A. 191) and having made part payment to Juergens in the sum of $10,000 in exchange for his shares (see Cumberland Glass Mfg. Co. v. Wheaton, 208 Mass. 425, 431, 94 N.E. 803), the corporation ratified the agreement. Ratification here may be inferred without a vote of the directors or stockholders. Alden Bros. Co. v. Dunn, 264 Mass. 355, 361, 162 N.E. 773 The final decree is reversed. The case is remanded to the Superior Court for further proceedings to determine the present status of the indebtedness, if any, of the individual defendants to the defendant, Venture Capital. A new final decree is to be entered declaring that Venture Capital is indebted to the plaintiff in the sum of $16,000 with interest from March 15, 1971, and granting the plaintiff such relief, if any, against the individual defendants as may appear to be appropriate So ordered GRANT, Justice (concurring in result) I concur in the result because Venture Capital's articles of organization do not provide that it may not repurchase shares of its own stock (see G.L. c. 156B, s 9(m)) and because its board of directors should be held to have ratified Shear's agreement to repurchase the plaintiff's shares. I am of opinion, however, that the provisions of G.L. c. 156B, s 55(i), preclude a holding that either the president or a single director of a corporation can be clothed with apparent authority to bind the corporation to a reacquisition of its stock for value.

Boston Athletic Ass’n v. Int’l Marathons, Inc . 392 Mass. 356, 467 N.E.2d 58 (1984) 355 BOSTON ATHLETIC ASSOCIATION v. INTERNATIONAL MARATHONS, INC., et al. [FN1] FN1. The other defendants in these cases are Marshall Medoff, the sole incorporator, officer, director, and shareholder of International Marathons, Inc.; Fidelity Daily Income Trust (FDIT), which maintains a money market fund in which some of the funds in dispute have been invested; Shawmut Bank of Boston, N.A., which acts as a custodian of the assets of FDIT; and the Attorney General of the Commonwealth, who is charged with the supervision and regulation of funds given to public charities within the Commonwealth. The Attorney General was joined as a party pursuant to G.L. c. 12, ' 8G. Supreme Judicial Court of Massachusetts, Suffolk. Argued March 8, 1984. Decided July 3, 1984. *357 LYNCH, Justice. These two appeals present the question whether the president of the Boston Athletic Association (BAA), William T. Cloney, was authorized to enter into a certain contract with the defendant International Marathons, Inc. (IMI), by its president Marshall Medoff. This contract purported to designate IMI as the exclusive promoter of the Boston Marathon (Marathon). Two rulings are before us: an interlocutory order granting the BAA's request for a preliminary injunction, and a partial summary judgment in favor of BAA declaring the contract between *358 the BAA and IMI void ab initio. [FN2] We affirm both the interlocutory order and the partial summary judgment. FN2. Both appeals were originally filed in the Appeals Court. This court granted the petition for direct appellate review of the partial summary judgment, took the review of the preliminary injunction on its own motion, and consolidated the two appeals for the purpose of argument. In granting the BAA's motion for partial summary judgment, the judge found the following facts. The BAA is a nonprofit corporation incorporated by c. 287 of the Acts of 1887, and under c. 180 of the General Laws. [FN3] The principal activity of the **60 BAA is the presentation of an annual road race, the Boston Marathon. IMI is a Massachusetts business corporation organized on May 1, 1981, and headed by Medoff. Its purpose is to carry on the business of sales and sports promotions. * * * Discussion between Cloney and Medoff began in late 1980 about the possibility of commercial promotion of the Marathon by a corporation that Medoff would organize. In March, 1981, Cloney, who was president and a member of the board of governors of the BAA (board), and Medoff met with two other members of the board. A proposal prepared by Medoff for his becoming a promoter of the Marathon was discussed, but several objections were raised and no 356 agreement was reached. The term of this proposed agreement was for a minimum of five years and a maximum of twenty years On April 27, 1981, a meeting of the board was held after due notice. There was general agreement at the meeting that a sharp increase in sponsorship revenues was needed to sustain the prestige of the race. A motion was presented to grant to Cloney authority to negotiate and execute agreements for the presentation and underwriting of the Marathon. Some of the *359 members expressed concern about the breadth of the authorization and possible implications as to the future conduct of the Marathon. After expressions of confidence in Cloney's judgment and discretion in the exercise of such a broad authorization, the following proposal was approved by the board: "That William T. Cloney, as President of the Association, be and hereby is authorized and directed to negotiate and to execute in the name of and in behalf of this Association such agreements as he deems in the best interest of the Association for the perpetuation, sponsorship or underwriting of the Boston A.A. Marathon." There was no mention at this meeting of the possibility of hiring an exclusive promoter to whom major responsibility for sponsorship of the Marathon would be delegated. In the past, all sponsorship and broadcast coverage contracts had been negotiated between Cloney and the individual sponsor. None of the prior contracts had resulted in annual revenues to the BAA in excess of $25,000. At no time in the past had the BAA engaged an independent promoter for the Marathon After the April 27 meeting, and without the knowledge of the other members of the board, Cloney continued to negotiate with Medoff toward an agreement that would designate Medoff as the exclusive promoter of the Marathon. Cloney informed Medoff of the specific language of the April 27 vote. On September 23, 1981, the agreement now in dispute was executed by Cloney on behalf of the BAA and by Medoff on behalf of IMI. Cloney and Medoff subsequently executed an amendment to that agreement on January 13, 1982 The agreement designates IMI as the exclusive promoter of the Marathon. IMI can make five "major" and five "minor" sponsorship contracts as well as agreements with an unlimited number of companies which would supply services to the BAA. The contract gives IMI the right to represent that the Marathon is "presented by" IMI or its assignee. With the exception of the Japanese market, all radio, television, and movie rights in the Marathon are assigned to IMI The exclusive promoter arrangement is accomplished through the transfer by the BAA to IMI of "all right, title and interest *360 to the exclusive use of the Boston Marathon and BAA Marathon logo(s)" and name, reserving to the BAA the right to use the name and logos only in so far as such use is "not inconsistent with" the agreement The agreement also governs the conduct of the parties in carrying out their contractual responsibilities. The agreement requires the BAA to "execute sponsorship agreements consistent with the terms and conditions stated herein, when IMI presents a sponsor ready, willing and able **61 to execute and carry out the obligations of a sponsorship agreement." The BAA is bound to "cooperate fully with IMI's efforts to negotiate with sponsors" and is required to "do all things reasonably necessary as may be requested by IMI to effectuate consummation of agreements with the sponsors." The BAA reserves the right to decline to accept "any or all sponsors," but "approval of a sponsor shall not be unreasonably withheld." Certain sponsors, however, are approved by the amendment to the contract and, as to these sponsors, IMI itself "may execute on 357 behalf of the BAA the sponsorship agreement, if the form of the sponsorship agreement is consistent with a form approved by prior BAA use." The BAA is solely responsible for the actual production and the expenses of the Marathon and "shall lend its cooperation and support to IMI and the sponsors to make the event successful." The agreement further provides that the BAA will not make any independent sponsorship arrangements "without the written consent of IMI." According to the financial terms of the agreement, the "annual sponsorship fee" due the BAA is $400,000. [FN4] All sponsorship revenues in excess of $400,000 are payable directly to IMI. The BAA can agree to accept less than $400,000 in a particular year if sponsorship agreements for that year total less than that amount. Every five years the sponsorship fee shall be increased by an amount equal to the average change of the Consumer Price Index for the preceding five-year term. *361 The agreement does not require that the annual fee be paid to the BAA from revenues actually received from a sponsor FN4. If the Marathon is produced on a Sunday (rather than the traditional Monday, Patriots' Day), and can be televised by a national commercial network, the fee becomes $600,000. The agreement has the following renewal provision: It "shall extend and renew itself automatically and shall continue year to year so long as the annual sponsorship fee ... is paid." Pursuant to this agreement, in the ensuing months Medoff negotiated and Cloney executed sponsorship contracts on behalf of the BAA. The existence of these contracts was not brought to the attention of the board. The sponsors that IMI secured paid their fees directly to IMI. A majority of the members of the board did not learn of the existence of the disputed agreement until late February, 1982. The board, by a vote taken on September 9, 1982, declared the agreement of September 23, 1981, to be beyond the authorization vested in Cloney by the board's vote of April 27, 1981. [FN5] FN5. The record indicates that on July 16, 1982, IMI tendered to BAA a check in the amount of $400,000 upon the condition that indorsement of the check would acknowledge that it was "[i]n full payment of the obligations for 1982 of International Marathons, Inc. under Agreement of September 23, 1981, as amended, which Agreement is ratified and confirmed by acceptance hereof." The BAA returned the check to IMI stating that the condition thus imposed was unacceptable. On September 9, 1982, the director of the division of public charities in the Department of the Attorney General examined the agreement between IMI and the BAA, pursuant to G.L. c. 68, ' 21, and determined that the compensation paid to IMI under the agreement was likely to exceed 15% of the total moneys, pledges, or other property raised or received as a result of the contract. As a result, the director disapproved the contract. [FN6] * * * On September 27, 1982, the BAA commenced an action seeking a preliminary injunction and to have the agreement set aside. Two of its arguments were that the contract had been disapproved as violative of G.L. c. 68, ' 21, and that its terms and conditions exceeded the authority delegated to Cloney

358 *362 On September 29, 1982, a Superior Court judge preliminarily enjoined IMI from using **62 or in any way alienating any of the funds received from sponsors of the Marathon. On August 29, 1983, a second judge of the Superior Court granted the BAA's motion for a partial summary judgment declaring the agreement of September 23, 1981, void and unenforceable. * * * 2. The validity of the contract. For the reasons developed below, we hold the contract between the BAA and IMI to be void and unenforceable. The defendant is, however, entitled to recovery in quantum meruit for the services it rendered in obtaining sponsorship contracts for the running of the Marathon in 1982. a. Improper delegation of authority. Whether the board intended by its vote of April 27, 1981, to confer upon Cloney the authority to enter into the sponsorship agreement with IMI, that contract is void. The board of directors of a corporation cannot delegate total control of the corporation to an individual officer. Stoneman v. Fox Film Corp., 295 Mass. 419, 425, 4 N.E.2d 63 (1936). See 2 Fletcher, Cyclopedia of the Law of Private Corporations ' 496, at 504 (rev. perm. ed. 1982). Neither can it delegate authority which is so broad that it enables the officer to bind the corporation to extraordinary commitments or significantly to encumber the principal asset or function of the corporation. Bloomberg v. Greylock Broadcasting Co., 342 Mass. 542, 548, 174 N.E.2d 438 (1961) The contract seriously encumbers the manner in which the BAA may conduct the Marathon. The BAA is obliged to produce the race in its traditional form and to pay the entire bill. But it is not entitled to "present" the race. That right, as well as the right to use the name and logo of the BAA, belongs to IMI or its assignee. The BAA may not use its own logo in any way "inconsistent" with IMI's rights pursuant to the contract. The right to enter into sponsorship agreements belongs exclusively to IMI, although the BAA can reasonably **63 withhold its approval. [FN8] The BAA may not make independent agreements without written permission from IMI. Finally, the contract between IMI and the BAA is automatically renewable at the *364 option of IMI. Under the plain language of the agreement, there is no way for the BAA to end the relationship. [FN9] FN8. The natural interpretation of a reasonable objection is one based on a conclusion that a sponsor's product is inconsistent with the principles espoused by the BAA, for instance, alcohol or cigarettes. FN9. IMI suggests that the BAA could exercise its option to decline all sponsors on the reasonable basis that it had "decided to change its policy and not have sponsors" at all. This interpretation leaves the BAA in the unreasonable position of having to choose between sponsorship through IMI or no sponsorship at all. In return for carrying out its obligations under the contract, the BAA is to be paid a $400,000 fee. Any revenues in excess of $400,000 are directly payable to IMI, and there is no limit to the number of sponsors who may be solicited or to the amount of money which may be raised. [FN10] The annual fee is to be paid prior to the actual running of the race, but if the Marathon should not be run for some reason, the fee is to be returned to IMI. FN10. Although the original agreement provided for a maximum of five "major" sponsors and five "minor" sponsors with on-site recognition (the number of minor

359 sponsors without on-site recognition is unlimited), the January 13, 1982, amendment to the contract did away with these restrictions. According to the traditional principles of corporate governance, the board of governors of the BAA does not have the power to delegate to an individual officer authority to enter into a contract which so totally encumbers the most significant purpose of the BAA, the presentation of the Marathon. The by-laws of the BAA indicate that its organization and operation are, in all material respects, the same as those of a Massachusetts business corporation. [FN11] Principles of corporate governance with respect to the power of the board of governors to delegate authority to individual officers are applicable to profit and nonprofit corporations alike. Massachusetts Charitable Mechanic Ass'n v. Beede, 320 Mass. 601, 609-610, 70 N.E.2d 825 (1947). In fact, the powers of an officer of a charitable corporation*365 to bind the corporation without specific ratification by the board of governors or directors are more strictly construed than would be similar powers of an officer of a business corporation. Boston Y.M.C.A. v. Royal Indem. Co., 289 Mass. 391, 395, 194 N.E. 125 (1935). The validity of the board's purported delegation of authority to Cloney must be analyzed in this context. FN11. Section 4.2 of the by-laws provides that the property and affairs of the association be managed by a board of governors. Section 12 provides that all contracts "shall be authorized by the board of governors." These provisions are consistent with the general principle expressed in G.L. c. 156B, ' 47, as appearing in St.1974, c. 350, ' 1, that "[e]xcept as reserved to the stockholders ... the business of every corporation shall be managed by a board of directors." Corporate officers are generally empowered, by delegation of authority of the board of directors, with general managerial functions. They are responsible for the day to day operation of the corporation. Lydia E. Pinkham Medicine Co. v. Gove, 298 Mass. 53, 63, 9 N.E.2d 573 (1937). See 2 Fletcher, Cyclopedia of the Law of Private Corporations ' 495, at 499 (rev. perm. ed. 1982). Courts are usually flexible and accommodating in allowing boards to delegate authority as necessary or expedient. Id. But certain powers cannot be delegated generally. Certain transactions require specific authorization by the board in order to be valid. For example, in Stoneman v. Fox Film Corp., 295 Mass. 419, 4 N.E.2d 63 (1936), the court found that the president, although authorized to act as a general manager on behalf of a film company, was not authorized to commit the company to the purchase of a theatre, an extraordinary transaction which involved a large financial commitment. The court indicated that delegation of authority to conduct such business was a "course of conduct manifestly ... unusual and extraordinary **64 in the management of a corporation." It was an abdication of "the entire control" of the corporation and "[t]he functions of directors may not be abdicated." Id. at 425, 4 N.E.2d 63 In Kanavos v. Hancock Bank & Trust Co., 14 Mass.App.Ct. 326, 439 N.E.2d 311 (1982), a bank officer was found to have authority to bind the bank with respect to certain loans. The court noted that this principle would not apply where "the requirement of specific authority is presumed, e.g., the sale of a major asset by a corporation or a transaction which by its nature commits the corporation to an obligation outside the scope of its usual activity." Id. at 333, 439 N.E.2d 311. Similarly, in Bloomberg v. Greylock Broadcasting Co., 342 Mass. 542, 548, 174 N.E.2d 438 (1961), the president and general manager of a broadcasting corporation did not

360 *366 have authority to sell a television station, "a substantial part of its assets, needed for the conduct of its business." The power of officers to bind charitable corporations is even more narrowly construed. In Peoples Nat'l Bank v. New England Home for Deaf Mutes, Aged, Blind & Infirm, 209 Mass. 48, 95 N.E. 77 (1911), for example, the court held that the president and the treasurer of a charitable corporation did not have the power, absent special authorization, to bind the organization on a promissory note. The rule on delegation of authority to officers of charitable or nonprofit organizations is the result of heightened public interest in the affairs of those organizations. Those entrusted with the management of funds dedicated to charitable purposes and donated out of a sense of social or moral responsibility owe an especially high degree of accountability to the individual donors as well as to the community. [FN12] * * * In light of these principles, it is clear that if the delegation to Cloney was so broad as to enable him to commit the BAA to an extraordinary contract which encumbered substantially all its assets, the board would have delegated away control of the very essence of the BAA's corporate existence. Cf. Massachusetts Charitable Mechanic Ass'n v. Beede, 320 Mass. 601, 611, 70 N.E.2d (1947) ("any action of the corporation, at least in the absence of statutory authority, whereby it attempted to divest itself of a large part of its assets ... must be deemed beyond its powers and ineffectual"). It is the obligation of the board of governors to oversee the presentation of the Marathon, not to surrender virtually complete control of the event to another organization. The fact that the agreement is automatically renewable and thus potentially perpetual demonstrates the pervasive nature of the limitation on the main purpose of the BAA. Authority to make such a contract was beyond the power of the *367 board to delegate to Cloney. See Bloomberg v. Greylock Broadcasting Co., supra. See also Stoneman v. Fox Film Corp., 295 Mass. 419, 4 N.E.2d 63 (1936) Furthermore, the contract between IMI and the BAA is especially vulnerable because it is antithetical to the BAA's nature as a nonprofit corporation inasmuch as this agreement turns the solicitation of sponsors from a way to support the Marathon to a way for IMI to make a profit. It is entirely inconsistent with the nonprofit nature of the organization to permit such a substantial segment of the revenue earning capacity of the Marathon to be used as a vehicle for personal gain. See Milton Frank Allen Publications, Inc. v. Georgia Ass'n of Petroleum Retailers, Inc., 224 Ga. 518, 526-528, 162 S.E.2d 724 (1968) (contract by which directors of a charitable corporation delegated away control over membership and dues, "both of which are **65 absolutely necessary for the existence of the Association and for its success in carrying out its purposes," and which divested the association of the greater portion of its income for the pecuniary benefit of a private party, was seen as offensive to public policy) For the foregoing reasons, the board of governors of the BAA was not empowered to delegate to Cloney the right to make this contract with IMI b. Apparent authority. IMI argues that the April 27, 1981, vote of the board conferred upon Cloney the apparent authority to enter into the disputed agreement. This argument is not persuasive. "Persons dealing with a corporation are presumed to know the extent of its powers." Wiley & Foss, Inc. v. Saxony Theatres, Inc., 335 Mass. 257, 260-261, 139 N.E.2d 400 (1957). An officer of a nonprofit corporation cannot have apparent authority to encumber the principal 361 function of the corporation and to divert the substantial earning capacity of the corporation to private benefit. Kanavos v. Hancock Bank & Trust Co., 14 Mass.App.Ct. 326, 333, 439 N.E.2d 311 (1982) (the doctrine of apparent authority does not apply when, in the case of an unusual transaction, "the requirement of specific authority is presumed"). * * * The partial summary judgment declaring the agreement of September 23, 1981, to be void and *369 unenforceable is also affirmed. The case is remanded to the Superior Court for a determination of the fair value of the services rendered by International Marathons, Inc So ordered.

Smith v. Van Gorkom 488 A.2d 858 (Del. 1985)

Alden SMITH and John W. Gosselin, Plaintiffs Below, Appellants, v. Jerome W. VAN GORKOM, Bruce S. Chelberg, William B. Johnson, Joseph B. Lanterman, Graham J. Morgan, Thomas P. O'Boyle, W. Allen Wallis, Sidney H. Bonser, William D. Browder, Trans Union Corporation, a Delaware corporation, Marmon Group, Inc., a Delaware corporation, GL Corporation, a Delaware corporation, and New T. Co., a Delaware corporation, Defendants Below, Appellees. Supreme Court of Delaware. Submitted: June 11, 1984. Decided: Jan. 29, 1985. Opinion on Denial of Reargument: March 14, 1985. HORSEY, Justice (for the majority): This appeal from the Court of Chancery involves a class action brought by shareholders of the defendant Trans Union Corporation ("Trans Union" or "the Company"), originally seeking rescission of a cash-out merger of Trans Union into the defendant New T Company ("New T"), a wholly-owned subsidiary of the defendant, Marmon Group, Inc. ("Marmon"). Alternate relief in the form of damages is sought against the defendant members of the Board of Directors of Trans Union, *864 New T, and Jay A. Pritzker and Robert A. Pritzker, owners of Marmon. [FN1] FN1. The plaintiff, Alden Smith, originally sought to enjoin the merger; but, following extensive discovery, the Trial Court denied the plaintiff's motion for preliminary injunction by unreported letter opinion dated February 3, 1981. On February 10, 1981, 362 the proposed merger was approved by Trans Union's stockholders at a special meeting and the merger became effective on that date. Thereafter, John W. Gosselin was permitted to intervene as an additional plaintiff; and Smith and Gosselin were certified as representing a class consisting of all persons, other than defendants, who held shares of Trans Union common stock on all relevant dates. At the time of the merger, Smith owned 54,000 shares of Trans Union stock, Gosselin owned 23,600 shares, and members of Gosselin's family owned 20,000 shares. Following trial, the former Chancellor granted judgment for the defendant directors by unreported letter opinion dated July 6, 1982. [FN2] Judgment was based on two findings: (1) that the Board of Directors had acted in an informed manner so as to be entitled to protection of the business judgment rule in approving the cash-out merger; and (2) that the shareholder vote approving the merger should not be set aside because the stockholders had been "fairly informed" by the Board of Directors before voting thereon. The plaintiffs appeal. * * * Speaking for the majority of the Court, we conclude that both rulings of the Court of Chancery are clearly erroneous. Therefore, we reverse and direct that judgment be entered in favor of the plaintiffs and against the defendant directors for the fair value of the plaintiffs' stockholdings in Trans Union, in accordance with Weinberger v. UOP, Inc., Del.Supr., 457 A.2d 701 (1983). [FN3] * * * We hold: (1) that the Board's decision, reached September 20, 1980, to approve the proposed cash-out merger was not the product of an informed business judgment; (2) that the Board's subsequent efforts to amend the Merger Agreement and take other curative action were ineffectual, both legally and factually; and (3) that the Board did not deal with complete candor with the stockholders by failing to disclose all material facts, which they knew or should have known, before securing the stockholders' approval of the merger. I. * * * -A- Trans Union was a publicly-traded, diversified holding company, the principal earnings of which were generated by its railcar leasing business. During the period here involved, the Company had a cash flow of hundreds of millions of dollars annually. However, the Company had difficulty in generating sufficient taxable income to offset increasingly large investment tax credits (ITCs). Accelerated depreciation deductions had decreased available taxable income against which to offset accumulating ITCs. * * * -B- On August 27, 1980, Van Gorkom met with Senior Management of Trans Union. Van Gorkom reported on his lobbying efforts in Washington and his desire to find a solution to the tax credit problem more permanent than a continued program of acquisitions. Various

363 alternatives were suggested and discussed preliminarily, including the sale of Trans Union to a company with a large amount of taxable income. Donald Romans, Chief Financial Officer of Trans Union, stated that his department had done a "very brief bit of work on the possibility of a leveraged buy-out." * * * On September 5, at another Senior Management meeting which Van Gorkom attended, Romans again brought up the idea of a leveraged buy-out as a "possible strategic alternative" to the Company's acquisition program. Romans and Bruce S. Chelberg, President and Chief Operating Officer of Trans Union, had been working on the matter in preparation for the meeting. According to Romans: They did not "come up" with a price for the Company. They merely "ran the numbers" at $50 a share and at $60 a share with the "rough form" of their cash figures at the time. Their "figures indicated that $50 would be very easy to do but $60 would be very difficult to do under those figures." This work did not purport to establish a fair price for either the Company or 100% of the stock. It was intended to determine the cash flow needed to service the debt that would "probably" be incurred in a leveraged buy-out, based on "rough calculations" without "any benefit of experts to identify what the limits were to that, and so forth." These computations were not considered extensive and no conclusion was reached. At this meeting, Van Gorkom stated that he would be willing to take $55 per share for his own 75,000 shares. He vetoed the suggestion of a leveraged buy- out by Management, however, as involving a potential conflict of interest for Management. Van Gorkom, a certified public accountant and lawyer, had been an officer of Trans Union *866 for 24 years, its Chief Executive Officer for more than 17 years, and Chairman of its Board for 2 years. It is noteworthy in this connection that he was then approaching 65 years of age and mandatory retirement. For several days following the September 5 meeting, Van Gorkom pondered the idea of a sale. He had participated in many acquisitions as a manager and director of Trans Union and as a director of other companies. He was familiar with acquisition procedures, valuation methods, and negotiations; and he privately considered the pros and cons of whether Trans Union should seek a privately or publicly-held purchaser. Van Gorkom decided to meet with Jay A. Pritzker, a well-known corporate takeover specialist and a social acquaintance. However, rather than approaching Pritzker simply to determine his interest in acquiring Trans Union, Van Gorkom assembled a proposed per share price for sale of the Company and a financing structure by which to accomplish the sale. Van Gorkom did so without consulting either his Board or any members of Senior Management except one: Carl Peterson, Trans Union's Controller. Telling Peterson that he wanted no other person on his staff to know what he was doing, but without telling him why, Van Gorkom directed Peterson to calculate the feasibility of a leveraged buy-out at an assumed price per share of $55. Apart from the Company's historic stock market price, [FN5] and Van Gorkom's long association with Trans Union, the record is devoid of any competent evidence that $55 represented the per share intrinsic value of the Company. * * * Having thus chosen the $55 figure, based solely on the availability of a leveraged buy- out, Van Gorkom multiplied the price per share by the number of shares outstanding to reach a 364 total value of the Company of $690 million. Van Gorkom told Peterson to use this $690 million figure and to assume a $200 million equity contribution by the buyer. Based on these assumptions, Van Gorkom directed Peterson to determine whether the debt portion of the purchase price could be paid off in five years or less if financed by Trans Union's cash flow as projected in the Five Year Forecast, and by the sale of certain weaker divisions identified in a study done for Trans Union by the Boston Consulting Group ("BCG study"). Peterson reported that, of the purchase price, approximately $50-80 million would remain outstanding after five years. Van Gorkom was disappointed, but decided to meet with Pritzker nevertheless. Van Gorkom arranged a meeting with Pritzker at the latter's home on Saturday, September 13, 1980. Van Gorkom prefaced his presentation by stating to Pritzker: "Now as far as you are concerned, I can, I think, show how you can pay a substantial premium over the present stock price and pay off most of the loan in the first five years. * * * If you could pay $55 for this Company, here is a way in which I think it can be financed." Van Gorkom then reviewed with Pritzker his calculations based upon his proposed price of $55 per share. Although Pritzker mentioned $50 as a more attractive figure, no other price was mentioned. However, Van Gorkom stated that to be sure that $55 was the best price obtainable, Trans Union should be free to accept any better offer. Pritzker demurred, stating that his organization would serve as a "stalking horse" for an "auction contest" only if Trans Union would permit Pritzker to buy 1,750,000 shares of Trans Union stock at market price which Pritzker could then sell to any higher bidder. After further discussion on this point, Pritzker told Van Gorkom that he would give him a more definite reaction soon. *867 On Monday, September 15, Pritzker advised Van Gorkom that he was interested in the $55 cash-out merger proposal and requested more information on Trans Union. Van Gorkom agreed to meet privately with Pritzker, accompanied by Peterson, Chelberg, and Michael Carpenter, Trans Union's consultant from the Boston Consulting Group. The meetings took place on September 16 and 17. Van Gorkom was "astounded that events were moving with such amazing rapidity." On Thursday, September 18, Van Gorkom met again with Pritzker. At that time, Van Gorkom knew that Pritzker intended to make a cash-out merger offer at Van Gorkom's proposed $55 per share. Pritzker instructed his attorney, a merger and acquisition specialist, to begin drafting merger documents. There was no further discussion of the $55 price. However, the number of shares of Trans Union's treasury stock to be offered to Pritzker was negotiated down to one million shares; the price was set at $38--75 cents above the per share price at the close of the market on September 19. At this point, Pritzker insisted that the Trans Union Board act on his merger proposal within the next three days, stating to Van Gorkom: "We have to have a decision by no later than Sunday [evening, September 21] before the opening of the English stock exchange on Monday morning." Pritzker's lawyer was then instructed to draft the merger documents, to be reviewed by Van Gorkom's lawyer, "sometimes with discussion and sometimes not, in the haste to get it finished." On Friday, September 19, Van Gorkom, Chelberg, and Pritzker consulted with Trans Union's lead bank regarding the financing of Pritzker's purchase of Trans Union. The bank indicated that it could form a syndicate of banks that would finance the transaction. On the same day, Van Gorkom retained James Brennan, Esquire, to advise Trans Union on the legal aspects of the merger. Van Gorkom did not consult with William Browder, a Vice-President and 365 director of Trans Union and former head of its legal department, or with William Moore, then the head of Trans Union's legal staff. On Friday, September 19, Van Gorkom called a special meeting of the Trans Union Board for noon the following day. He also called a meeting of the Company's Senior Management to convene at 11:00 a.m., prior to the meeting of the Board. No one, except Chelberg and Peterson, was told the purpose of the meetings. Van Gorkom did not invite Trans Union's investment banker, Salomon Brothers or its Chicago-based partner, to attend. Of those present at the Senior Management meeting on September 20, only Chelberg and Peterson had prior knowledge of Pritzker's offer. Van Gorkom disclosed the offer and described its terms, but he furnished no copies of the proposed Merger Agreement. Romans announced that his department had done a second study which showed that, for a leveraged buy-out, the price range for Trans Union stock was between $55 and $65 per share. Van Gorkom neither saw the study nor asked Romans to make it available for the Board meeting. Senior Management's reaction to the Pritzker proposal was completely negative. No member of Management, except Chelberg and Peterson, supported the proposal. Romans objected to the price as being too low; [FN6] he was critical of the timing and suggested that consideration should be given to the adverse tax consequences of an all-cash deal for low-basis shareholders; and he took the position that the agreement to sell Pritzker one million newly- issued shares at market price would inhibit other offers, as would the prohibitions against soliciting bids and furnishing inside information*868 to other bidders. Romans argued that the Pritzker proposal was a "lock up" and amounted to "an agreed merger as opposed to an offer." Nevertheless, Van Gorkom proceeded to the Board meeting as scheduled without further delay. FN6. Van Gorkom asked Romans to express his opinion as to the $55 price. Romans stated that he "thought the price was too low in relation to what he could derive for the company in a cash sale, particularly one which enabled us to realize the values of certain subsidiaries and independent entities." Ten directors served on the Trans Union Board, five inside (defendants Bonser, O'Boyle, Browder, Chelberg, and Van Gorkom) and five outside (defendants Wallis, Johnson, Lanterman, Morgan and Reneker). All directors were present at the meeting, except O'Boyle who was ill. Of the outside directors, four were corporate chief executive officers and one was the former Dean of the University of Chicago Business School. None was an investment banker or trained financial analyst. All members of the Board were well informed about the Company and its operations as a going concern. They were familiar with the current financial condition of the Company, as well as operating and earnings projections reported in the recent Five Year Forecast. The Board generally received regular and detailed reports and was kept abreast of the accumulated investment tax credit and accelerated depreciation problem. Van Gorkom began the Special Meeting of the Board with a twenty-minute oral presentation. Copies of the proposed Merger Agreement were delivered too late for study before or during the meeting. [FN7] He reviewed the Company's ITC and depreciation problems and the efforts theretofore made to solve them. He discussed his initial meeting with Pritzker and his motivation in arranging that meeting. Van Gorkom did not disclose to the Board, however, the methodology by which he alone had arrived at the $55 figure, or the fact that he first proposed the $55 price in his negotiations with Pritzker. 366 * * * Van Gorkom outlined the terms of the Pritzker offer as follows: Pritzker would pay $55 in cash for all outstanding shares of Trans Union stock upon completion of which Trans Union would be merged into New T Company, a subsidiary wholly-owned by Pritzker and formed to implement the merger; for a period of 90 days, Trans Union could receive, but could not actively solicit, competing offers; the offer had to be acted on by the next evening, Sunday, September 21; Trans Union could only furnish to competing bidders published information, and not proprietary information; the offer was subject to Pritzker obtaining the necessary financing by October 10, 1980; if the financing contingency were met or waived by Pritzker, Trans Union was required to sell to Pritzker one million newly-issued shares of Trans Union at $38 per share. Van Gorkom took the position that putting Trans Union "up for auction" through a 90- day market test would validate a decision by the Board that $55 was a fair price. He told the Board that the "free market will have an opportunity to judge whether $55 is a fair price." Van Gorkom framed the decision before the Board not as whether $55 per share was the highest price that could be obtained, but as whether the $55 price was a fair price that the stockholders should be given the opportunity to accept or reject. [FN8] FN8. In Van Gorkom's words: The "real decision" is whether to "let the stockholders decide it" which is "all you are being asked to decide today." Attorney Brennan advised the members of the Board that they might be sued if they failed to accept the offer and that a fairness opinion was not required as a matter of law. Romans attended the meeting as chief financial officer of the Company. He told the Board that he had not been involved in the negotiations with Pritzker and knew nothing about the merger proposal until *869 the morning of the meeting; that his studies did not indicate either a fair price for the stock or a valuation of the Company; that he did not see his role as directly addressing the fairness issue; and that he and his people "were trying to search for ways to justify a price in connection with such a [leveraged buy- out] transaction, rather than to say what the shares are worth." Romans testified: I told the Board that the study ran the numbers at 50 and 60, and then the subsequent study at 55 and 65, and that was not the same thing as saying that I have a valuation of the company at X dollars. But it was a way--a first step towards reaching that conclusion. Romans told the Board that, in his opinion, $55 was "in the range of a fair price," but "at the beginning of the range." Chelberg, Trans Union's President, supported Van Gorkom's presentation and representations. He testified that he "participated to make sure that the Board members collectively were clear on the details of the agreement or offer from Pritzker;" that he "participated in the discussion with Mr. Brennan, inquiring of him about the necessity for valuation opinions in spite of the way in which this particular offer was couched;" and that he was otherwise actively involved in supporting the positions being taken by Van Gorkom before the Board about "the necessity to act immediately on this offer," and about "the adequacy of the $55 and the question of how that would be tested."

367 The Board meeting of September 20 lasted about two hours. Based solely upon Van Gorkom's oral presentation, Chelberg's supporting representations, Romans' oral statement, Brennan's legal advice, and their knowledge of the market history of the Company's stock, [FN9] the directors approved the proposed Merger Agreement. However, the Board later claimed to have attached two conditions to its acceptance: (1) that Trans Union reserved the right to accept any better offer that was made during the market test period; and (2) that Trans Union could share its proprietary information with any other potential bidders. While the Board now claims to have reserved the right to accept any better offer received after the announcement of the Pritzker agreement (even though the minutes of the meeting do not reflect this), it is undisputed that the Board did not reserve the right to actively solicit alternate offers. FN9. The Trial Court stated the premium relationship of the $55 price to the market history of the Company's stock as follows: * * * the merger price offered to the stockholders of Trans Union represented a premium of 62% over the average of the high and low prices at which Trans Union stock had traded in 1980, a premium of 48% over the last closing price, and a premium of 39% over the highest price at which the stock of Trans Union had traded any time during the prior six years. The Merger Agreement was executed by Van Gorkom during the evening of September 20 at a formal social event that he hosted for the opening of the Chicago Lyric Opera. Neither he nor any other director read the agreement prior to its signing and delivery to Pritzker. * * * On Monday, September 22, the Company issued a press release announcing that Trans Union had entered into a "definitive" Merger Agreement with an affiliate of the Marmon Group, Inc., a Pritzker holding company. Within 10 days of the public announcement, dissent among Senior Management over the merger had become widespread. Faced with threatened resignations of key officers, Van Gorkom met with Pritzker who agreed to several modifications of the Agreement. Pritzker was willing to do so provided that Van Gorkom could persuade the dissidents to remain on the Company payroll for at least six months after consummation of the merger. Van Gorkom reconvened the Board on October 8 and secured the directors' approval of the proposed amendments--sight unseen. The Board also authorized the employment of Salomon Brothers, its investment *870 banker, to solicit other offers for Trans Union during the proposed "market test" period. The next day, October 9, Trans Union issued a press release announcing: (1) that Pritzker had obtained "the financing commitments necessary to consummate" the merger with Trans Union; (2) that Pritzker had acquired one million shares of Trans Union common stock at $38 per share; (3) that Trans Union was now permitted to actively seek other offers and had retained Salomon Brothers for that purpose; and (4) that if a more favorable offer were not received before February 1, 1981, Trans Union's shareholders would thereafter meet to vote on the Pritzker proposal. It was not until the following day, October 10, that the actual amendments to the Merger Agreement were prepared by Pritzker and delivered to Van Gorkom for execution. As will be

368 seen, the amendments were considerably at variance with Van Gorkom's representations of the amendments to the Board on October 8; and the amendments placed serious constraints on Trans Union's ability to negotiate a better deal and withdraw from the Pritzker agreement. Nevertheless, Van Gorkom proceeded to execute what became the October 10 amendments to the Merger Agreement without conferring further with the Board members and apparently without comprehending the actual implications of the amendments. * * * Salomon Brothers' efforts over a three-month period from October 21 to January 21 produced only one serious suitor for Trans Union--General Electric Credit Corporation ("GE Credit"), a subsidiary of the General Electric Company. However, GE Credit was unwilling to make an offer for Trans Union unless Trans Union first rescinded its Merger Agreement with Pritzker. When Pritzker refused, GE Credit terminated further discussions with Trans Union in early January. In the meantime, in early December, the investment firm of Kohlberg, Kravis, Roberts & Co. ("KKR"), the only other concern to make a firm offer for Trans Union, withdrew its offer under circumstances hereinafter detailed. On December 19, this litigation was commenced and, within four weeks, the plaintiffs had deposed eight of the ten directors of Trans Union, including Van Gorkom, Chelberg and Romans, its Chief Financial Officer. On January 21, Management's Proxy Statement for the February 10 shareholder meeting was mailed to Trans Union's stockholders. On January 26, Trans Union's Board met and, after a lengthy meeting, voted to proceed with the Pritzker merger. The Board also approved for mailing, "on or about January 27," a Supplement to its Proxy Statement. The Supplement purportedly set forth all information relevant to the Pritzker Merger Agreement, which had not been divulged in the first Proxy Statement. * * * On February 10, the stockholders of Trans Union approved the Pritzker merger proposal. Of the outstanding shares, 69.9% were voted in favor of the merger; 7.25% were voted against the merger; and 22.85% were not voted. II. We turn to the issue of the application of the business judgment rule to the September 20 meeting of the Board. The Court of Chancery concluded from the evidence that the Board of Directors' approval of the Pritzker merger proposal fell within the protection of the business judgment rule. The Court found that the Board had given sufficient time and attention to the transaction, since the directors had considered the Pritzker proposal on three different occasions, on September 20, and on October 8, 1980 and finally on January 26, 1981. On that basis, the Court reasoned that the Board had acquired, over the four-month period, sufficient information to reach an informed business judgment *871 on the cash-out merger proposal. The Court ruled: ... that given the market value of Trans Union's stock, the business acumen of the members of the board of Trans Union, the substantial premium over market offered by the Pritzkers and the ultimate effect on the merger price

369 provided by the prospect of other bids for the stock in question, that the board of directors of Trans Union did not act recklessly or improvidently in determining on a course of action which they believed to be in the best interest of the stockholders of Trans Union. The Court of Chancery made but one finding; i.e., that the Board's conduct over the entire period from September 20 through January 26, 1981 was not reckless or improvident, but informed. This ultimate conclusion was premised upon three subordinate findings, one explicit and two implied. The Court's explicit finding was that Trans Union's Board was "free to turn down the Pritzker proposal" not only on September 20 but also on October 8, 1980 and on January 26, 1981. The Court's implied, subordinate findings were: (1) that no legally binding agreement was reached by the parties until January 26; and (2) that if a higher offer were to be forthcoming, the market test would have produced it, [FN10] and Trans Union would have been contractually free to accept such higher offer. However, the Court offered no factual basis or legal * * * Under Delaware law, the business judgment rule is the offspring of the fundamental principle, codified in 8 Del.C. ' 141(a), that the business and affairs of a Delaware corporation are managed by or under its board of directors. [FN11] Pogostin v. Rice, Del.Supr., 480 A.2d 619, 624 (1984); Aronson v. Lewis, Del.Supr., 473 A.2d 805, 811 (1984); Zapata Corp. v. Maldonado, Del.Supr., 430 A.2d 779, 782 (1981). In carrying out their managerial roles, directors are charged with an unyielding fiduciary duty to the corporation and its shareholders. Loft, Inc. v. Guth, Del.Ch., 2 A.2d 225 (1938), aff'd, Del.Supr., 5 A.2d 503 (1939). The business judgment rule exists to protect and promote the full and free exercise of the managerial power granted to Delaware directors. Zapata Corp. v. Maldonado, supra at 782. The rule itself "is a presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company." Aronson, supra at 812. Thus, the party attacking a board decision as uninformed must rebut the presumption that its business judgment was an informed one. Id. FN11. 8 Del.C. ' 141 provides, in pertinent part: (a) The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation. If any such provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the board of directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation. The determination of whether a business judgment is an informed one turns on whether the directors have informed themselves "prior to making a business decision, of all material information reasonably available to them." Id. [FN12] * * * Under the business judgment rule there is no protection for directors who have made "an unintelligent or unadvised judgment." Mitchell v. Highland-Western Glass, Del.Ch., 167 A. 831, 833 (1933). A director's duty to inform himself in preparation for a decision derives from the

370 fiduciary capacity in which he serves the corporation and its stockholders. Lutz v. Boas, Del.Ch., 171 A.2d 381 (1961). See Weinberger v. UOP, Inc., supra; Guth v. Loft, supra. Since a director is vested with the responsibility for the management of the affairs of the corporation, he must execute that duty with the recognition that he acts on behalf of others. Such obligation does not tolerate faithlessness or self-dealing. But fulfillment of the fiduciary function requires more than the mere absence of bad faith or fraud. Representation of the financial interests of others imposes on a director an affirmative duty to protect those interests and to proceed with a critical eye in assessing information of the type and under the circumstances present here. See Lutz v. Boas, supra; Guth v. Loft, supra at 510. Compare Donovan v. Cunningham, 5th Cir., 716 F.2d 1455, 1467 (1983); Doyle v. Union Insurance Company, Neb.Supr., 277 N.W.2d 36 (1979); Continental Securities Co. v. Belmont, N.Y.App., 99 N.E. 138, 141 (1912). Thus, a director's duty to exercise an informed business judgment is in *873 the nature of a duty of care, as distinguished from a duty of loyalty. Here, there were no allegations of fraud, bad faith, or self-dealing, or proof thereof. Hence, it is presumed that the directors reached their business judgment in good faith, Allaun v. Consolidated Oil Co., Del.Ch., 147 A. 257 (1929), and considerations of motive are irrelevant to the issue before us. The standard of care applicable to a director's duty of care has also been recently restated by this Court. In Aronson, supra, we stated: While the Delaware cases use a variety of terms to describe the applicable standard of care, our analysis satisfies us that under the business judgment rule director liability is predicated upon concepts of gross negligence. (footnote omitted) 473 A.2d at 812. We again confirm that view. We think the concept of gross negligence is also the proper standard for determining whether a business judgment reached by a board of directors was an informed one. [FN13] * * * It is against those standards that the conduct of the directors of Trans Union must be tested, as a matter of law and as a matter of fact, regarding their exercise of an informed business judgment in voting to approve the Pritzker merger proposal. III. * * * The issue of whether the directors reached an informed decision to "sell" the Company on September 20, 1980 must be determined only upon the basis of the information then reasonably available to the directors and relevant to their decision to accept the Pritzker merger proposal. This is not to say that the directors were precluded from altering their original plan of action, had they done so in an informed manner. What we do say is that the question of whether the directors reached an informed business judgment in agreeing to sell the Company, pursuant to the terms of the September 20 Agreement presents, in reality, two questions: (A) whether the directors reached an informed business judgment on September 20, 1980; and (B) if they did not, whether the directors' actions taken subsequent to September 20 were adequate to cure any

371 infirmity in their action taken on September 20. We first consider the directors' September 20 action in terms of their reaching an informed business judgment. -A- On the record before us, we must conclude that the Board of Directors did not reach an informed business judgment on September 20, 1980 in voting to "sell" the Company for $55 per share pursuant to the Pritzker cash-out merger proposal. Our reasons, in summary, are as follows: The directors (1) did not adequately inform themselves as to Van Gorkom's role in forcing the "sale" of the Company and in establishing the per share purchase price; (2) were uninformed as to the intrinsic value of the Company; and (3) given these circumstances, at a minimum, were grossly negligent in approving the "sale" of the Company upon two hours' consideration, without prior notice, and without the exigency of a crisis or emergency. As has been noted, the Board based its September 20 decision to approve the cash-out merger primarily on Van Gorkom's representations. None of the directors, other than Van Gorkom and Chelberg, had any prior knowledge that the purpose of the meeting was to propose a cash-out merger of Trans Union. No members of Senior Management were present, other than Chelberg, Romans and Peterson; and the latter two had only learned of the proposed sale an hour earlier. Both general counsel Moore and former general counsel Browder attended the meeting, but were equally uninformed as to the purpose of the meeting and the documents to be acted upon. Without any documents before them concerning the proposed transaction, the members of the Board were required to rely entirely upon Van Gorkom's 20-minute oral presentation of the proposal. No written summary of the terms of the merger was presented; the directors were given no documentation to support the adequacy of $55 price per share for sale of the Company; and the Board had before it nothing more than Van Gorkom's statement of his understanding of the substance of an agreement which he admittedly had never read, nor which any member of the Board had ever seen. Under 8 Del.C. ' 141(e), [FN15] "directors are fully protected in relying in *875 good faith on reports made by officers." Michelson v. Duncan, Del.Ch., 386 A.2d 1144, 1156 (1978); aff'd in part and rev'd in part on other grounds, Del.Supr., 407 A.2d 211 (1979). See also Graham v. Allis-Chalmers Mfg. Co., Del.Supr., 188 A.2d 125, 130 (1963); Prince v. Bensinger, Del.Ch., 244 A.2d 89, 94 (1968). The term "report" has been liberally construed to include reports of informal personal investigations by corporate officers, Cheff v. Mathes, Del.Supr., 199 A.2d 548, 556 (1964). However, there is no evidence that any "report," as defined under ' 141(e), concerning the Pritzker proposal, was presented to the Board on September 20. [FN16] Van Gorkom's oral presentation of his understanding of the terms of the proposed Merger Agreement, which he had not seen, and Romans' brief oral statement of his preliminary study regarding the feasibility of a leveraged buy-out of Trans Union do not qualify as ' 141(e) "reports" for these reasons: The former lacked substance because Van Gorkom was basically uninformed as to the essential provisions of the very document about which he was talking. Romans' statement was irrelevant to the issues before the Board since it did not purport to be a valuation study. At a minimum for a report to enjoy the status conferred by ' 141(e), it must be pertinent to the subject matter upon which a board is called to act, and otherwise be entitled to 372 good faith, not blind, reliance. Considering all of the surrounding circumstances--hastily calling the meeting without prior notice of its subject matter, the proposed sale of the Company without any prior consideration of the issue or necessity therefor, the urgent time constraints imposed by Pritzker, and the total absence of any documentation whatsoever--the directors were duty bound to make reasonable inquiry of Van Gorkom and Romans, and if they had done so, the inadequacy of that upon which they now claim to have relied would have been apparent. FN15. Section 141(e) provides in pertinent part: A member of the board of directors ... shall, in the performance of his duties, be fully protected in relying in good faith upon the books of accounts or reports made to the corporation by any of its officers, or by an independent certified public accountant, or by an appraiser selected with reasonable care by the board of directors ..., or in relying in good faith upon other records of the corporation. * * * The defendants rely on the following factors to sustain the Trial Court's finding that the Board's decision was an informed one: (1) the magnitude of the premium or spread between the $55 Pritzker offering price and Trans Union's current market price of $38 per share; (2) the amendment of the Agreement as submitted on September 20 to permit the Board to accept any better offer during the "market test" period; (3) the collective experience and expertise of the Board's "inside" and "outside" directors; [FN17] and (4) their reliance on Brennan's legal advice that the directors might be sued if they rejected the Pritzker proposal. We discuss each of these grounds seriatim: * * *

(1) A substantial premium may provide one reason to recommend a merger, but in the absence of other sound valuation information, the fact of a premium alone does not provide an adequate basis upon which to assess the fairness of an offering price. * * * The record is clear that before September 20, Van Gorkom and other members of Trans Union's Board knew that the market had consistently undervalued the worth of Trans Union's stock, despite steady increases in the Company's operating income in the seven years preceding the merger. The Board related this occurrence in large part to Trans Union's inability to use its ITCs as previously noted. * * * The parties do not dispute that a publicly-traded stock price is solely a measure of the value of a minority position and, thus, market price represents only the value of a single share. Nevertheless, on September 20, the Board assessed the adequacy of the premium over market,

373 offered by Pritzker, solely by comparing it with Trans Union's current and historical stock price. (See supra note 5 at 866.) Indeed, as of September 20, the Board had no other information on which to base a determination of the intrinsic value of Trans Union as a going concern. As of September 20, the Board had made no evaluation of the Company designed to value the entire enterprise, nor had the Board ever previously considered selling the Company or consenting to a buy-out merger. * * * The record also establishes that the Board accepted without scrutiny Van Gorkom's representation as to the fairness of the $55 price per share for sale of the Company--a subject that the Board had never previously considered. The Board thereby failed to discover that Van Gorkom had suggested the $55 price to Pritzker and, most crucially, that Van Gorkom had arrived at the $55 figure based on calculations designed solely to determine the feasibility of a leveraged buy-out. [FN19] No questions were raised either as to the tax implications of a cash- out merger or how the price for the one million share option granted Pritzker was calculated. * * * We do not say that the Board of Directors was not entitled to give some credence to Van Gorkom's representation that $55 was an adequate or fair price. Under ' 141(e), the directors were entitled to rely upon their chairman's opinion of value and adequacy, provided that such opinion was reached on a sound basis. Here, the issue is whether the directors informed themselves as to all information that was reasonably available to them. Had they done so, they would have learned of the source and derivation of the $55 price and could not reasonably have relied thereupon in good faith. None of the directors, Management or outside, were investment bankers or financial analysts. Yet the Board did not consider recessing the meeting until a later hour that day (or requesting an extension of Pritzker's Sunday evening deadline) to give it time to elicit more information as to the sufficiency of the offer, either from *878 inside Management (in particular Romans) or from Trans Union's own investment banker, Salomon Brothers, whose Chicago specialist in merger and acquisitions was known to the Board and familiar with Trans Union's affairs. Thus, the record compels the conclusion that on September 20 the Board lacked valuation information adequate to reach an informed business judgment as to the fairness of $55 per share for sale of the Company. [FN20] * * * (2) This brings us to the post-September 20 "market test" upon which the defendants ultimately rely to confirm the reasonableness of their September 20 decision to accept the Pritzker proposal. In this connection, the directors present a two-part argument: (a) that by making a "market test" of Pritzker's $55 per share offer a condition of their September 20 decision to accept his offer, they cannot be found to have acted impulsively or in an uninformed manner on September 20; and (b) that the adequacy of the $17 premium for sale of the Company was conclusively established over the following 90 to 120 days by the most reliable evidence

374 available--the marketplace. Thus, the defendants impliedly contend that the "market test" eliminated the need for the Board to perform any other form of fairness test either on September 20, or thereafter. Again, the facts of record do not support the defendants' argument. There is no evidence: (a) that the Merger Agreement was effectively amended to give the Board freedom to put Trans Union up for auction sale to the highest bidder; or (b) that a public auction was in fact permitted to occur. * * * Van Gorkom states that the Agreement as submitted incorporated the ingredients for a market test by authorizing Trans Union to receive competing offers over the next 90-day period. However, he concedes that the Agreement barred Trans Union from actively soliciting such offers and from furnishing to interested parties any information about the Company other than that already in the public domain. * * * The only clause in the Agreement as finally executed to which the defendants can point as "keeping the door open" is the following underlined statement found in subparagraph (a) of section 2.03 of the Merger Agreement as executed: The Board of Directors shall recommend to the stockholders of Trans Union that they approve and adopt the Merger Agreement ('the stockholders' approval') and to use its best efforts to obtain the requisite votes therefor. GL acknowledges that Trans Union directors may have a competing fiduciary obligation to the shareholders under certain circumstances. Clearly, this language on its face cannot be construed as incorporating either of the two "conditions" described above: either the right to accept a better offer or the right to distribute proprietary information to third parties. * * * (3) The directors' unfounded reliance on both the premium and the market test as the basis for accepting the Pritzker proposal undermines the defendants' remaining contention that the Board's collective experience and sophistication was a sufficient basis for finding that it reached its September 20 decision with informed, reasonable deliberation. * * * (4) Part of the defense is based on a claim that the directors relied on legal advice rendered at the September 20 meeting by James Brennan, Esquire, who was present at Van Gorkom's request. Unfortunately, Brennan did not appear and testify at trial even though his firm participated in the defense of this action. There is no contemporaneous evidence of the advice given by Brennan on September 20, only the later deposition and trial testimony of certain directors as to their recollections or understanding of what was said at the meeting. Since counsel did not testify, and the advice attributed to Brennan is hearsay received by the Trial 375 Court over the plaintiffs' objections, we consider it only in the context of the directors' present claims. In fairness to counsel, we make no findings that the advice attributed to him was in fact given. We focus solely on the efficacy of the *881 defendants' claims, made months and years later, in an effort to extricate themselves from liability. Several defendants testified that Brennan advised them that Delaware law did not require a fairness opinion or an outside valuation of the Company before the Board could act on the Pritzker proposal. If given, the advice was correct. However, that did not end the matter. Unless the directors had before them adequate information regarding the intrinsic value of the Company, upon which a proper exercise of business judgment could be made, mere advice of this type is meaningless; and, given this record of the defendants' failures, it constitutes no defense here. [FN22] FN22. Nonetheless, we are satisfied that in an appropriate factual context a proper exercise of business judgment may include, as one of its aspects, reasonable reliance upon the advice of counsel. This is wholly outside the statutory protections of 8 Del.C. ' 141(e) involving reliance upon reports of officers, certain experts and books and records of the company. * * * We conclude that Trans Union's Board was grossly negligent in that it failed to act with informed reasonable deliberation in agreeing to the Pritzker merger proposal on September 20; and we further conclude that the Trial Court erred as a matter of law in failing to address that question before determining whether the directors' later conduct was sufficient to cure its initial error. A second claim is that counsel advised the Board it would be subject to lawsuits if it rejected the $55 per share offer. It is, of course, a fact of corporate life that today when faced with difficult or sensitive issues, directors often are subject to suit, irrespective of the decisions they make. However, counsel's mere acknowledgement of this circumstance cannot be rationally translated into a justification for a board permitting itself to be stampeded into a patently unadvised act. While suit might result from the rejection of a merger or tender offer, Delaware law makes clear that a board acting within the ambit of the business judgment rule faces no ultimate liability. Pogostin v. Rice, supra. Thus, we cannot conclude that the mere threat of litigation, acknowledged by counsel, constitutes either legal advice or any valid basis upon which to pursue an uninformed course.

* * * -B- We now examine the Board's post-September 20 conduct for the purpose of determining first, whether it was informed and not grossly negligent; and second, if informed, whether it was sufficient to legally rectify and cure the Board's derelictions of September 20. [FN23] FN23. As will be seen, we do not reach the second question. (1)

376 First, as to the Board meeting of October 8: Its purpose * * * was to amend the Merger Agreement, in a manner agreeable to Pritzker, to permit Trans Union to conduct a "market test." [FN24] Van Gorkom understood that the proposed amendments were intended to give the Company an unfettered "right to openly solicit offers down through January 31." Van Gorkom presumably so represented the amendments to Trans Union's Board members on October 8. In a brief session, the directors approved Van Gorkom's oral presentation of the substance of the proposed amendments, *883 the terms of which were not reduced to writing until October 10. But rather than waiting to review the amendments, the Board again approved them sight unseen and adjourned, giving Van Gorkom authority to execute the papers when he received them. [FN25] FN24. As previously noted, the Board mistakenly thought that it had amended the September 20 draft agreement to include a market test. * * * FN25. We do not suggest that a board must read in haec verba every contract or legal document which it approves, but if it is to successfully absolve itself from charges of the type made here, there must be some credible contemporary evidence demonstrating that the directors knew what they were doing, and ensured that their purported action was given effect. That is the consistent failure which cast this Board upon its unredeemable course. * * * The next day, October 9, and before the Agreement was amended, Pritzker moved swiftly to off-set the proposed market test amendment. First, Pritzker informed Trans Union that he had completed arrangements for financing its acquisition and that the parties were thereby mutually bound to a firm purchase and sale arrangement. Second, Pritzker announced the exercise of his option to purchase one million shares of Trans Union's treasury stock at $38 per share-- 75 cents above the current market price. Trans Union's Management responded the same day by issuing a press release announcing: (1) that all financing arrangements for Pritzker's acquisition of Trans Union had been completed; and (2) Pritzker's purchase of one million shares of Trans Union's treasury stock at $38 per share. The next day, October 10, Pritzker delivered to Trans Union the proposed amendments to the September 20 Merger Agreement. Van Gorkom promptly proceeded to countersign all the instruments on behalf of Trans Union without reviewing the instruments to determine if they were consistent with the authority previously granted him by the Board. * * *

The October 10 amendments to the Merger Agreement did authorize Trans Union to solicit competing offers, but the amendments had more far-reaching effects. The most significant change was in the definition of the third-party "offer" available to Trans Union as a possible basis for withdrawal from its Merger Agreement with Pritzker. Under the October 10 amendments, a better offer was no longer sufficient to permit Trans Union's withdrawal. Trans Union was now permitted to terminate the Pritzker Agreement and abandon the merger only if, prior to February 10, 1981, Trans Union had either consummated a merger (or sale of assets) 377 with a third party or had entered into a "definitive" merger agreement more favorable than Pritzker's and for a greater consideration-- subject only to stockholder approval. Further, the "extension" of the market test period to February 10, 1981 was circumscribed by other amendments which required Trans Union to file its preliminary proxy statement on the Pritzker merger proposal by December 5, 1980 and use its best efforts to mail the statement to its shareholders by January 5, 1981. Thus, the market test period was effectively reduced, not extended. (See infra note 29 at 886.) In our view, the record compels the conclusion that the directors' conduct on October *884 8 exhibited the same deficiencies as did their conduct on September 20. The Board permitted its Merger Agreement with Pritzker to be amended in a manner it had neither authorized nor intended. * * * We conclude that the Board acted in a grossly negligent manner on October 8; and that Van Gorkom's representations on which the Board based its actions do not constitute "reports" under ' 141(e) on which the directors could reasonably have relied. Further, the amended Merger Agreement imposed on Trans Union's acceptance of a third party offer conditions more onerous than those imposed on Trans Union's acceptance of Pritzker's offer on September 20. After October 10, Trans Union could accept from a third party a better offer only if it were incorporated in a definitive agreement between the parties, and not conditioned on financing or on any other contingency. The October 9 press release, coupled with the October 10 amendments, had the clear effect of locking Trans Union's Board into the Pritzker Agreement. Pritzker had thereby foreclosed Trans Union's Board from negotiating any better "definitive" agreement over the remaining eight weeks before Trans Union was required to clear the Proxy Statement submitting the Pritzker proposal to its shareholders. (2) Next, as to the "curative" effects of the Board's post-September 20 conduct, we review in more detail the reaction of Van Gorkom to the KKR proposal and the results of the Board- sponsored "market test." The KKR proposal was the first and only offer received subsequent to the Pritzker Merger Agreement. The offer resulted primarily from the efforts of Romans and other senior officers to propose an alternative to Pritzker's acquisition of Trans Union. In late September, Romans' group contacted KKR about the possibility of a leveraged buy-out by all members of Management, except Van Gorkom. By early October, Henry R. Kravis of KKR gave Romans written notice of KKR's "interest in making an offer to purchase 100%" of Trans Union's common stock. Thereafter, and until early December, Romans' group worked with KKR to develop a proposal. It did so with Van Gorkom's knowledge and apparently grudging consent. On December 2, Kravis and Romans hand-delivered to Van Gorkom a formal letter-offer to purchase all of Trans Union's assets and to assume all of its liabilities for an aggregate cash consideration equivalent to $60 per share. The offer was contingent upon completing equity and bank financing of $650 million, which Kravis represented as 80% complete. The KKR letter 378 made reference to discussions with major banks regarding the loan portion of the buy-out cost and stated that KKR was "confident that commitments for the bank financing * * * can be obtained within two or three weeks." The purchasing group was to include certain named key members of Trans Union's Senior Management, excluding Van Gorkom, and a major Canadian company. Kravis stated that they were willing to enter into a "definitive agreement" under terms and conditions "substantially the same" as those contained in Trans Union's agreement with Pritzker. The offer was addressed to Trans Union's Board of Directors and a meeting with the Board, scheduled for that afternoon, was requested. Van Gorkom's reaction to the KKR proposal was completely negative; he did not view the offer as being firm because of its *885 financing condition. It was pointed out, to no avail, that Pritzker's offer had not only been similarly conditioned, but accepted on an expedited basis. Van Gorkom refused Kravis' request that Trans Union issue a press release announcing KKR's offer, on the ground that it might "chill" any other offer. [FN27] Romans and Kravis left with the understanding that their proposal would be presented to Trans Union's Board that afternoon. FN27. This was inconsistent with Van Gorkom's espousal of the September 22 press release following Trans Union's acceptance of Pritzker's proposal. Van Gorkom had then justified a press release as encouraging rather than chilling later offers. Within a matter of hours and shortly before the scheduled Board meeting, Kravis withdrew his letter-offer. He gave as his reason a sudden decision by the Chief Officer of Trans Union's rail car leasing operation to withdraw from the KKR purchasing group. Van Gorkom had spoken to that officer about his participation in the KKR proposal immediately after his meeting with Romans and Kravis. However, Van Gorkom denied any responsibility for the officer's change of mind. At the Board meeting later that afternoon, Van Gorkom did not inform the directors of the KKR proposal because he considered it "dead." Van Gorkom did not contact KKR again until January 20, when faced with the realities of this lawsuit, he then attempted to reopen negotiations. KKR declined due to the imminence of the February 10 stockholder meeting. GE Credit Corporation's interest in Trans Union did not develop until November; and it made no written proposal until mid-January. Even then, its proposal was not in the form of an offer. Had there been time to do so, GE Credit was prepared to offer between $2 and $5 per share above the $55 per share price which Pritzker offered. But GE Credit needed an additional 60 to 90 days; and it was unwilling to make a formal offer without a concession from Pritzker extending the February 10 "deadline" for Trans Union's stockholder meeting. As previously stated, Pritzker refused to grant such extension; and on January 21, GE Credit terminated further negotiations with Trans Union. Its stated reasons, among others, were its "unwillingness to become involved in a bidding contest with Pritzker in the absence of the willingness of [the Pritzker interests] to terminate the proposed $55 cash merger." * * * . Our review of the record compels a finding that confirmation of the appropriateness of the Pritzker offer by an unfettered or free market test was virtually meaningless in the face of the terms and time limitations of Trans Union's Merger Agreement with Pritzker as amended October 10, 1980.

379 (3) Finally, we turn to the Board's meeting of January 26, 1981. The defendant directors rely upon the action there taken to refute the contention that they did not reach an informed business judgment in approving the Pritzker merger. * * * The defendants argue that whatever information the Board lacked to make a deliberate and informed judgment on September 20, or on October 8, was fully divulged to the entire Board on January 26. Hence, the argument goes, the Board's vote on January 26 to again "approve" the Pritzker merger must be found to have been an informed and deliberate judgment. * * * Johnson's testimony and the Board Minutes of January 26 are remarkably consistent. Both clearly indicate recognition that the question of the alternative courses of action, available to the Board on January 26 with respect to the Pritzker merger, was a legal question, presenting to the Board (after its review of the full record developed through pre-trial discovery) three options: (1) to "continue to recommend" the Pritzker merger; (2) to "recommend that *888 the stockholders vote against" the Pritzker merger; or (3) to take a noncommittal position on the merger and "simply leave the decision to [the] shareholders." We must conclude from the foregoing that the Board was mistaken as a matter of law regarding its available courses of action on January 26, 1981. Options (2) and (3) were not viable or legally available to the Board under 8 Del.C. ' 251(b). The Board could not remain committed to the Pritzker merger and yet recommend that its stockholders vote it down; nor could it take a neutral position and delegate to the stockholders the unadvised decision as to whether to accept or reject the merger. Under ' 251(b), the Board had but two options: (1) to proceed with the merger and the stockholder meeting, with the Board's recommendation of approval; or (2) to rescind its agreement with Pritzker, withdraw its approval of the merger, and notify its stockholders that the proposed shareholder meeting was cancelled. There is no evidence that the Board gave any consideration to these, its only legally viable alternative courses of action. But the second course of action would have clearly involved a substantial risk--that the Board would be faced with suit by Pritzker for breach of contract based on its September 20 agreement as amended October 10. As previously noted, under the terms of the October 10 amendment, the Board's only ground for release from its agreement with Pritzker was its entry into a more favorable definitive agreement to sell the Company to a third party. Thus, in reality, the Board was not "free to turn down the Pritzker proposal" as the Trial Court found. Indeed, short of negotiating a better agreement with a third party, the Board's only basis for release from the Pritzker Agreement without liability would have been to establish fundamental wrongdoing by Pritzker. Clearly, the Board was not "free" to withdraw from its agreement with Pritzker on January 26 by simply relying on its self-induced failure to have reached an informed business judgment at the time of its original agreement. * * * Upon the basis of the foregoing, we hold that the defendants' post-September conduct did not cure the deficiencies of their September 20 conduct; and that, accordingly, the Trial Court erred in according to the defendants the benefits of the business judgment rule. 380 * * * V. The defendants ultimately rely on the stockholder vote of February 10 for exoneration. The defendants contend that the stockholders' "overwhelming" vote approving the Pritzker Merger Agreement had the legal effect of curing any failure of the Board to reach an informed business judgment in its approval of the merger. The parties tacitly agree that a discovered failure of the Board to reach an informed business judgment in approving the merger constitutes a voidable, rather than a void, act. Hence, the merger can be sustained, notwithstanding the infirmity of the Board's action, if its approval by majority vote of the shareholders is found to have been based on an informed electorate. * * * The settled rule in Delaware is that "where a majority of fully informed stockholders ratify action of even interested directors, an attack on the ratified transaction normally must fail." Gerlach v. Gillam, Del.Ch., 139 A.2d 591, 593 (1958). The question of whether shareholders have been fully informed such that their vote can be said to ratify director action, "turns on the fairness and completeness of the proxy materials submitted by the management to the ... shareholders." Michelson v. Duncan, supra at 220. As this Court stated in Gottlieb v. Heyden Chemical Corp., Del.Supr., 91 A.2d 57, 59 (1952): [T]he entire atmosphere is freshened and a new set of rules invoked where a formal approval has been given by a majority of independent, fully informed stockholders.... * * * Applying this standard to the record before us, we find that Trans Union's stockholders were not fully informed of all facts material to their vote on the Pritzker Merger and that the Trial Court's ruling to the contrary is clearly erroneous. We list the material deficiencies in the proxy materials: (1) The fact that the Board had no reasonably adequate information indicative of the intrinsic value of the Company, other than a concededly depressed market price, was without question material to the shareholders voting on the merger. * * * Accordingly, the Board's lack of valuation information should have been disclosed. * * * (2) We find false and misleading the Board's characterization of the Romans report in the Supplemental Proxy Statement. The Supplemental Proxy stated: At the September 20, 1980 meeting of the Board of Directors of Trans Union, Mr. Romans indicated that while he could not say that $55,00 per share was an unfair price, he had prepared a preliminary report which reflected that the value of the Company was in the range of $55.00 to $65.00 per share.

381 Nowhere does the Board disclose that Romans stated to the Board that his calculations were made in a "search for ways to justify a price in connection with" a leveraged buy-out transaction, "rather than to say what the shares are worth," and that he stated to the Board that his conclusion thus arrived at "was not the same thing as saying that I have a valuation of the Company at X dollars." Such information would have been material to a reasonable shareholder because it tended to invalidate the fairness of the merger price of $55. Furthermore, defendants again failed to disclose the absence of valuation information, but still made repeated reference to the "substantial premium." (3) We find misleading the Board's references to the "substantial" premium offered. The Board gave as their primary reason in support of the merger the "substantial premium" shareholders would receive. But the Board did not disclose its failure to assess the premium offered in terms of other relevant valuation techniques, thereby rendering questionable its determination as to the substantiality of the premium over an admittedly depressed stock market price. (4) We find the Board's recital in the Supplemental Proxy of certain events preceding the September 20 meeting to be incomplete and misleading. It is beyond dispute that a reasonable stockholder would have considered material the fact that Van Gorkom not only suggested the $55 price to Pritzker, but also that he chose the figure because it made feasible a leveraged buy- out. The directors disclosed that Van Gorkom suggested the $55 price to Pritzker. But the Board misled the shareholders when they described the basis of Van Gorkom's suggestion as follows: Such suggestion was based, at least in part, on Mr. Van Gorkom's belief that loans could be obtained from institutional lenders (together with about a $200 million *892 equity contribution) which would justify the payment of such price, ... * * * (5) The Board's Supplemental Proxy Statement, mailed on or after January 27, added significant new matter, material to the proposal to be voted on February 10, which was not contained in the Original Proxy Statement. * * * For the foregoing reasons, we conclude that the director defendants breached their fiduciary duty of candor by their failure to make true and correct disclosures of all information they had, or should have had, material to the transaction submitted for stockholder approval. VI. To summarize: we hold that the directors of Trans Union breached their fiduciary duty to their stockholders (1) by their failure to inform themselves of all information reasonably available to them and relevant to their decision to recommend the Pritzker merger; and (2) by their failure to disclose all material information such as a reasonable stockholder would consider important in deciding whether to approve the Pritzker offer. * * * REVERSED and REMANDED for proceedings consistent herewith. 382 McNEILLY, Justice, dissenting: The majority opinion reads like an advocate's closing address to a hostile jury. And I say that not lightly. Throughout the *894 opinion great emphasis is directed only to the negative, with nothing more than lip service granted the positive aspects of this case. * * * The majority has spoken and has effectively said that Trans Union's Directors have been the victims of a "fast shuffle" by Van Gorkom and Pritzker. That is the beginning of the majority's comedy of errors. The first and most important error made is the majority's assessment of the directors' knowledge of the affairs of Trans Union and their combined ability to act in this situation under the protection of the business judgment rule. Trans Union's Board of Directors consisted of ten men, five of whom were "inside" directors and five of whom were "outside" directors. The "inside" directors were Van Gorkom, Chelberg, Bonser, William B. Browder, Senior Vice- President-Law, and Thomas P. O'Boyle, Senior Vice-President-Administration. At the time the merger was proposed the inside five directors had collectively been employed by the Company for 116 years and had 68 years of combined experience as directors. The "outside" directors were A.W. Wallis, William B. Johnson, Joseph B. Lanterman, Graham J. Morgan and Robert W. Reneker. With the exception of Wallis, these were all chief executive officers of Chicago based corporations that were at least as large as Trans Union. The five "outside" directors had 78 years of combined experience as chief executive officers, and 53 years cumulative service as Trans Union directors. The inside directors wear their badge of expertise in the corporate affairs of Trans Union on their sleeves. But what about the outsiders? Dr. Wallis is or was an economist and math statistician, a professor of economics at Yale University, dean of the graduate school of business at the University of Chicago, and Chancellor of the University of Rochester. Dr. Wallis had been on the Board of Trans Union since 1962. He also was on the Board of Bausch & Lomb, Kodak, Metropolitan Life Insurance Company, Standard Oil and others. William B. Johnson is a University of Pennsylvania law graduate, President of Railway Express until 1966, Chairman and Chief Executive of I.C. Industries Holding Company, and member of Trans Union's Board since 1968. Joseph Lanterman, a Certified Public Accountant, is or was President and Chief Executive of American Steel, on the Board of International Harvester, Peoples Energy, Illinois Bell Telephone, Harris Bank and Trust Company, Kemper Insurance Company and a director of Trans Union for four years. Graham Morgan is achemist, was Chairman and Chief Executive Officer of U.S. Gypsum, and in the 17 and 18 years prior to the Trans Union transaction had been involved in 31 or 32 corporate takeovers. Robert Reneker attended University of Chicago and Harvard Business Schools. He was President and Chief Executive of Swift and Company, director of Trans Union since 1971, and member of the Boards of seven other corporations including U.S. Gypsum and the Chicago Tribune.

383 Directors of this caliber are not ordinarily taken in by a "fast shuffle". I submit they were not taken into this multi-million dollar corporate transaction without being fully informed and aware of the state of the art as it pertained to the entire corporate panoroma of Trans Union. True, even *895 directors such as these, with their business acumen, interest and expertise, can go astray. I do not believe that to be the case here. These men knew Trans Union like the back of their hands and were more than well qualified to make on the spot informed business judgments concerning the affairs of Trans Union including a 100% sale of the corporation. Lest we forget, the corporate world of then and now operates on what is so aptly referred to as "the fast track". These men were at the time an integral part of that world, all professional business men, not intellectual figureheads. The majority of this Court holds that the Board's decision, reached on September 20, 1980, to approve the merger was not the product of an informed business judgment, that the Board's subsequent efforts to amend the Merger Agreement and take other curative action were legally and factually ineffectual, and that the Board did not deal with complete candor with the stockholders by failing to disclose all material facts, which they knew or should have known, before securing the stockholders' approval of the merger. I disagree. * * * While the language is not artfully drawn, the evidence is clear that the intention underlying that language was to make specific the right that the directors assumed they had, that is, to accept any offer that they thought was better, and not to recommend the Pritzker offer in the face of a better one. At the conclusion of the meeting, the proposed merger was approved. * * * Following the October 8 board meeting of Trans Union, the investment banking firm of Salomon Brothers was retained by the corporation to search for better offers than that of the Pritzkers, Salomon Brothers being charged with the responsibility of doing "whatever possible to see if there is a superior bid in the marketplace over a bid that is on the table for Trans Union". In undertaking such project, it was agreed that Salomon Brothers would be paid the amount of $500,000 to cover its expenses as well as a fee equal to 3/8 ths of 1% of the aggregate fair market value of the consideration to be received by the company in the case of a merger or the like, which meant that in the event Salomon Brothers should find a buyer willing to pay a price of $56.00 a share instead of $55.00, such firm would receive a fee of roughly $2,650,000 plus disbursements. As the first step in proceeding to carry out its commitment, Salomon Brothers had a brochure prepared, which set forth Trans Union's financial history, described the company's business in detail and set forth Trans Union's operating and financial projections. Salomon Brothers also prepared a list of over 150 companies which it believed might be suitable merger partners, and while four of such companies, namely, General Electric, Borg-Warner, Bendix, and Genstar, Ltd. showed some interest in such a merger, none made a firm proposal to Trans Union and only General Electric showed a sustained interest. [FN1] As matters transpired, no firm offer which bettered the Pritzker offer of $55 per share was ever made. * * *

384 On January 21, 1981 a proxy statement was sent to the shareholders of Trans Union advising them of a February 10, 1981 meeting in which the merger would be voted. On January 26, 1981 the directors held their regular meeting. At this meeting the Board discussed the instant merger as well as all events, including this litigation, surrounding it. At the conclusion of the meeting the Board unanimously voted to recommend to the stockholders that they approve the merger. Additionally, the directors reviewed and approved a Supplemental Proxy Statement which, among other things, advised the stockholders of what had occurred at the instant meeting and of the fact that General Electric had decided not to make an offer. On February 10, 1981 *897 the stockholders of Trans Union met pursuant to notice and voted overwhelmingly in favor of the Pritzker merger, 89% of the votes cast being in favor of it. I have no quarrel with the majority's analysis of the business judgment rule. It is the application of that rule to these facts which is wrong. An overview of the entire record, rather than the limited view of bits and pieces which the majority has exploded like popcorn, convinces me that the directors made an informed business judgment which was buttressed by their test of the market. * * * The majority finds that Trans Union stockholders were not fully informed and that the directors breached their fiduciary duty of complete candor to the stockholders required by Lynch v. Vickers Energy Corp., Del.Supr. 383 A.2d 278 (1978) [Lynch I], in that the proxy materials were deficient in five areas. Here again is exploitation of the negative by the majority without giving credit to the positive. To respond to the conclusions of the majority would merely be unnecessary prolonged argument. But briefly what did the proxy materials disclose? The proxy material informed the shareholders that projections were furnished to potential purchasers and such projections indicated that Trans Union's net income might increase to approximately $153 million in 1985. That projection, what is almost three times the net income of $58,248,000 reported by Trans Union as its net income for December 31, 1979 confirmed the statement in the proxy materials that the "Board of Directors believes that, assuming reasonably favorable economic and financial conditions, the Company's prospects for future earnings growth are excellent." This material was certainly sufficient to place the Company's stockholders on notice that there was a reasonable basis to believe that the prospects for future earnings growth were excellent, and that the value of their stock was more than the stock market value of their shares reflected. * * *

Stroh v. Blackhawk Holding Corp.

Donald L. STROH et al., Appellants, v. 385 BLACKHAWK HOLDING CORPORATION et al., Appellees. No. 42902. Supreme Court of Illinois. May 21, 1971. DAVIS, Justice. * * * The only issue before this court is the validity of the 500,000 shares of Class B stock, which by the articles of incorporation of Blackhawk were limited in their rights by the provision 'none of the shares of Class B stock shall be entitled to dividends either upon voluntary or involuntary liquidation or otherwise.' It is the plaintiffs' contention that because of the foregoing limitation--depriving the Class B shares of the 'economic' incidents of shares of stock, or of the proportionate interest in the corporate assets--the Class B shares do not in fact constitute shares of stock. Blackhawk Holding Corporation was organized under the Illinois Business Corporation Act in November of 1963. Its articles of incorporation authorized the issuance of 3,000,000 shares of Class A stock with a par value of $1, and 500,000 shares of Class B stock without par value. In addition to the limitation placed on the Class B stock, set forth above, the articles also provided that neither the Class A nor Class B shares would carry preemptive rights. Pursuant to the preorganization subscription agreements, 21 promoters purchased 87,868 shares of the Class A stock at the price of $3.40 per share ($298,751.20), and the 500,000 shares of Class B stock at 1/4 cents per share ($1,250). *474 Thereafter, the corporation registered the Class A shares with the securities division of the office of the Secretary of State of Illinois for the sale of 500,000 shares thereof to the general public at a price of $4 per share. The prospectus for the registration described the Class A and Class B stock, and quoted from the articles of incorporation relative to their respective rights and preferences. The prospectus explained that every share of each class of stock would be entitled to one vote on all general matters submitted to a vote of the shareholders and, that in the election of directors, the votes could be cumulated. The prospectus also explained that no Class B stock was being offered for sale in that all of such stock has been previously issued. Under the heading 'Organization and Development,' the prospectus also stated: 'Subscriptions for a total of $300,001.20 were sold to twenty-one persons, representing 87,868 class A shares, the class now being offered, at the price of $3.40 per share ($298,751.20) and 500,000 class B shares, at a price of one-fourth of a cent per share ($1,250.00); thus said subscribers by virtue of a $300,001.20 investment, have control of the corporation having an initial capitalization of $2,000,000.00 after this offering.' In August of 1964, there was a 2 for 1 split of the Class A stock, increasing the shares outstanding from 587,863 to 1,175.736 shares. The corporation sold additional Class A stock to the public in 1965 for $4 a share. As of June 1968, there were 1,237,681 Class A shares and 500,000 Class B shares outstanding, the latter representing 28.78% Of the total voting shares of the company. A corporation is a creature of statute. (Craig v. Sullivan Machinery Co., 344 Ill. 334, 336, 176 N.E. 353.) It is a legal entity which owes its existence to the fiat of law. Its being and

386 powers are from the sovereign State as its will is expressed through legislative enactment. (Chicago **3 Title and Trust Co. v. Central Republic Trust Co., 299 Ill.App. 483, 492, 20 N.E.2d 351.) The articles of incorporation of an Illinois corporation constitute *475 a contract, threefold in nature. It is a contract between the corporation and the State and it creates powers and limitations, rights and duties as between the corporation and its shareholders, as well as between the shareholders themselves. The powers and limitations of a corporation are found in its articles of incorporation, the provisions of its stock certificates, its bylaws, and in the constitutional and statutory provisions in force when the articles of incorporation were adopted. (Bowman v. Armour and Co., 17 Ill.2d 43, 47, 160 N.E.2d 753; Western Foundry Co. v. Wicker, 403 Ill. 260, 267, 268, 85 N.E.2d 722; Kreicker v. Naylor Pipe Co., 374 Ill. 364, 371, 29 N.E.2d 502.) The articles of incorporation of Blackhawk purport to create a Class B stock that possesses no rights in the assets or in the earnings of the corporation. Whether this can be done, and whether such shares have the requisite attributes of a valid share of stock, must be determined in accordance with the constitution of the State, the provision of the Business Corporation Act, and the common law of the State. Under the Illinois constitution of 1870, a stockholder in an Illinois corporation is guaranteed the right to vote based upon the number of shares owned by him. (Ill.Const. art. XI, sec. 3, S.H.A.) Section 14 of the Business Corporation Act (Ill.Rev.Stat.1969, ch. 32, par. 157.14) provides that shares of stock in an Illinois corporation may be divided into classes, 'with such designations, preferences, qualifications, limitations, restrictions and such special or relative rights as shall be stated in the articles of incorporation. The articles of incorporation shall not limit or deny the voting power of the shares of any class. Without limiting the authority herein contained, a corporation when so provided in its articles of incorporation, may issue shares of preferred or special classes: *476 (c) Having preference over any other class or classes of shares as to the payment of dividends. (d) Having preference as to the assets of the corporation over any other class or classes of shares upon the voluntary or involuntary liquidation of the corporation.' Section 41 of the Act, relating to the power of the board of directors to declare dividends, provides that no dividends may be declared or paid contrary to any restrictions in the articles of incorporation. Ill.Rev.Stat.1969, ch. 32, par. 157.41(h). Section 2.6 of the Act, in defining 'shares' states, "Shares' means the units into which the proprietary interests in a corporation are divided.' (Ill.Rev.Stat.1969, ch. 32, par. 157.2--6.) This was formerly section 2(f) of the Act (Ill.Rev.Stat.1955, ch. 32, par. 157.2(f)) which defined shares as 'units into which shareholders' rights to participate in the control of a corporation, in its surplus or profits, or in the distribution of its assets, are divided.' Committee Comment, relative to the change in definition by the 1957 amendment, is that it was made to enact the definition of the Model Business Corporation Act, 'but there was no change in legal effect.' 1 Ill.Bus.Corp.Act Anno., 2d ed., 1966 proc.supp. p. 5, s 2.6 comment.

387 To the plaintiffs, 'proprietary,' as used in the definition of shares, means a property right, and shares must then represent some economic interest, or interest in the property or assets of the corporation. However, the word 'proprietary' does not necessarily denote economic or asset rights, although it has been defined as synonymous with ownership or to denote legal title * * * We agree with the defendants' construction. We interpret this statutory definition to mean that the proprietary rights conferred by the ownership of stock may consist of one or more of the rights to participate 'in the control of the corporation, in its surplus or profits, or in the distribution of its assets.' The use of the disjunctive conjunction 'or,' indicates that one or more of the three named rights may inure to a stockholder by virtue of his stock ownership. * * * We must here decide the extent to which economic attributes of shares of stock may be eliminated. This must be determined from the intent of the legislature which, in no small part, can be gathered from the language and words it chose to express that intent. The statutory definition of 'shares' is of particular importance in that it governs the meaning of the word as used throughout the Business Corporation Act and controls in its construction. The legislature has the power to make any reasonable definition of the terms in a statute and such definition for the purposes of the Act, will be sustained. Modern Dairy Co. v. Department of Revenue, 413 Ill. 55, 66, 108 N.E.2d 8. Section 14 of the Act clearly expresses the intent of the legislature to be that parties to a corporate entity may create whatever restrictions and limitations they may want with regard to their corporate stock by expressing such restrictions and limitations in the articles of incorporation. These rights and powers granted by the legislature to the corporation to make the **5 terms of its contract with its shareholders are limited only by the proviso that the articles may not limit or deny the voting power of any share. This section of the Act expressly confers the right to prefer a class of shares over another with regard to dividends and assets. Section 2.6 defines shares as 'The units into which the proprietary interests in a corporation are divided.' *479 In seeking the intent of the legislature, a statute should be construed as a whole and its separate parts considered together. Our present constitution requires only that a shareholder not be deprived of his voice in management. It does not require that a shareholder, in addition to the management aspect of ownership, must also have an economic interest. Thus, section 14, like the constitution, limits the power of a corporation only as to the voting aspect of ownership. It confers upon the corporation the 'power to create and issue the number of shares stated in its article of incorporation'; it expressly permits the shares to be subject to 'such designations, preferences, qualifications, limitations, restrictions, and such special or relative rights as shall be stated in the articles of incorporation'; it also suggests that 'Without limiting the authority herein contained, a corporation, when so provided in its articles of incorporation, may issue shares of preferred or special classes,' which classes are delineated therein. Section 41 of the Act recognizes that while the power to declare dividends with respect to shares is in the board of directors, this power is limited, among other things, by any restrictions in the articles of incorporation. 388 When the relevant sections of the Act are read together with the constitution, it seems apparent that it was the intent of the legislature that the proprietary interests represented by the shares of stock consist of management or control rights, rights to earnings, and rights to assets. There are other rights which are incidental to these. Under our laws, the rights to earnings and the rights to assets--the 'economic' rights--may be removed and eliminated from the other attributes of a share of stock. Only the management incident of ownership may not be removed. * * * The constitution requires only that the right to vote be proportionate to the number of shares owned, not to the investment made in a corporation. It has long been the common practice in Illinois to classify shares of stock such that one may invest less than another in a corporation, and yet have control. One of two shareholders may purchase ten shares of a class of stock issued at its par value of $1,000 per share, and his business partner may purchase 100 shares of another class of the corporate stock issued at its par value of $10 per share. The parties, for varying reasons, may be very willing that the party investing the $1,000 have control of the management of the corporation, as opposed to the party having the investment of $10,000. See: Hoban, Voting Control Methods, 1958 Ill.Law.For. 111--113. If there is overreaching of fraud in establishing the different relative voting rights of shares, that is another matter and there is a remedy available. We are aware that the classification of shares, so as to enable one class to obtain greater voting rights with the same or lesser investment in a corporation than another class, may carry with it the possibility for wrongdoing. However, it also often serves a valid **7 purpose and there is nothing inherently wrong in such a scheme. The fact that a corporation makes a public offering of stock does not render the procedure outlined above less valid. The securities division of the Secretary of State's office has its particular guidelines to protect the public in such an offering. In this case the parties went one step further than is customary. The stock which could be bought cheaper, and yet carry the same voting power per share, was not permitted to share at all in the dividends or assets of the corporation. This additional step did not invalidate the stock. *483 We find nothing in the declared public policy of this State to condemn stock of this nature. Indeed, the constitution and Business Corporation Act evidence a public policy of only prohibiting the removal of voting rights from the normal attributes of shares of stock. * * * Affirmed and remanded, with directions. RYAN, J., took no part in the consideration or decision of this case. SCHAEFER, Justice (dissenting). * * * 'Under our laws,' say the majority, 'the rights to earnings and the rights to assets--the 'economic' rights--may be removed and eliminated from the other attributes of a share of stock. Only the management incident of ownership *486 may not be removed.' This seems to me to be saying that the ownership incidents of ownership may be eliminated. What remains, then, is a disembodied right to manage the assets of a corporation, divorced from any financial interest in those assets except such as may accrue from the power to manage them. In my opinion, what is 389 left after the economic rights are 'removed and eliminated' is not a share of corporate stock under the law of Illinois. * * * WARD, J., concurs in this dissent.

McQuade v. Stoneham 263 N.Y. 323, 189 N.E. 234 (1934) McQUADE v. STONEHAM et al. Court of Appeals of New York. Jan. 18, 1934. POUND, Chief Judge. The action is brought to compel specific performance of an agreement between the parties, entered into to secure the control of National Exhibition Company, also called the Baseball Club (New York Nationals *326 or 'Giants'). This was one of Stoneham's enterprises which used the New York polo grounds for its home games. McGraw was manager of the Giants. McQuade was at the time the contract was entered into a city magistrate. He resigned December 8, 1930. Defendant Stoneham became the owner of 1,306 shares, or a majority of the stock of National Exhibition Company. Plaintiff and defendant McGraw each purchased 70 shares of his stock. Plaintiff paid Stoneham $50,338.10 for the stock he purchased. As a part of the transaction, the agreement in question was entered into. It was dated May 21, 1919. Some of its pertinent provisions are 'VIII. The parties hereto will use their best endeavors for the purpose of continuing as directors of said Company and as officers thereof the following: 'Directors: 'Charles A. Stoneham, 'John J. McGraw, 'Francis X. McQuade '--with the right to the party of the first part [Stoneham] to name all additional directors as he sees fit: 'Officers: 'Charles A. Stoneham, President, 390 'John J. McGraw, Vice-President, 'Francis X. McQuade, Treasurer. 'IX. No salaries are to be paid to any of the above officers or directors, except as follows: "President...... $45,000 "Vice-President....7,500 "Treasurer...... 7,500 'X. There shall be no change in said salaries, no change in the amount of capital, or the number of shares, no change or amendment of the by-laws of the corporation or any matters regarding the policy of the business of the corporation or any matters which may in anywise affect, endanger or interfere with the rights of minority stockholders, *327 excepting upon the mutual and unanimous consent of all of the parties hereto. * * * 'XIV. This agreement shall continue and remain in force so long as the parties or any of them or the representative of any, own the stock referred to in this agreement, to wit, the party of the first part, 1,166 shares, the party of the second part 70 shares and the party of the third part 70 shares, except as may otherwise appear by this agreement. * * *' In pursuance of this contract Stoneham became president and McGraw vice president of the corporation. McQuade became treasurer. In June, 1925, his salary was increased to $10,000 a year. He continued to act until May 2, 1928, when Leo J. Bondy was elected to succeed him. The board of directors consisted of seven men. The four outside of the parties hereto were selected by Stoneham and he had complete control over them. At the meeting of May 2, 1928, Stoneham and McGraw refrained from voting, McQuade voted for himself, and the other four voted for Bondy. Defendants did not keep their agreement with McQuade to use their best efforts to continue him as treasurer. On the contrary, he was dropped with their entire acquiescence. At the next stockholders' meeting he was dropped as a director although they might have elected him. **236 The courts below have refused to order the reinstatement of McQuade, but have given him damages for wrongful discharge, with a right to sue for future damages. The cause for dropping McQuade was due to the falling out of friends. McQuade and Stoneham had disagreed. The trial court has found in substance that their numerous quarrels and disputes did not affect the orderly and efficient administration of the business of the corporation; that plaintiff was removed because he had antagonized the dominant Stoneham by persisting in challenging his power over the corporate treasury and for no misconduct on his part. The court also finds that plaintiff was removed by Stoneham for protecting the corporation *328 and its minority stockholders. We will assume that Stoneham put him out when he might have retained him, merely in order to get rid of him. Defendants say that the contract in suit was void because the directors held their office charged with the duty to act for the corporation according to their best judgment and that any contract which compels a director to vote to keep any particular person in office and at a stated salary is illegal. Directors are the exclusive executive representatives of the corporation, charged 391 with administration of its internal affairs and the management and use of its assets. They manage the business of the corporation. (General Corporation Law, Consol. Laws, c. 23, ' 27.) 'An agreement to continue a man as president is dependent upon his continued loyalty to the interests of the corporation.' Fells v. Katz, 256 N. Y. 67, 72, 175 N. E. 516, 517. So much is undisputed. Plaintiff contends that the converse of this proposition is true and that an agreement among directors to continue a man as an officer of a corporation is not to be broken so long as such officer is loyal to the interests of the corporation and that, as plaintiff has been found loyal to the corporation, the agreement of defendants is enforceable. Although it has been held that an agreement among stockholders whereby it is attempted to divest the directors of their power to discharge an unfaithful employee of the corporation is illegal as against public policy (Fells v. Katz, supra), it must be equally true that the stockholders may not, by agreement among themselves, control the directors in the exercise of the judgment vested in them by virtue of their office to elect officers and fix salaries. Their motives may not be questioned so long as their acts are legal. The bad faith or the improper motives of the parties does not change the rule. Manson v. Curtis, 223 N. Y. 313, 324, 119 N. E. 559, Ann. Cas. 1918E, 247. Directors may not by agreements entered into as stockholders abrogate their *329 independent judgment. Creed v. Copps, 103 Vt. 164, 152 A. 369, 71 A. L. R. 1287, annotated. Stockholders may, of course, combine to elect directors. That rule is well settled. As Holmes, C. J., pointedly said (Brightman v. Bates, 175 Mass. 105, 111, 55 N. E. 809, 811): 'If stockholders want to make their power felt, they must unite. There is no reason why a majority should not agree to keep together.' The power to unite is, however, limited to the election of directors and is not extended to contracts whereby limitations are placed on the power of diretors to manage the business of the corporation by the selection of agents at defined salaries. The minority shareholders whose interests McQuade says he has been punished for protecting, are not, aside from himself, complaining about his discharge. He is not acting for the corporation or for them in this action. It is impossible to see how the corporation has been injured by the substitution of Bondy as treasurer in place of McQuade. As McQuade represents himself in this action and seeks redress for his own wrongs, 'we prefer to listen to [the corporation and the minority stockholders] before any decision as to their wrongs.' Faulds v. Yates, 57 Ill. 416, 417, 11 Am. Rep. 24. It is urged that we should pay heed to the morals and manners of the market place to sustain this agreement and that we should hold that its violation gives rise to a cause of action for damages rather than base our decision on any outworn notions of public policy. Public policy is a dangerous guide in determining the validity of a contract and courts should not interfere lightly with the freedom of competent parties to make their own contracts. We do not close our eyes to the fact that such agreements, tacitly or openly arrived at, are not uncommon, especially in close corporations where the stockholders are doing business for convenience under a corporate organization. We know that majority stockholders, united in voting trusts, effectively manage the business of a corporation *330 by choosing trustworthy directors to reflect their policies in the corporate management. Nor are we unmindful that McQuade has, so the court has found, been shabbily treated as a purchaser of stock from Stoneham. We have said: 'A trustee is held to something stricter than the morals of the **237 market place' (Meinhard v. Salmon, 249 N. Y. 458, 464, 164 N. E. 545, 546, 62 A. L. R. 1), but Stoneham and McGraw were not trustees for 392 McQuade as an individual. Their duty was to the corporation and its stockholders, to be exercised according to their unrestricted lawful judgment. They were under no legal obligation to deal righteously with McQuade if it was against public policy to do so. The courts do not enforce mere moral obligations, nor legal ones either, unless some one seeks to establish rights which may be waived by custom and for convenience. We are constrained by authority to hold that a contract is illegal and void so far as it precludes the board of directors, at the risk of incurring legal liability, from changing officers, salaries, or policies or retaining individuals in office, except by consent of the contracting parties. On the whole, such a holding is probably preferable to one which would open the courts to pass on the motives of directors in the lawful exercise of their trust. A further reason for reversal exists. At the time the contract was made the plaintiff was a city magistrate. He complains that the defendant Stoneham breached the contract by failure 'to use his best endeavors' for the purpose of continuing him as a director and treasurer of the corporation which Stoneham controlled. The plaintiff resigned as city magistrate after the commencement of this action. He has recovered a judgment for 'the amount of the salary of the treasurer of the National Exhibition Company at the rate of $10,000 per year from the second day of May, 1928, to the date of the entry of this decree.' The Inferior Criminal Courts Act (Laws of 1910, c. *331 659, as amended) provides that no 'city magistrate shall engage in any other business, profession or hold any other public office or shall serve as the representative of any political party for any assembly, aldermanic, senatorial or congressional district in the executive committee or other governing body of any political party organization or political party association. No city magistrate shall engage in any other business or profession or act as referee, or receiver, but each of said justices and magistrates shall devote his whole time and capacity, so far as the public interest demands, to the duties of his office. * * *' (Section 161, Laws 1933, c. 746, formerly section 102, as amended, Laws 1915, c. 531.) The contract contemplated that the plaintiff should hold an executive office at a stipulated and substantial salary. The by-laws of the corporation impose upon the treasurer regular duties as the fiscal agent of the corporation and provide in addition that 'he shall perform such other duties, as shall be, from time to time assigned to him by the board of directors or the president, or as may be required by these by-laws.' * * * The plaintiff could not be *333 continued as treasurer. The illegality was not temporary and unexpected. It lasted for a period of years. Removal of the legal obstacle to the plaintiff's continuance in office came too late after his tenure of office was terminated. The judgment of the Appellate Division and that of the Trial Term should be reversed and the complaint dismissed, with costs in all courts. LEHMAN, Judge. I concur in the decision of the court on the second ground stated in the opinion. I desire to state the reasons why I do not accept the first ground. * * *

393 We have said: 'An ordinary agreement, among a minority in number, but a majority in shares, for the purpose of obtaining control of the corporation by the election of particular persons as directors is not illegal.' Manson v. Curtis, 223 N. Y. 313, 319, 119 N. E. 559, 561, Ann. Cas. 1918E, 247. We are agreed that, if the contract had provided only for the election of *334 directors, it would not have been illegal. Its vice, if any, is inherent in the provisions intended to give assurance that the directors so elected would act according to the prearranged design of the stockholders in apportioning the corporate offices and emoluments of such offices among the majority stockholders. The corporate charter and statutory provisions fix the manner in which the corporate affairs must be conducted. The majority stockholders do not own the corporation nor have they unlimited power of control. Their corporate powers are conferred by the charter and may be exercised only in the field defined by the charter. They act at stockholders' meetings in relation to matters which may be decided at such meetings. There the directors are chosen by the vote of the holders of a majority of the stock, but the stockholders have no power, except as provided by charter or statute, to divest directors of any of their functions or direct them in the exercise of their functions. The directors are constituted managers of the corporate affairs. They determine the corporate policies, they elect the corporate officers. In the functioning of the corporate machinery the power of control of the holders of the majority stock is, as in such matters, exhausted with the election of the directors. When elected, the directors must act in behalf of the corporation, not in behalf of any group of stockholders. It would constitute a wrong to the corporation and its minority stockholders if the directors were permitted to transfer their powers and functions to the holders of a majority of the stock or to bind themselves to accept direction from any persons not vested with power of control by law. There can, I think, be no doubt that shareholders owning a majority of the corporate stock may combine to obtain and exercise any control which a single owner of such stock could exercise. What may lawfully be done by an individual may ordinarily be lawfully done *335 by a combination, but no combination is legal if formed to accomplish an illegal object. No such combination or agreement may 'contravene any express charter or statutory provision or contemplate any fraud, oppression or wrong against other stockholders or other illegal object.' Manson v. Curtis, supra. * * * It seems difficult to reconcile such a decision with the statements in the opinion in Manson v. Curtis that 'it is not illegal or against public policy for two or more stockholders owning the majority of the shares of stock to unite upon a course of corporate policy or action, or upon the officers whom they will elect,' and that 'shareholders have the right to combine their interests and voting powers to secure such control of the corporation and the adoption of and adhesion by it to a specific policy and course of business.' Obviously, a combination intended to effect the election of certain officers and to obtain control of the corporation and adhesion by it to a specific policy and course of business can accomplish its ends only to the extent that directors will bow to the will of those who united to elect them. The directors have the power and the duty to act in accordance with their own best judgment so long as they remain directors. The majority stockholders can compel no action by the directors, but at the expiration of the term of office of the directors the stockholders have the power to replace them with others whose actions coincide with the judgment or *336 desires of the holders of a majority of the stock. The 394 theory that directors exercise in all matters an independent judgment in practice often yields to the fact that the choice of directors lies with the majority stockholders and thus gives the stockholders a very effective control of the action by the board of directors. In truth the board of directors may check the arbitrary will of those who would otherwise completely control the corporation, but cannot indefinitely thwart their will. A contract which destroys this check contravenes 'express charter or statutory provisions' and is, therefore, illegal. A contract which merely provides that stockholders shall in combination use their power to achieve a legitimate purpose is not illegal. They may join in the election of directors who, in their opinion, will be in sympathy with the policies of the majority stockholders and who, in the choice of executive officers, will be influenced by the wishes of the majority stockholders. The directors so chosen may not act in disregard of the best interests of the corporation and its minority stockholders, but with that limitation they may and, in practice, usually are swayed by the wishes of the majority. Otherwise there would be no continuity of corporate policy and no continuity in management of corporate affairs. The contract now under consideration provides, in a narrow field, for corporate action within these limitations. * * * A contract which merely provides for the election of fit officers and adhesion to particular policy determined in advance constitutes an agreement by which men in combination exercise a power which could be lawfully exercised if lodged in a single man. It is legal, if designed to protect legitimate interests *338 without wrong to others. Public policy should be governed by facts, not abstractions. The contract is, in my opinion, valid. It is unenforceable only because it resulted in an employment which was itself illegal. CRANE, KELLOGG, O'BRIEN, and HUBBS, JJ., concur with POUND, C. J. LEHMAN, J., concurs in result in opinion in which CROUCH, J., concurs. Judgments reversed, etc.

Clark v. Dodge 269 N.Y. 410, 199 N.E. 641 (1936)

CLARK v. DODGE et al. Court of Appeals of New York. Jan. 8, 1936. CROUCH, Judge. 395 The action is for the specific performance of a contract between the plaintiff, Clark, and the defendant Dodge, relating to the affairs of the two defendant corporations. * * * Those facts, briefly stated, are as follows: The two corporate defendants are New Jersey corporations manufacturing medicinal preparations by secret formulae. The main office, factory, and assets of both corporations are located in the state of New York. In 1921, and at all times since, Clark owned 25 per cent. and Dodge 75 per cent. of the stock of each corporation. Dodge took no active part in the business, although he was a director, and through ownership of their qualifying shares, controlled the other directors of both corporations. He was the president of Bell & Co., Inc., and nominally general manager of Hollings-Smith Company, Inc. The plaintiff, Clark, was a director and held the offices of treasurer and general manager of Bell & Co., Inc., and also had charge of the major portion of the business of Hollings-Msith Company, Inc. The formulae and methods of manufacture of the medicinal preparations were known to him alone. Under date of February 15, 1921, Dodge and Clark, the sole owners of the stock of both corporations, **642 entered into a written agreement under seal, which after reciting the stock ownership of both parties, the desire of Dodge that Clark should continue in the efficient management and control of the business of Bell & Co., Inc., so long as he should 'remain faithful, efficient and competent to so manage and control the said business'; and his further desire that Clark should not be the sole custodian of a specified formula, but should share his knowledge thereof and of the method of manufacture with a son of Dodge, provided, *414 in substance, as follows: That Dodge during his lifetime and, after his death, a trustee to be appointed by his will, would so vote his stock and so vote as a director that the plaintiff (a) should continue to be a director of Bell & Co., Inc.; and (b) should continue as its general manager so long as he should be 'faithful, efficient and competent'; (c) should during his life receive one-fourth of the net income of the corporations either by way of salary or dividends; and (d) that no unreasonable or incommensurate salaries should be paid to other officers or agents which would so reduce the net income as materially to affect Clark's profits. Clark on his part agreed to disclose the specified formula to the son and to instruct him in the details and methods of manufacture; and, further, at the end of his life to bequeath his stock--if no issue survived him--to the wife and children of Dodge. It was further provided that the provisions in regard to the division of net profits and the regulation of salaries should also apply to the Hollings-Smith Company. The complaint alleges due performance of the contract by Clark and breach thereof by Dodge in that he has failed to use his stock control to continue Clark as a director and as general manager, and has prevented Clark from receiving his proportion of the income, while taking his own, by causing the employment of incompetent persons at excessive salaries, and otherwise. The relief sought is reinstatement as director and general manager and an accounting by Dodge and by the corporations for waste and for the proportion of net income due plaintiff, with an injunction against further violations. The only question which need be discussed is whether the contract is illegal as against public policy within the decision in McQuade v. Stoneham, 263 N.Y. 323, 189 N.E. 234, upon the authority of which the complaint was dismissed by the Appellate Division.

396 'The business of a corporation shall be managed by its *415 board of directors.' General Corporation Law (Consol.Laws, c. 23) ' 27. That is the statutory norm. Are we committed by the McQuade Case to the doctrine that there may be no variation, however slight or innocuous, from that norm, where salaries or policies or the retention of individuals in office are concerned? There is ample authority supporting that doctrine. ... Apart from its practical administrative convenience, the reasons upon which it is said to rest are more or less nebulous. Public policy, the intention of the Legislature, detriment to the corporation, are phrases which in this connection mean little. Possible harm to bona fide purchasers of stock or to creditors or to stockholding minorities have more substance; but such harms are absent in many instances. If the enforcement of a particular contract damages nobody--not even, in any perceptible degree, the public--one sees no reason for holding it illegal, even though it impinges slightly upon the broad provision of section 27. Damage suffered or threatened is a logical and practical test, and has come to be the one generally adopted by the courts. See 28 Columbia Law Review 366, 372. Where the directors are the sole stockholders, there seems to be no objection to enforcing an agreement among them to vote for certain people as officers. There is no direct decision to that effect in this court, yet there are strong indications that such a rule has long been recognized. The opinion in Manson v. Curtis, 223 N.Y. 313, 325, 119 N.E. 559, 562, Ann.Cas. **643 1918E, 247, closed its discussion by saying: 'The rule that all the stockholders by their universal consent may do as they choose with the corporate concerns and assets, provided the interests of creditors are not affected, because they are the complete owners of the corporation, cannot be invoked here.' That was because all the stockholders were not parties to the agreement *416 there in question. So, where the public was not affected, 'the parties in interest, might, by their original agreement of incorporation, limit their respective rights and powers,' even where there was a conflicting statutory standard. Ripin v. United States Woven Label Co., 205 N.Y. 442, 448, 98 N.E. 855, 857. 'Such corporations were little more (though not quite the same as) than chartered partnerships.' * * * *417 Except for the broad dicta in the McQuade opinion, we think there can be no doubt that the agreement here in question was legal and that the complaint states a cause of action. There was no attempt to sterilize the board of directors, as in the Manson and McQuade Cases. The only restrictions on Dodge were (a) that as a stockholder he should vote for Clark as a director--a perfectly legal contract; (b) that as director he should continue Clark as general manager, so long as he proved faithful, efficient, and competent-- an agreement which could harm nobody; (c) that Clark should always receive as salary or dividends one-fourth of the 'net income.' For the purposes of this motion, it is only just to construe that phrase as meaning whatever was left for distribution after the directors had in good faith set aside whatever they deemed wise; (d) that no salaries to other officers should be paid, unreasonable in amount or incommensurate with services rendered-- a beneficial and not a harmful agreement. If there was any invasion of the powers of the directorate under that agreement, it is so slight as to be negligible; and certainly there is no damage suffered by or thretened to anybody. The broad statements in the McQuade opinion, applicable to the facts there, should be confined to those facts. The judgment of the Appellate Division should be reversed and the order of the Special Term affirmed, with costs in this court and in the Appellate Division. 397 CRANE, C. J., and LEHMAN, O'BRIEN, HUBBS, LOUGHRAN, and FINCH, JJ., concur. Judgment accordingly.

Ringling Bros.Barnum & Bailey v. Ringling 29 Del.Ch. 610, 53 A.2d 441 (1947)

RINGLING BROS.--BARNUM & BAILEY COMBINED SHOWS, Inc., et al. v. RINGLING. Supreme Court of Delaware. May 3, 1947. PEARSON, Judge. The Court of Chancery was called upon to review an attempted election of directors at the 1946 annual stockholders *613 meeting of the corporate defendant. The pivotal questions concern an agreement between two of the three present stockholders, and particularly the effect of this agreement with relation to the exercise of voting rights by these two stockholders. At the time of the meeting, the corporation had outstanding 1000 shares of capital stock held as follows: 315 by petitioner Edith Conway Ringling; 315 by defendant Aubrey B. Ringling Haley (individually or as executrix and legatee of a deceased husband); and 370 by defendant John Ringing North. The purpose of the meeting was to elect the entire board of seven directors. The shares could be voted cumulatively. Mrs. Ringling asserts that by virtue of the operation of an agreement between her and Mrs. Haley, the latter was bound to vote her shares for an adjournment of the meeting, or in the alternative, **443 for a certain slate of directors. Mrs. Haley contends that she was not so bound for reason that the agreement was invalid, or at least revocable. The two ladies entered into the agreement in 1941. It makes like provisions concerning stock of the corporate defendant and of another corporation, but in this case, we are concerned solely with the agreement as it affects the voting of stock of the corporate defendant. The agreement recites that each party was the owner 'subject only to possible claims of creditors of the estates of Charles Ringling and Richard Ringling, respectively' (deceased husbands of the parties), of 300 shares of the capital stock of the defendant corporation; that in 1938 these shares had been deposited under a voting trust agreement which would terminate in 1947, or earlier, upon the elimination of certain liability of the corporation; that each party also owned 15 shares individually; that the parties had 'entered into an agreement in April 1934 providing for joint action by them in matters affecting their ownership of stock and interest in' the corporate defendant; that the parties desired 'to continue to act jointly in all matters relating to their stock

398 ownership or interest in' the corporate defendant (and the *614 other corporation). The agreement then provides as follows: 'Now, Therefore, in consideration of the mutual covenants and agreements hereinafter contained the parties hereto agree as follows: '1. Neither party will sell any shares of stock or any voting trust certificates in either of said corporations to any other person whosoever, without first making a written offer to the other party hereto of all of the shares or voting trust certificates proposed to be sold, for the same price and upon the same terms and conditions as in such proposed sale, and allowing such other party a time of not less than 180 days from the date of such written offer within which to accept same. '2. In exercising any voting rights to which either party may be entitled by virtue of ownership of stock or voting trust certificates held by them in either of said corporation, each party will consult and confer with the other and the parties will act jointly in exercising such voting rights in accordance with such agreement as they may reach with respect to any matter calling for the exercise of such voting rights. '3. In the event the parties fail to agree with respect to any matter covered by paragraph 2 above, the question in disagreement shall be submitted for arbitration to Karl D. Loos, of Washington, D. C. as arbitrator and his decision thereon shall be binding upon the parties hereto. Such arbitration shall be exercised to the end of assuring for the respective corporations good management and such participation therein by the members of the Ringling family as the experience, capacity and ability of each may warrant. The parties may at any time by written agreement designate any other individual to act as arbitrator in lieu of said Loos. '4. Each of the parties hereto will enter into and execute such voting trust agreement or agreements and such other instruments as, from time to time they may deem advisable and as they may be advised by counsel are appropriate to effectuate the purposes and objects of this agreement. '5. This agreement shall be in effect from the date hereof and shall continue in effect for a period of ten years unless sooner terminated by mutual agreement in writing by the parties hereto. '6. The agreement of April 1934 is hereby terminated. '7. This agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators and assigns of the parties hereto respectively.' *615 The Mr. Loos mentioned in the agreement is an attorney and has represented both parties since 1937, and, before and after the voting trust was terminated in late 1942, advised them with respect to the exercise of their voting rights. At the annual meetings in 1943 and the two following years, the parties voted their shares in accordance with mutual understandings arrived at as a result of discussions. In each of these years, they elected five of the seven directors. Mrs. Ringling and Mrs. Haley each had sufficient votes, independently of the other, to

399 elect two of the seven **444 directors. By both voting for an additional candidate, they could be sure of his election regardless of how Mr. North, the remaining stockholder, might vote. [FN1] FN1 Each lady was entitled to cast 2205 votes (since each had the cumulative voting rights of 315 shares, and there were 7 vacancies in the directorate). The sum of the votes of both is 4410, which is sufficient to allow 882 votes for each of 5 persons. Mr. North, holding 370 shares, was entitled to cast 2590 votes, which obviously cannot be divided so as to give to more than two candidates as many as 882 votes each. It will be observed that in order for Mrs. Ringling and Mrs. Haley to be sure to elect five directors (regardless of how Mr. North might vote) they must act together in the sense that their combined votes must be divided among five different candidates and at least one of the five must be voted for by both Mrs. Ringling and Mrs. Haley. Some weeks before the 1946 meeting, they discussed with Mr. Loos the matter of voting for directors. They were in accord that Mrs. Ringling should cast sufficient votes to elect hereself and her son; and that Mrs. Haley should elect herself and her husband; but they did not agree upon a fifth director. The day before the meeting, the discussions were continued, Mrs. Haley being represented by her husband since she could not be present because of illness. In a conversation with Mr. Loos, Mr. Haley indicated that he would make a motion for an adjournment of the meeting for sixty days, in order to give the ladies additional time to come to an agreement about their voting. On the morning of the meeting, however, he stated that because of something *616 Mrs. Ringling had done, he would not consent to a postponement. Mrs. Ringling then made a demand upon Mr. Loos to act under the third paragraph of the agreement 'to arbitrate the disagreement' between her and Mrs. Haley in connection with the manner in which the stock of the two ladies should be voted. At the opening of the meeting, Mr. Loos read the written demand and stated that he determined and directed that the stock of both ladies be voted for an adjournment of sixty days. Mrs. Ringling then made a motion for adjournment and voted for it. Mr. Haley, as proxy for his wife, and Mr. North voted against the motion. Mrs. Ringling (herself or through her attorney, it is immaterial which,) objected to the voting of Mrs. Haley's stock in any manner other than in accordance with Mr. Loos' direction. The chairman ruled that the stock could not be voted contrary to such direction, and declared the motion for adjournment had carried. Nevertheless, the meeting proceeded to the election of directors. Mrs. Ringling stated that she would continue in the meeting 'but without prejudice to her position with respect to the voting of the stock and the fact that adjournment had not been taken.' Mr. Loos directed Mrs. Ringling to cast her votes 882 for Mrs. Ringling, 882 for her son, Robert, and 441 for a Mr. Dunn, who had been a member of the board for several years. She complied. Mr. Loos directed that Mrs. Haley's votes be cast 882 for Mrs. Haley, 882 for Mr. Haley, and 441 for Mr. Dunn.

400 Instead of complying, Mr. Haley attempted to vote his wife's shares 1103 for Mrs. Haley, and 1102 for Mr. Haley. Mr. North voted his shares 864 for a Mr. Woods, 863 for a Mr. Griffin, and 863 for Mr. North. *617 The chairman ruled that the five candidates proposed by Mr. Loos, together with Messrs. Woods and North, were elected. The Haley-North group disputed this ruling insofar as it declared the election of Mr. Dunn; and insisted that Mr. Griffin, instead, had been elected. A director's meeting followed in which Mrs. Ringling participated after stating that she would do so 'without prejudice to her position that the stockholders' meeting had been adjourned and that the directors' meeting was not properly held.' Mr. Dunn and Mr. Griffin, although each was challenged by an opposing faction, attempted to join **445 in voting as directors for different slates of officers. Soon after the meeting, Mrs. Ringling instituted this proceeding. The Vice Chancellor determined that the agreement to vote in accordance with the direction of Mr. Loos was valid as a 'stock pooling agreement' with lawful objects and purposes, and that it was not in violation of any public policy of this state. He held that where the arbitrator acts under the agreement and one party refuses to comply with his direction, 'the Agreement constitutes the willing party * * * an implied agent possessing the irrevocable proxy of the recalcitrant party for the purpose of casting the particular vote'. It was ordered that a new election be held before a master, with the direction that the master should recognize and give effect to the agreement if its terms were properly invoked. Before taking up defendants' objections to the agreement, let us analyze particularly what it attempts to provide with respect to voting, including what functions and powers it attempts to repose in Mr. Loos, the 'arbitrator'. The agreement recites that the parties desired 'to continue to act jointly in all matters relating to their stock ownership or interest in' the corporation. The parties agreed to consult and confer with each other in exercising their voting rights and to act jointly--that is, concertedly; unitedly; towards unified courses of action--in accordance with such agreement as they might reach. Thus, so long as the parties *618 agree for whom or for what their shares shall be voted, the agreement provides no function for the arbitrator. His role is limited to situations where the parties fail to agree upon a course of action. In such cases, the agreement directs that 'the question in disagreement shall be submitted for arbitration' to Mr. Loos 'as arbitrator and his decision thereon shall be binding upon the parties'. These provisions are designed to operate in aid of what appears to be a primary purpose of the parties, 'to act jointly' in exercising their voting rights, by providing a means for fixing a course of action whenever they themselves might reach a stalemate. Should the agreement be interpreted as attempting to empower the arbitrator to carry his directions into effect? Certainly there is no express delegation or grant of power to do so, either by authorizing him to vote the shares or to compel either party to vote them in accordance with his directions. The agreement expresses no other function of the arbitrator than that of deciding

401 questions in disagreement which prevent the effectuation of the purpose 'to act jointly'. The power to enforce a decision does not seem a necessary or usual incident of such a function. Mr. Loos is not a party to the agreement. It does not contemplate the transfer of any shares or interest in shares to him, or that he should undertake any duties which the parties might compel him to perform. They provided that they might designate any other individual to act instead of Mr. Loos. The agreement does not attempt to make the arbitrator a trustee of an express trust. What the arbitrator is to do is for the benefit of the parties, not for his own benefit. Whether the parties accept or reject his decision is no concern of his, so far as the agreement or the surrounding circumstances reveal. We think the parties sought to bind each other, but to be bound only to each other, and not to empower the arbitrator to enforce decisions he might make. From this conclusion, it follows necessarily that no decision of the arbitrator could ever be enforced if both *619 parties to the agreement were unwilling that it be enforced, for the obvious reason that there would be no one to enforce it. Under the agreement, something more is required after the arbitrator has given his decision in order that it should become compulsory: at least one of the parties must determine that such decision shall be carried into effect. Thus, any 'control' of the voting of the shares, which is reposed in the arbitrator, is substantially limited in action under the agreement in that it is subject to the overriding power of the parties themselves. The agreement does not describe the undertaking of each party with respect to a decision of the arbitrator other than to provide that it 'shall be binding upon the parties'. **446 It seems to us that this language, considered with relation to its context and the situations to which it is applicable, means that each party promised the other to exercise her own voting rights in accordance with the arbitrator's decision. The agreement is silent about any exercise of the voting rights of one party by the other. The language with reference to situations where the parties arrive at an understanding as to voting plainly suggests 'action' by each, and 'exercising' voting rights by each, rather than by one for the other. There is no intimation that this method should be different where the arbitrator's decision is to be carried into effect. Assuming that a power in each party to exercise the voting rights of the other might be a relatively more effective or convenient means of enforcing a decision of the arbitrator than would be available without the power, this would not justify implying a delegation of the power in the absence of some indication that the parties bargained for that means. The method of voting actually employed by the parties tends to show that they did not construe the agreement as creating powers to vote each other's shares; for at meetings prior to 1946 each party apparently exercised her own voting rights, and at the 1946 meeting, Mrs. Ringling, who wished to enforce the agreement, did not attempt to cast a ballot in exercise of any *620 voting rights of Mrs. Haley. We do not find enough in the agreement or in the circumstances to justify a construction that either party was empowered to exercise voting rights of the other. Having examined what the parties sought to provide by the agreement, we come now to defendants' contention that the voting provisions are illegal and revocable. They say that the courts of this state have definitely established the doctrine 'that there can be no agreement, or any device whatsoever, by which the voting power of stock of a Delaware corporation may be irrevocably separated from the ownership of the stock, except by an agreement which complies with Section 18' of the Corporation Law, Rev.Code 1935, ' 2050, and except by a proxy coupled with an interest. They rely on Perry v. Missouri- Kansas P.L. Co., 22 Del. Ch. 33, 191 A. 823; In re Public Industrials Corporation, 19 Del.Ch. 398, reported as In re Chilson, 168 A. 82; Aldridge

402 v. Franco Wyoming Oil Co., 24 Del.Ch. 126, 7 A.2d 753, affirmed in 24 Del.Ch. 349, 14 A.2d 380; Belle Isle Corporation v. Corcoran, Del.Sup., 49 A.2d 1; and contend that the doctrine is derived from Section 18 itself, Rev.Code of Del.1935, ' 2050. The statute reads, in part, as follows: 'Sec. 18. Fiduciary Stockholders; Voting Power of; Voting Trusts:--Persons holding stock in a fiduciary capacity shall be entitled to vote the shares so held, and persons whose stock is pledged shall be entitled to vote, unless in the transfer by the pledgor on the books of the corporation he shall have expressly empowered the pledgee to vote thereon, in which case only the pledgee, or his proxy may represent said stock and vote thereon. 'One or more stockholders may by agreement in writing deposit capital stock of an original issue with or transfer capital stock to any person or persons, or corporation or corporations authorized to act as trustee, for the purpose of vesting in said person or persons, corporation or corporations, who may be designated Voting Trustee or Voting Trustees, the right to vote thereon for any period of time determined by such agreement, not exceeding ten years, upon the terms and conditions stated in such agreement. Such agreement may *621 contain any other lawful provisions not inconsistent with said purpose. * * * Said Voting Trustees may vote upon the stock so issued or transferred during the period in such agreement specified; stock standing in the names of such Voting Trustees may be voted either in person or by proxy, and in voting said stock, such Voting Trustees shall incur no responsibility as stockholder, trustee or otherwise, except for their own individual malfeasance.' [FN2] * * * **447 In our view, neither the cases nor the statute sustain the rule for which the defendants contend. Their sweeping formulation would impugn well-recognized means by which a shareholder may effectively confer his voting rights upon others while retaining various other rights. For example, defendants' rule would apparently not permit holders of voting stock to confer upon stockholders of another class, by the device of an amendment of the certificate of incorporation, the exclusive right to vote during periods when dividends are not paid on stock of the latter class. The broad prohibitory meaning which defendants find in Section 18 seems inconsistent with their concession that proxies coupled with an interest may be irrevocable, for the statute contains nothing about such proxies. The statute authorizes, among other things, the deposit or transfer of stock in trust for a specified purpose, namely, 'vesting' in the transferee 'the right to vote thereon' for a limited period; and prescribes numerous requirements in this connection. Accordingly, it seems reasonable to infer that to establish the relationship and accomplish the purpose which the statute authorizes, its requirements must be complied with. But the statute does not purport to deal with agreements whereby shareholders attempt to bind each other as to how they shall vote their shares. Various forms of such pooling agreements, as they are sometimes called, have been held *622 valid and have been distinguished from voting trusts. ... . We think the particular agreement before us does not violate Section 18 or constitute an attempted evasion of its requirements, and is not illegal for any other reason. Generally speaking, a shareholder may exercise wide liberality of judgment in the matter of voting, and it is not objectionable that his motives may be for personal profit, or determined by whims or caprice, 403 so long as he violates no duty owed his fellow shareholders. Heil v. Standard G. & E. Co., 17 Del.Ch. 214, 151 A. 303. The ownership of voting stock imposes no legal duty to vote at all. A group of shareholders may, without impropriety, vote their respective shares so as to obtain advantages of concerted action. They may lawfully contract with each other to vote in the future in such way as they, or a majority of their group, from time to time determine. (See authorities listed above.) Reasonable provisions for cases of failure of the group to reach a determination because of an even division in their ranks seem unobjectionable. The provision here for submission to the arbitrator is plainly designed as a deadlock-breaking measure, and the arbitrator's decision cannot be enforced unless at least one of the parties (entitled to cast one- half of their combined votes) is willing that it be enforced. We find the provision reasonable. It does not appear that the agreement enables the parties to take any unlawful advantage of the outside sharehholder, or of any other person. It offends no rule of law or public policy of this state of which we are aware. *623 Legal consideration for the promises of each party is supplied by the mutual promises of the other party. The undertaking to vote in accordance with the arbitrator's decision is a valid contract. The good faith of the arbitrator's action has not been challenged and, indeed, the record indicates that no such challenge could be supported. Accordingly, the failure of Mrs. Haley to exercise her voting rights in accordance with his decision was a breach of her contract. It is no extenuation of the breach that her votes were cast for two of the three candidates directed by the arbitrator. His directions to her were part of a single plan or course of action for the voting of the shares of both parties to the agreement, calculated to utilize an advantage of joint action by them which would bring about the election of an additional director. The actual voting of Mrs. Haley's shares frustrates that plan to such an extent that it should not be treated as a partial performance of her contract. **448 Throughout their argument, defendants make much of the fact that all votes cast at the meeting were by the registered shareholders. The Court of Chancery may, in a review of an election, reject votes of a registered shareholder where his voting of them is found to be in violation of rights of another person. Compare: In re Giant Portland Cement Co., Del.Ch., 21 A.2d 697; In re Canal Construction Co., 21 Del.Ch. 155, 182 A. 545. It seems to us that upon the application of Mrs. Ringling, the injured party, the votes representing Mrs. Haley's shares should not be counted. Since no infirmity in Mr. North's voting has been demonstrated, his right to recognition of what he did at the meeting should be considered in granting any relief to Mrs. Ringling; for her rights arose under a contract to which Mr. North was not a party. With this in mind, we have concluded that the election should not be declared invalid, but that effect should be given to a rejection of the votes representing Mrs. Haley's shares. No other relief seems appropriate in this proceeding. Mr. North's vote against the motion for adjournment was sufficient to defeat *624 it. With respect to the election of directors, the return of the inspectors should be corrected to show a rejection of Mrs. Haley's votes, and to declare the election of the six persons for whom Mr. North and Mrs. Ringling voted. This leaves one vacancy in the directorate The question of what to do about such a vacancy was not considered by the court below and has not been argued here. For this reason, and because an election of directors at the 1947 annual meeting (which presumably will be held in the near future) may make a determination of the question unimportant, we shall not decide it

404 on this appeal. If a decision of the point appears important to the parties, any of them may apply to raise it in the Court of Chancery, after the mandate of this court is received there. An order should be entered directing a modification of the order of the Court of Chancery in accordance with this opinion.

Galler v. Galler 32 Ill.2d 16, 203 N.E.2d 577 (1964)

Emma GALLER, Appellant, v. Isadore A. GALLER et al., Appellees. No. 38475. Supreme Court of Illinois. Nov. 24, 1964. Rehearing Denied Jan. 21, 1965. UNDERWOOD, Justice. * * * There is no substantial dispute as to the facts in this case. From 1919 to 1924, Benjamin and Isadore Galler, brothers, were equal partners in the Galler Drug Company, a wholesale drug concern. In 1924 the business was incorporated under the Illinois Business Corporation Act, each owning one half of the outstanding 220 shares of stock. In 1945 each contracted to sell 6 shares to an employee, *18 Rosenberg, at a price of $10,500 for each block of 6 shares, payable within 10 years. They guaranteed to repurchase the shares if Rosenberg's employment were terminated, and further agreed that if they sold their shares, Rosenberg would receive the same price per share as that paid for the brothers' shares. Rosenberg was still indebted for the 12 shares in July, 1955, and continued to make payments on account even after Benjamin Galler died in 1957 and after the institution of this action by Emma Galler in 1959. Rosenberg was not involved in this litigation either as a party or as a witness, and in July of 1961, prior to the time that the master in chancery hearings were concluded, defendants Isadore and Rose Galler purchased the 12 shares from Rosenberg. A supplemental complaint was filed by the plaintiff, Emma Galler, asserting an equitable right to have 6 of the 12 shares transferred to her and offering to pay the defendants one half of the amount that the defendants paid Rosenberg. The parties have stipulated that pending disposition of the instant case, these shares will not be voted or transferred. For approximately one year prior to the entry of the decree by the chancellor in July of 1962, there were no outstanding minority shareholder interests.

405 In March, 1954, Benjamin and Isadore, on the advice of their accountant, decided to enter into an agreement for the financial protection of their immediate families and to assure their families, after death of either brother, equal control of the corporation. In June, 1954, while the agreement was in the process of preparation by an attorney-associate of the accountant, Benjamin suffered a heart attack. Although he resumed his business duties some months later, he was atain stricken in February, 1955, and thereafter was unable to return to work. During his brother's illness, Isadore asked the accountant to have the shareholders' agreement put in final form in order to protect Benjamin's wife, and this was done by another attorney *19 employed in the accountant's office. On a Saturday night in July, 1955, the accountant brought the agreement to Benjamin's home, and 6 copies of it were executed there by the two brothers and their wives. The accountant then collected all signed copies of the agreement and informed the parties that he was taking them for safe keeping. Between the execution of the agreement in July, 1955, and Benjamin's death in December, 1957, the agreement was not modified. Benjamin suffered a stroke late in July, 1955, and on August 2, 1955, Isadore and the accountant and a notary public brought to Benjamin for signature two powers of attorney which were retained by the accountant after Benjamin executed them with Isadore as a witness. The plaintiff did not read the powers and she never had them. One of the powers ahthorized the transfer of Benjamin's bank account to Emma and the other power enabled Emma to vote Benjamin's 104 shares. **580 Because of the state of Benjamin's health, nothing further was said to him by any of the parties concerning the agreement. It appears from the evidence that some months after the agreement was signed, the defendants Isadore and Rose Galler and their son, the defendant, Aaron Galler sought to have the agreements destroyed. The evidence is undisputed that defendants had decided prior to Benjamin's death they would not honor the agreement, but never disclosed their intention to plaintiff or her husband. On July 21, 1956, Benjamin executed an instrument creating a trust naming his wife as trustee. The trust covered, among other things, the 104 shares of Galler Drug Company stock and the stock certificates were endorsed by Benjamin and delivered to Emma. When Emma presented the certificates to defendants for transfer into her name as trustee, they sought to have Emma abandon the 1955 agreement or enter into some kind of a noninterference agreement as a price for the transfer of the shares. Finally, in September, 1956, after Emma had refused to *20 abandon the shareholders' agreement, she did agree to permit defendant Aaron to become president for one year and agreed that she would not interfere with the busines during that year. The stock was then reissued in her name as trustee. During the year 1957 while Benjamin was still alive, Emma tried many times to arrange a meeting with Isadore to discuss business matters but he refused to see her. Shortly after Benjamin's death, Emma went to the office and demanded the terms of the 1955 agreement be carried out. Isadore told her that anything she had to say could be said to Aaron, who then told her that his father would not abide by the agreement. He offered a modification of the agreement by proposing the salary continuation payment but without her becoming a director. When Emma refused to modify the agreement and sought enforcement of its terms, defendants refused and this suit followed. During the last few years of Benjamin's life both brothers drew an annual salary of $42,000. Aaron, whose salary was $15,000 as manager of the warehouse prior to September, 1956, has since the time that Emma agreed to his acting as president drawn an annual salary of

406 $20,000. In 1957, 1958, and 1959 a $40,000 annual dividend was paid. Plaintiff has received her proportionate share of the dividend. The July, 1955, agreement in question here, entered into between Benjamin, Emma, Isadore and Rose, recites that Benjamin and Isadore each own 47 1/2% of the issued and outstanding shares of the Galler Drug Company, an Illinois corporation, and that Benjamin and Isadore desired to provide income for the support and maintenance of their immediate families. No reference is made to the shares then being purchased by Rosenberg. The essential features of the contested portions of the agreement are substantially as set forth in the opinion of the Appellate Court: (2) that the bylaws of the corporation will be amended to provide *21 for a board of four directors; that the necessary quorum shall be three directors; and that no directors' meeting shall be held without giving ten days notice to all directors. (3) The shareholders will cast their votes for the above named persons (Isadore, Rose, Benjamin and Emma) as directors at said special meeting and at any other meeting held for the purpose of electing directors. (4, 5) In the event of the death of either brother his wife shall have the right to nominate a director in place of the decedent. (6) Certain annual dividends will be declared by the corporation. The dividend shall be $50,000 payable out of the accumulated earned surplus in excess of $500,000. If 50% of the annual net profits after taxes exceeds the minimum $50,000, then the directors shall have discretion to declare a dividend up to 50% of the annual net profits. If the net profits are less than $50,000, nevertheless the minimum $50,000 annual dividend shall be declared, providing the $500,000 surplus is maintained. Earned **581 surplus is defined. (9) The certificates evidencing the said shares of Benjamin Galler and Isadore Galler shall be a legend that the shares are subject to the terms of this agreement. (10) A salary continuation agreement shall be entered into by the corporation which shall authorize the corporation upon the death of Benjamin Galler or Isadore Galler, or both, to pay a sum equal to twice the salary of such officer, payable monthly over a five-year period. Said sum shall be paid to the widow during her widowhood, but should be paid to such widow's children if the widow remarries within the five- year period. * * * The Appellate Court found the 1955 agreement void because 'the undue duration, stated purpose and substantial disregard of the provisions of the Corporation Act outweigh any considerations which might call for divisibility' and held that 'the public policy of this state demands voiding this entire agreement'. While the conduct of defendant towards plaintiff was clearly inequitable, the basically controlling factor is the absence of an objecting minority interest, together with the absence of public detriment. Since the issues here presented must be resolved in accordance with the public policy of this State as exemplified in prior decisions or pertinent statutes, it will be helpful to review the applicable case law. Faulds v. Yates, 57 Ill. 416, decided by this court in 1870, established the general rule that the owners of the majority of the stock of a corporation have the right to select the agents for the management of the corporation. * * *

407 In Kantzler v. Bensinger, 214 Ill. 589, p. 598, 73 N.E. 874, p. 878, decided in 1905, the issue of statutory violation was raised, and this court again followed Faulds v. Yates, emphasizing and quoting the following: In Faulds v. Yates, 57 Ill. 416, it was objected that an agreement between certain persons, owning a majority of the stock of a corporation, that they would elect the directors and manage the business was against public policy. There were other stockholders, but they made no objection. The court upheld the agreement, and on page 420 of 57 Ill. said: 'There was no fraud in the agreement which has been so bitterly assailed in the argument. There was nothing unlawful in it. There was **582 nothing which necessarily affected the rights and interests of the minority. Three persons, owning a majority of the stock, had the unquestioned right to combine, and thus secure the board of directors and the management of the property. Corporations are governed by the republican principle that the whole are bound by the acts of the majority, when the acts conform to the lawof their creation. The co-operation, then, of these parties in the election of the officers of the company, and their agreement not to buy or sell stock except for their joint benefit, cannot properly be characterized as dishonest and violative of the rights of others, and in contravention of public policy. * * * The power to invalidate the agreements on the grounds of public policy is so far reaching and so easily abused that it should be called into action to set aside or annul the solemn engagement of parties dealing on equal terms only in cases where the corrupt or dangerous tendency clearly and unequivocally appears upon the face of the agreement itself or is the necessary inference from the matters which are expressed, and the only apparent exception to this general rule is to be found in those cases where the agreement, though fair and unobjectionable on its face, is a part of a corrupt scheme and is made to disguise the real nature of the transaction. 12 Am.Jur. 671. * * * *27 At this juncture it should be emphasized that we deal here with a so-called close corporation. Various attempts at definition of the close corporation have been made. For a collection of those most frequently proffered, see O'Neal, Close Corporations, s 1.02 (1958). For our purposes, a close corporation is one in which the stock is held in a few hands, or in a few families, and wherein it is not at all, or only rarely, dealt in by buying or selling. (Brooks v. Willcuts, 8th cir. 1935) 78 F.2d 270, 273.) Moreover, it should be recognized that shareholder agreements similar to that in question here are often, as a practical consideration, quite necessary for the protection of those financially interested in the close corporation. While the shareholder of a public-issue corporation may readily sell his shares on the open market should management **584 fail to use, in his opinion, sound business judgment, his counterpart of the close corporation often has a large total of his entire capital invested in the business and his no ready market for his shares should he desire to sell. He feels, understandably, that he is more than a mere investor and that his voice should be heard concerning all corporate activity. Without a shareholder agreement, specifically enforceable by the courts, insuring him a modicum of control, a large minority shareholder might find himself at the mercy of an oppressive or unknowledgeable majority. Moreover, as in the case at bar, the shareholders of a close corporation are often also the directors and officers thereof. With substantial shareholding interests abiding in each member of the board of directors, it is often quite impossible to secure, 408 as in the large public-issue corporation, independent board judgment free from personal motivations concerning corporate policy. For these and other reasons too vuluminous to enumerate here, often the only sound basis for protection *28 is afforded by a lengthy, detailed shareholder agreement securing the rights and obligations of all concerned. * * * As the preceding review of the applicable decisions of this court points out, there has been a definite, albeit inarticulate, trend toward eventual judicial treatment of the close corporation as sui generis. Several shareholder- director agreements that have technically 'violate' the letter of the Business Corporation Act have nevertheless been upheld in the light of the existing practical circumstances, i. e., no apparent public injury, the absence of a complaining minority interest, and no apparent prejudice to creditors. However, we have thus far not attempted to limit these decisions as applicable only to close corporations and have seemingly implied that general considerations regarding judicial supervision of all corporate behavior apply. * * * Numerous helpful textual statements and law review articles dealing with the judicial treatment of the close *30 corporation have been pointed out by counsel. One article concludes with the following: 'New needs compel fresh formulation of corporate 'norms'. There is no reason why mature men should not be able to adapt the statutory form to the structure they want, so long as they do not endanger other stockholders, holders, creditors, or the public, or violate a clearly mandatory provision of the corporation laws. In a typical close corporation the stockholders' agreement is usually the result of careful deliberation among all initial investors. In the large public-issue corporation, on the other hand, the 'agreement' represented by the corporate charter is not consciously agreed to by the investors; they have no voice in its formulation, and very few ever read the certificate of incorporation. Preservation of the corporate norms may there be necessary for the protection of the public investors.' Hornstein, 'Stockholders' Agreements in the Closely Held Corporation', 59 Yale L. Journal, 1040, 1056. This court has recognized, albeit sub silentio, the significant conceptual differences between the close corporation and its public-issue counterpart in, among other cases, Kantzler v. Bensinger, 214 Ill. 589, 73 N.E. 874, where an agreement quite similar to the one under attack here was upheld. Where, as in Kantzler and here, no complaining minority interest appears, no fraud or apparent injury to the public or creditors is present, and no clearly prohibitory statutory language is violated, we can see no valid reason for precluding the parties from reaching any arrangements concerning the management of the corporation which are agreeable to all. * * * We now, in the light of the foregoing, turn to specific provisions of the 1955 agreement. The Appellate Court correctly found many of the contractual provisions free from serious objection, and we need not prolong this opinion with a discussion of them here. That court did, however, find difficulties in the stated purpose of the agreement as it relates to its duration, the election of certain persons to specific offices for a number of years, the requirement for the mandatory declaration of stated dividends (**586 which the Appellate Court held invalid), and the salary continuation agreement. 409 Since the question as to the duration of the agreement is a principal source of controversy, we shall consider it first. The parties provided no specific termination date, and while the agreement concludes with a paragraph that its terms 'shall be binding upon and shall inure to the benefits of' the legal representatives, heirs and assigns of the parties, this clause is, we believe, intended to be operative only as long as one of the parties is living. It further provides that it shall be so construed as to carry out its purposes, and we believe these must be determined from a consideration of the agreement as a whole. Thus viewed, a fair construction is that its purposes were accomplished at the death of the survivor of the parties. While these life spans *32 are not precisely ascertainable, and the Appellate Court noted Emma Galler's life expectancy at her husband's death was 26.9 years, we are aware of no statutory or public policy provision against stockholder's agreements which would invalidate this agreement on that ground. (Thompson v. J. D. Thompson Carnation Co., 279 Ill. 54, 116 N.E. 648.) Vogal v. Melish, Ill., 203 N.E.2d 411, also involved a construction of a contract in a close corporation, but not the validity of the contract. While defendants argue that the public policy evinced by the legislative restrictions upon the duration of voting trust agreements (Ill.Rev.Stat.1963, chap. 32, par. 157.30a) should be applied here, this agreement is not a voting trust, but as pointed out by the dissenting justice in the Appellate Court, is a straight contractual voting control agreement which does not divorce voting rights from stock ownership. That the policy against agreements in which stock ownership and voting rights are separated, indicated in Luthy v. Ream, 270 Ill. 170, 110 N.E. 373, is inapplicable to voting control agreements was emphasized in Thompson wherein a control agreement was upheld as not attempting to separate ownership and voting power. While limiting voting trusts in 1947 to a maximum duration of 10 years, the legislature has indicated no similar policy regarding straight voting agreements although these have been common since prior to 1870. In view of the history of decisions of this court generally upholding, in the absence of fraud or prejudice to minority interests or public policy, the right of stockholders to agree among themselves as to the manner in which their stock will be voted, we do not regard the period of time within which this agreement may remain effective as rendering the agreement unenforceable. The clause the provides for the election of certain persons to specified offices for a period of years likewise does not require invalidation. In Kantzler v. Bensinger, *33 214 Ill. 589, 73 N.E. 874, this court upheld an agreement entered into by all the stockholders providing that certain parties would be elected to the offices of the corporation for a fixed period. In Faulds v. Yates, 57 Ill. 416, we upheld a similar agreement among the majority stockholders of a corporation, notwithstanding the existence of a minority which was not before the court complaining thereof. See also Hornstein, 'Judicial Tolerance of the Incorporated Partnership,' 18 Law and Contemporary Problems 435 at page 444. We turn next to a consideration of the effect of the stated purpose of the agreement upon its validity. The pertinent provision is: 'The said Benjamin A. Galler and Isadore A. Galler desire to provide income for the support and maintenance of their immediate families.' Obviously, there is no evil inherent in a contract entered into for the reason that the persons originating the terms desired to so arrange their property as to provide post- death support for those dependent upon them. Nor does the fact that the subject property is corporate stock alter the situation so long as there exists no detriment to minority stock interests, creditors or other public injury. **587 It is however, contended by defendants that the methods provided by the agreement for implementation of the stated purpose are, as a whole, violative of the Business 410 Corporation Act (Ill.Rev.Stat.1963, chap. 32, pars. 157.28, 157.30a, 157.33, 157.34, 157.41) to such an extent as to render it void in toto. The terms of the dividend agreement require a minimum annual dividend of $50,000, but this duty is limited by the subsequent provision that it shall be operative only so long as an earned surplus of $500,000 is maintained. It may be noted that in 1958, the year prior to commencement of this litigation, the corporation's net earnings after taxes amounted to $202,759 while its earned surplus was $1,543,270, and this was increased in 1958 to $1,680,079 while earnings were $172,964. The minimum earned surplus requirement *34 is designed for the protection of the corporation and its creditors, and we take no exception to the contractual dividend requirements as thus restricted. Kantzler v. Bensinger, 214 Ill. 589, 73 N.E. 874. The salary continuation agreement is a common feature, in one form or another, of corporate executive employment. It requires that the widow should receive a total benefit, payable monthly over a five-year period, aggregating twice the amount paid her deceased husband in one year. This requirement was likewise limited for the protection of the corporation by being contingent upon the payments being income tax-deductible by the corporation. The charge made in those cases which have considered the validity of payments to the widow of an officer and shareholder in a corporation is that a gift of its property by a noncharitable corporation is in violation of the rights of its shareholders and ultra vires. Since there are no shareholders here other than the parties to the contract, this objection is not here applicable, and its effect, as limited, upon the corporation is not so prejudicial as so require its invalidation. * * * We hold defendants must account for all monies received by them from the corporation since September 25, 1956, in excess of that theretofore authorized. Accordingly, the judgment of the Appellate Court is *35 reversed except insofar as it relates to fees, and is, as to them affirmed. The cause is remanded to the circuit court of Cook County with directions to proceed in accordance herewith. Affirmed in part and reversed in part, and remanded with directions.

Ramos v. Estrada 8 Cal.App.4th 1070 (1992)

LEOPOLDO L. RAMOS et al., Plaintiffs and Respondents v. ANGEL ESTRADA et al., Defendants and Appellants. No. B059572. Court of Appeal, Second District, California. 411 Aug. 13, 1992. SUMMARY GILBERT, J. Defendants Tila and Angel Estrada appeal a judgment which states they breached a written corporate shareholder voting agreement. We hold that a corporate shareholders' voting agreement may be valid even though the corporation is not technically a close corporation. We affirm. Facts Plaintiffs Leopoldo Ramos et al. formed Broadcast Corporation for the purpose of obtaining a Federal Communications Commission (FCC) construction permit to build a Spanish language television station in Ventura County. Ramos and his wife held 50 percent of Broadcast Corp. stock. The remaining 50 percent was issued in equal amounts to five other couples. The Estradas were one of the couples who purchased a 10 percent interest in Broadcast Corp. Tila Estrada became president of Broadcast Corp., sometimes known as the "Broadcast Group." In 1986, Broadcast Corp. merged with a competing applicant group, Ventura 41 Television Associates (Ventura 41), to form Costa del Oro Television, Inc. (Television Inc.). The merger agreement authorized the issuance of 10,002 shares of Television Inc. voting stock. Initially, Television Inc. was to issue 5,000 shares to Broadcast Corp. and 5,000 to Ventura 41. Each group would have the right to elect half of an eight- member board of directors. The two remaining outstanding shares were to be issued to Broadcast Corp. after the television station had operated at full power for six months. Television Inc.'s board would then increase to nine members, five of whom would be elected by Broadcast Corp. The merger agreement contained restrictions on the transfer of stock and required each group to adopt internal shareholder agreements to carry out the merger agreement. With FCC approval, Broadcast Corp. and Ventura 41 modified their agreement to permit stock in Television Inc. to be issued directly to the respective owners of the merged entities instead of to the entities themselves. Ventura 41 sought this change so that Television Inc. would be treated as a Subchapter S corporation for tax purposes. In part, Broadcast Group agreed to this change in exchange for approval by Ventura 41 of the agreement at issue here, which is known as the June Broadcast Agreement. Among other things, the June Broadcast Agreement provides for block voting for directors by the Broadcast Group shareholders according to their ownership. *1073 In January 1987, Broadcast Group executed a written shareholder agreement, known as the January Broadcast Agreement, to govern the voting and transfer of Broadcast Corp. shares in Television Inc. stock. At a later date, Broadcast Group drafted a written schedule showing the valuation of shares transferred pursuant to the January Broadcast Agreement. It set the price for purchase and sale of shares as their investment cost plus 8 percent per annum. In June 1987, the shareholders of Broadcast Group executed a Master Shareholder Agreement. This agreement was designed to implement the Merger Agreement. It permits direct shareholder ownership of stock and governs various voting and transfer provisions. It requires that shareholder votes be made in the manner voted by the majority of the shareholders. 412 Members of Broadcast Group subscribed for shares of Television Inc. in their respective proportion of ownership pursuant to written subscription agreements attached to the Master Shareholder Agreement. The Ventura 41 group acted similarly. Television Inc. issued stock to these subscribers in December 1987, and they elected an eight-member board. They also elected Leopoldo Ramos president, and Tila Estrada as one of the directors. At a special directors' meeting held on October 8, 1988, Tila Estrada voted with the Ventura 41 group block to remove Ramos as president and to replace him with Walter Ulloa, a member of Ventura 41. She also joined Ventura 41 in voting to remove Romualdo Ochoa, a Broadcast Group member, as secretary and to replace him with herself. Under the June Broadcast Agreement and the Merger Agreement, each of the groups were required to vote for the directors upon whom a majority of each respective group had agreed. The terms of that agreement expressly state that failure to adhere to the agreement constitutes an election by the shareholder to sell his or her shares pursuant to buy/sell provisions of the agreement. The agreement also calls for specific enforcement of such buy/sell provisions. On October 15, 1988, the Broadcast Group noticed another meeting to decide how its members would vote their shares for directors at the annual meeting. All members attended except the Estradas. The group agreed to nominate another slate of directors which did not include either of the Estradas. The Estradas were notified of the results of this meeting. The Estradas unilaterally declared the June Broadcast Agreement null and void as of October 15, 1988, in a letter dictated for them by Paul Zevnik, the *1074 attorney for Ventura 41. Tila Estrada refused to recognize the October 15 vote of the majority of the Broadcast Group to replace her as a director of Television Inc. Ramos et al. sued the Estradas for breach of the June Broadcast Agreement, among other things. The court ruled that the Estradas materially breached the valid June Broadcast Agreement, and it ordered their shares sold in accordance with the specific enforcement provisions of the June Broadcast Agreement. The court restrained the Estradas from voting their shares other than as provided in the June Broadcast Agreement. Discussion (1a) The Estradas contend that the June Broadcast Agreement is void because it constitutes an expired proxy which the Estradas validly revoked. (2) The interpretation of statutes and contracts is a matter of law subject to independent review by this court. (Stratton v. First Nat. Life Ins. Co. (1989) 210 Cal.App.3d 1071, 1079, 1084 [258 Cal.Rptr. 721].) Corporations Code [FN1] section 178 defines a proxy to be "a written authorization signed ... by a shareholder ... giving another person or persons power to vote with respect to the shares of such shareholder." (Italics added.) FN1 All further statutory references are to the Corporations Code unless otherwise specified. Section 7.1 of the June Broadcast Agreement details the voting arrangement among the shareholders. It states, in pertinent part: "The Stockholders agree that they shall consult with 413 each other prior to voting their shares in the Company. They shall attempt in good faith to reach a consensus as to the outcome of any such vote. In the case of a vote for directors, they agree that no director shall be selected who is not acceptable to at least one member (i.e., spousal unit) of each of Group A and Group B. (See & 1.2(b)(1) above [which states that: 'The Stockholders shall be divided into two groups, Group " A" being composed of Leopoldo Ramos and Cecilia Morris, and Group "B" being composed of all the other Stockholders.'].) In the case of all votes of Stockholders they agree that, following consultation and compliance with the other provisions of this paragraph, they will all vote their stock in the manner voted by a majority of the Stockholders." (Second italics in original.) (1b) No proxies are created by this agreement. The agreement has the characteristics of a shareholders' voting agreement expressly authorized by section 706, subdivision (a) for close corporations. (See also legis. committee com., West's Ann. Corp. Code ' 186 (1990) p. 52 [Deering's Ann. Corp. *1075 Code, ' 186 (1977) pp. 49-50], regarding proxies.) Although the articles of incorporation do not contain the talismanic statement that "This corporation is a close corporation," the arrangements of this corporation, and in particular this voting agreement, are strikingly similar to ones authorized by the code for close corporations. Section 706, subdivision (a) states, in pertinent part: "an agreement between two or more shareholders of a close corporation, if in writing and signed by the parties thereto, may provide that in exercising any voting rights the shares held by them shall be voted as provided by the agreement, or as the parties may agree or as determined in accordance with a procedure agreed upon by them. . . ." Here, the members of this corporation executed a written agreement providing that they shall try to reach a consensus on all votes and that they shall consult with one another and vote their own stock in accordance with the majority of the stockholders. They entered into this agreement because they "mutually desire[d]" to limit the transferability of their stock to ensure "the Company does not pass into the control of persons whose interests might be incompatible with the interests of the Company and of the Stockholders, establishing their mutual rights and obligations in the event of death, and establishing a mechanism for determining how the Stockholders' voting rights in the Company shall be exercised. . . ." Even though this corporation does not qualify as a close corporation, this agreement is valid and binding on the Estradas. Section 706, subdivision (d) states: "This section shall not invalidate any voting or other agreement among shareholders ... which agreement ... is not otherwise illegal." The legislative committee comment regarding section 706, subdivision (d) states that "[t]his subdivision is intended to preserve any agreements which would be upheld under court decisions even though they do not comply with one or more of the requirements of this section, including voting agreements of corporations other than close corporations." (West's Ann. Corp. Code, ' 706 (1990) p. 330, italics added.) The California Practice Guide indicates that such "pooling" agreements are valid not only for close corporations, but also "among any number of shareholders of other corporations as well." (Friedman, Cal. Practice Guide: Corporations (The Rutter Group 1992) & 3:159.2, p. 3- 31.)

414 The Estradas cite Dulin v. Pacific Wood and Coal Co. (1894) 103 Cal. 357 [37 P. 207], and Smith v. S. F. & N. P. Ry. Co. (1897) 115 Cal. 584 [47 P. *1076 582], as support for their argument that the agreement is an expired proxy which they revoked. Their reliance on these cases is misplaced. In Dulin, defendant Clugston claimed there was an oral agreement among the shareholders that he would be president of defendant corporation and receive a salary in exchange for various loans and a mortgage to the corporation. At a later election, certain stockholders cumulated their votes and plaintiff Dulin was elected president. Clugston charged a conspiracy to defeat him. The Supreme Court found that the alleged verbal agreement was void and that there had never been an express agreement to elect Clugston. (Dulin v. Pacific Wood and Coal Co., supra, 103 Cal. at p. 363.) No proxy had been given to vote the stock of the others involved, "nor was any required by the agreement to be given." (Ibid.) In short, there was no voting agreement whatsoever, oral or written which could be enforced. The Dulin court never considered whether the objects of the alleged oral agreement were lawful or proper. As Marsh on California Corporation Law explains, "[t]his case would seem to hold nothing more than that the alleged agreement was unenforceable because it was oral." (3 Marsh, Cal. Corporation Law (3d ed. 1991 supp.) ' 22.10, p. 1857.) In Smith, supra, three individuals purchased a majority share of stock in a corporation. To keep control of the corporation, they entered into a written agreement to pool their votes so as to vote in a block for a five-year period. Although two of the three agreed on a slate for an election, the third attempted to repudiate the agreement. The two presented the vote of all the stock held by the trio in accordance with their agreement; the third attempted to vote his own stock in the manner he desired. The court held that the express, written agreement validly called for the trio to vote their shares as a block. (Smith v. S. F. & N. P. Ry. Co., supra, 115 Cal. at p. 598.) The court viewed the agreement as a power (to vote) coupled with an interest (in purchasing stock) which was supported by consideration. (Id., at p. 600.) The court construed the agreement as an agency; a proxy which could not be repudiated. (Id., at pp. 598-599.) There is dicta in Smith suggesting that the agreement in that case constituted an irrevocable proxy. Said the court: "It is not in violation of any rule or principle of law for stockholders, who own a majority of the stock in a corporation, to cause its affairs to be managed in such way as they may think best calculated to further the ends of the corporation, and, for this purpose, *1077 to appoint one or more proxies who shall vote in such a way as will carry out their plan. Nor is it against public policy for two or more stockholders to agree . . . upon the officers whom they will elect, and they may do this either by themselves, or through their proxies. . . ." (Smith v. S. F. & N. P. Ry. Co., supra, 115 Cal. at pp. 600-601, italics added.) The Smith court also held that "[a]ny plan of procedure they [stockholders] may agree upon implies a previous comparison of views, and there is nothing illegal in an agreement to be bound by the will of the majority as to the means by which the result shall be reached. If they are in accord as to the ultimate purpose, it is but reasonable that the will of the majority should prevail as to the mode by which it may be accomplished." (Smith v. S. F. & N. P. Ry. Co., supra, 115 Cal. at p. 601.) 415 In the instant case, the only difference from Smith is that the shareholders here chose to vote their stocks themselves, and not by proxy. What the Smith court held, however, is that voting agreements, like the one here, are valid. If the shareholders are unable to reach a consensus, then each shareholder must vote his or her shares according to the will of the majority. The instant agreement is valid, enforceable and supported by consideration. It states, in pertinent part, that the stockholders entered into the agreement for the purposes of "limiting the transferability of ... stock in the Company, ensuring that the Company does not pass into the control of persons whose interests might be incompatible with the interests of the Company and of the Stockholders, establishing their mutual rights and obligations in the event of death, and establishing a mechanism for determining how the Stockholders' voting rights ... shall be exercised ...." (3) Section 7.2 of the agreement states that "[t]he Stockholders understand and acknowledge that the purpose of the foregoing arrangement is to preserve their relative voting power in the Company .... Accordingly, in the event that a Stockholder fails to abide by this arrangement for whatever reason, that failure shall constitute on [sic] irrevocable election by the Stockholder to sell his stock in the Company, triggering the same rights of purchase provided in Article IV above." The agreement calls for enforcement by specific performance of its terms because the stock is not readily marketable. Section 709, subdivision (c) expressly permits enforcement of shareholder voting agreements by such equitable remedies. It states, in pertinent part: "The court may determine the person entitled to the office of director or may order a new election to be held or appointment to be made, may determine the validity, effectiveness *1078 and construction of voting agreements ... and the right of persons to vote and may direct such other relief as may be just and proper." The Estradas contend that the forced sale provision is unconscionable and oppressive. They portray themselves as naive, small-town business people who were forced to sign an adhesion agreement without reviewing its contents. Substantial evidence supports the findings that Tila Estrada has been a licensed real estate broker. She is an astute businesswoman experienced with contracts concerning real property. The consent and signatures of the Estradas to the agreement were not procured by fraud, duress or other wrongful conduct of Ramos. The Estradas read and discussed with other members of Broadcast Group, and with their own counsel, the voting, buy/sell and other provisions of the agreement and the January Broadcast Agreement, as well as various drafts of these documents, and they freely signed these agreements. On direct examination, under Evidence Code section 776, Tila Estrada admitted she owns and operates a real estate brokerage business; she regularly reviews a broad variety of real estate documents; she and her husband own and manage investment property; and she has considered herself "to be an astute business woman" since 1985. Tila Estrada also has been a participant and owner in another application before the FCC, for an FM radio station, before the instant suit was filed.

416 Ms. Estrada stated she got copies "of all the drafts and all the Shareholders Agreements." She discussed these agreements with other members of Broadcast Group and with its counsel, Mr. Howard Weiss. The June Broadcast Agreement, including its voting and buy/sell provisions, was unanimously executed after the Estradas had a full and fair opportunity to consider it in its entirety. As the trial court found, the buy out provisions at issue here are valid, favored by courts and enforceable by specific performance. * * * The Estradas breached the agreement by their written repudiation of it. Their breach constituted an election to sell their Television Inc. shares in accordance with the terms of the buy/sell provisions in the agreement. This *1079 election does not constitute a forfeiture-they violated the agreement voluntarily, aware of the consequences of their acts and they are provided full compensation, per their agreement. The judgment is affirmed. Costs to Ramos. Stone (S. J.), P. J., and Yegan, J., concurred. * * *

Walta v. Gallegos 40 P.3d 449

Court of Appeals of New Mexico.

Mary E. WALTA, Plaintiff-Counterdefendant-Appellee, v. GALLEGOS LAW FIRM, P.C., a New Mexico professional corporation, and J.E. "Gene" Gallegos, Defendants-Counterclaimants-Appellants.

Dec. 14, 2001. Certiorari Denied, No. 27,281, Jan. 28, 2002.

OPINION

BUSTAMANTE, Judge.

{1} This case involves the contested restructuring of a professional corporation engaged in the practice of law. J.E. "Gene" Gallegos (Gallegos) appeals the jury's award of punitive damages in favor of Mary E. Walta (Walta) for breach of fiduciary duties with respect to the purchase of Walta's stock in the corporation. Gallegos argues that the award of punitive damages cannot be supported for three reasons: (1) he fulfilled his fiduciary duties as a majority stockholder of a close corporation in purchasing the stock of a minority shareholder by disclosing all material information bearing on the value of the stock, (2) the "economic loss rule" bars recovery in tort when damages flow from a breach of contract, and (3) punitive damages 417 cannot be awarded absent proof of a culpable state of mind coexistent with the conduct that constitutes the breach of legal duty. We affirm and address the nature of the fiduciary duties shareholders and directors of close corporations owe to each other.

BACKGROUND

{4} The Gallegos Law Firm, P.C. (GLF), is a New Mexico professional corporation engaged in the practice of law. Gallegos founded GLF in 1987 and has always served as the corporation's president. Walta joined GLF in January 1990. As of November 1994, GLF had five attorney-shareholders: Gallegos, Walta, Michael Condon, David Sandoval, and Glenn Theriot. At that time, Gallegos owned 4,000 shares (50%) of GLF's stock. Walta owned 2,000 shares (25%) of GLF's stock. The balance of the corporation's 8,000 issued and outstanding shares were held by Condon (1,000 shares), Sandoval (900 shares), and Theriot (100 shares).

{5} While GLF enjoyed reasonable financial success, it experienced sporadic financial pressures during 1993 and 1994. This resulted in some dissension among its shareholders. As early as June 1992, Walta had spoken in opposition to GLF's acceptance of certain contingency fee cases. On a number of occasions, Walta told Gallegos that the manner in which GLF accepted contingency fee cases should be reformed. Walta thought GLF was becoming too indebted on its line of credit because of its contingency case load. Gallegos responded with annoyance at Walta's concerns because he believed his experience made him more qualified than Walta to evaluate such cases.

{6} Walta felt Gallegos often singled her out as the source of his irritation. By 1993 GLF had become heavily involved in several contingent fee matters taken on by Gallegos that were taxing GLF's resources. Despite this, Gallegos had GLF spending heavily, including a corporate aircraft with added pilot and hangar expense. Expenses remained high and the bank lines of credit were heavily utilized. During an April 1993 shareholder meeting, Gallegos abruptly cut off Walta's efforts to discuss GLF's finances, saying:

[H]e didn't need [her] to tell him how to do--how to manage a firm. That he had been practicing law for 35 years. He didn't need [her] input. He didn't need [her] to tell him how to take cases.... And then he said to [her] "I am sick and tired of you nagging at me. You remind me of one of my ex-wives, and the same thing is going to happen to you that happened to her if you don't be quiet."

Later in 1993, Gallegos wanted Walta and Condon to sign a personal guarantee for GLF's burgeoning line of credit. When they disagreed with his demand, Gallegos discontinued their stock purchase rights.

{7} In early November 1994, Gallegos invited Walta to lunch. Walta characterized this as an unusual event. He questioned Walta about her future plans, referenced Walta's growing practice, and specifically asked her whether she planned to leave GLF soon. Walta, surprised, 418 said she had no plans to leave. Gallegos then repeated to Walta his "five year plan" to phase out of the practice of law and his desire to implement it. Gallegos indicated to Walta that he did not expect the GLF structure to change as he phased out of active practice.

{8} A few days later on November 27, 1994, Gallegos circulated a memorandum to each of GLF's four other shareholders, including Walta, proposing that GLF purchase their stock, leaving Gallegos the sole shareholder. The memorandum was left on each shareholder's desk on the Sunday evening following Thanksgiving. As an alternative, Gallegos suggested Walta and the other three shareholders could purchase Gallegos' stock with Gallegos departing from the firm if any of the shareholders believed that the proposal was not reasonable and acceptable. The memorandum implied that Gallegos' desire to dissolve GLF was motivated by his wish to devote more time to his family and personal interests, and by a desire to change the manner in which he practiced law.

{9} Walta testified that, immediately upon reading the memorandum, she believed the memorandum "fired" her, that it was directed at getting her out of GLF, and that her departure was a "done deal" over which she had no control. Walta concluded that Gallegos' proposals violated the GLF's by-laws, and she obtained legal advice concerning her rights. Walta kept all this to herself; she did not inform Gallegos that she objected to either proposal set forth in the memorandum until her last day at GLF, four months later on March 31, 1995. Walta testified that she did not talk to Gallegos about the memorandum because of the "angry tone" of the memorandum, and because she feared that Gallegos would retaliate against her for doing so.

{10} The terms of the proposal included that "stock will be surrendered and valued in accordance with the corporate by-laws as of December 31, 1994 and your employment terminated at that time." The firm's by-laws distinguished between "vested" and "non-vested" stock when valuing a departing shareholder's stock surrendered to the corporation. Walta's 2,000 shares of GLF stock included both vested and non-vested stock. For non-vested stock, generally, the shareholder would be paid the equivalent of the purchase price of the stock or no less than "the exact cost of the stock to him or her." Walta and the other shareholders had paid $10 per share. Vested stock was not so easily valued.

{11} Stock became "vested" only if a shareholder had at least three years of employment commencing from "the date that he or she first acquired shares in the corporation." A shareholder surrendering vested stock would receive "present book value ... as of the effective date of termination." The by-laws defined "present book value" as follows:

[T]he calculation of per share value resulting from total[ ]ing the assets of the corporation, subtracting the liabilities of the corporation, and dividing the net sum, if any, by the number of shares issued and outstanding. For this valuation, the corporate assets shall not include unbilled work in progress, but shall include collectible accounts receivable, including those billed for the month in which the shareholder's termination or disqualification is effective. Present book value shall be calculated as of the effective date of the shareholder's termination or disqualification.

If the computation of "present book value" yielded a negative value, or a value of less than $10 419 per share, the value of the vested stock would nevertheless be deemed to be the shareholder's acquisition price; $10 per share.

{12} GLF's shareholders met on December 15, 1994. All five shareholders, including Walta attended. Gallegos solicited responses to the November 27, 1994, memorandum. Walta commented on several aspects of the proposal, such as the need to extend the transition period, the effect of the proposal on the firm's clients, and the need to have time for the clients to decide whether their matters would stay with GLF or go with departing shareholders. It is uncontradicted that, during this meeting, Walta did not raise any concerns about valuation and buy-out of her stock or about the termination of her employment by the firm. At the conclusion of the meeting, Gallegos stated that he was open to extending the shareholders' transition until March 31, 1995; this was eventually done.

{13} On January 4, 1995, GLF's shareholders sent Gallegos a memorandum authored by Walta raising "[a] number of questions ... as to the proposed buy- out," and suggesting a shareholders' meeting to discuss the buy-out. The first of the multiple questions in the memorandum was "[t]iming. Unofficially set for 3/31/95. Is this now a firm date?"

{14} Gallegos responded on January 6, writing "The end of the transition period is firmly March 31, 1995." His memorandum further stated:

The operative date for stock evaluation is December 31, 1994. While the bylaws provide for options to purchase additional shares in January 1995, it is apparent that would be inappropriate given what I take to be all shareholders' agreement to sell out to the firm. On the same basis that December 31, 1994 is the operative date for buy-out of shares, departing shareholders have no concern regarding 1995 profit or loss. Payment for a departing shareholder's stock will be made on April 1, 1995 in full.

{15} From December 15, 1994, until Walta's departure from GLF on March 31, 1995, Walta and Gallegos met on a number of occasions to discuss year-end firm finances with the firm's accountant, to discuss the transition of client files, to work on pending cases and other matters. Gallegos testified Walta did not ask him about the buy-out of her stock or the financial information for valuing the stock, and she did not venture an estimate of her own as to the value of the stock.

{16} There was evidence that during this time GLF's working atmosphere was very strained. Gallegos communicated with Walta only on a "need to" basis, frequently in writing. Gallegos refused Walta access to GLF's monthly financial statements. Walta had to point out that Condon had access to them to get Gallegos to relent. Gallegos excluded Walta from GLF's presentations to prospective clients, although Condon and Sandoval continued to be included. Though GLF clearly promised to be busy in the months ahead, Gallegos offered Walta no contract work to assist her in her transition. When Walta attempted to purchase office furniture and books from GLF before she left, Gallegos refused, contrary to the offer in his November 27, 1994, memorandum. Walta was permitted to take only the furniture in her office, as was her right under the Shareholder's Agreement, and a few small items for which she paid book value. Walta testified she received no help from Gallegos in finding another job. 420 {17} Due to her tenure, Walta felt that 1000 shares of her stock was vested. Only Walta and Gallegos owned vested stock. Gallegos had represented in his November 27, 1994, letter that he would proceed under the by-laws in valuing the stock of departing shareholders under his proposed stock buy-out. However, on March 28, 1995, Walta received a copy of a letter from Gallegos to another shareholder, Theriot. As a new shareholder, Theriot was not vested and was not entitled to receive more than par value; ten dollars ($10) per share. Gallegos' letter to Theriot stated that under the "present book value" formula in the by-laws Gallegos had circulated, the stock had a "negative value" on December 31, 1994, and therefore, vested stock would only be valued at par, or $10 per share. Gallegos admitted to the jury that the letter was intended to deliver a message to Walta that she would only be paid $10 per share as well. Gallegos did not disclose that, in arriving at a "negative value" for GLF's stock, he had omitted certain accounts receivable from the calculation because he thought at that time they were not " collectible accounts receivables" within the definition of present book value in the bylaws.

{18} To value Walta's vested stock, Gallegos testified he used a substitute for GLF's "collectible accounts receivable," and used December 31, 1994, as Walta's termination date. Gallegos testified he did not use actual "collectible accounts receivable" as stated in the by-laws' definition of "present book value" because GLF business practices did not and had never included preparation of a report that provided such information. GLF accounting was on a cash basis, rather than an accrual basis; accordingly no amount for accounts receivable was entered on the regularly produced balance sheets. Gallegos felt that whether or not an account receivable was, in the words of the by-laws "collectible," had to be a judgment call for management to make by manually examining each account and forming an estimate of future collectibility. Gallegos opined that it would have required considerable time and subjective judgment to collect information on accounts receivables and determine whether they were collectible.

{19} Gallegos testified he valued Walta's stock using the same method used by the directors, including Walta, to value vested stock the only other time a shareholder with vested stock had left GLF. That shareholder, Michael Oja, resigned in February 1993. When valuing Oja's vested stock in April 1993, the directors used the dollar amount of accounts billed to clients for February 1993, the month of the shareholder's departure, as a substitute for "collectible accounts receivable." Although that procedure did not comply with the letter of the by-laws, all the directors, including Walta, had agreed to it. That method could result in an amount either more or less than the actual collectible accounts receivable; e.g., billings from the first of the month could be paid and no longer "receivable" but would be included.

{20} Gallegos' method of calculation resulted in a stock value for both vested and non-vested stock of $20,000--the amount Walta had paid for the stock.

{21} At trial, experts for Gallegos, GLF, and Walta had the advantage of hindsight in totaling accounts actually collected after Walta left. Gallegos' expert concluded that as of December 31, 1994, the GLF had accounts receivable of $657,989, and that even under his conservative estimate, the value of Walta's vested shares as of December 31, 1994, was $41,275, not $20,000, as contended by Gallegos. The jury ultimately decided that all of Gallegos's stock was worth 421 $62,550, the amount calculated by Gallegos's expert.

{22} On March 31 Walta left a letter on Gallegos' desk informing him that "I believe my termination of employment with the firm is wrongful and without cause." Walta's letter also stated that she had retained an attorney "as my legal counsel" to whom she had delivered her GLF stock to "work out the surrender of the stock." She wrote: "You have indicated that the value which you will assign to my stock is $10 per share, the cost of the stock. I dispute your valuation, as well as your determination that December 31, 1994 is to be the date upon which the valuation is based."

{23} Walta testified that between the time of Gallegos' stock buyout memorandum and her departure from GLF, it became apparent to her that Gallegos' actual intention in the stock buyout was to convert GLF to a corporation with a sole shareholder--Gene Gallegos, and to restructure the firm to remove only one attorney--Walta. Contrary to Gallegos' prior representations that going forward GLF would be comprised of only himself and a young associate, Walta discovered that before the end of 1994, Gallegos had offered shareholder Michael Condon continued full-time employment as a salaried associate with GLF after March 31, 1995. Condon accepted and was given a salary increase. Gallegos misrepresented to Walta that Condon was only working on contract. Walta also learned that shareholder David Sandoval had been offered continued full-time salaried employment, even though prior to the November 27, 1994, memorandum, Sandoval had already announced his resignation from GLF. Sandoval declined the offer. Walta also learned that Gallegos had offered shareholder Theriot contract employment indefinitely, without shareholder status. It was only Walta who was not asked to continue at GLF.

{24} In sum, based primarily on her testimony, if believed by a jury, Walta's evidence and theory of the case was to the effect that Gallegos disliked her, was angry at her, was dictatorial in his management of GLF, and that the firm's buy-out of the four attorney-shareholders was accomplished solely to get rid of her.

{25} In a June 6, 1995, letter, Walta's attorney valued her stock at $52,000, based on the valuation set for shareholder Oja in 1993, and the view that Walta's stock was 100% vested. Gallegos testified he disagreed with the amount claimed in the letter because her stock could not have been 100% vested. Gallegos understood the letter as demanding in excess of a half million dollars to settle all of Walta's claims, and not offering to settle any single claim. Walta herself was unsure if she would have accepted payment for her stock unless all of her claims were settled in a package deal. At no point did Walta surrender her stock to GLF, the requisite to being paid for it. Although the by-laws included a provision for arbitration of disputes concerning stock value, no one demanded arbitration. Gallegos' response to these settlement demands, was that he wanted the stock valuation and other issues to be resolved by a court.

PROCEDURAL POSTURE

{26} In July 1996 Walta sued GLF and Gallegos for money damages, alleging six separate claims for relief, including breach of employment contract, breach of obligations owed to shareholders under the shareholder agreement, breach of fiduciary duties, retaliatory discharge, 422 promissory estoppel, and intentional interference with contractual relationship. GLF and Gallegos answered the complaint and counterclaimed. GLF and Gallegos later filed an amended counterclaim against Walta asserting malicious abuse of process.

{27} The trial court directed a verdict against Walta on her retaliatory discharge and promissory estoppel claims and against Gallegos on his malicious abuse of process claim. Thereafter, Gallegos withdrew all of his remaining counterclaims and the matter was submitted to the jury only on Walta's surviving claims.

{28} The jury found in favor of GLF and Gallegos on Walta's breach of employment agreement and interference with contract claims. The jury found in favor of Walta, and against GLF, only on her claim for breach of the shareholder agreement, and in favor of Walta and against Gallegos alone for "breach [of] his fiduciary duties with respect to the Plaintiff's shareholder agreement and to Plaintiff Mary Walta." The jury awarded Walta compensatory damages in the amount of $62,550 against both GLF and Gallegos for the value of her stock. * * *

SCOPE OF FIDUCIARY DUTY

{30} The parties agree that some sort of fiduciary duty exists between them. They disagree as to its scope. [FN1]

FN1. Gallegos posits a four-factor test which is simply too narrow and is incompatible with the high standard of good faith we believe should apply. Gallegos' proposed test is: (a) an officer or director of a close corporation is dealing with a minority shareholder, (b) the purchaser withholds information that if made known would bear materially on the value of the stock, (c) the minority owner sold their stock, and (d) the price received was less than actual value. The test imposes an improper requirement when it presupposes an actual sale before a breach can occur. Further, the test does not adequately address the effect of breaches of the shareholders' agreements with regard to stock purchases.

{31} Gallegos correctly asserts that the nature of the fiduciary duty owed between shareholders and directors of close corporations is a matter of first impression in New Mexico. We have a few cases involving small corporations in conflict, but they do not address this issue. For example, Schwartzman v. Schwartzman Packing Co., 99 N.M. 436, 439, 659 P.2d 888, 891 (1983), involved the common law and statutory duty to allow examination of corporate books, but the court there had no reason to explore the contours of other shareholder's duties. In McCauley v. Tom McCauley & Son, Inc., 104 N.M. 523, 529, 724 P.2d 232, 238 (Ct.App.1986), this Court examined the concept of "oppressive conduct" sufficient to support judicial intervention in corporate affairs under the New Mexico corporation statute in effect at that time. See also NMSA 1978, § 53-16-16(A)(1) (b) (1967). McCauley is useful to us for its general approach and observations about the characteristic features of close corporation, but it does not address the idea of an enforceable fiduciary duty between shareholders outside the context of the corporation statute's provision for relief from illegal, oppressive or fraudulent conduct. Id., 104 N.M. at 526-29, 724 P.2d at 235-38.

423 {32} We start by examining the close corporation. In a widely cited opinion, the Massachusetts Supreme Judicial Court defined a close corporation as one "typified by: (1) a small number of stockholders; (2) no ready market for the corporate stock; and (3) substantial majority stockholder participation in the management, direction and operations of the corporation." Donahue v. Rodd Electrotype Co., 367 Mass. 578, 328 N.E.2d 505, 511 (1975). See generally O'Neal & Thompson, O'Neal's Close Corporations § 1.02 (3rd ed.) (hereafter O'Neal's).

{33} These characteristics of close corporations may sometimes be abused to allow majority shareholders to take advantage of minority shareholders. Minority shareholders are vulnerable to a variety of oppressive devices. These devices include refusing to declare dividends, draining of corporate earnings in the form of exorbitant salaries and bonuses paid to majority shareholders, denying minority shareholders corporate offices and employment, and selling corporate assets to majority shareholders at reduced prices. Donahue, 328 N.E.2d at 512-13. This Court noted the same phenomenon as the potential for the "freeze out' or squeeze out' of minority shareholders by use of oppressive tactics." McCauley, 104 N.M. at 527, 724 P.2d at 236; see O'Neal's § § 9.02, 9.03.

{34} To combat such tactics, courts have, over the years, recognized various versions of fiduciary duties that majority or controlling shareholders owe to minority shareholders. See generally 3 William Meade Fletcher, Cyclopedia of the Law of Private Corporations § 838 (rev. perm. ed. 1994 & Cum.Supp.2000) (asserting that all jurisdictions now recognize a fiduciary duty between officers and shareholders); O'Neal's § 9.19 (same). The general rule has been sufficiently developed by appellate opinions to establish that the fiduciary duty does not depend on shareholder control, but rather arises out of the nature of a closely held corporation. For example, some courts have explicitly recognized that the duty extends to minority shareholders in close corporations. Zimmerman v. Bogoff, 402 Mass. 650, 524 N.E.2d 849, 853 (1988); A.W. Chesterton Co. v. Chesterton, 128 F.3d 1, 6 (1st Cir.1997). As the Donahue court noted "the minority may do equal damage through unscrupulous and improper sharp dealings' with an unsuspecting majority." Donahue, 328 N.E.2d at 515 n. 17 (citing Helms v. Duckworth, 249 F.2d 482 (1957)).

{35} Starting with its observation that "the close corporation bears striking resemblance to a partnership," Id. at 512, the Donahue court's formulation stands today as the purest expression of the fiduciary duties owed by shareholders:

Because of the fundamental resemblance of the close corporation to the partnership, the trust and confidence which are essential to this scale and manner of enterprise, and the inherent danger to minority interests in the close corporation, we hold that stockholders in the close corporation owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another. In our previous decisions, we have defined the standard of duty owed by partners to one another as the "utmost good faith and loyalty." Stockholders in close corporations must discharge their management and stockholder responsibilities in conformity with this strict good faith standard. They may not act out of avarice, expediency or self-interest in derogation of their duty of loyalty to the other stockholders and to the corporation. 424 Id. at 515. (Footnotes and citations omitted).

{36} Since the Donahue decision, the Massachusetts court has refined its notion of fiduciary duty. Recognizing that self-interest is not necessarily synonymous with improper motivation, the court held that controlling groups should be allowed to demonstrate a legitimate business purpose for their actions. See Wilkes v. Springside Nursing Home, Inc., 370 Mass. 842, 353 N.E.2d 657, 663 (1976). Upon demonstration of such a purpose, the court then determines "the practicability of a less harmful alternative" to the minority interest. Id. This common sense approach alleviated the court's concern that "untempered application of the strict good faith standard" could unduly hamper corporate management. Id. at 663. This approach provides equilibrium to the majority's need to pursue legitimate business actions and the minority's vulnerability to oppression in a close corporation.

{37} Though formulated somewhat differently, other courts have followed the Donahue/Wilkes lead. For example, the Mississippi Supreme Court characterized Donahue and other cases as decisions which "evince the evolving awareness by courts of the distinctive characteristics and needs of close corporations." Fought v. Morris, 543 So.2d 167, 171 (Miss.1989). The court in Fought stated that majority action must be "intrinsically fair" to minority interests and observed that the relationship between shareholders in close corporations was of trust and confidence--the same relationship which prevails in partnerships. Id. The Minnesota courts have similarly analogized close corporations to partnerships as a basis for the recognition of fiduciary duties owed between shareholders. See Berreman v. West Publ'g Co., 615 N.W.2d 362, 367 (Minn.Ct.App.2000) and cases cited therein.

{38} We agree with the reasoning and approach of these cases. While the analogy to partnership principles is incomplete because partners are provided more protection by statute from freeze-out tactics than corporate shareholders, it is still useful. See NMSA 1978, § 54-1A- 401(f), (h), (i), (j) (1997). The analogy recognizes the nature of close corporation organization and, because our partnership case law is reasonably well-developed, it provides a ready source of precedent helping to provide content to the concept of fiduciary duty. [ * * * ] * * * Thus, we hold that Gallegos owed Walta a fiduciary duty in his efforts to restructure GLF, including the purchase of her GLF stock. And, drawing on our partnership case law, we hold that breach of this fiduciary duty can be asserted as an individual claim separate from the remedies available under our statutory corporate law for oppressive conduct. See * * * Restatement (Second) of Torts § 874 (1977).

{39} Of course, recognizing the fiduciary nature of a relationship does not give it content in any given context. As we noted in McCauley with regard to the concept of oppressive conduct, no specific catalog of elements is necessary or perhaps even appropriate. Too narrow a definition of an expansive term would be ossifying. McCauley, 104 N.M. at 537, 724 P.2d at 246. We can, however, place this duty in the context of other standards of right conduct recognized by the law, and we can provide guidance for analogous cases where restructuring a close corporation includes termination of shareholder/employer and corporate purchase of shares.

425 {40} First, it seems self-evident that a fiduciary duty is inconsistent with standards of conduct typically at play in arm's-length commercial or business transactions. As Chief Judge Cardozo noted: "Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties.... Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior." Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545, 546 (1928). The standard for a fiduciary, in this context, is thus higher than the duty of good faith and fair dealing imposed on all contractual relationships. Watson Truck & Supply Co. v. Males, 111 N.M. 57, 60, 801 P.2d 639, 642 (1990).

{41} The duty between shareholders of a close corporation is similar to that owed by directors, officers, and shareholders to the corporation itself; that is, loyalty, good faith, inherent fairness, and the obligation not to profit at the expense of the corporation. DiLaconi v. New Cal Corp., 97 N.M. 782, 788, 643 P.2d 1234, 1240 (Ct.App.1982); Donahue, 328 N.E.2d at 515-16.

{42} In adopting the Massachusetts approach, we are clearly aligning ourselves with the line of cases which impose a high duty of candor and good faith when majority shareholders are dealing with minority shareholders. See, e.g., Orchard v. Covelli, 590 F.Supp. 1548, 1556-57 (W.D.Penn.1984) (recognizing an enhanced fiduciary duty for directors and officers when dealing with minority shareholders in a close corporation); cf. Van Schaack Holdings, Ltd. v. Van Schaack, 867 P.2d 892, 897 (Colo.1994) (en banc) (adopting the "special facts" doctrine to impose an enhanced fiduciary duty to fully disclose material information bearing on the value of stock when purchased by the close corporation). While some commentators would label the approach we adopt as the "minority view," our review of the case law informs us that it is actually the prevalent view among those courts which have addressed the issue. * * *

{43} Having generally defined the rigor of the fiduciary duty, one must apply it to specific aspects of the legal relationship between shareholders in a close corporation. Issues are most likely to arise in connection with valuation of the stock, the related matter of disclosure of material facts relating to corporate officers, and adherence to contractual obligations between the shareholders.

{44} The duty of full disclosure of material facts affecting the value of stock has been dealt with often by the courts. The majority of the cases impose a duty of full, voluntary disclosure. Van Schaack, 867 P.2d at 898; Jordan v. Duff & Phelps, Inc., 815 F.2d 429, 435 (7th Cir.1987) ( "Close corporations buying their own stock, like knowledgeable insiders of closely held firms buying from outsiders, have a fiduciary duty to disclose material facts."); Thorne v. Bauder, 981 P.2d 662, 664 (Colo.Ct.App.1998); Shermer v. Baker, 2 Wash.App. 845, 472 P.2d 589, 594 (1970); Berreman, 615 N.W.2d at 371. The requirement of full disclosure felicitously acts to equalize bargaining positions where valuation is typically difficult. The cases are clear that the duty requires disclosure beyond mere access to the books and records of the corporation. Van Schaack, 867 P.2d at 898-99; Michaels v. Michaels, 767 F.2d 1185, 1200 (7th Cir.1985). Our cases have consistently held that partners, as fiduciaries, are "required to fully disclose material facts and information relating to partnership affairs to the other partners, even if the other partners have not asked for the information." Fate, 2001-NMCA-040, ¶ 25, 130 N.M. 503, 27 P.3d 990.

426 {45} In accordance with these authorities, we hold as a matter of New Mexico law that a majority shareholder, as well as an officer or director of a close corporation, when purchasing the stock of a minority shareholder, has a fiduciary obligation to disclose material facts affecting the value of the stock which are known to the purchasing shareholder, officer, or director by virtue of his position, but not known to the selling shareholder. We adopt the standard for what information is material established by the United States Supreme Court in TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 48 L.Ed.2d 757, (1976) (An omission or misstatement is material if there is a "substantial likelihood that, under all the circumstances, the omitted [or misstated] fact would have assumed actual significance in the deliberations of the reasonable shareholder.")

{46} This case--as perhaps most cases of this kind will--includes a shareholder agreement. It is undisputed that Gallegos and GLF did not follow the letter of the shareholder agreement embodied in the GLF by-laws, either as to Walta's termination as an employee or the valuation of her shares in connection with the proposed buy-out. [FN3] What is the nature of the fiduciary duty arising from shareholder agreements and when may non-compliance with such agreements be deemed a breach of the duty? This case is similar to Fought v. Morris. There, one of the shareholders wanted to sell his shares. Morris bought all of the departing shareholders' stock-- contrary to the stock redemption agreement controlling such events between them. Thereafter, Morris "froze out" Fought and offered to buy his shares at an improperly reduced price which was calculated contrary to the formula set forth in their agreement. Fought, 543 So.2d at 171-72. The Mississippi court held that breach of the shareholder agreement could also be a breach of the majority's fiduciary duty. The Court went on to hold that both the improper purchase and the improper value calculation were actionable breaches of Morris' fiduciary duty.

FN3. The jury found against Walta on her breach of employment contract claim. Thus, the jury decided that non-compliance with the bylaws as to her employment status was not actionable. The basis for that decision need not detain us since Walta has not appealed the verdict against her. However, resolution of the employment status says nothing about the jury's resolution of the issues surrounding Walta's status as a shareholder.

{47} We adopt the Fought court's reasoning, noting, however, that not every noncompliance with a shareholder agreement is necessarily a breach of fiduciary duty--but in appropriate circumstances may be. As with most matters of judgment, whether a breach of fiduciary duty has occurred will normally be a question of fact for the jury.

{48} We pause to note that the fiduciary duty we define here is a default standard applicable in the absence of a contrary agreement between shareholders. Shareholders are free to agree to different standards as long as the essence of right conduct is preserved.

{52} In this case there was evidence to support a jury conclusion that Gallegos breached his fiduciary obligations owed to Walta. As majority shareholder of a close corporation, as well as an officer and director, Gallegos had a duty of openness to disclose material facts affecting the 427 value of the stock in regard to the proposed buy-out. The shareholder agreement defined that duty in more detail. At the very least, that duty included compliance with the valuation formula set forth in the shareholder agreement, or a full and frank disclosure of any deviation from that formula and the reasons why.

{53} The record supports a conclusion that Gallegos did neither. He purposely omitted a valuation for the collectible accounts receivables and did not disclose that fact to Walta. Then, when confronted by Walta, Gallegos continued to refuse to perform his obligations under the shareholder agreement. The jury found the corporation liable for breach of the shareholder agreement. That breach was a direct result of Gallegos' failure to respect Walta's rights as a minority shareholder, in the particular context of a buy-out, and, as the jury also found, to fulfill his obligations to her as a fiduciary. We conclude that both the law, as previously discussed, and the facts, as elicited at trial, support a jury verdict that Gallegos breached his fiduciary obligations in his dealing with Walta.

CONCLUSION

{66} Finding no error in the trial court's submission of punitive damages to the jury, and finding substantial evidence to support the jury's verdict, we affirm.

{67} IT IS SO ORDERED.

WE CONCUR: RICHARD C. BOSSON, Chief Judge, and A. JOSEPH ALARID, Judge.

Cain v. Cain Mass.App.Ct. 467, 334 N.E.2d 650 (1975)

Patrick W. CAIN et al. v. John G. CAIN, Jr Appeals Court of Massachusetts, Suffolk Argued May 16, 1975 Decided Sept. 15, 1975. *468 GOODMAN, Justice. This is an appeal by the plaintiffs Patrick W. Cain (Patrick) and Airport Express, Inc. (Airport)[FN1] from a final judgment in an action against John G. Cain, Jr. (John) in which the plaintiffs sought (among other things) declaratory and injunctive relief, damages, and an 428 accounting. The case was tried before a judge who filed 'Findings, Rulings and Order for Judgment' (Mass.R.Civ.P. 52(a)). The evidence is reported. Our summary of the facts is taken primarily from the trial judge's findings *469 and from those factual allegations made by the plaintiffs in their bill of complaint that were admitted by the defendant in his answer. * * * Patrick and John are brothers and the sole stockholders in Airport, a Massachusetts corporation engaged in the trucking business at the Boston Airport (Logan). They each hold 50% of the outstanding shares. Patrick is the president and a director of Airport. John is treasurer, clerk, and a director In 1969 Patrick purchased Airport, an existing corporation, for $9,500. One of Airport's principal assets at that time, which it still possesses, was a certificate from the Interstate Commerce Commission (referred to as 'ICC rights') which relates to Airport's authority to carry goods throughout Massachusetts. About six months later, John went to work for Airport. On August 10, 1971, Patrick and John executed a document entitled 'Articles of Copartnership.'[FN2] On September 29, 1971, Patrick executed and delivered to John a 'bill of sale' under seal for fifty shares of Airport stock (constituting 50% of the outstanding shares) reciting receipt of 'one ($1.00) dollar and other valuable consideration.' Sometime in 1972 John was elected treasurer, clerk, and a director of Airport. From that time until the present the directors of Airport have been Patrick, Susanne Cain (Patrick's wife), John, and Esther D. Cain (John's wife). FN2. Among the provisions of this document (which 'came out of a business management book') are the following: '(t)hat the said parties have . . . formed a copartnership for the purpose of engaging in the transportation business' under Airport's name at that time; that '(a)ll profits and losses shall be shared equally'; that '(a) systematic record of all transactions is to be kept and made available to each partner for inspection'; that '(e)ach partner will devote his entire time and attention to the business and engage in no other business enterprise without the consent of the other'; that '(e)ach partner is to have a salary of $350 per week,' and '(n)either party is to withdraw an amount in excess of his salary without the consent of the other'; that Patrick is to 'supervise loading and unloading of freight and any other duties that pertain to the pickup and delivery of freight'; that John is to 'have charge of the office and records, dispatch of drivers and any other duties that pertain to the office,' and that '(e)ach will have equal hours.' *470 From 1972 until May, 1973, John borrowed amounts from Airport totalling $4,000. No portion of this sum has been repaid. Under date of March 11, 1972, John delivered a letter to Patrick stating that 'effective immediately I am hereby cancelling all contractual agreements between us. . . . The termination includes any and all written or verbal agreements of any type . . ..' In a separate letter sent on the same date, John, '(i)n accordance with the terms of the by-laws for Airport'[* * *], offered to sell his shares to the **653 corporation; this offer was not accepted by Airport. [FN4] The corporation continued to operate as previously without change in officers and directors and with John and Patrick drawing equal salaries. FN4. John made several other offers to sell his stock either to Patrick or to Airport after March 11, 1972. At a meeting of the board of directors of Airport on May 11, 1974, it 429 was voted to purchase John's shares for $40,000. The stock was never in fact purchased, and the trial judge declared this vote of the board voidable by the corporation. As of May 17, 1974, Novo Airfreight (Novo), a freight forwarder which accounted for a substantial part of Airport's business, terminated its agreement with Airport.[FN5] On or about the same date, John activated Airfreight Specials (Specials), a proprietorship of which he was the sole owner. Specials is a tenant, rent free, in Novo's space. Since then, 25% or 30% of Novo's business has been given to Specials, while Airport's share of Novo's business has declined from 50% to 7% or 10%. Two truck drivers left the employ of Airport in mid-May, 1974, and are now employed by Specials. There was conflicting testimony at trial whether Specials had taken over another of Airport's accounts. FN5. The agreement provided for termination upon a two-week notice by either party. There was also conflicting testimony as to access to corporate books and records and the corporate checkbook. Patrick claimed that John had denied him access to the *471 records, while John testified that Patrick had never requested such access. Finally there was a conflict as to the amount of time John devoted to Airport's affairs, with John testifying that in 1974 on the average he worked twelve to fifteen hours a day for Airport, while Patrick testified that during that period John only kept the books and did the billing and occasionally came into the office for two or three hours.[FN6] FN6. None of the conflicts referred to was resolved by the trial judge in his findings. The final judgment granted relief only to the extent of requiring repayment of the $4,000 borrowed by John from Airport and declaring that the vote on May 11, 1974, (fn. 4) to have Airport purchase John's shares was voidable by the corporation. The defendant did not appeal, and we do not disturb that much of the final judgment Patrick contends that he also is entitled to the retransfer of the 50% stock interest held by John and to damages arising out of the breach of the partnership agreement--both to be effected by way of a 'partnership accounting.' Airport asks that John be enjoined from competing with Airport, for damages arising out of past competition and 'other ('inimical') actions,' for the return of salary payments made to John from July 27, 1973, and for counsel fees to be paid by John. Patrick also asks for an injunction giving him access to the corporate books and records and the corporate checkbook I. THE PARTNERSHIP CLAIMS Patrick's claims are based on the partnership agreement (fn. 2) which, he claims, John breached and of which, he contends, the transfer of stock was a part. However, the trial judge found (in his 'rulings of law'; Commercial Credit Corp. v. Commonwealth Mortgage & Loan Co. Inc., 276 Mass. 335, 338, 177 N.E. 88, (1931)) that the partnership agreement, which contained 'no time limit or term for the duration of the partnership (or) . . . provision as to how the partnership can be terminated,' was dissolved on March 11, *472 1972, the date of the letter from John to Patrick. See G.L. c. 108A, s 31(1)(b). He also found that 'there was no agreement or understanding between the brothers that the transfer of the 50% interest in the enterprise was conditioned on the continued operation of the partnership.' **654 These findings are not clearly erroneous. Mass.R.Civ.P. 52(a), --- Mass. --- (1974). They are based on the face of the documents-- the partnership agreement, the letter terminating it, the 430 bill of sale, and the stock certificate. The trial judge could rely on them and discount, as he did, the confused and conflicting testimony on which Patrick seeks to rely. Nor was the trial judge required to find a waiver of the termination notice from the fact that the parties did not appear to have changed their method of operation after the notice. Their method of operation was as consistent with their relationship as joint stockholders in Airport as with a partnership. Jones v. Brown, 171 Mass. 318, 50 N.E. 648 (1898), on which the plaintiffs rely, is inapposite. There the court sustained a finding by a single justice of waiver of a notice based on inconsistent conduct. Whether a finding in this case that there had been a waiver of the termination notice might also have been sustained (which we need not decide), is immaterial. Cf. Wilson v. Jennings, 344 Mass. 608, 614--615, 184 N.E.2d 642 (1962). Though technically upon the termination of the partnership by the letter of March 11, 1972, Patrick became entitled to an accounting (G.L. c. 108A, s 43), this does not aid him in his claim to John's stock which, on the trial judge's findings, was not a partnership asset or in any way affected by the termination of the partnership. Further, the damage claims are based on events which occurred after the letter of termination. The plaintiffs' brief refers to various grievances, none of which appears to have occurred before May, 1973--the earliest date to which the plaintiffs' brief points.[FN7] FN7. Patrick's contention, which is based on the existence of the partnership, that he is entitled to access to Airport's books and records must also fail. This does not preclude relief by the Superior Court, upon appropriate findings, to Patrick as director (Henn, Corporations, s 216, pp. 426--427 (2d ed. 1970)) or stockholder (Varney v. Baker, 194 Mass. 239, 241, 80 N.E. 524 (1907); see G.L. c. 249, s 5, as amended by St.1973, c. 1114, s 291). Cf. New England LNG Co. Inc. v. Fall River, --- Mass. ---, ------, 331 N.E.2d 536, fn. 1 (1975). We do not understand that Patrick is seeking a partnership accounting apart from these claims. The business generally appears to have been handled through Airport, leaving nothing to require a partnership accounting. *473 II. THE CORPORATE CLAIMS The claims against John as shareholder, officer, and director of Airport stand quite differently, particularly in view of the recent case of Donahue v. Rodd Electrotype Co. of New England, Inc., --- Mass. ---,[FNa] 328 N.E.2d 505 (1975), in which the Supreme Judicial Court dealt with a close corporation, of which Airport is an obvious example. '(T)he enterprise remains one in which ownership is limited to the original parties . . . in which ownership and management are in the same hands, and in which the owners are quite dependent on one another for the success of the enterprise.' Donahue case at ---, [FNb] 328 N.E.2d at 512. The court there held that 'stockholders in the close corporation owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another . . . (and) this strict good faith standard (measures) . . . their duty of loyalty to the other stockholders and to the corporation' (footnotes omitted). Donahue case at ------,[FNc] 328 N.E.2d at 515. FNa. Mass.Adv.Sh. (1975) 1295. FNb. Mass.Adv.Sh. (1975) at 1307. FNc. Mass.Adv.Sh. (1975) at 1315--1316.

431 The Donahue case, moreover, builds on and finds support in such cases as Wilson v. Jennings, 344 Mass. 608, 184 N.E.2d 642 (1962), and Samia v. Central Oil Co. of Worcester, 339 Mass. 101, 158 N.E.2d 469 (1959), in which close corporations under particular circumstances were assimilated to partnerships or joint ventures **655 in measuring the fiduciary duty owed to the corporation by a stockholder, officer, and director of the corporation. Thus in Wilson v. Jennings, 344 Mass. at 617, 184 N.E.2d at 647, the court sustained the claim in a stockholder's derivative suit that the defendant, a director and officer of the corporation, *474 who was also the operating shareholder, had 'attempt(ed) to seize for his own benefit an advantageous opportunity which belonged to Polytop (the corporation)' and restricted the defendant's competition with the corporation. The court said, 'Doubtless, while any joint venture in corporate form continued and while Jennings (the defendant) was a director and officer of Polytop, Jennings and his wife were bound to act only in its best interests.' Wilson case at 620, 184 N.E.2d at 649. See Samia v. Central Oil Co. of Worcester, supra, 339 Mass. at 122, 158 N.E.2d at 482 (the defendants, who were also shareholders, 'were not free, as directors of Central, to take wholly for themselves a business opportunity of Central'). Whatever the limitation[FN8] on the extension in the Donahue case, supra, at ---,[FNd] 328 N.E.2d at 517 of 'this strict duty of loyalty to all stockholders in close corporations,' that duty seems to us to be particularly applicable to the circumstances in this case, and we look to partnership law to assess John's duty to Airport and whether he breached it when he organized Specials, hired former Airport employees, and took much of Novo's business away from Airport. FN8. See concurring opinion by Wilkins, J., in the Donahue case at ---, 328 N.E.2d 505 (1975), and, e.g., part IIIa and fn. 7 of this opinion. FNd. MassAdv.Sh. (1975) at 1322. Such competition is a clear violation of the fiduciary duty owed by one partner to another. '(T)he general rule (is) that a partner will not be permitted to obtain for himself profits arising from carrying on a separate business of the same nature as that of the firm, . . . but must account to his copartners for the benefits derived therefrom.' Holmes v. Darling, 213 Mass. 303, 306, 100 N.E. 611, 612 (1913). Shulkin v. Shulkin, 301 Mass. 184, 192--193, 16 N.E.2d 644 (1938). Henn, Corporations, s 22, p. 54 (2d ed. 1970). Crane and Bromberg, Partnership, s 68, p. 391 (1968) Indeed, John's acquisition of Novo's business, formerly enjoyed by Airport, whether viewed as the appropriation of a corporate opportunity or direct competition with Airport (see Henn, Corporations, s 236, p. 459 (1970)) is, in the circumstances of this case--quite apart from his position *475 as a stockholder in a close corporation--a violation of John's duty as an officer and director 'reasonably to protect the interests of the corporation.' Production Mach. Co. v. Howe, 327 Mass. 372, 377, 99 N.E.2d 32, 35 (1951), in which an officer was held responsible to the plaintiff corporation for profits he had made through another corporation (wholly owned by him) from the manufacture of a saw-sharpening machine. The plaintiff corporation could recover because (though then manufacturing heavier machinery) it was equipped to make the machine and was contemplating expanding into the manufacture of this type of machine-- something less drastic than the direct competition in this case which 'prevent(ed) or hinder(ed) the corporation in effecting the purposes of its creation.' Lincoln Stores, Inc. v. Grant, 309 Mass. 417, 421, 34 N.E.2d 704, 707 (1941) (dictum). Weismann v. Snyder, 338 Mass. 502, 505, 156 N.E.2d 21, 23 (1959) (indicating as a consideration whether 'the corporate charter powers were 432 broad enough to include sales activity of the type and on the scale undertaken'). Anderson Corp. v. Blanch, 340 Mass. 43, 50, 162 N.E.2d 825, 830 (1959) (holding that in establishing a competing company the defendant 'did not live up to his fiduciary relation as a general corporate officer to the corporation'). * * * The competition in this case is quite different from the type of activity in which an officer or director of a corporation may be expected to engage as 'a natural concession to commercial practice' (see Note, 54 Harv.L.Rev. at 1197.) where the office or directorship is not in a close corporation and is not a full-time job. Here one of John's duties to Airport was, he testified, as a salesman to promote for Airport the very business he had appropriated for himself. Further, he testified that another of his duties was to collect receivables, and this placed him in conflict with his personal interest in keeping for himself Novo's good will *476 and business since Novo was in debt to Airport, the exact amount of which was in question.[FN9] FN9. We need not attempt to determine whether John's duties were as officer, director, or employee. Even if they were those of an employee, it was his duty as director to see to it that they were performed consistently with the welfare of the corporation. John's appropriation of Novo's business is not excused by the trial judge's findings that 'Airport lost this business because Novo Airfreight was dissatisfied with Patrick as his attitude was one of non-cooperation (and that) (f)or six or seven months prior to May, 1974 Novo Airfreight was looking for a carrier to replace Airport.' From the testimony of Novo's manager and John's testimony it appears that they had discussed the withdrawal of Novo's business from Airport and its assumption by John for about thirty days before the consummation of the arrangement (on May 17, 1974) between Novo and John's operation as Airport Specials. Yet it appears John did not consult Patrick about this imminent loss to Airport. However, whether John was acting in good faith is not decisive. 'Breach of the duty could be found although no corruption, dishonesty, or bad faith was involved.' Production Mach. Co. v. Howe, 327 Mass. at 378, 99 N.E.2d at 36. John could not enter into an arrangement inconsistent with his fiduciary duty. It was incumbent on him either to get Patrick's consent[FN10] or relieve himself of his obligation to Airport by severing his relationship as officer, director, and equal stockholder. [FN11] '(T)he argument that a fiduciary is not subject to the general rule here involved where the venture is one that the corporation itself is unable to take advantage of is not persuasive.' Durfee v. Durfee & Canning, Inc., 323 Mass. at *477 202, 80 N.E.2d at 530. Irving Trust Co. v. Deutsch, 73 F.2d 121, 124 (2d Cir. 1934), cert. den., 294 U.S. 708, 55 S.Ct. 405, 79 L.Ed. 1243 (1935). * * * For John's breach of fiduciary duty, Airport[FN12] is entitled to recoup from **657 John all the profits he made from Novo's business and any other business competitive with Airport. (There is an indication in the transcript that John handled such other business.) Production Mach, Co. v. Howe, 327 Mass. at 378--379, 99 N.E.2d 32. See Lydia E. Pinkham Medicine Co. v. Gove, 303 Mass. 1, 10--11, 20 N.E.2d 482 (1939); Henn, Corporations, s 236, p. 460 (2d ed. 1970). However, the court did not reach this issue and made no findings as to John's profits. The case must therefore be remanded for this purpose to the Superior Court.

433 FN12. We follow '(t)he usual practice in Massachusetts (which) has been to afford relief in a case of this character to the corporation, on the ground that the stockholders have only derivative rights against one who has wronged their corporation.' Samia v. Central Oil Co. of Worcester, 339 Mass. at 123, 158 N.E.2d at 482. This is not inconsistent with Donahue v. Rodd Electrotype Co. of New England, Inc., --- Mass. ---, 328 N.E.2d 505, 508 (1975). Although the Donahue case was considered as an action 'in the personal right of the plaintiff (stockholder)' (see fns. 2, 4), it describes the fiduciary duty on which it is based as running 'to the other stockholders and to the corporation' (emphasis supplied). Donahue case at ---, 328 N.E.2d at 515. Further, the court suggested as an appropriate judgment the payment to the corporation of the amount the defendant received from the corporation for shares of his stock. While the 'violation of his fiduciary duty (was) to the other stockholders,' it consisted in 'obtain(ing) assets from his corporation' for which it was entitled to reimbursements. Id. at ---, 328 N.E.2d at 521 (1975). See Lydia E. Pinkham Medicine Co. v. Gove, 303 Mass. 1, 13, 20 N.E.2d 482 (1939). See also Shulkin v. Shulkin, 301 Mass. 184, 16 N.E.2d 644 (1938), in which profits made by a partner in breach of his fiduciary relationship were treated as a partnership asset subject to a partnership accounting. Airport also claims that John should be required to repay to the corporation the salary he received from the time he began competing with Airport by the activation of Specials.[FN13] But whether he should be required to repay his entire salary or whether he should receive a credit for the actual value of his services depends on the totality of *478 the circumstances, including John's good faith and whether he actually performed substantial services to Airport. See Lydia E. Pinkham Medicine Co. v. Gove, 303 Mass. at 4, 20 N.E.2d at 486 (complete forfeiture refused; 'the salaries paid to officers were not compensation for services in the ordinary sense at all'); Production Mach. Co. v. Howe, 327 Mass. at 379, 99 N.E.2d 32 (total forfeiture of compensation where the record was sparse as to the benefits conferred by the defendant's services); New England Inv. Corp. v. Sandler, 329 Mass. 230, 237, 107 N.E.2d 16 (1952) ('In view of the manner in which Sandler managed the corporation for his personal benefit, he is not in a position to charge for possible incidental benefits which the corporation may have received from his management'); Anderson Corp. v. Blanch, 340 Mass. at 50--51, 162 N.E.2d 825, 830 ('apportionment of compensation to services properly performed' on the basis of 'clear findings' of the specific value of the services). See also Shulkin v. Shulkin, 301 Mass. 184, 194, 16 N.E.2d 644 (1938) (wrongdoing partner did not forfeit salary in a partnership accounting); Greenan v. Ernst, 408 Pa. 495, 514--515, 184 A.2d 570 (1962) (applying 'the old adage that 'the laborer is worthy of his hire "); Whaler Motor Inn, Inc. v. Parsons, Mass.App.Ct. (1975). [FNe] FN13. The plaintiff puts this date as July 23, 1973. From our reading of the record, it would appear that John began operating Specials on May 15 or May 17, 1974. FNe. Mass.App.Ct.Adv.Sh. (1975) 1089, 1111--1112. The evidence in this regard was oral and conflicting. The differences can best be resolved by findings in the Superior Court, which it can thereupon use as a basis for deciding the extent (if any) to which repayment should be required. Airport is also entitled to injunctive relief against competition by John so long as he is an officer or director of Airport (Lydia E. Pinkham Medicine Co. v. Gove, 303 Mass. at 14, 20 N.E.2d 482; see Wilson v. Jennings, 344 Mass. at 620--621, 184 N.E.2d 642) and, under the 434 Donahue case, supra, so long as he is a shareholder in Airport. See Shulkin v. Shulkin, 301 Mass. at 190, 16 N.E.2d at 650 ('(T)he defendant could not properly engage in business which was in competition with that of the partnership'). If he disassociates himself from Airport, there appears to be no reason on this record to pbohibit him from engaging in the trucking business in competition with Airport. Anderson Corp. v. Blanch, 340 Mass. at 53, 162 N.E.2d 825. See National *479 Hearing Aid Centers, Inc. v. **658 Avers, --- Mass.App. ---, ---,[FNf] 311 N.E.2d 573 (1974). FNf. Mass.App.Ct.Adv.Sh. (1974) 547, 554. * * * *480 IV. CONCLUSION In accordance with this opinion, the final judgment is affirmed with the following additions. The Superior Court shall: (1) enjoin the defendant from competing with Airport, the exact scope of such competition to be determined in further proceedings in the Superior Court (including, at the discretion of the Superior Court, the taking of evidence) and the injunction to continue so long as John is a stockholder, officer, or director of Airport; (2) determine upon further proceedings (including, in the discretion of the Superior Court, the taking of further evidence) to the date of such determination: (a) the profits made by John from the aforesaid competition, which the Superior Court shall order to be paid to Airport with interest; (b) the salary received by John from Airport from May 17, 1974, which the Superior Court shall order to be repaid to Airport with interest, crediting him, if the court deems it appropriate, with such sums, if any, as the court shall determine to represent the value of his services to Airport; (c) the extent, if any, to which John should be ordered to permit Patrick access to the books and records of Airport; (d) what amount, if any, should be paid to Patrick as counsel fees and by whom. So ordered. Costs of this appeal to be taxed against the appellee.

Smith v. Atlantic Properties, Inc . 12 Mass.App.Ct. 201, 422 N.E.2d 798 (1981)

Paul T. SMITH et al.[FN1]

435 FN1. Lillian Zimble, executrix of the will of Abraham Zimble, and Louis Zimble. William H. Burke was originally a plaintiff. Prior to his death, Atlantic Properties, Inc., purchased Burke's stock in the corporation and it is now held as treasury stock. Mr. Abraham Zimble, while still living, sold twelve shares to Louis Zimble. v. ATLANTIC PROPERTIES, INC. et al.[FN2] FN2. Dr. Louis E. Wolfson. Appeals Court of Massachusetts, Suffolk. Argued April 10, 1981. Decided July 6, 1981. *202 CUTTER, Justice. In December, 1951, Dr. Louis E. Wolfson agreed to purchase land in Norwood for $350,000, with an initial cash payment of $50,000 and a mortgage note of $300,000 payable in thirty-three months. Dr. Wolfson offered a quarter interest each in the land to Mr. Paul T. Smith, Mr. Abraham Zimble, and William H. Burke. Each paid to Dr. Wolfson $12,500, one quarter of the initial payment. Mr. Smith, an attorney, organized the defendant corporation (Atlantic) in 1951 to operate the real estate. Each of the four subscribers received twenty-five shares of stock. Mr. Smith included, both in the corporation's articles of organization and in its by-laws, a provision reading, "No election, appointment or resolution by the Stockholders and no election, appointment, resolution, purchase, sale, lease, contract, contribution, compensation, proceeding or act by the Board of Directors or by any officer or officers shall be valid or binding upon the corporation until effected, passed, approved or ratified by an affirmative vote of eighty (80%) per cent of the capital stock issued outstanding and entitled to vote." This provision (hereafter referred to as the 80% provision) was included at Dr. Wolfson's request and had the effect of giving to any one of the four original shareholders a veto in corporate decisions Atlantic purchased the Norwood land. Some of the land and other assets were sold for about $220,000. Atlantic retained twenty-eight acres on which stood about twenty old brick or wood mill-type structures, which required expensive and constant repairs. After the first year, Altantic became profitable and showed a profit every year prior to 1969, ranging from a low of $7,683 in 1953 to a high of $44,358 in 1954. The mortgage was paid by 1958 and Atlantic has incurred no long-term debt thereafter. **800 Salaries *203 of about $25,000 were paid only in 1959 and 1960. Dividends in the total amount of $10,000 each were paid in 1964 and 1970. By 1961, Atlantic had about $172,000 in retained earnings, more than half in cash For various reasons, which need not be stated in detail, disagreements and ill will soon arose between Dr. Wolfson, on the one hand, and the other stockholders as a group.[FN3] Dr. Wolfson wished to see Atlantic's earnings devoted to repairs and possibly some improvements in its existing buildings and adjacent facilities. The other stockholders desired the declaration of dividends. Dr. Wolfson fairly steadily refused to vote for any dividends. Although it was pointed out to him that failure to declare dividends might result in the imposition by the Internal Revenue Service of a penalty under the Internal Revenue Code, I.R.C. s 531 et seq. (relating to unreasonable accumulation of corporate earnings and profits), Dr. Wolfson persisted in his refusal to declare dividends. The other shareholders did agree over the years to making at least 436 the most urgent repairs to Atlantic's buildings, but did not agree to make all repairs and improvements which were recommended in a 1962 report by an engineering firm retained by Atlantic to make a complete estimate of all repairs and improvements which might be beneficial. FN3. At least one cause of ill will on Dr. Wolfson's part may have been the refusal of the other shareholders to consent to his transferring his shares in Atlantic to the Louis E. Wolfson Foundation, a charitable foundation created by Dr. Wolfson. The fears of an Internal Revenue Service assessment of a penalty tax were soon realized. Penalty assessments were made in 1962, 1963, and 1964. These were settled by Dr. Wolfson for $11,767.71 in taxes and interest. Despite this settlement, Dr. Wolfson continued his opposition to declaring dividends. The record does not indicate that he developed any specific and definitive schedule or plan for a series of necessary or desirable repairs and improvements to Atlantic's properties. At least none was proposed which *204 would have had a reasonable chance of satisfying the Internal Revenue Service that expenditures for such repairs and improvements constituted "reasonable needs of the business," I.R.C. s 534(c), a term which includes (see I.R.C. s 537) "the reasonably anticipated needs of the business." Predictably, despite further warnings by Dr. Wolfson's shareholder colleagues, the Internal Revenue Service assessed further penalty taxes for the years 1965, 1966, 1967, and 1968. These taxes were upheld by the United States Tax Court in Atlantic Properties, Inc. v. Commissioner of Int. Rev., 62 T.C. 644 (1974), and on appeal in 519 F.2d 1233 (1st Cir. 1975). See the discussion of these opinions in Cathcart, Accumulated Earnings Tax: A Trap for the Wary, 62 A.B.A.J. 1197-1199 (1976). An examination of these decisions makes it apparent that Atlantic has incurred substantial penalty taxes and legal expense largely because of Dr. Wolfson's refusal to vote for the declaration of sufficient dividends to avoid the penalty, a refusal which was (in the Tax Court and upon appeal) attributed in some measure to a tax avoidance purpose on Dr. Wolfson's part On January 30, 1967, the shareholders, other than Dr. Wolfson, initiated this proceeding in the Superior Court, later supplemented to reflect developments after the original complaint. The plaintiffs sought a court determination of the dividends to be paid by Atlantic, the removal of Dr. Wolfson as a director, and an order that Atlantic be reimbursed by him for the penalty taxes assessed against it and related expenses. The case was tried before a justice of the Superior Court (jury waived) in September and October, 1979 The trial judge made findings (but in more detail) of essentially the facts outlined above and concluded that Dr. "Wolfson's obstinate refusal to vote in favor of ... dividends was ... caused more by his dislike for other stockholders and his desire to avoid additional tax payments than ... by any genuine desire to undertake a program for improving ... (Atlantic) property." She also determined that Dr. Wolfson was **801 liable to Atlantic for taxes and interest *205 amounting to "$11,767.11 plus interest from the commencement of this action, plus $35,646.14 plus interest from August 11, 1975," the date of the First Circuit decision affirming the second penalty tax assessment. The latter amount includes an attorney's fee of $7,500 in the Federal tax cases. She also ordered the directors of Atlantic to declare "a reasonable dividend at the earliest practical date and reasonable dividends annually thereafter consistent with good business practice." In addition, the trial judge directed that jurisdiction of the case be retained in the Superior Court "for a period of five years to (e)nsure compliance." Judgment was entered pursuant to the trial judge's order. After the entry of judgment, Dr. Wolfson and Atlantic filed a motion for a new trial and to amend the judge's findings. This motion, after hearing, was denied, and Dr. Wolfson 437 and Atlantic claimed an appeal from the judgment and the former from the denial of the motion. The plaintiffs (see note 1, supra) requested payment of their attorneys' fees in this proceeding and filed supporting affidavits. The motion was denied, and the plaintiffs appealed 1. The trial judge, in deciding that Dr. Wolfson had committed a breach of his fiduciary duty to other stockholders, relied greatly on broad language in Donahue v. Rodd Electrotype Co., 367 Mass. 578, 586-597, 328 N.E.2d 505 (1975), [FN4] in which the Supreme Judicial Court afforded to a minority stockholder in a close corporation equality of treatment (with members of a controlling group of shareholders) in the matter of the redemption of shares. The court (at 592- 593, 328 N.E.2d 505) relied on the resemblance of a close corporation to a partnership and held that "stockholders in the close corporation owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another" *206 (footnotes omitted). That standard of duty, the court said, was the "utmost good faith and loyalty." The court went on to say that such stockholders "may not act out of avarice, expediency or self-interest in derogation of their duty of loyalty to the other stockholders and to the corporation." Similar principles were stated in Wilkes v. Springside Nursing Home, Inc., 370 Mass. 842, 848-852, 353 N.E.2d 657 (1976), but with some modifications, mentioned in the margin,[FN5] of the sweeping language of the Donahue case. See Jessie v. Boynton, 372 Mass. 293, 304, 361 N.E.2d 1267 (1977); Hallahan v. Haltom Corp., 7 Mass.App. 68, 70-71, 385 N.E.2d 1033 (1979). See also Cain v. Cain, 3 Mass.App. 467, 473-479, 334 N.E.2d 650 (1975). FN4. Mr. Justice Wilkins (concurring at 604, 328 N.E.2d 505) expressed agreement "with much of what the" majority opinion said in favor of granting relief. He declined, however, to "join in any implication" that certain statements in the opinion applied "to all operations of ... (a close) corporation as they affect minority stockholders." FN5. The court said (at 850-852, 353 N.E.2d 657) that it was "concerned that (the) untempered application of the strict good faith standard ... will result in the imposition of limitations on legitimate action by the controlling group in a close corporation which will unduly hamper its effectiveness .... The majority ... have certain rights to what has been termed 'selfish ownership' in the corporation which should be balanced against the concept of their fiduciary obligation to the minority .... (W)hen minority stockholders ... bring suit ... alleging a breach of the strict good faith duty ... we must carefully analyze the action taken by the controlling stockholders in the individual case. It must be asked whether the controlling group can demonstrate a legitimate business purpose for its action .... (T)he controlling group in a close corporation must have some room to maneuver in establishing the business policy of the corporation. It must have a large measure of discretion, for example, in declaring or withholding dividends" (emphasis supplied) and in certain other matters. "When an asserted business purpose ... is advanced by the majority, however, ... it is open to minority stockholders to demonstrate that the ... objective could have been achieved through an alternative course ... less harmful to the minority's interest." In the Donahue case, 367 Mass. at 593 n. 17, 328 N.E.2d 505, the court recognized that cases may arise in which, in a close corporation, majority stockholders may ask protection from a minority stockholder. **802 Such an instance arises in the present case because Dr. Wolfson has been able to exercise a veto concerning corporate action on dividends by the 80% provision (in Atlantic's articles or organization and by-laws) already quoted. The 80% provision may have 438 substantially the effect of reversing the usual roles of the majority and *207 the minority shareholders. The minority, under that provision, becomes an ad hoc controlling interest.[FN6] FN6. The majority shareholders, in the event of a deadlock, at least may seek dissolution of the corporation if forty percent of the voting power can be mustered, whereas a single stockholder with only twenty-five percent of the stock may not do so. See G.L. c. 156B, s 99(b), as amended by St.1969, c. 392, s 23. It does not appear to be argued that this 80% provision is not authorized by G.L. c. 156B (inserted by St.1964, c. 723, s 1). See especially s 8(a). See also Seibert v. Milton Bradley Co., --- Mass. ---, ------,[FNa] 405 N.E.2d 131 (1980). Chapter 156B was intended to provide desirable flexibility in corporate arrangements.[FN7] The provision is only one of several methods which have been devised to protect minority shareholders in close corporations from being oppressed by their colleagues and, if the device is used reasonably, there may be no strong public policy considerations against its use. See 1 O'Neal, Close Corporations s 4.21 (2d ed. 1971 & Supp.1980). The textbook just cited contains in ss 4.01-4.30 a comprehensive discussion of the business considerations (see especially ss 4.02, 4.03, 4.06, & 4.24) which may recommend use of such a device. See also 2 O'Neal s 8.07 (& Supp. 1980 which, at 84-90, discusses the Massachusetts decisions). In the present case, Dr. Wolfson testified that he requested the inclusion of the 80% provision "in case the people (the other shareholders) whom I knew, but not very well, ganged up on me." The possibilities of shareholder disagreement on policy made the provision seem a sensible precaution.[FN8] A question is presented, however, concerning the extent to which such a veto power possessed by a minority *208 stockholder may be exercised as its holder may wish, without a violation of the "fiduciary duty" referred to in the Donahue case, 367 Mass. at 593, 328 N.E.2d 505, as modified in the Wilkes case. See note 5, supra. * * * FN8. Dr. Wolfson himself had discovered the business opportunity which led to the formation of Atlantic, had made the initial $50,000 payment which made possible the Norwood land purchase, and had given the other shareholders an opportunity to share with him in what looked like a probably profitable enterprise. It was reasonably foreseeable that there might be differences of opinion between Dr. Wolfson, a man with substantial income likely to be in a high income tax bracket, and less affluent shareholders on such matters of policy as dividend declarations, salaries, and investment in improvements in the property. The other shareholders, two of whom were attorneys, should have known that it was as open to Dr. Wolfson reasonably to exercise the veto provided to him by the 80% provision in favor of a policy of reinvestment of earnings in Atlantic's properties, which would probably avoid taxes and increase the value of the corporate assets, as it was for them (possessed of the same veto) to use reasonably their voting power in favor of a more generous dividend and salary policy. The decided cases in Massachusetts do little to answer this question. The most pertinent guidance is probably found in the Wilkes case, 370 Mass. at 849- 852, 353 N.E.2d 657, (see note 5, supra), essentially to the effect that in any judicial intervention in such a situation there must be a weighing of the business interests advanced as reasons for their action (a) by the majority or controlling group and (b) by the rival persons or group.[FN9] It would obviously be **803 appropriate, before a court-ordered solution is sought or imposed, for both sides to attempt *209 to reach a sensible solution of any incipient impasse in the interest of all concerned after 439 consideration of all relevant circumstances. See Helms v. Duckworth, 249 F.2d 482, 485-488 (D.C.Cir.1957) FN9. The duties and quasi-fiduciary responsibilities of minority shareholders who find themselves in a position to control corporate action are discussed helpfully in Hetherington, The Minority's Duty of Loyalty in Close Corporations, 1972 Duke L.J. 921. The author recognizes (at 944) that, in disputes concerning the wisdom of a particular course of corporate action, the majority (or the ad hoc controlling minority) shareholder may be entitled to follow the course he or it thinks best. The author concludes (at 946) with the general view: "In spite of the ... imprecision of such criteria for evaluating commercial behavior as good faith, commercial reasonableness, and unconscionability, the courts have moved toward imposing minimum requirements of fair dealing in nonfiduciary business situations. The similarly imprecise concept of fiduciary responsibility, at least as applied to majority shareholders ... has clearly promoted fair dealing within business enterprises. The majority may not exercise their corporate powers in a manner which is clearly intended to be and is in fact inimical to the corporate interest, or which is intended to deprive the minority of its pro rata share of the present or future gains accruing to the enterprise. A minority shareholder whose conduct is controlling on a particular issue should be bound by no different standard." 2. With respect to the past damage to Atlantic caused by Dr. Wolfson's refusal to vote in favor of any dividends, the trial judge was justified in finding that his conduct went beyond what was reasonable. The other stockholders shared to some extent responsibility for what occurred by failing to accept Dr. Wolfson's proposals with much sympathy, but the inaction on dividends seems the principal cause of the tax penalties. Dr. Wolfson had been warned of the dangers of an assessment under the Internal Revenue Code, I.R.C. s 531 et seq. He had refused to vote dividends in any amount adequate to minimize that danger and had failed to bring forward, within the relevant taxable years, a convincing, definitive program of appropriate improvements which could withstand scrutiny by the Internal Revenue Service. Whatever may have been the reason for Dr. Wolfson's refusal to declare dividends (and even if in any particular year he may have gained slight, if any, tax advantage from withholding dividends) we think that he recklessly ran serious and unjustified risks of precisely the penalty taxes eventually assessed, risks which were inconsistent with any reasonable interpretation of a duty of "utmost good faith and loyalty." The trial judge (despite the fact that the other shareholders helped to create the voting deadlock and despite the novelty of the situation) was justified in charging Dr. Wolfson with the out-of- pocket expenditure incurred by Atlantic for the penalty taxes and related counsel fees of the tax cases.[FN10] FN10. We do not now suggest that the standard of "utmost good faith and loyalty" may require some relaxation when applied to a minority ad hoc controlling interest, created by some device, similar to the 80% provision, designed in part to protect the selfish interests of a minority shareholder. This seems to us a difficult area of the law best developed on a case by case basis. See note 4, supra. *210 3. The trial judge's order to the directors of Atlantic, "to declare a reasonable dividend at the earliest practical date and reasonable dividends annually thereafter," presents difficulties. It may well not be a precise, clear, and unequivocal command which (without further explanation) would justify enforcement by civil contempt proceedings. See United States Time Corp. v. 440 G.E.M. of Boston, Inc., 345 Mass. 279, 282, 186 N.E.2d 920 (1963); United Factory Outlet, Inc. v. Jay's Stores, Inc., 361 Mass. 35, 36- 39, 278 N.E.2d 716 (1972). It also fails to order the directors to exercise similar business judgment with respect to Dr. Wolfson's desire to make all appropriate repairs and improvements to Atlantic's factory properties. See the language of the Supreme Judicial Court in the Wilkes case, 370 Mass. at 850- 852, 353 N.E.2d 657, see note 5, supra The somewhat ambiguous injunctive relief is made less significant by the trial judge's reservation of jurisdiction in the Superior Court, a provision which contemplates later judicial supervision. * * * Although the reservation of jurisdiction is appropriate in this case (see Nassif v. Boston & Maine R.R., 340 Mass. 557, 566-567, 165 N.E.2d 397 (1960); Department of Pub. Health v. Cumberland Cattle Co., 361 Mass. 817, 834, 282 N.E.2d 895 (1972)), its purpose should be stated more affirmatively. Paragraph 2 of the judgment should be revised to provide: (a) a direction that Atlantic's directors prepare promptly financial statements and copies *211 of State and Federal income and excise tax returns for the five most recent calendar or fiscal years, and a balance sheet as of as current a date as is possible; (b) an instruction that they confer with one another with a view to stipulating a general dividend and capital improvements policy for the next ensuing three fiscal years; (c) an order that, if such a stipulation is not filed with the clerk of the Superior Court within sixty days after the receipt of the rescript in the Superior Court, a further hearing shall be held promptly (either before the court or before a special master with substantial experience in business affairs), at which there shall be received in evidence at least the financial statements and tax returns above mentioned, as well as other relevant evidence. Thereafter, the court, after due consideration of the circumstances then existing, may direct the adoption (and carrying out), if it be then deemed appropriate, of a specific dividend and capital improvements policy adequate to minimize the risk of further penalty tax assessments for the then current fiscal year of Atlantic. The court also may reserve jurisdiction to take essentially the same action for each subsequent fiscal year until the parties are able to reach for themselves an agreed program * * * 5. The judgment is affirmed so far as it (par. 1) orders payments into Atlantic's treasury by Dr. Wolfson. Paragraph 2 of the judgment is to be modified in a manner consistent with part 3 of this opinion. The trial judge's denial of the plaintiff's motion to be allowed counsel fees is affirmed. Costs of this appeal are to be paid from the assets of Atlantic So ordered.

Wilkes v. Springside Nursing Home, Inc . 441 370 Mass. 842, 353 N.E.2d 657 (1976)

Stanley J. WILKES v. SPRINGSIDE NURSING HOME, INC., et al.[FN1] FN1. Barbara Quinn (executrix under the will of T. Edward Quinn), Leon L. Riche, and the First Agricultural National Bank of Berkshire County and Frank Sutherland MacShane (executors under the will of Lawrence R. Connor). Supreme Judicial Court of Massachusetts, Berkshire. Argued March 2, 1976. Decided Aug. 20, 1976. *843 HENNESSEY, Chief Justice. On August 5, 1971, the plaintiff (Wilkes) filed a bill in equity for declaratory judgment in the Probate Court for Berkshire County,[FN2] naming as defendants T. Edward Quinn (Quinn), [FN3] Leon L. Riche (Riche), the First Agricultural National Bank of Berkshire County and Frank Sutherland MacShane as executors under the will of Lawrence R. Connor (Connor), **659 and the Springside Nursing Home, Inc. (Springside or the corporation). Wilkes alleged that he, Quinn, Riche and Dr. Hubert A. Pipkin (Pipkin)[FN4] entered into a partnership agreement in 1951, prior to the incorporation of Springside, which agreement was breached in 1967 when Wilkes's salary was terminated and he was voted out as an officer and director of the corporation. Wilkes sought, among other forms of relief, damages in the amount of the salary he would have received had he continued as a director and officer of Springside subsequent to March, 1967. FN2. Wilkes urged the court, iter alia, to declare the rights of the parties under (1) an alleged partnership agreement entered into in 1951 between himself, T. Edward Quinn (see note 3 infra), Leon L. Riche and Dr. Hubert A. Pipkin (see note 4 infra); and (2) certain portions of a stock transfer restriction agreement exeucted by the four original stockholders in the Springside Nursing Home, Inc., in 1956. FN3. T. Edward Quinn died while this action was sub judice. The executrix of his estate has been substituted as a party-defendant. See note 1 supra. FN4. Dr. Pipkin transferred his interest in Springside to Connor in 1959 and is not a defendant in this action. * * * In 1951 Wilkes acquired an option to purchase a building and lot located on the corner of Springside Avenue and North Street in Pittsfield, Massachusetts, the building having previously housed the Hillcrest Hospital. Though Wilkes was principally engaged in the roofing and siding business, he had gained a reputation locally for profitable dealings in real estate. Riche, an acquaintance of Wilkes, learned of the option, and interested Quinn (who was known to Wilkes through membership on the draft board in Pittsfield) and Pipkin (an acquaintance of both Wilkes and Riche) in joining Wilkes in his investment. The four men met and decided to participate

442 jointly in the purchase of the building and lot as a real estate investment which, they believed, had good profit potential on resale or rental. The parties later determined that the property would have its greatest potential for profit if it were operated by them as a nursing home. Wilkes consulted his attorney, who advised him that if the four men were to operate the *845 contemplated nursing home as planned, they would be partners and would be liable for any debts incurred by the partnership and by each other. On the attorney's suggestion, and after consultation among themselves, ownership of the property was vested in Springside, a corporation organized under Massachusetts law. Each of the four men invested $1,000 and subscribed to ten shares of $100 par value stock in Springside.[FN6] At the time of **660 incorporation it was understood by all of the parties that each would be a director of Springside and each would participate actively in the management and decision making involved in operating the corporation.[FN7] It was, further, the understanding and intention of all the parties that, corporate resources permitting, each would receive money from the corporation in equal amounts as long as each assumed an active and ongoing responsibility for carrying a portion of the burdens necessary to operate the business. FN6. On May 2, 1955, and again on December 23, 1958, each of the four original investors paid for and was issued additional shares of $100 par value stock, eventually bringing the total number of shares owned by each to 115. FN7. Wilkes testified before the master that, when the corporate officers were elected, all four men 'were . . . guaranteed directorships.' Riche's understanding of the parties' intentions was that they all wanted to play a part in the management of the corporation and wanted to have some 'say' in the risks involved; that, to this end, they all would be directors; and that 'unless you (were) a director and officer you could not participate in the decisions of (the) enterprise.' The work involved in establishing and operating a nursing home was roughly apportioned, and each of the four men undertook his respective tasks.[FN8] Initially, Riche was *846 elected president of Springside, Wilkes was elected treasurer, and Quinn was elected clerk. [FN9] Each of the four was listed in the articles of organization as a director of the corporation. FN8. Wilkes took charge of the repair, upkeep and maintenance of the physical plant and grounds; Riche assumed supervision over the kitchen facilities and dietary and food aspects of the home; Pipkin was to make himself available if and when medical problems arose; and Quinn dealt with the personnel and administrative aspects of the nursing home, serving informally as a managing director. Quinn further coo rdinated the activities of the other parties and served as a communication link among them when matters had to be discussed and decisions had to be made without a formal meeting. FN9. Riche held the office of president from 1951 to 1963; Quinn served as president from 1963 on, as clerk from 1951 to 1967, and as treasurer from 1967 on; Wilkes was treasurer from 1951 to 1967. At some time in 1952, it became apparent that the operational income and cash flow from the business were sufficient to permit the four stockholders to draw money from the corporation on a regular basis. Each of the four original parties initially received $35 a week from the

443 corporation. As time went on the weekly return to each was increased until, in 1955, it totalled $100. In 1959, after a long illness, Pipkin sold his shares in the corporation to Connor, who was known to Wilkes, Riche and Quinn through past transactions with Springside in his capacity as president of the First Agricultural National Bank of Berkshire County. Connor received a weekly stipend from the corporation equal to that received by Wilkes, Riche and Quinn. He was elected a director of the corporation but never held any other office. He was assigned no specific area of responsibility in the operation of the nursing home but did participate in business discussions and decisions as a director and served additionally as financial adviser to the corporation. In 1965 the stockholders decided to sell a portion of the corporate property to Quinn who, in addition to being a stockholder in Springside, possessed an interest in another corporation which desired to operate a rest home on the property. Wilkes was successful in prevailing on the other stockholders of Springside to procure a higher sale price for the property than Quinn apparently anticipated paying or desired to pay. After the sale was consummated, the relationship between Quinn and Wilkes began to deteriorate. The bad blood between Quinn and Wilkes affected the attitudes of both Riche and Connor. As a consequence of *847 the strained relations among the parties, Wilkes, in January of 1967, gave notice of his intention to sell his shares for an amount based on an appraisal of their value. **661 In February of 1967 a directors' meeting was held and the board exercised its right to establish the salaries of its officers and employees.[FN10] A schuedle of payments was established whereby Quinn was to receive a substantial weekly increase and Riche and Connor were to continue receiving $100 a week. Wilkes, however, was left off the list of those to whom a salary was to be paid. The directors also set the annual meeting of the stockholders for March, 1967. FN10. The by-laws of the corporation provided that the directors, subject to the approval of the stockholders, had the power to fix the salaries of all officers and employees. This power, however, up until February, 1967, had not been exercised formally; all payments made to the four participants in the venture had resulted from the informal but unanimous approval of all the parties concerned. At the annual meeting in March,[FN11] Wilkes was not reelected as a director, nor was he ree lected as an officer of the corporation. He was further informed that neither his services nor his presence at the nursing home was wanted by his associates. FN11. Wilkes was unable to attend the meeting of the board of directors in February or the annual meeting of the stockholders in March, 1967. He was represented, however, at the annual meeting by his attorney, who held his proxy. The meetings of the directors and stockholders in early 1967, the master found, were used as a vehicle to force Wilkes out of active participation in the management and operation of the corporation and to cut off all corporate payments to him. Though the board of directors had the power to dismiss any officers or employees for misconduct or neglect of duties, there was no indication in the minutes of the board of directors' meeting of February, 1967, that the failure to establish a salary for Wilkes was based on either ground. The severance of Wilkes from the payroll resulted not from misconduct or neglect of duties, but because of the personal desire of 444 Quinn, Riche and Connor to prevent him from continuing to receive money from the *848 corporation. Despite a continuing deterioration in his personal relationship with his associates, Wilkes had consistently endeavored to carry on his responsibilities to the corporation in the same satisfactory manner and with the same degree of competence he had previously shown. Wilkes was at all times willing to carry on his responsibilities and participation if permitted so to do and provided that he receive his weekly stipend. 1. We turn to Wilkes's claim for damages based on a breach of the fiduciary duty owed to him by the other participants in this venture. In light of the theory underlying this claim, we do not consider it vital to our approach to this case whether the claim is governed by partnership law or the law applicable to business corporations. This is so because, as all the parties agree, Springside was at all times relevant to this action, a close corporation as we have recently defined such an entity in Donahue v. Rodd Electrotype Co. of New England, Inc., --- Mass. ---, ------,[FNa] 328 N.E.2d 505 (1975). FNa. Mass.Adv.Sh. (1975) 1295, 1305--1306. In Donahue,[FN12] we held that 'stockholders in the close corporation owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another.' Id. at ------(footnotes omitted),[FNb] 328 N.E.2d at 515. As determined in previous decisions of this court, the standard of duty owed by partners to one another is one of 'utmost good faith and loyalty.' Cardullo v. Landau, 329 Mass. 5, 8, 105 N.E.2d 843 (1952), and cases cited. DeCotis v. D'Antona, 350 Mass. 165, 168, 214 N.E.2d 21 (1966), qyuoting from Mendelsohn v. Leather Mfg. **662 Corp., 326 Mass. 226, 233, 93 N.E.2d 537 (1950). Thus, we concluded in Donahue, with regard to 'their actions relative to the operations of the enterprise and the effects of that operation on the rights and investments of other stockholders,' '(s)tockholders in close corporations must discharge their management and stockholder responsibilities in conformity with this strict good faith standard. *849 They may not act out of avarice, expediency or self- interest in derogation of their duty of loyalty to the other stockholders and to the corporation.' --- Mass. at n. 18, ---,[FNc] 328 N.E.2d at 515. FN12. For legal commentary relating to the Donahue case, see 89 Harv.L.Rev. 423 (1975); 60 Mass.L.Q. 318 (1975); 21 Vill.L.Rev. 307 (1976). FNb. Mass.Adv.Sh. (1975) at 1315--1316. FNc. Mass.Adv.Sh. (1975) at 1315 n. 18, 1316. In the Donahue case we recognized that one peculiar aspect of close corporations was the opportunity afforded to majority stockholders to oppress, disadvantage or 'freeze out' minority stockholders. In Donahue itself, for example, the majority refused the minority an equal opportunity to sell a ratable number of shares to the corporation at the same price available to the majority. The net result of this refusal, we said, was that the minority could be forced to 'sell out at less than fair value,' --- Mass. at ---,[FNd] 328 N.E.2d at 515, since there is by definition no ready market for minority stock in a close corporation. FNd. Mass.Adv.Sh. (1975) at 1315. 'Freeze outs,' however, may be accomplished by the use of other devices. One such device which has proved to be particularly effective in accomplishing the purpose of the majority is to deprive minority stockholders of corporate offices and of employment with the corporation. 445 F. H. O'Neal, 'Squeeze-Outs' of Minority Shareholders 59, 78--79 (1975). See --- Mass. at ---, ---, [FNe] 328 N.E.2d 505. This 'freeze-out' technique has been successful because courts fairly consistently have been disinclined to interfere in those facets of internal corporate operations, such as the selection and retention or dismissal of officers, directors and employees, which essentially involve management decisions subject to the principle of majority control. See Note, 35 N.C.L.Rev. 271, 277 (1957). As one authoritative source has said, '(M)any courts apparently feel that there is a legitimate sphere in which the controlling (directors or) shareholders can act in their own interest even if the minority suffers.' F. H. O'Neal, supra at 59 (footnote omitted). Comment, 1959 Duke L.J. 436, 437. FNe. Mass.Adv.Sh. (1975) at 1309, 1310. The denial of employment to the minority at the hands of the majority is especially pernicious in some instances. A guaranty of employment with the corporation may have been one of the 'basic reason(s) why a minority owner has invested capital in the firm.' Symposium-- The Close Corporation, 52 Nw.U.L.Rev. 345, 392 (1957). See F. H. *850 O'Neal, supra at 78-- 79; Hancock, Minority Interests in Small Business Entities, 17 Clev.-Mar.L.Rev. 130, 132--133 (1968); 89 Harv.L.Rev. 423, 427 (1975). The minority stockholder typically depends on his salary as the principal return on his investment, since the 'earnings of a close corporation . . . are distributed in major part in salaries, bonuses and retirement benefits.' 1 F. H. O'Neal, Close Corporations s 1.07 (1971).[FN13] Other noneconomic interests of the minority stockholder are likewise injuriously affected by barring him from corporate office. See F. H. O'Neal, 'Squeeze- Outs' of Minority Shareholders 79 (1975). Such action severely restricts his participation in the management of the enterprise, and he is relegated to enjoying those benefits incident to his status as a stockholder. See Symposium--The Close Corporation, 52 Nw.U.L.Rev. 345, 386 (1957). In sum, by terminating a minority stockholder's employment or by severing him from a position as an officer or director, the majority **663 effectively frustrate the minority stockholder's purposes in entering on the corporate venture and also deny him an equal return on his investment. FN13. We note here that the master found that Springside never declared or paid a dividend to its stockholders. The Donahue decision acknowledged, as a 'natural outgrowth' of the case law of this Commonwealth, a strict obligation on the part of majority stockholders in a close corporation to deal with the minority with the utmost good faith and loyalty. On its face, this strict standard is applicable in the instant case. The distinction between the majority action in Donahue and the majority action in this case is more one of form than of substance. Nevertheless, we are concerned that untempered application of the strict good faith standard enunciated in Donahue to cases such as the one before us will result in the imposition of limitations on legitimate action by the controlling group in a close corporation which will unduly hamper its effectiveness in managing the corporation in the best interests of all concerned. The majority, concededly, have certain *851 rights to what has been termed 'selfish ownership' in the corporation which should be balanced against the concept of their fiduciary obligation to the minority. See Hill, The Sale of Controlling Shares, 70 Harv.L.Rev. 986, 1013--1015 (1957); Note, 44 Iowa L.Rev. 734, 740-- 741 (1959); Symposium--The Close Corporation, 52 Nw.U.L.Rev. 345, 395--396 (1957). Therefore, when minority stockholders in a close corporation bring suit against the majority alleging a breach of the strict good faith duty owed to them by the majority, we must carefully analyze the action taken by the controlling stockholders in the individual case. It must 446 be asked whether the controlling group can demonstrate a legitimate business purpose for its action. * * * In asking this question, we acknowedge the fact that the controlling group in a close corporation must have some room to maneuver in establishing the business policy of the corporation. It must have a large measure of discretion, for example, in declaring or withholding dividends, deciding whether to merge or consolidate, establishing the salaries of corporate officers, dismissing directors with or without cause, and hiring and firing corporate employees. When an asserted business purpose for their action is advanced by the majority, however, we think it is open to minority stockholders to demonstrate that the same legitimate objective could have been achieved through an alternative *852 course of action less harmful to the minority's interest * * * . If called on to settle a dispute, our courts must weigh the legitimate business purpose, if any, against the practicability of a less harmful alternative. Applying this approach to the instant case it is apparent that the majority stockholders in Springside have not shown a legitimate business purpose for severing Wilkes from the payroll of the corporation or for refusing to ree lect him as a salaried officer and director. The master's subsidiary findings relating to the purpose of the **664 meetings of the directors and stockholders in February and March, 1967, are supported by the evidence. There was no showing of misconduct on Wilkes's part as a director, officer or employee of the corporation which would lead us to approve the majority action as a legitimate response to the disruptive nature of an undesirable individual bent on injuring or destroying the corporation. On the contrary, it appears that Wilkes had always accomplished his assigned share of the duties competently, and that he had never indicated an unwillingness to continue to do so. It is an inscapable conclusion from all the evidence that the action of the majority stockholders here was a designed 'freeze out' for which no legitimate business purpose has been suggested. Furthermore, we may infer that a design to pressure Wilkes into selling his shares to the corporation at a price below their value well may have been at the heart of the majority's plan.[FN14] FN14. This inference arises from the fact that Connor, acting on behalf of the three controlling stockholders, offered to purchase Wilkes's shares for a price Connor admittedly would not have accepted for his own shares. In the context of this case, several factors bear directly on the duty owed to Wilkes by his associates. At a minimum, the duty of utmost good faith and loyalty would demand that the majority consider that their action was *853 in disregard of a long-standing policy of the stockholders that each would be a director of the corporation and that employment with the corporation would go hand in hand with stock ownership; that Wilkes was one of the four originators of the nursing home venture; and that Wilkes, like the others, had invested his capital and time for more than fifteen years with the expectation that he would continue to participate in corporate decisions. Most important is the plain fact that the cutting off of Wilkes's salary,

447 together with the fact that the corporation never declared a dividend (see note 13 supra), assured that Wilkes would receive no return at all from the corporation. 2. The question of Wilkes's damages at the hands of the majority has not been thoroughly explored on the record before us. Wilkes, in his original complaint, sought damages in the amount of the $100 a week he believed he was entitled to from the time his salary was terminated up until the time this action was commenced. However, the record shows that, after Wilkes was severed from the corporate payroll, the schedule of salaries and payments made to the other stockholders varied from time to time. In addition, the duties assumed by the other stockholders after Wilkes was deprived of his share of the corporate earnings appear to have changed in significant respects.[FN15] Any resolution of this question must take into account whether the corporation was dissolved during the pendency of this litigation. FN15. In fairness to Wilkes, who, as the master found, was at all times ready and willing to work for the corporation, it should be noted that neither the other stockholders nor their representatives may be heard to say that Wilkes's duties were performed by them and the Wilkes's damages should, for that reason, be diminished. Therefore our order is as follows: So much of the judgment as dismisses Wilkes's complaint and awards costs to the defendants is reversed.[FN16] The case is remanded to the *854 Probate Court for Berkshire County for further proceedings concerning the issue of damages. Thereafter a judgment shall be entered declaring that Quinn, Riche and Connor breached their fiduciary duty to Wilkes as a minority stockholder in Springside, and awarding money damages therefor. Wilkes shall be allowed to recover **665 from Riche, the estate of T. Edward Quinn and the estate of Lawrence R. Connor, ratably, according to the inequitable enrichment of each, the salary he would have received had he remained an officer and director of Springside. In considering the issue of damages the judge on remand shall take into account the extent to which any remaining corporate funds of Springside may be diverted to satisfy Wilkes's claim. FN16. We do not disturb the judgment in so far as it dismissed a counterclaim by Springside against Wilkes arising from the payment of money by Quinn to Wilkes after the sale in 1965 of certain property of Springside to a corporation owned at that tiem by Quinn and his wife. See the discussion at pp. 660--661, supra. So ordered.

Merola v. Exergen 668 N.E.2d 351

Supreme Judicial Court of Massachusetts, Middlesex.

448 Steven MEROLA v. EXERGEN CORPORATION & another. [FN1]

FN1. Francesco Pompei.

Argued April 2, 1996. Decided Aug. 8, 1996.

Before LIACOS, C.J., and WILKINS, LYNCH, O'CONNOR and GREANEY, JJ.

LYNCH, Justice.

The plaintiff, a former vice president of Exergen Corporation (Exergen) and a former minority stockholder of that corporation, brought suit in the Superior Court against Exergen and the president and majority stockholder, Francesco Pompei, because of his termination as an officer and employee of Exergen. Count I of the complaint was dismissed prior to trial; count II (deceit) alleged that the plaintiff had been induced to work for the corporation by Pompei's knowingly false representations of continuing employment; and count III (breach of fiduciary duty) alleged that the corporation was a "close corporation," and that Pompei, as the majority stockholder, violated his fiduciary obligations to the plaintiff as a minority stockholder by terminating his employment without cause.

The trial judge ruled that the jury would hear evidence on both counts, but that she would make findings of fact and conclusions of law on count III, the equity count, following the verdict of the jury. The jury rendered a verdict, answering special questions regarding count II and providing advisory answers regarding count III. The jury found that, on count II, there had been no deceit by Pompei.

On count III the judge found that the corporation was a "close corporation" and that Pompei had breached his fiduciary obligations to the plaintiff by failing to give him an opportunity to become a major stockholder and by terminating his employment. She adopted the jury's advisory conclusion that he had been damaged only by the termination of employment to the extent of $50,000.

The Appeals Court affirmed the judgment as to Pompei, but modified it as to the corporation, holding that there was no basis for liability by Exergen to the plaintiff. 38 Mass.App.Ct. 462, 471-472 (1995). We granted the defendants' application for further appellate review [FN2] and now reverse the judgment of the Superior Court.

FN2. Both Pompei and Exergen were the named defendants in the complaint, however, as the allegations relating to the breach of fiduciary duty apply only to Pompei, we refer only to him regarding this issue.

We summarize the facts found by the judge. Exergen was formed in May, 1980, as a corporation in the business of developing and selling infrared heat detection devices. From 449 Exergen's inception to the date of trial, Pompei, the founder, was the majority shareholder in the corporation, as well as its president, owning over sixty per cent of the shares issued. At all relevant times, Pompei actively participated in and controlled the management of Exergen and, as the majority shareholder, had power to elect and change Exergen's board of directors.

The plaintiff began working for Exergen on a part-time basis in late 1980 while he was also employed full time by Analogic Corporation. In the course of conversations with Pompei in late 1981, and early 1982, the plaintiff was offered full-time employment with Exergen, and he understood that, if he came to work there and invested in Exergen stock, he would have the opportunity to become a major shareholder of Exergen and for continuing employment with Exergen.

As of March 1, 1982, the plaintiff resigned from Analogic and began working full time for Exergen. He also then began purchasing shares in Exergen when the company made periodic offerings to its employees. From March, 1982, through June, 1982, the plaintiff purchased 4,100 shares at $2.25 per share, for a total of $9,225. Exergen announced at the Exergen shareholders meeting in September, 1982, another option program to purchase shares at $5 per share within one year. By late 1983, the plaintiff had exercised his option to purchase an additional 1,200 shares. The plaintiff was not offered additional stock options after late 1983.

In response to special questions the jury made the following findings which were adopted by the judge: (1) the plaintiff did not receive an opportunity to become a major shareholder of Exergen; (2) there was a legitimate business purpose for not providing the plaintiff an opportunity to become a major shareholder of Exergen; (3) this business purpose could have been accomplished through an alternative course of action less harmful to the plaintiff's interests; and (4) the plaintiff suffered no damages by not being able to become a major shareholder of Exergen.

With regard to the alleged breach of fiduciary duty for terminating the plaintiff's employment with Exergen, the judge adopted the following findings by the jury: (1) the plaintiff was terminated by Pompei on April 16, 1987, and therefore did not receive continuing employment by Exergen; (2) there was no legitimate business purpose for not continuing the plaintiff's employment by Exergen; and (3) the plaintiff suffered damages in lost wages, reduced by income from other employment, in the total amount of $50,000.

Findings of fact, made by the jury on issues to be decided by the judge, shall be viewed as the findings of the judge, if adopted, and therefore shall not be set aside unless clearly erroneous. See Starr v. Fordham, 420 Mass. 178, 182, 648 N.E.2d 1261 (1995). See also Mass.R.Civ.P. 52(a), 365 Mass. 816 (1974). Based on these findings, the judge ruled that, as matter of law, Pompei breached a fiduciary duty to the plaintiff to honor the reasonable expectations that the plaintiff had concerning investments of time and resources in Exergen, [FN3] and awarded the plaintiff $50,000 in damages.

FN3. Although the judge ruled that Exergen and Pompei shall be jointly and severally liable for the judgment, the claim for breach of fiduciary duty lies only against the majority shareholder, not against the corporation. 38 Mass.App.Ct. 462, 471-472, 648 450 N.E.2d 1301 (1995).

Breach of fiduciary duty. In Donahue v. Rodd Electrotype Co., 367 Mass. 578, 593, 328 N.E.2d 505 (1975), this court recognized a fiduciary duty by a majority shareholder of "utmost good faith and loyalty" toward shareholders of a close corporation. A claim based on this duty is an equitable claim against individual stockholders. Zimmerman v. Bogoff, 402 Mass. 650, 660-661, 524 N.E.2d 849 (1988). The determination whether a breach of this fiduciary duty has occurred is a matter of law for the court, as is the remedy for such breach. Id. at 661, 524 N.E.2d 849.

We agree with the judge's conclusion that Exergen was a close corporation, and that stockholders in a close corporation owe one another a fiduciary duty of "utmost good faith and loyalty." Donahue v. Rodd Electrotype Co., supra at 593, 328 N.E.2d 505. We, therefore, look to see whether the plaintiff has established a breach of that duty under the principles of Donahue. Even in close corporations, the majority interest "must have a large measure of discretion, for example, in declaring or withholding dividends, deciding whether to merge or consolidate, establishing the salaries of corporate officers, dismissing directors with or without cause, and hiring and firing corporate employees." Wilkes v. Springside Nursing Home, Inc., 370 Mass. 842, 851, 353 N.E.2d 657 (1976).

Principles of employment law permit the termination of employees at will, with or without cause excepting situations within a narrow public policy exception. King v. Driscoll, 418 Mass. 576, 581-582, 638 N.E.2d 488 (1994), and cases cited. However, the termination of a minority shareholder's employment may present a situation where the majority interest has breached its fiduciary duty to the minority interest. Id. at 586, 638 N.E.2d 488. Wilkes v. Springside Nursing Home, Inc., supra at 852-853, 353 N.E.2d 657. There the court concluded that the majority stockholders had attempted unfairly to "freeze out" a minority stockholder by terminating his employment, in part because their policy and practice was to divide the available resources of the corporation equally by way of salaries to the shareholders who all participated in the operation of the enterprise. Id. at 846, 353 N.E.2d 657. As the investment became more profitable, the salaries were increased. Id. The court recognized that "[t]he minority stockholder typically depends on his salary as the principal return on his investment, since the 'earnings of a close corporation ... are distributed in major part in salaries, bonuses and retirement benefits.' " Id. at 850, 353 N.E.2d 657, quoting 1 F.H. O'Neal, Close Corporations § 1.07 (1971). Given those facts, this court concluded that the other shareholders did not show a legitimate business purpose for terminating the minority stockholder and that the other parties acted "in disregard of a long-standing policy of the stockholders that each would be a director of the corporation and that employment with the corporation would go hand in hand with stock ownership." Id. at 853, 353 N.E.2d 657.

Here, although the plaintiff invested in the stock of Exergen with the reasonable expectation of continued employment, there was no general policy regarding stock ownership and employment, and there was no evidence that any other stockholders had expectations of continuing employment because they purchased stock. The investment in the stock was an investment in the equity of the corporation which was not tied to employment in any formal way. The plaintiff acknowledged that he could have purchased 5,000 shares of stock while he was 451 working part time before resigning from his position at Analogic Corporation and accepting full- time employment at Exergen. He testified that he was induced to work for Exergen with the promise that he could become a major stockholder. There was no testimony that he was ever required to buy stock as a condition of employment.

Unlike the Wilkes case, there was no evidence that the corporation distributed all profits to shareholders in the form of salaries. On the contrary, the perceived value of the stock increased during the time that the plaintiff was employed. The plaintiff first purchased his stock at $2.25 per share and, one year later, he purchased more for $5 per share. This indicated that there was some increase in value to the investment independent of the employment expectation. Neither was the plaintiff a founder of the business, his stock purchases were made after the business was established, and there was no suggestion that he had to purchase stock to keep his job.

The plaintiff testified that, when he sold his stock back to the corporation in 1991, he was paid $17 per share. This was a price that had been paid to other shareholders who sold their shares to the corporation at a previous date, and it is a price which, after consulting with his attorney, he concluded was a fair price. With this payment, the plaintiff realized a significant return on his capital investment independent of the salary he received as an employee.

We conclude that this is not a situation where the majority shareholder breached his fiduciary duty to a minority shareholder. "[T]he controlling group in a close corporation must have some room to maneuver in establishing the business policy of the corporation." Wilkes v. Springside Nursing Home, Inc., supra at 851, 353 N.E.2d 657. Although there was no legitimate business purpose for the termination of the plaintiff, neither was the termination for the financial gain of Pompei or contrary to established public policy. Not every discharge of an at-will employee of a close corporation who happens to own stock in the corporation gives rise to a successful breach of fiduciary duty claim. The plaintiff was terminated in accordance with his employment contract and fairly compensated for his stock. He failed to establish a sufficient basis for a breach of fiduciary duty claim under the principles of Donahue v. Rodd Electrotype Co., supra.

Judgment reversed.

Anderson v. Wilder 2003 WL 22768666 (Tenn.Ct.App.)

SEE COURT OF APPEALS RULES 11 AND 12 [Unpublished Opinion]

452 Court of Appeals of Tennessee.

Melinda ANDERSON, et al., v. Brett WILDER, et al.

July 1, 2003 Session. Nov. 21, 2003.

HOUSTON M. GODDARD, P.J., delivered the opinion of the court, in which HERSCHEL P. FRANKS and D. MICHAEL SWINEY, JJ., joined.

OPINION

HOUSTON M. GODDARD, P.J.

This case involves a dispute between members of a limited liability company ("LLC") entitled FuturePoint Administrative Services, LLC. The Plaintiffs were expelled from the LLC by a vote of the Defendants, who together owned 53% of FuturePoint. The Plaintiffs received a buyout price of $150.00 per ownership unit in FuturePoint after they were expelled, pursuant to the operating agreement of the LLC. Shortly after the expulsion, the Defendants sold 499 ownership units, amounting to a 49.9% interest in the LLC, to a third party at a price of $250.00 per ownership unit. Plaintiffs filed this action, alleging, among other things, that the Defendants' actions violated their fiduciary duty and duty of good faith to Plaintiffs. Defendants moved for summary judgment, arguing that their actions were authorized by the operating agreement and that they acted in good faith in expelling the Plaintiffs. The Trial Court granted summary judgment in Defendants' favor. We vacate the order of summary judgment and remand.

FuturePoint Administrative Services, LLC, was created by the parties on or about January 1, 2000, at which time they executed the operating agreement for the company. FuturePoint commenced the business of administering third party medical claims in early 2000. Ownership of the company was divided into "ownership units." One ownership unit amounted to one-tenth of one percent ownership of the company. The ownership interest, and amount of capital contributed for the startup of FuturePoint, of each party is illustrated in the following chart:

FN1. Anna Stout was incorrectly identified in the complaint as "Susan Stout." Lamarr Stout, her husband, stated in his deposition that his wife goes by the nickname Susie, which presumably was the source of the error.

Member Name C2OEOwnership C3OECapital Interest Contributed ------William Thompson & Associates, Inc. 100 units (10%) $15,000 (Plaintiff) Charles and Janine Quade (Plaintiffs) 100 units (10%) $15,000 Michael Atkins and Sherry Turner 100 units (10%) $15,000 453 (Plaintiffs) Patrick L. Martin (Plaintiff) 100 units (10%) $15,000 Alan and Cherry Zimmerman (Plaintiffs) 40 units (4%) $ 6,000 Melinda Anderson (Plaintiff) 30 units (3%) $ 4,500

Brett and Dee Dee Wilder (Defendants) 200 units (20%) -0- Michael E. Cox (Defendant) 100 units (10%) $15,000 Lamar and Anna [FN1] Stout (Defendants) 100 units (10%) $15,000 FN1. Anna Stout was incorrectly identified in the complaint as "Susan Stout." Lamarr Stout, her husband, stated in his deposition that his wife goes by the nickname Susie, which presumably was the source of the error. Timothy and Kelly Welles (Defendants) 100 units (10%) $15,000 Dennis Freeman and Rhonda Shockley 30 units (3%) $ 4,500 (Defendants)

As can be seen from the chart, each member contributed $150.00 per ownership unit, with the exception of Defendants Brett and Dee Dee Wilder.

The parties set up FuturePoint as a member-managed LLC. The operating agreement provides for a management committee "to oversee and manage the business operations of the Company." The operating agreement gives the management committee the power and authority to contract on behalf of the company by a majority vote. FuturePoint's management committee was comprised of Plaintiffs Michael Atkins, Charles Quade, and Bill Thompson, and Defendants Lamarr Stout and Brett Wilder.

On September 10, 2001, a members' meeting took place at the FuturePoint offices, at which two offers to purchase ownership units were discussed. Each offer was at a price of $250.00 per ownership unit. At this time, FuturePoint had generated an amount of excess cash on hand in the amount of $63,000.00.

On September 14, 2001, the following actions were taken by the Defendants, as shown by a document styled "Actions taken by written consent of the members of FuturePoint Administrative Services, LLC":

In lieu of a meeting of the Members of FuturePoint Administrative Services, LLC (the "Company"), a Tennessee limited liability company, in accordance with the provisions of Section 48-233-101 of the Tennessee Limited Liability Company Act and Article 8.10 of the Operating Agreement of the Company, Members holding a majority of Units and who own Governance Rights with voting power equal to the voting power that would be required to take the same action at a meeting of the Members at which all Members are present hereby take the following actions: The following Resolutions are hereby adopted by vote of the aforesaid Members: RESOLVED, pursuant to Article 13.6 of the Operating Agreement of the Company, the following Members are hereby expelled from the Company effective as of the date hereof: William Thompson & Associates, Inc. Mike A. Atkins and/or Sherry Lynn Turner 454 Patrick L. Martin and/or Deborah N. Martin Charles F. Quade and/or Janine R. Quade Melinda Anderson and/or Adam & William Derreberry Alan Zimmerman and/or Cherry W. Zimmerman RESOLVED FURTHER, pursuant to Article XVII of the Operating Agreement of the Company, the Operating Agreement is hereby amended to delete in its entirety, Article IX and the Management Committee created thereunder; such functions previously conducted by the Management Committee to be hereafter conducted by the Chief Manager, Brett Wilder. RESOLVED FURTHER, pursuant to Article X of the Operating Agreement, Charles F. Quade is hereby removed as Secretary of the Company and Lamarr Stout is hereby elected as Secretary of the Company.

Pursuant to the terms of the operating agreement, the remaining members of the company bought the ownership interests of the expelled members at a price of $150.00 per membership unit. On October 11, 2001, the remaining members of FuturePoint sold a total of 499 membership units to a Don Allen at a price of $250.00 per unit.

The Plaintiffs brought this action on December 17, 2001, alleging breach of fiduciary duty and breach of the statutory and common law duty of good faith and fair dealing. Defendants moved for summary judgment, arguing that their actions were expressly permitted under the operating agreement, and that they acted in good faith in expelling the Plaintiffs. Specifically, Defendants relied upon the following provision of the operating agreement:

13.6 Expulsion of a Member. The Company may expel a Member, with or without cause, from the Company upon a vote or written consent of the Members who hold a majority of Units. In the event of a Member's expulsion, the remaining Members shall be obligated to purchase the expelled Member's Financial Rights at the Agreed Price and on the Agreed Terms within thirty (30) days of such expulsion. The remaining Members shall purchase the expelled Member's Financial Rights in proportion to their Financial Rights (excluding the Offered Financial Rights), or in such other proportion as they may agree.

The Trial Court granted the Defendants summary judgment, finding only that "no genuine issues of material fact exist for adjudication and the Defendants are entitled to summary judgment as a matter of law." Plaintiffs have appealed this ruling, raising the issue, which we restate, of whether the Trial Court erred in granting summary judgment.

We begin with the Plaintiffs' assertion that the majority shareholders in a member- managed, closely-held LLC stand in a fiduciary relationship to the minority shareholders, such as Plaintiffs in this case. We quote from Plaintiffs' brief as follows in summarizing their argument in this regard:

[I]t is well settled in Tennessee that the majority shareholders of a corporation owe a fiduciary duty to the minority shareholders. * * * While corporations are "fictional" entities created by statute, the fiduciary duty of the majority shareholders to the minority is a matter of common 455 law. The Tennessee Business Corporation Act at T.C.A. § 48-11-101 et seq. mentions nothing about any fiduciary duty owed by majority shareholders to minority shareholders. Accordingly, why should the majority members of a member-managed limited liability company not owe the same fiduciary duty to the minority? They should. There is no reason to distinguish the two forms of business enterprise. Indeed, member-managed limited liability companies are governed more like partnerships than conventional corporations. Since it is also well established as a fundamental rule of partnerships, that all partners, not just the majority, owe each other fiduciary duties * * *, it logically follows that a majority of the members of an "LLC" should owe a fiduciary duty to the minority members just like the duty a majority of the shareholders of an "Inc." owe the minority shareholders.

An analysis of the nature and history of the limited liability company is helpful in addressing this fiduciary duty question. The LLC is a relatively new form of business entity, a hybrid which "incorporates certain beneficial aspects of a partnership with certain beneficial aspects of a corporation." Annotation, Construction and Application of Limited Liability Company Acts, 79 A.L.R.5th 689. This A.L.R. annotation contains the following helpful observations:

It is important to keep the history of LLC development in perspective when working with LLCs and court interpretations of LLC acts. ... The typical LLC act is usually a hybrid of provisions culled from the individual state's partnership statutes and business corporation law. * * * [W]hen a court is interpreting an LLC act or agreement, the court will focus on the particular aspect of the LLC that gives rise to the problem, with emphasis on the foundational business form from which that characteristic originated. Usually, the particular aspect can be traced to either the corporate components or the partnership components of the LLC act or agreement. In such cases where the characteristic originated from the partnership aspects of the LLC, the court will use the established princip[le]s and precedent of the partnership law to resolve the issue ... In such cases where the characteristic originated from the corporate aspects of the LLC, the court will utilize the established princip[le]s and precedent of corporate law to resolve the issue.

79 A.L.R.5th at page 698.

It is well-recognized that a fiduciary relationship exists between members of either a partnership or a closely-held corporation under established principles of both partnership law and corporate law. In Lightfoot v. Hardaway, 751 S.W.2d 844 (Tenn.App.1988), the court stated as follows regarding business partnerships:

The fundamental rule that the relationship of partners is fiduciary and imposes on them the obligation of the utmost good faith and integrity in their dealings with one another with respect to partnership affairs is universally recognized in the modern cases and is reinforced by the Uniform Partnership Act.... Also well established is the applicability of this fiduciary duty on the sale of one partner's interest to another partner, the courts often characterizing the duty as being "particularly" or "especially" applicable to this situation. Although it is no longer 456 disputed, at least in theory, that such a sale will be sustained only when it is made in good faith, for a fair consideration, and on a full and complete disclosure of all important information as to value, the rule's application is by no means as clear and simple as its statement; and the specific content of such terms as "good", "fair", "full", and "important" can be known only by relating the particular conduct and circumstances of the parties to the results reached in the cases.

Lightfoot, 751 S.W.2d at 849 (quoting 4 A.L.R.4th at page 1128-29). The General Assembly has clarified the duties owed by partners by passage in 2001 of T.C.A. 61-1-404, which provides in relevant part as follows:

(a) The only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care set forth in subsections (b) and (c). (b) A partner's duty of loyalty to the partnership and the other partners is limited to the following: *5 (1) To account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity; (2) To refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership; and (3) To refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership. * * * (d) A partner shall discharge the duties to the partnership and the other partners under this act or under the partnership agreement and exercise any rights consistently with the obligation of good faith and fair dealing. (e) A partner does not violate a duty or obligation under this act or under the partnership agreement merely because the partner's conduct furthers the partner's own interest.

The Supreme Court has provided the following guidance as regards members of corporate associations:

This Court has stated that majority shareholders owe a fiduciary duty to minority shareholders. * * * The Court of Appeals stated in Johns v. Caldwell, 601 S.W.2d 37 (Tenn.App.1980), "Our courts are prompt to redress the injuries to minority stockholders caused by the wrongdoings of majority stockholders." Id. at 41 (citing McCampbell v. Fountain Head Railroad Co., 111 Tenn. 55, 77 S.W. 1070 (1903)). * * * In Intertherm v. Olympic Homes Systems, 569 S.W.2d 467 (Tenn .App.1978), the court noted that the transactions of majority or dominant shareholders will be closely scrutinized for good faith and fairness if challenged. The court stated that it would "apply the rule of close scrutiny and place the burden on the shareholder to justify a transaction with his corporation only when the shareholder owns a majority of stock, or is shown to dominate or control the corporation to a significant degree in some other way." Id. at 472. * * * 457 The Court has not addressed specifically the issues presented in this case, the relationship between shareholders in a close corporation where there is no majority or dominant shareholder and the dispute relates to the shareholders' interests as shareholders. The Court of Appeals relied upon the decision in Wilkes v. Springside Nursing Home, Inc., 370 Mass. 842, 353 N.E.2d 657 (1976), in which the Massachusetts court held there is a fiduciary relationship between shareholders of a close corporation. In Wilkes, the Court stated that "stockholders in the close corporation owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another." Id. 353 N.E.2d at 661 (quoting Donahue v. Rodd Electrotype Co., 367 Mass. 578, 328 N.E.2d 505, 515 (1975)). That standard of duty is one of "utmost good faith and loyalty." * * * Based on these principles, [defendants] Martin and Gammon, together and separately, were obligated to deal fairly and honestly with [plaintiff] Nelson and could not act out of avarice, malice, or self-interest in violation of their fiduciary duty to him as a shareholder.

Nelson v. Martin, 958 S.W.2d 643, 647-49 (Tenn.1997), overruled in part on other grounds by Trau-Med of America, Inc. v. Allstate Ins. Co., 71 S.W.3d 692 (Tenn.2002).

Defendants in the present case argue that an LLC is a "creature of statute" and because the LLC Act, found at T.C.A. 48-201-101 et seq., does not specifically prescribe a fiduciary duty of majority shareholders to a minority, this Court should not recognize such a duty. Defendants cite the case of McGee v. Best, 106 S.W.3d 48 (Tenn.App.2002) in support of their argument. The McGee court stated as follows regarding the LLC Act:

The statute in question defines the fiduciary duty of members of a member- managed LLC as one owing to the LLC, not to individual members. We cannot contravene the intent of the Legislature.

McGee, 106 S.W.3d at 64. The McGee case was in essence an employment dispute and did not involve an allegation of oppression by a majority shareholder group. The McGee Court noted that "this case boils down to a rather uncomplicated dispute controlled by the employment contract and the Operating Agreement ... The only issue involved is whether termination of the employment was for cause." McGee, 106 S.W.3d at 67.

The statute at issue here is T.C.A. 48-240-102, and it provides in pertinent part as follows:

(a) FIDUCIARY DUTY OF MEMBERS OF MEMBER-MANAGED LLC. Except as provided in the articles or operating agreement, every member of a member-managed LLC must account to the LLC for any benefit, and hold as trustee for it any profits derived by the member without the consent of the other members from any transaction connected with the formation, conduct, or liquidation of the LLC or from any use by the member of its property including, but not limited to, confidential or proprietary information of the LLC or other matters entrusted to the member as a result of such person's status as a member. (b) STANDARD OF CONDUCT. A member of a member-managed LLC shall discharge such member's duties as a member, including all duties as a member of a committee: 458 (1) In good faith; (2) With the care an ordinarily prudent person in a like position would exercise under similar circumstances; and (3) In a manner the member reasonably believes to be in the best interest of the LLC.

Pursuant to the above analysis, we are of the opinion that finding a majority shareholder of an LLC stands in a fiduciary relationship to the minority, similar to the Supreme Court's teaching in Nelson regarding a corporation, is warranted in this case. Such a holding does not conflict with the statute, and is in keeping with the statutory requirement that each LLC member discharge all of his or her duties in good faith.

We now turn to the question of whether Defendants' actions, viewed in the light most favorable to Plaintiffs under our summary judgment standard, could reasonably be said to have violated their fiduciary duty of dealing fairly and honestly with the minority Plaintiffs, and acting in good faith toward them.

In support of their motion for summary judgment, Defendants Mr. Wilder, Mr. Cox, Mr. Stout, Mr. Freeman, Mr. Welles, and Ms. Shockley each filed an affidavit, identical in every aspect, which alleged as follows:

Prior to the vote being taken to expel Plaintiff members, I was aware that the Plaintiff members of the management committee were planning to vote to distribute the remaining cash of the company, approximately $60,000, to the members, including themselves. I did not believe this would be beneficial to the company as it would not allow the company to meet payroll and other financial obligations, without most, if not all, of the members agreeing to loan that money back to the company.

As noted above, the members of FuturePoint met on September 10, 2001, to discuss two distinct offers to purchase ownership units in the company, one from Healthcare Economics Group, LLC, and one from Don Allen, who eventually purchased 499 ownership units. Plaintiff Mr. Atkins filed an affidavit stating in relevant part as follows:

My position on the subject of FuturePoint's cash in the bank had to do with the general offer from Health Care Economics (HCE) to purchase interests in the company that was being discussed September 10, 2001, as set forth in paragraph 24 of the Complaint. By the September 10, 2001, members meeting, that HCE offer was for $250.00 per unit and contemplated the FuturePoint members retaining the excess cash on hand of about $63,000.00. Therefore, the HCE offer had a value of $313.00 per unit for anyone who wanted to sell. The offer presented by Mr. Wilder from Don Allen was for $250.00 per unit but was silent on the subject of the excess cash. I then suggested, as a point of discussion, that to make the two offers comparable, if persons were to be authorized by the members to sell their interests to Allen, then perhaps those persons should receive their share of the excess cash. Their investments had earned it, they deserved it, there had never been a previous draw, and since they would be taxed on it, then they ought to have it. This is what I said at the September 10, 2001, members meeting as a point of discussion. As Allen's offer was for 50% of the Company or less, not everyone would be selling, and therefore not all the cash would be drawn. There would be ample cash on hand 459 to operate FuturePoint. The insinuation that I would advocate taking out all the cash to cause FuturePoint to go out of business is absurd. I requested a management committee meeting for September 12, 2001. On Wednesday September 12, 2001 Defendant Brett Wilder represented to me that he would arrange to pay anyone who wanted to sell the amount of $300 per unit which was comparable to the value of the Allen offer ($313.00 per unit). That same day I spoke to Defendant Tim Welles and Welles confirmed this. In reliance upon these representations, I dropped my insistence on holding a Management Committee meeting that day, and the meeting was agreed to be held the morning of September 14, 2001.

No management committee meeting took place September 14, 2001. As relayed to me after the fact, prior to the scheduled Management Committee meeting, on the morning of Friday September 14, 2001 the Defendants conducted a secret members meeting without notice to me and voted to disband the Management Committee and expel myself and the other Plaintiffs as members from FuturePoint.

Plaintiff Mr. Quade testified by affidavit as follows:

I have first hand knowledge of Brett Wilder's real reason for causing myself and the others to be expelled. In general, that reason was to expel us at a low price and sell the interests taken at a high price. As it specifically pertained to Bill Thompson and I, his reason no doubt included the fact that Bill and I would not go along with the plan he presented to us May 31, 2001, to expel certain members and take their interests and sell them at a higher price to one of the offerors at the time. Mr. Wilder even reduced his plan to a spreadsheet, a copy of which is attached as Exhibit A. He had it all figured out. That spreadsheet reflects how we would all gain by expelling 30% of the interests of the company. Those selected for the chopping block by Mr. Wilder were Mike Atkins, Pat Martin, Rhonda Shockley, Dennis Freeman, the Zimmermans, and Melinda Anderson. It was my view that these offers to purchase interests in the company were offers in general, and therefore to the members as a whole, and not just for a few of us to usurp--simply because we knew about the offers and the other members at the time did not. Bill Thompson and I told Mr. Wilder that we would not go along with that scheme, it was not ethical, and that these offers needed to [be] presented to all members for discussion. It seems that my efforts to do right by my fellow partners in the company got me expelled and without a job at FuturePoint. This was most disappointing, especially to see that Rhonda [Shockley] and Dennis [Freeman] voted to expel me after I had stood up for not expelling them.

Defendant Mr. Wilder testified by deposition regarding the spreadsheet referred to above and his plan to expel certain members of the company as follows:

A: [Mr. Wilder] During the meeting when we discussed the potential expulsion and the guilt by association topics, during that meeting we were brainstorming, all of us, about what would we do, and we realized it was a more complicated thing than we envisioned, expulsion of someone. And we were discussing various scenarios of wait a minute, when you do that, how do you do that in an LLC. I mean, we had an agreement there, we were reading, we were saying well, you know, those shares would have to become the ownership of persons who 460 aren't expelled. This was a worksheet where we were trying to do the math on that, what kind of scenario. * * * Q: And there's no names on any of these rows, but are you talking about expelling three members with a 10 percent interest? A: No. As I recall, we were talking about expelling Martin, Atkins and the 10 percent represented by the other small members, smaller shareholders that combined to 10. Q: Let's see who those might be. * * * Q: Because [Plaintiff] Anderson is three [percent]? A: Uh-huh. Q: Zimmermans were four, Freeman and Shockley were three, that adds up to 10? A: Correct. During that meeting we were talking about what if this occurred, how would it work. Q: Tell me about the next line here, says total sale price, $50,000; what is that? Is that the sale of interests to Mr. Allen? And are you not saying that we're going to sell 30 percent of the company to Mr. Allen for $50,000? A: I don't remember that $50,000 figure. But, I do know that during the meeting as we were discussing this scenario, we knew that at some point we would be selling interests and if we bought-- Q: If you bought low, you could sell high? A: In this particular situation, that's what this is showing you, yes. * * * Q: The first gain would be that if you repurchase 30 percent of the interests, but sell 20 percent of the company, the first gain is a reallocation of membership percentages amongst the remaining members? A: That's correct. Q: That's reflected in the final column that says final percentage interest? A: Correct. Q: For example, your interest would go up from 20 percent to 22.86 percent? A: Yes.

The record contains a written offer from Mr. Wilder to Mr. Freeman and Ms. Shockley, dated September 14, 2001, which states in its entirety as follows:

I do hereby offer to purchase 30 units of your ownership (including financial rights and governing rights) of FuturePoint Administrative Services, LLC for the sum of $10,000.00. This purchase offer is valid for a period of 10 days, with closing of sale to be completed within 10 days of your written acceptance of this offer. This purchase will comply with all terms of the FuturePoint Administrative Services, LLC Operating Agreement. In the event that any member exercises their right to purchase said shares at the agreed price ($4,500.00), I agree to pay you the difference of $5,500.00 within 10 days of said purchase.

Mr. Freeman and Ms. Shockley returned a signed letter of acceptance the same day, September 14, 2001, stating "[w]e accept your offer as written and verbally described to each of us on this date." The same day, the Defendants, who along with the votes of Mr. Freeman and 461 Ms. Shockley controlled 53 percent of the membership units and voting power of the company, voted to expel the Plaintiffs as described above.

The basis for Defendants' argument that they expelled the Plaintiffs in good faith is their assertion that "the Plaintiff members of the management committee were planning to vote to distribute the remaining cash of the company, approximately $60,000, to the members, including themselves." FuturePoint's management committee had the authority and responsibility to distribute the net cash flow of the company to the members. Up until this point, it appears that no cash distributions had been made to any member of the company. The record reflects that after Plaintiffs were expelled, the company made cash distributions to the remaining members in amounts of $13,405.20 on March 27, 2002 and $40,000.00 on April 4, 2002. In their affidavits, Plaintiffs Mr. Quade and Mr. Atkins deny Defendants' allegation that they intended to distribute the remaining cash among the members.

Plaintiffs further argue that Defendants' assertion is false and pretextual for at least two reasons. First, several of the expelled members, Ms. Anderson, Mr. and Mrs. Zimmerman, and Mr. Martin, were not on the management committee and thus had no role in any alleged decision to make a cash distribution. Mr. Quade offered another reason in somewhat colorful fashion in his affidavit:

The Defendants claim in their affidavits that myself, Mike Atkins, and Bill Thompson, as members of the management committee, were planning to vote to distribute all the remaining cash of the company so as to cause the company to not meet its payroll and other financial obligations. This is just not true. For one thing, I WAS ONE SUCH PAYROLL OBLIGATION. That is, I worked at FuturePoint. The notion that I would vote to ruin my investment and put myself out of a job is nuts!

We find that there exists a genuine issue of material fact regarding whether the Defendants' actions in expelling the minority Plaintiffs were taken in good faith, as required by the LLC Act, or whether they expelled Plaintiffs solely in order to force the acquisition of their membership units at a price of $150.00 in order to sell them at $250.00 per unit, in violation of their fiduciary duty.

In addition, there is a legitimate issue raised as to whether the sale of Mr. Freeman and Ms. Shockley's ownership units to Mr. Wilder violated the operating agreement, as alleged by Plaintiffs. The operating agreement contains the following provision regarding the transfer of financial rights in the company:

13.3 Voluntary Lifetime Transfers. No Member may make a Voluntary Lifetime Transfer of Financial Rights except pursuant to this Section. Any Member who wishes to make said Voluntary Lifetime Transfer must promptly send a notice to each other Member. Such notice shall include a description of the proposed Transfer, the price and terms on which the Financial Rights are to be Transferred, the name, address and business or occupation of the proposed transferee, and any other facts that are, or would reasonably be deemed to be, material to the proposed Transfer. The Member wishing to make a Voluntary Lifetime Transfer shall be deemed to have offered to sell his or her Financial Rights otherwise to be transferred to the 462 other Members. The other Members shall have the option to buy the Offered Financial Rights at either (a) the price and terms set forth in the notice of proposed Transfer or (b) at the Agreed Price and on the Agreed Terms. Each other Member shall have sixty (60) days from such notice in which to elect to buy all or any portion of the Offered Financial Rights. The other Members may elect to buy the Offered Financial Rights in proportion to their respective Financial Rights (excluding the Offered Financial Rights), or in such other proportion as they may agree.

It is not clear from the record whether Plaintiffs were given any opportunity to purchase the membership units and financial rights of Mr. Freeman and Ms. Shockley. There is nothing in the record to suggest that they were offered this opportunity, and Plaintiffs' brief argues that they were not. There thus exists an issue of whether the sale of Mr. Freeman and Ms. Shockley's financial rights to Mr. Wilder comported with the terms of the operating agreement.

Finally, it is not entirely clear from the record exactly who paid the $10,000.00 to Mr. Freeman and Ms. Shockley. Mr. Wilder testified as follows in his deposition:

Q: Were the Freemans and the Shockleys [sic] paid with a FuturePoint check? A: I believe so, but I'm not certain.

If the purchase price of the 30 units owned by Mr. Freeman and Ms. Shockley was paid by Mr. Wilder out of company funds, it would not only be a potential violation of Mr. Wilder's duty to the minority shareholders, but also a potential violation of his duty to the LLC itself. In addition to the fact that the $333.33 per unit paid to Mr. Freeman and Ms. Shockley arguably was more than market value, the transaction itself was one which would quite foreseeably embroil the company and its members in litigation. The question of the source of the purchase price of Mr. Freeman and Ms. Shockley's ownership units is to be determined by the trier of fact on remand.

For the foregoing reasons, we find there are questions of material fact regarding whether the Defendant's actions in expelling the minority Plaintiffs were taken in good faith and in accordance with their fiduciary duty to them. The Trial Court's grant of summary judgment is vacated, and the cause remanded for proceedings consistent with this opinion. Costs on appeal are adjudged against the Appellees Brett Wilder, Michael E. Cox, Lamarr Stout, Timothy Welles, Dennis Freeman, and Rhonda Shockley.

Pinebrook Properties v. Brookhaven Lake Property 77 S.W.3d 487

Court of Appeals of Texas, Texarkana. 463 PINEBROOK PROPERTIES, LTD., Appellant, v. BROOKHAVEN LAKE PROPERTY OWNERS ASSOCIATION, Appellee.

Submitted April 25, 2002. Decided May 24, 2002. Rehearing Overruled June 18, 2002.

Before CORNELIUS, C.J., GRANT and ROSS, JJ.

OPINION

Opinion by Justice ROSS.

Pinebrook Properties, Ltd., Pinebrook Properties Management, L.L.C., and A.C. Musgrave, Jr. (Pinebrook) appeal the trial court's judgment providing various relief for the different parties. The conflict embodied in this litigation is the culmination of a long and complicated history, including two prior suits resulting in appeals to this Court. The case currently before us (Musgrave III) is the result of the consolidation by the trial court of a suit filed in the year 2000 by Pinebrook Properties against Brookhaven Lake Property Owners Association and counterclaims by the Association and various lot owners (Owners) remaining after they were severed from a 1997 lawsuit. The other claims from the 1997 lawsuit were the subject of a recent appeal to this Court, which were decided in Musgrave v. Owen, 67 S.W.3d 513 (Tex.App.-Texarkana 2002, no pet.) ( Musgrave II).

Pinebrook brings eight issues in this appeal: * * * 2) whether the trial court erred in finding Pinebrook Properties and Pinebrook Management are the alter egos of Musgrave; * * *

Musgrave succeeded three other owners as the owner of certain real property in the Brookhaven in the Pines Addition. He purchased the lake, the roadways serving the lots, and some forested recreational property in the addition. The lot owners enjoy exclusive rights to hunt, fish, and recreate on the recreational property and the lake, and to use the roadways for ingress and egress. * * *

In December 1998, Pinebrook Properties, a Texas limited partnership, succeeded Musgrave's interest in the lake, roadways, and recreational property. Pinebrook Management, a Texas limited liability company, is the general partner of Pinebrook Properties. In this case (Musgrave III), Pinebrook Properties filed suit seeking injunctive relief from the trial court to stop the Association from working on the roadways and lake, and then billing Pinebrook. The Owners, the appellees in Musgrave III, include a number of people who were not parties to the first suit involving the Brookhaven in the Pines Addition, which we decided in Musgrave v. Brookhaven Lake Prop. Owners Ass'n, 990 S.W.2d 386 (Tex.App.-Texarkana 1999, pet. denied) ( Musgrave I). As counterplaintiffs in Musgrave III, the Owners sought injunctive relief, 464 declaratory judgment, and monetary relief against Pinebrook Properties, Pinebrook Management, and Musgrave. They contend Pinebrook Properties and Pinebrook Management are merely alter egos of Musgrave, who transferred his interest in the property to Pinebrook Properties in December 1998.

In Musgrave III, Pinebrook Properties sought 1) a temporary and permanent injunction to enjoin further work by the Association on the roadways, lake, and recreational property; 2) a declaratory judgment that Pinebrook Properties, not the Association, is the only entity authorized to perform such work; 3) a judgment in damages against the Association for the trespass it committed while performing work on the roadways, lake, and recreational property of Brookhaven in the Pines; 4) reasonable and necessary attorney's fees; 5) Pinebrook Properties' costs of suit; and 6) prejudgment and postjudgment interest at the highest rate allowed by law. The Owners sought 1) injunctive relief, 2) declaratory judgment, 3) monetary damages, and 4) attorney's fees.

The trial court rendered judgment in favor of the Owners. The trial court, in its amended findings of fact and conclusions of law, found * * * 3) Pinebrook Management and Pinebrook Properties are alter egos of Musgrave, and that Musgrave and/or any alter ego of Musgrave, his agents, servants, and/or employees have no control over the lake and recreational areas located in the Brookhaven in the Pines subdivision, and are without authority to promulgate rules and regulations regarding the lake and property located in the Brookhaven in the Pines subdivision, as such action has and will interfere with the property owners' exclusive rights to the use and enjoyment of said lake, dam, roadways, and recreational areas; * * *

Pinebrook contends in its second point of error that the trial court erred in finding Pinebrook Properties and Pinebrook Management are alter egos of Musgrave, and judgment should not have been granted against Musgrave individually. Pinebrook contends the standard of review for all its remaining points of error is abuse of discretion. However, in this second point of error, Pinebrook is challenging the trial court's finding of fact that Pinebrook Properties and Pinebrook Management are the alter egos of Musgrave. Findings of fact in a case tried to the court are of the same force and dignity as a jury's answers to jury questions. * * * The trial court's findings of fact are reviewable for legal and factual sufficiency of the evidence to support them by the same standards that are applied in reviewing the legal or factual sufficiency of the evidence supporting a jury's answer to a jury question. * * *

When deciding legal sufficiency, in determining whether there is no evidence of probative force to support a jury's finding, we must consider all of the evidence in the record in the light most favorable to the party in whose favor the verdict has been rendered, and we must apply every reasonable inference that could be made from the evidence in that party's favor. * * * In this review, we disregard all evidence and inferences to the contrary. * * * A no evidence point will be sustained when 1) there is a complete absence of evidence of a vital fact, 2) the 465 court is barred by rules of law or of evidence from giving weight to the only evidence offered to prove a vital fact, 3) the evidence offered to prove a vital fact is no more than a mere scintilla, or 4) the evidence conclusively establishes the opposite of the vital fact. * * *

More than a scintilla of evidence exists when the evidence supporting the finding, as a whole, rises to a level that would enable reasonable and fair- minded people to differ in their conclusions. * * * If we find some probative evidence, we will test the factual sufficiency of that evidence by examining the entire record to determine whether the finding is clearly wrong and unjust.

Alter ego is a basis for disregarding the corporate fiction. * * * It applies "when there is such unity between corporation and individual that the separateness of the corporation has ceased and holding only the corporation liable would result in injustice." Id. (citing First Nat'l Bank v. Gamble, 134 Tex. 112, 132 S.W.2d 100, 103 (1939)). Alter ego "is shown from the total dealings of the corporation and the individual, including the degree to which ... corporate and individual property have been kept separately, the amount of financial interest, ownership and control the individual maintains over the corporation, and whether the corporation has been used for personal purposes." Castleberry, 721 S.W.2d at 272; Hall v. Timmons, 987 S.W.2d 248, 250 (Tex.App.-Beaumont 1999, no pet.). Failure to comply with corporate formalities is no longer a factor in considering whether alter ego exists. Tex. Bus. Corp. Act Ann. art. 2.21(A) (3) (Vernon Supp.2002); * * *

Pinebrook Properties, Ltd., a Texas limited partnership, owns the lake, dam, roadways, and recreational areas at issue in this case. Pinebrook Properties Management, L.L.C., a Texas limited liability company, is the general partner of Pinebrook Properties. Musgrave is the president and general managing partner of Pinebrook Management.

The trial court erred in its application of law. The theory of alter ego, or piercing the corporate veil, is inapplicable to partnerships. Under traditional general partnership law, each partner is liable jointly and severally for the liabilities of the partnership. The Texas Legislature has altered this general scheme and statutorily created limited partnerships which are governed by the Texas Revised Limited Partnership Act (TRLPA). Tex.Rev.Civ. Stat. Ann. art. 6132a 1, § 1.01, et seq. (Vernon Supp.2002). Under TRLPA, "a general partner of a limited partnership has the liabilities of a partner in a partnership without limited partners to persons other than the partnership and the other partners." Tex.Rev.Civ. Stat. Ann. art. 6132a-1, § 4.03(b). Under the Texas Revised Partnership Act, "all partners are liable jointly and severally for all debts and obligations of the partnership...." Tex.Rev.Civ. Stat. Ann. art. 6132b-3.04 (Vernon Supp.2002). Therefore, in a limited partnership, the general partner is always liable for the debts and obligations of the partnership. Limited partners are not liable for the obligations of a limited partnership unless the limited partner is also a general partner or, in addition to the exercise of the limited partner's rights and powers as a limited partner, the limited partner participates in the control of the business. However, if the limited partner does participate in the control of the business, the limited partner is liable only to persons who transact business with the limited partnership reasonably believing, based on the limited partner's conduct, that the limited partner is a general partner. Tex.Rev.Civ. Stat. Ann. art. 6132a-1, § 3.03(a).

466 Under corporation law, officers and shareholders are not liable for the actions of the corporation absent an independent duty. Leitch v. Hornsby, 935 S.W.2d 114, 117 (Tex.1996). Because officers and shareholders may not be held liable for the actions of the corporation, the theory of alter ego is used to pierce the corporate veil so the injured party might recover from an officer or shareholder who is otherwise protected by the corporate structure. Alter ego is inapplicable with regard to a partnership because there is no veil that needs piercing, even when dealing with a limited partnership, because the general partner is always liable for the debts and obligations of the partnership to third parties. The trial court erred in finding Pinebrook Properties is the alter ego of Musgrave.

Having determined Pinebrook Properties cannot be the alter ego of Musgrave, we now turn to the trial court's finding that Pinebrook Management, which is a limited liability company, is the alter ego of Musgrave. A limited liability company is any company organized and in existence in conformity with the Texas Limited Liability Company Act (TLLCA). Tex.Rev.Civ. Stat. Ann. Art. 1528n, art. 1.02(A)(3) (Vernon 1997). The Texas Legislature's enactment of the TLLCA created a new business entity, the limited liability company. A limited liability company is a separate and distinct entity from other types of business entities already in existence in Texas, such as the corporation or the limited partnership. "Except as and to the extent the regulations specifically provide otherwise, a member or manager is not liable for the debts, obligations or liabilities of a limited liability company including under a judgment decree, or order of a court." Tex.Rev.Civ. Stat. Ann. Art. 1528n, art. 4.03(A) (Vernon 1997).

In determining if there is evidence legally sufficient to support the trial court's finding, we look to see if there is such unity between Musgrave and Pinebrook Management that the separateness has ceased to exist, and whether holding only Pinebrook Management liable, as the general partner of Pinebrook Properties, would result in injustice. See Castleberry, 721 S.W.2d at 272. We must look to the relationship between Musgrave and Pinebrook Management to see if alter ego is shown from the total dealings of Musgrave and Pinebrook Management--for example, if the corporate and individual properties have been kept separate; the amount of financial interest, ownership, and control the individual maintains over the corporation; and whether the corporation has been used for personal purposes. See id. The evidence of alter ego between Musgrave and Pinebrook Management presented by the Owners is that Pinebrook Management had no checking account, had not filed a tax return, and that Musgrave sent a letter to the lot owners, signing his own name and not designating that he signed it in any other capacity. However, the Owners failed to cite any authority holding that failure to have a checking account, or failure to file tax returns, establishes alter ego. There is no evidence provided that Musgrave commingled funds or that his assets and those of Pinebrook Management were not kept separate. The evidence clearly shows Pinebrook Management has never had the need, or been required, to file a tax return. This is no evidence that Pinebrook is the alter ego of Musgrave.

The Owners also rely on a letter signed by Musgrave after he transferred the property to Pinebrook Properties which denied reimbursement for expenditures. They contend this letter shows alter ego and Musgrave's disregard for the corporate structure. However, failing to sign the letter with "president," or putting the corporate name on the letter, is a corporate formality. Failure to comply with corporate formalities is no longer considered in determining alter ego and 467 is therefore no evidence of alter ego. Tex. Bus. Corp. Act Ann. art. 2.21(A)(3); * * *

The Owners contend Musgrave testified that Pinebrook Properties' and Pinebrook Management's only sources of income are derived from contributions or loans made by Musgrave. A review of Musgrave's testimony reveals neither Pinebrook Properties nor Pinebrook Management have any sources of income. Musgrave specifically testified there has never been any money flowing through Pinebrook Management. The only money expended on Pinebrook Management by Musgrave shown by the evidence is that he paid to have it incorporated. Musgrave has never received any funds from Pinebrook Properties or Pinebrook Management. There is evidence that Musgrave lent money to Pinebrook Properties via written open notes payable on demand. However, this is no evidence of the relationship between Musgrave and Pinebrook Management, or that their funds are commingled, or that Musgrave has disregarded the corporate structure of Pinebrook Management in any way.

The final evidence on which the Owners rely is Musgrave's testimony at trial: "Well, I own the property. I pay taxes on the property." The Owners contend this statement shows Musgrave disregarded the separation of the corporate enterprise. The context of this statement is as follows:

Q. You are objecting to the property owners association making any rules or regulations regarding that lake, correct? A. Not any. Q. Well, what does the word "exclusive" mean to you? A. Well, I own the property. I pay taxes on the property. Their exclusive rights are for use of the lake and the recreational property for hunting and fishing. Beyond that, they don't have the rights to set rules and regulations.

Although Musgrave did make the statement on which the Owners rely, based on the context in which it was made, we conclude it is no more than a scintilla of evidence that Musgrave disregarded the corporate structure or enterprise.

The evidence reveals Musgrave is not the sole manager of Pinebrook Management. There are two other managers involved, Bill Ragsdale and Billy Boles. Finally, there is no evidence that Musgrave used Pinebrook Management for personal purposes.

The Owners stated at oral argument that Musgrave transferred the land to Pinebrook Properties after suit was filed against him, suggesting that Pinebrook Properties and Pinebrook Management were created fraudulently. However, the Owners did not plead fraud or that Pinebrook Properties or Pinebrook Management were created in violation of law. The Owners, in their pleadings, rely solely on alter ego as the basis for Musgrave's liability.

The trial court erred in finding that Pinebrook Properties, a limited partnership, is the alter ego of Musgrave, and there is no evidence to support the trial court's finding that Pinebrook Management is the alter ego of Musgrave. Because the Owners, in their pleadings and trial strategy, relied on attaching individual liability to Musgrave solely on the theory of alter ego, we reverse the judgment as to Musgrave and render judgment that the Owners take nothing against 468 him.

In summary, we affirm the trial court's judgment finding that Pinebrook Properties' claims against the Association in the 2000 suit are barred by res judicata and that the Association had capacity to sue. We also affirm the trial court's permanent injunction against Pinebrook Management and Pinebrook Properties, Ltd. enjoining them from allowing use of the lake and dam to anyone other than lot owners and their accompanied guests, and from interfering with the exclusive rights of lot owners of Brookhaven to use the lake, dam, roadways, and recreational areas. All of Pinebrook's other points of error are sustained, and the trial court's judgment on those points is reversed and rendered.

Accordingly, the judgment is affirmed in part and reversed and rendered in part.

469 Appendix

Massachusetts General Laws

CHAPTER 108A. PARTNERSHIPS

§ 1 Citation of chapter § 2 Definitions § 3 Knowledge and notice; definition § 4 Interpretation and construction § 5 Application of rules of law and equity § 6 Partnership, defined; application to prior associations; limited partnerships § 7 Rules for determining existence of partnership § 8 Partnership property; acquisition and conveyance § 9 Partner as agent of partnership; authority § 10 Conveyance to title to realty § 11 Admissions and representations § 12 Notice to and knowledge of partner; imputation to partnership § 13 Liability of partnership for wrongful acts of partners § 14 Liability of partnership for partner's misapplication of money or property § 15 Joint and several liability of partners § 16 Misrepresentation of self as partner; liability § 17 Liability of new partner for partnership obligations § 18 Rights and duties of partners § 19 Partnership books; right of inspection § 20 Disclosure of information on demand § 21 Accounting of partner to partnership; profits; personal representative of deceased partner § 22 Partner§s right to formal accounting § 23 Continuation of partnership beyond time fixed for termination § 24 Property rights

1 § 25 Ownership of specific partnership property; tenancy in partnership; incidents of tenancy § 26 Interest in partnership; profits § 27 Conveyance of interest in partnership; rights of assignee § 28 Creditor's remedy to reach partner's interest in partnership § 29 Dissolution and winding up; definition § 30 Effect of dissolution § 31 Causes of dissolution § 32 Decree of dissolution § 33 Effect of dissolution on partner's authority § 34 Dissolution by act, death or bankruptcy; liability to copartners § 35 Authority and liability after dissolution § 36 Discharge of partner's liability; assumption of partnership obligations; deceased partner § 37 Right to wind up partnership affairs § 38 Rights of partners upon dissolution § 39 Rights of partner entitled to rescind partnership § 40 Rules for settling accounts between partners § 41 Creditors' rights; continuing business of dissolved partnership § 42 Rights of retiring or deceased partner against person or partnership continuing business § 43 Right to an account § 44 Actions to reach and apply corporate shares and interests § 45 Registration as limited liability partnership; annual report; withdrawal; revocation § 46 Name of registered limited liability partnership § 47 Recognition outside commonwealth § 48 Recordable instruments binding on partnership § 49 Certificate of good standing

MASSACHUSETTS GENERAL LAWS CHAPTER 108A. PARTNERSHIPS § 1 Citation of chapter This chapter may be cited as the Uniform Partnership Act. 2 § 2 Definitions In this chapter, "court" includes every court and judge having jurisdiction in the case. "Business" includes every trade, occupation, or profession. "Bankrupt" includes bankrupt under the Federal Bankruptcy Act or insolvent under any state insolvent law. "Conveyance" includes every assignment, lease, mortgage or encumbrance. "Foreign registered limited liability partnership", a registered limited liability partnership or a limited liability partnership formed pursuant to an agreement governed by the laws of another jurisdiction. "Real property", includes land or any interest or estate in land. "Registered limited liability partnership", a partnership registered under section forty-five and complying with section forty-six. § 3 Knowledge and notice; definition (1) A person has "knowledge" of a fact within the meaning of this chapter, not only when he has actual knowledge thereof, but also when he has knowledge of such other facts as in the circumstances show bad faith. (2) A person has "notice" of a fact within the meaning of this chapter when the person who claims the benefit of the notice. (a) States the fact to such person, or (b) Delivers through the mail, or by other means of communication, a written statement of the fact to such person or to a proper person at his place of business or residence. § 4 Interpretation and construction (1) The rule that statutes in derogation of the common law are to be strictly construed shall have no application to this chapter. (2) The law of estoppel shall apply under this chapter. (3) The law of agency shall apply under this chapter. (4) This chapter shall be so interpreted and construed as to effect its general purpose to make uniform the law of those states which enact it. (5) This chapter shall not be construed so as to impair the obligations of any contract existing on January first, nineteen hundred and twenty-three, nor to affect any action or proceedings begun or right accrued before said date. § 5 Application of rules of law and equity In any case not provided for in this chapter the rules of law and equity, including the law merchant, shall govern. § 6 Partnership, defined; application to prior associations; limited partnerships

3 (1) A partnership is an association of two or more persons to carry on as co- owners a business for profit and includes, for all purposes of the laws of the commonwealth, a registered limited liability partnership. (2) But any association formed under any other statute of this state, or any statute adopted by authority, other than the authority of this state, is not a partnership under this chapter, unless such association would have been a partnership in this state prior to January first, nineteen hundred and twenty- three; but this chapter shall apply to limited partnerships except in so far as the statutes relating to such partnerships are inconsistent herewith. § 7 Rules for determining existence of partnership In determining whether a partnership exists, these rules shall apply: (1) Except as provided by section sixteen persons who are not partners as to each other are not partners as to third persons. (2) Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not of itself establish a partnership, whether such co-owners do or do not share any profits made by the use of the property. (3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived. (4) The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment: (a) Of a debt by instalments or otherwise, (b) As wages of an employee or rent to a landlord, (c) As an annuity to a widow or representative of a deceased partner, (d) As interest on a loan, though the amount of payment vary with the profits of the business, (e) As the consideration for the sale of the good will of a business or other property by instalments or otherwise. § 8 Partnership property; acquisition and conveyance (1) All property originally brought into the partnership stock or subsequently acquired, by purchase or otherwise, on account of the partnership is partnership property. (2) Unless the contrary intention appears, property acquired with partnership funds is partnership property. (3) Any estate in real property may be acquired in the partnership name. Title so acquired can be conveyed only in the partnership name. (4) A conveyance to a partnership in the partnership name, though without words of inheritance, passes the entire estate of the grantor unless a contrary intent appears § 9 Partner as agent of partnership; authority 4 (1) Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership, unless the partner so acting has in fact no authority to act for the partnership in the particular matter, and the person with whom he is dealing has knowledge of the fact that he has no such authority. (2) An act of a partner which is not apparently for the carrying on of the business of the partnership in the usual way does not bind the partnership unless authorized by the other partners. (3) Unless authorized by the other partners or unless they have abandoned the business, one or more but less than all the partners have no authority to: (a) Assign the partnership property in trust for creditors or on the assignee’s promise to pay the debts of the partnership, (b) Dispose of the good will of the business, (c) Do any other act which would make it impossible to carry on the ordinary business of the partnership, (d) Confess a judgment, (e) Submit a partnership claim or liability to arbitration or reference. (4) No act of a partner in contravention of a restriction on his authority shall bind the partnership to persons having knowledge of the restriction. § 10 Conveyance to title to realty (1) Where title to real property is in the partnership name, any partner may convey title to such property by a conveyance executed in the partnership name; but the partnership may recover such property unless the partner's act binds the partnership under the provisions of paragraph (1) of section nine, or unless such property has been conveyed by the grantee or a person claiming through such grantee to a holder for value without knowledge that the partner, in making the conveyance, has exceeded his authority. (2) Where title to real property is in the name of the partnership, a conveyance executed by a partner, in his own name, passes the equitable interest of the partnership, provided the act is one within the authority of the partner under the provisions of paragraph (1) of section nine. (3) Where title to real property is in the name of one or more but not all the partners, and the record does not disclose the right of the partnership, the partners in whose name the title stands may convey title to such property, but the partnership may recover such property if the partners' act does not bind the partnership under the provisions of paragraph (1) of section nine, unless the purchaser or his assignee is a holder for value, without knowledge. (4) Where the title to real property is in the name of one or more of all the partners, or in a third person in trust for the partnership, a conveyance executed by a partner in the partnership name, or in his own name, passes the equitable interest of the partnership, provided the act is one within the authority of the partner under the provisions of paragraph (1) of section nine.

5 (5) Where the title to real property is in the names of all the partners a conveyance executed by all the partners passes all their rights in such property § 11 Admissions and representations An admission or representation made by any partner concerning partnership affairs within the scope of his authority as conferred by this chapter is evidence against the partnership. § 12 Notice to and knowledge of partner; imputation to partnership Notice to any partner of any matter relating to partnership affairs, and the knowledge of the partner acting in the particular matter, acquired while a partner or then present to his mind, and the knowledge of any other partner who reasonably could and should have communicated it to the acting partner operate as notice to or knowledge of the partnership, except in the case of a fraud on the partnership committed by or with the consent of that partner. § 13 Liability of partnership for wrongful acts of partners Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership, or with the authority of his co- partners, loss or injury is caused to any person, not being a partner in the partnership, or any penalty is incurred, the partnership is liable therefor to the same extent as the partner so acting or omitting to act. § 14 Liability of partnership for partner's misapplication of money or property The partnership is bound to make good the loss: (a) Where one partner acting within the scope of his apparent authority receives money or property of a third person and misapplies it; and (b) Where the partnership in the course of its business receives money or property of a third person and the money or property so received is misapplied by any partner while it is in the custody of the partnership. § 15 Joint and several liability of partners (1) Except as provided in paragraph (2), all partners are liable: (a) Jointly and severally for everything chargeable to the partnership under sections thirteen and fourteen. (b) Jointly for all other debts and obligations of the partnership; but any partner may enter into a separate obligation to perform a partnership contract. (2) Subject to the provisions of paragraph (3), a partner in a registered limited liability partnership shall not be personally liable directly or indirectly, including, without limitation, by way of indemnification, contribution, assessment or otherwise, for debts, obligations and liabilities of or chargeable to such partnership, whether in tort, contract or otherwise arising while the partnership is a registered limited liability partnership. (3) Paragraph (2) shall not affect (a) the liability of a partner in a registered limited liability partnership arising in whole or in part from such partner's own negligence, wrongful acts, errors or omissions, (b) the availability of partnership property to satisfy debts, obligations and liabilities of the partnership or (c) the persons on whom process may be served in an action against the partnership. 6 (4) Notwithstanding paragraphs (2) and (3), the personal liability of a partner in a limited liability partnership engaged in the rendering of professional services shall not be less than the personal liability of a shareholder of a professional corporation organized under chapter one hundred and fifty-six A engaged in the rendering of the same professional services § 16 Misrepresentation of self as partner; liability (1) When a person, by words spoken or written or by conduct, represents himself, or consents to another representing him to any one, as a partner in an existing partnership or with one or more persons not actual partners, he is liable to any such person to whom such representation has been made, who has, on the faith of such representation, given credit to the actual or apparent partnership, and if he has made such representation or consented to its being made in a public manner he is liable to such person, whether the representation has or has not been made or communicated to such person so giving credit by or with the knowledge of the apparent partner making the representation or consenting to its being made. (a) When a partnership liability results he is liable as though he were an actual member of the partnership. (b) When no partnership liability results he is liable jointly with the other persons, if any, so consenting to the contract or representation as to incur liability, otherwise separately. (2) When a person has been thus represented to be a partner in an existing partnership, or with one or more persons not actual partners, he is an agent of the persons consenting to such representation to bind them to the same extent and in the same manner as though he were a partner in fact, with respect to persons who rely upon the representation. Where all the members of the existing partnership consent to the representation, a partnership act or obligation results; but in all other cases it is the joint act or obligation of the person acting and the persons consenting to the representation. § 17 Liability of new partner for partnership obligations A person admitted as a partner into an existing partnership is liable for all the obligations of the partnership arising before his admission as though he had been a partner when such obligations were incurred, except that this liability shall be satisfied only out of partnership property. § 18 Rights and duties of partners The rights and duties of the partners in relation to the partnership shall be determined, subject to any agreement between them, by the following rules: (a) Each partner shall be repaid his contributions, whether by way of capital or advances to the partnership property, and share equally in the profits and surplus remaining after all liabilities, including those to partners, are satisfied; and except as provided in section fifteen, each partner must contribute towards the losses, whether of capital or otherwise, sustained by the partnership according to his share in the profits. (b) The partnership must indemnify every partner in respect of payments made and personal liabilities reasonably incurred by him in the ordinary and proper conduct of its business, or for the preservation of its business or property.

7 (c) A partner, who in aid of the partnership makes any payment or advance beyond the amount of capital which he agreed to contribute, shall be paid interest from the date of the payment or advance. (d) A partner shall receive interest on the capital contributed by him only from the date when repayment should be made. (e) All partners have equal rights in the management and conduct of the partnership business. (f) No partner is entitled to remuneration for acting in the partnership business, except that a surviving partner is entitled to reasonable compensation for his services in winding up the partnership affairs. (g) No person can become a member of a partnership without the consent of all the partners. (h) Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners; but no act in contravention of any agreement between the partners may be done rightfully without the consent of all the partners. § 19 Partnership books; right of inspection The partnership books shall be kept, subject to any agreement between the partners, at the principal place of business of the partnership, and every partner shall at all times have access to and may inspect and copy any of them. § 20 Disclosure of information on demand Partners shall render on demand true and full information of all things affecting the partnership to any partner or the legal representative of any deceased partner or partner under legal disability. § 21 Accounting of partner to partnership; profits; personal representative of deceased partner (1) Every partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the formation, conduct or liquidation of the partnership or from any use by him of its property. (2) This section applies also to the representatives of a deceased partner engaged in the liquidation of the affairs of the partnership as the personal representatives of the last surviving partner. § 22 Partner's right to formal accounting Any partner shall have the right to a formal account as to partnership affairs: (a) If he is wrongfully excluded from the partnership business or possession of its property by his co-partners, (b) If the right exists under the terms of any agreement, (c) As provided by section twenty-one, (d) Whenever other circumstances render it just and reasonable. § 23 Continuation of partnership beyond time fixed for termination 8 (1) When a partnership for a fixed term or particular undertaking is continued after the termination of such term or particular undertaking without any express agreement, the rights and duties of the partners remain the same as they were at such termination, so far as is consistent with a partnership at will. (2) A continuation of the business by the partners or such of them as habitually acted therein during the term, without any settlement or liquidation of the partnership affairs, is prima facie evidence of a continuation of the partnership. § 24 Property rights The property rights of a partner are (1) his rights in specific partnership property, (2) his interest in the partnership, and (3) his right to participate in the management. § 25 Ownership of specific partnership property; tenancy in partnership; incidents of tenancy (1) A partner is co-owner with his partners of specific partnership property holding as a tenant in partnership. (2) The incidents of this tenancy are such that: (a) A partner, subject to the provisions of this chapter and to any agreement between the partners, has an equal right with his partners to possess specific partnership property for partnership purposes; but he has no right to possess such property for any other purpose without the consent of his partners. (b) A partner's right in specific partnership property is not assignable except in connection with the assignment of the rights of all the partners in the same property. (c) A partner's right in specific partnership property is not subject to attachment or execution, except on a claim against the partnership. When partnership property is attached for a partnership debt the partners, or any of them, or the representatives of a deceased partner, cannot claim any right under the homestead or exemption laws. (d) On the death of a partner his right in specific partnership property vests in the surviving partner or partners, except where the deceased was the last surviving partner, when his right in such property vests in his legal representative. Such surviving partner or partners, or the legal representative of the last surviving partner, has no right to possess the partnership property for any but a partnership purpose. (e) A partner's right in specific partnership property is not subject to dower, curtesy, or allowances to widows, heirs, or next of kin. § 26 Interest in partnership; profits A partner's interest in the partnership is his share of the profits and surplus, and the same is personal property. § 27 Conveyance of interest in partnership; rights of assignee (1) A conveyance by a partner of his interest in the partnership does not of itself dissolve the partnership, nor, as against the other partners in the absence of agreement, entitle the assignee, during the continuance of the partnership, to interfere in the management or 9 administration of the partnership business or affairs, or to require any information or account of partnership transactions, or to inspect the partnership books; but it merely entitles the assignee to receive in accordance with his contract the profits to which the assigning partner would otherwise be entitled. (2) In case of a dissolution of the partnership, the assignee is entitled to receive his assignor's interest and may require an account from the date only of the last account agreed to by all the partners. § 28 Creditor's remedy to reach partner's interest in partnership (1) On due application to the superior court by any judgment creditor of a partner, such court may charge the interest of the debtor partner with payment of the unsatisfied amount of such judgment debt with interest thereon; and may then or later appoint a receiver of his share of the profits, and of any other money due or to fall due to him in respect of the partnership, and make all other orders, directions, accounts and inquiries which the debtor partner might have made, or which the circumstances of the case may require. (2) The interest charged may be redeemed at any time before foreclosure, or in case of a sale being directed by the court may be purchased without thereby causing a dissolution: (a) With separate property, by any one or more of the partners, or (b) With partnership property, by any one or more of the partners with the consent of all the partners whose interests are not so charged or sold. (3) Nothing in this chapter shall be held to deprive a partner of his right, if any, under the exemption laws, as regards his interest in the partnership. § 29 Dissolution and winding up; definition The dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business. § 30 Effect of dissolution On dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed. § 31 Causes of dissolution Dissolution is caused: (1) Without violation of the agreement between the partners, (a) By the termination of the definite term or particular undertaking specified in the agreement, (b) By the express will of any partner when no definite term or particular undertaking is specified, (c) By the express will of all the partners who have not assigned their interests or suffered them to be charged for their separate debts, either before or after the termination of any specified term or particular undertaking,

10 (d) By the expulsion of any partner from the business bona fide in accordance with such a power conferred by the agreement between the partners; (2) In contravention of the agreement between the partners, where the circumstances do not permit a dissolution under any other provision of this section, by the express will of any partner at any time; (3) By any event which makes it unlawful for the business of the partnership to be carried on or for the members to carry it on in partnership; (4) By the death of any partner; (5) By the bankruptcy of any partner or the partnership; (6) By decree of court under section thirty-two. § 32 Decree of dissolution (1) On application by or for a partner the court shall decree a dissolution whenever: (a) A partner has been declared a lunatic in any judicial proceeding or is shown to be of unsound mind, (b) A partner becomes in any other way incapable of performing his part of the partnership contract, (c) A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business, (d) A partner wilfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable to carry on the business in partnership with him, (e) The business of the partnership can only be carried on at a loss, (f) Other circumstances render a dissolution equitable. (2) On the application of the purchaser of a partner's interest under section twenty-seven or twenty-eight: (a) After the termination of the specified term or particular undertaking, (b) At any time if the partnership was a partnership at will when the interest was assigned or when the charging order was issued. § 33 Effect of dissolution on partner's authority Except so far as may be necessary to wind up partnership affairs or to complete transactions begun but not then finished, dissolution terminates all authority of any partner to act for the partnership, (1) With respect to the partners, (a) When the dissolution is not by the act, bankruptcy or death of a partner; or (b) When the dissolution is by such act, bankruptcy or death of a partner, in cases where section thirty-four so requires;

11 (2) With respect to persons not partners, as declared in section thirty-five. § 34 Dissolution by act, death or bankruptcy; liability to copartners Where the dissolution is caused by the act, death or bankruptcy of a partner, each partner is liable to his co-partners for his share of any liability created by any partner acting for the partnership as if the partnership had not been dissolved unless (a) The dissolution being by act of any partner, the partner acting for the partnership had knowledge of the dissolution; or (b) The dissolution being by the death or bankruptcy of a partner, the partner acting for the partnership had knowledge or notice of the death or bankruptcy. (c) The liability is for a debt, obligation, or liability for which the partner is not liable as provided in section fifteen. § 35 Authority and liability after dissolution (1) After dissolution a partner can bind the partnership except as provided in paragraph (3) (a) By any act appropriate for winding up partnership affairs or completing transactions unfinished at dissolution; (b) By any transaction which would bind the partnership if dissolution had not taken place, provided the other party to the transaction (I) Had extended credit to the partnership prior to dissolution and had no knowledge or notice of the dissolution; or (II) Though he had not so extended credit, had nevertheless known of the partnership prior to dissolution, and, having no knowledge or notice of dissolution, the fact of dissolution has not been advertised in a newspaper of general circulation in the place (or in each place if more than one) at which the partnership business was regularly carried on. (2) The liability of a partner under paragraph (1b) shall be satisfied out of partnership assets alone when such partner had been prior to dissolution (a) Unknown as a partner to the person with whom the contract is made; and (b) So far unknown and inactive in partnership affairs that the business reputation of the partnership could not be said to have been in any degree due to his connection with it. (3) The partnership is in no case bound by any act of a partner after dissolution (a) Where the partnership is dissolved because it is unlawful to carry on the business, unless the act is appropriate for winding up partnership affairs; or (b) Where the partner has become bankrupt; or (c) Where the partner has no authority to wind up partnership affairs, except by a transaction with one who (I) Had extended credit to the partnership prior to dissolution and had no knowledge or notice of his want of authority; or

12 (II) Had not extended credit to the partnership prior to dissolution, and, having no knowledge or notice of his want of authority, the fact of his want of authority has not been advertised in the manner provided for advertising the fact of dissolution in paragraph (1 b II). (4) Nothing in this section shall affect the liability under section sixteen of any person who after dissolution represents himself or consents to another representing him as a partner in a partnership engaged in carrying on business. § 36 Discharge of partner's liability; assumption of partnership obligations; deceased partner (1) The dissolution of the partnership does not of itself discharge the existing liability of any partner. (2) A partner is discharged from any existing liability upon dissolution of the partnership by an agreement to that effect between himself, the partnership creditor and the person or partnership continuing the business; and such agreement may be inferred from the course of dealing between the creditor having knowledge of the dissolution and the person or partnership continuing the business. (3) Where a person agrees to assume the existing obligations of a dissolved partnership, the partners whose obligations have been assumed shall be discharged from any liability to any creditor of the partnership who, knowing of the agreement, consents to a material alteration in the nature or time of payment of such obligations. (4) The individual property of a deceased partner shall be liable for those obligations of the partnership incurred while he was a partner and for which he was liable under section fifteen but subject to the prior payment of his separate debts. § 37 Right to wind up partnership affairs Unless otherwise agreed the partners who have not wrongfully dissolved the partnership or the legal representative of the last surviving partner, not bankrupt, has the right to wind up the partnership affairs; provided, that any partner, his legal representative, or his assignee, upon cause shown, may obtain winding up by the court. § 38 Rights of partners upon dissolution (1) When dissolution is caused in any way, except in contravention of the partnership agreement, each partner, as against his co-partners and all persons claiming through them in respect of their interests in the partnership, unless otherwise agreed, may have the partnership property applied to discharge its liabilities, and the surplus applied to pay in cash the net amount owing to the respective partners. But if dissolution is caused by expulsion of a partner bona fide under the partnership agreement, and if the expelled partner is discharged from all partnership liabilities, either by payment or agreement under section thirty-six (2), he shall receive in cash only the net amount due him from the partnership. (2) When dissolution is caused in contravention of the partnership agreement the rights of the partners shall be as follows: (a) Each partner who has not caused dissolution wrongfully shall have--

13 I. All the rights specified in paragraph (1) of this section, and II. The right, as against each partner who has caused the dissolution wrongfully, to damages for breach of the agreement. (b) The partners who have not caused the dissolution wrongfully, if they all desire to continue the business in the same name, either by themselves or jointly with others, may do so during the agreed term for the partnership, and for that purpose may possess the partnership property, provided they secure the payment by bond approved by the court, or pay to any partner who has caused the dissolution wrongfully the value of his interest in the partnership at the dissolution, less any damages recoverable under clause (2 a II) of this section, and in like manner indemnify him against all present or future partnership liabilities. (c) A partner who has caused the dissolution wrongfully shall have-- I. If the business is not continued under the provisions of paragraph (2b), all the rights of a partner under paragraph (1), subject to clause (2 a II) of this section. II. If the business is continued under paragraph (2b) of this section, the right as against his co-partners and all claiming through them in respect of their interests in the partnership, to have the value of his interest in the partnership, less any damages caused to his co partners by the dissolution, ascertained and paid to him in cash, or the payment secured by bond approved by the court, and to be released from all existing liabilities of the partnership; but in ascertaining the value of the partner's interest the value of the good will of the business shall not be considered. § 39 Rights of partner entitled to rescind partnership Where a partnership contract is rescinded on the ground of the fraud or misrepresentation of one of the parties thereto, the party entitled to rescind is, without prejudice to any other right, entitled-- (a) To a lien on, or right of retention of, the surplus of the partnership property after satisfying the partnership liabilities to third persons for any sum of money paid by him for the purchase of an interest in the partnership and for any capital or advances contributed by him; and (b) To stand, after all liabilities to third persons have been satisfied, in the place of the creditors of the partnership for any payments made by him in respect of the partnership liabilities; and (c) To be indemnified by the person guilty of the fraud or making the representation against all debts and liabilities of the partnership. § 40 Rules for settling accounts between partners In settling accounts between the partners after dissolution, the following rules shall be observed, subject to any agreement to the contrary: (a) The assets of the partnership are-- I. The partnership property.

14 II. The contributions of the partners specified in clause (d) of this section. (b) The liabilities of the partnership shall rank in order of payment, as follows: I. Those owing to creditors other than partners. II. Those owing to partners other than for capital and profits. III. Those owing to partners in respect of capital. IV. Those owing to partners in respect of profits. (c) The assets shall be applied in the order of their declaration in clause (a) of this section to the satisfaction of the liabilities. (d) The partners shall contribute, as provided by section eighteen (a), except as provided in section fifteen: (i) the amount necessary to satisfy the liabilities and (ii) if any, but not all, of the partners are insolvent, or, not being subject to process, refuse to contribute, the other partners shall contribute their share of the liabilities, and, in the relative proportions in which they share the profits, the additional amount necessary to pay the liabilities. (e) An assignee for the benefit of creditors or any person appointed by the court shall have the right to enforce the contributions specified in clause (d) of this section. (f) Any partner or his legal representative shall have the right to enforce the contributions specified in clause (d) of this section, to the extent of the amount which he has paid in excess of his share of the liability. (g) The individual property of a deceased partner shall be liable for the contributions specified in clause (d) of this section. (h) When partnership property and the individual properties of the partners are in the possession of a court for distribution, partnership creditors shall have priority on partnership property and separate creditors on individual property, saving the rights of lien or secured creditors as heretofore. (i) Where a partner has become bankrupt or his estate is insolvent, the claims against his separate property shall rank in the following order: I. Those owing to separate creditors. II. Those owing to partnership creditors. III. Those owing to partners by way of contribution. § 41 Creditors' rights; continuing business of dissolved partnership (1) When any new partner is admitted into an existing partnership, or when any partner retires and assigns, or dies and his representative assigns, his rights in partnership property to two or more of the partners, or to one or more of the partners, and one or more third persons, if the business is continued without liquidation of the partnership affairs, creditors of the first or dissolved partnership are also creditors of the partnership so continuing the business. (2) When all but one partner retire and assign, or die and their representatives assign, their rights in partnership property to the remaining partner, who continues the business without

15 liquidation of partnership affairs, either alone or with others, creditors of the dissolved partnership are also creditors of the person or partnership so continuing the business. (3) When any partner retires or dies and the business of the dissolved partnership is continued as set forth in paragraph (1) or (2) of this section, with the consent of the retired partners or the representative of the deceased partner, but without any assignment of his right in partnership property, rights of creditors of the dissolved partnership and of the creditors of the person or partnership continuing the business shall be as if such assignment had been made. (4) When all the partners or their representatives assign their rights in partnership property to one or more third persons, who promise to pay the debts and who continue the business of the dissolved partnership, creditors of the dissolved partnership are also creditors of the person or partnership continuing the business. (5) When any partner wrongfully causes a dissolution and the remaining partners continue the business under the provisions of section thirty-eight (2b), either alone or with others, and without liquidation of the partnership affairs, creditors of the dissolved partnership are also creditors of the person or partnership continuing the business. (6) When a partner is expelled and the remaining partners continue the business either alone or with others, without liquidation of the partnership affairs, creditors of the dissolved partnership are also creditors of the person or partnership continuing the business. (7) The liability of a third person becoming a partner in the partnership continuing the business, under this section, to the creditors of the dissolved partnership shall be satisfied out of partnership property only. (8) When the business of a partnership after dissolution is continued under any conditions set forth in this section, the creditors of the dissolved partnership, as against the separate creditors of the retiring or deceased partner or the representative of the deceased partner, have a prior right to any claim of the retired partner or the representative of the deceased partner against the person or partnership continuing the business, on account of the retired or deceased partner's interest in the dissolved partnership or on account of any consideration promised for such interest or for his right in partnership property. (9) Nothing in this section shall be held to modify any right of creditors to set aside any assignment on the ground of fraud. (10) The use by the person or partnership continuing the business of the partnership name, or the name of a deceased partner as part thereof, shall not of itself make the individual property of the deceased partner liable for any debts contracted by such person or partnership. § 42 Rights of retiring or deceased partner against person or partnership continuing business When any partner retires or dies, and the business is continued under any of the conditions set forth in section forty-one (1)(2)(3)(5)(6), or section thirty-eight (2b), without any settlement of accounts as between him or his estate and the person or partnership continuing the business, unless otherwise agreed, he or his legal representative as against such persons or partnership may have the value of his interest at the date of dissolution ascertained, and shall receive as an

16 ordinary creditor an amount equal to the value of his interest in the dissolved partnership with interest, or, at his option or at the option of his legal representative, in lieu of interest, the profits attributable to the use of his right in the property of the dissolved partnership; provided, that the creditors of the dissolved partnership as against the separate creditors, or the representative of the retired or deceased partner, shall have priority on any claim arising under this section, as provided by section forty-one (8). § 42 Rights of retiring or deceased partner against person or partnership continuing business When any partner retires or dies, and the business is continued under any of the conditions set forth in section forty-one (1)(2)(3)(5)(6), or section thirty-eight (2b), without any settlement of accounts as between him or his estate and the person or partnership continuing the business, unless otherwise agreed, he or his legal representative as against such persons or partnership may have the value of his interest at the date of dissolution ascertained, and shall receive as an ordinary creditor an amount equal to the value of his interest in the dissolved partnership with interest, or, at his option or at the option of his legal representative, in lieu of interest, the profits attributable to the use of his right in the property of the dissolved partnership; provided, that the creditors of the dissolved partnership as against the separate creditors, or the representative of the retired or deceased partner, shall have priority on any claim arising under this section, as provided by section forty-one (8). § 43 Right to an account The right to an account of his interest shall accrue to any partner, or his legal representative, as against the winding up partners or the surviving partners or the person or partnership continuing the business, at the date of dissolution, in the absence of any agreement to the contrary. § 44 Actions to reach and apply corporate shares and interests Nothing in this chapter shall effect clause seven of section three of chapter two hundred and fourteen. § 45 Registration as limited liability partnership; annual report; withdrawal; revocation (1) To become a registered limited liability partnership, a partnership shall file with the state secretary a registration stating the name of the partnership, the street address of its principal office in the commonwealth, the federal employer identification number of the partnership, a brief statement of the business or profession in which the partnership engages and, if desired, the names of one or more partners authorized to execute, acknowledge, deliver and record any recordable instrument purporting to affect an interest in real property, whether to be recorded with a registry of deeds or a district office of the land court. The registration shall be executed by one or more partners authorized by a majority of the partners. The registration shall be accompanied by a fee of five hundred dollars. (2) An annual report shall be filed by the partnership with the state secretary on or before the last day of February in each year following the year of registration. The annual report shall state the name of the partnership, the street address of its principal office in the commonwealth, the federal employer identification number of the partnership, and a brief statement of the business or profession in which the partnership engages. 17 (3) Each annual report shall be accompanied by a fee of five hundred dollars. (4) The status of the partnership as a registered limited liability partnership shall be effective upon filing of the registration and the required fee, and such status shall remain effective, regardless of changes in the partnership, until the registration is voluntarily withdrawn pursuant to paragraph (5) or revoked pursuant to paragraph (6). Withdrawal or revocation shall not affect the personal liability of any partner with respect to debts, obligations and liabilities of or chargeable to the partnership which arose prior to the effective date of such withdrawal or revocation. The status of a partnership as a registered limited liability partnership and the liability of the partners thereof shall not be affected by errors or subsequent changes in the information stated in a registration under paragraph (1). (5) The registration of a registered limited liability partnership may be voluntarily withdrawn by filing with the state secretary a written notice of withdrawal executed by one or more partners authorized by two-thirds of the partners. (6) If a partnership fails to file an annual report when due or to pay the required fee, the state secretary may revoke the registration of the partnership. The state secretary shall give the partnership at least sixty days notice of his intention to revoke the registration of the partnership. The notice shall be given by mail to the partnership at the address of its principal office as shown in the records of the state secretary. The notice shall specify the annual reports which have not been filed, the fees which have not been paid and the effective date of revocation. The revocation shall not be effective if the specified annual reports are filed and the specified fees are paid prior to specified effective date of revocation. (7) In the case of a partnership which renders professional services as defined in chapter one hundred and fifty-six A, (a) the registration and each annual report shall contain the names of each of the partners who renders a professional service on behalf of the partnership in the commonwealth at the time of filing and their business addresses, if different from that of the partnership, (b) the registration shall be accompanied by a certificate of the appropriate regulating board or boards that each of the partners who renders a professional service on behalf of the partnership in the commonwealth at the time of filing is duly licensed to render such service, and (c) each annual report contains a certification that each of the partners who renders professional services on behalf of the partnership in the commonwealth at the time of filing is duly licensed to render such services. (8) (a) A registered limited liability partnership which renders professional services as defined in chapter one hundred and fifty-six A shall carry at least the designated amount of liability insurance of a kind that is designed to cover negligence, wrongful acts, errors and omissions and that insures the partnership and its partners. The term designated amount shall mean the amount designated by the regulating board which regulates the professional service rendered. The regulating boards for each professional service shall adopt regulations requiring such a designated amount of liability insurance. (b) If a registered limited liability partnership is in compliance with the requirements of subsection (a), the requirements of this section shall not be admissible or in any way be made known to a jury in determining an issue of liability for or extent of the debt or obligation or damages in question.

18 (c) A registered limited liability partnership is considered to be in compliance with said subsection (a) if the partnership provides the designated amount of funds specifically designated and segregated for the satisfaction of judgments against the partnership or its partners based on negligence, wrongful acts, errors and omissions by: (1) deposit in trust or in bank escrow of cash, bank certificates of deposit, or United States Treasury obligations; or (2) a bank letter of credit or insurance company bond § 46 Name of registered limited liability partnership The name of every registered limited liability partnership shall end with words "registered limited liability partnership", "limited liability partnership" or the abbreviation "L.L.P." or "LLP". § 47 Recognition outside commonwealth (1) A partnership, including a registered limited liability partnership, formed and existing under an agreement governed by the laws of this commonwealth, may conduct its business, carry on its operations, and have and exercise the powers granted by this act in any state, territory, district, or possession of the United States or in any foreign country. (2) It is the intent of this section that the legal existence of registered limited liability partnerships be recognized outside the boundaries of this commonwealth and that the laws of this commonwealth governing such registered limited liability partnerships doing business outside this commonwealth be granted the protection of full faith and credit under the Constitution of the United States. (3) The internal affairs of partnerships, including registered limited liability partnerships, formed and existing under an agreement governed by the laws of this commonwealth, including the liability of partners for debts, obligations and liabilities of or chargeable to the partnership, shall be subject to and governed by the laws of this commonwealth. (4) Subject to any statutes for the regulation and control of specific types of business, foreign registered limited liability partnerships may do business in this commonwealth and shall be required to register with the state secretary under this chapter in the same manner as a registered limited liability partnership. (5) The name of a foreign registered limited liability partnership doing business in this commonwealth shall contain the words "registered limited liability partnership" or "limited liability partnership" or the abbreviation "L.L.P." or "LLP" as the last words or letters of its name or such other similar words or abbreviation as may be required or authorized by the laws of the state where the partnership is registered. (6) The internal affairs of foreign registered limited liability partnerships, including the liability of partners for debts, obligations and liabilities of or chargeable to the partnership, shall be subject to and governed by the laws of the jurisdiction in which the foreign registered limited liability partnership is registered. § 48 Recordable instruments binding on partnership

19 Any recordable instrument purporting to affect an interest in real property, including without limitation, any deed, lease, notice of lease, mortgage, discharge or release of mortgage, assignment of mortgage, easement, and certificate of fact, executed in the name of a registered limited liability partnership by any partner who is identified on the registration of the limited liability partnership, as amended, filed with the secretary of the commonwealth as authorized to execute, acknowledge, deliver and record recordable instruments affecting interests in real property, shall be binding on the registered limited liability partnership in favor of a seller, purchaser, lessor, lessee, mortgagor, mortgagee, or other person relying in good faith on such instrument, notwithstanding any inconsistent provisions of the partnership agreement, side agreements among the partners, by-laws or rules, resolutions or votes of the registered liability partnership. § 49 Certificate of good standing A registered limited liability partnership shall be deemed to be in good standing with the secretary of the commonwealth if such registered limited liability partnership appears from the records of said secretary to have been duly registered and has filed all annual reports and paid all fees then due to the secretary of the commonwealth, and the registration of the registered limited liability partnership has not been withdrawn or revoked pursuant to subsection (5) or (6) of section forty-five. Upon the request of any person and payment of such fee as may be prescribed by law, the state secretary shall issue a certificate stating, in substance, as to any registered limited liability partnership meeting the requirements of this section, that such registered limited liability partnership appears from the records in his office to exist and to be in good standing, and the identity of any and all partners authorized to act with respect to real property instruments who are named in the registration of the registered limited liability partnership, as amended. MASSACHUSETTS GENERAL LAWS

CHAPTER 109. LIMITED PARTNERSHIP

§1 Definitions §1A Short title §2 Name of limited partnership; requirements §3 Reservation of name §4 Office and agent for service of process § 4A Certificate of change of resident agent or address of resident agent; change of address of limited partnership business office; resignation §5 Records

§6 Business of partnership §7 Partners transacting business with partnership §8 Certificate §9 Amendment to certificate 20 §10 Cancellation of certificate §11 Execution of certificates §12 Execution of certificate ordered by court §13 Filing of certificates §14 False statements in certificates; damages §15 Notice §16 Delivery of certificates to limited partners §16A Consolidation or merger §17 Limited partners §18 Right to vote of limited partners §19 Liability of limited partners §20 Person erroneously believing himself limited partner §21 Records; rights of limited partners §22 Additional general partners §23 Cessation of general partner status §24 Rights, powers and liabilities of general partners §25 Contributions by general partner §26 Right to vote of general partners §27 Form of partner’s contribution §28 Obligation to contribute §29 Allocation of profits and losses §30 Distributions of cash or other assets §31 Interim distributions §32 Withdrawal of general partner §33 Withdrawal of limited partner §34 Distribution to partner upon withdrawal §35 Distribution in kind §36 Right to distribution §37 Limitations on distribution §38 Liability upon return of contribution §39 Nature of partnership interest §40 Assignment of partnership interest 21 §41 Rights of judgment creditor §42 Assignee becoming limited partner §43 Death or incompetency of partner; power to settle estate or administer property §44 Nonjudicial dissolution §45 Judicial dissolution §46 Winding up partnership affairs §47 Distribution of assets following winding up §48 Nature of business; liability of partners and agents; law governing §49 Registration §50 Approval of registration; fee; records §51 Name §52 Resident agent §53 Correction or amendment of false or changed statements in application for registration §54 Cancellation of registration; certificate of withdrawal §55 Failure to register; capacity to sue and be sued; secretary of state as attorney of unregistered or withdrawn partnerships §56 Right of action by limited partner §57 Proper plaintiff §58 Pleading §59 Expenses in successful action §60 Construction and application of chapter §61 Fees §62 Cases not provided for by chapter §63 Annual report; fee §64 Administrative dissolution; grounds; notice; wind up and liquidation of affairs §65 Revocation of authority of foreign limited partnership to transact business in commonwealth; notice; effective date § 66 Application for reinstatement after administrative dissolution or revocation of right to transact business; contents

MASSACHUSETTS GENERAL LAWS

22 CHAPTER 109. LIMITED PARTNERSHIP §1 Definitions As used in this chapter, the following words shall, unless the context clearly requires otherwise, have the following meanings:---- (1) "Certificate of limited partnership", the certificate referred to in section eight, and the certificate as amended or restated. (2) "Contribution", any cash, property, services rendered, or a promissory note or other binding obligation to contribute cash or property or to perform services, which a partner contributes to a limited partnership in his capacity as a partner. (3) "Event of withdrawal of a general partner", an event that causes a person to cease to be a general partner as provided in section twenty-three. (4) "Foreign limited partnership", a partnership formed under the laws of any state other than the commonwealth and having as partners one or more general partners and one or more limited partners. (5) "General partner", a person who has been admitted to a limited partnership as a general partner in accordance with the partnership agreement and named in the certificate of limited partnership as a general partner. (6) "Limited partner", a person who has been admitted to a limited partnership as a limited partner in accordance with the partnership agreement. (7) "Limited partnership" and "domestic limited partnership", a partnership formed by two or more persons under the laws of the commonwealth and having one or more general partners and one or more limited partners. (8) "Partner", a limited or general partner. (9) "Partnership agreement", any valid agreement, written or oral, of the partners as to the affairs of a limited partnership and the conduct of its business. (10) "Partnership interest", a partner's share of the profits and losses of a limited partnership and the right to receive distributions of partnership assets. (11) "Person", a natural person, partnership, limited partnership (domestic or foreign), trust, estate, association, or corporation. (12) "State", a state, territory, or possession of the United States, the District of Columbia, or the Commonwealth of Puerto Rico. §1A Short title This chapter may be cited as the Uniform Limited Partnership Act. §2 Name of limited partnership; requirements The name of each limited partnership as set forth in its certificate of limited partnership: (1) shall contain without abbreviation the words "limited partnership";

23 (2) may not contain the name of a limited partner unless (i) it is also the name of a general partner or the corporate name of a corporate general partner, or (ii) the business of the limited partnership had been carried on under that name before the admission of that limited partner; (3) may not contain any word or phrase indicating or implying that it is organized other than for a purpose stated in its certificate of limited partnership; (4) may not be the same as, or deceptively similar to, the name of any corporation or limited partnership organized under the laws of the commonwealth or licensed or registered as a foreign corporation or limited partnership in the commonwealth, except with the written consent of said corporation or limited partnership previously filed with the secretary of state. §3 Reservation of name (a) The exclusive right to the use of a name may be reserved by: (1) any person intending to organize a limited partnership under this chapter and to adopt such name; (2) any domestic limited partnership or any foreign limited partnership registered in the commonwealth which, in either case, intends to adopt such name; (3) any foreign limited partnership intending to register in the commonwealth and adopt such name; and (4) any person intending to organize a foreign limited partnership and intending to have it registered in the commonwealth and adopt such name. (b) The reservation shall be made by filing with the secretary of state an application, executed by the applicant and accompanied by the requisite fee, to reserve a specified name. If the secretary of state finds such name is available for use by a domestic or foreign limited partnership, he shall reserve the name for the exclusive use of the applicant for a period of 60 days. The secretary of state may extend the reservation for an additional 60 days upon written request of the applicant accompanied by the requisite fee. The right to the exclusive use of a reserved name may be transferred to any other person by filing in the office of the secretary of state a notice of the transfer, executed by the applicant for whom the name was reserved, specifying the name and the address of the transferee and accompanied by the requisite fee. §4 Office and agent for service of process Each limited partnership shall continuously maintain in the commonwealth: (1) an office, which may, but need not be a place of its business in the commonwealth, at which shall be kept the records required by section five to be maintained; and (2) an agent for service of process on the limited partnership, which agent must be an individual resident of the commonwealth, a domestic corporation, or a foreign corporation authorized to do business in the commonwealth. § 4A Certificate of change of resident agent or address of resident agent; change of address of limited partnership business office; resignation

24 (a) A limited partnership may change its resident agent or the street address of the resident agent by filing a certificate of change of agent or address with the state secretary. The statement shall contain the following information: (1) the name of the limited partnership; (2) the name and street address of its current resident agent; (3) if the current resident agent is to be changed, the name and street address of the new resident agent and the new agent's written consent, either on the statement or attached to it, to the appointment; and (4) if the street address of the business office of the resident agent is to be changed, the new street address of the business office of the resident agent. (b) If a resident agent changes the street address of his business office, he may change the street address of the business office of any limited partnership for which he is resident agent by notifying the limited partnership in writing of the change and signing, manually or by facsimile, and delivering to the state secretary for filing a statement of change that complies with the requirements of subsection (a) and recites that the limited partnership has been notified of the change. If the street address of more than 1 limited partnership is being changed at the same time, there may be included in a single certificate the names of all limited partnerships the street addresses of the business offices of which are being changed. (c) Any resident may resign his agency appointment by signing and delivering to the state secretary a certificate of resignation. The resident agent shall furnish a copy of such statement to the limited partnership. The agency appointment shall be terminated on the thirty-first day following the date on which the statement was filed. §5 Records (a) Each limited partnership shall keep at the office referred to in clause (1) of section four the following: (1) a current list of the full name and last known business address of each partner, separately identifying in alphabetical order the general partners and the limited partners; (2) a copy of the certificate of limited partnership and all certificates of amendment thereto, together with executed copies of any powers of attorney pursuant to which any certificate has been executed; (3) copies of the limited partnership's federal, state, and local income tax returns and reports, if any, for the three most recent years; (4) copies of any then effective written partnership agreements and of any financial statements of the limited partnership for the three most recent years; and (5) unless contained in a written partnership agreement, a writing setting out: (i) the amount of cash and a description and statement of the agreed value of the other property or services contributed by each partner and which each partner has agreed to contribute;

25 (ii) the times at which or events on the happening of which any additional contributions agreed to be made by each partner are to be made; (iii) any right of a partner to receive, or of a general partner to make distributions to a partner which include a return of all or any part of the partner's contribution; and (iv) any events upon the happening of which the limited partnership is to be dissolved and its affairs closed. (b) Records kept under this section shall be subject to inspection and copying at the reasonable request and at the expense of any partner during ordinary business hours. (c) The current list of names and addresses of the limited partners shall be made available to the secretary of state within five business days of receipt of a written request by said secretary or by the director of the securities division of the secretary of state's office stating that such information is required in connection with an investigatory or enforcement proceeding. §6 Business of partnership A limited partnership may carry on any business that a partnership without limited partners may carry on. §7 Partners transacting business with partnership Except as provided in the partnership agreement, a partner may lend money to and transact other business with the limited partnership and, subject to other applicable law, has the same rights and obligations with respect thereto as a person who is not a partner. §8 Certificate (a) In order to form a limited partnership a certificate of limited partnership shall be executed. The certificate shall be filed in the office of the secretary of state and shall set forth: (1) the name of the limited partnership; (2) the general character of its business; (3) the address of the office and the name and address of the agent for service of process required to be maintained by section 4; provided, however, that the agent's written consent to the appointment as agent shall be either in the certificate or attached to it; (4) the name and the business address of each general partner; (5) the latest date upon which the limited partnership is to dissolve; and (6) any other matters the general partners determine to include therein. (b) A limited partnership is formed at the time of the filing of the certificate of limited partnership in the office of the secretary of state or at any later time specified in the certificate of limited partnership if, in either case, there has been substantial compliance with the requirements of this section. §9 Amendment to certificate

26 (a) A certificate of limited partnership is amended by filing a certificate of amendment thereto in the office of the secretary of state. The certificate of amendment shall set forth: (1) the name of the limited partnership; (2) the date of filing the certificate; and (3) the amendment to the certificate. (b) Within thirty days after the happening of any of the following events, an amendment to a certificate of limited partnership reflecting the occurrence of the event or events shall be filed: (1) the admission of a new general partner; (2) the withdrawal of a general partner; or (3) the continuation of the business under section forty-four after an event of withdrawal of a general partner. (c) A general partner who becomes aware that any statement in a certificate of limited partnership was false when made or that any arrangements or other facts described have changed, making the certificate inaccurate in any respect, shall promptly amend the certificate. (d) A certificate of limited partnership may be amended at any time for any other proper purpose the general partners determine. (e) No person has any liability because an amendment to a certificate of limited partnership has not been filed to reflect the occurrence of any event referred to in subsection (b) if the amendment is filed within the thirty-day period specified in subsection (b). (f) A restated certificate of a limited partnership may be executed and filed in the same manner as a certificate of amendment. §10 Cancellation of certificate A certificate of limited partnership shall be cancelled upon the dissolution and the commencement of winding up of the partnership or at any other time there are no limited partners. A certificate of cancellation shall be filed in the office of the secretary of state and set forth: (1) the name of the limited partnership; (2) the date of filing of its certificate of limited partnership; (3) the reason for filing the certificate of cancellation; (4) the effective date, which shall be a date certain, of cancellation if it is not to be effective upon the filing of the certificate; and (5) any other information the general partners filing the certificate determine §11 Execution of certificates (a) Each certificate required by sections eight to sixteen, inclusive, to be filed in the office of the secretary of state shall be executed in the following manner: 27 (1) an original certificate of limited partnership must be signed by all general partners; (2) a certificate of amendment must be signed by at least one general partner and by each other general partner designated in the certificate as a new general partner; and (3) a certificate of cancellation must be signed by all general partners. (b) Any person may sign a certificate by an attorney-in-fact, but a power of attorney to sign a certificate relating to the admission of a general partner must specifically describe the admission. (c) The execution of a certificate by a general partner constitutes an affirmation under the penalties of perjury that the facts stated therein are true. §12 Execution of certificate ordered by court If a person required by section eleven to execute a certificate fails or refuses to do so, any other person who is adversely affected by the failure or refusal may petition the superior court department of the trial court to direct the execution of the certificate. If the court finds that it is proper for the certificate to be executed and that any person so designated has failed or refused to execute the certificate, it shall order the secretary of state to record an appropriate certificate. §13 Filing of certificates (a) Two signed copies of the certificate of limited partnership and of any certificates of amendment or cancellation, or of any judicial decree of amendment or cancellation, shall be delivered to the secretary of state. A person who executes a certificate as an agent or fiduciary need not exhibit evidence of his authority as a prerequisite to filing. Unless the secretary of state finds that any certificate does not conform to law, upon receipt of all filing fees required by law he shall: (1) endorse on each duplicate original the word "filed" and the day, month and year of the filing thereof; (2) file one duplicate original in his office; and (3) return the other duplicate original to the person who filed it or his representative. (b) Upon the filing of a certificate of amendment, or judicial decree of amendment, in the office of the secretary of state, the certificate of limited partnership shall be amended as set forth therein, and upon the effective date of a certificate of cancellation, or a judicial decree thereof, the certificate of limited partnership is cancelled. §14 False statements in certificates; damages If any certificate of limited partnership or certificate of amendment or cancellation contains a false statement, one who suffers loss by reliance on the statement may recover damages for the loss from: (1) any person who executes the certificate, or causes another to execute it on his behalf, and knew, and any general partner who knew or should have known, the statement to be false at the time the certificate was executed; and (2) any general partner who thereafter knows or should have known that any arrangement or other fact described in the certificate has changed, making the statement inaccurate in any 28 respect within a sufficient time before the statement was relied upon reasonably to have enabled that general partner to cancel or amend the certificate, or to file a petition for its cancellation or amendment under section twelve. §15 Notice The fact that a certificate of limited partnership is on file in the office of the secretary of state is notice that the partnership is a limited partnership and the persons designated therein as general partners are general partners, but it is not notice of any other fact. §16 Delivery of certificates to limited partners Upon the return by the secretary of state pursuant to section thirteen of a certificate marked "filed", the general partners shall promptly deliver or mail a copy of the certificate of limited partnership and each certificate to each limited partner unless the partnership agreement provides otherwise. §16A Consolidation or merger (a) As used in this section, other business entity shall mean a corporation to which section 17.01 of chapter 156D applies, a foreign corporation, as defined in subsection (a) of section 1.40 of said chapter 156D, a professional corporation and a foreign professional corporation, each as defined in section 2 of chapter 156A, an association or trust as defined in section 1 of chapter 182, a limited liability company, whether domestic or foreign, as defined in section 2 of chapter 156C, and a partnership, whether general, registered limited liability or limited and whether domestic or foreign as defined, respectively, in sections 2 and 6 of chapter 108A and section 1 of Chapter 109, but excluding a domestic limited partnership. (b) Pursuant to an agreement of consolidation or merger, a domestic limited partnership may consolidate or merge with or into one or more domestic limited partnerships or other business entities with such domestic limited partnership or other business entity as the agreement shall provide being the resulting or surviving domestic limited partnership or other business entity. (c) Unless otherwise provided in the partnership agreement, a consolidation or merger shall be approved by each domestic limited partnership which is to consolidate or merge (1) by all general partners, and (2) by the limited partners or, if there is more than one class or group of limited partners, then by each class or group of limited partners, in either case, by limited partners who own more than fifty percent of the then current percentage or other interest in the profits of the domestic limited partnership owned by all of the limited partners or by the limited partners in each class or group, as appropriate. (d) In connection with a consolidation or merger hereunder, rights or securities of, or interests in, a domestic limited partnership or other business entity which is a constituent party to the consolidation or merger may be exchanged for or converted into cash, property, rights or securities of, or interests in, the surviving or resulting domestic limited partnership or other business entity or, in addition to or in lieu thereof, may be exchanged for or converted into cash, property, rights or securities of, or interests in, a limited partnership or other business entity which is not the surviving or resulting limited partnership or other business entity in the consolidation or merger. Notwithstanding prior approval, an agreement of consolidation or merger may be terminated or amended pursuant to a provision for such termination or amendment contained in the agreement of consolidation or merger.

29 (e) If a domestic limited partnership is consolidating or merging under this section, the domestic limited partnership or other business entity resulting or surviving from or in the consolidation or merger shall file in the manner described in section thirteen a certificate of consolidation or merger in the office of the state secretary. The certificate of consolidation or merger shall be executed in the manner described in section eleven and shall state: (1) the name and jurisdiction of formation or organization of each of the domestic limited partnerships or other business entities which is to consolidate or merge; (2) that an agreement of consolidation or merger has been approved and executed by each of the domestic limited partnerships or other business entities which is to consolidate or merge; (3) the name of the resulting or surviving domestic limited partnership or other business entity; (4) the future effective date or time, which shall be a date or time certain, of the consolidation or merger if it is not to be effective upon the filing of the certificate of consolidation or merger; (5) that the agreement of consolidation or merger is on file at a place of business of the resulting or surviving domestic limited partnership or other business entity, and shall state the address thereof; (6) that a copy of the agreement of consolidation or merger will be furnished by the surviving or resulting domestic limited partnership or other business entity, on request and without cost, to any member of any domestic limited partnership or any person holding an interest in any other business entity which is to consolidate or merge; and (7) If the resulting or surviving entity is not an entity organized under the laws of the commonwealth, a statement that the resulting or surviving entity agrees that, if the entity does not continuously maintain an agent for service of process in the commonwealth, to appoint irrevocably the state secretary and his successor in office to be its true and lawful attorney upon whom all lawful process in any such action, suit or proceeding in the commonwealth may be served in the manner set forth in subsections (d), (e), and (g) of section 15.10 of Part 15 of chapter 156D relative to foreign corporations; except that the plaintiff in the action, suit or proceeding shall furnish the state secretary with the address specified in the certificate of consolidation or merger provided for in this section and the state secretary shall notify the surviving or resulting entity at that address. (f) Unless a future effective date or time is provided in a certificate of consolidation or merger, in which event a consolidation or merger shall be effective at any such future effective date or time, a consolidation or merger shall be effective upon the filing in the office of the state secretary of a certificate of consolidation or merger. (g) A certificate of consolidation or merger shall act (1) as a certificate of cancellation for a domestic limited partnership, and (2) as a certificate of withdrawal for a registered foreign partnership, which is not the resulting or surviving entity in the consolidation or merger. (i) Notwithstanding anything to the contrary contained in the partnership agreement, a partnership agreement containing a specific reference to this subsection may provide that an agreement of consolidation or merger approved in accordance with subsection (b) may (1) effect any amendment to the partnership agreement or (2) effect the adoption of a new partnership agreement, for a limited partnership if it is the resulting or surviving limited partnership in the consolidation or merger. Any amendment to a partnership agreement 30 or adoption of a new partnership agreement made pursuant to the foregoing sentence shall be effective at the effective time or date of the consolidation or merger. The provisions of this subsection shall not be construed to limit the accomplishment of a merger or of any of the matters referred to herein by any other means provided for in a partnership agreement or other agreement or as otherwise permitted by law, including that the partnership agreement of any constituent limited partnership to the consolidation or merger, including a limited partnership formed for the purpose of consummating a consolidation or merger, shall be the partnership agreement of the resulting or surviving limited partnership. (ii) When any consolidation or merger shall have become effective under this section, for all purposes of the laws of the commonwealth, all of the rights, privileges and powers of each of the domestic limited partnerships and other business entities that have consolidated or merged and all property, real, personal and mixed, and all debts due to any of said domestic limited partnerships and other business entities, as well as all other things and causes of action belonging to each of such domestic limited partnerships and other business entities, shall be vested in the resulting or surviving domestic limited partnership or other business entity, and shall thereafter be the property of the resulting or surviving domestic limited partnership or other business entity as they were of each of the domestic limited partnerships and other business entities that have consolidated or merged, and the title to any real property vested by deed or otherwise under the laws of the commonwealth, in any of such domestic limited partnerships and other business entities shall not revert or be in anyway impaired by reason of this chapter; but all rights of creditors and all liens upon any property of any of said domestic limited partnerships and other business entities shall be preserved unimpaired, and all debts, liabilities and duties of each of the said domestic limited partnerships and other business entities that have consolidated or merged shall thenceforth attach to the resulting or surviving domestic limited partnership or other business entity, and may be enforced against it to the same extent as if said debts, liabilities and duties had been incurred or contracted by it. Unless otherwise agreed, a consolidation or merger of a domestic limited partnership, including a domestic limited partnership which is not the resulting or surviving entity in the consolidation or merger, shall not require such domestic limited partnership to wind up its affairs under section forty-six or pay its liabilities and distribute its assets under section forty-seven. §17 Limited partners (a) A person becomes a limited partner on the later of: (1) the date the original certificate of limited partnership is filed; or (2) the date stated in the records of the limited partnership as the date that person becomes a limited partner. (b) After the filing of a limited partnership's original certificate of limited partnership, a person may be admitted as an additional limited partner: (1) in the case of a person acquiring a partnership interest directly from the limited partnership, upon compliance with the partnership agreement or, if the partnership agreement does not so provide, upon the written consent of all partners; and 31 (2) in the case of an assignee of a partnership interest of a partner who has the power, as provided in section forty-two, to grant the assignee the right to become a limited partner, upon the exercise of that power and compliance with any conditions limiting the grant or exercise of the power §18 Right to vote of limited partners (a) Subject to section nineteen, the partnership agreement may grant to all or a specified group of the limited partners the right to vote, on a per capita or other basis, upon any matter. (b) When the limited partnership is an investment company registered under the Investment Company Act of 1940, 15 USC 80a, the limited partner shall have the right to vote (i) in the election of general partners, directors, or trustees of the investment company, (ii) to approve or terminate investment advisory or underwriting contracts, (iii) for approval of auditors, and (iv) on any matters that the said Investment Company Act of 1940, or rules and regulations promulgated thereunder, requires to be approved by the holders of beneficial interests in the investment company. §19 Liability of limited partners (a) Except as provided in subsection (d), a limited partner is not liable for the obligations of a limited partnership unless he is also a general partner or, in addition to the exercise of his rights and powers as a limited partner, he participates in the control of the business; provided, however, that if the limited partner participates in the control of the business, he is liable only to persons who transact business with the limited partnership reasonably believing, based upon the limited partner's conduct, that the limited partner is a general partner. (b) A limited partner does not participate in the control of the business within the meaning of subsection (a) solely by doing one or more of the following: (1) being a contractor for or an agent or employee of the limited partnership or of a general partner, or being an officer, director or shareholder of a general partner which is a corporation; (2) consulting with and advising a general partner with respect to the business of the limited partnership; (3) acting as surety for the limited partnership or guaranteeing or assuming one or more specific obligations of the limited partnership; (4) taking any action required or permitted by law to bring or pursue a derivative action in the right of the limited partnership; (5) requesting or attending a meeting of partners; (6) proposing, or approving or disapproving, by voting or otherwise, one or more of the following matters: (i) the dissolution and closing of the limited partnership; (ii) the sale, exchange, lease, mortgage, pledge, or other transfer of all or substantially all of the assets of the limited partnership;

32 (iii) the incurrence of indebtedness by the limited partnership other than in the ordinary course of its business; (iv) a change in the nature of the business; (v) the admission or removal of a general partner; (vi) the admission or removal of a limited partner; (vii) a transaction involving an actual or potential conflict of interest between a general partner and the limited partnership or the limited partners; (viii) an amendment to the partnership agreement or certificate of limited partnership; or (ix) matters related to the business of the limited partnership not otherwise set forth in this subsection, which the partnership agreement states in writing may be subject to the approval or disapproval of limited partners; (7) closing of the affairs of the limited partnership pursuant to the provisions of section forty-six; or (8) exercising any right or power permitted to limited partners under this chapter and not specifically enumerated in this subsection. (c) The enumeration in subsection (b) shall not mean that the possession or exercise of any other powers by a limited partner constitutes participation by him in the control of the business of the limited partnership. (d) A limited partner who knowingly permits his name to be used in the name of the limited partnership, except under circumstances permitted by subclause (i) of clause (2) of section two, is liable to creditors who extend credit to the limited partnership without actual knowledge that the limited partner is not a general partner. §20 Person erroneously believing himself limited partner (a) Except as provided in subsection (b), a person who makes a contribution to a business enterprise and erroneously but in good faith believes that he has become a limited partner in the enterprise is not a general partner in the enterprise and is not bound by its obligations by reason of making the contribution, receiving distributions from the enterprise, or exercising any rights of a limited partner, if, on ascertaining the mistake, he: (1) causes an appropriate certificate of limited partnership or a certificate of amendment to be executed and filed; or (2) withdraws from future equity participation in the enterprise by executing and filing in the office of the state secretary a certificate declaring withdrawal under this section. (b) A person who makes a contribution of the kind described in subsection (a) is liable as a general partner to any third party who transacts business with the enterprise (i) before the person withdraws and an appropriate certificate is filed to show withdrawal, or (ii) before an appropriate certificate is filed to show that he is not a general partner, but in either case only if the third party actually believed in good faith that the person was a general partner at the time of the transaction. 33 §21 Records; rights of limited partners Each limited partner has the right to: (1) inspect and copy any of the partnership records required to be maintained by section five, and (2) obtain from the general partners from time to time upon reasonable demand (i) true and full information regarding the state of the business and financial condition of the limited partnership, (ii) promptly after becoming available, a copy of the limited partnership's federal, state and local income tax returns for each year, and (iii) other information regarding the affairs of the limited partnership as is just and reasonable §22 Additional general partners After the filing of a limited partnership's original certificate of limited partnership, additional general partners may be admitted as provided in the partnership agreement or, if the partnership agreement does not provide for the admission of additional general partners, with the written consent of all partners. §23 Cessation of general partner status Except as approved by the specific written consent of all partners at the time, a person ceases to be a general partner of a limited partnership upon the happening of any of the following events: (1) the general partner withdraws from the limited partnership as provided in section thirty-two; (2) the general partner ceases to be a member of the limited partnership as provided in section forty; (3) the general partner is removed as a general partner in accordance with the partnership agreement; (4) Unless otherwise provided in writing in the partnership agreement the general partner: (i) makes an assignment for the benefit of creditors, (ii) files a voluntary petition in bankruptcy; (iii) is adjudicated a bankrupt or insolvent; (iv) files a petition or answer seeking for himself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any statute, law or regulation; (v) files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against him in any proceeding of this nature; or (vi) seeks, consents to, or acquiesces in the appointment of a trustee, receiver, or liquidator of the general partner or of all or any substantial part of his properties; 34 (5) unless otherwise provided in writing in the partnership agreement one hundred and twenty days after the commencement of any proceeding against the general partner seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any statute, law, or regulation, the proceeding has not been dismissed, or if within ninety days after the appointment without his consent or acquiescence of a trustee, receiver, or liquidator of the general partner or of all or any substantial part of his properties, the appointment is not vacated or stayed or within ninety days after the expiration of any such stay, the appointment is not vacated; (6) in the case of a general partner who is a natural person: (i) his death; or (ii) the entry by a court of competent jurisdiction adjudicating him incompetent to manage his person or his estate; (7) in the case of a general partner who is acting as a general partner by virtue of being a trustee of a trust, the termination of the trust but not merely the substitution of a new trustee; (8) in the case of a general partner that is a separate partnership, the dissolution and commencement of winding up of the separate partnership; (9) in the case of a general partner that is a corporation, the filing of a certificate of dissolution, or its equivalent, for the corporation or the revocation of its charter; or (10) in the case of an estate, the distribution by the fiduciary of the estate's entire interest in the partnership. §24 Rights, powers and liabilities of general partners Except as provided in this chapter, a general partner of a limited partnership is subject to the liabilities of a partner in a partnership without limited partners and, except as provided in this chapter or in the partnership agreement, has the rights and powers and is subject to the restrictions of a partner in a partnership without limited partners. §25 Contributions by general partner A general partner of a limited partnership may make contributions to the partnership and share in the profits and losses of, and in distributions from, the limited partnership as a general partner. A general partner also may make contributions to and share in profits, losses, and distributions as a limited partner. A person who is both a general partner and a limited partner has the rights and powers, and is subject to the restrictions and liabilities, of a general partner and, except as provided in the partnership agreement, also has the powers, and is subject to the restrictions, of a limited partner to the extent of his participation in the partnership as a limited partner. §26 Right to vote of general partners The partnership agreement may grant to all or certain identified general partners the right to vote, on a per capita or any other basis, separately or with all or any class of the limited partners, on any matter. §27 Form of partner's contribution

35 The contribution of a partner may be in cash, property, or services rendered, or a promissory note or other obligation to contribute cash or property or to perform services. §28 Obligation to contribute (a) No promise by a limited partner to contribute to the limited partnership is enforceable unless set out in a writing signed by the limited partner. (b) Except as provided in the partnership agreement, a partner is obligated to the limited partnership to perform any enforceable promise to contribute cash or property or to perform services, even if he is unable to perform because of death, disability or any other reason. If a partner does not make the required contribution of property or services, he is obligated at the option of the limited partnership to contribute cash equal to that portion of the value, as stated in the partnership records required to be kept pursuant to section five, of the stated contribution that has not been made. (c) Unless otherwise provided in the partnership agreement, the obligation of a partner to make a contribution or return money or other property paid or distributed in violation of this chapter may be compromised only by consent of all the partners. Notwithstanding the compromise, a creditor of a limited partnership who extends credit, or otherwise acts in reliance on that obligation after the partner signs a writing which reflects the obligation, and before the amendment or cancellation thereof to reflect the compromise, may enforce the original obligation. §29 Allocation of profits and losses The profits and losses of a limited partnership shall be allocated among the partners, and among classes of partners, in the manner provided in writing in the partnership agreement. If the partnership agreement does not so provide in writing, profits and losses shall be allocated on the basis of the value, as stated in the partnership records to be kept pursuant to section five, of the contributions made by each partner to the extent they have been received by the partnership and have not been returned. §30 Distributions of cash or other assets Distributions of cash or other assets of a limited partnership shall be allocated among the partners, and among classes of partners, in the manner provided in writing in the partnership agreement. If the partnership agreement does not so provide in writing, distributions shall be made on the basis of the value, as stated in the partnership records to be kept pursuant to section five, of the contributions made by each partner to the extent they have been received by the partnership and have not been returned. §31 Interim distributions Except as provided in sections thirty-one to thirty-eight, inclusive, a partner is entitled to receive distributions from a limited partnership before his withdrawal from the limited partnership and before the dissolution and closing of its affairs to the extent and at the times or upon the happening of the events specified in the partnership agreement. §32 Withdrawal of general partner A general partner may withdraw from a limited partnership at any time by giving written notice to the other partners, but if the withdrawal violates the partnership agreement, the limited 36 partnership may recover from the withdrawing general partner damages for breach of the partnership agreement and offset the damages against the amount otherwise distributable to him. §33 Withdrawal of limited partner A limited partner may withdraw from a limited partnership at the time or upon the happening of events specified in writing in the partnership agreement. If the agreement does not specify the time or the events upon the happening of which the limited partner may withdraw or a definite time for the dissolution and closing of the affairs of the limited partnership, a limited partner may withdraw upon not less than six months' prior written notice to each general partner at his address on the books of the limited partnership at its office in the commonwealth. §34 Distribution to partner upon withdrawal Except as provided in sections thirty-one to thirty-eight, inclusive, upon withdrawal any withdrawing partner is entitled to receive any distribution to which he is entitled under the partnership agreement and, if not otherwise provided in the agreement, he is entitled to receive, within a reasonable time after withdrawal, the fair value of his interest in the limited partnership as of the date of withdrawal based upon his right to share in distributions from the limited partnership. §35 Distribution in kind Except as provided in writing in the partnership agreement, a partner, regardless of the nature of his contribution, has no right to demand and receive any distribution from a limited partnership in any form other than cash. Except as provided in writing in the partnership agreement, a partner may not be compelled to accept a distribution of any asset in kind from a limited partnership to the extent that the percentage of the asset distributed to him exceeds a percentage of that asset which is equal to the percentage in which he shares in distributions from the limited partnership. §36 Right to distribution At the time a partner becomes entitled to receive a distribution, he has the status of, and is entitled to all remedies available to, a creditor of the limited partnership with respect to the distribution §37 Limitations on distribution A partner may not receive a distribution from a limited partnership to the extent that, after giving effect to the distribution, all liabilities of the limited partnership, other than liabilities to partners on account of their partnership interests, exceed the fair value of the partnership assets. §38 Liability upon return of contribution (a) If a partner has received the return of any part of his contribution without violation of the partnership agreement or this chapter, he is liable to the limited partnership for a period of one year thereafter for the amount of the returned contribution, but only to the extent necessary to discharge the limited partnership's liabilities to creditors who extended credit to the limited partnership during the period the contribution was held by the partnership.

37 (b) If a partner has received the return of any part of his contribution in violation of the partnership agreement or this chapter, he is liable to the limited partnership for a period of six years thereafter for the amount of the contribution wrongfully returned. (c) A partner receives a return of his contribution to the extent that a distribution to him reduces his shares of the fair value of the net assets of the limited partnership below the value, as set forth in the partnership records required to be kept pursuant to section five, of his contribution which has not been distributed to him. §39 Nature of partnership interest A partnership interest is personal property. §40 Assignment of partnership interest Except as provided in the partnership agreement, a partnership interest is assignable in whole or in part. An assignment of a partnership interest shall not dissolve a limited partnership or entitle the assignee to become or to exercise any rights of a partner. An assignment entitles the assignee to receive, to the extent assigned, only the distribution to which the assignor would be entitled. Except as provided in the partnership agreement, a partner ceases to be a partner upon assignment of all his partnership interest. §41 Rights of judgment creditor On application to a court of competent jurisdiction by any judgment creditor of a partner, the court may charge the partnership interest of the partner with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the partnership interest. This chapter shall not deprive any partner of the benefit of any exemption laws applicable to his partnership interest. §42 Assignee becoming limited partner (a) An assignee of a partnership interest, including an assignee of a general partner, may become a limited partner if and to the extent that (1) the assignor gives the assignee that right in accordance with authority described in the partnership agreement, or (2) all other partners consent. (b) An assignee who has become a limited partner has, to the extent assigned, the rights and powers, and is subject to the restrictions and liabilities, of a limited partner under the partnership agreement and this chapter. An assignee who becomes a limited partner also is liable for the obligations of his assignor to make and return contributions as provided in sections twenty-seven to thirty-eight, inclusive; provided, however, that the assignee is not obligated for liabilities unknown to the assignee at the time he became a limited partner. (c) If an assignee of a partnership interest becomes a limited partner, the assignor is not released from his liability to the limited partnership under sections fourteen and twenty-eight. §43 Death or incompetency of partner; power to settle estate or administer property If a partner who is an individual dies or a court of competent jurisdiction adjudges him to be incompetent to manage his person or his property, the partner's executor, administrator, guardian, conservator, or other legal representative may exercise all the partner's rights for the purpose of settling his estate or administering his property, including any power the partner had to give an 38 assignee the right to become a limited partner. If a partner is a corporation, trust, or other entity and is dissolved or terminated, the powers of that partner may be exercised by its legal representative or successor. §44 Nonjudicial dissolution A limited partnership is dissolved and its affairs shall be closed upon the happening of the first to occur of the following: (1) at the time specified in writing in the partnership agreement; (2) upon the happening of events specified in writing in the partnership agreement; (3) written consent of all partners; (4) an event of withdrawal of a general partner unless at the time there is at least one other general partner and the written provisions of the partnership agreement permit the business of the limited partnership to be carried on by the remaining general partner and that partner does so, but the limited partnership is not dissolved and is not required to close its affairs by reason of any event of withdrawal, if, within ninety days after the withdrawal, all partners agree in writing to continue the business of the limited partnership and to the appointment of one or more additional general partners if necessary or desired; or (5) entry of a decree of judicial dissolution under section forty-five. §45 Judicial dissolution On application by or for a partner the superior court department of the trial court may decree dissolution of a limited partnership whenever it is not reasonably practicable to carry on the business in conformity with the partnership agreement. §46 Winding up partnership affairs Except as provided in the partnership agreement, the general partners who have not wrongfully dissolved a limited partnership or, if none, the limited partners, may wind up the limited partnership's affairs; provided, however, that the superior court department of the trial court may wind up the limited partnership's affairs upon application of any partner, his legal representative, or assignee. §47 Distribution of assets following winding up Upon the winding up of a limited partnership, the assets shall be distributed as follows: (1) to creditors, including partners who are creditors, to the extent permitted by law, in satisfaction of liabilities of the limited partnership other than liabilities for distributions to partners under sections thirty-one and thirty-four; (2) except as provided in the partnership agreement, to partners and former partners in satisfaction of liabilities for distributions under sections thirty-one and thirty-four; and (3) except as provided in the partnership agreement, to partners (i) for the return of their contributions and (ii) respecting their partnership interests, in the proportions in which the partners share in distributions. §48 Nature of business; liability of partners and agents; law governing

39 A foreign limited partnership shall not do any business in the commonwealth which is prohibited to a limited partnership organized under this chapter. A general partner or other agent of a foreign limited partnership shall be subject to the liabilities, and shall have the defenses, with respect to the foreign limited partnership, as officers, directors and other agents of a foreign corporation have under section 15.11 of subdivision A of Part 15 of chapter 156D. Subject to the constitution of the commonwealth, its organization and internal affairs and the liability of its limited partners shall be governed by the laws of the state under which it is organized. § 49. Registration of foreign limited partnership A foreign limited partnership shall be considered to be doing business in the commonwealth for the purposes of this section if it would be considered to be doing business in the commonwealth for the purpose of section 15.01 of subdivision A of Part 15 of chapter 156D if it were a foreign corporation. Every foreign limited partnership doing business in the commonwealth shall submit to the secretary of state, within ten days after it commences doing business in the commonwealth, an application for registration as a foreign limited partnership, which shall be signed and sworn to by the general partner. The application shall be in such form as the secretary of state shall require, and shall be accompanied by a certificate of legal existence of the foreign limited partnership, issued by an officer or agency properly authorized in the jurisdiction in which the foreign limited partnership is organized, or such other evidence of legal existence as the secretary of state shall approve. If the certificate or such evidence is in a foreign language, a translation thereof, under oath of the translator, shall be attached thereto. The application for registration shall set forth the following information:-- (1) the name of the foreign limited partnership and, if different, the name under which it proposes to do business in the commonwealth; (2) the jurisdiction where such partnership was organized and the date of its organization; (3) the general character of the business it proposes to do in the commonwealth; (4) the business address of its principal office; (5) the names, business addresses and residence addresses of its general partners; (6) the business address of its principal office in the commonwealth, if any; (7) the name and business address of its resident agent and the agent's written consent, either on the certificate or attached to it, to his appointment as agent; and (8) the address of the office at which is kept a list of the names and addresses of the limited partners and their capital contributions, together with an undertaking by the foreign limited partnership to keep those records until the foreign limited partnership's registration in the commonwealth is cancelled. If the foreign limited partnership's certificate of partnership from its jurisdiction of organization sets forth any part of the information required to be set forth in the application for registration in the commonwealth, the foreign limited partnership may submit a certified copy of such certificate, with a sworn translation, if necessary, in lieu of such part of the application for registration. §50 Approval of registration; fee; records The secretary of state shall examine and endorse his approval on the application for registration if the business of the foreign limited partnership is not prohibited by law to a limited partnership formed under this chapter and if the secretary of state determines that the application complies with this section. Upon such approval and payment of the required fee, 40 the application shall be deemed to be filed with the secretary of state and the foreign limited partnership shall be deemed to be registered to do business in the commonwealth. The secretary of state shall keep the records and have the duties with respect to foreign limited partnerships as are provided in subsection 6 of section 15.03 of subdivision A of Part 15 of chapter 156D relative to foreign corporations. §51 Name A foreign limited partnership may register with the secretary of state and do business in the commonwealth under any name, whether or not it is the name under which it is registered in its jurisdiction of organization, that could be assumed by a limited partnership. §52 Resident agent A foreign limited partnership doing business in the commonwealth shall appoint a resident agent as its true and lawful attorney upon whom all lawful process in any action or proceeding against the foreign limited partnership in the commonwealth may be served. Sections 15.07, 15.08 and 15.09 of chapter 156D relative to the appointment and qualifications of a resident agent shall be applicable to the appointment of a resident agent pursuant to this section. §53 Correction or amendment of false or changed statements in application for registration If any statement in the application for registration of a foreign limited partnership was false when made or any arrangements or other facts described have changed, making the application inaccurate in any respect, the foreign limited partnership shall promptly file in the office of the secretary of state a certificate, signed and sworn to by a general partner, correcting or amending such statement. §54 Cancellation of registration; certificate of withdrawal The registration of a foreign limited partnership doing business in the commonwealth shall be cancelled in the manner and at such times as are provided in section ten except that the cancellation shall be signed by a general partner. A foreign limited partnership doing business in this commonwealth may withdraw from the commonwealth by submitting to the secretary of state a certificate of withdrawal, in such form as the secretary of state shall require, signed and sworn to by a general partner, stating: (1) the name of the foreign limited partnership and, if different, the name under which it is registered and doing business in the commonwealth; (2) the business address of its principal office; (3) the business address of its principal office in the commonwealth, if any, and the name and business address of its resident agent in the commonwealth; (4) that the foreign limited partnership is not doing business in the commonwealth; and (5) that all taxes and fees owed the commonwealth have been paid or provided for. The secretary of state shall examine and endorse his approval on the certificate of withdrawal if he determines that the certificate complies with this section. Upon such approval and payment of the required fee, the certificate of withdrawal shall be deemed to be filed with the secretary of state.

41 §55 Failure to register; capacity to sue and be sued; secretary of state as attorney of unregistered or withdrawn partnerships (a) A foreign limited partnership doing business in the commonwealth which fails to register with the secretary of state shall be subject to subdivision A of section 15.02 of chapter 156D relative to foreign corporations. (b) Foreign limited partnership shall be liable to be sued and to have their property attached in the same manner and to the same extent as individuals who are residents of other jurisdictions. Every foreign limited partnership doing business in the commonwealth without having registered as prescribed in this section and every foreign limited partnership which shall have withdrawn from the commonwealth shall be considered to have appointed the secretary of state to be its true and lawful attorney upon whom all lawful process in any action or proceeding in the commonwealth may be served in the manner set forth in subsections (d), (e), (f) and (g) of section 15.10 of Part 15 of chapter 156D relative to foreign corporations. §56 Right of action by limited partner A limited partner may bring an action in the right of a limited partnership to recover a judgment in its favor if general partners with authority to do so have refused to bring the action or if an effort to cause those general partners to bring the action is not likely to succeed. §57 Proper plaintiff In a derivative action, the plaintiff must be a partner at the time of bringing the action and (1) at the time of the transaction of which he complains or (2) his status as a partner had devolved upon him by operation of law or pursuant to the terms of the partnership agreement from a person who was a partner at the time of the transaction. §58 Pleading In a derivative action, the complaint shall set forth with particularity the effort of the plaintiff to secure initiation of the action by a general partner or the reasons for not making the effort. §59 Expenses in successful action If a derivative action is successful, in whole or in part, or if anything is received by the plaintiff as a result of a judgment, compromise or settlement of an action or claim, the court may award the plaintiff reasonable expenses, including reasonable attorney's fees, and shall direct him to remit to the limited partnership the remainder of those proceeds received by him §60 Construction and application of chapter This chapter shall apply and be construed to effectuate its general purpose to make uniform the law with respect to the subject of this chapter among states enacting it. §61 Fees The fee for filing in the office of the secretary of state of any original certificate of limited partnership or application for registration as a foreign limited partnership shall be one hundred and fifty dollars. The fee for filing a certificate of amendment, cancellation or withdrawal shall be seventy-five dollars. The fee for the reservation of a name or the extension of a reservation shall be ten dollars. §62 Cases not provided for by chapter In any case not provided for in this chapter, the provisions of the Uniform Partnership Act as provided in chapter one hundred and eight A shall control.

42 § 63. Annual report; fee (a) Each domestic or foreign limited partnership authorized to transact business in the commonwealth shall file an annual report with the state secretary on or before the anniversary date of the filing of the certificate of limited partnership. The annual report shall contain all information required to be included in the certificate of limited partnership. (b) The fee for filing the annual report shall be $500 if the report is filed on paper or by facsimile. The fee for filing the annual report electronically shall be $450. § 64. Administrative dissolution; grounds; notice; wind up and liquidation of affairs (a) The state secretary may commence a proceeding to dissolve a limited partnership if: (1) the limited partnership has failed for 2 consecutive years to comply with the laws requiring the filing of annual reports; or (2) he is satisfied that the limited partnership has become inactive and its dissolution would be in the public interest. (b) If the state secretary determines that grounds exist under subsection (a), he shall serve the limited partnership with written notice of his determination. The notice shall be sent to the address of the office in the commonwealth required by clause (1) of section 4. If, within 90 days after the notice, the limited partnership fails to correct each ground for dissolution or fails to demonstrate to the reasonable satisfaction of the state secretary that each ground determined by the state secretary does not exist, the state secretary shall administratively dissolve the limited partnership. (c) A limited partnership administratively dissolved continues in existence but shall not carry on any business except that necessary to wind up and liquidate its affairs. § 65. Revocation of authority of foreign limited partnership to transact business in commonwealth; notice; effective date (a) The state secretary may commence a proceeding to revoke the authority of a foreign limited partnership to transact business in the commonwealth if: (1) the limited partnership has failed for 2 consecutive years to comply with the laws requiring the filing of annual reports; or (2) he is satisfied that the revocation of the limited partnership's authority to transact business in the commonwealth would be in the public interest. (b) If the state secretary determines that grounds exist under subsection (a), he shall serve the limited partnership with written notice of his determination. The notice shall be sent to the address of the foreign limited partnership. If, within 90 days after the notice, the limited partnership fails to correct each ground for revocation or fails to demonstrate to the reasonable satisfaction of state secretary that each ground determined by the state secretary does not exist, the state secretary of state shall administratively revoke the authority of the foreign limited partnership to transact business in the commonwealth. (c) The authority of the foreign limited partnership to transact business in the commonwealth shall cease on the date the state secretary makes such revocation effective.

43 § 66. Application for reinstatement after administrative dissolution or revocation of right to transact business; contents A limited partnership administratively dissolved under section 64 or whose authority to transact business in the commonwealth has been revoked under section 65 may apply to the state secretary for reinstatement at any time. The application for reinstatement shall: (1) recite the name of the limited partnership and the effective date of its administrative dissolution or revocation; (2) state that the grounds for dissolution or revocation either did not exist or have been corrected; and (3) state that the name of the limited partnership satisfies the requirements of section 2; provided, however, that if the state secretary determines that the application contains the full and correct information, he shall reinstate the limited partnership.

CHAPTER 156C LIMITED LIABILITY COMPANY ACT

§1 Short title §2 Definitions §3 Name of limited liability company §4 Reservation of exclusive right to name §5 Office and agent for service of process in commonwealth §6 Powers and privileges of limited liability company; information to be provided on certificate of organization or application for registration §7 Transaction of business between member or manager and limited liability company §8 Indemnification of member or manager §9 Records and documents §10 Furnishing of documents and information to members and managers §11 Reliance on records and documents §12 Certificate of organization §13 Amendment of certificate of organization §14 Cancellation of certificate of organization §15 Execution of certificate by authorized person §16 Failure or refusal to execute certificate 44 §17 Filing of certificate with state secretary §18 Filing of certificate as notice §19 Restated certificates of organization §20 Admission as member of limited liability company §21 Rights, powers and duties of classes or groups of members §22 Debts, obligations and liabilities of limited liability company §23 Designation of manager §24 Management of limited liability company §25 Manager's membership in company §26 Relative rights, duties and powers of classes or groups of managers §27 Contributions of members §28 Members' obligations to limited liability company §29 Allocation of profits and losses §30 Distributions of cash or other assets §31 Entitlement to distributions §32 Distribution to resigning member §33 Form of distribution on demand; acceptance of distribution of assets §34 Entitlement to creditor remedies §35 Liability for distribution in excess of terms of operating agreement §36 Resignation of member §37 Resignation of manager §38 Personal property §39 Assignment of interest §40 Judgment against member payable with interest in limited liability company §41 Membership of assignee §42 Death or incompetence of member §43 Dissolution of limited liability company §44 Court-decreed dissolution §45 Winding up affairs of dissolved limited liability company §46 Distribution of assets of limited liability company following dissolution §47 Laws applicable to foreign limited liability company §48 Registration of foreign limited liability company 45 §49 Duties of state secretary with respect to foreign limited liability companies §50 Name of foreign limited liability company §51 Agent for service of process on foreign limited liability company §52 Correction or amendment of application for registration of foreign limited liability company §53 Cancellation of registration of foreign limited liability company §54 Failure to register; penalty; service of process §55 Suits by or against limited liability company §56 Suits on behalf of limited liability company §57 Court orders on termination of derivative suit §58 Lack of authority to sue §59 Consolidation or merger §59 Consolidation or merger §60 Approval of consolidation or merger; objection; termination or amendment §61 Certificate of consolidation or merger §62 Rights, privileges, powers, property and debts of consolidated or merged business entity §63 Duties and liabilities of members and managers §64 Reorganization of limited liability company §65 Liability insurance §66 Recordable instruments affecting real property binding on limited liability company §67 Certification of authority to act for limited liability company §68 Good standing §69 Conversion of business entity to limited liability company §70 Administrative dissolution; notice; wind up and liquidation of affairs §71 Application for reinstatement by limited liability company subject to administrative dissolution or revocation of authority to transact business §72 Revocation of foreign limited liability company's authority to transact business in commonwealth; grounds; notice; effective date

MASSACHUSETTS GENERAL LAWS ANNOTATED CHAPTER 156C - LIMITED LIABILITY COMPANY ACT §1 Short title 46 This chapter may be cited as the Massachusetts Limited Liability Company Act. §2 Definitions As used in this chapter, the following words shall unless the context clearly otherwise requires have the following meanings:-- (1) "Bankruptcy", the occurrence of any of the following events: (a) a member: (1) makes an assignment for the benefit of creditors; (2) files a voluntary petition in bankruptcy; (3) is adjudged a bankrupt or insolvent, or has entered against him an order for relief, in any bankruptcy or insolvency proceeding; (4) files a petition or answer seeking for himself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any statute, law or regulation; (5) files an answer or other pleading, admitting or failing to contest the material allegations of a petition filed against him in any proceeding of this nature; (6) seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator of the member or of all or any substantial part of his properties; or (b) one hundred and twenty days after the commencement of any proceeding against the member seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any statute, law or regulation, if the proceeding has not been dismissed, or if within ninety days after the appointment without his consent or acquiescence of a trustee, receiver or liquidator of the member or of all or any substantial part of his properties, the appointment is not vacated or stayed, or within ninety days after the expiration of any such stay, the appointment is not vacated. (2) "Certificate of organization", the certificate referred to in section twelve, and the certificate as amended. (3) "Contribution", any cash, property, services rendered or a promissory note or other obligation to contribute cash or property or to perform services, which a person contributes to a limited liability company in his capacity as a member. (4) "Foreign limited liability company", a limited liability company formed under the laws of any state other than the commonwealth or under the laws of any foreign country or other foreign jurisdiction and denominated as such under the laws of such state or foreign country or other foreign jurisdiction. (5) "Limited liability company" and "domestic limited liability company", an unincorporated organization formed under this chapter and having one or more members. (6) "Limited liability company interest", a member's share of the profits and losses of a limited liability company and the member's right to receive distributions of the limited liability company's assets.

47 (7) "Manager", a person who is designated as a manager of a limited liability company pursuant to the operating agreement. (8) "Member", a person who has been admitted to a limited liability company as a member as provided in section twenty or, in the case of a foreign limited liability company, in accordance with the laws of the state or foreign country or other foreign jurisdiction under which the foreign limited liability company is organized, and whose membership has not been terminated pursuant to the operating agreement or the operation of law. (9) "Operating agreement", any written or oral agreement of the members as to the affairs of a limited liability company and the conduct of its business. (10) "Person", a natural person, partnership, whether general or limited and whether domestic or foreign, limited liability company, foreign limited liability company, trust, estate, association, corporation, custodian, nominee or any other individual or entity in its own or any representative capacity. (11) "State", the District of Columbia or the Commonwealth of Puerto Rico or any state, territory, possession, or other jurisdiction of the United States other than the commonwealth. §3 Name of limited liability company The name of each limited liability company as set forth in its certificate of organization: (1) shall contain the words "limited liability company", "limited company", or the abbreviation "L.L.C.", "L.C.", "LLC" or "LC"; (2) may contain the name of a member or manager; and (3) may not be the same as, or deceptively similar to the name of any corporation, limited partnership or limited liability company reserved or organized under the laws of the commonwealth or licensed or registered as a foreign corporation, foreign limited partnership or foreign limited liability company in the commonwealth, except with the written consent of said corporation, limited partnership or limited liability company previously filed with the state secretary. §4 Reservation of exclusive right to name (a) The exclusive right to the use of a name may be reserved by: (1) any person intending to organize a limited liability company under this chapter and to adopt such name; (2) any domestic limited liability company or any foreign limited liability company registered in the commonwealth which, in either case, intends to adopt such name; (3) any foreign limited liability company intending to register in the commonwealth and adopt such name; and (4) any person intending to organize a foreign limited liability company and intending to have it register in the commonwealth and adopt such name. (b) The reservation of a specified name shall be made by filing with the state secretary, an application, executed by the applicant, specifying the name to be reserved and the name and address of the applicant. If the state secretary finds that the name is available for use by a 48 domestic or foreign limited liability company, he shall reserve the name for the exclusive use of the applicant for a period of 60 days. The state secretary may extend the reservation for an additional 60 days upon written request of the applicant. The right to the exclusive use of a reserved name may be transferred to any other person by filing in the office of the state secretary a notice of the transfer, executed by the applicant for whom the name was reserved, specifying the name to be transferred and the name and address of the transferee. §5 Office and agent for service of process in commonwealth Each limited liability company shall have and maintain in the commonwealth: (1) an office, which may but need not be a place of its business in the commonwealth at which shall be kept the records required by section nine to be maintained; and (2) a resident agent for service of process on the limited liability company, which agent must be an individual resident of the commonwealth, a domestic corporation, or a foreign corporation authorized to do business in the commonwealth. § 5A. Certificate of change of resident agent or street address of resident agent; change of address of LLC business office; resignation (a) A limited liability company may change its resident agent or the street address of the resident agent by filing a certificate of change of agent or address with the state secretary. The statement shall contain the following information: (1) the name of the limited liability company; (2) the name and street address of its current resident agent; (3) if the current resident agent is to be changed, the name and street address of the new resident agent and the new agent's written consent, either on the statement or attached to it, to the appointment; and (4) if the street address of the business office of the resident agent is to be changed, the new street address of the business office of the resident agent. (b) If a resident agent changes the street address of his business office, he may change the street address of the business office of any limited liability company for which he is resident agent by notifying the limited liability company in writing of the change and signing, either manually or by facsimile, and delivering to the state secretary for filing a statement of change that complies with the requirements of subsection (a) and recites that the limited liability company has been notified of the change. If the street address of more than 1 limited liability company is being changed at the same time, there may be included in a single certificate the names of all limited liability companies the street addresses of the business offices of which are being changed. (c) Any resident agent may resign his agency appointment by signing and delivering to the state secretary a certificate of resignation. The resident agent shall furnish a copy of such statement to the limited liability company. The agency appointment shall be terminated on the thirty-first day following the date on which the statement was filed. §6 Powers and privileges of limited liability company; information to be provided on certificate of organization or application for registration 49 (a) Except as otherwise expressly provided by law, a limited liability company may carry on any lawful business, trade, profession, purpose or activity. (b) A limited liability company shall possess and may exercise all the powers and privileges granted by this chapter or by any other law or by the operating agreement, together with any powers incidental thereto, so far as such powers and privileges are necessary or convenient to the conduct, promotion or attainment of the business, trade, profession, purposes or activities of the limited liability company. (c) A limited liability company or foreign limited liability company which is organized to render a professional service as defined in section two of chapter one hundred and fifty-six A shall (i) indicate in its certificate of organization or application for registration the specific professional services which it shall render, (ii) be subject to any conditions or limitations established by any applicable regulating boards as defined in said section two, including the provision of liability insurance required by section sixty-five, and (iii) include with its certificate of organization or application for registration a certificate by the applicable regulating board which indicates compliance as of the date of organization or registration by the members and managers with any eligibility standards established by such regulating board. §7 Transaction of business between member or manager and limited liability company Except as provided in a written operating agreement, a member or manager may lend money to, borrow money from, act as a surety, guarantor or endorser for, guarantee or assume one or more specific obligations of, provide collateral for, and transact other business with a limited liability company and, subject to other applicable law, has the same rights and obligations with respect to any such matter as a person who is not a member or manager. §8 Indemnification of member or manager (a) Subject to such standards and restrictions, if any, as are set forth in its certificate of organization or a written operating agreement, a limited liability company may, and shall have the power to, indemnify and hold harmless any member or manager or other person from and against any and all claims and demands whatsoever. Such indemnification may include payment by the limited liability company of expenses incurred in defending a civil or criminal action or proceeding in advance of the final disposition of such action or proceeding, upon receipt of an undertaking by the person indemnified to repay such payment if he shall be adjudicated to be not entitled to indemnification under this section which undertaking may be accepted without reference to the financial ability of such person to make repayment. Any such indemnification may be provided although the person to be indemnified is no longer a member or manager. No indemnification shall be provided for any person with respect to any matter as to which he shall have been adjudicated in any proceeding not to have acted in good faith in the reasonable belief that his action was in the best interest of the limited liability company. (b) The certificate of organization or a written operating agreement may eliminate or limit the personal liability of a manager for breach of any duty to the limited liability company. §9 Records and documents

50 (a) Each limited liability company shall keep at the office referred to in clause (1) of section five the following: (1) a current list of the full name and last known address of each member and manager; (2) a copy of the certificate of organization and all certificates of amendment thereto, together with executed copies of any powers of attorney pursuant to which any certificate has been executed; (3) copies of the limited liability company's federal, state, and local income tax returns and reports, if any, for the three most recent years; (4) copies of any then effective written operating agreements and of any financial statements of the limited liability company for the three most recent years; and (5) unless contained in a written operating agreement, a writing setting out: (i) the amount of cash and a description and statement of the agreed value of the other property or services contributed by each member and which each member has agreed to contribute; (ii) the times at which or events on the happening of which any additional contributions agreed to be made by each member are to be made; (iii) any right of a member to receive, or of a manager to make, distributions to a member; and (iv) any events upon the happening of which the limited liability company is to be dissolved and its affairs wound up. (b) Records kept under this section shall be subject to inspection and copying at the reasonable request and at the expense of any member or manager during ordinary business hours. (c) The current list of names and addresses of the members shall be made available to the state secretary within five business days of receipt of a written request by said state secretary or by the director of the securities division of the state secretary's office stating that such information is required in connection with an investigatory or enforcement proceeding. §10 Furnishing of documents and information to members and managers Each member or manager of a limited liability company has the right, subject to such reasonable standards, including standards governing what information and documents are to be furnished at what time and location and at whose expense, as may be set forth in the operating agreement or otherwise established by the manager or, if there is no manager, then by the members, to obtain from the limited liability company from time to time upon reasonable demand in writing for any purpose reasonably related to the member’s or manager's interest as a member or manager of the limited liability company (i) true and full information regarding the state of the business and financial condition of the limited liability company, (ii) promptly after becoming available, a copy of the limited liability company's federal, state and local income tax returns for each year, and (iii) other information regarding the affairs of the limited liability company as is just and reasonable. §11 Reliance on records and documents 51 A member or manager of a limited liability company shall be fully protected in relying in good faith upon the provisions of a written operating agreement and the records of the limited liability company and upon such information, opinions, reports or statements presented to the limited liability company by any of its other managers, members, officers, employees, or committees or by any other person, as to matters the member or manager reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the limited liability company, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits or losses of the limited liability company or any other facts pertinent to the existence and amount of assets from which distributions to members might properly be paid. §12 Certificate of organization (a) In order to form a limited liability company, one or more authorized persons must execute a certificate of organization. The certificate of organization shall be filed in the office of the state secretary and set forth: (1) the name of the limited liability company; (2) the address of the office in the commonwealth required to be maintained by section five; (3) the name and address of the resident agent for service of process required to be maintained by section 5; provided, however, that the agent's written consent to the appointment shall be either in the certificate or attached to it; (4) if the limited liability company is to have a specific date of dissolution, the latest date on which the limited liability company is to dissolve; (5) if the limited liability company has managers at the time of its formation, the name and address of each manager; (6) the name of any other person in addition to any manager who is authorized to execute any documents to be filed with the office of the state secretary and at least one such person shall be named if there are no managers; (7) the general character of the limited liability company's business; (8) if desired, the names of one or more persons authorized to execute, acknowledge, deliver and record any recordable instrument purporting to affect an interest in real property, whether to be recorded with a registry of deeds or a district office of the land court; and (9) any other matters the authorized persons determine to be included therein. (b) A limited liability company is formed at the time of the filing of the initial certificate of organization in the office of the state secretary or at any later date specified in the certificate of organization if, in either case, there has been substantial compliance with the requirements of this section. A limited liability company formed under this chapter shall be a separate legal entity, the existence of which as a separate legal entity shall continue until cancellation of the limited liability company's certificate of organization.

52 (c) All limited liability companies formed under this chapter shall also file an annual report with the state secretary setting forth the information required in subsection (a). (d) The fee for the filing of the certificate of organization required by subsection (a) shall be five hundred dollars. The fee for the filing of the annual report required by subsection (c) shall be five hundred dollars. Such fees shall be paid to the state secretary at the time the certificate of organization or the annual report is filed. §13 Amendment of certificate of organization (a) A certificate of organization may be amended by filing a certificate of amendment thereto in the office of the state secretary. The certificate of amendment shall set forth: (1) the name of the limited liability company; (2) the date of filing of its certificate of organization; and (3) the amendment to the certificate of organization. (b) A manager or, it there is no manager, then any member, who becomes aware that any statement in a certificate of organization was false when made, or that any matter described in the certificate of organization has changed, making the certificate of organization false in any material respect, shall promptly amend the certificate of organization to correct such matter. (c) A certificate of organization shall be amended to reflect (i) the designation of managers of a limited liability company which theretofore did not have managers or (ii) any change in the managers of a limited liability company or other authorized signatories. (d) A certificate of organization may be amended at any time for any other proper purpose. (e) Unless otherwise provided in this chapter or unless a later effective date, which shall be a date certain, is provided for in the certificate of amendment, a certificate of amendment shall be effective at the time of its filing with the state secretary. §14 Cancellation of certificate of organization A certificate of organization shall be cancelled upon the dissolution and the completion of winding up of a limited liability company, or at any other time there are fewer than two members, or upon the filing of a certificate of consolidation or merger if the limited liability company is not the resulting or surviving entity in a consolidation or merger. A certificate of cancellation shall be filed in the office of the state secretary to accomplish the cancellation of a certificate of organization upon the dissolution and the completion of winding up of a limited liability company or at any other time there are not two members and shall set forth: (1) the name of the limited liability company; (2) the date of filing of its certificate of organization; (3) the reason for filing the certificate of cancellation; (4) the effective date, which shall be a date certain, of cancellation if it is not to be effective upon the filing of the certificate; and (5) any other information the person filing the certificate of cancellation determines.

53 §15 Execution of certificate by authorized person (a) Each certificate required by this chapter to be filed in the office of the state secretary shall be executed: (1) by any manager if the limited liability company has managers or by any other authorized person set forth in the certificate of organization or any amendment thereto; (2) if the limited liability company has not been formed, by the person or persons forming the limited liability company; or (3) if the limited liability company is in the hands of a receiver, trustee, or other court-appointed fiduciary, by such receiver, trustee or fiduciary. (b) Unless otherwise provided in the operating agreement, any person may sign any certificate or amendment thereto or enter into the operating agreement or amendment thereto by an agent, including an attorney-in-fact. An authorization, including a power of attorney, to sign any certificate or amendment thereto or to enter into the operating agreement or amendment thereto need not be in writing, need not be sworn to, verified or acknowledged, and need not be filed in the office of the state secretary, but if in writing, must be retained by the limited liability company. (c) The execution of a certificate by an authorized person constitutes an affirmation, under the penalties of perjury, that the facts stated therein are true. §16 Failure or refusal to execute certificate (a) If a person required to execute a certificate required by this chapter fails or refuses to do so, any other person who is adversely affected by the failure or refusal may petition the superior court department of the trial court to direct the execution of the certificate. If the court finds that the execution of the certificate is proper and that any person so designated has failed or refused to execute the certificate, it shall order the state secretary to record an appropriate certificate. (b) If a person required to execute an operating agreement or amendment thereto fails or refuses to do so, any person who is adversely affected by the failure or refusal may petition the superior court department of the trial court to direct the execution of the operating agreement or amendment thereto. If the court finds that the operating agreement or amendment thereto should be executed and that any person required to execute the operating agreement or amendment thereto has failed or refused to do so, it shall enter an order granting appropriate relief. §17 Filing of certificate with state secretary (a) The original signed copy of the certificate of organization and of any certificates of amendment or cancellation or of any judicial decree of amendment or cancellation, and of any certificate of consolidation or merger and of any restated certificate shall be delivered to the state secretary, together with a duplicate copy which may be a photocopy or a duplicate original. A person who executes a certificate as an attorney-in-fact or fiduciary shall not be required to exhibit evidence of his authority as a prerequisite to filing. Any certificate authorized to be filed with the state secretary under any provision of this chapter shall be originally signed except as otherwise required by this chapter or permitted from time to time 54 by the state secretary. Unless the state secretary finds that any certificate does not conform to law, he shall: (1) confirm that the certificate of organization, the certificate of amendment, the certificate of cancellation or of any judicial decree of amendment or cancellation, the certificate of consolidation or merger or the restated certificate has been filed in his office by endorsing upon the original certificate and the duplicate certificate the word "filed", and the date and time of the filing. Said endorsement shall be conclusive of the date and time of its filing in the absence of actual fraud; (2) file the endorsed certificate; and (3) return to the person who filed it or his representative the duplicate copy of the original signed instrument, similarly endorsed. (b) Upon the filing of a certificate of amendment or judicial decree of amendment or restated certificate in the office of the state secretary, or upon the effective date of a certificate of amendment or judicial decree thereto or restated certificate, as provided for therein, the certificate of organization shall be amended or restated as set forth therein. Upon the filing of a certificate of cancellation or a judicial decree thereof, or a certificate of consolidation or merger which acts as a certificate of cancellation, or upon the effective date of a certificate of cancellation or a judicial decree thereof or of a certificate of consolidation or merger which acts as a certificate of cancellation, as provided for therein, said certificate of organization shall be cancelled. §18 Filing of certificate as notice The fact that a certificate of organization is on file in the office of the state secretary shall be notice that the entity formed in connection with the filing of the certificate of organization is a limited liability company formed under the laws of the commonwealth and shall be notice of all other facts set forth therein which are required to be set forth in a certificate of organization by section twelve. §19 Restated certificates of organization (a) A limited liability company may at any time, integrate into a single instrument all of the provisions of its certificate of organization which are then in effect and operative as a result of there having theretofore been filed with the state secretary one or more certificates or other instruments pursuant to any of the sections referred to in this chapter and it may at the same time also further amend its certificate of organization by adopting a restated certificate of organization. (b) If a restated certificate of organization merely restates and integrates but does not further amend the initial certificate of organization, as theretofore amended or supplemented by any instrument that was executed and filed pursuant to any of the sections in this chapter, it shall be specifically designated in its heading as a "restated certificate of organization" together with such other words as the limited liability company may deem appropriate and shall be executed by an authorized person and filed as provided in section seventeen in the office of the state secretary. If a restated certificate restates and integrates and also further amends in any respect the certificate of organization, as theretofore amended or supplemented, it shall be specifically designated in its heading as an "amended and restated certificate of 55 organization" together with such other words as the limited liability company may deem appropriate and shall be executed by at least one authorized person, and filed as provided in section seventeen in the office of the state secretary. (c) A restated certificate of organization shall state, either in its heading or in an introductory paragraph, the limited liability company's present name, and, if such name has been changed, the name under which it was originally filed, the date of filing of its original certificate of organization with the state secretary, and the effective date, which shall be a date certain, of the restated certificate if it is not to be effective upon the filing of the restated certificate. A restated certificate shall also state that it was duly executed and is being filed in accordance with this section. If a restated certificate only restates and integrates and does not further amend a limited liability company's certificate of organization as theretofore amended or supplemented and there is no difference between the provisions of such certificate of organization and the provisions contained in the restated certificate, it shall state the fact of such difference. (d) Upon the filing of a restated certificate of organization with the state secretary, or upon the future effective date of a restated certificate of organization as provided for therein, the initial certificate of organization, as theretofore amended or supplemented, shall be superseded by such restated certificate; thereafter, the restated certificate of organization, including any further amendment or changes made thereby, shall be the certificate of organization of the limited liability company, but the original effective date of organization shall remain unchanged. (e) Any amendment or change effected in connection with the restatement and integration of the certificate of organization shall be subject to any other provision of this chapter, not inconsistent with this section, which would apply if a separate certificate of amendment were filed to effect such amendment or change. §20 Admission as member of limited liability company (a) In connection with the formation of a limited liability company, a person acquiring a limited liability company interest is admitted as a member of the limited liability company upon the later to occur of: (1) the formation of the limited liability company; or (2) the time provided in and upon compliance with the operating agreement or, if the operating agreement does not so provide, when the person's admission is reflected in the records of the limited liability company. (b) After the formation of a limited liability company, a person acquiring a limited liability company interest is admitted as a member of the limited liability company: (1) in the case of a person acquiring a limited liability company interest directly from the limited liability company, at the time provided in and upon compliance with a written operating agreement or, if a written operating agreement does not so provide, upon the consent of all members; or (2) in the case of an assignee of a limited liability company interest, as provided in section forty-one.

56 (c) A person may be admitted to a limited liability company as a member and may receive an interest in the limited liability company without making a contribution or being obligated to make a contribution to the limited liability company. §21 Rights, powers and duties of classes or groups of members (a) An operating agreement may provide for classes or groups of members having such relative rights, powers and duties as the operating agreement may provide, and may make provision for the future creation in the manner provided in the operating agreement of additional classes or groups of members having such relative rights, powers and duties as may from time to time be established, including rights, powers and duties senior to existing classes and groups of members. An operating agreement may provide for the taking of an action, including the amendment of the operating agreement, without the vote or approval of any member or class or group of members, including an action to create under the provisions of the operating agreement a class or group of limited liability company interests that was not previously outstanding. (b) An operating agreement may grant to all or certain identified members or a specified class or group of the members the right to vote separately or with all or any class or group of the members or managers, on any matter. Voting by members may be on a per capita, number, financial interest, class group or any other basis. (c) An operating agreement which grants members a right to vote may set forth provisions relating to notice of the time, place or purpose of any meeting at which any matter is to be voted on by any members, waiver of any such notice, action by consent without a meeting, the establishment of a record date, quorum requirements, voting in person or by proxy, or any other matter with respect to the exercise of any such right to vote. (d) If an operating agreement does not provide for the voting rights of members, the decision of members who own more than fifty percent of the unreturned contributions to the limited liability company determined in accordance with section twenty-nine shall be controlling. §22 Debts, obligations and liabilities of limited liability company Except as otherwise provided by this chapter, the debts, obligations and liabilities of a limited liability company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the limited liability company; and no member or manager of a limited liability company shall be obligated personally for any such debt, obligation or liability of the limited liability company solely by reason of being a member or acting as a manager of the limited liability company. §23 Designation of manager A person may be named or designated as a manager of the limited liability company as defined in clause seven of section two. §24 Management of limited liability company Unless otherwise provided in the operating agreement, the management of a limited liability company shall be vested in its members. An operating agreement may provide for the management, in whole or in part, of a limited liability company by one or more managers, who

57 shall hold office and have the duties set forth in the operating agreement. Subject to section thirty-seven, a manager shall cease to be a manager as provided in the operating agreement. §25 Manager's membership in company A manager need not be a member of the limited liability company. §26 Relative rights, duties and powers of classes or groups of managers (a) An operating agreement may provide for classes or groups of managers having such relative rights, powers and duties as the operating agreement may provide, and may make provision for the future creation in the manner provided in the operating agreement of additional classes or groups of managers having such relative rights, powers and duties as may from time to time be established, including rights, powers and duties senior to existing classes and groups of managers. An operating agreement may provide for the taking of an action, including the amendment of the operating agreement, without the vote or approval of any manager or class or group of managers. (b) The operating agreement may grant to all or certain identified managers or a specified class or group of the managers the right to vote, separately or with all or any class or group of managers or members, on any matter. Voting by managers may be on a per capita, number, financial interest, class, group or any other basis. (c) An operating agreement which grants managers a right to vote may set forth provisions relating to notice of the time, place or purpose of any meeting at which any matter is to be voted on by any manager or class or group of managers, waiver of any such notice, action by consent without a meeting, the establishment of a record date, quorum requirements, voting in person or by proxy, or any other matter with respect to the exercise of any such right to vote. (d) If an operating agreement does not provide for the voting rights of managers, the decision of a majority in number of the managers shall be controlling. §27 Contributions of members The contribution of a member to a limited liability company may be in cash, property or services rendered, or a promissory note or other obligation to contribute cash or property or to perform services. §28 Members' obligations to limited liability company (a) Except as provided in a written operating agreement, a member is obligated to a limited liability company to perform any promise to contribute cash or property or to perform services, even if he is unable to perform because of death, disability or any other reason. If a member does not make the required contribution of property or services, he is obligated at the option of the limited liability company to contribute cash equal to that portion of the agreed value as stated in the records of the limited liability company of the contribution that has not been made. The foregoing option shall be in addition to, and not in lieu of, any other rights, including the right to specific performance, that the limited liability company may have against such member under an operating agreement or applicable law. (b) Unless otherwise provided in a written operating agreement, the obligation of a member to make a contribution or return money or other property paid or distributed in violation of 58 this chapter may be compromised only by consent of all the members. Notwithstanding the compromise, a creditor of a limited liability company who extends credit, after the entering into of the operating agreement or an amendment thereto which, in either case, reflects the obligation, and before the amendment thereof to reflect the compromise, may enforce the original obligation to the extent that, in extending credit, the creditor reasonably relied on the obligation of a member to make a contribution or return. A conditional obligation of a member to make a contribution or return money or other property to a limited liability company may not be enforced unless the conditions of the obligation have been satisfied or waived as to or by such member. Conditional obligations include contributions payable upon a discretionary call of a limited liability company prior to the time the call occurs. (c) An operating agreement may provide that the interest of a member who fails to make any contribution or other payment that the member is required to make shall be subject to specified remedies for, or specified consequences of, the failure. The remedy or consequence may take the form of reducing the defaulting member's interest in the limited liability company, subordinating the defaulting member's interest in the limited liability company to that of the nondefaulting members, a forced sale of the interest in the limited liability company, forfeiture of the interest in the limited liability company, the lending by the nondefaulting members of the amount necessary to meet the commitment, a fixing of the value of the member's interest in the limited liability company by appraisal or by formula and redemption and sale of the member's interest in the limited liability company at that value, or other remedy or consequences. §29 Allocation of profits and losses (a) The profits and losses of a limited liability company shall be allocated among the members, and among classes or groups of members, in the manner provided in the operating agreement. If an operating agreement does not so provide, profits and losses shall be allocated on the basis of the agreed value as stated in the records of the limited liability company of the contributions of each member to the extent they have been received by the limited liability company and have not been returned. (b) For purposes of this chapter, a member receives a return of his contribution to the extent that a distribution to him reduces his share of the fair value of the net assets of the limited liability company below the value, as set forth in the records required to be kept under this chapter, of his contribution which has not been distributed to him. §30 Distributions of cash or other assets Distributions of cash or other assets of a limited liability company shall be allocated among the members, and among classes or groups of members, in the manner provided in the operating agreement. If the operating agreement does not so provide, distributions shall be made on the basis of the agreed value as stated in the records of the limited liability company of the contributions of each member to the extent they have been received by the limited liability company and have not been returned. §31 Entitlement to distributions Except as provided in sections thirty-two and forty-six, a member is entitled to receive distributions from a limited liability company only to the extent and at the times or upon the 59 happening of the events specified in the operating agreement or, if the operating agreement does not so specify, as determined by the members or managers pursuant to section twenty-one or section twenty-six. §32 Distribution to resigning member Upon resignation, a resigning member is entitled to receive any distribution to which he is entitled upon resignation under a written operating agreement. If not otherwise provided in a written operating agreement, a resigning member is entitled to receive, within a reasonable time after resignation, the fair value of his limited liability company interest as of the date of resignation based upon his right to share in distributions from the limited liability company. §33 Form of distribution on demand; acceptance of distribution of assets Except as provided in a written operating agreement, a member, regardless of the nature of his contribution, has no right to demand and receive any distribution from a limited liability company in any form other than cash. Except as provided in a written operating agreement, a member may not be compelled to accept a distribution of any asset in kind from a limited liability company to the extent that the percentage of the asset distributed to him exceeds a percentage of the asset which is equal to the percentage in which he shares in distributions from the limited liability company §34 Entitlement to creditor remedies Except as provided in the operating agreement, and subject to section forty- six, at the time a member becomes entitled to receive a distribution, he has the status of, and is entitled to all remedies available to, a creditor of the limited liability company with respect to the distribution. An operating agreement may provide for the establishment of a record date with respect to allocations and distributions by a limited liability company. §35 Liability for distribution in excess of terms of operating agreement (a) A member or manager who votes for or assents to a distribution in violation of the operating agreement shall be personally liable to the limited liability company for the amount of the distribution that exceeds what could have been distributed without violating the operating agreement. (b) Each member or manager held liable under subsection (a) for an unlawful distribution is entitled to contribution: (1) from each other member or manager who could be held liable under said subsection (a) for the unlawful distribution; and (2) from each member for the amount the member received knowing that the distribution was made in violation of the operating agreement. (c) A proceeding under this section is barred unless it is commenced within two years after the date of the distribution. §36 Resignation of member A member may resign as a member of a limited liability company at the time or upon the happening of events specified in the operating agreement and in accordance with the operating agreement. An operating agreement may provide that a member shall not have the right to resign 60 as a member of a limited liability company. Regardless of whether an operating agreement provides that a member does not have the right to resign as a member of a limited liability company, a member may resign as a member of a limited liability company upon not less than six months' prior written notice to the limited liability company at its office in the commonwealth as set forth in the certificate of organization filed in the office of the state secretary and to each other member and each manager at each other member's and each manager's address as set forth on the records of the limited liability company as of the date of the notice. If the resignation of a member violates the operating agreement, in addition to any remedies otherwise available under applicable law, a limited liability company may recover from the resigning member damages for breach of the operating agreement and offset the damages against any amounts otherwise distributable to the resigning member. §37 Resignation of manager A manager may resign as a manager of a limited liability company at the time or upon the happening of events specified in the operating agreement and in accordance with the operating agreement. An operating agreement may provide that a manager shall not have the right to resign as a manager of a limited liability company. Regardless of whether the operating agreement provides that a manager does not have the right to resign as a manager of a limited liability company, a manager may resign as a manager of a limited liability company at any time upon prior written notice to each member and each other manager at each member's and each other manager's address as set forth on the records of the limited liability company as of the date of the notice. If the resignation of a manager violates the operating agreement, in addition to any remedies otherwise available under applicable law, a limited liability company may recover from the resigning manager damages for breach of the operating agreement and offset the damages against any amounts otherwise distributable to the resigning manager. §38 Personal property A limited liability company interest is personal property. A member has no interest in specific limited liability company property. §39 Assignment of interest (a) A limited liability company interest is assignable in whole or in part except as provided in the operating agreement. The assignee of a member's limited liability company interest shall have no right to participate in the management of the business and affairs of a limited liability company except: (1) upon the approval of all of the members of the limited liability company other than the member assigning the limited liability company interest; or (2) upon compliance with any procedure provided for in a written operating agreement. (b) Unless otherwise provided in the operating agreement: (1) an assignment entitles the assignee to share in such profits and losses, to receive such distribution or distributions, and to receive such allocation of income, gain, loss, deduction, or credit or similar items to which the assignor was entitled, to the extent assigned; and

61 (2) a member ceases to be a member and to have the power to exercise any rights or powers of a member upon assignment of all of his limited liability company interest. Unless otherwise provided in the operating agreement, the pledge of, or granting of a security interest, lien or other encumbrance in or against, any or all of the limited liability company interest of a member shall not cause the member to cease to be a member or to have the power to exercise any rights or powers of a member. (c) An operating agreement may provide that a member's interest in a limited liability company may be evidenced by a certificate of limited liability company interest issued by the limited liability company. (d) Unless otherwise provided in the operating agreement and except to the extent assumed by agreement, until an assignee of a limited liability company interest becomes a member, the assignee shall have no liability as a member solely as the result of the assignment. §40 Judgment against member payable with interest in limited liability company On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the limited liability company interest of the member with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of the limited liability company interest. This chapter does not deprive any member of the benefit of any exemption laws applicable to his limited liability company interest. §41 Membership of assignee (a) An assignee of a limited liability company interest may become a member: (1) upon the approval of all of the members of the limited liability company other than the member assigning the limited liability company interest; or (2) upon compliance with any procedure provided for in a written operating agreement. (b) An assignee who has become a member has, to the extent assigned, the rights and powers, and is subject to the restrictions and liabilities, of a member under the operating agreement and this chapter. Notwithstanding the foregoing, unless otherwise provided in the operating agreement, an assignee who becomes a member is liable for the obligations of his assignor to make contributions as provided in section twenty-eight, but shall not be liable for the obligations of his assignor under section thirty-five. However, the assignee is not obligated for liabilities, including the obligations of his assignor to make contributions as provided in section twenty-eight, unknown to the assignee at the time he became a member and which could not be ascertained from the operating agreement. (c) Whether or not an assignee of a limited liability company interest becomes a member, the assignor is not released from his liability to a limited liability company under sections thirty-one to thirty-seven, inclusive. §42 Death or incompetence of member Unless otherwise provided in the operating agreement, if a member who is an individual dies or a court of competent jurisdiction adjudges him to be incompetent to manage his person or his property, the member's executor, administrator, guardian, conservator or other legal representative may exercise all of the member's rights for the purpose of settling his estate or 62 administering his property, including any power under the operating agreement of an assignee to become a member. Unless otherwise provided in an operating agreement, if a member is a corporation, trust or other entity and is dissolved or terminated, the powers of that member may be exercised by its legal representative or successor. §43 Dissolution of limited liability company A limited liability company is dissolved and its affairs shall be wound up upon the first to occur of the following: (1) the time specified in the operating agreement; (2) the happening of an event as specified in the operating agreement; (3) the written consent of all members; (4) with respect to a limited liability company formed prior to January 1, 1997, except as provided in a written operating agreement, the death, insanity, retirement, resignation, expulsion, bankruptcy or dissolution of a member or the occurrence of any other event which terminates the membership of a member in the limited liability company unless the business of the limited liability company is continued either by the consent of all the remaining members within ninety days following the occurrence of any such event or pursuant to a right to continue stated in a written operating agreement; or (5) the entry of a decree of judicial dissolution under section forty-four. §44 Court-decreed dissolution On application by or for a member or manager the superior court department of the trial court may decree dissolution of a limited liability company whenever it is not reasonably practicable to carry on its business in conformity with the certificate of organization or the operating agreement. §45 Winding up affairs of dissolved limited liability company (a) Unless otherwise provided in an operating agreement, a manager who has not wrongfully dissolved a limited liability company or, if none, the members or a person approved by the members pursuant to the operating agreement, or if there is no operating agreement, pursuant to section twenty-one, may wind up the limited liability company's affairs; but the superior court department of the trial court, upon cause shown, may wind up the limited liability company's affairs upon application of any member or manager, his legal representative or assignee, and in connection therewith, may appoint a liquidating trustee. (b) Upon dissolution of a limited liability company and until the filing of a certificate of cancellation as provided in section fourteen, the persons winding up the limited liability company's affairs may, in the name of, and for and on behalf of, the limited liability company, prosecute and defend suits, whether civil, criminal or administrative, gradually settle and close the limited liability company's business, dispose of and convey the limited liability company's property, discharge or make reasonable provision for the limited liability company's liabilities, and distribute to the members any remaining assets of the limited liability company, all without affecting the liability of members and managers and without imposing liability on a liquidating trustee.

63 §46 Distribution of assets of limited liability company following dissolution (a) Upon the winding up of a limited liability company, the assets shall be distributed as follows: (1) to creditors, including members and managers who are creditors, to the extent otherwise permitted by law, in satisfaction of liabilities of the limited liability company, whether by payment or the making of reasonable provision for payment thereof, other than liabilities for which reasonable provision for payment has been made and liabilities for distributions to members under section thirty-one or section thirty-two; (2) unless otherwise provided in the operating agreement, to members and former members in satisfaction of liabilities for distributions under section thirty-one or section thirty-two; and (3) unless otherwise provided in the operating agreement, to members first for the return of their contributions and second respecting their limited liability company interests, in the proportions in which the members share in distributions. (b) A limited liability company which has dissolved shall pay or make reasonable provision to pay all claims and obligations, including all contingent, conditional or unmatured claims and obligations, known to the limited liability company and all claims and obligations which are known to the limited liability company but for which the identity of the claimant is unknown. If there are sufficient assets, such claims and obligations shall be paid in full and any such provision for payment made shall be made in full. If there are insufficient assets, such claims and obligations shall be paid or provided for according to their priority and, among claims and obligations of equal priority, ratably to the extent of assets available therefor. Unless otherwise provided in an operating agreement, any remaining assets shall be distributed as provided in this chapter. Any liquidating trustee winding up a limited liability company's affairs who has complied with this section shall not be personally liable to the claimants of the dissolved limited liability company by reason of such person's actions in winding up the limited liability company. §47 Laws applicable to foreign limited liability company A foreign limited liability company shall not do any business in the commonwealth which is prohibited to a limited liability company organized under this chapter. A member, manager or other agent of a foreign limited liability company shall be subject to the liabilities, and shall have the defenses, with respect to the limited liability company, as officers, directors and other agents of a foreign corporation have under section 15.11 of subdivision A of Part 15 of chapter 156D. Subject to the constitution of the commonwealth, a foreign limited liability company's organization and internal affairs and the liability of its members and managers shall be governed by the laws of the jurisdiction under which it is organized. A foreign limited liability company may not be denied registration by reason of any difference between such laws and the laws of the commonwealth. §48 Registration of foreign limited liability company A foreign limited liability company shall be considered to be doing business in the commonwealth for the purpose of this section if it would be considered to be doing business in the commonwealth for the purpose of Part 15 of subdivision A of chapter 156D if it were a 64 foreign corporation. Every foreign limited liability company doing business in the commonwealth shall submit to the state secretary, within ten days after it commences doing business in the commonwealth, an application for registration as a foreign limited liability company, which shall be signed and sworn to by an authorized person. The application shall be in such form as the state secretary shall require and shall be accompanied by a certificate of legal existence or comparable certificate of the foreign limited liability company, issued by an officer or agency properly authorized in the jurisdiction in which the foreign limited liability company is organized, or such other evidence of legal existence as the state secretary shall approve. If the certificate or such evidence is in a foreign language, a translation thereof, under oath of the translator, shall be attached thereto. The application for registration shall set forth the following information: (1) the name of the foreign limited liability company and, if different, the name under which it proposes to do business in the commonwealth; (2) the jurisdiction where such limited liability company was organized and the date of its organization; (3) the general character of the business the foreign limited liability company proposes to do in the commonwealth; (4) the address of the principal office of the foreign limited liability company; (5) if the foreign limited liability company has managers, the name and address of each manager; (6) the address of the principal office of the foreign limited liability company in the commonwealth, if any; (7) the name and address of its resident agent and the agent's written consent, either on the certificate or attached to it, to his appointment as agent; (8) if the foreign limited liability company has a specific date of dissolution, the latest date on which the foreign limited liability company is to dissolve; and (9) if desired, the name of one or more persons authorized to execute, acknowledge, deliver and record any recordable instrument purporting to affect an interest in real property, whether to be recorded with a registry of deeds or a district office of the land court. If the foreign limited liability company's certificate of organization from its jurisdiction of organization sets forth any part of the information required to be set forth in the application for registration in the commonwealth, the foreign limited liability company may submit a certified copy of such certificate, with a sworn translation, if necessary, in lieu of such part of the application for registration. Each foreign limited liability company formed under this chapter shall also file with the state secretary an annual report setting forth, in updated form, the information contained in the application for registration. The fee for the filing of the application of registration and each annual report shall be five hundred dollars payable to the state secretary and due at the time of filing. §49 Duties of state secretary with respect to foreign limited liability companies 65 The state secretary shall examine and endorse his approval on the application for registration if the business of the foreign limited liability company is not prohibited by law to a limited liability company formed under this chapter and if the state secretary determines that the application complies with section forty-eight. Upon such approval, the application shall be deemed to be filed with the state secretary and the foreign limited liability company shall be deemed to be registered to do business in the commonwealth. The state secretary shall keep the records and have the other duties with respect to foreign limited liability companies as provided in subsection (c) of section 15.03 of subdivision A of Part 15 of chapter 156D. §50 Name of foreign limited liability company A foreign limited liability company may register with the state secretary and do business in the commonwealth under any name, whether or not it is the name under which it is registered in its jurisdiction of organization, that could be assumed by a limited liability company organized under this chapter. §51 Agent for service of process on foreign limited liability company Each foreign limited liability company doing business in the commonwealth shall appoint a resident agent as its true and lawful attorney upon whom all lawful process in any action or proceeding against the foreign limited liability company in the commonwealth may be served. Sections 15.07, 15.08 and 15.09 of chapter 156D relative to the appointment and qualifications of a resident agent shall be applicable to the appointment of a resident agent pursuant to this section. §52 Correction or amendment of application for registration of foreign limited liability company If any statement in the application for registration of a foreign limited liability company was false when made or any arrangements or other facts described have changed, making the application inaccurate in any respect, the foreign limited liability company shall promptly file in the office of the state secretary a certificate, signed and sworn to by an authorized person, correcting or amending such statement. §53 Cancellation of registration of foreign limited liability company The registration of a foreign limited liability company doing business in the commonwealth shall be canceled in the manner and at such times as are provided in section fourteen, except that the certificate of cancellation required under section fourteen shall, in addition to the information required thereunder, set forth either that all taxes and fees owed the commonwealth have been paid or provided for or that such foreign limited liability company has no assets. A foreign limited liability company doing business in this commonwealth may withdraw from the commonwealth by submitting to the state secretary a certificate of withdrawal, in such form as said state secretary shall require, signed and sworn to by an authorized person, stating: (1) the name of such foreign limited liability company and, if different, the name under which it is registered and doing business in the commonwealth; (2) the address of the principal office of such foreign limited liability company; (3) the address of the principal office in the commonwealth of such foreign limited liability company, if any, and the name and business address of its resident agent in the commonwealth;

66 (4) that such foreign limited liability company is not doing business in the commonwealth; and (5) that all taxes and fees owed the commonwealth have been paid or provided for. The state secretary shall examine and endorse his approval on the certificate of withdrawal if he determines that the certificate complies with this section. Upon such approval, the certificate of withdrawal shall be deemed to be filed with the state secretary. §54 Failure to register; penalty; service of process (a) A foreign limited liability company doing business in the commonwealth which fails to register with the state secretary shall, for each year that such failure shall continue, be fined not more than five hundred dollars. No such failure shall affect the validity of any contract involving the foreign limited liability company, nor is a member or a manager of a foreign limited liability company liable for the obligations of the foreign limited liability company solely by reason of such failure, but no action shall be maintained or recovery had by the foreign limited liability company in any of the courts of the commonwealth as long as such failure continues. The failure of a foreign limited liability company to register with the state secretary shall not prevent the foreign limited liability company from defending any action, suit or proceeding in any of the courts of the commonwealth. (b) A foreign limited liability company shall be liable to be sued and to have its property attached in the same manner and to the same extent as persons who are residents of other jurisdictions. Every foreign limited liability company doing business in the commonwealth without having registered as prescribed in this chapter, and every foreign limited liability company having registered as prescribed in this chapter but whose resident agent cannot after a diligent search by an officer authorized to serve legal process be found at the business address of such resident agent stated in its most recent certificate filed with the state secretary pursuant to this chapter, and every foreign limited liability company whose resident agent refuses to act as such, shall be deemed to have appointed the state secretary to be its true and lawful attorney upon whom all process in any action or proceeding may be served so long as any liability incurred in the commonwealth while it was doing business shall remain outstanding. Service of process in all actions and proceedings in the commonwealth against such a foreign limited liability company may be made upon the state secretary. Service of process in all actions and proceedings in the commonwealth against a foreign limited liability company formerly doing business in the commonwealth that has not complied with the provisions of section forty-eight or against a foreign limited liability company formerly doing business in the commonwealth that has withdrawn from the commonwealth pursuant to this chapter, may be made upon the state secretary if the action or proceeding involves a liability alleged to have been incurred by the foreign limited liability company while it was doing business in the commonwealth. When lawful process in any action or proceeding against any foreign limited liability company which pursuant to this section may be made upon the state secretary is served upon the state secretary, he shall immediately forward the process by mail, postage prepaid, directed to such foreign limited liability company at its last known principal office or, in the case of a foreign limited liability company established in a foreign country, to the resident manager, if

67 any, in the United States. The state secretary shall keep a record of all such process, which shall show the date of service. In the case of service of process on a foreign limited liability company that has not complied with the provisions of section forty-eight, the notice herein provided for shall be mailed by the state secretary to the proper address of the foreign limited liability company furnished to him by the plaintiff or his attorney. Service of process upon a foreign limited liability company for violation of any criminal law of the commonwealth may be made in the manner hereinabove provided. §55 Suits by or against limited liability company Suit may be brought by or against a limited liability company in its own name. §56 Suits on behalf of limited liability company Except as otherwise provided in a written operating agreement, suit on behalf of the limited liability company may be brought in the name of the limited liability company by: (a) any member or members of a limited liability company, whether or not the operating agreement vests management of the limited liability company in one or more managers, who are authorized to sue by the vote of members who own more than fifty percent of the unreturned contributions to the limited liability company determined in accordance with section twenty-nine; provided, however, that in determining the vote so required, the vote of any member who has an interest in the outcome of the suit that is adverse to the interest of the limited liability company shall be excluded; or (b) any manager or managers of a limited liability company, if the operating agreement vests management of the limited liability company in one or more managers, who are authorized to sue by the vote of a majority in number of the managers; provided, however, that, in determining the vote so required, the vote of any manager who has an interest in the outcome of the suit that is adverse to the interest of the limited liability company shall be excluded. §57 Court orders on termination of derivative suit On termination of the derivative suit, the court may: (a) order the limited liability company to pay the plaintiff's reasonable expenses, including counsel fees, incurred in the proceeding if it finds that the suit has resulted in a substantial benefit to the limited liability company; or (b) order the plaintiff to pay any defendant's reasonable expenses, including counsel fees, incurred in defending the suit if it finds that the suit was commenced or maintained without reasonable cause or for an improper purpose. §58 Lack of authority to sue The lack of authority of a member or manager to sue on behalf of the limited liability company may not be asserted as a defense to an action by the limited liability company or by the limited liability company as a basis for bringing a subsequent suit on the same cause of action. §59 Consolidation or merger

68 (a) As used in sections 59 to 63, inclusive, the words "other business entity" shall mean a corporation to which section 17.01 of Part 17 of chapter 156D applies, a professional corporation and a foreign professional corporation each as defined in section 2 of chapter 156A, a foreign corporation, an association or a trust, as defined in section 1 of chapter 182, a partnership whether general or limited and whether domestic or foreign, as defined, respectively, in section 6 of chapter 108A and section 1 of chapter 109, and a foreign limited liability company as defined in this chapter. (b) Pursuant to an agreement of consolidation or merger, a domestic limited liability company may consolidate or merge with or into one or more domestic limited liability companies or other business entities formed or organized under the law of the commonwealth or any other state of the United States or any foreign country or other foreign jurisdiction, with such domestic limited liability company or other business entity as the agreement shall provide being the resulting or surviving domestic limited liability company or other business entity. (c) In connection with a consolidation or merger under this chapter, rights or securities of, or interests in, a domestic limited liability company or other business entity which is a constituent party to the consolidation or merger may be exchanged for or converted into cash, property, rights or securities of, or interests in, the resulting or surviving domestic limited liability company or other business entity or, in addition to or in lieu thereof, may be exchanged for or converted into cash, property, rights or securities of, or interests in, a domestic limited liability company or other business entity which is not the resulting or surviving limited liability company or other business entity in the consolidation or merger. §59 Consolidation or merger (a) As used in sections fifty-nine to sixty-three, inclusive, the phrase "other business entity" shall mean a corporation to which paragraph (a) of section three of chapter one hundred and fifty-six B applies, a professional corporation and a foreign professional corporation, as defined in section two of chapter one hundred and fifty-six A, a foreign corporation, as defined in section one of chapter one hundred and eighty-one, an association or a trust, as defined in section one of chapter one hundred and eighty-two, and as having filed a copy of its instrument or declaration with the state secretary in compliance with, chapter one hundred and eighty-two, a partnership whether general or limited and whether domestic or foreign, as defined, respectively, in section six of chapter one hundred and eight A and section one of chapter one hundred and nine, and a foreign limited liability company as defined in this chapter. (b) Pursuant to an agreement of consolidation or merger, a domestic limited liability company may consolidate or merge with or into one or more domestic limited liability companies or other business entities formed or organized under the law of the commonwealth or any other state of the United States or any foreign country or other foreign jurisdiction, with such domestic limited liability company or other business entity as the agreement shall provide being the resulting or surviving domestic limited liability company or other business entity. (c) In connection with a consolidation or merger under this chapter, rights or securities of, or interests in, a domestic limited liability company or other business entity which is a constituent party to the consolidation or merger may be exchanged for or converted into cash, property, rights or securities of, or interests in, the resulting or surviving domestic limited liability company or other business entity or, in addition to or in lieu thereof, may be 69 exchanged for or converted into cash, property, rights or securities of, or interests in, a domestic limited liability company or other business entity which is not the resulting or surviving limited liability company or other business entity in the consolidation or merger. §60 Approval of consolidation or merger; objection; termination or amendment (a) Unless otherwise provided in a written operating agreement, a consolidation or merger shall be approved by each domestic limited liability company which is to consolidate or merge by the members or, if there is more than one class or group of members, then by each class or group of members, in either case, by members who own more than fifty percent of the unreturned contributions to the domestic limited liability company, determined in accordance with section twenty-nine, owned by all of the members or by the members in each class or group, as appropriate. (b) The exclusive remedy of a member of a domestic limited liability company, which has voted to consolidate or to merge with another entity under the provisions of sections fifty-nine to sixty-three, inclusive, who objects to such consolidation or merger, shall be the right to resign as a member and to receive any distribution with respect to his limited liability company interest, as provided in sections thirty-one to thirty-seven, inclusive. Such members and the resulting or surviving entity shall have the rights and duties, and shall follow the procedure set forth in said sections. (c) Notwithstanding prior approval, an agreement of consolidation or merger may be terminated or amended pursuant to a provision for such termination or amendment contained in the agreement of consolidation or merger §61 Certificate of consolidation or merger (a) If a domestic limited liability company is consolidating or merging under this chapter, the domestic limited liability company or other business entity resulting from or surviving in the consolidation or merger shall file in the manner described in section seventeen a certificate of consolidation or merger in the office of the state secretary. The certificate of consolidation or merger shall be executed in the manner described in section fifteen and shall state: (1) the name and jurisdiction of formation or organization of each of the domestic limited liability companies or other business entities which is to consolidate or merge; (2) that an agreement of consolidation or merger has been approved and executed by each of the domestic limited liability companies or other business entities which is to consolidate or merge; (3) the name of the resulting or surviving domestic limited liability company or other business entity; (4) the future effective date or time, which shall be a date or time certain, of the consolidation or merger if it is not to be effective upon the filing of the certificate of consolidation or merger; (5) that the agreement of consolidation or merger is on file at a place of business of the resulting or surviving domestic limited liability company or other business entity, and shall state the address thereof;

70 (6) that a copy of the agreement of consolidation or merger will be furnished by the resulting or surviving domestic limited liability company or other business entity, on request and without cost, to any member of any domestic limited liability company or any person holding an interest in any other business entity which is to consolidate or merge; and (7) if the resulting or surviving entity is not an entity organized under the laws of the commonwealth, a statement that the resulting or surviving entity agrees that, if the entity does not continuously maintain an agent for service of process in the commonwealth, to appoint irrevocably the state secretary to be its true and lawful attorney upon whom all lawful process in any action or proceeding in the commonwealth may be served in the manner set forth in subsections (d), (e), (f) and (g) of section 15.10 of subdivision A of Part 15 of chapter 156D relative to foreign corporations. (b) Unless a future effective date or time is provided in a certificate of consolidation or merger, in which event a consolidation or merger shall be effective at any such future effective date or time, a consolidation or merger shall be effective upon the filing in the office of the state secretary of a certificate of consolidation or merger. (c) A certificate of consolidation or merger shall act (1) as a certificate of cancellation for a domestic limited liability company which is not the resulting or surviving entity in the consolidation or merger and (2) as a final annual report for an association or trust, as defined in section one of chapter one hundred and eighty-two. (d) An agreement of consolidation or merger approved in accordance with section sixty may (1) effect any amendment to the operating agreement or (2) effect the adoption of a new operating agreement, for a domestic limited liability company if it is the resulting or surviving entity in the consolidation or merger. Any amendment to an operating agreement or adoption of a new operating agreement made pursuant to the foregoing sentence shall be effective at the effective time or date of the consolidation or merger. The provisions of this subsection shall not be construed to limit the accomplishment of a merger or of any of the matters referred to herein by any other means provided for in the operating agreement, or other agreement, or as otherwise permitted by law; the operating agreement of any constituent limited liability company to the consolidation or merger including a limited liability company formed for the purpose of consummating a consolidation or merger may be the operating agreement of the resulting or surviving limited liability company. §62 Rights, privileges, powers, property and debts of consolidated or merged business entity When any consolidation or merger becomes effective as hereinbefore provided, for all purposes of the laws of the commonwealth, all of the rights, privileges and powers of each of the domestic limited liability companies and other business entities that have consolidated or merged, and all property, real, personal and mixed, and all debts due to any of said domestic limited liability companies and other business entities, as well as all other things and causes of action belonging to each of such domestic limited liability companies and other business entities, shall be vested in the resulting or surviving domestic limited liability company or other business entity, and shall thereafter be the property of the resulting or surviving domestic limited liability company or other business entity as they were of each of the domestic limited liability companies and other business entities that have consolidated or merged, and the title to any real 71 property vested by deed or otherwise, under the laws of the commonwealth, in any of such domestic limited liability companies and other business entities, shall not revert or be in any way impaired by reason of this chapter; but all rights of creditors and all liens upon any property of any of said domestic limited liability companies and other business entities shall be preserved unimpaired, and all debts, liabilities and duties of each of the said domestic limited liability companies and other business entities that have consolidated or merged shall thenceforth attach to the resulting or surviving domestic limited liability company or other business entity, and may be enforced against it to the same extent as if said debts, liabilities and duties had been incurred or contracted by it. Unless otherwise agreed, a consolidation or merger of a domestic limited liability company, including a domestic limited liability company which is not the resulting or surviving entity in the consolidation or merger, shall not require such domestic limited liability company to wind up its affairs under section forty-five or pay its liabilities and distribute its assets under section forty-six. §63 Duties and liabilities of members and managers (a) Unless the provisions of this chapter or the context indicate otherwise, each reference in the General Laws to a "person", where such reference includes any partnership, whether general or limited and whether domestic or foreign, shall be deemed to include a limited liability company. (b) To the extent that, at law or in equity, a member or manager has duties, including fiduciary duties, and liabilities relating thereto to a limited liability company or to another member or manager, (1) any such member or manager acting under the operating agreement shall not be liable to the limited liability company or to any such other member or manager for the member's or manager's good faith reliance on the provision of the operating agreement, and (2) the member's or manager's duties and liabilities may be expanded or restricted by provisions in the operating agreement. §64 Reorganization of limited liability company (a) Any limited liability company, a plan of reorganization of which, pursuant to the provisions of any applicable statute of the United States relating to reorganizations of corporations or limited liability companies, has been or shall be confirmed by the decree or order of a court of competent jurisdiction, may put into effect and carry out the plan and the decrees and orders of the court relative thereto and may take any proceeding and do any act provided in the plan or directed by such decrees and orders, without further action by its members or managers. Such power and authority may be exercised, and such proceedings and acts may be taken, as may be directed by such decrees or orders, by the trustee or trustees of such limited liability company appointed by the court in the reorganization proceedings or a majority thereof or if none be appointed and acting, by designated members or managers of the limited liability company, or by a master or other representative appointed by the court, with like effect as if exercised and taken by unanimous action of the members and managers of the limited liability company. (b) The provisions of this section shall cease to apply to such limited liability company upon the entry of a final decree in the reorganization proceedings closing the case and discharging the trustee or trustees, if any. §65 Liability insurance 72 The regulating boards, as defined in subsection (c) of section two of chapter one hundred and fifty-six A, shall adopt regulations requiring the designated amount of required liability insurance to be maintained by limited liability companies and members subject to their jurisdiction pursuant to subsection (c) of section six. The term designated amount shall be the amount deemed appropriate by the regulating board to cover negligence, wrongful acts, errors and omissions and that insures the company and its members. §66 Recordable instruments affecting real property binding on limited liability company Any recordable instrument purporting to affect an interest in real property, including without limitation, any deed, lease, notice of lease, mortgage, discharge or release of mortgage, assignment of mortgage, easement and certificate of fact, executed in the name of a limited liability company by any person who is identified on the certificate of organization, as amended, of a domestic limited liability company, or on the application for registration, as amended, of a foreign limited liability company, as a manager or as a person authorized to execute, acknowledge, deliver and record recordable instruments affecting interests in real property, shall be binding on the limited liability company in favor of a seller, purchaser, grantor, grantee, lessor, lessee, mortgagor, mortgagee, and any other person relying in good faith on such instrument, notwithstanding any inconsistent provisions of the operating agreement, side agreements among the members or managers, by-laws or rules, resolutions or votes of the limited liability company. §67 Certification of authority to act for limited liability company Any person who is identified on the certificate of organization, as amended, of a domestic limited liability company, or on the application for registration, as amended, of a foreign limited liability company, as a manager or as a person who is authorized to execute any documents to be filed with the office of the state secretary, may certify as to the incumbency of any manager or member and as to the authority of any person, whether or not such person is identified on the certificate of organization or on the application for registration, to act for the limited liability company, including without limitation with respect to the matters referred to in section sixty-six, and any such certification shall be binding on the limited liability company in favor of a person relying in good faith on such certification, notwithstanding any inconsistent provisions of the operating agreement, side agreements among the members, the managers or both, by-laws or rules, resolutions or votes of the limited liability company. §68 Good standing A limited liability company shall be deemed to be in good standing with the secretary of the commonwealth if such limited liability company appears from the records of the said secretary to exist and has paid all fees then due to the secretary, and no certificate of cancellation has been filed by or with respect to the limited liability company. Upon the request of any person and payment of such fee as may be prescribed by law, the secretary of the commonwealth shall issue a certificate stating, in substance, as to any limited liability company meeting the requirements of this section, that such limited liability company appears from the records in his office to exist and to be in good standing and the identity of any and all managers and persons authorized to act with respect to real property instruments who are named in the certificate of organization of the limited liability company, as amended. § 69. Conversion of business entity to limited liability company 73 (a) As used in this section the term “other business entity” shall mean an association or trust as defined in section 1 of chapter 182, and a partnership, whether general or limited and whether domestic or foreign as each may be defined in section 6 of chapter 108A or section 1 of chapter 109, including a foreign or domestic registered limited liability partnership as defined in section 2 of said chapter 108A. (b) Any other business entity may convert to a domestic limited liability company by complying with subsection (h) and filing with the office of the state secretary in accordance with section 17: (1) a certificate of conversion to a limited liability company that has been executed in accordance with section 15; and (2) a certificate of organization of a limited liability company that complies with section 12 and has been executed in accordance with said section 15. (c) The certificate of conversion to a limited liability company shall state: (1) the date on which, and jurisdiction in which, the other business entity was first created, incorporated or otherwise came into being and, if it has changed, its jurisdiction immediately prior to its conversion to a domestic limited liability company; (2) the name of the other business entity immediately prior to the filing of the certificate of conversion to a limited liability company; (3) the name of the limited liability company as set forth in its certificate of organization filed in accordance with subsection (b); and (4) the future effective date, which shall be a date certain, of the conversion to a limited liability company if it is not to be effective upon the filing of the certificate of conversion and certificate of organization. (d) Upon the effective date of the filing of the certificate of conversion and certificate of organization in the office of the state secretary, the other business entity shall be converted into a domestic limited liability company and the limited liability company shall thereafter be subject to this chapter. (e) The conversion of any other business entity into a domestic limited liability company shall not be deemed to affect any obligations or liabilities of the other business entity incurred prior to such conversion or the personal liability of any person incurred prior to such conversion. (f) When a conversion becomes effective under this section, for all purposes of the laws of the commonwealth, all of the rights, privileges and powers of the other business entity that has converted and all property, real, personal and mixed, and all debts due to such other entity, as well as all other things and causes of action belonging to such other entity, shall be vested in the domestic limited liability company and shall thereafter be the property of the domestic limited liability company as they were of such other entity. The title to any real property vested by deed or otherwise under the laws of the commonwealth in such other entity shall not revert or be in any way impaired by reason of this chapter, but all rights of creditors and all liens upon any property of such other entity shall be preserved unimpaired and all debts, liabilities and duties of such other entity shall then attach to the domestic 74 limited liability company and may be enforced against it to the same extent as if the debts, liabilities and duties had been incurred or contracted by it. (g) Unless otherwise agreed or required under the laws of another jurisdiction applicable to the other business entity, such other entity shall not be required to wind up its affairs or pay its liabilities and distribute its assets and the conversion shall not be deemed to constitute a dissolution of such other entity. (h) Prior to filing a certificate of conversion to a limited liability company with the state secretary, the conversion and the operating agreement of the limited liability company shall be approved by the other business entity in the manner provided in its governing documents or the laws applicable to it for authorization of a merger of the other business entity into a limited liability company or, in the absence of such provisions, in the manner of a sale of all or substantially all of its assets. (i) This section shall not be construed to limit the ability of another business entity to change its governing law, its legal status or its domicile by any other means provided for in its governing documents, instruments or agreements or by applicable laws, including by amendment of the governing documents or operating agreement. § 70. Administrative dissolution; notice; wind up and liquidation of affairs (a) The state secretary may commence a proceeding to dissolve a limited liability company if: (1) the limited liability company has failed for 2 consecutive years to comply with the laws requiring the filing of annual reports; or (2) he is satisfied that the limited liability company has become inactive and its dissolution would be in the public interest. (b) If the state secretary determines that grounds exist under subsection (a), he shall serve the limited liability company with written notice of his determination. The notice shall be sent to the address of the office in the commonwealth required by clause (1) of section 5. If, within 90 days after the notice, the limited liability company fails to correct each ground for dissolution or fails to demonstrate to the reasonable satisfaction of the state secretary that each ground determined by the state secretary does not exist, the state secretary shall administratively dissolve the limited liability company. (c) A limited liability company administratively dissolved continues in existence, but shall not carry on any business except that necessary to wind up and liquidate its affairs. § 71. Application for reinstatement by limited liability company subject to administrative dissolution or revocation of authority to transact business

A limited liability company administratively dissolved under section 70 or whose authority to transact business in the commonwealth has been revoked under section 72 may apply to the state secretary for reinstatement at any time. The application shall: (1) recite the name of the limited liability company and the effective date of its administrative dissolution or revocation; 75 (2) state that the grounds for dissolution or revocation either did not exist or have been corrected; (3) state that the name of the limited liability company satisfies the requirements of section 3; provided, however, that if the state secretary determines that the application contains the full and correct information, he shall reinstate the limited liability company. § 72. Revocation of foreign limited liability company's authority to transact business in commonwealth; grounds; notice; effective date (a) The state secretary may commence a proceeding to revoke the authority of a foreign limited liability company to transact business in the commonwealth if: (1) the limited liability company has failed for 2 consecutive years to comply with the laws requiring the filing of annual reports; or (2) he is satisfied that the revocation of the limited liability company's authority to transact business in the commonwealth would be in the public interest. (b) If the state secretary determines that grounds exist under subsection (a), he shall serve the limited liability company with written notice of his determination. The notice shall be sent to the address of the foreign limited liability company. If, within 90 days after the notice, the limited liability company fails to correct each ground for revocation or fails to demonstrate to the reasonable satisfaction of the state secretary that each ground determined by the secretary of state does not exist, the state secretary shall administratively revoke the authority of the foreign limited liability company to transact business in the commonwealth. (c) The authority of the foreign limited liability company to transact business in the commonwealth shall cease on the date on which the state secretary makes such revocation effective.

CHAPTER 156D BUSINESS CORPORATIONS

MASSACHUSETTS GENERAL LAWS Chapter 156D Business Corporations

TABLE OF CONTENTS ARTICLE 1...... Error! Bookmark not defined. PART A. SHORT TITLE AND RESERVATION OF POWER Error! Bookmark not defined. § 1.01. Short Title...... Error! Bookmark not defined. 76 § 1.02. Reservation of Power to Amend or Repeal...... Error! Bookmark not defined. PART B. FILING DOCUMENTS...... - 81 - § 1.20. Filing Requirements.. . . .Error! Bookmark not defined. § 1.21. Forms...... Error! Bookmark not defined. § 1.22. Filing, Service and Copying Fees. Error! Bookmark not defined. § 1.23. Effective Time and Date of Document. Error! Bookmark not defined. § 1.24. Correcting Filed Document...... Error! Bookmark not defined. § 1.25. Filing Duty of Secretary of State.. .Error! Bookmark not defined. § 1.26. Appeal From Secretary of State's Refusal to File Document...... Error! Bookmark not defined. § 1.27. Evidentiary Effect of Copy of Filed Document. Error! Bookmark not defined. § 1.28. Certificates Regarding Corporations. Error! Bookmark not defined. § 1.29. Penalty for Signing False Document.. Error! Bookmark not defined. § 1.30. Powers...... Error! Bookmark not defined. PART D. DEFINITIONS...... Error! Bookmark not defined. § 1.40. Act Definitions...... Error! Bookmark not defined. § 1.41. Notice...... Error! Bookmark not defined. § 1.42. Number of Shareholders.. Error! Bookmark not defined. PART E. INTERPRETATION...... Error! Bookmark not defined. § 1.50. Interpretation of Act.. .Error! Bookmark not defined. ARTICLE 2...... Error! Bookmark not defined. § 2.01. Incorporators...... Error! Bookmark not defined. § 2.02. Articles of Organization...... Error! Bookmark not defined. § 2.03. Incorporation...... Error! Bookmark not defined. § 2.04. Liability for Pre-Incorporation Transactions. Error! Bookmark not defined. § 2.05. Organization of Corporation.. . . .Error! Bookmark not defined. § 2.06. Bylaws...... Error! Bookmark not defined. § 2.07. Emergency Bylaws...... Error! Bookmark not defined. ARTICLE 3...... Error! Bookmark not defined. § 3.01. Purposes...... Error! Bookmark not defined. § 3.02. General Powers...... Error! Bookmark not defined. § 3.03. Emergency Powers...... Error! Bookmark not defined. § 3.04. Ultra Vires...... Error! Bookmark not defined. ARTICLE 4...... Error! Bookmark not defined. § 4.01. Corporate Name...... Error! Bookmark not defined.

77 § 4.02. Reserved Name...... Error! Bookmark not defined. ARTICLE 5...... Error! Bookmark not defined. § 5.01. Registered Office and Registered Agent...... Error! Bookmark not defined. § 5.02. Change of Registered Office or Registered Agent...... Error! Bookmark not defined. § 5.03. Resignation of Registered Agent. Error! Bookmark not defined. § 5.04. Service on Corporation.. Error! Bookmark not defined. ARTICLE 6...... Error! Bookmark not defined. PART A. SHARES...... Error! Bookmark not defined. § 6.01. Authorized Shares...... Error! Bookmark not defined. § 6.02. Determination of Terms of Class or Series.. . .Error! Bookmark not defined. § 6.03. Issued and Outstanding Shares.. .Error! Bookmark not defined. § 6.04. Fractional Shares...... Error! Bookmark not defined. PART B. ISSUANCE OF SHARES...... Error! Bookmark not defined. § 6.20. Subscription for Shares Before Incorporation. Error! Bookmark not defined. § 6.21. Issuance of Shares...... Error! Bookmark not defined. § 6.22. Liability of Shareholders...... Error! Bookmark not defined. § 6.23. Share Dividends...... Error! Bookmark not defined. § 6.24. Share Options...... Error! Bookmark not defined. § 6.25. Form and Content of Certificates. Error! Bookmark not defined. § 6.26. Shares Without Certificates.. . . .Error! Bookmark not defined. § 6.27. Restriction on Transfer of Shares and Other Securities...... Error! Bookmark not defined. PART C. SUBSEQUENT ACQUISITION OF SHARES BY SHAREHOLDERS AND CORPORATION...... - 104 - § 6.30. Shareholders' Preemptive Rights. Error! Bookmark not defined. § 6.31. Corporation's Acquisition of Its Own Shares.. Error! Bookmark not defined. PART D. DISTRIBUTIONS...... Error! Bookmark not defined. § 6.40. Distributions to Shareholders.. .Error! Bookmark not defined. § 6.41. Liability for Improper Distributions. Error! Bookmark not defined. ARTICLE 7...... Error! Bookmark not defined. PART A. MEETINGS...... Error! Bookmark not defined. § 7.01. Annual Meeting...... Error! Bookmark not defined. § 7.02. Special Meeting...... Error! Bookmark not defined.

78 § 7.03. Court-Ordered Meeting.. .Error! Bookmark not defined. § 7.04. Action Without Meeting.. Error! Bookmark not defined. § 7.05. Notice of Meeting...... Error! Bookmark not defined. § 7.06. Waiver of Notice...... Error! Bookmark not defined. § 7.07. Record Date...... Error! Bookmark not defined. § 7.08. Meetings by Remote Communications; Remote Participation in Meetings...... Error! Bookmark not defined. PART B. VOTING...... Error! Bookmark not defined. § 7.20. Shareholders List for Meeting.. .Error! Bookmark not defined. § 7.21. Voting Entitlement of Shares.. . .Error! Bookmark not defined. § 7.22. Proxies...... Error! Bookmark not defined. § 7.23. Shares Held by Nominees. Error! Bookmark not defined. § 7.24. Corporation's Acceptance of Votes.. .Error! Bookmark not defined. § 7.25. Quorum and Voting Requirements for Voting Groups...... Error! Bookmark not defined. § 7.26. Action by Single and Multiple Voting Groups.. Error! Bookmark not defined. § 7.27. Greater or Lesser Quorum or Voting Requirements for Shareholders...... Error! Bookmark not defined. § 7.28. Voting for Directors; Cumulative Voting...... Error! Bookmark not defined. § 7.29. Form of Shareholder Action...... Error! Bookmark not defined. PART C. VOTING TRUSTS AND AGREEMENTS...... Error! Bookmark not defined. § 7.30. Voting Trusts...... Error! Bookmark not defined. § 7.31. Voting Agreements...... Error! Bookmark not defined. § 7.32. Shareholder Agreements.. Error! Bookmark not defined. PART D. DERIVATIVE PROCEEDINGS...... - 119 - § 7.40. Subchapter Definitions.. Error! Bookmark not defined. § 7.41. Standing...... Error! Bookmark not defined. § 7.42. Demand...... Error! Bookmark not defined. § 7.43. Stay of Proceedings.. . . .Error! Bookmark not defined. § 7.44. Dismissal...... Error! Bookmark not defined. § 7.45. Discontinuance or Settlement.. . .Error! Bookmark not defined. § 7.46. Payment of Expenses.. . . .Error! Bookmark not defined. § 7.47. Applicability to Foreign Corporations...... Error! Bookmark not defined. ARTICLE 8...... Error! Bookmark not defined. PART A. BOARD OF DIRECTORS...... Error! Bookmark not defined. § 8.01. Requirement for and Duties of Board of Directors...... Error! Bookmark not defined.

79 § 8.02. Qualifications of Directors.. . . .Error! Bookmark not defined. § 8.03. Number and Election of Directors. Error! Bookmark not defined. § 8.04. Election of Directors by Certain Classes of Shareholders...... Error! Bookmark not defined. § 8.05. Terms of Directors Generally.. . .Error! Bookmark not defined. § 8.06. Staggered Terms for Directors.. .Error! Bookmark not defined. § 8.07. Resignation of Directors...... Error! Bookmark not defined. § 8.08. Removal of Directors.. . .Error! Bookmark not defined. § 8.10. Vacancy on Board...... Error! Bookmark not defined. § 8.11. Compensation of Directors...... Error! Bookmark not defined. PART B. MEETINGS AND ACTION OF THE BOARD...Error! Bookmark not defined. § 8.20. Meetings...... Error! Bookmark not defined. § 8.21. Action Without Meeting.. Error! Bookmark not defined. § 8.22. Notice of Meeting...... Error! Bookmark not defined. § 8.23. Waiver of Notice...... Error! Bookmark not defined. § 8.24. Quorum and Voting...... Error! Bookmark not defined. § 8.25. Committees...... Error! Bookmark not defined. PART C. STANDARDS OF CONDUCT...... Error! Bookmark not defined. § 8.30. General Standards for Directors. Error! Bookmark not defined. § 8.31. Director Conflict of Interest.. .Error! Bookmark not defined. § 8.32. Loans to Directors...... Error! Bookmark not defined. PART D. OFFICERS...... Error! Bookmark not defined. § 8.40. Required Officers...... Error! Bookmark not defined. § 8.41. Duties of Officers...... Error! Bookmark not defined. § 8.43. Resignation and Removal of Officers. Error! Bookmark not defined. § 8.44. Contract Rights of Officers.. . . .Error! Bookmark not defined. § 8.45. Certificate of Change in Officers or Directors...... Error! Bookmark not defined. § 8.46. Instruments Affecting Real Estate.. .Error! Bookmark not defined. PART E. INDEMNIFICATION...... Error! Bookmark not defined. § 8.50. Subchapter Definitions.. Error! Bookmark not defined. § 8.51. Permissible Indemnification.. . . .Error! Bookmark not defined. § 8.52. Mandatory Indemnification...... Error! Bookmark not

80 defined. § 8.53. Advance for Expenses.. . .Error! Bookmark not defined. § 8.54. Court-Ordered Indemnification and Advance for Expenses...... Error! Bookmark not defined. § 8.55. Determination and Authorization of Indemnification...... Error! Bookmark not defined. § 8.56. Officers...... Error! Bookmark not defined. § 8.57. Insurance...... Error! Bookmark not defined. § 8.58. Variation by Corporate Action; Application of Subchapter...... Error! Bookmark not defined. § 8.59. Exclusivity of Subchapter...... Error! Bookmark not defined. ARTICLE 9...... Error! Bookmark not defined. PART A. DOMESTICATION...... Error! Bookmark not defined. § 9.20. Domestication...... Error! Bookmark not defined. § 9.21. Action on a Plan of Domestication.. .Error! Bookmark not defined. § 9.22. Articles of Domestication...... Error! Bookmark not defined. § 9.23. Surrender of Charter Upon Domestication...... Error! Bookmark not defined. § 9.24. Effect of Domestication. Error! Bookmark not defined. § 9.25. Abandonment of a Domestication.. Error! Bookmark not defined. PART B. NONPROFIT CONVERSION...... Error! Bookmark not defined. § 9.30. Nonprofit Conversion.. . .Error! Bookmark not defined. § 9.31. Action on a Plan of Nonprofit Conversion.. . . .Error! Bookmark not defined. § 9.32. Articles of Nonprofit Conversion. Error! Bookmark not defined. § 9.33. Surrender of Charter Upon Foreign Nonprofit Conversion...... Error! Bookmark not defined. § 9.34. Effect of Nonprofit Conversion.. Error! Bookmark not defined. § 9.35. Abandonment of a Nonprofit Conversion...... Error! Bookmark not defined. PART D. FOREIGN NONPROFIT DOMESTICATION AND CONVERSION. .Error! Bookmark not defined. § 9.40. Foreign Nonprofit Domestication and Conversion...... Error! Bookmark not defined. § 9.41. Articles of Domestication and Conversion.. . . .Error! Bookmark not defined. § 9.42. Effect of Foreign Nonprofit Domestication and Conversion...... Error! Bookmark not defined. § 9.43. Abandonment of a Foreign Nonprofit Domestication and Conversion...... Error! Bookmark not defined.

81 PART E. ENTITY CONVERSION...... Error! Bookmark not defined. § 9.50. Entity Conversion Authorized; Definitions.. . .Error! Bookmark not defined. § 9.51. Plan of Entity Conversion...... Error! Bookmark not defined. § 9.52. Action on a Plan of Entity Conversion...... Error! Bookmark not defined. § 9.53. Articles of Entity Conversion.. .Error! Bookmark not defined. § 9.54. Surrender of Charter Upon Conversion. Error! Bookmark not defined. § 9.55. Effect of Entity Conversion.. . . .Error! Bookmark not defined. § 9.56. Abandonment of an Entity Conversion. Error! Bookmark not defined. ARTICLE 10...... Error! Bookmark not defined. PART A. AMENDMENT OF ARTICLES OF ORGANIZATION. .Error! Bookmark not defined. § 10.01. Authority to Amend.. . . .Error! Bookmark not defined. § 10.02. Amendment Before Issuance of Shares. Error! Bookmark not defined. § 10.03. Amendment by Board of Directors and Shareholders; Exception...... Error! Bookmark not defined. § 10.04. Voting on Amendments by Voting Groups...... Error! Bookmark not defined. § 10.05. Amendment by Board of Directors. Error! Bookmark not defined. § 10.06. Articles of Amendment.. Error! Bookmark not defined. § 10.07. Restated Articles of Organization.. Error! Bookmark not defined. § 10.08. Effect of Amendment.. . .Error! Bookmark not defined. PART B. AMENDMENT OF BYLAWS...... Error! Bookmark not defined. § 10.20. Amendment by Board of Directors or Shareholders...... Error! Bookmark not defined. § 10.21. Bylaw Dealing With Quorum or Voting Requirements for Shareholders...... Error! Bookmark not defined. § 10.22. Bylaw Dealing With Quorum or Voting Requirements for Board of Directors...... Error! Bookmark not defined. ARTICLE 11...... Error! Bookmark not defined. § 11.01. Definitions...... Error! Bookmark not defined. § 11.02. Merger...... Error! Bookmark not defined. § 11.03. Share Exchange...... Error! Bookmark not defined. § 11.04. Action on a Plan of Merger or Share Exchange. Error! Bookmark not defined. § 11.05. Merger Between Parent and Subsidiary or Between Subsidiaries...... Error! Bookmark not defined.

82 § 11.06. Articles of Merger or Share Exchange...... Error! Bookmark not defined. § 11.07. Effect of Merger or Share Exchange. Error! Bookmark not defined. § 11.08. Abandonment of a Merger or Share Exchange.. .Error! Bookmark not defined. ARTICLE 12...... Error! Bookmark not defined. § 12.01. Sale of Assets in Regular Course of Business and Mortgage of Assets...... Error! Bookmark not defined. § 12.02. Sale of Assets Other Than in Regular Course of Business...... Error! Bookmark not defined. ARTICLE 13...... Error! Bookmark not defined. PART A. RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES. .Error! Bookmark not defined. § 13.01. Definitions...... Error! Bookmark not defined. § 13.02. Right to Appraisal.. . . .Error! Bookmark not defined. § 13.03. Assertion of Rights by Nominees and Beneficial Owners...... Error! Bookmark not defined. PART B. PROCEDURE FOR EXERCISE OF APPRAISAL RIGHTS...... Error! Bookmark not defined. § 13.20. Notice of Appraisal Rights.. . . .Error! Bookmark not defined. § 13.21. Notice of Intent to Demand Payment. Error! Bookmark not defined. § 13.22. Appraisal Notice and Form...... Error! Bookmark not defined. § 13.23. Perfection of Rights; Right to Withdraw.. . . .Error! Bookmark not defined. § 13.24. Payment...... Error! Bookmark not defined. § 13.25. After-Acquired Shares.. Error! Bookmark not defined. § 13.26. Procedure if Shareholder Dissatisfied With Payment or Offer...... Error! Bookmark not defined. PART C. JUDICIAL APPRAISAL OF SHARES...... Error! Bookmark not defined. § 13.30. Court Action...... Error! Bookmark not defined. § 13.31. Court Costs and Counsel Fees.. .Error! Bookmark not defined. ARTICLE 14...... Error! Bookmark not defined. PART A. VOLUNTARY DISSOLUTION...... Error! Bookmark not defined. § 14.01. Dissolution by Incorporators or Initial Directors...... Error! Bookmark not defined. § 14.02. Dissolution by Board of Directors and Shareholders, or Otherwise in Accordance With Articles of Organization ...... Error! Bookmark not defined. § 14.03. Articles of Dissolution...... Error! Bookmark not defined.

83 § 14.04. Revocation of Dissolution...... Error! Bookmark not defined. § 14.05. Effect of Dissolution.. Error! Bookmark not defined. § 14.06. Known Non-Contingent Claims Against Dissolved Corporation...... Error! Bookmark not defined. § 14.07. Unknown Claims Against Dissolved Corporation. Error! Bookmark not defined. § 14.08. Creation of Reserves as Adequate Provision for Unasserted Product Liability Claims and Known Contingent Claims Against Dissolved Corporation.. . . .Error! Bookmark not defined. § 14.09. Enforcement of Claims Against Dissolved Corporation...... Error! Bookmark not defined. PART B. ADMINISTRATIVE DISSOLUTION. Error! Bookmark not defined. § 14.20. Grounds for Administrative Dissolution...... Error! Bookmark not defined. § 14.21. Procedure for and Effect of Administrative Dissolution...... Error! Bookmark not defined. § 14.22. Reinstatement Following Administrative Dissolution...... Error! Bookmark not defined. § 14.23. Appeal From Denial of Reinstatement. Error! Bookmark not defined. PART C. JUDICIAL DISSOLUTION...... Error! Bookmark not defined. § 14.30. Grounds for Judicial Dissolution.. .Error! Bookmark not defined. § 14.31. Procedure for Judicial Dissolution. Error! Bookmark not defined. § 14.32. Receivership or Custodianship.. Error! Bookmark not defined. § 14.33. Decree of Dissolution.. Error! Bookmark not defined. § 14.34. Reorganization Under a Statute of the United States: Effectuation...... Error! Bookmark not defined. PART D. MISCELLANEOUS...... Error! Bookmark not defined. § 14.40. Deposit With Treasurer of the Commonwealth.. Error! Bookmark not defined. ARTICLE 15...... Error! Bookmark not defined. PART A. REQUIREMENTS FOR AUTHORITY TO TRANSACT BUSINESS. Error! Bookmark not defined. § 15.01. Authority to Transact Business Required.. . . .Error! Bookmark not defined. § 15.02. Consequences of Transacting Business Without Authority...... Error! Bookmark not defined. § 15.03. Delivering Certificate by Foreign Corporation...... Error! Bookmark not defined. § 15.04. Amended Certificate.. . .Error! Bookmark not defined. § 15.05. Effect of Filing of Certificate. Error! Bookmark not

84 defined. § 15.06. Corporate Name of Foreign Corporation...... Error! Bookmark not defined. § 15.07. Registered Office and Registered Agent of Foreign Corporation...... Error! Bookmark not defined. § 15.08. Change of Registered Office or Registered Agent of Foreign Corporation...... Error! Bookmark not defined. § 15.09. Resignation of Registered Agent of Foreign Corporation...... Error! Bookmark not defined. § 15.10. Liability to be Sued; Service on Foreign Corporation...... Error! Bookmark not defined. § 15.11. False Reports or Statements.. . .Error! Bookmark not defined. PART B. WITHDRAWAL OR TRANSFER OF AUTHORITY Error! Bookmark not defined. § 15.20. Withdrawal of Foreign Corporation.. Error! Bookmark not defined. § 15.21. Automatic Withdrawal Upon Certain Conversions...... Error! Bookmark not defined. § 15.22. Withdrawal Upon Conversion to a Nonfiling Entity...... Error! Bookmark not defined. § 15.23. Transfer of Authority.. Error! Bookmark not defined. PART C. REVOCATION OF AUTHORITY TO TRANSACT BUSINESS....Error! Bookmark not defined. § 15.30. Grounds for Revocation. Error! Bookmark not defined. § 15.31. Procedure for and Effect of Revocation...... Error! Bookmark not defined. § 15.32. Appeal From Revocation. Error! Bookmark not defined. ARTICLE 16...... Error! Bookmark not defined. PART A. RECORDS...... Error! Bookmark not defined. § 16.01. Corporate Records...... Error! Bookmark not defined. § 16.02. Inspection of Records by Shareholders...... Error! Bookmark not defined. § 16.03. Scope of Inspection Right...... Error! Bookmark not defined. § 16.04. Court-Ordered Inspection...... Error! Bookmark not defined. § 16.05. Inspection of Records by Directors. Error! Bookmark not defined. § 16.06. Exception to Notice Requirement; Consequences of Inability to Deliver Notice...... Error! Bookmark not defined. PART B. REPORTS...... Error! Bookmark not defined. § 16.20. Financial Statements for Shareholders...... Error! Bookmark not defined. § 16.21. By-Law Amendments...... Error! Bookmark not defined. § 16.22. Annual Report for Secretary of State...... Error!

85 Bookmark not defined. ARTICLE 17...... Error! Bookmark not defined. TRANSITION PROVISIONS...... Error! Bookmark not defined. § 17.01. Application to Existing Domestic Corporations...... Error! Bookmark not defined. § 17.02. Application to Qualified Foreign Corporations...... Error! Bookmark not defined. § 17.03. Saving Provisions...... Error! Bookmark not defined. § 17.04. Severability...... Error! Bookmark not defined.

86 MASSACHUSETTS GENERAL LAWS Chapter 156D Business Corporations

ARTICLE 1

PART A. SHORT TITLE AND RESERVATION OF POWER

§ 1.01. Short Title.

This chapter shall be known and may be cited as the "Massachusetts Business Corporation Act".

§ 1.02. Reservation of Power to Amend or Repeal

The General Court of the commonwealth has power to amend or repeal all or part of this Act at any time and all domestic and foreign corporations subject to this Act are governed by the amendment or repeal.

PART B. FILING DOCUMENTS

§ 1.20. Filing Requirements

(a) To be entitled to filing with the secretary of state, a document shall satisfy the requirements of this section, any other section of this chapter that adds to or varies from these requirements, any applicable forms or regulations promulgated by the secretary of state hereunder, and any other relevant laws or regulations of the commonwealth. (b) This chapter shall require or permit the filing of the document in the office of the secretary of state. (c) The document shall contain the information required by this chapter. The document may contain other information as well that is relevant to the business or affairs of the corporation. (d) The document shall be typewritten, printed or in such other form as the secretary of state shall prescribe. (e) The document shall be in the English language. A corporate name need not be in English if written in English letters or Arabic or Roman numerals, and the certificate of existence required of foreign corporations need not be in English if accompanied by a reasonably authenticated English translation. (f) The document shall be executed: (1) by the chairman of the board of directors of a domestic or foreign corporation, by its president, or by another of its officers; (2) if directors have not been selected or the corporation has not been formed, by the incorporator or incorporators; or 87 (3) if the corporation is in the hands of a receiver, trustee, or other court-appointed fiduciary, by that fiduciary. (g) The person executing the document shall sign it and state beneath or opposite his signature his name and the capacity in which he signs. The document may but need not contain any of: (1) the corporate seal, (2) an attestation, and (3) an acknowledgment or verification. (h) The document shall be delivered to the office of the secretary of state for filing and shall be accompanied by one exact or conformed copy, except that no copy is required for filings under sections 5.02, 15.03, 15.08, 15.09 and 16.22, the correct filing fee and any payment or penalty required by this chapter or other law. The secretary of state may waive the requirement that an exact or conformed copy accompany any document submitted for filing, including documents submitted electronically. (i) Electronic documents or transmissions may be filed with the secretary of state if and to the extent permitted by the secretary. The secretary of state may promulgate regulations regarding the procedures for electronic filings which shall supersede any inconsistent provisions of this chapter with respect to such filings.

§ 1.21. Forms.

(a) The secretary of state may prescribe and furnish on request forms for any documents to be filed under this chapter. If the secretary of state so requires, use of these forms is mandatory. (b) The secretary of state may accept for filing a document that contains the information required by this chapter but that does not conform to a prescribed form, whether or not use of the form is mandatory.

§ 1.22. Filing, Service and Copying Fees

The commissioner of administration shall issue regulations prescribing fees for the filing and copying of documents, the issuance of certificates and the handling of service of process under this chapter.

§ 1.23. Effective Time and Date of Document

(a) Except as provided in subsection (b) and in subsection (c) of section 1.24, a document that is filed by the secretary of state pursuant to section 1.25 is effective: (1) at the time and on the date when it was approved for filing by the secretary of state; or (2) in the case of articles of organization, amendment or merger, at the time and on the date when the articles were received for filing by the secretary of state if the articles are not rejected by the secretary within such time after their filing as is specified in regulations promulgated by the secretary. (b) A filed document may specify a delayed effective time and date, and if it does so the document will become effective at the time and date specified. If a delayed effective date but no time is specified, the document is effective at the close of business on that date. A delayed 88 effective date for a document may not be later than the ninetieth day after the date when it is received for filing by the secretary of state.

§ 1.24. Correcting Filed Document

(a) A domestic or foreign corporation may correct a document filed by the secretary of state if the document (1) contains a typographical error or an incorrect statement or (2) was defectively executed, attested, sealed, verified, or acknowledged. (b) A document is corrected: (1) by preparing articles of correction that (i) describe the document, including its filing date, or attach a copy of it to the articles; (ii) specify the typographical error, the incorrect statement and the reason it is incorrect or the manner in which the execution was defective; and (iii) correct the typographical error, incorrect statement or defective execution; and (2) by delivering the articles of correction to the secretary of state for filing. (c) Articles of correction are effective on the effective date of the document they correct except as to persons relying on the uncorrected document and adversely affected by the correction. As to those persons, articles of correction are effective when filed. (d) Articles of correction cannot be used to change the effective date of a filed document; provided, however, that if a document has been filed with a delayed effective date, articles of correction may be filed prior to said date (1) to accelerate the effective date to a date not earlier than the date of the articles of correction, or (2) to abandon a merger or amendment to the articles of organization if authority to do so is granted by the merger agreement or the persons approving the amendment. (e) If the secretary of state permits electronic filings, defects in the electronic recording or transmission of documents may be corrected under this section to the extent permitted by regulations promulgated by the secretary.

§ 1.25. Filing Duty of Secretary of State

(a) Upon receipt of a document for filing, except an annual report filed pursuant to section 16.22, the secretary of state shall record the date and time of receipt on or with the document and, if the person submitting the document or his representative so requests, furnish evidence of the date and time of receipt to the person or his representative in a form as the secretary of state shall determine. (b) The secretary of state shall examine each document received by him for filing. If he finds that the relevant provisions of law have been satisfied, he shall evidence his approval on or with the document. Upon such approval and the payment of the fee authorized by section 1.22, the document shall be deemed to be filed with the secretary of state. (c) If the secretary of state refuses to file a document, he shall notify the person or his representative in writing of the refusal and his reasons therefor within 90 days after receipt in the

89 case of annual reports under section 16.22 or within 5 days after receipt in the case of other documents. (d) The secretary of state shall keep a record of each document received, of the date and time of its receipt for filing, and of the date and, if requested, the time of his approval for filing, and shall keep the document and such records on file in his office in a manner convenient for public inspection.

§ 1.26. Appeal From Secretary of State's Refusal to File Document

If the secretary of state refuses to file a document delivered to his office for filing, the person attempting to file may appeal that refusal. Such an appeal must be commenced within 90 days after the return of the document to the superior court of the county where the corporation's principal office or, if none in the commonwealth, its registered office, is or will be located. Such an appeal is commenced by petitioning the court to compel the filing of the document and by attaching to the petition the document and the explanation of the secretary of state for his refusal to file.

§ 1.27. Evidentiary Effect of Copy of Filed Document

A certified copy of a document filed by the secretary of state is conclusive evidence that the original document is on file with the secretary of state.

§ 1.28. Certificates Regarding Corporations

(a) Anyone may apply to the secretary of state to furnish a certificate of legal existence for a domestic corporation. A certificate of legal existence shall set forth: (1) the name of the corporation; (2) the date the corporation was organized under the laws of the commonwealth; and (3) that the corporation has legal existence so far as it appears in the records of the state secretary. (b) Anyone may apply to the secretary of state to furnish a certificate of good standing. A certificate of good standing shall set forth: (1) the name of the corporation; (2) the date the corporation was organized under the laws of the commonwealth; (3) that the corporation has filed all annual reports required by section 16.22 to be filed by it and paid all fees due with respect to such reports; (4) that no proceedings are pending under section 14.21 for the dissolution of the corporation; (5) that no articles of dissolution have been filed by the corporation; and (6) that the corporation appears from the records of the state secretary to be in good standing. 90 (c) The secretary of state shall issue, upon request, such other certificates regarding facts of record in his office concerning corporations upon payment of the fees as may be specified in regulations promulgated by the commissioner of administration including, without limitation, certificates of merger, certificates of dissolution and certificates regarding the authority of a foreign corporation to do business in the commonwealth. (d) The certificates may be relied upon as conclusive evidence of the facts stated therein.

§ 1.29. Penalty for Signing False Document

(a) A person commits an offense if he signs a document that he knows is false in any material respect with intent that the document be delivered to the secretary of state for filing. (b) The secretary of state shall refer to the attorney general for action evidence of offenses under this section. (c) An offense under this section is a civil misdemeanor punishable by a fine not to exceed $ 100,000.

PART C. SECRETARY OF STATE

§ 1.30. Powers

The secretary of state has the power reasonably necessary to perform the duties required of him by this chapter, including the power to promulgate regulations, prescribe forms and fees and adopt policies in order to implement this chapter.

PART D. DEFINITIONS

§ 1.40. Act Definitions (a) As used in this chapter the following words shall have the following meanings, unless the context requires otherwise: “Articles of organization”, the original and any amended and restated articles of organization and articles of merger, and special acts of incorporation, as amended from time to time by various articles and certificates provided for by this chapter. “Authorized shares”, the shares of all classes a domestic or foreign corporation is authorized to issue. “Conspicuous”, written so that a reasonable person against whom the writing is to operate should have noticed it. “Corporation”, “domestic corporation” or “domestic business corporation”, a corporation for profit, which is not a foreign corporation, incorporated under or subject to this chapter. “ Deliver”, any method of delivery used in conventional commercial practice, including mailing, delivery by hand, messenger or delivery service and delivery by electronic 91 transmission; however the secretary of state is not required to accept delivery of electronic documents or transmissions unless he adopts regulations authorizing this practice. “Distribution”, a direct or indirect transfer of money or other property, except its own shares, or incurrence of indebtedness by a corporation to or for the benefit of its shareholders in respect of any of its shares. A distribution includes a declaration or payment of a dividend; a purchase, redemption, or other acquisition of shares; a distribution of indebtedness; and a distribution in voluntary or involuntary liquidation. “Domestic other entity”, an other entity organized under the laws of the commonwealth. “Effective date of notice”, as defined in section 1.41. “ Electronic document” or “electronic transmission”, any process of communication not directly involving the physical transfer of paper that is suitable for the retention, retrieval and reproduction of information by the recipient. “Employee”, includes an officer but not a director. A director may accept duties that make him also an employee. “ Entity”, a corporation and a foreign corporation; a nonprofit corporation; a profit and a nonprofit unincorporated association; a limited liability company; a business trust; an estate; a partnership; a registered limited liability partnership; a trust, and two or more persons having a joint or common economic interest; and a state, the United States, and a foreign government. “Filing entity”, an other entity that is of a type created by filing a public organic document. “Foreign business corporation”, a corporation for profit incorporated under a law other than the law of the commonwealth. “Foreign corporation”, a corporation for profit or a nonprofit corporation incorporated under a law other than the laws of the commonwealth. “Foreign nonprofit corporation”, a corporation incorporated under a law other than the laws of the commonwealth, which if incorporated under the laws of the commonwealth would be a nonprofit corporation. “ Foreign other entity”, an other entity organized under a law other than the laws of the commonwealth. “Governmental subdivision”, an authority, county, district or municipality. “Individual”, includes the estate of an incompetent or deceased individual. “Interest holder”, a person who holds of record: (i) a right to receive distributions from an other entity either in the ordinary course of business or upon liquidation, other than as an assignee; or (ii) a right to vote on issues involving its internal affairs, other than as an agent, assignee, proxy or person responsible for managing its business and affairs. “Interests”, the interests in an other entity held by its interest holders. “Membership”, the rights of a member in a nonprofit corporation. 92 “ Nonfiling entity”, an other entity that is of a type that is not created by filing a filed organizational document. “ Nonprofit corporation” or “domestic nonprofit corporation”, a corporation incorporated under the laws of the commonwealth and subject to chapter 180. “Notice”, as defined in section 1.41. “Organic document”, a public organic document or a private organic document. “Organic law”, the law governing the internal affairs of an entity. “ Other entity”, any association or entity other than a domestic or foreign business corporation, a domestic or foreign nonprofit corporation or a governmental or quasi- governmental organization. The term includes, without limitation, limited partnerships, general partnerships, limited liability partnerships, limited liability companies, joint ventures, joint stock companies, business trusts and profit and not-for-profit unincorporated associations. “ Owner liability”, personal liability for a debt, obligation or liability of an entity that is imposed on a person: (i) solely by reason of the person's status as a shareholder or interest holder; or (ii) by the articles of organization, bylaws or an organic document under a provision of the organic law of an entity authorizing the articles of organization, bylaws or an organic document to make one or more specified shareholders, members or interest holders liable in their capacity as shareholders, members or interest holders for all or specified debts, obligations or liabilities of the entity. “Person”, includes individual and entity. “ Principal office”, the office, within or without the commonwealth, so designated in the annual report where the principal executive offices of a domestic or foreign corporation are located. “Private organic document”, any document, other than the public organic document, if any, that determines the internal governance of an other entity. “Proceeding”, includes civil suit and criminal, administrative, and investigatory action. “Public corporation”, any corporation to which this chapter applies to, and which has a class of voting stock registered under the Securities Exchange Act of 1934, as amended; provided, that if a corporation is subject to paragraph (b) of section 8.06 at the time it ceases to have any class of voting stock so registered, such corporation shall nonetheless be deemed to be a public corporation for a period of twelve months following the date it ceased to have such stock registered. “Public organic document”, the document, if any, that is filed of public record to create an other entity, including amendments and restatements thereof. “Record date”, the date established under PART 6 or PART 7 hereof on which a corporation determines the identity of its shareholders for purposes of this chapter.

93 “Secretary”, the corporate officer to whom the board of directors has delegated responsibility under subsection (c) of section 8.40 for custody of the minutes of the meetings of the board of directors and of the shareholders and for authenticating records of the corporation, and includes a “clerk” appointed under chapter 156B unless the corporation has also appointed a “secretary” or the context otherwise requires. “Secretary of state”, the state secretary. “Shares”, the units into which the proprietary interests in a corporation are divided. “Shareholder”, the person in whose name shares are registered in the records of a corporation or the beneficial owner of shares to the extent of the rights granted by a nominee certificate on file with a corporation. “Sign” or “signature”, includes any manual, facsimile, conformed or electronic signature. “State”, when referring to a part of the United States, includes a state and commonwealth, and their agencies and governmental subdivisions, and a territory and insular possession, and their agencies and governmental subdivisions, of the United States. “Subscriber”, a person who subscribes for shares in a corporation, whether before or after incorporation. “United States”, includes a district, authority, bureau, commission, department, and any other agency of the United States. “ Voting group”, all shares of one or more classes or series that under the articles of organization or this chapter are entitled to vote and to be counted together collectively on a matter at a meeting of shareholders. All shares entitled by the articles of organization or this chapter to vote generally on the matter are for that purpose a single voting group. (b) In this chapter, use of the masculine gender includes the feminine gender or, where the context permits, an entity.

§ 1.41. Notice

(a) Notice under this chapter shall be in writing unless oral notice is reasonable under the circumstances. Notice by electronic transmission is written notice. (b) Notice may be communicated in person; by telephone, voice mail, telegraph, teletype, or other electronic means; by mail; by electronic transmission; or by messenger or delivery service. If these forms of personal notice are impracticable, notice may be communicated by a newspaper of general circulation in the area where published; or by radio, television, or other form of public broadcast communication. (c) Written notice, other than notice by electronic transmission, by a domestic or foreign corporation to any of its shareholders, if in a comprehensible form, is effective upon deposit in the United States mail, if mailed postpaid and correctly addressed to the shareholder's address shown in the corporation's current record of shareholders. (d) Written notice by electronic transmission by a domestic or foreign corporation to any of its shareholders, if in comprehensible form, is effective: 94 (1) if by facsimile telecommunication, when directed to a number furnished by the shareholder for the purpose; (2) if by electronic mail, when directed to an electronic mail address furnished by the shareholder for the purpose; (3) if by a posting on an electronic network together with separate notice to the shareholder of such specific posting, directed to an electronic mail address furnished by the shareholder for the purpose, upon the later of (i) such posting and (ii) the giving of such separate notice; and (4) if by any other form of electronic transmission, when directed to the shareholder in such manner as the shareholder shall have specified to the corporation. An affidavit of the secretary or an assistant secretary of the corporation, the transfer agent or other agent of the corporation that the notice has been given by a form of electronic transmission shall, in the absence of fraud, be prima facie evidence of the facts stated therein. (e) Written notice, including notice by electronic transmission, to a domestic or foreign corporation, authorized to transact business in the commonwealth, may be addressed to its registered agent at its registered office or to the corporation at its principal office shown in its most recent annual report or, in the case of a foreign corporation that has not yet delivered an annual report, in its application for a certificate of qualification. (f) Except as provided in subsection (c), written notice, other than notice by electronic transmission, if in a comprehensible form, is effective at the earliest of the following: (1) when received; (2) five days after its deposit in the United States mail, if mailed postpaid and correctly addressed; (3) on the date shown on the return receipt, if sent by registered or certified mail, return receipt requested; or if sent by messenger or delivery service on the date shown on the return receipt signed by or on behalf of the addressee; or (4) on the date of publication if notice by publication is permitted. (g) Oral notice is effective when communicated if communicated in a comprehensible manner. (h) If this chapter or any other General Law prescribes notice requirements for particular circumstances, those requirements shall govern. If articles of organization or bylaws prescribe notice requirements, which are not inconsistent with this chapter, those requirements shall govern.

§ 1.42. Number of Shareholders

(a) For purposes of this chapter, except as provided in subsection (c), the following identified as a shareholder in a corporation's current record of shareholders constitutes one shareholder: (1) three or fewer co-owners;

95 (2) a corporation, partnership, trust, estate, or other entity; (3) the trustees, guardians, custodians, or other fiduciaries of a single trust, estate, or account. (b) For purposes of this chapter, shareholders registered in substantially similar names constitute one shareholder if it is reasonable to believe that the names represent the same person. (c) For purposes of this chapter, each beneficial owner of shares registered in the name of a nominee in a corporation's current record of shareholders constitutes one shareholder.

PART E. INTERPRETATION

§ 1.50. Interpretation of Chapter

In interpreting this chapter, in the absence of controlling Massachusetts precedent on any matter, consideration shall be given to the following: Inasmuch as predictability is important in the conduct of the affairs of Massachusetts corporations and in their relations with corporations organized under the laws of other jurisdictions, significant weight shall be given to the interpretations of courts of other jurisdictions of substantially equivalent provisions of the corporate laws of such other jurisdictions.

ARTICLE 2

§ 2.01. Incorporators

One or more persons may act as the incorporator or incorporators of a corporation by signing articles of organization and delivering them to the secretary of state for filing. Before the initial issuance of shares by the corporation, the incorporators may exercise all powers of shareholders and take any action required or permitted by law, the articles of organization or the bylaws to be taken by shareholders.

§ 2.02. Articles of Organization

(a) The articles of organization shall set forth: (1) a corporate name for the corporation that satisfies the requirements of section 4.01; (2) the number of shares the corporation is authorized to issue, and any required description of additional classes or series of shares, in conformity with section 6.01; and (3) the name and address of each incorporator. (b) The articles of organization may set forth: (1) provisions not inconsistent with law regarding: (i) the purpose or purposes for which the corporation is organized; 96 (ii) managing the business and regulating the affairs of the corporation; iii) defining, limiting, and regulating the powers of the corporation, its board of directors, and shareholders or any class thereof; (iv) a par value for authorized shares or classes of shares; (v) the imposition of personal liability on shareholders for the debts of the corporation to a specified extent and upon specified conditions; or (vi) the voluntary dissolution of the corporation; and (2) any provision that under this chapter is required to be set forth in the articles of organization in order for the subject matter of the provision to be effective or is permitted to be set forth in such articles; (3) any provision that under this chapter is required or permitted to be set forth in the bylaws; and (4) a provision eliminating or limiting the personal liability of a director to the corporation for monetary damages for breach of fiduciary duty as a director notwithstanding any provision of law imposing such liability; but the provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its shareholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for improper distributions under section 6.40, or (iv) for any transaction from which the director derived an improper personal benefit. (c) The articles of organization need not set forth any of the corporate powers enumerated in this chapter. (d) The form on which articles of organization are filed shall also include the following supplemental information, which is not to be considered a part of the articles: (1) the street address of the initial registered office of the corporation; (2) the names and addresses of the individuals who will serve as the initial directors, president, treasurer and secretary of the corporation; (3) the name of its initial registered agent at its registered office; (4) the fiscal year of the corporation that is initially adopted; and (5) such other supplemental information as the secretary of state may require, including (i) a brief description of the type of business in which the corporation intends to engage or its SIC code, and (ii) the federal tax identification number of the corporation.

§ 2.03. Incorporation

(a) Corporate existence begins when the articles of organization become effective pursuant to section 1.23. (b) The filing of the articles of organization with the state secretary shall be conclusive evidence that the incorporators satisfied all conditions precedent to incorporation and that the

97 corporation has been incorporated under this chapter, except in a proceeding by the commonwealth to challenge the validity of the corporation.

§ 2.04. Liability for Pre-Incorporation Transactions

All persons purporting to act as or on behalf of a corporation, knowing there was no incorporation under this chapter shall be jointly and severally liable for all liabilities created while so acting.

§ 2.05. Organization of Corporation

(a) The organization of the corporation shall be completed as follows: (1) The incorporator or incorporators may hold an organizational meeting before or after incorporation at the call of a majority of the incorporators at which by-laws shall be adopted and the initial directors, a president, treasurer and secretary, shall be elected. (2) If no organizational meeting of the incorporators is held, the initial directors named in the articles of organization shall hold an organizational meeting after incorporation at the call of a majority of the directors at which by-laws shall be adopted and a president, treasurer and secretary shall be elected. (3) At the organization meeting of the incorporators or the directors, additional officers may be appointed and any other business may be transacted which is properly brought before the meeting. (b) Action required or permitted by this chapter to be taken by incorporators at an organizational meeting may be taken without a meeting if the action taken is evidenced by one or more written consents describing the action taken and signed by each incorporator. (c) An organizational meeting may be held within and without the commonwealth.

§ 2.06. Bylaws

(a) The incorporators or board of directors of a corporation shall adopt initial bylaws for the corporation. (b) The bylaws of a corporation may contain any provision for managing the business and regulating the affairs of the corporation that is not inconsistent with law or the articles of organization.

§ 2.07. Emergency Bylaws

(a) Unless the articles of organization provide otherwise, the board of directors of a corporation may adopt bylaws to be effective only in an emergency defined in subsection (d). The emergency bylaws, which are subject to amendment or repeal by the shareholders, may make all provisions necessary for managing the corporation during the emergency, including:

98 (1) appointment of successors to any of the officers, directors, employees or agents; (2) relocation of the principal office or designation of alternative officers; (3) procedures for calling and giving notice of a meeting of the board of directors; (4) quorum requirements for the meeting; and (5) designation of additional or substitute directors. (b) All provisions of the regular bylaws consistent with the emergency bylaws remain effective during the emergency. The emergency bylaws are not effective after the emergency ends. (c) Corporate action taken in good faith in accordance with the emergency bylaws: (1) binds the corporation; and (2) may not be used to impose liability on a corporate director, officer, employee, or agent. (d) An emergency exists for purposes of this section if a quorum of the corporation's directors cannot readily be assembled because of some catastrophic event.

ARTICLE 3

§ 3.01. Purposes

Every corporation incorporated under this chapter has the purpose of engaging in any lawful business unless a more limited purpose is set forth in its articles of organization.

§ 3.02. General Powers

(a) Unless its articles of organization provide otherwise, every corporation shall have perpetual duration and succession in its corporate name and has the same powers as an individual to do all things necessary or convenient to carry out its business and affairs, including without limitation power: (1) to sue and be sued, complain and defend in its corporate name; (2) to have a corporate seal, which may be altered at will, and to use it, or a facsimile of it, by impressing or affixing it or in any other manner reproducing it; (3) to make and amend bylaws, not inconsistent with its articles of organization or with the laws of the commonwealth, for managing the business and regulating the affairs of the corporation; (4) to purchase, receive, borrow, lease or otherwise acquire, to own, hold, lend, improve, use, transfer and otherwise deal with, and to sell, convey, mortgage, pledge, lease, exchange and otherwise dispose of, all or any part of its real or personal property, or any legal or equitable interest in such property, wherever located;

99 (5) to purchase, receive, borrow or otherwise acquire, to use, own, hold, sell, lend, transfer and otherwise dispose of, and to pledge, exchange and otherwise deal in and with, its own shares; (6) to purchase, receive, subscribe for, or otherwise acquire, to own, hold, vote, use, sell, mortgage, lend, pledge, or otherwise dispose of; and deal in and with shares or other interests in, or obligations of, any other entity; (7) to make contracts and guarantees, incur liabilities, borrow money, issue its notes, bonds, and other obligations, which may be convertible into or include the option to purchase other securities of the corporation, and secure any of its obligations by mortgage or pledge of any of its property, franchises, or income; (8) to lend money, invest and reinvest its funds, and receive and hold real and personal property as security for repayment; (9) to be a promoter, partner, member, associate, or manager of any partnership, joint venture, trust, or other entity; (10) to conduct its business, locate offices, and exercise the powers granted by this chapter within or without the commonwealth or the United States; (11) to elect directors and appoint officers, employees, and agents of the corporation, define their duties, fix their compensation, and lend them money and credit; (12) to pay pensions and establish pension plans, pension trusts, profit sharing plans, share bonus plans, share option plans, and benefit or incentive plans for any or all of the current or former directors, officers, employees, and agents of the corporation or any other corporation or entity in which it has an interest; (13) to make donations for the public welfare or for charitable, religious, scientific, civic or educational purposes; (14) to transact any lawful business that will aid governmental policy; and (15) to make payments or donations, or do any other act, not inconsistent with law, that furthers the business and affairs of the corporation. (b) Unless its articles of organization provide otherwise, a contract of guarantee or suretyship made by a corporation with respect to the obligation of another entity, (i) all of the equity interest in which is owned, directly or indirectly, by the contracting corporation, or (ii) which owns, directly or indirectly, all of the outstanding stock of the contracting corporation, or (iii) all of the equity interest in which is owned, directly or indirectly, by an entity which owns, directly or indirectly, all of the outstanding stock of the contracting corporation, shall be deemed necessary or convenient to carry out the business and affairs of the contracting corporation.

§ 3.03. Emergency Powers

(a) In anticipation of or during an emergency defined in subsection (d), unless emergency bylaws or other bylaws that specifically refer to this section provide otherwise, the board of directors of a corporation may:

100 (1) modify lines of succession to accommodate the incapacity of any director, officer, employee, or agent; and (2) relocate the principal office, designate alternative principal offices or regional offices, or authorize the officers to do so. (b) During an emergency defined in subsection (d), unless emergency bylaws or other bylaws that specifically refer to this section provide otherwise: (1) notice of a meeting of the board of directors need be given only to those directors whom it is practicable to reach and may be given in any practicable manner, including by publication and radio; and (2) those directors present may reduce the quorum requirement and/or treat one or more officers of the corporation present at such a meeting as directors for the meeting, in order of rank and within the same rank in order of seniority, as necessary to achieve a quorum. (c) Corporate action taken in good faith during an emergency under this section to further the ordinary business affairs of the corporation: (1) binds the corporation; and (2) may not be used to impose liability on a corporate director, officer, employee, or agent. (d) An emergency exists for purposes of this section if a quorum of the corporation's directors cannot readily be assembled because of some catastrophic event.

§ 3.04. Ultra Vires

(a) Except as provided in subsection (b), the validity of corporate action may not be challenged on the ground that the corporation lacks or lacked power to act. (b) A corporation's power to act may be challenged: (1) in a proceeding by a shareholder against the corporation to enjoin the act; (2) in a proceeding by the corporation, directly, derivatively, or through a receiver, trustee, or other legal representative, against an incumbent or former director, officer, employee, or agent of the corporation; or (3) in a proceeding by the attorney general under section 14.30.

ARTICLE 4

§ 4.01. Corporate Name

(a) A corporate name: (1) shall contain the word “corporation, “incorporated,” “company,” or “limited” or the abbreviation “corp.,” “inc., or ltd.,” or words or abbreviations of like import in another language; and 101 (2) may not contain language stating or implying that the corporation is organized for a purpose other than that permitted by section 3.01. and its articles of organization. (b) Except as authorized by subsections (c) and (d), a corporate name may not be the same as, or so similar that it is likely to be mistaken for: (1) the corporate name or trade name of a corporation organized, authorized to transact business or otherwise lawfully conducting business in the commonwealth; (2) a corporate name reserved under section 4.02; (3) the fictitious name adopted by a foreign corporation or entity authorized to transact business or otherwise lawfully conducting business in the commonwealth because its real or trade name is unavailable; (4) the corporate name or trade name of a not-for-profit corporation organized, authorized to conduct its activities or otherwise lawfully conducting its activities in the commonwealth; (5) the name or trade name of a partnership, business trust or other entity organized, authorized to transact business or otherwise lawfully conducting business in the commonwealth; or (6) a trademark or service mark registered with the secretary of state under chapter 110B or 110G. (c) A person may apply to the secretary of state for authorization to use a corporate name that does not comply with the requirements of subsection (b). The secretary of state shall authorize use of the name applied for if: (1) the other user consents to the use in writing and, if required by the secretary of state, submits an undertaking in form satisfactory to the secretary of state to change its name or mark to a name or mark that is not the same as or so similar that it is likely to be mistaken for the name of the applicant; or (2) the applicant delivers to the secretary of state a certified copy of the final judgment of a court of competent jurisdiction establishing the applicant's right to use the name applied for in the commonwealth. (d) A corporation may use the name, including the fictitious name, or mark of another entity that is used in the commonwealth if the other entity is organized, authorized to transact business or otherwise lawfully conducting business in the commonwealth and the proposed user corporation: (1) has merged with the other entity; or (2) has been formed by reorganization of the other entity; or (3) has acquired all or substantially all of the assets, including the name and marks, of the other entity. (e) Within 90 days after articles of organization or articles of amendment affecting a change in the name of a corporation are filed with the secretary of state, any person who is registered, qualified or carrying on business in the commonwealth at the time or who has reserved a name under section 4.02 may protest in writing to the secretary of state that the name assumed by the 102 corporation is the same as or so similar that it is likely to be mistaken for the name of such person in violation of this section. In such event, if the secretary of state decides to conduct a hearing regarding the dispute, he shall give notice thereof as soon as possible to the protesting party and the corporation which assumed the name. If as a result of the hearing or otherwise, the secretary of state determines that the assumption of the corporate name violates this section, he shall file a statement withdrawing his approval of the articles of organization or articles of amendment insofar as they relate to the name assumed by the corporation and shall give written notice thereof to the protesting party and the corporation. The withdrawal of approval shall take effect on the date specified by the secretary of state, which shall be not later than 180 days after the filing which was protested. After the effective date of the withdrawal of approval, the corporation shall have no right to use its assumed name and may be enjoined from doing business under such name by the superior court upon application of any interested person.

§ 4.02. Reserved Name

(a) A person may reserve the exclusive use of a corporate name, including a fictitious name for a foreign corporation whose corporate name is not available, by delivering an application to the secretary of state for filing. The application shall set forth the name and address of the applicant and the name proposed to be reserved. If the secretary of state finds that the corporate name applied for is available, he shall reserve the name for the applicant's exclusive use for a 60- day period and, upon the applicant's written request within the 60-day period, extend the reservation for an additional 60-day period. (b) The holder of a reserved corporate name may transfer the reservation to another person by delivering to the secretary of state a signed notice of the transfer that states the name and address of the transferee.

ARTICLE 5

§ 5.01. Registered Office and Registered Agent

Each corporation shall continuously maintain in the commonwealth: (1) a registered office that may, but need not be, the same as any of its places of business; and (2) a registered agent who may be any of the following individuals or entities whose business office is also the registered office of the corporation: (i) an individual, including the secretary or another officer of the corporation; (ii) a domestic corporation or not-for-profit domestic corporation; or (iii) a foreign corporation or not-for-profit foreign corporation qualified to do business in this commonwealth.

§ 5.02. Change of Registered Office or Registered Agent 103 (a) A corporation may change its registered office or registered agent by delivering to the secretary of state for filing a statement of change that sets forth: (1) the name of the corporation; (2) the street address of its current registered office; (3) if the current registered office is to be changed, the street address of the new registered office; (4) the name of its current registered agent; (5) if the current registered agent is to be changed, the name of the new registered agent and the new agent's written consent, either on the statement or attached to it, to the appointment; and (6) that after the change or changes are made, the street addresses of its registered office and the business office of its registered agent will be identical. (b) If a registered agent changes the street address of his business office, he may change the street address of the registered office of any corporation for which he is the registered agent by notifying the corporation in writing of the change and signing, either manually or in facsimile, and delivering to the state secretary for filing a statement of change that complies with the requirements of subsection (a) and recites that the corporation has been notified of the change. If the street addresses of more than one corporation are being changed at the same time, there may be included in a single statement the names of all corporations the street addresses of the registered office of which are being changed.

§ 5.03. Resignation of Registered Agent

(a) The registered agent of a corporation may resign his agency appointment by signing and delivering to the secretary of state for filing a statement of resignation. The registered agent shall furnish a copy of such statement to the corporation. The statement of resignation may include a statement that the registered office is also discontinued. (b) The agency appointment is terminated, and the registered office discontinued if so provided, on the thirty-first day after the date on which the statement was filed.

§ 5.04. Service on Corporation

(a) A corporation's registered agent is the corporation's agent for service of process, notice, or demand required or permitted by law to be served on the corporation. (b) Service on a corporation shall be effected and shall be perfected in accordance with the Massachusetts Rules of Civil Procedure and applicable provisions of the General Laws.

ARTICLE 6

104 PART A. SHARES

§ 6.01. Authorized Shares

(a) The articles of organization shall prescribe the total number of shares the corporation is authorized to issue. The articles of organization also shall, before the issuance of any shares of a class or series, prescribe the number of authorized shares of the class or series, the distinguishing designation thereof and the preferences, limitations and relative rights identical with those of other shares of the same class or series, except that if a class consists of more than 1 series, all shares of each series within the class shall have identical preferences, limitations and relative rights with those of other shares within such series and may, but need not, have some or all preferences, limitations and relative rights which are identical with those of shares of other series within the class or any other class. (b) The articles of organization shall authorize 1 or more classes or series of shares that together have unlimited voting rights, and 1 or more classes or series of shares, which may be the same class or series or classes and series as those with voting rights, that together are entitled to receive the net assets of the corporation upon dissolution. (c) The articles of organization may authorize 1 or more classes or series of shares that: (1) have special, conditional, or limited voting rights, or no right to vote, except to the extent prohibited by this chapter; (2) are redeemable or convertible as specified in the articles of organization (i) at the option of the corporation, the shareholder, or another person or upon the occurrence of a designated event; (ii) for cash, indebtedness, securities, or other property; (iii) in a designated amount or in an amount determined in accordance with a designated formula or by reference to extrinsic data or events; (3) entitle the holders to distributions calculated in any manner, including dividends that may be cumulative, noncumulative, or partially cumulative; (4) have preference over any other class or series of shares with respect to distributions, including dividends and distributions upon the dissolution of the corporation. (d) The description of the designations, preferences, limitations, and relative rights of share classes and series in subsection (c) is not exhaustive.

§ 6.02. Determination of Terms of Class or Series

(a) The number of authorized shares of any class or series, the distinguishing designation thereof and the preferences, limitations and relative rights applicable thereto shall be set forth in the articles of organization or any amendment thereto approved by the shareholders or, if the articles of organization so permit, by the board of directors, provided that the board of directors may not approve an aggregate number of authorized shares of all classes and series which exceeds the total number of authorized shares specified in the articles of organization approved by the shareholders. Any such action with respect to any class or series may be amended or rescinded by the shareholders or, if initially taken by it, by the board of directors at any time 105 prior to, but, except as provided in the next following subsection with respect to unissued shares, not after, the initial issuance of shares of such class or series. (b) At any time after the initial issuance of shares of any class or series the shareholders or, if the articles of organization so permit, the board of directors may reclassify any unissued shares of the class or series into 1 or more existing or new classes or series. (c) Before issuing any shares of a class or series, the number, preferences, limitations or relative rights of which have been determined by the board of directors, the corporation must deliver to the secretary of state for filing articles of amendment, which are effective without shareholder action, that set forth: (1) the name of the corporation; (2) the text of the amendment determining the terms of the class or series of shares; (3) the date it was adopted; and (4) a statement that the amendment was duly adopted by the board of directors. (d) If the shareholders or board of directors shall, before the issuance of any shares of any class or series of which the number, preferences, limitations or relative rights are contained in articles of amendment filed with the secretary of state pursuant to subsection (c), amend or rescind any terms applicable to such class or series, or if the shareholders or board of directors shall reclassify any unissued shares of any class or series pursuant to subsection (b), the corporation shall deliver to the secretary of state for filing articles of amendment, which in the case of any amendment effected by the board of directors are effective without shareholder action, reflecting such amendment, recision or reclassification and setting forth the information required by clauses (1) and (4) of subsection (c) and, in the case of an amendment, the text of the amendment or, in the case of a reclassification, the number and existing class or series of the shares to be reclassified and the text of the amendment determining the terms of any new class or classes or series into which the shares are to be reclassified.

§ 6.03. Issued and Outstanding Shares

(a) A corporation may issue the number of shares of each class or series authorized by the articles of organization. Shares that are issued are outstanding shares until they are reacquired, redeemed, converted or canceled. (b) The reacquisition, redemption or conversion of outstanding shares is subject to the limitations of subsection (c) and to section 6.40. (c) At all times that shares of the corporation are outstanding, 1 or more shares that together have unlimited voting rights and 1 or more shares that together are entitled to receive the net assets of the corporation upon dissolution shall be outstanding.

§ 6.04. Fractional Shares

(a) A corporation may: (1) issue fractions of a share or pay in money or property the value of fractions of a share; 106 (2) arrange for disposition of fractional shares by the shareholders; (3) issue scrip in registered or bearer form entitling the holder to receive a full share upon surrendering enough scrip to equal a full share. (b) Each certificate representing scrip must be conspicuously labeled "scrip" and must contain the information required by subsection (b) of section 6.25. (c) The holder of a fractional share is entitled to exercise the rights of a shareholder, including the right to vote, to receive dividends, and to participate in the assets of the corporation upon liquidation. The holder of scrip is not entitled to any of these rights unless the scrip provides for them. (d) The board of directors may authorize the issuance of scrip subject to any condition considered desirable, including: (1) that the scrip will become void if not exchanged for full shares before a specified date; and (2) that the shares for which the scrip is exchangeable may be sold and the proceeds paid to the scripholders.

PART B. ISSUANCE OF SHARES

§ 6.20. Subscription for Shares Before Incorporation

(a) A subscription for shares entered into before incorporation is irrevocable for 6 months unless the subscription agreement provides a longer or shorter period or all the subscribers agree to revocation or extension. The subscription agreement shall not be binding on the corporation until it is accepted by the board of directors. (b) The board of directors may determine the payment terms of subscriptions for shares that were entered into before incorporation, unless the subscription agreement specifies them. A call for payment by the board of directors shall be uniform so far as practicable as to all shares of the same class or series, unless the subscription agreement specifies otherwise. (c) Shares issued pursuant to subscriptions entered into before incorporation are fully paid and nonassessable when the corporation receives the consideration specified in the subscription agreement. (d) If a subscriber defaults in payment of money or property under a subscription agreement entered into before incorporation, the corporation may collect the amount owed as any other debt. Alternatively, unless the subscription agreement provides otherwise, the corporation may rescind the agreement and may sell the shares if the debt remains unpaid more than 20 days after the corporation sends written demand for payment to the subscriber. The rescission shall not affect the status of any shares theretofore issued pursuant thereto. (e) A subscription agreement entered into after incorporation is a contract between the subscriber and the corporation subject to section 6.21.

§ 6.21. Issuance of Shares 107 (a) The powers granted in this section to the board of directors may be reserved to the shareholders, either exclusively or concurrently with the powers of the directors, by the articles of organization. (b) The board of directors may authorize shares to be issued for consideration consisting of any tangible or intangible property or benefit to the corporation, including cash, promissory notes, services performed, contracts for services to be performed, or other securities of the corporation. (c) Before the corporation issues shares, the board of directors must determine that the consideration received or to be received for shares to be issued is adequate. That determination by the board of directors is conclusive insofar as the adequacy of consideration for the issuance of shares relates to whether the shares are validly issued, fully paid, and nonassessable. (d) The articles of organization may limit the type or specify the minimum amount of consideration for which the shares of any class or series may be issued. A reference in the articles of organization to par value shall not, by itself, be deemed to be a specification of the minimum amount. (e) Notwithstanding subsection (d), when the corporation receives the consideration for which the board of directors authorized the issuance of shares, the shares issued therefor are fully paid and nonassessable. (f) The corporation may place in escrow shares issued for a contract for future services or benefits or a promissory note, or make other arrangements to restrict the transfer of the shares, and may credit distributions in respect of the shares against their purchase price, until the services are performed, the note is paid, or the benefits received. If the services are not performed, the note is not paid when due, or the benefits are not received, the shares escrowed or restricted and the distributions credited may be canceled in whole or part.

§ 6.22. Liability of Shareholders

(a) A purchaser from a corporation of its own shares is not liable to the corporation or its creditors with respect to the shares except to pay the consideration for which the shares were authorized to be issued or specified in the subscription agreement. (b) Unless otherwise provided in the articles of organization, a shareholder of a corporation shall not be personally liable for the acts or debts of the corporation except that he may become personally liable by reason of his own acts or conduct.

§ 6.23. Share Dividends

(a) Unless the articles of organization provide otherwise, shares may be issued pro rata and without consideration to the corporation's shareholders or to the shareholders of 1 or more classes or series. An issuance of shares under this subsection is a share dividend. (b) Shares of 1 class or series shall not be issued as a share dividend in respect of shares of another class or series unless: (1) authorized by the articles of organization; (2) the holders of a 108 majority of the outstanding shares of the class or series to be issued approve the issue; or (3) there are no outstanding shares of the class or series to be issued. In addition, shares of a class or series having preference over another class or series with respect to distributions, including dividends and distributions upon the dissolution of the corporation, shall not be issued as a share dividend in respect of shares of such other class or series if there are at the time any outstanding shares of any third class or series as to which the shares then to be issued have a right with respect to a distribution which is prior, superior or substantially equal unless: (1) authorized by the articles of organization; or (2) the holders of a majority of the outstanding shares of such third class or series approve the issue. (c) If the board of directors does not fix the record date for determining shareholders entitled to a share dividend, it is the date the board of directors authorized the share dividend.

§ 6.24. Share Options

(a) A corporation may issue rights, options or warrants for the purchase of shares or other securities of the corporation. The board of directors shall determine the terms upon which the rights, options, or warrants are issued and the terms, including the consideration, for which the shares or other securities are to be issued. (b) The terms and conditions of such rights, options or warrants, including those outstanding on the effective date of the chapter, may include without limitation, restrictions or conditions that: (1) preclude or limit the exercise, transfer or receipt of the rights, options or warrants by any person owning or offering to acquire a specified number or percentage of the outstanding shares or other securities of the corporation or by any transferee of any person, or that preclude or limit the exercise, transfer or receipt based on such other factors, including the nature or identity of such persons, as the directors determine to be reasonable and in the best interests of the corporation, or (2) invalidate or void such rights, options or warrants held by any such person or persons or any such transferee or transferees.

§ 6.25. Form and Content of Certificates

(a) Shares may but need not be represented by certificates. Unless this chapter or another statute expressly provides otherwise, the rights and obligations of shareholders are identical whether or not their shares are represented by certificates. (b) At a minimum each share certificate shall state on its face: (1) the name of the issuing corporation and that it is organized under the laws of the commonwealth; (2) the name of the person to whom issued; and (3) the number and class of shares and the designation of the series, if any, the certificate represents.

109 (c) If the issuing corporation is authorized to issue different classes of shares or different series within a class then the variations in rights, preferences and limitations applicable to each class and series, and the authority of the board of directors to determine variations for any future class or series, must be summarized on the front or back of each certificate. Alternatively, each certificate may state conspicuously on its front or back that the corporation will furnish the shareholder this information on request in writing and without charge. (d) Each share certificate shall be signed either manually or in facsimile by 2 officers designated in the by-laws or by the board of directors and may bear the corporate seal or its facsimile. (e) If the person who signed, either manually or in facsimile, a share certificate no longer holds office when the certificate is issued, the certificate shall be nevertheless valid.

§ 6.26. Shares Without Certificates

(a) Unless the articles of organization or bylaws provide otherwise, the board of directors of a corporation may authorize the issue of some or all of the shares of any or all of its classes or series without certificates. The authorization shall not affect shares already represented by certificates until they are surrendered to the corporation. (b) Within a reasonable time after the issue or transfer of shares without certificates, the corporation shall send the shareholder a written statement of the information required on certificates by subsections (b) and (c) of section 6.25, and, if applicable, section 6.27.

§ 6.27. Restriction on Transfer of Shares and Other Securities

(a) The articles of organization, bylaws, an agreement among shareholders or an agreement between shareholders and the corporation may impose restrictions on the transfer or registration of transfer of shares of the corporation. A restriction shall not affect shares issued before the restriction was adopted unless the holders of the shares are parties to the restriction agreement or voted in favor of the restriction, or unless the restriction is set forth in an amendment to the articles of organization or bylaws approved by the holders of that percentage of each voting group of the outstanding shares required for the approval of an amendment of the articles of organization containing the restriction. (b) A restriction on the transfer or registration of transfer of shares is valid and enforceable against the holder or a transferee of the holder if the restriction is authorized by this section and its existence is noted conspicuously on the front or back of the certificate or is contained in the information statement required by subsection (b) of section 6.26. Unless so noted, a restriction is not enforceable against a person without knowledge of the restriction.

(c) A restriction on the transfer or registration of transfer of shares is authorized: (1) to maintain the corporation's status when it is dependent on the number or identity of its shareholders;

110 (2) to preserve exemptions under federal or state securities law; (3) for any other reasonable purpose. (d) A restriction on the transfer or registration of transfer of shares may, without limitation: (1) obligate the shareholder first to offer the corporation or other persons, separately, consecutively, or simultaneously, an opportunity to acquire the restricted shares; (2) obligate the corporation or other persons, separately, consecutively, or simultaneously, to acquire the restricted shares; (3) require the corporation, the holders of any class of its shares, or another person to approve the transfer of the restricted shares, if the requirement is not manifestly unreasonable; (4) prohibit the transfer of the restricted shares to designated persons or classes of persons, if the prohibition is not manifestly unreasonable. (e) For purposes of this section, “shares” includes a security convertible into or carrying a right to subscribe for or acquire shares.

PART C. SUBSEQUENT ACQUISITION OF SHARES BY SHAREHOLDERS AND CORPORATION

§ 6.30. Shareholders' Preemptive Rights

(a) The shareholders of a corporation shall not have a preemptive right to acquire the corporation's unissued shares except to the extent the articles of organization or any contract to which the corporation is a party so provides. (b) For purposes of this section, "shares" include a security convertible into or carrying a right to subscribe for or acquire shares.

§ 6.31. Corporation's Acquisition of Its Own Shares

(a) A corporation may acquire its own shares and shares so acquired constitute authorized but unissued shares. (b) If the articles of organization prohibit the reissue of acquired shares, the number of authorized shares is reduced by the number of shares acquired.

PART D. DISTRIBUTIONS

§ 6.40. Distributions to Shareholders

(a) A board of directors may authorize and the corporation may make distributions to its shareholders subject to restriction by the articles of organization and the limitations in subsections (c) and (h). 111 (b) If the board of directors does not fix the record date for determining shareholders entitled to a distribution, other than one involving a purchase, redemption or other acquisition of the corporation's shares, it is the date the board of directors authorizes the distribution. (c) No distribution may be made by a corporation which is a going concern if, after giving it effect, (1) the corporation would not be able to pay its existing and reasonably foreseeable debts, liabilities and obligations, whether or not liquidated, matured, asserted or contingent, as they become due in the usual course of business; or (2) the corporation's total assets would be less than the sum of its total liabilities plus, unless the articles of organization permit otherwise, the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. (d) The board of directors may base a determination that a distribution is not prohibited under subsection (c) either on financial statements prepared on the basis of accounting practices and principles that are reasonable in the circumstances or on a fair valuation or other method that is reasonable in the circumstances. (e) Except as provided in subsection (g), the effect of a distribution made in accordance with subsection (c) is measured: (1) in the case of distribution by purchase, redemption, or other acquisition of the corporation's shares, as of the earlier of (i) the date money or other property is transferred or debt incurred by the corporation, or (ii) the date the shareholder ceases to be a shareholder with respect to the acquired shares; (2) in the case of any other distribution of indebtedness, as of the date the indebtedness is distributed; and (3) in all other cases, as of (i) the date the distribution is authorized if the payment occurs within 120 days after the date of authorization or (ii) the date the payment is made if it occurs more than 120 days after the date of authorization. (f) A corporation's indebtedness to a shareholder incurred by reason of a distribution made in accordance with subsection (c) is at parity with the corporation's indebtedness to its general, unsecured creditors except to the extent subordinated by agreement. (g) Indebtedness of a corporation, including indebtedness issued as a distribution, is not considered a liability for purposes of determinations under subsection (c) if its terms provide that payment of principal and interest are made only if and to the extent that payment of a distribution to shareholders could then be made under this section. If the indebtedness is issued as a distribution, each payment of principal or interest is treated as a distribution, the effect of which is measured on the date the payment is actually made. (h) No distribution in liquidation may be made by a corporation unless adequate provision has been made, after giving effect to the provisions of PART 14, to satisfy: (1) the corporation's existing and reasonably foreseeable debts, liabilities and obligations, whether or not liquidated, matured, asserted or contingent, as they thereafter arise; and 112 (2) the preferential liquidation rights of shares whose preferential rights are superior to such rights of the shares which would receive the distribution. A distribution in liquidation means a distribution made by a corporation in dissolution under PART 14, or a distribution, or 1 of a series of related distributions, of all or substantially all of the corporation's assets.

§ 6.41. Liability for Improper Distributions.

(a) A director who votes for or assents to a distribution, including a distribution in liquidation as described in subsection (h) of section 6.40, made in violation of this chapter or the articles of organization, is personally liable to the corporation for the amount of the distribution that exceeds what could have been distributed without violating this chapter or the articles of organization, if it is established that he did not perform his duties in compliance with section 8.30. In any proceeding under this section, a director has all of the defenses ordinarily available to a director. (b) A director who pays the corporation on account of liability for an improper distribution under subsection (a) is entitled to: (1) contribution from every other director who could be held liable under subsection (a) for the distribution; (2) reimbursement from each shareholder who received the distribution knowing it was improper, for the amount that exceeded what could properly have been distributed to him; and (3) reimbursement from each shareholder who received the distribution without knowing it was improper, to the extent determined appropriate in the circumstances by a court. (c) Each shareholder who receives a distribution, including one in liquidation, knowing it was made in violation of this chapter or the articles of organization, shall be personally liable to the corporation for the amount of the distribution he received in excess of what could have been distributed to him without violating this chapter or the articles of organization. (d) If a distribution in liquidation in violation of this chapter is made before 3 years after the effective date of the corporation's dissolution under PART 14, shareholders who receive the distribution without knowing it is improper are personally liable to the corporation on account of any claim against the corporation existing at the end of the 3-year period, to the extent of each shareholder's respective pro rata share of the claim, with pro ration to be determined by reference to the respective amounts distributed to shareholders in excess of what could properly have been distributed to them. (e) Any shareholder's total liability for all claims under this section on account of distributions in liquidation may not exceed the total amount of assets distributed to the shareholder in liquidation. (f) A proceeding by or on behalf of the corporation under this section is barred unless it is commenced by: (1) in the case of a distribution not in liquidation, 2 years after the date on which the effect of the challenged distribution was measured under subsection (e) or (g) of section 6.40; 113 (2) in the case of a distribution in liquidation by a corporation in dissolution under PART 14, the later of the time specified in the preceding clause (1) and 6 months after the end of the 3- year period referred to in subsection (d); or (3) in the case of a distribution in liquidation by a corporation not in dissolution, as described in the second clause in the last sentence of subsection (h) of section 6.40, three years after the date on which the effect of the challenged distribution was measured under subsection (e) or (g) of section 6.40. (g) A proceeding under subsection (b) against a director for contribution or against a shareholder for reimbursement is barred unless it is commenced by the later of (1) two years after the date on which the effect of the challenged distribution was measured under subsection (e) or (g) of section 6.40, and (2) 6 months after payment to the corporation on account of liability under subsection (a) of this section by the party seeking contribution or reimbursement.

ARTICLE 7

PART A. MEETINGS

§ 7.01. Annual Meeting

(a) A corporation shall hold a meeting of shareholders annually at a time stated in or fixed in accordance with the bylaws. (b) Except as otherwise permitted by section 7.08, annual shareholders' meetings may be held within or without the commonwealth at the place stated in or fixed in accordance with the bylaws. If no place is stated in or fixed in accordance with the bylaws, annual meetings shall be held at the corporation's principal office. (c) The failure to hold an annual meeting at the time stated in or fixed in accordance with a corporation's bylaws shall not affect the validity of any corporate action. (d) Unless otherwise provided in the articles of organization, an annual meeting shall be held for the purpose of electing directors and such other purposes as are specified in the notice of the meeting, and only business within such purposes may be conducted at the meeting.

§ 7.02. Special Meeting

(a) A corporation shall hold a special meeting of shareholders: (1) on call of its board of directors or the person authorized to do so by the articles of organization or bylaws; or (2) in the case of a corporation other than a public corporation, if the holders of at least 10 per cent, or such lesser percentage as the articles of organization permit, of all the votes entitled to be cast on any issue to be considered at the proposed special meeting sign, date, and deliver to the corporation's secretary one or more written demands for the meeting describing the purpose for which it is to be held; or 114 (3) in the case of a public corporation, unless otherwise provided in the articles of organization or bylaws, if the holders of at least 40 per cent of all the votes entitled to be cast on any issue to be considered at the proposed special meeting sign, date, and deliver to the corporation's secretary one or more written demands for the meeting describing the purposes for which it is to be held. (b) If not otherwise fixed under section 7.03 or 7.07, the record date for determining shareholders entitled to demand a special meeting is the date the first shareholder signs the demand. (c) Except for meetings held as permitted by section 7.08, special shareholders' meetings may be held in or out of the commonwealth at the place stated in or fixed in accordance with the bylaws. If no place is stated or fixed in accordance with the bylaws, special meetings shall be held at the corporation's principal office. (d) Only business within the purpose or purposes described in the meeting notice required by subsection (a) of section 7.05 may be conducted at a special shareholders' meeting. (e) In the event an annual meeting is not held at the time stated in or fixed in accordance with the bylaws or the time for an annual meeting is not fixed in accordance with the bylaws to be held within 13 months after the last annual meeting was held, the corporation may designate a special meeting held thereafter in accordance with this section 7.02 as a special meeting in lieu of the annual meeting, and the meeting shall have all of the effect of an annual meeting.

§ 7.03. Court-Ordered Meeting

(a) The superior court of the county where a corporation's principal office or, if none in the commonwealth, its registered office is located may summarily order a meeting to be held: (1) on application of any shareholder of the corporation entitled to participate in an annual meeting if an annual meeting was not held within the earlier of 6 months after the end of the corporation's fiscal year or 15 months after its last annual meeting; or (2) on application of a shareholder who signed a demand for a special meeting valid under section 7.02, if: (i) notice of the special meeting was not given within 30 days after the date the demand was delivered to the corporation's secretary or within such further time as the court may order under the circumstances; or (ii) the special meeting was not held in accordance with the notice. (b) The court may fix the time and place of the meeting, determine the voting groups entitled to participate in the meeting, specify a record date for determining shareholders entitled to notice of and to vote at the meeting, prescribe the form and content of the meeting notice, fix the quorum required for specific matters to be considered at the meeting, or direct that the votes represented at the meeting constitute a quorum for action on those matters, and enter other orders necessary to accomplish the purpose or purposes of the meeting.

§ 7.04. Action Without Meeting 115 (a) Action required or permitted by this chapter to be taken at a shareholders' meeting may be taken without a meeting if the action is taken either: (1) by all shareholders entitled to vote on the action; or (2) to the extent permitted by the articles of organization, by shareholders having not less than the minimum number of votes necessary to take the action at a meeting at which all shareholders entitled to vote on the action are present and voting. The action shall be evidenced by 1 or more written consents that describe the action taken, are signed by shareholders having the requisite votes, bear the date of the signatures of such shareholders, and are delivered to the corporation for inclusion with the records of meetings within 60 days of the earliest dated consent delivered to the corporation as required by this section. (b) If not otherwise fixed under section 7.03 or 7.07, the record date for determining shareholders entitled to take action without a meeting is the date the first shareholder signs the consent under subsection (a). (c) A consent signed under this section has the effect of a vote at a meeting and may be described as such in any document, except that if action is taken by the consent of less than all shareholders entitled to vote on the action, any document required to be filed under this chapter with respect to such action shall state that the action was taken by consent of the required number of shareholders and that any required notice has been given to other shareholders. (d) If action is to be taken pursuant to the consent of voting shareholders without a meeting, the corporation, at least 7 days before the action pursuant to the consent is taken, shall give notice, which complies in form with the requirements of section 7.05, of the action (1) to nonvoting shareholders in any case where this chapter would require such notice if the action is to be taken pursuant to a vote by voting shareholders at a meeting, and (2) if the action is to be taken pursuant to the consent of less than all the shareholders entitled to vote on the matter, to all shareholders entitled to vote who did not consent to the action. The notice shall contain, or be accompanied by, the same material that, under this chapter, would have been required to be sent to shareholders in or with the notice of a meeting at which the action would have been submitted to the shareholders for approval.

§ 7.05. Notice of Meeting

(a) A written notice of the date, time, and place of each annual and special shareholders' meeting describing the purposes of the meeting shall be given to shareholders no fewer than 7 nor more than 60 days before the meeting date. Unless this chapter or the articles of organization require otherwise, the corporation is required to give notice only to shareholders entitled to vote at the meeting. (b) Unless the bylaws require otherwise, if an annual of special meeting of shareholders is adjourned to a different date, time or place, notice need not be given of the new date, time or place if the new date, time or place, if any, is announced at the meeting before adjournment. If a new record date for the adjourned meeting is or shall be fixed under section 7.07, however, notice of the adjourned meeting shall be given under this section to persons who are shareholders as of the new record date.

116 § 7.06. Waiver of Notice

(a) A shareholder may waive any notice required by this chapter, the articles of organization, or the bylaws before or after the date and time stated in the notice. The waiver shall be in writing, be signed by the shareholder entitled to the notice, and be delivered to the corporation for inclusion with the records of the meeting. (b) A shareholder's attendance at a meeting: (1) waives objection to lack of notice or defective notice of the meeting, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting; and (2) waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder objects to considering the matter when it is presented.

§ 7.07. Record Date

(a) Except as otherwise provided in section 7.03, the bylaws may fix or provide the manner of fixing the record date for one or more voting groups in order to determine the shareholders entitled to notice of a shareholders' meeting, to demand a special meeting, to vote, or to take any other action. If the bylaws do not fix or provide for fixing a record date, the board of directors of the corporation may fix a future date as the record date. If a record date for a specific action is not fixed by the bylaws or the board of directors, and is not supplied by the section of this chapter dealing with that action, the record date shall be the close of business either on the day before the first notice is sent to shareholders, or, if no notice is sent, on the day before the meeting. (b) A record date fixed under this section may not be more than 70 days before the meeting or action requiring a determination of shareholders. (c) A determination of shareholders entitled to notice of or to vote at a shareholders' meeting is effective for any adjournment of the meeting unless the board of directors fixes a new record date, which it shall do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. (d) If a court orders a meeting adjourned to a date more than 120 days after the date fixed for the original meeting, it may provide that the original record date continues in effect or it may fix a new record date.

§ 7.08. Meetings by Remote Communications; Remote Participation in Meetings

Unless otherwise provided in the articles of organization or bylaws, if authorized by the board of directors: any annual or special meeting of shareholders need not be held at any place but may instead be held solely by means of remote communication, unless the corporation is a public corporation; and subject to such guidelines and procedures as the board of directors may

117 adopt, shareholders and proxyholders not physically present at a meeting of shareholders may, by means of remote communications: (1) participate in a meeting of shareholders; and (2) be deemed present in person and vote at a meeting of shareholders whether such meeting is to be held at a designated place or solely by means of remote communication, provided that: (i) the corporation shall implement reasonable measures to verify that each person deemed present and permitted to vote at the meeting by means of remote communication is a stockholder or proxyholder; (ii) the corporation shall implement reasonable measures to provide such shareholders and proxyholders a reasonable opportunity to participate in the meeting and to vote on matters submitted to the shareholders, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with such proceedings; and (iii) if any stockholder or proxyholder votes or takes other action at the meeting by means of remote communication, a record of such vote or other action shall be maintained by the corporation.

PART B. VOTING

§ 7.20. Shareholders List for Meeting

(a) After fixing a record date for a shareholders' meeting, a corporation shall prepare an alphabetical list of the names of all its shareholders who are entitled to notice of the meeting. The list shall be arranged by voting group, and within each voting group by class or series of shares, and show the address of and number of shares held by each shareholder, but need not include an electronic mail address or other electronic contact information for any shareholder. (b) The shareholders list shall be available for inspection by any shareholder, beginning 2 business days after notice is given of the meeting for which the list was prepared and continuing through the meeting: (1) at the corporation's principal office or at a place identified in the meeting notice in the city where the meeting will be held; or (2) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting. If the meeting is to be held solely by means of remote communication, the list shall be made available on an electronic network. In the event the corporation determines or is required to make the list available on an electronic network, the corporation may take reasonable steps to ensure that such information is available only to shareholders of the corporation. (c) A shareholder, his agent, or attorney is entitled on written demand to inspect and, subject to the requirements of section 16.02(c), to copy the list, during regular business hours and at his expense, during the period it is available for inspection.

118 (d) The corporation shall make the shareholders list available at the meeting, and any shareholder or his agent or attorney is entitled to inspect the list at any time during the meeting or any adjournment. (e) If the corporation refuses to allow a shareholder or his agent or attorney to inspect the shareholders list before or at the meeting, or copy the list as permitted by subsection (b), the superior court of the county where a corporation's principal office or, if none in the commonwealth, its registered office is located, on application of the shareholder, may summarily, order the inspection or copying at the corporation's expense and may postpone the meeting for which the list was prepared until the inspection or copying is complete. (f) Refusal or failure to prepare or make available the shareholders list shall not affect the validity of action taken at the meeting.

§ 7.21. Voting Entitlement of Shares

(a) Except as provided in subsections (b) and (c) or unless the articles of organization provide otherwise, each outstanding share, regardless of class, is entitled to 1 vote on each matter voted on at a shareholders' meeting. Pursuant to subsection (c) of section 6.04 each fractional share is entitled to a proportional vote. Only shares are entitled to vote. (b) Absent special circumstances, the shares of a corporation are not entitled to vote if they are owned, directly or indirectly, by another entity of which the corporation owns, directly or indirectly, a majority of the voting interests. (c) Subsection (b) shall not limit the power of a corporation to vote any shares, including its own shares, held by it, directly or indirectly, in a fiduciary capacity. (d) Unless the articles of organization provide otherwise, redeemable shares are not entitled to vote after notice of redemption is given to the holders and a sum sufficient to redeem the shares has been deposited with a bank, trust company or other financial institution under an irrevocable obligation to pay the holders the redemption price upon surrender of the shares.

§ 7.22. Proxies

(a) A shareholder may vote his shares in person or by proxy. (b) A shareholder may appoint a proxy to vote or otherwise act for him by signing an appointment form, either personally or by his attorney-in-fact. (c) An appointment of a proxy is effective when received by the secretary or other officer or agent authorized to tabulate votes. Unless otherwise provided in the appointment form, an appointment is valid for a period of 11 months from the date the shareholder signed the form or, if it is undated, from the date of its receipt by the officer or agent, or for such shorter period as may be specified in the bylaws. (d) An appointment of a proxy is revocable by the shareholder unless the appointment form conspicuously states that it is irrevocable and the appointment is coupled with an interest. Appointments coupled with an interest include, without limitation, the appointment of:

119 (1) a secured party; (2) a person who purchased or agreed to purchase the shares; (3) a creditor of the corporation who extended it credit under terms requiring the appointment; (4) an employee of the corporation whose employment contract requires the appointment; or (5) a party to a voting agreement created under section 7.31. (e) The death or incapacity of the shareholder appointing a proxy shall not affect the right of the corporation to accept the proxy's authority unless notice of the death or incapacity is received by the secretary or other officer or agent authorized to tabulate votes before the proxy exercises his authority under the appointment. (f) An appointment made irrevocable under subsection (d) is revoked when the interest with which it is coupled is extinguished. (g) A transferee for value of shares subject to an irrevocable appointment may revoke the appointment if he did not know of its existence when he acquired the shares and the existence of the irrevocable appointment was not noted conspicuously on the certificate representing the shares or on the information statement for shares without certificates. (h) Subject to section 7.24 and to any express limitation on the proxy's authority appearing on the face of the appointment form, a corporation is entitled to accept the proxy's vote or other action as that of the shareholder making the appointment.

§ 7.23. Shares Held by Nominees.

(a) A corporation may establish a procedure by which the beneficial owner of shares that are registered in the name of a nominee will be recognized by the corporation as the shareholder, to the extent provided in the procedure. (b) The procedure may set forth: (1) the types of nominees to which it applies; (2) the rights or privileges that the corporation recognizes in a beneficial owner; (3) the manner in which the procedure is selected by the nominee; (4) a requirement for the certification by the nominee of the beneficial holders; (5) the information that must be provided when the procedure is selected; (6) the period for which selection of the procedure is effective; and (7) other aspects of the rights and duties created.

§ 7.24. Corporation's Acceptance of Votes

120 (a) If the name signed on a vote, consent, waiver, or proxy appointment corresponds to the name of a shareholder, the corporation if acting in good faith is entitled to accept the vote, consent, waiver, or proxy appointment and give it effect as the act of the shareholder. (b) If the name signed on a vote, consent, waiver, or proxy appointment does not correspond to the name of its shareholder, the corporation if acting in good faith is nevertheless entitled to accept the vote, consent, waiver, or proxy appointment and give it effect as the act of the shareholder if: (1) the shareholder is an entity and the name signed purports to be that of an officer or agent of the entity; (2) the name signed purports to be that of an administrator, executor, guardian, conservator or other fiduciary representing the shareholder and, if the corporation requests, evidence of fiduciary status acceptable to the corporation has been presented; (3) the name signed purports to be that of a receiver or trustee in bankruptcy of the shareholder and, if the corporation requests, evidence of this status acceptable to the corporation has been presented; (4) the name signed purports to be that of a secured party, beneficial owner, or attorney- in-fact of the shareholder and, if the corporation requests, evidence acceptable to the corporation of the signatory's authority to sign for the shareholder has been presented; (5) two or more persons are the shareholder as co-owners, cotenants or fiduciaries and the name signed purports to be the name of at least one of the co-owners and the person signing appears to be acting on behalf of all the co-owners; or (6) the corporation otherwise has a reasonable basis for believing that the signatory is, or has authority to sign for, the shareholder. (c) The corporation is entitled to reject a vote, consent, waiver, or proxy appointment if the secretary or other officer or agent authorized to tabulate votes, acting in good faith, has reasonable basis for doubting the validity of the signature on it or the signatory's authority to sign for the shareholder. (d) The corporation and its officer or agent who accepts or rejects a vote, consent, waiver, or proxy appointment in good faith and in accordance with the standards of this section shall not be liable to the shareholder for damages resulting from the acceptance or rejection. (e) Corporate action based on the acceptance or rejection of a vote, consent, waiver, or proxy appointment under this section is valid unless a court of competent jurisdiction determines otherwise.

§ 7.25. Quorum and Voting Requirements for Voting Groups

(a) Shares entitled to vote as a separate voting group may take action on a matter at a meeting only if a quorum of those shares exists with respect to that matter. Unless otherwise provided in this chapter, or in the articles of organization, the bylaws or a resolution of the board of directors, as permitted by subsection (a) of section 7.27, a majority of the votes entitled to be cast on the matter by the voting group constitutes a quorum of that voting group for action on that matter. 121 (b) A share once represented for any purpose at a meeting is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless: (1) the shareholder attends solely to object to lack of notice, defective notice, or the conduct of the meeting on other grounds, and does not vote the shares or otherwise consent that they are to be deemed present; or (2) in the case of an adjournment, a new record date is or shall be set for that adjourned meeting. (c) If a quorum of a voting group exists, favorable action on a matter, other than the election of directors, is taken by a voting group if the votes cast within the group favoring the action exceed the votes cast opposing the action, unless either this chapter, or the articles of organization, the bylaws or a resolution of the board of directors, as permitted by subsection (a) of section 7.27, requires a greater number of affirmative votes. (d) An amendment of the articles of organization or the bylaws affecting the quorum or voting requirement for a voting group is governed by section 7.27 or section 10.21 respectively. (e) The election of directors is governed by section 7.28.

§ 7.26. Action by Single and Multiple Voting Groups

(a) When a matter is to be voted upon by a single voting group, action on that matter is taken when voted upon by that voting group as provided in section 7.25. (b) When a matter is to be voted upon by two or more voting groups, favorable action on that matter is taken only by the required vote of each of those voting groups counted separately, as provided in section 7.25. Action may be taken by one voting group on a matter even though no action is taken by another voting group entitled to vote on the matter.

§ 7.27. Greater or Lesser Quorum or Voting Requirements for Shareholders.

(a) The articles of organization, or a bylaw adopted in conformity to section 10.21, may provide for a greater or lesser quorum requirement for action by any voting group, or for a greater affirmative vote requirement, including additional separate voting groups, than is provided for by this chapter. Whenever authorized by this chapter, the board of directors may require for the approval of a matter submitted to a vote of the shareholders satisfaction of a greater quorum requirement for any voting group, or receipt of a greater affirmative vote of the shareholders, including more separate voting groups, than is required by this chapter or the articles or bylaws. (b) If any provision of this chapter requires the affirmative vote of more than a majority of the shares in any voting group, the articles of organization may provide that favorable action may be taken by vote of a lesser proportion of shares than the chapter specifies, but not less than a majority of all the shares in the voting group eligible to vote on the matter. (c) Action to approve an amendment to the articles of organization or bylaws that changes or deletes a quorum or voting requirement for action by shareholders must satisfy both the quorum

122 and voting requirements then applicable for amendment of the articles or bylaws, as the case may be, and also the quorum and voting requirements sought to be changed or deleted.

§ 7.28. Voting for Directors; Cumulative Voting

(a) Unless otherwise provided in the articles of organization or bylaws, directors are elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present. (b) Shareholders do not have a right to cumulate their votes for directors unless the articles of organization so provide. (c) A statement included in the articles of organization that "a designated voting group of shareholders are entitled to cumulate their votes for directors", or words of similar import, means that the shareholders designated are entitled to multiply the number of votes they are entitled to cast by the number of directors for whom they are entitled to vote and cast the product for a single candidate or distribute the product among two or more candidates.

§ 7.29. Form of Shareholder Action

(a) Any vote, consent, waiver, proxy appointment or other action by a shareholder or by the proxy or other agent of any shareholder pursuant to any section of this chapter shall be considered given in writing, dated and signed as required by this chapter if, in lieu of any other means permitted by this chapter, it consists of an electronic transmission that sets forth or is delivered with information from which the corporation can determine (i) that the electronic transmission was transmitted by the shareholder, proxy or agent or by a person authorized to act for the shareholder, proxy or agent; and (ii) the date on which such shareholder, proxy, agent or authorized person transmitted the electronic transmission. The date on which the electronic transmission is transmitted shall be considered to be the date on which it was signed. The electronic transmission shall be considered received by the corporation if it has been sent to any address specified by the corporation for the purpose or, if no address has been specified, to the principal office of the corporation, addressed to the secretary or other officer or agent having custody of the records of proceedings of shareholders. (b) Any copy, facsimile or other reliable reproduction of a vote, consent, waiver, proxy appointment or other action by a shareholder or by the proxy or other agent of any shareholder may be substituted or used in lieu of the original writing for any purpose for which the original writing could be used, but the copy, facsimile or other reproduction shall be a complete reproduction of the entire original writing.

PART C. VOTING TRUSTS AND AGREEMENTS

§ 7.30. Voting Trusts

(a) One or more shareholders may create a voting trust, conferring on a trustee the right to vote or otherwise act for them, by signing an agreement setting out the provisions of the trust, which may include anything consistent with its purpose, and transferring their shares to the 123 trustee. The trustee shall also sign the voting trust agreement and the shares transferred shall be registered in the name of the trustee. Promptly thereafter, the trustee shall prepare a list of the names and addresses of all owners of beneficial interests in the trust, together with the number and class of shares each transferred to the trust, and deliver copies of the list and agreement to the corporation's principal office. (b) A voting trust becomes effective on the date the first shares subject to the trust are registered in the trustee's name. A voting trust is valid for the period as is specified in the trust agreement. (c) All or some of the parties to a voting trust my extend it for additional terms by signing an extension agreement and obtaining the voting trustee's written consent to the extension. An extension is valid for such period as is specified in the extension agreement. The voting trustee shall deliver copies of the extension agreement and list of beneficial owners to the corporation's principal office. An extension agreement binds only those parties signing it.

§ 7.31. Voting Agreements

(a) An agreement between 2 or more shareholders or between 1 or more shareholders and 1 or more other persons, if in writing and signed by the parties to the agreement, whether or not the parties include all of the shareholders of the corporation, may provide for the manner in which the parties who are shareholders will vote their shares. A voting agreement created under this section is not subject to section 7.30. (b) A voting agreement is valid for such period as is specified in the agreement or in any extension agreement entered into by all or some of the parties to it. An extension agreement binds only those parties signing it. (c) A voting agreement created under this section is specifically enforceable.

§ 7.32. Shareholder Agreements

(a) An agreement among the shareholders of a corporation that complies with this section is effective among the shareholders and the corporation even though it is inconsistent with 1 or more other sections of this chapter in that it: (1) eliminates the board of directors or restricts the discretion or powers of the board of directors; (2) governs the authorization or making of distributions whether or not in proportion to ownership of shares, subject to the limitations in section 6.40; (3) establishes who shall be directors or officers of the corporation, or their terms of office or manner of selection or removal; (4) governs, in general or in regard to specific matters, the exercise or division of voting power by or between the shareholders and directors or by or among any of them, including use of weighted voting rights or director proxies;

124 (5) establishes the terms and conditions of any agreement for the transfer or use of property or the provision of services between the corporation and any shareholder, director, officer or employee of the corporation or among any of them; (6) transfers to 1 or more shareholders or other persons all or part of the authority to exercise corporate powers or to manage the business and affairs of the corporation, including the resolution of any issue about which there exists a deadlock among directors or shareholders; (7) requires dissolution of the corporation at the request of 1 or more of the shareholders or upon the occurrence of a specified event or contingency; or (8) otherwise governs exercise of the corporate powers or management of the business and affairs of the corporation or the relationship among the shareholders, the directors and the corporation, or among any of them, and is not contrary to public policy. (b) An agreement authorized by this section shall be: (1) set forth (i) in the articles of organization or bylaws and approved by all persons who are shareholders at the time of the agreement or (ii) in a written agreement that is signed by all persons who are shareholders at the time of the agreement and is made known to the corporation; (2) subject to amendment only by all persons who are shareholders at the time of the amendment, unless the agreement provides otherwise; and (3) valid for 10 years, unless the agreement provides otherwise. (c) The existence of an agreement authorized by this section shall be noted conspicuously on the front or back of each certificate for outstanding shares or on the information statement required by subsection (b) of section 6.26. If at the time of the agreement the corporation has shares outstanding represented by certificates, the corporation shall recall the outstanding certificates and issue substitute certificates that comply with this subsection. The failure to note the existence of the agreement on the certificate or information statement does not affect the validity of the agreement or any action taken pursuant to it. Any purchaser of shares who, at the time of purchase, did not have knowledge of the existence of the agreement is entitled to rescission of the purchase. A purchaser is considered to have knowledge of the existence of the agreement if its existence is noted on the certificate or information statement for the shares in compliance with this subsection and, if the shares are not represented by a certificate, the information statement is delivered to the purchaser at or prior to the time of purchase of the shares. An action to enforce the right of rescission authorized by this subsection shall be commenced within the earlier of 90 days after discovery of the existence of the agreement or 2 years after the time of purchase of the shares. (d) An agreement authorized by this section automatically terminates when shares of the corporation are listed on a national securities exchange or are regularly traded in a market maintained by 1 or more members of a national or affiliated securities association. If the agreement so terminates or otherwise ceases to be effective, the board of directors may, if the agreement is contained or referred to in the corporation's articles of organization or bylaws, adopt an amendment to the articles of organization or bylaws, without shareholder action, to delete the agreement and any references to it.

125 (e) To the extent that an agreement authorized by this section limits the discretion or powers of the board of directors, liability for acts or omissions otherwise imposed by law on directors shall be imposed instead upon the person or persons in whom the discretion or powers are vested. (f) If an agreement is authorized by this section, shareholders shall not be personally liable for the acts or debts of the corporation on the ground that the agreement or its performance treats the corporation as if it were a partnership or results in a failure to observe corporate formalities that would otherwise apply. (g) Incorporators or subscribers for shares may act as shareholders with respect to an agreement authorized by this section if no shares have been issued when the agreement is made. (h) Nothing contained in this section shall be construed to limit the effectiveness of any agreement or arrangement permitted by or not inconsistent with any other provision of this chapter.

PART D. DERIVATIVE PROCEEDINGS

§ 7.40. Subdivision Definitions

In this SUBDIVISION the following words shall have the following meanings unless the context requires otherwise: "Derivative proceeding", a civil suit in the right of a domestic corporations or, to the extent provided in section 7.47, in the right of a foreign corporation. "Shareholder" includes a beneficial owner whose shares are held in a voting trust or held by a nominee on the beneficial owner's behalf.

§ 7.41. Standing

A shareholder may not commence or maintain a derivative proceeding unless the shareholder: (1) was a shareholder of the corporation at the time of the act or omission complained of or became a shareholder through transfer by operation of law from one who was a shareholder at that time; and (2) fairly and adequately represents the interests of the corporation in enforcing the right of the corporation.

§ 7.42. Demand

No shareholder may commence a derivative proceeding until: (1) a written demand has been made upon the corporation to take suitable action; and (2) 90 days have elapsed from the date the demand was made, or, if the decision whether to reject such demand has been duly submitted to a vote of the shareholders, not including the 126 holders of those shares referred to in section 7.44(b)(3), within 60 days from the date when demand was made, 120 days have elapsed from the date the demand was made, unless in either case the shareholder has earlier been notified that the demand has been rejected by the corporation or irreparable injury to the corporation would result by waiting for the expiration of such 90-day or 120-day period.

§ 7.43. Stay of Proceedings

If the corporation commences an inquiry into the allegations made in the demand or complaint, the court may stay any derivative proceeding for a period as the court considers appropriate.

§ 7.44. Dismissal

(a) A derivative proceeding commenced after rejection of a demand shall be dismissed by the court on motion by the corporation if the court finds that either: (1) 1 of the groups specified in subsections (b)(1) or (f) has determined in good faith after conducting a reasonable inquiry upon which its conclusions are based that the maintenance of the derivative proceeding is not in the best interests of the corporation; or (2) shareholders specified in subsection (b)(3) have determined that the maintenance of the derivative proceeding is not in the best interests of the corporation. (b) Unless a panel is appointed pursuant to subsection (f), the determination in subsection (a) shall be made by: (1) a majority vote of independent directors present at a meeting of the board of directors if the independent directors constitute a quorum; (2) a majority vote of a committee consisting of 2 or more independent directors appointed by majority vote of independent directors present at a meeting of the board of directors, whether or not the independent directors constituted a quorum; or (3) the vote of the holders of a majority of the outstanding shares entitled to vote, not including shares owned by or voted under the control of a shareholder or related person who has or had a beneficial financial interest in the act or omission complained of or other interest therein that would reasonably be expected to exert an influence on that shareholder's or related person's judgment if called upon to vote in the determination. (c) None of the following shall by itself cause a director to be considered not independent for the purposes of this section: (1) the nomination or election of the director by a person who is a defendant in the derivative proceeding or against whom action is demanded; (2) the naming of the director as a defendant in the derivative proceeding or as a person against whom action is demanded; or (3) the approval by the director of the act being challenged in the derivative proceeding or demand if the act resulted in no personal benefit to the director.

127 (d) If the corporation moves to dismiss the derivative suit, it shall make a written filing with the court setting forth facts to show (1) whether a majority of the board of directors was independent at the time of the determination by the independent directors and (2) that the independent directors made the determination in good faith after conducting a reasonable inquiry upon which their conclusions are based. Unless otherwise required by subsection (a), the court shall dismiss the suit unless the plaintiff has alleged with particularity facts rebutting the corporation's filing in its complaint or an amended complaint or in a written filing with the court. All discovery proceedings shall be stayed upon the filing by the corporation of the motion to dismiss and the filing required by this subsection until the notice of entry of the order ruling on the motion; but the court, on motion and after a hearing and for good cause shown, may order that specified discovery be conducted. (e) If a majority of the board of directors does not consist of independent directors at the time the determination by independent directors is made, the corporation shall have the burden of proving that the requirements of subsection (a) have been met. If a majority of the board of directors consists of independent directors at the time the determination is made or if the determination is made by shareholders pursuant to clause (3) of subsection (b) or is made pursuant to subsection (f), the plaintiff shall have the burden of proving that the requirements of subsection (a) have not been met. (f) The court may appoint a panel of 1 or more independent persons upon motion by the corporation to make a determination whether the maintenance of the derivative proceeding is in the best interests of the corporation. In such case, the plaintiff shall have the burden of proving that the requirements of subsection (a) have not been met.

§ 7.45. Discontinuance or Settlement

A derivative proceeding may not be discontinued or settled without the court's approval. If the court determines that a proposed discontinuance or settlement will substantially affect the interests of the corporation's shareholders or a class of shareholders, the court shall direct that notice to be given to the shareholders affected.

§ 7.46. Payment of Expenses

On termination of the derivative proceeding the court may: (1) order the corporation to pay the plaintiff's reasonable expenses, including counsel fees, incurred in the proceeding if it finds that the proceeding has resulted in a substantial benefit to the corporation; or (2) order the plaintiff to pay any defendant's reasonable expenses, including counsel fees, incurred in defending the proceeding if it finds that the proceeding was commenced or maintained without reasonable cause or for an improper purpose.

§ 7.47. Applicability to Foreign Corporations

128 In any derivative proceeding in the right of a foreign corporation, the matters covered by this subdivision shall be governed by the laws of the jurisdiction of incorporation of the foreign corporation except for section 7.43, 7.45 and 7.46.

ARTICLE 8

PART A. BOARD OF DIRECTORS

§ 8.01. Requirement for and Duties of Board of Directors

(a) Except as provided in section 7.32, each corporation shall have a board of directors. (b) All corporate power shall be exercised by or under the authority of, and the business and affairs of the corporation shall be managed under the direction of, its board of directors, subject to any limitation set forth in the articles of organization or in an agreement authorized under section 7.32.

§ 8.02. Qualifications of Directors

The articles of organization or bylaws may prescribe qualifications for directors. A director need not be a resident of the commonwealth or a shareholder of the corporation unless the articles of organization or bylaws so prescribe.

§ 8.03. Number and Election of Directors

(a) A board of directors shall consist of 1 or more individuals, with the number specified in or fixed in accordance with the articles of organization or bylaws, but, unless otherwise provided in the articles of organization, if the corporation has more than 1 shareholder, the number of directors shall not be less than 3, except that whenever there shall be only 2 shareholders, the number of directors shall not be less than 2. (b) If a board of directors has power to fix or change the number of directors, the board may increase or decrease the number of directors last approved by the shareholders. (c) The articles of organization or bylaws may establish a variable range for the size of the board of directors by fixing a minimum and maximum number of directors. If a variable range is established, the number of directors may be fixed or changed from time to time, within the minimum and maximum, by the shareholders or the board of directors. After shares are issued, only the shareholders may change the range for the size of the board or change from a fixed or a variable-range size board to the other. (d) Directors shall be elected at the first annual shareholders' meeting and at each annual meeting thereafter unless their terms are staggered under section 8.06.

§ 8.04. Election of Directors by Certain Classes of Shareholders

129 If the articles of organization authorize dividing the shares into classes or series, the articles may also authorize the election of all or a specified number of directors by the holders of 1 or more authorized classes or series of shares. A class or series of shares entitled to elect 1 or more directors is a separate voting group for purposes of the election of directors.

§ 8.05. Terms of Directors Generally.

(a) The terms of the initial directors of a corporation shall expire at the first shareholders' meeting at which directors are elected. (b) The terms of all directors shall expire at the next annual shareholders' meeting following their election unless their terms are staggered under section 8.06. (c) A decrease in the number of directors does not shorten an incumbent director's term. (d) Unless otherwise provided in the articles of organization or a bylaw adopted by shareholders or required by section 8.06(e), the term of a director elected to fill a vacancy shall expire at the next shareholders' meeting at which directors are elected. (e) Despite the expiration of a director's term, he shall continue to serve until his successor is elected and qualified or until there is a decrease in the number of directors.

§ 8.06. Staggered Terms for Directors

(a) The articles of organization may provide for staggering the terms of directors by dividing the total number of directors into 2 or 3 groups, with each group containing 1/2 or 1/3 of the total, as near as may be. In that event, the terms of directors in the first group expire at the first annual shareholders' meeting after their election, the terms of the second group expire at the second annual shareholders' meeting after their election, and the terms of the third group, if any, expire at the third annual shareholders' meeting after their election. At each annual shareholders' meeting held thereafter, directors shall be chosen for a term of 2 years or 3 years, as the case may be, to succeed those whose terms expire. (b) Except as provided in subsection (c) and notwithstanding anything to the contrary in this chapter or in the articles of organization or bylaws of any public corporation, the terms of the directors of a public corporation shall be staggered by dividing the number of directors into 3 groups, as nearly equal in number as possible; the term of office of those of the first group, "Class I Directors", to continue until the first annual meeting following the date such public corporation becomes subject to this subsection and until their successors are elected and qualified; the term of office of those of the second group, "Class II Directors", to continue until the second annual meeting following the date the public corporation becomes subject to this subsection and until their successors are elected and qualified; and the term of office of those of the third group, "Class III Directors", to continue until the third annual meeting following the date such public corporation becomes subject to this subsection and until their successors are elected and qualified. At each annual meeting of a public corporation subject to this subsection, the successors to the class of directors whose term expires at that meeting shall be elected to hold office for a term continuing until the annual meeting held in the third year following the year of their election and until their successors are elected and qualified. On or before the date on which 130 a public corporation first convenes an annual meeting following the time at which the public corporation becomes subject to this subsection, the board of directors of the public corporation shall adopt a vote designating, from among its members, directors to serve as Class I Directors, Class II Directors and Class III Directors. Notwithstanding this subsection, the articles of organization may confer upon holders of any class or series of preference or preferred stock the right to elect 1 or more directors who shall serve for such term, and have such voting powers, as shall be stated in the articles of organization; provided, however, that no such provision of the articles of organization which confers upon such holders any such right and which is filed with the state secretary after the effective date of this chapter shall become effective unless before its adoption it was approved by a vote of a majority in number of the directors of the public corporation. (c)(1) Subsection (b) shall apply to every public corporation, whether or not notice of an annual meeting of the public corporation has been given on or prior to the effective date of this chapter, unless the board of directors of the public corporation, or the shareholders of the corporation by a vote of two-thirds of each class of stock outstanding at a meeting duly called for the purpose of the vote, shall adopt a vote providing that the corporation elects to be exempt from the provisions of subsection (b). Upon adoption of the vote, subsection (b) shall, unless otherwise provided in the vote, shall become immediately ineffective with respect to such public corporation and the provisions of section 8.05 shall become immediately effective with respect to the corporation as soon as subsection (b) of this section is no longer effective. (2) In the event that any public corporation shall so elect by vote of the board of directors to be exempt pursuant to clause (1) the public corporation may at any time thereafter adopt a vote of its board of directors electing to be subject to subsection (b). In the event that any public corporation shall so elect by vote of two-thirds of the shareholders to be exempt pursuant to clause (1) of this subsection the public corporation may at any time thereafter by vote of two- thirds of the shareholders elect to be subject to the provisions of subsection (b). Upon adoption of the vote, subsection (b), unless otherwise provided in the vote, shall immediately become effective. (3) If a corporation is subject to subsection (b) at the time it ceases to be a public corporation, the corporation shall nonetheless be considered to be a public corporation for purposes of this section for a period of 12 months following the date it ceased to be a public corporation. (d) Notwithstanding anything to the contrary in this chapter or in the articles of organization or bylaws of any public corporation, in the case of directors of a public corporation whose terms are staggered pursuant to subsection (b), shareholders may effect, by the affirmative vote of a majority of the shares outstanding and entitled to vote in the election of directors, the removal of any director or directors or the entire board of directors only for cause. (e) Notwithstanding anything to the contrary in this chapter or in the articles of organization or bylaws of any public corporation, in the case of directors of a public corporation whose terms are staggered pursuant to subsection (b): (1) vacancies and newly created directorships, whether resulting from an increase in the size of the board of directors, from the death, resignation, disqualification or removal of a

131 director or otherwise, shall be filled solely by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the board of directors; (2) any director elected in accordance with clause (1) shall hold office for the remainder of the full term of the class of directors in which the vacancy occurred or the new directorship was created and until the director's successor shall have been elected and qualified; (3) no decrease in the number of directors constituting the board of directors shall shorten the term of any incumbent director; and (4) the number of directors of a public corporation subject to subsection (b) shall be fixed only by vote of its board of directors. (f) As used in subsections (b) to (g), inclusive, the following words shall have the following meanings: (1) "Annual meeting", any annual meeting of shareholders and any special meeting of shareholders in lieu of an annual meeting provided for by law, the articles of organization, bylaws or otherwise. (2) "Cause", with respect to the removal of any director of a public corporation, only (i) conviction of a felony, (ii) declaration of unsound mind by order of court, (iii) gross dereliction of duty, (iv) commission of an action involving moral turpitude, or (v) commission of an action which constitutes intentional misconduct or a knowing violation of law if such action in either event results both in an improper substantial personal benefit and a material injury to the public corporation. (g) Nothing elsewhere in this section shall be considered to amend, modify or otherwise effect the validity of any of the articles of organization or bylaws of any corporation during any period that it elects not to be subject to subsection (b), whether or not currently in effect, providing for staggering the terms of directors as contemplated by subsection (a). No provision of the articles of organization or bylaws of any public corporation that is subject to subsection (b), whether or not currently in effect, shall render inapplicable any provision of subsections (b) to (g), inclusive, or require the board of directors of the corporation to adopt any vote pursuant to subsection (c). No vote adopted by a board of directors electing not to be subject to subsection (b) shall render invalid, or prevent adoption of, any amendment to the corporation's articles of organization as contemplated by section 8.05.

§ 8.07. Resignation of Directors

(a) A director may resign at any time by delivering written notice of resignation to the board of directors, its chairman, or to the corporation. (b) A resignation is effective when the notice is delivered unless the notice specifies a later effective date.

§ 8.08. Removal of Directors

132 (a) Subject to subsection (b) of section 8.06 and except as otherwise provided in the articles of organization or bylaws, the shareholders may remove 1 or more directors with or without cause. (b) If a director is elected by a voting group of shareholders, only the shareholders of that voting group may participate in the vote to remove him. (c) If cumulative voting is authorized, a director may not be removed by the shareholders if the number of votes sufficient to elect him under cumulative voting is voted against his removal. If cumulative voting is not authorized, a director may be removed by the shareholders only if the number of votes cast to remove him exceeds the number of votes cast not to remove him. (d) A director may be removed for cause by the directors by vote of the greater of (1) a majority of the directors then in office or (2) the number of directors required by the articles of organization or bylaws to take action under section 8.24, but, if a director is elected by a voting group of shareholders, only the directors elected by that voting group may participate in the vote to remove him. (e) A director may be removed by the shareholders or the directors only at a meeting called for the purpose of removing him and the meeting notice must state that the purpose, or one of the purposes, of the meeting is removal of the director.

§ 8.10. Vacancy on Board

(a) Unless the articles of organization or section 8.06 provide otherwise, if a vacancy occurs on a board of directors, including a vacancy resulting from an increase in the number of directors: (1) the shareholders may fill the vacancy; (2) the board of directors may fill the vacancy; or (3) if the directors remaining in office constitute fewer than a quorum of the board, they may fill the vacancy by the affirmative vote of a majority of all the directors remaining in office. (b) If the vacant office was held by a director elected by a voting group of shareholders, only the holders of shares of that voting group or, unless the articles of organization or by-laws provide otherwise, the directors elected by that voting group are entitled to vote to fill the vacancy. (c) A vacancy that will occur at a specific later date, by reason of a resignation effective at a later date under subsection (b) of section 8.07 or otherwise, may be filled before the vacancy occurs but the new director may not take office until the vacancy occurs.

§ 8.11. Compensation of Directors

Unless the articles of organization or bylaws provide otherwise, the board of directors may fix the compensation of directors.

PART B. MEETINGS AND ACTION OF THE BOARD

133 § 8.20. Meetings

(a) The board of directors may hold regular or special meetings within or without the commonwealth. (b) Unless the articles of organization or bylaws provide otherwise, the board of directors may permit any or all directors to participate in a regular or special meeting by, or conduct the meeting through the use of, any means of communication by which all directors participating may simultaneously hear each other during the meeting. A director participating in a meeting by this means is considered to be present in person at the meeting.

§ 8.21. Action Without Meeting

(a) Unless the articles of organization or bylaws provide that action required or permitted by this chapter to be taken by the directors may be taken only at a meeting, the action may be taken without a meeting if the action is taken by the unanimous consent of the members of the board of directors. The action must be evidenced by 1 or more consents describing the action taken, in writing, signed by each director, or delivered to the corporation by electronic transmission, to the address specified by the corporation for the purpose or, if no address has been specified, to the principal office of the corporation, addressed to the secretary or other officer or agent having custody of the records of proceedings of directors, and included in the minutes or filed with the corporate records reflecting the action taken. (b) Action taken under this section is effective when the last director signs or delivers the consent, unless the consent specifies a different effective date. (c) A consent signed or delivered under this section has the effect of a meeting vote and may be described as such in any document.

§ 8.22. Notice of Meeting

(a) Unless the articles of organization or bylaws provide otherwise, regular meetings of the board of directors may be held without notice of the date, time, place or purpose of the meeting. (b) Unless the articles of organization or bylaws otherwise provide, special meetings of the board of directors must be preceded by at least 2 days' notice of the date, time and place of the meeting. The notice need not describe the purpose of the special meeting unless required by the articles of organization or bylaws.

§ 8.23. Waiver of Notice

(a) A director may waive any notice required by this chapter, the articles of organization or the bylaws before or after the date and time of the meeting. Except as provided by subsection (b), the waiver shall be in writing, signed by the director entitled to the notice, or in the form of an electronic transmission by the director to the corporation, and filed with the minutes or corporate records. (b) A director's attendance at or participation in a meeting waives any required notice to him of the meeting unless the director at the beginning of the meeting, or promptly upon his arrival, 134 objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting.

§ 8.24. Quorum and Voting

(a) Subject to subsection (b), unless the articles of organization or bylaws otherwise provide or unless otherwise specifically provided in this chapter, a quorum of a board of directors consists of: (1) a majority of the fixed number of directors if the corporation has a fixed board size; or (2) a majority of the number of directors prescribed, or if no number is prescribed the number in office immediately before the meeting begins, if the corporation has a variable-range size board. (b) The articles of organization or bylaws may authorize a quorum of a board of directors to consist of no fewer than: (1) one-third of the fixed or prescribed number of directors determined under subsection (a); or (2) a majority of the directors then in office, without regard to the number of directors determined under subsection (a) of this section. (c) If a quorum is present when a vote is taken, the affirmative vote of a majority of directors present is the act of the board of directors unless the articles of organization or bylaws require the vote of a greater number of directors. (d) A director who is present at a meeting of the board of directors or a committee of the board of directors when corporate action is taken is considered to have assented to the action taken unless: (1) he objects at the beginning of the meeting, or promptly upon his arrival, to holding it or transacting business at the meeting; (2) his dissent or abstention from the action taken is entered in the minutes of the meeting; or (3) he delivers written notice of his dissent or abstention to the presiding officer of the meeting before its adjournment or to the corporation immediately after adjournment of the meeting. The right of dissent or abstention is not available to a director who votes in favor of the action taken.

§ 8.25. Committees

(a) Unless the articles of organization or bylaws provide otherwise, a board of directors may create 1 or more committees and appoint members of the board of directors to serve on them. Each committee may have 1 or more members, who serve at the pleasure of the board of directors. (b) The creation of a committee and appointment of members to it must be approved by the greater of: (1) a majority of all the directors in office when the action is taken; or (2) the number of directors required by the articles of organization or bylaws to take action under section 8.24. (c) Sections 8.20 through 8.24, which govern meetings, action without meetings, notice and waiver of notice, and quorum and voting requirements of the board of directors, shall apply to committees and their members. 135 (d) To the extent specified by the board of directors or in the articles of organization or bylaws, each committee may exercise the authority of the board of directors under section 8.01. (e) A committee may not, however: (1) authorize distributions; (2) approve or propose to shareholders action that this chapter requires be approved by shareholders; (3) change the number of the board of directors, remove directors from office or fill vacancies on the board of directors; (4) amend articles of organization pursuant to section 10.02; (5) adopt, amend or repeal bylaws; or (6) authorize or approve reacquisition of shares, except according to a formula or method prescribed by the board of directors. (f) The creation of, delegation of authority to, or action by a committee does not alone constitute compliance by a director with the standards of conduct described in section 8.30.

PART C. STANDARDS OF CONDUCT

§ 8.30. General Standards for Directors

(a) A director shall discharge his duties as a director, including his duties as a member of a committee: (1) in good faith; (2) with the care that a person in a like position would reasonably believe appropriate under similar circumstances; and (3) in a manner the director reasonably believes to be in the best interests of the corporation. In determining what the director reasonably believes to be in the best interests of the corporation, a director may consider the interests of the corporation's employees, suppliers, creditors and customers, the economy of the state, the region and the nation, community and societal considerations, and the long-term and short-term interests of the corporation and its shareholders, including the possibility that these interests may be best served by the continued independence of the corporation. (b) In discharging his duties, a director who does not have knowledge that makes reliance unwarranted is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by: (1) one of more officers or employees of the corporation whom the director reasonably believes to be reliable and competent with respect to the information, opinions, reports or statements presented; (2) legal counsel, public accountants, or other persons retained by the corporation, as to matters involving skills or expertise the director reasonably believes are matters (i) within the 136 particular person's professional or expert competence or (ii) as to which the particular person merits confidence; or (3) a committee of the board of directors of which the director is not a member if the director reasonably believes the committee merits confidence. (c) A director is not liable for any action taken as a director, or any failure to take any action, if he performed the duties of his office in compliance with this section.

§ 8.31. Director Conflict of Interest

(a) A conflict of interest transaction is a transaction with the corporation in which a director of the corporation has a material direct or indirect interest. A conflict of interest transaction is not voidable by the corporation solely because of the director's interest in the transaction if any one of the following is true: (1) the material facts of the transaction and the director's interest were disclosed or known to the board of directors or a committee of the board of directors and the board of directors or committee authorized, approved, or ratified the transaction; (2) the material facts of the transaction and the director's interest were disclosed or known to the shareholders entitled to vote and they authorized, approved, or ratified the transaction; or (3) the transaction was fair to the corporation. (b) For purposes of this section, and without limiting the interests that may create conflict of interest transactions, a director of the corporation has an indirect interest in a transaction if: (1) another entity in which he has a material financial interest or in which he is a general partner is a party to the transaction; or (2) another entity of which he is a director, officer, or trustee or in which he holds another position is a party to the transaction and the transaction is or should be considered by the board of directors of the corporation. (c) For purposes of clause (1) of subsection (a), a conflict of interest transaction is authorized, approved, or ratified if it receives the affirmative vote of a majority of the directors on the board of directors (or on the committee) who have no direct or indirect interest in the transaction, but a transaction may not be authorized, approved, or ratified under this section by single director. If a majority of the directors who have no direct or indirect interest in the transaction vote to authorize, approve, or ratify the transaction, a quorum is present for the purpose of taking action under this section. The presence of or a vote cast by, a director with a direct or indirect interest in the transaction does not affect the validity of any action taken under clause (1) of subsection (a) if the transaction is otherwise authorized, approved, or ratified as provided in that subsection. (d) For purposes of clause (2) of subsection (a), a conflict of interest transaction is authorized, approved, or ratified if it receives the vote of a majority of the shares entitled to be counted under this subsection. Shares owned by or voted under the control of a director who has a direct or indirect interest in the transaction, and shares owned by or voted under the control of an entity described in clause (1) of subsection (b), may not be counted in a vote of shareholders to determine whether to authorize, approve, or ratify a conflict of interest transaction under clause (2) of subsection (a). The vote of those shares, however, is counted in determining 137 whether the transaction is approved under other sections of this chapter. A majority of the shares, whether or not present, that are entitled to be counted in a vote on the transaction under this subsection constitutes a quorum for the purpose of taking action under this section.

§ 8.32. Loans to Directors

(a) Except as provided by subsection (c), a corporation may not lend money to, or guarantee the obligation of a director of, the corporation unless: (1) the specific loan or guarantee is approved by a majority of the votes represented by the outstanding voting shares of all classes, voting as a single voting group, except the votes of shares owned by or voted under the control of the benefited director; or (2) the corporation's board of directors determines that the loan or guarantee benefits the corporation and either approves the specific loan or guarantee or a general plan authorizing loans and guarantees. (b) The fact that a loan or guarantee is made in violation of this section shall not affect the borrower's liability on the loan. (c) This section shall not apply to loans and guarantees authorized by statute regulating any special class of corporations.

PART D. OFFICERS

§ 8.40. Required Officers

(a) A corporation shall have a president, a treasurer and a secretary and such other officers described in its bylaws or appointed by the board of directors in accordance with the bylaws. (b) A duly appointed officer may appoint 1 or more officers or assistant officers if authorized by the bylaws or the board of directors. (c) Unless the bylaws or the board of directors shall designate another officer, the secretary or an assistant secretary shall have responsibility for preparing minutes of the directors' and shareholders' meetings and for authenticating records of the corporation. (d) The same individual may simultaneously hold more than 1 office in a corporation.

§ 8.41. Duties of Officers

Each officer has the authority and shall perform the duties set forth in the bylaws or, to the extent consistent with the bylaws, the duties prescribed by the board of directors or by direction of an officer authorized by the board of directors to prescribe the duties of other officers.

§ 8.42. Standards of Conduct for Officers.

(a) An officer shall discharge his duties:

138 (1) in good faith; (2) with the care that a person in a like position would reasonably exercise under similar circumstances; and (3) in a manner the officer reasonably believes to be in the best interests of the corporation. (b) In discharging his duties an officer, who does not have knowledge that makes reliance unwarranted, is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by: (1) one or more officers or employees of the corporation whom the officer reasonably believes to be reliable and competent with respect to the information, opinions, reports or statements presented; or (2) legal counsel, public accountants, or other persons retained by the corporation as to matters involving skills or expertise the officer reasonably believes are matters (i) within the particular person's professional or expert competence or (ii) as to which the particular person merits confidence. (c) An officer shall not be liable to the corporation or its shareholders for any decision to take or not to take any action taken, or any failure to take any action, as an officer, if the duties of the officer are performed in compliance with this section.

§ 8.43. Resignation and Removal of Officers

(a) An officer may resign at any time by delivering notice of the resignation to the corporation. A resignation is effective when the notice is delivered unless the notice specifies a later effective date. If a resignation is made effective at a later date and the corporation accepts the future effective date, its board of directors may fill the pending vacancy before the effective date if the board of directors provides that the successor shall not take office until the effective date. (b) A board of directors may remove any officer at any time with or without cause.

§ 8.44. Contract Rights of Officers

(a) The appointment of an officer shall not itself create contract rights. (b) An officer's removal shall not affect the officer's contract rights, if any, with the corporation. An officer's resignation shall not affect the corporation's contract rights, if any, with the officer.

§ 8.45. Certificate of Change in Officers or Directors

Whenever any change is made in the directors or in the president, treasurer or secretary of a corporation, the corporation shall forthwith file in the office of the state secretary a certificate of the change signed under the penalties of perjury by the clerk or an assistant clerk. If a corporation fails or refuses to file such a certificate within the 30-day period following a change 139 in the directors or in the officers, any director or officer involved in the change, or the personal representative of any deceased director or office so involved, may evidence the change by filing a certificate thereof with the office of the state secretary, signed under the penalties or perjury, including a statement that a copy of the certificate has been delivered to the corporation or has been mailed to the principal office of the corporation, postage prepaid.

§ 8.46. Instruments Affecting Real Estate.

Any recordable instrument purporting to affect an interest in real estate, executed in the name of a corporation by the president or a vice president and the treasurer or an assistant treasurer, who may be one and the same person, shall be binding on the corporation in favor of a purchaser or other person relying in good faith on the instrument notwithstanding any inconsistent provisions of the articles of organization or bylaws of the corporation, any special act of incorporation governing the corporation or any vote or other action by the shareholders or directors of the corporation.

PART E. INDEMNIFICATION

§ 8.50. Subdivision Definitions

In this SUBDIVISION the following words shall have the following meanings unless the context requires otherwise: "Corporation", includes any domestic or foreign predecessor entity of a corporation in a merger. "Director" or "officer", an individual who is or was a director or officer, respectively, of a corporation or who, while a director or officer of the corporation, is or was serving at the corporation's request as a director, officer, partner, trustee, employee, or agent of another domestic or foreign corporation, partnership, joint venture, trust, employee benefit plan, or other entity. A director or officer is considered to be serving an employee benefit plan at the corporation's request if his duties to the corporation also impose duties on, or otherwise involve services by, him to the plan or to participants in or beneficiaries of the plan. "Director" or "officer" includes, unless the context requires otherwise, the estate or personal representative of a director or officer. "Disinterested director", a director who, at the time of a vote referred to in subsection (c) of section 8.53 or a vote or selection referred to in subsection (b) or (c) of section 8.55, is not (i) a party to the proceeding, or (ii) an individual having a familial, financial, professional, or employment relationship with the director whose indemnification or advance for expenses is the subject of the decision being made, which relationship would, in the circumstances, reasonably be expected to exert an influence on the director's judgment when voting on the decision being made. "Expenses", includes counsel fees. "Liability", the obligation to pay a judgment, settlement, penalty, fine including an excise tax assessed with respect to an employee benefit plan, or reasonable expenses incurred with respect to a proceeding. 140 "Party", an individual who was, is, or is threatened to be made, a defendant or respondent in a proceeding. "Proceeding", any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, arbitrative, or investigative and whether formal or informal.

§ 8.51. Permissible Indemnification

(a) Except as otherwise provided in this section, a corporation may indemnify an individual who is a party to a proceeding because he is a director against liability incurred in the proceeding if: (1) (i) he conducted himself in good faith; and (ii) he reasonably believed that his conduct was in the best interests of the corporation or that his conduct was at least not opposed to the best interests of the corporation; and (iii) in the case of any criminal proceeding, he had no reasonable cause to believe his conduct was unlawful; or (2) he engaged in conduct for which he shall not be liable under a provision of the articles of organization authorized by clause (4) of subsection (b) of section 2.02. (b) A director's conduct with respect to an employee benefit plan for a purpose he reasonably believed to be in the interests of the participants in, and the beneficiaries of, the plan is conduct that satisfies the requirement that his conduct was at least not opposed to the best interests of the corporation. (c) The termination of a proceeding by judgment, order, settlement, or conviction, or upon a plea of nolo contendere or its equivalent, is not, of itself, determinative that the director did not meet the relevant standard of conduct described in this section. (d) Unless ordered by a court under clause (3) of subsection (a) of section 8.54, a corporation may not indemnify a director under this section if his conduct did not satisfy the standards set forth in subsection (a) or subsection (b).

§ 8.52. Mandatory Indemnification

A corporation shall indemnify a director who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which he was a party because he was a director of the corporation against reasonable expenses incurred by him in connection with the proceeding.

§ 8.53. Advance for Expenses

(a) A corporation may, before final disposition of a proceeding, advance funds to pay for or reimburse the reasonable expenses incurred by a director who is a party to a proceeding because he is a director if he delivers to the corporation: (1) a written affirmation of his good faith belief that he has met the relevant standard of conduct described in section 8.51 or that the proceeding involves conduct for which liability has 141 been eliminated under a provision of the articles of organization as authorized by clause (4) of subsection (b) of section 2.02; and (2) his written undertaking to repay any funds advanced if he is not entitled to mandatory indemnification under section 8.52 and it is ultimately determined under section 8.54 or section 8.55 that he has not met the relevant standard of conduct described in section 8.51. (b) The undertaking required by clause (2) of subsection (a) must be an unlimited general obligation of the director but need not be secured and may be accepted without reference to the financial ability of the director to make repayment. (c) Authorizations under this section shall be made: (1) by the board of directors; (i) if there are 2 or more disinterested directors, by a majority vote of all the disinterested directors, a majority of whom shall for such purpose constitute a quorum, or by a majority of the members of a committee of two or more disinterested directors appointed by the vote; or (ii) if there are fewer than 2 disinterested directors, by the vote necessary for action by the board in accordance with subsection (c) of section 8.24, in which authorization directors who do not qualify as disinterested directors may participate; or (2) by the shareholders, but shares owned by or voted under the control of a director who at the time does not qualify as a disinterested director may not be voted on the authorization; or (3) as otherwise permitted by law.

§ 8.54. Court-Ordered Indemnification and Advance for Expenses

(a) A director who is a party to a proceeding because he is a director may apply for indemnification or an advance for expenses to the court conducting the proceeding or to another court of competent jurisdiction. After receipt of an application and after giving any notice it considers necessary, the court shall: (1) order indemnification if the court determines that the director is entitled to mandatory indemnification under section 8.52; (2) order indemnification or advance for expenses if the court determines that the director is entitled to indemnification or advance for expenses pursuant to a provision authorized by subsection (a) of section 8.58; or (3) order indemnification or advance for expenses if the court determines, in view of all the relevant circumstances, that it is fair and reasonable (i) to indemnify the director pursuant to section 8.51, or (ii) to advance expenses to the director, even if he has not met the relevant standard of conduct set forth in subsection (a) or (b) of sections 8.51 or 8.51 or failed to comply with section 8.53.

142 (b) If the court determines that the director is entitled to indemnification under clause (1) of subsection (a) or to indemnification or advance for expenses under clause (2) of subsection (a), it shall also order the corporation to pay the director's reasonable expenses incurred in connection with obtaining court-ordered indemnification or advance for expenses. If the court determines that the director is entitled to indemnification or advance for expenses under clause (3) of subsection (a), it may also order the corporation to pay the director's reasonable expenses to obtain court-ordered indemnification or advance for expenses.

§ 8.55. Determination and Authorization of Indemnification.

(a) A corporation may not indemnify a director under section 8.51 unless authorized for a specific proceeding after a determination has been made that indemnification of the director is permissible because he has met the relevant standard of conduct set forth in said section 8.51. (b) The determination shall be made: (1) if there are 2 or more disinterested directors, by the board of directors by a majority vote of all the disinterested directors, a majority of whom shall for such purpose constitute a quorum, or by a majority of the members of a committee of 2 or more disinterested directors appointed by such a vote; (2) by special legal counsel (i) selected in the manner prescribed in clause (1); or (ii) if there are fewer than two disinterested directors, selected by the board of directors, in which selection directors who do not qualify as disinterested directors may participate; or (3) by the shareholders, but shares owned by or voted under the control of a director who at the time does not qualify as a disinterested director may not be voted on the determination. (c) Authorization of indemnification shall be made in the same manner as the determination that indemnification is permissible, except that if there are fewer than two disinterested directors, authorization of indemnification shall be made by those entitled under subclause (ii) of clause (2) of subsection (b) to select special legal counsel.

§ 8.56. Officers

(a) A corporation may indemnify and advance expenses under this subdivision to an officer of the corporation who is a party to a proceeding because he is an officer of the corporation. (1) to the same extent as a director; and (2) if he is an officer but not a director, to such further extent as may be provided by the articles of organization, the bylaws, a resolution of the board of directors, or contract except for liability arising out of acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law. (b) Clause (2) of subsection (a) shall apply to an officer who is also a director if the basis on which he is made a party to the proceeding is an act or omission solely as an officer. 143 (c) An officer of a corporation who is not a director is entitled to mandatory indemnification under section 8.52, and may apply to a court under section 8.54 for indemnification or an advance for expenses, in each case to the same extent to which a director may be entitled to indemnification or advance under those provisions.

§ 8.57. Insurance

A corporation may purchase and maintain insurance on behalf of an individual who is a director or officer of the corporation, or who, while a director or officer of the corporation, serves at the corporation's request as a director, officer, partner, trustee, employee, or agent of another domestic or foreign corporation, partnership, joint venture, trust, employee benefit plan, or other entity, against liability asserted against or incurred by him in that capacity or arising from his status as a director or officer, whether or not the corporation would have power to indemnify or advance expenses to him against the same liability under this subdivision.

§ 8.58. Variation by Corporate Action; Application of Subdivision

(a) A corporation may, by its articles of organization or bylaws or in a resolution adopted or a contract approved by its board of directors or shareholders, obligate itself in advance of the act or omission giving rise to a proceeding to provide indemnification in accordance with section 8.51 or section 8.56 or advance funds to pay for or reimburse expenses in accordance with section 8.53. Any such obligatory provision shall be deemed to satisfy the requirements for authorization referred to in subsection (c) of section 8.53 and in subsection (c) of section 8.55. Any such provision that obligates the corporation to provide indemnification to the fullest extent permitted by law shall be considered to obligate the corporation to advance funds to pay for or reimburse expenses in accordance with section 8.53 to the fullest extent permitted by law, unless the provision specifically provides otherwise. (b) Any provision pursuant to subsection (a) shall not obligate the corporation to indemnify or advance expenses to a director of a predecessor of the corporation, pertaining to conduct with respect to the predecessor, unless otherwise specifically provided. Any provision for indemnification or advance for expenses in the articles of incorporation, bylaws, or a resolution of the board of directors or shareholders of a predecessor of the corporation in a merger or in a contract to which the predecessor is a party, existing at the time the merger takes effect, shall be governed by clause (3) of subsection (a) of section 11.07. (c) A corporation in its articles of organization may, limit any of the rights to indemnification or advance for expenses created by or pursuant to this subdivision. (d) This subdivision shall not limit a corporation's power to pay or reimburse expenses incurred by a director or an officer in connection with his appearance as a witness in a proceeding at a time when he is not a party. (e) This subdivision shall not limit a corporation's power to indemnify, advance expenses to or provide or maintain insurance on behalf of an employee or agent.

§ 8.59. Exclusivity of Subdivision

144 The indemnification and advancement of expenses provided by, or granted pursuant to, this subdivision shall not be considered exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled.

ARTICLE 9

PART A. DOMESTICATION

§ 9.20. Domestication

(a) A foreign business corporation may become a domestic business corporation only if the domestication is permitted by the organic law of the foreign corporation. The laws of the commonwealth shall govern the effect of domesticating in the commonwealth pursuant to this subdivision. (b) A domestic business corporation may become a foreign business corporation only if the domestication is permitted by the laws of the foreign jurisdiction. Regardless of whether the laws of the foreign jurisdiction require the adoption of a plan of domestication, the domestication shall be approved by the adoption by the corporation of a plan of domestication in the manner provided in this subdivision. The laws of the foreign jurisdiction shall govern the effect of domesticating in that jurisdiction. (c) The plan of domestication adopted by a domestic business corporation shall include: (1) a statement of the jurisdiction in which the corporation is to be domesticated; (2) the terms and conditions of the domestication; (3) the manner and basis of reclassifying the shares of the corporation into other shares or other securities, obligations, rights to acquire shares or other securities, cash, other property, or any combination of the foregoing; and (4) any amendments to the articles of organization of the corporation following its domestication that may be desired. The plan of domestication may include any other provisions relating to the domestication that may be desired. (d) The plan of domestication may also include a provision that the plan may be amended before filing the document required by the laws of the commonwealth or the other jurisdiction to consummate the domestication, except that subsequent to the approval of the plan by the shareholders the plan may not be amended to change: (1) the amount or kind of shares or other securities, obligations, rights to acquire shares or other securities, cash, or other property to be received by the shareholders under the plan; (2) the articles of organization as they will be in effect immediately following the domestication, except for changes permitted by section 10.05 or by comparable laws of the other jurisdiction; or

145 (3) any of the other terms or conditions of the plan if the change would adversely affect any of the shareholders in any material respect.

§ 9.21. Action on a Plan of Domestication.

In the case of a domestication of a domestic business corporation in a foreign jurisdiction: (1) The plan of domestication shall be adopted by the board of directors. (2) After adopting the plan of domestication the board of directors shall submit the plan to the shareholders for their approval. (3) The board of directors may condition its submission of the plan of domestication to the shareholders on any basis. (4) If the approval of the shareholders is to be given at a meeting, the corporation shall notify each shareholder, whether or not entitled to vote, of the meeting of shareholders at which the plan of domestication is to be submitted for approval. The notice shall state that the purpose, or one of the purposes, of the meeting is to consider the plan and shall contain or be accompanied by a copy or summary of the plan. The notice shall include or be accompanied by a copy or a summary of the articles of organization as they will be in effect immediately after the domestication. (5) Unless (1) a greater percentage vote, or one or more additional separate voting groups, is required by the articles of organization, pursuant to subsection (a) of section 7.27, by the bylaws, pursuant to section 10.21, or by the board of directors, acting pursuant to paragraph (3), or (2) the articles provide for a lesser percentage vote, in accordance with subsection (b) of section 7.27, approval of the plan of domestication requires approval by two-thirds of all the shares entitled generally to vote on the matter by the articles of organization, and in addition two-thirds of the shares in any voting group entitled to vote separately on the matter by this chapter, by the articles, by the bylaws, or by action of the board of directors pursuant to subsection (c) of section 9.21. (6) Separate voting by voting groups is required by each class or series of shares that: (i) are to be reclassified under the plan of domestication into other securities, obligations, rights to acquire shares or other securities, cash, other property or any combination of the foregoing; (ii) would be entitled to vote as a separate group on a provision of the plan that, if contained in a proposed amendment to articles of organization, would require action by separate voting groups under section 10.04; or (iii) is entitled under the articles of organization to vote as a voting group to approve an amendment of the articles. (7) If the articles of organization, bylaws or an agreement to which any of the directors or shareholders are parties, adopted or entered into before the effective date of this chapter, contains a provision applying to a merger of the corporation that does not refer to a domestication of the corporation, the provision shall be deemed to apply to a domestication of the corporation until such time as the provision is amended subsequent to that date. 146 § 9.22. Articles of Domestication

(a) After the domestication of a foreign business corporation has been authorized as required by the laws of the foreign jurisdiction, articles of domestication shall be executed by any officer or other duly authorized representative. The articles shall set forth: (1) the name of the corporation immediately before the filing of the articles of domestication and, if that name is unavailable for use in the commonwealth or the corporation desires to change its name in connection with the domestication, a name that satisfies the requirements of section 4.01; (2) the jurisdiction of incorporation of the corporation immediately before the filing of the articles of domestication and the date the corporation was incorporated in that jurisdiction; and (3) a statement that the domestication of the corporation in the commonwealth was duly authorized as required by the laws of the jurisdiction in which the corporation was incorporated immediately before its domestication in the commonwealth. (b) The articles of domestication shall either contain all of the provisions that subsection (a) of section 2.02 requires to be set forth in articles of organization and other desired provisions that subsection (b) of section 2.02 permits to be included in articles of organization, or shall have attached articles of organization, except that, in either case, provisions that would not be required to be included in restated articles of organization may be omitted. (c) The articles of domestication shall be delivered by the corporation to the secretary of state for filing and shall take effect at the effective time provided in section 1.23. (d) The corporation shall file a copy of the articles of domestication certified by the state secretary in the registry of deeds in each district within the commonwealth in which real property of the corporation is situated. The domestication shall not be affected by this requirement. (e) If the foreign corporation is authorized to transact business in the commonwealth under Part 15, its authority shall be cancelled automatically on the effective date of its domestication.

§ 9.23. Surrender of Charter Upon Domestication

(a) Whenever a domestic business corporation has adopted and approved, in the manner required by this chapter, a plan of domestication providing for the corporation to be domesticated in a foreign jurisdiction, articles of charter surrender shall be executed on behalf of the corporation by any officer or other duly authorized representative. The articles of charter surrender shall set forth: (1) the name of the corporation; (2) a statement that the articles of charter surrender are being filed in connection with the domestication of the corporation in a foreign jurisdiction;

147 (3) a statement that the domestication was duly approved by the shareholder and, if voting by any separate voting group was required, by each such separate voting group, in the manner required by this chapter and the articles of organization; and (4) the corporation's new jurisdiction of incorporation. (b) The articles of charter surrender shall be delivered by the corporation to the secretary of state for filing. The articles of charter surrender shall take effect on the effective time provided in section 1.23.

§ 9.24. Effect of Domestication.

(a) When a domestication of a foreign business corporation in the commonwealth becomes effective: (1) the title to all real and personal property, both tangible and intangible, of the corporation remains in the corporation without reversion or impairment; (2) the liabilities of the corporation remain the liabilities of the corporation; (3) an action or proceeding pending against the corporation continues against the corporation as if the domestication had not occurred; (4) the articles of domestication, or the articles of organization attached to the articles of domestication, constitute the articles of organization of the corporation; (5) the shares of the corporation are reclassified into other shares, other securities, obligations, rights to acquire shares or other securities of the corporation or into cash or other property in accordance with the terms of the domestication as approved under the laws of the foreign jurisdiction, and the shareholders are entitled only to the rights provided by those terms and under those laws; and (6) the corporation is considered to: (i) be incorporated under the laws of the commonwealth for all purposes; (ii) be the same corporation without interruption as the corporation that existed under the laws of the foreign jurisdiction; and (iii) have been incorporated on the date it was originally incorporated in the foreign jurisdiction. (b) When a domestication of a domestic business corporation in a foreign jurisdiction becomes effective, the foreign business corporation is considered to: (1) appoint the secretary of state as its agent for service of process in a proceeding to enforce the rights of shareholders who exercise appraisal rights in connection with the domestication; and (2) agree that it will promptly pay the amount, if any, to which such shareholders are entitled under PART 13. (c) The owner liability of a shareholder in a foreign corporation that is domesticated in the commonwealth shall be as follows: 148 (1) The domestication shall not discharge any owner liability under the laws of the foreign jurisdiction to the extent the owner liability arose before the effective time of the articles of domestication. (2) The shareholder shall not have owner liability under the laws of the foreign jurisdiction for any debt, obligation or liability of the corporation that arises after the effective time of the articles of domestication. (3) The laws of the foreign jurisdiction shall continue to apply to the collection or discharge of any owner liability preserved by clause (1), as if the domestication had not occurred and the corporation were still incorporated under the laws of the foreign jurisdiction. (4) The shareholder shall have whatever rights of contribution from other shareholders are provided by the laws of the foreign jurisdiction with respect to any owner liability preserved by clause (1), as if the domestication had not occurred and the corporation were still incorporated under the laws of that jurisdiction. (d) A shareholder who becomes subject to owner liability for some or all of the debts, obligations or liabilities of the corporation as a result of its domestication in the commonwealth shall be personally liable only for those debts, obligations or liabilities of the corporation that arise after the effective time of the articles of domestication.

§ 9.25. Abandonment of a Domestication

(a) Unless otherwise provided in a plan of domestication of a domestic business corporation, after the plan has been adopted and approved as required by this subdivision, and at any time before the domestication has become effective, it may be abandoned by the board of directors without action by the shareholders. (b) If a domestication is abandoned under subsection (a) after articles of charter surrender have been filed with the secretary of state but before the domestication has become effective, a statement that the domestication has been abandoned in accordance with this section, executed by an officer or other duly authorized representative, shall be delivered to the secretary of state for filing prior to the effective date of the domestication. The statement shall take effect upon filing and the domestication shall be deemed abandoned and shall not become effective. (c) If the domestication of a foreign business corporation into the commonwealth is abandoned in accordance with the laws of the foreign jurisdiction after articles of domestication have been filed with the secretary of state but before their effective date, a statement that the domestication has been abandoned, executed by an officer or other duly authorized representative shall be delivered to the secretary of state for filing. The statement shall take effect upon filing and the domestication shall be considered abandoned and shall not become effective.

PART B. NONPROFIT CONVERSION

§ 9.30. Nonprofit Conversion

149 (a) A domestic business corporation may become a domestic nonprofit corporation pursuant to a plan of nonprofit conversion. (b) A domestic business corporation may become a foreign nonprofit corporation if the nonprofit conversion is permitted by the laws of the foreign jurisdiction. Regardless of whether the laws of the foreign jurisdiction require the adoption of a plan of nonprofit conversion, the foreign nonprofit conversion shall be approved by the adoption by the domestic business corporation of a plan of nonprofit conversion in the manner provided in this subdivision. The laws of the foreign jurisdiction govern the effect of the foreign nonprofit conversion. (c) The plan of nonprofit conversion shall include: (1) the terms and conditions of the conversion; (2) the manner and basis of reclassifying the shares of the corporation into memberships, if any, or securities, obligations, rights to acquire memberships or securities, cash, other property, or any combination of the foregoing; (3) any desired amendments to the articles of organization of the corporation following its conversion; and (4) if the domestic business corporation is to be converted into a foreign nonprofit corporation, a statement of the jurisdiction in which the corporation will be incorporated after the conversion. The plan of nonprofit conversion may include any other provisions relating to the conversion that may be desired. (d) The plan of nonprofit conversion may also include a provision that the plan may be amended before filing articles of nonprofit conversion, except that subsequent to approval of the plan by the shareholders it may not be amended to change: (1) the amount or kind of memberships or securities, obligations, rights to acquire memberships or securities, cash, or other property to be received by the shareholders under the plan; (2) the articles of organization as they will be in effect immediately following consummation of the conversion, except for changes permitted by section 10.05; or (3) any of the other terms or conditions of the plan if the change would adversely affect any of the shareholders in any material respect.

§ 9.31. Action on a Plan of Nonprofit Conversion

In the case of a conversion of a domestic business corporation to a domestic or foreign nonprofit corporation: (1) The plan of nonprofit conversion shall be adopted by the board of directors. (2) After adopting the plan of nonprofit conversion, the board of directors shall submit the plan to the shareholders for their approval. The board of directors shall also transmit to the shareholders a recommendation that the shareholders approve the plan, unless the board of directors makes a determination that because of conflicts of interest or other special 150 circumstances it should not make such a recommendation, in which case the board of directors shall transmit to the shareholders the basis for that determination. (3) The board of directors may condition its submission of the plan of nonprofit conversion to the shareholders on any basis. (4) If the approval of the shareholders is to be given at a meeting, the corporation shall notify each shareholder, whether or not entitled to vote, of the meeting of shareholders at which the plan of nonprofit conversion is to be submitted for approval. The notice shall state that the purpose, or one of the purposes, of the meeting is to consider the plan and shall contain or be accompanied by a copy or summary of the plan. The notice shall include or be accompanied by a copy of the articles of organization as they will be in effect immediately after the nonprofit conversion. (5) Unless (1) a greater percentage vote, or one or more additional separate voting groups, is required by the articles of organization, pursuant to section 7.27(a), by the bylaws, pursuant to section 10.22, or by the board of directors, acting pursuant to paragraph (3), or (2) the articles provide for a lesser percentage vote, in accordance with subsection (b) of section 7.27, approval of the plan of domestication requires approval by two-thirds of all the shares entitled generally to vote on the matter by the articles of organization, and in addition two-thirds of the shares in any voting group entitled to vote separately on the matter by this chapter, by the articles, by the bylaws, or by action of the board of directors pursuant to section 9.31(c). (6) Separate voting by voting groups is required by each class or series of shares that: (i) would have a right to vote as a separate group on a provision in the plan that, if contained in a proposed amendment to articles of organization, would require action by separate voting groups under section 10.04; or (ii) is entitled under the articles of organization to vote as a voting group to approve a plan of merger or amendment of articles. (7) If any provision of the articles of organization, bylaws or an agreement to which any of the directors or shareholders are parties, adopted or entered into before the effective date of this chapter, applies to a merger of the corporation and does not refer to a nonprofit conversion of the corporation, the provision shall be deemed to apply to a nonprofit conversion of the corporation until such time as the provision is amended subsequent to that date.

§ 9.32. Articles of Nonprofit Conversion

(a) After a plan of nonprofit conversion providing for the conversion of a domestic business corporation to a domestic nonprofit corporation has been adopted and approved as required by this chapter, articles of nonprofit conversion shall be executed on behalf of the corporation by any officer or other duly authorized representative. The articles shall set forth: (1) the name of the corporation immediately before the filing of the articles of nonprofit conversion and if that name does not satisfy the requirements of chapter 180 or the corporation desires to change its name in connection with the conversion, a name that satisfies the requirements of said chapter 180; and

151 (2) a statement that the plan of nonprofit conversion was duly approved by the shareholders and, if voting by any separate voting group was required, by each such separate voting group, in the manner required by this chapter and the articles of organization. (b) The articles of nonprofit conversion shall either contain all of the provisions that chapter 180 requires to be set forth in articles of organization of a domestic nonprofit corporation and any other desired provisions permitted by said chapter 180, or shall have attached articles of organization that satisfy the requirements of said chapter 180, except that in either case provisions that would not be required to be included in restated articles of organization of a domestic nonprofit corporation may be omitted. (c) The articles of nonprofit conversion shall be delivered to the secretary of state for filing and shall take effect at the effective time provided in section 1.23. (d) The resulting or surviving corporation shall file a copy of the articles of nonprofit conversion certified by the state secretary in the registry of deeds in each district within the commonwealth in which real property of the corporation is situated. The conversion shall be valid and effective in accordance with the terms of the plan of nonprofit conversion and the articles of nonprofit conversion delivered to the secretary of state pursuant to subsection (c) of section 9.32, notwithstanding any failure to make the filing.

§ 9.33. Surrender of Charter Upon Foreign Nonprofit Conversion

(a) Whenever a domestic business corporation has adopted and approved, in the manner required by this subdivision, a plan of nonprofit conversion providing for the corporation to be converted to a foreign nonprofit corporation, articles of charter surrender shall be executed on behalf of the corporation by any officer or other duly authorized representative. The articles of charter surrender shall set forth: (1) the name of the corporation; (2) a statement that the articles of charter surrender are being filed in connection with the conversion of the corporation to a foreign nonprofit corporation; (3) a statement that the foreign nonprofit conversion was duly approved by the shareholders and, if voting by any separate voting group was required, by each such separate voting group, in the manner required by this chapter and the articles of organization; and (4) the corporation's new jurisdiction of incorporation. (b) The articles of charter surrender shall be delivered by the corporation to the secretary of state for filing. The articles of charter surrender shall take effect on the effective time provided in section 1.23.

§ 9.34. Effect of Nonprofit Conversion

(a) When a conversion of a domestic business corporation to a domestic nonprofit corporation becomes effective:

152 (1) the title to all real and personal property, both tangible and intangible, of the corporation remains in the corporation without reversion or impairment; (2) the liabilities of the corporation remain the liabilities of the corporation; (3) an action or proceeding pending against the corporation continues against the corporation as if the conversion had not occurred; (4) the articles of nonprofit conversion, or the articles of organization attached to the articles of nonprofit conversion, constitute the articles of organization of the corporation; (5) the shares of the corporation are reclassified into memberships, securities, obligations, rights to acquire memberships or securities of the corporation or into cash or other property in accordance with the plan of conversion, and the shareholders are entitled only to the rights provided in the plan of nonprofit conversion or to any rights they may have under PART 13; and (6) the corporation is considered to: (i) be a domestic nonprofit corporation for all purposes; (ii) be the same corporation without interruption as the corporation that existed before the conversion; and (iii) have been incorporated on the date that it was originally incorporated as a domestic business corporation. (b) When a conversion of a domestic business corporation to a foreign nonprofit corporation becomes effective, the foreign nonprofit corporation is considered to: (1) appoint the secretary of state as its agent for service of process in a proceeding to enforce the rights of shareholders who exercise appraisal rights in connection with the conversion; and (2) agree that it will promptly pay the amount, if any, to which such shareholders are entitled under PART 13. (c) The owner liability of a shareholder in a domestic business corporation that converts to a domestic nonprofit corporation shall be as follows: (1) The conversion does not discharge any owner liability of the shareholder with respect to the business corporation to the extent any such owner liability arose before the effective date of the articles of nonprofit conversion. (2) The shareholder shall not have owner liability for any debt, obligation or liability of the nonprofit corporation that arises after the effective date of the articles of nonprofit conversion. (3) The laws of the commonwealth shall continue to apply to the collection or discharge of any owner liability preserved by paragraph (1), as if the conversion had not occurred and the nonprofit corporation were still a business corporation. (4) The shareholder shall have whatever rights of contribution from other shareholders are provided by the laws of the commonwealth with respect to any owner liability preserved by paragraph (1), as if the conversion had not occurred and the nonprofit corporation were still a business corporation. 153 (d) A shareholder who becomes subject to owner liability for some or all of the debts, obligations or liabilities of the nonprofit corporation shall be personally liable only for those debts, obligations or liabilities of the nonprofit corporation that arise after the effective time of the articles of nonprofit conversion.

§ 9.35. Abandonment of a Nonprofit Conversion

(a) Unless otherwise provided in a plan of nonprofit conversion of a domestic business corporation, after the plan has been adopted and approved as required by this chapter, and at any time before the nonprofit conversion has become effective, it may be abandoned by the board of directors without action by the shareholders. (b) If a nonprofit conversion is abandoned under subsection (a) after articles of nonprofit conversion or articles of charter surrender have been filed with the secretary of state but before the nonprofit conversion has become effective, a statement that the nonprofit conversion has been abandoned in accordance with this section, executed by an officer or other duly authorized representative, shall be delivered to the secretary of state for filing before the effective date of the nonprofit conversion. The statement shall take effect upon filing and the nonprofit conversion shall be deemed abandoned and shall not become effective.

PART D. FOREIGN NONPROFIT DOMESTICATION AND CONVERSION

§ 9.40. Foreign Nonprofit Domestication and Conversion

A foreign nonprofit corporation may become a domestic business corporation if the domestication and conversion is permitted by the organic law of the foreign nonprofit corporation. The laws of the commonwealth shall govern the effect of converting to a domestic business corporation pursuant to this subdivision.

§ 9.41. Articles of Domestication and Conversion.

(a) After the conversion of a foreign nonprofit corporation to a domestic business corporation has been authorized as required by the laws of the foreign jurisdiction, articles of domestication and conversion shall be executed by any officer or other duly authorized representative. The articles shall set forth: (1) the name of the corporation immediately before the filing of the articles of domestication and conversion and, if that name is unavailable for use in the commonwealth or the corporation desires to change its name in connection with the domestication and conversion, a name that satisfies the requirements of section 4.01; (2) the jurisdiction of incorporation of the corporation immediately before the filing of the articles of domestication and conversion and the date the corporation was incorporated in that jurisdiction; and (3) a statement that the domestication and conversion of the corporation in the commonwealth was duly authorized as required by the laws of the jurisdiction in which the

154 corporation was incorporated immediately before its domestication and conversion in the commonwealth. (b) The articles of domestication and conversion shall either contain all of the provisions that subsection (a) of section 2.02 requires to be set forth in articles of organization and any other desired provisions that subsection (b) of section 2.02 permits to be included in articles of organization, or shall have attached articles of organization. In either case, provisions that would not be required to be included in restated articles of organization may be omitted. (c) The articles of domestication and conversion shall be delivered by the corporation to the secretary of state for filing and shall take effect at the effective time provided in section 1.23. (d) The corporation shall file a copy of the articles of domestication and conversion certified by the state secretary in the registry of deeds in each district within the commonwealth in which real property of the corporation is situated. The domestication and conversion shall be valid and effective in accordance with the terms of the plan of domestication and conversion and the articles of domestication and conversion delivered to the secretary of state pursuant to subsection (c), notwithstanding any failure to make the filing. (e) If the foreign nonprofit corporation is authorized to transact business in the commonwealth under this chapter, its authority shall be cancelled automatically on the effective date of its domestication and conversion.

§ 9.42. Effect of Foreign Nonprofit Domestication and Conversion

(a) When a domestication and conversion of a foreign nonprofit corporation to a domestic business corporation becomes effective: (1) the title to all real and personal property, both tangible and intangible, of the corporation remains in the corporation without reversion or impairment; (2) the liabilities of the corporation remain the liabilities of the corporation; (3) an action or proceeding pending against the corporation continues against the corporation as if the domestication and conversion had not occurred; (4) the articles of domestication and conversion, or the articles of organization attached to the articles of domestication and conversion, constitute the articles of organization of the corporation; (5) shares, other securities, obligations, rights to acquire shares or other securities of the corporation or cash or other property shall be issued or paid as provided pursuant to the laws of the foreign jurisdiction, so long as at least one share is outstanding immediately after the effective time; and (6) the corporation is considered to: (i) be a domestic corporation for all purposes; (ii) be the same corporation without interruption as the corporation that existed under the laws of the jurisdiction in which it was formerly domiciled; and

155 (iii) have been incorporated on the date it was originally incorporated in the former jurisdiction. (b) The owner liability of a member of a foreign nonprofit corporation that domesticates and converts to a domestic business corporation shall be as follows: (1) The domestication and conversion does not discharge any owner liability under the laws of the foreign jurisdiction to the extent any such owner liability arose before the effective time of the articles of domestication and conversion. (2) The member shall not have owner liability under the laws of the foreign jurisdiction for any debt, obligation or liability of the corporation that arises after the effective time of the articles of domestication and conversion. (3) The provisions of the laws of the foreign jurisdiction shall continue to apply to the collection or discharge of any owner liability preserved by paragraph (1), as if the domestication and conversion had not occurred and the corporation were still incorporated under the laws of the foreign jurisdiction. (4) The member shall have whatever rights of contribution from other members are provided by the laws of the foreign jurisdiction with respect to any owner liability preserved by paragraph (1), as if the domestication and conversion had not occurred and the corporation were still incorporated under the laws of that jurisdiction. (c) A member of a foreign nonprofit corporation who becomes subject to owner liability for some or all of the debts, obligations or liabilities of the corporation as a result of its domestication and conversion in the commonwealth shall be personally liable only for those debts, obligations or liabilities of the corporation that arise after the effective time of the articles of domestication and conversion.

§ 9.43. Abandonment of a Foreign Nonprofit Domestication and Conversion

If the domestication and conversion of a foreign nonprofit corporation to a domestic business corporation is abandoned in accordance with the laws of the foreign jurisdiction after articles of domestication and conversion have been filed with the secretary of state, a statement that the domestication and conversion has been abandoned, executed by an officer or other duly authorized representative, shall be delivered to the secretary of state for filing. The statement shall take effect upon filing and the domestication and conversion shall be deemed abandoned and shall not become effective.

PART E. ENTITY CONVERSION

§ 9.50. Entity Conversion Authorized; Definitions

(a) A domestic business corporation may become a domestic other entity pursuant to a plan of entity conversion. If the organic law of the other entity does not provide for such a conversion, section 9.55 governs the effect of converting to that form of entity.

156 (b) A domestic business corporation may become a foreign other entity only if the entity conversion is permitted by the laws of the foreign jurisdiction. The laws of the foreign jurisdiction governs the effect of converting to an other entity organized in that jurisdiction. (c) A domestic other entity may become a domestic business corporation. Section 9.55 governs the effect of converting to a domestic business corporation. If the organic law of a domestic other entity does not provide procedures for the approval of an entity conversion, the conversion shall be adopted and approved, and the entity conversion effectuated, in the same manner as a merger of the other entity and its interest holders shall be entitled to appraisal rights if appraisal rights are available upon any type of merger under the organic law of the other entity. If the organic law of a domestic other entity does not provide procedures for the approval of either an entity conversion or a merger, a plan of entity conversion shall be adopted and approved, the entity conversion effectuated, and appraisal rights exercised, in accordance with the procedures in this subdivision and PART 13. Without limiting the provisions of this subsection, a domestic other entity whose organic law does not provide procedures for the approval of an entity conversion shall be subject to subsection (e) of this section and clause (7) of section 9.52. For purposes of applying this subdivision and PART 13: (1) the other entity, its interest holders, interests and organic documents taken together, shall be deemed to be a domestic business corporation, shareholders, shares and articles of organization, respectively, and vice versa, as the context may require; and (2) if the business and affairs of the other entity are managed by a group of persons that is not identical to the interest holders, that group shall be deemed to be the board of directors. (d) A foreign other entity may become a domestic business corporation if the organic law of the foreign other entity authorizes it to become a corporation in another jurisdiction. The laws of the commonwealth shall govern the effect of converting to a domestic business corporation pursuant to this subdivision. (e) As used in this SUBDIVISION the following words shall have the following meanings unless the context requires otherwise. "Converting entity", the domestic business corporation or domestic other entity that adopts a plan of entity conversion or the foreign other entity converting to a domestic business corporation. "Surviving entity", the corporation or other entity that is in existence immediately after consummation of an entity conversion pursuant to this subdivision.

§ 9.51. Plan of Entity Conversion

(a) A plan of entity conversion shall include: (1) a statement of the type of entity the surviving entity will be and, if it will be a foreign other entity, its jurisdiction of organization; (2) the terms and conditions of the conversion; (3) if the surviving entity will be an other entity, the manner and basis of converting the shares of the domestic business corporation into interests or other securities, obligations, rights to 157 acquire interests or other securities, cash, other property, or any combination of the foregoing; and (4) if the surviving entity will be a domestic business corporation, the manner and basis of converting the interests in the other entity into shares of the domestic business corporation, if any, or other securities, obligations, rights to acquire interests or other securities, cash, other property, or any combination of the foregoing; and (5) the full text of the organic documents of the surviving entity, as they will be in effect immediately after consummation of the conversion. The plan of entity conversion may include any other provisions relating to the conversion that may be desired. (b) The plan of entity conversion may also include a provision that the plan may be amended prior to filing articles of entity conversion, except that subsequent to approval of the plan by the shareholders or by the holders of voting interests in the other entity the plan may not be amended to change: (1) the amount or kind of shares or other securities, interests, obligations, rights to acquire shares, other securities or interests, cash, or other property to be received by the shareholders or interest holders under the plan; (2) the organic documents that will be in effect immediately following the conversion, except for changes permitted by a provision of the organic law of the surviving entity comparable to section 10.05; or (3) any of the other terms or conditions of the plan if the change would adversely affect any of the shareholders or the interest holders in any material respect.

§ 9.52. Action on a Plan of Entity Conversion

In the case of an entity conversion of a domestic business corporation to a domestic or foreign other entity: (1) The plan of entity conversion shall be adopted by the board of directors. (2) After adopting the plan of entity conversion, the board of directors shall submit the plan to the shareholders for their approval. (3) The board of directors may condition its submission of the plan of entity conversion to the shareholders on any basis. (4) If the approval of the shareholders is to be given at a meeting, the corporation shall notify each shareholder, whether or not entitled to vote, of the meeting of shareholders at which the plan of entity conversion is to be submitted for approval. The notice shall state that the purpose, or one of the purposes, of the meeting is to consider the plan and shall contain or be accompanied by a copy or summary of the plan. The notice shall include or be accompanied by a copy or summary of the organizational documents as they will be in effect immediately after the entity conversion.

158 (5) Unless (i) a greater percentage vote, or one or more additional separate voting groups, is required by the articles of organization, pursuant to section 7.27(a), by the bylaws, pursuant to section 10.21, or by the board of directors, acting pursuant to paragraph (3), or (ii) the articles provide for a lesser percentage vote, in accordance with subsection (b) of section 7.27, approval of the plan of domestication requires approval by two-thirds of all the shares entitled generally to vote on the matter by the articles of organization, and in addition two-thirds of the shares in any voting group entitled to vote separately on the matter by this chapter, by the articles, by the bylaws, or by action of the board of directors pursuant to subsection (c) of this section. (6) Separate voting by voting groups is required by each class or series of shares that: (i) would have a right to vote as a separate voting group on a provision in the plan that, if contained in a proposed amendment to the articles of organization, would require action by separate voting groups under section 10.04; or (ii) is entitled under the articles of organization to vote as a voting group to approve a plan of merger.

(7) If the articles of organization, bylaws or an agreement to which any of the directors or shareholders are parties, adopted or entered into before the effective date of this chapter, applies to a merger of the corporation and the document does not refer to an entity conversion of the corporation, the provision shall be deemed to apply to an entity conversion of the corporation until such time as the provision is subsequently amended. (8) If as a result of the conversion one or more shareholders of the corporation would become subject to owner liability for the debts, obligations or liabilities of any other person or entity, approval of the plan of conversion shall require the execution, by each such shareholder who does not assert appraisal rights, of a separate written consent to become subject to such owner liability.

§ 9.53. Articles of Entity Conversion

(a) After the conversion of a domestic business corporation to a domestic other entity has been adopted and approved as required by this chapter, articles of entity conversion shall be executed on behalf of the corporation by any officer or other duly authorized representative. The articles shall: (1) set forth the name of the corporation immediately before the filing of the articles of entity conversion and the name to which the name of the corporation is to be changed, which shall be a name that satisfies the organic law of the surviving entity; (2) state the type of other entity that the surviving entity will be; (3) set forth a statement that the plan of entity conversion was duly approved by the shareholders and if voting by any separate voting group was required, by each such separate voting group, in the manner required by this chapter and the articles of organization; (4) if the surviving entity is a filing entity, either contain all of the provisions required to be set forth in its public organic document and any other desired provisions that are permitted, or

159 have attached a public organic document, except that, in either case, provisions that would not be required to be included in a restated public organic document may be omitted; (b) After the conversion of a domestic other entity to a domestic business corporation has been adopted and approved as required by the organic laws of the other entity, articles of entity conversion shall be executed on behalf of the other entity by any officer or other duly authorized representative. The articles shall: (1) set forth the name of the other entity immediately before the filing of the articles of entity conversion and the name to which the name of the other entity is to be changed, which shall be a name that satisfies the requirements of section 4.01; (2) set forth a statement that the plan of entity conversion was duly approved in accordance with the organic law of the other entity; (3) either contain all of the provisions that subsection (a) of section 2.02 requires to be set forth in articles of organization and any other desired provisions that section 2.02 subsection (b) of permits to be included in articles of organization, or have attached articles of organization, except that, in either case, provisions that would not be required to be included in restated articles of organization of a domestic business corporation may be omitted. (c) After the conversion of a foreign other entity to a domestic business corporation has been authorized as required by the laws of the foreign jurisdiction, articles of entity conversion shall be executed on behalf of the foreign other entity by any officer or other duly authorized representative. The articles shall: (1) set forth the name of the other entity immediately before the filing of the articles of entity conversion and the name to which the name of the other entity is to be changed, which shall be a name that satisfies the requirements of section 4.01; (2) set forth the jurisdiction under the laws of which the other entity was organized immediately before the filing of the articles of entity conversion and the date on which the other entity was organized in that jurisdiction; (3) set forth a statement that the conversion of the other entity was duly approved in the manner required by its organic law; and (4) either contain all of the provisions that subsection (a) of section 2.02 requires to be set forth in articles of organization and any other desired provisions that subsection (b) of section 2.02 permits to be included in articles of organizations, or have attached articles of organization, except that, in either case, provisions that would not be required to be included in restated articles of organization of a domestic business corporation may be omitted. (d) The articles of entity conversion shall be delivered to the secretary of state for filing, and shall take effect at the effective time provided in section 1.23. (e) The corporation shall file a copy of the articles of entity conversion certified by the state secretary in the registry of deeds in each district within the commonwealth in which real property of the corporation is situated. The entity conversion shall be valid and effective in accordance with the terms of the plan of entity conversion and the articles of entity conversion delivered to the secretary of state pursuant to subsection (d) of section 9.53, notwithstanding any failure to make the filing. 160 (f) If the converting entity is a foreign other entity that is authorized to transact business in the commonwealth under a provision of law similar to PART 15, its authority or other type of foreign qualification shall be cancelled automatically on the effective date of its conversion.

§ 9.54. Surrender of Charter Upon Conversion

(a) Whenever a domestic business corporation has adopted and approved, in the manner required by this subdivision, a plan of entity conversion providing for the corporation to be converted to a foreign other entity, articles of charter surrender shall be executed on behalf of the corporation by any officer or other duly authorized representative. The articles of charter surrender shall set forth: (1) the name of the corporation; (2) a statement that the articles of charter surrender are being filed in connection with the conversion of the corporation to a foreign other entity; (3) a statement that the conversion was duly approved by the shareholders and, if voting by any separate voting group was required, by each such separate voting group, in the manner required by this chapter and the articles of organization; (4) the jurisdiction under the laws of which the surviving entity will be organized; (5) if the surviving entity will be a nonfiling entity, the address of its executive office immediately after the conversion. (b) The articles of charter surrender shall be delivered by the corporation to the secretary of state for filing. The articles of charter surrender shall take effect on the effective time provided in section 1.23.

§ 9.55. Effect of Entity Conversion

(a) When a conversion under this subdivision in which the surviving entity is a domestic business corporation or domestic other entity becomes effective: (1) the title to all real and personal property, both tangible and intangible, of the converting entity remains in the surviving entity without reversion or impairment; (2) the liabilities of the converting entity remain the liabilities of the surviving entity; (3) an action or proceeding pending against the converting entity continues against the surviving entity as if the conversion had not occurred; (4) in the case of a surviving entity that is a filing entity, the articles of conversion, or the articles of organization or public organic document attached to the articles of conversion, constitute the articles of organization or public organic document of the surviving entity; (5) in the case of a surviving entity that is a nonfiling entity, the private organizational document provided for in the plan of conversion constitutes the private organizational document of the surviving entity;

161 (6) the shares or interests of the converting entity are reclassified into shares, interests, other securities, obligations, rights to acquire shares, interests or other securities of the surviving entity or into cash or other property in accordance with the plan of conversion, and the shareholders or interest holders of the converting entity are entitled only to the rights provided in the plan of conversion or, in the case of a converting entity that is a domestic business corporation, to any rights they may have under PART 13; and (7) the surviving entity is considered to: (i) be a domestic business corporation or other entity for all purposes; (ii) be the same corporation or other entity without interruption as the converting entity that existed prior to the conversion; and (iii) have been incorporated or otherwise organized on the date that the converting entity was originally incorporated or organized. (b) When a conversion of a domestic business corporation to a foreign other entity becomes effective, the surviving entity is considered to: (1) appoint the secretary of state as its agent for service of process in a proceeding to enforce the rights of shareholders who exercise appraisal rights in connection with the conversion; and (2) agree that it will promptly pay the amount, if any, to which such shareholders are entitled under PART 13. (c) A shareholder who becomes subject to owner liability for some or all of the debts, obligations or liabilities of the surviving entity as a result of an entity conversion shall be personally liable only for those debts, obligations or liabilities of the surviving entity that arise after the effective time of the articles of entity conversion. (d) The owner liability of an interest holder in an other entity that converts to a domestic business corporation shall be as follows: (1) The conversion does not discharge any owner liability under the organic law of the other entity to the extent any such owner liability arose before the effective time of the articles of entity conversion. (2) The interest holder shall not have owner liability under the organic law of the other entity for any debt, obligation or liability of the corporation that arises after the effective time of the articles of entity conversion. (3) The provisions of the organic law of the other entity shall continue to apply to the collection or discharge of any owner liability preserved by paragraph (1), as if the conversion had not occurred and the surviving entity were still the converting entity. (4) The interest holder shall have whatever rights of contribution from other interest holders are provided by the organic law of the other entity with respect to any owner liability preserved by paragraph (1), as if the conversion had not occurred and the surviving entity were still the converting entity.

§ 9.56. Abandonment of an Entity Conversion 162 (a) Unless otherwise provided in a plan of entity conversion of a domestic business corporation, after the plan has been adopted and approved as required by this chapter, and at any time before the entity conversion has become effective, it may be abandoned by the board of directors without action by the shareholders. (b) If an entity conversion is abandoned after articles of entity conversion or articles of charter surrender have been filed with the secretary of state but before the entity conversion has become effective, a statement that the entity conversion has been abandoned in accordance with this section, executed by an officer or other duly authorized representative, shall be delivered to the secretary of state for filing before the effective date of the entity conversion. Upon filing, the statement shall take effect and the entity conversion shall be considered abandoned and shall not become effective.

ARTICLE 10

PART A. AMENDMENT OF ARTICLES OF ORGANIZATION

§ 10.01. Authority to Amend

(a) A corporation may amend its articles of organization at any time to add or change a provision that is required or permitted in the articles of organization as of the effective date of the amendment or to delete a provision not required in the articles of organization. (b) A shareholder of the corporation shall not have a vested property right resulting from any provision in the articles of organization, including provisions relating to management, control, capital structure, dividend entitlement, or purpose or duration of the corporation.

§ 10.02. Amendment Before Issuance of Shares

If a corporation has not yet issued shares, its board of directors, or its incorporators if it has no board of directors, may adopt one or more amendments to the corporation's articles of organization.

§ 10.03. Amendment by Board of Directors and Shareholders; Exception

If a corporation has issued shares, an amendment to the articles of organization shall be adopted in the following manner: (a) The proposed amendment must be adopted by the board of directors. (b) Except as provided in sections 10.05, 10.07, and 14.34, after adopting the proposed amendment the board of directors shall submit the amendment to the shareholders for their approval. (c) The board of directors may condition its submission of the amendment to the shareholders on any basis.

163 (d) If the amendment is required to be approved by the shareholders, and the approval is to be given at a meeting, the corporation shall notify each shareholder, whether or not entitled to vote, of the meeting of shareholders at which the amendment is to be submitted for approval. The notice shall state that the purpose, or one of the purposes, of the meeting is to consider the amendment and shall contain or be accompanied by a copy or a summary of the amendment. (e) Unless (1) a greater percentage vote, or action by 1 or more additional separate voting groups, is required by the articles of organization, pursuant to subsection (a) of section 7.27, by the bylaws, pursuant to section 10.21, or by the board of directors, acting pursuant to subsection (c) of section 10.03, or (2) the articles provide for a lesser percentage vote, in accordance with subsection (b) of section 7.27, approval of the amendment requires: (1) except as otherwise provided in clause (2), the affirmative vote of two-thirds of all the shares entitled generally to vote on the matter by the articles of organization, and in addition two-thirds of the shares of any voting group entitled to vote separately on the matter by the chapter, by the articles, by the bylaws, or by action of the board of directors pursuant to subsection (c) of section 10.03, or (2) if the amendment relates solely to (A) an increase or reduction in the corporation's capital stock of any class or series then authorized, (B) a change in its authorized shares into a different number of shares or the exchange thereof pro rata for a different number of shares of the same class or series, or (C) a change of its corporate name, the required vote shall be a majority rather than two-thirds, except that if the vote of a separate voting group is required under section 10.04, the required vote of that voting group shall remain two-thirds. If the amendment to the articles of organization changes a quorum or voting requirement for action by the shareholders, approval by the shareholders shall satisfy not only the quorum and voting requirement then applicable for amendment of the articles but also the particular quorum or voting requirement being changed. (f) The articles of organization of any corporation, a plan of reorganization of which, pursuant to any applicable statute of the United States relating to reorganizations of corporations, has been or shall be confirmed by the decree or order of a court of competent jurisdiction may be amended as provided in section 14.34, notwithstanding the terms of this section.

§ 10.04. Voting on Amendments by Voting Groups

(a) The holders of the outstanding shares of a class or of a series of a class are entitled to vote as a separate voting group, whether or not shareholder voting is otherwise required by this chapter, on a proposed amendment to the articles of organization if the amendment would: (1) increase or decrease the aggregate number of authorized shares of the class or the series; (2) authorize an exchange or effect a reclassification of all or part of the shares of the class or series into shares of another class or series; (3) authorize an exchange or create a right of exchange, or effect a reclassification, of all or part of the outstanding shares of another class or series into shares of the class or series;

164 (4) change the designation, or the stated rights, preferences or limitations of all or part of the shares of the class or the series; (5) change all or part of the shares of the class or series into a different number of shares of the same class or series; (6) increase the voting rights of the outstanding shares of another class or series relative to the voting rights of the subject class or series; (7) increase directly the stated rights or preferences of the outstanding shares of another class or series with respect to distributions or to dissolution, to make them prior, superior, or substantially equal to the rights or preferences of the subject class or series, or do so indirectly by way of implementing an exchange or reclassification of the outstanding shares of the other class or series into shares of a third class or series; (8) limit or deny an existing preemptive right of all or part of the outstanding shares of the class or series; or (9) cancel or otherwise affect interests in distributions or dividends that have accumulated but not yet been declared on all or part of the outstanding shares of the class or series. (b) If a proposed amendment that entitles the holders of 2 or more classes or series of shares to vote as separate voting groups under this section would affect those 2 or more classes or series in the same or a substantially similar way, the holders of shares of all the classes or series so affected shall vote together as a single voting group on the proposed amendment, unless otherwise provided in the articles of organization or required by the board of directors. (c) A class or series of shares is entitled to the voting rights granted by this section although the articles of organization provide that the shares are nonvoting shares.

§ 10.05. Amendment by Board of Directors.

Unless the articles of organization provide otherwise, a corporation's board of directors may adopt amendments to the corporation's articles of organization without shareholder approval: (1) to extend the duration of the corporation if it was incorporated at a time when limited duration was required by law; (2) if the corporation has only one class of shares outstanding: (a) to change each issued and unissued authorized share of the class into a greater number of whole shares of that class; or (b) to increase the number of authorized shares of the class to the extent necessary to permit the issuance of shares as a share dividend; (3) to change the corporate name by substituting the word "corporation," "incorporated," "company," "limited," or the abbreviation "corp.," "inc.," "co.," or "ltd.," for a similar word or abbreviation in the name, or by adding, deleting, or changing a geographical attribution for the name;

165 (4) to reflect a reduction in authorized shares, as a result of the operation of subsection (b) of section 6.31, when the corporation has acquired its own shares and the articles of organization prohibit the reissue of the acquired shares; (5) to delete a class or series of shares from the articles of organization, as a result of the operation of subsection (b) of section 6.31 or of the conversion of the shares, when there are no remaining shares of the class or series because the corporation has acquired all shares of the class or series, or all shares of the class or series have been converted into other securities, and the articles of organization prohibit the reissue of the acquired or converted shares; or (6) to make any change expressly permitted by section 6.02 to be made without shareholder approval.

§ 10.06. Articles of Amendment

After an amendment to the articles of organization has been adopted and approved in the manner required by the chapter and by the articles of organization, the corporation shall deliver to the secretary of state for filing articles of amendment setting forth: (1) the name of the corporation; (2) the text of each amendment adopted; (3) if an amendment authorizes an exchange, or effects a reclassification or cancellation, of issued shares, provisions for implementing that action unless contained in the amendment itself; (4) the date of each amendment's adoption; (5) if an amendment: (a) was adopted by the incorporators or board of directors without shareholder approval, a statement that the amendment was duly approved by the incorporators or by the board of directors, as the case may be, and that shareholder approval was not required; (b) required approval by the shareholders, a statement that the amendment was duly approved by the shareholders in the manner required by this chapter and by the articles of organization.

§ 10.07. Restated Articles of Organization

(a) A corporation's board of directors may restate its articles of organization at any time, with or without shareholder approval, to consolidate all amendments into a single document. (b) If the restated articles include one or more new amendments that require shareholder approval, the amendments must be adopted and approved as provided in section 10.03. (c) A corporation that restates its articles of organization shall deliver to the secretary of state for filing articles of restatement setting forth the name of the corporation and the text of the restated articles of organization together with a certificate which states that the restated articles consolidate all amendments into a single document and, if a new amendment is included in the restated articles, which also includes the statements required under section 10.06. 166 (d) Duly adopted restated articles of organization supersede the original articles of organization and all amendments thereto. (e) The secretary of state may certify restated articles of organization as the articles of organization currently in effect, without including the certificate information required by subsection (c).

§ 10.08. Effect of Amendment

An amendment to the articles of organization shall not affect a cause of action existing against or in favor of the corporation, a proceeding to which the corporation is a party, or the existing rights of persons other than shareholders of the corporation. An amendment changing a corporation's name shall not abate a proceeding brought by or against the corporation in its former name.

PART B. AMENDMENT OF BYLAWS

§ 10.20. Amendment by Board of Directors or Shareholders

(a) The power to make, amend or repeal bylaws shall be in the shareholders. If authorized by the articles of organization, or by the bylaws pursuant to authorization in the articles, the board of directors may also make, amend or repeal bylaws in whole or in part, except with respect to any provision thereof which by virtue of an express provision in this chapter, the articles of organization, or the bylaws, requires action by the shareholders. (b) Not later than the time of giving notice of the meeting of shareholders next following the making, amending or repealing by the board of directors of any bylaw, notice stating the substance of the action taken by the board of directors shall be given to all shareholders entitled to vote on amending the bylaws. Any action taken by the board of directors with respect to the bylaws may be amended or repealed by the shareholders.

§ 10.21. Bylaw Dealing With Quorum or Voting Requirements for Shareholders

(a) If authorized by the articles of organization, the initial bylaws or a bylaw subsequently adopted by shareholders may provide for a greater or lesser quorum requirement for action by any voting group of shareholders, or for a greater affirmative vote requirement, including additional separate voting groups, than is provided for by this chapter. (b) Approval of an amendment to the bylaws that changes or deletes a quorum or voting requirement for action by shareholders must satisfy both the applicable quorum and voting requirements for action by shareholders with respect to amendment of the bylaws and also the particular quorum and voting requirements sought to be changed or deleted. (c) A bylaw dealing with quorum or voting requirements for shareholders, including additional voting groups, may not be adopted, amended or repealed by the board of directors.

§ 10.22. Bylaw Dealing With Quorum or Voting Requirements for Board of Directors

167 (a) A bylaw that fixes a greater or lesser quorum requirement for action by the board of directors, or a greater voting requirement, than provided for by this chapter may be adopted in the initial bylaws, or thereafter by the shareholders pursuant to subsection (a) of section 10.20, or by the board of directors if authorized by subsection (a) of section 10.20. (b) A bylaw authorized by subsection (a) may be amended or repealed by the shareholders, or by the board of directors if authorized by subsection (a) of section 10.20; (c) A bylaw adopted or amended by the shareholders pursuant to subsection (a) may provide that it may be amended or repealed only by a specified vote of the shareholders, or by a specified vote of the board of directors if the board is authorized to act by both subsection (a) of section 10.20 and subsection (b) of this section. (d) If the board of directors is authorized to amend the bylaws by subsection (a) of section 10.20, approval by the board of directors of an amendment to the bylaws that changes or deletes a quorum or voting requirement for action by the board of directors must satisfy both the applicable quorum and voting requirements for action by the board of directors with respect to amendment of the bylaws, and also the particular quorum and voting requirements sought to be changed or deleted.

ARTICLE 11

§ 11.01. Definitions

As used in this PART: "Interests", includes any form of membership in a domestic or foreign non-profit corporation. "Merger", a business combination pursuant to section 11.02. "Other entity", includes a domestic or foreign nonprofit corporation. "Party to a merger" or "party to a share exchange", any domestic or foreign corporation or other entity that will either: (1) merger under a plan of merger; (2) acquire shares or interests of another corporation or an other entity in a share exchange; or (3) have all of its shares or interests or all of one or more classes or series of its shares or interests acquired in a share exchange. "Share exchange", a business combination pursuant to section 11.03. "Survivor", in a merger, the corporation or other entity into which one or more other corporations or other entities are merged. A survivor of a merger may preexist the merger or be created by the merger.

§ 11.02. Merger

168 One or more domestic corporations may merge with a domestic or foreign corporation or other entity pursuant to a plan of merger. (a) A foreign corporation, or a foreign other entity, may be a party to the merger, or may be created by the terms of the plan of merger, only if: (1) the merger is permitted by the laws under which the corporation or other entity is organized or by which it is governed; and (2) in effecting the merger, the corporation or other entity complies with such laws and with its articles of organization or organizational documents. (b) If the law under which a domestic other entity is organized does not provide procedures for the approval of a merger, a plan of merger may be adopted and approved, and the merger effectuated, by the other entity in accordance with the procedures in this PART and PART 13 applicable to domestic business corporations, and for the purposes of applying this chapter: (1) the other entity, its interest holders, interests and filed organizational document, if any, shall be considered to be a domestic business corporation, shareholders, shares and articles of organization, respectively; and (2) if the affairs of the other entity are managed by a group of persons that is not identical to the interest holders, that group shall be considered to be the board of directors. (c) The plan of merger shall include: (1) the name of each corporation or other entity that will merge and the name of the corporation or other entity that will be the survivor of the merger; (2) the terms and conditions of the merger; (3) the manner and basis of converting the shares of each merging corporation and interests of each merging other entity into shares or other securities, interests, obligations, rights to acquire shares or other securities, rights to acquire interests, cash, other property, or any combination of the foregoing; (4) the articles of organization of any corporation, or the organizational documents of any other entity, to be created by the merger, or if a new corporation or other entity is not to be created by the merger, any amendments to the survivor's articles of organization or organizational documents; and (5) any other provisions required by the laws under which any party to the merger is organized or by which it is governed, or by the articles of organization or organizational documents of any such party. (d) The plan of merger may set forth: (1) to the extent not inconsistent with contractual rights, the manner and basis of converting rights to acquire shares of each corporation into rights to acquire shares, obligations or other securities of the surviving or any other corporation or into cash or other property in whole or in part; and (2) other provisions relating to the merger.

169 (e) The plan of merger may also include a provision that the plan may be amended before filing the articles of merger with the secretary of state; but, if the shareholders of a domestic corporation that is a party to the merger are required or permitted to vote on the plan, the plan shall provide that subsequent to approval of the plan by the shareholders the plan may not be amended to: (1) change the amount or kind of shares or other securities, interests, obligations, rights to acquire shares or other securities, cash, or other property to be received by the shareholders of or owners of interests in any party to the merger upon conversion of their shares or interests under the plan; (2) change the articles of organization of any corporation, or the organizational documents of any other entity, that will survive or be created as a result of the merger, except for changes permitted by section 10.05 or by comparable provisions of the laws under which the foreign corporation or other entity is organized or governed; or (3) change any of the other terms or conditions of the plan if the change would adversely affect such shareholders in any material respect.

§ 11.03. Share Exchange

(a) Through a share exchange: (1) a domestic corporation may acquire all of the shares of 1 or more classes or series of shares of another domestic or foreign corporation, or all of the interests of 1 or more classes or series of interests of a domestic or foreign other entity, in exchange for shares or other securities, interests, obligations, rights to acquire shares or other securities, cash, other property, or any combination of the foregoing, pursuant to a plan of share exchange; or (2) all of the shares of 1 or more classes or series of shares of a domestic corporation may be acquired by another domestic or foreign corporation or other entity, in exchange for shares or other securities, interests, obligations, rights to acquire shares or other securities, cash, other property, or any combination of the foregoing, pursuant to a plan of share exchange. (b) If the law under which a domestic other entity is organized does not provide procedures for the approval of a share exchange, a plan of share exchange may be adopted and approved, and the share exchange effectuated, in accordance with the procedures, if any, for a merger. If the law under which a domestic other entity is organized does not provide procedures for the approval of either a share exchange or a merger, a plan of share exchange may be adopted and approved, and the share exchange effectuated, by the other entity in accordance with the procedures in this Part and Part 13 applicable to domestic business corporations; and for the purposes of applying this Part and Part 13: (1) the other entity, its interest holders, interests and filed organizational document, if any, shall be considered to be a domestic business corporation, shareholders, shares and articles of organization, respectively; and (2) if the affairs of the other entity are managed by a group of persons that it is not identical to the interest holders, that group shall be considered to be the board of directors.

170 (c) A foreign corporation, or a domestic or foreign other entity, may be a party to the share exchange only if: (1) the share exchange is permitted by the laws under which the corporation or other entity is organized or by which it is governed; and (2) in effecting the share exchange, the corporation or other entity complies with such laws and with its articles of organization or organizational documents. (d) The plan of share exchange shall include: (1) the name of each corporation or other entity whose shares or interests will be acquired and the name of the corporation or other entity that will acquire those shares or interests; (2) the terms and conditions of the share exchange; (3) the manner and basis of exchanging shares of a corporation or interests in an other entity whose shares or interests will be acquired under the share exchange into shares or other securities, interests, obligations, rights to acquire shares or other securities, rights to acquire interests, cash, other property, or any combination of the foregoing; and (4) any other provisions required by the laws under which any party to the share exchange is organized or by the articles of organization or organizational documents of any such party. (e) The terms described in clauses (2) and (3) of subsection (d) may be made dependent on facts ascertainable outside the plan of share exchange, provided that those facts are objectively ascertainable. The term "facts" shall include, but shall not limited to, the occurrence of any event, including a determination or action by any person or body, including the corporation or other entity. (f) The plan of share exchange may also include a provision that the plan may be amended prior to filing of the articles of share exchange with the secretary of state, provided that if the shareholders of a domestic corporation that is a party to the share exchange are required or permitted to vote on the plan, the plan shall provide that subsequent to approval of the plan by such shareholders the plan may not be amended to: (1) change the amount or kind of shares or other securities, interests, obligations, rights to acquire shares or other securities, cash, or other property to be issued by the corporation or to be received by the shareholders of or owners of interests in any party to the share exchange in exchange for their shares or interests under the plan; or (2) change any of the terms or conditions of the plan if the change would adversely affect such shareholders in any material respect. (g) This section shall not limit the power of a domestic corporation to acquire shares of another corporation or interests in another entity in a transaction other than a share exchange.

§ 11.04. Action on a Plan of Merger or Share Exchange

In the case of a domestic corporation that is a party to a merger or share exchange: (1) The plan of merger or share exchange shall be adopted by the board of directors. 171 (2) Except as provided in clause (7) and in section 11.05, after adopting the plan of merger or share exchange the board of directors must submit the plan to the shareholders for their approval. (3) The board of directors may condition its submission of the plan of merger or share exchange to the shareholders on any basis. (4) If the plan of merger or share exchange is required to be approved by the shareholders, and if the approval is to be given at a meeting, the corporation shall notify each shareholder, whether or not entitled to vote, of the meeting of shareholders at which the plan is to be submitted for approval. The notice shall state that the purpose, or one of the purposes, of the meeting is to consider the plan and shall contain or be accompanied by a copy or summary of the plan. If the corporation is to be merged into an existing corporation or other entity, the notice shall also include or be accompanied by a copy or summary of the articles of organization or organizational documents of that corporation or other entity. If the corporation is to be merged into a corporation or other entity that is to be created pursuant to the merger, the notice shall include or be accompanied by a copy or a summary of the articles of organization or organizational documents of the new corporation or other entity. (5) Unless (i) a greater percentage vote, or one or more additional separate voting groups, is required by the articles of organization, pursuant to subsection (a) of section 7.27, by the bylaws, pursuant to section 10.21, or by the board of directors, acting pursuant to clause (3) of this section, or (ii) the articles provide for a lesser percentage vote, in accordance with subsection (b) of section 7.27, approval of the plan of merger or share exchange requires approval by two- thirds of all the shares entitled generally to vote on the matter by the articles of organization, and in addition two-thirds of the shares in any voting group entitled to vote separately on the matter by this chapter, by the articles, by the bylaws, or by action of the board of directors pursuant to subsection (c) of section 11.04. (6) Except as otherwise expressly provided in the article of organization, voting by a class or series of shares as a separate voting group is required on a plan of merger or share exchange if the plan contains a provision that, if contained in a proposed amendment to articles of organization, would entitle such class or series to vote as a separate voting group on the proposed amendment under section 10.04; provided however, that (i) receipt of shares of a class or series of shares in exchange for shares pursuant to a plan of merger or share exchange involving each outstanding class and series shall not, in and of itself, entitle holders of the exchanged class or series to vote as a separate voting group, and (ii) if the proposed provision would, as an amendment, entitle two or more classes or series of shares to vote separately but would affect those classes or series in the same or a substantially similar way, the shares of all such classes or series shall, unless the articles of organization provide otherwise, vote together as a single voting group on the plan. (7) Unless the articles of organization otherwise provide, approval by the corporation's shareholders of a plan of merger or share exchange is not required if: (i) the corporation will survive the merger or is the acquiring corporation in a share exchange; (ii) except for amendments permitted by section 10.05, its articles of organization will not be changed; 172 (iii) each shareholder of the corporation whose shares were outstanding immediately before the effective date of the merger or share exchange will hold the same number of shares, with identical preferences, limitations, and relative rights, immediately after the effective date of change; and (iv) the shares of any class or series of stock of such corporation to be issued or delivered pursuant to the plan of merger does not exceed 20 per cent of the shares of such corporation of the same class or series outstanding immediately before the effective date of the merger. (8) If as a result of a merger or share exchange 1 or more shareholders of a domestic corporation would become subject to owner liability for the obligations or liabilities of any other person or entity, approval of the plan of merger shall require the execution, by each such shareholder, of a separate written consent to become subject to such owner liability.

§ 11.05. Merger Between Parent and Subsidiary or Between Subsidiaries

(a) A domestic parent corporation that owns shares of a domestic or foreign subsidiary corporation that carry at least 90 per cent of the voting power of each class and series of the outstanding shares of the subsidiary that have voting power may merge the subsidiary into itself or into another such subsidiary, or merge itself into the subsidiary, without the approval of the board of directors or shareholders of the subsidiary, unless the articles of organization of any of the corporations otherwise provide, and unless, in the case of a foreign subsidiary, approval by the subsidiary's board of directors or shareholders is required by the laws under which the subsidiary is organized. (b) If under subsection (a) approval of a merger by the subsidiary's shareholders is not required, the parent corporation shall, within 10 days after the effective date of the merger, notify each of the subsidiary's shareholders that a merger has become effective. (c) Except as provided in subsections (a) and (b), a merger between a parent and subsidiary shall be governed by PART 11 applicable to mergers generally.

§ 11.06. Articles of Merger or Share Exchange

(a) After a plan of merger or share exchange has been adopted and approved as required by this chapter, articles of merger or share exchange shall be executed on behalf of each party to the merger or share exchange by any officer or other duly authorized representative. The articles shall set forth: (1) the names of the parties to the merger or share exchange and the date on which the merger or share exchange occurred or is to be effective; (2) if the articles of organization of the survivor of a merger are amended, or if a new corporation is created as a result of a merger, the amendments to the survivor's articles of organization or the articles of organization of the new corporation; (3) if the plan of merger or share exchange required approval by the shareholders of a domestic corporation that was a party to the merger or share exchange, a statement that the plan was duly approved by the shareholders and, if voting by any separate voting group was required, 173 by each such separate voting group, in the manner required by this chapter and the articles of organization; (4) if the plan of merger or share exchange did not require approval by the shareholders of a domestic corporation that was a party to the merger or share exchange, a statement to that effect; and (5) as to each foreign corporation and each other entity that was a party to the merger or share exchange, a statement that the participation of the foreign corporation or other entity was duly authorized by the laws under which the corporation or other entity is organized or by which it is governed and by all action required by such laws, and by its articles of organization or other organizational documents. (b) Articles of merger or share exchange shall be delivered to the secretary of state for filing by the survivor of the merger or the acquiring corporation in a share exchange and shall take effect at the effective time provided in section 1.23. (c) The survivor of the merger or share exchange shall file a copy of the articles of merger or share exchange certified by the state secretary in the registry of deeds in each district within the commonwealth in which real property of any constituent corporation is situated, except that no filing need be made with respect to real property of a constituent corporation which is the survivor. The effectiveness of the merger or share exchange shall not be affected by this requirement.

§ 11.07. Effect of Merger or Share Exchange

(a) When a merger becomes effective: (1) the corporation or other entity that is designated in the plan of merger as the survivor continues or comes into existence, as the case may be; (2) the separate existence of every corporation or other entity that is merged into the survivor ceases; (3) all property owned by, and every contract right possessed by each corporation or other entity that merges into the survivor is vested in the survivor without reversion or impairment; (4) all liabilities of each corporation or other entity that is merged into the survivor are vested in the survivor; (5) the name of the survivor may, but need not be, substituted in any pending proceeding for the name of any party to the merger whose separate existence ceased in the merger; (6) the articles of organization or organizational documents of the survivor are amended to the extent provided in the plan of merger; (7) the articles of organization or organizational documents of a survivor that is created by the merger become effective; and (8) the shares of each corporation that is a party to the merger, and the interests in an other entity that is a party to a merger, that are to be converted under the plan of merger into shares, interests, obligations, rights to acquire securities, other securities, cash, other property, or 174 any combination of the foregoing, are converted, and the former holders of such shares or interests are entitled only to the rights provided to them in the plan of merger or to any rights they may have under PART 13. (b) When a share exchange becomes effective, the shares of each domestic corporation that are to be exchanged for shares or other securities, interests, obligations, rights to acquire shares or other securities, cash, other property, or any combination of the foregoing, are entitled only to the rights provided to them in the plan of share exchange or to any rights they may have under PART 13. (c) A person who becomes subject to owner liability for some or all of the debts, obligations or liabilities of any entity as a result of a merger or share exchange shall have owner liability only to the extent provided in the organic law of the entity and only for those debts, obligations and liabilities that arise after the effective time of the articles of merger or share exchange. (d) Upon a merger becoming effective, a foreign corporation, or a foreign other entity, that is the survivor of the merger is deemed: (1) unless, in the case of a foreign corporation, it is qualified as a foreign corporation under PART 15 after the effectiveness of the merger, to revoke the authority of its registered agent to accept service on its behalf and appoint the secretary of state as its agent for service of process in any proceeding based on a cause of action arising during the time it was authorized to transact business in the commonwealth and to appoint the secretary of state as its agent for service of process in a proceeding to enforce the rights of shareholders of each domestic corporation that is a party to the merger who exercise appraisal rights, and (2) to agree that it will promptly pay the amount, if any, to which such shareholders are entitled under PART 13. (e) The effect of a merger or share exchange on the owner liability of a person who had owner liability for some or all of the debts, obligations or liabilities of a party to the plan of merger or share exchange shall be as follows: (1) The merger or share exchange does not discharge any owner liability under the organic law of the entity in which the person was a shareholder or interest holder to the extent any such owner liability arose before the effective time of the articles of merger or share exchange. (2) The person shall not have owner liability under the organic law of the entity in which the person was a shareholder or interest holder before the merger or share exchange for any debt, obligation or liability that arises after the effective time of the articles of merger or share exchange. (3) The organic law of any entity for which the person had owner liability before the merger or share exchange shall continue to apply to the collection or discharge of any owner liability preserved by paragraph (1), as if the merger or share exchange had not occurred. (4) The person shall have whatever rights of contribution from other persons are provided by the organic law of the entity for which the person had owner liability with respect to any owner liability preserved by paragraph (1), as if the merger or share exchange had not occurred.

175 § 11.08. Abandonment of a Merger or Share Exchange

(a) Unless otherwise provided in a plan of merger or share exchange or in the laws under which a foreign corporation or a domestic or foreign other entity that is a party to a merger or a share exchange is organized or by which it is governed, after the plan has been adopted and approved as required by this chapter, and at any time before the merger or share exchange has become effective, it may be abandoned by any party thereto without action by the party's shareholders or owners of interests, in accordance with any procedures set forth in the plan of merger or share exchange or, if no such procedures are set forth in the plan, in the manner determined by the board of directors of a corporation, or the managers of an other entity, subject to any contractual rights of other parties to the merger or share exchange. (b) If a merger or share exchange is abandoned under subsection (a) after articles of merger or share exchange have been filed with the secretary of state but before the merger or share exchange has become effective, a statement that the merger or share exchange has been abandoned in accordance with this section, executed on behalf of a party to the merger or share exchange by an officer or other duly authorized representative, shall be delivered to the secretary of state for filing prior to the effective date of the merger or share exchange. Upon filing, the statement shall take effect and the merger or share exchange shall be deemed abandoned and shall not become effective.

ARTICLE 12

§ 12.01. Sale of Assets in Regular Course of Business and Mortgage of Assets

(a) A corporation may, on the terms and conditions and for the consideration determined by the board of directors: (1) sell, lease, exchange, or otherwise dispose of all, or substantially all, of its property in the usual and regular course of business; (2) mortgage, pledge, including any sale upon foreclosure of such pledge, dedicate to the repayment of indebtedness, whether with or without recourse, or otherwise encumber all or substantially all of its property whether or not in the usual and regular course of business; (3) transfer all, or substantially all, of its property to another corporation all of the shares of which are owned, directly or indirectly, by the corporation; or (4) distribute assets pro rata to the holders of 1 or more classes or series of the corporation's shares. (b) Unless the articles of organization require it, approval by the shareholders of a transaction described in subsection (a) is not required.

§ 12.02. Sale of Assets Other Than in Regular Course of Business

(a) A corporation may sell, lease, exchange, or otherwise dispose of all, or substantially all, of its property, otherwise than in the usual and regular course of business, on the terms and 176 conditions and for the consideration determined by the corporation's board of directors, if the board of directors proposes and the shareholders entitled to vote approve the proposed transaction. (b) The board of directors may condition its submission of the proposed transaction to the shareholders on any basis. (c) When seeking the approval of the shareholders, the corporation shall notify each shareholder, whether or not entitled to vote, of the proposed shareholders' meeting in accordance with section 7.05. The notice shall also state that the purpose, or 1 of the purposes, of the meeting is to consider the sale, lease, exchange or other disposition, as the case may be, of all, or substantially all, the property of the corporation, otherwise than in the usual and regular course of business, and shall contain or be accompanied by a description of the proposed transaction. (d) The shareholders may approve the terms and conditions of the proposed transaction, and the consideration to be received by the corporation, as previously determined by the board of directors or may fix, or authorize the board of directors to fix, the terms and conditions of the proposed transaction and the consideration to be received by the corporation. (e) Unless (1) a greater percentage vote, or one or more additional separate voting groups, is required by the articles of organization, pursuant to subsection (a) of section 7.27, by the bylaws, pursuant to section 10.21, or by the board of directors, acting pursuant to subsection (c) of section 12.02, or (2) the articles provide for a lesser percentage vote, in accordance with subsection (b) of section 7.27, approval of the transaction requires the affirmative vote of two- thirds of all the shares entitled generally to vote on the matter by the articles of organization, and in addition two-thirds of the shares in any voting group entitled to vote separately on the matter by the articles, by the bylaws, or by action of the board of directors pursuant to subsection (c) of section 12.02. (f) After such a transaction is approved by shareholders, but before it has been consummated, it may be abandoned by the corporation without further shareholder action, subject to any contractual rights which may have arisen. (g) A transaction that constitutes a pro rata distribution of the corporation's property to its shareholders is governed by section 6.40 and not by this section.

ARTICLE 13

PART A. RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES

§ 13.01. Definitions

In this PART the following words shall have the following meanings unless the context requires otherwise: "Affiliate", any person that directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control of or with another person.

177 "Beneficial shareholder", the person who is a beneficial owner of shares held in a voting trust or by a nominee as the record shareholder. "Corporation", the issuer of the shares held by a shareholder demanding appraisal and, for matters covered in sections 13.22 to 13.31, inclusive, includes the surviving entity in a merger. "Fair value", with respect to shares being appraised, the value of the shares immediately before the effective date of the corporate action to which the shareholder demanding appraisal objects, excluding any element of value arising from the expectation or accomplishment of the proposed corporate action unless exclusion would be inequitable. "Interest", interest from the effective date of the corporate action until the date of payment, at the average rate currently paid by the corporation on its principal bank loans or, if none, at a rate that is fair and equitable under all the circumstances. "Marketable securities", securities held of record by, or by financial intermediaries or depositories on behalf of, at least 1,000 persons and which were (a) listed on a national securities exchange, (b) designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc., or (c) listed on a regional securities exchange or traded in an interdealer quotation system or other trading system and had at least 250,000 outstanding shares, exclusive of shares held by officers, directors and affiliates, which have a market value of at least $ 5,000,000. "Officer", the chief executive officer, president, chief operating officer, chief financial officer, and any vice president in charge of a principal business unit or function of the issuer. "Person", any individual, corporation, partnership, unincorporated association or other entity. "Record shareholder", the person in whose name shares are registered in the records of a corporation or the beneficial owner of shares to the extent of the rights granted by a nominee certificate on file with a corporation. "Shareholder", the record shareholder or the beneficial shareholder.

§ 13.02. Right to Appraisal

(a) A shareholder is entitled to appraisal rights, and obtain payment of the fair value of his shares in the event of, any of the following corporate or other actions: (1) consummation of a plan of merger to which the corporation is a party if shareholder approval is required for the merger by section 11.04 or the articles of organization or if the corporation is a subsidiary that is merged with its parent under section 11.05, unless, in either case, (A) all shareholders are to receive only cash for their shares in amounts equal to what they would receive upon a dissolution of the corporation or, in the case of shareholders already holding marketable securities in the merging corporation, only marketable securities of the surviving corporation and/or cash and (B) no director, officer or controlling shareholder has a direct or indirect material financial interest in the merger other than in his capacity as (i) a 178 shareholder of the corporation, (ii) a director, officer, employee or consultant of either the merging or the surviving corporation or of any affiliate of the surviving corporation if his financial interest is pursuant to bona fide arrangements with either corporation or any such affiliate, or (iii) in any other capacity so long as the shareholder owns not more than five percent of the voting shares of all classes and series of the corporation in the aggregate; (2) consummation of a plan of share exchange in which his shares are included unless: (A) both his existing shares and the shares, obligations or other securities to be acquired are marketable securities; and (B) no director, officer or controlling shareholder has a direct or indirect material financial interest in the share exchange other than in his capacity as (i) a shareholder of the corporation whose shares are to be exchanged, (ii) a director, officer, employee or consultant of either the corporation whose shares are to be exchanged or the acquiring corporation or of any affiliate of the acquiring corporation if his financial interest is pursuant to bona fide arrangements with either corporation or any such affiliate, or (iii) in any other capacity so long as the shareholder owns not more than five percent of the voting shares of all classes and series of the corporation whose shares are to be exchanged in the aggregate; (3) consummation of a sale or exchange of all, or substantially all, of the property of the corporation if the sale or exchange is subject to section 12.02, or a sale or exchange of all, or substantially all, of the property of a corporation in dissolution, unless: (i) his shares are then redeemable by the corporation at a price not greater than the cash to be received in exchange for his shares; or (ii) the sale or exchange is pursuant to court order; or (iii) in the case of a sale or exchange of all or substantially all the property of the corporation subject to section 12.02, approval of shareholders for the sale or exchange is conditioned upon the dissolution of the corporation and the distribution in cash or, if his shares are marketable securities, in marketable securities and/or cash, of substantially all of its net assets, in excess of a reasonable amount reserved to meet unknown claims under section 14.07, to the shareholders in accordance with their respective interests within one year after the sale or exchange and no director, officer or controlling shareholder has a direct or indirect material financial interest in the sale or exchange other than in his capacity as (i) a shareholder of the corporation, (ii) a director, officer, employee or consultant of either the corporation or the acquiring corporation or of any affiliate of the acquiring corporation if his financial interest is pursuant to bona fide arrangements with either corporation or any such affiliate, or (iii) in any other capacity so long as the shareholder owns not more than five percent of the voting shares of all classes and series of the corporation in the aggregate; (4) an amendment of the articles of organization that materially and adversely affects rights in respect of a shareholder's shares because it: (i) creates, alters or abolishes the stated rights or preferences of the shares with respect to distributions or to dissolution, including making non-cumulative in whole or in part a dividend theretofore stated as cumulative; (ii) creates, alters or abolishes a stated right in respect of conversion or redemption, including any provision relating to any sinking fund or purchase, of the shares;

179 (iii) alters or abolishes a preemptive right of the holder of the shares to acquire shares or other securities; (iv) excludes or limits the right of the holder of the shares to vote on any matter, or to cumulate votes, except as such right may be limited by voting rights given to new shares then being authorized of an existing or new class; or (v) reduces the number of shares owned by the shareholder to a fraction of a share if the fractional share so created is to be acquired for cash under section 6.04; (5) an amendment of the articles of organization or of the bylaws or the entering into by the corporation of any agreement to which the shareholder is not a party that adds restrictions on the transfer or registration or any outstanding shares held by the shareholder or amends any pre- existing restrictions on the transfer or registration of his shares in a manner which is materially adverse to the ability of the shareholder to transfer his shares; (6) any corporate action taken pursuant to a shareholder vote to the extent the articles of organization, bylaws or a resolution of the board of directors provides that voting or nonvoting shareholders are entitled to appraisal; (7) consummation of a conversion of the corporation to nonprofit status pursuant to subdivision B of PART 9; or (8) consummation of a conversion of the corporation into a form of other entity pursuant to subdivision D of PART 9. (b) Except as otherwise provided in subsection (a) of section 13.03, in the event of corporate action specified in clauses (1), (2), (3), (7) or (8) of subsection (a), a shareholder may assert appraisal rights only if he seeks them with respect to all of his shares of whatever class or series. (c) Except as otherwise provided in subsection (a) of section 13.03, in the event of an amendment to the articles of organization specified in clause (4) of subsection (a) or in the event of an amendment of the articles of organization or the bylaws or an agreement to which the shareholder is not a party specified in clause (5) of subsection (a), a shareholder may assert appraisal rights with respect to those shares adversely affected by the amendment or agreement only if he seeks them as to all of such shares and, in the case of an amendment to the articles of organization or the bylaws, has not voted any of his shares of any class or series in favor of the proposed amendment. (d) The shareholder's right to obtain payment of the fair value of his shares shall terminate upon the occurrence of any of the following events: (i) the proposed action is abandoned or rescinded; or (ii) a court having jurisdiction permanently enjoins or sets aside the action; or (iii) the shareholder's demand for payment is withdrawn with the written consent of the corporation. (e) A shareholder entitled to appraisal rights under this chapter may not challenge the action creating his entitlement unless the action is unlawful or fraudulent with respect to the shareholder or the corporation.

180 § 13.03. Assertion of Rights by Nominees and Beneficial Owners

(a) A record shareholder may assert appraisal rights as to fewer than all the shares registered in the record shareholder's name but owned by a beneficial shareholder only if the record shareholder objects with respect to all shares of the class or series owned by the beneficial shareholder and notifies the corporation in writing of the name and address of each beneficial shareholder on whose behalf appraisal rights are being asserted. The rights of a record shareholder who asserts appraisal rights for only part of the shares held of record in the record shareholder's name under this subsection shall be determined as if the shares as to which the record shareholder objects and the record shareholder's other shares were registered in the names of different record shareholders. (b) A beneficial shareholder may assert appraisal rights as to shares of any class or series held on behalf of the shareholder only if such shareholder: (1) submits to the corporation the record shareholder's written consent to the assertion of such rights no later than the date referred to in subclause (ii) of clause (2) of subsection (b) of section 13.22; and (2) does so with respect to all shares of the class or series that are beneficially owned by the beneficial shareholder.

PART B. PROCEDURE FOR EXERCISE OF APPRAISAL RIGHTS

§ 13.20. Notice of Appraisal Rights

(a) If proposed corporate action described in subsection (a) of section 13.02 is to be submitted to a vote at a shareholders' meeting or through the solicitation of written consents, the meeting notice or solicitation of consents shall state that the corporation has concluded that shareholders are, are not or may be entitled to assert appraisal rights under this Part and refer to the necessity of the shareholder delivering, before the vote is taken, written notice of his intent to demand payment and to the requirement that he not vote his shares in favor of the proposed action. If the corporation concludes that appraisal rights are or may be available, a copy of this Part shall accompany the meeting notice sent to those record shareholders entitled to exercise appraisal rights. (b) In a merger pursuant to section 11.05, the parent corporation shall notify in writing all record shareholders of the subsidiary who are entitled to assert appraisal rights that the corporate action became effective. Such notice shall be sent within 10 days after the corporate action became effective and include the materials described in section 13.22.

§ 13.21. Notice of Intent to Demand Payment

(a) If proposed corporate action requiring appraisal rights under section 13.02 is submitted to vote at a shareholders' meeting, a shareholder who wishes to assert appraisal rights with respect to any class or series of shares:

181 (1) shall deliver to the corporation before the vote is taken written notice of the shareholder's intent to demand payment if the proposed action is effectuated; and (2) shall not vote, or cause or permit to be voted, any shares of such class or series in favor of the proposed action. (b) A shareholder who does not satisfy the requirements of subsection (a) is not entitled to payment under this chapter.

§ 13.22. Appraisal Notice and Form

(a) If proposed corporate action requiring appraisal rights under subsection (a) of section 13.02 becomes effective, the corporation shall deliver a written appraisal notice and form required by clause (1) of subsection (b) to all shareholders who satisfied the requirements of section 13.21 or, if the action was taken by written consent, did not consent. In the case of a merger under section 11.05, the parent shall deliver a written appraisal notice and form to all record shareholders who may be entitled to assert appraisal rights. (b) The appraisal notice shall be sent no earlier than the date the corporate action became effective and no later than 10 days after such date and must: (1) supply a form that specifies the date of the first announcement to shareholders of the principal terms of the proposed corporate action and requires the shareholder asserting appraisal rights to certify (A) whether or not beneficial ownership of those shares for which appraisal rights are asserted was acquired before that date and (B) that the shareholder did not vote for the transaction; (2) state: (i) where the form shall be sent and where certificates for certificated shares shall be deposited and the date by which those certificates shall be deposited, which date may not be earlier than the date for receiving the required form under subclause (ii); (ii) a date by which the corporation shall receive the form which date may not be fewer than 40 nor more than 60 days after the date the subsection (a) appraisal notice and form are sent, and state that the shareholder shall have waived the right to demand appraisal with respect to the shares unless the form is received by the corporation by such specified date; (iii) the corporation's estimate of the fair value of the shares; (iv) that, if requested in writing, the corporation will provide, to the shareholder so requesting, within 10 days after the date specified in clause (ii) the number of shareholders who return the forms by the specified date and the total number of shares owned by them; and (v) the date by which the notice to withdraw under section 13.23 shall be received, which date shall be within 20 days after the date specified in subclause (ii) of this subsection; and (3) be accompanied by a copy of this chapter.

182 § 13.23. Perfection of Rights; Right to Withdraw

(a) A shareholder who receives notice pursuant to section 13.22 and who wishes to exercise appraisal rights shall certify on the form sent by the corporation whether the beneficial owner of the shares acquired beneficial ownership of the shares before the date required to be set forth in the notice pursuant to clause (1) of subsection (b) of section 13.22. If a shareholder fails to make this certification, the corporation may elect to treat the shareholder's shares as after-acquired shares under section 13.25. In addition, a shareholder who wishes to exercise appraisal rights shall execute and return the form and, in the case of certificated shares, deposit the shareholder's certificates in accordance with the terms of the notice by the date referred to in the notice pursuant to subclause (ii) of clause (2) of subsection (b) of section 13.22. Once a shareholder deposits that shareholder's certificates or, in the case of uncertificated shares, returns the executed forms, that shareholder loses all rights as a shareholder, unless the shareholder withdraws pursuant to said subsection (b). (b) A shareholder who has complied with subsection (a) may nevertheless decline to exercise appraisal rights and withdraw from the appraisal process by so notifying the corporation in writing by the date set forth in the appraisal notice pursuant to subclause (v) of clause (2) of subsection (b) of section 13.22. A shareholder who fails to so withdraw from the appraisal process may not thereafter withdraw without the corporation's written consent. (c) A shareholder who does not execute and return the form and, in the case of certificated shares, deposit that shareholder's share certificates where required, each by the date set forth in the notice described in subsection (b) of section 13.22, shall not be entitled to payment under this chapter.

§ 13.24. Payment

(a) Except as provided in section 13.25, within 30 days after the form required by subclause (ii) of clause (2) of subsection (b) of section 13.22 is due, the corporation shall pay in cash to those shareholders who complied with subsection (a) of section 13.23 the amount the corporation estimates to be the fair value of their shares, plus interest. (b) The payment to each shareholder pursuant to subsection (a) shall be accompanied by: (1) financial statements of the corporation that issued the shares to be appraised, consisting of a balance sheet as of the end of a fiscal year ending not more than 16 months before the date of payment, an income statement for that year, a statement of changes in shareholders' equity for that year, and the latest available interim financial statements, if any; (2) a statement of the corporation's estimate of the fair value of the shares, which estimate shall equal or exceed the corporation's estimate given pursuant to subclause (iii) of clause (2) of subsection (b) of section 13.22; and (3) a statement that shareholders described in subsection (a) have the right to demand further payment under section 13.26 and that if any such shareholder does not do so within the time period specified therein, such shareholder shall be deemed to have accepted the payment in full satisfaction of the corporation's obligations under this chapter.

183 § 13.25. After-Acquired Shares

(a) A corporation may elect to withhold payment required by section 13.24 from any shareholder who did not certify that beneficial ownership of all of the shareholder's shares for which appraisal rights are asserted was acquired before the date set forth in the appraisal notice sent pursuant to clause (1) subsection (b) of section 13.22. (b) If the corporation elected to withhold payment under subsection (a) it must, within 30 days after the form required by subclause (ii) of clause (2) of subsection (b) of section 13.22 is due, notify all shareholders who are described in subsection (a): (1) of the information required by clause (1) of subsection (b) of section 13.24: (2) of the corporation's estimate of fair value pursuant to clause (2) of subsection (b) of said section 13.24; (3) that they may accept the corporation's estimate of fair value, plus interest, in full satisfaction of their demands or demand appraisal under section 13.26; (4) that those shareholders who wish to accept the offer shall so notify the corporation of their acceptance of the corporation's offer within 30 days after receiving the offer; and (5) that those shareholders who do not satisfy the requirements for demanding appraisal under section 13.26 shall be deemed to have accepted the corporation's offer. (c) Within 10 days after receiving the shareholder's acceptance pursuant to subsection(b), the corporation shall pay in cash the amount it offered under clause (2) of subsection (b) to each shareholder who agreed to accept the corporation's offer in full satisfaction of the shareholder's demand. (d) Within 40 days after sending the notice described in subsection (b), the corporation must pay in cash the amount if offered to pay under clause (2) of subsection (b) to each shareholder deserved in clause (5) of subsection (b).

§ 13.26. Procedure if Shareholder Dissatisfied With Payment or Offer

(a) A shareholder paid pursuant to section 13.24 who is dissatisfied with the amount of the payment shall notify the corporation in writing of that shareholder's estimate of the fair value of the shares and demand payment of that estimate plus interest, less any payment under section 13.24. A shareholder offered payment under section 13.25 who is dissatisfied with that offer shall reject the offer and demand payment of the shareholder's stated estimate of the fair value of the shares plus interest. (b) A shareholder who fails to notify the corporation in writing of that shareholder's demand to be paid the shareholder's stated estimate of the fair value plus interest under subsection (a) within 30 days after receiving the corporation's payment or offer of payment under section 13.24 or section 13.25, respectively, waives the right to demand payment under this section and shall be entitled only to the payment made or offered pursuant to those respective sections.

PART C. JUDICIAL APPRAISAL OF SHARES 184 § 13.30. Court Action

(a) If a shareholder makes demand for payment under section 13.26 which remains unsettled, the corporation shall commence an equitable proceeding within 60 days after receiving the payment demand and petition the court to determine the fair value of the shares and accrued interest. If the corporation does not commence the proceeding within the 60-day period, it shall pay in cash to each shareholder the amount the shareholder demanded pursuant to section 13.26 plus interest. (b) The corporation shall commence the proceeding in the appropriate court of the county where the corporation's principal office, or, if none, its registered office, in the commonwealth is located. If the corporation is a foreign corporation without a registered office in the commonwealth, it shall commence the proceeding in the county in the commonwealth where the principal office or registered office of the domestic corporation merged with the foreign corporation was located at the time of the transaction. (c) The corporation shall make all shareholders, whether or not residents of the commonwealth, whose demands remain unsettled parties to the proceeding as an action against their shares, and all parties shall be served with a copy of the petition. Nonresidents may be served by registered or certified mail or by publication as provided by law or otherwise as ordered by the court. (d) The jurisdiction of the court in which the proceeding is commenced under subsection (b) is plenary and exclusive. The court may appoint 1 or more persons as appraisers to receive evidence and recommend a decision on the question of fair value. The appraisers shall have the powers described in the order appointing them, or in any amendment to it. The shareholders demanding appraisal rights are entitled to the same discovery rights as parties in other civil proceedings. (e) Each shareholder made a party to the proceeding is entitled to judgment (i) for the amount, if any, by which the court finds the fair value of the shareholder's shares, plus interest, exceeds the amount paid by the corporation to the shareholder for such shares or (ii) for the fair value, plus interest, of the shareholder's shares for which the corporation elected to withhold payment under section 13.25.

§ 13.31. Court Costs and Counsel Fees

(a) The court in an appraisal proceeding commenced under section 13.30 shall determine all costs of the proceeding, including the reasonable compensation and expenses of appraisers appointed by the court. The court shall assess the costs against the corporation, except that the court may assess cost against all or some of the shareholders demanding appraisal, in amounts the court finds equitable, to the extent the court finds such shareholders acted arbitrarily, vexatiously, or not in good faith with respect to the rights provided by this chapter. (b) The court in an appraisal proceeding may also assess the fees and expenses of counsel and experts for the respective parties, in amounts the court finds equitable:

185 (1) against the corporation and in favor of any or all shareholders demanding appraisal if the court finds the corporation did not substantially comply with the requirements of sections 13.20, 13.22, 13.24 or 13.25; or (2) against either the corporation or a shareholder demanding appraisal, in favor of any other party, if the court finds that the party against whom the fees and expenses are assessed acted arbitrarily, vexatiously, or not in good faith with respect to the rights provided by this chapter. (c) If the court in an appraisal proceeding finds that the services of counsel for any shareholder were of substantial benefit to other shareholders similarly situated, and that the fees for those services should not be assessed against the corporation, the court may award to such counsel reasonable fees to be paid out of the amounts awarded the shareholders who were benefited. (d) To the extent the corporation fails to make a required payment pursuant to sections 13.24, 13.25, or 13.26, the shareholder may sue directly for the amount owed and, to the extent successful, shall be entitled to recover from the corporation all costs and expenses of the suit, including counsel fees.

ARTICLE 14

PART A. VOLUNTARY DISSOLUTION

§ 14.01. Dissolution by Incorporators or Initial Directors

A majority of the incorporators or initial directors of a corporation that has not issued shares or has not commenced business may dissolve the corporation by delivering to the secretary of state for filing articles of dissolution that set forth: (1) the name of the corporation; (2) the date of its incorporation; (3) either (i) that none of the corporation's shares has been issued or (ii) that the corporation has not commenced business; (4) that no debt of the corporation remains unpaid; (5) that the net assets of the corporation remaining after winding up have been distributed to the shareholders, if shares were issued; and (6) that a majority of the incorporators or initial directors authorized the dissolution.

§ 14.02. Dissolution by Board of Directors and Shareholders, or Otherwise in Accordance With Articles of Organization.

(a) A corporation may voluntarily authorize dissolution by any method or procedure specified in its articles of organization. The articles of organization may condition the

186 availability of the method or procedure on any basis. Notwithstanding anything else contained in this subsection, any provision in the articles of organization adopted pursuant to this subsection shall cease to be effective when shares of the corporation are listed on a national securities exchange or regularly traded in a market maintained by 1 or more members of a national or affiliated securities association. If a provision of the articles of organization ceases to be effective for any reason, the board of directors may, without shareholder action, adopt an amendment to the articles of organization, and, if appropriate, to the bylaws of the corporation, to delete such a provision and any references to it. (b) In the absence of any specified methods or procedures in the articles of organization, and in addition to any methods or procedures so specified unless the articles of organization state that the specified methods or procedures are exclusive, a corporation may voluntarily authorize dissolution as follows: (1) the board of directors shall submit a proposal for and terms of the proposed dissolution to the shareholders; and (2) the shareholders entitled to vote shall approve the dissolution as provided in subsection (e). (c) The board of directors may condition any submission to the shareholders of a proposal for dissolution under subsection (b) on any basis. (d) The corporation shall notify each shareholder, whether or not entitled to vote, of the proposed shareholders' meeting, in connection with any submission of a proposal for dissolution under subsection (b), in accordance with section 7.05. The notice shall also state that the purpose, or one of the purposes, of the meeting is to consider dissolving the corporation. (e) Unless (1) a greater percentage vote, or the vote of one or more additional separate voting groups, is required by the articles of organization, pursuant to subsection (a) of section 7.27, by the bylaws, pursuant to section 10.21, or by the board of directors, acting pursuant to subsection (c) of this section, or (2) the articles provide for a lesser percentage vote, in accordance with subsection (b) of section 7.27, and subject, except as otherwise permitted by subsection (a) of this section, to the requirement that such lesser percentage be not less than a majority of all the votes entitled to be cast on the proposal, adoption of the proposal to dissolve requires approval by two-thirds of all the votes entitled generally to be cast on the matter by the articles of organization.

§ 14.03. Articles of Dissolution

(a) At any time after dissolution is authorized, the corporation may dissolve by delivering to the secretary of state for filing articles of dissolution setting forth: (1) the name of the corporation; (2) the date dissolution was authorized; (3) if dissolution was approved by the shareholders under subsection (b) of section 14.02: (i) the number of votes entitled to be cast on the proposal to dissolve; and

187 (ii) either the total number of votes cast for and against dissolution or the total number of undisputed votes cast for dissolution and a statement that the number cast for dissolution was sufficient for approval. (4) If voting by voting groups was required on a dissolution proposal under subsection (b) of section 14.02, the information required by subparagraph (3) of this section shall be separately provided for each voting group entitled to vote separately on the proposal to dissolve. (5) If dissolution was authorized by a method or procedure specified in the articles of organization pursuant to subsection (a) of section 14.02, the articles of dissolution shall set forth such method or procedure, together with sufficient information to establish that the corporation has complied therewith. (b) A corporation is dissolved upon the effective date of its articles of dissolution.

§ 14.04. Revocation of Dissolution

(a) A corporation may revoke its dissolution within 120 days of its effective date. (b) Revocation of a dissolution under subsection (b) of section 14.02 shall be authorized in the same manner as the dissolution was authorized unless that authorization permitted revocation by action of the board of directors alone, in which event the board of directors may revoke the dissolution without shareholder action. Revocation of a dissolution under subsection (a) of section 14.02 may be authorized only as specifically contemplated by the articles of organization. (c) After the revocation of dissolution is authorized, the corporation may revoke the dissolution by delivering to the secretary of state for filing articles of revocation of dissolution, together with a copy of its articles of dissolution, that set forth: (1) the name of the corporation; (2) the effective date of the dissolution that was revoked; (3) the date that the revocation of dissolution was authorized; (4) if the corporation's board of directors, or incorporators, revoked the dissolution, a statement to that effect; (5) if the corporation's board of directors revoked a dissolution authorized by the shareholders under subsection (b) of section 14.02, a statement that revocation was permitted by action by the board of directors alone pursuant to that authorization; (6) if shareholder action was required under subsection (b) of section 14.02 to revoke the dissolution, the information required by clauses (3) or (4) of subsection (a) of section 14.03; and (7) if the dissolution being revoked was authorized under subsection (a) of section 14.02, sufficient information to establish that the corporation has complied with the provisions of its articles of organization governing such revocation. (d) Revocation of dissolution is effective upon the effective date of the articles of revocation of dissolution.

188 (e) When the revocation of dissolution is effective, it relates back to and takes effect as of the effective date of the dissolution and the corporation resumes carrying on its business as if dissolution had never occurred.

§ 14.05. Effect of Dissolution

(a) A dissolved corporation continues its corporate existence but may not carry on any business except such as is necessary in connection with winding up and liquidating its business and affairs, including: (1) collecting its assets; (2) disposing of its properties that will not be distributed in kind to its shareholders; (3) making adequate provision, by payment or otherwise, and after giving effect to the provisions of sections 14.06, 14.07 and 14.08, for all of the corporation's existing and reasonably foreseeable debts, liabilities, and obligations, whether or not liquidated, matured, asserted, or contingent; (4) distributing its remaining property among its shareholders according to their interests; and (5) doing every other act necessary to wind up and liquidate its business and affairs. (b) Dissolution of a corporation shall not: (1) transfer title to the corporation's property; (2) prevent transfer of its shares or securities, although the authorization to dissolve may provide for closing the corporation's share transfer records; (3) subject its directors or officers to standards of conduct different from those prescribed in PART 8; (4) change quorum or voting requirements for its board of directors or shareholders; change provisions for selection, resignation, or removal of its directors or officers or both; or change provisions for amending its bylaws; (5) prevent commencement of a proceeding by or against the corporation in its corporate name; (6) abate or suspend a proceeding pending by or against the corporation on the effective date of dissolution; or (7) terminate the authority of the registered agent of the corporation.

§ 14.06. Known Non-Contingent Claims Against Dissolved Corporation

(a) With respect to any non-contingent claim against the corporation, whether or not matured, known to the corporation at any time prior to the end of the 3-year period specified in clause (3) of subsection (b) of section 14.07, to the extent that the corporation in good faith disputes the claim, a dissolved corporation may, subject to paragraph (f), limit the assets out of which the claim may be satisfied to the assets retained by the corporation plus, to the extent provided in 189 section 6.41, any assets distributed to its shareholders within 3 years after the effective date of the corporation's dissolution, by following the procedure described in this section. (b) The dissolved corporation may send notice in writing of the dissolution at any time after its effective date to any known claimant whose claim the corporation disputes in whole or in part. The written notice shall: (1) include a copy or a summary of this section; (2) state the amount of the claim that is disputed; (3) state that the assets out of which the claim may be satisfied shall be limited as provided in subsection (c) unless a statement of the claim is received within the deadline specified in the notice by which the dissolved corporation shall receive the statement of the claim, which deadline may not be earlier than 3 years after the effective date of the corporation's dissolution or 120 days after the effective date of the written notice, whichever is later; (4) describe the information that shall be included in the statement of the claim; and (5) provide the mailing address to which the statement shall be sent. (c) To the extent that the corporation in good faith disputes any non-contingent claim against the corporation, whether or not matured, known to the corporation at any time before the end of the 3-year period specified in clause (3) of subsection (b) of section 14.07, and if written notice of the claim was given under subsection (b), the assets out of which the claim may be satisfied shall be limited, except as provided in subsection (a) of section 14.09, to the assets retained by the corporation plus, to the extent provided in section 6.41, any assets distributed to its shareholders within 3 years after the effective date of the corporation's dissolution: (1) if a claimant does not deliver a statement of the claim to the dissolved corporation by the specified deadlines; or (2) if a claimant, who has delivered a statement of the claim to the dissolved corporation and the claim was rejected in writing by the dissolved corporation, does not furnish notice to the corporation by the later of the specified deadline and 90 days from the effective date of the rejection notice that the holder intends to commence a proceeding to enforce the claim, and does not actually commence the proceeding by the later of the specified deadline and 270 days from the effective date of the rejection notice. (d) If a claim described in subsection (a) has not been asserted against the dissolved corporation and the corporation has reason to believe that the claimant is unaware of the claim, the claim shall be considered to be unknown and subject to section 14.07 rather than section 14.06, unless the notice described in subsection (b) contains a reasonable description of the claim the corporation believes the claimant may have. (e) The giving of notice by the dissolved corporation pursuant to section 14.06 is not evidence or admission of the existence or validity of any claim or amount.

§ 14.07. Unknown Claims Against Dissolved Corporation

(a) With respect to any unknown claim against the corporation, including unknown contingent claims, a dissolved corporation may limit the assets out of which the claim may be 190 satisfied to the assets retained by the corporation plus, to the extent provided in section 6.41, any assets distributed to its shareholders within three years after the effective date of the corporation's dissolution, by following the procedure described in this section. (b) The dissolved corporation may publish notice of the dissolution at any time after its effective date, and request that any person with a claim against the corporation send a statement of it in accordance with the notice. The notice shall: (1) be published 1 time in a newspaper of general circulation in the city, town or county where the dissolved corporation's principal office, or, if none in the state, its registered office, is or was last located and, if such dissolved corporation then has a website, posting the notice on the website until the earlier to occur of 30 days or the discontinuance of such website, and, if the dissolved corporation at the time of its dissolution had a class of securities registered under the Securities Exchange Act of 1934, as amended, in addition at least once in a daily newspaper with national circulation; (2) describe the information that shall be included in the statement of the claim and provide a mailing address where the statement is to be sent; and (3) state that the assets out of which any unknown claim against the corporation, including unknown contingent claims, may be satisfied will be limited as provided in subsection (c) unless a statement of the claim is received within three years after the publication of the notice. (c) If the dissolved corporation follows the procedure in subsection (b), except as provided in subsection (a) of section 14.09, (1) the assets out of which any unknown claim described in paragraph (a) may be satisfied will be limited to the assets retained by the corporation plus, to the extent provided in section 6.41, any assets distributed to its shareholders within three years after the effective date of the corporation's dissolution, if a statement of the claim is not presented to the corporation within the three-year period specified in clause (3) of subsection (b), and (2) the assets out of which any previously unknown non-contingent claim which has been presented to the corporation and rejected in writing may be satisfied will be limited as provided in clause (1) of subsection (c) if the claimant does not furnish notice to the corporation by the later of the deadline specified in clause (1) of subsection (c) and 90 days from the effective date of the rejection notice that the holder intends to commence a proceeding to enforce the claim, and does not actually commence the proceeding by the later of the specified deadline and 270 days from the effective date of the rejection notice.

§ 14.08. Creation of Reserves as Adequate Provision for Unasserted Product Liability Claims and Known Contingent Claims Against Dissolved Corporation

(a) At any time after the end of the 3-year period specified in clause (3) of subsection (b) of section 14.07, it shall constitute adequate provision by a dissolved corporation under subsection (h) of section 6.40 and clause (3) of subsection (a) of section 14.05:

191 (1) for all unasserted claims for personal injury, wrongful death, loss of consortium or property damage based upon products or services provided by the corporation which may thereafter be asserted against the corporation, if the corporation (i) sets aside in a reserve a reasonable amount of its assets, including by purchasing paid-up insurance or obtaining an assumption of liability by a responsible third party, to cover such claims, in compliance with subsection (b), and (ii) publishes a notice as described in clause (1) of subsection (b) of section 14.07 stating that the corporation has complied with this section 14.08; and (2) for all remaining known but still contingent claims against the corporation, if it (i) creates a separate reserve in accordance with subclause (i) of clause (1) of subsection (a) to cover such claims or increases by a reasonable amount the assets set aside in a reserve for unasserted liability claims specified in clause (1) of subsection (a) and makes such reserve also applicable to known but contingent claims, and (ii) sends written notice to each holder of a known but still contingent claim against the corporation stating that, pursuant to this section 14.08, if such claim thereafter becomes due and payable and is not paid by the corporation, the assets out of which such claim may be satisfied will be limited as provided in subsection (c). (b) To meet the requirement of subsection (a) that the amount of assets set aside in a reserve be reasonable, the directors or those acting in their place must comply with the applicable standards of conduct under section 8.30 in determining the amount needed to provide for payment of the category or categories of claims to which such reserve is directed, after taking into account any other claims against the corporation for which the assets in such reserve might be reached because of the lack of other adequate provision. (c) With respect to any claims described in clause (1) and (2) of subsection (a) not paid by the corporation, upon compliance by the dissolved corporation with subsections (a) and (b), except as provided in section 14.09(a), the assets out of which the claims may be satisfied will be limited to the assets retained by the corporation, including the applicable reserve created pursuant to subsection (a), plus, to the extent provided in section 6.41, any assets distributed to shareholders within 3 years after the effective date of the corporation's dissolution.

§ 14.09. Enforcement of Claims Against Dissolved Corporation

(a) A claim against a dissolved corporation described in sections 14.06, 14.07 or 14.08, and which is not barred under the applicable statute of limitations, may be enforced against the dissolved corporation to the extent of any undistributed assets, including any available assets in a reserve created under section 14.08, any available proceeds under an insurance policy, and any applicable assumption of the dissolved corporation's liabilities by a third party. (b) The giving of notice and/or the setting aside of any reserve hereunder or otherwise by the dissolved corporation is not an admission of the existence or validity of any claim or amount. (c) No time periods set forth in sections 14.06, 14.07 or 14.08 extend or shorten any applicable statute of limitations.

192 (d) No liability shall be imposed upon the dissolved corporation's shareholders or directors, or those acting in their place, under section 6.41 or otherwise with respect to any claim described in sections 14.06, 14.07 or 14.08 if the procedures described in those sections are followed.

PART B. ADMINISTRATIVE DISSOLUTION

§ 14.20. Grounds for Administrative Dissolution

The secretary of state may commence a proceeding under section 14.21 to dissolve a corporation administratively if: (a) the corporation has failed to comply with the provisions of law requiring the filing of reports with the secretary of state or the filing of any tax returns or the payment of any taxes under chapter 62C or chapter 63 of the General Laws for 2 or more consecutive years; or (b) the secretary of state is satisfied that the corporation has become inactive and that its dissolution would be in the public interest.

§ 14.21. Procedure for and Effect of Administrative Dissolution

(a) If the secretary of state determines that one or more grounds exist under section 14.20 for dissolving a corporation, he shall notify the corporation's registered agent of his determination. The notice shall be in writing and mailed postage prepaid to the corporation's registered office, or if the registered agent consents, sent by electronic mail to an electronic mail address furnished by the agent for the purpose. (b) If the corporation does not correct each ground for dissolution or demonstrate to the reasonable satisfaction of the secretary of state that each ground determined by the secretary of state does not exist within 90 days after service of the notice is perfected under section 5.04, the secretary of state shall administratively dissolve the corporation. (b) If the corporation does not correct each ground for dissolution or demonstrate to the reasonable satisfaction of the secretary of state that each ground determined by the secretary of state does not exist within 90 days after notice is given, the secretary of state shall administratively dissolve the corporation. (c) [Stricken.] (d) The administrative dissolution of a corporation does not terminate the authority of its registered agent.

§ 14.22. Reinstatement Following Administrative Dissolution

(a) A corporation administratively dissolved under section 14.21 may apply to the secretary of state for reinstatement at any time. The application shall: (1) recite the name of the corporation and the effective date of its administrative dissolution;

193 (2) state that the ground or grounds for dissolution either did not exist or have been eliminated; (3) state that the corporation's name satisfies the requirements of section 4.01; and (4) contain a certificate from the department of revenue reciting that all corporate excise taxes owed by the corporation, and any related penalties, have been paid. (b) If the secretary of state determines that the application contains the information required by subsection (a) and that the information is correct, he shall reinstate the corporation. (c) The secretary of state may subject the reinstatement to such terms and conditions, including the payment of reasonable fees, as in his judgment the public interest may require. He may in his discretion make the reinstatement effective for all purposes or for any specified purpose or purposes, in each case with or without limitation of time. When the reinstatement is effective, if by its terms it is effective for all purposes or if the secretary of state specifies that it shall be effective for purposes of this sentence, then the reinstatement relates back to and takes effect as of the effective date of the administrative dissolution and the corporation resumes carrying on its business as if the administrative dissolution had never occurred, with all its original powers and duties and with liability, for all contracts, acts, matters and things made, done or performed in its name and on its behalf prior to reinstatement, as if the administrative dissolution had never occurred, and with all acts and proceedings of its officers, directors and shareholders, acting or purporting to act as such, which would have been legal and valid but for such dissolution, standing ratified and confirmed, in each case except as otherwise specified by the secretary of state. (d) The certificate of reinstatement, or other equivalent public record, filed by the secretary of state pursuant to this section shall constitute an amendment of the articles of organization of the corporation, effective when filed. Any specification in the certificate of the purpose or purposes of reinstatement, or of a limitation of the time thereof, may, by further certificate filed as aforesaid, be amended by the secretary of state for cause shown to his satisfaction.

§ 14.23. Appeal From Denial of Reinstatement

(a) If the secretary of state denies a corporation's application for reinstatement following administrative dissolution, he shall serve the corporation under section 5.04 with a written notice that explains the reason or reasons for denial. (b) The corporation may appeal the denial of reinstatement to the superior court for Suffolk county within 30 days after service of the notice of denial is perfected. The corporation appeals by petitioning the court to set aside the dissolution and attaching to the petition copies of the secretary of state's certificate, or other public record, of dissolution, the corporation's application for reinstatement, and the secretary of state's notice of denial. (c) The court may summarily order the secretary of state to reinstate the dissolved corporation or may take other action the court considers appropriate. (d) The court's final decision may be appealed as in other civil proceedings.

PART C. JUDICIAL DISSOLUTION 194 § 14.30. Grounds for Judicial Dissolution

The superior court located in the county set forth in section 14.31 may dissolve a corporation: (1) in a proceeding by the attorney general if it is established that: (i) the corporation obtained its articles of organization through fraud; or (ii) the corporation has continued to exceed or abuse the authority conferred upon it by law; (2) upon a petition filed by the shareholders holding not less than 40 per cent of the total combined voting power of all the shares of the corporation's stock outstanding and entitled to vote on the question of dissolution, if it is established that: (i) the directors are deadlocked in the management of the corporate affairs, the shareholders are unable to break the deadlock, and irreparable injury to the corporation is threatened or being suffered; or (ii) the shareholders are deadlocked in voting power and have failed, for a period that includes at least 2 consecutive annual meeting dates, to elect successors to directors whose terms have expired, or would have expired upon the election of their successors, and irreparable injury to the corporation is threatened or being suffered; (3) in a proceeding by a creditor if it is established that: (i) the creditor's claim has been reduced to judgment, the execution on the judgment returned unsatisfied, and the corporation is insolvent; or (ii) the corporation has admitted in writing that the creditor's claim is due and owing and the corporation is insolvent; or (4) in a proceeding by the corporation to have its voluntary dissolution continued under court supervision.

§ 14.31. Procedure for Judicial Dissolution

(a) Venue for a proceeding by the attorney general to dissolve a corporation lies in Suffolk county. Venue for a proceeding brought by any other party named in section 14.30 lies in the county where a corporation's principal office, or, if none in the commonwealth, its registered office, is or was last located. (b) It is not necessary to make shareholders parties to a proceeding to dissolve a corporation unless relief is sought against them individually. (c) A court in a proceeding brought to dissolve a corporation may issue injunctions, appoint a receiver or custodian pendente lite with all powers and duties the court directs, take other action required to preserve the corporate assets wherever located, and carry on the business of the corporation until a full hearing can be held.

§ 14.32. Receivership or Custodianship

195 (a) A court in a judicial proceeding brought to dissolve a corporation may appoint 1 or more receivers to wind up and liquidate, or one or more custodians to manage, the business and affairs of the corporation. The court shall hold a hearing, after notifying all parties to the proceeding and any interested persons designated by the court, before appointing a receiver or custodian. The court appointing a receiver or custodian has exclusive jurisdiction over the corporation and all of its property wherever located. (b) The court may appoint an individual or a domestic or foreign corporation, authorized to transact business in the commonwealth, as a receiver or custodian. The court may require the receiver or custodian to post bond, with or without sureties, in an amount the court directs. (c) The court shall describe the powers and duties of the receiver or custodian in its appointing order, which may be amended from time to time. Among other powers: (1) the receiver (i) may dispose of all or any part of the assets of the corporation wherever located, at a public or private sale, if authorized by the court; and (ii) may sue and defend in his own name as receiver of the corporation in all courts of the commonwealth; (2) the custodian may exercise all of the powers of the corporation, through or in place of its board of directors or officers, to the extent necessary to manage the affairs of the corporation in the best interests of its shareholders and creditors. (d) The court during a receivership may redesignate the receiver a custodian, and during a custodianship may redesignate the custodian a receiver, if doing so is in the best interests of the corporation, its shareholders, and creditors. (e) The court from time to time during the receivership or custodianship may order compensation paid and expense disbursements or reimbursements made to the receiver or custodian and his counsel from the assets of the corporation or proceeds from the sale of the assets.

§ 14.33. Decree of Dissolution

(a) If after a hearing the court determines that 1 or more grounds for judicial dissolution described in section 14.30 exist, it may enter a decree dissolving the corporation and specifying the effective date of the dissolution, and the clerk of the court shall deliver a certified copy of the decree to the secretary of state, who shall file it. (b) After entering the decree of dissolution, the court shall direct the winding up and liquidation of the corporation's business and affairs in accordance with section 14.05 and, to the extent not theretofore completed, the notification of claimants in accordance with sections 14.06 and 14.07.

§ 14.34. Reorganization Under a Statute of the United States: Effectuation

(a) Any corporation, a plan of reorganization of which, pursuant to any applicable statute of the United States relating to reorganizations of corporations, has been or shall be confirmed by the decree or order of a court of competent jurisdiction, may put into effect and carry out the plan and the decrees and orders of the court or judge relative thereto and may take any proceeding and do any act provided in the plan or directed by the decrees and orders, without further action by 196 its directors or shareholders. The power and authority may be exercised, and the proceedings and acts may be taken, as may be directed by the decrees or orders, by the trustee or trustees of the corporation appointed in the reorganization proceedings, or a majority thereof, or if none be appointed and acting, by designated officers of the corporation, or by a master or other representative appointed by the court or judge, with like effect as if exercised and taken by unanimous action of the directors and shareholders of the corporation. (b) The corporation may, in the manner provided in subsection (a), but without limiting the generality or effect of the foregoing, alter, amend, or repeal its bylaws; constitute or reconstitute and classify or reclassify its board of directors, and name, constitute or appoint directors and officers in place of or in addition to all or some of the directors or officers then in office; amend its articles of organization, and make any change in its capital or capital stock, or any other amendment, change, or alteration, or provision, authorized by this chapter; be dissolved; sell or otherwise transfer all or part of its assets, merge or consolidate as permitted by this chapter, in any of which cases, however, no shareholder shall have any statutory right of appraisal of his shares pursuant to section 13.02; change the location of its registered office, change its registered agent, and remove or appoint any agent to receive service of process; authorize, fix the terms, manner and conditions of the issuance of, and issue bonds, debentures or other obligations, whether or not convertible into shares of any class or series, or bearing warrants or other evidences of optional rights to purchase, or subscribe for shares of any class or series; or lease its property and franchises to any corporation or other party, if permitted by law. (c) Articles of amendment, merger, share exchange or dissolution effected by the corporation pursuant to the foregoing provisions shall be filed with the secretary of state, and shall become effective, all in accordance with this chapter. The articles shall be made, executed and acknowledged, as may be directed by the decrees or orders, by the trustee or trustees appointed in the reorganization proceedings, or a majority thereof, or, if none be appointed and acting, by the officers of the corporations, or by a master or other representative appointed by the court or judge, and shall certify that provision for the making and filing of the articles is contained in a decree or order of a court or judge having jurisdiction of a proceeding under the applicable statute of the United States for the reorganization of the corporation. (d) This section shall cease to apply to the corporation upon the entry of a final decree in the reorganization proceedings closing the case and discharging the trustee or trustees, if any. (e) On filing any articles or other instrument made or executed pursuant to this section, there shall be paid to the secretary of state the same fees as are payable by corporations not in reorganization upon the filing of like articles or instruments.

PART D. MISCELLANEOUS

§ 14.40. Deposit With Treasurer of the Commonwealth

Assets of a dissolved corporation that should be transferred to a creditor, claimant, or shareholder of the corporation who cannot be found or who is not competent to receive them shall be reduced to cash and deposited with the treasurer of the commonwealth or other appropriate official of the commonwealth for safekeeping. When the creditor, claimant, or

197 shareholder furnishes satisfactory proof of entitlement to the amount deposited, the treasurer or other appropriate official of the commonwealth shall pay him or his representative that amount.

ARTICLE 15

PART A. REQUIREMENTS FOR AUTHORITY TO TRANSACT BUSINESS

§ 15.01. Authority to Transact Business Required

(a) A foreign corporation that transacts business or has a usual place of business in the commonwealth shall deliver the certificate required by section 15.03 to the secretary of state for filing. (b) The following activities, among others, do constitute transacting business within the meaning of subsection (a): (1) the ownership or leasing of real estate in the commonwealth; (2) engaging in the construction, alteration or repair of any structure, railway or road; or (3) engaging in any other activity requiring the performance of labor. (c) The following activities, among others, without more, do not constitute transacting business within the meaning of subsection (a): (1) maintaining, defending, or settling any proceeding; (2) holding meetings of the board of directors or shareholders or carrying on other activities concerning internal corporate affairs; (3) maintaining bank accounts; (4) maintaining offices or agencies for the transfer, exchange, and registration of the corporations own securities or maintaining trustees or depositories with respect to those securities; (5) selling through independent contractors; (6) soliciting or obtaining orders, whether by mail or through employees or agents or otherwise, if the orders require acceptance outside the commonwealth before they become contracts; (7) [Stricken] (8) [Stricken] (9) conducting an isolated transaction that is not one in the course of repeated transactions of a like nature; (10) transacting business in interstate commerce; or (11) performing activities subject to regulation under chapter 167 or chapter 175, if the foreign corporation has complied with the applicable chapter.

198 (d) The list of activities in subsections (b) and (c) is not exhaustive.

§ 15.02. Consequences of Transacting Business Without Authority

(a) A foreign corporation transacting business in the commonwealth without delivering to the secretary of state for filing the certificate required by section 15.03 shall not maintain a proceeding in any court in the commonwealth until the certificate is delivered and filed. (b) The successor to a foreign corporation that transacted business in the commonwealth without delivering to the secretary of state for filing the certificate required by section 15.03 and the assignee of a cause of action arising out of that business shall not maintain a proceeding based on that cause of action in any court in the commonwealth until the foreign corporation or its successor delivers the certificate and it is filed. (c) A court may stay a proceeding commenced by a foreign corporation, its successor, or assignee until it determines whether the foreign corporation or its successor is required to deliver to the secretary of state for filing the certificate required by section 15.03. If it so determines, the court may further stay the proceeding until the foreign corporation or its successor delivers the certificate and it is filed. (d) A foreign corporation is liable to the commonwealth for the years or parts of years during which it transacted business in the commonwealth without delivering to the secretary of state for filing the certificate required by section 15.03, in an amount equal to (1) all late fees which would have been imposed by law had it duly delivered the certificate and (2) all interest and penalties imposed by law for failure to pay the fees. A foreign corporation is further liable to the commonwealth, for each month or part thereof during which it transacted business without delivering the certificate, in an amount determined by the secretary of state, which amount shall in no event exceed the amount established by the commissioner of administration under section 3B of chapter 7, except that a foreign corporation which has delivered such certificate shall not be liable for such monthly penalty for the first 10 days during which it transacted business without delivering such certificate. Such fees and penalties may be levied by the secretary of state. The attorney general may bring an action necessary to recover amounts due to the commonwealth under this subsection including an action to restrain a foreign corporation against which fees and penalties have been imposed pursuant to this subsection from transacting business in the commonwealth until the fees and penalties have been paid. (e) Notwithstanding subsections (a) and (b), the failure of a foreign corporation to deliver to the secretary of state for filing the certificate required by section 15.03 shall not impair the validity of its corporate acts or prevent it from defending any proceeding in the commonwealth, or affect the validity of any contract entered into by the foreign corporation.

§ 15.03. Delivering Certificate by Foreign Corporation

(a) A foreign corporation shall, not later than 10 days after it commences transacting business in the commonwealth, deliver to the secretary of state for filing a certificate setting forth: (1) the name of the foreign corporation or, if its name is unavailable for use in the commonwealth, a corporate name that satisfies the requirements of section 15.06;

199 (2) the name of the state or country under whose law it is incorporated; (3) its date of incorporation and period of duration; (4) the street address of its principal office; (5) the address of its registered office in the commonwealth, the name of its registered agent at that office and the agents written consent, either on the certificate or attached to it, to its appointment as agent; (6) its fiscal year; (7) a brief description of the activities to be conducted by the foreign corporation in the commonwealth; and (8) the names and usual business addresses of its current directors and officers. (b) The foreign corporation shall deliver with the completed certificate a certificate of existence, or a document of similar import, duly authenticated by the secretary of state or other official having custody of corporate records in the state or country under whose law it is incorporated. (c) The secretary of state shall examine and endorse his approval on the certificate delivered by the foreign corporation if the business of the foreign corporation is not prohibited by law to a corporation formed under the laws of the commonwealth and if the secretary of state determines that the certificate complies with this section. Upon such approval and payment of the required fee, the certificate shall be filed by the secretary of state and the foreign corporation shall be considered to be registered to transact business in the commonwealth.

§ 15.04. Amended Certificate

(a) A foreign corporation that has delivered to the secretary of state for filing the certificate required by section 15.03 shall deliver an amendment to the certificate if it changes: (1) its corporate name; (2) the period of its duration; (3) the state or country of its incorporation; (4) the street address of its principal office; (5) its fiscal year; or (6) the activities conducted by the foreign corporation in the commonwealth. (b) A foreign corporation that changes its corporate name or the state or country of its incorporation shall deliver with the completed amendment a certificate evidencing the changes duly authenticated by the secretary of state or other official having custody of corporate records in the state or country under whose law it is incorporated. (c) A foreign corporation that has delivered to the secretary of state for filing the certificate required by section 15.03 may deliver an amendment to the certificate for any other reason.

200 (d) The requirements of section 15.03 for delivering to the secretary of state for filing an original certificate apply to delivering any amendment thereto under this section, except that an amendment need not contain any of the information the original certificate that is not being changed and the certificate required by subsection (b) of this section need be delivered only in the circumstances set forth in said subsection (b).

§ 15.05. Effect of Filing of Certificate

(a) The delivering by the foreign corporation to the secretary of state for filing of the certificate required by section 15.03 authorizes the foreign corporation to transact business in the commonwealth subject, however, to the right of the commonwealth to revoke the authority as provided in this chapter. (b) A foreign corporation authorized to do business in the commonwealth has the same but no greater rights and has the same but no greater privileges as, and except as otherwise provided by this chapter is subject to the same duties, restrictions, penalties, and liabilities now or later imposed on, a domestic corporation of like character. (c) Subject to the constitution of the commonwealth, a foreign corporation organization and internal affairs and the liability of its stockholders and directors shall be governed by the laws of the jurisdiction under which it is organized. A foreign corporation may not be denied the authority to transact business in the commonwealth by reason of any difference between such laws and the laws of the commonwealth.

§ 15.06. Corporate Name of Foreign Corporation

(a) If the corporate name of a foreign corporation does not satisfy the requirements of section 4.01, the foreign corporation, to obtain or maintain a certificate of authority to transact business in the commonwealth: (1) may add the word "corporation", "incorporated", "company", or "limited", or the abbreviation "corp.", "inc.", "co.", or "ltd.", to its corporate name for use in the commonwealth; or (2) may use a fictitious name to transact business in the commonwealth if its real name is unavailable and it delivers to the secretary of state for filing a copy of the resolution of its board of directors, certified by its secretary, adopting the fictitious name. (b) Except as authorized by subsections (c) and (d), the corporate name (including a fictitious name) of a foreign corporation may not be the same as, or so similar that it is likely to be mistaken for: (1) the corporate name or trade name of a corporation organized, authorized to transact business or otherwise lawfully conducting business in the commonwealth; (2) a corporate name reserved under section 4.02; (3) the fictitious name of another foreign corporation or entity authorized to transact business or otherwise lawfully conducting business in the commonwealth because its real or trade name is unavailable; 201 (4) the corporate name or trade name of a not-for-profit corporation organized, authorized to conduct its activities or otherwise lawfully conducting its activities in the commonwealth; (5) the name or trade name of a partnership, business trust or other entity organized, authorized to transact business or otherwise lawfully conducting business in the commonwealth; or (6) a trademark or service mark registered with the secretary of state under chapter 110B or 110G. (c) A foreign corporation may apply to the secretary of state for authorization to use a corporate name that does not comply with the requirements of subsection (b). The secretary of state shall authorize use of the name applied for if: (1) the other corporation consents to the use in writing and, if required by the secretary of state, submits an undertaking in form satisfactory to the secretary of state to change its name to a name that is not the same as or so similar that is likely to be mistaken for the name of the applicant; or (2) the applicant delivers to the secretary of state a certified copy of a final judgment of a court of competent jurisdiction establishing the applicants right to use the name applied for in the commonwealth. (d) A foreign corporation may use the name, including the fictitious name, or mark of another entity that is used in the commonwealth if the other entity is organized, authorized to transact business or otherwise lawfully conducting business in the commonwealth and the foreign corporation: (1) has merged with the other entity; (2) has been formed by reorganization of the other entity; or (3) has acquired all or substantially all of the assets, including the name and marks, of the other entity. (e) If a foreign corporation authorized to transact business in the commonwealth changes its corporate name to one that does not satisfy the requirements of section 4.01, it may not transact business in the commonwealth under the changed name until it adopts a name satisfying the requirements of section 4.01 and files with the secretary of state, under section 15.04, an amendment to the certificate required to be filed by it under section 15.03. (f) Within 90 days after the delivery to the secretary of state for filing of a certificate under section 15.03, or of an amendment to such certificate under section 15.04 that effects an amendment reflecting a change in the name of a foreign corporation used in the commonwealth, any person who is registered, qualified or carrying on business in the commonwealth at that time or who has reserved or registered a name under sections 4.02, 15.03 or 15.04 may protest in writing to the secretary of state that the name used by the foreign corporation in the commonwealth is the same as or so similar that it is likely to be mistaken for the name of such person in violation of this section. In that event, if the secretary of state decides to conduct a hearing regarding the dispute, he shall give notice thereof as soon as possible to the protesting party and the foreign corporation using the name in the commonwealth. If as a result of the hearing or otherwise, the secretary of state determines that the use in the commonwealth of the 202 corporate name violates this section, he shall file a statement withdrawing his approval of the amendment insofar as it relates to the name used by the foreign corporation and shall give written notice thereof to the protesting party and the foreign corporation. The withdrawal of approval shall take effect on the date specified by the secretary of state, which shall be not later than 180 days after the date of the filing which was protested. After the effective date of the withdrawal of approval, the foreign corporation shall have no right to use the name in the commonwealth and may be enjoined from doing business under the name by the superior court upon application of any interested person.

§ 15.07. Registered Office and Registered Agent of Foreign Corporation

Each foreign corporation authorized to transact business in the commonwealth shall continuously maintain in the commonwealth: (1) a registered office that may be the same as any of its places of business; and (2) a registered agent, who may be: (i) an individual who resides in the commonwealth and whose business office is identical with the registered office; (ii) a domestic corporation, not-for-profit domestic corporation or domestic limited liability company whose business office is identical with the registered office; or (iii) a foreign corporation, foreign not-for-profit corporation or foreign limited liability company authorized to transact business in the commonwealth whose business office is identical with the registered office.

§ 15.08. Change of Registered Office or Registered Agent of Foreign Corporation

(a) A foreign corporation authorized to transact business in the commonwealth may change its registered office or registered agent by delivering to the secretary of state for filing a statement of change that sets forth: (1) its name; (2) the street address of its current registered office; (3) if the current registered office is to be changed, the street address of its new registered office; (4) the name of its current registered agent; (5) if the current registered agent is to be changed, the name of its new registered agent and the new agent's written consent, either on the statement or attached to it, to the appointment; and (6) that after the change or changes are made, the street addresses of its registered office and the business office of its registered agent will be identical. (b) If a registered agent changes the street address of his business office, he may change the street address of the registered office of any foreign corporation, for which he is the registered agent by notifying the foreign corporation in writing of the change and signing, either manually 203 or in facsimile, and delivering to the secretary of state for filing a statement of change that complies with the requirements of subsection (a) and recites that the foreign corporation has been notified of the change. If the street addresses of more than one foreign corporation are being changed at the same time, there may be included in a single statement the names of all foreign corporations the street addresses of the registered office of which are being changed.

§ 15.09. Resignation of Registered Agent of Foreign Corporation

(a) The registered agent of a foreign corporation may resign his agency appointment by signing and delivering to the secretary of state for filing a statement of resignation. The registered agent shall furnish a copy of the statement to the foreign corporation. The statement of resignation may include a statement that the registered office is also discontinued. (b) The agency appointment is terminated, and the registered office discontinued if so provided, on the thirty-first day after the date on which the statement was filed.

§ 15.10. Liability to be Sued; Service on Foreign Corporation

(a) Foreign corporations shall be liable to be sued and to have their property attached in the same manner and to the same extent as individuals who are residents of other states. (b) Every foreign corporation doing business in the commonwealth which has not complied with section 15.03 and every foreign corporation which has complied with said section 15.03 but whose resident agent cannot, after a diligent search by an officer authorized to serve legal process, be found at the business address of such resident agent stated in its most recent certificate filed with the secretary of state pursuant to this chapter or its most recent annual report filed with the secretary of state pursuant to section 16.22 and every foreign corporation whose resident agent refuses to act as such, shall be deemed to have appointed the secretary of state and his successor in office to be its true and lawful attorney upon whom all lawful process in any action or proceeding may be served so long as any liability incurred in the commonwealth while it was doing business shall remain outstanding. (c) Service of process in all actions and proceedings in the commonwealth against such a foreign corporation may be made upon the secretary of state. Service of process in all actions and proceedings in the commonwealth against a foreign corporation formerly doing business in the commonwealth that has not complied with the provision of section 15.03, or against a foreign corporation formerly doing business in the commonwealth that has withdrawn from the commonwealth pursuant to this chapter, may be made upon the secretary of state if the action or proceeding involves a liability alleged to have been incurred by the foreign corporation while it was doing business in the commonwealth. (d) When lawful process in any action or proceeding against any foreign corporation which pursuant to this section may be made upon the secretary of state is served upon the secretary of state, the secretary of state shall immediately forward the process by mail, postage prepaid, directed to such foreign corporation at its last known principal office or, in the case of a foreign corporation established in a foreign country, to the resident manager, if any, in the United States. A fee of $ 10 shall be paid by the plaintiff to the secretary of state at the time of the service and

204 the fees shall be taxed in his costs, if he prevails in the suit. The secretary of state shall keep a record of all such processes, which shall show the day of service. (e) In the case of service of process on a foreign corporation that has not complied with section 15.03, the notice herein provided for shall be mailed by the secretary of state to the proper address of the foreign corporation furnished to him by the plaintiff or his attorney. (f) Service of process upon a foreign corporation for violation of any criminal law of the commonwealth may be made in the manner hereinabove provided except that no fee shall be paid to the secretary of state. (g) This section does not prescribe the only means, or necessarily the required means, of serving a foreign corporation.

§ 15.11. False Reports or Statements

(a) An officer of a foreign corporation who signs any statement or report required by this chapter which is false in any material representation and that he knows or has reason to know to be false shall be liable to a creditor of the foreign corporation who has relied upon the false representation to the extent of the actual damage sustained by him by reason of such reliance; but the officer signing the statement or report shall not be liable to creditors for debts contracted or contracts entered into after the filing of a statement or report or a corrected statement or report that is not false in any material representation. (b) No liability shall be imposed under this section upon any director or officer who shall have discharged the duties of his position in good faith and with the degree of diligence, care and skill that prudent men would ordinarily exercise under similar circumstances in a like position. In discharging his duties the person, when acting in good faith shall be entitled to rely upon the books of account of the foreign corporation or upon written reports made to the foreign corporation by any of its officers, other than such person, or by an independent public accountant. (c) Any director or officer who pays on a judgment rendered on a claim asserted under this section shall be entitled to contribution from the other directors and officers against whom judgment has been entered on the same claim or who shall be ascertained to be liable to the plaintiff upon the same claim. (d) Whoever knowingly makes, executes, delivers or publishes any report or statement required by law to be made, executed, filed or published by a foreign corporation in the commonwealth, or whoever causes the same to be done, which report or statement is false in any material representation, shall be punished by a fine of not more than $ 5,000 or by imprisonment for not more than 3 years, or both. (e) Whoever knowingly makes, executes, delivers or publishes any report or statement required by the law of another state or country to be made, executed, or published by a foreign corporation, or whoever causes the same to be done, within the commonwealth, which report or statement is false in any material representation, shall be punished by a fine of not more than $ 5,000 or by imprisonment for not more than 3 years, or both.

205 PART B. WITHDRAWAL OR TRANSFER OF AUTHORITY

§ 15.20. Withdrawal of Foreign Corporation

(a) A foreign corporation authorized to transact business in the commonwealth may not withdraw from the commonwealth until it obtains the consent of the secretary of state. (b) A foreign corporation authorized to transact business in the commonwealth may apply for withdrawal by delivering an application to the secretary of state for filing. The application shall set forth: (1) the name of the foreign corporation and the name of the state or country under whose law it is incorporated; (2) that it is not transacting business in the commonwealth and that it surrenders its authority to transact business in the commonwealth; (3) that it revokes the authority of its registered agent to accept service on its behalf and appoints the secretary of state as its agent for service of process in any proceeding based on a cause of action arising during the time it was authorized to transact business in the commonwealth; (4) a mailing address to which the secretary of state may mail a copy of any process served on him under clause (3); (5) a commitment to notify the secretary of state in the future of any change in its mailing address; and (6) a certification that all taxes known to the corporation to be due to the commonwealth have been paid or provided for. (c) After the withdrawal of the corporation is effective, service of process on the secretary of state under this section is service on the foreign corporation. Upon receipt of process, the secretary of state shall mail a copy of the process to the foreign corporation at the mailing address set forth under subsection (b).

§ 15.21. Automatic Withdrawal Upon Certain Conversions

A foreign business corporation authorized to transact business in the commonwealth that converts into a domestic nonprofit corporation or any form of domestic filing entity shall be considered to have withdrawn on the effective date of the conversion.

§ 15.22. Withdrawal Upon Conversion to a Nonfiling Entity

(a) A foreign corporation authorized to transact business in the commonwealth that converts into a form of domestic or foreign nonfiling entity shall apply for withdrawal by delivering an application to the secretary of state for filing. The application shall set forth: (1) the name of the foreign business corporation and the name of the state or country under whose law it was incorporated before the conversion;

206 (2) that it surrenders its authority to transact business in the commonwealth as a foreign business corporation; (3) the type of other entity into which it has been converted and the jurisdiction whose laws govern its internal affairs; (4) if it has been converted into a foreign other entity: (i) that it revokes the authority of its registered agent to accept service on its behalf and appoints the secretary of state as its agent for service of process in any proceeding based on a cause of action arising during the time it was authorized to transact business in the commonwealth; (ii) a mailing address to which the secretary of state may mail a copy of any process served on him under subclause (i); and (iii) a commitment to notify the secretary of state in the future of any change in its mailing address. (b) After the withdrawal under this section of a corporation that has converted into a foreign other entity is effective, service of process on the secretary of state is service on the foreign other entity. Upon receipt of process, the secretary of state shall mail a copy of the process to the foreign other entity at the mailing address set forth under clause (4) of subsection (a). (c) After the withdrawal under this section of a corporation that has converted into a domestic other entity is effective, service of process shall be made on the other entity in accordance with the regular procedures for service of process on the form of other entity into which the corporation was converted.

§ 15.23. Transfer of Authority

(a) A foreign business corporation authorized to transact business in the commonwealth that converts into a foreign nonprofit corporation or into any form of foreign other entity that is required to deliver for filing an application for authority to transact business in the commonwealth or make a similar type of delivery with the secretary of state if it transacts business in the commonwealth shall deliver to the secretary of state for filing an application for transfer of authority executed by any officer or other duly authorized representative. The application shall set forth: (1) the name of the corporation; (2) the type of other entity into which it has been converted and the jurisdiction whose laws govern its internal affairs; (3) any other information that would be required in a filing under the laws of the commonwealth by an other entity of the type the corporation has become seeking authority to transact business in the commonwealth. (b) The application for transfer of authority shall be delivered to the secretary of state for filing and shall take effect on the effective date provided in section 1.23. (c) Upon the effectiveness of the application for transfer of authority, the authority of the corporation under this chapter to transact business in the commonwealth shall be transferred 207 without interruption to the other entity which shall thereafter hold such authority subject to the provisions of the laws of the commonwealth applicable to that type of other entity.

PART C. REVOCATION OF AUTHORITY TO TRANSACT BUSINESS

§ 15.30. Grounds for Revocation

The secretary of state may commence a proceeding under section 15.31 to revoke the authority of a foreign corporation to transact business in the commonwealth if the foreign corporation has failed to comply with laws requiring the filing of reports with the secretary of state or the filing of any tax returns or the payment of any taxes under chapter 62C or chapter 63 for 2 or more consecutive years.

§ 15.31. Procedure for and Effect of Revocation

(a) If the secretary of state determines that 1 or more grounds exist under section 15.30 for revocation of authority of a foreign corporation to transact business in the commonwealth, he shall notify the corporation's registered agent of his determination. The notice shall be in writing and mailed postage prepaid to the corporation's registered office or if the registered agent consents, sent by electronic mail to an electronic address furnished by the agent for the purpose. (b) If the foreign corporation does not correct each ground for revocation or demonstrate to the reasonable satisfaction of the secretary of state that each ground determined by the secretary of state does not exist within 90 days after the notice is given, the secretary of state may revoke the foreign corporations authority to transact business in the commonwealth. The secretary of state shall note the fact of revocation on his records, including the effective date thereof. (c) The authority of a foreign corporation to transact business in the commonwealth ceases on the date on which the secretary of state makes revocation of such authority effective. (d) Revocation of a foreign corporations authority to transact business in the commonwealth does not terminate the authority of the registered agent of the corporation until the registered agent resigns his agency pursuant to section 15.09.

§ 15.32. Appeal From Revocation

(a) A foreign corporation the authority to transact business in the commonwealth of which has been revoked under section 15.30 may apply to the secretary of state for reinstatement of such authority at any time. The application shall: (1) recite the name of the foreign corporation and the effective date of the revocation; (2) state that the ground or grounds for revocation either did not exist or have been eliminated; (3) state that the foreign corporations name satisfies the requirements of sections 4.01 and 15.06; and

208 (4) contain a certificate from the department of revenue reciting that all tax returns required to be filed by the foreign corporation under chapters 62C and 63 have been filed and all taxes shown due on such returns and any related penalties have been paid. (b) If the secretary of state determines that the application contains the information required by subsection (a) and that the information is correct, he shall reinstate the authority of the foreign corporation to transact business in the commonwealth and shall note the fact of reinstatement on his records and the effective date of reinstatement. (c) The secretary of state may subject such reinstatement to such terms and conditions, including the payment of reasonable fees, as in his judgment the public interest may require. He may in his discretion make the reinstatement effective for all purposes or for any specified purpose or purposes, in each case with or without limitation of time. When the reinstatement is effective, if by its terms it is effective for all purposes or if the secretary of state specifies that it shall be effective for purposes of this sentence, then the reinstatement relates back to and takes effect as of the effective date of the revocation of authority and the corporation resumes carrying on its business as if the revocation of authority had never occurred, with all its original powers and duties and with liability, for all contracts, acts, matters and things made, done or performed in its name and on its behalf before reinstatement, as if the revocation of authority had never occurred, except as otherwise specified by the secretary of state. (d) Any limitation in the reinstatement relative to the purpose or purposes of reinstatement, or of a limitation of the time thereof, may be amended by the secretary of state for cause shown to his satisfaction.

ARTICLE 16

PART A. RECORDS

§ 16.01. Corporate Records

(a) A corporation shall keep as permanent records minutes of all meetings of its shareholders and board of directors, a record of all actions taken by the shareholders or board of directors without a meeting, and a record of all actions taken by a committee of the board of directors in place of the board of directors on behalf of the corporation. (b) A corporation shall maintain appropriate accounting records. (c) A corporation or its agent shall maintain a record of its shareholders, in a form that permits preparation of a list of the names and addresses of all shareholders, in alphabetical order by class of shares showing the number and class of shares held by each. (d) A corporation shall maintain its records in written form or in another form capable of conversion into written form within a reasonable time. (e) A corporation shall keep within the commonwealth a copy of the following records at its principal office or an office of its transfer agent or of its secretary or assistant secretary or of its registered agent:

209 (1) its articles or restated articles of organization and all amendments to them currently in effect; (2) its bylaws or restated bylaws and all amendments to them currently in effect; (3) resolutions adopted by its board of directors creating one or more classes or series of shares, and fixing their relative rights, preferences, and limitations, if shares issued pursuant to those resolutions are outstanding; (4) the minutes of all shareholders' meetings, and records of all action taken by shareholders without a meeting, for the past 3 years; (5) all written communications to shareholders generally within the past 3 years, including the financial statements furnished under section 16.20 for the past 3 years; (6) a list of the names and business addresses of its current directors and officers; and (7) its most recent annual report delivered to the secretary of state under section 16.22.

§ 16.02. Inspection of Records by Shareholders

(a) A shareholder of a corporation is entitled to inspect and copy, during regular business hours at the office where they are maintained pursuant to subsection (e) of section 16.01, copies of any of the records of the corporation described in said subsection (e) of said section 16.01 if he gives the corporation written notice of his demand at least five business days before the date on which he wishes to inspect and copy. (b) A shareholder of a corporation is entitled to inspect and copy, during regular business hours at a reasonable location specified by the corporation, any of the following records of the corporation if the shareholder meets the requirements of subsection (c) and gives the corporation written notice of his demand at least 5 business days before the date on which he wishes to inspect and copy: (1) excerpts from minutes reflecting action taken at any meeting of the board of directors, records of any action of a committee of the board of directors while acting in place of the board of directors on behalf of the corporation, minutes of any meeting of the shareholders, and records of action taken by the shareholders or board of directors without a meeting, to the extent not subject to inspection under subsection (a) of section 16.02; (2) accounting records of the corporation, but if the financial statements of the corporation are audited by a certified public accountant, inspection shall be limited to the financial statements and the supporting schedules reasonably necessary to verify any line item on those statements; and (3) the record of shareholders described in section 16.01(c). (c) A shareholder may inspect and copy the records described in subsection (b) only if: (1) his demand is made in good faith and for a proper purpose; (2) he describes with reasonable particularity his purpose and the records he desires to inspect; (3) the records are directly connected with his purpose; and 210 (4) the corporation shall not have determined in good faith that disclosure of the records sought would adversely affect the corporation in the conduct of its business or, in the case of a public corporation, constitute material non-public information at the time when the shareholder's notice of demand to inspect and copy is received by the corporation. (d) The right of inspection granted by this section may not be abolished or limited by a corporation's articles of organization or bylaws. (e) This section shall not affect: (1) the right of a shareholder to inspect records under section 7.20 or, if the shareholder is in litigation with the corporation, to the same extent as any other litigant; or (2) the power of a court, independently of this chapter, to compel the production of corporate records for examination, provided that, in the case of production of records described in subsection (b) at the request of a shareholder, the shareholder has met the requirements of subsection (c). (f) For purposes of this section, "shareholder" includes a beneficial owner whose shares are held in a voting trust or by a nominee on his behalf.

§ 16.03. Scope of Inspection Right

(a) A shareholder's agent or attorney has the same inspection and copying rights as the shareholder represented. (b) The corporation may, if reasonable, satisfy the right of a shareholder to copy records under section 16.02 by furnishing to the shareholder copies by photocopy or other means chosen by the corporation including copies furnished through an electronic transmission. (c) The corporation may impose a reasonable charge, covering the costs of labor, material, transmission and delivery, for copies of any documents provided to the shareholder. The charge may not exceed the estimated cost of production, reproduction, transmission or delivery of the records. (d) The corporation may comply at its expense, with a shareholder's demand to inspect the record of shareholders under clause (3) of subsection (b) of section 16.02 by providing the shareholder with a list of shareholders that was compiled no earlier than the date of the shareholder's demand. (e) The corporation may impose reasonable restrictions on the use or distribution of records by the demanding shareholder.

§ 16.04. Court-Ordered Inspection

(a) If a corporation does not allow a shareholder who complies with section 16.02(a) to inspect and copy any records required by that subsection to be available for inspection, the superior court of the county where the corporation's principal office or, if none in the commonwealth, its registered office is located may summarily order inspection and copying of the records demanded at the corporation's expense upon application of the shareholder.

211 (b) If a corporation does not within a reasonable time allow a shareholder to inspect and copy any other record, the shareholder who complies with subsections (b) and (c) of section 16.02 may apply to the superior court in the county where the corporation's principal office or, if none in the commonwealth, its registered office is located for an order to permit inspection and copying of the records demanded. The court shall dispose of an application under this subsection on an expedited basis. (c) If the court orders inspection and copying of the records demanded under section 16.02, it shall also order the corporation to pay the shareholder's costs, including reasonable counsel fees, incurred to obtain the order unless the corporation proves that it refused inspection in good faith because it had a reasonable basis for doubt about the right of the shareholder to inspect the records demanded; and the court may order the corporation to pay the shareholder's costs if it orders inspection and copying of records other than under section 16.02. (d) If the court orders inspection and copying of the records demanded, it may impose reasonable restrictions on the use or distribution of the records by the demanding shareholder.

§ 16.05. Inspection of Records by Directors

(a) A director of a corporation is entitled to inspect and copy the books, records and documents of the corporation at any reasonable time to the extent reasonably related to the performance of the director's duties as a director, including duties as a member of a committee, but not for any other purpose or in any manner that would violate any duty to the corporation. (b) If a corporation does not allow a director who purports to be entitled thereto pursuant to subsection (a) of section 16.05 to inspect and copy any books, records or documents required by that subsection to be available for inspection, the superior court of the county where the corporation's principal office or, if none in the commonwealth, its registered office is located may order inspection and copying of the books, records and documents demanded at the corporation's expense upon application of the director, unless the corporation establishes that the director is not entitled to such inspection rights. The court shall dispose of an application under this subsection on an expedited basis. (c) If the court orders inspection and copying of the books, records and documents demanded, it may include provisions protecting the corporation from undue burden or expense, and prohibiting the director from using information obtained upon exercise of the inspection rights in a manner that would violate a duty to the corporation, and may also order the corporation to pay the director's costs, including reasonable counsel fees, incurred in connection with the application.

§ 16.06. Exception to Notice Requirement; Consequences of Inability to Deliver Notice

(a) Whenever notice is required to be given under any provision of this chapter to any shareholder, the notice shall not be required to be given if: (1) notice of 2 consecutive annual meetings, and all notices of meetings during the period between the 2 consecutive annual meetings, have been sent to the shareholder at the shareholder's address as shown on the records of the corporation and have been returned undeliverable; or 212 (2) all, but not less than 2, payments of dividends on securities during a 12-month period, or 2 consecutive payments of dividends on securities during a period of more than 12 months, have been sent to the shareholder at the shareholder's address as shown on the records of the corporation and have been returned undeliverable. (b) If the shareholder shall deliver to the corporation a written notice setting forth the shareholder's then-current address, the requirement that notice be given to the shareholder shall be reinstated. (c) If the corporation is unable to deliver notice to any shareholder to an address furnished by the shareholder for the purpose and the inability becomes known to the secretary or an assistant secretary of the corporation, the transfer agent or other person responsible for the giving of notice, the corporation shall take such action as shall be reasonable in the circumstances to inform the shareholder of the inability and to request the shareholder to furnish a new address for the receipt of notices. Attempting to contact the shareholder at such other address, if any, as the corporation may have for the shareholder is deemed reasonable. The corporation may continue to rely on the address last furnished by the shareholder for notice until it is furnished in writing a new address for notice. The failure of the corporation to take the action required by this subsection shall not invalidate any meeting or other action.

PART B. REPORTS

§ 16.20. Financial Statements for Shareholders

(a) A corporation shall furnish to its shareholders upon request annual financial statements, which may be consolidated or combined statements of the corporation and 1 or more of its subsidiaries, as appropriate, that include a balance sheet as at the end of the fiscal year, an income statement for that year and, if available, a statement of changes in shareholder equity for that year unless that information appears elsewhere in, the financial statements. If prepared by the corporation, the corporation shall also furnish a statement of cash flows for that year. If financial statements are prepared by the corporation on the basis of generally accepted accounting principles, the annual financial statements must also be prepared on that basis. For purposes of this subsection, financial statements may consist of copies of federal tax returns or other comparable information which is reasonable under the circumstances in the case where the corporation does not prepare financial statements as described above. (b) If the annual financial statements are reported upon by a public accountant, his report shall accompany those statements. If not, those statements shall be accompanied by a certificate of the president or the person responsible for the corporation's accounting records: (1) stating his reasonable belief whether the statements were prepared in accordance with generally accepted accounting principles or, if not, describing the basis of preparation; and (2) describing any respects in which the statements were not prepared on a basis of accounting consistent with the statements prepared for the preceding year. (c) A corporation shall deliver the annual financial statements, or a written notice of their availability, to each shareholder before the earlier to occur of the annual meeting of shareholders or 120 days after the close of the fiscal year. Thereafter, the corporation shall deliver its most 213 recent financial statements upon the written request of any shareholder to whom the statements were not delivered. (d) A corporation shall not be required to furnish its annual financial statements to a shareholder if it can demonstrate a proper corporate purpose for withholding information contained in those statements from that shareholder.

§ 16.21. By-Law Amendments

If the board of directors of a corporation makes, amends or repeals any bylaw, the corporation shall report in writing the substance of the change to the shareholders entitled to vote on amending the bylaws, with or before the notice of the next shareholders meeting. Any bylaw adopted by the board of directors may be amended or repealed by the shareholders.

§ 16.22. Annual Report for Secretary of State

(a) Each domestic corporation, and each foreign corporation authorized to transact business in the commonwealth, shall deliver to the secretary of state for filing an annual report that sets forth: (1) the name of the corporation and the state or country under whose law it is incorporated; (2) the address of its registered office and the name of its registered agent at that office in the commonwealth; (3) the address of its principal office; (4) the names and business addresses of its directors, officers required by section 8.40(a), and chief executive officer and chief financial officer, if different; (5) A brief description of its activities in the commonwealth; (6) the total number of authorized shares, itemized by class and series, if any, within each class; (7) the total number of issued and outstanding shares, itemized by class and series, if any, within each class; and (8) the fiscal year of the corporation. (b) Information in the annual report shall be current as of the date the annual report is executed on behalf of the corporation. (c) The annual report shall be delivered to the secretary of state within 2 1/2 months after the end of the fiscal year of the corporation. (d) [Stricken]

ARTICLE 17

214 TRANSITION PROVISIONS

§ 17.01. Application to Existing Domestic Corporations

Except so far as such application may be inconsistent with (i) provisions still in force of any special acts of incorporation, enacted before March 11, 1831, and not subject to amendment, alteration or repeal by the general court, or (ii) chapter 156A applicable to professional corporations incorporated thereunder, this chapter shall apply to: (1) all domestic corporations having capital stock whether established before or after the effective date of this chapter, either by general or special law, for the purpose of carrying on business for profit except corporations organized for the purpose of carrying on the business of a bank, savings bank, co-operative bank, trust company, credit union, surety or indemnity company, or safe deposit company, or for the purpose of carrying on within the commonwealth the business of an insurance company, railroad, electric railroad, street railway or trolley motor company, telegraph or telephone company, gas or electric light, heat or power company, canal, aqueduct or water company, cemetery or crematory company, any other corporations which on October 1, 1965 have or may thereafter have the right to take land within the commonwealth by eminent domain or to exercise franchises in public ways granted by the commonwealth or by any county, city or town, and corporations subject to chapter 157 and corporations subject to chapter 157A; and (2) notwithstanding anything to the contrary in clause (1), all other corporations to which this chapter is made applicable by the express provisions of any other general or special law to the extent provided thereby.

§ 17.02. Application to Qualified Foreign Corporations

A foreign corporation authorized to transact business in the commonwealth on the effective date of this chapter is subject to this chapter but is not required to apply for new authority to transact business under this chapter.

§ 17.03. Saving Provisions

(a) Except as provided in subsection (b), the repeal of chapter 181 shall not affect: (1) the operation of said chapter 181 or any action taken under it before its repeal; (2) any ratification, right, remedy, privilege, obligation, or liability acquired, accrued, or incurred under said chapter 181 before its repeal; (3) any violation of said chapter 181, or any penalty, forfeiture, or punishment incurred because of the violation, before its repeal; or (4) any proceeding commenced under said chapter 181 before its repeal, and the proceeding may be completed in accordance with said chapter 181 as if it had not been repealed. (b) If a penalty or punishment imposed for a violation of said chapter 181 is reduced by chapter 156D, the penalty or punishment if not already imposed shall be imposed in accordance with this chapter. 215 § 17.04. Severability

If any provision of this chapter or its application to any person or circumstance is held invalid by a court of competent jurisdiction, the invalidity shall not affect other provisions or applications of the chapter that can be given effect without the invalid provision or application, and to this end the provisions of the chapter are severable.