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08/24/78 JOSEPH T. PUPECKI v. JAMES MADISON

August 24, 1978

JOSEPH T. PUPECKI
v.
JAMES MADISON CORPORATION & OTHERS



Worcester. Civil action commenced in the Superior Court on August 23, 1976. Motions to dismiss and for summary judgment were heard by Meagher, J. The Supreme Judicial Court granted a request for direct appellate review.

Hennessey, C.j., Quirico, Kaplan, Wilkins, & Abrams, JJ.

SYLLABUS BY THE COURT

Corporations, Stockholder, Close corporation, Sale of assets, Stockholder's derivative suit. Champerty.

The opinion of the court was delivered by: Quirico

A minority shareholder was not limited in his remedies to appraisal of his shares under G. L. c. 156B, § 98, where his complaint alleged that the corporation had sold substantially all its assets for inadequate consideration, with additional consideration from the purchasers diverted from the corporation to its controlling shareholder under the guise of payment for separate employment and non-competition agreements. [216-217]

An allegation in a complaint by a minority shareholder that corporate assets were sold for inadequate consideration, with additional consideration from the purchasers diverted from the corporation to the controlling shareholder, was not refuted by an affidavit filed by the defendants, asserting generally that the transactions were not intended to benefit the controlling shareholder at the plaintiff's expense, so as to warrant the granting of the defendants' motion for summary judgment. [217-218]

In an action by a minority shareholder seeking rescission of an agreement to sell the corporate assets, it was error to grant the defendants' motion for summary judgment on the ground that the plaintiff failed to satisfy the requirements for bringing a derivative suit on the corporation's behalf where it appeared that the owner of ninety per cent of the corporation's stock not only voted for the sale but also was the primary beneficiary of it and where the plaintiff's failure to allege why a demand on the directors would have been futile could be remedied by amending the complaint. [218-219]

An agreement between a minority shareholder seeking rescission of a sale of corporate assets and the corporation, one of the defendants, that the corporation would reimburse the plaintiff for the expenses and fees of the suit, regardless of its outcome, was not champertous where the corporation had an interest in the suit and its promise to pay the expenses was not made in consideration for a portion of any recovery. [219-220]

In this case the plaintiff alleged that the corporation of which he was a minority shareholder had sold substantially all its assets for inadequate consideration, with additional consideration from the purchasers diverted from the corporation to its controlling shareholder under the guise of being payment for separate employment and non-competition agreements. The trial Judge granted motions to dismiss and for summary judgment in favor of the defendants. The principal question before us is whether the allegations would be sufficient, if proved, to constitute illegality or fraud under G. L. c. 156B, § 98, so as to entitle the plaintiff to relief other than appraisal of his shares.

We first summarize the allegations admitted by the parties. The defendant James Madison Corporation (Madison), a Massachusetts corporation, formerly known as Madison Wire and Cable Corp., operated a small wire and cable business. Its two stockholders were the plaintiff Joseph T. Pupecki, who owned five shares of the common voting stock, and Martin Fisher, who owned the remaining forty-seven and one-half shares outstanding. Pupecki and Fisher were both employees of the corporation, and Fisher was also a director.

Sometime prior to April 14, 1976, Fisher notified Pupecki that a stockholders' meeting would be held on that date for the purpose of authorizing the sale of substantially all of Madison's assets. *fn1 At the meeting the sale was approved over the objecting vote of Pupecki, and shortly thereafter agreements for the sale were signed. The purchasers were the defendant Bretco, Inc., a Massachusetts corporation which was to buy the nonrealty assets, and the defendant Bretco Associates, a partnership composed of the defendants Robert M. Bretholtz and Harold N. Cotton, which was to purchase the real estate (these four defendants will be referred to collectively as Bretco). Under the terms of the respective agreements Bretco was to pay Madison the net book value for the company's inventory and the same for its machinery and equipment. The amounts were estimated in the contract as $285,000 and $157,973, respectively. Bretco agreed to purchase the real estate for $470,000.

In addition to these agreements between Bretco and Madison, Fisher and Bretco entered into two separate agreements between themselves, the execution of these being condition precedent to the sale of the corporate assets. The first agreement entitled "Employment and Consultant Agreements," provided that Fisher would work full time for Bretco, for two years at an annual salary of $42,100, with the option of either continuing the full-time employment for eight more years at the same salary, or of selecting instead to become a consultant to the firm on a part-time basis at an annual salary of $20,000. The second agreement entitled "Covenant Not to Compete," provided that, in return for Bretco's promise to pay Fisher $100,000 over a ten-year period, Fisher agreed that he would not, either directly or indirectly, become engaged in the wire and cable business for that length of time. In sum, then, the total benefits realizable to Fisher as the result of his personal transactions with the purchasers of Madison ranged from a maximum of $521,000, if he continued to work full-time for the entire ten years, to a minimum of $344,200 if he chose rather to exercise the part-time option available under the employment agreement.

On August 23, 1976, the plaintiff filed suit in Superior Court seeking to rescind all agreements that transferred Madison's assets to the Bretco parties. He charged that the consideration to be paid for the assets was inadequate, that Fisher, through his ownership of over ninety per cent of Madison's outstanding voting shares, had caused the assets to be sold for the inadequate consideration, and that Fisher had diverted to himself individually, through his employment and non-competition agreements with Bretco, funds that rightfully belonged to the corporation because they were really consideration for the assets. Each of the defendants denied this claim in its answer. Subsequently the Bretco defendants filed motions to dismiss *fn2 and motions for summary judgment which stated a variety of grounds. These were granted by a Judge of the Superior Court without opinion and final judgment was entered for all the defendants. The plaintiff appealed, and we granted an application for direct appellate review. G. L. c. 211A, § 10 (A).

Since the Judge did not indicate on which ground he granted the defendants' motions, all the grounds specified below are open on appeal. Siegel v. Knott, 316 Mass. 526, 527 (1944). See Alholm v. Wareham, 371 Mass. 621, 625 (1976); Greeley v. Zoning Bd. of Appeals of Framingham, 350 Mass. 549, 551 (1966). We examine, however, only those that the Bretco defendants *fn3 have argued in their brief. These are (1) that G. L. c. 156B, ยง 98, limits the plaintiff's remedy to appraisal of his shares, (2) that the plaintiff failed to meet the ...


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