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Katz, Nannis & Solomon, P.C. v. Levine

Supreme Judicial Court of Massachusetts, Norfolk

March 9, 2016

Katz, Nannis & Solomon, P.C., & others [1]
Bruce C. Levine & another. [2]

         Argued December 10, 2015

          Civil action commenced in the Superior Court Department on February 27, 2013.

         A motion to confirm an arbitration award was heard by Patrick F. Brady, J.; a motion for attorney's fees and costs was heard by him; and entry of separate and final judgments was ordered by him.

         The Supreme Judicial Court granted an application for direct appellate review.

          Thomas J. Carey, Jr. ( Daniel J. Cloherty & Victoria L. Steinberg with him) for Bruce C. Levine.

Page 785

          Warren D. Hutchison ( Nancy M. Reimer with him) for the plaintiffs.

          Joseph S.U. Bodoff, for Levine, Caufield, Martin & Goldberg, P.C., was present but did not argue.

         Present: Gants, C.J., Spina, Cordy, Botsford, Duffly, Lenk, & Hines, JJ.


          [46 N.E.3d 542] Botsford, J.

          The central question presented in this appeal is whether parties to a commercial arbitration agreement may alter by contract the scope or grounds of judicial review of an arbitration award that are set out in the Massachusetts Uniform Arbitration Act for Commercial Disputes (MAA), G. L. c. 251. We decide that the grounds of judicial review are limited to those delineated in G. L. c. 251, § § 12 and 13.


          The defendant Bruce C. Levine and the plaintiffs Allen G. Katz, Lawrence S. Nannis, and Jeffery D. Solomon were members of an accounting firm known as Levine, Katz, Nannis & Solomon, P.C. (LKNS or firm). They were each a shareholder in the firm, and a party to a stockholder agreement dated October 1, 1998 (agreement), that governed their professional association and relationship.[3] [46 N.E.3d 543] In 2011, Katz, Nannis, and Solomon, purporting to act pursuant to the agreement, voted to require the withdrawal of Levine as a director and stockholder in LKNS; Levine disagreed that the termination of his stockholder interest and position was in accordance with the agreement's terms, and the arbitration at issue in this case concerned that dispute. We summarize the relevant provisions of the agreement, the parties' dispute leading to arbitration, and the arbitration award, followed by a summary of the proceedings in the Superior Court that led to this appeal.

          The agreement.

          The agreement provides that a stockholder may withdraw voluntarily or be required to withdraw involuntarily. Two provisions in the agreement relate to involuntary withdrawal:

" 4(e) Involuntary Withdrawal. A Stockholder may be required to withdraw from the Corporation, for any reason, upon the affirmative vote of the holders of at least 75% of the issued and outstanding Shares, excluding the Shares of the subject Stockholder.
" 4(f) For Cause Withdrawal. A Stockholder may be required to withdraw from the Corporation for 'Cause.' 'Cause' shall

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be deemed to exist upon the occurrence of any of the following:
" (i) Commission of an act of fraud, dishonesty or the like involving the Corporation or any of its clients." [4]

         Under section 5(a)(i) of the agreement a voluntarily withdrawing stockholder is entitled to the redemption of his shares at " an amount equal to the accrual basis book value of the [firm]" multiplied by the percentage of shares issued and outstanding held by the withdrawing stockholder. Section 5(a)(i) also provides that a stockholder subject to an involuntary withdrawal, but not " for cause," is also generally entitled to redemption. However, section 5(a)(iii) provides:

" If the withdrawal is for Cause (as defined in Section 4[f]) or as described in Section 8(a)(iii) [i.e., where there is involuntary withdrawal and stockholder competes with the firm], the subject Stockholder shall forfeit his Shares ... and the Redemption Price shall be $zero."

         In addition to the redemption of shares, under section 8(a)(i), in certain circumstances, a withdrawing stockholder is entitled to the payment of deferred compensation. However, under section 8(a)(v), a stockholder whose withdrawal is for cause receives no deferred compensation. In addition, under section 8(a)(iii), if a stockholder's withdrawal is an " involuntary withdrawal pursuant to Section 4(e)" and the stockholder competes with the firm within three years after his withdrawal, he receives no deferred compensation and must compensate the firm pursuant to a stipulated formula. A stockholder who withdraws and within three months employs an employee of the firm also must pay liquidated damages to the firm, under section 8(a)(vii).

         Section 13(i) provides that the agreement is to " be subject to and governed by the laws of the Commonwealth of Massachusetts pertaining to agreements executed in and to be performed in the Commonwealth of Massachusetts." Section 13(j) [46 N.E.3d 544] contains an arbitration clause that provides in relevant part:

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" Binding Arbitration.

In the event of any dispute concerning any aspect of this Agreement, the parties agree to submit the matter to binding arbitration before a single arbitrator appointed by the American Arbitration Association . ... The decision of the arbitrator shall be final; provided, however, solely in the event of a material, gross and flagrant error by the arbitrator, such decision shall be subject to review in court. ... [T]he party against which final, adverse judgment is entered [shall be] responsible for (in addition to its own) the other party's(ies') costs and expenses, including reasonable attorneys' fees."

          The dispute.

          The arbitration at issue here arose out of a dispute between Levine and the other three shareholders of LKNS, relating to work Levine had performed for a firm client, Levine's cousin Linda Sallop and her company (collectively, Sallop). Sallop sustained tax losses in the amount of $750,000 when the Internal Revenue Service (IRS) refused to grant capital gains treatment for an employee stock ownership plan in 2002 because the IRS did not receive the necessary documentation. In 2004, Levine knew that these events created " problems with Sallop's [2002] tax return." In April, 2007, Sallop threatened to sue Levine and LKNS. Five months later, Levine submitted a professional liability insurance renewal application on behalf of the firm that did not mention the lawsuit threatened by Sallop. Sallop sued Levine and LKNS in September, 2008, and Levine retained counsel to represent himself and LKNS in defending against the suit and the threatened attachment of LKNS's assets. Levine did not inform Katz, Nannis, or Solomon of the lawsuit, of Levine's retention of legal counsel on behalf of the firm, or of Sallop's motion to attach LKNS's assets at the time that the lawsuit and motion were filed. Instead, he did so for the first time during a stockholder meeting in February, 2009, just before his deposition in the case. In March, 2010, Levine informed the three that LKNS's insurance coverage was rescinded because Levine had failed to disclose Sallop's threatened lawsuit in a renewal application.

         At a special meeting held August 10, 2011, Katz, Nannis, and Solomon voted to terminate Levine's employment and to remove him as an officer and director of the firm, which then changed its name to Katz, Nannis & Solomon, P.C. (KNS). Soon ...

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