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Balles v. Babcock Power Inc.

Supreme Judicial Court of Massachusetts, Middlesex

March 6, 2017


          Heard: November 8, 2016

         Civil action commenced in the Superior Court Department on December 21, 2010. The case was heard by Douglas H. Wilkins, J.

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

          Mark C. Fleming (Jonathan A. Cox also present) for the defendant.

          Thomas J. Carey, Jr. (Jody L. Newman also present) for the plaintiff.

          Ben Robbins & Martin J. Newhouse, for New England Legal Foundation, amicus curiae, submitted a brief.

          Present: Gants, C.J., Botsford, Lenk, Hines, Gaziano, Lowy, & Budd, JJ.

          LENK, J.

         The dispute before us chiefly concerns the meaning and application of the stockholders' agreement between a company, Babcock Power Inc. (Babcock or company), and its former executive, Eric N. Balles. To a lesser extent, it also concerns the separate employment agreement between the two.

         Babcock terminated Balles's employment when it discovered that he was engaged in an ongoing extramarital affair with a young female subordinate. Babcock's board of directors (board) subsequently concluded that Balles had been terminated "for cause" under the terms of his stockholders' agreement with the company, thereby allowing the board to repurchase his stock at a minimal price. The board withheld subsequent dividends, amounting to approximately $900, 000 in total, and refused to pay Balles any severance.

         Years of litigation followed, with Balles seeking declaratory relief to the effect that the stock be returned to him, along with the withheld dividends. Babcock responded with counterclaims on various grounds. Following a bifurcated trial, a Superior Court jury rejected Babcock's counterclaims, and although Balles prevailed at a jury-waived trial on his claim for declaratory relief, a portion of his prior salary was subjected to equitable forfeiture and he was unsuccessful in his bid to receive severance pay. Babcock appealed from the judgment at the jury-waived trial, and we allowed its application for direct appellate review. We affirm.[1]

         1. Background.

         We recite the facts found by the trial judge, which the parties acknowledged at oral argument they do not challenge. We have supplemented those findings by reference to facts in the record that the parties do not dispute.

         a. Stockholders' agreement and employment agreement.

         When his employment at Babcock began in 2002, [2] Balles entered into two agreements: a stockholders' agreement and an employment agreement.[3] Under the terms of the stockholders' agreement, Balles, one of seventeen "management investors" in Babcock, [4]received 100, 000 shares of common stock in the company at a price of $0, 001 per share.

         Section 5 of the stockholders' agreement sets forth the rights of management investors in the event of their termination. Section 5(d) states that, if a management investor's employment is terminated without cause, the stockholders' agreement continues to apply to his or her stock. By contrast, section 5(e) provides that if a management investor's employment is terminated "for cause, " as defined in the stockholders' agreement, Babcock's board of directors must repurchase his or her stock at the nominal price of $0, 001 per share.

         "Cause, " in turn, is defined under section 1 of the stockholder's agreement as follows:

"(a) fraud, embezzlement or gross insubordination on the part of the Management Investor; (b) the Management Investor's conviction of or plea of nolo contendere to any felony; (c) the Management Investor's willful and material breach of or willful failure or refusal to perform and discharge, his duties, responsibilities or obligations to the Company (other than by reason of disability or death) that is not corrected within thirty (30) days following written notice thereof to the Management Investor by the Company, such notice to state with specificity the nature of the breach, failure or refusal; provided, that if such breach, failure or refusal cannot reasonably be corrected within thirty (30) days of written notice thereof, such thirty (30) day period shall be extended for so long as may be reasonably necessary to correct the same; or (d) any act of willful misconduct by the Management Investor which (i) is intended to result in substantial personal enrichment of the Management Investor at the expense of the Company or any of its subsidiaries or affiliates or (ii) is intended to and does have a material adverse impact on the business or reputation of the Company or any of its subsidiaries or affiliates. For purposes of this Agreement, a determination of 'Cause' may only be made by the Board of Directors of the Company."

         The stockholders' agreement also provides for a jury-waived trial to adjudicate any claims arising under it, stating in relevant part that "each party acknowledges and agrees that any controversy which may arise under [the stockholders' agreement] is likely to involve complicated and difficult issues, " and that the parties "waive[] any right such party may have to a trial by jury in respect of any litigation directly or indirectly arising out of or relating to the [stockholders' agreement]."

         The employment agreement between Balles and Babcock provided that he would serve as an employee "at will" and could be terminated at any time for any reason. The employment agreement also stated that, in the event of Balles's termination, he would be entitled to severance pay unless he was terminated for cause, "as defined in [the] [s]tockholders' [a]greement."

         b. Relationship with female subordinate.

         The female subordinate began working at Babcock as an intern when she was still an undergraduate student. She eventually obtained a full-time position at the company as an "Engineering Management Assistant/Engineering Coordinator." After receiving two raises while serving in this role, she eventually was promoted to the position of "Operations Associate/Engineering." Balles was her supervisor at all relevant times.

         In the summer of 2008, Balles began an intimate extramarital relationship with the female subordinate, which continued through his termination in 2010. The pair pursued their relationship on business trips funded by Babcock, and exchanged sexually explicit text messages on their personal cellular telephones. Balles uploaded, downloaded, and saved photographs of the female subordinate, some depicting sexual content, on his Babcock-issued laptop computer.[5] To conceal his relationship with the female subordinate from Babcock, Balles falsified the details of at least one travel reimbursement request, but did not intentionally claim any fiscal reimbursement from Babcock to which he was not entitled under company policy.[6]

         On August 30, 2010, Michael LeClair, the president and chief executive officer of Babcock, learned of the relationship between Balles and the female subordinate. Soon thereafter, Jim Dougherty, president and chief executive officer of a subsidiary of Babcock, hand-delivered a memorandum to Balles stating that his employment was suspended "pending an investigation into allegations of misconduct and improper workplace behavior relating to [his] relationship with a female subordinate employee." Babcock's investigation included an in-depth review of Balles's documents, text messages, and electronic mail messages, all of which were stored on his company-issued computer. The investigation disclosed more than one hundred photographs and thousands of text messages between Balles and the female subordinate. Several of the messages described executives, as well as Balles's "negative feelings about working for [Babcock] and about his superiors." LeClair came to the conclusion that "Balles failed to perform his job from the moment" that he began his affair with the female subordinate.

         During the investigation, Balles repeatedly requested a face-to-face meeting with the board, which Babcock declined to provide. He received a letter on September 15, 2010, informing him that his employment had been terminated effective September 1, 2010, and that the board would be meeting shortly to determine whether his conduct met the definition of "[c]ause" under the stockholders' agreement. Babcock's attorney sent notice separately that it would not be necessary for Balles to provide information relating to the allegations of misconduct against him. The parties engaged in settlement negotiations but were unable to come to an agreement.[7]

         At the subsequent board meeting to determine whether Balles's conduct constituted "cause" within the meaning of the stockholders' agreement, LeClair summarized the investigation and recommended that the board terminate Balles "for cause" pursuant to clauses (a), (c), and (d) of the definition of "[c]ause" in section 1 of the stockholders' agreement. The board, after discussion, unanimously agreed, as noted in its minutes, that Balles's conduct constituted "cause" under the stockholders' agreement. The minutes reflected the board's determination that there was "overwhelming and irrefutable evidence that . . . Balles engaged in serious misconduct during his employment and [that] such misconduct was a breach of fiduciary duty to the [c]ompany, including a breach of his duty of loyalty." Because the board terminated Balles for cause, it went on to "repurchase" all of Balles's shares pursuant to section 5(e) of the stockholders' agreement, "amounting to 100, 000 shares of capital stock of [Babcock] for a repurchase price of $0, 001 per share."

         c. Prior proceedings.

         Shortly after the board voted to terminate him "for cause, " Balles commenced this action against Babcock in the Superior Court. He sought a declaratory judgment invalidating the board's repurchase of his shares under the stockholders' agreement and alleged that the board had committed a breach of the agreement by denying him subsequent dividend payments. He also asserted that the company had committed a breach of his employment agreement by declining to pay him severance upon his termination. The company denied the allegations and asserted seven counterclaims.[8] The proceedings in the Superior Court were bifurcated into a jury trial to adjudicate the majority of Babcock's counterclaims, and a jury-waived trial to ...

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