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Koshy v. Sachde

Supreme Judicial Court of Massachusetts, Middlesex

September 14, 2017


          Heard: May 2, 2017.

         The case was heard by Bruce R. Henry, J., and a complaint for contempt, filed on March 2, 2015, was also heard by him.

         The Supreme Judicial Court on its own initiative transferred the case from the Appeals Court.

          Charles M. Waters for the plaintiff.

          Maureen Mulligan (Timothy M. Pomarole also present) for the defendant.

          Thomas J. Carey, Jr., for Brian JM Quinn & others, amici curiae, submitted a brief.

          Present: Gants, C.J., Lenk, Hines, Gaziano, Lowy, Budd, & Cypher, JJ. [1]

          LENK, J.

         We are called upon in this case to construe for the first time G. L. c. 156D, § 14.30, the corporate dissolution statute. That statute allows a shareholder to petition a judge of the Superior Court to dissolve a corporation in the event of a deadlock between its directors. See G. L. c. 156D, § 14.30 (2) (i) .

         George T. Koshy and Anupam Sachdev are the sole shareholders and directors of Indus Systems, Inc. (Indus). After years of deepening dissension and acrimony between the two, Koshy filed a petition in the Superior Court in 2012, pursuant to the corporate dissolution statute, seeking to dissolve Indus. Koshy also brought claims against Sachdev for breach of fiduciary duties and, after a jury-waived trial had taken place, but prior to the issuance of the judge's decision, filed a separate claim for contempt of court. The judge rejected all of Koshy's claims and Sachdev's counterclaims, and dismissed Koshy's complaint for contempt. Koshy appealed, and we transferred the matter to this court on our own motion.

         We conclude that the utter impasse as to fundamental matters of corporate governance and operations shown to exist in these circumstances gave rise to a state of "true deadlock" such that the remedy of dissolution provided by the statute is permissible. See comment to G. L. c. 156D, § 14.30, 25A Mass. Gen. Laws Ann. at 71 (Thomson/West 2005). Since dissolution is a discretionary remedy, however, we remand the matter to the Superior Court for a determination whether it is the appropriate remedy in these circumstances. In addition, because a number of the claims in the complaint for contempt were not raised at trial, we vacate and set aside the judgment dismissing that complaint, and remand the matter for consideration of the allegations in the complaint concerning conduct that occurred after the trial.[2]

         1. Background.

          We recite the facts found by the trial judge, [3] supplemented with references to undisputed facts in the record.

         a. Formation and growth of Indus.

         As one of the motion judges observed, "[t]his case concerns the demise of a longstanding business relationship between two men who were once close friends." The parties formed Indus in April, 1987, after working together for several years at another company. Indus provides "computer aided design" (CAD) services, creating and storing digital renderings of "existing manual drawings, sketches and other information supplied by client organizations." Koshy and Sachdev each own fifty per cent of Indus's shares and serve as its sole directors. They are both authorized to act on the company's behalf.

          After a few years of growing pains, Indus developed a steady market for its services. By the end of 1997, the company was generating revenues of approximately $700, 000 annually. In June, 1999, Indus was awarded a United States Government Services Administration contract, which allowed it to bid on projects for agencies of the Federal government. To help meet the new wave of demand created by this contract, the parties established eSystems Software Pvt. Ltd. (eSystems), an Indian corporation, to provide support services to Indus.[4]

         Building upon its success, Indus obtained a Federal "streamlined technology acquisition resources for services" contract (STARS contract) in 2004. It allowed government clients to purchase products and services from Indus without having to go through a competitive bidding process. The STARS contract, which was effective through November 30, 2011, gave Indus access to a new client base and provided approximately sixty per cent of the company's revenue from 2004 to 2010. By 2007, Indus's revenues exceeded $2 million annually.

         b. Parties' dispute.

          Sometime in the late 2000s, the relationship between the parties began to fall apart. They developed a fundamental difference of opinion concerning the future of Indus. While Koshy wanted the company to focus primarily on its existing services for government agencies, Sachdev believed that it should explore new markets. Both parties viewed their counterpart's vision of Indus's future as gravely flawed. Koshy saw Sachdev's efforts to develop new markets as quixotic and costly, while Sachdev considered Koshy's focus on existing clients myopic and shortsighted. This difference in viewpoints bred growing distrust as well, as is evident from a dispute arising around 2010 in connection with payments made from Indus to eSystems. While Sachdev preferred to make prepayments to eSystems for services to be performed, Koshy favored payments only for services rendered. Koshy believed that prepayments, which could not easily be recovered due to jurisdictional obstacles, provided Sachdev with a means clandestinely to direct company resources into new projects. Notwithstanding Koshy's stated concerns, Sachdev routinely made prepayments to eSystems without consulting with Koshy.

         As these disagreements strained the parties' relationship, an incident in the fall of 2011 furthered its disintegration. At that time, Indus had approximately $1.4 million in retained earnings. Koshy wanted this money to be paid out to himself and Sachdev as a distribution, while Sachdev did not. In November, 2011, Koshy wrote himself a check from Indus's corporate account, in the amount of $690, 000, as a distribution, without Sachdev's consent. Koshy encouraged Sachdev, who was in India at the time, to take a matching distribution. Sachdev instead reacted by effectively locking Koshy out of the company. He initiated a lawsuit against Koshy on behalf of Indus, seeking a return of the distribution; stopped payment of Koshy's salary; terminated his company credit cards; and changed the locks on the door of Indus's offices. He also refused to consent to a tax distribution to the parties, as had been the practice in prior years. Koshy subsequently placed the $690, 000 in an escrow account.

         As this dispute was ongoing, each party offered to buy out the other, based on evaluations of Indus's worth created by consultants that each had hired. Sachdev offered to purchase Koshy's shares for $480, 000. Koshy rejected that offer and tendered his own offer to purchase Sachdev's shares for approximately $2.8 million; Sachdev rejected that proposal. Ultimately, the $690, 000 was returned to Indus, and in June, 2012, the complaint was dismissed. Koshy's salary, company credit cards, and access to his office were restored. The relationship between the parties however, continued to spiral downward.

         The parties' welling antipathy for and toxic distrust of each other inevitably began to impinge upon the day-to-day operations of Indus. In December, 2011, without consulting Koshy, Sachdev hired Michael Xifaras to help with the company's sales. Xifaras replaced Roger Geilen, a long-time Indus salesperson, who had worked largely with Koshy. Koshy and Xifaras did not get along, as Koshy believed that Sachdev had hired Xifaras, in effect, as his replacement. The hostility between the two broke out into open conflict when Xifaras sent an extremely critical electronic mail message to Koshy, with a copy to Sachdev, which included a variety of insults.[5] In response, Koshy informed Sachdev that he would be firing Xifaras, and provided Xifaras notice of the termination. Sachdev responded by saying that he agreed with Xifaras's criticisms and that Koshy had no authority to fire employees without Sachdev's consent; Xifaras retained his position at Indus. A few months later, Koshy again attempted to terminate Xifaras, with the same result. At the time of trial in October, 2013, Xifaras still worked for Indus.

         Finally, in June, 2012, Koshy commenced in the Superior Court the underlying action in this case. The complaint asserted that Sachdev had committed a breach of his fiduciary duty to Koshy, as well as the implied covenant of good faith and fair dealing; the complaint also asserted that the parties were deadlocked and sought corporate dissolution on that ground. Sachdev filed counterclaims alleging breach of fiduciary duties by Koshy and abuse of process.

         Koshy also sought a preliminary injunction enjoining Sachdev from taking certain actions purportedly intended to freeze out Koshy. A Superior Court judge (who was not the trial judge) granted the motion in part, enjoining Sachdev from (1) blocking or impeding regular tax distributions to Koshy; (2) making any non-payroll-related disbursement or expenditure in excess of $5, 000 on behalf of Indus without providing written notice to Koshy in advance; (3) hiring or firing any employee without providing written notice to Koshy in advance; (4) making any payments on behalf of Indus to eSystems for services not yet performed without Koshy's prior written consent; and (5) taking any action for the purpose of "forcing or pressuring [Koshy] to sell his shares for less than fair market value." Shortly thereafter, Sachdev approved a tax distribution to the parties. In September, 2012, Sachdev sought to have the preliminary injunction dissolved. The judge denied the motion, and instead modified the order such that the same provisions also were applicable to Koshy.

         In March, 2015, nearly one and one-half years after the trial in October, 2013, and while a decision on the issues raised at trial was still pending, Koshy filed a complaint seeking a judgment of contempt against Sachdev for asserted repeated violations of the preliminary injunction. The trial judge ultimately dismissed the ...

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