Energy Resources Corp., Inc. v. Porter 505

ENERGY RESOURCES CORPORATION, INC. 505

v. 505

James H. PORTER et al. [FN1] 505

FN1. Energy & Environmental Engineering, Inc. 505

Appeals Court of Massachusetts, 505

Middlesex. 505

Argued April 22, 1982. 505

Decided Aug. 5, 1982. 505

KASS, Justice. 505

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 505

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 506

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 506

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) 506

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 506

**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, 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 506

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 506

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." 507

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 507

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 507

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) 507

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. 507

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. 508

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. Note, Corporate Opportunity, 74 Harv.L.Rev. 765, 773 (1961). See Brudney & Clark, A New Look at Corporate Opportunities, 94 Harv.L.Rev. 997, 1021 (1981). If the refusal to deal is shrouded in secrecy, it is too likely that the tempted officer will find himself in the position of Fielding's "fair creature" of whom he wrote, "[He] would have ravished her, if she had not, by a timely compliance, prevented him." [FN3] 508

FN3. Fielding, Jonathan Wild 102 (Everyman's Library ed. 1964). 508

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 508

A case closer on its facts to that at bar was Kelly v. 74 & 76 W. Tremont Ave. Corp., 4 Misc.2d 533, 151 N.Y.S.2d 900 (1956), in which the executive, defending a diversion of a corporate opportunity, claimed that the seller would not have sold certain controlling stock to his corporation at the same price available to him. Commenting that, at the least, the executive was required to make full and frank disclosure of this refusal to deal, the court wrote: "If Jameson [the seller], in no event, would **395 change his mind, and Goldstein [*302 the buyer] made full disclosure, there would have been time enough to have permitted Goldstein's purchase of the stock for himself and his favored colleagues." Id. at 537, 151 N.Y.S.2d 900. See also Patient Care Servs., S. C. v. Segal, 32 Ill.App.3d 1021, 1031, 337 N.E.2d 471 (1975); Ellzey v. Fyr-Pruf, Inc., 376 So.2d 1328 (Miss.1979). 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 508

2. Misappropriation of trade secrets. It might be thought that the questions of misappropriation of trade secrets are subsumed in the corporate opportunity question; that is, whatever damages flow from diversion of the corporate opportunity would be the same as from misappropriation of trade secrets concerning staged fluidized bed combustion, if there were any. Upon closer examination, the diversion of the corporate opportunity related not to fluidized bed combustion but to joining with Howard to obtain a development grant for the process. The misappropriation question retains significance 509

The trial judge found that: "fluidized bed technology and concepts have been common knowledge in the professional and scientific community for a number of years; ... that staged or multi-staged fluidized beds have been in existence for at least [twenty] years and are illustrated and discussed in technical literature ...;" and that such nuances as ERCO had developed through Porter's work had not been closely guarded. There was support in the record for these findings and we are far from a conviction that a mistake has been made. New England Canteen Serv., Inc. v. Ashley, 372 Mass. 671, 675, 363 N.E.2d 526 (1977). On the basis of these findings the judge correctly ruled that Porter was not to be broadly restrained from putting to use the product of his *303 general knowledge, experience and skill in the fluidized bed combustion field. J. T. Healy & Son v. James A. Murphy & Son, 357 Mass. 728, 736, 260 N.E.2d 723 (1970). Jet Spray Cooler, Inc. v. Crampton, 361 Mass. 835, 840, 282 N.E.2d 921 (1972). Jet Spray Cooler, Inc. v. Crampton, 377 Mass. 159, 165, 385 N.E.2d 1349 (1979). Chomerics, Inc. v. Ehrreich, --- Mass.App. ---, ---, Mass.App.Adv.Sh. (1981) 1040, 1045, 421 N.E.2d 453. See also Manos v. Melton, 358 Mich. 500, 100 N.W.2d 235 (1960), a case close on its facts to that at bar 509

3. Other issues. Whether Porter was in breach of his employment agreement is subsumed in the resolution of the previous issues, i.e., the diversion of the corporate opportunity is perforce a breach of a provision in the employment agreement that the employee will "diligently perform all duties of his ... employment and ... devote his full time, skill, energy and ability for the promotion of the business of the Company." The same damage results, whether seen as flowing from violation of Porter's fiduciary duty or violation of the agreement. Since no misappropriation of trade secrets was found, Porter cannot be in breach of that portion of the agreement which required him not to divulge confidential information 509

ERCO's claim under G.L. c. 93A is governed by Newton v. Moffie, 13 Mass.App. 462, 469, 434 N.E.2d 656 (1982), and is, therefore, without merit 509

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 509

So ordered 510

BROWN, Justice (concurring) 510

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. 510

FN1. Counsel of record on appeal was not involved in this matter prior to the commencement of the litigation. 510

Walter M. JUERGENS 510

v. 510

VENTURE CAPITAL CORPORATION et al 510

Appeals Court of Massachusetts, Middlesex 510

Argued Nov. 13, 1972 510

Decided May 2, 1973. 510

**399 KEVILLE, Justice. 510

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 510

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 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 27 510

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 $23,000 510

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 511

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 $140,000 511

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 511

**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 511

Under the by-laws, as president, Shear was designated as chief executive officer. The by-laws 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 511

*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 512

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 512

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 512

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. 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. 868 512

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. 75 512

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. 773 513

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 513

So ordered 513

GRANT, Justice (concurring in result) 513

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. 513