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Ramos v. Estrada 597

LEOPOLDO L. RAMOS et al., Plaintiffs and Respondents 597

v. 597

ANGEL ESTRADA et al., Defendants and Appellants. 597

No. B059572. 597

Court of Appeal, Second District, California. 597

Aug. 13, 1992. 597



Defendants Tila and Angel Estrada appeal a judgment which states they breached a written corporate shareholder voting agreement. We hold that a corporate shareholders' voting agreement may be valid even though the corporation is not technically a close corporation. We affirm. 598

Facts 598

Plaintiffs Leopoldo Ramos et al. formed Broadcast Corporation for the purpose of obtaining a Federal Communications Commission (FCC) construction permit to build a Spanish language television station in Ventura County. 598

Ramos and his wife held 50 percent of Broadcast Corp. stock. The remaining 50 percent was issued in equal amounts to five other couples. The Estradas were one of the couples who purchased a 10 percent interest in Broadcast Corp. Tila Estrada became president of Broadcast Corp., sometimes known as the "Broadcast Group." 598

In 1986, Broadcast Corp. merged with a competing applicant group, Ventura 41 Television Associates (Ventura 41), to form Costa del Oro Television, Inc. (Television Inc.). The merger agreement authorized the issuance of 10,002 shares of Television Inc. voting stock. 598

Initially, Television Inc. was to issue 5,000 shares to Broadcast Corp. and 5,000 to Ventura 41. Each group would have the right to elect half of an eight- member board of directors. The two remaining outstanding shares were to be issued to Broadcast Corp. after the television station had operated at full power for six months. Television Inc.'s board would then increase to nine members, five of whom would be elected by Broadcast Corp. 598

The merger agreement contained restrictions on the transfer of stock and required each group to adopt internal shareholder agreements to carry out the merger agreement. With FCC approval, Broadcast Corp. and Ventura 41 modified their agreement to permit stock in Television Inc. to be issued directly to the respective owners of the merged entities instead of to the entities themselves. Ventura 41 sought this change so that Television Inc. would be treated as a Subchapter S corporation for tax purposes. In part, Broadcast Group agreed to this change in exchange for approval by Ventura 41 of the agreement at issue here, which is known as the June Broadcast Agreement. Among other things, the June Broadcast Agreement provides for block voting for directors by the Broadcast Group shareholders according to their ownership. *1073 598

In January 1987, Broadcast Group executed a written shareholder agreement, known as the January Broadcast Agreement, to govern the voting and transfer of Broadcast Corp. shares in Television Inc. stock. At a later date, Broadcast Group drafted a written schedule showing the valuation of shares transferred pursuant to the January Broadcast Agreement. It set the price for purchase and sale of shares as their investment cost plus 8 percent per annum. 598

In June 1987, the shareholders of Broadcast Group executed a Master Shareholder Agreement. This agreement was designed to implement the Merger Agreement. It permits direct shareholder ownership of stock and governs various voting and transfer provisions. It requires that shareholder votes be made in the manner voted by the majority of the shareholders. 598

Members of Broadcast Group subscribed for shares of Television Inc. in their respective proportion of ownership pursuant to written subscription agreements attached to the Master Shareholder Agreement. The Ventura 41 group acted similarly. 598

Television Inc. issued stock to these subscribers in December 1987, and they elected an eight-member board. They also elected Leopoldo Ramos president, and Tila Estrada as one of the directors. 599

At a special directors' meeting held on October 8, 1988, Tila Estrada voted with the Ventura 41 group block to remove Ramos as president and to replace him with Walter Ulloa, a member of Ventura 41. She also joined Ventura 41 in voting to remove Romualdo Ochoa, a Broadcast Group member, as secretary and to replace him with herself. 599

Under the June Broadcast Agreement and the Merger Agreement, each of the groups were required to vote for the directors upon whom a majority of each respective group had agreed. The terms of that agreement expressly state that failure to adhere to the agreement constitutes an election by the shareholder to sell his or her shares pursuant to buy/sell provisions of the agreement. The agreement also calls for specific enforcement of such buy/sell provisions. 599

On October 15, 1988, the Broadcast Group noticed another meeting to decide how its members would vote their shares for directors at the annual meeting. All members attended except the Estradas. The group agreed to nominate another slate of directors which did not include either of the Estradas. The Estradas were notified of the results of this meeting. 599

The Estradas unilaterally declared the June Broadcast Agreement null and void as of October 15, 1988, in a letter dictated for them by Paul Zevnik, the *1074 attorney for Ventura 41. Tila Estrada refused to recognize the October 15 vote of the majority of the Broadcast Group to replace her as a director of Television Inc. Ramos et al. sued the Estradas for breach of the June Broadcast Agreement, among other things. 599

The court ruled that the Estradas materially breached the valid June Broadcast Agreement, and it ordered their shares sold in accordance with the specific enforcement provisions of the June Broadcast Agreement. The court restrained the Estradas from voting their shares other than as provided in the June Broadcast Agreement. 599

Discussion 599

(1a) The Estradas contend that the June Broadcast Agreement is void because it constitutes an expired proxy which the Estradas validly revoked. 599

(2) The interpretation of statutes and contracts is a matter of law subject to independent review by this court. (Stratton v. First Nat. Life Ins. Co. (1989) 210 Cal.App.3d 1071, 1079, 1084 [258 Cal.Rptr. 721].) 599

Corporations Code [FN1] section 178 defines a proxy to be "a written authorization signed ... by a shareholder ... giving another person or persons power to vote with respect to the shares of such shareholder." (Italics added.) 599

FN1 All further statutory references are to the Corporations Code unless otherwise specified. 599

Section 7.1 of the June Broadcast Agreement details the voting arrangement among the shareholders. It states, in pertinent part: "The Stockholders agree that they shall consult with each other prior to voting their shares in the Company. They shall attempt in good faith to reach a consensus as to the outcome of any such vote. In the case of a vote for directors, they agree that no director shall be selected who is not acceptable to at least one member (i.e., spousal unit) of each of Group A and Group B. (See ¶ 1.2(b)(1) above [which states that: 'The Stockholders shall be divided into two groups, Group " A" being composed of Leopoldo Ramos and Cecilia Morris, and Group "B" being composed of all the other Stockholders.'].) In the case of all votes of Stockholders they agree that, following consultation and compliance with the other provisions of this paragraph, they will all vote their stock in the manner voted by a majority of the Stockholders." (Second italics in original.) 599

(1b) No proxies are created by this agreement. The agreement has the characteristics of a shareholders' voting agreement expressly authorized by section 706, subdivision (a) for close corporations. (See also legis. committee com., West's Ann. Corp. Code § 186 (1990) p. 52 [Deering's Ann. Corp. *1075 Code, § 186 (1977) pp. 49-50], regarding proxies.) Although the articles of incorporation do not contain the talismanic statement that "This corporation is a close corporation," the arrangements of this corporation, and in particular this voting agreement, are strikingly similar to ones authorized by the code for close corporations. 600

Section 706, subdivision (a) states, in pertinent part: "an agreement between two or more shareholders of a close corporation, if in writing and signed by the parties thereto, may provide that in exercising any voting rights the shares held by them shall be voted as provided by the agreement, or as the parties may agree or as determined in accordance with a procedure agreed upon by them...." 600

Here, the members of this corporation executed a written agreement providing that they shall try to reach a consensus on all votes and that they shall consult with one another and vote their own stock in accordance with the majority of the stockholders. They entered into this agreement because they "mutually desire[d]" to limit the transferability of their stock to ensure "the Company does not pass into the control of persons whose interests might be incompatible with the interests of the Company and of the Stockholders, establishing their mutual rights and obligations in the event of death, and establishing a mechanism for determining how the Stockholders' voting rights in the Company shall be exercised. . . ." 600

Even though this corporation does not qualify as a close corporation, this agreement is valid and binding on the Estradas. Section 706, subdivision (d) states: "This section shall not invalidate any voting or other agreement among shareholders ... which agreement ... is not otherwise illegal." 600

The legislative committee comment regarding section 706, subdivision (d) states that "[t]his subdivision is intended to preserve any agreements which would be upheld under court decisions even though they do not comply with one or more of the requirements of this section, including voting agreements of corporations other than close corporations." (West's Ann. Corp. Code, § 706 (1990) p. 330, italics added.) 600

The California Practice Guide indicates that such "pooling" agreements are valid not only for close corporations, but also "among any number of shareholders of other corporations as well." (Friedman, Cal. Practice Guide: Corporations (The Rutter Group 1992) ¶ 3:159.2, p. 3-31.) 600

The Estradas cite Dulin v. Pacific Wood and Coal Co. (1894) 103 Cal. 357 [37 P. 207], and Smith v. S. F. & N. P. Ry. Co. (1897) 115 Cal. 584 [47 P. *1076 582], as support for their argument that the agreement is an expired proxy which they revoked. Their reliance on these cases is misplaced. 600

In Dulin, defendant Clugston claimed there was an oral agreement among the shareholders that he would be president of defendant corporation and receive a salary in exchange for various loans and a mortgage to the corporation. At a later election, certain stockholders cumulated their votes and plaintiff Dulin was elected president. Clugston charged a conspiracy to defeat him. 601

The Supreme Court found that the alleged verbal agreement was void and that there had never been an express agreement to elect Clugston. (Dulin v. Pacific Wood and Coal Co., supra, 103 Cal. at p. 363.) No proxy had been given to vote the stock of the others involved, "nor was any required by the agreement to be given." (Ibid.) In short, there was no voting agreement whatsoever, oral or written which could be enforced. 601

The Dulin court never considered whether the objects of the alleged oral agreement were lawful or proper. As Marsh on California Corporation Law explains, "[t]his case would seem to hold nothing more than that the alleged agreement was unenforceable because it was oral." (3 Marsh, Cal. Corporation Law (3d ed. 1991 supp.) § 22.10, p. 1857.) 601

In Smith, supra, three individuals purchased a majority share of stock in a corporation. To keep control of the corporation, they entered into a written agreement to pool their votes so as to vote in a block for a five-year period. Although two of the three agreed on a slate for an election, the third attempted to repudiate the agreement. The two presented the vote of all the stock held by the trio in accordance with their agreement; the third attempted to vote his own stock in the manner he desired. 601

The court held that the express, written agreement validly called for the trio to vote their shares as a block. (Smith v. S. F. & N. P. Ry. Co., supra, 115 Cal. at p. 598.) The court viewed the agreement as a power (to vote) coupled with an interest (in purchasing stock) which was supported by consideration. (Id., at p. 600.) The court construed the agreement as an agency; a proxy which could not be repudiated. (Id., at pp. 598-599.) 601

There is dicta in Smith suggesting that the agreement in that case constituted an irrevocable proxy. Said the court: "It is not in violation of any rule or principle of law for stockholders, who own a majority of the stock in a corporation, to cause its affairs to be managed in such way as they may think best calculated to further the ends of the corporation, and, for this purpose, *1077 to appoint one or more proxies who shall vote in such a way as will carry out their plan. Nor is it against public policy for two or more stockholders to agree . . . upon the officers whom they will elect, and they may do this either by themselves, or through their proxies. . . ." (Smith v. S. F. & N. P. Ry. Co., supra, 115 Cal. at pp. 600-601, italics added.) 601

The Smith court also held that "[a]ny plan of procedure they [stockholders] may agree upon implies a previous comparison of views, and there is nothing illegal in an agreement to be bound by the will of the majority as to the means by which the result shall be reached. If they are in accord as to the ultimate purpose, it is but reasonable that the will of the majority should prevail as to the mode by which it may be accomplished." (Smith v. S. F. & N. P. Ry. Co., supra, 115 Cal. at p. 601.) 601

In the instant case, the only difference from Smith is that the shareholders here chose to vote their stocks themselves, and not by proxy. What the Smith court held, however, is that voting agreements, like the one here, are valid. If the shareholders are unable to reach a consensus, then each shareholder must vote his or her shares according to the will of the majority. 601

The instant agreement is valid, enforceable and supported by consideration. It states, in pertinent part, that the stockholders entered into the agreement for the purposes of "limiting the transferability of ... stock in the Company, ensuring that the Company does not pass into the control of persons whose interests might be incompatible with the interests of the Company and of the Stockholders, establishing their mutual rights and obligations in the event of death, and establishing a mechanism for determining how the Stockholders' voting rights ... shall be exercised ...." 602

(3) Section 7.2 of the agreement states that "[t]he Stockholders understand and acknowledge that the purpose of the foregoing arrangement is to preserve their relative voting power in the Company .... Accordingly, in the event that a Stockholder fails to abide by this arrangement for whatever reason, that failure shall constitute on [sic] irrevocable election by the Stockholder to sell his stock in the Company, triggering the same rights of purchase provided in Article IV above." 602

The agreement calls for enforcement by specific performance of its terms because the stock is not readily marketable. Section 709, subdivision (c) expressly permits enforcement of shareholder voting agreements by such equitable remedies. It states, in pertinent part: "The court may determine the person entitled to the office of director or may order a new election to be held or appointment to be made, may determine the validity, effectiveness *1078 and construction of voting agreements ... and the right of persons to vote and may direct such other relief as may be just and proper." 602

The Estradas contend that the forced sale provision is unconscionable and oppressive. They portray themselves as naive, small-town business people who were forced to sign an adhesion agreement without reviewing its contents. 602

Substantial evidence supports the findings that Tila Estrada has been a licensed real estate broker. She is an astute businesswoman experienced with contracts concerning real property. The consent and signatures of the Estradas to the agreement were not procured by fraud, duress or other wrongful conduct of Ramos. The Estradas read and discussed with other members of Broadcast Group, and with their own counsel, the voting, buy/sell and other provisions of the agreement and the January Broadcast Agreement, as well as various drafts of these documents, and they freely signed these agreements. 602

On direct examination, under Evidence Code section 776, Tila Estrada admitted she owns and operates a real estate brokerage business; she regularly reviews a broad variety of real estate documents; she and her husband own and manage investment property; and she has considered herself "to be an astute business woman" since 1985. Tila Estrada also has been a participant and owner in another application before the FCC, for an FM radio station, before the instant suit was filed. 602

Ms. Estrada stated she got copies "of all the drafts and all the Shareholders Agreements." She discussed these agreements with other members of Broadcast Group and with its counsel, Mr. Howard Weiss. 602

The June Broadcast Agreement, including its voting and buy/sell provisions, was unanimously executed after the Estradas had a full and fair opportunity to consider it in its entirety. As the trial court found, the buy out provisions at issue here are valid, favored by courts and enforceable by specific performance. (And see 3 Marsh, supra, at § 22.14, p. 1867; see generally Vannucci v. Pedrini (1932) 217 Cal. 138, 144-145 [17 P.2d 706], on the right of those who are the original incorporators to enter into a corporate agreement requiring limitations on shareholder actions so as to preserve control of the corporation as set forth in their executed agreements.) 603

The Estradas breached the agreement by their written repudiation of it. Their breach constituted an election to sell their Television Inc. shares in accordance with the terms of the buy/sell provisions in the agreement. This *1079 election does not constitute a forfeiture-they violated the agreement voluntarily, aware of the consequences of their acts and they are provided full compensation, per their agreement. The judgment is affirmed. Costs to Ramos. 603

Stone (S. J.), P. J., and Yegan, J., concurred. 603

A petition for a rehearing was denied September 11, 1992, and the opinion was modified to read as printed above. Appellants' petition for review by the Supreme Court was denied October 29, 1992. *1080 603

Walta v. Gallegos Law Firm, P.C. 603

Cain v. Cain 619

Patrick W. CAIN et al. 619

v. 619

John G. CAIN, Jr 619

Appeals Court of Massachusetts, Suffolk 619

Argued May 16, 1975 619

Decided Sept. 15, 1975. 619

*468 GOODMAN, Justice. 619

This is an appeal by the plaintiffs Patrick W. Cain (Patrick) and Airport Express, Inc. (Airport)[FN1] from a final judgment in an action against John G. Cain, Jr. (John) in which the plaintiffs sought (among other things) declaratory and injunctive relief, damages, and an accounting. The case was tried before a judge who filed 'Findings, Rulings and Order for Judgment' (Mass.R.Civ.P. 52(a)). The evidence is reported. Our summary of the facts is taken primarily from the trial judge's findings *469 and from those factual allegations made by the plaintiffs in their bill of complaint that were admitted by the defendant in his answer. 619

FN1. The defendant (who has not appealed) did not press the allegations in his answer that Airport 'lacks the authority to sue.' No question is raised whether Airport should have been named as a plaintiff or as a defendant. 619

Patrick and John are brothers and the sole stockholders in Airport, a Massachusetts corporation engaged in the trucking business at the Boston Airport (Logan). They each hold 50% of the outstanding shares. Patrick is the president and a director of Airport. John is treasurer, clerk, and a director 619

In 1969 Patrick purchased Airport, an existing corporation, for $9,500. One of Airport's principal assets at that time, which it still possesses, was a certificate from the Interstate Commerce Commission (referred to as 'ICC rights') which relates to Airport's authority to carry goods throughout Massachusetts. About six months later, John went to work for Airport. On August 10, 1971, Patrick and John executed a document entitled 'Articles of Copartnership.'[FN2] On September 29, 1971, Patrick executed and delivered to John a 'bill of sale' under seal for fifty shares of Airport stock (constituting 50% of the outstanding shares) reciting receipt of 'one ($1.00) dollar and other valuable consideration.' Sometime in 1972 John was elected treasurer, clerk, and a director of Airport. From that time until the present the directors of Airport have been Patrick, Susanne Cain (Patrick's wife), John, and Esther D. Cain (John's wife). 619

FN2. Among the provisions of this document (which 'came out of a business management book') are the following: '(t)hat the said parties have . . . formed a copartnership for the purpose of engaging in the transportation business' under Airport's name at that time; that '(a)ll profits and losses shall be shared equally'; that '(a) systematic record of all transactions is to be kept and made available to each partner for inspection'; that '(e)ach partner will devote his entire time and attention to the business and engage in no other business enterprise without the consent of the other'; that '(e)ach partner is to have a salary of $350 per week,' and '(n)either party is to withdraw an amount in excess of his salary without the consent of the other'; that Patrick is to 'supervise loading and unloading of freight and any other duties that pertain to the pickup and delivery of freight'; that John is to 'have charge of the office and records, dispatch of drivers and any other duties that pertain to the office,' and that '(e)ach will have equal hours.' 620

*470 From 1972 until May, 1973, John borrowed amounts from Airport totalling $4,000. No portion of this sum has been repaid. 620

Under date of March 11, 1972, John delivered a letter to Patrick stating that 'effective immediately I am hereby cancelling all contractual agreements between us. . . . The termination includes any and all written or verbal agreements of any type . . ..' In a separate letter sent on the same date, John, '(i)n accordance with the terms of the by-laws for Airport'[FN3], offered to sell his shares to the **653 corporation; this offer was not accepted by Airport. [FN4] The corporation continued to operate as previously without change in officers and directors and with John and Patrick drawing equal salaries. 620

FN3. Neither the articles of organization nor the by-laws of Airport appear in the record. 620

FN4. John made several other offers to sell his stock either to Patrick or to Airport after March 11, 1972. At a meeting of the board of directors of Airport on May 11, 1974, it was voted to purchase John's shares for $40,000. The stock was never in fact purchased, and the trial judge declared this vote of the board voidable by the corporation. 620

As of May 17, 1974, Novo Airfreight (Novo), a freight forwarder which accounted for a substantial part of Airport's business, terminated its agreement with Airport.[FN5] On or about the same date, John activated Airfreight Specials (Specials), a proprietorship of which he was the sole owner. Specials is a tenant, rent free, in Novo's space. Since then, 25% or 30% of Novo's business has been given to Specials, while Airport's share of Novo's business has declined from 50% to 7% or 10%. Two truck drivers left the employ of Airport in mid-May, 1974, and are now employed by Specials. There was conflicting testimony at trial whether Specials had taken over another of Airport's accounts. 620

FN5. The agreement provided for termination upon a two-week notice by either party. 620

There was also conflicting testimony as to access to corporate books and records and the corporate checkbook. Patrick claimed that John had denied him access to the *471 records, while John testified that Patrick had never requested such access. Finally there was a conflict as to the amount of time John devoted to Airport's affairs, with John testifying that in 1974 on the average he worked twelve to fifteen hours a day for Airport, while Patrick testified that during that period John only kept the books and did the billing and occasionally came into the office for two or three hours.[FN6] 620

FN6. None of the conflicts referred to was resolved by the trial judge in his findings. 621

The final judgment granted relief only to the extent of requiring repayment of the $4,000 borrowed by John from Airport and declaring that the vote on May 11, 1974, (fn. 4) to have Airport purchase John's shares was voidable by the corporation. The defendant did not appeal, and we do not disturb that much of the final judgment 621

Patrick contends that he also is entitled to the retransfer of the 50% stock interest held by John and to damages arising out of the breach of the partnership agreement--both to be effected by way of a 'partnership accounting.' Airport asks that John be enjoined from competing with Airport, for damages arising out of past competition and 'other ('inimical') actions,' for the return of salary payments made to John from July 27, 1973, and for counsel fees to be paid by John. Patrick also asks for an injunction giving him access to the corporate books and records and the corporate checkbook. 621


Patrick's claims are based on the partnership agreement (fn. 2) which, he claims, John breached and of which, he contends, the transfer of stock was a part. However, the trial judge found (in his 'rulings of law'; Commercial Credit Corp. v. Commonwealth Mortgage & Loan Co. Inc., 276 Mass. 335, 338, 177 N.E. 88, (1931)) that the partnership agreement, which contained 'no time limit or term for the duration of the partnership (or) . . . provision as to how the partnership can be terminated,' was dissolved on March 11, *472 1972, the date of the letter from John to Patrick. See G.L. c. 108A, s 31(1)(b). He also found that 'there was no agreement or understanding between the brothers that the transfer of the 50% interest in the enterprise was conditioned on the continued operation of the partnership.' 621

**654 These findings are not clearly erroneous. Mass.R.Civ.P. 52(a), --- Mass. --- (1974). They are based on the face of the documents-- the partnership agreement, the letter terminating it, the bill of sale, and the stock certificate. The trial judge could rely on them and discount, as he did, the confused and conflicting testimony on which Patrick seeks to rely. Nor was the trial judge required to find a waiver of the termination notice from the fact that the parties did not appear to have changed their method of operation after the notice. Their method of operation was as consistent with their relationship as joint stockholders in Airport as with a partnership. Jones v. Brown, 171 Mass. 318, 50 N.E. 648 (1898), on which the plaintiffs rely, is inapposite. There the court sustained a finding by a single justice of waiver of a notice based on inconsistent conduct. Whether a finding in this case that there had been a waiver of the termination notice might also have been sustained (which we need not decide), is immaterial. Cf. Wilson v. Jennings, 344 Mass. 608, 614--615, 184 N.E.2d 642 (1962). 621

Though technically upon the termination of the partnership by the letter of March 11, 1972, Patrick became entitled to an accounting (G.L. c. 108A, s 43), this does not aid him in his claim to John's stock which, on the trial judge's findings, was not a partnership asset or in any way affected by the termination of the partnership. Further, the damage claims are based on events which occurred after the letter of termination. The plaintiffs' brief refers to various grievances, none of which appears to have occurred before May, 1973--the earliest date to which the plaintiffs' brief points.[FN7] 621

FN7. Patrick's contention, which is based on the existence of the partnership, that he is entitled to access to Airport's books and records must also fail. This does not preclude relief by the Superior Court, upon appropriate findings, to Patrick as director (Henn, Corporations, s 216, pp. 426--427 (2d ed. 1970)) or stockholder (Varney v. Baker, 194 Mass. 239, 241, 80 N.E. 524 (1907); see G.L. c. 249, s 5, as amended by St.1973, c. 1114, s 291). Cf. New England LNG Co. Inc. v. Fall River, --- Mass. ---, --- - ---, 331 N.E.2d 536, fn. 1 (1975). 622

We do not understand that Patrick is seeking a partnership accounting apart from these claims. The business generally appears to have been handled through Airport, leaving nothing to require a partnership accounting. 622


The claims against John as shareholder, officer, and director of Airport stand quite differently, particularly in view of the recent case of Donahue v. Rodd Electrotype Co. of New England, Inc., --- Mass. ---,[FNa] 328 N.E.2d 505 (1975), in which the Supreme Judicial Court dealt with a close corporation, of which Airport is an obvious example. '(T)he enterprise remains one in which ownership is limited to the original parties . . . in which ownership and management are in the same hands, and in which the owners are quite dependent on one another for the success of the enterprise.' Donahue case at ---, [FNb] 328 N.E.2d at 512. The court there held that 'stockholders in the close corporation owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another . . . (and) this strict good faith standard (measures) . . . their duty of loyalty to the other stockholders and to the corporation' (footnotes omitted). Donahue case at --- - ---,[FNc] 328 N.E.2d at 515. 622

FNa. Mass.Adv.Sh. (1975) 1295. 622

FNb. Mass.Adv.Sh. (1975) at 1307. 622

FNc. Mass.Adv.Sh. (1975) at 1315--1316. 622

The Donahue case, moreover, builds on and finds support in such cases as Wilson v. Jennings, 344 Mass. 608, 184 N.E.2d 642 (1962), and Samia v. Central Oil Co. of Worcester, 339 Mass. 101, 158 N.E.2d 469 (1959), in which close corporations under particular circumstances were assimilated to partnerships or joint ventures **655 in measuring the fiduciary duty owed to the corporation by a stockholder, officer, and director of the corporation. Thus in Wilson v. Jennings, 344 Mass. at 617, 184 N.E.2d at 647, the court sustained the claim in a stockholder's derivative suit that the defendant, a director and officer of the corporation, *474 who was also the operating shareholder, had 'attempt(ed) to seize for his own benefit an advantageous opportunity which belonged to Polytop (the corporation)' and restricted the defendant's competition with the corporation. The court said, 'Doubtless, while any joint venture in corporate form continued and while Jennings (the defendant) was a director and officer of Polytop, Jennings and his wife were bound to act only in its best interests.' Wilson case at 620, 184 N.E.2d at 649. See Samia v. Central Oil Co. of Worcester, supra, 339 Mass. at 122, 158 N.E.2d at 482 (the defendants, who were also shareholders, 'were not free, as directors of Central, to take wholly for themselves a business opportunity of Central'). Whatever the limitation[FN8] on the extension in the Donahue case, supra, at ---,[FNd] 328 N.E.2d at 517 of 'this strict duty of loyalty to all stockholders in close corporations,' that duty seems to us to be particularly applicable to the circumstances in this case, and we look to partnership law to assess John's duty to Airport and whether he breached it when he organized Specials, hired former Airport employees, and took much of Novo's business away from Airport. 622

FN8. See concurring opinion by Wilkins, J., in the Donahue case at ---, 328 N.E.2d 505 (1975), and, e.g., part IIIa and fn. 7 of this opinion. 623

FNd. MassAdv.Sh. (1975) at 1322. 623

Such competition is a clear violation of the fiduciary duty owed by one partner to another. '(T)he general rule (is) that a partner will not be permitted to obtain for himself profits arising from carrying on a separate business of the same nature as that of the firm, . . . but must account to his copartners for the benefits derived therefrom.' Holmes v. Darling, 213 Mass. 303, 306, 100 N.E. 611, 612 (1913). Shulkin v. Shulkin, 301 Mass. 184, 192--193, 16 N.E.2d 644 (1938). Henn, Corporations, s 22, p. 54 (2d ed. 1970). Crane and Bromberg, Partnership, s 68, p. 391 (1968) 623

Indeed, John's acquisition of Novo's business, formerly enjoyed by Airport, whether viewed as the appropriation of a corporate opportunity or direct competition with Airport (see Henn, Corporations, s 236, p. 459 (1970)) is, in the circumstances of this case--quite apart from his position *475 as a stockholder in a close corporation--a violation of John's duty as an officer and director 'reasonably to protect the interests of the corporation.' Production Mach. Co. v. Howe, 327 Mass. 372, 377, 99 N.E.2d 32, 35 (1951), in which an officer was held responsible to the plaintiff corporation for profits he had made through another corporation (wholly owned by him) from the manufacture of a saw-sharpening machine. The plaintiff corporation could recover because (though then manufacturing heavier machinery) it was equipped to make the machine and was contemplating expanding into the manufacture of this type of machine--something less drastic than the direct competition in this case which 'prevent(ed) or hinder(ed) the corporation in effecting the purposes of its creation.' Lincoln Stores, Inc. v. Grant, 309 Mass. 417, 421, 34 N.E.2d 704, 707 (1941) (dictum). Weismann v. Snyder, 338 Mass. 502, 505, 156 N.E.2d 21, 23 (1959) (indicating as a consideration whether 'the corporate charter powers were broad enough to include sales activity of the type and on the scale undertaken'). Anderson Corp. v. Blanch, 340 Mass. 43, 50, 162 N.E.2d 825, 830 (1959) (holding that in establishing a competing company the defendant 'did not live up to his fiduciary relation as a general corporate officer to the corporation'). Rosenblum v. Judson Engr. Corp., 99 N.H. 267, 273, 109 **656 A.2d 558 (1954). See Durfee v. Durfee & Canning, Inc., 323 Mass. 187, 193, 199--203, 80 N.E.2d 522 (1948); Note, Fiduciary Duty of Officers and Directors Not to Compete with the Corporation, 54 Harv.L.Rev. 1191, 1197--1198 (1941) 623

The competition in this case is quite different from the type of activity in which an officer or director of a corporation may be expected to engage as 'a natural concession to commercial practice' (see Note, 54 Harv.L.Rev. at 1197.) where the office or directorship is not in a close corporation and is not a full-time job. Here one of John's duties to Airport was, he testified, as a salesman to promote for Airport the very business he had appropriated for himself. Further, he testified that another of his duties was to collect receivables, and this placed him in conflict with his personal interest in keeping for himself Novo's good will *476 and business since Novo was in debt to Airport, the exact amount of which was in question.[FN9] 623

FN9. We need not attempt to determine whether John's duties were as officer, director, or employee. Even if they were those of an employee, it was his duty as director to see to it that they were performed consistently with the welfare of the corporation. 623

John's appropriation of Novo's business is not excused by the trial judge's findings that 'Airport lost this business because Novo Airfreight was dissatisfied with Patrick as his attitude was one of non-cooperation (and that) (f)or six or seven months prior to May, 1974 Novo Airfreight was looking for a carrier to replace Airport.' From the testimony of Novo's manager and John's testimony it appears that they had discussed the withdrawal of Novo's business from Airport and its assumption by John for about thirty days before the consummation of the arrangement (on May 17, 1974) between Novo and John's operation as Airport Specials. Yet it appears John did not consult Patrick about this imminent loss to Airport. However, whether John was acting in good faith is not decisive. 'Breach of the duty could be found although no corruption, dishonesty, or bad faith was involved.' Production Mach. Co. v. Howe, 327 Mass. at 378, 99 N.E.2d at 36. John could not enter into an arrangement inconsistent with his fiduciary duty. It was incumbent on him either to get Patrick's consent[FN10] or relieve himself of his obligation to Airport by severing his relationship as officer, director, and equal stockholder.[FN11] '(T)he argument that a fiduciary is not subject to the general rule here involved where the venture is one that the corporation itself is unable to take advantage of is not persuasive.' Durfee v. Durfee & Canning, Inc., 323 Mass. at *477 202, 80 N.E.2d at 530. Irving Trust Co. v. Deutsch, 73 F.2d 121, 124 (2d Cir. 1934), cert. den., 294 U.S. 708, 55 S.Ct. 405, 79 L.Ed. 1243 (1935). 624

FN10. There is no evidence of inequitable conduct by Patrick which might permit John to claim unclean hands. Nor was that defense pleaded. See American Window Cleaning Co. of Springfield v. Cohen, 343 Mass. 195, 201, 178 N.E.2d 5 (1961); Wilson v. Jennings, 344 Mass. at 619, 184 N.E.2d 642. 624

FN11. We are not here concerned with a minority stockholder not involved in management. 624

For John's breach of fiduciary duty, Airport[FN12] is entitled to recoup from **657 John all the profits he made from Novo's business and any other business competitive with Airport. (There is an indication in the transcript that John handled such other business.) Production Mach, Co. v. Howe, 327 Mass. at 378--379, 99 N.E.2d 32. See Lydia E. Pinkham Medicine Co. v. Gove, 303 Mass. 1, 10--11, 20 N.E.2d 482 (1939); Henn, Corporations, s 236, p. 460 (2d ed. 1970). However, the court did not reach this issue and made no findings as to John's profits. The case must therefore be remanded for this purpose to the Superior Court. 624

FN12. We follow '(t)he usual practice in Massachusetts (which) has been to afford relief in a case of this character to the corporation, on the ground that the stockholders have only derivative rights against one who has wronged their corporation.' Samia v. Central Oil Co. of Worcester, 339 Mass. at 123, 158 N.E.2d at 482. This is not inconsistent with Donahue v. Rodd Electrotype Co. of New England, Inc., --- Mass. ---, 328 N.E.2d 505, 508 (1975). Although the Donahue case was considered as an action 'in the personal right of the plaintiff (stockholder)' (see fns. 2, 4), it describes the fiduciary duty on which it is based as running 'to the other stockholders and to the corporation' (emphasis supplied). Donahue case at ---, 328 N.E.2d at 515. Further, the court suggested as an appropriate judgment the payment to the corporation of the amount the defendant received from the corporation for shares of his stock. While the 'violation of his fiduciary duty (was) to the other stockholders,' it consisted in 'obtain(ing) assets from his corporation' for which it was entitled to reimbursements. Id. at ---, 328 N.E.2d at 521 (1975). See Lydia E. Pinkham Medicine Co. v. Gove, 303 Mass. 1, 13, 20 N.E.2d 482 (1939). See also Shulkin v. Shulkin, 301 Mass. 184, 16 N.E.2d 644 (1938), in which profits made by a partner in breach of his fiduciary relationship were treated as a partnership asset subject to a partnership accounting. 624

Airport also claims that John should be required to repay to the corporation the salary he received from the time he began competing with Airport by the activation of Specials.[FN13] But whether he should be required to repay his entire salary or whether he should receive a credit for the actual value of his services depends on the totality of *478 the circumstances, including John's good faith and whether he actually performed substantial services to Airport. See Lydia E. Pinkham Medicine Co. v. Gove, 303 Mass. at 4, 20 N.E.2d at 486 (complete forfeiture refused; 'the salaries paid to officers were not compensation for services in the ordinary sense at all'); Production Mach. Co. v. Howe, 327 Mass. at 379, 99 N.E.2d 32 (total forfeiture of compensation where the record was sparse as to the benefits conferred by the defendant's services); New England Inv. Corp. v. Sandler, 329 Mass. 230, 237, 107 N.E.2d 16 (1952) ('In view of the manner in which Sandler managed the corporation for his personal benefit, he is not in a position to charge for possible incidental benefits which the corporation may have received from his management'); Anderson Corp. v. Blanch, 340 Mass. at 50--51, 162 N.E.2d 825, 830 ('apportionment of compensation to services properly performed' on the basis of 'clear findings' of the specific value of the services). See also Shulkin v. Shulkin, 301 Mass. 184, 194, 16 N.E.2d 644 (1938) (wrongdoing partner did not forfeit salary in a partnership accounting); Greenan v. Ernst, 408 Pa. 495, 514--515, 184 A.2d 570 (1962) (applying 'the old adage that 'the laborer is worthy of his hire "); Whaler Motor Inn, Inc. v. Parsons, Mass.App.Ct. (1975). [FNe] 625

FN13. The plaintiff puts this date as July 23, 1973. From our reading of the record, it would appear that John began operating Specials on May 15 or May 17, 1974. 625

FNe. Mass.App.Ct.Adv.Sh. (1975) 1089, 1111--1112. 625

The evidence in this regard was oral and conflicting. The differences can best be resolved by findings in the Superior Court, which it can thereupon use as a basis for deciding the extent (if any) to which repayment should be required. 625

Airport is also entitled to injunctive relief against competition by John so long as he is an officer or director of Airport (Lydia E. Pinkham Medicine Co. v. Gove, 303 Mass. at 14, 20 N.E.2d 482; see Wilson v. Jennings, 344 Mass. at 620--621, 184 N.E.2d 642) and, under the Donahue case, supra, so long as he is a shareholder in Airport. See Shulkin v. Shulkin, 301 Mass. at 190, 16 N.E.2d at 650 ('(T)he defendant could not properly engage in business which was in competition with that of the partnership'). If he disassociates himself from Airport, there appears to be no reason on this record to pbohibit him from engaging in the trucking business in competition with Airport. Anderson Corp. v. Blanch, 340 Mass. at 53, 162 N.E.2d 825. See National *479 Hearing Aid Centers, Inc. v. **658 Avers, --- Mass.App. ---, ---,[FNf] 311 N.E.2d 573 (1974). 625

FNf. Mass.App.Ct.Adv.Sh. (1974) 547, 554. 625


Patrick's other contentions do not require extended discussion. 625

a. Dissolution of the corporation. His contention, as an alternative to a partnership accounting (see part I), that this court provide for the dissolution of Airport is inconsistent with G.L. c. 156B, s 99(b), which lodges such jurisdiction in the Supreme Judicial Court. '(T)he stockholder in the close corporation or 'incorporated partnership' may achieve dissolution and recovery of his share of the enterprise assets only by compliance with the rigorous terms of the applicable chapter of the General Laws.' Donahue v. Rodd Electrotype Co. of New England, Inc., --- Mass. at --- - ---,[FNg] 328 N.E.2d at 514. That the Supreme Judicial Court under G.L. c. 211, s 4A, may refer a petition for dissolution to the Superior Court does not give us the power to order the Superior Court to entertain such a petition. 625

FNg. Mass.Adv.Sh. (1975) at 1313--1314. 626

b. Counsel fees. Patrick contends that he is entitled to reimbursement for counsel fees from John personally in litigating Airport's claims and relies on Wilson v. Jennings, 344 Mass. at 621, 184 N.E.2d at 649, in which the court refused to disturb such an award. The court held that '(a)wards of this type, in such cases, commonly rest in sound judicial discretion.' The Superior Court in this case made no findings on the issue and made no award. At least to the extent that further proceedings may bring additional funds into the corporation, Patrick under general principles is entitled to reimbursement from those funds for counsel fees in its behalf. Commissioner of Ins. v. Massachusetts Acc. Co., 318 Mass. 238, 242--243, 61 N.E.2d 137 (1945). We do not decide in the abstract what circumstances might call for the application of Wilson v. Jennings, 344 Mass. at 621, 184 N.E.2d 642. See Samia v. Central Oil Co. of Worcester, 339 Mass. at 129, 158 N.E.2d 469. 626


In accordance with this opinion, the final judgment is affirmed with the following additions. The Superior Court shall: 626

(1) enjoin the defendant from competing with Airport, the exact scope of such competition to be determined in further proceedings in the Superior Court (including, at the discretion of the Superior Court, the taking of evidence) and the injunction to continue so long as John is a stockholder, officer, or director of Airport; 626

(2) determine upon further proceedings (including, in the discretion of the Superior Court, the taking of further evidence) to the date of such determination: 626

(a) the profits made by John from the aforesaid competition, which the Superior Court shall order to be paid to Airport with interest; 626

(b) the salary received by John from Airport from May 17, 1974, which the Superior Court shall order to be repaid to Airport with interest, crediting him, if the court deems it appropriate, with such sums, if any, as the court shall determine to represent the value of his services to Airport; 626

(c) the extent, if any, to which John should be ordered to permit Patrick access to the books and records of Airport; 626

(d) what amount, if any, should be paid to Patrick as counsel fees and by whom. 626

So ordered. 626

Costs of this appeal to be taxed against the appellee. 626

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