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

• Decision Date: 09 March 2016
• Docket Number: SJC–11902.
• Citation: 473 Mass. 784,46 N.E.3d 541
• Parties: KATZ, NANNIS & SOLOMON, P.C., & others v. Bruce C. LEVINE & another.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

473 Mass. 784

46 N.E.3d 541

KATZ, NANNIS & SOLOMON, P.C., & others¹

v.Bruce C. LEVINE & another.²

SJC–11902.

Supreme Judicial Court of Massachusetts, Norfolk.

Argued Dec. 10, 2015.

Decided March 9, 2016.

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

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

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

Present: GANTS, C.J., SPINA, CORDY, BOTSFORD, DUFFLY, LENK, & HINES, JJ.

Opinion

BOTSFORD

, J.

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

and 13.

Background. The defendant Bruce C. Levine and the plaintiffs Allen G. Katz, Lawrence S. Nannis, and Jeffrey D. Solomon were members of an accounting firm known as Levine, Katz, Nannis & Solomon, P.C. (LKNS or firm). They were each a shareholder in the firm, and a party to a stockholder agreement dated October 1, 1998 (agreement), that governed their professional association and relationship.³

In 2011, Katz, Nannis, and Solomon, purporting to act pursuant to the agreement, voted to require the withdrawal of Levine as a director and stockholder in LKNS; Levine disagreed that the termination of his stockholder interest and position was in accordance with the agreement's terms, and the arbitration at issue in this case concerned that dispute. We summarize the relevant provisions of the agreement, the parties' dispute leading to arbitration, and the arbitration award, followed by a summary of the proceedings in the Superior Court that led to this appeal.

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

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

“4(f) For Cause Withdrawal. A Stockholder may be required to withdraw from the Corporation for ‘Cause.’ ‘Cause’ shall be deemed to exist upon the occurrence of any of the following:

“(i) Commission of an act of fraud, dishonesty or the like involving the Corporation or any of its clients.”⁴

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

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

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

Section 13(i)

provides that the agreement is to “be subject to and governed by the laws of the Commonwealth of Massachusetts pertaining to agreements executed in and to be performed in the Commonwealth of Massachusetts.” Section 13(j) contains an arbitration clause that provides in relevant part:

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

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

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

Caufield, Martin & Goldberg, P.C. (LCMG), and a number of employees of LKNS left that firm and joined Levine at LCMG. The nature and terms of Levine's withdrawal from the firm and his subsequent competition with KNS were the bases of the dispute between Levine and the other LKNS stockholders, and became the subject of the arbitration proceeding at issue here.

The arbitration and award. Pursuant to the terms of the agreement's arbitration clause, the dispute was submitted to binding arbitration before a single arbitrator appointed by the American Arbitration Association. The arbitrator heard from eleven witnesses over nine days. On December 19, 2012, the arbitrator issued a partial final award in which he concluded that Levine had been validly terminated or “withdraw[n]” involuntarily as a stockholder in accordance with the agreement, that there was sufficient evidence to require Levine's withdrawal “for cause,” and that he had been terminated for cause. The arbitrator concluded, however, that it did not make any difference whether Levine's involuntary withdrawal or termination was “for cause” pursuant to section 4(f) of the agreement or “for any reason” pursuant to section 4(e), because, following his termination, Levine competed with KNS. The arbitrator further found that because Levine was terminated for cause, he forfeited his shares and was not entitled to receive deferred compensation. With respect to damages, the arbitrator determined that Levine would be liable to KNS for, among other things, amounts paid by former clients of LKNS to Levine after his termination for work performed before his termination, liquidated damages for competing with KNS following his termination, as well as liquidated damages on account of employees who left KNS to join Levine. The arbitrator denied both parties' requests for attorney's fees. After a hearing on damages, the arbitrator issued the final award, ruling that KNS was to receive $1,749,293.20,⁵ plus statutory interest.

Confirmation of the arbitration award. On February, 2013, KNS filed the present action in the Superior Court seeking confirmation of the arbitration award and also asserting claims to ensure payment of the arbitration award and prevent Levine from

diverting money to LCMG.⁶ Levine filed an answer, an opposition to KNS's motion to confirm the award, and a cross motion to vacate or modify the arbitration award. A Superior Court judge (motion judge) allowed KNS's motion to confirm the award and denied Levine's cross motion to vacate or modify it. KNS moved for an award of attorney's fees, and the judge allowed the motion. With a stipulation by the parties in place that secured any judgment that would enter against Levine, KNS moved to dismiss the remaining claims against Levine and all claims against LCMG. In February, 2014, judgment entered confirming the arbitration award, dismissing the remaining claims, and granting KNS attorney's fees and costs. Levine thereafter filed a motion for a new trial, to amend or alter the judgment, or for relief from judgment,...