Boston Children's Heart Foundation, Inc. v. Nadal-Ginard
| Decision Date | 04 August 1995 |
| Docket Number | Nos. 95-1053,NADAL-GINAR,D,95-1136,s. 95-1053 |
| Citation | 73 F.3d 429 |
| Parties | BOSTON CHILDREN'S HEART FOUNDATION, INC., Plaintiff-Appellee, v. Bernardoefendant-Appellant. BOSTON CHILDREN'S HEART FOUNDATION, INC., Plaintiff-Appellant, v. Bernardoefendant-Appellee. . Heard |
| Court | U.S. Court of Appeals — First Circuit |
Laura Steinberg, with whom Cynthia M. Clarke, Katherine J. Ross, Lisa F. Sherman and Sullivan & Worcester, Boston, MA, were on brief, for Bernardo Nadal-Ginard.
Alexander H. Pratt, Jr., with whom Paul R. Devin, James H. Belanger, Robin E. Folsom, William M. Cowan and Peabody & Arnold Boston, MA, were on brief, for Boston Children's Heart Foundation, Inc.
Before SELYA and BOUDIN, Circuit Judges, and LISI, * District Judge.
These appeals present us with the classic tale of a corporate officer who, when caught using corporate funds for personal gain, resists making amends for his misdeeds. In this instance, Dr. Bernardo Nadal-Ginard was alleged to have misappropriated the funds of the corporation of which he had served as both an officer and director, the Boston Children's Heart Foundation ("BCHF"). Following an eighteen-day bench trial, the district court found that Nadal-Ginard violated his fiduciary duties to BCHF, and entered judgment in its favor in the amount of $6,562,283.02. Notwithstanding allegations of error by both parties, we affirm the district court's decision.
Plaintiff-appellee BCHF is a non-profit corporation organized for the purposes of conducting medical research in the field of cardiology and providing medical services to patients at Boston Children's Hospital ("Hospital"), a teaching hospital affiliated with Harvard Medical School ("Medical School"). The defendant-appellant, Nadal-Ginard, was the president and a member of the Board of Directors of BCHF ("Board"). Nadal-Ginard was also Chairman of the Department of Cardiology ("Department") at the Hospital, as well as a member of the faculty of the Medical School.
Nadal-Ginard first became associated with these entities in 1982, when he accepted the chairmanship and faculty position. Approximately one year later, with the assistance of Boston attorney Douglas Nadeau, BCHF, a tax-exempt Massachusetts corporation created to conduct the Department's clinical activities, was organized. 1 Like the other departments' corporations, the Operating Agreement between the Hospital and BCHF explicitly acknowledged the independent status of the foundation. Indeed, control of the foundation was given to BCHF's three directors: Nadal-Ginard, Donald Fyler, and Michael Freed. 2 Nadal-Ginard also served as president of BCHF until 1993, when the circumstances leading to this litigation began to surface.
In addition to his duties at the Hospital, Medical School, and BCHF, Nadal-Ginard accepted a position as an investigator with the Howard Hughes Medical Institute ("HHMI") in 1986. In this position, he directed the activities of the Howard Hughes Medical Institute Laboratory of Cellular and Molecular Cardiology at the Hospital. Nadal-Ginard received a substantial salary and some optional fringe benefits as compensation for his services.
There were never any questions as to Nadal-Ginard's qualifications as a scientist and a physician. Several questions did arise, however, with respect to certain actions Nadal-Ginard took with respect to setting his salary, establishing a severance benefit plan, and using BCHF funds for personal expenses. On November 12, 1993, BCHF filed suit claiming that Nadal-Ginard breached his fiduciary duties to the corporation. 3 Following a bench trial, the district court found most of the allegations to be true and awarded damages to BCHF.
On appeal, Nadal-Ginard alleges that the district court committed a plethora of errors in deciding in favor of BCHF. BCHF cross-appeals on several issues which the district court decided in favor of Nadal-Ginard. We examine each of these alleged errors in the context of their common factual bases.
Nadal-Ginard's first allegation of error relates to the district court's finding that he violated his fiduciary duties to BCHF by setting his BCHF salary without making any disclosure to the Board of his receipt of an annual salary from HHMI. The BCHF Articles of Organization authorized the payment of reasonable compensation to its employees and members. The Hospital's Group Practice Policy Statement defined the procedures to be used in calculating the compensation, delegating exclusive authority to the BCHF president to determine the compensation levels of all BCHF members, including his or her own compensation. During his tenure, Nadal-Ginard acted in accordance with the provisions contained in these documents.
The district court found that Nadal-Ginard's setting his own salary constituted a self-interested transaction under Massachusetts law. As such, the validity of this action depended on whether the other Board members had approved the corporate action after receiving all information relevant to the decision. Finding that Nadal-Ginard failed to disclose his HHMI income to the other Board members, information the court found material to any discussion by the Board regarding the appropriate amount of his BCHF compensation, the court held that Nadal-Ginard violated his fiduciary duties. Accordingly, the court awarded damages equal to three years of his BCHF salary, an amount totaling $801,172.90.
Nadal-Ginard alleges that the district court committed two errors relating to his BCHF salary. First, he challenges the court's finding that he breached any fiduciary duties through his participation in the Board's salary decision. Second, he argues that the district court erred in denying a quantum meruit offset to any liability arising from such participation. We address these contentions separately.
Nadal-Ginard contends that the district court ignored "well-established law and stipulated facts" in finding that he breached his fiduciary duties to BCHF with respect to his BCHF salary. Specifically, he argues that his compensation was at all times "fair and reasonable" in light of the services he rendered, precluding any such finding. We disagree.
The basic standard of care of corporate officers or directors is well-established under Massachusetts law. In essence, it is the "standard of complete good faith plus the exercise of reasonable intelligence." Murphy v. Hanlon, 322 Mass. 683, 79 N.E.2d 292, 293 (1948). Under this standard, officers or directors are not responsible for mere errors of judgment or want of prudence in the performance of their duties. See Sagalyn v. Meekins, Packard & Wheat, Inc., 290 Mass. 434, 195 N.E. 769, 771 (1935). Further, if officers or directors act in good faith, albeit imprudently, they are not subject to personal liability absent clear and gross negligence in their conduct. See Spiegel v. Beacon Participations, Inc., 297 Mass. 398, 8 N.E.2d 895, 904 (1937).
This basic standard of care is enhanced in situations when an officer or director engages in self-dealing. See Johnson v. Witkowski, 30 Mass.App. 697, 573 N.E.2d 513, 522 (1991). Courts subject these transactions to "vigorous scrutiny," obligating the officers or directors to prove two elements: first, that the officer or director acted in good faith with respect to the transaction; and, second, that the transaction is inherently fair from the corporation's point of view. 4 Crowley v. Communications for Hospitals, Inc., 30 Mass.App. 751, 573 N.E.2d 996, 1000 (1991); see also Winchell v. Plywood Corp., 324 Mass. 171, 85 N.E.2d 313, 317 (1949). The former element requires a corporate officer to fully and honestly disclose any information relevant to the transaction, thereby permitting a disinterested decision maker to exercise informed judgment. See, e.g., Dynan v. Fritz, 400 Mass. 230, 508 N.E.2d 1371, 1378 (1987); Cooke v. Lynn Sand & Stone Co., 37 Mass.App. 490, 640 N.E.2d 786, 791 (1994). The latter element emanates from the officer's or director's responsibility "to refrain from taking an undue advantage of the corporation," and gives rise to a fiduciary breach in a situation where an officer determines his or her salary when that individual's salary exceeds the fair value of services rendered. Sagalyn v. Meekins, Packard & Wheat, Inc., 195 N.E. at 771; see also Heise v. Earnshaw Publications, 130 F.Supp. 38, 40 (D.Mass.1955).
The district court found a lack of good faith on Nadal-Ginard's part as a result of two factual findings: first, that Nadal-Ginard failed to disclose his HHMI salary and benefits to the other BCHF directors; and, second, that this information was material to any decision concerning the amount of Nadal-Ginard's BCHF salary. We accept the former as true, as Nadal-Ginard alleges no error with respect to this finding. 5 Nadal-Ginard suggests error with respect to the latter finding, however, arguing that the district court reached this conclusion because it erroneously believed that BCHF and HHMI paid him for the same or related research activities. Specifically, Nadal-Ginard argues that the district court "grossly mischaracterized" the services Nadal-Ginard rendered to BCHF and its affiliates. In so doing, we believe that it is Nadal-Ginard who offers a mischaracterization.
The district court found only that the HHMI salary information "was material to any decision on the appropriate compensation paid by BCHF for the same or related research activities...." Trial Court Opinion, p. 32. Nowhere in its opinion did the court conclude that Nadal-Ginard engaged in the same or related work for both BCHF and HHMI. Rather, this statement merely indicates that the court believed that the BCHF Board, armed with the information about the HHMI salary, might have found that Nadal-Ginard engaged in similar or related research. Indeed, in...
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