Charlette v. Charlette Brothers Foundry, Inc.
| Decision Date | 22 August 2003 |
| Docket Number | No. 01-P-695.,01-P-695. |
| Citation | 59 Mass. App. Ct. 34 |
| Parties | Roy CHARLETTE v. CHARLETTE BROTHERS FOUNDRY, INC., & another.[ 1 ] |
| Court | Appeals Court of Massachusetts |
Practice, Civil, Findings by judge. Negotiable Instruments, Note. Fiduciary. Corporation, Close corporation. Judgment, Preclusive effect. Receiver.
Civil action commenced in the Superior Court Department on July 24, 1996.
The case was heard by Martha B. Sosman, J.
Richard C. Van Nostrand for Charlette Brothers Foundry, Inc.
Helene Gerstle for the plaintiff.
Present: Beck, Smith, & Duffly, JJ.
The plaintiff, Roy Charlette (Roy), brought an action in Superior Court against the defendants, Charlette Brothers Foundry, Inc. (Foundry), and Ronald Charlette (Ronald) seeking to collect on a promissory note issued to him by the Foundry. Roy also included in his action claims against the Foundry and Ronald for wrongful termination, intentional interference with his employment contract, and violations of G.L. c. 93A.[2] The defendants answered the complaint, denying all of the allegations and asserting two counterclaims for breach of fiduciary duty: one claiming self-dealing by Roy in connection with his compensation, and the second for alleged actions by Roy which were undertaken to interfere and obstruct the Foundry's operations. The defendants' motion to dismiss Roy's claims was denied, as was their motion for summary judgment.
After a trial in Superior Court, a judge, sitting without a jury, made detailed written findings and awarded judgment for Roy against the Foundry on the promissory note cause of action, ordering the Foundry to pay Roy $47,618, plus interest. The judge rejected Roy's other claims against the Foundry and Ronald.
With respect to the defendants' counterclaims, the judge found in favor of Roy on the cause of action alleging self-dealing but found for the defendants in their counterclaim alleging Roy improperly interfered with the Foundry's operation. As a result of that finding, the judge issued a permanent injunction ordering Roy not to interfere with the Foundry's operation.
The Foundry appealed from both the judge's findings in favor of Roy on his promissory note claim, as well as the judge's findings in favor of Roy on the defendants' counterclaim of self-dealing. Ronald did not appeal. Roy did not appeal from the denial of his other claims.
Facts. We summarize the facts found by the trial judge, supplemented by additional uncontested evidence appearing on the record, reserving certain details for our discussion of the issues.
The Foundry is engaged in the business of iron casting and is located in Blackstone. The Foundry was started by Peter and John Charlette in the early 1900's and incorporated in 1947. Ultimately, the ownership of the business passed to John's four sons: Leo, David, Ralph, and the plaintiff, Roy.
From January of 1976 through July of 1991, Roy served as president and treasurer of the Foundry after Leo died in 1976.[3] Roy also served as a director and majority shareholder. David served as vice-president and clerk of the company from 1976 to 1984. Both brothers also worked full-time at the Foundry and were actively engaged in its operations.
The Foundry's by-laws authorized its board of directors to exercise "control and management of the business and property" of the corporation. In particular, the board had the power to "appoint and remove" employees, as well as to fix or change, from time to time, employee salaries or compensation.
By a vote on January 16, 1978, the board established written duties for company officers, including the president, whose obligation it was to "negotiate[ ] and consummate[ ] all loans and financial transactions at all levels of the Corporation" and "make[ ] full reports to the Board of Directors and to the Corporation of all financial transactions at appropriate times."
The defendant, Ronald, son of David Charlette, began working at the Foundry in 1977, became a vice-president in 1979, and was elected to the board of directors in 1981. In 1984, David retired and Ronald acquired a portion of his father's stock. In 1986, the corporation also repurchased some of Leo, Jr.'s stock. By 1991, as a result of these transactions, Roy was left with forty shares of stock, Ronald with twenty shares, David with twenty shares, and Leo, Jr. with ten shares. Two of Roy's sons, Earl and Richard, also worked at the Foundry. Earl acquired ten shares of stock from his father in 1988 or 1989.
Though there was evidence that the board was actively involved in approving significant equipment purchases, issues of employee or officer compensation or bonuses were never raised at either the shareholder or board of directors meetings.
From around the time of its incorporation, the Foundry had used the services of an accountant, one Albert Lambert, to keep its books and prepare tax returns. Roy consulted with Lambert in regard to compensation for employees, officers, and directors. On Lambert's advice, Roy drew a weekly paycheck plus deferred compensation that was taken as a lump sum at the end of each month. From 1984 through 1990, Roy's annual total paycheck (weekly pay plus the month-end extra check) was on the order of $42,000 to $46,000.
The Foundry did not have any pensions, retirement, or severance package. On the advice of Lambert, Roy started to pay bonuses to himself and other officers, directors, shareholders, and employees. The bonuses were issued in lieu of any retirement or severance benefits. After calculating the amount that the company could commit to paying as a bonus, the practice was to have a substantial portion of the bonus made payable by way of short-term promissory notes, thus avoiding any sudden drain of cash from the company. Promissory notes representing bonuses were signed by Roy and issued to himself and to others, including Ronald and Roy's sons, Earl and Richard. On occasion, when a bonus promissory note had not been paid in full by the time of the next year's bonus, the amount still outstanding would be included in the next year's note.
In 1986, the total compensation including the bonus received by Roy was $44,820, while Ronald received $24,002. Richard and Earl each received approximately $25,000 in compensation. For 1987, Roy received a total of $83,800, while Ronald received $50,052, Earl received $55,465, and Richard received $33,369. In 1988, Roy received $94,700, Ronald received $63,068, Earl received $68,437, and Richard received $39,661. For 1989, Roy received $168,650, Ronald received $113,189, and Earl received $117,944. In 1990, Roy received $89,000, Ronald received $57,172, and Earl received $61,854.
The 1989 bonuses were, as was customary, paid largely by promissory note. In December of 1989, Roy signed a promissory note from the Foundry to himself in the amount of $60,218, payable in one year, with interest at ten per cent. Payment to Roy over the next year, however, was only $40,000 plus interest, leaving an outstanding balance of $20,218 still owing on the note. Thus, when the promissory notes for the year 1990 were issued, the new note to Roy included his 1990 bonus, plus the $20,218, for a total amount of $47,618. At no time during the 1980's did Ronald question the compensation his uncle was receiving, nor did he question how his own salary and bonus were calculated. Ronald also did not question the practice of using promissory notes to pay the bonuses.
At some point in 1990, Ronald became aware of the bonus payments to Earl and Richard. Roy resisted efforts by Ronald to discuss the particulars of these payments. Instead, Ronald asked the company's counsel, one Wayne Davies, to undertake an investigation. Davies found that there was no significant issue with the year-end bonus amounts to Roy and his sons, but Davies questioned the propriety of Roy's drawing an additional paycheck, on a monthly basis, during the relevant time period. Davies inquired of Roy by letter, but received no response.
Ronald then called a shareholders meeting for July 11, 1991. Through the fifty shares that he controlled,[4] Ronald succeeded in obtaining the revision of the corporate by-laws and getting himself, Earl, and Leo, Jr. elected as directors. Ronald then nominated Earl as president, himself as vice-president, treasurer and clerk, and Roy as vice-president. Roy voted for this proposed slate of officers, with Earl abstaining. The compensation for the various officers was also set at this meeting, and Ronald also raised the issue of outstanding bonuses, noting that the 1990 bonuses had not been paid. It was voted that Ronald, as treasurer, pay the remaining unpaid balance of the 1990 bonuses to each employee stockholder.
On August 21, 1991, the directors (Earl, Ronald, and Leo, Jr.) held a special meeting. Ronald raised the issue of whether the annual bonuses paid to stockholder employees in previous years were valid and authorized. The board (with Earl abstaining) voted to have Davies examine "whether authority existed for Roy to distribute previous year-end bonuses and what action may be appropriately taken by the board."
Davies gave his opinion in a September 11, 1991, letter reporting that, because of the absence of corporate records, he could not ascertain whether the board had ever set compensation levels for officers. Davies also considered whether there had been any prior agreement or understandings regarding compensation, noting that it could be within Roy's implied authority as president to pay officers and employees in accordance with any compensation agreements. With bonuses distributed in a pro rata ratio that the person's particular stock ownership bore to the total number of shares owned by all officers, Davies noted that Roy's bonuses to himself were somewhat less than they should have been. Roy had held fifty per cent of the stock held by officers during the time period in question which would have entitled him to a bonus of $81,200 ...
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