Choate, Hall & Stewart v. SCA Services, Inc.

• Decision Date: 27 July 1979
• Citation: 378 Mass. 535,392 N.E.2d 1045
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court
• Parties: CHOATE, HALL & STEWART v. SCA SERVICES, INC.

Page 1045

392 N.E.2d 1045

378 Mass. 535

CHOATE, HALL & STEWART v. SCA SERVICES, INC.

Supreme Judicial Court of Massachusetts, Suffolk.

Argued April 5, 1979.

Decided July 27, 1979.

Mark A. Michelson, Boston (John A. Nadas, Boston, with him), for plaintiff.

Marshall Simonds, Boston (Carol Goodman, Boston, with him), for defendant.

Before HENNESSEY, C. J., and QUIRICO, KAPLAN and ABRAMS, JJ.

KAPLAN, Justice.

We hold on the facts of the case so far disclosed that the plaintiff, an "intended" beneficiary, of the "creditor" type, of a contract between the defendant (promisor) and another (promisee), may maintain this action to enforce the defendant's promise. In so deciding we make a long anticipated but relatively minor change in the law of the Commonwealth.

The plaintiff law partnership Choate, Hall & Stewart ¹ commenced this action against the defendant SCA Services, Inc. (a company doing a waste disposal business), to recover fees for legal services performed for one Berton Steir. The claim is based on a provision of an agreement between the defendant and Steir (among others) by which the defendant undertook to pay legal fees incurred by Steir in circumstances and under conditions to be detailed below.

The record made on the defendant's motion for judgment on the pleadings, converted through the reception of affidavits into a motion for summary judgment (see Mass.R.Civ.P. 56, 365 Mass. 824-826 (1974)), was, briefly stated, as follows. In March, 1976, a dispute arose within the board of directors of the defendant corporation, dividing the board four members to four. The dispute centered on allegations that one Christopher P. Recklitis, formerly president and treasurer of the corporation, had engaged in a series of transactions from 1972 to 1975 by which he diverted funds unlawfully from the defendant to himself or his controlled corporations. Under the scheme alleged, Recklitis contrived to withdraw moneys from the defendant as loans and used them to pay personal debts, while falsely informing the defendant's auditors that the loans had legitimate corporate purposes. Further, Recklitis caused various properties owned by him to be purchased by the defendant at grossly excessive prices. He also used corporate funds to make unauthorized and unreported bribes and payoffs. The defendant became aware of some of these alleged misdeeds in 1975 and retained counsel to carry out an investigation. It was completed in March, 1976, and in consequence the defendant brought separate actions against Recklitis, Stanton L. Kurzman, a member of the board, and Steir, formerly president and at the time of suit chairman of the board. This third suit against Steir charged him with breach of fiduciary duties, negligent mismanagement, and intentional waste of corporate assets; there were allegations that Steir knew of some of Recklitis's illegal activities and had assisted him in their perpetration. About the same time in 1976, Steir, Kurzman, and two other members of the board instituted two actions against the defendant herein. (The grounds do not appear from the present record.)

With the board at an impasse, as noted, and cross-litigations pending, settlement negotiations commenced on June 24, 1976, which on August 13, 1976, resulted in a contract among the eight directors and the defendant. It was agreed that the four law suits (those mentioned other than that against Recklitis) would be dismissed with prejudice and without costs, and there were to be mutual releases of all those claims, of which the parties to those suits had actual notice, that had been or could have been asserted therein. Kurzman, Steir, and the two directors aligned with them agreed to resign as board members or officers of the defendant or its subsidiaries, and to deliver irrevocable proxies of shares of the defendant owned by them to designated proxy agents. The defendant was to enter into a contract with Steir by which Steir would serve as a consultant to the defendant; and the defendant was to pay the resigning directors the legal expenses incurred by them before the date of the settlement agreement, as well as the reasonable out-of-pocket expenses they had laid out in the performance of their duties as directors or officers of the defendant.

We come now to the further provision of the settlement contract which is in issue in the present case. By that provision, set out in the margin, ² the defendant agreed to "continue to indemnify and hold harmless" each of the resigning directors for "all losses, liabilities or expenses" incurred by him resulting "from any acts or omissions to act . . . while a director, officer or employee of (the defendant) or any of its subsidiaries . . . and each of the (resigning directors) may select his own counsel whose reasonable fees and out-of-pocket expenses will be paid on a current basis directly by (the defendant), all to the maximum extent permissible under Delaware law." The obligation was expressly stated to include legal fees and expenses to arise from a then pending investigation of the defendant by the Securities and Exchange Commission.

The agreement was executed by the eight directors and the defendant. The plaintiff law firm had represented Steir throughout the preceding negotiations.

In pursuance of the agreement, the defendant twice paid the plaintiff its submitted statements of fees and expenses for representing Steir in the SEC matter. The defendant made the payments direct to the plaintiff, upon the plaintiff's statements addressed to the defendant, followed by Steir's letters of request to the defendant. The defendant pursuant to the agreement made similar payments direct to other attorneys representing Steir, as well as to attorneys retained by the other resigning directors.

But on the plaintiff's statements of March 1, and May 28, 1977, respectively for $18,345.34 and $10,137.03, the defendant refused payment. The defendant had apparently learned of an SEC determination to bring suit; it took the position that it would decline further payments to the plaintiff (or other attorneys for Steir) until Steir vindicated himself in the SEC case or restored to the defendant the $125,000 it claimed Steir had wrongfully abstracted from it. On August 8, 1977, the SEC in fact commenced a civil action in a United States District Court against Recklitis, Kurzman, Steir, and others, based in substance on the alleged Recklitis and related depredations. The defendant, however, has continued to make payments to attorneys representing Kurzman because, it says, Kurzman has made good to the defendant the amounts he earlier misappropriated.

The plaintiff brought the present action on July 25, 1977, praying a declaratory judgment. Before answer, the plaintiff applied for a preliminary injunction enjoining the defendant from failing to pay the March and May bills, or bills that would be submitted for later work on Steir's behalf. The injunction issued (without opinion) on condition that the plaintiff post bond.

The defendant's answer, besides denials, asserted a number of affirmative defenses: that the plaintiff was not a party to the settlement agreement and therefore could not sue to enforce it; that indemnification was unlawful in the circumstances by Massachusetts, Delaware, and Federal law; that the provision sued on had been procured by misrepresentations (including failure to disclose material facts) on the part of Steir. Also asserted was a claim to set off the $125,000 against any recovery to which the plaintiff would be otherwise entitled. The defendant moved for judgment on the pleadings on the first affirmative defense mentioned that the plaintiff, not a party to the agreement, was disabled from suing to enforce it. Affidavits were filed on both sides with respect to the negotiation of the critical provision.

Treating the motion as one for summary judgment, the judge held for the defendant, applying Massachusetts law as to the standing of third-party beneficiaries. Thereupon the plaintiff moved to amend its complaint to substitute Steir for itself as plaintiff in the action and correspondingly as the party to the preliminary injunction. The motions were denied. Later the judge granted the defendant's motion to enforce liability on the bond obligation in the amount of $34,526.31. The plaintiff appealed from the summary judgment, and from the order denying its motions to substitute; it also appealed from judgment for the amount stated. The appeals were consolidated and are brought here on our own motion.

We discuss a choice of law issue and then pass to the question of the plaintiff's standing to sue. Other issues resolve themselves accordingly.

1. Choice of law. The judge was correct in concluding that the question of the right of the plaintiff to sue on the contract should be decided in accordance with the law of Massachusetts. Choice of law was important for the judge below, as he conceived that the law of Massachusetts on the beneficiary's right differed from that of Delaware. As we now declare the law of Massachusetts, it is probably similar to Delaware's; but since we cannot be altogether sure of Delaware's hypothesized precise disposition on the particular facts, choice of law may remain significant, and we discuss it. ³ Traditionally this court has held, as a general rule, that material issues arising in actions to enforce contracts are to be answered according to the law of the place where the contract was made (see Cameron v. Gunstock Acres, Inc., 370 Mass. 378, 381-382, 348 N.E.2d 791 (1976); Dicker v. Klein, 360 Mass. 735, 736, 277 N.E.2d 514 (1972); Fine, Massachusetts Contract Cases and Problems in the Choice of Law, 43 Mass.L.Q. No. 3, at 46 (1958)), and that rule has been held to comprehend the issue of third-party beneficiary rights. See Carnegie v. Morrison, 2 Met. 381, 398-400 (1841). It has been recognized that reference to the law of the place of making can produce...