Danger Records, Inc. v. Berger

• Decision Date: 14 April 2005
• Citation: 825 N.E.2d 498,444 Mass. 1
• Parties: DANGER RECORDS, INC. v. Steven L. BERGER; Frederick G. Danner & others,<SMALL><SUP>1</SUP></SMALL> defendants-in-counterclaim.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

825 N.E.2d 498

444 Mass. 1

DANGER RECORDS, INC. v. Steven L. BERGER; Frederick G. Danner & others,¹ defendants-in-counterclaim.

Supreme Judicial Court of Massachusetts, Suffolk.

Argued December 6, 2004.

Decided April 14, 2005.

COPYRIGHT MATERIAL OMITTED

Derege B. Demissie, Cambridge, for the plaintiff.

Linda E. Abrahams, Natick (Dennis P. Derrick, Essex, with her) for Stephen L. Berger.

Present: MARSHALL, C.J., GREANEY, IRELAND, SPINA, COWIN, SOSMAN, & CORDY, JJ.

SOSMAN, J.

The present appeal requires us to articulate the proper scope of review of an order of a single justice of the Appeals Court pursuant to G.L. c. 231, § 6G, and then, applying that standard of review, to determine whether the single justice erred when he affirmed the trial judge's order awarding attorney's fees and costs pursuant to G.L. c. 231, § 6F. In an unpublished memorandum and order pursuant to its rule 1:28, the Appeals Court reversed the single justice, concluding that there was no basis in the record for the trial judge's finding that the defendant's defenses and counterclaims were wholly insubstantial, frivolous, and not advanced in good faith. Danger Records, Inc. v. Berger, 61 Mass. App.Ct. 1110, 809 N.E.2d 1100 (2004). We granted the plaintiff's application for further appellate review, and now affirm the order of the Appeals Court's single justice.

1. Factual background. On April 8, 1996, Danger Records, Inc. (Danger), filed a complaint in the Superior Court seeking a declaration that the defendant, Steven Berger, was not a legal or equitable shareholder of any stock in Danger. On May 16, 1996, Berger filed his answer, contending that he was a shareholder. That answer also included counterclaims against Danger, Frederick Danner (claimed by Danger to be the sole shareholder), and Leonard Collins (another participant in the venture), alleging that their failure to repay loans Berger made to Danger, their attempts to remove him as a director, and their attempts to deprive him of his shares of stock constituted a breach of contract, breach of fiduciary duty, and violation of G.L. c. 93A.² After a jury-waived trial, the judge found in favor of Danger on its complaint for declaratory relief, entering a declaration that Berger was not and never had been a shareholder of Danger. The judge also found in favor of the counterclaim defendants on all of Berger's counterclaims. Berger appealed from that judgment, and the Appeals Court affirmed the judgment in a memorandum and order pursuant to its rule 1:28. Danger Records, Inc. v. Berger, 55 Mass.App.Ct. 1109, 772 N.E.2d 600 (2002). We denied Berger's application for further appellate review, 437 Mass. 1109, 774 N.E.2d 1099 (2002), and that judgment is now final.

We summarize the judge's findings with respect to the merits of the claims, defenses, and counterclaims, insofar as they provide background to her later ruling concerning attorney's fees. In 1992, Berger and Danner decided to form a record company, with Danner contributing his technical recording expertise and the use of his recording studio (in which he had invested approximately $500,000). Berger, an attorney, was to contribute his legal expertise (in particular his claimed expertise in representing musicians in contract matters) and approximately $40,000 in funds. Berger handled the preparation and filing of the papers to form the corporation, listing Danner and himself as directors, along with two other individuals who did not know that they were being named as directors. Berger also had control of the corporate checkbook.

The venture did not prosper, in part due to the fact that Berger did not have the contacts or expertise in the music industry that Danner had been led to believe he had. To rectify the problem, Danner sought the assistance of Collins, who had significant experience with major recording companies. Collins, although ultimately willing to participate, wanted neither an ownership interest in nor any financial responsibility for the company. Danner, Berger, and Collins agreed to an arrangement whereby Danner would provide the studio and recording expertise, Berger would provide legal representation and funds, and Collins would run the daily operation and provide promotion and marketing expertise. None of them would draw any salary; the three would share equally in whatever profits were earned. Pursuant to this understanding, Collins began working at Danger at the end of 1993.

In December, 1993, and January, 1994, Berger filed certificates changing the officers and directors of the corporation, removing the two people who had not known they were even part of the corporation; listing himself, Danner, and Collins as directors (despite the fact that Collins did not want to be a director); and listing himself as the new clerk of the corporation.³ Neither Danner nor Collins knew anything about the corporate filings prepared by Berger and submitted by him to the Secretary of the Commonwealth.

Berger also handled the corporation's tax returns. Unbeknownst to Danner or Collins, Berger had advised his own accountant to prepare the 1993 corporate income tax returns as if Danger were a qualified Subchapter S corporation⁴; to list himself, Danner, and the former clerk as equal shareholders; to reflect that he had made $21,175 in loans to the corporation; and to take the entire operating loss of $12,455 for himself. Neither Danner nor Collins signed or saw these tax documents.

Over the course of 1994, Berger's commitment to the venture waned. He began complaining that he was "tapped out" and suggesting to Danner and Collins that (contrary to their prior understanding) the expenses should be borne amongst all three of them. Collins reminded him that, if the venture failed, he would not get his money back. By the fall of 1994, Berger reduced the time he spent coming to the office and, by December, 1994, had ceased to do any work at all for Danger.

During the same period, Berger announced that he was separating from his wife, and divorce proceedings ensued shortly thereafter. In a series of financial statements submitted during 1994 and the first half of 1995 in connection with Berger's divorce proceedings, Berger did not make any reference to Danger or to any asset he held in connection with Danger.

After Berger's departure, Collins and Danner looked into the corporation's financial affairs, and discovered an assortment of bills that Berger had neglected. They then paid those bills themselves. They also had the corporation's records reviewed by another attorney, who in turn contacted Berger's attorney. On March 3, 1995, for the first time, Berger asserted through his counsel that he was a stockholder. Danger held a directors' meeting on March 24, 1995, and removed Berger as president and clerk. At that time, they took no action with respect to Berger's claim that he was also a stockholder and director.

On July 21, 1995, Berger submitted a revised financial statement in his divorce proceeding, reporting for the first time that he had a "disputed" one-third interest in Danger, but assigning no value to that claimed interest. That financial statement made no reference to any loans owed to him by Danger. It was not until much later (and well after the present litigation commenced in April, 1996) that Berger's financial reports in the divorce proceeding referenced any claimed debt owed to him by Danger, which he listed at $32,487.73.

At trial, Berger testified that there had been an oral agreement that he was to own one-third of the stock in Danger. The judge did not credit his testimony, noting that it was supported only by documents that Berger himself had created, without approval of or review by Danner or Collins, in an attempt to "conjure up and paper a relationship to which the parties never agreed." She also noted that Berger's claims with respect to stock ownership and loans were inconsistent with the financial statements he had submitted during the initial phases of his divorce proceedings. She concluded that there had never been any discussion about Berger's being a shareholder, and that Berger's financial contributions to the venture (such as they were) had not been loans.⁵ The understanding had been that Berger would make his contribution of funds and legal expertise, and would share in the profits if and when any were earned. None had been earned by the time Berger abandoned the venture, and he was not entitled to get his money back. The judge therefore entered a declaration that Berger was not and never had been a shareholder in Danger, and concluded that Danger, Danner, and Collins had not breached any contractual or fiduciary duty or committed any violation of G.L. c. 93A.⁶

2. Procedural history of the motion for attorney's fees and costs under G.L. c. 231, § 6F. After the judge issued her findings and rulings, Danger and the two individual counterclaim defendants filed a motion for attorney's fees and costs pursuant to G.L. c. 231, § 6F. The judge issued her separate findings and order on that motion, finding that Berger had been represented by counsel,⁷ and that his defenses and counterclaims were "wholly insubstantial, frivolous and not advanced in good faith." G.L. c. 231, § 6F. As the basis for her conclusion that Berger's claims and defenses were wholly insubstantial and frivolous, the judge found that there had been no evidence, other than Berger's own testimony, to support them. She also referenced her finding at trial that documentary support proffered in support of Berger's claims consisted entirely of documents that Berger himself had prepared "to conjure up" a relationship with Danner and Collins different from the one to which they had agreed. She also gave weight to the fact that, although the original suit had only been filed by Danger, Berger's counterclaims had brought two individuals into the case (see note 2, supra); making them respond to the allegations individually had...