DIAMOND v. PAPPATHANASI

• Decision Date: 15 October 2010
• Docket Number: No. 09-P-1386.,09-P-1386.
• Citation: 935 N.E.2d 340,78 Mass.App.Ct. 77
• Parties: Kathryn DIAMOND v. Arthur PAPPATHANASI & others.
• Court: Appeals Court of Massachusetts

78 Mass.App.Ct. 77

935 N.E.2d 340

Kathryn DIAMOND ¹ v.Arthur PAPPATHANASI ² & others. ³

No. 09-P-1386.

Appeals Court of Massachusetts,Suffolk.

Argued March 8, 2010.

Decided Oct. 15, 2010.

COPYRIGHT MATERIAL OMITTED.

COPYRIGHT MATERIAL OMITTED.

Thomas S. Fitzpatrick (Thomas Frisardi with him), Boston, for the plaintiff.

Jeffrey J. Upton, Boston, for the defendants.

Present: McHUGH, MILKEY, & HANLON, JJ.

MILKEY, J.

This appeal involves a distressingly familiar scenario: the development of a successful family business enterprise by one generation, followed by a bitter intrafamily battle over ownership and control in the next generation. At the center of the current litigation is Scangas Realty Associates (SRA), a general partnership that four siblings formed in 1973. The plaintiff is the daughter of one of SRA's founding members. As of the date of trial, the plaintiff was herself a member of SRA, as well as a limited partner in a related entity. She alleged that three of her cousins, who had day-to-day control of the relevant entities, engaged in a variety of misdeeds that harmed her and the entities in which she had ownership interests. She brought this derivative and direct action against the defendants, who include three of her cousins (Arthur Pappathanasi, Nicholas Scangas, and Christopher Scangas, collectively, the primary defendants), four of her other cousins (joined largely as nominal defendants), and certain entities controlled by the primary defendants.

After a seven-day jury-waived trial in the business litigation section of the Superior Court, the judge ruled in favor of the plaintiff on some of her claims and against her on others. He entered a judgment, as subsequently amended, that required the primary defendants to reimburse SRA and a related entity $403,026.27 (plus interest to run from September 1, 2004, the date the complaint was filed). In the amended judgment, the judge also made various declarations, including: (a) that the partnership interests in SRA remain unchanged, and (b) that the amendments to the SRA partnership agreement were valid. He dismissed all other claims, including the plaintiff's request for an accounting.

On appeal, the plaintiff accepts all of the judge's findings but argues that these findings demonstrate that she was entitled to additional relief. She also argues that the judge erred in not modifying the partnership interests, in declaring that the amendments to the SRA agreement were valid, in not entertaining her request for attorney's fees, and in setting the date on which interest began to accrue. On cross appeal, the defendants argue that the judge erred in awarding the plaintiff any damages, both on jurisdictional grounds and on the merits. We affirm.

Background. The creation of SRA. This dispute involves, in addition to SRA, a complicated array of related entities, including several corporations, limited partnerships, limited liability companies, and trusts of various sorts. Although we need not lay out a full taxonomy of these entities, some background is necessary.

Many decades ago, three brothers (Paul N. Scangas, Angelo Scangas, and James Scangas) and their sister (Georgia Pappathanasi) founded a variety of businesses, which were held in various corporate forms, located mainly in Essex County. The largest of these businesses was a dairy enterprise known as the West Lynn Creamery (creamery). In addition to operating such businesses, the siblings invested in commercial real estate. It is this latter side of the family enterprise that is mainly at issue in the current litigation.

As the first generation aged, some in the younger generation took an increasingly active role in the family business. The rising star was defendant Arthur Pappathanasi, who began working at the creamery at age twelve and who eventually became its president and chief executive officer. Pappathanasi was a close protégé of his uncle, Paul N. Scangas, who was the father of the plaintiff, Kathryn Diamond.

In 1973, the four siblings formed SRA, a general partnership founded under Massachusetts law, to operate the real estate side of the family business. SRA's original members included the four siblings, their spouses, and their eleven children, for a total of nineteen members in all. Each of the partners received an equal share of the partnership (slightly more than five percent).

Changes in SRA ownership and control. The membership of SRA declined over the years as many of the original nineteen members died or voluntarily withdrew. The partnership agreement provided that, in either event, SRA was to cash out the departing member's interests by paying him (or his estate) a “liquidating share.” As members began to die, however, the remaining partners never actually followed this provision. Instead of the deceased member's interests being redeemed, those interests were transferred to the deceased member's branch of the family (thus increasing the proportionate share of those members who received the transfer, while leaving all other members' proportionate shares unchanged). This did not alter any member's voting rights, because each member had one vote under the partnership agreement.

Paul N. Scangas (the plaintiff's father) died in 1987, and his interest was treated in the same manner as those of the members who had died before him: his widow's interest doubled to reflect both her and his interests. In 1997, one decade after Paul's death, his own family created a limited liability company known as the Paul N. Scangas Realty LLC (PNSR) to hold the interests he had held in the various family businesses. After his estate was finally settled, his interest in SRA was transferred to PNSR.

The day-to-day operations of SRA were run by a three-person investment committee. ⁴ At the time of SRA's formation, that committee included Paul N. Scangas, defendant Arthur Pappathanasi, and defendant Nicholas Scangas. At least by 1993, and continuing to the present, the investment committee has been composed of the three primary defendants (Arthur Pappathanasi, Nicholas Scangas, and Christopher Scangas). In 1995, the primary defendants created two new entities related to SRA.

One was 330 Scangas Limited Partnership (330 Scangas LP), whose sole limited partner is SRA and whose sole general partner is 330 Scangas, Inc., a corporation run by the primary defendants. The other entity was the 330 Scangas Nominee Trust (trust), whose sole beneficiary is 330 Scangas LP, with the three primary defendants as its trustees. By this time, SRA and its two new related entities had stopped purchasing new properties, and their business was limited to managing existing commercial properties.

In 1998, the family sold the creamery to Suiza Foods Corporation (Suiza). The sale of the family's principal business occasioned a great deal of family friction and various pieces of actual or threatened litigation among the cousins. Two of the cousins, Janice Scangas and Joyce Scangas, insisted that their interests in SRA be cashed out as part of the sale. After a lengthy appraisal process and extended negotiations, the sale of their interests was finally consummated in 2001. Although the original plan had been for SRA to redeem Janice's and Joyce's interests, this plan was changed at the insistence of their father, James Scangas, one of the founding members of the partnership. ⁵ Instead of SRA as a whole buying out the interests of Janice and Joyce, the primary defendants and the other four individual defendants purchased the interests directly (thus increasing their respective shares). These same seven individual defendants also purchased the shares of James Scangas and his wife in 2003. Other details regarding these purchases are discussed further, infra.

The plaintiff's efforts to gain more information and control. Prior to the sale of the creamery, SRA partnership meetings were held at the same time as the corporate meetings of the affiliated family businesses. After the sale, the partnership meetings essentially ceased, and the primary defendants ran the business with little involvement from other family members. The role of the other members was limited to that of passive investors who received annual reports, occasional telephone consultations, and periodic distributions. Their limited role was not entirely of their own choosing. The plaintiff in particular was unhappy that her branch of the family had no representation on the SRA investment committee.

As the plaintiff acknowledged at trial, she knew very little about the operations of SRA as of the fall of 2003. To educate herself, she began to make a series of escalating demands for information. The response by the primary defendants was mixed. Although they cooperated with her to a great extent, they continued to hold some information close to the vest. Some of their responses were less than complete and arguably misleading. It bears noting that family relationships were particularly strained at this time. The primary defendants were focused on other pressing legal matters related to the creamery, and they were of the view that the plaintiff was trying to take advantage of their situation. Armed with the information that she was provided, the plaintiff became convinced that there were improprieties in how the primary defendants were running the various entities in which she held interests.

As tensions increased, the primary defendants called an SRA partnership meeting for July 21, 2004, the first such meeting in several years. One of the purposes of the meeting was to discuss possible dissolution of SRA. That option never took off, however, because of the perceived tax implications. Faced with the knowledge that the plaintiff believed that there were improprieties, the primary defendants had one of their allied family members propose a motion to ratify all the past actions of the investment committee since the last partnership meeting. On...