DiLuglio v. Providence Auto Body, Inc.

• Decision Date: 30 June 2000
• Docket Number: No. 98-274-Appeal., No. 97-285-Appeal
• Citation: 755 A.2d 757
• Parties: Thomas R. DiLUGLIO v. PROVIDENCE AUTO BODY, INC., et al.
• Court: Rhode Island Supreme Court

755 A.2d 757

Thomas R. DiLUGLIO v. PROVIDENCE AUTO BODY, INC., et al.

Nos. 97-285-Appeal, 98-274-Appeal.

Supreme Court of Rhode Island.

June 30, 2000.

Present WEISBERGER, C.J., LEDERBERG, FLANDERS, and GOLDBERG, JJ.

Julius C. Michaelson, Jeffrey S. Michaelson, Samuel E. Zurier, Providence, for Plaintiff.

Lauren E. Jones, David A Schechter, Providence, for Defendant.

OPINION

FLANDERS, Justice.

An attorney, plaintiff Thomas R. DiLuglio (DiLuglio), and a businessman, defendant John H. Petrarca (Petrarca), formerly the co-owners of defendant Providence Auto Body, Inc. (PAB), and Waldlum Realty, Inc. (Waldlum), are here on cross-appeals from an amended judgment entered by the Superior Court. Sitting without a jury, a trial justice adjudicated their respective claims and defenses, including DiLuglio's request for PAB's dissolution and Petrarca's election to purchase DiLuglio's 20 percent minority-shareholder position in PAB. With the help of a special master, the court fixed the purchase price and interest thereon for Petrarca's buyout of DiLuglio's PAB shares. On appeal, both sides find fault with various aspects of the trial justice's decisions and rulings in this case. After reviewing these contentions, we affirm in part and reverse in part, for the reasons adduced below.

Issues on Appeal

The defendants Petrarca and PAB contend that the trial justice erred when she refused to void the transactions whereby DiLuglio became a minority shareholder — first in Waldlum and then in PAB. Positing that DiLuglio acted both in his legal capacity and as an investor in the corporations that Petrarca controlled, defendants argue that DiLuglio breached his fiduciary obligations by failing to disclose to Petrarca the existing and potential conflicts of interest that inhered in DiLuglio's providing legal advice and performing legal work in connection with the very same transactions whereby he acquired an ownership interest in these businesses. Petrarca and PAB also suggest that DiLuglio's PAB shareholder status should have been voided because DiLuglio failed to obtain Petrarca's informed written consent to serving both as his lawyer and as a minority shareholder in the corporation that owned all of PAB's stock. They next challenge the trial justice's failure to discount the value of DiLuglio's shares in PAB because of their relative lack of marketability and lack of controlling status. Finally, defendants question the trial justice's decision to add compound interest to the purchase price of DiLuglio's minority equity holding in PAB.

DiLuglio's cross-appeal, on the other hand, takes the trial justice to task for rejecting his misrepresentation, misappropriation, and other misconduct claims against Petrarca and PAB without giving him the opportunity to submit evidence on the merits of these assertions and in violation of an alleged oral agreement to address these claims at a later court hearing. DiLuglio also suggests that the trial justice erred in allowing Petrarca to purchase his PAB shares for their fair value when Petrarca's election to do so was conditioned and qualified in ways that the applicable election statute did not permit. Finally, DiLuglio contends that Petrarca's election to purchase his PAB shares was untimely and that the trial justice erred in refusing to award him interest on the purchase price of his PAB stock from the date he filed his dissolution claim. Before resolving each of these issues, however, we pause toreview the factual background that led to this long-running legal rumpus and the applicable standard of review that we follow in cases of this kind.

Facts and Travel

In 1969 Petrarca hired DiLuglio as his attorney to defend him against federal criminal charges in connection with the alleged theft of a stereo system. DiLuglio succeeded in getting those charges dismissed in 1970 and, in the warm afterglow of that successful result, Petrarca believed that their personal relationship blossomed. Indeed, Petrarca contended that DiLuglio not only became friendly with him, but, from his perspective, they entered into a close and trusting relationship with each other over the next twelve years. DiLuglio, however, sharply disputed this characterization of their association. In any event, Petrarca and DiLuglio certainly remained in contact with each other during these intervening years, although DiLuglio never formally represented Petrarca in any other legal matter from 1970 to 1982.

Nevertheless, on a few occasions during this twelve-year interlude, Petrarca found himself needing legal assistance. In these instances, he initially sought out DiLuglio for his advice and counsel. DiLuglio, whose "kind of practice * * * [involved] lots of corporate advice as far as acquisition of property and selling of properties and businesses," ultimately referred these legal matters to as many as three separate attorneys, including his son, Thomas A. DiLuglio. Moreover, from January 1977 through January 1985 DiLuglio served as the Lieutenant Governor of Rhode Island.

In 1982, Petrarca decided to leave Dean Auto Body, his former partnership, and he began to operate his own auto-repair shop out of a friend's house. He soon began looking for a new and better site for this business. Petrarca again sought out DiLuglio's advice about how he should proceed to accomplish his objective. Together they visited a potential business site in East Providence, andDiLuglio haggled with the owner over a down payment for the property. The negotiations collapsed, however, after DiLuglio and Richard Tallo (Tallo) — an attorney who shared office space with and received legal-work referrals from DiLuglio — flushed out an easement on the property that rendered its prospective purchase too problematic for them to pursue further.

Later that year, Petrarca located another potential site on Silver Spring Street in Providence (the property). This real estate constituted the sole asset of Waldlum, a corporation owned by Paul and Sylvia Waldman. Unfortunately for Petrarca, he could not obtain the financing he needed to consummate this purchase. When DiLuglio learned that Petrarca needed money to acquire the property, he provided $25,000 to Petrarca. Petrarca would eventually claim that this $25,000 was simply a loan. DiLuglio, on the other hand, contended that these funds constituted his own startup-capital investment in both the property and in PAB, Petrarca's soon-to-be-formed corporation for his auto-body business.

DiLuglio also orchestrated the somewhat convoluted means used to acquire the property.¹ To preserve the existing mortgage financing on the property, the Waldmans agreed to transfer all their stock in Waldlum, rather than having Waldlum simply sell the property itself. To keep Petrarca's creditors at bay, DiLuglio suggested that Petrarca's parents serve as the nominal buyers of Waldlum's stock. In exchange for a payment that exceeded the $25,000 DiLuglio had provided to Petrarca, the Waldmans assigned all 1,000 shares of Waldlum's outstanding stock to Petrarca's parents. Tallo testified at trial that, at DiLuglio's request, he performed the title work on the property, searched the UCC filings, and represented Petrarca and his parents at the October 1982 closing to purchase Waldlum's stock from the Waldmans, but he could not recall any more specific details of that closing. DiLuglio testified that he had "asked * * * Tallo to communicate to [Petrarca] the fact that [he] was willing to invest $25,000 in return for 20 percent of the stock [in Waldlum]. John [Petrarca then] came over to me and said `Hey, I'm happy to have you as a partner.'"² Tallo, on the other hand, disclaimed any knowledge about DiLuglio's claimed ownership or investment interest in Waldlum. As far as Tallo knew, Petrarca was the sole beneficial owner of Waldlum, and Tallo played no role whatsoever in communicating any arrangements or understandings between Petrarca and DiLuglio vis-à-vis their respective ownership claims to Waldlum and PAB. In any event, nothing in writing documented any alleged agreement between Petrarca and DiLuglio concerning DiLuglio's $25,000 and whether it was intended to be a loan or an investment, nor did they otherwise memorialize the terms of their business relationship.

Nevertheless, it was DiLuglio who negotiated for and structured the acquisition of Waldlum's shares and who organized the ownership of both Waldlum and PAB. Most significantly, he incorporated PAB and then set it up as a wholly owned subsidiary of Waldlum. DiLuglio also arranged for the Waldmans to assign all of Waldlum's 1,000 outstanding shares to Peter and Gina Petrarca, Petrarca's parents. DiLuglio prepared whatever legal paperwork was required to accomplish this assignment. In December 1982, he then incorporated PAB and prepared and filed its articles of incorporation. Later that month he arranged for Petrarca's parents to assign 200 of Waldlum's 1,000 shares to himself and he prepared the documentation to memorialize this transfer. Thereafter, in early 1983, Petrarca's parents used DiLuglio's assignment documentation to transfer their remaining 800 Waldlum shares to their son. DiLuglio also obtained fictitious business names for PAB's automobile leasing and sales divisions, and he prepared annual corporate report forms to reflect that Petrarca was PAB's president. Thus, DiLuglio structured the Waldlum stock acquisition such that he not only became a 20 percent shareholder of Waldlum, but he also became, indirectly, a 20 percent shareholder of PAB because he caused PAB to come into its corporate existence as Waldlum's wholly owned subsidiary.³

PAB prospered and, in 1986, with the help of its accountant and tax attorney, it arranged to become a "Subchapter S" corporation⁴ to avoid paying a separate corporate tax on its income. But for PAB to take advantage of this favorable tax treatment, Waldlum had to divest itself of its PAB stock. Thus, Waldlum...