Fronk v. Fowler

• Decision Date: 25 March 2010
• Docket Number: SJC-10467.
• Citation: 456 Mass. 317,923 N.E.2d 503
• Parties: Robert L. FRONK & others<SMALL><SUP>1</SUP></SMALL> v. John P. FOWLER & others.<SMALL><SUP>2</SUP></SMALL>
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

923 N.E.2d 503

456 Mass. 317

Robert L. FRONK & others¹ v. John P. FOWLER & others.²

SJC-10467.

Supreme Judicial Court of Massachusetts, Suffolk.

Argued December 7, 2009.

Decided March 25, 2010.

Stephen H. Oleskey, Boston (Timothy R. Shannon & Mark C. Fleming with him) for the defendants.

Lawrence G. Green, Boston (Michael K. Sugrue with him) for the plaintiffs.

Present: MARSHALL, C.J., IRELAND, SPINA, COWIN, CORDY, BOTSFORD, & GANTS, JJ.

CORDY, J.

This is a consolidated appeal from the separate orders of a single justice of the Appeals Court and of a full panel of the Appeals Court concerning the award of attorney's fees and litigation costs to the defendants. After a jury-waived trial, a Superior Court judge granted the defendants' motion for fees and costs under G.L. c. 231, § 6F, finding that "substantially all, if not all, of the plaintiffs' claims were wholly insubstantial, frivolous, and not advanced in good faith." A single justice of the Appeals Court vacated the award. We granted the defendants' application for direct appellate review. In addition, we granted the defendants' application for further appellate review of an order by a full panel of the Appeals Court denying the defendants' motion for appellate fees and costs under G.L. c. 211A, § 15, and Mass. R.A.P. 25, as appearing in 376 Mass. 949 (1979), arising out of the merits appeal of this case, Fronk v. Fowler, 71 Mass.App. Ct. 502, 883 N.E.2d 972 (2008). We conclude that the plaintiffs' claims were frivolous and insubstantial. Consequently, we reinstate the fees and costs awarded by the trial judge and we remand to the Appeals Court its decision so that it may exercise its discretion with respect to appellate fees and costs.

1. Background. We draw the following from the findings of fact issued by the judge at the close of the trial. Those findings, having been described as "fully supported in the record," and affirmed by the Appeals Court, Fronk v. Fowler, supra at 503, 883 N.E.2d 972, are conclusive and "unassailable" in this context. Danger Records, Inc. v. Berger, 444 Mass. 1, 12 n. 11, 825 N.E.2d 498 (2005) (Danger Records).

a. The limited partnership. In 1984, the defendants, Robert L. Wolff, Jr.; John P. Fowler; and Jeffrey A. Millman, established The Cambridge Company, Inc., for the purpose of engaging in the real estate business.³ Through The Cambridge Company, the defendants identified properties to develop and created individual limited partnerships to acquire them. In 1985 they entered into a purchase and sale agreement to acquire a commercial property located at 23 East Street in Cambridge, a former hot dog factory, which they planned to renovate and lease. Consistent with their business model, their plan was to form a limited partnership that would assume ownership and management of the property.

Concurrent with their negotiations to purchase the 23 East Street property, the defendants entered lease negotiations with the plaintiffs, Ed Walter, Jack Saltiel, and Robert Fronk, who were the principals of Compumart Corporation. The plaintiffs were interested in leasing three floors of the building for their business operations. Over the course of the negotiations, the plaintiffs expressed interest in acquiring an ownership interest in the limited partnership. The defendants agreed, and in exchange for a fifteen-year lease and a $500,000 letter of credit to be used for project cost overruns, they entered into a limited partnership agreement with the plaintiffs creating the Maple East Associates Limited Partnership (MEALP). The defendants were the general partners of MEALP and held a sixty per cent interest in it. The plaintiffs were limited partners, possessing a forty per cent interest.⁴ Throughout the negotiations, the defendants made it clear to the plaintiffs that they would continue to acquire other properties outside the partnership.

The partnership agreement included the following terms. Section 4 set out the limited purpose of MEALP:

"The purpose of the partnership shall be (i) to acquire approximately 32,268 square feet of land and the six story concrete building thereon located at 23 East Street, Cambridge, Massachusetts (the `Property'); (ii) to renovate such building in such manner as the General Partners shall determine (the `Project'); (iii) to own, operate and manage the Project; and (iv) to lease, sell, acquire or otherwise deal with the Project and other real estate in such manner as the General Partners shall determine."

Section 5 authorized the defendants, as general partners, to acquire property in furtherance of MEALP's limited purpose:

"In furtherance of its purpose, but subject to all other provisions of this Agreement, the partnership is authorized to: ...

"5.2 acquire by purchase, lease or otherwise any real or personal property which may be necessary, convenient or incidental to the accomplishment of the purposes of the partnership;

"5.3 own, construct, operate, maintain, finance, improve, sell, convey, assign, mortgage or lease any real estate and any personal property necessary, convenient or incidental to the accomplishment of the purposes of the partnership" (emphasis added).

Significantly, the defendants were not required to make such acquisitions, and the authorizations in § 5 explicitly were subject to other provisions in the partnership agreement. One of those provisions was § 13.2:

"It is expressly understood that a General Partner may engage in any other business or investment, including the ownership of or investment in real estate and the operation and management of real estate, and neither the partnership nor any of the partners thereof shall have any rights in and to said businesses or investments, or the income or profits derived therefrom."

Therefore, although authorized to acquire real estate "convenient" to the purpose of MEALP, the defendants were also free to continue their separate real estate business.

Finally, § 12.5 of the partnership agreement anticipated that the defendants would use their respective skills to provide services to MEALP but required them to charge "terms and conditions which [were] not materially less favorable to the partnership than the terms and conditions which would be available from unrelated parties," that is, market rates.

On the same day that MEALP was formed, the defendants obtained a $5.3 million mortgage on its behalf, guaranteeing the debt personally.⁵ Consistent with the partnership agreement, MEALP paid Fowler's firm for its role in securing the mortgage. The fees paid were "in accordance with industry standards." MEALP also paid fees to Millman for his services as architect and project manager. Again, the fees were market rate. Pursuant to its fifteen-year lease with MEALP, the plaintiffs' company moved into 23 East Street in January, 1986. However, in December, 1986, the plaintiffs' company went bankrupt and defaulted on its lease. It vacated the building in 1987.⁶ The default cost MEALP hundreds of thousands of dollars. Nevertheless, the plaintiffs remained limited partners in MEALP.

The defendants continued to manage MEALP over the next decade, saving it from failure several times and successfully refinancing the property to reduce the debt burden by approximately $1.5 million.⁷ MEALP paid fees to entities related to the defendants for various necessary services over this time, all of which were at or below market rates.

Separately, the defendants also continued to grow their real estate portfolio. In 1994, they created a new investment partnership to acquire two warehouse-type buildings at 9 East Street in Cambridge, and in 1997 they acquired another warehouse at 1 East Street, again through the creation of a separate investment partnership. The defendants did not invite the plaintiffs to participate in either of these ventures.

In 1998, the defendants were approached by Charles E. Smith Residential Realty LP (Smith), a publicly traded real estate investment trust that was interested in purchasing the defendants' properties at 1 and 9 East Street. Smith had no interest in MEALP's 23 East Street property, but the defendants insisted the property be included.⁸ Smith agreed to purchase all three properties for $28 million, which included an $8 million price for 23 East Street, not accounting for the debt on the property. This was an "extremely favorable" price.⁹ As a consequence, the plaintiffs—who parted with nothing to acquire their partnership interests in MEALP and who contributed no time, energy, or capital toward the management of its property—collectively received $921,600 as a result of the sale.

b. Complaint and trial. Notwithstanding the apparently favorable outcome, the plaintiffs filed a complaint against the defendants alleging breach of contract, breach of fiduciary duty, fraud and misrepresentation, misappropriation of business opportunity, and restitution.¹⁰ The judge organized the contentions in the complaint into three categories. The first category consisted of the plaintiffs' contention that the defendants denied them an opportunity to participate in the 1 and 9 East Street properties (business opportunity claim). In support of this claim, the plaintiffs asserted that the defendants were required to afford them the opportunity both under the terms of the partnership agreement and in accordance with their fiduciary duties as general partners. The second category included the plaintiffs' contentions that the defendants had charged MEALP excessive fees during their management of the property (related party transactions claim). The third category consisted of the plaintiffs' contention that the defendants had materially undervalued 23 East Street in the sale to Smith (valuation claim).

After a jury-waived trial, the judge found in favor of the defendants on all three claims.¹¹ With respect to the business opportunity claim, the judge concluded it could stand on neither of its two legs. First, she found that ...