Hanover Ins. Co. v. Sutton

• Decision Date: 30 March 1999
• Docket Number: No. 97-P-657,97-P-657
• Citation: 705 N.E.2d 279,46 Mass.App.Ct. 153
• Court: Appeals Court of Massachusetts
• Parties: HANOVER INSURANCE COMPANY v. John SUTTON, & others. 1

Page 279

705 N.E.2d 279

46 Mass.App.Ct. 153

HANOVER INSURANCE COMPANY v. John SUTTON, & others. ¹

No. 97-P-657.

Appeals Court of Massachusetts Suffolk.

Argued June 5, 1998.

Decided Jan. 15, 1999.

Further Appellate Review Denied March 30, 1999.

Gallagher for the plaintiff.

Richard W. Renehan, Boston (Brian Linehan, Cambridge, with him) for the defendants.

Present: ARMSTRONG, JACOBS, DREBEN and FLANNERY, JJ. ²

FLANNERY, J.

On December 16, 1994, the plaintiff, Hanover Insurance Company (Hanover), filed an eight-count complaint against the defendants, John Sutton, William J. O'Brien, William J. O'Brien, Inc., and Insurance Partnerships, Inc. (IPI). ³ The gravamen of the complaint was that Sutton, Hanover's former employee, failed in his fiduciary duty to Hanover by diverting a corporate opportunity.

On February 13, 1995, a jury trial commenced on Hanover's original complaint. ⁴ Before the case went to the jury, Hanover amended its complaint to add three additional counts. ⁵ On March 1, 1995, verdicts were returned for the defendants on all claims submitted to the jury, which were counts I, IV, VI and XI.

Hanover moved for judgment notwithstanding the verdict. The motion was allowed as to count I based on Sutton's breach of his duty to disclose a corporate opportunity. See Mass.R.Civ.P. 50(b), 365 Mass. 814-815 (1974). The judge, however, ruled that the amount of damages was uncertain and awarded nominal damages of $1.00. Hanover moved for a new trial on the issue of damages, which was denied. See Mass.R.Civ.P. 59(a), 365 Mass. 827 (1974). On the same basis as his ruling on count I, the judge ruled in favor of Hanover on count V. ⁶

On May 9, 1996, judgment entered for the plaintiff on counts I and V and for the defendants on all the remaining counts except count III which was reserved pending a hearing on attorneys' fees.

On February 18, 1997, judgment entered in favor of Hanover on count III, on a finding that IPI violated G.L. c. 93A, § 11, by aiding and abetting Sutton's breach of fiduciary duty. The judge awarded Hanover $1.00 in nominal damages and $168,154.04 in attorneys' fees and costs.

Both Hanover and the defendants, Sutton, O'Brien, IPI, and William J. O'Brien, Inc., appeal. We address, in turn, the issues on appeal: (1) Hanover's contention that it was denied a fair trial because of an accelerated trial date, discovery restrictions, and an unfair protective order; (2) the judge's instructions to the jury on count I; (3) Sutton's liability to Hanover on count I for breach of fiduciary duty; (4) the judge's denial of a jury trial on damages after granting judgment notwithstanding the verdict on count I; (5) IPI's liability to Hanover on count III for engaging in practices that violated G.L. c. 93A; (6) Hanover's contention that the judge erred in finding only nominal damages on count III; (7) the award of attorneys' fees on count III; (8) Sutton's liability to Hanover on count V for loss of corporate opportunity; and (9) the adequacy of the judge's findings of fact and conclusions of law on count VII.

1. Background. We summarize the facts. ⁷ The Hanover InsuranceCompany is a national property and casualty insurance company headquartered in Worcester. William J. O'Brien was the president of Hanover from 1979 until he resigned in December, 1991. ⁸ Upon resignation, O'Brien entered into a severance agreement with Hanover. The agreement stated in part:

"For the period January 1, 1992 through December 31, 1994 (the "Consultation Period"), you agree to be available to provide consulting, advisory and related services to Hanover and/or its subsidiaries as may be reasonably requested from time to time by the Chairman of the Hanover Board of Directors....

"For the Consultation Period, you agree not to directly or indirectly solicit the insurance business of any insured of Hanover and/or its subsidiaries or assist any other person to do so or solicit, recruit or assist or encourage a third party to solicit or recruit the services of any current employee, agent or broker of Hanover and/or its subsidiaries."

John Sutton was hired by Hanover in December, 1976, as associate counsel. He held that position until 1980 or 1981 when he was elected vice president, general counsel, and corporate secretary. In May, 1990, O'Brien appointed Sutton president of a local operating company called Hanover Metro, Inc., in New Jersey. Hanover Metro, Inc., Hanover's second largest operating company, was a full-service operation which was responsible for New Jersey, Pennsylvania, and what Hanover deemed "down state New York."

After Sutton's mentor and personal friend, O'Brien, resigned from Hanover, Sutton began considering his professional future. Sutton discussed with John Kittel, ⁹ Hanover's vice president of marketing and strategic development, the notion of entering a property and casualty insurance business venture. Sutton envisioned establishing a business enterprise to link local insurance companies. The network of local companies would consist of existing agencies with established "books of business." books of business would be acquired and underwritten by a single company.

Sutton and Kittel approached Joseph Grochmal, a principal of Northington Partners, Inc. (Northington), a Connecticut-based investment banking and venture capital firm specializing in the insurance industry, about raising capital for their business venture. At Grochmal's request, Sutton and Kittel prepared a writing of their business plan, which was completed in September, 1992. After reviewing the plan, Northington embarked on an effort to raise funds for the venture.

In November, 1992, Sutton and Kittel incorporated themselves as Sutton, Kittel & Associates, Inc. (SKA). Sutton and Kittel were SKA's only directors and shareholders; its officers were Kittel, Sutton, and Sutton's wife, a lawyer who served as the corporate secretary and handled all the necessary corporate filings.

The same day SKA was incorporated, O'Brien incorporated William J. O'Brien, Inc. Thereafter, on November 23, 1992, SKA and William J. O'Brien, Inc., executed an agreement by which William J. O'Brien, Inc., would provide consulting services to SKA. ¹⁰

In January, 1993, Hanover's new president, Rupley, met with Sutton to discuss Sutton's being promoted to a position in Hanover's home office. Sutton accepted Rupley's offer in May, 1993. Sutton testified that he did not tell Rupley that he was working on any outside insurance business or that he had formed SKA. He said he told Rupley that, in all fairness, Rupley should know that he had been talking with investment bankers about raising money for a potential new business opportunity.

In March, 1993, Grochmal learned that the Covenant Mutual Insurance Company (Covenant), a long-standing Connecticut mutual insurance company, had been placed in receivership because of disastrous losses caused by Hurricane Andrew in Florida. Grochmal and Northington pursued the possible acquisition of Covenant for the benefit of SKA. Northington's intent, which was known to Sutton, was to acquire Covenant and then implement Sutton and Kittel's plan to establish a network of local property and casualty insurance companies.

furtherance of these ends, Grochmal met with the Connecticut Insurance Commissioner to discuss the possible acquisition. Grochmal and Northington also prepared a detailed business plan, dated July 21, 1993, which outlined the financial and corporate structure for the possible acquisition of Covenant by a new company, Insurance Partnerships, Inc. (IPI). The plan listed O'Brien as chairman, Sutton as president, and Kittel as chief operating officer of IPI. IPI's principal business according to the plan

"will be to act as the holding company for a network of property-casualty insurance companies. IPI has targeted the 162-year old Covenant Mutual Insurance Company ('Covenant') as the first company in this network and has worked closely with the Connecticut Insurance Department to develop a structure designed to rehabilitate Covenant.

"IPI anticipates acquiring the 31-state licenses and charter of Covenant exclusive of all current assets and liabilities of the company. In return for these licenses and the charter, IPI will contribute $1 million and 1% of its common stock to the Liquidating Trust established by the Connecticut Insurance Department for disposal of the liabilities of Covenant. IPI expects to build Covenant through the acquisition of profitable agency blocks of business or agencies and to develop Covenant into a captive agency underwriter with significant expense and marketing advantages versus its competitors. IPI will focus on personal lines and small-case coverages produced by its agents."

On August 2, 1993, Northington executed a letter of intent with the Connecticut Insurance Department for the proposed restructuring and acquisition of Covenant. The letter of intent was signed by Northington on behalf of IPI, a "to-be-formed" corporation.

By March, 1994, Covenant was converted from a mutual company to a stock company, thereby allowing IPI to buy its stock. The to-be-formed entity, IPI, was needed in order to acquire the stock of Covenant. Instead of incorporating a new entity, however, Northington's lawyers elected to use SKA which, by name change, became IPI. IPI executed a definitive purchase agreement with one Googins ¹¹ for the right to purchase all of Covenant's capital stock, subject to court approval and IPI's securing appropriate financing.

On March 18, 1994, Sutton and Kittel entered into employment agreements with IPI to become part of the company's management team. On May 4, 1994, the demutualization of Covenant was confirmed by the Connecticut Superior Court. Northington invested $2 million in IPI; other investors procured by Northington put in $5 million; and IPI borrowed $4 million. Sutton bought 1,861 shares of common stock in IPI for $18,610; another 2,791 shares were...