Harhen v. Brown, 97-P-2126

• Decision Date: 21 May 1999
• Docket Number: No. 97-P-2126,97-P-2126
• Citation: 46 Mass.App.Ct. 793,710 N.E.2d 224
• Parties: Loretta M. HARHEN v. Stephen L. BROWN & others. 1
• Court: Appeals Court of Massachusetts

Page 224

710 N.E.2d 224

46 Mass.App.Ct. 793

Loretta M. HARHEN v. Stephen L. BROWN & others. ¹

No. 97-P-2126.

Appeals Court of Massachusetts,

Suffolk.

Argued March 10, 1999.

Decided May 21, 1999.

Alan Morrison, for the plaintiff.

Jeffrey B. Rudman, Boston, for Stephen L. Brown & others.

Thomas R. Kiley, Boston, for F. William Sawyer, was present but did not argue.

Morris M. Goldings & Ellen S. Shapiro, Boston, for Raeburn B. Hathaway, Jr., were present but did not argue.

Present: WARNER, C.J., SMITH, & GILLERMAN, JJ.

GILLERMAN, J.

The plaintiff, a policyholder of John Hancock Mutual Life Insurance Company (Hancock) brought this derivative action by verified complaint against Stephen L. Brown, E. James Morton, and David F. D'Alessandro, directors and senior officers of Hancock, Raeburn B. Hathaway, a vice-president of Hancock and head of its government relations department, F. William Sawyer, the senior registered lobbyist for Hancock, and Hancock as nominal defendant. Brown, Morton, and D'Alessandro are referred to collectively as the Hancock defendants.

The complaint alleges that the individual defendants participated in, or approved, the illegal lobbying of members of the Massachusetts Legislature, resulting in fines and legal expenses paid by Hancock and harm to Hancock's reputation. The plaintiff seeks the recovery of those payments and losses for the benefit of Hancock.

The Hancock defendants moved to dismiss the complaint on the grounds that (i) the complaint fails to allege particularized facts sufficient to overcome the "strong presumption of the business judgment rule," and (ii) the complaint fails to state any claim upon which relief may be granted, see Mass.R.Civ.P. 12(b)(6), 365 Mass. 754 (1974). Hathaway moved to dismiss the complaint on the grounds that the complaint is "time-barred" and fails to state a claim upon which relief may be granted. Sawyer moved to dismiss the complaint pursuant to Mass.R.Civ.P. 12.

A judge of the Superior Court dismissed the action, explaining that the complaint lacked the required specificity on the issue of the bias and lack of independence of the board-appointed special committee of two directors, and therefore the judge "defer[red] totally to the business judgment of the Hancock sub-committee and the Hancock board [of directors] on all issues presented in the plaintiff's demand." ² The plaintiff has appealed. ³

1. Standard of review. We treat the judge's decision dismissing the complaint against all defendants as a dismissal on the ground the complaint failed to state a claim against any defendant upon which relief may be granted.

It is settled law that in testing the correctness of a dismissal for failure to state a cognizable claim "we accept as true all of the allegations of the complaint and all reasonable inferences which may be drawn from the complaint and which are favorable to the party whose claims have been dismissed [citation omitted]. Further, a motion to dismiss a complaint on such grounds should not be allowed unless it appears certain that the complaining party is not entitled to relief under any state of facts which could be proved in support of his claim" (emphasis added). Spinner v. Nutt, 417 Mass. 549, 550, 631 N.E.2d 542 (1994), quoting from Logotheti v. Gordon, 414 Mass. 308, 310-311, 607 N.E.2d 1015 (1993). See Brum v. Dartmouth, 44 Mass.App.Ct. 318, 321-322, 690 N.E.2d 844 (1998) (collecting cases), S. C., 428 Mass. 684, 704 N.E.2d 1147 (1999). ⁴

2. The complaint. The following is a summary of the material allegations in the plaintiff's fifty-page complaint filed March 21, 1997.

a. Description of the defendants. Since 1991, Brown has been chairman of the board of directors and chief executive officer of Hancock. Prior thereto he served as vice-chairman of the board, president, and chief operating officer.

Morton was Brown's predecessor; he served as chairman of the board and chief executive officer from 1987 to 1991, and thereafter he remained a director and officer of Hancock.

D'Alessandro was senior executive vice-president of Hancock's retail sector until becoming president of Hancock on January 1, 1998. He also served as a director of Hancock at all material times.

From 1982, through May, 1993, Hathaway was a vice-president of Hancock and head of Hancock's government relations department.

Sawyer was Hancock's senior registered lobbyist and was responsible for Hancock's relations with the Massachusetts Legislature. He was neither an officer nor a director of Hancock.

b. Description of Hancock. Hancock is alleged to be one of the "top six" life insurance companies in the United States, chartered in Massachusetts in 1862. It has approximately seven million policyholders in all fifty states, over ten thousand employees one hundred and twenty subsidiaries, and "over $107 billion in managed assets and over $54 billion in direct assets." Hancock is headquartered in Massachusetts, which is Hancock's primary regulator. Therefore, the laws of Massachusetts, and the members of the Legislature's joint committee on insurance, are, according to the complaint, of the "utmost importance to Hancock."

c. Hancock's government relations department. This department was responsible for monitoring Massachusetts legislation relating to insurance and presenting Hancock's positions on such legislation to members of the Legislature. Hathaway was the head of this department and a vice-president of Hancock. Hathaway reported directly to the president of Hancock, a position held by Morton until 1991, and by Brown from 1991 until 1998, when D'Alessandro became president.

Sawyer, a licensed attorney, was Hancock's senior registered lobbyist, responsible for maintaining Hancock's good relations with members of the Massachusetts Legislature. To that end, Sawyer, as described more fully below, entertained legislators at golf clubs, hotels, restaurants, and cultural and sporting events in Massachusetts and elsewhere. Sawyer prepared monthly expense reports, detailing his activities, for approval by Hathaway. Sawyer also prepared regular written reports about proposed legislation of interest to Hancock which were circulated among Hancock's senior officers.

d. Hancock's management committee. Brown, Morton, D'Alessandro, and Hathaway were members of Hancock's management committee. This committee was responsible for overseeing all aspects of Hancock's operations, including government relations. Members of the committee were kept informed of Sawyer's activities with members of the Legislature and other government officials, and they "knew or should have known" of what subsequently was revealed as Sawyer's illegal activities. The individual defendant directors, as members of the management committee, failed to take any action to assure Sawyer's compliance with the law, and "they authorized [Hancock's] funds to be used in connection with Sawyer's illegal lobbying activities."

e. Sawyer and the government relations department. Hancock's government relations department was aware, beginning in 1979, that Hancock's lobbyists were prohibited from making any gift worth $50 or more on any single occasion, or gifts with an aggregate value of $100 in any calendar year, including meals and all other forms of entertainment, to any public official. Moreover, Hancock, at all material times, had a written policy prohibiting any gift of $50 or more to any person "with whom [Hancock] has or is likely to have any business dealings."

In 1982, Morton, as president of Hancock, personally approved payment of the cost of Sawyer's membership in a private golf club because, Hathaway's written memorandum stated, "this membership for [Sawyer] ... would greatly enhance opportunities for him to perform his responsibilities." It was foreseeable, when Morton approved Sawyer's golf club membership, that Sawyer would use the privileges of the golf club to exceed the legal limit on gifts to legislators.

As part of a larger pattern, Hancock maintained corporate boxes at the Boston Garden, Foxboro Stadium, and Fenway Park. Tickets were made available to persons selected by board members, senior management, and Hathaway and Sawyer. Records were also maintained of the Hancock personnel to whom such tickets were "charged." These records show numerous charges to Sawyer and the government relations department revealing, according to the complaint, "per se violations of the lobbying law." Further, in 1982, Sawyer was granted permission to take the then chairman of the Legislature's joint insurance committee and his wife to the Super Bowl at a cost far in excess of the legal limit.

In addition to the foregoing, Sawyer provided entertainment for public officials at Las Palmas del Mar, Puerto Rico; Amelia Island, Florida; and Cape Cod.

Sawyer maintained itemized expense records for the government relations department. Hathaway, a member of Hancock's management committee, reviewed these records, "which included the identity of each legislator entertained on each of many occasions, and approved payment of these expenses."

In violation of Hancock's own policy prohibiting gifts exceeding $50 in value, no steps were taken by the management committee or the board to ensure that box seats, tickets, meals, and other gifts of various sorts were not in violation of Massachusetts laws.

f. The 1994 Federal and State proceedings against Hancock; Hancock's admissions of violations of law. In March, 1994, Hancock paid a fine of $900,000 to the Federal government in settlement of a civil complaint brought in the Federal District Court for the District of Massachusetts charging that from January, 1986, until May, 1993, Hancock's lobbyists, in violation of Massachusetts law, gave gratuities valued at over $50 each to Massachusetts legislators on at least three hundred occasions. The gifts were alleged to have been given as part of a "scheme to defraud the public of its right to the honest services...