Jernberg v. Mann, 03-1303.

• Decision Date: 19 February 2004
• Docket Number: No. 03-1303.,03-1303.
• Citation: 358 F.3d 131
• Parties: Willard R. JERNBERG, Plaintiff, Appellant, v. Sally E. MANN, Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

358 F.3d 131

Willard R. JERNBERG, Plaintiff, Appellant, v. Sally E. MANN, Defendant, Appellee.

No. 03-1303.

United States Court of Appeals, First Circuit.

Heard October 8, 2003.

Decided February 19, 2004.

Franklin H. Levy with whom Eve M. Slattery and Dwyer & Collora, LLP were on brief for appellant.

James D. O'Brien, Jr. with whom Lisa D. Tingue and Mountain, Dearborn & Whiting, LLP were on brief for appellee.

Before LIPEZ, Circuit Judge, CAMPBELL, Senior Circuit Judge, and HOWARD, Circuit Judge.

CAMPBELL, Senior Circuit Judge.

This appeal is from a final judgment for defendant entered in the United States District Court for the District of Massachusetts following a jury trial. Plaintiff, Willard Jernberg, sued defendant, Sally Mann, for breach of contract, fraud, and breach of fiduciary duty. Jernberg voluntarily dismissed the breach of contract claim, and the jury found in Mann's favor on the remaining counts. On appeal, Jernberg challenges only the court's failure to instruct the jury that Mann had the burden of proving that Jernberg's sale of his corporation to her was fair and reasonable to him.

BACKGROUND

In 1980, Jernberg founded the Jernberg Corporation, a company providing services to assist employees with personal problems like alcoholism, drugs, depression, and family concerns. He was the sole shareholder. In 1981, Jernberg hired Mann, the eighteen-year-old daughter of his cousin, as an assistant. Jernberg and Mann were very close, and he considered her to be like a daughter. The Jernberg Corporation grew tremendously over the course of the eighties and early nineties, benefitting in particular from obtaining Paul Revere Insurance Company (Paul Revere) as a client. Paul Revere purchased employee assistance services for its own employees and for various disability policy holders. For many years, Jernberg Corporation and Paul Revere dealt with one another without a contract, but in 1992, Jernberg, after some shaky moments with Paul Revere management, negotiated a written agreement that paid Jernberg Corporation at a flat rate for the employees Jernberg Corporation serviced. Business boomed. At that time, Mann asked Jernberg to give her a right of first refusal if he ever decided to sell the company. He agreed.

Jernberg Corporation's profitability took a turn for the worse in 1993. Paul Revere amended its contract causing Jernberg Corporation to lose approximately one-third of its revenues and two-thirds of its individual accounts. That year, Jernberg relapsed into alcoholism. Mann helped him deal with the problem over the next three years, but Jernberg's involvement with Jernberg Corporation was reduced. Mann essentially ran the business from that point forward. In April of 1994, Jernberg named Mann President of Jernberg Corporation. Jernberg continued to be the sole shareholder and the Chairman of the Board. Although disputed, Mann's version of the facts is that Jernberg was kept current on the affairs of Jernberg Corporation by Mann, corporate counsel, the corporate controller, the corporate accountant and others.

At the end of 1994, Paul Revere informed Jernberg Corporation that it would not renew its contract after it expired in May of 1995. Months later, Jernberg again relapsed into alcoholism and went to a treatment program. On top of this, Jernberg Corporation was about to assume the burden of a very expensive office space lease. Around that time, Mann and Jernberg began negotiations for the sale of the Jernberg Corporation to Mann. Mann expected Jernberg Corporation would lose other major independent accounts in the next year, but she was eager to accept the challenge posed by the termination of the Paul Revere account. She was frightened more by the possibility that she would be fired by a new owner than if the company failed with her at the helm. Further, she believed that if she took a smaller salary than Jernberg had in the past, she could weather a transitional phase while Jernberg Corporation reinvented itself. Jernberg was aware of the difficulties too, and he asked corporate counsel whether the company could avoid the office lease. Corporate counsel advised him that this was not possible. Jernberg concluded that his options were to keep the company and run it into the ground, find an outside buyer, or sell the company to Mann. According to Mann, throughout the negotiation, Jernberg continued to be provided with information about the affairs of the company. Ultimately, Jernberg concluded that no one other than Mann would be interested in purchasing the company, given that the loss of Paul Revere's business reduced its worth drastically. He further expressed a desire to help Mann for her hard work. Accordingly, he decided to sell the company to Mann.

Jernberg sold his stock to Mann in January of 1996. They executed a lengthy purchase and sales agreement, as to which they had the advice of counsel (although Jernberg contends that neither the corporate accountant nor the corporate attorney were involved in the negotiation beyond being mere scriveners). Mann paid Jernberg $50,000 for the stock and agreed to pay him $160,000 over several years for consulting services (according to Jernberg, Mann paid only $33,000 for the stock). At that time, there was evidence the stock had a fair market value of $1.91 million. Shortly before the sale closed, Jernberg took $520,000 out of the corporation, together with an automobile, his 401K plan, and a large life insurance policy. He was relieved of any obligation under the lease. The contract also guaranteed Jernberg a "kicker payment" which would consist of a percentage of any differential between gross revenues for the years between 1996 and 1999.

Following Mann's purchase, Jernberg Corporation underwent many changes. Through aggressive marketing and new products, it was able to retain 50 percent of its accounts and broadened its base of customers. In November of 1999, nearly four years after she purchased the company, Mann sold her interest in Jernberg Corporation to Ceridian for approximately $2 million. According to Jernberg, at the time of sale, the majority of accounts, including Paul Revere, were those that had been established prior to Mann's purchase of the company. Furthermore, according to Jernberg, she made a total of over $4.1 million after totaling her salary, profits, and the sale of the company.

DISCUSSION

This appeal concerns the adequacy of the district court's jury instructions. Jernberg had submitted proposed jury instructions requesting the court to instruct that, "[t]he defendant bears the burden of proving that she disclosed all material information to the plaintiff when she purchased the Jernberg Corporation from him and that the sale was fair and reasonable to the plaintiff." [Emphasis supplied.] The district court instructed the jury both that Mann owed a fiduciary duty to Jernberg and that she bore "the burden of proving by a preponderance of the evidence that she disclosed all material information to Mr. Jernberg when she purchased the Jernberg Corporation from him or his stock from him." The district court did not, however, instruct that Mann had the burden of proving that the sale was fair and reasonable to Jernberg. It is this omission that plaintiff now asserts was error.¹

This court reviews jury instructions de novo. Seahorse Marine Supplies, Inc. v. Puerto Rico Sun Oil Co., 295 F.3d 68, 76 (1st Cir.2002). The trial court's refusal to give a particular instruction constitutes reversible error "if the requested instruction was (1) correct as a matter of substantive law, (2) not substantially incorporated into the charge as rendered, and (3) integral to an important point in the case." United States v. DeStefano, 59 F.3d 1, 2 (1st Cir.1995) (internal quotation marks omitted). "An erroneous instruction will require a new trial only if the error was prejudicial, based on the record as a whole...." Tatro v. Kervin, 41 F.3d 9, 14 (1st Cir.1994).

Here, Jernberg contends that the court's instruction was substantively wrong because it omitted to require that Mann — in addition to disclosing all material information — bore the burden of proving that her purchase of the stock was fair and reasonable to the plaintiff.²

To justify imposing upon Mann this additional burden, Jernberg presents a two-stage argument. First, he calls attention to the law, well-known in Massachusetts as elsewhere, that a corporate officer or director owes a fiduciary duty of fair dealing in respect to corporate actions that may impact upon one or more shareholders. See, e.g., Jessie v. Boynton, 372 Mass. 293, 303-304, 361 N.E.2d 1267 (1977). Jernberg, who was the company's sole stockholder when he sold his stock to Mann, would have us apply this rule so as to constitute Mann a fiduciary for Jernberg. (The court, in fact, so instructed the jury in this case. See supra note 2.) Building on the purported fiduciary relationship, Jernberg further contends that Mann's fiduciary role was of an "enhanced" variety, placing on Mann the burden to satisfy the jury that her purchase of Jernberg's stock was inherently fair and reasonable to him. The concept of enhanced fiduciary duty appears in Massachusetts cases holding that when a corporate fiduciary engages in "self-dealing" so as to be "on both sides" of a transaction, the fiduciary must show the transaction was done in good faith and was inherently fair to the corporation. See, e.g., Boston Children's Heart Foundation, Inc. v. Nadal-Ginard, 73 F.3d 429, 433-34 (1st Cir.1996) (relying on Massachusetts law).

But Jernberg's argument overlooks that the enhanced fiduciary duty described in the case law is premised on the director's or officer's fiduciary duty to the corporation. While it is sometimes said that directors and officers owe a fiduciary duty to the corporation and its shareholders, any responsibility to the latter is anchored in the duty to the former. Otherwise, as noted in a...