Martin v. F.S. Payne Co.

• Citation: 569 N.E.2d 808,409 Mass. 753
• Parties: William J. MARTIN et al. 1 v. F.S. PAYNE CO.
• Decision Date: 10 April 1991
• Court: United States State Supreme Judicial Court of Massachusetts

Page 808

569 N.E.2d 808

409 Mass. 753

William J. MARTIN et al. ¹ v. F.S. PAYNE CO.

Supreme Judicial Court of Massachusetts,

Middlesex.

Argued Jan. 9, 1991.

Decided April 10, 1991.

Richard L. Neumeier, Boston, for defendant.

Kenneth H. Tatarian, Boston, for plaintiffs.

Before LIACOS, C.J., and WILKINS, NOLAN, O'CONNOR and GREANEY, JJ.

WILKINS, Justice.

Earlier aspects of this case were before us in Dynan v. Fritz, 400 Mass. 230, 508 N.E.2d 1371 (1987). There we remanded the case for further action, including a determination of "the amount, if any, which, in the judge's discretion, the plaintiffs shall receive from the company [i.e., F.S. Payne Co.] in payment of their reasonable counsel fees and expenses." Id. at 249, 508 N.E.2d 1371.

The company (Payne) has appealed from a judgment, entered in April, 1990, that awarded the plaintiffs approximately $392,000 for counsel fees and costs and also made certain other determinations. Payne makes no claim that the amount of the award should be reduced for any reason, but rather, arguing that it received no benefit in this stockholders' derivative action, Payne challenges the award of any fee at all.

We shall briefly describe certain events since our June, 1987, opinion. In that opinion, we did not decide whether the standard agreement to repurchase stockholders' shares on death or retirement called for the use of the number of Payne shares outstanding or the number of Payne shares issued on any valuation date. We noted that language in the buy-back agreements presented problems. ² We suggested that the company might wish to revise the agreements. Id. at 245 n. 20, 508 N.E.2d 1371. In October, 1987, the Payne stockholders voted to use the number of shares outstanding in valuing repurchased stock and not the number of shares issued. Because the number of Payne shares outstanding was substantially less than the number of shares issued, the shareholders' decision increased the cost to Payne of repurchasing shares and rejected the opportunity that this case had given Payne to reduce the cost of buying back its shares.

Judgment after rescript, not intended to be a final judgment, was entered in April, 1988. That judgment determined which stockholders were disinterested on the question of the ratification of the 1982 agreement to repurchase the stock of Edward A. Fritz, Jr., a former president of Payne, and thus were entitled to vote, as our opinion indicated, on whether to accept the terms of Payne's agreement with Fritz concerning the repurchase of his shares. See 400 Mass. at 244, 508 N.E.2d 1371. The judgment further provided that, if the stockholders were to elect to repurchase the Fritz shares, they would be deemed to have been repurchased in 1984 and 1985 "for the purpose of calculating the per share price for stock repurchased under the Buy-Back Agreement at any time after January 1, 1987." This provision was detrimental to Payne because it increased the per share cost of stock repurchased after January 1, 1987. It apparently directly benefited individual plaintiffs who after January 1, 1987, had resold or would resell their stock to Payne.

The April, 1988, judgment also stated that "the Buy-Back Agreement provides for the use of the number of shares issued in calculating repurchase prices, subject to any modification by the parties to the Agreement which may occur or may have occurred subsequent to the issuance of the Supreme Judicial Court's decision." Because the stockholders had already voted to use the number of shares outstanding, it is not immediately apparent why this provision was included in the judgment. The issue decided does, however, have a bearing, as we shall see, on the judge's award of counsel fees to the plaintiffs. The judgment additionally stated that the court would retain jurisdiction to decide the question of counsel fees for the plaintiffs after the stockholders' vote on the purchase of the Fritz stock.

In July, 1988, the stockholders voted unanimously to ratify the agreement to repurchase the Fritz stock, using the number of shares outstanding in determining the value of Fritz's stock. The stockholders' decision resulted in Payne paying substantial amounts to Fritz that would not have been payable if they had not ratified the agreement.

In April, 1990, the judge entered a final judgment that awarded approximately $392,000 in counsel fees and costs to the plaintiffs. He stated that the defendants had not acted in good faith in certain respects and concluded that the plaintiffs had brought the action in good faith. On the critical question whether this derivative action had benefited the corporation, he ruled that the facts that the stockholders had ratified the Fritz agreement and had selected the shares outstanding method for repurchasing stock were not dispositive on the question of benefit. He ruled that "significant financial benefits were made available to the company as a result of the lawsuit in that the company could have used the shares issued valuation formula in redeeming stock and thereby saved itself thousands of dollars per share." He found that the potential, but rejected, saving under the Fritz agreement was almost $700,000. He seems to have accepted the plaintiffs' calculation of a potential saving of almost $1,500,000 in the repurchase cost of 670 shares that Payne bought back between June, 1987, and July, 1988. He also concluded that Payne obtained nonfinancial benefits from the litigation because it raised the company's standards of fiduciary performance and that counsel fees could be based on such intangibles. He impliedly rejected Payne's argument that, because there was no fund produced by the litigation from which counsel fees could be paid, any award of counsel fees in this stockholders' derivative action was improper. We allowed Payne's application for direct appellate review.

We are advised that, since final judgment was entered, a corporation has purchased all Payne's stock. The plaintiffs argue that, because of the sale and the terms of the agreement to sell, all issues in this case, including the issue of counsel fees, are moot. We shall discuss the mootness issue first and, after concluding that the counsel fees issue is not moot, we shall then turn to that issue. Finally, we shall discuss the question whether the judge was correct in concluding that the Fritz shares should be treated as already redeemed for the purpose of valuing the repurchase price of certain shares.

1. The plaintiffs argue that the issues that Payne raises on appeal are moot because, due to changes in circumstances, the parties "no longer have a stake in the determination of [those issues]." First Nat'l Bank v. Haufler, 377 Mass. 209, 211, 385 N.E.2d 970 (1979). The plaintiffs rely on (1) the sale of all Payne's stock by its remaining stockholders to a single corporate purchaser and (2) an escrow agreement between those stockholders and the purchaser under which, apparently, the selling stockholders, through funds held in escrow, will pay any liabilities of Payne that result from the judgment in this case.

The sale of all outstanding shares of Payne stock to an outside purchaser obviously makes unimportant to the parties the proper future application of the stock buy-back agreements. The question whether shares outstanding or shares issued should be used in valuing the stock of a deceased or retired employee, in repurchasing stock under the buy-back agreements, will not arise again among the parties. To the extent, however, that the judge's ruling in the plaintiffs' favor on this issue provides a basis for the plaintiffs' claim for counsel fees, the issue is not moot, unless the counsel fees issue itself is moot. A second question, whether certain shares of the defendant Fritz should have been treated as outstanding on particular dates when Payne stock was repurchased under buy-back agreements, also can have no effect on future events. That issue does have a bearing, however, on the per share prices that Payne must pay to certain stockholders who have sold their shares back to Payne. That issue is, therefore, not moot, unless it is rendered so by the terms of the escrow agreement between the new stockholder and the selling stockholders.

The plaintiffs argue that any obligations to be satisfied pursuant to the judgment in this case are not the responsibility of Payne, against which the judgment has been entered, but rather are the responsibility of the selling shareholders who, it is said, have put aside sufficient funds in an escrow account to satisfy Payne's contingent obligations, including any amounts to be paid pursuant to the judgment.

The issues in this appeal are not ones in which both parties no longer have a stake. Certainly, the plaintiffs care about an award for attorneys' fees and about proper payment for stock sold back to Payne. They would be most disappointed if we were to declare the issues moot and then follow our usual practice of vacating the judgment on the ground of mootness and not on the merits. See First Nat'l Bank v. Haufler, supra, at 212, 385 N.E.2d 970; Blake v. Massachusetts Parole Bd., 369 Mass. 701, 708, 341 N.E.2d 902 (1976), and cases cited. On the Payne side, the selling stockholders, whom Payne is indirectly representing, have a major financial interest in the appeal. The escrow agreement, which is not in the record, is apparently based on the assumption that the appeal will go forward, and, therefore, obligations under the escrow agreement will be influenced by the judgment. Certainly, the selling stockholders do not all agree that Payne's obligations expressed in the judgment are no longer important to them.

In any event, it is difficult to conclude that Payne has no continuing interest in a judgment being entered against it that imposes on it an obligation to pay substantial sums to the plaintiffs, even if, assuming the solvency of the escrow fund, Payne hopes and expects...