Palmer v. Murphy

• Decision Date: 27 May 1997
• Docket Number: No. 95-P-747,95-P-747
• Citation: 677 N.E.2d 247,42 Mass.App.Ct. 334
• Parties: James R. PALMER, individually and as executor, 1 v. Harold B. MURPHY, trustee, 2 & others 3 (and a companion case 4 ).
• Court: Appeals Court of Massachusetts

Page 247

677 N.E.2d 247

42 Mass.App.Ct. 334

James R. PALMER, individually and as executor, ¹ v. Harold B. MURPHY, trustee, ² & others³ (and a companion case⁴).

No. 95-P-747.

Appeals Court of Massachusetts Suffolk.

Argued Oct. 11, 1996.

Decided March 21, 1997.

Further Appellate Review Denied May 27, 1997.

Walter H. Mayo, III, Boston, for Joseph E. McCallion & others.

Amy J. Axelrod, Boston (R. David Beck, with her), for James R. Palmer.

Before BROWN, GILLERMAN and IRELAND, JJ.

IRELAND, Justice.

In this case of corporate wrongdoing, involving the skimming of corporate assets by the three former officers, directors, and shareholders of a close corporation that is now in bankruptcy, the parties have filed cross appeals from a final judgment of the Superior Court in consolidated actions. In the first action (Palmer case), James R. Palmer sued Fayette Corporation (Fayette) and its two other shareholders, James E. Rafferty and Joseph E. McCallion (both of whom were also officers and directors) in multiple counts, alleging numerous breaches of fiduciary duty by them--most notably their siphoning off of corporate assets for personal use. ⁵ In the second action (Curtin case, see note 4), Charles Curtin sought to have a trust in his behalf imposed by the court on shares of Fayette stock currently held by Palmer.

One week after the Palmer case was filed in Superior Court in September, 1989, defendant Fayette filed for bankruptcy protection under chapter seven of the United States Bankruptcy Code. At the time of this appeal, Fayette's chapter seven petition for liquidation remains pending in the United States Bankruptcy Court. The plaintiff in the Curtin case moved to sever Fayette as a defendant because of the pending bankruptcy proceedings and on the theory that the corporation was not a necessary or indispensable party to that case. The motion was allowed. In the Palmer case, Palmer sought to sever the claim against Fayette for the same reason and also to avoid possible problems with the automatic stay provisions of the Bankruptcy Code, 11 U.S.C. § 362 (1994). ⁶ Palmer's first motion to sever Fayette was denied without prejudice. His renewed motion to sever was allowed, and both the Palmer and Curtin cases then proceeded to a consolidated trial with neither the corporation nor the bankruptcy trustee as a party.

Following a five-day, jury-waived trial in the Superior Court, the judge issued a memorandum of decision with findings of fact and rulings of law in the two cases. We summarize the salient points. The judge ruled in the Curtin case that Curtin had failed to establish an equitable interest in twenty-five of the fifty shares of Fayette stock previously held by Warren C. White and now held by Palmer as White's executor and principal beneficiary under White's will.

The judge found in the Palmer case that, between 1986 and 1989, when Fayette actively conducted the business of operating a lounge in downtown Boston, its three principals--James E. Rafferty, Joseph E. McCallion and the late Warren C. White--had siphoned off for their personal use nearly $1,500,000, or approximately one third of the corporation's gross earnings. The judge ruled, however, that Palmer was not entitled to recover on any of the skimmed assets. The siphoned funds belonged, instead, to Fayette, and, since Fayette was in bankruptcy, the funds belonged to Fayette's bankruptcy trustee. The judge concluded that the skimmed assets to which the trustee was entitled were $556,825 from Rafferty, $574,325 from McCallion, ⁷ and $336,205 from White's estate (based on a finding that, until his death in 1987, White had also skimmed corporate assets). The judge found, in addition, that the three principals had jointly engaged in a scheme to defraud the taxing authorities and other creditors. In essence, the three had kept two sets of corporate records--one showing Fayette's "true" financial picture ("green ledger sheets" or "income summaries") and the other, showing far fewer receipts, that was provided to Fayette's accountant for Federal and State tax-filing purposes. ⁸

In a subsequent memorandum and order (dated July 7, 1993), the judge on his own motion added Fayette's bankruptcy trustee, attorney John Maiona, as a party and sent notice thereof to Maiona, giving him ten days in which to object. No objection was filed.

In addition, the judge ruled that Palmer could recover attorneys' fees (of $114,427) and costs (of $11,154) for pursuing the corporate skimming claim (count V of the Palmer case), which the judge characterized as a stockholder derivative action brought by Palmer on behalf of Fayette to recover assets that the principals had wrongfully diverted from the corporation. He also ruled that Palmer was entitled to an award of attorneys' fees and costs (on count VI of the Palmer case) for defending against the Curtin case, because the two defendant stockholders (Rafferty and McCallion) had conspired to use Curtin (a nonstockholder) as their agent to file a frivolous lawsuit--the Curtin case--against Palmer. On this count he awarded $22,500 in attorneys' fees and $988 in costs, under G.L. c. 231, § 6F.

1. Joinder of trustee in bankruptcy as party plaintiff in the Palmer case. The defendants in the Palmer case (Curtin, Rafferty, and McCallion, hereafter referred to as the defendants) claim that the judge erred by adding Fayette's bankruptcy trustee as a party after the trial had already concluded. The defendants also point out that John Maiona, the person whom the judge formally named as a party in his July 7, 1993, order was, in fact, no longer the trustee at that time, having resigned the post almost eleven months earlier, on August 21, 1992. ⁹ According to the defendants, Palmer had no standing to pursue a claim against corporate officers and directors, either individually or derivatively on behalf of Fayette; rather, they argue that, as the legal representative of the Fayette bankrupt estate, the trustee alone was empowered to pursue the claim. See John L. Motley Assocs. v. Rumbaugh, 97 B.R. 182, 185 (E.D.Pa.1989); Bessette v. Bessette, 385 Mass. 806, 807 n. 2, 434 N.E.2d 206 (1982). Because Fayette had been severed as a defendant from the case and the trustee had not been joined, they argue, the skimming claim could not proceed to trial and should have been dismissed. See Bessette v. Bessette, 385 Mass. at 806-807, 434 N.E.2d 206 (action brought by minority stockholders against majority stockholder for personal recovery was properly dismissed, where plaintiffs declined to recast their claims as a derivative action on behalf of the corporation and to name the corporation as a nominal defendant).

The defendants' argument ignores two crucial facts: first, they never raised this point before or during trial; second, the current bankruptcy trustee has now received notice of the judgment and has approved its terms. We expand on each point. The defendants' trial counsel objected to both of Palmer's motions to sever Fayette, but not on the ground the corporate skimming claim was essentially derivative in nature (which would have required Fayette to remain in the action as a nominal defendant). The defendants' opposition to the motion did not even mention the point they now press--that only the bankruptcy trustee could have advanced the skimming claim. ¹⁰ We have examined, too, the trial transcript and can find no evidence there that the defendants' trial counsel ever objected to or questioned the admittedly flawed posture of the case as it proceeded through trial.

Objections, issues, or claims--however meritorious--that have not been raised at the trial level are deemed generally to have been waived on appeal. See, e.g., McNamara v. Honeyman, 406 Mass. 43, 53, 546 N.E.2d 139 (1989); Darling v. Pinkham, 9 Mass.App.Ct. 885, 886, 402 N.E.2d 115 (1980); and Crawford v. City of Cambridge, 25 Mass.App.Ct. 47, 50, 514 N.E.2d 1331 (1987). This case fits none of the usual exceptions to the general rule that claims not raised below are waived on appeal. The claim does not go to jurisdiction over the subject matter. No public interest is involved that would warrant us to take up the claim and order a dismissal. Contrast Filippone v. Mayor of Newton, 16 Mass.App.Ct. 417, 421, 452 N.E.2d 239 (1983). Nor can the defendants argue that injustice would result unless the claims against them for serious corporate wrongdoing are dismissed. Contrast Cruz v. Commissioner of Pub. Welfare, 395 Mass. 107, 111-112, 478 N.E.2d 1262 (1985).

Moreover, we do not read Bessette v. Bessette, 385 Mass. at 806-807 & n. 2, 434 N.E.2d 206, as actually requiring the judge, sua sponte and absent motion by a party, to dismiss a derivative claim such as this that fails to name a closely held corporation as a defendant, where the parties agree that the corporation--not the individual plaintiff shareholder--is entitled to receive the fruits of the recovery. Contrast Bessette v. Bessette, 385 Mass. at 806-807, 434 N.E.2d 206 (in which the plaintiff shareholders had sought a personal recovery only), and Crowley v. Communications for Hosps., Inc., 30 Mass.App.Ct. 751, 763-765, 573 N.E.2d 996 (1991), in which the judge wrongly awarded a personal recovery to the plaintiff shareholder. Nor can the defendants plausibly contend that a corporate presence somehow was required at the beginning of the case because a majority of Fayette's disinterested directors might have objected to going forward with the suit. There were no disinterested directors; all three had actively and knowingly participated in the scheme to siphon off assets.

The present bankruptcy trustee, attorney Harold B. Murphy, appeared with the parties before the panel at a second hearing on this appeal. He stated on the record that he had received and reviewed both the judge's memorandum and order formally naming the trustee as a party and the final judgment, which names the trustee as the party entitled to...