Pollock v. Marshall
Decision Date | 28 March 1984 |
Citation | 462 N.E.2d 312,391 Mass. 543 |
Parties | Lewis G. POLLOCK et al. 1 v. John A. MARSHALL, administrator, 2 (and a companion case 3 ). |
Court | United States State Supreme Judicial Court of Massachusetts Supreme Court |
Joseph L. Kociubes, Boston, for John A. Marshall and another.
Regina E. Roman, Boston (Edward J. Barshak, Boston, with her), for Lewis G. Pollock and others.
Before HENNESSEY, C.J., and WILKINS, NOLAN, LYNCH and O'CONNOR, JJ.HENNESSEY, Chief Justice.
The plaintiffs, partners of a Massachusetts law firm, 4 filed actions for attorneys' fees against the defendants, The dataCon Companies, Inc.(company), and John A. Marshall, the administrator of the estate of Albert J. Marshall(Marshall).In their counterclaims, the defendants sought rescission of five transactions involving the company, Marshall, and the plaintiffs.The defendants alleged the transactions involved overreaching.The defendants also alleged that, in each transaction, one or more of the plaintiffs violated the duty owed to clients by attorneys.The actions were consolidated upon the defendants' motion and referred to a master.The master found for the plaintiffs on their claims for attorneys' fees.On the counterclaims, the master found only one transaction was tainted by a breach of fiduciary duty.5He found no impropriety in connection with the other four challenged transactions.A Superior Court judge allowed the plaintiffs' motion to adopt the master's report and entered judgments accordingly.The defendants filed a notice of appeal and sought direct appellate review, which we granted.On appeal, the defendants challenge only that part of the judgments dismissing the four counts of their counterclaim.6We affirm.
The subsidiary findings contained in the master's report are not contested, and we summarize them.The plaintiffs at all relevant times were partners in a law firm of general practice with an emphasis on corporate and securities matters.Mr. Jacobs specialized in such matters and, in addition to providing traditional legal advice to his clients, provided business and financial planning services to a number of young, growing companies.
DataCon is a Massachusetts corporation.From its incorporation in 1971 through July 20, 1977, the company was engaged in wire wrapping of electrical control and assembly panels for customers involved in independent telecommunications, computer guidance, and printing.Marshall was the founder, president, and treasurer of the company.He was primarily in charge of the technical and production aspects of the company's business.Albert R. Hughes was, until the time of certain transactions described below, the majority stockholder in the company.Marshall's initial understanding with Hughes was that Hughes would be responsible for obtaining the financing necessary for the company's anticipated growth.Marshall remained president and chief executive officer of the company until his sudden and unexpected death on June 25, 1977, at the approximate age of forty-six.The master found that Marshall was intelligent, financially prudent, and a strong administrator who had been described by the defendants' only witness as "no pushover."In addition, the master found that there was "absolutely no suggestion anywhere in the record that [Marshall] suffered from any physical, mental or emotional disability which would have precluded him from understanding the financial transactions" which the defendants seek to rescind.
The plaintiffs' firm was retained as general counsel to the company in 1972, and continued as such until shortly after July 12, 1977.Marshall and Mr. Jacobs first met during the summer of 1972 when Mr. Jacobs was asked by a third party to review a proposed financing arrangement which Marshall was about to enter.Mr. Jacobs found the proposed financing agreement unsatisfactory because of the high interest rate to be charged and because the lender insisted on receiving an equity interest in the company.Based on Mr. Jacobs's advice, the proposed financing agreement was terminated and Marshall retained Mr. Jacobs to try to obtain an alternate source of financing.Within ten days, Mr. Jacobs secured a line of credit which did not require the transfer of any equity interest in the company.Mr. Jacobs also negotiated a sale of 20,000 shares of the company's stock owned by Hughes to Marshall at ten cents per share.Marshall wanted this reallocation of equity interest because he felt Hughes had become inactive in the business and had failed to fulfill his role of a financial manager who would accommodate the company's growth needs.This sale gave Marshall and Hughes equal equity interest in the company.On February 13, 1973, Mr. Jacobs became a director of the company.7From the summer of 1972 until July 19, 1973, Mr. Jacobs billed the company at his hourly rate as an attorney.
Between 1973 and 1977, Marshall, Mr. Jacobs, and Mr. Jacobs's law partners entered into four transactions which the defendants claim were impermissible: (1) Marshall's transfer of stock in the company to Washington Associates, a partnership established by Mr. Jacobs and his law partners, and subsequent transfers of stock; (2) the sale of the company's stock by Mr. Jacobs's law partners to Marshall; (3) a pledge of the company's stock by Mr. Jacobs; and (4) an investment by Marshall in an entertainment agency controlled largely by Mr. Jacobs.We summarize the master's subsidiary findings on each transaction separately.
In the spring of 1973, Marshall became concerned with various aspects of the equity structure of the company.Marshall wanted to increase his equity ownership of the company to greater than 50%, increase the equity interest held by certain active employees, and eliminate the equity holdings of parties, including Hughes, not actually involved in the company.Mr. Jacobs negotiated a series of transactions to accomplish these goals by mid-July, 1973.During this period, Marshall also sought to involve Mr. Jacobs more closely with the company.According to the master,
Marshall and Mr. Jacobs had several conversations over a three-month period in which the subject of Mr. Jacobs's obtaining an equity interest in the company was discussed.During some or all of these conversations, Marshall and Mr. Jacobs discussed the percentage of outstanding shares of the company's stock Mr. Jacobs would own, the price to be paid for those shares, and the precise form of ownership which Mr. Jacobs's equity interest would take.While these discussions were taking place, Mr. Jacobs was functioning, in essence, as the company's general counsel and Mr. Jacobs's firm was its only corporate counsel.Mr. Jacobs did not advise Marshall to refrain from transferring some of his stock in the company to Mr. Jacobs.Similarly, he never advised Marshall or the company to obtain independent legal or other advice concerning this proposed transaction.Marshall suggested that Mr. Jacobs should own somewhere between 25% and 30% of the shares which would be outstanding after the various transactions to be made during the summer of 1973 were completed.Marshall chose this range of equity ownership for Mr. Jacobs because it left Marshall with more than 50% of the equity in the company.The price to be paid by Mr. Jacobs for the shares of stock he was going to purchase from Marshall was not a negotiated price; it was not intended to be a reflection of the fair market value or book value of the company.The price was advantageous to Mr. Jacobs.It was established, however, in a manner which Mr. Jacobs and Marshall believed would provide favorable tax consequences for Marshall.
During these discussions, Mr. Jacobs informed Marshall that he and his law partners had formed a separate partnership known as Washington Associates which served as a vehicle for holding equity participation received by the law firm in client companies.By agreement among the partners in the law firm, any equity participation in a client company which any partner acquired was to be held by Washington Associates and owned by all the partners according to a ratio which changed annually.Mr. Jacobs also informed Marshall that shares of stock acquired by Washington Associates would ultimately be distributed to the individual partners in accordance with their internal distribution formula.While he would have preferred Mr. Jacobs to own the shares of stock in the company personally rather than through Washington Associates, Marshall understood and accepted the arrangement and agreed to transfer the shares in question to Washington Associates.
As a result of the various changes in stock ownership planned by Marshall and Mr. Jacobs in the spring and summer of 1973, Marshall was going to own greater than 50% of the outstanding stock in the company.Marshall, however, also sought a two-thirds majority voting control in the company.Accordingly, Mr. Jacobs, on behalf of Washington Associates, and Marshall agreed that Marshall would, for a period of five years, retain voting control of the shares of stock he was transferring to Washington Associates.That agreement was embodied in a July 19, 1973, letter of agreement between Marshall and Mr. Jacobs.Marshall and Mr. Jacobs did not discuss what effect, if any, the distribution of Washington Associates's shares to its individual partners would have on the agreement.On or...
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