Pupecki v. James Madison Corp.

• Decision Date: 24 August 1978
• Parties: Joseph T. PUPECKI v. JAMES MADISON CORPORATION & others.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 1030

382 N.E.2d 1030

376 Mass. 212

Joseph T. PUPECKI v. JAMES MADISON CORPORATION & others.

Supreme Judicial Court of Massachusetts, Worcester.

Argued Feb. 13, 1978.

Decided Aug. 24, 1978.

H. Mitchell Gould, Clinton, for plaintiff.

Robert D. Price, Worcester, for James Madison Corporation.

Daniel I. Cotton, Worcester, for Bretco Associates & others.

Before HENNESSEY, C. J., and QUIRICO, KAPLAN, WILKINS and ABRAMS, JJ.

QUIRICO, Justice.

In this case the plaintiff alleged that the corporation of which he was a minority shareholder had sold substantially all its assets for inadequate consideration, with additional consideration from the purchasers diverted from the corporation to its controlling shareholder under the guise of being payment for separate employment and noncompetition agreements. The trial judge granted motions to dismiss and for summary judgment in favor of the defendants. The principal question before us is whether the allegations would be sufficient, if proved, to constitute illegality or fraud under G.L. c. 156B, § 98, so as to entitle the plaintiff to relief other than appraisal of his shares.

We first summarize the allegations admitted by the parties. The defendant James Madison Corporation (Madison), a Massachusetts corporation, formerly known as Madison Wire and Cable Corp., operated a small wire and cable business. Its two stockholders were the plaintiff Joseph T. Pupecki, who owned five shares of the common voting stock, and Martin Fisher, who owned the remaining forty-seven and one-half shares outstanding. Pupecki and Fisher were both employees of the corporation, and Fisher was also a director.

Sometime prior to April 14, 1976, Fisher notified Pupecki that a stockholders' meeting would be held on that date for the purpose of authorizing the sale of substantially all of Madison's assets. ¹ At the meeting the sale was approved over the objecting vote of Pupecki, and shortly thereafter agreements for the sale were signed. The purchasers were the defendant Bretco, Inc., a Massachusetts corporation which was to buy the nonrealty assets, and the defendant Bretco Associates, a partnership composed of the defendants Robert M. Bretholtz and Harold N. Cotton, which was to purchase the real estate (these four defendants will be referred to collectively as Bretco). Under the terms of the respective agreements Bretco was to pay Madison the net book value for the company's inventory and the same for its machinery and equipment. The amounts were estimated in the contract at $285,000 and $157,973, respectively. Bretco agreed to purchase the real estate for $470,000.

In addition to these agreements between Bretco and Madison, Fisher and Bretco entered into two separate agreements between themselves, the execution of these being condition precedent to the sale of the corporate assets. The first agreement entitled "Employment and Consultant Agreements," provided that Fisher would work full time for Bretco, for two years at an annual salary of $42,100, with the option of either continuing the full-time employment for eight more years at the same salary, or of selecting instead to become a consultant to the firm on a part-time basis at an annual salary of $20,000. The second agreement entitled "Covenant Not to Compete," provided that in return for Bretco's promise to pay Fisher $100,000 over a ten-year period, Fisher agreed that he would not, either directly or indirectly, become engaged in the wire and cable business for that length of time. In sum, then, the total benefits realizable to Fisher as the result of his personal transactions with the purchasers of Madison ranged from a maximum of $521,000, if he continued to work full-time for the entire ten years, to a minimum of $344,200 if he chose rather to exercise the part-time option available under the employment agreement.

On August 23, 1976, the plaintiff filed suit in Superior Court seeking to rescind all agreements that transferred Madison's assets to the Bretco parties. He charged that the consideration to be paid for the assets was inadequate, that Fisher, through his ownership of over ninety per cent of Madison's outstanding voting shares, had caused the assets to be sold for the inadequate consideration, and that Fisher had diverted to himself individually, through his employment and noncompetition agreements with Bretco, funds that rightfully belonged to the corporation because they were really consideration for the assets. Each of the defendants denied this claim in its answer. Subsequently the Bretco defendants filed motions to dismiss ² and motions for summary judgment which stated a variety of grounds. These were granted by a judge of the Superior Court without opinion and final judgment was entered for all the defendants. The plaintiff appealed, and we granted an application for direct appellate review. G.L. c. 211A, § 10(A).

Since the judge did not indicate on which ground he granted the defendants' motions, all the grounds specified below are open on appeal. Siegel v. Knott, 316 Mass. 526, 527, 55 N.E.2d 889 (1944). See Alholm v. Wareham, 371 Mass. ---, --- ^A, 358 N.E.2d 788 (1976); Greeley v. Zoning Bd. of Appeals of Framingham, 350 Mass. 549, 551, 215 N.E.2d 791 (1966). We examine, however, only those that the Bretco defendants ³ have argued in their brief. These are (1) that G.L. c. 156B, § 98, limits the plaintiff's remedy to appraisal of his shares, (2) that the plaintiff failed to meet the requirements for bringing a derivative suit under Mass.R.Civ.P. 23.1, 365 Mass. 768 (1974), and (3) that the suit is champertous. ⁴

1. The primary ground for both the motion to dismiss and the summary judgment motion was that the plaintiff, pursuant to G.L. c. 156B, § 98, was limited in his remedies to appraisal of his shares. We hold that this ground is inadequate as to both motions because, respectively, the complaint alleged facts that justify relief other than appraisal, and the defendants failed to refute these factual allegations by affidavits. Section 98, as amended by St.1965, c. 685, § 43, referring to the right of appraisal defined in chapter 156B, provides: "The enforcement by a stockholder of his right to receive payment for his shares in the manner provided in this chapter shall be an exclusive remedy except that this chapter shall not exclude the right of such stockholder to bring or maintain an appropriate proceeding to obtain relief on the ground that such corporate action will be or is illegal or fraudulent as to him." The defendants contend that the facts alleged in the complaint are not sufficient to constitute illegality or fraud under this provision. We disagree. The complaint alleges that the consideration paid for Madison's assets was substantially less than fair value, and that this underpayment was made up by payments made directly to Fisher who, as owner of approximately ninety per cent of the outstanding voting stock, was able to control Madison's affairs and determine the terms of the sale of its assets. The complaint asserted that these payments to Fisher, although they were made in the guise of consideration for employment and noncompetition agreements between Fisher and the purchasers, were actually in consideration for the corporation's assets, and were thus a diversion of funds rightfully belonging to the corporation. Because of his controlling ownership in Madison, Fisher possessed the authority to cause the corporation to sell its assets, G.L. c. 156B, § 75; he was also under a duty, however, to assure that the corporation received adequate consideration for them. Cf. Wilkes v. Springside Nursing Home, Inc., 370 Mass. --- ^B, 353 N.E.2d 657 (1976), Donahue v. Rodd Electrotype Co. of New England, Inc., 367 Mass. 578, 328 N.E.2d 505 (1975). If the allegations of the diversion of corporation property are proved by the plaintiff that would constitute "illegality or fraud" within the provision of § 98 and thus entitle him to remedies other than appraisal. See Smith v. Good Music Station, Inc., 36 Del.Ch. 262, 129 A.2d 242 (1957).

We further hold that the defendants did not refute these allegations of fact with affidavits so as to warrant the granting of the summary judgment motion. The complaint was verified and is therefore treated as an affidavit in so far as it contains specific facts that the signer knows to be true. ⁵ Khan v. Garanzini, 411 F.2d 210, 212-213 (6th Cir. 1969). 2A Moore's Federal Practice par. 11.04, at 11-13 (2d ed. 1975). 5 C.A. Wright & A. R. Miller, Federal Practice & Procedure § 1335, at 508 (1969). Such facts here include the amount to be paid for the assets by the purchaser, and the amounts going to Fisher individually as a result of his personal contracts with Bretco. The inadequacy of the consideration to be paid for the assets may also have been a matter within the personal knowledge of the plaintiff, although the complaint contains no background information to support his conclusion on this issue. Nevertheless, for the defendant to prevail on a motion for summary judgment, he must show affirmatively that no material issue of fact exists. Mass.R.Civ.P. 56(c), 365 Mass. 824 (1974). Only one affidavit was filed by the defendants, it was by the defendant Cotton. It asserts, generally, that the transactions surrounding the sale were not intended to benefit Fisher at the plaintiff's expense. This general assertion is not sufficient, however to overcome the similarly general allegations made to the contrary by the plaintiff. Nor does Cotton's affidavit contain any specific data that...