Rubin v. Household Commercial Financial Services

• Decision Date: 07 October 1999
• Docket Number: P-342
• Citation: Rubin v. Household Commercial Financial Services, 746 N.E.2d 1018, 51 Mass. App. Ct. 432 (Mass. App. 1999)
• Parties: (Mass.App.Ct. 2001) DONALD M. RUBIN vs. HOUSEHOLD COMMERCIAL FINANCIAL SERVICES, INC. 98-
• Court: Appeals Court of Massachusetts

746 N.E.2d 1018 (Mass.App.Ct. 2001)

DONALD M. RUBIN vs.HOUSEHOLD COMMERCIAL FINANCIAL SERVICES, INC.

98-P-342

Appeals Court of Massachusetts

October 7, 1999.

May 3, 2001.

County: Hampden

Present: Porada, Dreben, & Beck, JJ.

Contract, Employment.Employment, Constructive discharge.

Civil action commenced in the Superior Court Department on November 9, 1993.

The case was heard by John F. Moriarty, J.

Bonita L. Stone(Kevin C. Maynard with her) for the defendant.

Charles V. Ryan for the plaintiff.

BECK, J.

On July 22, 1988, the plaintiff, Donald M. Rubin, became president and chief executive officer of National Felt Company, Inc.(National Felt), pursuant to a written five-year contract.Three years later, on August 16, 1991, he sent a letter to National Felt claiming that the company had constructively discharged him.Rubin also sent a letter that day to Eli S. Jacobs, chairman of the National Felt board of directors, and Karen Gordon Mills, a member of the board and close associate of Jacobs.The letter asserted that the recipients had "stripp[ed him] of [his] powers and responsibilities as President and Chief Executive Officer of National Felt Company, Inc. . . . constitut[ing] a constructive discharge . . . in direct violation of [his] rights and responsibilities as set forth in [the] employment contract."He characterized the actions of the individuals as "part of a classic freeze out maneuver . . . constitut[ing] a violation of the fiduciary duty [they owed to him] as a minority stockholder of [National Felt]."After sending the letters, Rubin cleaned out his desk, left his office, and never returned.

Rubin subsequently settled his claims against National Felt and the Jacobs parties.What remains is his complaint against Household Commercial Financial Services, Inc.(Household), the entity that financed Jacobs's purchase of the assets of the company which became National Felt.The complaint sought damages for interference with contract and breach of fiduciary duty.After a seven-day jury-waived trial, a Superior court judge ruled for the defendant Household on both counts.We affirm.

Facts.

The particulars of the sale and subsequent operations of National Felt are set out in considerable detail in the Superior Court judge's findings and rulings.Our condensed version follows, "giv[ing] due weight to the findings of the [trial] judge which will be not be reversed unless clearly erroneous . . . ."Steranko v. Inforex, Inc., 5 Mass. App. Ct. 253, 255(1977).SeeMass.R.Civ.P. 52(a), as amended, 423 Mass. 1402(1996).

Rubin began working for the predecessor to National Felt in 1965.The original company was a Massachusetts corporation with its principal place of business in Easthampton, owned and operated by Israel Goldberg and his sons.It manufactured a variety of nonwoven synthetic and wool felt products, including cowboy hats and Mickey Mouse hats for Disney as well as novelty hats for many other customers.It was a successful enterprise.Beginning in 1970, Rubin was general manager of the nonwoven fabrics division.As the judge found and the plaintiff's brief acknowledges, "although [Rubin] developed considerable expertise in the production and marketing aspects of the company's business, he had no experience in financial matters," to the extent that he never saw a balance sheet or income statement for the division he headed.The Goldbergs had handled all the finances.

On July 22, 1988, the Goldbergs sold most of the company's assets for $34,750,000 to an acquisition company controlled by the E.S. Jacobs Company.Eli S. Jacobs, the principal figure behind E.S. Jacobs Co., was an investment banker and entrepreneur who owned real estate and a number of businesses.Upon completion of the asset sale, he established National Felt as the new company.

The defendant Household financed a major part of Jacobs's purchase of the Goldbergs' company through various arrangements including a "revolving" loan, a "term" loan, and a "junior subordinated" loan, totaling $32 million.It also committed to provide National Felt with working capital up to $11 million.Household's total commitment at the outset was thus $43 million.The equity capital of the new company consisted of one million shares at two dollars per share, distributed as follows: Jacobs, sixty-two percent; Household, eighteen percent; Rubin, fifteen percent; and five percent divided among four other National Felt employees.The sum of these transactions was a highly leveraged buyout.The debt to equity ratio was more than twenty to one.

Two days before the closing, the three-member board of directors of the new company -- Jacobs, Karen Gordon Mills(managing director of E.S. Jacobs Co.), and Roland Knight(another Jacobs employee) -- met by telephone conference call.They elected Jacobs chairman of the board; Robert A. Crisafulli, "the financial man" for E.S. Jacobs Co., treasurer; Rubin, secretary; and Knight, assistant secretary.

As part of these transactions, Rubin negotiated a written employment contract.The terms of the agreement, as negotiated with Mills, called for Rubin to serve for five years as president and chief executive officer (CEO)"report[ing] only to the Board of Directors of [National Felt] . . . [and] vested with all powers incident or necessary to the office of Chief Executive, in accordance with policies established by, and subject to the authority of, the Board of Directors."Rubin's base salary was $200,000 per year, with an annual bonus, disability, medical, and life insurance, retirement benefits, four weeks paid vacation, a Cadillac automobile or the substantial equivalent, and reimbursement for all car related expenses.The agreement was subject to termination by reason of death, disability, or for cause.

In recognition of Rubin's lack of financial training and experience, Mills conducted a search for a chief financial officer (CFO) and recommended two candidates to Rubin.Rubin chose one of the candidates, who then in effect reported directly to the board of directors through Mills.As CEO, Rubin was in charge of all aspects of National Felt's activities except the financial area.The new company carried on essentially the same business as the old company.Rubin devoted his efforts to production and marketing.

National Felt did well in its first year of operation under Rubin's leadership.It had 4,000 products, purchased materials from 2,000 suppliers, and had 2,000 customers.In the spring of 1989, Rubin proposed to expand the synthetic nonwoven division's capacity by purchasing a nearby building and installing new, state of the art, computerized equipment.(The division had been operating at full capacity.)In June, 1989, Household agreed to increase the company's line of credit by the $8 million necessary to finance the expansion project.

In the fall of 1989, National Felt's situation began to deteriorate.A number of factors combined -- the onset of the 1989 business recession, strong competition from Asia, the loss of the company's principal supplier, which went out of business, and increased costs of other supplies.The expansion project ran fifty per cent over budget because of increased costs of machinery and equipment and delay in completing the project.The company's net sales fell, as did its pre-tax income.In the winter of 1990 to 1991, it became apparent that Rubin needed some assistance to turn the company around.

By April, 1991, the company's cash flow was inadequate to meet the combination of its interest payments to Household and its operating expenses.It had already defaulted on a number of its contractual obligations to Household, and its line of credit was nearly exhausted.Mills had several discussions with Rubin about bringing in additional management personnel to help run the company.

In May, there were meetings and conversations between the Jacobs principals and Household.Rubin's future role in the company was among the subjects discussed.Mills and a business consultant whom Rubin had contacted at Mills's suggestion thought Rubin was important, even "critical," to the company's recovery because of his knowledge of the manufacturing process and his relationships with the company's major customers.A Household participant thought he would have to be replaced or "moved upstairs" as chairman of the board with no responsibilities.

In late spring or early summer of 1991, Mills met with Rubin and introduced him to Peter Kurzina of Argus Management Company(Argus), a "crisis management" firm of "turnaround consultants."(Apparently the plaintiff disliked Kurzina almost from the beginning.)On July 11, 1991, the CFO of National Felt notified Household that the company would be unable to comply with a scheduled reduction on its revolving loan that the agreement, as amended, required.Household responded that it would not waive the default.As a result of Household's letter, Mills, acting on behalf of Jacobs, engaged Argus to take control of the financial and operating sides of National Felt as of July 25, 1991.By the end of the 1991 fiscal year, the company's liabilities exceeded its assets by $1.6 million.In their fiscal 1991 audited financial statement, the independent auditors expressed "substantial doubt about [National Felt's] ability to continue as a going concern."

On July 22, 1991(three years to the day after the initial purchase), National Felt's treasurer and two representatives of Argus visited Rubin and told him that Argus would be taking over the following Thursday.They said they would be in town that day and asked him to introduce them to the key employees of the company at that time.After confirming that Mills had indeed engaged Argus, the plaintiff wrote a memorandum entitled "Priorities for Argus Management Corporation," which he faxed to Mills.Mills telephoned the plaintiff to make clear that Argus was not working for him and "that he would have to...