Rubin v. Murray

• Decision Date: 16 March 2011
• Docket Number: No. 09–P–1676.,09–P–1676.
• Citation: 79 Mass.App.Ct. 64,943 N.E.2d 949
• Court: Appeals Court of Massachusetts
• Parties: Merek RUBINv.John E. MURRAY, JR., & others.1

79 Mass.App.Ct. 64

943 N.E.2d 949

Merek RUBIN

v.John E. MURRAY, JR., & others.1

No. 09–P–1676.

Appeals Court of Massachusetts, Norfolk.

Argued Sept. 17, 2010.Decided March 16, 2011.

Janet Steckel Lundberg (Vincent J. Pisegna & Susan A. Hartnett with her), Boston, for the defendants.Michael R. Gottfried, Boston, for the plaintiff.Present: GRAHAM, KATZMANN, & VUONO, JJ.KATZMANN, J.

The corporate defendant, Olympic Adhesives, Inc. (Olympic), and individual defendants John E. Murray, Jr., Stephen P. Hopkins, and Paul C. Ryan, controlling shareholders of Olympic,² appeal from a Superior Court judgment in favor of the plaintiff, Merek Rubin, a minority shareholder and Olympic's former corporate counsel—who had acquired stock in Olympic as partial payment for legal services rendered to the individual defendants—on his claim that the individual defendants paid themselves excessive compensation and deprived Rubin of his share in Olympic's profits. Following a jury-waived trial, the judge ordered the individual defendants to reimburse Olympic for amounts over and above what he determined to be their reasonable compensation for the years 1995 through 2005, to be redistributed among all the shareholders according to their ownership interests. We affirm.

We summarize the facts from the judge's findings in his August 17, 2005, memorandum of decision and order, which were fully supported by the record, and which we augment somewhat, here and in our discussion, from the undisputed evidence in the record. Olympic is a closely held Massachusetts corporation, formed by the individual defendants in March, 1975, to manufacture and distribute industrial adhesives. Originally, the individual defendants were Olympic's sole shareholders; they are also Olympic officers, directors, and employees. Prior to 1975, the three individual defendants worked for Nicholson and Company, Inc. (Nicholson), an adhesive company controlled by John Murray, Sr. (Murray, Sr.), who is Murray's father and Hopkins's grandfather. Murray and Hopkins were also Nicholson shareholders. In 1975, a dispute between Murray, Sr., and the individual defendants, concerning voting rights and control of Nicholson, prompted the individual defendants to leave Nicholson and form Olympic. Upon their departure, Murray, Sr., sued the individual defendants for breach of fiduciary duty, along with other claims.

Rubin is an attorney specializing in corporate and tax matters. Prior to 1975, he had performed estate planning work for both Hopkins and Murray. When the individual defendants left Nicholson, they sought Rubin's advice in forming Olympic and in defending the Nicholson lawsuit. Rubin recommended they hire Edward Barshak, a trial attorney. Barshak successfully defeated Nicholson's motion for a preliminary injunction against Olympic. Rubin conducted settlement negotiations with Nicholson over several months, obtaining dismissal of the case and promissory notes for the purchase of Murray's and Hopkins's shares in Nicholson. Rubin spent approximately 500 hours on the Olympic start-up and the Nicholson litigation and settlement, and the individual defendants were enormously grateful. They had difficulty paying Rubin for his legal services, however, having invested their cash in the start-up of Olympic.

In October, 1975, Rubin met with the individual defendants to discuss his unpaid fee. At that meeting, Rubin proposed that they pay his fee in three parts: a cash payment of $40,000, a percentage of the notes from Nicholson to Murray and Hopkins to purchase their Nicholson shares, and nonvoting stock equal to ten percent in Olympic.³ Rubin suggested the individual defendants consult another attorney to review his fee proposal for fairness. They chose not to, as they trusted Rubin and were satisfied with the proposal. At that time, Olympic's accountant valued Rubin's proposed ten percent interest in Olympic at $2,750.

Rubin drafted the necessary documents to create a new class of nonvoting stock, designated class B common stock, identical in all respects to the individual defendants' class A common stock except for its nonvoting status. In particular, Olympic's articles of organization were amended to provide, in relevant part, the following:

“Shares of Class A Common Stock and Class B Common Stock shall be identical in all respects, except that shares of Class B Common Stock shall not possess or enjoy any voting rights or powers, and no holder of Class B Common Stock shall be required to receive notice of any meetings of stockholders of the corporation. Holders of Class A Common Stock shall have exclusive voting power and shall be entitled to one vote in respect of each share of Class A Stock issued and outstanding.”

At no time did the parties indicate that nonvoting stock was not entitled to receive dividends, if and when declared. The articles of amendment were approved by the individual defendants.⁴

In 1976, Olympic adopted an employee profit-sharing plan, setting aside twenty percent of the net operating income, before taxes, for distribution. In 1977, Olympic began to make a profit, and Rubin advised the individual defendants to distribute the profit among themselves, as a merit bonus, to avoid paying additional taxes under Olympic's C-corporation tax status. As a result, Murray received a bonus that year of $5,000, and Hopkins and Ryan each received $4,000. The individual defendants continued to declare bonuses to themselves thereafter.

In 1978, Rubin encountered personal financial difficulties and borrowed $20,000 from Olympic, pledging his Olympic stock as security. Rubin paid interest on the note but did not pay the note when due, and Olympic extended it several times. In 1994, Olympic forgave the note because of the long-standing relationship between the individual defendants and Rubin. Rubin retained his shares in Olympic.

In April, 1981, Murray replaced Rubin with new general counsel. Murray had been tried for and convicted of Federal customs violations in 1980, and faced with the possibility that Olympic's assets might be seized, he decided that Olympic needed the services of a law firm with broader experience. As a result, Rubin performed no legal services for Olympic after 1981, though he continued to handle personal legal matters for Hopkins and Ryan. Each year Rubin received Olympic's financial statements and was invited to the annual shareholder meetings. Rubin attended occasionally, and he continued to see the individual defendants socially.

Olympic continued to do well. In 1990, Olympic adopted a restated profit-sharing plan, whereby one-third of the net operating income went to a fund that would be distributed to employees, including the individual defendants. Twice a year, after calculating amounts for the profit-sharing plan, the individual defendants also paid themselves what they referred to as additional compensation, representing what the judge described as “a very high percentage” of Olympic's net profits.⁵ Between 1990 and 2005, this additional compensation totaled $14,925,000, which was, again, in addition to the individual defendants' salaries and their share of the employee profit-sharing fund, and which the judge found was allocated among the defendants according to their stock ownership.

On December 11, 1998, Rubin wrote to Murray, complaining that the individual defendants “were effectively taking disguised dividends from the company with no pro rata distributions made to [him].” At that point, Rubin's accountant was permitted to review Olympic's records and tax returns, and on January 26, 2000, Rubin's attorney made a formal demand of Olympic's board of directors pursuant to Mass.R.Civ.P. 23.1, 365 Mass. 768 (1974).

Rubin filed this action on March 15, 2000, claiming individually and derivatively that the three individual defendants had paid themselves excessive compensation, in violation of their fiduciary duty to Rubin as a minority shareholder.⁶ The case was tried over nine days and the judge ruled for Rubin. The judge ordered the three individual defendants to repay to Olympic $5,806,000, the amount he found to be in excess of their reasonable compensation for the years 1995 to 2005, together with interest, to be redistributed among all the Olympic shareholders after taxes. The judge further ordered the three individual defendants to repay Olympic for their legal fees, which Olympic had paid on their behalf.

The defendants appeal. Their arguments are directed principally at whether Rubin was entitled, under the 1975 fee agreement, to challenge the individual defendants' compensation, and whether the remedy ordered by the judge was supported by the evidence and the law.

The 1975 fee agreement. 1. Attorney-client transactions. The defendants first argue that Rubin has no right, either as the individual defendants' former attorney or as an Olympic shareholder, to challenge the individual defendants' compensation. They maintain that the 1975 fee agreement should not be enforced because Rubin breached his fiduciary duty, as the defendants' attorney, by failing to disclose his potential conflict of interest between his duties as their attorney and his rights as a minority shareholder in Olympic. The judge found that Rubin's disclosure was adequate and that the transaction was fair.⁷

In analyzing whether the fee arrangement should be enforced, the judge was guided by the principles set out in Pollock v. Marshall, 391 Mass. 543, 555–559, 462 N.E.2d 312 (1984). In that case, the court upheld the attorney-client business transaction even though the attorney never advised his client to seek independent legal counsel, because the court concluded that the presumed influence of an attorney over the client in such transactions may be “neutralized by independent advice given to the client or by some other means.” Id. at 556–557, 462 N.E.2d 312, quoting from Barnum v. Fay, 320 Mass. 177, 181, 69 N.E.2d 470 (1946). See ...