Schaeffer v. Cohen, Rosenthal, Price, Mirkin, Jennings & Berg, P.C.

• Decision Date: 07 August 1989
• Citation: 405 Mass. 506,541 N.E.2d 997
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court
• Parties: Arline SCHAEFFER v. COHEN, ROSENTHAL, PRICE, MIRKIN, JENNINGS & BERG, P.C., et al. 1 Supreme Judicial Court of Massachusetts, Hampden

Page 997

541 N.E.2d 997

405 Mass. 506

Arline SCHAEFFER v. COHEN, ROSENTHAL, PRICE, MIRKIN, JENNINGS & BERG, P.C., et al. ¹ Supreme Judicial Court of Massachusetts Hampden.

Argued May 4, 1989.

Decided Aug. 7, 1989.

Richard M. Howland, Amherst, for plaintiff.

Edward L. Donnellan, Springfield, for defendants.

Before LIACOS, C.J., and ABRAMS, NOLAN, LYNCH and O'CONNOR, JJ.

O'CONNOR, Justice.

The complaint alleges that the defendant law firm, Cohen, Rosenthal, Price, Mirkin, Jennings & Berg, P.C., and two members of that firm were negligent in providing the plaintiff with legal services, violated a contract to represent her legal interest, violated fiduciary duties they owed her as a fifty per cent shareholder of Paragon Rubber Corporation (Paragon), a closely held corporation, and violated G.L. c. 93A (1986 ed.). The gist of the complaint is that the defendants concurrently represented the conflicting interests of Paragon and Emanuel Gross (Gross), Paragon's other fifty per cent shareholder, to the detriment of the plaintiff's interests, that they accepted fees from Paragon for services rendered to Gross in opposition to the plaintiff, that they failed to disclose to the plaintiff facts that were material to her interests, and that they helped Gross in his attempts to "squeeze out" the plaintiff from Paragon.

After trial, and following the judge's denial of the defendants' directed verdict motions, the judge submitted a series of questions relative to the plaintiff's common law claims to the jury for their special verdicts under Mass.R.Civ.P. 49(a), 365 Mass. 812 (1974). There is no indication in the record that the plaintiff objected to the questions as inaccurately reflecting her claims, and she does not make that assertion on appeal. The questions and the jury's answers were as follows: "(1) Did the law firm of Cohen, Rosenthal, Price, Mirkin, Jennings and Berg, P.C. undertake or continue to simultaneously represent both the defendant Emanuel Gross and Paragon Rubber Corporation in a derivative action brought against them by the plaintiff, Arline Schaeffer, when it knew or should have known that such multiple employment would be likely to involve it in representing differing interests?" The jury answered, "yes." "(2) If the answer to Question (1) is YES, did said law firm accept compensation from Paragon Rubber Corporation for legal services performed by it in the defense of that civil action when it knew or should have known that such multiple employment would be likely to involve it in representing differing interests?" The jury again answered, "yes." "(3) If the answer to Question (2) is YES, what was the amount of such compensation?" The jury found that the amount of compensation obtained was $63,074. "(4) In any matters or controversies in which the defendants represented Paragon Rubber Corporation, did the defendants fail to represent Paragon Rubber Company in accordance with good legal practice? The jury's answer was, "yes." "(5) If the answer to Question (4) is YES, was such failure on the part of the defendants a proximate cause of any financial loss by Paragon Rubber Corporation?" Again, the jury answered, "yes." "(6) If the answer to Question (5) is YES, what was the amount of such financial loss?" The jury found $77,624 as the amount of the loss Paragon sustained.

Following the special verdicts, the judge considered a motion submitted by the defendants for judgment notwithstanding the verdicts as to the common law claims. He also addressed the factual and legal questions bearing on the G.L. c. 93A claim which had not been submitted to the jury. The judge set forth in a memorandum in considerable detail his findings, rulings, and order for judgment. According to his findings, this case arose out of a controversy between the plaintiff and Gross over the ownership and management of Paragon. Paragon is a closely held Massachusetts corporation founded in order to continue a business begun by the plaintiff's father-in-law, Edward Schaeffer. When Schaeffer died in 1962, he left the business in trust for the plaintiff's late husband and their children. When the plaintiff's husband died, in 1964, the trustees put the business up for sale. Gross, who was then married to the plaintiff's sister, proposed that he and the plaintiff purchase and jointly own the business. Gross offered to contribute $100,000 in cash and to finance the remainder of the price with a mortgage on the business's real estate. He and the plaintiff would have equal ownership of the business and real estate, and the plaintiff would repay him $50,000 out of a salary that the business would pay her.

The plaintiff and Gross enlisted the defendant Irving M. Cohen's legal assistance. Cohen formed Paragon as a corporation to own the nonreal estate assets of the business. Fifty per cent of the corporate stock was assigned to the plaintiff, who was named vice president and chairman of the board of directors. The other fifty per cent was assigned to Gross, who was named president and treasurer. The real estate was conveyed to Gross and the plaintiff as tenants in common.

From the outset, Gross managed Paragon's business. The plaintiff was paid a "salary" by the corporation which was applied against her loan debt, but she did not perform any real services. Cohen represented both the plaintiff and Gross in the formation of Paragon. Gross subsequently retained Cohen as corporate counsel for Paragon without objection by the plaintiff. Cohen also handled Gross's personal legal matters from time to time. Cohen remained friendly with the plaintiff for at least ten years, and also represented her in the sale of her house in 1978.

Some time in the mid-1970's, it was revealed that Gross had been selling scrap metal owned by the corporation and retaining the proceeds. Gross contended that he used the money to pay kickbacks to purchasing agents of Paragon's customers. Gross was indicted for income tax evasion and Paragon also faced difficulties with the Internal Revenue Service. Cohen and his law firm declined to represent Gross and Paragon in this matter because they lacked expertise in the subject. Instead, they referred the matter to another firm. According to the judge's findings, "[Cohen's] lack of expertise, however, did not deter Cohen from accepting a 33 1/3% referral fee ... even though he knew or should have known that the fees were being paid by Paragon. By the time the matter was concluded, that referral fee amounted to $4,850.00."

As a result of the Internal Revenue Service audit, Paragon discontinued paying the plaintiff's salary. In order to replace at least part of her income, the plaintiff and Gross arranged to increase the rent which Paragon was paying on the real estate. After a period of time, however, Gross discontinued rental payments. The plaintiff then retained her own counsel.

According to the judge's findings, "[f]rom at least that point onward, the positions of Gross and the plaintiff with regard to the corporation were adversary and antagonistic.... Also from that time onward, however, the plaintiff was at all times represented by her own counsel in all matters pertaining to Paragon. Cohen continued to serve as corporate counsel for Paragon, and he also continued to serve as Gross's personal attorney." For the next several years, the plaintiff and Gross had serious disagreements concerning the payment of dividends and rent. "The parties could agree on little or nothing" concerning Paragon and its affairs.

The judge's findings continue: "A meeting of stockholders and directors was held on June 22, 1981, at the behest of the plaintiff for the purpose of considering a proposed discharge of Gross as president and treasurer of the corporation and a proposed sale of the business.... Cohen did not attend that meeting but he sent a member of his law firm, the defendant Arthur W. Price.... Price ostensibly attended the meeting as corporate counsel, but, I am convinced, he was there to protect the interests of Gross as well." Price refused to agree to the plaintiff's demand that Gross reveal details of the kickback scheme in which he alleged he had participated. All votes taken at that meeting ended in a tie, and nothing was accomplished.

On February 9, 1982, the plaintiff commenced a shareholder's derivative suit on behalf of Paragon against Gross and another corporate employee alleging that Gross had taken excess salary from Paragon and had otherwise caused corporate assets to be diverted to himself and his family. A member of the defendant law firm filed an appearance on behalf of both Gross and Paragon and an answer on behalf of Gross. In response, the plaintiff's attorney filed, and the court allowed, a motion to require the defendant law firm to withdraw its appearance as either counsel for Gross or for Paragon. "Despite the allowance of that motion, the defendant filed no disappearance on behalf of either Gross or Paragon, and it continued to bill Paragon for all services rendered by it in the derivative action."

On February 14, 1983, according to the findings, while the derivative action was pending, the plaintiff filed a petition for dissolution of Paragon and its wholly owned subsidiary. The defendant law firm appeared on behalf of Gross in opposition to that petition. In September, 1983, counsel for the plaintiff again filed a motion seeking to disqualify the defendant firm from representing both Gross and Paragon in the pending litigation. The defendants vigorously resisted the motion at a hearing, but soon thereafter withdrew as counsel for both Gross and Paragon.

The judge found that the derivative action, the petition for dissolution, and an action commenced by the plaintiff in the District Court to obtain an accounting of rents from the real estate were settled in January, 1984. By the terms of the settlement, the plaintiff transferred her entire interest in Paragon and the real estate it ...