Selmark Assocs., Inc. v. Ehrlich

• Decision Date: 14 March 2014
• Citation: 467 Mass. 525,5 N.E.3d 923
• Parties: SELMARK ASSOCIATES, INC. v. Evan EHRLICH.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

467 Mass. 525

5 N.E.3d 923

SELMARK ASSOCIATES, INC.¹

v.Evan EHRLICH.

Supreme Judicial Court of Massachusetts,

Worcester.

Argued Nov. 7, 2013.

Decided March 14, 2014.

Ronald W. Dunbar, Jr., Boston, for the plaintiffs.

Robert D. Cohan, Boston, for the defendant.

Present: IRELAND, C.J., SPINA, CORDY, BOTSFORD, GANTS, DUFFLY, & LENK, JJ.

BOTSFORD, J.

This case is, like many, factually intense. On appeal, however, the primary legal issues raised concern the duties fellow shareholders and directors of close corporations owe to each other in a context where contractual agreements exist defining in part their relationship; also raised are questions about damages.

For the reasons discussed hereafter, we affirm the jury verdict in favor of Selmark Associates, Inc. (Selmark), and Marathon Sales, Ltd. (Marathon), on their breach of fiduciary duty claim against Evan Ehrlich. We also affirm the verdict in favor of Ehrlich on his breach of fiduciary duty counterclaim against Selmark and David Elofson. We conclude that, as the jury found, Ehrlich is entitled to recover on his breach of contract counterclaim, but we vacate the award of damages and remand the case to the Superior Court for a new trial on the issue of contractual damages. Additionally, we conclude that Ehrlich is not entitled to recover under G.L. c. 93A, and his c. 93A counterclaim must be dismissed.

1. Background. What follows is a summary of the factual background of the case, taken from the evidence at trial. We reserve for later discussion additional facts relevant to the issues raised on appeal.

Selmark and Marathon are both closely held Massachusetts corporations that operate as what the sales industry calls manufacturer's representative companies. Both provide outsourced sales support to companies manufacturing electronic components that lack their own sales staff; these manufacturers are Marathon's and Selmark's customers or “principals.” Andrea Terenzi established Marathon in 1980 and remained its owner and sole shareholder until the transactions at issue in this case. In 1997, Terenzi hired Ehrlich as a salesperson for Marathon and the two had a verbal agreement under which, if all went well, Ehrlich would have an option to become an owner and manager of Marathon. Ehrlich proved to be a high-performing salesperson and maintained a good relationship with Terenzi. As Terenzi's retirement approached, Terenzi was looking for a successor and a way to sell his company, and wanted Ehrlich to have an ownership interest in it. This led to nearly two years of negotiations among Terenzi, Ehrlich, and Selmark for the sale of Marathon. At the time, Selmark was owned by Elofson and Clifton Snuffer, both former Selmark sales managers who purchased the business from Elofson's father on his retirement in 1993.²

On or about September 14, 2001, Ehrlich entered into a series of written agreements (collectively, the agreements) providing for the gradual sale of Marathon by Terenzi to Selmark and Ehrlich. The agreements comprise four contracts referred to as follows: (i) stock purchase and redemption agreement (purchase agreement); (ii) employment agreement; (iii) conversion agreement; and (iv) stock agreement.

a. The agreements. We set forth the essential terms of each agreement: ³

i. Purchase agreement. The purchase agreement detailed the terms of sale of Marathon to Selmark and Ehrlich. It provided for the gradual acquisition of Marathon stock by the two purchasers through monthly payments to Terenzi, pursuant to two promissory notes.^4,5 Upon full payment to Terenzi, Selmark would own fifty-one per cent of the Marathon stock, and Ehrlich the remaining forty-nine per cent. Under the terms of the purchase agreement Marathon bore primary responsibility for the monthly payments to Terenzi.⁶ However, if Marathon's monthly cash flow was insufficient to pay, Ehrlich and Selmark, as separate coguarantors, were responsible for the monthly shortfall. Section 5 of the purchase agreement detailed the procedures in the event of a shortfall and the steps to be taken by Terenzi to notify Ehrlich and Selmark of their respective payment obligations. Specifically, section 5 provided for the parties to conduct a semiannual review of Marathon's monthly cash flow on March 1 and September 1 of each year and, in the event of a shortfall in the previous six months, Terenzi was to notify Ehrlich and Selmark by sending a “shortfall notice” pursuant to the notice provisions of Section 24 of the purchase agreement. If either Selmark or Ehrlich did not make the payment for which it or he was responsible within the required time frame, Terenzi could declare default on the nonpayor by sending a default notice. The nondefaulting party then had the option to cure the default by making the payment due from the defaulting party and acquiring the Marathon stock attributable to that payment for itself. If a default occurred and was not cured, the purchase agreement allowed Terenzi to recover all Marathon stock, including that which was previously purchased.

ii. Employment agreement. The employment agreement was attached to the purchase agreement, and was between Ehrlich and Marathon. The agreement provided for an initial fifteen-month term, until December 31, 2002, with extension possible on the written agreement of the parties. Under the employment agreement's terms, Ehrlich became the vice-president of Marathon and potentially a director, and could only be terminated for cause. If the agreement was not extended, at the conclusion of the initial contract term, the agreement would terminate and Ehrlich would be required to resign as an officer and director of Marathon.

iii. Conversion agreement. Under the conversion agreement, Ehrlich had the option, once he and Selmark fully paid off Terenzi for the purchase of Marathon, to convert what would then be Ehrlich's forty-nine per cent interest in Marathon into a twelve and one-half per cent ownership interest in Selmark. ⁷ If Ehrlich exercised this option, Selmark would then acquire full ownership of Marathon.

The conversion agreement also required that, upon conversion, Selmark offer Ehrlich an employment agreement that would provide “for compensation, bonuses, expense payments, and benefits consistent with his percentage ownership of [Selmark].” ⁸ Independent of employment, upon conversion, Ehrlich was to become an officer of Selmark and member of its board of directors.

iv. Stock agreement. The stock agreement, attached to the conversion agreement, would become operative if and when Ehrlich paid Terenzi his full share of the Marathon purchase price pursuant to the terms of the purchase agreement, and opted to exercise his right to convert Marathon stock for Selmark stock under the conversion agreement. Upon those events happening, the stock agreement, a contract between Ehrlich and Selmark, would govern Ehrlich's rights as a minority stockholder of the company. The stock agreement provided both parties with the opportunity to end the business relationship through the sale of Ehrlich's stock, subject to certain financial penalties for the party exercising this right. Specifically, Selmark would possess a “call right” pursuant to which, on the occurrence of certain conditions, the company could purchase all of Ehrlich's stock.⁹ If Selmark were to exercise this call right, Ehrlich would receive a premium purchase price of 110 per cent of the “stock purchase value.” ¹⁰ Similarly, Ehrlich possessed a “put right,” where, at any time, he could sell, and Selmark would be obligated to purchase, all of his Selmark stock. However, if Ehrlich chose to exercise his put right, he would only receive ninety per cent of the stock purchase value.

b. Subsequent events. After the agreements were executed, Marathon and Selmark remained separate entities, but presented themselves as Selmark to the outside world. Marathon moved into the Selmark office space, but maintained separate bank accounts and tax returns. The two companies used each other's sales forces to sell one another's product lines, and they did not compete with each other. Ehrlich's business card identified him as vice-president of Selmark even though in fact he was an employee and vice-president of Marathon pursuant to the employment agreement.

Ehrlich's employment agreement expired by its terms on December 31, 2002, because the parties had not agreed to extend it in writing. Nevertheless, after that date Ehrlich remained an employee of Marathon and retained his position as vice-president. In 2003, Terenzi retired from Marathon, and Ehrlich began to report directly to Elofson. Ehrlich received no complaints from Elofson about his job performance. Ehrlich brought in new business, and was consistently the number two (second only to Elofson) producer of commission income among all Selmark and Marathon sales representatives.

In July of 2007, Ehrlich notified Elofson that he intended to accelerate his final payments to Terenzi and complete the payment due on his forty-nine percent share of Marathon stock by December, 2007. According to Elofson, Ehrlich's announcement prompted Elofson to contemplate the future of Selmark, and then to conclude that he did not see Ehrlich as a successor or want him involved in the future of the business.¹¹ On October 26, 2007, Ehrlich and Elofson met at a local hotel, purportedly to discuss the details of the Marathon payoff. At that meeting, Elofson informed Ehrlich that his employment with Marathon was terminated, effective immediately, and presented Ehrlich with a termination letter. The letter contained an offer by Selmark to purchase Ehrlich's forty-nine per cent ownership interest in Marathon for the same price he would have received had he converted his Marathon shares into Selmark stock and Selmark then exercised its call rights pursuant to the stock agreement. ¹² The letter also informed Ehrlich that, due to decreased cash flow, Marathon would have...