Shane v. Shane

• Decision Date: 08 June 1989
• Docket Number: No. 89-1115,89-1115
• Citation: 891 F.2d 976
• Parties: 29 Fed. R. Evid. Serv. 493 Michael B. SHANE, Plaintiff, Appellee, v. James H. SHANE, et al., Defendants, Appellants. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 976

891 F.2d 976

29 Fed. R. Evid. Serv. 493

Michael B. SHANE, Plaintiff, Appellee, v. James H. SHANE, et al., Defendants, Appellants.

No. 89-1115.

United States Court of Appeals, First Circuit.

Heard June 8, 1989.

Decided Dec. 20, 1989.

Kenneth A. Cohen with whom A. Lauren Carpenter, Goodwin, Procter & Hoar, Stephen S. Young and Sherburne, Powers & Needham, Boston, Mass., were on brief for defendants, appellants.

Donald R. Ware with whom Michael B. Keating, Bruce R. Parker and Foley, Hoag & Eliot, Boston, Mass., were on brief for plaintiff, appellee.

Before BREYER and SELYA, Circuit Judges, and CAFFREY, ^* Senior District Judge.

CAFFREY, Senior District Judge.

The defendants-appellants James Shane, Jimmy Ip, and Charles Lee challenge an adverse jury verdict in the United States District Court for the District of Massachusetts ¹ awarding $1,259,000 in damages to the plaintiff-appellee Michael Shane. The appellants raise a number of detailed factual and legal issues on appeal which, for clarity, may be consolidated into three arguments. First, the appellants claim that there is insufficient evidence to support the jury's finding of damages--specifically, the valuation of stock in a closely-held corporation. Second, the appellants argue that the district court improperly allowed the jury to consider certain evidence of stock dilution in reaching its verdict. Third, the appellants challenge the sufficiency of evidence and legal basis for several federal security law claims. While these arguments require a rigorous examination of the record in this case, we find none of them persuasive, and, accordingly, we affirm the jury's verdict.

I.

This case presents the story of "Faded Glory." ² In 1973, the plaintiff Michael Shane, his brother James Shane, and a Hong Kong clothing manufacturer Jimmy Ip agreed to enter into the business of selling faded "fashion" blue jeans in the United States. The jeans would be manufactured by Ip's Hong Kong company Kapok Garments, Ltd. ("Kapok"). The jeans would then be imported and distributed in the United States by a company managed by the Shane brothers. This American company would be jointly owned by the Shanes and Ip. The name of their company was Appendagez, Inc. ("Appendagez"). The label on their jeans was "Faded Glory."

The first years of Appendagez were brilliantly successful. By 1976 the annual sales of "Faded Glory" jeans and apparel had reached $55 million and earnings were in excess of $3 million a year. Appendagez employed some 500 people including a sales staff of more than 200 people. After only a few years, "Faded Glory" jeans were a major producer in the American jean apparel market.

This rapid growth, however, almost immediately created problems between Kapok and Appendagez. Appendagez's sales people were taking in orders at a rate approaching $100 million in merchandise a year. But Kapok, which was the only manufacturer of "Faded Glory" jeans, failed to meet the increasing demand. Instead, Kapok started supplying its jeans to Bang Bang Fashions, a company formed by Ip to distribute jeans in Southeast Asia.

Kapok also increased its prices thereby reducing Appendagez's marginal profit. Starting in 1973, Appendagez made a 40 percent marginal profit between the cost of jeans imported from Kapok and the price of the jeans distributed to retailers. By the late 1970s, increased costs from Kapok shrunk Appendagez's marginal profit to roughly 14 percent. Appendagez started to lose money--$8 million in net losses for 1978 alone.

At that point, Appendagez had become a family business. Michael Shane was responsible for sales and marketing. James Shane was in charge of dealing with Kapok, travelling frequently to Hong Kong to discuss pricing and production with Ip. Thomas Shane, another brother, worked for Appendagez and became a director. Appendagez also employed the Shanes' sister Sandy, their mother, and stepfather.

As of 1978, the ownership of Appendagez remained split between Michael Shane, James Shane, and Ip. Of the 100 outstanding shares in Appendagez, Michael owned 56, James owned 24, and Ip owned 20. Over the next year, the ownership structure of Appendagez underwent several shifts culminating in Michael's complete withdrawal from the company.

Near the end of 1978, Michael Shane decided to pursue an interest in managing a public policy institute in New York. Michael agreed to relinquish managerial responsibilities to his brother James, and Michael became a consultant for Appendagez. Michael also agreed to sell a portion of his stock to Ip, but he did not relinquish family control of Appendagez.

In January 1979, Michael Shane negotiated and executed an agreement to sell 30 shares of Appendagez stock to Ip. The price per share was just under $42,000, and the total price was $1.25 million. Under the agreement, Michael would receive the money in four annual installments with the shares held in escrow as security. Following this agreement, Ip owned half of Appendagez, and the Shane brothers owned the other half.

Later in 1979, the business relationship between Michael and James Shane soured. The two brothers disagreed over Michael's claim for $550,000 in commissions owed to him by Appendagez. The two brothers also began to negotiate a separation of their interests in jointly-owned commercial real estate in Norwood, Massachusetts. Throughout 1979, Michael received no financial information concerning the business operations of Appendagez.

During this same time, James Shane and Ip took strides to shore up Appendagez. James Shane and Ip had discussions with Appendagez's bank, the New England Merchants National Bank ("the New England Bank"), and agreed to infuse new capital into the business. As part of these discussions, Ip pledged to capitalize $2 million in debt owed by Appendagez to Kapok which would create more security for the New England Bank's loans to Appendagez. James Shane also reported to the New England Bank that he expected the coming year to be profitable.

In August of 1979, the rancor between Michael and James Shane flared again. Michael, still a director, shareholder, and personal guarantor for debts in Appendagez, approached James about certain credit memos that Appendagez had issued to customers for defective goods. Michael was concerned that the credit memos interfered with Appendagez's security for loans to the New England Bank. In response, James fired Michael as a consultant and fired their sister Sandy who had given Michael copies of the credit memo.

Following this incident, James Shane called a special meeting of the Appendagez board of directors to restructure the company. At the meeting in September, Michael Shane and Thomas Shane were removed as directors and replaced by Ip and his attorney Charles Lee. The new board of directors authorized an increase in the number of shares in Appendagez from 100 to 5,000. The new board also voted to sell 1,000 of the new shares at $500 per share. Michael Shane was offered 260 shares, corresponding to his previous 26 percent interest in Appendagez, but he declined, and Lee purchased all the new shares. Following the special meeting, Michael Shane renewed negotiations to sever all ties with his brother James and Appendagez.

During these negotiations in October, James Shane, Ip, and Lee made plans for further changes in Appendagez. On October 22, all the shareholders in Appendagez, except Michael Shane, met with all the shareholders in Kapok. The parties agreed that Kapok would acquire all of Appendagez's stock in exchange for Kapok stock. The parties promised to reallocate the interest in Kapok and Appendagez as follows: James Shane would get an 8 percent interest in Kapok for his 2 percent interest in Appendagez; Lee would get 12 percent of Kapok for his 91 percent of Appendagez; and Ip would get 38 percent of Kapok for his 5 percent of Appendagez. ³ The parties memorialized their understanding in a signed agreement.

On November 1, 1979, the negotiations between Michael and James Shane culminated in a settlement meeting. At this meeting, James told Michael that the September board of directors' meeting was necessary to save Appendagez. James told Michael the company was broke, that Ip was broke, and that Lee was investing the new money. James Shane said he was reorganizing the company to save the livelihood of workers in Hong Kong. In negotiating the price of Appendagez stock, James Shane said his shares were worth virtually nothing. In response, Michael Shane agreed to give James a 10 percent greater interest in their jointly-held commercial real estate. Michael also agreed to sell his remaining 26 shares of Appendagez stock for $50,000--just under $2,000 per share. These details were memorialized in a settlement agreement which was executed the next day on November 2, 1979.

Throughout the settlement negotiations, James Shane did not disclose the October 22 agreement to consolidate Appendagez and Kapok. James Shane also did not disclose Ip's pledge to recapitalize $2 million of Appendagez's debt to Kapok. Michael Shane only discovered these facts several years later following litigation.

Following the November settlement agreement, James Shane, Ip, and Lee continued their plans to restructure Appendagez. In December 1979, they formed SIL Imports, Inc. ("SIL"), the corporate name representing the first letter of their surnames, to continue Appendagez's business. In June of 1980, James Shane, Ip, and Lee caused the "Faded Glory" trademark to be assigned to SIL. In 1982, the "Faded Glory" trademark was licensed to Global Industries, Inc., of which James Shane was chairman and 40 percent stockholder.

In 1982, the plaintiff Michael Shane commenced this action alleging that the defendants James Shane, Ip, and Lee conspired to defraud Michael Shane of his interests in Appendagez. Specifically, Michael Shane alleged that the defendants, by failing to disclose information and making false...