Smith v. Kelley

Decision Date11 February 2020
Docket NumberSJC-12759
Citation139 N.E.3d 314,484 Mass. 111
Parties Robert SMITH v. Robert E. KELLEY.
CourtUnited States State Supreme Judicial Court of Massachusetts Supreme Court

Jeffrey S. Baker (Jonathan D. Plaut also present), Boston, for the plaintiff.

Dana Alan Curhan, Boston, (James F. McLaughlin also present), Brockton, for the defendant.

Thomas J. Carey, Jr., Hingham, for Brian JM Quinn & others, amici curiae, submitted a brief.

Present: Gants, C.J., Lenk, Lowy, Budd, Cypher, & Kafker, JJ.

KAFKER, J.

The instant case concerns a final judgment that was entered four years ago against a professional corporation, RKelley-Law, P.C. (the P.C.), for the fraudulent activity of one of its associates. The associate defrauded the plaintiff, Robert Smith, in a mortgage scam. The defendant in this case, Robert Kelley, was at all times the sole shareholder and officer of the P.C. The day after the entry of final judgment against the P.C., the defendant voted to wind up the corporation. That same day, he began operating his law practice as a sole proprietorship. Not long thereafter, the P.C. was placed into bankruptcy proceedings. The P.C. now has no assets, and the plaintiff seeks to recover from the defendant personally. For the reasons discussed infra, we conclude that, in the very unique circumstances of this case, the plaintiff may pursue successor liability against the defendant's sole proprietorship, as it was a mere continuation of the former professional corporation.1

1. Background. In the instant litigation, Smith seeks recompense from the defendant for liability established in prior Federal court proceedings, see Smith v. Jenkins, 818 F. Supp. 2d 336 (D. Mass. 2011) ( Smith I ), aff'd in part, vacated in part, & rev'd in part, 732 F.3d 51 (1st Cir. 2013) ( Smith II ). We begin by summarizing the facts and rulings from those proceedings.

a. Mortgage fraud scheme. The plaintiff, Smith, is a United States Marine Corps veteran. Smith I, 818 F. Supp. 2d at 340. He suffers from schizophrenia

, posttraumatic stress disorder, and depression, and he is functionally illiterate. Smith II, 732 F.3d at 59. In 2005, Smith was living out of his car and working as a trash collector. Smith I, supra at 341. It was during this period that he was the victim of a mortgage fraud scheme. Smith II, supra.

Smith was approached by a participant in the scheme about a "special investment program" that would not require him to invest any money. Smith I, 818 F. Supp. 2d at 341. Smith agreed, and two real estate purchases were subsequently orchestrated in Smith's name using a false financial profile of his income, assets, and work and renting history. Smith II, 732 F.3d at 60.

Louis Bertucci, a real estate attorney and then-associate at the P.C., acted as the closing attorney for both properties. See Smith I, 818 F. Supp. 2d at 341. Although Bertucci was acting as the lender's attorney in these transactions, he directed Smith to sign the loan documents. Id. at 341, 344. Bertucci also instructed Smith to sign contradictory and false owner-occupancy affidavits. Id. at 345. As the District Court judge explained:

"Smith testified that at each closing Bertucci introduced himself as the lawyer handling the paperwork for the ‘investment.’ Although Bertucci testified that he had no memory of Smith, the jury were warranted from their observations of Smith's demeanor in the belief that it would have been apparent to Bertucci that Smith did not understand the significance of the closings, much less the nature of the real estate ‘investments’ being made in his name. They were also warranted in crediting Smith's testimony that Bertucci had led him to believe that he was acting in Smith's best interest as his lawyer."

Id. at 344.

Several months after the closings, Smith began receiving telephone calls from lenders about missed mortgage payments. Id. at 342. Both properties subsequently went into foreclosure. Smith II, 732 F.3d at 61. The foreclosures ruined Smith's credit and prevented him from being able to rent an apartment. Id. His mental health also deteriorated precipitously; his schizophrenia

worsened, he became suicidal, and he withdrew from others. Id.

b. Lawsuit against Bertucci, Kelley, and others. In 2007, Smith brought suit in State court against Bertucci, the P.C., Kelley (the sole shareholder of the P.C.), and others. Id. at 61. The case was removed to the United States District Court for the District of Massachusetts. Id. At trial, Kelley and the P.C. sought a directed verdict on the claims asserted against them for fraud and vicarious liability. See id. at 72. The District Court judge concluded that

"with respect to ... Kelley, there is absolutely nothing in the record that would persuade me that he even knew [the ringleader of the scheme, who was not Bertucci], much less that he actively participated in the scheme alleged; and because, as I have indicated, there is no basis under which an attorney-client relationship with [the ringleader] can be imposed on [the P.C.], there is no basis for liability on the part of ... Kelley."

Accordingly, the District Judge entered a directed verdict in favor of Kelley and the P.C. Smith I, 818 F. Supp. 2d at 339 n.1. At the conclusion of the trial, judgment was entered in Smith's favor as to most of his remaining claims. Smith II, 732 F.3d at 61-62.

On appeal, the United States Court of Appeals for the First Circuit agreed that there was insufficient evidence of Kelley's personal liability. The First Circuit observed that, while Kelley had signed several of the closing documents, "Kelley's signature on a couple of forms is simply not enough to show that Kelley made false statements to Smith upon which Smith relied to his detriment." Id. at 72. At the same time, however, the First Circuit ruled that "[s]ufficient evidence was presented to warrant a finding that the [P.C.] was vicariously liable for Bertucci's fraud" and remanded the case to the District Court for a determination on that issue. Id. at 72-73.

On remand, the District Court judge noted that "[the P.C.] did receive compensation for the ... property closings. Additionally, ... Kelley and [the P.C.] are identified as the closing agents for both properties, and Bertucci (and ... Kelley) signed the closing documents on behalf of ‘RKelley-Law.’ " Accordingly, the judge found the P.C. vicariously liable for Bertucci's participation in the mortgage fraud scheme. The judge entered a final judgment against the P.C. in excess of $200,000 on January 12, 2016. As the District Court judge had entered a directed verdict in favor of Kelley on the claims against him, and the verdicts were affirmed on appeal, no final judgment was entered against Kelley personally.

c. The P.C. The P.C., against which the final judgment was entered, had been formed by Kelley in or around 2003. The practice primarily involved real estate conveyances. At the height of the practice, the P.C. employed twelve to fifteen employees. At all times, Kelley was the sole shareholder, president, treasurer, secretary, and director of the P.C. Additionally, he served as the P.C.'s registered agent in Massachusetts.

In 2014, during the pendency of the litigation in Federal court, Kelley laid off everyone who worked at the P.C. other than himself. For approximately six months, Kelley was the only employee of the P.C. Kelley eventually hired back his wife as an office manager, but he remained the only other employee.

The day after final judgment was entered against the P.C. on Smith's claims, Kelley resigned from his officer positions in the P.C. and voted to wind up the corporation. Pursuant to the vote,2 Kelley decided to "consult with [a] bankruptcy lawyer on whether to file dissolution papers or bankruptcy." At the same time, Kelley opened a sole proprietorship called Law Office of R. Emmett Kelley (the sole proprietorship).3 Pursuant to the wind-up vote, Kelley had existing clients of the P.C. amend their fee agreements to bill all future work to the sole proprietorship, instead of the P.C. The sole proprietorship operated out of the same office as the P.C., used the same e-mail address, and utilized very similar letterhead.

Approximately three months after final judgment was entered against the P.C., on April 4, 2016, the Federal District Court judge issued an execution against the P.C. for $255,728 plus interest.4 Smith made a demand upon the P.C., but the P.C. failed to remit any money to him. On July 18, 2016, Smith brought the instant suit against Kelley in the Superior Court, seeking a declaratory judgment that Kelley was personally liable for the P.C.'s liabilities as a successor in interest to the P.C. Smith also brought an equitable claim to reach and apply Kelley's assets to satisfy the final judgment entered against the P.C.

d. Bankruptcy proceedings. On May 19, 2017, the P.C. filed a voluntary petition for relief under Chapter 7 of the United States Bankruptcy Code, 11 U.S.C. §§ 301 et seq. (2012). A trustee was appointed. During the course of discovery in the bankruptcy proceedings, the trustee determined that the P.C. had direct claims against Kelley. Specifically, Kelley had taken equipment, inventory, and supplies from the P.C. without paying for them. Moreover, receivables owed to the P.C. had been deposited into Kelley's account, rather than the account of the P.C. The trustee calculated the total value of the direct claims that the P.C. could assert against Kelley at $74,000.5 Kelley offered to purchase the claims from the bankruptcy estate for $85,000.

The trustee subsequently moved for an order from the bankruptcy court to authorize the sale of the P.C.'s claims. The sale was to comprise "all of the claims ... that the bankruptcy estate has or could have against Kelley." This included not only direct claims that the P.C. could assert against Kelley, mentioned supra, but also any "indirect-liability" claims, defined as claims "based on imputation of liability theories such as...

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