Whaler Motor Inn, Inc. v. Parsons

• Decision Date: 31 May 1977
• Citation: 372 Mass. 620,363 N.E.2d 493
• Parties: , 84 A.L.R.3d 152 WHALER MOTOR INN, INC. v. Richard H. PARSONS et al. 1 (and a companion case 2 ).
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 493

363 N.E.2d 493

372 Mass. 620, 84 A.L.R.3d 152

WHALER MOTOR INN, INC.

v.

Richard H. PARSONS et al. ¹ (and a companion case ²).

Supreme Judicial Court of Massachusetts, Bristol.

Argued Oct. 5, 1976.

Decided May 31, 1977.

Howard M. Miller, Boston, for Whaler Motor Inn, Inc.

Robert W. Harrington, Boston, (John M. Doukas, Boston, with him), for Richard H. Parsons.

Thomas F. McGuire, Fall River, for David S. Barnet & others, trustees.

John A. Tierney, New Bedford, for David Freedman & another.

Before HENNESSEY, C.J., and BRAUCHER, KAPLAN and WILKINS, JJ.

KAPLAN, Justice.

We granted further appellate review of decisions of the Appeals Court, reached by a five to one vote of the Justices of that court, reversing decrees of a judge of the Superior Court, which pose questions as to the duties of 'promoters' and, in case of a breach of duty, as to the measure of damages to be cast. Relegating the procedural history of these cases and certain matters of detail to footnotes, ³ we block out the facts as they emerge from the subsidiary findings of the master ⁴ who tried the cases on reference from the Superior Court.

In late 1965, the defendant Nathaniel Lipton, an accountant, introduced his client, the defendant Richard H. Parsons, to other clients, the defendants David Freedman and Louis Freedman, all experienced businessmen. The four (hereafter called the promoters) commenced to meet and make plans toward building and operating a motel somewhere in the New Bedford area. By early 1966, the promoters had made visits to a number of motels for purposes of self-education, and were sufficiently interested to decide to take further preliminary steps. Selection of the exact site was obviously important, so the promoters, besides inspecting and discussing several possible sites, contracted for a 'feasibility study' by the Real Estate Research Corporation. The report was delivered in November, 1966. They reached the conclusion that the most promising location was on Hathaway Road, near Route 140, in the city of New Bedford. Parsons had earlier intended to build a motel at that location on his own, and had bought a parcel there as far back as 1964 for some $2,000. In July, 1966, before the feasibility report and before there was agreement on the site, Parsons bought a larger parcel for $35,000 and secured an option on a third parcel. He also made arrangements with the city for discontinuing a public way and for utility connections that looked to eventual construction.

Meanwhile the promoters were concerning themselves with choosing a franchiser for their venture. After travel to Tennessee, New York, Connecticut, and other places, they settled on a 'Holiday Inn' franchise.

On February 14, 1967, the promoters caused the plaintiff corporation to be formed with 1,000 no par shares authorized. Officers and directors were installed consisting of members of the law firm retained by the promoters. When in October, 1967, plans were approaching realization--the promoters were seeing to the financing of the project and meeting with a building contractor--it was deemed advisable to remove the 'dummy' officers and directors and to replace them with the promoters and Samuel Lipman, a person who was interested in making an investment. This was accomplished at a meeting of the board of directors actually held on October 18, 1967. ⁵ Record was made of another meeting, nominally held the following day, at which each of the promoters offered to purchase 130 shares for $108,000 (a total of 52% of the authorized shares) and Lipman offered to purchase 120 shares for $100,000, and the offers were accepted on behalf of the corporation. The promoters did not in fact pay cash for their shares then or later; Lipman paid cash for his shares on November 14, 1967.

On October 28, Parsons, pursuant to informal agreement with the other promoters, conveyed the two parcels and option to the corporation at an understood price of $75,000. Considering the advantages of the location for motel purposes, the master found the fair market value of the properties to be $150,000. Evidently no record of the transaction was made apart from the conveyance proper. The stamps on the conveyance indicated a price of $37,500 and it is indicated that Parsons treated the sale accordingly on his personal income tax return.

The problem of financing the venture was now to be got over. The promoters commissioned a second feasibility report and appraisal for use with lenders. After negotiating with a number of institutions, the promoters closed with a syndicate of banks headed by the First Federal Savings and Loan Association of Attleboro. In consideration of the banks' loan, the corporation on March 25, 1968, gave its promissory note for $1,130,000 secured by mortgage. This was required to be, and was guaranteed personally by each of the promoters. The corporation was obliged to deposit $300,000 with the banks, of which $100,000 would be used to make the first payments for construction.

Investors were brought in to purchase most of the remaining 360 shares whose price was established (as in the case of Lipman) at $833 a share. Record was made of a special meeting of the board of directors on April 2, 1968, at which certificates for 520 shares were issued to the promoters and 120 shares to Lipman (all, however, dated October 19, 1967); and certificates were also issued to the outsiders for which cash was paid. Parsons used the money paid for shares by two outsiders (actually his relatives) to cover $75,000 owing to him for the land. The fund of $300,000 required by the banks was evidently made up out of the remaining cash contributions from the outsiders including the Lipmans. Construction of the motel was completed in the summer of 1968.

Business reverses of the promoter Lipton led to an accounting which revealed that the promoters had not paid cash for their shares. This precipitated the present lawsuits on dates in 1970.

With respect to the promoters' claim in the litigation that they paid for their shares by their services in addition to their out-of-pocket expenditures--services being a legal method of payment, see G.L. c. 156, §§ 14, 15; c. 156B, § 18--it is fair to say that the promotional and related activities, as found by the master, were extensive, and, of course, indispensable to the launching of the enterprise. The master found cash outlays by Parsons of $18,453 (almost fully reimbursed by corporate funds) and by Lipton of $31,433 (less than half reimbursed). He could not figure the Freedmans' expenditures on the evidence presented (they had loaned a substantial sum to the corporation as yet unpaid). For want of proof he did not attempt to place a value on the promoters' personal guaranties, still outstanding. Evidence was offered of the value of the entrepreneurial efforts by the promoters viewed as a whole, but the master apparently thought it too 'hypothetical' to go by.

There was no disclosure by Parsons or the other promoters to the outsiders that the land on which the motel was built had been sold by Parsons to the corporation. But there is no indication that the promoters misrepresented the fact to the outsiders.

The promoters did not disclose to the outsiders that they had not paid cash for their shares. It is possible to say that such corporate records as existed would have suggested to a reader that cash had been paid, although an audit would show it had not been; but it is not indicated that any outsider consulted the records before buying. On the score of misrepresentations by the promoters, the master said that they stated to outsiders at various times that they were investing money in the purchase of stock. The master cited an instance in which there was mention of an investment of $100,000 by each promoter, and another instance where the promoters were said to be giving their services to the venture without charge. If these statements are to be characterized as lies, they are nevertheless equivocal in their nature, for the promoters had expended money and could assume that their services had value; on the other hand they were not making specific charges for their services.

The nub of the final decrees of the judge of the Superior Court was that there were breaches of duty and that the proper remedy was to restore the shares to the corporation ⁶ allowing credit only for the unreimbursed out-of-pocket expenditures incurred by the promoters; and with respect to the land, to require the return to the corporation of all consideration received by Parsons above his own costs, that is, $37,500. This was also the view taken by the dissenting Justice of the Appeals Court. The majority of that court agreed there were breaches of duty, but held that credit should be allowed for the value (to be ascertained on remand) of the promotional services as well as for the promoters' unrepaid actual expenditures, and that, as to the land, there need be no payment to the corporation since the market value exceeded the price received by Parsons. --- Mass.App. ---, ---, ---, --- - ---, --- - --- ^a, 339 N.E.2d 197 (1975). We agree with the majority and largely for their reasons.

1. We agree that whatever their own understanding of the situation may have been, the defendants must be held to have committed breaches of duty toward the corporation and thus to the outsiders. In transactions with their corporate instrument, promoters are considered to be fiduciaries. See Keith v. Radway, 220 Mass. 532, 535, 108 N.E. 498 (1915). We need not speculate just what kind of fiduciaries they are. Note, Inadequacy of Traditional Concepts in the Treatment of the Promoter, 81 U.Pa.L.Rev. 746, 747 (1933). To fulfil their responsibilities, the defendants in the present case were bound to make full disclosures about the two transactions (land and shares) to the outsiders as intending investors. See Old Dominion Copper Mining & Smelting Co. v. Bigelow, 203 Mass....