Court Decisions

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A recent decision by the Supreme Judicial Court declared that sellers of shares in a closely held corporation did not breach their fiduciary duty when the sale imperiled the corporation’s favorable S corporation status. See Merriam, et al. v. Demoulas Super Markets, Inc., et al., SJC-11098 (slip op., March 27, 2013)

A closely held corporation sought a judgment that minority shareholders had a fiduciary duty not to sell their shares if the sale would terminate the corporation’s favorable S corporation status.

The corporation’s articles of organization restricted stockholders from freely transferring their stock by putting in place a familiar procedure whereby the stockholder must first offer his shares to the corporation, but thereafter describes a discrete process of valuation and subsequent offer at a price to be determined by arbitrators.

The SJC held that such a clause in the articles of organization be treated as a contract between shareholders and the corporation. The clause restricting free sale of shares was a bargained for procedure for disposing of interests in the corporation. If the corporation had wished the procedure to reflect the importance of S corporation status then it should have included that in the articles or bylaws.

A shareholder in a close corporation always owes a fiduciary duty to fellow shareholders, however good faith compliance with the terms of an agreement entered into by the shareholders will satisfy that duty. The corporation cannot later require a shareholder who wishes to sell to be bound by additional substantive restrictions on the sale of their shares based on an asserted fiduciary duty that goes beyond a restriction imposed in the original articles or bylaws.

The SJC therefore rejected the corporation’s argument that selling the shares, which could terminate its S corporation status, constituted a breach of contract or fiduciary duty. Further, the SJC rejected the corporation’s argument that the sellers were required to reoffer their shares to the corporation should the sellers decide to offer the shares to a third party at a price lower than the value determined by arbitrators.

Click Here to contact Raymond Law Group for assistance with shareholder issues involving closely held corporations.

The Supreme Judicial Court of Massachusetts ruled last week that a city cannot recharacterize vacation pay from a recently-terminated administrator.  The case centered on the 2007 termination of Gary Dixon, administrator of the McFadden Memorial Manor nursing home in 2007.   Dixon brought suit against the city of Malden, which operated the nursing home, seeking $13,700 in unused vacation pay.

Despite high quality evaluations, McFadden had proven unable to fill to capacity, and the cost of repair was estimated at $1 million.  Dixon was terminated while the city was deliberating whether or not to put public money toward renovation of the nursing home. 

The Superior Court dismissed the suit due to the city’s continued payment of additional pay and benefits, the Supreme Judicial Court reversed the decision.  The SJC instruced the Superior Court to award Dixon vacation pay, attorneys’ fees, and court costs.  The Supreme Judicial Court noted that payment of salary and benefits post-termination does not substitute for payment of unused vacation time, which was shown to be 50 days.  Under the Massachusetts Wage Act, a terminated employee is explicitly entitled to payment of unused vacation upon termination.

Massachusetts employers and employees alike should take heed of this ruling.  Raymond Law Group can help make sure clients are advised of the requirements of way payment laws. 

gavel.jpgA recent decision by the U.S. Bankruptcy Court held that a 93A judgment was not subject to a bankruptcy discharge pursuant to 11 U.S.C. §523(a)(6) even though the 93A judgment included a finding that the debtor’s conduct was willful. In its holding, the Court noted that M.G.L. c. 93A and 11 U.S.C. §523(a)(6) have different standards for willfulness.

The plaintiff had previously filed a lawsuit against the defendant in the U.S. District Court alleging the defendant committed fraud and breach of contract. The plaintiff contracted with defendant to provide reinsurance in connection with an employer’s liability insurance program. As part of this agreement, the defendant agreed to a contract in which another one of his companies would assume a percentage of the risk however this agreement was not in writing. The plaintiff prevailed in a bench trial and the court found that a contract did in fact exist. Further, the District Court found the defendant’s misconduct was willful and thus awarded double damages along with attorneys’ fees and expenses.

The defendant subsequently filed bankruptcy and sought to discharge the judgment.  The plaintiff then sought a declaration that their injury was not dischargeable under §523(a)(6).  Chapter 523 (a) (6) provides an exception to discharge  in cases for willful and malicious injury by the debtor to another entity or the property of another entity.  Under this section, willful requires the actor to intend the injury, not just the act that leads to the injury. Therefore, judgments from recklessness or negligence are not subject to the exception under 523(a)(6).

In the bankruptcy action, the debtor argued that plaintiff’s conduct met the willful and malicious conduct standard required of §523(a)(6). The bankruptcy court disagreed and held that 523(a)(6) requires an intentional tort. An award of damages under M.G.L. c. 93A for a breach of contract action, even one involving bad faith, does not involve an intentional tort. While an award for multiple damages under 93A may stem from intentional conduct, the exception under 523(a)(6) requires a deliberate intent to injure. A deliberate act that leads to an injury will not suffice.  To protect against such a result moving forward, parties would be well advised to seek the trial court to make specific findings that the conduct by a defendant specifically sought to harm the plaintiff. 

data thief.jpgA data breach resulting in the theft and use of customer credit card numbers results in significant expenses and penalties for the victim company. Many companies still do not have specific cyber liability coverage and thus can be on the hook for all expenses related to such a breach. The Sixth Circuit Court of Appeals recently held that such losses resulting from the cyber theft of customer data were recoverable under a commercial crime policy. Retail Ventures, Inc. v. Nat’l Union Fire Ins. Co., 691 F. 3d 821 (6th Cir. 2012). 

In 2005, hackers used an apparently unlocked wireless network at a DSW Shoe Warehouse store to obtain unauthorized access to DSW’s computer systems and downloaded credit card and bank account information from over 1.4 million DSW customers.  Subsequently, fraudulent transactions using the stolen customer payment information occurred. DSW incurred millions of dollars of expenses for customer communications, public relations, customer claims and lawsuits, and attorney fees in connection with investigations by seven State Attorneys General and the Federal Trade Commission (FTC).

DSW submitted a claim for coverage under a computer fraud rider to a “blanket Crime Policy” for losses related to the computer hacking. The rider provided coverage for Computer and Funds Transfer Fraud Coverage; specifically, any loss resulting from the theft of any insured property by computer fraud.

In subsequent litigation to determine whether the losses were covered by the commercial crime policy, DSW prevailed on summary judgment with respect to its claim that the hacking damages were covered under the policy. Defendant appealed arguing that the trial court erred by finding that the expenses incurred were a loss resulting directly from the theft of insured property by computer fraud. Defendant urged the Court to use the “direct means approach” which would require DSW to show the computer fraud to be the sole and immediate cause of the loss. DSW argued the District Court correctly utilized a traditional proximate cause standard.

The Appeals Court held that the District Court was correct in applying a proximate cause standard and did not err in finding that the loss was caused by the hacking. The Court also rejected the Defendant’s argument that the theft of customer data was covered by an exclusion under the policy. The policy stated that coverage does not apply to any loss of proprietary information, trade secrets, confidential processing methods or other confidential information of any kind. The Court held that the stolen customer information was not proprietary information because it belonged to the customer and not DSW. Furthermore, the stolen information did not constitute trade secrets or confidential processing methods. Finally, the language “other confidential information of any kind” was held to be general and should apply only to secret information of DSW. Otherwise, it would swallow the entire coverage for computer fraud. Since the confidential information was credit card and bank account numbers which belonged to the customers themselves, no exclusion under the policy applied.

DSW did not have a specific cyber insurance policy yet was still able to obtain coverage based on language in its commercial crime policy. Businesses should review their existing coverage carefully and may find that coverage for data breach is not expressly covered.

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Though public employees tend to enjoy greater protections that private sector employees, their personal activities posted online can cost them their jobs.  On January 11, 2013, the California Commission on Professional Competence issued an influential ruling upholding the termination of an adult actress turned teacher.  The three-judge panel issued a 46-page decision denying the Stacie Halas’s appeal to return to work after her school’s administration discovered her previous career. 

Halas, formerly known as Tiffany Six, was three years removed from a brief career in the adult entertainment industry when she was hired in 2009.  She taught science at the Richard B. Haydock Intermediate School in Oxnard, California.  Halas did not disclose her past upon hiring or during her employer.  

This past April, however, students and teachers became aware of Halas’s past, with explicit content readily available online.  This caused an immediate disruption, physically manifested by profanity engraved on her classroom window.  Halas was terminated because she could no longer be an effective teacher.  Halas was fired from two previous teaching jobs for similar reasons.

Ethics scholar Jack Marshall has long studied the “Naked Teacher Principal,” which he describes as being an irreversible stain on a teacher’s professional ability and reputation.  Marshall writes, “The principle, based in accountability and responsibility, holds that once a teacher has allowed naked or otherwise sexually provocative photographs of herself or himself to become available over the internet, that teacher will be unable to properly maintain the respect of and proper professional relationship to students, serve as a role model, or be trusted to meet professional standards.” 

Halas appealed the decision to the California Commission on Professional Competence, who ruled last week that the ever-present availability of Halas’s adult film work inhibited her ability to effectively teach and run a classroom. 

 While this decision may not apply to many because it deals specifically with pornographic videos, it is yet another reminder to be careful about what you put in the public purview and to always be up front about your past when seeking work.  Even if the subject matter is embarrassing and not itself a bar to employment, a lack of candor in the job application process is a frequent cause for lawful termination.

*Special thanks to Aaron Spacone for assisting with the drafting of this post.

 

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A party files a request for production pursuant to Rule 34 seeking any profiles, messages (including status updates, wall comments, causes joined, groups joined, activity streams, blog entries) from social networking sites that reveal, refer or relate to any emotion, feeling, or mental state of plaintiff as well as communications by the plaintiff that may reveal or relate to events that could be expected to produce a significant emotion, feeling or mental state.

Essentially, the opposing counsel wants your social media activity. Potentially all of it. A party’s first thought might be that is private! I don’t want anyone to see it. However, depending on the claims advanced by a party this information may be discoverable and potential damaging and/or embarrassing posts may be ordered produced.

The production of social media posts, such as Facebook wall posts, are governed by the same relevance standard as any other discovery requests. While this issue is relatively new, cases and discovery orders on motions to compel are starting to become more prevalent. For instance, on Sept 7, 2012 a U.S. District Court granted a motion to compel social media posts from a plaintiff who claimed she was discriminated against by Home Depot. See Mailhoit v. Home Depot U.S.A., 2012 WL 3939063 (C.D. Cal. Sept 7, 2012).

The plaintiff had testified at her deposition that as a result of the defendant’s actions, plaintiff suffered from depression. Defendant then sought to discover social media posts such as pictures on Facebook that would undermine the plaintiff’s claims of isolation and loss of friendship.

In examining the defendant’s discovery requests, the court noted that social networking posts are neither privileged nor protected by any right of privacy. However, the court acknowledged FRCP 34 does not allow a requesting party “a generalized right to rummage at will” through a party’s Facebook posts, but rather requires a threshold showing that the requested information is reasonably calculated to lead to the discovery of admissible evidence.

Therefore, the court held that a request for any profiles, postings or messages that reveal or relate to plaintiff’s emotional or mental state was too broad and failed to put a reasonable person of ordinary intelligence on notice of which specified documents or information would be responsive to the request.

However, the court did order the plaintiff to produce all social networking posts which in any way refer to her employment at Home Depot. Other courts have applied a similar rationale. For instance, another U.S. District Court denied a discovery request  in a slip and fall case seeking production of the plaintiff’s entire Facebook account. Tompkins v. Detroit Metro Airport, 278 F.R.D. 387 (E.D. Mich. 2012).

The defendant attached to their motion to compel pictures that were publically available on the plaintiff’s Facebook wall as well as private surveillance photos which showed her standing at a party and holding a small dog. The defendant argued these posts showed the relevance of the private posts which the defendant could not view. The court disagreed and stated that holding a small dog was not inconsistent with plaintiff’s claim of injury and therefore the defendant did not have a strong enough argument to obtain discovery of the plaintiff’s entire Facebook account. The court noted that if the pictures had showed her playing golf or riding a horse the defendant’s argument would have been stronger.

What is clear is that Facebook posts can be discoverable and that courts will utilize traditional principles of relevance to determine whether social media account information must be produced. While case law is still developing on this issue, counsel would be advised to limit their requests for social media posts to those that are relevant to the case as opposed to seeking a party’s entire Facebook account. 

Last week, the First Circuit Court of Appeals handed down a ruling that all class action attorneys should remember.  In the Volkswagen and Audi Warranty Extension Litigation, the litigants had reached a class action settlement that permitted class counsel to seek an award of reasonable attorney fees.  The U.S. District Court for the District of Massachusetts,  Judge Tauro presiding, had approved the settlement and issued an award of $30 million in attorneys’ fees.  Judge Tauro had applied the percentage method, finding that it represented a reasonable percentage of the overall settlement amount.  While the parties did not actually agree on what that settlement amount was, due to the varying value of the type of relief provided, Judge Tauro felt that $30 million was a reasonable percentage when balancing the range of value offered by the parties, from $50 million to $223 million.  Judge Tauro, in assessing reasonableness, also considered the lodestar value of class counsel’s time, which was approximately $7.75 million, with a 2.5 multiplier of unknown basis.  While this was still less than $20 million, Judge Tauro approved $30 million in fees.  Class counsel had sought $37.5 million.

The First Circuit reversed and remanded this award.  The District Court had used the wrong methodology to calculate attorney fees.  The underlying litigation was premised solely on diversity and presented no federal causes of action.  Thus, the First Circuit found that the attorney fee provision of the settlement must be construed under state law, being a substantive issue under the Erie doctrine.  As the matter arose from Multi-District Litigation, the First Circuit then undertook an analysis of which state’s law should apply.  Applying choice of law principles from all of the jurisdictions in which the cases were originally filed, the First Circuit found that the law of Massachusetts, the forum state, would govern.  One of the overarching considerations in this choice of law analysis was that the class action settlement was largely negotiated in Massachusetts and that the District Court, in exercising continuing jurisdiction, provided a location for the implementation of the agreement.  The First Circuit remanded for consideration under Massachusetts law, which uses a lodestar approach, though permitting a multiplier or enhancement for novel issues of law, complexity, or matters affecting a wide range of persons.  As Judge Tauro made no findings to justify a multiplier, remand was necessary.

Attorneys bringing class actions based only on state law claims, which find themselves in federal court and, ultimately, in Multi-District Litigation, should keep this decision in mind.  In the Volkswagen and Audi Litigation, the parties expressly avoided making a choice of law determination; such avoidance, at least in the First Circuit, is now impossible.  While a different outcome may have presented itself if there were federal claims or if more than one state’s law would govern, the MDL panel’s choice of forum may end up with that forum’s law governing the ultimate settlement itself. 

The decision is found at Volkswagen Group of America, Inc., et al. v. Peter J. McNulty Law Firm, et al., Nos. 11-1438, 11-1857 (1st. Cir. Jul. 27, 2012), http://www.ca1.uscourts.gov/pdf.opinions/11-1438P-01A.pdf