Summary
The Massachusetts Supreme Judicial Court held that shareholders in a closely held corporation could be found to have breached their fiduciary duty by excluding a minority shareholder from information, participation, and decision-making and by shifting the corporation away from its agreed business purpose. The court affirmed the liability determination but concluded that the $900,000 lost-profits award was too speculative and not shown with reasonable certainty to have been proximately caused by the breach. The case was remanded for a new trial limited to damages.
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Practice areas
Questions Presented
- Whether the evidence was sufficient to support the jury's finding that Pearson and Palm breached their fiduciary duty of utmost good faith and loyalty to O'Brien as shareholders in a closely held corporation.
- Whether the trial judge abused his discretion by denying the defendants' motion for a new trial on liability.
- Whether O'Brien proved with reasonable certainty that the defendants' fiduciary breach proximately caused the claimed lost profits.
- Whether O'Brien could recover damages against the defendants individually for a breach of fiduciary duty owed between shareholders.
- Whether O'Brien could receive both forty-eight percent of the mortgage-discharge proceeds and lost-profit damages.
Holdings
- The evidence, construed in O'Brien's favor, was sufficient to support a finding that the defendants breached their fiduciary duty of utmost good faith and loyalty by unilaterally shifting Summerhill away from its agreed purpose and excluding O'Brien from information, participation, and decision-making.
- The trial judge did not abuse his discretion in denying a new trial on the issue of liability.
- O'Brien did not prove with reasonable certainty that the defendants' fiduciary breach proximately caused the claimed lost profits from development of the subdivision.
- A shareholder may recover individually against fellow shareholders for a breach of fiduciary duty owed directly between shareholders in a closely held corporation; such recovery does not require piercing the corporate veil.
- O'Brien may not recover both lost-profit damages and forty-eight percent of the mortgage-discharge proceeds; on remand, he may be required to elect between those remedies.
Key quotations
“As shareholders in a close corporation, the parties owed each other a fiduciary duty of the “utmost good faith and loyalty.”” (383)
“Not honesty alone, but the punctilio of an honor the most sensitive . . . .” (386)
“The benefits to which O’Brien could claim a reasonable expectation, but were denied as a result of the fiduciary breach, would be involvement in the information sharing and decision-making of Summerhill.” (389)
“There simply lie too many contingencies and uncertainties between the breach and the completed subdivision to conclude otherwise.” (390)
“He may recover one or the other — to allow otherwise would result in a duplicative award.” (391)
Factual background
O'Brien, Pearson, and Palm formed Summerhill Estates, Inc., a closely held corporation intended to acquire and develop a subdivision in Dracut, Massachusetts, with O'Brien holding an agreed forty-eight percent interest and Pearson and Margaret Palm holding twenty-six percent each. The defendants acquired a note and mortgage on the subdivision, but excluded O'Brien from negotiations and pursued a risk-averse strategy aimed at recovering the investment rather than acquiring and developing the entire subdivision. Summerhill ultimately discharged the mortgage after the property was sold to a third party, and O'Brien sued for breach of fiduciary duty. The jury awarded O'Brien $900,000 based on projected profits from development of the subdivision.
Procedural history
The Superior Court entered judgment on the jury's breach-of-fiduciary-duty verdict and denied the defendants' posttrial motions. The Appeals Court reversed the judgment. The Supreme Judicial Court affirmed the rulings concerning liability and the award of O'Brien's share of the mortgage-discharge proceeds, but reversed the denial of a new trial as to lost-profit damages and remanded for a new trial solely on damages.
Remand instructions
Remand to the Superior Court for a new trial solely on damages. The fact finder must determine what damages were proximately caused by the fiduciary breach—O'Brien's exclusion from the corporation's information, participation, and decision-making—and award the benefits he reasonably expected but did not receive because of the breach. O'Brien may be required to elect between proceeding on lost-profit damages and retaining the forty-eight percent share of the mortgage-discharge proceeds; if he proceeds to trial on damages, the fact finder must not consider that share in calculating damages.