Petition for Writ of Certiorari — Medical Air Technology Corp. v. Marwan Investment, Inc.
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Va 742 NO 122002
OFFICE OF THE CLIRK
No.
IN THE
Supreme Court of the United States
MEDICAL AIR TECHNOLOGY
CORPORATION,
Petitioner,
Vv.
MARWAN INVESTMENT, INC., MARWANI HOLDING
COMPANY, N.V., MULTIFINANCE HOLDING
CORPORATION, and DR. K. PHILIP RAHBANY,
Respondents.
On Petition For Writ Of Certiorari From The United
States Court of Appeals For The First Circuit
PETITION FOR WRIT OF CERTIORARI ?
Albert L. Farrah, Jr. Louis N. Massery
CORWIN & CORWIN LLP Counsel of Record.
One Washington Mall MASSERY & GILLIS, LLP
Boston, MA 02108 101 Merrimac Street
(617) 742-3420 Boston, MA 02114
(617) 523-1125
QUESTIONS PRESENTED
1. Whether the Court of Appeals for the First Circuit erred
in affirming the District Court’s ruling that a controlling,
albeit minority, shareholder in the plaintiff, a closely-held
corporation did not violate its duty of utmost good faith
and loyalty to the corporation under Massachusetts law
when it cast dissenting a vote, catastrophic iz) its
consequences to that corporation, blocking an extremely
favorable merger, where that vote was based on the
dissenting shareholder's own financial interests and
business purposes, and not those of the corporation, in light
of the uncontroverted admissions at trial that the vote was
not to serve a legitimate business interest of the
corporation, but rather was to serve the business interests
of the blocking shareholder, and those of an affiliate, which
was foreclosing the assets of the corporation.
2. Whether the Court of Appeals erred in upholding the
District Court’s allowance of defendants’ motion to strike
plaintiffs jury claim as to all parties, based upon a jury
waiver in a security agreement between the plaintiff, and
only one of the four defendants, and where there was no
evidence the plaintiff knowingly, intelligently and
voluntarily waived its rights to a jury as to the other
defendants when it entered into a complicated transaction,
evidenced by over twenty documents between the parties,
none of which, except the security agreement, contained a
jury waiver.
PUBLISHER'S NOTE:
Page(s) |! missing in original.
ill
TABLE OF CONTENTS
ne FIs 553 snesecessunsesoseonvavsccsesevsscescees i
PARTIES TO THE PROCEEDING. ..........cccccccsscsccsssecscess ii
CORPORATE DISCLOSURE STATEMENT.............0.cceeeees ii
hats ankninidsabvechehassexccserassnsvenheves ili
I co sais ccick ies dicvcnacadesscdanies vii
PETITION OF A WRIT OF CERTIORARI..............000ecceeee 1
OPINIONS AND JUDGMENTS BELOW...............ccccceeecese 1
I Eid sas ckbnsvarendnnbeanddecdiveronccesnvevacvevtes 1
CONSTITUTIONAL AND STATUTORY PROVISIONS
rian andenhahwinsteaneydedduinndsccbewsaeeessavatnvasis 1
PR RRMEE GI BOM Gis cssssvansiccscossvecssecveccsvocence 1
REASONS FOR GRANTING THE WRIT...............cceeecceeee 9
I. BECAUSE THE COURT OF APPEALS MISAPPLIED
THE LAW OF THE DUTY OWED BY SHAREHOLDERS IN A
MASSACHUSETTS CLOSELY HELD CORPORATION, THIS
COURT SHOULD REVERSE THAT DECISION, AND ORDER
A NEW TRIAL, BEFORE A JURY, OF MEDICAL AIR’S
CLAIMS FOR BREACH OF FIDUCIARY DUTY. _...... 9
a. Standard of Review Applicable to the
Trial Court’s Legal Determinations ..9
iv
TABLE OF CONTENTS-—Continued
b.
i.
The Fiduciary Duty Owed by
Controlling Shareholders in a
Closely-held Massachusetts
CIE var stcssiasvesvecesssces 10
Both the Court of Appeals and the
District Court Misapplied of the Law
of Fiduciary Duty Owed in a Closely
held Massachusetts Corporation ...11
Defendants Failed in Their Burden to
Demonstrate a Legitimate Business
Purpose of Medical Air Which was
Served by the Vote Against the
MED ssiticitgnhinanensdvinntdadstaninl 14
Marwani Holding’s President Could
not Articulate a Legitimate Medical Air
Business Purpose for His Vote............. 15
ii.
Marwani Holding’s President Admitted
the Vote was to Serve the Defendants’
Business Interests; Its Attorney’s Testimony
Shows a Further Selfish Motivation....... 16
e.
A Less Harmful Alternative Existed....17
TABLE OF CONTENTS-Continued
EXCEPT MARWAN INVESTMENT, SINCE MEDICAL AIR
DID NOT WAIVE ITS RIGHTS TO A JURY TRIAL AS TO
THOSE DEFENDANTS ......022eeseeeersserersensnssneeseree® 18
a. All Parties Have a Fundamental
Right to a Jury Trial.......+---+sererseee 18
b. A Contractual Waiver of a Jury Trial
Must be Strictly Construed, and Binds Only
the Party to the Contract—There is no
Evidence Medical Air Abandoned its Jury
Claims in Signing the Security
Agreement...18
Cc. In Addition to no Evidence of a
Waiver, There is no Basis to Conclude Such
waiver was Knowing and Voluntary....--.. 19
d. The Court of Appeals Did Not
Uphold the District Court’s Decision Striking
the Jury Claim, but Wrongly Concluded that
Decision was Irrelevant to the Outcome of
TABLE OF CONTENTS-Continued
CONCLUSION ..ccccccrccccecscscveccccsccccsccocesoccesesees 22
APPENDIX A: First Circuit’s Opinion la-24a
APPENDIX B: District Court’s Order in Medical Air
Technology Corporation v. Marwan Investment, Inc.,
Marwani Holding Company, N.V., Multifinance Holding
Corporation and Dr. K. Philip Rahbany, No. 97-10764-JLT
(D. Mass. August 21,2001) 25a-26a
APPENDIX C: District Court’s Judgment in Medical Air
Technology Corporation v. Marwan Investment, Inc.,
Marwani Holding Company, N.V., Multifinance Holding
Corporation and Dr. K. Philip Rahbany, No. 97-10764-JLT
(D. Mass. August 21, 2001) 27a-28a
APPENDIX D: District Court’s Memorandum in Medical Air
Technology Corporation v. Marwan Investment, Inc.,
Marwani Holding Company, N.V., Multifinance Holding
Corporation and Dr. K. Philip Rahbany, No. 97-10764-JLT
(D. Mass. August 21,2001) 29a-48a
APPENDIX E: District Court’s Order striking plaintiffs jury
demand in Medical Air Technology Corporation v. Marwan
Investment, Inc., Marwani Holding Company, N.V.,
Multifinance Holding Corporation and Dr. K. Philip Rahbany,
No. 97-10764-JLT (D. Mass. January 17, 2001) 49a-
Sla ;
vii
TABLE OF AUTHORITIES
Cases
Aetna Ins. Co. v. Kennedy,
a salenibeauieted 18
Bergersen v. Commissioner,
Be te IEEE Ey IPT Dic cacbcccoccoconctsccamsencesevesocans 10
Blank v. Chelmsford Ob/Gyn, P. C.,
ER RNS OR mae 11
Donahue v. Rodd Electrotype Co. of New England, Inc.,
ss pecumetenion 10, 12
EEOC v. Waffle House, Inc.,
I i i catalan 19
Inwood Labs v. Ives Labs.,
alin 10
Merola v. Exergen,
RT RI ae eae ee ame NE re 13
Paracor Fin. v. GE Capital Corp.,
De te Es Bi cccccccoscescacsncesccccecacccscsecs 18
Schwartz v. Marien,
I i eweuseus 17
Seaboard Lumber Co. v. United States,
FOS Feats BSED COG, Cir, 1990) nec cvosccccccccccevccccocccccces 19
Simler v. Connor,
I a cell eakcmndili 19
Smith v. Atlantic Properties, Inc.,
SU IE APE, CIE Doccnccccccccscceccccsesceseses 10, 13
Smith v. F.W. Morse & Co.,
FE Nica acs cncicccoceccccccnecsoncousste u
Telum, Inc. v. E.F. Hutton Credit Corp.,
859 F.2d 835 (10th Cir. 1988)...... Ridcstiiekaninskbeiniotinneinae 19
United States v. Parke, Davis & Co.,
ES 5 re 9,10
United States v. Singer Mfg. Co.,
I lee 10
Vinick v. United States,
IU 10
TABLE OF AUTHORITIES—Continued
Wilkes v. Springside Nursing Home,
37O Mass. B4Z (1976)....ccccccccsccccccccesccccsccccsesscoes 12, 17
Zimmerman v. Bogoff,
GOB Blass. GEO CISBB)...cccccccoccsevevcceveccccccoccens: v9: 11, 14
PETITION FOR A WRIT OF CERTIORARI
Petitioner Medical Air Tech iology Corporation
respectfully petitions for a writ of certiorari to review the
judgment of the United States Court of Appeals for the First
Circuit in this case.
OPINIONS AND JUDGMENTS BELOW
The opinion of the First Circuit (Pet. App. 1a-24a) is
reported at 303 F.3d 11. The opinion of the District Court
(Pet. App. 29a-48a) is not reported.
JURISDICTION
The opinion of the Court of Appeals was issued on
August 14, 2002. The jurisdiction of this court to review
the judgment of the First Circuit is invoked under 28 U.S.C.
1254(1).
CONSTITUTIONAL AND STATUTORY PROVISIONS
INVOLVED
The Seventh Amendment of the United States
Constitution provides, in pertinent part: “In Suits at
common law, where the value in controversy shall exceed
twenty dollars, the right to a trial by jury shall be
preserved...”
STATEMENT OF THE CASE
Medical Air Technology Corporation (Medical Air)
is a closely held corporation incorporated in December of
1992, which sold air purification equipment to medical
facilities. In search of financing, Medical Air executed an
agreement in January 1996 with Multifinance Holding
Company (MFH). MFH used two related companies,
Marwan Investment and Marwani Holding Company, to
structure the deal. Dr. Kalil Philip Rahbany was the
President of MFH and an agent of Marwan Investment and
Marwani Holding. The agreement resulted in a total of
$1.375 million in funding for Medical Air: a $625,000 luan
from Marwan Investment and a $750,000 purchase of
preferred stock by Marwani Holding. The transaction
closed on January 22, 1996. Medical Air signed over
twenty documents, including an Investment and
Stockholders Agreement, a Secured Promissory Note for the
loan, and a Security Agreement.
The Security Agreement was executed by Medical Air
and Marwan Investment only, and served to secure the loan
from Marwan Investment. Of all the documents signed, the
Security Agreement alone contained a jury waiver, which
provided that:
“Grantor [Medical Air] and Marwan hereby waive
their respective rights to a jury trial of any claim or
cause of action based upon or arising out of this
Security Agreement, the Investment and
Stockholders Agreement or any other agreement
evidencing, securing, or otherwise executed in
connection with any Obligations.”
Within a few months, the parties’ relationship had
soured. Medical Air began to have cash flow problems. In
May 1996, it failed to meet the minimum net worth and net
working capital requirements to which it had agreed in the
Investment and Stockholders Agreement.
Medical Air tried to work its way out of the
situation. It attempted to obtain the defendants’ permission
to issue additional stock in the hope that increased funding
would allow it to expand its production capacity to take
advantage of sales opportunities. The defendants opposed
this plan. Medical Air then presented the defendants with
the possibility cf a buy-out by an outside investor. The
defendants were not interested.
Instead, between July 8 and August 15, 1996, the
3
defendants sent three separate notices of default to Medical
Air and threatened litigation. Efforts made to restructure
the business were unsuccessful. In the August 15 notice,
Marwan Investment exercised its right to demand
acceleration of the loan and, the following month, Marwani
Holding requested that Medical Air redeem its stock.
By the fall of 1996, Medical Air was out of money to
fili orders, a fact well known to the defendants, who had
hired their own consultants, including a lawyer specializing
in bankruptcies, to meet with and monitor Medical Air’s
management. In response to this predicament, and the
refusal of the defendants to inject, or permit the injection
of, new capital into the company, Medical Air began to look
for a new investor to buy out the defendants.
Nortek, Inc., a publicly traded Rhode Island
company, with a complimentary product line which was
growing by aggressively acquiring smaller companies,
quickly became interested in Medical Air. On November 8,
1996, Nortek and Medical Air signed a non-binding letter of
intent to merge, which proposed that Medical Air's
shareholders would. receive 500,000 shares of Nortek
common stock, worth at that time about seven million
dollars, and Marwan Investment’s note would be paid in
fuli. Medical Air quickly scheduled a shareholders' meeting
for January 8, 1997. Notices of the meeting and proxy
were sent to Medical Air shareholders on December 19,
1996.
Rahbany knew the possibility of this merger nearly
two months before the vote. On November 19, 1996, after
receiving Nortek's letter of intent, Rahbany requested from
Medical Air the due diligence material provided to Nortek
as part of the proposed merger. Rahbany never received
copies of what had been provided to Nortek. Medical Air,
for its part, was "reluctant to produce the documents
because" corporate officials felt that the defendants were
"going fishing" for evidence for their litigation in the default
suit. Medical Air asked the defendants to identify the
specific due diligence items they wanted, and the reasons
for each. The defendants refused.
Rahbany never sought to meet with anyone at
Medical Air or Nortek in the two months before the vote on
the merger to discuss the potential deal. He understood
that Medical Air was a closely held corporation and that, as
a preferred shareholder, Marwani Holding had a fiduciary
relationship to the corporation.
On December 31, 1996, Medical Air sent a draft
merger agreement and certain other draft documents it had
received from Nortek to shareholders for review. According
to the testimony of the Medical Air attorney who worked
on the deal, merger terins are never final until the closing,
and it is customary for shareholder votes to take place
before the merger documents are finalized.
Five days before the scheduled vote, representatives
of Medical Air and the defendants met to discuss the
proposed merger. At that meeting, the defendants asked
for certain information, including a valuation of the
company, and Medical Air’s November financial statements.
Medical Air provided the November financial statements,
and a valuation of the defendants’ stock under the proposed
merger plan (between $1.4 and $1.8 million) to the
defendants’ counsel on the following day.’ Rahbany says
he was not given sufficient information to determine if that
valuation was a credible number. Rahbany admitted at
trial that he never reviewed the public records of Nortek to
try to assess the basis for Nortek's interest in Medical Air.
The Medical Air shareholders met on January 8,
1997. Although all other shareholders voted for it,
Marwani Holding, owning almost 15% of the shares, was
able to single-handedly defeat the merger because Nortek,
as part of the proposed merger agreement, had required a
minimum of 95% stockholder agreement.
"In the period between Medical Air’s execution of a letter of
intent with Nortek and the January 8, 1997 shareholder’s vote,
the value of the 500,000 shares of Nortek stock had increased to
nearly $10,000,000.
At trial, Joseph Bodoff, the defendants’ bankruptcy
attorney, admitted that, prior to the January 8, 1997
shareholders’ meeting, had done an analysis of how “short
Dr. Rahbany was going to be as a result of the proposed
merger” and concluded it could be as much as $1 million.
Bodoff testified that, immediately after he tendered
Marwani Holding's “no” vote, he told Medical Air's attorney
that the principals of Medical Air were "getting a lot of
money from the transaction” and that, in his "experience as
an attorney there's no case that can't be settled with
money." Medical Air’s attorney testified that Bodoff told
him he was voting against the merger because they felt "the
transaction was a little bit too rich in favor of certain
principals in the company”, and that "money cures all ills or
money could make it better, something like that".
Rahbany claimed at trial he was short of the
substantive elements of the due diligence materials and,
since he did not get them, he voted against the merger.
He stated that he wanted the “business forecasts” of
Medical Air. He maintained that he had to see those
forecasts in order: to determine the viability and
sustainability of the negotiations with Nortek. However,
Rahbany admitted at trial that, at the time of the vote, he
knew of Medical Air's dire financial condition, in part
because Medical Air had disclosed in July of 1996 that the
company was running out of cash. Rahbany testified he
that the value of the company was virtually zero at that
time.”
Rahbany was asked at trial "(w)hat legitimate
business purpose of Medical Air was served in voting
against the merger(?)" He answered "(b)ecause I wanted at
the same time to know how viable, to find the basis,
2 at the time of the vote, Marwan Investment was pursing its
right to hold a secured party sale of all of Medical Air's assets.
That sale subsequently occurred and Marwan Investment was the
purchaser. It is undisputable that Marwani Holding's "no" vote
paved the way for the Marwan foreclosure.
because I had a fiduciary responsibility to cast a vote, and I
had to have a reasonable basis for my action. And when
you don't know what you're doing, you don't do anything."
The trial court was satisfied this answer was
responsive to the question and would not permit Rahbany
to answer the question "(w)hat business purpose did your
voting against the proxy serve of Medical Air Technology?"
Rahbany admitted at trial that one of the purposes
of his vote was to advance the purposes of Marwan
Investment, but claimed he "had in mind the multiple
entities that [he] represented al] the time and also the
separateness all the time."
Medical Air failed to meet its fourth quarter 1996
projections; it had projected sales of $750,000 for the
quarter, but realized only $236,000. Medical Air blames
this failure on its problems with the defendants, which it
said were distracting its principal officers from business and
demoralizing its sales force.
After the January 8, 1997 vote, negotiations with
Nortek were reopened, at a lesser price, because Medical
Air had failed to meet its fourth quarter projections. Later
in January 1997, Medical Air and Nortek signed a second
letter of intent to merge. This time Nortek offered 250,000
shares, providing that the base purchase price would not
exceed $6.25 million. The second letter of intent provided
an opportunity, with good performance, for Medical Air to
earn substantially more. The second letter of intent was
not dependant on Medical Air meeting any projections, but
did require, as of the closing date, there be no “material
adverse change in the business of the Company, including
the assets, financial condition, projections and prospects of
the Company since December 31, 1996.” No such change
occurred.
Although the terms of the second letter of intent
were acceptable to Medical Air's management, the merger
ultimately did not go through, since, among others, Medical
Airs management did not believe that, given the
defendants’ veto of the original transaction, they would
bales a ace ae
approve of a merger at a lesser price.
In April 1997, Medical Air filed a diversity suit in
the District of Massachusetts, seeking a declaration that it
was not in default to the defendants, an injunction against
the sale of its assets, and damages for breach of contract,
negligence and other claims based on Marwani Holding’s
vote against the merger. On January 26, 1998, the district
court found that, as of May 1996, Medical Air was in
default of its responsibilities under the Investment and
Stockholders Agreement, and permitted Marwan
Investment to sell Medical Air's assets. Medical Air Tech.
Corp. v. Marwan Inv., Inc., No. 97-10764-JLT (D. Mass.
Jan. 26, 1998). Medical Air did not appeal this judgment.
In August 1998, Marwan Investment began
foreclosure proceedings against Medical Air. At public
auction in November 1998, it bought all of Medical Air's
remaining assets for $150,000.
On August 10, 2000, the defendants filed a motion
to strike Medical Airs jury demand. No hearing was
scheduled. The parties were in court on January 12, 2001,
on an unrelated matter. That day, which was ten days
prior to the scheduled start of trial, and without any prior
notice to the parties, the district court announced it would
hear argument on the jury waiver issue. Medical Air's
counsel conceded the Security Agreement was a valid
waiver of the right to jury with respect to Marwan
Investment only, and stated that Medical Air had not
waived jury trial for any of the other defendants. The court
did not conduct an evidentiary hearing; both parties had
submitted affidavits.
Despite Medical Airs objection, on January 17,
2001, the court allowed the motion to strike the jury
demand without issuing a written order explaining the
basis for its decision. (Pet. App. 49a). As noted by the
Court of Appeals (Pet. App. 10a-11a), the trial judge
apparently believed that, in a case arising out of a single
transaction and presenting claims against multiple
SESE
defendants, a waiver against one was a waiver against all.’
Three of Medical Air's claims remained for trial: 1)
breach of contract and of the implied covenant of good
faith and fair dealing as to MFH and Marwani Holding; 2)
breach of fiduciary duty as to Marwani Holding; and
3) tortious interference with contractual and business
relations as to all the defendants.
At the conclusion of the four-day bench trial, the
district court ruled for the defendants on each of Medical
Air's claims and entered judgment in the amount of
$1,015,236, plus post-trial interest, for Marwan Investment
on its counterclaim based on Medical Air's default of the
Investment Agreement. Med. Air Tech. Corp. v. Marwan
Inv., Inc., No. 97-10764-JLT (D. Mass. Aug. 21, 2001).
(Pet. App. 27a).
Medical Air appealed, presenting two claims of
error: 1) that the district court applied the wrong legal
standard for a shareholder's fiduciary duty to a closely held
corporation; and 2) that the district court judge improperly
found that Medical Air had waived its right to a jury trial
* The district court stated, "If I understand correctly, regardless of
whether you think -- you talk in terms of integrated documents or
anything else, it is very, very clear that the plaintiff waived jury;
is that right?" Medical Air's counsel responded by arguing that
the only waiver was in the Security Agreement, and it applied
only to Marwan Investment. The judge then said:
But you did waive. With respect to this case, you waived
jury.
Do you know of any precedent where you can waive with
respect to one defendant and not with respect to
another? I have never tried a case like that. I would not
know how to preside. . . . I am just talking about within
- the cast, the traditional cast, of a transaction, one
plaintiff, four people, some actual signatory, some by
inference, perhaps, but the plaintiff says, I waive jury.
Doesn't that count for everything?
against all of the defendants, and not just one of the
defendants. The First Circuit affirmed the district court's
judgment, on the grounds the defendants were not in
breach of any fiduciary duties owed, and because there was
no evidence that the defendants’ actions caused the harm
that Medical Air suffered. It held that Medical Air's claim,
if any, to a jury trial was irrelevant to the outcome of the
case.
REASONS FOR GRANTING THE WRIT
I. BECAUSE THE COURT OF APPEALS MISAPPLIED
THE LAW OF THE DUTY OWED BY SHAREHOLDERS IN A
MASSACHUSETTS CLOSELY HELD CORPORATION, THIS
COURT SHOULD REVERSE THAT DECISION, AND ORDER
A NEW TRIAL, BEFORE A JURY, OF MEDICAL AIR’S
CLAIMS FOR BREACH OF FIDUCIARY DUTY.
This is one of those relatively rare cases where,
since the material evidence of Marwani Holding’s selfish
motivation and lack ‘of consideration for the well being of
Medical Air is uncontroverted, and the catastrophic effects
of the vote upon Medical Air conceded, an appellate court
need accord no special deference to the district court’s
ability at a bench trial to assess the witnesses. The trial
court’s erroneous legal determinations, upheld by the Court
of Appeals, require reversal and a new trial.
a. Standard of Review Applicable to the Trial Court’s
Legal Determinations
When a district court conducts a bench trial, its
legal determinations engender de novo review. Smith v.
F.W. Morse _& Co., 76 F.3d 413, 420 (Ist Cir. 1996).
When, as in this case, a trial cou: "premise[s] its ultimate
finding . . . on an erroneous interpretation of the standard
to be applied," an appellate court does not use clear-error
review, United States v. Parke, Davis & Co., 362 U.S. 29, 44
10
(1960), but treats the trial court's conclusion as a question
of law, which it has the power to reverse. See, United
States v. Singer Mfg. Co., 374 U.S. 174, 194 n.9 (1963)
(conclusion derived from the court's application of an
improper standard to the facts may be corrected as a matter
of law.); Parke, Davis, 362 U.S. at 44 (noting that in such
circumstances, the appeals court is "reviewing a question of
law, namely, whether the District Court applied the proper
standard to essentially undisputed facts"); ersen v.
Commissioner, 109 F.3d 56, 61 (1st Cir. 1997) (noting that
with mixed questions of law and fact "once the raw facts
are determined, deciding which legal label to apply to those
facts is a normative decision--strictly speaking, a legal
issue").
Here the Court of Appeals failed in its obligation to
reverse a District Court outcome based on mistake in
applying conirolling legal principles. No deference to the
trial court’s “first hand” opportunity to assess the witnesses
exists in such a case. Vinick v. United States, 205 F.3d 1,
6-7 (1st Cir. 2000) (“(t)he case for deference vanishes
when a court's ultimate conclusion is infected by legal
error.”); Inwood Labs v. Ives Labs., 456 U.S. 844, 855 n.15
(1982).
b. The Fiduciary Duty Owed by Controlling Shareholders
in a Closely held Corporation
In Massachusetts, shareholders in a _ close
corporation owe a duty of utmost good faith and loyalty to
the corporation and to other shareholders. Donahue v.
Co. of New d, Inc., 367 Mass. 578,
598 (1975). In such a corporation, often “the owners are
quite dependent upon one another for the success of the
enterprise...” Id. at 587, and are thus bound by this “strict,
good faith standard.” Id at 593. All shareholders,
including minority shareholders (like Marwani Holding),
are bound by the duty. See Smith v. Atlantic Properties,
Inc., 12 Mass. App. Ct. 201, 208-09 (1981).
11
This rule means that shareholders may not put their
own interests ahead of that of the company, and may not
take action based on “avarice, expediency, or self-interest in
derogation of their duty of loyalty to the other stockholders
and to the corporation.” Blank v. Chelmsford Ob/Gyn, P.
C., 420 Mass. 404, 408 (1995). Since the claim is often
made that complained of shareholder action was motivated
by such selfish, and thus not proper corporate, purposes,
Massachusetts courts have established the requirement that
when, as here, a breach of fiduciary duty is alleged, the
burden is on the controlling shareholder to show that the
challenged conduct served a legitimate purpose of the
corporation and the remaining shareholders. Zimmerman
v. Bogoff, 402 Mass. 650, 657-8 (1988). (emphasis
added).
C. Both the Court of Appeals and the District Court
Misapplied of the Law of Fiduciary Duty Owed in a Closely
held Corporation in Massachusetts
This Court’s focus should be on the crucial inquiry
of whether the lower courts appreciated, and properly
applied, the duty a controlling shareholder owes in a
Massachusetts closely held corporation. The discussion
below shows both courts misunderstood, and thus
misapplied, the law to the uncontroverted facts in this case.
Both the trial court and the Court of Appeals
incorrectly concluded that Marwani Holding could properly
discharge its fiduciary duties to Medical Air by voting
against the Nortek merger, an action that Marwani Holding
admitted served its business purposes and that of its
affiliate, Marwan, and not those of Medical Air.‘
* The district court misstated applicable Massachusetts law when
he wrote on Page 9 of the Decision “but where a breach of the
fiduciary duty is alleged, the defendant may show that it acted
for a legitimate business purpose to assure that the affairs of the
corporation were managed effectively in the best interest of all.
ae ss | | ; a a SS SSS SSIS SSS
12
Marwani Holding’s vote against Medical Air’s $10
million merger with Nortek thwarted that merger. At the
time of the vote, Medical Air’s situation was extremely dire,
a fact well known to Marwani Holding. The company had
effectively run out of operating capital, and Marwani
Holding, and its affiliate, Marwan Investment, had sent
Medical Air default notices. The Court of Appeals
recognized this fact in its decision (“The parties agree that,
by the fall of 1996, Medical Air was out of money to fill
orders and, to put it mildly, not doing well.”) (Pet. App.
5a). Medical Air’s only hope for survival lay in the Nortek
merger. °
In his decision, the district court judge wrote
“Marwani Holding did not know the basis for the merger,
the final terms of the merger or the price that would be
paid by Nortek for the merger. Lacking this information,
Marwani Iding certainl d_a_legitimate busi
purpose for voting against the merger.” (Pet. App. 39a).
Wilkes v. Springside Nursing Home, 370 Mass. 842, 850-51.”
(Pet. App. 37a-38a). There is no “effective management” concept
articulated in Donahue and its progeny, and certainly none set
out on the pages 850-1 of Wilkes. Even if this were the law, as
the discussion below shows, there is nothing in the record to
support the claim that Marwani Holding’s vote assured that the
affairs of the corporation were managed effectively, or in the best
interests of the shareholders.
* The Court of Appeals determination that “no reasonable jury
could conclude” the Nortek merger was to occur is misplaced.
(Pet. App. 15a). To begin, according to the Medical Air attorney
who worked on the deai, merger terms are never final until the
closing, and it is customary for shareholder votes to take place
before the merger documents are finalized. Nortek had a
compatible product line and was in a highly acquisitive state at
the time. Furthermore, Nortek’s actions in entering into the
January letter of intent, albeit at a reduced base merger amount,
compel the conclusion that sufficient fact existed for a jury to
conclude Nortek was prepared acquire Medical Air for a lesser
amount.
(emphasis added). :
The Court of Appeals approved of this reasoning
when it wrote: “Medical Air mischaracterizes the trial
court's holding. The trial court held that Marwani Holding
had a legitimate purpose in voting against the merger when
it had not been provided material information about the
merger and perceived a risk that the proposed merger was
made of gossamer. That legitimate purpose is not negated
if Marwani Holding's vote also coincided with its self-
interest.” (Pet. App. 18a). This is not the law. Inescapably,
Marwani Holding’s vote was for its financial gain and very
much against public policy. Compare, Merola v. Exergen,
423 Mass. 461 (1996) (Although there was no legitimate
business purpose for the termination of the plaintiff,
neither was the termination for the financial gain of
majority or contrary to established public policy).
The courts below in this action are wrong to rely on
the fact that the Investors and Stockholders Agreement
contained a provision by which, at a certain per share
merger price, and by certifying to that price, Medical Air
could compel Marwani Holding to vote for the merger.°
Simply because such a provision exists does not absolve
Marwani Holding of its duty of utmost good faith and
loyalty.
A case closely analogous to the present action is
Smith v. Atlantic Properties, Inc., 12 Mass. App. Ct. 201,
208-09 (1981). In Smith, a minority shareholder in a close
corporation, owning 25% of the oustanding stock, vetoed a
proposed distribution of dividends for personal tax reasons.
This veto, permitted by the articles of organization, which
required 80% of the stock to approve the dividend, caused
6 Section 5.3 of the Investors and Stockholders Agreement, which
prohibited Medical Air from merging with another entity without
the prior written consent of both Marwan and Marwani Holding,
except where the per share consideration for the merger
exceeded the “Qualifying Price” described in Section 5.3 and
Medical Air’s directors so certified.
14
the corporation to suffer tax penalties. Even though the
corporate organizational documents granted the defendant
veto power, the appeals court held that the shareholder's
refusal to accept the dividends was reckless and unjustified,
and that the vote was inconsistent with any reasonable
interpretation of a duty of utmost good faith and loyalty.
As in Smith, Marwani Holding was a controlling
shareholder, even though it was in the minority. There the
similarity to Smith ends. The actions of the defendants in
the present case are actually much worse than those ruled
unlawful in Smith, where there the defendant, for his own
purposes, “recklessly ran serious and unjustified risks” of
incurring a tax penalty. Id. at 209. Here, the defendants
had to have known the catastrophic consequences of their
vote, and intended that the veto either get them more
money or control of Medical Air’s valuable assets.
d. Defendants Failed in Their Burden to Demonstrate a
Legitimate Business Purpose of Medical Air Which was
Served by the Vote Against the Merger
When, as here, a breach of fiduciary duty is alleged,
the burden is on Marwani to show that the challenged
conduct served a legitimate purpose of Medical Air.
Zimmerman v. Bogoff, 402 Mass. 650, 657-8 (1988). The
unchallenged evidence, as set out in the decisions of both
lower courts, compels the conclusion that defendants have
failed to meet that burden. There is no case in
Massachusetts which stands for the proposition that a
controlling shareholder’s business purposes trump those of
the corporation, and that such a shareholder may prefer its
self interest to the good of the corporation. Furthermore,
no Massachusetts case stands for the proposition that lack
of information is a legitimate business purpose. Marwani
Holding had all the information it needed; its vote against
the merger would crush Medical Air.
Both the trial court and the Court of Appeals
recognized it was Marwani Holding’s burden to act with the
15
utmost good faith and loyalty toward, and in the best
interests of, Medical Air, and to demonstrate a legitimate
business purpose for its “no” vote. Both concluded that the
defendants had met that burden. In light of the point blank
admissions of Rahbany and his attorney and adviser,
Bodoff, each court’s analysis of what is a legitimate
business purpose, and whose legitimate business purposes
may be satisfied in the operation of a closely held
corporation, constitute, as a matter of law, reversible error.
At trial, Marwani Holding’s president, Rahbany, a)
was unable to articulate any legitimate business purpose of
Medical Airs that was served by the vote against the
merger, and b) admitted the vote served the business
purposes of Marwan Investment, which was in the process
of, and ultimately foreclosed on, Medical Air’s assets.
ji. Marwani Holding’s President Could not Articulate
a Legitimate Medical Air Business Purpose for His
Vote
In reply to the question “(w)hat legitimate business
purpose of Medical Air was served in voting against the
merger(?)”, Rahbany testified “(b)ecause I wanted at the
same time to know how viable, to find the basis, because I
had a fiduciary responsibility to cast a vote, and I had to
have a reasonable basis for my action. And when you
don’t know what you're doing, you don’t do anything.”
The trial court was satisfied this answer was responsive to
the question and would not permit Rahbany to answer the
question “(w)hat business purpose did your voting against
the proxy serve of Medical Air Technology?”
Rahbany’s testimony about what he thought would
occur if the merger was not voted on is as illogical and
nonsensical as his attempt to articulate a legitimate
Medical Air business purpose. Consider this exchange.
“Q. What alternative did you expect would occur if in fact
the merger did not -- this merger was not voted on? A.
For them, with the forbearance at that time, not a legal
16
concept but a disposition, waiting time, for them to mend
their ways for them to restore their viability.” ”
ii. Marwani Holding’s President Admitted the Vote
was to Serve the Defendants’ Business Interests; Its
Attorney's Testimony Shows a Further Selfish
Motivation
Rahbany’s testimony compels the conclusion his
vote was designed to serve the business interests of the
defendants, both of which, by January 7, 1997 had
declared Medical Air in default and each of which was
pursuing its remedies against Medical Air for that default.
He admitted at trial that it was in Marwan Investment and
Marwani Holding’s interests that he authorized the vote
against the Nortek merger. Rahbany was asked “(t)he
purpose of your vote was to advance the benefit of Marwan
Investment, correct?”, and answered “(t)hat was in part so,
yes.” He admitted in connection with the vote that he was
“interested in the business purpose of Marwan, the lender
... and Marwani.”
Bodoffs testimony suggests Marwani Holding’s
- refusal to vote for the Nortek merger was based on a belief
that Medical Air’s principals were getting a lot of money
from the merger, and the defendants not getting enough.
” Although theoretically possible, this is not a case where it could
be argued that the vote against the merger benefited both the
defendants and Medical Air. Rahbany admitted at trial that, at
the time of the vote, he knew of Medical Air’s dire financial
condition. Medical Air had disclosed to him six month’s earlier
that the company was running out of cash. Rahbany testified
that the value of the company was virtually zero at the time of
the vote. Marwani was pursing its right to hold a secured party
sale of all of Medical Air’s assets, which subsequently occurred
and at which Marwan was the purchaser. Furthermore, all of the
remaining Medical Air shareholders voted for the merger. It is
undisputable that Marwani Holding’s “no” vote paved the way for
the Marwan foreclosure, and did Medical Air no good.
17
The basis for this statement was his earlier “calculation of
how short Dr. Rahbany was going to be...”. Bodoff
admitted that, immediately after he tendered Marwani
Holding’s vote, he told Medicai Air’s attorney that, in his
“experience as an attorney there's no case that can't be
settled with money.” Both Bodoff and Medical Air’s
attorney agree that Bodoff made statements intimating that
a payment of money to the defendants might be a way to
resolve any differences.
e. A Less Harmful Alternative Existed to a “No” Vote
Even if this Court were to find Marwani Holding
had met its burden of establishing a legitimate business
purpose in voting against the merger, Medical Air must still
prevail, since there existed a less harmful alternative to the
veto.
“When an asserted business purpose for their action
is advanced by the majority...we think it is open to minority
shareholders to demonstrate that the same legitimate
objective could have been achieved through an alternative
course of action less harmful to the minority’s interest. See
Schwartz v. Marien, 37 NY2d 487, 492 (1975) {and further
citations}. If called on to settle a dispute our courts must
weigh the legitimate business purpose, if any, against the-
practicability of a less harmful alternative.” Wilkes v.
Springside Nursing Home, 370 Mass. 842, 851-2 (1976).
(emphasis added).
There was nothing to prevent Marwani Holding
from voting for the merger, and tendering its vote in
escrow, subject to the successful culmination of the merger.
As in the case of an outright vote, the defendants were fully
protected. Marwan Investment was protected with a first
security interest in all Medical Air’s assets, none of which
was wasting. Nortek was not requiring any relinquishment
of the defendants’ rights to proceed under the default
notices, and as a matter of law, the defendants would have
relinquished none of their rights, under the Investors and
18
Stockholders Agreement or related documents, in voting for
the merger. There was no urgency, and no harm to voting
for the merger. If the merger had gone forward, as was
pointed out to one of Rahbany’s attorneys, Marwani
Holding would have doubled its investment, and Marwan
Investment repaid with interest If the merger did not go
forward, the defendants would have been in the same
position they were in before the vote.
II. ON REMAND, MEDICAL AIR IS ENTITLED TO A
JURY TRIAL ON ALL CLAIMS AGAINST ALL DEFENDANTS
EXCEPT MARWAN INVESTMENT, SINCE MEDICAL AIR
DID NOT WAIVE ITS RIGHTS TO A JURY TRIAL AS TO
THOSE DEFENDANTS
a. All Parties Have a Fundamental Right to a Jury Trial
A jury trial under the Seventh Amendment to the
United States Constitution is a fundamental right that
ensures that litigants will have their disputes heard by
individual citizens and not by courts that may seek to
aggrandize their power.
b. A Contractual Waiver of a Jury Trial Must be
Strictly Construed, and Binds Only the Party to the
Contract—There is no Evidence Medical Air Abandoned its
Jury Claims in Signing the Security Agreement
While a jury right can be contracted away, such a
contract must be strictly construed. As the Court of
Appeals correctly wrote: “There is a presumption against
denying a jury trial based on waiver, and waivers must be
strictly construed. Aetna Ins. Co. v. Kennedy ex rel.
Bogash, 301 U.S. 389, 393 (1937) ("[A]s the right of jury
trial is fundamental, courts indulge every reasonable
presumption against waiver."); Paracor Fin., Inc. v. Gen.
Elec. Capital Corp., 96 F.3d 1151, 1166 n.21 (9th Cir.
1996). In a diversity jurisdiction suit, the enforcement of a
19
jury waiver is a question of federal, not state, law. See
Simler v. Conner, 372 U.S. 221, 222 (1963).” (Pet. App.
12a-13a).
A contractual waiver binds only the parties who
sign the contract. See, EEOC v. Waffle House, Inc., 122 S.
Ct. 754, 764 (2002) ("It goes without saying that a contract
cannot bind a nonparty."). Courts look to the plain
language of the contract's jury waiver to determine whether
it unambiguously covers the claims asserted. In the present
action, with only one of the four defendants a signatory to
the waiver, it can hardly be said that the language of the
Security Agreemei.t was an unambiguous abandonment of
Medical Air’s right to a jury trial against the remaining
defendants.
c. In Addition to no Evidence of a Waiver, There is no
Basis to Conclude Such Waiver was Knowing and Voluntary
Here, the district court’s decision on the jury waiver
fails for two reasons; first, as discussed above, it is based on
erroneous conclusion that the spread of the waiver in one
document out of twenty, signed only by Medical Air and
Marwan Investment, somehow reached all the way to the
remaining, non-signing defendants. The second reason it
fails is that there was no evidence before the court of a
knowing and voluntary waiver. Courts will not enforce a
jury waiver unless it was entered into knowingly and
voluntarily. See, Seaboard Lumber Co. v. United States
903 F.2d 1560, 1563 (Fed. Cir. 1990); Telum, Inc. v. E.F.
Hutton Credit Corp., 859 F.2d 835, 837 (10th Cir. 1988).
In its decision, the Court of Appeals acknowledged that, in
cases such as this, where the jury waiver was part of a
separate contract, signed only by certain parties to the
larger transaction, non-signatory parties seeking
enforcement of the waiver have a more difficult task in
showing that the waiver was voluntary and knowing. (Pet.
App. 14a). Here, no such showing was made before the
district court.
20
d. The Court of Appeals Did Not Uphold the District
Court’s Decision Striking the Jury Claim, but Wrongly
Concluded that Decision was Irrelevant to the Outcome of
the Case
The Court of Appeals’ opinion shows it was troubled
by the district court’s decision to strike the jury claims
against the remaining defendants, and noted “the confusion
in the record”. This is hardly a surprise since the district
court announced, without warning on the day it struck the
jury trial, that it would consider that motion along with the
already scheduled motion for summary judgment, and
then, struck the jury claims without issuing a written order
in any way explaining the basis for its decision. The failure
to issue such a decision underscores the trial court’s utter
lack of reliance upon any precedent in depriving Medical
Air of its fundamental constitutional right.
It is abundantly clear the Court of Appeals saw it
this way, when it wrote, “However, it appears that the trial
judge believed that in a case arising out of a single
transaction and presenting claims against multiple
defendants, a waiver against one was a waiver against all.”
(Pet. App. 10a).
The Court of Appeals, charitably characterizing the
record supporting the tria! court’s ruling as “sparse”, then
“resolved” Medical Air’s objections to the District Court’s
handling of the jury waiver issue by determining that “no
reasonable jury could find liability for breach of fiduciary
duty against Marwani Holding nor a causal link between
Marwani Holding’s vote at the January 8 board meeting
and the failure of the proposed merger with Nortek.” (Pet.
App. 15a).
The Court of Appeals determination that “no
reasonable jury could conclude” the Nortek merger was to
occur is misplaced. According to the Medical Air attorney
who worked on the deal, merger terms are never final until
the closing, and it is customary for shareholder votes to
21
take place before the merger documents are finalized.
Nortek had a compatible product line and was in a highly
acquisitive state at the time. Furthermore, Nortek’s actions
in entering into the January letter of intent, albeit at a
reduced base merger amount, compel the conclusion that
sufficient facts existed for a jury to conclude Nortek was
prepared acquire Medical Air for a lesser amount. Judging
the credibility of these witnesses should have been left to
the jury.
CONCLUSION
The petition for a writ of certiorari should be granted.
Respectfully Submitted,
Yoon ft rwiorny
Louis N. ses
Counsel of Record
MASSERY & GILLIS, LLP
101 Merrimac Street
Boston, MA 02114
Telephone (617) 523-1125
Attorney for Petitioner Medical
Air Technology Corporation
Dated: November 2002
la
United States Court of Appeals
For the First Circuit
No. 01-2348
MEDICAL AIR TECHNOLOGY CORPORATION,
Plaintiff, Appellant,
V.
MARWAN INVESTMENT, INC.; MARWANI HOLDING
COMPANY, N.V.; MULTIFINANCE HOLDING
CORPORATION; AND DR. K. PHILIP RAHBANY,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
- (Hon. Joseph L. Tauro, U.S. District Judge}
Before
Torruella, Circuit Judge,
Coffin, Senior Circuit Judge,
and Lynch, Circuit Judge.
a
2a
Louis N. Massery with whom Massery & Gillis, LLP,
Albert L. Farrah Jr., and Corwin & Corwin, LLP were on brief
for appellant.
James W. Prendergast with whom Michael G.
Bongiorno, Peter J. Kolovos, Barbara Van Gorder, and Hale
and Dorr LLP were on brief for appellees.
August 14, 2002
LYNCH, Circuit Judge. Medical Air Technology
appeals a judgment rendered after a bench trial involving a
closely held corporation's financial travails and allegations of
fiduciary violations by one of its investors. The plaintiff
Medical Air, the closely held corporation, presents two claims
of error: 1) that the district court applied the wrong legal
standard for a shareholder's fiduciary duty to a closely held
corporation; and 2) that the district court judge improperly
found that Medical Air had waived its right to a jury trial
against all of the defendants, and not just one of the
defendants. We affirm the district court's judgment, because
the defendants were not in breach of any fiduciary duties
owed, and because there was no evidence that the
defendants' actions caused the harm that Medical Air
suffered. The reasoning we use in affirming that judgment
renders Medical Air's claim, if any, to a jury trial irrelevant
and disposes of all claims in the case.
I,
Medical Air is a closely held corporation, incorporated
in 1992, which sold air purification equipment to medical
facilities. In search of financing, Medical Air executed an
agreement in January 1996 with Multifinance Holding
3a
Company ("MFH"). MFH used two related holding
companies, Marwan Investment and Marwani Holding
Company, to structure the deal. Dr. Kalil Philip Rahbany was
the President of MFH and an agent of Marwan Investment
and Marwani Holding.
The agreement resulted in a total of $1.375 million
in funding for Medical Air: a $625,000 loan from Marwan
Investment and a $750,000 purchase of preferred stock by
Marwani Holding. Medical Air signed an Investment and
Stockholders Agreement, a Secured Promissory Note for the
loan, and a Security Agreement. It also amended its Articles
of Organization. The Security Agreement was executed by
Medical Air and Marwan Investment only and served to
secure the loan from Marwan Investment. It contained a jury
waiver, which provided that:
Grantor [Medical Air] and Marwan hereby waive
their respective rights to a jury trial of any claim or
cause of action based upon or arising out of this
Security Agreement, the Investment and Stockholders
Agreement or any other agreement evidencing,
securing, or otherwise executed in connection with
any Obligations.
The Security Agreement defines "Obligations" as:
any and all indebtedness, obligations, agreements
and liabilities of either Grantor to Marwan including,
without limitation, all indebtedness and obligations
of Grantor under the Investment and Stockholders
Agreement, the Notes executed pursuant thereto, and
any other indebtedness, obligations, agreements and
liabilities of Grantor to Marwan of every kind and
description, direct or indirect, absolute or contingent,
due or to become due, regardless of how they arose
or were acquired, now existing or hereafter arising.
4a
MFH and Medical Air also entered into a Consulting
Agreement, under which MFH would provide specified
consulting services to Medical Air for the fee of $4,000 a
month. Medical Air's President, Frank Paradise, took the lead
in negotiating the deal. Medical Air was represented by
counsel in the negotiations and the drafting of the investment
agreements, as were the defendants.
Within a few months, the relationship had soured. In
May, 1996, Medical Air failed to meet the minimum net
worth and net working capital requirements to which it had
agreed in the Investment and Stockholders Agreement. The
Investment and Stockholders Agreement specified that if
Medical Air defaulted on these terms, then Marwan
Investment could accelerate the loan, making it immediately
payable, and Marwani Holding could immediately seek to
redeem its stock. If Medical Air failed to redeem the stock
within six months, under the amended Articles of
Organization, its Board of Directors would double in size plus
one, and Marwani Holding could appoint the new Board
members. Thus, if the stock was not redeemed after default,
control of Medical Air would shift to Marwani Holding.
Medical Air attempted to obtain the defendants'
permission to issue additional stock in the hope that
increased funding would allow it to expand its production
capacity to take advantage of some inchoate sales
opportunities. The defendants opposed this plan, fearing it
would dilute their interest in the company. Medical Air then
presented the defendants with the possibility of a buy-out by
an outside investor, but the defendants were not interested.
Instead, between July 8 and August 15, 1996, the
defendants sent three separate notices of default to Medical
Air and threatened litigation. Efforts were made to
restructure the business, but these were unsuccessful. In the
August 15 notice, Marwan Investment exercised its right to
demand acceleration of the loan and, the following month,
Marwani Holding requested that Medical Air redeem its
EEO ee
Sa
stock. In response, Medical Air began to look for a new
investor to buy out the defendants. During this time, the
defendants chose not to exercise their security rights against
Medical Air, waiting to see if Medical Air could secure new
funding. The parties agree that, by the fall of 1996, Medical
Air was out of money to fill orders and, to put it mildly, not
doing well.
A company called Nortek, Inc., expressed some
interest in a merger with Medical Air. On November 8, 1996,
Nortek and Medical Air signed a non-binding letter of intent,
which proposed that Medical Air's shareholders would receive
500,000 shares of Nortek common stock, worth about seven
to ten million dollars. Nortek reserved decision on a final
purchase price for Medical Air until it saw whether Medical
Air could meet its sales projections for the fourth quarter of
1996. Medical Air quickly scheduled a shareholders’ meeting
for January 8, 1997. Notices of the meeting and proxy were
sent to Medical Air shareholders on December 19, 1996.
On November 19, after receiving Nortek's letter of
intent, Rahbany requested from Medical Air the due diligence
material provided to Nortek. Under the Investment and
Shareholders Agreement, Marwani was entitled to receive
any reasonably requested information within five business
days. Rahbany says he was particularly interested in any
financial forecasts Medical Air had made, because he wanted
to assess whether Nortek's interest in Medical Air had a
realistic basis. This concern was not unfounded; at trial,
Medical Air's financial adviser testified that he warned
Medical Air that, once Nortek had seen the due diligence
materials, it would attempt to negotiate a lower purchase
price.
Rahbany says he repeatedly requested the information
over two months, but never received copies of what had been
provided to Nortek. Medical Air, in turn, was "reluctant to
produce the documents because" corporate officials felt that
the defendants were "going fishing" for evidence for their
6a
litigation in the default suit. Medical Air also asked the
defendants to identify the specific items they wanted, and the
reasons for each. The defendants refused, and reiterated
their request for all the due diligence documents. At Medical
Air's request, the defendants signed a non-disclosure
agreement, agreeing not to disclose any information about
the proposed merger.
Medical Air says that it supplied Rahbany with the
information that it judged to be necessary for Rahbany's
review of the proposed deal, including a listing of the due
diligence materials (but not the materials themselves).
Medical Air's CEO testified that he did not recall if he ever
supplied the defendants with the fourth quarter sales
projections provided to Nortek. Medical Air's financial adviser
who worked on the merger deal testified that he never
provided the defendants with the due diligence materials.
On December 31, 1996, Medical Air sent a draft
merger agreement and certain other draft documents to
shareholders for review. The defendants say that they were
not able to assess the deal in part because the terms,
including the purchase price, had not been finalized at that
time. According to the Medical Air attorney who worked on
the deal, merger terms are never final until the closing, and
it is customary for shareholder votes to take place before the
merger documents are finalized. The defendants also say
that they were unable to assess the viability of the deal
because Medical Air's fourth quarter financial results were
not yet available. The defendants had certain other problems
with the draft documents: the draft merger agreement stated
that Marwan Investment's loan would be repaid at the
Original interest rate, rather than the default interest rate
triggered by Medical Air's May 1996 default (a difference of
less than $25,000); the shares that Marwani Holding would
receive in the proposed merger would not be immediately
saleable; and a portion of the shares would be subject to loss
if the warranties that Medical Air made in the merger proved
7a
to be false. Finally, the draft merger failed to give Marwani
Holding preferred shareholder rights, although Medical Air's
amended Articles of Organization stated that any merger
would make "appropriate provisions" to provide the same
privileges to preferred stockholders "as nearly as may be,
with respect to any shares of stock or securities" received in
a merger. |
Five days before the scheduled vote, the parties met
to discuss the proposed merger. At that meeting, the
defendants asked for five pieces of information: a statement
from Nortek that due diligence was satisfactory; a patent
assignment release; an explanation of how the default loan
interest rate would be dealt with; a copy of the November
financial statements; and a valuation of the company.
Medical Air says it provided the November financial
statements, and a valuation of the defendants’ stock under
the proposed merger plan (between $1.4 and $1.8 million)
to the defendants’ counsel on the following day. Rahbany
says he was not given sufficient information to determine if
that valuation was a credible number, and says that he never
received the November financial statements. At that time,
the December financial statements were not yet ready.
Rahbany admitted at trial that he never reviewed the public
records of Nortek to try to assess the basis for Nortek's
interest in Medical Air.
Medical Ai failed to meet its fourth quarter 1996
projections; it had projected sales of $750,000 for the
quarter, but realized only $236,000. Medical Air blames this
failure on its problems with the defendants, which it said
were distracting its principal officers from business and
demoralizing its sales force.
A day or two before the vote, Medical Air's president,
Frank Paradise, was told by an associate of his that Marwani
planned to vote against the deal. Medical Air says that, as
a result of learning that Marwani intended to vote against the
deal, it reopened negotiations with Nortek on the day before
8a
the scheduled vote. The memory of Nortek's representative
was that the negotiations were reopened because Medical Air
had failed to meet its fourth quarter projections.
At the January 8 vote, Marwani Holding voted against
the merger. All other shareholders voted for the merger.
Marwani Holding, holding almost 15% of the shares, was
able to single-handedly defeat the merger because Nortek, as
part of the proposed merger agreement, had required a
minimum of 95% stockholder agreement. Still, the terms of
the Investment and Stockholders Agreement appeared to
allow Medical Air to proceed with a merger without the
defendants’ approval if the Medical Air Board of Directors
certified that the purchase price met a certain "qualifying
price" defined in the Agreement. This was never done.’
Rahbany testified that he voted against the merger
because
I wanted at the same time to know how viable, to
find the basis, because I had a fiduciary responsibility
to cast a vote, and I had to have a reasonable basis
for my action. And when you don't know what you're
doing, you don't do anything.
He also testified that he voted against the deal because he did
not think that the deal was viable. He admitted that one of
the purposes of his vote was to advance the purposes of
Marwan Investment, but stated that he "had in mind the
multiple entities that [he] represented all the time and also
the separateness all the time." After the shareholders’
meeting, Marwani's attorney, who tendered the proxy vote,
. Rahbany testified that one of the reasons justifying
his suspicions of the deal was Medical Air's failure to certify the
purchase price, although he did not voice that suspicion to Medical
Air at the time.
.
Ne
9a
told Medical Air's attorney that the Medical Air principals
would make a lot of money from the proposed merger, while
Rahbany was coming up short.
Medical Air and Nortek continued negotiations, and
later in January 1997 Nortek signed a second letter of intent
offering 250,000 shares, while providing that the purchase
price would not exceed $6.25 million. The defendants, for
their part, continued to request more information. The
merger ultimately did not go through, and Medical Air
blames this on the legal problems caused by the defendants.
Medical Air does not argue, however, that the defendants
violated any fiduciary duty with respect to their actions
following the January 8 vote.
II.
In April 1997, Medical Air filed a diversity suit in the
District of Massachusetts, seeking a declaration that it was
not in default to the defendants, an injunction against the
sale of its assets, and damages for breach of contract,
negligence and other claims based on Marwani Holding’s vote
against the merger. On January 26, 1998, the district court
found that, as of May 1996, Medical Air was in default of its
responsibilities under the Investment and Stockholders
Agreement, and permitted Marwan Investment to sell
Medical Air's assets. Medical Air Tech. Corp. v. Marwan Inv.
Inc., No. 97-10764-JLT (D. Mass. Jan. 26, 1998). Medicai Air
does not appeal this judgment.
The defendants did not immediately enforce their
security rights against Medical Air; they say they were
waiting to see if Medical Air could find a way to pull itself
out of its financial hole. In August 1998, Marwan Investment
began foreclosure proceedings against Medical Air. At public
auction in November 1998, Marwan Investment bought all of
Medical Air's remaining assets with a credit bid of $150,000.
Marwan says Medical Air still owed a debt of $1,015,236 to
Marwan on the 1996 loan. The defendants then moved for
10a
a dismissal of Medical Air's case, arguing that their
foreclosure purchase had included Medical Air's rights in this
case. The district court denied that motion on June 22, 1999.
It also denied a motion by Medical Air's shareholders to
intervene.
On August 10, 2000, the defendants filed a motion to
strike Medical Air's jury demand. On January 12, 2001, the
court heard argument on the jury waiver issue. Medical Air's
counsel argued that when Medical Air signed the Security
Agreement it did not understand that it was waiving jury
trial, but he conceded that the Security Agreement effected
a valid waiver of the right to jury with respect to Marwan
Investment. Nonetheless, he argued that Medical Air had not
waived jury trial for any of the other defendants. The district
court judge expressed concern about the feasibility of having
a bench trial for one defendant and a simultaneous jury trial
for the others. The defendants argued that the plaintiff had
presented a claim under Mass. Gen. L. ch. 93A, which could
not be considered by a jury, and so the judge "would have to
make findings that would be the mirror findings of" the jury
findings. The court did not conduct an evidentiary hearing
(none had been requested), but both parties had submitted
affidavits. The court allowed the motion to strike the jury
demand without issuing a written order explaining the basis
for its decision. However, it appears that the trial judge
believed that, in a case arising out of a single transaction and
presenting claims against multiple defendants, a waiver
against one was a waiver against all.”
2 The court initially noted, "If 1 understand correctly,
regardless of whether you think -- you talk in terms of integrated
documents or anything else, it is very, very clear that the plaintiff
waived jury; is that right?" Medical Air's counsel responded by
arguing that the only waiver was in the Security Agreement, and it
applied only to Marwan Investment. The judge then said:
lla
After the court ruled on the defendants’ summary
judgment motion, three of Medical Air's claims remained for
trial: 1) breach of contract and of the implied covenant of
good faith and fair dealing as to MFH and Marwani Holding;
2) breach of fiduciary duty as to Marwani Holding; and
3) tortious interference with contractual and business
relations as to all the defendants.
At the conclusion of the four day bench trial, the
district court ruled for the defendants on each of Medical
Air's remaining claims and entered judgment in the amount
of $1,015,236, plus post-trial interest, for Marwan
Investment on its counterclaim based on Medical Air's default
of the Investment Agreement. It also ruled for the plaintiffs
on the defendants’ good faith counterclaim. Med. Air Tech.
Corp. v. Marwan Inv., Inc., No. 97-10764-JLT (D. Mass. Aug.
21, 2001).
Il.
On appeal to this court, Medical Air primarily
challenges two of the district court's rulings: its order
dismissing the jury demand, and its ruling that Marwani
Holding was not in breach of its fiduciary duty as a
stockholder. The defendants defend the court's rulings on
But you did waive. With respect to this case, you waived
jury.
Do you know of any precedent where you can waive with
respect to one defendant and not with respect to another?
I have never tried a case like that. I would not know how
to preside. . . . 1 am just talking about within the cast, the
traditional cast, of a transaction, one plaintiff, four people,
some actual signatory, some by inference, perhaps, but the
plaintiff says, 1 waive jury. Doesn't that count for
everything?
12a
the grounds given by the district court. They also argue, in
the alternative, that the district court's judgment should be
upheld because Marwan Investment became the assignee of
Medical Air's right to pursue this case when it bought all
Medical Air's assets in foreclosure.
A. Jury Trial
Medical Air argues that the trial judge erred in
granting the defendants' motion to strike Medical Air's jury
demand as to its claims against Dr. Rahbany, MFH, and
Marwani Holding, because only Marwan Investment was
party to the Security Agreement which contained the jury
waiver.
The confusion on this issue evident in the record leads
us to review basic principles. There is a presumption against
denying a jury trial based on waiver, and waivers must be
strictly construed.’ Aetna Ins. Co. v. Kennedy ex rel. Bogash,
301 U.S. 389, 393 (1937) ("[A]s the right of jury trial is
fundamental, courts indulge every reasonable presumption
against waiver."); Paracor Fin., Inc. v. Gen. Elec. Capital
Corp., 96 F.3d 1151, 1166 n.21 (9th Cir. 1996). Ina
diversity jurisdiction suit, the enforcement of a jury waiver is
. The circuits are currently split on the question of
which party bears the burden of proof as to whether a contractual
jury trial waiver was knowing and voluntary. See Pierce v.
Atchison Topeka & Santa Fe Ry. Co., 110 F.3d 431, 435 n.4 (7th
Cir. 1997) (collecting cases); Hulsey v. West, 966 F.2d 579, 581
(10th Cir. 1992). We have not yet ruled on this point, although a
district court within this circuit has held that the party seeking to
enforce the waiver bears the burden. See Luis Inc. v.
Citibank, N.A., 920 F. Supp. 15, 18 (D.P.R. 1996). In the
analogous situation of a release of claims against an employer, we
have held that the party seeking to enforce the release bears the
burden of proof. See Melanson v. Browning-Ferris Indus., 281 F.3d
272, 276 (1st Cir. 2002). We need not resolve the issue here.
13a
a question of federal, not state, law. See Simler v. Conner,
372 U.S. 221, 222 (1963).
In general, a contractual waiver binds only the parties
who sign the contract. See EEOC v. Waffle House. Inc.. 122
S. Ct. 754, 764 (2002) ("It goes without saying that a
contract cannot bind a nonparty."). In Waffle House. the
Supreme Court held that the EEOC was not bound by an
employer-employee contractual arbitration agreement,
reasoning that "[a]bsent some ambiguity in the agreement,
... it is the language of the contract that defines the scope of
disputes subject to arbitration," and therefore even the
federal policy favoring arbitration does not "authorize[] a
court to compel arbitration . . . by any parties. . . that are not
already covered in the agreement." Id. at 762.
There are some exceptions to this rule. For instance,
some courts have applied a theory of equitable estoppel for
suits against non-signatories arising out of the contract itself,
reasoning that the party seeking the benefit of a contract
could not refuse to be bound by a clause contained within it.
E.g., Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524,
527-31 (Sth Cir.), cert. denied, 531 U.S. 1013 (2000); MS
Dealer Serv. Corp. v. Franklin, 177 F.3d 942, 947-48 (11th
Cir. 1999); Hughes Masonry Co. v. Greater Clark County Sch.
Bldg. Corp., 659 F.2d 836, 841 & n.9 (7th Cir. 1981).
In general, though, we look to the plain language of
the contract's jury waiver to determine whether it
unambiguously covers the claims asserted. In cases where
the contractual language is ambiguous, simultaneously
executed documents may be relevant as a matter. of
contractual interpretation. In Massachusetts, "if the parties
execute two or more documents, with a manifested intent
that the documents together express their entire agreement,
a court reads the documents together, rather than construing
each as if it stood alone." Donoghue v. IBC USA (Publ'ns
Inc., 70 F.3d 206, 212 (1st Cir. 1995); see also FDIC v. Singh,
977 F.2d 18, 21-22 (1st Cir. 1992); Chase Comm. Corp. v.
14a
Owen, 32 Mass. App. Ct. 248, 588 N.E.2d 705, 707 (1992);
cf. Paracor Fin., 96 F.3d at 1165 (holding that this is "a
principle of interpretation [which] does not mean that
contemporaneously executed documents somehow become
a single unified contract binding all signatories to all
provisions").
Even once it is determined that a contractual jury
waiver clause does encompass the asserted claims, courts will
not enforce the jury waiver unless it was entered into
knowingly and voluntarily. See Seaboard Lumber Co. v.
United States, 903 F.2d 1560, 1563 (Fed. Cir. 1990); Telum,
Inc. v. E.F. Hutton Credit Corp., 859 F.2d 835, 837 (10th Cir.
1988) (jury waiver may not be fraudulently induced); K.M.C.
Co. v. Irving Tr. Co., 757 F.2d 752, 755-56 (6th Cir. 1985).
In cases such as this, where the jury waiver was part of a
separate contract, signed only by certain parties to the larger
transaction, non-signatory parties seeking enforcement of the
waiver may have a more difficult task in showing that the
waiver was voluntary and knowing. This is, however, a fact-
based inquiry. See Smart v. Gillette Co. Long-Term
Disability Plan, 70 F.3d 173, 182 (1st Cir. 1995).
Medical Air has conceded that it made a valid jury
waiver with regards to all claims against Marwan Investment.
The record is sparse as to the basis for the trial court's ruling.
: In analogous situations we have looked to the
"totality of the circumstances," including factors such as the waiving
party's education and business experience, the respective roles of
the parties in determining the terms of the waiver, the clarity of the
agreement, the amount of time the waiving party had to consider
the waiver, whether the waiving party was represented by counsel,
and the consideration offered for the waiver, to determine if the
waiver was knowing and voluntary. Melanson, 281 F.3d at 276 &
n.4 (waiver of Title VII rights through release of claims against
employer); Smart v. Gille _Long-T isability Plan, 70 F.3d
173, 181-82 (1st Cir. 1995) (waiver of ERISA pension benefits).
15a
We do not, though, need to decide the issue. As we hold
below, no reasonable jury could find liability for breach of
fiduciary duty against Marwani Holding nor a causal link
between Marwani Holding's vote at the January 8 board
meeting and the failure of the proposed merger with Nortek.
Because the core ruling is correct and none of Medical
Air's claims could survive a motion for judgment as a matter
of law, the jury waiver question is no longer viable. See
Segrets v. Gillman Knitwear Co., 207 F.3d 56, 64 (1st Cir.
2000); In re N-500L Cases, 691 F.3d 15, 25 (1st Cir. 1982).
See generally 9 C. Wright & A. Miller, Federal Practice and
Procedure § 2322 n.6 (2d ed. 1995 & Supp. 2002) (collecting
cases).
B. Fiducia u
1. Alleged Breach of Duty
Under Massachusetts law, shareholders in a close
corporation owe a fiduciary duty of "utmost good faith and
loyalty." Zimmerman v. Bogoff, 402 Mass. 650, 524 N.E.2d
849, 853 (1988) (quoting Donahue v. R fe) Co.
of New England, 367 Mass. 578, 328 N.E.2d 505, 515
(1975)) (internal quotation marks omitted). This is a higher
standard than a simple "good faith and inherent fairness"
standard. Donahue, 328 N.E.2d at 515-16. The
Massachusetts Supreme Judicial Court (SJC) has articulated
a two-part test for determining if this fiduciary duty has been
violated. First, the defendant must show 4a legitimate
business purpose for its action that allegedly is a breach. If
the defendant makes such a showing, the burden shifts to the
plaintiff to show that "the proffered legitimate objective could
have been achieved through a less harmful, reasonably
practicable, alternative mode of action.". Zimmerman, 524
N.E.2d at 853. Then the court "must weigh the legitimate
business purpose, if any, against the practicability of a less
harmful alternative." Wilkes v. Springside Nursing Home,
16a
370 Mass. 842, 353 N.E.2d 657, 663 (1976). In applying this
test, courts must be sure not to "unduly hamper...
effectiveness in inanaging the corporation in the best
interests of all concerned." Id. Moreover, "mere errors of
judgment" do not constitute a fiduciary breach. Spiegel v.
Beacon Participations, 297 Mass. 398, 8 N.E.2d 895, 904
(1937).
Donahue itself involved an attempt by majority
stockholders to freeze out minority shareholders. 328 N.E.2d
at 509-11. See generally Peter M. Rosenblum, Corporate
Fiduciary Duties in Massachusetts and Delaware, in How to
Incorporate and Counsel _a Business (Massachusetts
Continuing Legal Education, Inc. 1999). By contrast, this
case involves actions by 15% minority shareholders.
Massachusetts law is clear that minority shareholders in close
corporations also have fiduciary responsibilities. See A.W.
Chesterton Co. v. Chesterton, 128 F.3d 1, 5-6 (1st Cir. 1997);
Zimmerman, 524 N.E.2d at 853; Donahue, 328 N.E.2d at
517; Smith v. Atl. Props., Inc., 12 Mass. App. Ct. 201, 422
N.E.2d 798, 801-02 (1981). Chesterton and Smith involved
situations in which unilateral action by minority shareholders
would result in dire tax consequences to the majority
shareholders. See A.W. Chesterton Co., 128 F.3d at 3; Smith,
422 N.E.2d at 800. Further, because the financial obligations
were owed to the government, there was no market
mechanism to determine the consequences of the action. In
that sense, the minority shareholders had effective control
over one aspect of corporate finances. Here, by contrast, the
defendants did not inherently have effective control. Their
15% was needed only because the outside purchasers set as
a condition of sale that 95% of the shareholders approve the
-merger. The Donahue rule itself involves a balancing of
legitimate interests, and the scope of the duties owed may
depend, in part, on context. See Zimmerman, 524 N.E.2d at
853 ("[T]he Donahue remedy is not intended to place a strait
jacket on legitimate corporate activity.")
PERSIE TDR, MOORE: CR RIN ESN
Sin ay Sead ats hac
a ela LAS ls daly’ eS Lamha pha gs Sek
17a
The district court here found that "[lJacking th[e]
information [concerning the basis for the merger, the final
terms of the merger, or the price that would be paid],
Marwani certainly had a legitimate business reason for voting
against the merger" and, further, that Medical Air's refusal to
provide the requested infcrmation "left Marwani with no
choice but to vote against merger." The district court then
found that the only alternative advanced by Medical Air was
for Marwani simply to vote for the Nortek merger, an
alternative that totally failed to address the problems with
the deal itself. This showing does not meet the plaintiff's
burden.
Medical Air argues that the district judge improperly
construed the Massachusetts law governing fiduciary duty in
closely held relationships by holding that Marwani Holding's
own business interests could be a proper motivating factor
for the vote. It argues that Marwani's vote against the
merger was not motivated by legitimate business interests,
saying that the vote was really motivated by the defendants’
own self-interest -- specifically, that Marwani wanted more
of the proceeds of the merger to go to Marwan, rather than
the Medical Air principals. It says that Marwani's vote
against the merger was intended to pave the way for
Marwan's foreclosure of Medical Air's assets, given that
Medical Air's financial situation was so desperate in January
1997 that the merger was the only way to salvage the
business. Medical Air relies heavily on Rahbany's testimony
admitting that he did take Marwan Investment's and
Marwani Holding's interests into consideration in his
decision. It also relies on the statement that Marwani
Holding’s counsel allegedly made after the January 8 vote,
complaining that Rahbany would not make enough money
out of the proposed deal.
Medical Air mischaracterizes the trial court's holding.
The trial court held that Marwani Holding had a legitimate
purpose in voting agairist the merger when it had not been
18a
provided material information about the merger and
perceived a risk that the proposed merger was made of
gossamer. That legitimate purpose is not negated if Marwani
Holding's vote also coincided with its self-interest.
We reject Medical Air's argument that a minority
shareholder may never, under the Donahue rule, take its own
interest into account in deciding its vote. Such an argument
is both unrealistic and too biased. The SJC has observed that
stockholders in a close corporation "may not act out of
avarice, expediency, or self-interest in derogation of their
duty of loyalty to the other stockholders and to the
corporation." Blank v. Chelmsford OB/Gyn, P.C., 420 Mass.
404, 649 N.E.2d 1102, 1105 (1995) (emphasis added); see
also Donahue, 328 N.E.2d at 515 (using same language). But
self-interest may be a proper motive for a stockholder's
actions, so long as that interest does not result in acts in
derogation of the stockholder's fiduciary duty. The SJC has
held that majority stockholders "have certain rights to what
has been termed 'selfish ownership’ in the corporation which
should be balanced against the concept of their fiduciary
obligation." Wilkes, 353 N.E.2d at 663. We think that
principle extends, at least in part, to minority stockholders,
although their interests are somewhat different in character.
See A.W. Chesterton Co., 128 F.3d at 7 (noting that minority
stockholders may control some aspects of a corporation but
not others). Admittedly, there may be tensions between the
two types of interests -- loyalty to the corporation and selfish
ownership. Difficult cases will arise where the dividing line
is not clear. This is not one of those cases.
The district court correctly found that Marwani
Holding had shown a legitimate business rationale for the
vote against the merger. To begin with, Marwani Holding
did lack material information about the proposed merger and
Medical Air had failed to provide Marwani Holding with the
requested due diligence materials. Marwani Holding also
had a suspicion, reasonable in context, that the deal was
19a
based on unrealistic assumptions that would ultimately doom
it, and that it served only as a distraction from the real
problems facing Medical Air. This suspicion was well-
founded; Medical Air's CEO admitted at trial that the fourth
quarter sales estimates for 1996 provided to Nortek were
above what Medical Air had ever accomplished before and
far exceeded its actual fourth quarter sales results. These
reasons more than suffice to show a legitimate business
reason for Marwani's vote.
Upon this showing, the burden shifted to Medical Air
to show that there was "a less harmful, reasonably
practicable, alternative mode of action" other than the vote
against the merger. Medical Air has not made any such
showing. The district court found that Medical Air's
proposed alternative -- that Marwani could have simply voted
for the merger -- is not a reasonable and practicable
alternative, given Marwani's legitimate concerns about what
form the deal would ultimately take, or whether the whole
deal was simply a chimera. Its finding was compelled by the
evidence.
2. Causation
The defendants argue in the alternative that, even if
Marwani Holding had violated a fiduciary duty in voting
against the merger, it was not the cause of the merger's
failure. We agree. Nortek's CEO testified at trial (through
deposition) that after Nortek saw the fourth quarter sales
results, it decided that it should pay less than was offered in
the original letter of intent and reopened negotiations with
Medical Air. The renegotiated offer from Nortek, as
expressed in the second letter of intent, provided only half
what was offered in the deal before the Board at the January
8 vote. It is clear that Nortek was not willing to go through
with the terms of the earlier proposed merger put before the
Board that Marwani voted against. Even if Marwani Holding
had voted for the proposed merger, it would have made no
20a
difference. Medical Air still would have been in the same
position as it was after the January 8 vote, negotiating new
terms with Nortek. No reasonable jury could find that
Marwani Holding's vote was the proximate cause of the
demise of the proposed Nortek merger.
C. Other Claims
The plaintiff's other claims are similarly lacking in
merit. The remaining questions decided by the district court
in the bench trial were: a claim against MFH for breach of the
consulting agreement; a breach of the implied covenant of
good faith and fair dealing against Marwani Holding based
on its vote against the Nortek merger; and tortious
interference with contractual relations against Rahbany,
MFH, and Marwani Holding for their actions with regard to
the Nortek merger.* The latter two claims must fail, for the
same reasons that the fiduciary duty claim against Marwan
Holding fails. Neither Rahbany nor MFH took any actions
with regards to the Nortek deal that were separate from the
actions taken by Marwan Holding, discussed above. Medical
Air has not presented any evidence to indicate that these
actions, rather than Medical Air's inability to meet fourth
quarter sales projections, caused the proposed merger before
the Board on January 8 to fail. Without causation, there can
be no claim for tortious interference, see United Truck
Leasing Corp. v. Geltman, 406 Mass. 811, 551 N.E.2d 20, 21
(1990), or for a breach of the implied covenant of good faith
and fair dealing, see Druker v. Roland Wm. Jutras Assocs.,
370 Mass. 383, 348 N.E.2d 763, 765 (1976) ("[I]n every
contract there is an implied covenant [of good faith and fair
. Medical Air did not appeal the merits of the district
court's rulings on these claims. We consider the question only for
the purpose of Medical Air's appeal of the denial of a jury trial on
all of its claims against MFH, Rahbany and Marwani Holding.
2la
dealing) that neither party shall do anything which will have
the effect of destroying or injuring the right of the other party
to receive the fruits of the contract .. . ."") (quoting Uproar
Co. v. Nat'l Broad. Co., 81 F.2d 373, 377 (1st Cir. 1936));
MacGillivary v. W. Dana Bartlett Ins. Agency of Lexington,
Inc., 14 Mass. App. Ct. 52, 436 N.E.2d 964, 967 (1982).
That leaves only Medical Air's claim that MFH
violated its contractual obligations under the consulting
agreement. The district court outlined the alleged claim well
in its opinion. The consulting agreement required MFH to
provide "financial and strategic corporate planning services"
to Medical Air "including, by way of example: (i) assisting
[Medical Air] in attracting a new senior leader; (ii)
evaluating and helping source transactions such as
acquisitions, joint ventures and public offerings; and (iii)
assisting [Medical Air] in developing financial and operating
reporting systems." Medical Air's CEO, Stephen Hague,
testified that MFH did nothing to help attract a new lender or
to develop financial and operating reporting systems.
However, Hague also testified that he met on a monthly basis
for a few hours with the consultant provided by MFH, as well
as speaking with him on the phone for a few hours each
month. During these meetings, the consultant reviewed the
operation of the company and proposals for the company.
According to Hague, the consultant encouraged Medical Air
to expand its sales force rapidly; assisted in putting together
an expansion plan; recommended and outlined the creation
of a business advisory board; and investigated at least one
possible acquisition. The consultant also occasionally
interviewed or spoke with sales representatives. In addition,
Medical Air did effect changes in its accounting procedures
during this time period; the consultant was copied on the
relevant documents, but the record is not clear as to what his
level of participation was.
In August 1996, the consultant who had been working
with Medical Air ceased to work for MFH. In September,
22a
Medical Air stopped paying the $4,000 per month
consultancy fee. In October 1996, Medical Air met with a
new individual that MFH had appointed to replace the
previous consultant, but that was the last service provided
under the consultancy agreement. At this point, Medical Air
was already in default of its obligations under the Investment
and Stockholders Agreement.°
Based on the information provided by Medical Air's
CEO, we doubt that Medical Air has presented enough
evidence on this claim for it to go to a jury. It is undisputed
that the MFH consultant worked with Medical Air throughout
the relevant time period and provided input on the business's
development. As the district court noted, the fact that the
MFH consultant did not achieve all of the goals laid out "by
way of example" in the consulting agreement did not
constitute breach, given how quickly the entire relationship
disintegrated and the agreement's lack of any time frame for
achieving these goals.
Regardless of the strength of the claim, however, the
claim is no longer Medical Air's to make. Marwan Investment
purchased all the assets of Medical Air at the foreclosure sale
in November 1998. The description of assets included "all
rights, claims, counterclaims, crossclaims, demands,
recoveries and defenses in connection with or asserted or
which may be asserted by Medical Air in that certain
litigation styled Medical Air Technolo orporation v.
Marwan Investment . . . pending in the United States District
Court for the District of Massachusetts." Under
Massachusetts law, claims for breach of contract are
$ Medical Air did not argue that MFH's breach was
based on the failure to provide ongoing consultancy services after
September 1996.
23a
és
tm
i
x
generally assignable.’ Raymer v. Bay State Nat'l Bank, 384
Mass. 310, 424 N.E.2d 515, 518 (1981); see also SAPC, Inc.
v. Lotus Dev. Corp., 921 F.2d 360 (ist Cir. 1990). Although
® there may be cases in which public policy concerns merit the
creation of an exception to that rule when the claim has been
involuntarily assigned through a foreclosure sale, this is not
such a case. If the claim for breach of the consulting
agreement constituted a defense to the defendants' claim of
default, or if it would have saved Medical Air as an ongoing
concern, than Medical Air should have raised this as a
defense to the defendants’ summary judgment motion on the
default claim. Medical Air did not do so, nor did it raise any
contemporaneous objection to the inclusion of its rights in
this matter in the assets foreclosure sale.
pe
Saab Sea seinetinT vatote tee dy oc
Conclusion
The district court's decision is affirmed. No costs are
awarded.
4 Sandra L. Lynch
: First Circuit Judge
’ The defendants have argued that all of Medical
Air's claims are assignable, whether or not they sound in contract.
We need not decide this point, as we have disposed of Medical Air's
other claims on other grounds.
7 ae eeeeies |
24a
United States Court of Appeals
For the First Circuit
No..01-2348
MEDICAL AIR TECHNOLOGY CORPORATION,
Plaintiff, Appellant,
v.
MARWAN INVESTMENT, INC.; MARWANI HOLDING
COMPANY, N.V.; MULTIFINANCE HOLDING
CORPORATION; AND DR. K. PHILIP RAHBANY,
Defendants, Appellees.
' ERRATA SHEET
The opinion of this court, issued August 14, 2002,
should be amended as follows:
page 8, line 4: delete "," after "statements"
page 13, line 2: replace "plaintiffs" with "plaintiff"
page 24, line 17: replace "leader" with "lender"
25a
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
MEDICAL AIR TECHNOLOGY )Civil Action
CORPORATION )#97-10764-
) JLT
Plaintiff )
)
Vv. )
)
)
MARWAN INVESTMENT, INC., )
MARWANI HOLDING COMPANY, N.V., )
MULTIFINANCE HOLDING CORPORATION )
AND DR. K. PHILLIP RAHBANY )
Defendants )
ORDER
August 21, 2001
TAURO, J.,
The court hereby orders that:
(1) Judgment is entered for Marwani on
Plaintiffs breach of fiduciary duty claim;
(2) Judgment is entered for Multifinance Holding
Co. on Plaintiffs breach of contract claim;
(3) Judgment is entered for Marwani on
PlaintifPs breach of the implied covenant of
good faith and fair dealing claim;
(4)
(3)
(6)
(7)
26a
Judgment is entered for all Defendants on
Plaintiffs tortious interference claim;
Judgment is entered in the amount of
$1,015,236, plus interest accrued since Trial,
for Marwan on its counterclaims for action of
the note and breach of contract;
Judgment is entered for Plaintiff on Marwan
and Marwani’s counterciaiim for breach of the
implied covenant of good faith and fair
dealing; and
Judgment is entered for Marwan and
Marwani on their counterclaim for
declaratory judgment.
IT IS SO ORDERED.
/s/
United States District Judge
27a
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
MEDICAL AIR TECHNOLOGY CORP.,
Plaintiff
V. CIVIL ACTION
NO. 97-10764-JLT
MARWAN INVESTMENT, INC.,
MARWANI HOLDING COMPANY, N.V.
AND DR. K. PHILLIP RAHBANY
Defendants
JUDGMENT
TAURO, D.J.
In accordance with the Court’s Memorandum and
Order dated August 21, 2001 in the above-entitled action, it
is hereby ORDERED:
Judgment for Defendant, Marwani on Plaintiffs
breach of fiduciary duty;
Judgment for Defendant, Multi-finance Holding Co..,
on Plaintiffs breach of contract claim; Judgment for
Defendant, Marwan on Plaintiffs beach of the implied
covenant of good faith and fair dealing claim; Judgment for
all of the Defendants on Plaintiffs tortious interference claim;
Ju ent for Defendant, Marwan in the unt _ of
1,015,326, plus interest since Trial on its counterclaims for
action of the note and breach of contract; Judgment for
Plainiiff on Marwan and Marwani’s counterclaim for breach
of implied covenant of good faith and fair dealing; and
Judgment for Defendants, Marwan and Marwani on their
counterclaim for declaratory judgment.
28a
By the Court,
August 22, 2001 /s/.
Date Deputy Clerk
29a
UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
Civil Action
No. 97-
10764-JLT
MEDICAL AIR TECHNOLOGY, CORP.,
Plaintiff,
Lf
MARWAN INVESTMENT, INC.;
MARWANI HOLDING CO., N.V.;
MULTIFINANCE HOLDING CORP.; and
K. PHILIP RAHBANY,
Defendants.
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MEMORANDUM
August 21, 2001
TAURO, J.=——
Plaintiff Medical Air Technology Corp. ("Medical Air")
sues Defendants Marwan Investment, Inc. ("Marwan");
Marwani Holding Co., N.V. ("Marwani"); Multifinance
Holding Corp. ("MHC"); and Dr. K. Philip Rahbany. Medical
Air alleges that Marwani breached its fiduciary duty; MHC
breached its contract; Marwani breached the implied
covenant of good faith and fair dealing; and all Defendants
tortiously interfered with contractual relations. Marwan and
Marwani counterclaim for action on a note, breach of
contract, breach of the implied covenant of good faith and
fair dealing, and for a declaratory judgment that rights under
the contract are enforceable. The court conducted a bench
trial and makes the following findings of fact and conclusions
30a
of law.
FINDINGS OF FACT
Medical Air is a closely-held corporation that
manufactures air-purification equipment for controlling the
spread of tuberculosis.’ Stephen Hague was the company's
chief executive officer? Frank Paradise was the company's
president.°
In 1995, Medical Air began seeking sources of
investment.* After an unsuccessful attempt to raise funds
through an initial public offering, Medical Air sought a
"venture-type investor. * Medical Air's counsel introduced the
company to MHC, the assets manager of Multifinance
Investment & Holding ("MFIH"); and to Marwan and
Marwani, holding companies for investments made by or on
behalf of MFIH.° Defendant Rahbany is the President and
sole director of MHC, and Marwan and Marwani's agent.
With MHC's approval, Marwan and Marwani entered
into an Investment and Stockholders Agreement ("ISA") with
Medical Air, Hague, and Paradise, whereby Marwan loaned
Medical Air $625,000 and Marwani invested $750,000 in
exchange for 15,000 shares of Medical Air's convertible
1 (Tr. Vol. I at 68:16-18.)
? cTr. Vol. I at 79:5.)
3 (Tr. Vol. I at 79:14.)
* (Tr. Vol. I at 78:13-21.)
$ (Tr. Vol. I at 78:13-21.)
* (Tr. Vol. I at 80:3-5.)
” (Tr. Vol. IIA at 91:11-15.)
3la
redeemable preferred stock.®
The ISA contained three provisions particularly
relevant to this litigation. The information-request provision
required Medical Air to provide Marwan and Marwani with
any reasonably requested information within five business
days of the request.”
The merger provision stated that if Medical Air sought
to merge with another company, Marwani's shareholder vote
would be unnecessary if Medical Air's Board of Directors
certified in writing that the consideration for the merger was
a "Qualifying Price," as defined in the ISA."° Section 5.3 of
the ISA provided that Medical Air "may merge with or into or
consolidate with or sell substantially all of its assets to
another entity if...the value of the consideration received in
respect to each share of Medical's Common Stock equals or
exceeds the Qualifying Price."
The ISA also contained a default provision, stating
that Medical Air would default if it failed to maintain a
specified minimum "Consolidated Net Worth" or to maintain
a minimum "Consolidated Net Working Capital’. "* In the
event of default, two things could occur. First, under the ISA,
Marwan could accelerate the loan, and all principal and
* (Trial Ex. 6.)
® (Trial Ex. 6 @ § 4.5(d).)
dd. at § 5.3.)
" dd. at § 4.8.)
? dd. at § 4.9.)
8 dd. at § 11.1.)
32a
interest would be immediately payable.'* Second, according
to Medical Air's Articles of Incorporation, Marwani could
immediately seek to redeem its preferred stock.’* Medical Air
had six months to comply.’® If Medical Air failed to redeem
within the six-month period, Medical Air's Board of Directors
would double in size and increase by one.’ Marwani could
then elect a majority of the new board members.”*
Securing the needed capital solved one problem, but
Medical Air also required financial and management
expertise.” The company turned to MHC, with whom it
entered a Consulting Agreement.”” For $4000/month, MHC
agreed to act as Medical Air's financial consultant.” MHC
designated one of its vice presidents, John Flaherty, to act as
Medical Air's primary consultant, a position Flaherty served
in from January to August 1996.”
In May 1996, Medical Air failed to meet the minimum
Net Worth and Net Working Capital requirements established
in the ISA, thus placing the company in default. On July 8,
dd. at § 11.1(g).)
'S (Trial Ex. 4 at § 6(a) (ii).)
6 (Id. at § 6(b).)
7 (Trial Ex. 4 at § 6(b).)
* dd.)
'9 (Tr. Vol. I at 77:2-8.)
2° (Id. at 90:5-6.)
7! (Trial Ex. 11 at § 4(a).)
2 (id. at § 3; Tr. Vol. IIA at 116:10-118:9.)
aE eae ore
33a
1996, Flaherty, acting on Marwan and Marwani's behalf,
notified Medical Air of the default and reserved all rights
under the ISA.”°
On July 15, 1996, after working with Flaherty,
Medical Air's Board of Directors adopted an operating plan to
cut costs by, among others, reducing the monthly operating
budget. On August 15, 1996, despite the company's efforts,
Marwan exercised its right to accelerate the loan, in
accordance with the ISA, and on September 3, 1996,
Marwani requested that Medical Air redeem the preferred
stock, as permitted under the Articles of Incorporation.”°
Realizing the impact of these actions, Medical Air
sought to "take out" Marwan and Marwani.2° Medical Air
retained Joseph Finn, a certified public accountant and
shareholder, to identify businesses or individuals potentially
interested in purchasing the company.”” Finn sent a mass
mailing to 800 prospective purchasers.“ Jerold Lavine
responded to Finn's letter and contacted Richard Bready, the
Chairman and CEO of Nortek, Inc.”° - - a building-products
manufacturer with a subsidiary in the medical-air-quality
* (Trial Ex. 25.)
* (Trial Ex. 27.)
** (Trial Ex. 30.)
* (Tr. Vol. IV at 25:7-13.)
?” (Trial Ex. 28.)
8 (Tr. Vol. IIA at 41:19-42:8.)
*° (Id. at 42:25-43:5.)
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business.*°
Bready expressed interest in Nortek acquiring Medical
Air, and on November 8, 1996, the two companies executed
a Letter of Intent for their proposed merger.*’ The Letter set
a closing date of no later than January 15, 1997. The Letter
of Intent stated that Medical Air's shareholders would receive
500,000 shares of Nortek common stock.** Based upon the
then current trading price, the consideration for the proposed
merger was approximately $7 million.” This price was based
on Medical Air's financial projections. But the Letter of Intent
stated that Nortek's commitment was "subject to its
satisfaction with the results of its review of [Medical Air's]
business affairs.”*°
On November 7, 1996, Medical Air delivered due-
diligence materials to Nortek.*° On November 19, 1996,
counsel for Marwan, Marwani, and MHC sent a letter to
Medical Air, requesting the due-diligence materials supplied
to Nortek.*” At Medical Air's request, Defendants signed a
non-disclosure agreement, agreeing not to disclose any
* (Tr. Vol. IV at 18:16-19:8.)
| (Trial Ex. 36.)
2 dd. at 4 3.)
3 (Tr. Vol. IV at 30:19-22; Trial Ex. 36.)
* (Trial Ex. 63.)
%$ (Trial Ex. 36.)
* (Tr. Vol. III at 165:17-166:14.)
* (Trial Ex. 40.)
LR me BR OE MEI OM SERS Ty
35a
information regarding the proposed merger. *
Fearing a fishing expedition, Medical Air's counsel
responded to Defendants' request with a letter asking
Defendants to identify the specific items they sought and the
reasons for each request.” Defendants did not comply,
stating that the only way to secure their cooperation was
through full disclosure.”
In December 1996, Medical Air sent its shareholders
a draft Agreement and Plan of Merger and related
documents.** The draft merger documents were not to
become final until Nortek received Medical Air's fourth-
quarter financial results and completed due diligence.“
Medical Air advised the shareholders that "[w]hile there are
some provisions that may be revised in the final draft of the
agreement, these documents reflect the essential structure
and framework of the merger.”
For merger approval, Nortek required ninety-five
percent of Medical Air's shareholders to vote in favor of the
merger.“ The ISA, however, excepted the need for
Marwani's vote if Medical Air's Board certified in writing that
the value of the consideration paid in the proposed merger
* (Tr. Vol. Il at 166:16-168:6; Trial Ex. 37.)
*? (Tr. Vol. III at 86:2-88:10.)
* (Trial Ex. 44.)
*’ (Trial Ex. 45, 48.)
® (Tr. Vol. IV at 52:5-13.)
* (Trial Ex. 48.)
“ (Trial Ex. 45 at § 7.6.)
36a
met or exceeded the Qualifying Price, as defined in the ISA.*
Medical Air's Board did not provide this written
certification.“ Thus, because Marwani owned fifteen percent
of the shares, its vote was required for merger approval.
On December 19, 1996, Medical Air noticed the
shareholder meeting for January 8, 1997.*” Four days before
the shareholder meeting, representatives of Medical Air and
Marwan and Marwani met to discuss the proposed merger.”
Marwan and Marwani continued to request the due-diligence
information, which Medical Air had not provided.*” At the
January 8, 1997 shareholder meeting, Marwani voted against
the proposed merger.” .
Although the merger was not approved at the
shareholder meeting, Nortek sent Medical Air a Second Letter
of Intent on January 28, 1997.’ Like the first, the Second
Letter was non-binding, with its terms "subject to a number
of conditions, including: negotiation of a definitive
agreement, approval by Nortek's board of directors, year-end
audit results satisfactory to Nortek and no material adverse
change in business or projections.” Medical Air never
*S (Trial Ex. 6 at § 5.3.)
* (Tr. Vol. IIB at 59:15-18.)
* cTrial Ex. 47.)
8 (Tr. Vol. IIA at 57:17-25.)
” dd. at 58:9-59:10.)
(Trial Ex. 51.)
** dd.)
* dd.)
li te ea
mh girs AeA RPE TH ed,
SOC) tar aR cae
37a
notified Defendants of the Second Letter and, despite
negotiations, Medical Air never executed the Second Letter.
On April 8, 1997, Medical Air sued Defendants for a
declaratory judgment that Medical Air was not in default
under the ISA, breach of contract and breach of the implied
covenant of good faith and fair dealing, breach of fiduciary
duty, conspiracy to breach the fiduciary duty, tortious
interference with contractual relations, a 18 U.S.C. § 1362(b)
(RICO) violation, and a Mass. Gen. Laws ch. 93A violation.
This court granted Summary Judgment for Defendants on
Medical Air's claim for declaratory judgment, concluding that
-- aS a matter of law -- Medical Air defaulted under the ISA.
The court later granted Summary Judgment for Defendants
on Medical Air's RICO violation, conspiracy, and ch. 93A
claims.
CONCLUSIONS OF LAW
I. Plaintiff's Remaining Claims
A. Breach of Fiduciary Duty
Medical Air argues that Marwani breached its
fiduciary duty as a shareholder by
voting against the merger. A shareholder of a closely-held
corporation owes a fiduciary duty of utmost good faith and
loyalty.** But where a breach of the fiduciary duty is alleged,
the defendant may show that it acted for a legitimate
business purpose to assure that the affairs of the corporation
°° (Tr. Vol. IV at 6:23-7:16.)
* (Tr. Vol. III at 157:19-21.)
55 Donahue v. Rodd Electrotype Co., 367 Mass. 578, 593
(1975).
38a
were managed effectively in the best interests of all.*° If the
defendant demonstrates a legitimate business purpose, the
burden shifts back to the plaintiff to prove that the same
objective could have been achieved through an alternative,
less harmful course of action.”
Medical Air argues that Marwani breached its
fiduciary duty by failing to vote for the merger because
Marwani knew Medical Air was running out of money, and
voted against the merger because it thought Hague and
Paradise would receive too much money and Rahbany too
little. Marwani counters that it opposed the merger because,
without the requested due-diligence information, it could not
determine the proposed merger's price and terms. Moreover,
Marwani contends that Medical Air's failure to certify that the
merger was for a Qualified Price made it further skeptical of
the deal.
By the shareholder meeting, Marwani had been
requesting the due-diligence materials for almost two
months. Section 4.5 of the ISA required Medical Air to
deliver to Marwahl any reasonably requested information
within five business days of the request. Given that Marwani
was a substantial shareholder whose vote -- as Medical Air
points out -- was necessary for merger approval, Marwani's
request for due-diligence materials provided to Nortek was
reasonable. Because the request was reasonable, the ISA
required Medical Air to provide the materials.
But Medical Air's failure to produce the materials was
not the only reason that Marwani questioned the deal's
viability. The ISA gave Medical Air a way to avoid the need
for Marwani's merger approval altogether by certifying that
*° Wilkes v. Springside Nursing Home, Inc., 370 Mass.
842, 850-51 (1976).
*7 Id.
seeds GLE Oe Ra
ok LUE AE aE
39a
"the value of the consideration received in respect to each
share of Medical's Common Stock equals or exceeds the
Qualifying Price,” as defined in the ISA. Medical Air never
provided this certification.
At the time of the shareholder vote, therefore,
Medical Air had refused for almost two months to provide
Marwani the requested due-diligence materials. Marwani did
not know the basis for the merger, the final terms of the
merger, or the price that would be paid by Nortek for the
merger. Lacking this information, Marwani certainly had a
legitimate business reason for voting against the merger.
Medical Air disagrees, arguing instead that this court should
follow the Massachusetts Appeals Court decision in Smith v.
Atlantic Properties, Inc..*° In Atlantic Properties, four
individuals formed the defendant corporation to purchase a
piece of property. Each received a quarter interest in the
corporation. The corporation's Articles of Incorporation
required that 80% of the shareholders approve all acts of the
Board of Directors. |
Ill will arose between the shareholders over whether
the corporation should declare dividends or use its profits for
repairs and improvements to existing facilities on the
property. One shareholder, Dr. Wolfson, wanted profits
diverted to the latter, and the remaining shareholders sought
a dividend declaration because of the tax penalty that would
result from failing to do so. Although some repairs and
improvements were made, Dr. Wolfson continued to vote
against declaring dividends, and consequently the Internal
Revenue Service imposed substaqtial penalty taxes. ;
The Massachusetts Appeals Court concluded that Dr.
Wolfson's refusal to approve a dividend declaration was
‘® 12 Mass. App. Ct. 201 (1981).
40a
unreasonable.” It held that Dr. Wolfson "refused to vote
dividends in any amount adequate to minimize the danger
and had failed to bring forward, within the relevant taxable
years, a convincing, definitive program of appropriate
improvements which could withstand [IRS] scrutiny.”” The
court concluded that through his actions, Wolfson recklessly
ran the unjustified risk that the IRS would impose the penalty
taxes, and that this risk was inconsistent with his fiduciary
duty.*
The facts in this case are distinguishable from Atlantic
Properties. There, some repairs and improvements had been
made to accommodate Dr. Wolfson's request. In addition,
Dr. Wolfson was unable to show any improvement plan that
would have avoided the penalty taxes, or any groinids on
which he would have approved the dividend declaration.
Unlike Dr. Wolfson, Marwani's request was information was
never accommodated. Moreover, Marwani argues that it was
prepared to vote for the merger if it had more information
about the merger's terms and price.
Having shown a legitimate business purpose, the
burden shifts back to Medical Air to prove that Marwani had
a less harmful alternative available. Medical Air claims that
Marwani would have been no worse off had it simply voted
to approve the merger because Marwani would have retained
all default rights afforded it under the ISA.
Medical Air fails to address, however, the deal itself.
Regardless of Marwani's default rights under the ISA,
Marwani was voting on whether Medical Air should merge
with Nortek, a deal with substantial ramifications for all
9 Id. at 803.
--.
Cu
AE RER STIS»
4la
involved. As stated above, the terms were still open to
change, and the consideration was uncertain. In addition to
its default rights, Marwani had to assess whether the deal
was viable, and how it and Medical Air could be affected.
Medical Air's failure to provide written certification that the
consideration met a Qualifying Price and its refusal to
provide the requested due-diligence information left Marwani
with no choice but to vote against merger. By doing so,
Marwani did not breach the fiduciary duty it owed to Medical
Air.
B. Breach of Contract
Medical Air next alleges that MHC breached the
Consulting Agreement by failing to provide the promises
financial consulting services.” To prove breach of contract,
a plaintiff must show an agreement, a breach of the
agreement, and resulting damage.™
The Consulting Agreement required MHC to provide
"financial and strategic corporate planning services" to
Medical Air "including, by way of example: (i) assisting
[Medical Air] in attracting a new senior lender; (ii)
evaluating and helping source corporate transactions such as
acquisitions, joint ventures and public offerings; and (iii)
assisting [Medical Air] in developing financial and operating
reporting systems.”™
Medical Air argues that Flaherty failed to provide the
promised services. It focuses on the fact that Flaherty met
*? The Complaint only references the ISA and the
Security Agreement. Section 13.10, however, contains an
integration clause, incorporating all exhibits into the agreement.
One of the exhibits, Exhibit 3.7, is the Consulting Agreement.
*? Michelson v. Digital Fin. Serv., 167 F.3d 715, 719 (1%
Cir. 1999) (citation omitted).
* (Trial Ex. 11 at § 3.)
42a
with Medical Air personnel only once a month and did not
act as a financial officer or secure a new CFO. Medical Air
further states that MHC did not assist in attracting a new
lender or in developing reporting systems, and that Flaherty
failed to inform Medical Air, when recommending a sales-
force increase, that the new sales employees would not
generate sales for the first six months. MHC's failure to
perform under the Agreement, Medical Air contends, caused
the company's June 1996 default. MHC counters that it
provided Medical Air financial and strategic planning
services, and that it was not obligated under the Agreement
to find a Chief Financial Officer or to serve as Medical Air's
interim CFO.
Evidence at Trial revealed that, while consulting,
Flaherty met with Hague monthly,® and frequently
communicated with the company by fax and telephone.”
Flaherty also advised Medical Air concerning potential
acquisitions.” He specifically forwarded information to
Hague and Paradise on a Texas company, Z-Scan, referred to
by Flaherty as ASSCO.® In fact, Medical Air's accountant,
Joseph Faris, prepared an analysis on Medical Air acquiring
ASSCO -- an analysis he forwarded to Flaherty.”
It also appears that Flaherty facilitated a change in
the company's reporting systems.” Two months after
*° (Tr. Vol. IIA at 8:10-11.)
(Tr. Vol. I at 102:10-25; 106:7-10.)
®? (Tr. Vol. I at 106:8-23; Trial Ex. 17.)
* (Tr. Vol. I at 106:8-13; Trial Ex. 17.)
© (Tr. Vol. I at 186:4-21; Trial Ex. 18.)
7 (Trial Ex. 16.)
43a
Flaherty began serving as consultant, Medical Air began using
a different financial reporting package.”
Additionally, Flaherty recommended and assisted
Medical Air in increasing its sales force.’”* He discussed with
Hague the need to establish a business advisory board and
recommended that the board make decisions on issues such
as acquisitions, staffing, and sales organization.”? Flaherty
assisted in changing Medical Air's accounting department.”
Although no evidence exists on whether Flaherty took any
action to attract a senior lender, this fact is not fatal given
Flaherty's brief tenure as Medical Air's consultant.
Medical Air also claims that MHC's failure to find a
permanent CFO for the company breached the contract. But
nothing in the Consulting Agreement obligates MHC to locate
a permanent CFO. The only reference in the Consulting
Agreement to a CFO relates to the Agreement's term. It
states that the Agreement "shall be for a term beginning
[January 22, 1996] and continuing until the last day of the
month in which [Medical Air] hires a Chief Financial Officer
reasonably acceptable to [MHC].””°
The Consulting Agreement required MHC to provide
Medical Air financial and strategic planning consultation.
The evidence shows that MHC, through Flaherty, fully
performed this contractual obligation.
C. Breach of the Implied Covenant of Good Faith
Every contract in Massachusetts contains an implied
7! (Trial Ex. 3.)
” CTr. Vol. I at 100:16-101:4.)
7° (Trial Ex. 14.)
” (Trial Ex. 19.)
7° (Trial Ex. 11 at § 2.)
a
44a
covenant of good faith and fair dealing between the parties
that prohibits either party from doing "anything that will
have the effect of destroying or injuring the right of the other
party to receive thc fruits of the contract.”°
Although Medical Air's breach of the implied covenant
of good fair and fair dealing is brought against all
Defendants, its argument is limited to Marwani. Medical Air
alleges that Marwahl breached the covenant implied in the
ISA when it voted against the Nortek merger. In support of its
claim, Medical Air directs the court to the Massachusetts
Supreme Judicial Court's (SJC) decision in Anthony's Pier
Four, Inc. v. HBC Assoc.”
In Anthony's, Anthony's entered into agreements with
HBC, whereby HBC would acquire and develop Boston's Fan
Pier in conjunction with Anthony's development of Pier Four.
The agreements gave Anthony's limited approval rights for
changes in HBC's basic development plan. Anthony's owner,
| Anathas, worked on the development with HBC, and
| continuously voiced satisfaction with HBC's development
plan.
Anathas later leaned that another harborfront deal
had been far more lucrative than that Anthony's had with
HBC. Upset that he entered a less-than-ideal development
contract, Anathas confronted HBC about better compensating
Anthony's for the project. When HBC did not accommodate
his request, Anathas stated, despite comments to the
contrary, that he never formally approved HBC's
development plan and now refused to approve it.” Anathas'
7° Anthony’s Pier Four, Inc. v. HBC Assoc., 411 Mass.
451, 471-72 (1991) (citations omitted.)
77 Id.
7 Id. at 461.
eT NR RNY Rf ER TREES er Ne mere
. i aaa Nik a a PEA ED Sea ee is . oi
45a
s disapproval led HBC to stop work on the project.
HBC claimed that Anthony's breached the implied
covenant of good faith and fair dealing in the agreements by
disapproving the development plan. The Massachuse%ts
Supreme Judicial Court affirmed the trial court, holding that
Anthony's violated the implied covenant because Anathas
voted against the plan based solely on his desire for better
compensation.” The SJC concluded that Anathas knew his
approval was crucial, and that he withheld it in an attempt to
force HBC to "sweeten the deal.” Such action constituted a
breach.”
Defendants here did not exhibit the same level of
disregard for a contracting party's rights. In Anthony's,
Anathas did not dispute that the reason he withheld his
approval was to "sweeten his deal" with HBC. Here Marwani
states that it voted against the deal because it lacked
sufficient information upon which to base its vote --
information the ISA required Medical Air to provide.
Additionally, in Anthony's, Anathas's approval was required
for the project to proceed, and his disapproval brought the
“project to a standstill. But here Marwani's vote was
unnecessary if Medical Air's Board certified that the
consideration for the merger met or exceeded the ISA-defined
"Qualifying Price.”
Given Medical Air's failure to provide the required
information and its opportunity to completely avoid the need
for Marwani's approval, this court cannot conclude that
Marwani denied Medical Air the right to receive the fruits of
the ISA and breached the implied covenant of good faith and
fair dealing.
D. Tortious__Interference__with Contractual
9 Id. at 472.
8 Id. at 473.
46a
Relations
Medical Air next claims that Defendants tortiously
interfered with the Nortek merger. To prove tortious
interference, Medical Air must show that: (1) it had a
prospective, advantageous relationship with Nortek; (2)
Defendants induced Nortek not to go forward with the
merger; (3) Defendants acted with intent; (4) Defendants’
actions were improper; and (5) Defendants caused Medical
Air injury.”
Medical Air contends that the Nortek merger would
have gone through but for Marwani's vote against it.
Marwani knew that Nortek would not go forward with the
merger without its vote of approval, and Marwani's actions,
Medical Air argues, caused Nortek to back out of the deal.
Medical Air's argument fails for several reasons. First,
Medical Air has not shown that it had a prospective
advantageous relationship with Nortek. Medical Air
conceded at Trial that the terms and pr/ce of the proposed
transaction were never finalized. In fact, Nortek's CEO,
Richard Bready, testified that Nortek was not prepared to go
forward with the merger because Medical Air failed to meet
fourth-quarter projections.** Second, it is undisputed that
Defendants never contacted anyone at Nortek.®* In fact,
Medical Air never informed Defendants of the Second Letter
of Intent.
Because Medical Air cannot show that it had a
prospective advantageous business relationship with Nortek
and that Defendants induced Nortek to call off the merger,
8! See, United Truck Leasing Corp. v. Geltman, 406 Mass.
811, 812-17 (1990).
82 (Tr. Vol. IV at 39:21-40:2; 47:1-4.)
3 dd. at 63:13-15.)
47a
Defendants did not engage in tortious interference.
II. Defendants' Counterclaims
Defendants counterclaim against Medical Air for
action on the note, breach of the ISA, breach of the implied
covenant of good faith and fair dealing, and for declaratory
judgment that Marwan and Marwani are entitled to enforce
their security fights under the ISA
A. Action on the Note/Breach of the ISA
Marwan claims that it is owed $1,015,236 -- the
amount outstanding on the $625,000 loan -- plus interest
accrued since Trial."* The ISA required Medical Air to
immediately repay the loan in the event of default if Marwan
exercised its fight to accelerate. Marwan exercised this right
on September 3, 1996, but Medical Air failed to repay the
amount due on the loan. Because the ISA contractually
obligated Medical Air to immediately repay the loan in the
event of default, Marwan is entitled to $1,015,236 plus
interest accrued since Trial.
B. Breach of the Covenant of Good Faith and Fair
Dealing
Marwan and Marwani claim that Medical Air
breached the implied covenant in the ISA by refusing to
provide the requested due-diligence information and still
holding the shareholder meeting on January 8, 1997. They
further claim that breach occurred because Medical Air held
the merger vote when the terms of the proposed merger were
being renegotiated.
The ISA required Marwani's merger approval if
Medical Air failed to certify that the consideration to be
received met or exceeded the Qualifying Price. Because
Medical Air did not certify the price, a shareholder vote was
required. If Marwani had insufficient information or was
” {Tr. Vol. IIB at 62:11-21.)
* 3
ye
48a
dissatisfied with the finality of the merger terms, it could vote
against the merger, which it did. Because Marwan and
Marwani retained all rights under the ISA, Medical A/r did
not breach the implied covenant of good faith and fair
dealing.
C. Declaratory Judgment
As this court found at Summary Judgment, Medical
Air was in default under the ISA. Thus, Marwan and Marwani
are entitled to enforce the security rights provided in the ISA
CONCLUSION
In sum, the court finds for Defendants on Medical
Air's claims, and for Medical Air on Defendants’ counterclaim
for breach of the implied covenant of good faith and fair
dealing claim. Defendants, however, prevail on their
counterclaims for action on the note, breach of the ISA, and
for Geclaratory judgment.
AN ORDER WILL ISSUE.
/s/
United States District Judge
biome 13s Sige
Nike sti a
MEMES
PLA SEEN ENR ARE Ne Bel
ats»:
AEN PA NIM 8 *
49a
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
MEDICAL AIR TECHNOLOGY )Civil Action
CORPORATION )#97-10764-
>)
Plaintiff )
)
Vv. )
)
)
MARWAN INVESTMENT, INC., )
MARWANI HOLDING COMPANY, N.V., )
MULTIFINANCE HOLDING CORPORATION )
AND DR. K. PHILLIP RAHBANY )
Defendants )
ORDER
January 17, 2001
TAURO, J.,
The court hereby orders as follows:
(1) Defendants’ Motion for Leave to File in Excess
of Page Limit [95-1] is DENIED as moot;
(2) Defendants’ Motion [84-1] [105-1] for Leave
to File a Reply Memorandum are ALLOWED;
(3) Defendants’ Motion to Strike Plaintiffs Jury
Demand [69-1] is ALLOWED based on
Plaintiffs jury waiver in the Security
Agreement;
(4)
50a
Defendants’ Motion for Summary Judgment
[94-1] is ALLOWED in part and DENIED in
part:
(A) Defendants’ Motion is DENIED on
Plaintiffs claims for Breach of
Contract/Breach of Implied Covenant
of Good Faith and Fair Dealing,
Breach of Fiduciary Duty against
Marwani and Tortious Interference
with Contractual Relations;
(B) Defendants’ Motion is ALLOWED,
without objection, on Plaintiffs RICO
claim. Defendants’ Motion also is
ALLOWED on Plaintiff’s
Mass.Gen.Laws. ch. § 93A claim
because Plaintiff alleges only intra-
company conduct. See Manning v.
Zuckerman, 388 Mass. 8, 12 (1983)
(“(T]he unfair or deceptive acts or
practices prohibited [under
Mass.Gen.Laws, ch. § 93A] are those
that may arise in dealings between
discrete, independent business
entities, and not those that may occur
within a single company.”);
(C) Defendants’ Motion on Plaintiffs
Conspiracy to Breach a Fiduciary Duty
claim against Marwan, MFH, and
Rahbany remains under advisement,
pending Plaintiffs January 18, 2001
filing on the issue.
5la
IT IS SO ORDERED.
/s/
United States District Judge
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