Opposition Brief — Medical Air Technology Corp. v. Marwan Investment, Inc.

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No. 02-742

IN THE

Supreme Court of the Gnited States

MEDICAL AIR TECHNOLOGY CORPORATION,

Petitioner,

MARWAN INVESTMENT, INC.,

MARWANI HOLDING COMPANY, N.V.,

MULTIFINANCE HOLDING CORPORATION, AND

DR. K. PHILIP RAHBANY,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR THE FIRST CIRCUIT

BRIEF IN OPPOSITION

MARY JO JOHNSON

Counsel of Record

JAMES W. PRENDERGAST

MICHAEL G. BONGIORNO

PETER J. KOLOVOS

HALE AND DORR LLP

60 State Street

Boston, Massachusetts 02109

(617) 526-6000

Counsel for Respondents

Dated: December 13, 2002

BATEMAN & SLADE, INC. BOSTON, MASSACHUSETTS

QUESTION PRESENTED FOR REVIEW

Whether this Honorable Court should review

the judgment of the Court of Appeals for the First

Circuit affirming the District Court’s post-trial

judgment that Petitioner Medical Air Technology

Corporation (“Medical Air”) failed to demonstrate that

Respondent Marwani Holding Company, N.V.

(“Marwani Holding”) had breached its fiduciary duty

by voting against a proposed merger between Medical

Air and a third party, where (1) the judgment of the

Court of Appeals rests solely on the application of

Massachusetts state law, (2) the questions presented

in the Petition are not outcome determinative, given

the Court of Appeals’ conclusion that “{n]o reasonable

jury could find that Marwani Holding’s vote was the

proximate cause of the demise of the proposed Nortek

merger,” (3) ample evidence supports _ that

determination, and (4) the Court of Appeals never

decided the only federal question that the Petition

purports to present — whether the District Court

erred in striking Medical Air’s jury demand.

CORPORATE DISCLOSURE STATEMENT

Pursuant to Rule 29.6 of the Supreme Court

Rules, the Respondents respectfully submit this

disclosure statement.

A Respondent Marwan Investment, Inc. is

a Delaware corporation. Marwan Investment, Inc. is

wholly-owned by Sarah Financial Limited, a Delaware

corporation, which in turn is wholly-owned by Hamda

investment, N.V., a Netherlands Antilles corporation.

Hamda Investment, N.V. is _ wholly-owned by

Multifinance Investment and Holding, S.A. a

Luxembourg corporation. No publicly-held company

owns 10% or more of the stock of any of the above-

listed entities.

2. Respondent Marwani Holding Company,

N.V. is a Netherlands Antilles corporation. Marwani

Holding Company, N.V. is _ wholly-owned’ by

Multifinance Investment and Holding, S.A. a

Luxembourg corporation. No publicly-held company

owns 10% or more of the stock of any of the above-

listed entities.

3. Respondent Multifinance Holding

Corporation is a Delaware corporation. Multifinance

Holding Corporation is wholly-owned by Sarah

Financial Limited, a Delaware corporation, which in

turn is wholly-owned by Hamda Investment, N.V., a

Netherlands Antilles corporation. Hamda Investment,

N.V. is wholly-owned by Multifinance Investment and

Holding, S.A., a Luxembourg corporation. No

publicly-held company owns 10% or more of the stock

of any of the above-listed entities.

4. Respondent Dr. K. Philip Rahbany is an

individual.

TABLE OF CONTENTS

QUESTION PRESENTED FOR REVIEW ........--.-0000000... 1

CORPORATE DISCLOSURE STATEMENT. ................ i

TABLE OF AUTHORITIES .............s00cseccsseccsccescccoceses, Vv

SI BE PPO ME EIT ooo. iscnssvsesssccnensvevevcecessrerseceeees, ]

SLATEMENT OF THE CASE. .............00ccessccesssesaseeceee. 2

REASONS FOR DENYING THE PETITION ................. 7

A. THE DECISION OF THE COURT

OF APPEALS DOES NOT

PRESENT ANY ISSUE WORTHY

OF SUPREME COURT REVIEW. .......... 7

a The Judgment of the Court

of Appeals Rests Entirely on

ET HIP: Shine vactssivebesenenssescnasdvecns 8

2. The Questions Presented in

the Petition Are Not

Outcome Determinative, As

the Judgment of the Court

of Appeals Rests. on

Independent Grounds. .............. 8

2. The Petition’s Claims of

Misapplication of Properly

Stated Massachusetts Law

and Erroneous Factual

Findings Are Inaccurate

and Would Not Merit This

Court’s Intervention

oc RE TTT 10

4. The Court of Appeals Did

Not Decide the Sole Federal

Question Raised in the

Petition, and the Question |

Does Not Require Resolu-

tion or Clarification in Any

BIN ce hnndeatcscdincdesecsmisiiunsaanets 12

B. THE DECISION OF THE COURT

OF APPEALS IS CORRECT. ............... 14

GATTI * cbhanctancideevarctiunsnsondaniemenpenahairianaadels 20 |

TABLE OF AUTHORITIES

CASES:

Blank v. Chelmsford Ob/ Gyn, P.C.,

420 Mass. 404, 649 N.E.2d 1102

SINE ite Clencssitecdaedee ee ee ae 16n, 17n

Clark v. Rowe,

428 Mass. 339, 701 N.E.2d 624

SITE ‘hndrnnnieniendecedccoeaniandabnacnnel ee 18

Donahue v. Rodd Electrotype Co.,

367 Mass. 578, 328 N.E.2d 505

GRRTGE Sitsnrsisidincbsaaaiee ea 14, 16n

Leasing Service Corp. v. Crane,

804 F.2d 828 (4% Cir. 1986) oo... 13n

Merola v. Exergen Corp.,

423 Mass. 461, 668 N.E.2d 351

EIGEN ssascsnesisacieicadaananenic ace eee 17n

Telum, Inc. v. E.F. Hutton Credit Corp.,

859 F.2d 835 (10% Cir. 1988) woo... 13n

United States v. United Foods, Inc., :

eR WPM, GUI GED seieviivnacovcscnsechvenséceranssss 18n

Wilkes v. Springside Nursing Home, Inc.,

370 Mass. 842, 353 N.E.2d 657

GFE. dcusiunhteninieteisideitubiam eee lin, 14, 17n

Zimmerman v. Bogoff,

402 Mass. 650, 524 N.E.2d 849

PRWOUE pvsnchedupaneasibenbidegeddaemiisumercnseeieece: 14

SUPREME COURT RULES:

PENNE IEP cnsscdccubadsocchunssecesbulinicdndiatesueseuaeanaiateneee 11

]

BRIEF IN OPPOSITION

The Respondents, Marwan Investment, Inc.

(“Marwan Investment”), Marwani Holding Company,

N.V. (“Marwani Holding”), Multifinance Holding

Corporation (“Multifinance”), and Dr. K. Philip

Rahbany (“Rahbany”), respectfully oppose the Petition

(“Pet.”) filed by Medical Air Technology Corporation

(“Medical Air”) for a writ of certiorari to review the

judgment of the Court of Appeals for the First Circuit

in this case.

This action involves the application of settled

principles of Massachusetts law on breach of fiduciary

duty. The central matter in the lawsuit concerns the

vote of a minority shareholder, Marwani Holding,

regarding a proposed merger between Medical Air and

a third party, Nortek, Inc. (“Nortek”). The Petition fails

to present any issue of recurring importance or

involving a conflict with decisions of this Court or

other courts of appeal. In fact, given the Court of

Appeals’ holding that “[n]o reasonable jury could find

that Marwani Holding’s vote was the proximate cause

of the demise of the proposed Nortek merger,” Pet.

App. at 20a, the questions presented in the Petition

would not change the outcome in this case. Indeed,

the sole federal question that the Petition attempts to

present — whether the District Court erred in striking

Medical Air’s jury demand — was not even decided by

the Court of Appeals.

The Petition represents nothing more than

Medical Air’s dissatisfaction with the Court of Appeals’

application of properly stated Massachusetts law.

Because the decision of the Court of Appeals is not

only unworthy of review but also clearly correct, the

Petition should be denied.

‘ _—

STATEMENT OF THE CASE

This case arises out of a $1.375 million

investment that Marwan Investment and Marwani

Holding made in Medical Air pursuant to a January

22, 1996 Investment and Stockholders Agreement (the

“ISA”), a Secured Promissory Note (the “Note”), and a

Security Agreement. As the District Court held in

January, 1998, when it granted partial summary

judgment to the Respondents — a judgment which

Medical Air has never challenged on appeal — Medical

Air failed in May, 1996, to maintain certain minimum

financial covenants of the ISA, which triggered an

Event of Default. After reserving their rights in light of

Medical Air’s default, Marwan Investment and

Marwani Holding (defined collectively in the ISA as the

“Investors”) forebore from the exercise of their security

rights while Medical Air pursued negotiations of a

potential merger with Nortek that would “take out” the

Investors’ interests in Medical Air. When Medical Air

presented a draft merger agreement to its share-

holders (including Marwani Holding) for approval,

without having reached agreement on material terms

of the proposed merger (including the purchase price,

which was being renegotiated at Nortek’s insistence),

Marwani Holding voted against it. Medical Air and

Nortek continued their negotiations, but never

presented a further proposal to Medical Air’s

shareholders for consideration. !

1 Contrary to Medical Air’s assertion that Marwani Holding

and Marwan Investment each was “pursuing its remedies against

Medical Air” as of the date of the vote on the merger (Pet. at 16),

and that the vote “paved the way” for the foreclosure (id. at 5 n.2),

the record demonstrates that the Investors continued to forbear in

the exercise of their security rights until August, 1998 — nineteen

months after the January 8, 1997 vote on the merger, sixteen

months after Medical Air commenced this action, and seven

months after the District Court found that Medical Air had

defaulted under the ISA — when, with no acquisition offer

Although Medical Air and Nortek never reached

final agreement on merger terms, Medical Air has for

the past five years pursued claims against Marwani

Holding based on its vote against the proposed

merger, which, according to Medical Air, “thwarted

that merger.” Pet. at 12. In particular, Medical Air

contended at trial, inter alia, that by voting against the

proposed merger, Marwani Holding breached the

fiduciary duty it owed under Massachusetts law as a

minority shareholder in a closely-held corporation.

The District Court conducted a four-day trial in this

matter in January, 2001. The District Court issued

its post-trial Findings of Fact and Conclusions of Law

in an August 21, 2001 Memorandum (Pet. App. at

29a-48a), in which it addressed and, in turn, rejected

each of Medical Air’s claims. The District Court then

entered judgment for Marwan Investment on its

Counterclaim against Medical Air for $1,015,236

accrued under the unpaid Note from Medical Air, plus

post-trial interest. Id. at 27a-28a.

Medical Air raised two issues on its appeal to

the Court of Appeals for the First Circuit: whether the

District Court erred (1) by striking Medical Air’s jury

demand, or (2) by finding as a matter of fact, after

trial, that Marwani Holding had not breached its

fiduciary duty to Medical Air. The Court of Appeals

determined that it was unnecessary to reach the

former issue in order to resolve Medical Air’s appeal,

pending, and none contemplated, Marwan Investment finally

began foreclosure proceedings against Medical Air’s assets. Pet.

App. at 9a. Marwan Investment foreclosed on all of Medical Air’s

tangible and intangible assets at a duly noticed public auction,

conducted on November 6, 1998. At the public auction, Marwan

Investment purchased all of Medical Air’s remaining assets with a

credit bid deducted from the amounts Medical Air owed to Marwan

Investment, without objection from the Medical Air officers and

directors who attended the auction. Id. at 9a.

2 .

because the District Court’s judgment could be

affirmed in its entirety on independent, state law

grounds:

We do not, though, need to decide the

[jury waiver] 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.

Id. at 15a.

Turning to Medical Air’s fiduciary duty claim,

the Court of Appeais recognized that, under

Massachusetts law, a shareholder in a_ close

corporation may defeat a claim for breach of fiduciary

duty by demonstrating a legitimate business purpose

for its actions. Id. at 15a-16a. The Court of Appeals

then determined that the evidence presented at trial

more than sufficiently supported the District Court’s

finding that Marwani Holding had legitimate business

reasons for voting against the proposed Nortek

merger. In particular, the Court of Appeals found that

Medical Air’s refusal for almost two months to comply

with Marwani Holding’s repeated requests for basic

information about the proposed merger (despite

Medical Air’s contractual obligation to do so under the

ISA) not only led Marwani Holding to question the

viability of the deal, but also left it without basic

information that it needed to cast an informed vote on

the proposal:

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 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.

Id. at 18a-19a.2

The Court of Appeals also rejected Medical Air’s

fiduciary duty claim on a wholly independent ground:

lack of causation. Contrary to Medical Air’s

misstatements of the record evidence concerning the

2 This record evidence of Marwani Holding’s legitimate

business reasons for voting against the Nortek merger contrasts

with Medical Air’s bare assertions that “Marwani Holding’s selfish

motivation and lack of consideration for the well being of Medical

Air [are] uncontroverted,” and that “Marwani Holding’s President

could not articulate a legitimate Medical Air business purpose for

his vote.” Pet. at 9, 15.

reasons for the failure of the Nortek merger — e.g.,

that Marwani Holding’s vote had “catastrophic effects”

on Medical Air and “thwarted” the merger (Pet. at 9,

12), the Court of Appeals held that Medical Air’s

failure to meet its own fourth-quarter sales projections

(and not the actions of Marwani Holding or any other

defendant) led Nortek to renegotiate the potential

purchase price and attempt to restructure the

proposed deal, before Marwani Holding even voted on

the merger:

Nortek’s CEO testified at trial (through

deposition) that after Nortek saw the

fourth quarter sales results [of Medical

Air], it decided that it should pay less

than was offered in the original letter of

intent and reopened negotiations with

Medical Air.... 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 difference. Medical Air

still would have been in the same

position as it was after the January 8

vote, negotiating new terms with Nortek.

Pet. App. at 19a-20a (emphasis added). In other

words, at the time of the vote in question, Medical Air

asked Marwani Holding to approve a proposed merger

that (unbeknownst to Marwani Holding) was no longer

the proposal that Medical Air and Nortek were

negotiating, and was not a proposal on which Nortek

was willing to conclude a merger. Id. at 7a-8a.3

3 Medical Air misstates the factual record below when it

claims that “negotiations with Nortek were reopened” after the

January 8, 1997 vote. Pet. at 6. As the Court of Appeals noted,

Therefore, because “[n]o reasonable jury could find

that Marwani Holding’s vote was the proximate cause

of the demise of the proposed Nortek merger,” the

Court of Appeals held that Medical Air’s fiduciary duty

claim could be rejected for this reason alone. Id. at

20a.4

REASONS FOR DENYING THE PETITION

A. THE DECISION OF THE COURT OF APPEALS

DOES NOT PRESENT ANY ISSUE WORTHY

OF SUPREME COURT REVIEW.

The Petition should be denied because (1) the

judgment of the Court of Appeals rests entirely on

principles of Massachusetts state law, (2) the

questions presented in the Petition are not outcome

determinative, (3) the Petition complains only of a

purported misapplication of properly stated rules of

law and erroneous factual findings, and (4) the sole

federal question raised in the Petition was not decided

by the Court of Appeals, and, in any event, does not

require this Court’s consideration.

Medical Air and Nortek reopened their negotiations on the day

before the vote of Medical Air’s shareholders. Pet. App. at 7a-8a.

4 The Court of Appeals determined that this lack of

causation also defeated Medical Air’s claims for tortious

interference and breach of the implied covenant of good faith and

fair dealing, Pet. App. at 20a-21la, and further held that Medical

Air’s breach of contract claim is “no longer Medical Air’s to make,”

because this claim was assigned to Marwan Investment when

Marwan Investment purchased all of Medical Air’s tangible and

intangible assets ai a foreclosure sale in November, 1998. Id. at

22a-23a. Although Medicai Air did not appeal the merits of the

District Court’s rulings on these three claims, the Court of Appeals

nonetheless addressed them only for purposes of Medical Air’s

appeal of the denial of a jury trial. Id. at 20a n.5.

ggg oer

i. The Judgment of the Court of Appeals

Rests Entirely on State Law.

The principal aspect of the Court of Appeals’

decision that Medical Air seeks to challenge in this

Court is the First Circuit’s application of settled

principles of Massachusetts state law concerning the

fiduciary duties owed by shareholders in a closely held

corporation. This is apparent on the face of the

Petition. See Pet. at 9-18. Although the Court of

Appeals reviewed the “basic principles” applicable to

an analysis of Medical Air’s contractual jury trial

waiver (Pet. App. at 12a-15a), the Court of Appeals

ultimately found it unnecessary to apply these

principles, because Medical Air’s appeal could b>

resolved entirely on independent state law grounds.

Id. at 15a. Accordingly, because the judgment of the

Court of Appeals in this diversity action rests solely on

principles of Massachusetts law, the Court of Appeals

did not decide any federal question (let alone an

important federal question) worthy of this Court’s

review.5

2. The Questions Presented in the

Petition Are Not Outcome Determi-

native, As the Judgment of the Court

of Appeals Rests on Independent

Grounds.

Medical Air seeks to present two questions for

this Court’s review: (1) whether the Court of Appeals

erred in affirming the District Court’s judgment that

Marwani Holding did not breach its fiduciary duty by

voting against the proposed Nortek merger, and (2)

whether the District Court erred in striking Medical

S Medical Air never contends that this issue of

Massachusetts law presents a sufficiently important legal question

to warrant the exercise of this Court’s discretion to grant a writ of

certiorari.

Air’s jury demand (an issue which the Court of

Appeals did not decide). Pet. at i6 However, because

neither of these questions are necessary to determine

the outcome in this case, this Court’s consideration is

not warranted.

As discussed above, although the Court of

| Appeals affirmed the District Court’s finding that

Medical Air had failed to establish at trial that

Marwani Holding breached its fiduciary duty to

Medical Air (Pet. App. at 15a-19a), the Court held that

the District Court’s judgment could be upheld in its

entirety on an independent ground — lack of

causation. Id. at 19a-20a. Based on its review of the

evidence, the Court of Appeals held that “[nJo

reasonable jury could find that Marwani Holding’s

vote was the proximate cause of the demise of the

proposed Nortek merger” — the only purported injury

advanced at trial by Medical Air. Id. at 20a.

Therefore, even if Medical Air could show that the

Court of Appeals erred in its application of

Massachusetts law in finding that Marwani Holding

did not breach its fiduciary duty, judgment

nonetheless would have entered for Marwani Holding

on this claim based on the failure of evidence on

causation.

The Court of Appeals then held that, as a

i matter of law, Medical Air’s inability to establish a

causal link between Marwani Holding’s vote and the

6 In its statement of the “Questions Presented,” Medical

Air misstates the record below by suggesting that one question for

this Court’s review is “[w]hether the Court of Appeals erred in

upholding the District Court’s allowance of defendants’ motion to

strike plaintiffs jury claim as to all parties ....”. Pet. at i. As set

forth below, the Court of Appeals never decided this question. The

Court of Appeals based its judgment solely on state law grounds.

failure of the Nortek merger also would operate to

defeat two of Medical Air’s claims that remained for

trial (tortious interference and breach of the implied

covenant of good faith and fair dealing) regardless of

the resolution of the jury waiver issue, and rejected

Medical Air’s last claim (breach of contract) on a

ground that Medical Air does not challenge in its

Petition. Id. at 20a-23a. Accordingly, as the Court of

Appeals’ decision rests on grounds that are

independent of the two questions presented in the

Petition, Medical Air fails to present any issue worthy

of this Court’s review.

3. The Petition’s Claims of Mis-

application of Properly Stated

Massachusetts Law and Erroneous

Factual Findings Are Inaccurate and

Would Not Merit This Court’s

Intervention Regardless.

Medical Air concedes that its challenge to the

Court of Appeals’ analysis of the fiduciary duty claim

rests primarily on a purported misapplication —

rather than a misstatement — of governing

Massachusetts law. See Pet. at 9, 11 (asserting that

Court of Appeals “misapplied” applicabie law on

fiduciary duty).”? The Petition also seeks to relitigate

7 Later in the Petition, Medical Air half-heartedly

challenges the Court of Appeals’ legal conclusion that, under

Massachusetts law, a legitimate business purpose is not negated

by the mere fact that this purpose coincides with a shareholder’s

self-interest (Pet. at 13; Pet. App. at 18a). As set forth below, see

note 15 infra, the First Circuit correctly set forth and applied

Massachusetts law on this point.

Further, although Medical Air contends that the District

Court (not the Court of Appeals) “misstated applicable

Massachusetts law” by articulating an “effective management”

concept in its legitimate business purpose inquiry (Pet. at 11 n.4

(emphasis in original)), the language from the District Court

the facts bearing on this claim, for example, by taking

issue with the Court of Appeals’ conclusion that

Marwani Holding had shown a legitimate business

purpose for its vote against the Nortek merger (id. at

14-17), or that this vote did not cause the failure of

the Nortek merger (id. at 12).8

The application of well-settled rules to disputed

facts is not the type of situation in which this Court

customarily intervenes, nor should it. See U.S.

Supreme Ct. Rule 10. The central issue presented in

the Petition — the case-specific determination of

whether Medical Air offered adequate proof to

establish a claim for breach of fiduciary duty — is a

matter the Court of Appeals was well-equipped to

decision challenged by Medical Air is taken directly from a seminal

Massachusetts Supreme Judicial Court decision addressing the

fiduciary obligations of shareholders in close corporations. See

Wilkes v. Springside Nursing Home, Inc., 370 Mass. 842, 850, 353

N.E.2d 657, 663 (1976) (noting that “untempered application” of

strict good faith standard would “result in the imposition of

limitations on legitimate action ... which will unduly hamper its

effectiveness in managing the corporation in the best interests of all

concerned.” (emphasis added)). The Wilkes Court adopted the

burden-shifting framework discussed in section B infra to shield

such “legitimate action” from scrutiny. See id. at 851, 335 N.E.2d

at 663. Thus, far from “misstating” the law, by referencing the

“effective management” concept the District Court evidenced its

appreciation of the rationale underlying the legal standard.

8 Indeed, unable to respond to the First Circuit’s finding

that “no reasonable jury could find ... 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. at 15a),

Medical Air attempts to sidestep this critical finding by twice

recasting it as “[t]he Court of Appeals determination that ‘no

reasonable jury could conclude’ the Nortek merger was to occur

...” Pet. at 12 n.5, 20. Thus, not only does Medical Air seek to

relitigate factual issues in this Court, but it also seeks review

based on an alleged factual finding that the Court of Appeals never

made.

address, and therefore does not require this Court’s

consideration.

4. The Court of Appeals Did Not Decide

the Sole Federal Question Raised in

the Petition, and the Question Does

Not Require Resolution or Clari-

fication in Any Event.

The Court of Appeals never decided the only

federal question presented in the Petition — whether

the District Court properly struck Medical Air’s jury

demand. The absence of any federal law-based

challenge to the decision of the Court of Appeals is one

reason for denying the Petition (see section A.1 supra),

and Medical Air presents no countervailing reason for

finding that the District Court’s decision on the jury

waiver issue warrants review by this Court. Medical

Air does not assert that either the Court of Appeals or

the District Court misstated the governing law.

Medical Air also fails to identify any conflict between

the District Court’s decision and those of either this

Court or the courts of appeal on the jury waiver issue.

Nor is there any suggestion in the Petition that the

analysis of Medical Air’s contractual jury trial waiver

presents an important or recurring question of law

that has not been, but should be, settled by this

Court.

9 Medical Air’s suggestion that the District Court heard

argument on the pending motion to strike Medical Air’s jury

demand “without warning” is not only irrelevant, but also ignores

the procedural record. Pet. at 20. Respondents moved to strike

Medical Air’s jury demand on August 10, 2000, Medical Air

submitted its opposition on September 5, 2000 (with a supporting

affidavit and without any request for an evidentiary hearing), and

Respondents filed a reply memorandum on September 12, 2000.

The Respondents then identified this fully-briefed motion as a

“pending motion” in their pre-trial status report to the District

Court on November 17, 2000. Accordingly, it should have come as

At most, Medical Air complains only that the

District Court made a factual error in finding that

Medical Air “knowingly and intentionally” waived its

right to a jury trial by contract. Even if the issue were

relevant to the outcome of the Court of Appeals’

decision, this case-specific factual determination by

the trial court does not warrant the exercise of this

Court’s discretion to grant a writ of certiorari. See Pet.

App. at 14a (noting that analysis of “voluntary and

knowing” nature of waiver is “a fact-based inquiry”).!°

no surprise to the parties that when the District Court scheduled a

hearing on a pending motion for summary judgment for ten days

prior to the scheduled start of trial, the Court also requested

argument on all other pending motions. In any event, Medical Air

never even requested oral argument on the motion.

10 Medical Air’s discussion of this issue misstates the

record. For instance, contrary to Medical Air’s assertion “that

there was no evidence before the court of a knowing and voluntary

waiver” (Pet. at 19), the record below demonstrates that the

Medical Air executives who negotiated the terms of Marwan

Investment’s and Marwani Holding’s investment in Medical Air

were experienced businessmen, who were assisted by counsel

throughout these negotiations. Pet. App. at 4a. Further, the jury

waiver provision was clearly and conspicuously set forth in an

agreement that Medical Air considered so central to the parties’

elationship that Medical Air selected only this agreement and two

other documents from the closing binder for the transaction (out of

the “over twenty documents” executed by the parties (Pet. at 2)) to

attach as exhibits to its Complaint. Moreover, given that Medical

Air acknowledges that its jury waiver is enforceable at least by

Marwan Investment (see Pet. App. at 14a), Medical Air has

necessarily conceded that this provision was conspicuous. Courts

routinely cite such objective factors in concluding that a

contractual jury waiver provision was entered into knowingly and

intentionally, and thus is enforceable. See, e.g., Telum, Inc. v.

E.F. Hutton Credit Corp., 859 F.2d 835, 837 (10t Cir. 1988);

Leasing Service Corp. v. Crane, 804 F.2d 828, 833 (4th Cir. 1986).

B. THE DECISION OF THE COURT OF APPEALS

IS CORRECT.

This Court’s review is unnecessary for the

additional reason that the Court of Appeals’ rejection

of Medical Air’s breach of fiduciary duty claim is both

legally and factually correct. Pet. App. at 15a-20a.

The burden-shifting framework that the Court of

Appeals articulated (id. at 15a-16a) is the appropriate

legal standard. As the Court of Appeals recognized,

shareholders in a Massachusetts close corporation

owe a fiduciary duty of utmost good faith and loyalty.

See Donahue v. Rodd Electrotype Co., 367 Mass. 578,

992-93, 328 N.E.2d 505, 515 (1975). Where a breach

of this fiduciary duty is alleged, the burden is on the

defendant to “demonstrate a legitimate business

purpose for its action.” Wilkes, 370 Mass. at 850-51,

353 N.E.2d at 663. If the defendant meets this

burden, “no liability will result unless the [plaintiff]

succeeds in showing that the proffered legitimate

objective could have been achieved through a less

harmful, reasonably practicable, alternative mode of

action.” Zimmerman v. Bogoff, 402 Mass. 650, 657,

524 N.E.2d 849, 853 (1988). Thus, there was no error

of law.

Further, the trial evidence more _ than

sufficiently supported the finding that Marwani

Holding had legitimate business reasons to vote

against the proposed merger — Marwani Holding

“lack[ed] material information about the proposed

merger” and “had a suspicion, reasonable in context,

that the deal was based on unrealistic assumptions

that would ultimately doom it, and that it served only

as a distraction from the real problems facing Medical

Air.” Pet. App. at 18a-19a. At the time of the vote,

Medical Air had refused for almost two months to

honor Marwani Holding’s repeated requests for copies

of the due diligence materials that had been provided

to Nortek. Id. at 5a-6a. Dr. Rahbany (Marwani

Holding’s Agent) testified that, in his view, Marwani

Holding had a duty as a shareholder of Medical Air to

cast an informed vote on the Nortek proposal, which is

why he requested copies of these due diligence

materials. Id. at 5a, 8a.!! Dr. Rahbany further

testified that these materials would allow him to

assess whether the proposed purchase price was

based on credible representations and financial

projections, and thus whether the Nortek proposal

ultimately would be viable. Id. at 5a, 7a-8a.!2 He also

explained why the viability of the Nortek proposal was

important: given Medical Air’s financial difficulties, it

was preferable that Medical Air’s management focus

on improving the company’s performance, rather than

devote significant time and resources to negotiating a

proposal with Nortek that might not be sustainable.

Id. at 19a. As Dr. Rahbany testified, “Nobody buys

your problems: you have to solve them.”

This testimony amply supports the Court of

Appeals’ findings as to Marwani Holding’s reasons for

voting against the Nortek proposal. It was certainly

reasonable (as the Court of Appeals found) for a

shareholder — acting with the best interests of

Medical Air and his fellow shareholders in mind — to

vote against a transaction where he lacked basic

information about the basis and viability of the

proposed transaction. Id. at 17a-19a. Arguably, it

11 Even after the vote, Marwani Holding continued to

request information about Medical Air’s negotiations with Nortek.

Pet. App. at 9a.

12 Further, Medical Air’s decision to seek Marwani

Holding’s approval of the Nortek proposal, rather than proceed

under the “Qualifying Price” certification provision of the ISA —

pursuant to which Medical Air could have proceeded with a merger

without such approval — led Dr. Rahbany to question further the

sustainability of the proposal through the course of negotiations

with Nortek. Pet. App. at 8a & n.1.

would be entirely inconsistent with a shareholder’s

fiduciary duties to vote in favor of such a significant

transaction without knowing such _ material

information about the proposal.!3

Medical Air contends that the Court of Appeals

should have placed greater weight on Marwani

Holding’s alleged “admissions” that its vote also served

its own self-interests. Pet. at 16-17. Even if Medical

Air’s characterization of this testimony were

accurate,!* the Court of Appeals correctly determined

that where, as here, challenged conduct serves the

13 The judgment of the Court of Appeals also may be

upheld on the alternative ground that, under Massachusetts law,

Marwani Holding’s vote on the proposed merger was not subject to

the fiduciary duties ordinarily owed by shareholders in a close

corporation. Those duties do not apply where the issue before the

shareholders involves pre-approved procedures set forth in the

company’s organizational documents or stockholder agreements.

See, e.g., Donahue, 367 Mass. at 598 n.24, 328 N.E.2d at 518

n.24 (heightened fiduciary duties are not implicated where “all

other stockholders give advance consent to the stock purchase

arrangements through acceptance of an appropriate provision in

the articles of organization, the corporate by-laws ... or a

stockholder’s agreement”). The proposed Nortek transaction

triggered the merger and stock-redemption procedures of the ISA

and Medical Air’s Amended Articles of Organization — which

Medical Air chose not to, or otherwise failed to, follow. See Pet.

App. at 6a-8a. Accordingly, under Donahue, because Marwani

Holding’s vote against the Nortek proposal was consistent with its

agreed-upon rights, its vote was not governed by heightened

fiduciary duties. See Donahue, 367 Mass. at 598 n.24, 328

N.E.2d at 518 n.24; Blank v. Chelmsford Ob/Gyn, P.C., 420 Mass.

404, 408, 649 N.E.2d 1102, 1105-06 (1995) (“when all the

stockholders in advance enter into agreements,” questions of

fiduciary duty do not arise regarding conduct that falls within the

terms of those agreements).

14 The Court of Appeals expressly acknowledged this

testimony, but found that it did not provide the conclusive proof of

Marwani Holding’s motivation that Medical Air attributes to it.

Pet. App. at 8a-9a, 17a-18a.

interests of the corporation and of the shareholder,

the “legitimate purpose” articulated by the

shareholder “is not negated if [the shareholder’s] vote

also coincided with its self-interest.” Pet. App. at 18a

(“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”).!5 As noted, Marwani Holding did not

have sufficient information to assess whether the

proposed merger was in the best interests of Medical

Air, and thus voted against the proposal. At most,

Medical Air suggests that Marwani Holding’s own

interests provided it with further reasons to vote

against the proposed transaction. Given the

alignment of these interests, Medical Air cannot claim

that Marwani Holding breached its fiduciary duty

simply by voting in accordance with both interests. As

the Court of Appeals recognized:

1S This statement is entirely consistent with the decisions

of the Massachusetts Supreme Judicial Court addressing the

fiduciary duties of stockholders in close corporations. See Blank,

420 Mass. at 408, 649 N.E.2d at 1105 (stockholders “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”

(emphasis added)); Wilkes, 370 Mass. at 850-51, 353 N.E.2d at

663 (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”). The

sole case cited by Medical Air to contradict the statement of the

Court of Appeals — “This is not the law” (Pet. at 13) — is

inapposite. In Merola v. Exergen Corp., even though the majority

shareholder could not show a legitimate business purpose for

terminating the employment of a minority shareholder, the Court

nonetheless concluded that the termination did not give rise to a

breach of fiduciary duty. See Merola v. Exergen Corp., 423 Mass.

461, 465-66, 668 N.E.2d 351, 354-55 (1996). Thus, Merola does

not support Medical Air’s suggestion that a legitimate business

purpose is negated if the shareholder is acting both in the interest

of the corporation and in his own self-interest.

Admittedly, there may be_ tensions

between the two types of interests —

loyalty to the corporation and selfish

ownership. Djfficult cases will arise

where the dividing line is not clear. This

is not one of those cases.

Id. (emphasis added).!6

Additionally, the evidence presented at trial is

more than sufficient to support the First Circuit’s

conclusion that “[n]jo reasonable jury could find that

Marwani Holding’s vote was the proximate cause of

the demise of the proposed Nortek merger,” which the

Court of Appeals cited as a separate and independent

ground for rejecting Medical Air’s fiduciary duty claim.

Id. at 19a-20a; see Clark v. Rowe, 428 Mass. 339,

345, 701 N.E.2d 624, 628 (1998) (to establish liability

for breach of fiduciary duty, plaintiff must prove that

alleged breach was proximate cause of damage).

Nortek’s Chairman and Chief Executive Officer

testified that Nortek decided to renegotiate the

purchase price and restructure the _ proposed

16 The Court of Appeals concluded its analysis of the

alleged breach of fiduciary duty by finding that Medical Air had

not met its burden of showing that the legitimate business

purpose articulated by Marwani Holding could have been achieved

through a less harmful course of action. Pet. App. at 19a.

Medical Air did not dispute the District Court’s identical finding on

this issue in Medical Air’s submission to the Court of Appeals, and

thus has waived any argument on this question before this Court.

See United States v. United Foods, Inc., 533 U.S. 405, 417 (2001).

In any event, the Court of Appeals correctly concluded that the

alternative proposed by Medical Air — that Marwani Holding could

have simply voted for the merger (Pet. at 17-18) — “is not a

reasonable and practicable alternative,” as it would not have

resolved Marwani Holding’s “legitimate concerns about what form

the deal would ultimately take, or whether the whole deal was

simply a chimera.” Pet. App. at 19a.

transaction because Medical Air missed the fourth

quarter sales projections that it had provided to

induce Nortek’s interest in the first instance. Pet.

App. at 8a.17 He also testified that Marwani Holding’s

vote on the proposed merger had no bearing on

Nortek’s decision to restructure the transaction with

Medical Air, and that after Nortek reviewed Medical

Air’s fourth quarter sales results, Nortek was not

willing to go forward with the transaction under

consideration. Id. at 5a, 19a-20a.

The record below also supports the conclusion

that Nortek’s negotiations with Medical Air, including

negotiations of the purchase price, were not finalized

as of the date of the shareholder vote. For instance,

even though Medical Air had represented to its

shareholders that the draft merger documents

submitted to them for approval “reflect the essential

structure and framework of the merger,” that

structure and framework had changed substantially

by the date of the shareholder vote, as Medical Air

already had suggested to Nortek, in writing, “a

restructuring of our agreement to include a

performance consideration.” In other words, on

January 8, 1997, Medical Air asked Marwani Holding

to approve a proposed transaction that (unbeknownst

to Marwani Holding) Medical Air and Nortek were not

even contemplating. Id. at 7a-8a, 19a-20a.

Accordingly, as the Court of Appeals determined, the

loss of the proposed merger was not, and could not

have been, caused by Marwani Holding’s failure to

vote in favor of a proposal that, by the time of that

17 Indeed, Medical Air at least occasionally concedes that

Medical Air and Nortek reopened their negotiations “because

Medical Air had failed to meet its fourth quarter projections.” Pet.

at 6.

vote, Medical Air and Nortek were no longer pursuing.

Id. at 20a.

CONCLUSION

For all of the foregoing reasons, the

Respondents respectfully request that this Honorable

Court deny Medical Air’s petition for a writ of