Opinion ID: 200721
Heading Depth: 2
Heading Rank: 4

Heading: Application of the Standards to the Mi-Lor Release

Text: 49 The trial court held in an earlier order, on August 17, 2001, that those who executed the Release were not disinterested. The defendants have not argued this issue on appeal, other than simply stating in a footnote that there was adequate evidence in the record to show ... that the recipients of the release were disinterested. The issue is waived. 18 50 Defendants argue that the record establishes that they made full disclosure of all material facts about the Release. There is no formal ruling on this issue, either in the November 20, 2002 memorandum entering judgment for defendants on the Release or elsewhere. Defendants point to the following comment made by the trial judge during a colloquy with counsel on April 20, 2001: Full disclosure as to what? ... [T]hey all played the same game. There certainly was full disclosure. Everybody knew that everybody was doing `it,' whatever it is. This comment is far from a ruling and, in any event, does not foreclose the disclosure issue. 51 First, the defendants' argument does not logically follow. The fact that Mi-Lor's remaining directors and shareholders also had expenses paid by the corporation means that they were most likely not disinterested, because they benefitted from a practice of corporate largesse. But it certainly does not mean that the Redeeming Principals fully disclosed all material details regarding their own self-dealing. 52 Second, we cannot say that the record establishes full disclosure, thus resolving the issue. At oral argument, this court asked defendants' counsel to indicate what evidence was in the record to show that the defendants had made full disclosure. Counsel replied that Mi-Lor's bookkeeper had testified that he knew of the details of the unjust enrichment. The bookkeeper's knowledge does not even come close to establishing full disclosure, which must be made to the remaining shareholders. 53 The plaintiffs, in turn, contend that they are entitled to judgment because the defendants have the burden of proof and did not prove that they made full disclosure of their self-dealing. The argument is premature. No one yet has had the benefit of the full analysis of this issue from the distinguished judge who sat through the trial and has lived with this case for some years. This opinion clarifies the applicable standards and burdens, and whether to accept additional evidence on this or any other matter is an issue for the trial judge. The defendants bear the burden on remand of establishing full disclosure. 54 Plaintiffs also urge us to hold as a matter of law that the Release was unfair because there was no consideration given for it. They cite cases which they say hold that redemption of stock never benefits a corporation. See In re Roco Corp., 701 F.2d 978 (1st Cir.1983); In re Main St. Brewing Co., Ltd., 210 B.R. 662 (Bankr. D.Mass.1997). Those cases do not stand for that proposition at all. Instead, Roco essentially says that when a corporation is insolvent on the date it redeems shares of its stock, the corporation receives nothing of value, 701 F.2d at 982, and Main St. Brewing says that stock redemption claims in bankruptcy are subordinated to the claims of creditors, 210 B.R. at 664-65. In March 1990, when Mi-Lor redeemed the stock of the defendants, the company was not insolvent and its stock was not worthless. And the equitable subordination issue in Main St. Brewing is not at all relevant to the fairness of the Release. Furthermore, agreements by a corporation to purchase its own stock are generally enforceable. Winchell, 85 N.E.2d at 317. 55 There was no finding on fairness by the district judge and the record does not, from our reading of it, readily provide an answer. In theory, the Release could have benefitted both parties. The corporation, for its part, received stock back, which enhanced the value of its remaining shares and which conceivably could have led to some benefit to it; it also received cooperation and non-compete agreements from the defendants, a release from the defendants of claims against it, and miscellaneous benefits. In turn, the corporation paid out $1 million for the redeemed shares and other consideration and gave up claims that, eleven years later, led to a judgment of $380,807.66 (exclusive of interest). It is not clear what the value of the shares was or how to assess the expected value of the unjust enrichment claim at the time the Release was signed, given the risks and costs of litigation and other factors. In short, it is better to have the trial court determine this matter on remand. Cf. Lawton v. Nyman, 327 F.3d 30, 51 (1st Cir.2003).