Weiler v. PortfolioScope, Inc. , 469 Mass. 75 ( 2014 )

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SJC-11476
MILTON C. WEILER, JR. vs. PORTFOLIOSCOPE, INC., & others. 1
Suffolk. March 3, 2014. - July 11, 2014.
Present: Ireland, C.J., Spina, Cordy, Botsford, Gants, Duffly,
& Lenk, JJ.
Secured Transactions. Uniform Commercial Code, Secured
creditor, Secured transaction, Good faith. Corporation,
Stock. Contract, Performance and breach, Implied covenant
of good faith and fair dealing, Interference with
contractual relations. Conversion. Consumer Protection
Act, Unfair or deceptive act. Uniform Fraudulent Transfer
Act.
Civil action commenced in the Superior Court Department on
February 17, 2009.
The case was heard by Margaret R. Hinkle, J.
After review by the Appeals Court, the Supreme Judicial
Court granted leave to obtain further appellate review.
Curtis C. Pfunder for the plaintiff.
Andrew N. Nathanson (Keith P. Carroll with him) for the
defendants.
1
Kevin B. Kimberlin and Joseph T. Whelihan.
2
BOTSFORD, J. The disputes in this case arise from a
complex web of relationships between various individual and
corporate entities. The plaintiff, Milton C. Weiler, Jr., the
former president and chief operating officer of the defendant
corporation, PortfolioScope, Inc. (PortfolioScope), brought suit
against the defendants raising various claims, including breach
of contract, violation of G. L. c. 93A, and fraudulent transfers
pursuant to the Uniform Fraudulent Transfer Act (UFTA). After a
jury-waived trial, Weiler prevailed, and a judgment entered in
his favor. The Appeals Court reversed the judgment in part, and
we granted Weiler's application for further appellate review.
For the reasons discussed hereafter, we affirm the judgment of
the Superior Court in almost all respects.
1. Background. We summarize the pertinent facts as found
by the trial judge; additional facts are discussed in connection
with the issues raised. In 1981 and 1998, respectively, Weiler
cofounded Computer Aided Decisions and CAD Research, Inc. (CAD
entities), companies that developed and marketed software to
help manage investment portfolios. In early 2000, Spencer Trask
& Co. (Spencer Trask), a venture capital firm effectively
controlled by the defendant Kevin Kimberlin, 2 acquired the CAD
2
Kevin Kimberlin owns approximately ninety-five per cent of
Spencer Trask & Co. (Spencer Trask). The principal
beneficiaries of Spencer Trask are trusts and partnerships in
the names of Kimberlin's wife and children. Kimberlin served as
3
entities from Weiler and the cofounder. After the purchase, the
CAD entities were merged into a new company that became the
defendant PortfolioScope. Weiler received cash as well as stock
and stock options in the new company at the time of the sale and
served at that time as its president and chief operating
officer.
In 2001, PortfolioScope began experiencing financial
difficulty, and it received a series of loans from Wachovia
Bank, N.A. (Wachovia), beginning on February 20, 2001. 3 Kevin
Kimberlin Partners, L.P. (KKP), guaranteed these Wachovia loans,
and in that connection, on February 20, 2001, PortfolioScope
executed a security agreement granting KKP a security interest
in all of PortfolioScope's property, including its deposit
accounts and cash. On July 25, 2001, PortfolioScope executed a
demand note in favor of Wachovia in the amount of $4.01 million. 4
On July 10, 2002, KKP paid off PortfolioScope's debt to
Wachovia, and thereafter received an assignment of all of
Wachovia's rights and interests in PortfolioScope. The
the chairman of the board and the sole director of Spencer
Trask.
3
The initial loan from Wachovia Bank, N.A. (Wachovia), to
PortfolioScope was for $3.01 million.
4
All of the loans Wachovia made to PortfolioScope were
covered by the February 20, 2001, security agreement between
Kevin Kimberlin Partners, L.P. (KKP), and PortfolioScope.
4
assignment agreement incorporated the security agreement that
PortfolioScope previously had executed in favor of KKP. Between
2003 and 2008, PortfolioScope received additional loans from KKP
directly. 5
Weiler served as PortfolioScope's president and chief
operating officer from January, 2000, to May, 2002. Kimberlin
hired the defendant, Joseph T. Whelihan, in January, 2002, to
become PortfolioScope's chief executive officer. On February
13, 2002, Weiler entered into a stock option purchase and sale
agreement with PortfolioScope (five per cent agreement), in
which Weiler agreed to sell back to PortfolioScope 666,667
vested and unvested stock options in the company, and in
exchange would be paid a contingent purchase price. On October
21, 2002, the parties amended the five per cent agreement (five
per cent amendment) to include a provision that PortfolioScope
would pay Weiler five per cent of the net proceeds received in
connection with a pending lawsuit between PortfolioScope and
iFlex Solutions Limited (iFlex litigation). 6 Whelihan, as
5
These loans were made between October 1, 2003, and
October 9, 2008, totaled $1.272 million, and were evidenced by
senior secured promissory notes executed by PortfolioScope.
6
The amendment to the five per cent agreement (five per
cent amendment) provides in pertinent part that, "[i]n addition
to payments to be made by the Company as described in the [five
per cent agreement]," PortfolioScope would pay Weiler:
5
Portfolioscope's chief executive officer, signed both the five
per cent agreement and the five per cent amendment on behalf of
the company; the five per cent agreement also was initialed by
Kimberlin.
Between May, 2002, and October 21, 2008, Weiler consulted
with PortfolioScope, principally in connection with the then
pending iFlex litigation. 7 On October 21, 2008, the iFlex
litigation settled for $10 million. The law firm serving as
PortfolioScope's counsel in that litigation received the $10
million settlement funds on November 7, and, after deducting the
amount claimed by the firm as legal fees, transferred
approximately $8.2 million to PortfolioScope on November 12.
That same day, Kimberlin directed Whelihan to wire $5.2 million
of the proceeds to a Spencer Trask brokerage account because he
wanted to gain immediate access to the settlement proceeds. On
"Five (5) percent of the net proceeds (or net recovery) to
the Company [PortfolioScope] in connection with any claims
by the Company against Citicorp (and its affiliates)
related to copyright infringement and/or theft of
confidential information and trade secrets. The term net
proceeds or net recovery as used in this Section shall mean
gross proceeds less legal fees of the Company's counsel."
The parties do not dispute that the litigation with iFlex
Solutions Limited (iFlex litigation) is covered by the five per
cent amendment.
7
Weiler and PortfolioScope also entered into various
consulting agreements between 2002 and 2008, of which the trial
judge found PortfolioScope had committed a breach.
6
November 17, again at Kimberlin's direction, Whelihan wired
another $1.296 million to the Spencer Trask account and,
separately, another $1,231,186.13, also to Spencer Trask. 8 Also
on November 17, at Kimberlin's direction, Whelihan wired
$500,000 to an account in Whelihan's wife's name. Finally, on
November 25, Whelihan paid himself $15,000 from the iFlex
litigation settlement proceeds, a transaction authorized by
Kimberlin. 9 Taken together, these transfers accounted for almost
all of the iFlex litigation settlement proceeds. 10
After the iFlex litigation settled, beginning on
November 10, 2008, Weiler initiated a series of "increasingly
frustrated" inquiries directed at Whelihan, Kimberlin, and
others connected to PortfolioScope and Spencer Trask as to when
he was to be paid his entitlement under the five per cent
amendment. On December 2, 2008 -- after the iFlex litigation
proceeds were essentially depleted -- Whelihan sent a message
via electronic mail (e-mail) to Weiler, with a copy to
8
This second transfer on November 17, 2008, appears to have
been intended to satisfy an escrow order entered by a Superior
Court judge in a then-pending lawsuit between PortfolioScope and
Charles Hunt, Weiler's former business partner.
9
For ease of reference, we refer to the transfer to
Whelihan's wife and the transfer to Whelihan collectively as
transfers to Whelihan.
10
After these transfers, approximately $36,000 remained
from the iFlex litigation settlement funds.
7
Kimberlin, asking whether Weiler would settle for an amount less
than that he was otherwise entitled to under the five per cent
amendment. On December 4, Weiler responded that he would accept
$406,000 as payment in full. When no transfer of funds was
made, Weiler sent an e-mail to Whelihan on December 8, asking
when he should expect payment; Whelihan asked Weiler to "hold on
a little longer." Weiler made a subsequent inquiry on
December 17, to which Whelihan indicated that Weiler was "[his]
first priority tomorrow. Promise." 11 Weiler never received
payment from PortfolioScope.
On March 23, 2009, Whelihan sent an e-mail to Weiler
informing him that he was sending Weiler a $20,000 check as part
of an instalment plan as an incentive to help with the pending
litigation between PortfolioScope and Charles Hunt. 12 See note
8, supra. Shortly thereafter, Weiler served his complaint in
this action, alleging various claims against PortfolioScope,
Whelihan, and Kimberlin (collectively, defendants). 13 Only after
11
The trial judge found that "[a]t this point . . .
Whelihan was simply stringing Weiler along."
12
Weiler subsequently received and cashed the $20,000
check.
13
Weiler asserted the following claims in his amended
complaint: (1) breach of contract against PortfolioScope; (2)
breach of the implied covenant of good faith and fair dealing
against PortfolioScope; (3) tortious interference with
contractual relations against Kimberlin; (4) violation of G. L.
c. 93A, § 11, against PortfolioScope, Whelihan, and Kimberlin
8
the lawsuit was filed did Weiler learn that: (1) Whelihan had
transferred $515,000 to himself; and (2) the defendants were
asserting that Weiler was not being paid because KKP was a
secured creditor of PortfolioScope and had a priority interest
in the settlement proceeds that trumped Weiler's contractual
rights.
After a bench trial, the judge issued a written decision in
which she made detailed findings and concluded that: (1)
PortfolioScope committed a breach of the five per cent amendment
and the consulting agreements with Weiler as well as the
covenant of good faith and fair dealing; 14 (2) Kimberlin
tortiously interfered with Weiler's contractual rights vis-à-vis
Portfolioscope; (3) the defendants converted funds belonging to
Weiler; (4) the defendants knowingly and wilfully engaged in
unfair or deceptive acts or practices in violation of G. L.
c. 93A, § 11; (5) the defendants violated UFTA; and (6) the
(collectively, defendants); (5) fraudulent transfers in
violation of the Uniform Fraudulent Transfer Act (UFTA) against
the defendants; (6) misrepresentation against the defendants;
(7) violation of the Massachusetts Wage Act against the
defendants; (8) quantum meruit, unjust enrichment, and equitable
estoppel against the defendants; (9) detrimental reliance
against Kimberlin and Whelihan; (10) conversion against the
defendants; (11) civil conspiracy against the defendants; (12)
piercing the corporate veil against Kimberlin; and (13) a claim
for an accounting against the defendants.
14
The defendants do not challenge the judge's finding of
breach of contract (the five per cent amendment or the
consulting agreements) against Portfolio, or the judgment of
$471,122.97 on this count.
9
defendants conspired against Weiler. 15 The defendants appealed
to the Appeals Court, which affirmed the judgment against
Portfolioscope for breach of contract, but otherwise reversed,
concluding that judgment should enter in favor of the defendants
on all other counts in Weiler's amended complaint. Weiler v.
PortfolioScope, Inc., 83 Mass. App. Ct. 216, 233 (2013). We
affirm the judgment of the Superior Court with the exception of
Weiler's claim for conversion.
2. Discussion. The defendants argue that the judge erred
in certain fundamental respects in her interpretation of the
five per cent agreement and five per cent amendment, as well as
in her analysis of secured transaction principles as applied to
this case; in the defendants' view, these errors infected almost
every part of the disposition of the case. As to the five per
cent agreement and amendment, the defendants contend that the
judge misinterpreted the five per cent amendment as giving
Weiler a right to five per cent of the actual settlement
proceeds of the iFlex litigation (less legal fees), rather than
a right to five per cent of the value of the settlement (less
legal fees). With respect to secured transaction principles,
15
Judgment entered awarding damages against the defendants,
jointly and severally where applicable, with respect to each
count of the amended complaint on which one or more of the
defendants were found liable, including double damages and
attorney's fees in connection with the violation of G. L.
c. 93A, and additional remedies in connection with the violation
of UFTA.
10
the defendants contend that the judge failed to accord proper
legal significance to the fact that the $515,000 in transfers
from the iFlex litigation settlement proceeds to Whelihan and
the approximately $6.5 million in transfers from the proceeds to
Spencer Trask in substance and legal effect were transfers to
PortfolioScope's secured creditor, KKP, an entity that as a
matter of law had priority over Weiler. 16 The Appeals Court
agreed with the defendants. See Weiler, 83 Mass. App. Ct. at
218, 223-226. We also agree that the five per cent amendment
did not give Weiler a right to recover from the actual
settlement proceeds, but in the factual circumstances of this
case, conclude that any error in the judge's interpretation of
the five per cent amendment affects only Weiler's claim for
conversion. On the law of secured transactions, the judge's
factual findings in this case persuade us that no legal error
16
There is a question whether KKP's February 20, 2001,
security agreement actually covered the iFlex litigation
settlement proceeds. To have a security interest in commercial
tort claims, they must be named expressly in the security
agreement and must be in existence at the time the security
agreement is created. See G. L. c. 106, § 9-108 (e) (1)
(description by type insufficient for commercial tort claims);
G. L. c. 106, § 9-204 (b) (2) (after-acquired property clause
ineffective against commercial tort claims). At all relevant
times in this case, however, the iFlex litigation settlement had
been reduced to cash and placed in PortfolioScope's account, and
KKP had a security interest in PortfolioScope's cash and deposit
accounts. For the purposes of our discussion, we assume,
without deciding, that KKP's security interest in
PortfolioScope's assets extended to the settlement proceeds of
the iFlex litigation.
11
infected the judge's consideration of KKP's security interest in
the iFlex litigation settlement proceeds.
a. Standard of review. "We accept the judge's findings of
fact in a bench trial unless they are clearly erroneous,"
Makrigiannis v. Nintendo of Am., Inc., 442 Mass. 675, 677
(2004), and the credibility of the witnesses rests within the
purview of the trial judge. See Mass. R. Civ. P. 52 (a), as
amended, 423 Mass. 1402 (1996).
b. Breach of implied covenant of good faith and fair
dealing by PortfolioScope. The judge found that Portfolioscope
committed a breach of the covenant of good faith and fair
dealing when it paid $515,000, which constituted more than five
per cent of the net proceeds of the iFlex litigation, to
Whelihan. She explained that there was "simply no tenable
argument that the [five per cent] [a]greement[17] permitted
PortfolioScope to make any payment to Whelihan before paying
Weiler." PortfolioScope takes the position that it did not
commit a breach of the covenant of good faith and fair dealing
because its payment to Whelihan was directed by KKP --
PortfolioScope's secured creditor. Its argument is that
PortfolioScope was required to comply with KKP's instructions to
17
It is clear from the context that the trial judge was
focusing on the five per cent amendment.
12
pay Whelihan directly. 18 See G. L. c. 106, § 9-405 (a). We
affirm the judge's finding.
"The covenant of good faith and fair dealing is implied in
every contract," Uno Restaurants, Inc. v. Boston Kenmore Realty
Corp., 441 Mass. 376, 385 (2004), citing Kerrigan v. Boston, 361
Mass. 24, 33 (1972), including contracts between sophisticated
business people. See Anthony's Pier Four, Inc. v. HBC Assocs.,
411 Mass. 451, 473 (1991). The implied covenant provides "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 . . . ." Drucker v. Roland Wm.
Jutras Assocs., Inc., 370 Mass. 383, 385 (1976), quoting Uproar
Co. v. National Broadcasting Co., 81 F.2d 373, 377 (1st Cir.
1934), cert. denied, 298 U.S. 670 (1936), and "exists so that
the objectives of the contract may be realized," Ayash v. Dana-
Farber Cancer Inst., 443 Mass. 367, 385, cert. denied sub nom.
Globe Newspaper Co. v. Ayash, 546 U.S. 927 (2005). "A breach
occurs when one party violates the reasonable expectations of
the other." Chokel v. Genzyme Corp., 449 Mass. 272, 276 (2007),
and cases cited.
"In determining whether a party violated the implied
covenant of good faith and fair dealing, we look to the
18
The Appeals Court essentially adopted this rationale in
reversing the breach of implied covenant of good faith and fair
dealing claim against PortfolioScope. See Weiler, 83 Mass. App.
Ct. 216, 226-227 (2013).
13
party's manner of performance. . . . There is no
requirement that bad faith be shown; instead, the plaintiff
has the burden of proving a lack of good faith. . . . The
lack of good faith can be inferred from the totality of the
circumstances." (Citations omitted.)
T.W. Nickerson, Inc. v. Fleet Nat'l Bank, 456 Mass. 562, 570
(2010).
PortfolioScope's argument, that the payment to Whelihan was
actually a payment ordered by its secured creditor KKP, is at
odds with the trial judge's findings concerning the transfers
made to Whelihan from the iFlex litigation proceeds. The judge
found that the $500,000 transfer was made "at Kimberlin's
direction," and the $15,000 transfer was "authorized by
Kimberlin." What is absent from these findings -- and what is
necessary for Portfolioscope's secured creditor argument -- is
that Kimberlin authorized or directed these payments on behalf
of KKP. The defendants apparently assume that Kimberlin did so,
but do not identify the basis for this assumption; the mere fact
that Kimberlin controlled KKP is not a sufficient one. 19
19
Moreover, a finding that Kimberlin acted on behalf of KKP
in directing Whelihan to pay himself from the iFlex litigation
proceeds logically would seem to require a corollary finding
that KKP credited the $515,000 transferred to Whelihan against
PortfolioScope's debt to KKP. We do not read the judge's
decision as including such a finding. The judge stated, "KKP,
L.P. allegedly gave PortfolioScope a $500,000 credit on
Portfolioscope's secured debt obligation for the $500,000
Whelihan payment" (emphasis added). This was the only fact
included in the judge's decision that she qualified with
"allegedly," and the judge also stated at a different point in
her decision, when discussing Weiler's UFTA claim, that
14
What the judge's findings do indicate is that
PortfolioScope, at Kimberlin's direction, transferred $515,000
to Whelihan, who was neither a secured creditor of
PortfolioScope nor otherwise entitled to the funds; 20 and that
PortfolioScope's $515,000 payment to Whelihan represented more
than five per cent of the net proceeds from the iFlex
litigation, which was the amount to which Weiler was entitled
under the five per cent amendment. 21 Moreover, the judge found
"PortfolioScope received no value in exchange for" the transfers
of $515,000 to Whelihan. Moreover, the only evidence that
PortfolioScope did receive credit was the testimony of
Kimberlin, a witness the judge discredited in several respects.
The defendants did not introduce any financial or other business
records of either PortfolioScope or KKP reflecting this alleged
credit. Cf. Automobile Insurers Bur. of Mass. v. Commissioner
of Ins., 430 Mass. 285, 291 (1999) (commissioner could properly
draw adverse inference from insurers' failure to produce
complete information on subject "peculiarly within their
control"). Given that the judge's findings quoted here indicate
she did not believe Kimberlin's testimony, the factual premise
on which the defendants' argument is built does not exist.
At oral argument before this court, counsel for the
defendants agreed that, if PortfolioScope had not credited the
$515,000 payment to Whelihan against the amount it owed to KKP,
the failure to have done so would undermine the defendants'
contention that PortfsolioScope's payment to Whelihan
constituted a payment to the secured creditor.
20
The judge expressly discredited Whelihan's testimony that
he was "owed" $500,000 for past services rendered to
PortfolioScope and various other entities connected to
Kimberlin.
21
The judge's discussion of the implied covenant claim may
be read to indicate that she interpreted the five per cent
amendment as giving Weiler a right to recover five per cent of
the actual iFlex litigation settlement proceeds. As previously
15
that these transfers were motivated by a desire to enrich
Whelihan at the expense of Weiler who had provided substantial
services in order to make the iFlex litigation settlement
possible -- a finding which is supported by the evidence. See
T.W. Nickerson, Inc., 456 Mass. at 574 (looking to whether
defendant's motivation was "to affect negatively the plaintiff's
rights" under the contract to determine whether breach of
implied covenant of good faith and fair dealing occurred). See
also Chokel, 449 Mass. at 278 n.5; Anthony's Pier Four, Inc.,
411 Mass. at 472-473. PortfolioScope's argument fails.
c. Tortious interference with contractual relations by
Kimberlin. "To prevail on a claim of tortious interference with
a contract, a plaintiff must establish that '(1) he had a
contract with a third party; (2) the defendant knowingly induced
the third party to break that contract; (3) the defendant's
stated, we agree with the defendants and the Appeals Court that
such an interpretation is not correct, but the error has no
significance because the settlement proceeds represented
essentially all of PortfolioScope's assets. In other words, the
company would have been required to transfer a portion of the
settlement proceeds in order to meet its contractual obligation
to Weiler.
Although it is true that approximately $1.231 million of
the iFlex litigation settlement funds, which represented more
than five per cent of the net proceeds, purportedly went to
satisfy an escrow order for then pending litigation between
PortfolioScope and Charles Hunt, during the time period involved
in this case, PortfolioScope had no ability to reach that money
to pay Weiler, and there was no guarantee that that sum would
ever be returned to PortfolioScope.
16
interference, in addition to being intentional, was improper in
motive or means; and (4) the plaintiff was harmed by the
defendant's actions.'" Psy-Ed Corp. v. Klein, 459 Mass. 697,
715-716 (2011), quoting G.S. Enters., Inc. v. Falmouth Marine,
Inc., 410 Mass. 262, 272 (1991). Accord Blackstone v. Cashman,
448 Mass. 255, 260 (2007). However, "[w]here the defendant is a
corporate official acting in the scope of his corporate
responsibilities, a plaintiff has a heightened burden of showing
the improper motive or means constituted 'actual malice,' that
is, 'a spiteful, malignant purpose, unrelated to the legitimate
corporate interest.'" Psy-Ed Corp., supra at 716, quoting
Blackstone, supra at 260-261.
The judge concluded that Kimberlin intentionally interfered
with Weiler's right to be paid from the iFlex litigation
proceeds under the five per cent amendment by authorizing
Whelihan to pay $515,000 to himself, and that Kimberlin did so
with improper motive or means; the judge did not apply the
"actual malice" standard in reaching this result, or even
discuss the standard -- presumably because the defendants did
not mention this standard or suggest that the standard had any
application to this case. The Appeals Court reversed,
concluding that because Kimberlin served as chair of the board
and sole director of Spencer Trask, which owned ninety per cent
of PortfolioScope, he qualified as a "corporate official" of
17
Portfolioscope to whom the actual malice standard applied, and
Weiler failed to meet the "heightened burden" that the standard
imposes. Weiler, 83 Mass. App. Ct. at 228. Before this court,
Kimberlin embraces the Appeals Court's theory and argues that he
is entitled to the actual malice standard because, as the
Appeals Court concluded, he was a Portfolioscope "corporate
official."
We have stated that "[t]he 'actual malice' standard for
proving improper motive or means on the part of a corporate
official is a burden placed on the plaintiff, not a defense that
must be proved by the defendant." Blackstone, 448 Mass. at 261.
See id. at 261 n.10. That the plaintiff must prove a corporate
official acted with actual malice, however, does not absolve the
defendant from bringing to the attention of the plaintiff and
the court in some fashion that he claims to qualify as a
"corporate official" of the relevant corporation and therefore
is entitled to have the actual malice standard apply. See id.
at 256, 259, 268 (defendant, one of two directors of close
corporation employing plaintiff, requested actual malice jury
instruction at trial; error not to give it). Cf. Teller v.
Schepens, 381 Mass. 621, 623 (1980) (once defendant raises
statute of limitations issue, plaintiff bears burden of proving
claims are not time barred). Cf. also Commonwealth v.
Humphries, 465 Mass. 762, 771 (2013) (where defendant was
18
charged with joint venture possession of firearm, his claim that
coventurer possessed license to carry firearm would be defense
to charge; defendant not required to produce evidence of
coventurer's license, but only bears burden of raising issue of
license; once issue raised, burden on Commonwealth to prove
coventurer was not licensed). The need to identify the
"corporate official" issue is especially pronounced in a case
like the present one, where the complexities of the corporate
and individual relationships raise, at best, a possibility that
the defendant qualifies as a corporate official. 22
To summarize: only where a defendant raises a claim that
he qualifies as a corporate official does the plaintiff then
bear the burden of proving either that the defendant does not so
qualify and is not entitled to the actual malice standard, or
22
Contrast Weber v. Community Teamwork, Inc., 434 Mass.
761, 762, 781 (2001) (executive director constituted corporate
official); King v. Driscoll, 418 Mass. 576, 578, 587 (1994),
S.C., 424 Mass. 1 (1996) (shareholder-directors actively
involved in management as corporate officials); Gram v. Liberty
Mut. Ins. Co., 384 Mass. 659, 660, 663-664 (1981), S.C., 391
Mass. 333 (1984) (direct supervisors entitled to actual malice
standard). In Blackstone v. Cashman, 448 Mass. 255, 267 (2007),
this court concluded that a director of a close corporation,
even if not involved in the day-to-day operations of the
company, still "has an important interest in and responsibility
for the conduct of business" because of his status as director,
and qualifies as a corporate official to whom the actual malice
standard would apply. The court left open whether the same
would be true for a person who was simply a shareholder of a
close corporation. See id. at 267 n.16. Although, as the judge
found, Kimberlin may have exerted practical control over
PortfolioScope, he was not an employee, officer, director, or
even shareholder of the company.
19
that the defendant did act with actual malice. Here, Kimberlin
did not argue or suggest at trial (or before the Appeals Court)
that he was a "corporate official" of PortfolioScope and thereby
was entitled to the actual malice standard. 23 Rather, he
advances it for the first time before this court. Having failed
to raise the issue below, he has waived it. See Canton v.
Commissioner of Mass. Highway Dep't, 455 Mass. 783, 795 n.18
(2010), and cases cited; Mullins v. Pine Manor College, 389
Mass. 47, 63 (1983), citing Royal Indem. Co. v. Blakeley, 372
Mass. 86, 88 (1977) (issues not raised below are usually not
considered on appeal unless "the questions presented are of some
public importance and the result we reach is not changed by our
consideration of them").
The defendants claim also that even if Kimberlin was not
entitled to the benefit of the actual malice standard, Weiler
failed to establish that Kimberlin used improper motive or means
in interfering with the five per cent amendment because
Kimberlin, acting on behalf of the secured creditor KKP, was
privileged to interfere with Weiler's contract in order to
23
In fact, at trial, Kimberlin emphasized his limited
involvement with PortfolioScope for the purposes of defending
against Weiler's claim to pierce the corporate veil and hold
Kimberlin personally liable for Weiler's claims against
PortfolioScope. Advancing a corporate official claim would run
counter to this stance.
20
further KKP's own legitimate economic interest. 24 As discussed,
the judge did not find that in directing or authorizing Whelihan
to transfer $515,000 from PortfolioScope to himself (Whelihan),
Kimberlin was acting on behalf of KKP in its capacity as
PortfolioScope's secured creditor. 25,26
d. Conversion. To be liable for conversion, a defendant
must wrongfully "exercise dominion or control over the personal
property of" the plaintiff. See Third Nat'l Bank of Hampden
24
The Appeals Court adopted this reasoning in concluding
that, even if Kimberlin was not a corporate official, reversal
of the tortious interference claim against him was required.
See Weiler, 83 Mass. App. Ct. at 228-229.
25
There was ample evidence to support the judge's
conclusion that Kimberlin acted with improper motive or means in
directing that $515,000 be paid to Whelihan, leaving
PortfolioScope with insufficient funds to meet its contractual
commitment to Weiler. As to improper means, Kimberlin, who was
not an employee, officer, or director of PortfolioScope,
nonetheless personally assumed the right and authority to direct
the transfer of a portion of PortfolioScope's assets –- the
iFlex litigation settlement proceeds –- to Whelihan and
assiduously concealed the transfer from Weiler for months,
impeding Weiler's ability to recover what was due to him. As to
improper motive, the judge in substance found that Kimberlin
directed the transfer in an effort to benefit Whelihan, his
consultant for Spencer Trask who otherwise was not entitled to
the $515,000, to the detriment of Weiler, who had a legitimate
contractual claim to the money.
26
The defendants' sole argument as to why Weiler's claim
for civil conspiracy cannot stand is that there was no
underlying tort to which they could conspire. The argument
fails in light of our affirmance of the claim of tortious
interference with contractual relations against Kimberlin.
Moreover, the finding that the defendants conspired to
tortiously interfere with Weiler's contractual relations is
amply supported by the record.
21
County v. Continental Ins. Co., 388 Mass. 240, 244 (1983).
Accord Spooner v. Holmes, 102 Mass. 503, 506 (1869). The
defendants argue that the conversion claim cannot stand because
the iFlex litigation proceeds never constituted Weiler's
property. Weiler counters that money can be the subject of
conversion, and, therefore, the judge correctly held the
defendants liable for converting Weiler's five per cent share of
the iFlex litigation net proceeds pursuant to the five per cent
amendment. Weiler is correct that conversion may lie if an
individual wrongly exercises dominion or control over the money
of another. Matter of Hilson, 448 Mass. 603, 611 (2007), citing
Morrin v. Manning, 205 Mass. 205, 211 (1910). However, as
previously stated, we agree with the defendants and the Appeals
Court, see Weiler, 83 Mass. App. Ct. at 223, that under the
terms of the five per cent agreement and five per cent
amendment, Weiler was entitled to the value of five per cent of
the net proceeds of the iFlex litigation; the contractual
documents did not give him a right to five per cent of the iFlex
litigation funds themselves. Contrast Matter of Hilson, supra.
Therefore, the judgment for Weiler on his conversion claim must
be reversed.
e. Fraudulent transfers. Under UFTA, a transfer made by a
debtor before or after the creditor's claim arose is fraudulent
if made with actual intent to hinder, delay, or defraud, see
22
G. L. c. 109A, § 5 (a) (1), or if made without receiving the
reasonably equivalent value of the property in exchange and
after the transfer, the debtor would not have enough assets to
carry on its business or pay expected creditors. See G. L.
c. 109A, § 5 (a) (2). 27 The judge concluded that the defendants
violated UFTA, based on her finding that the transfers were made
with the actual intent to hinder, delay, or defraud Weiler. See
G. L. c. 109A, § 5 (a) (1). With respect to the $515,000
transferred by PortfolioScope to Whelihan, the judge pointed to
the following: (1) at the time of the transfers, Whelihan was
not a secured or even an unsecured creditor of PortfolioScope,
and Portfolioscope received no value in exchange for the
27
General Laws c. 109A, § 5 (a), provides in pertinent
part:
"A transfer made or obligation incurred by a debtor is
fraudulent as to a creditor, whether the creditor's claim
arose before or after the transfer was made or the
obligation was incurred, if the debtor made the transfer or
incurred the obligation:
"(1) with actual intent to hinder, delay, or defraud any
creditor of the debtor; or
"(2) without receiving a reasonably equivalent value in
exchange for the transfer or obligation, and the debtor:
"(i) was engaged or was about to engage in a business or a
transaction for which the remaining assets of the debtor
were unreasonably small in relation to the business or
transaction; or
"(ii) intended to incur, or believed or reasonably should
have believed that he would incur, debts beyond his ability
to pay as they became due."
23
transfers; 28 (2) Whelihan was an "insider," see G. L. c. 109A,
§ 2; (3) the settlement proceeds as a whole represented
substantially all of PortfolioScope's assets; and (4) Whelihan
and Kimberlin attempted to conceal the transfers while
simultaneously delaying response to Weiler's requests to be
paid. As to the $6.496 million 29 transferred by PortfolioScope
to the Spencer Trask brokerage account, the judge observed that:
(1) the transfers were made to Spencer Trask, a PortfolioScope
insider, for the benefit of KKP, controlled by Kimberlin; (2)
the transfers involved substantially all of PortfolioScope's
assets, rendering it insolvent; (3) KKP never perfected its
security interest until after Weiler commenced this litigation;
(4) neither Whelihan nor Kimberlin ever informed Weiler that
PortfolioScope was unable to pay him because it was required to
pay its secured creditor, KKP; and (5) both Kimberlin and
Whelihan engaged in a series of actions that were intended to
28
The judge expressly discredited Whelihan's testimony that
he was owed $500,000 for his work both at PortfolioScope and at
Spencer Trask. She further rejected Whelihan's assertion that
he had been working for years as a Spencer Trask employee
without compensation, citing the fact that Whelihan was
receiving a monthly $9,000 retainer from Spencer Trask.
29
This sum consisted of the $5.2 million wired on
November 12 and the $1.296 million wired on November 17. The
judge did not find the approximately $1.231 million transfer,
apparently designed to satisfy the Superior Court escrow order
in the Hunt litigation, to be a fraudulent transfer under UFTA.
24
conceal the transfers from Weiler and avoid his attempts to
collect what was due him. 30
The defendants contend that the trial judge's finding that
the transfers to Whelihan and to Spencer Trask were made with
intent to hinder or delay was clearly erroneous. We disagree. 31
i. Transfers to Whelihan. The defendants' only argument
as to why the transfers made to Whelihan are not fraudulent
within the meaning of UFTA is that the payment to Whelihan was,
in actuality, a transfer to KKP, PortfolioScope's secured
creditor. As discussed, the trial judge's findings do not
support this factual claim, therefore the issue of paying a
secured creditor is irrelevant. The question that remains is
whether the evidence showed that the Whelihan transfers were
made with actual intent to hinder, delay, or defraud, or more
particularly, whether the judge's finding that they were made
30
The Appeals Court concluded that the transfers at issue
did not violate UFTA. Weiler, 83 Mass. App. Ct. at 231-233.
That court reasoned that, because "the transfers were made at
the instruction of KKP, a secured creditor and holder of a
demand note," id. at 232, Weiler was required to prove that
PortfolioScope received some hidden benefit in making the
transfers. Id. at 232-233.
31
Essentially, the defendants' argument is that KKP was a
secured creditor of PortfolioScope, that the various transfers
were made in satisfaction of that security interest, and that
accordingly they are insulated from being found to have violated
UFTA. Additionally, they claim that there was insufficient
evidence to support the finding that the transfers to Spencer
Trask were to an "insider," and to support the finding that
PorfolioScope became insolvent as a result of the transfers.
25
with such intent was clearly erroneous. Cf. Max Sugarman
Funeral Home, Inc. v. A.D.B. Investors, 926 F.2d 1248, 1255 (1st
Cir. 1991) (finding of actual intent to hinder, delay, or
defraud under § 548 of United States Bankruptcy Code "is a
finding of fact, which [is] not disturb[ed] absent clear
error"). 32
General Laws c. 109A, § 5 (b), provides a nonexclusive list
of factors that may be considered in determining whether the
parties made the transfers with actual intent to hinder, delay,
or defraud. 33 See Alford v. Thibault, 83 Mass. App. Ct. 822, 828
32
See In re Spatz, 222 B.R. 157, 164 (N.D. Ill. 1998)
(noting that provisions of UFTA parallel § 548 of Bankruptcy
Code).
33
The factors set forth in G. L. c. 109A, § 5 (b), are
whether:
"(1) the transfer or obligation was to an insider;
"(2) the debtor retained possession or control of the
property transferred after the transfer;
"(3) the transfer or obligation was disclosed or
concealed;
"(4) before the transfer was made or obligation was
incurred, the debtor had been sued or threatened with suit;
"(5) the transfer was of substantially all of the
debtor's assets;
"(6) the debtor absconded;
"(7) the debtor removed or concealed assets;
26
(2013). "While the 'presence of a single badge of fraud may
spur mere suspicion, the confluence of several can constitute
conclusive evidence of an actual intent to defraud.'" Hasbro,
Inc. v. Serafino, 37 F. Supp. 2d 94, 98 (D. Mass. 1999), quoting
Max Sugarman Funeral Home, Inc., supra at 1254-1255.
The subsidiary findings listed by the judge in support of
her ultimate finding of actual intent included at least four
indicia listed in UFTA, see G. L. c. 109A, § 5 (b): the
transfers to Whelihan, the chief executive officer of
PortfolioScope, were to an insider, see § 5 (b) (1) 34; Whelihan
and Kimberlin concealed the transfers from Weiler, see § 5 (b)
(3); the transfers to Whelihan, combined with the virtually
simultaneous transfers to Spencer Trask, accounted for
substantially all of PortfolioScope's assets at that time, see
"(8) the value of the consideration received by the
debtor was reasonably equivalent to the value of the asset
transferred or the amount of the obligation incurred;
"(9) the debtor was insolvent or became insolvent
shortly after the transfer was made or the obligation was
incurred;
"(10) the transfer occurred shortly before or shortly
after a substantial debt was incurred; and
"(11) the debtor transferred the essential assets of
the business to a lienor who transferred the assets to an
insider of the debtor."
34
See also G. L. c. 109A, § 2 (officer of debtor
corporation is insider for purposes of UFTA).
27
§ 5 (b) (5); and, because Whelihan was not a secured or
unsecured creditor of PortfolioScope and had no entitlement to
any portion of the iFlex litigation settlement proceeds,
PortfolioScope received no value -- much less something of
equivalent value -- as a result of the transfer, see § 5 (b)
(8). As the trial evidence supports these findings, the judge's
determination that the transfer of $515,000 to Whelihan was made
with intent to hinder, delay, or defraud was not clearly
erroneous.
ii. Transfers to Spencer Trask. Kimberlin principally
argues that because KKP was a secured creditor of
PortfolioScope, the approximately $6.5 million in transfers to
KKP through Spencer Trask represented a preference of paying one
creditor over another, and, therefore, it is not fraudulent
under UFTA. "Fraudulent conveyance laws, such as the Bankruptcy
Code and [S]tate statutes adopting some form of the Uniform
Fraudulent Conveyance Act or the Uniform Fraudulent Transfers
Act, are intended to prevent shareholders, secured creditors,
and others from benefitting at the expense of others, including
unsecured creditors" (emphasis added). In re Hechinger Inv. Co.
of Del., 274 B.R. 71, 81 (D. Del. 2002). Accordingly,
compliance with the law of secured transactions, see G. L.
c. 106, §§ 9-101 to 9-709, does not by itself protect a secured
creditor from a fraudulent transfer claim. See Steel Co. v.
28
Morgan Marshall Indus., Inc., 278 Ill. App. 3d 241, 250-252
(1996) (although no dispute that art. 9 of Uniform Commercial
Code was complied with, genuine issue of material fact remained
whether transfers made with actual intent to defraud). Cf.
Sheffield Progressive, Inc. v. Kingston Tool Co., 10 Mass. App.
Ct. 47, 50 (1980), quoting 1B Coogan, Hogan & Vagts, Secured
Transactions under the Uniform Commercial Code § 13.07(1), at
1381 (1980) ("Clearly, article 9 does not replace the Uniform
Fraudulent Conveyance Act").
Cases decided before the enactment of UFTA in Massachusetts
have stated that when a debtor has paid one creditor over
another, even when the payment comprised substantially all of
the debtor's assets, this fact by itself is insufficient to
establish an intent to hinder, delay, or defraud. See, e.g.,
Goldstein v. Columbia Diamond Ring Co., Inc., 366 Mass. 835,
843-844 (1975). See also Mason v. Wylde, 308 Mass. 268, 281-
283, cert. denied, 314 U.S. 638 (1941). Implicit in those
cases, however, is a premise that the debtor is acting in good
faith in making the challenged transfers -- that the debtor's
motivation or purpose in doing so was to pay the creditor the
antecedent debt, not to advance a goal of secretly benefiting
the debtor's own, personal interests at the expense of the
unpaid creditor. See Mason, supra at 282-283. As to the
approximately $6.5 million in transfers to Spencer Trask, the
29
judge expressly rejected a conclusion that PortfolioScope,
acting through Whelihan and Kimberlin in effecting these
transfers, was acting in good faith, concluding instead that the
defendants' purpose was to benefit Kimberlin and Whelihan at
Weiler's expense. And, as is true of the transfers to Whelihan,
the indicia of actual intent to hinder, delay, or defraud found
by the judge -- the defendants' failure at the time of making
the transfers to explain to Weiler that PortfolioScope was
unable to pay him because of the need to pay its secured
creditor KKP; their concealment from Weiler of the transfers;
and the fact that the transfers to Spencer Trask, combined with
the transfers to Whelihan, constituted substantially all of
PortfolioScope's assets -- are supported by the evidence. 35,36
35
The judge also found that the $6.5 million in transfers
to Spencer Trask effectively rendered PortfolioScope insolvent.
The defendants, as noted, contend that this finding was clearly
erroneous. It may be that the evidence failed to show that
PortfolioScope was insolvent within the meaning of UFTA, see
G. L. c. 109A, § 3. Nevertheless, there still is sufficient
evidence of actual intent to hinder, delay, or defraud to affirm
the judge's conclusion that the transfers were fraudulent under
§ 5 (a) (1) of UFTA.
36
The defendants argue that, although Spencer Trask may
have qualified as an insider under UFTA as it was a ninety per
cent owner of PortfolioScope, Spencer Trask was a transferee in
"name only"; the actual transferee was KKP, its secured
creditor. We are not convinced that we should ignore that
Spencer Trask was the initial transferee for purposes of UFTA,
especially where Kimberlin admitted that he did not have a "good
answer" as to why he directed Whelihan to wire the settlement
proceeds purportedly for KKP to a Spencer Trask brokerage
account. In any event, even if the transfers were not made to
30
e. G. L. c. 93A, § 11. The trial judge concluded that by
improperly using the iFlex litigation settlement proceeds to
benefit themselves rather than meeting PortfolioScope's
contractual obligations to pay Weiler and by intentionally
misleading and concealing their improper conduct, the defendants
acted unfairly or deceptively within the meaning of G. L. c.
93A, § 11, and did so knowingly and wilfully, entitling Weiler
to double damages and attorney's fees. The Appeals Court
disagreed. Although the defendants had not raised the issue in
the Superior Court or on appeal, the Appeals Court concluded
that Weiler was not entitled to recover under G. L. c. 93A, §
11, because "the dispute . . . arose out of a private
transaction between PortfolioScope and Weiler in his role as a
former employee and options holder of the company," Weiler, 83
Mass. App. Ct. at 230, and as a result Weiler did not meet the
trade or commerce requirement of the statute. Id. at 230-231.
Weiler argues that the defendants have waived this defense --
that it is too late for them to take up the intra-corporate
transaction banner at this stage of the case. The defendants do
not contest that they did not previously raise this issue, but
claim that the "trade or commerce" requirement of c. 93A, § 11,
an insider, they were nonetheless made to an entity with which
PortfolioScope "had an intimate financial relationship." Max
Sugarman Funeral Home, Inc. v. A.D.B. Investors, 926 F.2d 1248,
1255 (1991).
31
goes to the court's subject matter jurisdiction and therefore
cannot be waived.
Our cases make clear that G. L. c. 93A, § 11, does not
cover internal employment or intra-enterprise disputes. See,
e.g., Selmark Assocs., Inc. v. Ehrlich, 467 Mass. 525, 549-551
(2014); Psy-Ed Corp., 459 Mass. at 719-720; Manning v.
Zuckerman, 388 Mass. 8, 12-15 (1983). This does not mean,
however, that the Superior Court lacks jurisdiction even to
entertain arguments that the plaintiff's claim of unfair or
deceptive conduct on the part of various individuals and
entities falls squarely within the proper "trade or commerce”
scope of § 11, and is not a private employment or intra-
corporate dispute. See G. L. c. 93A, § 11, first par. (granting
Superior Court jurisdiction to hear such claims). 37 See also
Wachovia Bank, Nat'l Ass'n v. Schmidt, 546 U.S. 303, 316 (2006)
(question for purposes of subject matter jurisdiction is, "Has
the Legislature empowered the court to hear cases of a certain
37
General Laws c. 93A, § 11, first par., provides in
relevant part:
"Any person who engages in the conduct of any trade or
commerce and who suffers any loss of money or property
. . . as a result of the use or employment by another
person who engages in any trade or commerce of an unfair or
deceptive act or practice declared unlawful by [§ 2] . . .
may, as hereinafter provided, bring an action in the
superior court . . . for damages and such equitable relief,
including an injunction, as the court deems to be necessary
and proper."
32
genre?"); Doe, Sex Offender Registry Bd., No. 3974 v. Sex
Offender Registry Bd., 457 Mass. 53, 56-57 (2010). 38 Our cases
routinely have addressed the argument or defense that a dispute
is intra-corporate in nature, and therefore fails to satisfy the
"trade or commerce" requirement of § 11, as a basis for a motion
to dismiss for failure to state a claim upon which relief can be
granted under Mass. R. Civ. P. 12 (b) (6), 365 Mass. 754 (1974).
See, e.g., First Enters., Ltd. v. Cooper, 425 Mass. 344, 345
n.3, 347-348 (1997) (analyzing whether G. L. c. 93A, § 11, claim
38
Our cases addressing whether an issue is one of subject
matter jurisdiction have distinguished between the general
"'nature of the case assigned' to [the court]," which implicates
the court's subject matter jurisdiction, and "the elements of a
prima facie case before the [court]," which do not. Doe, Sex
Offender Registry Bd., No. 3974 v. Sex Offender Registry Bd.,
457 Mass. 53, 57 (2010) (Doe, No. 3974). See Wachovia Bank,
Nat'l Ass'n v. Schmidt 546 U.S. 303, 316 (2006) ("Subject matter
jurisdiction . . . concerns a court's competence to adjudicate a
particular category of cases"). Here, the Superior Court is
clearly granted the authority to hear G. L. c. 93A claims. See
G. L. c. 93A, §§ 9 (1) and 11. Whether the parties were engaged
in "trade or commerce" at the time the alleged unfair or
deceptive practices occurred is a substantive question. Cf.
Doe, No. 3974, supra at 57 (whether sex offender was person who
resides in Massachusetts, which board was required to prove for
statutory definition of "sex offender," was substantive question
not going to board's subject matter jurisdiction, and was waived
when not raised until appeal); Middleborough v. Housing Appeals
Comm., 449 Mass. 514, 520-521 (2007) (requirement that project
be "fundable" before permit decision could be challenged was
substantive as opposed to jurisdictional). Contrast St.
Joseph's Polish Nat'l Catholic Church v. Lawn Care Assocs.,
Inc., 414 Mass. 1003, 1003 & n.1 (1993) (Housing Court lacked
jurisdiction to hear G. L. c. 93A action where claim was that
defendant failed "properly to perform an agreement for grading,
seeding and paving work on a cemetery owned by the plaintiff,"
as claims were only tangentially related to housing).
33
was properly dismissed for failure to state claim under rule 12
[b] [6] because it constituted intra-enterprise dispute);
Manning, 388 Mass. at 9, 12-14 (same); Cavicchi v. Koski, 67
Mass. App. Ct. 654, 655, 662-663 (2006) (same). We continue to
view a rule 12 (b) (6) motion as the proper vehicle for a party
to raise such a defense. A rule 12 (b) (6) motion, however,
does not implicate the court's subject matter jurisdiction, and
it may be waived. See Mass. R. Civ. P. 12 (h) (2), 365 Mass.
754 (1974) (failure to state claim on which relief can be
granted may be raised by pleading, motion to dismiss, motion for
judgment on pleadings, or at trial). Compare Mass. R. Civ. P.
12 (h) (3), 365 Mass. 754 (1974) ("Whenever it appears by
suggestion of a party or otherwise that the court lacks
jurisdiction of the subject matter, the court shall dismiss the
action" [emphasis added]). Because the defendants did not raise
the issue of employment or intra-enterprise dispute before
judgment entered in the Superior Court (and also did not raise
the issue before the Appeals Court), it is waived. 39 The
39
Although we do not decide the issue, it is far from clear
that the dispute here in any event could qualify as a private,
employment-related or intra-enterprise controversy outside the
trade or commerce boundary line of G. L. c. 93A, § 11.
Kimberlin was not a stockholder, officer, director, or employee
of PortfolioScope, there are a variety of separately organized
entities involved in this case, and the conduct of the
defendants giving rise to Weiler's claim under § 11 took place
six years after the five per cent agreement and five per cent
amendment were signed –- six years in which Weiler had been
34
defendants do not challenge the judge's disposition of Weiler's
c. 93A claim on any other ground, and therefore, the judgment on
this claim is affirmed.
3. Conclusion. The judgment of the Superior Court is
affirmed as to all counts of the first amended complaint with
the exception of count 9 for conversion, and as to that count,
the judgment is reversed.
So ordered.
working not as an employee of PortfolioScope but as a
consultant. In short, the factual circumstances of this case
appear to be significantly different from the direct
employer-employee or shareholder-corporation disputes to which
we have held G. L. c. 93A inapplicable. Contrast, e.g., Selmark
Assocs., Inc. v. Ehrlich, 467 Mass. 525, 550 (2014), quoting
Milliken & Co. v. Duro Textiles, LLC, 451 Mass. 547, 563 (2008);
Zimmerman v. Bogoff, 402 Mass. 650, 662-663 (1988) (G. L. c. 93A
inapplicable to transactions and disputes between fellow
shareholders in close corporation); Manning v. Zuckerman, 388
Mass. 8, 15 (1983) (G. L. c. 93A in applicable to dispute
between employer and employee).