Balles v. Babcock Power Inc.

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SJC-12112
ERIC N. BALLES vs. BABCOCK POWER INC.
Middlesex. November 8, 2016. - March 6, 2017.
Present: Gants, C.J., Botsford, Lenk, Hines, Gaziano, Lowy, &
Budd, JJ.
Executive. Employment, Termination. Corporation, Stockholder,
Close corporation, Liability of officers. Contract,
Employment, Performance and breach. Fiduciary.
Civil action commenced in the Superior Court Department on
December 21, 2010.
The case was heard by Douglas H. Wilkins, J.
The Supreme Judicial Court granted an application for
direct appellate review.
Mark C. Fleming (Jonathan A. Cox also present) for the
defendant.
Thomas J. Carey, Jr. (Jody L. Newman also present) for the
plaintiff.
Ben Robbins & Martin J. Newhouse, for New England Legal
Foundation, amicus curiae, submitted a brief.
LENK, J. The dispute before us chiefly concerns the
meaning and application of the stockholders' agreement between a
2
company, Babcock Power Inc. (Babcock or company), and its former
executive, Eric N. Balles. To a lesser extent, it also concerns
the separate employment agreement between the two.
Babcock terminated Balles's employment when it discovered
that he was engaged in an ongoing extramarital affair with a
young female subordinate. Babcock's board of directors (board)
subsequently concluded that Balles had been terminated "for
cause" under the terms of his stockholders' agreement with the
company, thereby allowing the board to repurchase his stock at a
minimal price. The board withheld subsequent dividends,
amounting to approximately $900,000 in total, and refused to pay
Balles any severance.
Years of litigation followed, with Balles seeking
declaratory relief to the effect that the stock be returned to
him, along with the withheld dividends. Babcock responded with
counterclaims on various grounds. Following a bifurcated trial,
a Superior Court jury rejected Babcock's counterclaims, and
although Balles prevailed at a jury-waived trial on his claim
for declaratory relief, a portion of his prior salary was
subjected to equitable forfeiture and he was unsuccessful in his
bid to receive severance pay. Babcock appealed from the
3
judgment at the jury-waived trial, and we allowed its
application for direct appellate review. We affirm.1
1. Background. We recite the facts found by the trial
judge, which the parties acknowledged at oral argument they do
not challenge. We have supplemented those findings by reference
to facts in the record that the parties do not dispute.
a. Stockholders' agreement and employment agreement. When
his employment at Babcock began in 2002,2 Balles entered into two
agreements: a stockholders' agreement and an employment
agreement.3 Under the terms of the stockholders' agreement,
Balles, one of seventeen "management investors" in Babcock,4
received 100,000 shares of common stock in the company at a
price of $0.001 per share.
Section 5 of the stockholders' agreement sets forth the
rights of management investors in the event of their
1
We acknowledge the amicus brief submitted by New England
Legal Foundation in support of the defendant.
2
Balles joined the conglomerate that would become Babcock
Power Inc. (Babcock or company) in 2001, when he became the
senior vice-president of technology development for Babcock
Borsig Power, Inc. (Borsig). In 2002, Borsig combined with
several other affiliated companies to form a new entity,
Babcock.
3
At all times relevant to this dispute, prior to his
termination, Balles served as an executive of various
subsidiaries of Babcock.
4
Balles entered into the stockholders' agreement partially
in consideration for relinquishing his rights in Borsig.
4
termination. Section 5(d) states that, if a management
investor's employment is terminated without cause, the
stockholders' agreement continues to apply to his or her stock.
By contrast, section 5(e) provides that if a management
investor's employment is terminated "for cause," as defined in
the stockholders' agreement, Babcock's board of directors must
repurchase his or her stock at the nominal price of $0.001 per
share.
"Cause," in turn, is defined under section 1 of the
stockholder's agreement as follows:
"(a) fraud, embezzlement or gross insubordination on the
part of the Management Investor; (b) the Management
Investor's conviction of or plea of nolo contendere to any
felony; (c) the Management Investor's willful and material
breach of or willful failure or refusal to perform and
discharge, his duties, responsibilities or obligations to
the Company (other than by reason of disability or death)
that is not corrected within thirty (30) days following
written notice thereof to the Management Investor by the
Company, such notice to state with specificity the nature
of the breach, failure or refusal; provided, that if such
breach, failure or refusal cannot reasonably be corrected
within thirty (30) days of written notice thereof, such
thirty (30) day period shall be extended for so long as may
be reasonably necessary to correct the same; or (d) any act
of willful misconduct by the Management Investor which (i)
is intended to result in substantial personal enrichment of
the Management Investor at the expense of the Company or
any of its subsidiaries or affiliates or (ii) is intended
to and does have a material adverse impact on the business
or reputation of the Company or any of its subsidiaries or
affiliates. For purposes of this Agreement, a
determination of 'Cause' may only be made by the Board of
Directors of the Company."
5
The stockholders' agreement also provides for a jury-waived
trial to adjudicate any claims arising under it, stating in
relevant part that "each party acknowledges and agrees that any
controversy which may arise under [the stockholders' agreement]
is likely to involve complicated and difficult issues," and that
the parties "waive[] any right such party may have to a trial by
jury in respect of any litigation directly or indirectly arising
out of or relating to the [stockholders' agreement]."
The employment agreement between Balles and Babcock
provided that he would serve as an employee "at will" and could
be terminated at any time for any reason. The employment
agreement also stated that, in the event of Balles's
termination, he would be entitled to severance pay unless he was
terminated for cause, "as defined in [the] [s]tockholders'
[a]greement."
b. Relationship with female subordinate. The female
subordinate began working at Babcock as an intern when she was
still an undergraduate student. She eventually obtained a full-
time position at the company as an "Engineering Management
Assistant/Engineering Coordinator." After receiving two raises
while serving in this role, she eventually was promoted to the
position of "Operations Associate/Engineering." Balles was her
supervisor at all relevant times.
6
In the summer of 2008, Balles began an intimate
extramarital relationship with the female subordinate, which
continued through his termination in 2010. The pair pursued
their relationship on business trips funded by Babcock, and
exchanged sexually explicit text messages on their personal
cellular telephones. Balles uploaded, downloaded, and saved
photographs of the female subordinate, some depicting sexual
content, on his Babcock-issued laptop computer.5 To conceal his
relationship with the female subordinate from Babcock, Balles
falsified the details of at least one travel reimbursement
request, but did not intentionally claim any fiscal
reimbursement from Babcock to which he was not entitled under
company policy.6
On August 30, 2010, Michael LeClair, the president and
chief executive officer of Babcock, learned of the relationship
between Balles and the female subordinate. Soon thereafter, Jim
Dougherty, president and chief executive officer of a subsidiary
of Babcock, hand-delivered a memorandum to Balles stating that
5
Balles gave several conflicting explanations as to how the
photographs of the female subordinate ended up on his Babcock-
issued laptop computer, none of which was credited by the trial
judge.
6
The trial judge found that Balles did not intentionally
deprive Babcock of any funds during his relationship with the
female subordinate. He did find, however, that Balles
apparently inadvertently requested $316.43 in reimbursements to
which he was not entitled.
7
his employment was suspended "pending an investigation into
allegations of misconduct and improper workplace behavior
relating to [his] relationship with a female subordinate
employee." Babcock's investigation included an in-depth review
of Balles's documents, text messages, and electronic mail
messages, all of which were stored on his company-issued
computer. The investigation disclosed more than one hundred
photographs and thousands of text messages between Balles and
the female subordinate. Several of the messages described
executives, as well as Balles's "negative feelings about working
for [Babcock] and about his superiors." LeClair came to the
conclusion that "Balles failed to perform his job from the
moment" that he began his affair with the female subordinate.
During the investigation, Balles repeatedly requested a
face-to-face meeting with the board, which Babcock declined to
provide. He received a letter on September 15, 2010, informing
him that his employment had been terminated effective September
1, 2010, and that the board would be meeting shortly to
determine whether his conduct met the definition of "[c]ause"
under the stockholders' agreement. Babcock's attorney sent
notice separately that it would not be necessary for Balles to
provide information relating to the allegations of misconduct
8
against him. The parties engaged in settlement negotiations but
were unable to come to an agreement.7
At the subsequent board meeting to determine whether
Balles's conduct constituted "cause" within the meaning of the
stockholders' agreement, LeClair summarized the investigation
and recommended that the board terminate Balles "for cause"
pursuant to clauses (a), (c), and (d) of the definition of
"[c]ause" in section 1 of the stockholders' agreement. The
board, after discussion, unanimously agreed, as noted in its
minutes, that Balles's conduct constituted "cause" under the
stockholders' agreement. The minutes reflected the board's
determination that there was "overwhelming and irrefutable
evidence that . . . Balles engaged in serious misconduct during
his employment and [that] such misconduct was a breach of
fiduciary duty to the [c]ompany, including a breach of his duty
of loyalty." Because the board terminated Balles for cause, it
went on to "repurchase" all of Balles's shares pursuant to
section 5(e) of the stockholders' agreement, "amounting to
100,000 shares of capital stock of [Babcock] for a repurchase
price of $0.001 per share."
c. Prior proceedings. Shortly after the board voted to
terminate him "for cause," Balles commenced this action against
7
Balles's settlement offer included a forfeiture of
$500,000 in dividends and a limited noncompete agreement. The
board summarily rejected this offer.
9
Babcock in the Superior Court. He sought a declaratory judgment
invalidating the board's repurchase of his shares under the
stockholders' agreement and alleged that the board had committed
a breach of the agreement by denying him subsequent dividend
payments. He also asserted that the company had committed a
breach of his employment agreement by declining to pay him
severance upon his termination. The company denied the
allegations and asserted seven counterclaims.8 The proceedings
in the Superior Court were bifurcated into a jury trial to
adjudicate the majority of Babcock's counterclaims, and a jury-
waived trial to resolve Balles's declaratory judgment and
contract claims, along with Babcock's counterclaim asserting a
breach of fiduciary duty and the duties of loyalty and good
faith.9
The jury found for Balles on Babcock's counterclaims. The
trial judge, moreover, ruled in favor of Balles on the
declaratory judgment and breach of contract claims, concluding
8
The counterclaims included "breach of fiduciary duty and
the duties of loyalty and good faith," which the company alleged
arose from Balles's occupation of "a position of trust and
confidence at [Babcock]"; waste of corporate assets; fraud;
misrepresentation; nondisclosure; conversion; and breach of the
implied covenant of good faith and fair dealing.
9
The trial judge referred to this claim as the "equitable
forfeiture claim," presumably because Babcock requested the
equitable forfeiture of Balles's salary during the period of his
affair with the female subordinate on the basis of his alleged
breach.
10
that Balles "was not fired 'for cause' as defined in the
[s]tockholders' [a]greement" and that he was therefore "entitled
to the return of his stock and payment of all dividends and
other benefits provided by Babcock . . . as if he had own[ed]
the stock continuously." The judge found in favor of Babcock on
its remaining counterclaim, concluding that Balles had committed
a breach of his fiduciary duty of loyalty to the company, owed
pursuant to his status as an employee. On this basis, the judge
assessed Balles $412,000 in equitable forfeiture of his past
salary. The judge also rejected Balles's claim for severance
pay under the employment agreement, on the ground that Balles
had committed a material breach of the agreement through his
disloyal actions.
Babcock appealed from the judgment, raising issues arising
only from the jury-waived trial, and we allowed its application
for direct appellate review.10
2. Discussion. Babcock advances three arguments on
appeal. First, it contends that the trial judge should have
accorded deference to the board's decision and reviewed it only
to ascertain whether it was arbitrary, capricious, or made in
10
Balles did not appeal from the denial of his claim for
severance under the employment agreement, or from the allowance
of Babcock's breach of fiduciary duty claim resulting in the
equitable forfeiture of his salary.
11
bad faith.11 Second, it argues that the judge erred in
determining that Balles's conduct did not constitute "cause"
under clauses (a) and (c) of the definition of that term in
section 1 of the stockholders' agreement. Third, it maintains
that Balles committed a material breach of the stockholders'
agreement and therefore cannot recover under it. We address
each argument in turn.
a. Appropriate standard of review. Babcock argues that
the trial judge improperly reviewed on a de novo basis the
board's determinations of "cause." The company relies in this
regard on the last sentence of the "[c]ause" definition in
section 1 of the stockholders' agreement, which provides that
"[f]or purposes of this [a]greement, a determination of
'[c]ause' may only be made by the [board]." Babcock contends
that this language demonstrates the parties' intent that the
board's determinations under the "cause" provision receive
deference upon any judicial review. We agree with the trial
judge that the language of the stockholders' agreement does not
support Babcock's suggested interpretation.
11
In order to facilitate appellate review, the trial judge
also applied the deferential standard of review to which Babcock
argues it is entitled to the board's determination, concluding
that the board's decision was "arbitrary and capricious."
12
We review a court's "interpretation of the meaning of a
term in a contract," a question of law, de novo.12 EventMonitor,
Inc. v. Leness, 473 Mass. 540, 549 (2016). In so doing, we are
mindful that when the language of a contract is clear, it alone
determines the contract's meaning, but that a court may consider
extrinsic evidence if the language is ambiguous. Id. The
determination of ambiguity in a contract is also a question of
law. Eigerman v. Putnam Invs., Inc., 450 Mass. 281, 287 (2007).
Contractual language is ambiguous when it "can support a
reasonable difference of opinion as to the meaning of the words
employed and the obligations undertaken" (citation omitted).
Bank v. Thermo Elemental Inc., 451 Mass. 638, 648 (2008). When
contract language is unambiguous, it must be construed according
to its plain meaning. General Convention of the New Jerusalem
in the U.S. of Am., Inc. v. MacKenzie, 449 Mass. 832, 835
(2007).
To determine whether the language at issue is ambiguous, we
look both to the contested language and to the text of the
contract as a whole. Assuming without deciding that parties to
a private agreement may contract for a specific standard of
12
The interpretation of a contract constitutes "a question
of law for the court" (citation omitted). See Freelander v. G.
& K. Realty Corp., 357 Mass. 512, 516. Accordingly, a court
generally will accord no deference to a party's interpretation
of a contract but, rather, will focus on the language of the
instrument to effectuate its terms. See id.
13
judicial review in this situation,13 we conclude that the
language at issue is not ambiguous and that it does not provide
for a deferential standard of judicial review.
On its face, the contract language that Babcock highlights
speaks to which persons in the company are to determine "cause"
for purposes of the stockholders' agreement. Standing alone,
the sentence is silent as to an appropriate standard of judicial
review for disputes relating to that determination. The
language does not, by itself, contain an ambiguity that could
support Babcock's suggested interpretation. The language also
does not convey any ambiguity when read in conjunction with the
remainder of clause (c) of the definition of "[c]ause" or the
stockholders' agreement as a whole. The only provision dealing
with a somewhat related matter is section 9(e)(iii), which
provides that "any controversy which may arise under [the
stockholders' agreement] is likely to involve complicated and
difficult issues, and therefore each . . . party . . .
unconditionally waives any right such party may have to a trial
13
Parties to a private agreement have been permitted to
contract for a more deferential standard of review in certain
instances, see, e.g., Acmat Corp. v. Daniel O'Connell's Sons,
Inc., 17 Mass App. Ct. 44, 49 (1983) (contract provision
granting architect power to decide all questions of
interpretation of contract valid unless decision arbitrary or
capricious), but not in others. See, e.g., Patton v. Babson
Statistical Org., 259 Mass. 424, 428 (1927) ("It would be a
travesty upon all ideas of judicial propriety or of judicial
work for a man to be an arbitrator to settle the amount of his
own liability" [citation omitted]).
14
by jury in respect of any litigation directly or indirectly
arising [out] of or relating to [the stockholders' agreement]
. . . ." If anything, this recognition of the innate complexity
of disputes arising under the contract and of the need for
resolution by judges rather than juries is consistent with the
application by judges of the usual de novo standard of review.14
Concluding, as we do, that the contractual language on
which Babcock relies does not provide for judicial deference to
the board's determination of "cause," de novo review by the
trial judge thus was appropriate.15
14
The result is the same if we assume, as the parties
apparently do, that the language in question is ambiguous and
turn to extrinsic evidence to discern the term's meaning.
Because contracting parties' intent is an issue of fact, we
defer to the trial judge's findings and review only for clear
error. See Seaco Ins. Co. v. Barbosa, 435 Mass. 772, 779
(2002). The trial judge concluded that the drafters "intended
to protect the property rights of [management investors] through
the specific language they chose, as finally construed and
applied by a judge or judges." This determination is supported
by the uncontroverted testimony of Dale Miller, a corporate
lawyer who negotiated the stockholders' agreement. He testified
that if the board terminated a management investor "for cause"
without a "very clear" case, it "could have an adverse
unintended consequence of having other founder
shareholders . . . walk out the door," thus depriving the
company of its "primary asset[s]."
15
Babcock's reliance on Noonan v. Staples, Inc., 556 F.3d
20 (1st Cir. 2009), does not persuade us to the contrary.
Noonan addressed a stock-option agreement providing that
"[c]ause" would be "determined by [the company], which
determination shall be conclusive." Id. at 24. The United
States Court of Appeals for the First Circuit resolved that,
given such language, judicial review of the company's
determination would appropriately be limited to whether it "was
15
b. Board's decision to terminate Balles for cause under
stockholders' agreement. Babcock argues that the trial judge
erred in determining that Balles's conduct did not meet clauses
(a) and (c) of the definition of "[c]ause" in section 1 of the
stockholders' agreement.
i. Clause (a). Babcock argues that Balles's conduct
constituted "fraud" and "gross insubordination" under clause (a)
for three reasons: (i) his intentional submission of false
expense reports for the purpose of concealing his affair with
the female subordinate was fraudulent; (ii) his outspoken
support for the female subordinate constituted fraud because she
lacked fitness for employment; (iii) his over-all conduct during
his relationship with the female subordinate constituted gross
insubordination. We discern no error in the judge's
determination that Balles's conduct did not constitute fraud or
gross insubordination.
A. Fraud. The elements of fraud consist of "[1] a false
representation [2] of a matter of material fact [3] with
knowledge of its falsity [4] for the purpose of inducing
arbitrary, capricious, or made in bad faith." Id. at 33.
Babcock attempts to liken the language at issue to that in
Noonan and urges that it similarly represents the parties'
intent to provide the board with deferential review. The Noonan
contract, however, provided that the company's judgment "shall
be conclusive" (emphasis added). Id. at 24. The language here,
in contrast, merely provides that only the board is authorized
to find cause in the first instance.
16
[action] thereon, and [5] that the plaintiff relied upon the
representation as true and acted upon it to his [or her]
damage." Danca v. Taunton Sav. Bank, 385 Mass. 1, 8 (1982),
quoting Barrett Assocs. v. Aronson, 346 Mass. 150, 152 (1963).16
I. False reimbursement requests. The trial judge found
that Balles's false reimbursement requests had not resulted in
damage to Babcock, and that Balles lacked fraudulent intent,
both necessary elements of fraud. Because Babcock has failed to
show that the judge's findings, amply supported by the evidence,
were clearly erroneous, it cannot establish that Balles's
submission of false reimbursement requests gave rise to fraud
that would constitute cause under clause (a) of the definition
of "[c]ause" in the stockholders' agreement.
II. Advocacy for the female subordinate. Babcock
similarly maintains, again without merit, that in view of the
female subordinate's inadequate qualifications and poor job
performance, it was fraudulent conduct on Balles's part to
advocate -- as her supervisor and without disclosing their
personal ties -- on her behalf professionally. The judge,
however, determined that "[t]he jury, the court, or both, have
rejected the factual claim that Balles was engaged in any ruse
when he made decisions about [the female subordinate's]
16
Both parties accept that, as the trial judge determined,
the definition of "fraud" under the stockholders' agreement
mirrors the concept of fraud in our common law.
17
employment, [and] her salary and benefits," and that "[a]ll of
those decisions had a sound business justification." He found
in this regard that given "the actual work [the female
subordinate] did, in combination with her obvious verbal and
managerial skills, intelligence, maturity and motivation, . . .
[the female subordinate] fully earned her salary, benefits, and
tuition reimbursement during the period she was employed at
[Babcock]."
To demonstrate that the female subordinate's qualifications
and performance were inadequate, the company points to a
statement from a coworker suggesting that she had received
preferential treatment and a statement from a manager that she
lacked an engineering degree. These two statements, however, do
not suffice to establish that the trial judge's findings of fact
to the contrary, supported by other evidence, were clearly
erroneous. See Weiler v. PortfolioScope, Inc., 469 Mass. 75, 81
(2014). Given this, Balles's advocacy on the female
subordinate's behalf neither constituted a "false"
representation nor resulted in damages to Babcock, and
accordingly was not fraudulent.
B. Gross insubordination. Babcock maintains that Balles's
conduct also constituted "gross insubordination" under clause
(a) because he violated various company policies during his
affair with the female subordinate. The trial judge, however,
18
interpreted the term "gross insubordination" to mean "more than
just breaking generally applicable rules." He instead took it
to mean the defiance of authority "such as [the violation of] a
direct order . . . or disrespect directed to a supervisor
personally." The judge found that Balles's conduct did not fall
within this definition, noting that "there is no credible
evidence of a direct order to Balles to do anything he failed to
do," and that he did not "act disrespectfully to his superiors
in person."
We defer to the judge's factual findings, but review de
novo his interpretation of "gross insubordination" under the
stockholders' agreement. Because the stockholders' agreement
does not define "gross insubordination," it is appropriate to
look to other sources to determine the meaning of the term. See
Meehan v. Shaughnessy, 404 Mass. 419, 445 n.22 (1989)
(professional norms can supply meaningful definition of
contractual term); Zeo v. Loomis, 246 Mass. 366, 368 (1923)
("[Contract term] must be determined from all the circumstances
according to the reasonable inferences presumably entertained by
normal business [people]").
Babcock relies chiefly on Oehme v. Whittemore-Wright Co.,
279 Mass. 558, 563 (1932), which defines "insubordination" as "a
wilful disregard of express or implied directions and refusal to
obey reasonable orders." The company emphasizes the "implied
19
directions" portion of the definition, presumably to suggest
that Balles's violations of company policy constituted gross
insubordination. It is "gross insubordination," and not
"insubordination," that gives rise to "[c]ause" under clause
(a), however, and Oehme does not speak to the more egregious
misconduct required to establish gross insubordination.17 A
review of relevant case law indicates, as the judge concluded,
that gross insubordination is generally defined as wilful
disregard of a direct order. See Hawkins v. Director of the
Div. of Employment Sec., 392 Mass. 305, 306-307 (1984)
(affirming review examiner's finding that twice refusing to
comply with reasonable and legitimate requests by supervisor
constituted "gross insubordination"); Stone v. Omaha, 229 Neb.
10, 13-14 (1988) (employee's refusal to follow orders
constituted gross insubordination). Given the judge's
uncontested factual finding that Balles never disobeyed a direct
order, his conduct did not constitute gross insubordination.
17
Moreover, clause (c) provides that a management
investor's "willful and material breach of, or willful failure
or refusal to perform and discharge, his duties,
responsibilities or obligations to the [c]ompany" constitutes a
predicate for "cause." Construing "gross insubordination" under
clause (a) in the manner that Babcock advocates, i.e., as
coterminous with the conduct outlined in clause (c), would
render the latter section impermissibly superfluous. See Tupper
v. Hancock, 319 Mass. 105, 109 (1946) ("It is a canon of
construction that every word and phrase of an instrument is if
possible to be given meaning, and none is to be rejected as
surplusage if any other course is rationally possible" [citation
omitted]).
20
ii. Clause (c). Babcock also maintains that Balles's
conduct fell within clause (c), which defines "[c]ause" as
follows:
"the . . . willful and material breach of, or willful
failure or refusal to perform and discharge, his duties,
responsibilities or obligations to the [c]ompany . . . that
is not corrected within thirty (30) days following written
notice thereof to the [m]anagement [i]nvestor by the
[c]ompany, such notice to state with specificity the nature
of the breach, failure or refusal; provided, that if such
breach, failure or refusal cannot reasonably be corrected
within thirty (30) days of written notice thereof, such
thirty (30) day period shall be extended for so long as may
be reasonably necessary to correct the same."
Babcock argues that Balles's relationship with the female
subordinate and his attempts to conceal it constituted a wilful
and material breach of his obligation of loyalty to the company.
Balles concedes that his conduct constituted a breach of loyalty
under clause (c), but argues that Babcock failed to provide him
with an opportunity to correct his breach, as required by clause
(c). The company counters that, because Balles's breach could
not be corrected, it was excused from the requirement of
offering him an opportunity to correct the breach, as to do so
would have been futile.
The trial judge concluded that Babcock had failed to
provide Balles with an opportunity to correct his breach in
violation of clause (c) and that Balles's conduct was
correctable. On appeal, Babcock argues that three particular
21
components of Balles's breach were uncorrectable:18 (1) the
effect of Balles's divided loyalty on his job performance during
his affair with the female subordinate; (2) the harmful effects
of Balles's example on company culture; and (3) the risk of a
sexual harassment lawsuit caused by Balles's conduct.
We begin by noting that the futility exception upon which
Babcock relies is not expressly mentioned in the stockholders'
agreement. Both parties nonetheless seem to accept the
contention that truly futile gestures under the agreement are
unnecessary, an assumption that accords with our common law. To
excuse nonperformance in that respect, parties in breach of a
contract may establish that compliance with the contract would
have been futile. See Shawmut-Canton LLC v. Great Spring Waters
of Am., Inc., 62 Mass. App. Ct. 330, 340 (2004). The exception,
notably, is quite narrow, see Jefferson Ins. Co. of N.Y. v.
National Union Fire Ins. Co. of Pittsburgh, Pa., 42 Mass. App.
Ct. 94, 103 (1997) (rejecting interpretation of contract that
"would have the exclusion swallow the policy" [citation
omitted]), and the party in breach bears the burden of proving
that its performance under the contract would have been futile.
See, e.g., 7-Eleven, Inc. v. Khan, 977 F. Supp. 2d 214, 230-231
(2013) (party claiming that incurable breach relieved obligation
18
We accept for the sake of argument the company's apparent
assumption that, if any one aspect of Balles's breach is
uncorrectable, the breach itself is uncorrectable.
22
to provide notice and opportunity to cure bore burden of proof).
Ordinarily, futility is shown where performance under the
contract would be impossible, see, e.g., L.K. Comstock & Co. v.
United Engineers & Constructors Inc., 880 F.2d 219, 231-232 (9th
Cir. 1989) (finding contractually guaranteed opportunity to cure
would have been futile where party could not have cured its
breaches in allotted time period), or where the other party had
first repudiated performance under the contract, see, e.g.,
Wolff & Munier, Inc. v. Whiting-Turner Contracting Co., 946 F.2d
1003, 1009 (1991) (burden on party claiming incurable breach),
neither of which took place here.
We nonetheless turn to Babcock's contention that, because
Balles's breach cannot be corrected, its failure to provide him
with an opportunity to do so falls within the narrow futility
exception. Babcock first contends that Balles's breach of
loyalty throughout his affair with the female subordinate could
not be corrected because the correction provision "contemplates
correction of the 'breach' itself -- not its future
consequences." In the company's view, "'[c]orrection' presumes
that the wrong has been righted, as though no breach happened,"
and a "'correctable' offense would have been one where,
following a 'correction,' Babcock and Balles could have
continued their association as before." We are unpersuaded by
this argument, both because it relies on an implausible
23
interpretation of the contract and because Babcock has not shown
that Balles's breach was intrinsically incapable of correction.
By asserting that correction requires actually undoing the
breach, rather than remedying its effects, Babcock would in
effect read the correction provision out of clause (c). See
J.A. Sullivan Corp. v. Commonwealth, 397 Mass. 789, 795 (1986)
("A contract is to be construed to give reasonable effect to
each of its provisions"). As a practical matter, bells cannot
be unrung, nor the past undone. Clause (c) contemplates that,
in the event of a management investor's "willful and material
breach of . . . duties, responsibilities or obligations to the
[c]ompany," the management investor will be given thirty days
following written notice to "correct" that "breach, failure or
refusal [to perform]." No exception is made for breaches of
loyalty. The correction envisioned, reasonably construed within
the context of that clause and the contract as a whole, can only
be to remedy the adverse effects from the breach or
nonperformance when performance will not itself be adequate or
possible. See Downer & Co. v. STI Holding, Inc., 76 Mass. App.
Ct. 786, 792 (2010) (objective in interpreting contract "is to
construe the contract as a whole, in a reasonable and practical
way, consistent with its language, background, and purpose"
[citation omitted]).
24
Given the foregoing, Babcock has not met its burden of
showing that the adverse effects of the breach were
uncorrectable if Balles were given the opportunity to do so.
Indeed, Babcock prevailed on its counterclaim when the judge
deducted over $400,000 from the amount of Balles's salary
because of his breach of the duty of loyalty during his
relationship with the female subordinate, thereby in essence
compensating Babcock for the lost value of Balles's services in
that period.
Babcock's contention that Balles's harm to company culture
was uncorrectable meets a similar fate. While the trial judge
did not address this argument directly,19 Babcock does not
establish why any such harms would not be remedied by the
termination of Balles. The company's abrupt termination of
Balles, a senior executive, surely made clear to other employees
that his impermissible conduct would not be tolerated. The
company's lone argument why this would not suffice is its
insistence that only terminating Balles for cause could correct
the harms he visited upon company values. This argument is at
best circular, for if only terminating a management investor for
cause adequately can correct his or her harm to company culture,
19
The record does not disclose whether the argument was
raised below. Any potential waiver issues are immaterial,
however, given our disposition of the issue.
25
the correction provision itself would be for naught. See
Jefferson Ins. Co. of N.Y., 42 Mass. App. Ct. at 103.
Babcock's final argument -- that the risk of a sexual
harassment lawsuit brought by the female subordinate constituted
uncorrectable harm to the corporation -- also lacks merit. The
trial judge summarily dismissed this argument, determining that
the stockholders' agreement pertains to "actual harm, not
potential harm that never materialized." Even if the judge were
incorrect in this and we were to assume that Balles's conduct in
fact created a risk to the company that would not otherwise have
existed, Babcock has not shown that the harm was uncorrectable.
Risks are routinely adjusted and reallocated by various means
such as indemnification agreements providing for the costs of
defense, and such measures could presumably have been employed
here.20 We accordingly reject Babcock's view that the risk of a
sexual harassment claim brought by the female subordinate was
uncorrectable.21
20
As it stands, Babcock does not suggest that it engaged in
any preparation for litigation or incurred any defense costs.
21
Although the trial judge did not appear to rely on this
particular ground in rejecting Babcock's claim, "[a]n appellate
court is free to affirm a ruling on grounds different from those
relied on by the motion judge if the correct or preferred basis
for affirmance is supported by the record and the findings."
Commonwealth. v. Va Meng Joe, 425 Mass. 99, 102 (1997).
26
There was thus no error in the judge's determination that
Babcock's failure to provide Balles with an opportunity to
correct his breach prevents a finding of cause under clause (c).
c. Whether Balles committed a material breach of the
stockholders' agreement. Babcock argues further that Balles
committed a material breach of the stockholders' agreement,
thereby precluding the recovery he seeks under it. The company
maintains that Balles owed a fiduciary duty of loyalty to it as
an officer and shareholder of a closely held corporation,22 and
that, by committing a breach of this duty, he committed a
material breach of the stockholders' agreement.
Even if Balles had committed a breach of a fiduciary duty
owed to Babcock arising out of the stockholders' agreement,
Babcock's argument nonetheless fails as a matter of law. The
rights of stockholders arising under a contract, as here, are
governed solely by the contract. See Chokel v. Genzyme Corp.,
449 Mass. 272, 278 (2007) ("When rights of stockholders arise
under a contract . . . the obligations of the parties are
determined by reference to contract law, and not by the
fiduciary principles that would otherwise govern"); Blank v.
Chelmsford Ob/Gyn, P.C., 420 Mass. 404, 408 (1995) ("questions
of good faith and loyalty with respect to rights on termination
22
Babcock appears to argue that this fiduciary duty of
loyalty arises directly out of the stockholders' agreement.
27
or stock purchase do not arise when all the stockholders in
advance enter into agreements concerning termination of
employment"); Donahue v. Rodd Electrotype Co. of New England,
Inc., 367 Mass. 578, 598 n.24 (1975) (shareholders of close
corporation may contract for "stock purchase arrangements" that
would otherwise violate duties of loyalty and good faith to
other shareholders if "stockholders give advance consent . . .
through . . . a stockholders' agreement."). Contrast Prozinski
v. Northeast Real Estate Servs., LLC, 59 Mass. App. Ct. 599,
608-610 (2003) (employee's breach of fiduciary duties to
employer could constitute material breach barring recovery under
employment agreement).
Sections 1 and 5 of the stockholders' agreement clearly
address the rights of management investors as to their company
stock holdings in the event of their termination. Section 5(e)
provides that a management investor may only be divested of his
or her stock if terminated for "cause." Section 1, in turn,
sets forth a detailed, carefully crafted definition of "cause."
Clause (c) of that definition specifically speaks to a
management investor's rights in the event of termination for a
material breach, including a breach of the duty of loyalty.
Insofar as the stockholders' agreement speaks directly to the
rights of a management investor in the event of the material
28
breach alleged here, Balles is not precluded from seeking relief
pursuant to its terms.
Judgment affirmed.