DocketNumber: No. PB 03-3355
Judges: RUBINE, J.
Filed Date: 6/23/2005
Status: Non-Precedential
Modified Date: 4/18/2021
Kennedy Co. is a Rhode Island corporation formed in 1966 and engaged in the distribution of equipment and products related to the petroleum industry. Plaintiff Jessie Lynch owns 20 shares of stock of Kennedy Co., or 20 percent of the Corporation's issued and outstanding stock, and Defendant Jo-Anne Kennedy owns 80 shares, or 80 percent of the Corporation's issued and outstanding stock.
In 1989, Jo-Anne Kennedy became the CEO and Treasurer of Kennedy Co. and has held these positions until the present time. As CEO and Treasurer, Jo-Anne was responsible for the day-to-day management of Kennedy Co. Prior to 1989, Kennedy Co.'s CEO was the late John W. Kennedy Jr., Jo-Anne Kennedy's husband and Jessie Lynch's brother. Jo-Anne was initially paid the same base salary as the former CEO, $150,000, and her base salary is currently set at $200,000 per year. From 1989 until 2003, the directors of Kennedy Co. were Jo-Anne Kennedy and John J. Lynch ("Jack" or "Lynch"), Jessie's husband. Presently, the Board of Directors consists of Jo-Anne Kennedy, Jack Lynch, and John W. Kennedy III, Jo-Anne's son. Although Jack Lynch remains a director, he is no longer an employee of the Corporation, as he retired in June 2002 after 35 years of employment.
According to Jo-Anne Kennedy, she received a discretionary bonus during her first year as the Corporation's CEO and Treasurer in the amount of $81,000. From 1990 to the present, Jo-Anne in addition to her base salary, received a discretionary bonus each year such that her total compensation on an annual basis ranged from $406,000 in fiscal year 1990, to a total of $641,000 in fiscal year 1997. In fiscal year 2003 she received total compensation of $308,000.
A dispute exists as to whether Jo-Anne Kennedy's compensation was approved or ratified by the Board of Directors. Jo-Anne argues that each year from 1989 through 2002 the Board of Directors reviewed and approved payroll census data for each company employee, including Jo-Anne Kennedy, in determining whether and to what extent to make and allocate contributions to the Pension and Profit Sharing Plans of the Company.See E. Colby Cameron Aff. ¶ 1(c). Plaintiff, to the contrary, has submitted an affidavit stating that the Board of Directors neither established a base salary for the position of CEO, nor authorized the Company to pay any discretionary bonus to Jo-Anne during the relevant period. See Jessie L. Lynch Aff. ¶¶ 3, 4; Pl.'s Verified Complaint, ¶ 19. No corporate minutes have been produced by either side to evidence the Board's actions, if any, with regard to the compensation Jo-Anne Kennedy was authorized to receive.
On June 20, 2003, Jessie Lynch filed the underlying complaint. The Plaintiff's claim for derivative relief contained in Count III is made pursuant to Super. R. Civ. P. 23.1 and Gen. Laws 1956 § 7-1.1-43.1. The Defendants agree that Count III is a claim belonging to Kennedy Co. and, for purposes of this motion, have conceded compliance with the procedural requirements of Rule 23.1.
In response to the underlying complaint, the Defendants' have, interalia, raised the affirmative defenses of statute of limitations and laches. It is on the basis of those defenses, as well as the business judgment rule and the doctrine of quasi-contract, that the Defendants move for summary judgment as to Count III of the verified complaint.
Furthermore, when "an examination of pleadings, affidavits, admissions, answers to interrogatories, and other similar matters, viewed in a light most favorable to the opposing party, reveals no such issue, then the suit is ripe for summary judgment." Rhode Island Hosp. Tr. Nat'lBank,
Both parties agree that pursuant to Gen. Laws 1956 §
The Plaintiff contends that pursuant to the concealment provision set forth in Gen. Laws §
Section
"If any person, liable to an action by another, shall fraudulently, by actual misrepresentation, conceal from him or her the existence of the cause of action, the cause of action shall be deemed to accrue against the person so liable at the time when the person entitled to sue thereon shall first discover its existence." Section
9-1-20 .
To prove fraudulent concealment of a cause of action sufficient to toll the running of the limitations period, the plaintiff must show that the defendant: (1) made an actual misrepresentation of fact and (2) in making such misrepresentation, the defendant fraudulently concealed the existence of a cause of action. Kelly v. Marcantonio,
The Plaintiff relies upon two alleged statements to demonstrate a concealed cause of action — a statement made in 1989 wherein Jo-Anne Kennedy allegedly represented to Jack Lynch that the amount of her compensation would continue at the same 125 % ratio to his compensation that had been maintained in the years prior to 1989 by the former CEO; and a second statement allegedly made to Jack Lynch when he requested corporate compensation and salary records, and was told by Jo-Anne Kennedy that the information was "none of his business."
Even assuming that the statements as alleged by Plaintiff were in fact made, these two statements, made in 1989, cannot be relied upon as continuous misrepresentations that fraudulently concealed a cause of action. Accepting as true for purposes of this motion that the Plaintiff was given false information about Jo-Anne's salary in 1989, as a minority shareholder of the corporation the Plaintiff had a statutory right to demand access to the corporate books and records to verify the representation received by her husband as a member of the Board. See
Gen. Laws 1956 § 7-1.1-46. If the Lynch family decided to accept the representation of Jo-Anne and not demand access to the books after receiving a response that the information was "none of your business," it cannot be said that they were induced by a fraudulent concealment not to assert a timely claim. See Kelly,
Moreover, to avoid the statute of limitations, the Plaintiff must demonstrate that through the exercise of reasonable diligence, the plaintiff could not have discovered the defendant's wrongful conduct. SeeCurtis,
Since statutory tolling is not available to the Plaintiff, the question the Court must determine, therefore, is when the cause of action stated in Count III accrued for limitations purposes. The Defendants allege that the base salary paid to the Corporation's CEO was established in 1987, prior to Jo-Anne assuming the position. Further, the Defendants claim that the historical practice of paying a bonus pre-dates Jo-Anne's tenure as CEO and that the decision to pay a total compensation package to the CEO was first initiated by Kennedy Co. in 1990. Thus, according to the Defendants, claims to recover alleged excessive compensation paid to Jo-Anne Kennedy accrued more than ten years prior to the filing of the complaint and should be barred by the ten-year statute of limitations.
The Complaint alleges, however, that it is the "annual compensation" computed and paid to Jo-Anne Kennedy that has been excessive. Therefore any claim that the corporation paid Jo-Anne excessive compensation is a claim that accrued separately each year, since her compensation was determined and paid on an annual basis for each fiscal year. See Verified Complaint ¶ 19; John J. Lynch Aff. ¶ 7.1
Accordingly, since the complaint was filed on June 20, 2003, any compensation which was paid to Jo-Anne Kennedy for any fiscal year that was completed prior to June 20, 1993 would be considered compensation which was paid on account of services rendered more than ten years prior to the filing of the complaint Any claim seeking to characterize such compensation as excessive must be deemed to have accrued more than ten years prior to the filing of the Complaint, and is barred by the applicable period of limitation. For the reasons stated herein, claims for excessive compensation paid to Jo-Anne Kennedy after June 20, 1993 are not barred by the applicable period of limitation.
Laches
The Defendants next argue that Count III is barred by the doctrine of laches, pointing out that fifteen years have lapsed between the time Jo-Anne Kennedy first received compensation from Kennedy Co. and the time Plaintiff brought this action. Laches is "an equitable defense that precludes a lawsuit by a plaintiff who has negligently sat on his or her rights to the detriment of a defendant." O'Reilly v. Town of Gloucester,
In opposing summary judgment as to Count III, the Plaintiff makes a blanket statement that "the passage of time did not result from negligence on the part of the Lynches." Rather, Plaintiff suggests that the delay in filing the claim resulted from misrepresentation and active concealment. For the reasons earlier stated, the Court cannot accept such a blanket conclusion, since other means were available to the Plaintiff as a minority shareholder to obtain the compensation information relative to Jo-Anne Kennedy.
However, even if delay by the Plaintiff was the result of negligence, an issue the Court need not resolve at the present time, for purposes of summary judgment the Defendants have not, by way of affidavit or otherwise, established that the delay has caused prejudice. Prejudice must be proven and cannot be inferred from the mere passage of time in the assertion of a claim. See Berthiaume v. School Comm. of City ofWoonsocket,
The Business Judgment Rule
The Defendants further contend that they are entitled to summary judgment as to Count III of the verified complaint because the presumptions of the business judgment rule insulate from judicial scrutiny the decision of the Corporation's Board of Directors to approve Jo-Anne Kennedy's total compensation package. The business judgment rule has been adopted in Rhode Island; however, it has received minimal treatment by our Courts. See Heritage Healthcare Services, Inc. v. The Beacon MutualIns. Co., C.A. No. 02-7016, 2004 R.I. Super. LEXIS 29, *16 (R.I. Super. Jan. 21, 2004) (citing Meyer v. Jewish Home for the Aged of RhodeIsland, C.A. No. 93-5374, 1994 R.I. Super. LEXIS 42, *42-43 (R.I. Super. 1994) (following Oberly v. Kirby,
The business judgment rule "is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company." Aronson v. Lewis, Del. Supr.,
It is axiomatic, however, that if a business decision is not a "board approved transaction," then such decision cannot be insulated by the business judgment rule because application of the rule requires in the first instance that the decision at issue be properly considered by the board of directors. At this stage of the litigation, the Plaintiff has raised a genuine issue of material fact as to whether the Board, either by direct vote or ratification, ever passed judgment on the amount of compensation to be paid to Jo-Anne Kennedy. Without first resolving that threshold question, it would be premature to reach the question of the applicability of the presumption created by the business judgment rule. Accordingly, on the current state of the record, the business judgment rule does not entitle Defendants to judgment as a matter of law as to Count III.
Quasi-Contract
Lastly, the Defendants contend that the Plaintiffs are barred from recovering compensation paid to Jo-Anne based on the doctrine of quasi-contract. Quasi-contractual liability is based upon the equitable principal that one shall not be permitted to be unjustly enriched at the expense of another or to receive property or benefits without providing compensation. R B Electric Co., Inc. v. Amco Construction Co., Inc.,
According to the Defendants, Jo-Anne conferred a benefit to Kennedy Co. by faithfully serving and guiding the Company to success, and it would be against the principals of equity if Jo-Anne were forced to forfeit compensation received from the Corporation. The Plaintiffs agree that Jo-Anne Kennedy should be compensated for the reasonable value of her services. However, they have offered evidence suggesting that Jo-Anne's annual compensation grossly exceeded the industry averages set forth by the Petroleum Equipment Institute (PEI), thereby leaving the value of Jo-Anne's services in dispute. See John J. Lynch Aff. ¶¶ 5-8.2 To the extent that quasi-contract can be raised as a defense, the relevant inquiries — here, the benefits conferred upon the Company by Jo-Anne and the reasonable value of such services to the Company — are fact intensive. The Defendants have not demonstrated the absence of genuine issues of material fact as to the reasonableness of the compensation paid and, therefore, this issue cannot be resolved by way of motion for summary judgment.
The parties will present the Court with an order consistent with this decision.
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