People's United Bank v. B&B Fire Protection, Inc. ( 2019 )

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17-P-1533 Appeals Court
PEOPLE'S UNITED BANK vs. B&B FIRE PROTECTION, INC.
No. 17-P-1533.
Essex. October 4, 2018. - January 2, 2019.
Present: Milkey, Desmond, & Wendlandt, JJ.
Loan. Guaranty. Agency, Ratification. Practice, Civil,
Attorney's fees, Judicial discretion.
Civil action commenced in the Superior Court Department on
December 22, 2014.
The case was heard by Joshua I. Wall, J., and a motion for
reconsideration was considered by him.
Peter M. Ross for the defendant.
Charles J. Domestico (Vincent M. Domestico also present)
for the plaintiff.
MILKEY, J. In 2014, EAB Elevator, Inc. (EAB Elevator), and
Barnes International, LLC (Barnes International), defaulted on
two loans they had received from plaintiff People's United Bank
(bank). Seeking to collect on the loans, the bank brought this
action against EAB Elevator, Barnes International, their
2
principal, Andrew Barnes, and B&B Fire Protection, Inc. (B&B or
company). What remains of the case is the bank's collection
action against B&B based on that entity's having executed a
guaranty of the loans.1 B&B's defense was that it never properly
authorized the guaranty. Following a two-day bench trial, a
Superior Court judge ruled in the bank's favor after concluding
that regardless of whether the guaranty initially had been
executed with authority, B&B effectively had ratified it through
its actions and inaction. For substantially the same reasons
expressed by the judge in his thoughtful memorandum of decision,
we affirm.
Background.2 1. B&B's relationship with EAB Elevator and
Barnes International. B&B, formed in 2012 by Andrew Barnes and
Daniel Berry, was a business that designed and installed fire
sprinkler systems. Barnes and Berry had a family connection in
that Berry was married to Barnes's first cousin. The two men
had distinct roles at B&B. Barnes, who held a fifty-one percent
ownership share, served as B&B's president and ran the business
1 The other three original defendants defaulted and a
separate and final judgment was entered against them pursuant to
Mass. R. Civ. P. 54 (b), 365 Mass. 820 (1974), and Mass. R. Civ.
P. 55 (b) (2), as amended, 463 Mass. 1401 (2012).
2 Except for an isolated misstatement that was quite
obviously a typographical error, B&B has not demonstrated that
any of the judge's careful findings are clearly erroneous. The
factual recitation that follows is drawn from those findings
unless otherwise noted.
3
side of the enterprise. Berry, who owned the remaining forty-
nine percent, ran the operations side, that is, he was the one
who performed, or at least oversaw, the actual design,
installation, and maintenance of the sprinkler systems.
Although Berry nominally served as a B&B director and its
treasurer and secretary, he was content to leave business
decisions to Barnes. At no point did the company observe any
corporate formalities; for example, there never were any board
meetings or resolutions. Rather, B&B was run in practice as a
partnership, with Barnes as the one in charge.
EAB Elevator was in the business of installing and
maintaining elevator systems, and Barnes International was an
affiliated company. Unlike B&B, both of these other entities
were wholly owned by Barnes. However, their operations were
intertwined with those of B&B, which allowed all three companies
to take advantage of various mutual benefits, such as joint
marketing opportunities. The three firms shared office space,
equipment, and personnel, and B&B was marketed "as a Barnes
International Company." Their finances were also enmeshed, with
B&B directly receiving some of the monies lent to EAB Elevator,
and B&B in turn making regular payments to Barnes International
in the form of monthly management fees. At least initially,
Berry was content with this arrangement.
4
2. The May 2013 loan. In May of 2013, the bank agreed to
loan EAB Elevator $100,000 in the form of a credit line.3 B&B
executed a guaranty of that loan (the May 2013 loan). Berry was
aware of the guaranty at the time and either affirmatively
blessed it or at least made no objection.4
3. The falling out. By Thanksgiving of 2013, Berry had
grown disaffected with Barnes's management of B&B. As he
explained at trial, he had begun to believe that Barnes was
skimming money from B&B for his own benefit. The two men had a
falling out, and by mid-December, Berry either quit or was
fired. Nevertheless, Berry retained his ownership interest in
B&B and nominally remained a director and officer thereof.
4. The December 2013 loans. On Christmas Eve of 2013
(that is, after Berry had left the company as an employee), the
bank executed two agreements to lend money to EAB Elevator and
Barnes International. These loans (the December 2013 loans) are
the subject of the current collection action. One loan, for
$65,000, was to refinance an existing loan from a different
bank. The other, for $200,000, had two components. One paid
3 The president of the bank was an uncle of both Barnes and
Berry's wife, a happenstance that may explain some of the
informality that occurred.
4 At trial, Berry maintained that he believed that the
indebtedness that resulted from the May 2013 loan was for only
$65,000. The judge did not address this particular issue in his
findings, but nothing turns on it.
5
off the existing $100,000 indebtedness on the May 2013 loan to
EAB Elevator (thus effectively serving as a refinancing of that
debt). The other established an additional $100,000 line of
credit that could be drawn from over time. B&B executed a
separate corporate guaranty on these loans, and thereby
nominally agreed to obligate itself on them. The guaranty was
signed by B&B's general counsel, purportedly pursuant to a power
of attorney executed by Barnes (who, at the time, was in
Florida). Meanwhile, Berry, who continued to hold a forty-nine
percent share of B&B, was not informed about the December 2013
loans, much less about B&B's agreeing to guarantee payment on
them. The judge determined that "[t]he evidence compels the
inference that Barnes intentionally kept Berry from knowing
anything about the December 2013 [l]oans and the December 2013
[g]uaranty."
5. Berry takes over B&B. In January of 2014, Berry sought
information about the finances of B&B but was rebuffed. The
following month he commenced an action against Barnes in the
Superior Court, and the record indicates that he was seeking
dissolution of the company. Trial evidence showed that the
action ended quickly in a settlement through which Berry agreed
to buy out Barnes's interest in B&B, and thus himself take over
sole ownership and control of the company. Berry entered into
that settlement while taking a decidedly casual approach to
6
B&B's finances. He remained unaware of the December 2013 loans
and B&B's agreement to guarantee them.5
6. Berry learns of the December 2013 loans. At a lunch
held on April 9, 2014, Barnes told Berry about the December 2013
loans and B&B's guaranty of them. The following day, Berry sent
an electronic mail message (e-mail) to the bank's loan officer
requesting that disbursements on the letter of credit
established by the loans be put on hold for the time being.6 The
loan officer sent a brief reply e-mail that stated as follows:
"We will need to meet and discuss your options. Please
note, that I cannot discuss anything associated with Barnes
International. Give me a call, or shoot me an email when
you have a chance."
The following day, Berry called the loan officer and they spoke
by telephone. There is little in the trial record as to the
details of that conversation. Berry acknowledged that he never
raised with the loan officer his current position that B&B's
guaranty of the loans was unauthorized. It was also uncontested
5 As part of the settlement, Berry did extract Barnes's
agreement to indemnify Berry for B&B's indebtedness to the bank
(which Berry understood at the time to refer to the guaranty of
the May 2013 loan, not knowing that that loan had been paid
off).
6 Specifically, in the e-mail, Berry stated: "Until
[Barnes] and I hash out the details of all this can you put a
freeze on the line of credit or require a signature from both
him and [me] before Money is drawn as it is my understanding it
is attached to all three companies." The trial evidence is less
than clear as to how much money was disbursed after Berry sent
the e-mail.
7
that the loan officer reiterated that he could not discuss the
Barnes International financials with Berry. In any event, at
that point, both Berry and the bank let the matter drop.7 There
were no further communications in the ensuing months between
Berry and anyone at the bank with respect to the loans or B&B's
guaranty.
Instead of taking action to repudiate the guaranty, Berry
implemented a different approach toward distancing himself from
B&B's potential obligations. He formed a new company, Berry
Fire Protection, to take over B&B's operations and assets,
including its outstanding accounts receivable. Thus, B&B at
this point effectively went out of business, and Berry used the
company's receivables to pay for Berry Fire Protection's
expenses (as well as some personal expenses), instead of paying
the bank.
7. The bank's collection action. Barnes International and
EAB Elevator defaulted on the December 2013 loans as of August
of 2014. After the bank's efforts to collect the money from
those companies and Barnes personally foundered,8 the bank
7 The judge found, "Berry testified, 'I hoped this would all
go away because of the family dynamic.'"
8 The record reflects that the bank made extensive efforts
to try to pursue Barnes to no ultimate avail. As of the date of
trial, Barnes's whereabouts were unknown (although one witness
expressed his belief that Barnes was likely somewhere in Las
Vegas).
8
pursued its claim against B&B on the guaranty. In defense, B&B
maintained that the guaranty was never authorized. The company
argued that Barnes's directing it to enter into the guaranty
without Berry's knowledge or consent presented an obvious
conflict of interest that deprived Barnes of the power to
authorize it on his own. At trial, B&B argued that the
execution of the guaranty was a "conflict of interest
transaction" governed by G. L. c. 156D, § 8.31, and that, as
such, it could be "authorized, approved, or ratified" only
through the three specific options laid out in that section
(none of which, B&B argued, applied).9
In addition, B&B argued at trial -- albeit in passing --
that, in any event, it should not be liable for any loan monies
disbursed after Berry specifically had requested in writing that
the bank freeze such payments. In support of this argument, B&B
pointed out that the guaranty document itself included a
provision that allowed B&B to revoke the guaranty going forward
if it did so in writing, among other requirements. See note 15,
infra.
9 B&B also argued that there was a separate authority
problem related to the power of attorney. Specifically, B&B
argued that the power of attorney in fact authorized the general
counsel to sign for Barnes only in his personal capacity and
that, in any event, it could not delegate to her Barnes's
corporate authority without express board approval.
9
For its part, the bank did not contest that Barnes's
directing that B&B execute a guaranty without Berry's knowledge
presented an obvious conflict of interest. Nor did the bank
press an argument that B&B entered into the guaranty with actual
authority. Highlighting that B&B never observed any corporate
formalities and that B&B entered into the May 2013 loan without
corporate votes or resolutions, the bank did make some argument
that the guaranty was executed with apparent authority.
However, the bank's principal defense was that B&B effectively
had ratified the guaranty by Berry's not repudiating it once he
learned of its existence on April 9, 2014. According to the
bank, B&B's failure to disavow the guaranty deprived the bank of
the opportunity to take steps immediately to protect itself.
The judge's ruling. After making careful findings, the
judge passed over the question whether the guaranty initially
was executed with authority (actual or apparent). Instead, he
relied on the bank's principal argument that B&B effectively had
ratified the guaranty by not repudiating it once Berry had
learned of it. The judge did not specifically address B&B's
fallback argument that, in any event, it should not be liable
for any disbursements made after Berry had requested a freeze on
the line of credit. However, a close reading of the judge's
memorandum of decision reveals his view that the loan officer
acted properly in response to Berry's request, and that Berry
10
alone was to blame for dropping the ball.10 The judge entered
judgment against B&B for $296,327.24, the full outstanding
amount owed on the December 2013 loans. The judge subsequently
denied B&B's motion for reconsideration and -- as further
explained below -- required B&B to pay one-half of the bank's
attorney's fees in defending that motion.
Discussion. 1. Ratification of guaranty. As the judge
ably observed, the case law long has recognized that a
corporation can ratify an existing unauthorized agreement not
only by its actions but by its inaction. See, e.g., Linkage
Corp. v. Trustees of Boston Univ., 425 Mass. 1, 18, cert.
denied, 522 U.S. 1015 (1997) ("Where an agent lacks actual
authority to agree on behalf of his principal, the principal may
still be bound if the principal acquiesces in the agent's
action, or fails promptly to disavow the unauthorized conduct
after disclosure of material facts"). We agree with the judge
10 The judge stated as follows:
"Berry did contact [the loan officer] of the Bank by email
on April 10 and by phone on April 11. Berry did not
contest or repudiate B&B's obligation to the Bank. Rather
than sending documents [that Berry had requested], [the
loan officer] suggested a meeting 'to discuss your
options.' Because Berry had not previously informed the
Bank of the sale of B&B, [the loan officer] cannot be
faulted for his insistence on a meeting. Berry did not
arrange a meeting. Berry did not contact [the loan
officer] again to request information or documents. He
chose not to pursue information from the Bank after his
request was not immediately successful."
11
that once Berry learned of the existence of the guaranty, B&B
had an obligation to repudiate the guaranty promptly or be held
to its terms.11 Put differently, even if we assume that the
guaranty was voidable at the point that Berry learned of it,
Berry did nothing to exercise that right and instead
"purposefully shut his eyes to means of information within his
own possession and control, having only that knowledge which he
care[d] to have." Colony of Wellfleet, Inc. v. Harris, 71 Mass.
App. Ct. 522, 529 (2008), quoting Perkins v. Rich, 11 Mass. App.
Ct. 317, 322 (1981), S.C., 385 Mass. 1001 (1982). Berry pursued
the alternative strategy of draining B&B's assets into his newly
formed company while the bank was deprived of the opportunity to
take action to try to protect itself. Under these
11We agree with the judge that at that point, Berry was in
possession of all the material facts and that even if he
remained ignorant of some of the details, he could not bury his
head in the sand to avoid learning of those details. See Colony
of Wellfleet, Inc. v. Harris, 71 Mass. App. Ct. 522, 529 (2008),
citing Perkins v. Rich, 11 Mass. App. Ct. 317, 322 (1981), S.C.,
385 Mass. 1001 (1982). In addition, we note that at the point
Berry learned of the guaranty, he was B&B's sole shareholder and
principal. We see no impediment to imputing his actions and
inaction to B&B notwithstanding the absence of formal corporate
resolutions. With Berry having been content to have B&B operate
without any corporate formalities throughout its life, B&B
cannot now raise such practices as a defense to its liability.
See Diamond v. Pappathanasi, 78 Mass. App. Ct. 77, 94-96 (2010)
(where nonmanaging partner benefited for years from "loose
arrangements through which the enterprises operated," judge
properly applied equitable principles in limiting her relief in
"after-the-fact" claims of breached fiduciary duties).
12
circumstances, we discern no error in the judge's conclusion
that B&B ratified the guaranty after Berry learned of it.12
To the extent that B&B argues that the existing case law on
ratification was abrogated by the 2003 enactment of G. L.
c. 156D, § 8.31, we are unpersuaded. By its express terms, that
statute recognizes that a "conflict of interest transaction" --
such as B&B's guaranty here13 -- is not voidable solely because
of the conflict of interest if it has been "authorized,
approved, or ratified" by the company's disinterested directors
or owners after they are apprised of it. G. L. c. 156D, § 8.31
(a). The judge determined that B&B ratified the guaranty after
Berry learned of it, and hence there is no inconsistency between
the judge's ruling and the terms of the statute. To be sure, in
discussing what action will be sufficient to "authorize[],
approve[], or ratif[y]" a conflict of interest transaction, the
statute does refer to a "vote" by either the directors or
It bears noting that $100,000 of the December 2013 loans
12
went to refinance an existing loan on which B&B already was
obligated as a guarantor. B&B has no argument that it should
not be held liable to that extent.
A "conflict of interest transaction" is defined as "a
13
transaction with the corporation in which a director of the
corporation has a material direct or indirect interest." G. L.
c. 156D, § 8.31 (a). Because Barnes obviously benefited from
his directing B&B to guarantee the loans made to EAB Elevator
and Barnes International -- companies that he wholly owned --
B&B's execution of that guaranty unquestionably constitutes a
conflict of interest transaction.
13
shareholders. G. L. c. 156D, § 8.31 (c) & (d). However, we
interpret such references as drawing a road map on how companies
can try to ensure that conflict of interest transactions
properly have been "authorized, approved, or ratified," not as
establishing a new edict that such authorization, approval, or
ratification necessarily can be effected only through formal
corporate action. See generally Kerins v. Lima, 425 Mass. 108,
110 (1997), quoting Commercial Wharf E. Condominium Ass'n v.
Waterfront Parking Corp., 407 Mass. 123, 129 (1990), S.C., 412
Mass. 309 (1992) ("a court 'will not presume that the
Legislature intended . . . a radical change in the common law
without a clear expression of such intent'").
We are left to consider B&B's fallback argument that it at
least should be relieved of having to reimburse the bank for the
amount that was disbursed after Berry asked that such
disbursements temporarily be placed on hold. We respectfully
disagree with the judge's assessment that only Berry was to
blame for the abbreviated nature of the discussions between him
and the bank. At various points in the process, the bank seems
as keen as Berry to bury its own head in the sand.14
Nevertheless, we do not view B&B's request that the bank place a
temporary hold on future loan disbursements as amounting to
14As the bank's counsel forthrightly acknowledged at trial,
"no party was covered with glory."
14
formal notice to the bank that B&B sought to revoke its guaranty
under the terms of that contract.15 Accordingly, we conclude
that B&B has not presented a viable ground for the alternative
relief it requests.
2. Attorney's fees issues. The judge found that when B&B
filed a motion asking him to reconsider his memorandum of
decision, it included a "blatantly misleading" quote from that
decision. Based on this conduct, the judge ordered B&B to pay
one-half of the bank's legal fees in defending the motion for
reconsideration. B&B has not demonstrated that the judge's
finding on this point was clearly erroneous or that the judge's
imposition of the sanction constituted an abuse of discretion.
See Van Christo Advertising, Inc. v. M/A-COM/LCS, 426 Mass. 410,
416-417 (1998) (setting forth standards applicable to appellate
review of sanctions imposed pursuant to Mass. R. Civ. P. 11, as
15B&B suggests that because the bank never provided Berry
with the loan-related documents that he requested in his April
10, 2014, e-mail, Berry was not made aware of the existence of
the "duration of guaranty" provision, and thus was prevented
from terminating the guaranty. However, in that e-mail, Berry
actually requested "copies of the [Federal Small Business
Administration] loan paperwork" for B&B, and documents regarding
the line of credit that was established by the December 2013
loans. Berry's e-mail did not specifically request the guaranty
agreement that B&B had executed (a document that one might
expect to be in B&B's own files). B&B does not appear to claim
that a copy of the guaranty agreement it executed was missing
from its own files, and there is, in any event, no evidence in
the trial record to support such a claim.
15
amended, 456 Mass. 1401 [2010]). We therefore affirm the order
requiring payment of those fees.16
Conclusion. The judgment entered on June 26, 2017, is
affirmed. The postjudgment order entered on August 16, 2017, is
also affirmed.
So ordered.
16At the conclusion of its brief, the bank makes a one-
sentence request for "an award of costs and its appellate
attorneys' fees." That request is unadorned by argument or
citation, and we are left to speculate as to the legal grounds
on which the bank relies. An initial request for an award of
appellate legal fees and costs included in a brief need not --
indeed, should not -- specify the amount of the requested fees,
or the number of hours and hourly rates on which the request is
based. Those issues are properly the subject of the petition
for fees that is to follow an order allowing fees. See Fabre v.
Walton, 441 Mass. 9, 10-11 (2004). However, the case law long
has established that where, as here, a request for appellate
fees and costs fails to identify the legal grounds on which the
award allegedly would be justified, that request does not rise
to the level of adequate appellate argument contemplated by
Mass. R. A. P. 16 (a) (4), as amended, 367 Mass. 921 (1975), and
therefore need not be entertained. Gustin v. Gustin, 420 Mass.
854, 858 (1995). Nor are valid grounds for an award of
appellate fees otherwise apparent on the record before us. We
therefore deny the bank's request. See id. Finally, we note
that the appellate rules themselves soon expressly will require
that a request for an award of appellate fees shall include "a
citation to the authority therefor." Mass. R. A. P. 16 (a)
(10), as amended, 481 Mass. 1630 (2018) (effective March 1,
2019).