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

• Court: Massachusetts Appeals Court
• Decided: January 2, 2019
• Docket: AC 17-P-1533
• Status: Published

Opinion

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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).