Opinion
No. 218-2017-CV-1322
01-03-2020
John Meehan v. Jay Gould and Flatbread, Inc.
ORDER
Plaintiff has asserted a right to a jury trial. The Defendants assert that the Plaintiff John Meehan, ("Meehan") has either waived his right to jury trial or is not entitled to a jury trial in the circumstances of this case. For the reasons stated in this Order, the Court finds that the Plaintiff is not entitled to a jury trial, and that the case shall proceed as a bench trial.
The parties recently advised the Court at a discovery conference that although they had submitted letter briefs on whether or not a jury trial is available to the Plaintiff in the circumstances of this case, the Court had not issued an Order.
I
Defendants first assert that the Plaintiff failed to properly preserve his right to a jury trial by failing to include the jury demand "upon the first page of the Complaint at the time of the filing." See Superior Court R. 8 (c). Meehan admits that he did not include his jury demand on the first page of the Complaint, although it was included in the Complaint. There is, therefore, a technical noncompliance with the Rules. The Court has discretion to waive its Rules, but need not decide whether it is appropriate to do so in this case, because the Plaintiff is not entitled to a jury trial in the circumstances of this case as a matter of law.
The right to a jury trial is guaranteed by the New Hampshire Constitution. N.H. CONST. part I, art. 20. Although the right to jury trial is a fundamental one under the State Constitution, in civil cases the right is considerably less expansive than it is in criminal cases. See State v. Bilc, 158 N.H. 651, 653 (2009) (holding that the right to a jury trial is fundamental in criminal cases). In civil cases the right extends only to those cases for which the jury trial right existed when the Constitution was adopted in 1784. Ridlon v. New Hampshire Bureau of Securities Regulation, 172 N.H. 417, 418 (2019); Davis v. Dyer, 62 N.H. 231, 235 (1882) (Part 1 Article 20 "was a recognition of an existing right, guaranteeing it as it then stood and was practised, guarding it against repeal, infringement, or undue trammel by legislative action, but not extending it so as to include what had not before been within its benefits."). It has long been settled that no constitutional right to trial by jury exists in equity cases. McElroy v. Gaffney, 129 N.H. 382, 386 (1987); City of Manchester v. Anton, 106 N.H. 478 (1965); Lakeman v. LaFrance, 102 N.H. 300 (1959); see generally, G. MacDonald, Wiebusch on New Hampshire Civil Practice and Procedure, § 42.01[2] (3rd ed. 2010). It is nonetheless true that the jury right remains intact even though a legal action to which the right attaches is joined with an action in equity. McElroy v. Gaffney, 129 N.H. at 386. Thus, the Court must consider Meehan's claims to determine whether they are wholly equitable, or may be considered actions at law.
II
Meehan's Complaint has four Counts. Count I alleges a Breach of Fiduciary Duty. Meehan claims that Gould's Breach of Fiduciary Duty to him includes the following allegedly wrongful acts:
a. Withholding regular distributions of profits to Meehan and making distributions based on Gould's personal financial interest rather than the best interests of Meehan and business;(Complaint ¶ 72 (a)-(d).) Meehan alleges that Gould has engaged in these acts "in a manner to deprive Meehan of salary, benefits and profit distributions and to force Meehan to sell his 30% ownership interest at significantly less than fair market value." (Complaint ¶ 73.)
b. Threatening to retain profits for purposes of developing new restaurants rather than, consistent with past practice, funding development through bank financing and distributing the profit;
c. Unilaterally, and without any business justification, waiving a franchise fee and royalty payments and thereby denying Meehan of a share of the profits from these payments; and
d. Threatening to not allow increases of lease rents to fair market value so as to keep the real estate from generating their profits and income to Meehan.
The two other counts are derivative of the Breach of Fiduciary Duty claim. Count II of the case is captioned Breach of Contract. Meehan alleges:
76. Meehan and Gould have a binding and enforceable agreement that each would draw an identical salary from Flatbread, Inc.(Complaint ¶¶ 76-78.) Counts III and IV are based upon the existence of a contract between Meehan and Gould. Count III of the Complaint alleges a Breach of the Implied Covenant of Good Faith and Fair Dealing, which is a part of any contract and simply recites that "under New Hampshire law and by virtue of his status as a majority shareholder in a closely held corporation, Gould owed Meehan an implied covenant that he would act in good faith and fairly in the performance of their agreement." (Complaint ¶ 81.) Count IV also assumes the existence of a contract. It further alleges that Gould maliciously, in bad faith, and through improper motive, terminated Meehan's employment relationship with Flatbread, Inc. (Complaint ¶ 86.)
77. Meehan and Gould agreed that in exchange for his investment and efforts on behalf of the business, Meehan would be continually employed by Flatbread, Inc. and earn his livelihood from the business as an important benefit of his minority shareholder status.
78. In breach of the agreement, Gould unilaterally and without any legitimate business reason terminated Meehan's position and effectively eliminated his salary, while maintaining his own salary at $250,000 annually.
III
This Court has previously held that the allegations in the Complaint set forth a cause of action for corporate freezeout. Meehan v. Gould, No. 218-2017-CV-01322, 2019 WL 3519455, at *4 (N.H.Super. July 31, 2019). Most jurisdictions recognize what is generally called the tort of corporate freezeout. Id.; see also Thorndike v. Thorndike, 154 N.H. 443, 446 (2006) (noting that the Court has never explicitly adopted the tort of corporate freezeout). To determine whether a party has a right to a trial by jury in a particular action the New Hampshire Supreme Court will "generally look to both the nature of the case and the relief sought, and ascertain whether the customary practice included a trial by jury before 1784." Ridlon, 172 N.H. at 420.
The existence of the tort of corporate freezeout is a modern development; it did not exist at common law when the law of corporations, as we understand it, did not exist. Therefore, there can be no constitutional right to a jury trial under Part 1, Article 20 of the New Hampshire Constitution. A trial by jury cannot be invoked in proceedings "unknown to the common law." Hallahan v. Riley, 94 N.H. 338, 339-40 (1947); In re Sandra H. 150 N.H. 634, 636 (2004).
Meehan's request for relief is essentially equitable in nature. He seeks that the Court require "that his employment and salary be reinstated (a); that profits and losses be accounted for at the individual restaurant level and paid/debited to each owner accordingly (b); that neither Flatbread Inc. ("FBI") nor the Flatbread restaurant entities from restructuring or transferring [sic] assets to a holding company (c); that expenditures be limited to those in the normal course of business, and that the restaurants' payments to Flatbread, Inc. for management services remain at their customary percentage (d); that monies from the individual restaurants not be commingled (e); that Gould be required to personally bear his attorney's fees (f); that the profits of each restaurant be paid proportionately to each owner quarterly. (Pl.'s Letter Br., April 30, 2019).
The relief sought by Meehan is akin to an action for accounting between partners or a shareholders derivative suit. In fact, the first cases recognizing the tort of corporate freezeout found the theoretical basis for the tort to be the close corporations "striking resemblance to a partnership." Donahue v. Rodd Electrotype Co. of New England, Inc., 367 Mass. 578, 587 (1975). Actions between partners in New Hampshire are generally considered equitable in nature and subject to trial by jury. Eames v.Bedor, 2010 N.H. Super. LEXIS 13 at *6-7 (N.H. Super. July 19, 2010) (suit between partners). Similarly, shareholder derivative actions are equitable in nature, and not amenable to trial by jury. McElroy v. Gaffney, 129 N.H. 382, 385 (1987).
Meehan does, however also assert a claim of a breach of a contract for employment. Recognizing that contracts for lifetime employment are not favored, Meehan asserted in his Opposition to the Defendants' Motion for Summary Judgment that by asserting his breach of contract claim he "seeks to reap the same benefits of an oral agreement by which each partner would take the same amount characterized as salary, although that sum was unrelated to services rendered." Meehan v. Gould, 2019 WL 3519455 at *3. In denying summary judgment, the Court also assumed in the alternative, that Meehan could bring a breach of an employment contract claim.
In this Court's prior order, the Court noted that his claim for breach of contract and his claim for the breach of implied covenant of good faith and fair dealing are one and the same. Meehan v. Gould, 2019 WL 3519455 at *6.
The alternative breach of contract claim presents an intersection of a straightforward breach of an employment contract claim and a claim based upon a breach of the tort obligation members of a closely held corporation owe each other. Courts have held that the doctrine of employment-based shareholder oppression is distinct from the wrongful termination doctrine and that the analysis under the separate doctrines must attempt to protect close corporation employment and at the same time respect the legitimate sphere of the at-will rule. Gunderson v. Alliance of Computer Professionals Inc., 628 N.W.2d 173, 190 (Minnesota Ct. App. 2001); see also Kortum v. Johnson, 755 N.W.2d 432, 441 (N. D. 2008). For that reason, in denying summary judgment, this Court held that even if Meehan had a contract of employment, whether or not Meehan's removal from employment at the corporation was in the best interest of the corporation and therefore proper relies upon analysis under the business judgment rule, which is a question of fact. Meehan v. Gould, 2019 WL 3519455 at *8.
There is authority for the proposition that a cause of action for breach of the fiduciary duty owed by majority shareholders to a minority shareholder does not extend to claims based on the termination of the minority shareholder's employment. 18A Am. Jur. 2d Corporations § 637; see generally Majority's Fiduciary Obligation to Minority Shareholder of Close Corporation-Breach and Remedy, 39 A.L.R.6th 1 (Originally published in 2008) §§ 13-14. However, generally in cases where courts find that there is no fiduciary obligation applicable when a minority shareholder's employment is terminated, usually involve a contract in which the parameters of employment are formalized. See, e.g. Datto Inc. v. Braband, 856 F.Supp. 2d 354 (D.Conn. 2012). There is no formal employment contract in this case and in fact Meehan characterizes the agreement between the parties as one which would allow an equal amount of salary to be taken by each shareholder, regardless of the amount of work which was performed. The terms of Meehan's alleged contract are inextricably entwined with his claim of breach of fiduciary duty.
It may be that a member of a closely held corporation could bring a breach of contract action which is separate from an action based on the tort duties that shareholders of a closely held corporation owe one another. Illustrative is Blank v. Chelmsford OB/GYN, P.C., 420 Mass. 404, 408 (1995) in which the court considered an employment contract that permitted employment of a member of a closely held corporation to be terminated by either party on 6 months' notice. In the case before the court, there was no allegation that the defendants were denying the plaintiffs' contractual rights or future compensation for past services. The court reasoned that "the plaintiff had received all he had bargained for, the book value of the stock and 6 months' notice of his termination. Such a claim is obviously based on the contract between the parties and not the terms of a particular contract. It is far different from this case.
Massachusetts, like New Hampshire, recognizes that there is an implied covenant of good faith and fair dealing between parties to a contract, and that termination of a contract of employment not made in good faith may constitute a breach of the contract. Fortune v. National Cash Register Co., 373 Mass. 96, 101 (1977). Massachusetts, as the New Hampshire Supreme Court recognized in Thorndike v. Thorndike (supra) also contains a well-developed body of law regarding corporate freezeout.
Meehan's claim does not involve a specific employment contract interpreting discrete terms but can only be considered a part of his tort claim of freezeout. It follows that he is not entitled to a jury trial.
SO ORDERED
1/3/20
DATE
s/Richard B . McNamara
Richard B. McNamara,
Presiding Justice RBM/