by BBA President Jon Albano
Earlier this year, the Boston Bar Association launched the pilot phase of its Service Innovation Project. Made possible by the Burnes Innovation in Service Fund of the Boston Bar Foundation, the project aims to identify ways for attorneys to disrupt the school-to-prison pipeline in our community.
As you will read in this special edition of the Boston Bar Journal, the factors that contribute to perpetuating the school-to-prison pipeline are numerous and complicated. At the BBA, we have been fortunate to be able to partner with longtime experts who have been on the front lines fighting for students’ rights and school discipline reform for decades. Many of them have written the pieces that follow, and I would like to thank them for their continued efforts.
I also would like to thank the Service Innovation Project Steering Committee for their devotion to working toward better outcomes for children in Massachusetts and beyond. Finally, I would like to offer my sincere thanks to the students and parents who lent their voices to this publication and shared their stories firsthand.
If you are interested in getting involved in the Service Innovation Project, please consider attending our pro bono training on representing students in school discipline cases on October 24.
by Hon. Jay Blitzman
Voice of the Judiciary
The Supreme Court has abolished the juvenile death penalty, mandatory juvenile life without parole, and in acknowledging the reality of adolescent brain development, has outlined a regime of proportional accountability. Children are constitutionally different than adults. Research has demonstrated that reducing detention also reduces recidivism by promoting the socially connective tissue of family, school, and community that is vital to positive youth development. We can protect public safety at less cost. Youth who do not graduate from high school are eight times more likely to later be arrested and it costs three to five times more to incarcerate than to pay for public education.
The message of proportional accountability has implications in all contexts, including zero tolerance in schools, mandatory transfer and collateral consequences. However, in an era of dramatically declining juvenile arrest rates, this promising landscape has been complicated by a counterintuitive narrative – the recriminalization of status offense conduct that was decriminalized in the aftermath of In Re Gault, 387 U.S. 1 (1967). This has manifested itself in various forms, including treating status offenders as probation violators in some states and imposing conditions of supervision which are status offense-like in nature (e.g. attending school without incident), and commitments for probation violations not related to re-offending. This article focuses on another aspect of this process- the surge of school referrals to juvenile justice which, as discussed in Arrested Futures, a collaboration between the ACLU of Massachusetts and the Massachusetts Citizens for Juvenile Justice, has unfortunately involved many arrests for essentially non-violent normative adolescent behavior.
Nationally about 84% of youth in the juvenile justice system are there for non-violent conduct and over two-thirds of this number are youth of color. Although detention and commitment rates have declined, racial and ethnic disparities have increased. In 2017, the Sentencing Project reported that African-American youth are five times more likely to be held than whites, Latino youth are 65% more likely to be held, and Native American youth were three times more likely to be detained. LGBTQ- gender non-conforming youth comprise 5% of the nation’s youth population, but 20% of those are detained and 85% of that number are youth of color. Over 75% of children who appear in juvenile sessions have mental health or clinical issues as courts have become default service providers.
Issues affecting children should be considered in the context of the larger systems that affect them. The multi-faceted factors that contribute to the school-to-prison pipeline implicate fundamental questions of race and class. As Marian Wright-Edelman has observed, the school-to-prison pipeline runs through economically depressed neighborhoods and failing schools. Over sixty years after Brown v. Board of Education held that separate in public education is per se unequal, our schools remain segregated. The issue is national in scope. New York City, for example, has perhaps the most segregated school system in the country. In a real sense we live in a world that is still separate and unequal. Access to adequate public education remains an access to juvenile justice issue. Professor Charles Ogletree has concluded that as regards Brown’s legacy, there is little left to celebrate. In The Color of Law, Richard Rosenstein attacks the premise of de facto segregation, arguing that geographical segregation is the result of race conscious de jure actions which have included zoning, housing, school siting, and urban renewal polices.
Where people live matters. The Boston Globe recently reported that the Brockton school system was only able to spend $1.28 per student on classroom supplies during the 2016-2017 school year, while Weston allotted $275.00 per student. The adverse impact of geographic segregation is reflected in the reality that we see the same children and families in the child welfare system as we do in the juvenile system, with the same rates of racial and ethnic disproportionality. Between 2010 and 2012, 72% of the children committed to the Massachusetts’ Department of Youth Services had been involved with the Department of Children and Families (DCF.) and over half of that number’s families had been involved with DCF before they were five. Every time a child’s placement in foster care is changed it is estimated they lose six months of educational progress which compromises their ability to graduate. Marian Wright-Edelman and others now use the phrase cradle-to-prison pipeline.
Police have been in schools since the civil rights era, but after the 1999 school shooting in Columbine, police presence in schools accelerated exponentially as did the expanded use of “zero tolerance” formerly reserved for guns and drugs. Police were placed in schools without first considering their relationship with educators and the scope of their authority. Police officers were largely placed in schools serving students of color, schools which had never had a Columbine type of incident. New York City, for example, has over 5,400 school police officers. The unregulated deployment of police in schools, coupled with zero tolerance, has fueled the pipeline and adversely affected schools of color. While these practices may be rationalized as logical responses to protect children, National Center for Education data shows that reported incidents of school violence had peaked in 1994, well before Columbine, and that national juvenile arrest rates had reached their high point in 1994, and by 2016 had declined by 70%. The effects of these policies were apparent. In 2000, over three million students were suspended and over ninety-seven thousand arrested. African-American students have been three-to-five times more likely to be suspended than white students for comparable behavior, underlining the mythology of race-neutral zero tolerance.
The reality of the “pipeline” was demonstrated in 2012, when the Department of Justice accused the city of Meridian, Mississippi of operating a school-to-prison pipeline. Named defendants included the schools, police, judges, probation officers, and the state’s Department of Human Services and Division of Youth Services. While the circumstances are rarely as overt. The pipeline exists and deconstructing it requires a multi-faceted response. The Juvenile Detention Alternative Initiative JDAI), and the MacArthur Foundation’s Models for Change are examples of data based initiatives that encourage cross-system dialogue and examine evidence based practices to better protect public safety while promoting positive youth development. Massachusetts features a robust partnership with JDAI by partnering with court professionals and practitioners in an effort to decrease unnecessary detention and address racial and ethnic disparities. Adopting more proportional and strength based models in engaging youth in lieu of zero tolerance regimes, as recommended by the American Psychological Association and the American Bar Association (ABA), coincides with the Supreme Court’s message of proportional accountability. Restorative justice, especially as applied in schools and communities in lieu of court referral, is an example of a public health oriented approach. Massachusetts juvenile justice reform, enacted this year, expanded diversion opportunities and allowed for the expungement of records for the first time, in certain circumstances. Of particular importance is the legislation’s call for school districts to develop memoranda of understanding to inform the relationship of school resource officers and educators. This would provide a framework for conversation and exploration of alternative action. Given the school shooting in Parkland, FL, the need to capitalize on this legislative opportunity cannot be over-emphasized, unless we wish to revisit the unintended consequences that followed Columbine. Promulgation of memoranda of understanding is consistent with JDAI initiatives and resolutions adopted by the ABA.
We have made progress through systemic dialogue, use of data, and the development of memoranda of understanding. However, to truly deconstruct the pipeline we must tackle the underlying structural realities which fuel implicit bias and the school/cradle-to-prison pipeline. Equal Justice Initiative’s Bryan Stevenson has stressed that in order to have truth and reconciliation we must address the realities of our history. Hopefully, the Boston Bar Association’s focus on this important subject will prove to be a step in the right direction.
Judge Jay Blitzman is the First Justice of the Middlesex Division of the Massachusetts Juvenile Court. Prior to his appointment he was a co-founder and the first director of the Roxbury Youth Advocacy Project, a multi-disciplinary public defender’s office, which was template for the creation of the statewide Youth Advocacy Division of C.PC.S. Jay is also a co-founder of the Massachusetts Citizens for Juvenile Justice and Our RJ, diversionary restorative justice program. Jay writes and presents regularly at a variety of forums. His most recent publications are, Gault’s Promise Revisited: The Search for Due Process (Juvenile and Family Law Journal, NCJFCJ June 2018), The State of Juvenile Justice (ABA Criminal Justice Section, June 2018), Realizing Gault’s Promise ( Arizona Attorney, May 2017) and Are We Criminalizing Adolescence? (ABA Criminal Justice, May 2015). Jay has held a variety of teaching positions. He currently teaches juvenile law at Northeastern University School of Law, and is a team leader at Harvard Law School’s Trial Advocacy Workshop program. Judge Blitzman is a member of the S,J.C. Standing Committee on Eyewitness Identification and the S.J.C. Jury Advisory Committee.
An alumnus of the Boston Public Schools, who has chosen to be referred to as “JMC,” shares an experience with school discipline that led to the student’s eventual suspension.
During my senior year of high school, I was a part of my school’s “Senior Committee.” We planned events for our senior class. I was very passionate about these events; I cared about my school. I had a class period where the Senior Committee would plan our senior events. This was one of my favorite classes, and always kept me on my toes.
In November of my senior year, my class had been discussing methods to raise money for the senior class. We’d been discussing ways to raise money for a long time, and frankly, we felt like things weren’t exactly going the way it did for the senior class last year. We felt like we weren’t getting as much help from the administration as the administration gave to the class last year. We were a very outspoken class, and admittedly, things had gotten pretty tense in our classroom. We really disagreed with administration about how to plan our senior year.
Our teacher had a school administrator come to our class to help with this tension, but it did not help. Instead, we immediately got into a very heated discussion with a few of the students and the administrator. I felt myself getting angrier and angrier. I knew that I needed to take a break and calm down, so I decided to step out of the classroom.
I walked out of class and decided that I wanted to call my mom, because my mom can always help me calm down. When I called my mom, we made a plan for me to go see one of my teachers. This teacher had helped me when issues came up before, and I thought she would help me come up with a plan for Senior Committee. I began to walk towards my teacher’s classroom to see if she had time to talk with me, or if I could schedule a time to talk with her.
As I was walking to her classroom, a hall monitor started to follow me and asked me where I was going. I told her that I was going to see one of my mentors in the school, one of my teachers, to help me calm down. She told me I couldn’t do that and that she was going to call for back up.
That’s the last thing I remember before being completely surrounded by three staff members and two police officers. Things seemed to be escalating by the second. I didn’t know what to do, and I didn’t know what was going to happen to me. I remember constantly asking for them to back up and give me space because I felt beyond uncomfortable and anxious. I kept trying not to cry, but eventually I couldn’t help it anymore. I started crying and asking them to please leave me alone. I was so scared. I didn’t understand what had happened. I just wanted to see a teacher.
Then my teacher saw me. She ran down the hallway towards me, stepped between me and the police officers, and helped pull me past the police officers surrounding me. A school administrator told me I had to leave school right then, and they would let me know when I could come back. Then, one of the staff members surrounding me got in contact with my mother after they made me leave school. They told my mom that she had to come to school with me the next morning.
That next day I returned to school with my mother without knowing what is going on or what will happen. We were told to wait in the lobby, and that someone would be with us soon. I had never been in trouble like this before, and I had no idea what would happen. After a few minutes, we were sent to the Dean’s Office. I kept trying to explain to the dean what was happening, but he said he didn’t believe me. I asked to bring in my teacher who helped me get away from the police officers, but the dean wouldn’t let me get her. He told me I was suspended for ten days.
None of it made any sense to me. I’ve never been suspended before throughout my high school career, and I was so worried about what it would do to my college applications.
I felt so disrespected and belittled. To this day I don’t understand how one moment could lead to such a suspension. It all made me feel like they tried to make a show out of me. I knew this suspension wasn’t right, so I decided to fight it. I appealed the suspension, but I lost that appeal. I still wouldn’t give up, so I brought it to the state and Massachusetts agreed with me that my suspension was illegal. It was taken off my records before I graduated.
It felt so empowering, I’m happy I did my research, found a lawyer, and was able to fight this and win. I feel like our school systems take advantage of so many kids who just don’t know what their rights are or how to stand up for themselves. I couldn’t be one of those kids. I hope kids see this and know that if they aren’t in the wrong, you can stand up for yourself. Never give up and know your rights.
Schama, who has chosen to be identified by only her first name, shares her experience appealing her expulsion from her Boston high school.
The world is not peaches and cream: we need to be aware of the warfare being waged against us by the prison system and the education system. Learn to love one another and make better choices.
According to President Obama, the United States has just five percent of the world’s population, but 25 percent of the world’s prisoners. As Van Jones said in Ava DuVernay’s documentary 13th, “One out of four human beings with their hands on bars, shackled, in the world, are locked up here in the land of the free.” I recently learned about the school to prison pipeline. It works like this: A student may get into a fight at school that they didn’t start, but they still get suspended. And they go to a disciplinary school for a little while, and when they come back to their old school everything is different. Nobody believes that they didn’t start the fight. Now everyone thinks they’re a bad kid, so they start acting like a bad kid. They can no longer see the future they used to see, they get into another fight and this time they get arrested. This is how the pipeline works, I could have fallen into this pipeline.
Malcolm X wrote in his Autobiography, “Any person who claims to have deep feeling for other human beings should think a long, long time before he votes to have other men kept behind bars – caged. I am not saying there shouldn’t be prisons, but there shouldn’t be bars. Behind bars, a man never reforms. He will never forget. He never will get completely over the memory of the bars.” (Malcolm X, The Autobiography of Malcolm X, 155).
They want you to be weak, and that my friend we will never be.
On October 30th I was coming out of class; it was a regular Monday. I was talking to my friends and we were messing around as friends do. A lady walked up next to us and asked, “Where do you need to be?” It bothered me because I was where I needed to be, so I ignored her, waved her off and walked away. The next thing I know, my dean came in to my class at the end of the day. He quietly walked over, and he almost sounded depressed when he said, “Schama, can I please talk to you outside?” I was thinking he was going to tell me he found out who stole my wallet earlier that week. We went to a different classroom, and he asked me if I knew why he brought me there. “No,” I said. He told me that I had assaulted the assistant headmaster. “What!? What are you talking about!? Who?” I exclaimed. He told me her name, and I still didn’t know who it was. I told him to check the cameras. I knew I hadn’t done what he was saying, but he told me to go home.
I ended up having two hearings: a suspension hearing and then an expulsion hearing. But what I want to share is how I felt and my memories during those hearings. I remember walking to the conference room with my mom and the Dean. We walked past a white woman who looked kind of familiar. She was up against the wall as if I were a bully telling her to get out of my way. I couldn’t understand why she was so afraid and thought, “Wow, relax, I’m not an animal… I’m a human being.” During the hearing I asked who the assistant headmaster was because I still didn’t know. The Dean said I had just passed by her in the hall. And then everything started to become so clear. This woman didn’t know me; we had only a thirty second interaction. Why is she scared of me? Why am I here? I became an emotional wreck. They said that they might press charges. The School Officer came in and read a police report. I was crying; I couldn’t believe it, I started having a panic attack. The only other time I felt this way was when my grandmother had died.
When the assistant headmaster came in I should have handed her an Oscar she was so dramatic. She said that after this happened she wanted to talk to me but I ran away. But that didn’t happen, I walked away, and if she had wanted to talk to me I would have. And if she had told me I touched her, even though I didn’t think I had, I would have apologized. If she had talked to me I would have apologized, period! Later the Dean said it might have been an accident, but it still happened. I was so confused, in my head I was thinking, “she can’t press charges if I didn’t put my hands on her. If there’s no proof she can’t press charges. If this was an accident she can’t press charges. If she was upset I would have gladly apologized, why is this happening, I’m a good kid, I have good grades, I’m about to get honor roll!”
While I was suspended, I spent five days at the Barron Center – a counseling and intervention center where kids go when they are suspended for something serious – but the counselor there told me I didn’t need to be there. Later we had the expulsion hearing and they expelled me. After I was expelled I went to Community Academy. The first day, I started having a panic attack and was sent home. I went back and was okay, but the school hadn’t sent any of my work and I was frustrated. I was a junior. My work mattered, and I couldn’t do it.
I got a lawyer and appealed my expulsion. When I went to the hearing, I saw that the headmaster and the hearing officer knew each other, and I already knew my voice wasn’t going to be heard. I almost gave up. I didn’t think I could win this. Who is going to believe a child over a headmaster? No one is going to listen to me. Who is listening? My lawyer wanted to record the hearing, but the hearing officer refused. At the hearing I told my side of story. I became emotional. I said that I was a good kid, I worked hard, I am a Black queen and didn’t understand why this was happening. If I hurt anyone I’m sorry, I just want to go back to school and finish. After I presented my case, the headmaster said that he expelled me because I had become an emotional wreck and was aggressive and flailed my arms dangerously. I couldn’t believe he had said that, this didn’t make sense. What was I really being expelled for? Was he saying because I’m black and I have an “attitude” I should be expelled? I’m very blunt and everyone at school knew that. But not anymore, my school was a turnaround school, which meant 60 percent of the staff and teachers had been replaced, and everyone who knew me had left. I lost the appeal.
My lawyer and I appealed to the state. The Department of Education overturned my expulsion, ordered BPS to fix my grades and give me extra help. I’m really glad I beat my case, but this experience still really affected me. During my suspension and my expulsion, I took the time and reflected on my life and how to go about things. I knew where I wanted to go, I wanted to finish school, but I couldn’t see how I could get there. When I got to my new school I walked into my ELA class, Mr. Driscoll’s class. I noticed that his room was covered in black history and Malcolm X. At first, I thought he was just another white guy trying to be black, but then I talked to him. I wanted to figure out how to be me and he helped me. He had read my file and told me that he knew I wasn’t a bad kid, that if I needed space he would give it to me, but if I wanted to talk to someone he was there. I didn’t have to say anything to him for him to understand me and where I was coming from. And we read Malcolm X.
Malcolm’s autobiography helped me see that it wasn’t white people, it was how white people see black kids, it was about the system. “The white man is not inherently evil, but America’s racist society influences him to act evilly. The society has produced and nourished a psychology which brings out the lowest, most base part of human beings.”(Malcolm X, The Autobiography of Malcolm X, 378) This is why black kids are being sent out of school and sent to prison. The system makes white people bold.
I don’t like to share my story and I don’t want sympathy, but I need to share so it doesn’t happen to others. I am sharing my story because I’m tired and I won’t keep sitting around while my sisters and brothers are getting physically and verbally abused by the system. With the help of my family and some of my new teachers, I overcame my obstacles and I am going to be a senior with almost the grades that I wanted, and I’m going to apply to college in the fall. But not everybody is like me and can bounce back the way I did. So for anybody out there that has gone through what I’ve gone through, or is going through what I went through. I just want you to know that you aren’t the only one. Forgive those who have done you wrong, keep building your future and show them how wrong they were about who you are and what you can be.
by Tara J. Myslinski and Stephanie R. Parker
Filing a new complaint? If your client is part of a for-profit corporate entity and the dispute concerns that entity, there is a good chance that you are wondering whether some or all of your client’s potential claims are derivative or direct claims. There are plenty of ways to get tripped up in this context; it is wise to think early about all of the possible pitfalls in such a case and understand the road ahead.
In this article we discuss the steps an attorney facing this issue must take, including understanding the nature of your client’s entity at the outset of a case, determining whether your client has direct or derivative claims, and following the unique procedural and substantive rules applicable to derivative claims.
Understand the Nature of Your Client’s Entity and its Place of Formation.
The law of the state of the entity’s incorporation or registration will dictate substantive issues of law for claims concerning that entity. Procedural rules for the forum will govern procedural issues.
Issues of substantive law include whether claims are derivative or direct and whether a plaintiff has standing to pursue derivative claims against the entity. See Cannonball Fund, Ltd. v. Dutchess Capital Mgmt., LLC, 84 Mass. App. Ct. 75, 93 (2013) (quoting Harrison v. NetCentric Corp., 433 Mass. 465, 471 (2001)). The differences among the states on derivative suits can be substantial; for example, whereas under Massachusetts law a shareholder is required to make demand on directors in every case alleging derivative claims on behalf of a corporation, see G.L. c. 156D, § 7.42, a suit on behalf of a Delaware corporation may still allege futility of such demand. See Johnston v. Box, 453 Mass. 569, 578 & n. 15 (2009); Del. Ct. Ch. R. 23.1; see also 6 Del. C. §§ 18-1001 & 18-1002 (allowing any LLC member to bring derivative action).
In addition to ascertaining the state of your entity’s formation, study the entity’s governing documents for specific provisions that may apply to derivative suits. See, e.g., G.L. c. 156C, § 56.
Determine Whether Your Client has Direct or Derivative Claims, or Both.
In your complaint, you must specify whether each claim is brought directly by your client as an individual or derivatively by your client on behalf of the entity. This distinction is important because, as discussed below, you must comply with special procedural requirements for any derivative claims you assert.
In general, a derivative claim asserts a wrong done to the corporation, as opposed to any particular shareholder. As such, a derivative claim belongs to the corporation and any damages recovered on a derivative claim will go to the corporation. Examples of derivative claims include:
Wasting, mismanaging or misappropriating corporate assets, resulting in a general diminution of the value of corporate stock, assets, or cash on hand; see, e.g., Rubin v. Murray, 79 Mass. App. Ct. 64, 80 (2011);
- Engaging in acts of self-dealing and/or diverting corporate opportunities; see, e.g., Williams v. Charles, 84 Mass. App. Ct. 328, 338 (2013);
- Breach of a contractual obligation owed to the company, including breach of a non-competition provision; see, e.g., Pagounis v. Pendleton, 52 Mass. App. Ct. 270, 275 (2001); and
- Breach of a fiduciary or other duty owed by the defendant to the corporation. See, e.g., International Brotherhood of Electrical Workers Local No. 129 Benefit Fund v. Tucci, 476 Mass. 553, 558 (2017).
A direct claim, in contrast, alleges breach of a duty owed to the plaintiff as a shareholder, investor, or creditor of a corporation and seeks to remedy some harm that is distinct from that suffered by shareholders generally. IBEW, 476 Mass. at 558. As such, damages recovered on a direct claim will go directly to the plaintiff. Examples of direct claims include:
- Misrepresentation or fraud perpetrated on an individual investor in connection with his or her investment; see, e.g., Amorim Holding Financeria, S.G.P.S., S.A. v. C.P. Baker & Co., 53 F. Supp. 3d 279, 306-07 (D. Mass. 2014);
- Failure to make payments owed directly to plaintiff, such as profit distributions; see, e.g., Reeve v. Folly Hill Limited Partnership, 36 Mass. App. Ct. 90, 97 (1994);
- Dilution of one shareholder’s share value or equity while increasing the equity held by other shareholders; see, e.g., Donahue v. Rodd Electrotype Co., 367 Mass. 578, 600 n.25 (1975); and
- Breach of a fiduciary duty owed to a shareholder/member or freeze out of a shareholder/member. See id. at 579 n. 4.
In certain contexts, particularly cases involving a close corporation, the line separating direct and derivative claims can be blurred. In those contexts, good pleading practice may require alleging certain claims both individually and derivatively.
Follow the Procedural Prerequisites and Substantive Rules that Apply Uniquely to Derivative Suits.
1. As a Threshold Matter, Ensure Your Plaintiff has Standing.
Massachusetts law on a plaintiff’s standing to bring a derivative claim varies somewhat depending on the type of entity at issue. See G.L c. 156C, §§ 56-57 (LLCs); G.L c. 156D, §§ 7.40-7.47 (corporations); G.L. c. 109, §§ 56-59 (limited partnerships).
With respect to any entity in Massachusetts, however, to have standing to bring a derivative claim, a plaintiff must have been a shareholder (or member or partner) at the time of the alleged misconduct and must continue to be a shareholder throughout the entirety of the derivative litigation. G.L. c. 156D, § 7.41; see Billings v. GTFM, LLC, 449 Mass. 281, 289-96 (2007) (involuntary loss of ownership interest during pendency of litigation deprived plaintiff of standing to press derivative claims); see also Kolancian v. Snowden, 532 F. Supp. 2d 260, 262-263 (D. Mass. 2008) (“a narrow exception to this rule arises where the [event causing the loss of the plaintiff’s ownership interest] itself is the subject of a claim of fraud. . . [t]o establish that a merger was fraudulent, a plaintiff must plead with particularity that it was undertaken ‘merely to eliminate derivative claims’”) (quotation omitted). If your client is concerned that, during the pendency of the case, the defendant may eliminate your client’s interest, preliminary injunctive relief to halt that transaction may be necessary. See IBEW, 476 Mass. at 564 n.15.
If your client controls the entity by owning a majority of its shares or serving as its manager or president, your client may be able to bring a direct suit against a wrongdoer. But if the company is owned 50/50 and your client is one of the 50% owners seeking to sue the other 50% owner in the company’s name, the analysis is different. Although Massachusetts has yet to issue a clear decision on this issue, other jurisdictions uniformly hold that a 50% owner may not bring suit against another 50% owner in the company’s name without following derivative procedures. See, e.g., Swart v. Pawar, No. 1:14-cv-10, ECF #162 (N.D.W.Va. Nov. 19, 2015); Barry v. Curtin, 993 F. Supp. 2d 347, 352-53 (E.D.N.Y. 2014); Crouse v. Mineo, 189 N.C. App. 232, 238-39 (2008).
If the entity is a limited liability company, G.L. c. 156C, § 56 imposes additional constraints on a plaintiff’s standing. It requires that a plaintiff alleging a derivative claim be either: (1) a member authorized to sue by the vote of members owning more than 50% of the unreturned contributions to the LLC; or (2) a manager of the LLC authorized to sue by a vote of a majority of the managers. In either case, the vote of any member or manager who has an interest in the outcome of the suit that is adverse to the LLC’s interest must be excluded. Given this statutory rigor, unless the LLC’s operating documents state otherwise, a minority member, or single manager in a multi-manager LLC, would have to secure a favorable vote to obtain a non-interested majority in order to have standing to sue on behalf of the LLC. Compare G.L. c. 156D, § 7.41 (any shareholder holding stock at the time of wrongdoing may commence a derivative proceeding so long as they “fairly and adequately” represent the interests of the corporation).
2. Comply with Procedural Rules for Derivative Claims in Massachusetts State or Federal Court.
State and federal rules of civil procedure impose special pleading requirements on derivative claims. Specifically, in addition to any substantive law governed by the entity’s state of formation, Massachusetts Rule of Civil Procedure 23.1 requires that the derivative complaint:
- Be verified;
- Allege that the plaintiff was a shareholder or member at the time of the transaction at issue, or that the plaintiff’s share or membership thereafter devolved on him by operation of law from someone who was a shareholder or member at the time; and
- Allege with particularity the efforts made by the plaintiff to obtain the action he or she desires from the directors or comparable authority and the reasons for his failure to obtain the action.
The requirements of Federal Rule of Civil Procedure 23.1 are similar, but add that the plaintiff must plead that “the action is not a collusive one to confer jurisdiction that the court would otherwise lack.” The requirements of the Massachusetts Rule can be waived if a defendant proceeds to trial without addressing these issues, see Diamond v. Pappathanasi, 78 Mass. App. Ct. 77, 89 (2010) (involving a general partnership), but there is no analogous case law concerning the Federal Rule.
You also must name the company as a nominal defendant in any derivative action when filing suit in Massachusetts state or federal court, regardless of the state of formation of the entity. See Fusco v. Rocky Mountain I Investments Ltd. P’ship, 42 Mass. App. Ct. 441, 447 (1997); Gabriel v. Preble, 396 F.3d 10, 14-15 (1st Cir. 2005).
3. Properly Apply Substantive Law on Demand Requirements Prior to Filing a Derivative Suit.
The most frequently litigated issue of substantive law in derivative cases is demand/demand futility. Massachusetts substantive law imposes hurdles additional to the procedural requirement of Mass. R. Civ. P. 23.1.
A plaintiff intending to bring a derivative claim on behalf of a Massachusetts corporation must first demand that the corporation pursue the claim. G.L. c. 156D, § 7.42. “The rationale behind the demand requirement is that, as a basic principle of corporate governance, the board of directors or majority of shareholders should set the corporation’s business policy, including the decision whether to pursue a lawsuit.” Harhen v. Brown, 431 Mass. 838, 844 (2010). The procedure for making demand is detailed and is set forth in G.L. c. 156D, §§ 7.40, et seq. Massachusetts is a universal demand state, which means that demand must be made even if the plaintiff believes it would be futile due to a board’s interest or lack of independence. See Johnston, 453 Mass. at 578 n.15.
A plaintiff may only initiate a derivative action once the corporation has either (i) refused a demand to bring suit; or (ii) ignored the demand for at least 90 days (or 120 days if the decision regarding whether to pursue the claims is submitted to the shareholders for a vote). A derivative plaintiff may file suit before expiration of the waiting period if the plaintiff can show that irreparable injury would result by waiting for the period to expire. G.L. c. 156D, § 7.42.
If your client’s demand is refused and she disagrees with the corporation’s decision, you should carefully study G.L. c. 156D, § 7.44 and be prepared to challenge the refusal in your complaint and in your opposition to the inevitable motion to dismiss. In this context, the “business judgment rule” precludes the suit if the corporation can show that it determined in good faith and after reasonable inquiry that the suit would not be in the best interests of the corporation. G.L. c. 156D, § 7.44(a). Although challenging a director vote to refuse a demand is difficult because of the protections of the business judgment rule, Judge Kaplan of the Superior Court’s Business Litigation Session recently denied a motion to dismiss derivative claims in just that context. See Brining v. Donovan, No. 1684-CV-3422-BLS1 (Mass. Super. Ct. Sept. 14, 2017). The court questioned the directors’ independence given their close ties with the alleged wrongdoer and also found reasonable doubt as to whether the board conducted its investigation in good faith because its conclusion in the face of glaring financial improprieties was “so different from what an independent Board would be expected to do.” Id.
Limited Liability Companies
In contrast to corporation derivative suits, the futility exception is still alive in the context of LLC derivative suits, but must be well-pleaded to satisfy Mass. R. Civ. P. 23.1. See Billings, 449 Mass. at 289-90 n.19; see also Harhen, 431 Mass. at 844 (futility exception is pled by alleging that “a majority of [members] are alleged to have participated in wrongdoing, or are otherwise interested” and adopting definition of “interested” director as stated in ALI’s Principles of Corporate Governance, §§ 1.15 & 1.23); Diamond, 78 Mass. App. Ct. at 89 (“to satisfy rule 23.1, a complaint in a derivative action must plead with particularity either the presuit demand the plaintiff has made or the reasons why making such demand would have been futile”).
Limited partners alleging damage to the partnership must make demand upon the general partner or allege the reasons that doing so would be futile. G.L. c. 109, § 58.
4. Follow Procedural and Substantive Rules at the Conclusion of a Derivative Case.
A derivative proceeding filed in Massachusetts may not be discontinued or settled without court approval. Mass. R. Civ. P. 23.1; G.L. c. 156D, § 7.45.
As discussed above, damages recovered on a derivative claim will go to the entity. The Massachusetts Appeals Court recently noted that there may be some irony, particularly in the context of a close corporation, if this rule results in the wrongdoer benefiting from a share in the recovery. See Beninati v. Borghi, 90 Mass. App. Ct. 566, 567, n.11 (2016). This irony can be mitigated by the trial judge, who is “free to take the equities into account in fashioning any remedy under c. 93A.” Id. In an effort to remedy that type of unfair result, on remand to the Business Litigation Session in Beninati, Judge Sanders recently reduced a G.L. c. 93A damages award by a wrongdoer’s percentage of ownership interest in the company and directed that the company “shall not permit” any distribution of the damages to the wrongdoer. Beninati v. Borghi, Nos. 1284-cv-1985-BLS2, 1384-cv-1772-BLS2 (Mass. Super. Ct. June 30, 2017). An appeal of that decision is currently pending.
Massachusetts law authorizes the court to award attorneys’ fees and costs to the plaintiff upon conclusion of a case if the court finds that the proceeding has resulted in a “substantial benefit to the corporation.” G.L. c. 156D, § 7.46; see also Beninati , 90 Mass. App. Ct. at 568 (affirming denial of fee application in part because time records failed to make that distinction). The court may award the defendant its fees and costs if the court finds that the proceeding was commenced or maintained without reasonable cause or for an improper purpose. G.L. c. 156C, § 57 contains parallel fee-shifting provisions for derivative claims in the Massachusetts LLC context. Because Massachusetts law is not clear on the issue of whether an award of attorneys’ fees in derivative litigation is procedural or substantive, be sure to also understand the law of the entity’s formation state on this issue at the outset of your case.
Tara J. Myslinski is a partner in the business litigation boutique O’Connor Carnathan & Mack LLC based in Burlington. She focuses her practice in complex commercial and corporate litigation, frequently involving small-business shareholder disputes, complex contractual disputes, trade secret and non-compete litigation, and internal pre-litigation investigations.
Stephanie R. Parker is an associate in the business litigation boutique O’Connor, Carnathan & Mack LLC, based in Burlington, MA. Ms. Parker graduated from Northeastern University School of Law in May 2013. Prior to joining OCM, Ms. Parker worked as a judicial intern for The Honorable Patti B. Saris at the U.S. District Court for the District of Massachusetts.
by Christopher T. Saccardi
Every day in Massachusetts state courts, people take on the burden of representing themselves in civil cases. While there are a number of reasons for this, the principal factor is obvious: lawyers are expensive, and many individuals simply can’t afford them.
There are no easy solutions to this problem, but Limited Assistance Representation (LAR), which was introduced in Massachusetts in 2009 and has been expanding through the trial courts, can help. It allows litigants to retain counsel for an essential phase of litigation, or for a crucial hearing, at a cost that is much less than what an attorney might charge to represent the client for a full case. LAR also allows an attorney to offer pro bono services for a particular litigation event without having to commit to taking on an entire case.
While this article draws primarily on procedures and experience with LAR in Housing Court to introduce practitioners to LAR, highlight its benefits, and identify key issues and potential pitfalls, the rules are very similar in the other courts in which LAR is now available to civil litigants—the District Court, the Boston Municipal Court, Probate and Family Court, and the Superior Court.
Under LAR, attorneys are permitted to represent clients on a limited basis after registering with the appropriate court and watching a short video or attending a training on the mechanics of LAR. The duration of the representation can vary by agreement reached between counsel and client. Representations can be as short as a single hearing or discrete task, or they can cover a longer period of time, such as assisting through the completion of discovery or even preparing for and conducting a trial.
For example, common parts of a Housing Court case that are particularly conducive to LAR are: answering or drafting discovery requests; drafting and filing motions; appearing to argue a motion, such as a motion to vacate a default judgment or to issue an execution; conducting a mediation with a Housing Specialist; or trying a summary process (eviction) case.
The mechanics of appearing and withdrawing under LAR vary slightly from court to court, but generally follow the same basic parameters throughout the Commonwealth: attorney and client must sign an agreement that details the specific nature of the representation and the tasks and period of time to be included. The attorney will then complete a set of LAR appearance and withdrawal forms that can be obtained from the appropriate court (or online) and which must be signed by both the client and the attorney. The withdrawal is filed as soon as the representation ends; in the case of LAR for a discrete hearing, it is not unusual to file the limited appearance form at the beginning of the hearing and to file the withdrawal in open court immediately following the conclusion of the hearing.
While LAR can be a convenient tool for both attorney and client, it does present some unique challenges that are important for practitioners to keep in mind. Litigants can risk disjointed or incomplete counsel from an LAR attorney who focuses narrowly on the specific task at hand without considering the overall litigation strategy. Or, a client who engages an attorney only to draft a motion could be ill-served, even if the motion is excellent, if the LAR agreement does not provide for properly preparing the client to argue that motion. It is therefore important for both attorney and client to carefully consider the appropriate duration of the representation and the way in which the included tasks will be defined. A failure to do this can lead to awkward situations, as a judge will occasionally not allow the LAR withdrawal if he or she feels that an additional task should be completed by the attorney. For example, a judge will sometimes ask the LAR attorney to postpone the withdrawal after a hearing in order to receive a copy of the decision and explain it to the client.
Another challenge can result if it is unclear to opposing counsel when exactly an LAR attorney has entered and, more importantly, has exited the case. Not knowing whether the adverse party is represented or is pro se can hamper the ability of opposing counsel to negotiate a resolution or simply to communicate about procedural issues. Timely providing copies of the limited appearance and withdrawal to opposing counsel is therefore critically important.
Housing Court Standing Order 1-10, which governs LAR in the Housing Court, contains several requirements counsel must follow to help avoid those potential pitfalls. For example, the signature block of any document filed by an LAR attorney must indicate that it is filed under a LAR representation; a failure to do this could convert the engagement from limited to full representation. The Standing Order also requires opposing counsel to serve documents related to matters within the scope of the limited representation on both the LAR counsel and the party. Similar rules apply in other courts. See, e.g., BMC Standing Order 1-10, District Court Standing Order 1-11, Superior Court Standing Order 2-17, and a memo and FAQ regarding LAR in Probate and Family Court. The LAR page on the Massachusetts state website provides a good summary of the various LAR rules, along with links to FAQs, standing orders, and court forms.
In sum, LAR can be a valuable tool, especially in courts that serve a large population of unrepresented parties. It can be used on a pro bono basis or for paying clients, and can be a helpful way to provide assistance to a party with a critical piece of litigation at considerably lower cost than full representation. Judges are generally appreciative of LAR attorneys because they understand that often the alternative is no representation at all. So long as counsel give careful consideration to how they delineate the duration of the representation and are familiar with the applicable rules, LAR can be a useful part of any practice.
Chris Saccardi, formerly a litigation associate at Edwards Angell Palmer and Dodge, LLP, opened his own practice in 2010 in which he focuses exclusively on landlord-tenant law. He was named to the BBA’s Public Interest Leadership program in 2012-2013 and has served as Co-Chair of the BBA’s Solo and Small Firm Section.
How to Get an LLC into Federal Court: Tips for Pleading Diversity Jurisdiction Over Unincorporated EntitiesPosted: May 14, 2018
by Thomas Sutcliffe
For federal diversity jurisdiction under 28 U.S.C. § 1332, a plaintiff, or removing defendant, must establish diversity of citizenship between the parties. Typically, that means that all of the plaintiffs must be citizens of a different state than all of the defendants. And a party wishing to get into federal court is required to plead diversity at the outset of litigation.
Pleading diversity, however, can be a challenge when the other party is an unincorporated entity. A corporation’s citizenship is straightforward; it is considered to be a citizen of both the state of incorporation and the state in which its principal place of business is located. The citizenship of other entities, such as LLCs and partnerships, is based upon the citizenship of each of its individual members or partners. See generally Americold Realty Tr. v. Conagra Foods, Inc., 136 S. Ct. 1012 (2016). A complaint or notice of removal, therefore, must say something about the citizenship of an unincorporated entity’s members. Failure to do so can result, at the very least, in a show cause order, especially within the First Circuit, where judges have not hesitated to raise the issue sua sponte. See e.g., N. Beacon 155 Assocs. LLC v. Mesirow Fin. Interim Mgmt. LLC, No. CV 15-11750-LTS, 2015 WL 13427609, at *1 (D. Mass. June 29, 2015) (finding that allegation in notice of removal that only pleaded state of organization and principal place of business of LLC parties insufficient); Fratus v. Vivint Solar Developer LLC, 1:16-CV-10517 (D. Mass June 8, 2016) (issuing show cause order sua sponte based on similar problem in plaintiff’s complaint); see also D.B. Zwirn Special Opportunities Fund, L.P. v. Mehrotra, 661 F.3d 124, 125 (1st Cir. 2011) (determining, sua sponte, that notice of removal failed to allege jurisdiction over LLC plaintiff).
Requiring a party to plead the citizenship of another party’s members results in something of a Catch-22. The membership of an LLC or partnership is often not publically available information, meaning a party trying to access federal court may not be able to determine the citizenship of its adversary until discovery. But parties typically cannot conduct discovery unless they can plead some basis for subject matter jurisdiction, leaving plaintiffs and removing defendants in a quandary.
The Pragmatic Approach Taken by Some Circuits
Some courts, outside the First Circuit, have started to address this dilemma by adopting a more pragmatic approach to pleading citizenship. For example, in Carolina Cas. Ins. Co. v. Team Equip., Inc., 741 F.3d 1082 (9th Cir. 2014), the Ninth Circuit embraced the “sensible principle that, at [the pleading stage], a party should not be required to plead jurisdiction [against an LLC] affirmatively based on actual knowledge.” Id. at 1087. Instead, the court held, it is enough for a plaintiff “to allege simply that the defendants were diverse to it,” and it is permitted “to plead its allegations on the basis of information and belief.” Id. Meanwhile, if the unincorporated entity – which presumably knows the citizenship of its own members – has information to the contrary, it is free to provide it and the court can “reevaluate its jurisdiction if contrary information emerged later.” Id. Until then, the court reasoned, the unincorporated entity is not in a position to complain.
The Third Circuit reached a similar conclusion in Lincoln Ben. Life Co. v. AEI Life, LLC, 800 F.3d 99 (3d Cir. 2015). In Lincoln, the court reasoned that “[d]epriving a party of a federal forum simply because it cannot identify all of the members of an unincorporated association is not a rational screening mechanism,” particularly given that “[t]he membership of an LLC is often not a matter of public record.” Id. at 108. As a result, the court forged a compromise aimed at “strik[ing] the appropriate balance between facilitating access to the courts and managing the burdens of discovery.” Id. Specifically, it held that it was enough for a plaintiff to “alleg[e] that none of the defendant association’s members are citizens of” the same state as the plaintiff. Id. at 107. Furthermore, plaintiffs were permitted to make that allegation on information and belief provided they “conduct[ed] a reasonable inquiry into the facts alleged,” such as by consulting publically available sources. Id. at 108. “If, after this inquiry,” the court held, “the plaintiff has no reason to believe that any of the association’s members share its state of citizenship, it may allege complete diversity in good faith.” Id.
The court in Lincoln went on to examine the plaintiff’s complaint and found that – when combined with the plaintiff’s opposition to the defendants’ motion to dismiss – its allegations were sufficient to plead diversity of citizenship. Specifically, the court noted that the plaintiff had alleged that:
- The LLC defendants had some connection to states where the plaintiff was not a citizen;
- Plaintiff’s counsel had “conducted a reasonable inquiry to determine the membership of the LLC defendants but found nothing of value;” and
- Plaintiff’s counsel “found no connection between the LLC defendants” and plaintiff’s home state.
Id. at 110.
Based on these allegations, the court concluded that the plaintiff had “alleged complete diversity in good faith.” Id. at 111.
Applying Carolina and Lincoln in the First Circuit
Can the approach of Carolina and Lincoln be applied in the First Circuit? Not exactly. In D.B. Zwirn Special Opportunities Fund, L.P. v. Mehrotra, 661 F.3d 124 (1st Cir. 2011), the First Circuit held, in a decision that predates Lincoln, that citizenship cannot be pleaded in the negative; that is, it is not enough to allege that the plaintiff and defendants are not parties of the same state, as the parties in that case had done. The problem, the court explained, was that even if a party was not a citizen of the same state as its adversary, that did not rule out the possibility that one of the parties was a stateless entity (such as a foreign corporation) in which case diversity jurisdiction would again be lacking. Id. at 126-27. As a result, the court required affirmative information regarding the citizenship of the plaintiff-LLC’s members.
But the Carolina/Lincoln approach still offers some guidance, and Massachusetts courts might be warming to it. In BRT Mgmt. LLC v. Malden Storage, LLC, No. CV 17-10005-FDS, 2017 WL 2726689 (D. Mass. June 23, 2017), for example, the court issued a show cause order, and the plaintiff, citing Lincoln, argued that it had searched publically available records but had been unable to determine the citizenship of the LLC defendant. Judge Saylor observed that the approach articulated in Lincoln conflicted somewhat with D.B. Zwirn, but he nonetheless concluded that Lincoln’s “basic reasoning is sound.” Id. at *1. He further held that, because BRT – like the plaintiff in Lincoln – had “consulted all available public information and alleged, in good faith, that there is complete diversity of citizenship,” it was entitled to take jurisdictional discovery. Id.
BRT suggests then that providing some indication of good faith research might go a long way towards overcoming the seemingly high burden set by D.B. Zwirn. The decision in D.B. Zwirn itself signaled that the court may be open to this kind of a pragmatic approach. Indeed, it is noteworthy that, in D.B. Zwirn, the court ordered the plaintiff-LLC to provide information regarding its citizenship, not the defendant who had removed the case to federal court (and who bore the burden of establishing jurisdiction). That suggests that the First Circuit may, in the future, be open to permitting jurisdictional discovery, at least in those instances where the party seeking federal jurisdiction makes an adequate threshold showing.
Lessons to Be Learned
So what are the lessons that can be gleaned from the case law? A few guidelines seem to emerge:
- First, a party seeking federal diversity jurisdiction involving an unincorporated entity should research publically available information to the fullest practical extent and describe those efforts in the complaint or notice of removal. Even if that research is inconclusive, it is helpful to establish good faith.
- Second, if the research reveals no contacts between the unincorporated party and the state of which the party seeking federal jurisdiction is a citizen, the complaint should say so. If there are some contacts, the complaint should explain (if possible) why those contacts are insufficient and/or explain why the unincorporated party’s connections to another state are more extensive. The party should also allege, if appropriate, on information and belief, that the parties are not citizens of the same state.
- Third, the party should try to allege the unincorporated party’s state of citizenship, even if it is only an educated guess. That will help avoid the kind of “negative” pleading the First Circuit rejected in D. B. Zwirn. Failing that, the complaint should at least try to allege facts ruling out the possibility that the unincorporated party is a “stateless” actor, such as, for example, establishing that the entity is based in the United States (and therefore presumably a citizen of some state).
The rules for establishing diversity jurisdiction over unincorporated parties are at times byzantine and arguably “def[y] logic.” Lincoln, 800 F.3d at 111 (all judges concurring). But neither the Supreme Court nor Congress has shown any sign of changing those rules, and courts are quick to enforce them. By putting a bit of extra time into alleging diversity jurisdiction over these entities, parties can save themselves considerable trouble in the future and ensure that they remain in the forum of their choosing.
Thomas Sutcliffe is an attorney at Prince Lobel Tye LLP. His practice focuses on complex commercial litigation.
by Hon. Gary S. Katzmann
Voice of the Judiciary
From October 27, 2004 until September 15, 2016, it was my great privilege to serve as an Associate Justice of the Massachusetts Appeals Court. On September 16, 2016, after evaluation by the American Bar Association, nomination by President Obama, a hearing before the Senate Judiciary Committee, and confirmation by the United States Senate, I began service as a Judge on the United States Court of International Trade (CIT). In the federal constellation, in contrast to other specialized courts, the CIT is an Article III court, with lifetime judicial appointment, equivalent to a United States District Court, and with full powers in law and equity. The CIT judges can also sit by designation, upon assignment by the Chief Justice of the United States, on other Article IIII courts, that is, the District Courts and Courts of Appeals throughout the nation.
With the intense focus in recent years on the global marketplace, it is perhaps not surprising that there has been heightened interest in the work of the CIT — in particular, adjudication under domestic trade laws involving protection of U.S. businesses from unfair competition arising from unfair pricing by foreign companies and unfair subsidies to foreign companies by their governments. Yet, it should be noted that from the founding of this nation, international trade has presented matters for adjudication in our federal courts. The first case tried in the first court organized under the Constitution of the United States involved an importation dispute. Eventually, such disputes were heard by the U.S. Customs Court. The Customs Court Act of 1980 replaced that court with the CIT. That Act broadened the power of the court, creating a comprehensive system for judicial review of civil actions arising out of import transactions and federal transactions affecting international trade. This system is rooted in the mandate of Article I, Sec. 8 of the Constitution that “all Duties, Imposes and Excises shall be uniform throughout the United States.” The geographic jurisdiction of the CIT, the only national Article III trial court, encompasses all of the United States. The CIT has nine sitting judges, including the chief judge, who is a statutory member of the Judicial Conference of the United States, as well as senior judges. The CIT sits in the James L. Watson Courthouse in New York City, although it is authorized to sit elsewhere, including in foreign nations. While the Second Circuit sits across the street in Foley Square, the appeals from the final decisions of CIT go not to that court but to the Federal Circuit in Washington, D.C., and ultimately can reach the Supreme Court.
Since the geographical jurisdiction of the court extends throughout the United States, the judges of the court are assigned, as needed, to preside at trials at any place in the United States in the appropriate United States Courthouse. When a judge of the court conducts a trial outside New York City, the clerk of the district court in that judicial district may act as clerk of the CIT for that case, including selecting and summoning the jury.
The CIT possesses limited subject matter jurisdiction. It may hear only cases involving particular international trade and customs law questions. For example, the CIT hears disputes involving determinations made by the U. S. International Trade Commission and the Department of Commerce’s International Trade Administration regarding anti-dumping and countervailing duties (imposed when a foreign producer sells a product in the United States at a price that is below that producer’s sales price in its home market), protests filed with U.S. Customs and Border Protection regarding classification of goods and imposition of duties, decisions regarding Trade Adjustment Assistance by the U. S. Department of Labor or U.S. Department of Agriculture for workers and sectors injured by increased imports, and customs broker licensing. An exception to the CIT’s jurisdiction arises under the 1994 North American Free Trade Agreement, whereby in cases involving antidumping and countervailing duties imposed on Canadian or Mexican merchandise, an interested party can request that the case be heard before a special ad hoc binational panel.
In addition to specified types of international trade cases, the CIT has residual, exclusive authority to decide any civil action against the United States and its agencies or officers that arises from any law pertaining to international trade. Because the CIT possesses all powers in law and equity of, or as conferred by statutes on, a U.S. District Court, the CIT may grant any relief appropriate to the particular case before it, including, but not limited to, declaratory and monetary judgments, writes of mandamus, and preliminary or permanent injunctions. The CIT also has exclusive subject matter jurisdiction of certain civil actions brought by the U.S. Government under the laws governing import transactions, as well as counterclaims, cross-claims and third party actions relating to cases pending in the Court.
A few examples:
Is a Dixon Ticonderoga pencil manufactured by an American company – such that Dixon Ticonderoga can challenge a Chinese manufacturer on the basis that it is dumping pencils on the American market – that is, at less than fair value to the detriment of American business? The Chinese company said “no,” alleging that Dixon Ticonderoga is a Chinese manufacturer with no standing to sue under American laws. See https://www.cit.uscourts.gov//SlipOpinions/Slip_op17/17-11.pdf
A surety company that issued bonds to multiple importers to duties imposed under the United States’ custom laws, on entries of the importers’ goods into the national commerce, challenges the U.S. Customs agency’s demands for payments on the bonds. The surety alleges that defects in the bond forms void the bonds. The U.S. Government, on behalf of Customs, opposes these contentions, and argues that the bonds are valid, and that sovereign immunity bars the surety’s defensive theory that its obligations are discharged because its surety rights have been impaired. See https://www.cit.uscourts.gov//SlipOpinions/Slip_op17/17-103.pdf
Does the automatic stay in bankruptcy under the bankruptcy code stay a civil penalty action brought by the United States against the bankrupt party for alleged fraudulent representations made in the course of importing goods into the commerce of the country?
How should food casings composed of both textile and plastic be classified under the Harmonized Tariff Schedule of the United States for determining what tariff rate should apply to their importation? Millions of dollars hang in the balance.
These are all questions that have come before more me during this past, inaugural year on the court. We see the full panoply of complex matters – including administrative agency action, statutory interpretation, standing issues, contracts, insurance, sufficiency of evidence, and the intricacies of foreign institutions and practices. The menu of the issues, although more specialized than the diverse range presented by the general jurisdiction of the Massachusetts Appeals Court, are nearly always challenging. The quality of the lawyering is generally excellent, with appearances by many of the large firms and boutique firms specializing in international trade; the U.S. Department of Justice appears in every case on behalf of the Department of Commerce. There is a civility among the bar that is impressive.
Although our cases can include jury trials (such as a battle of experts in a customs classification case where the essence of a good is in controversy), the great bulk of our work is judicial review of administrative action – that is, appeals from agency decisions. In this respect, the work is the work of an appellate judge, and not really different from adjudication on the Appeals Court. Of course, one important distinction is that while an Appeals Court judge must persuade two other panelists comprising the three judge panel, on the CIT, with the exception of cases raising constitutional or vital public policy issues, we each sit alone. On the Appeals Court, there is a great volume of cases, and typically, for those cases that are argued, not more than thirty minutes is allotted to a case. On the CIT, while the volume is less, the records in each case are huge and the multiple issues raised by each case are complex. In this respect, the cases are akin in size to antitrust or multidistrict litigation. I have adopted the practice of some of my colleagues of sending counsel, at least two weeks in advance of argument, the many questions I will ask at oral argument. It is not uncommon for the arguments in a case to last two or three hours, but because the parties have the benefit of the questions and the ensuing discussion is truly a search to address challenging legal questions or to elucidate the record, the time flies. I have found that sending the questions in advance removes the “gotcha” quality of argument and truly advances the dialogue between the court and counsel. In retrospect, I have thought of some cases during my tenure on the Appeals Court when such a practice would have been beneficial to the process of decision.
As on the Appeals Court, on the CIT, the ultimate judicial product in a case is the opinion. On the Appeals Court, my view was that the decision should be understandable not only to the experienced litigator but to those unschooled in the law. So too on the CIT, my goal is to produce opinions which strip away the legal jargon and demystify the complex international trade cases that affect in a very real way the every day quality of life in this country.
Reminiscing about his service on the First Circuit, at my investiture Justice Breyer noted the longstanding connection to the First Circuit established by the CIT judges who sat by designation. Other judges and practitioners have remembered the CIT judges who have sat in the District Court in Boston over the years. Beyond that, the CIT, as constituted by a single judge, has sat in Boston in the adjudication of cases under the court’s jurisdiction. The relationship between the court and the Massachusetts legal community has been historic. May it continue to thrive.
Judge Katzmann is a Judge on the United States Court of International Trade. He previously served as an Associate Justice of the Massachusetts Appeals Court. He is a former member of the BBJ Board of Editors.
Massachusetts Appeals Court Permits Claim for Breach of Fiduciary Duties Against Company Counsel by Minority LLC MembersPosted: February 2, 2018
by Michael Cohen and William Cushing
In Baker v. Wilmer Cutler Pickering Hale and Dorr LLP, 91 Mass. App. Ct. 835 (2017), decided this past July, the Massachusetts Appeals Court allowed the minority members of a Massachusetts limited liability company to sue the LLC’s outside counsel for breach of fiduciary duty relating to counsel’s involvement in an alleged “freeze-out” scheme that benefited the majority members. Although the Supreme Judicial Court had previously held that counsel to closely-held corporations may owe fiduciary duties to individual stockholders, Baker is the first case in which a Massachusetts appellate court has permitted a claim for breach of fiduciary duty to proceed against outside company counsel by minority owners. Corporate lawyers should be acutely aware of the Baker decision and its implications.
The factual allegations relating to the underlying dispute that are set out below come from the plaintiffs’ complaint, as related by the Appeals Court’s opinion.
Elof Eriksson and W. Robert Allison formed Applied Tissue Technologies LLC (“ATT”) as a Massachusetts LLC in early 2000, at which time they were issued seventy-five and twenty-five percent membership interests in the company, respectively. (Both Eriksson and Allison later assigned portions of their interests to family trusts, and a former key employee was granted a small interest in ATT.)
In 2003, ATT adopted an amended operating agreement which provided, among other things, that (a) the members have exclusive management control over ATT, which they exercise by votes in proportion to their percentage interest in the company, (b) the agreement cannot be amended unless both Eriksson and Allison agree in writing, (c) the proportion of net profits to which each member is entitled cannot be reduced or diluted without that member’s consent, (d) if any member chooses to provide additional funds to the company, those advances are treated as loans for which ATT will pay interest at the prime rate, and (e) all members owe each other a duty of utmost loyalty and good faith in the conduct of ATT’s affairs.
By early 2012, ATT was facing financial difficulties, and Eriksson and Allison could not agree on how to address ATT’s challenges. Eriksson was willing to contribute capital in exchange for additional equity in the company, while Allison wanted outside investment and a new management team.
Around this time, company management urged Eriksson to gain “control” of the company. Eriksson reached out to his daughter, an associate at a Boston law firm, who in turn connected her father with a partner at the firm who had experience working with emerging companies. In February 2012, ATT’s chief executive officer signed an agreement to engage the law firm as company counsel. The agreement expressly provided that the law firm would represent ATT, and would not represent any individual members of ATT. Shortly thereafter, the law partner relocated his practice to another law firm, which provided ATT with a substantially similar engagement letter to represent only the company.
At the request of Eriksson and management, ATT’s outside lawyers initially drafted a plan to buy out Allison’s minority membership interests, along with an email that Eriksson would send making the buyout offer to Allison. Allison rejected the offer and responded that he wished to work to maximize ATT’s value for a more favorable exit down the road. He also reminded Eriksson of the minority protections in the ATT operating agreement and suggested that all members meet to address the issues facing the company. Soon after receiving Allison’s response, Eriksson and ATT’s outside lawyers prepared an alternative plan to forcibly remove the minority member protections by using General Laws chapter 156C, section 60, which authorizes a Massachusetts LLC to merge with another business entity (in this case, a Delaware LLC specifically created to facilitate the “freeze-out”) upon the vote of a simple majority of the members unless the company’s operating agreement provides otherwise. Because ATT’s operating agreement was silent about a member’s rights in connection with a merger, ATT could be merged into the new entity by a simple majority vote, thereby depriving the minority members of the protections for which they had previously bargained. ATT’s lawyers advised management that the merger would eliminate Allison’s “ability to interfere with company operations” and that, over time, the company could reduce Allison’s interest to “a smaller and smaller ownership position.”
Having accomplished everything necessary to effectuate the plan, Eriksson and company management met with Allison and informed him of the merger. They advised Allison to contact the company’s lawyers if he wanted copies of the new operating agreement and other company documents for the surviving entity. Over the ensuing months, the new Delaware LLC issued additional preferred interests to Eriksson and management, substantially reducing the interests of Allison and the other minority members in the surviving company.
In May 2015, Allison and the company’s other minority members sued, among others, the law firms that had acted as outside counsel to the company, along with the individual attorneys who had advised Eriksson and company management, alleging, among other claims, breach of fiduciary duty. The Superior Court dismissed the fiduciary duty claim and Allison and other minority members appealed.
Massachusetts law has long provided enhanced protections to minority shareholders in closely held corporations. In Donahue v. Rodd Electrotype Co. of New England, Inc., 367 Mass. 578, 593 (1975), the SJC held that shareholders in a closely held company owe each other a fiduciary duty of utmost good faith and loyalty, akin to the duties owed among partners in a partnership. And, in Schaeffer v. Cohen, Rosenthal, Price, Mirkin, Jennings & Berg, P.C., 405 Mass. 506, 513 (1989), the SJC observed that “there is logic in the proposition that, even though counsel for a closely held corporation does not by virtue of that relationship alone have an attorney-client relationship with the individual shareholders, counsel nevertheless owes each shareholder a fiduciary duty,” though the SJC’s decision in Schaeffer did not require it to determine that issue.
In Baker, the Appeals Court invoked a decision of the Michigan Court of Appeals holding that the lack of an attorney-client relationship between a fifty percent shareholder in a closely held professional corporation and counsel for the corporation did not necessarily preclude a fiduciary relationship between the shareholder and corporate counsel. Baker, 91 Mass. App. Ct. at 843-44 (citing Fassihi v. Sommers, Schwartz, Silver, Schwartz & Tyler, P.C., 107 Mich. App. 509, 309 N.W.2d 645 (1981)). Rather, a fiduciary relationship may arise when “one reposes faith, confidence, and trust in another’s judgment and advice,” and the existence of that relationship is largely a question of fact. Id. (quoting Fassihi, 107 Mich. App. at 514-15).
The Appeals Court observed that the defendants in Baker undertook their representation of ATT “with full knowledge” of the protections that the operating agreement afforded the minority members, that they “knew, or should have reasonably foreseen” that company counsel was “constrained by the operating agreement, and the consensual decision-making it imposed on important matters,” and that counsel could not act “in concert with the majority members, for the very purpose of eliminating those protections.” The court also noted counsel’s “purposeful steps” to conceal their activities from the minority members, even though the minority members “should have been able to repose trust and confidence that any counsel hired by the company would have communicated and consulted with them prior to undoing [the minority] protections.” Noting that the existence of a fiduciary relationship “is largely a question of fact,” the Appeals Court could not conclude that the defendant attorneys owed no fiduciary duty to the minority LLC members in this case based on the facts alleged in the complaint. Accordingly, the court reversed the dismissal of the complaint and remanded the case to the Superior Court so that the lawsuit could proceed. The defendants did not file a petition for further appellate review in the SJC.
The Baker decision yields at least two crucial practice points for attorneys working with LLCs and other closely held companies:
- Respect the Role of Company Counsel, and Remain Faithful to Your Client
An attorney retained by a corporation represents the corporate entity, not its shareholders, members, officers, employees, directors, or other constituents. Cf. Mass. R. Prof. Conduct 1.13(a) (attorney represents the organization), 1.13(f) (attorney shall explain identity of client to organization’s constituent with whom he is dealing if organization’s interests are adverse to that person). The corporate attorney may also represent a corporate constituent, but counsel must address potential conflicts of interest in accordance with the dual-representation rules. Mass. R. Prof. Conduct 1.13(g) (referring to Mass. R. Prof. Conduct 1.7). Attorneys engaged as company counsel owe allegiance to the entity, and they should be mindful of potential conflicts of interest involving those persons giving instructions and of the ways in which the interests of the entity and (all of) its owners may differ from the interests of those directing company counsel. The defendant lawyers in Baker would have been wise to suggest that Erikkson and management retain separate counsel to address personal interests.
- Respect Negotiated Contractual Rights
The members of ATT had agreed upon a set of rights intended to ensure that all members moved together, and they provided in the operating agreement that these rights could be varied only by express agreement of the members. The Appeals Court took a dim view of the use of a merger transaction, orchestrated by company counsel, to involuntarily deprive the minority LLC members of those rights, notwithstanding that the operating agreement did not expressly prohibit a merger or impose enhanced approval requirements in connection with a merger. Company counsel should ensure that advantageous contractual rights are changed only through a process that respects the “faith, confidence and trust” that members of an LLC may repose in company counsel.
Michael J. Cohen is a Partner in Brown Rudnick LLP’s U.S. Corporate and Capital Markets practice group, and is based in the firm’s Boston office. Michael represents early stage and mid-market companies in connection with mergers and acquisitions, joint ventures and strategic alliances, financing transactions and general corporate and commercial matters at all stages of the corporate life cycle. Michael also advises venture capital and private equity funds and would-be portfolio companies in connection with deal terms and transaction structuring.
William T. Cushing is an Associate in Brown Rudnick LLP’s U.S. Corporate and Capital Markets practice group, and is based in the firm’s Boston office. While at Boston University School of Law, Will was an Executive Editor for the Review of Banking & Financial Law. In 2014, Will worked as a legal Intern at the Massachusetts Attorney General’s Office in the Gaming Division.