Preview:

Supreme Court No. 2010-372-Appeal. (KC 03-612)

Charles Takian et al. v. Ralph Rafaelian et al. v. Charles Takian et al.

: : : : :

NOTICE: This opinion is subject to formal revision before publication in the Rhode Island Reporter. Readers are requested to notify the Opinion Analyst, Supreme Court of Rhode Island, 250 Benefit Street, Providence, Rhode Island 02903, at Tel. 222-3258 of any typographical or other formal errors in order that corrections may be made before the opinion is published.

Supreme Court No. 2010-372-Appeal. (KC 03-612) (Concurring and dissenting Opinion begins on page 18) Charles Takian et al. v. Ralph Rafaelian et al. v. Charles Takian et al. : : : : :

Present: Suttell, C.J., Goldberg, Flaherty, and Robinson JJ. OPINION Justice Flaherty, for the Court. "In the business world, the rearview mirror is always clearer than the windshield." 1 This dispute springs from the remnants of a potentially fruitful business relationship that rapidly turned sour. The plaintiffs, Charles and Marguerite Takian, and the defendants, Ralph and Lucia Rafaelian, together purchased property in South Kingstown that included a motel, a restaurant, and a trailer park. 2 The couples formed Lumar Realty Corporation to manage the property, and the plaintiffs agreed to run the businesses situated on it. In 2002, the relationship between the plaintiffs and the defendants began to deteriorate because

1 2

Warren Buffet. The plaintiff Randolph Takian was not involved in the original purchase of the property or the creation of the corporation. -1-

the defendants believed that the plaintiffs were mismanaging the businesses, and the defendants decided to sell their interest to the plaintiff's son, Randolph. As part of the sale, the defendants signed a release absolving the plaintiffs from "any and all claims arising out of the ownership of the property and operation of the business." After the sale, defendants continued to feel unsettled about how the business had been operated. They investigated further and alleged to have discovered facts that suggested far more serious misdeeds in the management of Lumar. It was plaintiffs, however, that initiated legal action. They filed an action for declaratory relief, in which they sought a ruling that the release that had been executed by defendants contemporaneous with the sale barred any further claims. The defendants counterclaimed, both on behalf of themselves and derivatively on behalf of the corporation, alleging a torrent of claims, including embezzlement, misrepresentation, misappropriation, and loss of corporate opportunity. A justice of the Superior Court granted summary judgment in favor of plaintiffs, after he found that the release was both valid and effective against both defendants and the corporation. This appeal ensued. On March 6, 2012, the parties appeared before this Court for oral argument based on an order directing the parties to show cause why the issues raised by defendants' appeal should not be decided summarily, without further briefing or argument. After considering the record, the memoranda submitted by the parties, and the oral arguments advanced by each, we are of the opinion that cause has not been shown and that the appeal should be decided at this time. For the reasons set forth in this opinion, we affirm in part and vacate in part the judgment of the Superior Court, and remand the matter for further proceedings not inconsistent with this opinion.

-2-

I Facts & Travel In 1986, plaintiffs and defendants purchased property located at 836 Matunuck Road in South Kingstown, Rhode Island; there were three businesses on the property: the Blackbeard Ocean View Hotel, a small restaurant, and a trailer park. Each couple contributed a $25,000 downpayment to the purchase price and each owned a 50 percent interest in the property. 3 According to defendants, there was a quid pro quo agreement between the parties; defendants would finance the remainder of the purchase price if plaintiffs would operate the business. To effectuate their intent, the parties formed Lumar Realty Corporation. The corporation's stated purpose was to manage the hotel and real estate operations, which included the sale and rental of space for trailers and the maintenance of the property. Significantly, no stock was issued by the corporation at the time of its formation. Despite the existence and stated purpose of Lumar, it is unclear from the record whether the corporation was continuously used to manage the businesses. For instance, letters to the trailer park tenants from the early 1990s ask the tenants to make their rent checks payable to Lumar Realty Corp., but subsequent letters from the mid-to-late 1990s ask the tenants to make their checks payable to Charles Takian. Lumar entered into lease agreements with trailer-park tenants as lessor, but at no time did the corporation own any of the property. In 2000, Lumar's corporate charter was revoked for failure to file an annual report with the secretary of state, but defendants had the charter reinstated in 2003. Additionally, it is undisputed that although the

3

The balance was paid for with loans from defendants' children, who held a promissory note and mortgage on the property. In addition, defendants maintain they periodically loaned Lumar additional money. -3-

corporate charter authorizes the issuance of 600 shares of stock, Lumar did not issue any stock until 2005, when defendants issued fifty shares each to themselves. The defendants contend that a series of revelations about the corporation's businesses led to the deterioration and eventual dissolution of their relationship with plaintiffs. First and foremost, the businesses did not appear to be profitable or even capable of meeting their operating costs. The defendants assert that they received a notice from the fire district that the property was subject to a tax sale because of unpaid taxes. A liability insurance cancellation notice was also issued. Furthermore, when defendants visited the property, they found it to be in "deplorable condition." Thus, defendants decided to bring their involvement in this venture to an end by selling their interest to plaintiffs. The defendants hired an accountant, Mark Provost, C.P.A., to review Lumar's records in preparation for the sale. The records showed that "shareholders" had loaned Lumar $145,673, which had been placed into a "loan account." Based on his review, however, Provost concluded that $94,961 had been withdrawn from that account over time. The defendants alleged that these withdrawals represented "actual distributions" of money and that because they received no money, plaintiffs must have improperly kept the proceeds entirely for themselves. Conversely, an accountant retained by plaintiffs to inspect the corporation's finances testified at a deposition that the loan account was used when he compiled Lumar's annual tax returns as a "balancing account" to balance the corporate check book at the end of the year. He illustrated this purpose using the following example: If the checking account had a balance of $5,000 at the beginning of the year, and the corporation had a net profit of $10,000, but at the end of the year the account's balance was only $8,000, then he would debit the shareholder loan account $7,000 to balance the

-4-

checking account. The defendants argued that this was merely an artifice to cover up the plaintiffs distributions of corporate funds to themselves. Upset by these revelations, Ralph Rafaelian authored a memorandum, which he sent to plaintiffs, that summarized his understanding of the loan account, the distributions from that account he believed he and his wife were entitled to, and additional compensation he believed they were owed because of plaintiffs' general mismanagement of the property over the years. After detailing the basis for defendants' grievances against Charles and Marguerite Takian, the memorandum concluded with an ultimatum; in addition to a purchase price, it demanded a separate $100,000 payment to them from Charles and Marguerite. Concluding, Ralph threatened that if plaintiffs did not agree to such a payment, "the deal is terminated" and defendants will conduct "a full audit and let the `chips fall.'" The plaintiffs agreed immediately to the $100,000 payment, and they delivered a promissory note through Randolph to defendants. The plaintiffs' riposte came in the form of a "joint and mutual release and indemnity agreement." The agreement says, in relevant part, "The Takians and Rafaelians hereby mutually release one another from any and all claims arising out of the ownership of the property and operation of the business." Additionally, plaintiffs agreed to "defend, indemnify, and hold harmless the Rafaelians from any and all liability arising out of the parties ownership of the property and operation of the business * * *." All the parties, including Randolph, signed the agreement and the sale was consummated in August 2002. At all times during the closing, the Rafaelians were represented by counsel. In 2003, plaintiffs sold the campground to the Blackbeard Housing Association, an organization that had been created by the property's tenants, for $1.4 million. It is noteworthy that in July 2002, a tenant named Donald Tatro had approached Lucy Rafaelian and told her that

-5-

the tenants were interested in purchasing the property; she responded by telling them to come back with an offer of more than $1 million. The defendants say that Charles Takian became aware of the offer and threatened the tenant spearheading the effort to buy the property by "screaming and hollering" that he would handle any negotiations and that "in no uncertain terms" he was not to speak to Lucy. Lucy received no further calls from the association before defendants' sale of their interest to Randolph Takian. Even after severing their ties to the property and ending their business relationship with plaintiffs, defendants continued to investigate plaintiffs' management of Lumar. Eventually, they came to believe that plaintiffs were guilty of more nefarious wrongdoings than they originally had suspected. Both plaintiffs and defendants filed miscellaneous petitions for

discovery in the Superior Court, in which they sought each other's financial records. After it came to light that the trailer-park tenants' checks had been deposited into plaintiffs' personal bank account, plaintiffs, in a preemptory strike, sought a declaratory judgment that the releaseand-indemnity agreement executed in connection with the sale was valid and that it barred any further claims by defendants. In response, defendants filed a plethora of counterclaims. 4 The plaintiffs filed a motion for summary judgment, and a hearing was held before a justice of the Superior Court on June 14, 2010. After considering the arguments of the parties, To enhance the clarity of our analysis, we summarize defendants' counterclaims as follows: (1) derivative action by Rafaelians as shareholders of Lumar against Charles and Marguerite Takian; (2) intentional faud against Charles and Marguerite Takian; (3) negligent misrepresentation against Randolph Takian; (4) fraudulent inducement against Charles, Marguerite, and Randolph Takian; (5) breach of fiduciary duty against Charles and Marguerite Takian; (6) breach of implied covenant of good faith and fair dealing against Charles, Marguerite, and Randolph Takian; (7) loss of business opportunity against Charles, Marguerite, and Randolph Takian; (8) fraudulent inducement to sell interest in real estate against Charles, Marguerite, and Randolph Takian; (9) abuse of process against Charles, Marguerite, and Randolph Takian; (10) violation of the Rhode Island R.I.C.O. Act against Charles, Marguerite, and Randolph Takian; (11) conspiracy to violate the R.I.C.O. Act against Charles, Marguerite, and Randolph Takian. -64

the motion justice found that the release was valid and that it barred both the personal claims of defendants and their derivative claims on behalf of Lumar. In reaching this conclusion, the motion justice found that the prima facie requirements for a valid release were present: plaintiffs provided consideration for the release, and each of the parties was represented by counsel. With respect to defendants' direct claims, he found that defendants were "experienced business owners" who owned a jewelry company and that they were "not novices in matters of business." In ruling that the release should not be set aside based on fraud or misrepresentation, the motion justice found that when defendants signed the release, they had at least some knowledge not only of plaintiffs mismanagement of the business, but also of more serious illegal conduct. He declared that "a person is not deceived who knows himself to be deceived," and he based that conclusion largely on the ultimatum contained in defendants' memorandum to plaintiffs, which alluded to conducting a full audit. He found that the ultimatum made clear that plaintiffs could have pursued the matter further, but were choosing instead to "make peace" and be done with the matter. With respect to defendants' derivative claim, the motion justice ruled that the release was equally operative against Lumar. First, he found that defendants' counterclaim on behalf of Lumar did not comport with the requirements of Rule 23.1 of the Superior Court Rules of Civil Procedure because defendants were not shareholders at the time of the alleged improprieties. Additionally, he noted that Lumar's charter had been revoked in 2000 and was not reinstated until 2003. He also found it significant that "all the officers, directors, [and] shareholders participated, made peace, settled, and released each other from all claims." He concluded that defendants' argument was therefore "hyper-technical" and did not "do justice to the

-7-

circumstances."

Accordingly, he found that defendants could not maintain any of their

derivative claims, and he granted summary judgment in favor of plaintiffs. 5 Lastly, the motion justice concluded that defendants also had presented no evidence to support their claims against Randolph Takian. He found that defendants could point to nothing in the record showing that they reasonably relied on any representations made by Randolph. Conversely, he found that Ralph Rafaelian admitted in his deposition testimony that he did not rely on Randolph at all and had no relationship with him. Therefore, he found in favor of plaintiff on those claims. II Standard of Review "It is a fundamental principle that `[s]ummary judgment is a drastic remedy, and a motion for summary judgment should be dealt with cautiously.'" Employers Mutual Casualty Co. v. Arbella Protection Insurance Co., 24 A.3d 544, 553 (R.I. 2011) (quoting Estate of Giuliano v. Giuliano, 949 A.2d 386, 390 (R.I. 2008)); McPhillips v. Zayre Corp., 582 A.2d 747, 749 (R.I. 1990) (citing Commercial Union Companies v. Graham, 495 A.2d 243 (R.I. 1985); Rustigian v. Celona, 478 A.2d 187 (R.I. 1984); Steinberg v. State, 427 A.2d 338 (R.I. 1981)). This Court "review[s] the granting of a motion for summary judgment de novo." Zanni v. Voccola, 13 A.3d 1068, 1070 (R.I. 2011). In so doing, we follow the same standards and criteria as the trial justice. Id. This Court will affirm a trial justice's ruling that grants a party summary judgment "if there exists no genuine issue of material fact and the moving party is entitled to judgment as a matter of law." Classic Entertainment & Sports, Inc. v. Pemberton, 988 A.2d 847, 849 (R.I. Final judgment was entered for plaintiffs on August 30, 2010. The defendants did not file their notice of appeal until October 6, 2010, after the window for filing the notice had closed. Nonetheless, as is reflected in an order dated December 9, 2010, the Court decided to treat defendants' notice of appeal as a petition for common-law certiorari and granted the petition. -85

2010) (quoting Lynch v. Spirit Rent-A-Car, Inc., 965 A.2d 417, 424 (R.I. 2009)). "This Court reviews the evidence and draws `all reasonable inferences in the light most favorable to the nonmoving party.'" Id. (quoting Fiorenzano v. Lima, 982 A.2d 585, 589 (R.I. 2009)). "The nonmoving party bears the burden of showing the existence of disputed issues of material fact by competent evidence; it `cannot rest on allegations or denials in the pleadings or on conclusions or legal opinions.'" Zanni, 13 A.3d at 1071 (quoting Classic Entertainment & Sports, Inc., 988 A.2d at 849). III Arguments of the Parties On appeal, defendants argue that the motion justice erred when he granted summary judgment on their direct claims because he made impermissible findings with respect to issues that the parties genuinely disputed. The defendants assert that the motion justice improperly found as a fact that defendants (1) knew about the scope and extent of plaintiffs' misconduct, (2) knew that the Blackbeard Housing Association was willing and able to negotiate about the sale of the property, and (3) that defendants were "sophisticated" businesspeople. The defendants also argue that the motion justice erred as a matter of law with respect to disclosure requirements attendant to plaintiffs' fiduciary duty to defendants. As for their derivative claims, defendants argue that the motion justice erred because he improperly "construed facts and circumstances" when he held that the release applied to Lumar despite the fact that the corporation is not even referred to in the agreement. Additionally, defendants contend that the motion justice erred when he concluded that the reinstatement of a revoked certificate of incorporation does not have the retrospective effect of granting standing to the corporation to sue for wrongs committed during the period of revocation.

-9-

The plaintiffs, on the other hand, argue that the motion justice correctly concluded that the required elements for a release of claims were present. Therefore, they assert, the release was effective to bar all of defendants' direct counterclaims. With respect to the derivative claims, plaintiffs argue that defendants have no standing to bring counterclaims on behalf of Lumar because they were not stockholders at the time of the alleged wrongdoing. IV Analysis A. Appellants' Derivative Claim The motion justice granted summary judgment in favor of plaintiffs on the claims that defendants brought on behalf of Lumar, reasoning that they had not complied with the requirements of Rule 23.1 because they were not shareholders at the time of plaintiffs' alleged misdeeds. Additionally, the motion justice expressed concern about the fact that the secretary of state had revoked Lumar's corporate charter in 2000, that the charter was not reinstated until after the sale, and that the reinstatement was achieved unilaterally by defendants. Moreover, he found it unsettling that a right of action could survive in Lumar, which was a closely held corporation, when all the parties with an interest in the corporation had agreed to the release. After considering the relevant law and the arguments of the parties, we affirm the ruling of the motion justice. Rule 23.1 provides that, in a derivative action by a shareholder, the verified complaint "shall allege that the plaintiff was a shareholder or member at the time of the transaction of which the plaintiff complains or that the plaintiff's share or membership thereafter devolved on the plaintiff by operation of law." The Rhode Island provision is similar to the federal rule, and this Court frequently turns to federal case law for guidance in its interpretation of similar rules of

- 10 -

procedure. See Greensleeves, Inc. v. Smiley, 942 A.2d 284, 290 (R.I. 2007). The primary purpose of the so-called contemporaneous shareholder rule is to "prevent[ ] * * * courts from being used to litigate purchased grievances." 7C Charles Alan Wright et al., Federal Practice and Procedure

Download 10-372.pdf

Rhode Island Law