ERRINGTON A. BRIGHAM & another vs. M & J CORPORATION & others.

SPIEGEL, J. This is a bill in equity in which the plaintiffs seek to enjoin the defendant H. Arthur Sweatt, administrator of the estate of Herbert A. Sweatt, from transferring "or in any manner dealing with" a number of shares of stock in the defendant M & J Corporation (Corporation) "standing in the name of . . . Herbert A. Sweatt, deceased." They also seek to have these same shares transferred to the Corporation upon the payment of a certain sum in ten equal installments. The trial judge made a "Report of Material Facts, Rulings, and Order for Decree."

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A final decree was entered ordering the defendant H. Arthur Sweatt, as administrator, to deliver to the Corporation 29.5 shares of stock upon payment by it of $15,789.88 with interest at four per cent on the total purchase price from December 5, 1963, to the date of payment; and to deliver "also another 29.5 shares of said stock upon payment by said Corporation of the installment of $15,789.88 due on December 5, 1964, together with interest . . . on the total agreed purchase price of $157,898.75 from December 5, 1963, to the date of payment; and on December 5, 1965, and on each succeeding December 5 until all 295 shares have been transferred." The decree also provided that "Until default by said M & J Corporation in the payment of any of said installments, the . . . [defendant] H. Arthur Sweatt . . . is permanently enjoined from voting any of said 295 shares . . . in such a way as to derogate in any way from said agreement of October 22, 1938. Until default by said M & J Corporation in the payment of any of said installments, the . . . [defendant] H. Arthur Sweatt . . . is permanently enjoined from selling, transferring, hypothecating or in any way disposing of the stock . . . except to transfer it to said M & J Corporation." [Note 1]

The plaintiffs and the defendant H. Arthur Sweatt appealed from the decree. The evidence is reported.

The judge found the following facts. The Corporation is the successor to the corporation known as G. C. Prince & Son, Inc., incorporated on January 14, 1908. The "[C]orporation had capital stock consisting of 565 shares with no par value, of which 472 shares were outstanding and 93 shares were in the treasury . . . and not outstanding." The 472 shares were "held on the books of the [C]orporation in the names of Herbert A. Sweatt, 295 shares; Jennie C. Sweatt, 1 share; Errington A. Brigham, 175 shares; Mildred C. Brigham, 1 share."

On October 22, 1938, an agreement was entered into by Arthur D. Prince Herbert A. Sweatt, Errington A. Brigham,

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Robert G. Dudley, and G. C. Prince & Son, Inc. This agreement provided for the purchase of stock held by the individuals heretofore named upon the death of these individuals in a manner set forth under paragraph 3 of the agreement. [Note 2] Herbert A. Sweatt died on or about December 5, 1963, and his son, H. Arthur Sweatt, was appointed administrator of his estate.

The "parties . . . agreed that the value of each share of stock of . . . [the] [C]orporation is $535.25. At a subsequent meeting of the [C]orporation and a subsequent meeting of the Board of Directors, it was voted to purchase the stock . . . of Herbert A. Sweatt pursuant to the terms of the agreement dated October 22, 1938 at a price of $535.25."

On December 1, 1964, a check for $22,105.83 was sent to H. Arthur Sweatt, administrator, in payment of ten per cent of the shares held in the name of Herbert A. Sweatt. H. Arthur Sweatt has not cashed this check and refuses to transfer any of the stock. He "wants to be paid for the entire amount of the shares of stock in one lump sum and not in 10 equal installments."

The judge ruled "That [p]aragraph 3 . . . [of the agreement] contains language that is mandatory wherein the word `shall' is used and that the paragraph may not be waived by the . . . [defendant] H. Arthur Sweatt." He also ruled that "the agreement dated October 22, 1938, is valid and binding upon all the parties"; that the stock is to be paid for in "10 equal installments [in] the amount heretofore agreed by the parties with interest at the rate of 4 per cent; . . . and . . . that . . . H.Arthur Sweatt . . . shall only transfer 10 per cent of the total shares of stock to the [C]orporation upon receipt of the check in payment for the same." The judge also ruled that the Corporation

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shall pay to the administrator of the estate in "9 other equal installments the sum of $15,789.88 with interest on the unpaid balance then remaining due at the rate of 4 per cent per annum."

THE DEFENDANTS APPEAL.

1. The defendant first argues that the plaintiffs "are not the proper parties to bring this action." He argues that "Once it became known that Errington A. Brigham (Errington) was the survivor, any apparent contract between him and the [C]orporation became illusory. Neither he nor the [C]orporation was bound to do anything with respect to each other." He further argues that a contract "never existed . . . between Errington . . . and the defendant's] intestate . . . which was intended to confer mutual rights enforceable by either against the other." We do not agree.

The contract states that it is made "between and among" all of the parties thereto, and recites that the "named individuals are all of the stockholders of the Corporation and desire to arrange for the purchase of their shares by the Corporation in the event of their respective deaths." We think it is clear that the purpose of the agreement is not only to benefit the shareholder who dies by providing a market for the disposition of his shares, but also to benefit the surviving shareholders by assuring them that the shares of the Corporation would continue to be closely held. Contracts of this kind among shareholders of closely held corporations are common and the purposes of such contracts are clear. See Horstein, Stockholders' Agreements in the Closely Held Corporation, 59 Yale L. J. 1040-1041, 1047-1049. The plaintiffs were entitled to enforce the contract against the defendant. See New England Trust Co. v. Spaulding, 310 Mass. 424, 429; Winchell v. Plywood Corp. 324 Mass. 171, 178.

We do not agree with the defendant's related argument that this suit is really for the benefit of the Corporation, in the nature of a minority shareholders' derivative suit, and

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hence the Corporation should have been joined as a party plaintiff. Compare Bartlett v. New York, N.H. & H. R.R. 221 Mass. 530, 532.

The defendant also contends that "justice and equity require that the [C]orporation be bound by the final decree." The judge did rule that the agreement was "valid and binding on all the parties" and that "the [C]orporation shall pay to . . . [the defendant] in 9 other equal installments the sum of $15,789.88 with interest on the unpaid balance." In the final decree the delivery of the shares by the defendant was conditioned upon the payment by the Corporation of the instalment due. In view of our other modifications of the decree set out below we agree with the defendant that the Corporation should also be bound by the final decree and the decree should be modified accordingly. See Andersen v. Albert & J.M. Anderson Mfg. Co. 325 Mass. 343, 347.

2. The defendant next argues that "[t]he agreement does not require a decree for specific performance over a ten-year period." He characterizes the instalment method of payment set out in the agreement as "procedural," not mandatory. We do not agree. The terms of payment set out in the contract were as definite and binding as the agreement to buy and sell. This is not a case such as Blabon v. Hay, 269 Mass. 401, cited by the defendant, in which the corporation was given an option of first refusal. There was no error in enforcing the terms of payment set out in the contract.

3. The third ground of appeal of the defendant is the alleged denial by the judge of his "right to vote his intestate's stock until it is transferred to the [C]orporation." He argues that "[u]ntil the transfer of stock to the [C]orporation, the right to vote his intestate's shares is in the" defendant.

But the judge restrained the defendant only from voting the shares "in such a way as to derogate in any way from" the agreement. Furthermore, in view of our holding below, the manner in which the defendant might vote his intestate's shares is moot.

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4. The defendant also maintains that the case of Albert E. Touchet, Inc. v. Touchet, 264 Mass. 499, controls the instant case and requires a holding that "the . . . [plaintiffs], by their conduct, have forfeited the right to specific performance." In the Touchet case the corporation was given the right of first refusal to purchase the shares of a deceased shareholder. By leaving such an option in the corporation the parties to that agreement must have contemplated that the holders of a majority of shares, even the representatives of the estate of a deceased shareholder, could exercise their power to prevent the purchase of such shares by the corporation. In the instant case the agreement to buy and sell the stock was, by its terms, mandatory. The defendant was not entitled to exercise his power as a majority shareholder to abrogate the clear mandate of the agreement.

5. It is also contended by the defendant that "[i]n order to justify a decree of specific performance, the burden is on the . . . [plaintiffs] to prove that the [C]orporation can purchase its own shares without prejudice to its stockholders and creditors," citing such cases as Winchell v. Plywood Corp. 324 Mass. 171, 178-179. It is true that in the Winchell case we stated on page 178, that "[w]hile . . . the law in this Commonwealth is settled that a corporation may purchase its own stock, it has been assumed in some of our decisions that this can be done only if there is no prejudice to creditors or stockholders." We note that the defendant in arguing this contention ignores the answer the defendants filed in this suit wherein they state that they were "willing and anxious to sell the stock . . . to the [C]orporation" and that this "would not be to the detriment of the [C]orporation, but on the contrary would be of mutual benefit." This would seem to dispose of any argument that it was necessary for the plaintiffs to prove that the present payment by the Corporation would not be detrimental to the interest of a stockholder or a creditor.

What the defendant really wants is a guaranty that the Corporation will meet its future obligations to him. An

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ordinary instalment creditor has no right to require proof of the ability of his debtor to meet future installments. If the activities of the Corporation amount to fraudulent conveyances, or other fraudulent behavior, there are adequate means of protecting creditors. [Note 3] It seems to us that the defendant in the instant case should be in no better position with respect to the Corporation than any other creditor. The interest of a creditor in seeing that the Corporation is not rendered insolvent by distributions to shareholders is protected by G. L. c. 156B, Section 61. [Note 4] We need not now decide the question as to whether the insolvency test of this section could be applied to each payment by the Corporation under the instalment stock repurchase agreement. See Herwitz, Instalment Repurchase of Stock: Surplus Limitations, 79 Harv. L. Rev. 303, 309. The purpose of the statute is to prevent distributions to stockholders such as the defendant which would be prejudicial to creditors of a corporation. The possibility that the defendant may be harmed in the future by the operation of this statute does not entitle him to receive special treatment.

THE PLAINTIFFS' APPEAL.

1. The final decree calls for interest to be paid annually on the total agreed price of $157,898.75 instead of upon the unpaid balance, as set out in the judge's report. We agree with the plaintiffs that "the decree should provide for interest only on the unpaid balance" and the decree should be modified accordingly.

2. The agreement is silent as to the time at which the shares are to be transferred to the Corporation. However, it does provide that the individual parties "agree for themselves and for their heirs, executors and administrators to sell, and the Corporation agrees to buy such shares of the

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Corporation as shall be registered in the name of such individuals at the time of their respective deaths." Paragraph 3 of the agreement provides only that the "Corporation shall pay the purchase price . . . in ten equal annual installments." No similar provision is made for the transfer of the stock in ten equal annual installments. It was within the power of the parties to secure the performance by the Corporation of its obligation to make annual instalment payments for the stock, but the agreement is utterly devoid of such a provision. We are of opinion that all of the shares were to be delivered to the Corporation upon its tender of the first instalment.

We are not impressed with the defendant's argument that his "position as a fiduciary appointed by the Probate Court should be considered." Forbes v. Allen, 240 Mass. 363, 366, cited by the defendant, is not in point. The defendant here is being asked to perform a contract of his intestate according to its terms, not to compromise the terms of a contract, as the fiduciary in the Forbes case did. Nor do we think it is inequitable or unfair to enforce this contract according to its terms. The ease with which a provision could have been inserted in the agreement which would have required the Corporation to furnish security for the payment of the stock to the estate of a deceased stockholder is a strong indication that the parties had no such intention.

3. The decree is to be modified by (1) providing that interest shall be payable only on the unpaid balance of the agreed price for the stock, (2) ordering the Corporation to pay the annual installments as they fall due, with interest as herein provided, and (3) ordering that the defendant forthwith transfer to the Corporation all shares held by him as the representative of the estate of the deceased stockholder and, as so modified, is affirmed.

So ordered.