Liston v. Gottsegen (In Re Mi-Lor Corp.)

United States Court of Appeals
For the First Circuit

Nos. 02-2578, 02-2659

IN RE: MI-LOR CORP.; PROFESSIONAL BRUSHES, INC.,

Debtors.

JAMES M. LISTON; JOHN J. MONAGHAN, as Creditors Trustees,

Plaintiffs-Appellants, Cross-Appellees,

v.

ROBERT GOTTSEGEN; MICHAEL GOTTSEGEN;
LORI GOTTSEGEN ZINMAN; DOROTHY GOTTSEGEN,

Defendants-Appellees, Cross-Appellants.

CROSS-APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Rya W. Zobel, U.S. District Judge]

Before

Boudin, Chief Judge,
Siler,* Circuit Judge,
and Lynch, Circuit Judge

Howard M. Brown, with whom Frank F. McGinn and Bartlett
Hackett Feinberg P.C. were on brief for plaintiffs-appellants,
cross-appellees.
Stephen F. Gordon, with whom Ronald W. Dunbar, Jr., Leslie F.
Su, Gordon Haley LLP and Henry Mark Holzer were on brief for
defendants-appellees, cross-appellants.
 November 3, 2003

_____________________
*Of the United States Court of Appeals for the Sixth Circuit,
sitting by designation.
 LYNCH, Circuit Judge. This case explores the

Massachusetts law of close corporations and the ability of those

corporations to give releases of claims of self-dealing. A jury

found that the defendants, an officer/director and the controlling

shareholders in two close family corporations, had unjustly

enriched themselves from corporate funds in the sum of over

$380,000. This appeal concerns whether that liability was

extinguished by a release in favor of the defendants that was

executed by the corporation and its remaining directors and

shareholders on March 31, 1990, as part of mutual releases given in

connection with a stock redemption of the defendants' shares. If

liability is extinguished, then the plaintiffs, who are creditors

in bankruptcy standing in the shoes of the corporation, cannot

recover on the jury verdict.

The district court did not reach the questions about the

validity and enforceability of the release because it ruled that

the creditors could not assert such claims -- essentially, that

they lacked standing. While that standing analysis has some

attraction, it is ultimately unpersuasive. The questions about the

release will have to be addressed on remand because this record

does not permit their resolution. No Massachusetts case is

directly on point as to the standards to be used. This opinion

attempts to provide guidance for the case on remand, in an area of

law marked by ambiguity and inconsistency.

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 I.

Mi-Lor Corporation was in the business of manufacturing,

distributing, and selling plastic dental and hair products, such as

toothbrushes and combs. The company was formed under Massachusetts

law in 1977 by three family groupings -- the Robert Gottsegen

family, the Stuart Gottsegen family, and the Lawrence Gottsegen

family1 -- and an individual named Larry Wald. Robert was the

president of the company, and he, Stuart, and Wald served as Mi-

Lor's directors. Lawrence was primarily responsible for sales;

Wald was responsible for Mi-Lor's financial operations.

Robert's children, Lori and Michael, and Robert's ex-

wife, Dorothy, were stockholders of the company, as were Stuart,

Lawrence, and Wald.2 Two trusts, one for the benefit of Michael

and one for the benefit of Lori, also owned Mi-Lor stock. Lawrence

was the trustee of both trusts. Although Robert did not own Mi-Lor

stock, he effectively controlled the company in his capacity as the

sole voting trustee of a voting trust that owned sixty-five percent

of Mi-Lor's voting stock. Wald was the only stockholder who was

not a member of the voting trust. The voting trust included all of

the stock held by Dorothy, Lori, Michael, and the two trusts. To

the extent that Robert's interests were aligned with the interests

1
Stuart is Robert's brother and Lawrence is Robert's
cousin.
2
Arthur Gottsegen, John Bambera, and Anthony Glydon were
stockholders initially, but they sold their stock in the 1980s.

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of the other members of his family unit, the Robert Gottsegen group

effectively functioned as one unit in three intertwined capacities:

as the president, as a director, and as the majority shareholder of

Mi-Lor.

Professional Brush, Inc. ("Pro Brush") was formed in 1987

and was in the business of manufacturing, distributing, and selling

toothbrushes and other dental care products. Robert was president

and a director of the company; Lawrence, Stuart, and Wald were the

other directors. Michael and Lori owned Pro Brush stock, as did

Steven Gottsegen, Stuart, and Wald.

In 1989, Robert suffered a heart attack. On March 31,

1990, pursuant to a stock redemption agreement, Mi-Lor redeemed all

of the shares held by Michael, Lori, Dorothy, and the two trusts.

As of the same date, the voting trust was terminated, Robert

resigned as both president and director, and the management of the

corporation changed accordingly.3 As part of the redemption

agreement, in exchange for 2,480 shares of stock and for other

consideration (including "consulting, confidentiality and

noncompetition" agreements with Robert and Dorothy, and

"confidentiality and noncompetition" agreements with Lori and

3
Initially, Wald became president and Lawrence filled the
director position vacated by Robert. Then, after Wald died in
1991, Stuart became president and Steven, Lawrence's son, filled
the vacant director position. After Wald's death, Lawrence
allegedly first discovered and investigated Wald's misuse of
corporate funds. Mi-Lor filed suit in state court against Wald's
estate in July 1992.

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Michael), Mi-Lor assigned to Michael, Lori, Dorothy, and the

trustee of the two trusts the proceeds (totaling approximately $1

million) from the merger of Solo Products, Inc. into Mi-Lor and

granted them entitlements to receive certain other payments.

Also on March 31, 1990, Michael and Lori entered into a

stock redemption agreement with Pro Brush, whereby Michael and Lori

each received twenty-five dollars in exchange for the 625 shares of

Pro Brush stock that each held. Pursuant to a provision in this

redemption agreement, Robert resigned as president and director of

Pro Brush.

As part of the Mi-Lor stock redemption agreement,4

Robert, Dorothy, Lori, Michael, and the two trusts (the "Redeeming

Principals" or the "Robert Gottsegen group") also entered into an

Agreement of Mutual Release (the "Release") with the company and

its remaining principals5 on March 31, 1990. Under its terms, Mi-

Lor and its remaining shareholders agreed to release the Redeeming

Principals from "any and all actions, causes of action, damages, .

. . claims or demands of whatever kind or nature . . . which the

4
Several agreements were executed ancillary to the Mi-Lor
stock redemption agreement. Pursuant to a consulting agreement,
for example, Robert remained connected to Mi-Lor. Within a year of
the stock transaction, Robert instituted an arbitration proceeding
to force Mi-Lor to pay him according to the terms of the consulting
agreement. The parties settled and Mi-Lor agreed to pay Robert.
5
The remaining principals were Wald, Stuart, Lawrence,
Joan Gottsegen, Steven Gottsegen, and four trusts (two for which
Lawrence served as trustee and two for which Sandra Gottsegen
served as trustee).

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Company and Remaining Principals ever had or claimed to have"

relating to "any act, omission, cause or thing done or omitted"

with respect to the "formation, incorporation or operation of the

Company . . . ." The Release excluded claims related to "the

continuing obligations owed by the Redeeming Principals . . . under

the terms . . . of the Redemption Agreement ... and the collateral

. . . agreements" and claims arising from "any legal proceeding

initiated by Alfred Stauble." The Release was signed by all of Mi-

Lor's shareholders and all of its directors. It is this release

that is at issue here.

In June 1994, the Redeeming Principals sued Mi-Lor in

state court alleging that they were owed additional payments under

the stock redemption agreement based on Mi-Lor's attainment of a

specified level of pre-tax earnings. They also alleged fraud on

the part of Mi-Lor in the termination of the voting trust. A

default judgment was entered against Mi-Lor for $226,984.80, and

the voting trust was reinstated. On February 10, 1995, the

Redeeming Principals and Mi-Lor entered into a settlement agreement

whereby the voting trust was again terminated and Robert was

elected a director but agreed not to prevent Mi-Lor from filing for

bankruptcy.

On March 3, 1995, Mi-Lor and Pro Brush voluntarily filed

Chapter 11 petitions. On February 28, 1997, Mi-Lor and Pro Brush,

as debtors-in-possession, brought an adversary proceeding against

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the Redeeming Principals alleging a host of claims. Among other

things, the complaint alleged that the Redeeming Principals had

caused Mi-Lor to pay for their personal expenses and make other

expenditures for their benefit that had no legitimate corporate

purpose.6 The defendants' affirmative defenses included the

Release and the statute of limitations.

On November 2, 1998, the bankruptcy court confirmed the

Second Amended Liquidating Joint Plan of Reorganization of the

Debtors. The court's order established that all property of the

Mi-Lor and Pro Brush bankruptcy estates would thereafter be vested

in the Creditors Trust and that the trustees of the Creditors Trust

would succeed to the debtors' right to bring or continue causes of

action. Subsequently, James M. Liston and John J. Monaghan, in

their capacity as Creditors Trustees, replaced Mi-Lor and Pro Brush

as plaintiffs in the corporations' suit against the Redeeming

Principals.

The defendants moved for summary judgment based on the

release and statute of limitations defenses, and the bankruptcy

court denied the motion on February 26, 1999. On May 7, 1999, the

bankruptcy court sua sponte vacated its February 26 order and

granted partial summary judgment to the plaintiffs on the statute

of limitations defense. Discovery ensued. The defendants filed a

6
It was through the discovery proceeding in the state suit
against Wald's estate (see supra note 3) that Lawrence claims to
have first learned of Robert's misuse of Mi-Lor funds.

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motion to vacate the May 7 order in December 2000, and the district

court denied that motion on January 25, 2001 after de novo review.

During the five day trial in April 2001, the parties

disagreed, among other things, about the extent to which the

defendants had received personal payments, about whether the

defendants had reimbursed the company for the payments of personal

expenses they did receive, and about whether the defendants had made

loans to the company. There was general agreement, however, that

Mi-Lor funds were indeed used to pay the personal expenses of the

defendants in the first instance, and that other

directors/shareholders in Mi-Lor also received payments of personal

expenses. By agreement, the release defense was not submitted to

the jury.

In a special verdict, the jury found that Mi-Lor had paid

$380,807.66 of the Redeeming Principals' personal, non-business

expenses and that the Redeeming Principals had not reimbursed Mi-Lor

for such payments.7 Among the allegedly unreimbursed payments shown

to have been made to Robert and other members of his family unit

were country club dues and expenses; payments to pharmacies for

medications; automobile expenses; payments for telephone calls from

7
The special verdict did not specifically characterize the
finding as one of "unjust enrichment." The district court's August
17, 2001 memorandum and order stated that the "jury found in favor
of the plaintiffs on the unjust enrichment claim." The defendants
did not raise an objection to the characterization of the jury
verdict as a finding of unjust enrichment and have waived the
issue.

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Robert's home in Bermuda; legal fees for litigation to which Mi-Lor

was not a party; payments to Robert's divorce lawyers; monthly

payments to Robert's mother; rent payments for an apartment occupied

by Michael; and monthly payments to Dorothy.

The parties filed motions for judgment as a matter of law

under Rule 50 regarding whether the Release should bar the unjust

enrichment claim, and the district court scheduled an evidentiary

hearing on that issue. The parties then agreed to have the district

court decide the issues pertaining to the Release without hearing

further evidence, so the district court cancelled the hearing.

The district court's memorandum and order on the parties'

respective motions for judgment as a matter of law concluded,

against the plaintiffs, that the Release was (1) executed by Mi-Lor,

because there was sufficient evidence that Mi-Lor had assented to

it, despite its formal shortcomings, and (2) enforceable, because

it was executed at a time when no duties were owed to Mi-Lor's

creditors. The district court entered judgment in favor of the

defendants.

The Creditors Trustees appeal the district court's

decisions to deny their motion for judgment as a matter of law

regarding the Release and to allow the defendants' motion for

judgment as a matter of law. The defendants' cross-appeal on the

statute of limitations ruling argues that their statutory and

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constitutional rights were violated when the bankruptcy court sua

sponte granted summary judgment to the plaintiffs on May 7, 1999.

II.

A. Creditors Trustees as Plaintiffs

The district court construed the question of the validity

and enforceability of the Release as an issue of law. It first

determined that the Release had been executed by the corporation,

even though no signature qua corporation was designated.8 It also

determined that the broad scope of the Release would cover the

unjust enrichment claims, if the Release was deemed valid and

enforceable.

The district court then explained that the corporation's

shareholders could have brought a derivative action if the unjustly

enriched participants had acted to the detriment of the corporation

in executing the Release. However, the court held that the

plaintiffs here were creditors and could not bring an action

challenging the Release unless its execution contributed to the

corporation's insolvency or took place while the corporation was

insolvent. Because the corporation was not insolvent at the time

of the Release and there was no evidence suggesting that the Release

contributed to its subsequent insolvency, the court ruled:

8
The plaintiffs argued that no one had signed the Release
specifically on behalf of Mi-Lor. The plaintiffs' attack is
without merit. There was ample evidence to support the district
court's factual determination.

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 While shareholders may have been able to object to the
Release, in fact, every shareholder signed it. The fact
that Mi-Lor is presently insolvent does not mean that the
Release suddenly becomes invalid as a result of duties
owed to creditors or to the corporation on behalf of the
creditors. Invalidating the Release years after its
execution because of its adverse effects on creditors'
interests would create fiduciary duties to creditors
where they simply do not exist.

Accordingly, the court did not reach the questions raised about the

validity and enforceability of the Release.

On appeal, the plaintiffs argue that the court applied the

wrong analytical principles in choosing to deny creditors the

ability to pursue claims as substitute plaintiffs for the

corporation. They argue that the company, as debtor-in-possession,

properly filed an adversary proceeding against the defendants

pursuant to the rules of the federal bankruptcy system. This

position is correct. A corporation may bring an action against its

directors, current or former, for self-dealing. See Boston

Children's Heart Foundation, Inc. v. Nadal-Ginard, 73 F.3d 429 (1st

Cir. 1996) (applying Massachusetts law). And a debtor-in-possession

may commence an action without court approval. Collier on

Bankruptcy ¶ 323.01 (15th ed. rev.).

The Creditors Trustees then argue that, by order of the

bankruptcy court, they properly stepped into the shoes of the

corporation as plaintiffs. In those shoes, they are asserting the

corporation's right to recover to the estate the amount of the

unjust enrichment. That they, as creditors, would be the real

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beneficiaries of any recovery is, they say, happenstance and does

not alter the fact that they sue in the shoes of the company. The

defendants do not contest this proposition; indeed, no objection was

made to the bankruptcy court when it permitted the creditors to sue,

and the case was characterized to the jury as just explained.

While the district court's contrary view is a well-

reasoned position,9 it ultimately must give way on the question of

standing. The court's intuition does, though, inform the analysis

later.

The Creditors Trustees may properly stand in the shoes of

the corporation and its shareholders for purposes of the suit

because they are continuing the corporation's cause of action, not

initiating a separate action on behalf of creditors. See Collier

on Bankruptcy ¶ 541.08 (15th ed. rev.) ("The trustee . . . stands

in the shoes of the debtor corporation in prosecuting a cause of

action belonging to the debtor . . . ."); id. ¶ 323.01 ("A trustee

appointed in a chapter 11 case . . . is automatically substituted

as a party in any pending action, proceeding or matter and therefore

has the same rights and obligations as the . . . debtor in

possession."). When a corporation sues its fiduciaries or a

9
Frequently, the statute of limitations will bar claims by
creditors pursuing actions in the capacity of the corporation when
those claims reach back to transactions from years earlier. In
addition, some claims of this sort may trigger a successful laches
defense. But here, the district court correctly determined that
the statute of limitations was no bar, and no laches defense was
raised.

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stockholder brings a derivative suit against corporate fiduciaries

to enforce the corporation's rights, any recovery for the fiduciary

breach belongs to the corporation.10 See, e.g., Bessette v.

Bessette, 434 N.E.2d 206, 208 (Mass. 1982) ("It is a basic principle

of corporate law that if a majority shareholder receives corporate

cash distributions and a salary in excess of the reasonable value

of services rendered, the right to recover the overpayments belongs

to the corporation."). Sums recovered by a corporation in such

suits are paid first to creditors, before any distributions are made

to shareholders.11 See Bagdon v. Bridgestone/Firestone, Inc., 916

F.2d 379, 383 (7th Cir. 1990) ("Recoveries [in derivative suits]

pass through the corporate treasury, a process that both protects

creditors (who get first dibs) and avoids questions of apportionment

. . . ."). As a result, the issues pretermitted by the district

10
In some circumstances, the Donahue doctrine permits
stockholders of close corporations to sue for direct injuries and
recover personal relief for breaches of fiduciary duties owed
directly to them. See Donahue v. Rodd Electrotype Co., 328 N.E.2d
505, 515 (Mass. 1975). Such a suit for personal relief is
appropriate where it would be difficult to establish a breach of
duty owed to the corporation, as in the case of a freeze-out of
minority shareholders. Id. at 514-15. The Creditors Trustees,
however, do not sue as Donahue plaintiffs.
11
This result explains why the plaintiff in Bessette
refused to assert a derivative rather than a direct claim.
Bessette involved a company on the verge of bankruptcy, and as one
commentator explained: "The plaintiff presumably wanted personal
relief because he feared the corporation's creditors, not its
stockholders, would reap the benefits of any recovery in a
derivative action." Richard W. Southgate & Donald W. Glazer,
Massachusetts Corporation Law & Practice § 16.5(b) (2003 Supp.).

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court about the validity and enforceability of the release must be

reached.

In one sense it is quite true that the other shareholders

were the victims of the unjust enrichment and of any failure to make

adequate disclosure to them in securing the Release, and they are

not complaining about either. But to the extent that unjust

enrichment occurred, it was through a misuse of the corporation's

assets; and the Release, although ratified by the shareholders, was

a corporate act surrendering a claim of the corporation. Whatever

right the corporation may have to recover for unjust enrichment,

through the invalidation of the Release, is an asset of the

corporation and now belongs to the creditors.

B. Standard for Determining the Enforceability of the Release

In essence, this case involves two claims of fiduciary

breach. The first, on which the jury found for the plaintiffs, is

that the Redeeming Principals had unjustly enriched themselves from

the corporation's coffers. The second claim is that the Redeeming

Principals committed a fiduciary breach that renders the Release

unenforceable. The plaintiffs argue that the Release is

unenforceable at a minimum because the defendants failed to disclose

the material details of their unjust enrichment to Mi-Lor's

remaining shareholders and directors when seeking the Release. They

also argue that the Release is unenforceable because the defendants

have not demonstrated that the Release was fair to the company.

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 At issue, then, is the standard for determining the

enforceability of a release, executed by a close corporation and its

directors and shareholders, of claims later proven to a jury that

certain corporate directors and shareholders unjustly enriched

themselves at the expense of the corporation. There is no

Massachusetts case directly on point.

Corporations, whether close or public, have a strong

interest in being able to give valid and enforceable releases. A

release of claims by a close corporation in particular, even a

release of self-dealing claims against its controlling shareholders,

may benefit the close corporation by allowing it to resolve internal

disputes in a swift and cost-effective manner and by enabling it to

facilitate the termination of the involvement of its principals.12

Close corporations like Mi-Lor also present fewer concerns about

possible injury to the investing public from the actions of

12
Massachusetts does not prohibit a company from releasing
directors from claims of self-dealing. Massachusetts does prohibit
a corporation from including in its articles of organization a
provision that eliminates or limits the liability of a director:
(1) for any breach of the director's duty of loyalty to the
corporation or its stockholders; (2) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing
violation of law; (3) for illegal distributions to stockholders and
improper loans to directors or officers; or (4) for any
transactions from which the director derived an improper personal
benefit. Mass. Gen. Laws ch. 156B, § 13(B)(1.5). And a
Massachusetts corporation may not enact a by-law that conflicts
with either a statute or its articles of organization. Ch. 156B,
§ 16; Assessors of Boston v. World Wide Broadcasting Foundation of
Mass., Inc., 59 N.E.2d 188, 191 (Mass. 1945) (noting that by-laws
may not enlarge or alter the powers conferred by the articles of
organization or by statute).

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corporate directors and shareholders than do public corporations or

charitable corporations. And where all of the shareholders (as

opposed to the directors) of a close corporation execute a release

after having received full disclosure, there are self-evident policy

reasons to enforce such a release.

Even so, within close corporations there are fiduciary

duties imposed on directors, officers, and, for some purposes,

shareholders, in connection with their respective dealings with, and

on behalf of, the close corporation and its shareholders. See

Demoulas v. Demoulas Super Mkts., Inc., 677 N.E. 2d 159, 179-80

(Mass. 1997); Donahue v. Rodd Electrotype Co., 328 N.E. 2d 505, 515-

16 (Mass. 1975). The release transaction involved here was not

entered into by two or more independent business entities, but

rather, was an entirely intra-corporation transaction -- entered

into by the close corporation itself (acting through the

ratification of its shareholders) with its own principals. The

intra-corporation nature of the transaction, the plaintiffs argue,

gave rise to certain fiduciary obligations by the Redeeming

Principals.

In Demoulas, the most recent Massachusetts case about

self-dealing, the plaintiff brought a derivative action against the

president/director/voting trustee of a close corporation and certain

affiliated persons and entities, alleging that the defendants had

diverted corporate opportunities and engaged in self-dealing. 677

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N.E.2d at 165-66. The Supreme Judicial Court explained that a

corporate fiduciary is not entirely barred from pursuing a corporate

opportunity or entering into a self-dealing transaction. When such

actions are taken, though, the corporate fiduciary has a duty to

disclose the details of the opportunity/transaction to the corporate

decision-makers and, at least when the decision-makers are

interested directors, has the burden of proving that the opportunity

or transaction is fair. Id. at 180-82. The court summarized the

standard as follows:

In short, to meet a fiduciary's duty of loyalty, a
director or officer who wishes to take advantage of a
corporate opportunity or engage in self-dealing must
first disclose material details of the venture to the
corporation, and then either receive the assent of
disinterested directors or shareholders, or otherwise
prove that the decision is fair to the corporation.

Id. at 182.

It is clear from Demoulas that Massachusetts imposes on

corporate fiduciaries a duty of full disclosure of material facts

in connection with self-dealing. Material information about the

self-dealing transaction is needed to make an educated decision

about whether to allow it, and in the case of a self-dealing

release, information about the conduct of the potential recipients

of the release is necessary for deciding whether to grant the

release encompassing such conduct. Thus, the Demoulas rule protects

decision-makers by giving them information.

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 But Demoulas does not explicitly address the question of

whether full disclosure to interested shareholders suffices in the

context of a release given with unanimous shareholder consent.13

And more generally, Demoulas leaves open the question of the effect

of ratification by interested shareholders and the question of what

role fairness plays when interested shareholders have ratified.

The law in this area is a tangled web. Language from

cases in both the Supreme Judicial Court and in this court could,

if lifted out of context, be taken to mean that a showing of

fairness is always a requirement. See Winchell v. Plywood Corp.,

85 N.E.2d 313, 316-17 (Mass. 1949) (requiring a self-dealing

corporate fiduciary to prove full disclosure and fairness to the

corporation); Boston Children's Heart Foundation, Inc. v. Nadal-

Ginard, 73 F.3d 429, 433-34 (1st Cir. 1996) (same, applying

Massachusetts law). This language in modern opinions, which seems

to invoke a universal requirement of showing fairness, is at odds

with older cases saying that transactions between corporations and

their fiduciaries that are open and informed may be approved by the

express "consent of all the stockholders." Warren v. Para Rubber

Shoe Co., 44 N.E. 112, 113 (Mass. 1896) (holding that a corporation

13
It is unclear from the quoted language from Demoulas
whether the term "disinterested" modifies only "directors" or
modifies both "directors" and "shareholders." That is, can
shareholders assent only if they are disinterested? If the
modifier applies to both words, then, apparently, interested
shareholders cannot, even upon full disclosure and unanimous
agreement, approve self-dealing by corporate fiduciaries.

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could contract with directors when the contract was made openly and

with the assent of all the stockholders and the stockholders were

not ignorant of the terms of the contract or of the self-dealing

relationship between the contracting parties). Until Massachusetts

addresses these questions directly, we are left to work out the

issue.

On balance, we conclude the wiser rule is that where there

is unanimous and fully informed shareholder approval in a close

corporation, such approval suffices (subject to special rules for

insolvency). If there is not full disclosure and unanimous

approval, the question arises whether a showing of fairness alone

would suffice to validate the Release. This appears to be the rule

in most jurisdictions, Gevurtz, Corporation Law 324 (2000); yet a

very literal reading of Demoulas' language quoted above might

suggest the need for both full disclosure and fairness -- although

this variation was not decided there. Quite possibly the question

need not be answered in the present case (and we do not seek to do

so) because, if the transaction embracing the Release was fair,

arguably this means that the corporation has already been properly

compensated for its unjust enrichment claim.

The rule we adopt is close to the non-exclusive rule in

the Delaware statute14 that a self-dealing transaction may be

14
It is true that Massachusetts has not always followed
Delaware law on corporations. Compare Donahue, 328 N.E.2d at 515
& n.17 (creating a new fiduciary duty of utmost good faith and

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approved by the consent of all shareholders -- whether interested

or not -- so long as there is disclosure to those shareholders of

all material facts concerning the self-dealing.15 See Del. Code

Ann. tit. 8, § 144(a); R. Clark, Corporate Law 168 (1986). That

statutory rule is modified by Delaware case law, but the case law

regarding the effect of the fully informed consent of shareholders

in various contexts16 has been described by the Delaware Chancery

loyalty among the stockholders of Massachusetts close corporations
that is more exacting than the duty traditionally owed by corporate
directors and officers), with Nixon v. Blackwell, 626 A.2d 1366,
1379-81 (Del. 1993) (noting that directors have the same fiduciary
duties under Delaware law whether or not a corporation is closely
held and declining to fashion "a special judicially-created rule
for minority investors" in close corporations). Massachusetts'
independent view expressed in Donahue does not address how the
duties imposed on fiduciaries in close corporations might be
affected where there is unanimous ratification by informed
shareholders. The applications of fiduciary duties in Donahue and
in Demoulas do not involve second-guessing the unanimous decision
of informed shareholders, so neither of those cases reaches as far
as this case requires.
15
Under the Delaware statute, a self-dealing transaction
may be approved by the consent of a majority of fully-informed and
disinterested directors; by the consent of fully-informed
shareholders; or by a showing that "the contract or transaction is
fair to the corporation as of the time it is authorized, approved
or ratified, by the board of directors, a committee or the
shareholders." Del. Code Ann. tit. 8, § 144(a)(3). Delaware case
law suggests that the approval of a majority of informed
shareholders is sufficient under the statute, but the cases
disagree about whether interested shareholders may be counted
towards the majority.
16
One commentator has noted the weaknesses of relying on
shareholder approval in public corporations to protect investors'
interests. See R. Clark, Corporate Law 180-183 (1986).

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Court as "not a model of clarity." Solomon v. Armstrong, 747 A.2d

1098, 1113 (Del. Ch. 1999).

Here, there was unanimous shareholder approval, so the

case does not present the question of what to do where a majority

of shareholders approve but that majority is controlled by or

composed of the defendants. If fully informed shareholder approval

were simply by a majority, then different rules and shifting burdens

might apply, see, e.g., Wachsler, Inc. v. Florafax Int'l, Inc., 778

F.2d 547, 552 (10th Cir. 1985), because then, "even an informed

shareholder vote may not afford the minority sufficient protection

to obviate the judicial oversight role." In re Wheelabrator Techs.,

Inc. S'holders Litig., 663 A.2d 1194, 1204 (Del. Ch. 1995). That

rationale for requiring an additional fairness showing -- the

protection of dissenting minority shareholders who, perforce, have

brought a derivative action -- is inapplicable where the fully

informed shareholder owners of a close corporation, even if

interested, unanimously consent to the giving of a release.

As a practical matter, many close corporations are family

corporations and/or do not have any disinterested shareholders or

disinterested directors. Because the shareholders are the owners,

if all of the owners, "interested" or not, of a close corporation

agree to allow a release of claims of self-dealing after receiving

full information about it, then they have had the opportunity to

protect their own interests and there are no dissenting shareholders

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who may need further protection. It would ordinarily be unwise to

involve courts in reviewing the informed and unanimous decisions of

the owners, absent special circumstances.

Massachusetts, of course, may choose a different path in

the future. It may, for example, feel that creditors of close

corporations deserve protection against the mutual looting of

corporate assets by all of a close corporation's shareholders. The

law, however, already provides a degree of such protection. As the

district court aptly recognized, a corporation may not act to

release claims when that action would cause the corporation to go

into insolvency or would take place during insolvency. See Mass.

Gen. Laws ch. 109A, § 5; In re Tufts Elecs., Inc., 746 F.2d 915, 917

(Mass. App. Ct. 1984) (explaining that "prejudice [to creditors]

arises where the transaction is a fraudulent conveyance or one which

led to corporate insolvency").

If there has not been adequate disclosure to the remaining

Mi-Lor shareholders, then there may be defenses available such as

lack of causation or lack of damages, the availability or force of

which we need not determine.

C. Burden of Proving the Enforceability of the Release

The fact of a release is an affirmative defense, and the

party seeking to have a release enforced usually bears the initial

burden of pleading and proving the existence of that release. See

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Sharon v. City of Newton, 769 N.E.2d 738, 742-43 (Mass. 2002). That

was done here.

Once the burden of proving the existence of an executed

release has been met, the burden of proving or disproving its

enforceability may lie with either party, depending on the context

in which the release was given. The defendants argue that the

Release is a contract and cannot be nullified absent the plaintiff's

proving "fraud, misrepresentation, mutual mistake, breach of

fiduciary duty, or undue influence" or "that at the time the release

was given the corporation was insolvent or became insolvent as a

result of the release." The last ground for nullification does not

apply on the facts here. As to the other grounds for nullification,

the burden of proof is generally on the plaintiff in non-fiduciary

duty situations. See, e.g., Sharon, 769 N.E.2d at 743 n.6. The

defendants argue that the plaintiffs have the burden on the

enforceability issue here.

The defendants' argument ignores the special fiduciary

context of the Release: that the Release goes to a proven breach

of fiduciary duty by a corporate officer/director and shareholders.

At least where an underlying claim of breach of fiduciary duty has

been proven,17 we conclude that Massachusetts would place the burden

17
We need not decide who has the burden of showing
enforceability when there is an unadjudicated claim of an
underlying breach of fiduciary duty by the corporate fiduciary. As
a federal court sitting in diversity, we prefer to make narrow
rulings on issues of state law. See, e.g., V. Suarez & Co., Inc.

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of showing the enforceability of a release on the corporate

fiduciary who relies on that release to extinguish any recovery for

the underlying breach. Two doctrines converge to place this burden

on the corporate fiduciary. First, Massachusetts adopts the rule

that "[a] release executed in favor of one standing in a fiduciary

relation to the one executing the release will be subjected to the

closest scrutiny by the court." Allen v. Moushegian, 71 N.E.2d 393,

400 (Mass. 1947) (involving a release issued by a client to her

attorney). Second, Massachusetts refers to the law of trusts in

cases involving corporate fiduciaries, see, e.g., Demoulas, 677

N.E.2d at 171 ("Trust law applies . . . to the management of

corporations."), and under trust law, a release of a trustee is

"subjected to the closest scrutiny," Akin v. Warner, 63 N.E.2d 566,

570 (Mass. 1945); Restatement (Second) of Trusts § 217(2).

D. Application of the Standards to the Mi-Lor Release

The trial court held in an earlier order, on August 17,

2001, that those who executed the Release were not disinterested.

The defendants have not argued this issue on appeal, other than

simply stating in a footnote that "there was adequate evidence in

the record to show . . . that the recipients of the release were

disinterested." The issue is waived.18

v. Dow Brands, Inc., 337 F.3d 1, 8-9 (1st Cir. 2003).
18
Even were it not waived, the ruling is fully supportable.
A director or officer may be "interested" under Massachusetts law
if she is a party to the transaction; has a business, financial, or

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 Defendants argue that the record establishes that they

made full disclosure of all material facts about the Release. There

is no formal ruling on this issue, either in the November 20, 2002

memorandum entering judgment for defendants on the Release or

elsewhere. Defendants point to the following comment made by the

trial judge during a colloquy with counsel on April 20, 2001: "Full

disclosure as to what? . . . [T]hey all played the same game.

There certainly was full disclosure. Everybody knew that everybody

was doing 'it,' whatever it is." This comment is far from a ruling

and, in any event, does not foreclose the disclosure issue.

First, the defendants' argument does not logically follow.

The fact that Mi-Lor's remaining directors and shareholders also had

expenses paid by the corporation means that they were most likely

not disinterested, because they benefitted from a practice of

corporate largesse. But it certainly does not mean that the

Redeeming Principals fully disclosed all material details regarding

their own self-dealing.

familial relationship with a party to the transaction; has a
material pecuniary interest in the transaction; or is subject to a
controlling influence by a party to the transaction who has a
material pecuniary interest. Harhen v. Brown, 730 N.E.2d 859, 864
& n.5 (Mass. 2000) (adopting the definition of "interested" stated
in 1 ALI Principles of Corporate Governance § 1.23 (1994)). A
shareholder is "interested" if she is a party to the transaction or
is also an interested director or officer. Id. The directors and
shareholders who approved the Release had interconnected familial,
financial, and business relationships with parties on both sides of
the Release.

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 Second, we cannot say that the record establishes full

disclosure, thus resolving the issue. At oral argument, this court

asked defendants' counsel to indicate what evidence was in the

record to show that the defendants had made full disclosure.

Counsel replied that Mi-Lor's bookkeeper had testified that he knew

of the details of the unjust enrichment. The bookkeeper's knowledge

does not even come close to establishing full disclosure, which must

be made to the remaining shareholders.

The plaintiffs, in turn, contend that they are entitled

to judgment because the defendants have the burden of proof and did

not prove that they made full disclosure of their self-dealing. The

argument is premature. No one yet has had the benefit of the full

analysis of this issue from the distinguished judge who sat through

the trial and has lived with this case for some years. This opinion

clarifies the applicable standards and burdens, and whether to

accept additional evidence on this or any other matter is an issue

for the trial judge. The defendants bear the burden on remand of

establishing full disclosure.

Plaintiffs also urge us to hold as a matter of law that

the Release was unfair because there was no consideration given for

it. They cite cases which they say hold that redemption of stock

never benefits a corporation. See In re Roco Corp., 701 F.2d 978

(1st Cir. 1983); In re Main St. Brewing Co., Ltd., 210 B.R. 662

(Bankr. D. Mass. 1997). Those cases do not stand for that

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proposition at all. Instead, Roco essentially says that when a

corporation is insolvent on the date it redeems shares of its stock,

the corporation receives nothing of value, 701 F.2d at 982, and Main

St. Brewing says that stock redemption claims in bankruptcy are

subordinated to the claims of creditors, 210 B.R. at 664-65. In

March 1990, when Mi-Lor redeemed the stock of the defendants, the

company was not insolvent and its stock was not worthless. And the

equitable subordination issue in Main St. Brewing is not at all

relevant to the fairness of the Release. Furthermore, agreements

by a corporation to purchase its own stock are generally

enforceable. Winchell, 85 N.E.2d at 317.

There was no finding on fairness by the district judge and

the record does not, from our reading of it, readily provide an

answer. In theory, the Release could have benefitted both parties.

The corporation, for its part, received stock back, which enhanced

the value of its remaining shares and which conceivably could have

led to some benefit to it; it also received cooperation and non-

compete agreements from the defendants, a release from the

defendants of claims against it, and miscellaneous benefits. In

turn, the corporation paid out $1 million for the redeemed shares

and other consideration and gave up claims that, eleven years later,

led to a judgment of $380,807.66 (exclusive of interest). It is not

clear what the value of the shares was or how to assess the expected

value of the unjust enrichment claim at the time the Release was

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signed, given the risks and costs of litigation and other factors.

In short, it is better to have the trial court determine this matter

on remand. Cf. Lawton v. Nyman, 327 F.3d 30, 51 (1st Cir. 2003).

III.

In their cross-appeal, the defendants argue that their

statutory and constitutional rights were violated when the

bankruptcy court sua sponte granted summary judgment to the

plaintiffs on the statute of limitations defense in response to the

same defendants' motion that the bankruptcy court had denied over

two months earlier.

The cross-appeal is close to frivolous. The district

court reviewed the bankruptcy court's summary judgment ruling de

novo after both a hearing and the completion of discovery and

affirmed the bankruptcy court's order. Any deficiency in the sua

sponte nature of the bankruptcy court's decision was cured by the

district court's de novo review.

IV.

Conclusion

The underlying sum involved here is approximately

$380,000, and considerable counsel fees have been spent to this

point. We urge the parties to settle this case before the

additional costs of further proceedings become a reality.

The decision of the district court that the Release is

valid and enforceable is reversed; entry of judgment for the

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defendants is vacated; the decision of the district court on the

statute of limitations is affirmed; and the case is remanded to the

district court for further proceedings consistent with this opinion.

Costs are awarded to the Creditors Trustees. So ordered.

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