Commonwealth has greatest interest in claim, judge rules

By Eric T. Berkman Lawyers Weekly Correspondent

Massachusetts’ six-year statute of limitations applied to a breach-of-contract claim even though the cor-porate operating agreement the case arose under contained a choice-of-law provision stating that Delaware law would govern any dispute, a Su-perior Court judge has determined.

The plaintiff in the case had sued his fellow owners of a closely held corporation for allegedly freezing him out of the company before dis-solving it and transferring its assets into a new, more profitable venture that excluded him. Under Dela-ware’s three-year statute of limita-tions for contract claims, his lawsuit would have been time-barred.

However, the plaintiff argued that absent specific contractual lan-guage to the contrary, Supreme Ju-dicial Court precedent dictates that the Massachusetts statute of lim-itations applies to disputes in the commonwealth’s courts unless ex-ceptional circumstances would make it unreasonable to do so.

Judge Kenneth W. Salinger, sit-ting in the Business Litigation Ses-sion, agreed, noting that Massa-chusetts had a more substantial re-lationship to the particular claim at issue than Delaware.

“The four individual parties all lived and worked in Massa-chusetts during the relevant time, they all executed the … operat-ing agreement in Massachusetts, and the contract was allegedly breached through conduct in Mas-sachusetts,” Salinger wrote, add-ing that the commonwealth had a

significant interest in seeing that its resident defendants be held ac-countable for their alleged conduct.

The full text of Petrucci v. Esdaile, et al., Lawyers Weekly No. 12-063-17, can be found at masslawyer-sweekly.com.

Forum shopping? Races to the courthouse?

Boston attorney Howard Coo-per, who represented the plain-tiff, said the ruling is important to counsel and clients negotiating agreements of every type.

“Judge Salinger has determined that, based on the Massachusetts functional approach to statutes of limitation, if you want the law of a particular state to govern which statutes of limitation are going to apply, you need to say so explic-itly,” he said. “It’s not enough just to refer to the law of another state as governing.”

Cooper noted that Delaware law points the case back to Massachu-setts regardless, since Delaware ap-plies the statute of limitations of the forum where the case has the stron-gest connection.

Charles L. Solomont, who rep-resented one of the defendant co-owners, declined to comment. Attorneys for the other defen-dants could not be reached prior to deadline.

According to Boston business litigator Joseph L. Bierwirth Jr., the decision provides an important les-son from a drafting perspective: If an operating agreement does not specifically state that a choice-of-law provision is intended to cov-er not only the agreement and any claims related to it, but also the stat-ute of limitations governing such claims, there is a chance a judge will apply the law of the forum where the suit was filed.

“This can lead to forum-shop-ping and races to the courthouse,” he said, adding that another way to deal with the issue is to pro-vide an exclusive forum selection clause as well as a broad choice-of-law provision.

Bierwirth also questioned the judge’s analysis.

Language in the decision sug-gests that Massachusetts no lon-ger views a statute of limitations as strictly procedural. Thus an ar-gument could be made that the choice-of-law provision in the agreement was broad enough to encompass all substantive law is-sues involving its “application or interpretation,” including stat-ute-of-limitations issues, he said.

At the same time, Bierwirth said, existing Massachusetts law is un-clear on the subject since none of the SJC cases cited in the decision involved a situation in which the court had to grapple with a stat-ute-of-limitations question and a governing agreement containing a choice-of-law provision.

“Given the opportunity, the SJC may be in a position to clarify that statutes of limitations are substan-tive and therefore subject to a valid choice-of-law provision in an oper-ative document,” he said.

David Himelfarb, a commercial litigator in Boston, said the decision is significant because many law-yers assume that a choice-of-law

provision specifying another state’s law will include that state’s limita-tions period, but Salinger clarified that that is not the case.

Meanwhile, Himelfarb found noteworthy the judge’s finding that one of the plaintiff ’s substan-tive claims, for unjust enrichment, which did not arise under the op-erating agreement, would be inter-preted under Massachusetts law. That happened because the choice-of-law clause in the operating agreement was restricted to claims arising under the agreement, he pointed out.

“This could have been avoided by a broader choice-of-law clause extending to all claims arising un-der or related to the operating agreement,” Himelfarb said.

Alleged freeze-outPlaintiff Daniel Petrucci, along

with defendants Charles Esdai-le, Christopher Hayes and Dun-can McIntyre, formed a Delaware company, Market Maker Solutions LLC, in 2010.

Petrucci, Esdaile and Hayes each owned 30 percent of the compa-ny while McIntyre owned the re-maining 10 percent. When they formed the venture, they executed an operating agreement contain-ing a choice-of-law provision that stated any dispute arising under the agreement would be governed by Delaware law.

massachusetts

Volume 46 Issue No. 25

June 19, 2017

Despite ‘choice of law,’ Mass. statute applies“Given the opportunity, the SJC may be in a position to clarify that statutes of limitations are substantive and therefore subject to a valid choice-of-law provision in an operative document.”

— Joseph L. Bierwirth Jr., Boston

At the time of the MMS forma-tion, Esdaile and Hayes formed a different Delaware corporation called Altenex DE, which appar-ently was intended as MMS’s mar-keting entity.

The business plan was to create a carbon-trading platform, but when it became clear that federal carbon legislation would not pass, the plan was no longer viable.

Accordingly, after meeting with executives at Dow Chemical Co., Petrucci allegedly came up with a new business model that would involve advising large companies on how to achieve renewable en-ergy goals while assisting them in seeking and negotiating contracts with entities that could help them implement low-carbon initiatives. Dow apparently was intrigued by the idea and signed on as a “charter member” of Altenex DE.

According to Petrucci, he was the only owner with renewable en-ergy expertise while Hayes and Es-daile contributed an IT platform they had developed and licensed to the company and which was to be used as a virtual tool through which MMS’s advisory and pro-curement business could operate.

Petrucci also alleged that, by late 2010, due to omissions by the de-fendants, Dow came to believe that Altenex DE was the only enti-ty it was dealing with when in re-ality MMS housed the resources, knowledge and technology Altenex DE would need to perform the ser-vices it had promised to Dow.

To eliminate such confusion, Petrucci and the defendants signed a letter of intent agreeing to com-bine MMS and Altenex DE into a single entity. The merger, however, was never completed.

Several months later, according

to Petrucci, the defendants, hav-ing extracted Petrucci’s needed contributions, started taking steps to freeze him out of the business. Meanwhile, Petrucci asserted that the defendants secretly formed a new company, Altenex MA, and transferred all of MMS’s assets into the new venture.

In August 2011, Petrucci pur-portedly learned of the dissolution by mail. Enclosed in the letter was a $300 check for what the defendants claimed was his 30 percent inter-est in the company. Esdaile later al-legedly told Petrucci that an inde-pendent expert had determined the business was not viable and had no assets, thus the $300 was generous.

The defendants also allegedly told Petrucci that their new busi-ness would not be operating un-der the same business model as MMS and Altenex DE. But Petruc-ci claimed he learned in 2016 that they were, in fact, utilizing his con-tributions to pursue the same mod-el he had developed.

Ultimately, the defendants sold

Altenex MA for tens of millions of dollars and spun off a new business called Altenex Renewable Capital.

Petrucci eventually sued the de-fendants in Superior Court, alleg-ing they had breached the MMS operating agreement. He also brought claims for breach of fidu-ciary duty and violation of Chap-ter 93A.

Citing a provision in the oper-ating agreement stating that Del-aware law would govern any dis-putes that arose under that con-tract, the defendants moved to dis-miss the contract claim as time-barred under Delaware’s three-year statute of limitations.

Substantial interestSalinger ruled that the Massa-

chusetts statute of limitations in-deed governed the contractu-al dispute.

Where a choice-of-law provi-sion does not expressly address limitations periods, SJC precedent requires courts of the common-wealth to apply a functional anal-ysis to determine which statute of

limitations applies, Salinger said.That is the clear majority rule in

other jurisdictions, he added, com-menting that a contractual choice-of-law provision generally only de-termines which forum’s substan-tive law governs the contract.

Under the functional analysis, the forum state applies its own stat-ute of limitations unless resolution of the claims serves no substantial interest of that state and the claim would be time-barred in the state with the more significant relation-ship to the parties, the judge said.

Here, the parties all lived in Massachusetts during the relative time period, the contract was exe-cuted in Massachusetts, and it was allegedly breached in Massachu-setts, Salinger said.

“In addition, the individual de-fendants still live in Massachu-setts, which therefore ‘has a signif-icant interest in seeing that … its resident defendant[s] … be held accountable for [their] conduct, which took place in Massachusetts, and which allegedly caused’ [the plaintiff ’s] ‘injury,’” the judge said, quoting the Appeals Court’s 1998 decision in Dasha v. Adelman.

Salinger also went on to find that despite the choice-of-law pro-vision in the operating agreement, Petrucci’s claim for unjust enrich-ment would be interpreted under Massachusetts law.

In so ruling, the judge decided that such a claim did not fall under the operating agreement. Rather, he said, it stemmed from an argu-ment that the plaintiff was entitled to “quasi-contractual” compen-sation based on circumstances — the alleged freeze-out and improp-er transfer of MMS assets to a new company — not addressed in the contract.

2 • Massachusetts Lawyers Weekly June 19, 2017

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