No. 00-2897, 00-2882Commonwealth of Massachusetts Superior Court. MIDDLESEX, SS
DATED: August 13, 2001
MEMORANDUM AND ORDER ON ANDREA SERPA MORRISON’S MOTION FOR SUMMARY JUDGMENT
BRASSARD, J.
Plaintiff Andrea Morrison’s (“Morrison”) former partner, defendant Vincent Leo (“Leo”), loaned funds to defendant Mystic Donuts, Inc. (“Mystic”), which in turn paid the balance on a promissory note owed by the partnership, Leo and Morrison. Morrison then filed suit seeking a judgment declaring that her obligations under the Note have been discharged. Morrison now moves for summary judgment on that claim. The defendants contend that material issues of fact remain in dispute. Having heard the parties and examined the papers, Morrison’s motion for summary judgment is DENIED.
BACKGROUND
The facts, taken in the light most favorable to the defendants, are as follows:
On or about August 6, 1982, Morrison, Leo, and William Caso (“Caso”) established Val’s Realty Trust (“VRT”) to acquire real property. Morrison, Leo and Caso were each designated as co-equal Trustees and co-equal beneficiaries. On July 24, 1984, Caso resigned as Trustee and sold his beneficial interest to Leo and Morrison.
Corporations operating Dunkin’ Donuts franchises occupy VRT’s properties in Medford, Quincy and Dorchester. Val’s Donuts, Inc. (Val’s Donuts”) owns the Dunkin’ Donuts franchise that occupies VRT’s property in Medford. Leo is the sole shareholder, officer and director of Val’s Donuts.
On May 11, 1993, VRT entered into an agreement with Century Bank to refinance an existing loan. Subsequently, VRT, and Leo and Morrison, individually, executed and delivered to Century Bank a Promissory Note (“the Note”) in the amount of $937, 070 to mature on June 10, 1998. Morrison and Leo, as Trustees of Val’s Realty Trust, also executed and delivered to Century Bank Mortgages on the Medford, Dorchester and Quincy Properties. The parties thereafter agreed to extend the maturity date through January 31, 1999.
As a result of litigation between Morrison and Leo in 1995, the parties did not pay the Note at maturity. Consequently, Century Bank commenced a foreclosure proceeding against VRT and scheduled a foreclosure sale on all the properties for June 6, 2000.
On June 2, 2000, Mystic Donuts, Inc. (“Mystic”), whose sole shareholder, director and officer is Leo, paid Century Bank in full for all obligations under the Note. Specifically, Mystic paid Century Bank $707,458 which represented the total obligation due under the Note for principal, interest, late charges, legal fees, cost of foreclosure, preparation of the agreements and appraisals, and auctioneer fees. Leo loaned Mystic the money that Mystic used to pay Century Bank, and the loan was evidenced by an unsecured demand note. In exchange for the $707,458, Mystic received from Century Bank a Nonrecourse Assignment and Agreement pursuant to which Century Bank assigned the Note and the Mortgages to Mystic. Mystic does not occupy any of the properties owned by VRT.
On June 21, 2000, Morrison filed suit against Leo and Mystic (collectively, “the defendants”), seeking a judgment declaring that the Note and Mortgage are satisfied (Count I); alleging breach of fiduciary duty (Count II); and seeking a preliminary injunction prohibiting Mystic from foreclosing on the properties (Count III). On June 22, 2000, Mystic Donuts and Leo filed suit against Morrison alleging breach of fiduciary duty (Count I) and seeking declaratory judgment (Count II). This court (Botsford, J.) consolidated both actions on June 26, 2000.[1] The court now has before it Morrison’s motion for summary judgment as to Count I of her complaint and Count II of the defendant’s complaint seeking declaratory judgment.
DISCUSSION
This court grants summary judgment where there are no genuine issues of material fact and where the moving party is entitled to judgment as a matter of law. Cassesso v. Comm’r of Correction, 390 Mass. 419, 422
(1983); Mass.R.Civ.P. 56(c). The moving party bears the burden of affirmatively demonstrating that there is no genuine issue of material fact on every relevant issue. See Pederson v. Time, Inc., 404 Mass. 14, 17 (1989). The materials presented by the moving party need not negate or disprove every essential element of the claim of the party on whom the burden of proof at trial will rest, but they must demonstrate that there is no reasonable expectation that proof of the elements will be forthcoming at trial. See Kourouvacilis v. General Motor Corp., 410 Mass. 706, 711-16 (1991).
General Laws c. 106, § 3-602 (a) of the Massachusetts Uniform Commercial Code provides in pertinent part that:
an instrument is paid to the extent payment is made (i) by or on behalf of a party obliged to pay the instrument, and (ii) to a person entitled to enforce the instrument. To the extent of the payment, the obligation of the party obliged to pay the instrument is discharged . . .
Morrison contends that because Leo is Mystic’s sole shareholder, officer and director, and because Leo loaned Mystic the funds necessary to purchase the Note, Mystic did not act as a third-party acquirer of the Note, but rather as a straw for Leo. Thus, according to Morrison, the payment by Mystic to Century Bank is either a payment by or on behalf of Leo, in which case Morrison and VRT’s obligations on the Note are discharged pursuant to G.L.c. 106, § 3-602(a).[2] In opposition, the defendants argue that Mystic purchased the Note from Century Bank for legitimate business reasons and in good faith, and therefore, neither Morrison’s, Leo’s nor VRT’s obligations under the Note have been discharged. The issue thus becomes whether Morrison has provided sufficient Rule 56 evidence to support her claim that Mystic is a sham corporation functioning as a straw for Leo.
Customarily, a corporation is a separate legal entity, even in those instances in which the ownership of all stock and the absolute control of corporate affairs is vested in a single individual. See M. McDonoughCorp., v. Connolly, 313 Mass. 62, 65-66 (1943); My Bread Baking Co., v.Cumberland Farms, Inc., 353 Mass. 614, 618 (1968). If, however, the corporation is a sham, or is used to perpetrate deception to defeat a public policy, then it may be disregarded. See Gordon Chemical Co. Inc. v. Aetna Casualty, 358 Mass. 632, 638 (1971); Evans v. Multicon Const.Corp., 30 Mass. App. Ct. at 728, 732 (1991).
In order to hold Leo responsible for Mystic’s paying of the Note for purposes of summary judgment, Morrison must establish by uncontroverted facts that Leo’s activities demonstrate a virtual disregard of Mystic’s existence, i.e., that it is permissible to pierce the corporate veil.[3]
See My Bread Baking Co. v.Cumberland Farms, Inc., 353 Mass. 614, 620
(1968); Evans v. Multicon Construction Corp., 30 Mass. App. Ct. at 732. Factors to be considered when determining to pierce the corporate veil and impose direct liability include: pervasive control, confused intermingling of business activity assets or management, thin capitalization; nonobservance of corporate formalities, absence of a corporate record, no payment of dividends, insolvency at the time of the litigated transaction, siphoning away of corporate assets by dominating shareholders, non-functioning of officers and directors, use of the corporation for transaction of the dominant shareholder, and the use of the corporation in promoting fraud.[4] See Pepsi-Cola MetropolitanBottling Co. v. Checkers, Inc. 754 F.2d 10, 14-16 (1st Cir. 1985).
Whether Leo conducted the affairs of Mystic in disregard of the distinction between the corporate entity and himself as an individual is a material issue of fact disputed in this case. Although Leo agreed at oral argument that his arrangement with Mystic was advantageous because it maintained Morrison’s potential liability under the Note, Leo also contends in his affidavit that he had a legitimate business reason for loaning Mystic the funds necessary to purchase the Note. According to Leo, Mystic does not have baking facilities at its location and is therefore forced to rely on Val’s Donut’s facilities to bake and transfer to Mystic all of Mystic’s products daily. In pertinent part, Leo testified in his affidavit :
As president and sole shareholder of Mystic Donuts, Inc., I made the decision on about June I, 2000 that Mystic could not risk putting its business survival in jeopardy if Val’s Donuts Inc. were foreclosed on by Century Bank as the result of the default of Morrison and myself under the promissory note we had given to the bank. As a result, I loaned sufficient funds to Mystic to enable it to purchase an assignment of the note and mortgage from Century Bank.
Leo also stated at his deposition:
Q: Why did you make the decision to acquire the note in the name of Mystic Donuts?
A: Because I had a vested interest in that real property, actually securing. That real estate is a production center for Mystic Donuts.
Q: Why did you decide to buy the note from Century bank and Trust Company as opposed to paying the note off?
A: Because why did I decide that? I mean, . . . It is Mystic Donuts’ interest in that production center.
Q: And wouldn’t that interest have been protected just as well as paying the note and discharging the mortgage?
A: I don’t know that.
Moreover, Leo has submitted documents evidencing that all the corporate formalities were observed regarding Leo’s loan to Mystic and Mystic’s purchasing of the Note from the Bank, and that Mystic has begun repaying Leo in a timely manner. It is thus for the jury to determine whether Mystic’s corporate existence should be disregarded and Mystic’s payment of the Note should be attributable to Leo. For these reasons, Morrison’s motion for summary judgment is DENIED.
ORDER
For the foregoing reasons, Morrison’s motion for summary judgment seeking declaratory judgment as to Count I of her complaint and as to Count II of the defendants’ complaint is DENIED.
____________________________ Raymond J. Brassard Justice of the Superior Court
DATED: August ___, 2001