Corporate – Counsel – Compensation

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Where the plaintiff, a corporation’s minority shareholder and former corporate counsel, brought suit claiming that the defendant controlling shareholders paid themselves excessive compensation and deprived the plaintiff of his share in the corporation’s profits, a judgment for the plaintiff was proper, as an agreement under which the attorney received shares as payment for legal services was valid.

Valid agreement

“The corporate defendant, Olympic Adhesives, Inc. (Olympic), and individual defendants John E. Murray, Jr., Stephen P. Hopkins, and Paul C. Ryan, controlling shareholders of Olympic, appeal from a Superior Court judgment in favor of the plaintiff, Merek Rubin, a minority shareholder and Olympic’s former corporate counsel — who had acquired stock in Olympic as partial payment for legal services rendered to the individual defendants — on his claim that the individual defendants paid themselves excessive compensation and deprived Rubin of his share in Olympic’s profits. Following a jury-waived trial, the judge ordered the individual defendants to reimburse Olympic for amounts over and above what he determined to be their reasonable compensation for the years 1995 through 2005, to be redistributed among all the shareholders according to their ownership interests. We affirm. …

“The defendants first argue that Rubin has no right, either as the individual defendants’ former attorney or as an Olympic shareholder, to challenge the individual defendants’ compensation. They maintain that the 1975 fee agreement should not be enforced because Rubin breached his fiduciary duty, as the defendants’ attorney, by failing to disclose his potential conflict of interest between his duties as their attorney and his rights as a minority shareholder in Olympic. …

“In light of the judge’s findings regarding the individual defendants’ knowledge and experience in corporate matters, we think he properly rejected the defendants’ argument that Rubin was required to disclose to the individual defendants that it would be a breach of their fiduciary duty if they paid nearly all of the corporation’s profits to themselves and paid Rubin nothing, and that he could sue them for such breach.  …

“Based on this record, we discern no fundamental unfairness in the transaction involving the transfer to Rubin of ten percent of the stock in Olympic as partial payment for his legal services. We conclude that the judge appropriately applied the factors set out in Pollack v. Marshall, [91 Mass. 543 (1984), and that the record supported his conclusion that the 1975 fee agreement was arrived at fairly and equitably. …

“The defendants further argue that the 1975 fee agreement should be subject to a second look for reasonableness. In particular, they urge that we look to the current value of the stock in determining what was a reasonable fee for legal services performed and completed in 1975. However, the policy arguments put forth by the defendants that permit judicial re-examination of contingent fee agreements, or fee agreements that involve ongoing legal services, are not implicated here. …

“Contingent fee agreements, because the outcome and the extent of the legal services are unknown at the time of the bargain, must comply with certain strict requirements to ensure fairness. … Because contingency fees are negotiated at a time of significant uncertainty, and with the possibility that the client lacks true bargaining power, contingent fee agreements may be reviewed for reasonableness once the attorney’s services are completed and the outcome known. …

“Those concerns are not present here. Rubin was seeking payment for work already performed at the time the parties entered into the 1975 fee agreement, and thus the hours expended and the results achieved were known. All parties agreed to the amount to be paid and to the value of the Olympic shares as part of that payment, and the judge found those amounts to be reasonable for the services provided. Moreover, as the record makes clear, these individual defendants were not naive and did not lack in bargaining power. …

“Finally, we note that contrary to the ‘second look for reasonableness’ urged here by the defendants, various authorities support the valuation of stock issued in lieu of legal fees at the time that it is issued. … Any windfall that the attorney may receive from valuing the asset at the time that the fee is set is a ‘reward [that] stems from the investment risk accepted.’ … As a practical matter, adopting a ‘second look’ at stock issued in lieu of legal fees is problematic because there is no natural point at which to review the value of the stock. By contrast, an approach that evaluates the stock at the time that it was issued is sensible and practicable.

“While it can be very difficult to accurately value a start-up business, Rubin made efforts to determine the value of the stock that he was requesting in lieu of fees. In order to place a monetary value on the stock, he sought the advice of Olympic’s accountant, who indicated that the defendants had contributed $25,000 for 100 percent interest, six months earlier, so therefore he thought it made sense to value Rubin’s ten percent interest at $2,750. The defendants do not challenge the fact that $2,750 was a fair assessment of the value of a ten percent interest in Olympic in 1975.

“The judge here found that the cash portion of Rubin’s compensation ($40,000) was inadequate to ‘compensate the plaintiff fully and fairly’ and that because of this Rubin asked for an additional ten percent stock interest. Recognizing that the ‘value of Olympic’s stock at the time of issuance was highly problematical’ and ‘[t]he enterprise could easily have failed,’ the judge found that ‘[i]t cannot be said that the fee was excessive.’ We are presented with no persuasive argument to disturb that conclusion.”

Rubin v. Murray, et al. (Lawyers Weekly No. 11-046-11) (31 pages) (Katzmann, J.) (Appeals Court) Case heard by Brady, J., in Superior Court. Janet Steckel Lundberg, Vincent J. Pisegna, both of Krokidas & Bluestein, and Susan A. Hartnett, of Sugarman, Rogers, Barshak & Cohen, for the defendants; Michael R. Gottfried, of Duane Morris, for the plaintiff (Docket No. 09-P-1676) (March 16, 2011).