COUTURE v. ZAGAMI (2019)

MEMORANDUM AND ORDER PURSUANT TO RULE 1:28

Plaintiff Gina Couture sued her brothers, Thomas and Michael Zagami (Zagamis), and three business entities in which some or all of the siblings were involved, the Zagami Realty Trust (trust),⁴ Zagami Family, LLC (LLC), and Zagami Brothers, LLC, seeking, among other things, her share of income produced from real estate owned by the trust and a full accounting of the businesses.⁵ ,  ⁶

We summarize the facts found by the judge following the jury-waived trial in this case. The trust held a property formerly owned by the siblings' family, and the Zagamis managed that property, as well as other properties subsequently purchased with the assistance of the parties' parents and held by the LLC. Ultimately, the Zagamis transferred one such property from the LLC to Zagami Brothers, LLC, an entity in which Couture had no interest.

The judge concluded that the Zagamis' management of the real estate held by the trust and the LLC amounted to a willful breach of their fiduciary duties to the trust, the LLC, and Couture. The judge found that the defendants had engaged in self-dealing, maintained poor records, commingled funds, and fraudulently transferred property for their own benefit. As part of the award of damages, the judge ordered the Zagamis to reimburse the trust for $ 35,000 in fees and expenses related to the litigation, and to remit directly to Couture one-third of that amount. The judge also ordered the Zagamis to provide quarterly accountings to Couture prospectively and to pay Couture her share of income derived from the trust and the LLC.

On appeal, the Zagamis claim that the judge erred by (1) interpreting the terms of the trust and the LLC's operating agreement so as to require equal distributions of income, (2) imposing prospective relief that effectively reformed the terms of the trust and operating agreement, (3) failing to enforce the exculpatory clauses in the trust and LLC documents, (4) finding that the Zagamis breached their duty to Couture, (5) awarding damages, and (6) admitting the testimony of Couture's expert witness. We vacate one facet of the damages awarded by the judge; otherwise, we affirm.

Discussion. We review the trial judge's findings of fact for clear error and review de novo the judge's rulings on questions of law. See Trace Constr., Inc. v. Dana Barros Sports Complex, LLC, 459 Mass. 346, 351 (2011). “A finding is clearly erroneous when ‘although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.’ ” Green v. Blue Cross & Blue Shield of Mass., Inc., 47 Mass. App. Ct. 443, 446 (1999), quoting Springgate v. School Comm. of Mattapoisett, 11 Mass. App. Ct. 304, 309-310 (1981). We review the judge's evidentiary rulings, including those relating to the admission of expert testimony, for an abuse of discretion. See Commonwealth v. Evans, 469 Mass. 834, 849 (2014); Beaupre v. Cliff Smith & Assocs., 50 Mass. App. Ct. 480, 485 (2000).

1. Distributions and remedies. The Zagamis argue that the judge erred as a matter of law in reading the declaration of trust and the operating agreement of the LLC to require that the distributions made to Couture be equal to those made to each of the Zagamis, and that the judgment amounted to an improper reformation of the trust and LLC instruments. We disagree. The terms of the trust provide that, in the absence of “direction” from the majority in interest of the beneficiaries, the trustees “shall pay the income [from the trust] to the [b]eneficiaries in proportion to their respective interests.” There was no evidence in this case of such “direction”; accordingly, there was no error in the judge's conclusion that distributions were required to be made in equal thirds. The LLC's operating agreement likewise directed that the profits and sale proceeds of LLC property would be allocated in equal thirds. Although both the trust declaration and the operating agreement gave broad discretion to the beneficiaries and members, as we discuss below, the Zagamis' ability to exercise that discretion was limited by their fiduciary duties as trustees and co-members.

The judge's prospective orders were equitable remedies permissible in light of Couture's equitable claims. A court may “grant equitable relief when there has been a violation of fiduciary dut[ies] and fraud.” Demoulas v. Demoulas, 428 Mass. 555, 580 (1998). “Equitable remedies are flexible tools to be applied with the focus on fairness and justice.” Id. Here, as trustees of the trust and members of the LLC, the defendants were fiduciaries. See Allison v. Eriksson, 479 Mass. 626, 627, 634-635 (2018) (members of limited liability company owe each other fiduciary duties, subject to enhancement or restriction by terms of operating agreement); Markell v. Sidney B. Pfeifer Found., Inc., 9 Mass. App. Ct. 412, 442 (1980) (relationship between trustee and beneficiary, and between director and corporation, is fiduciary as matter of law). Moreover, the duties inherent in a fiduciary relationship are heightened with regard to members of a closely-held corporation, as the Zagamis and Couture were here. See Demoulas v. Demoulas Super Mkts., 424 Mass. 501, 528-529 (1997) (shareholders in close corporation owe one another duties of utmost good faith and loyalty stricter than that required of directors and shareholders in corporations generally). Accordingly, the Zagamis were subject to concurrent and stringent duties of good faith and fair dealing as to each entity. See Markell, supra at 443 (law of fiduciary duty provides remedy against one who abuses another's trust).

“[E]ven very broad discretionary powers [granted to a trustee] are to be exercised in accordance with fiduciary standards and with reasonable regard for usual fiduciary principles.” Old Colony Trust Co. v. Silliman, 352 Mass. 6, 10 (1967). Neither the language of the declaration of trust and the LLC operating agreement, nor the intent of the settlor of the trust, negates the requirement that a fiduciary act for the benefit of beneficiaries or members, and not for his or her own advantage. Even where a trust permissibly “authorize[s] the performance of acts which would otherwise be invalid as violative of the trustee's normal duties,” a trustee is still subject to liability for abusing his or her discretion. Steele v. Kelley, 46 Mass. App. Ct. 712, 734-735 (1999). Here, there was ample evidence that the Zagamis had breached their fiduciary duties to the trust, the LLC, and Couture as beneficiary and member by commingling the three entities' funds, failing to maintain accurate records, and, most troublingly, engaging in self-dealing. We find no error in the remedies ordered by the judge in this case.

2. Indemnification clauses. We are likewise not persuaded by the defendants' argument that the judge erred in denying them the protections of the indemnification clauses included in the declaration of trust and the operating agreement. The instruments provide that the trustees or members will not be liable for losses arising out of their actions, except for their “willful breach of trust” (declaration of trust) or “willful misconduct” (operating agreement). The findings in this case, supported by ample evidence, demonstrate the Zagamis' “willful breach[es] of trust” and “willful misconduct.” As trustees and LLC members, the defendants deposited rents from property owned by the trust into Michael Zagami's personal account in order to prevent Couture from obtaining any part of them. The defendants also transferred ownership of a property purchased and financed by the LLC from the LLC (of which Couture was a member) to Zagami Brothers, LLC (in which Couture had no stake). Contrary to the defendants' argument, the fact that the judge heard evidence that, at some times, the defendants acted within their fiduciary duties to Couture and to her benefit does not preclude a finding that they willfully breached those duties at other times.

3. Damages. We turn to the issue of damages. We discern no error in the judge's assessment of the $ 35,000 identified as Couture's proportional share of distributions that the Zagamis took beyond the amounts due to them for their services as trustees of the trust and managing members of the LLC. The defendants argue that the only evidence supporting this aspect of the damages award was testimony by Couture's accounting witness, Denise Cataldo, to a figure of $ 31,612.38, and that the judge's award of $ 35,000 is therefore clear error. Cataldo's testimony was that this figure represented her calculation of the “actual cash” differential for 2009 through 2016, reflecting only cash distributions. That calculation did not account for any of the rental income for the Stoneham or Marlborough properties, which Cataldo testified were commingled through the LLC and Zagami Brothers, LLC, nor for the tax benefits obtained by the defendants as a result of losses sustained by those properties.

The extent of damages “often must be left to estimate and judgment.” Our Lady of the Sea Corp. v. Borges, 40 Mass. App. Ct. 484, 488 (1996). “Reasonable approximation is permissible, especially in circumstances of indefiniteness caused by the conduct of the wrongdoer.” Renovator's Supply, Inc. v. Sovereign Bank, 72 Mass. App. Ct. 419, 436 (2008). The defendants' contention that the $ 35,000 award failed to take into account the hundreds of hours that the judge found the defendants to have invested in the trust and LLC properties is in direct contradiction to the judge's statement that the award of $ 35,000 was for “[Couture's] proportional share of the distributions taken by the [defendants], beyond their legitimate services as [t]rustees and [m]anaging [m]embers of the [t]rust and LLC, respectively” (emphasis added). While the judge's findings and rulings indicate that he credited at least some of the evidence of the defendants' work on the trust and LLC properties, there was evidence that the defendants did not provide any reliable records of their time or work on the properties, and did not, as LLC members, follow accepted accounting methods for providing services to the LLC. The judge was not required to itemize the nature and value of those services as the defendants suggest. See id.

As to the remaining disputed components of the judge's damages award, there is evidentiary support for the judge's award of $ 29,112.33 in connection with the sale of the Fuyatt Street property,⁷ and, contrary to the defendants' argument, there is nothing to indicate that the $ 5,000 the judge awarded to compensate Couture for lost income on the sale of Unit 2 in the Harvard Street property duplicated any other portion of the damages awarded.

We do, however, agree with the defendants that the award of $ 11,200 for the plaintiff's share of the proceeds of the garage rentals at the Stoneham property is not supported by the evidence. The unrefuted evidence was that the garages, collectively,⁸ had been rented at $ 700 per month for twelve or fourteen months as of the September 2017 trial date. Thus, the award should have been between $ 2,800 and $ 3,267. Accordingly, we vacate this aspect of the damage award and remand so that the judgment may be amended consistent with this decision.

4. Expert testimony. The defendants' final arguments concern Denise Cataldo's testimony, her report, and the exhibits to her report. The defendants moved in limine to preclude Cataldo from testifying, contending in part that her testimony would be based on “speculation.” The motion was denied and, as noted, Cataldo testified. There was nothing speculative about her testimony or her report. Cataldo's report identified the documents on which Cataldo relied in coming to her opinion. Those documents, and Cataldo's review of them, provided factual foundation for Cataldo's opinions. The fact that she did not review every document that might have been available did not render the opinion impermissibly speculative. See Salvas v. Wal-Mart Stores, Inc., 452 Mass. 337, 359-360 (2008). Accordingly, the judge did not abuse his discretion in permitting Cataldo to testify.

The defendants further assert that Cataldo should not have been permitted to opine on the defendants' breaches of fiduciary duty and that her report should not have been introduced in evidence. However, neither contention is supported by the record. Cataldo was not permitted to testify to such opinions, even in response to defense counsel's questioning, and the report, although marked for identification, was not admitted in evidence.

Lastly, the defendants argue that the judge abused his discretion in admitting “exhibit 86.”⁹ Although the defendants raised the possibility of these objections more than once, they first failed to identify those objections with enough specificity to allow the judge to rule on them, and later, once they did identify the objections, they failed to seek a ruling on them. A party cannot protect its rights by simply announcing an intention to make a focused objection at a later time. “A party challenging the admission of evidence must timely object and state the specific grounds for his objection.” Commonwealth v. Costa, 88 Mass. App. Ct. 750, 753 (2015), quoting Commonwealth v. Vasquez, 456 Mass. 350, 376 (2010) (Spina, J., dissenting in part and concurring in part). On this record, the judge did not abuse his discretion in failing to rule on the defendants' objections to particular portions of exhibit 86, or by admitting the exhibit in its entirety.¹⁰

Conclusion. So much of the judgment as awards $ 11,200 for the plaintiff's share of the garage rentals is vacated, and that issue is remanded for further consideration and amendment of the judgment consistent with this decision. The judgment is otherwise affirmed.

So ordered.

Vacated in part and Remanded otherwise affirmed.

FOOTNOTES

4.   The trial judge observed that the complaint misidentified this trust by the name “Zagami Family Trust.”

5.   All three siblings are one-third beneficiaries of the trust and members of the LLC; Thomas and Michael Zagami are the sole members of Zagami Brothers, LLC.

6.   Couture's claims included (1) breach of fiduciary duty, (2) accounting, (3) fraudulent conveyance of assets, and (4) a request for injunctive relief.

7.   As a result of a typographical error, the judge's memorandum ascribes this amount to “the Harvard Street property.”

8.   The judge found that the $ 700 rate applied “per garage”; at oral argument, Couture confirmed that the rate was $ 700 for all five garages, as a group.

9.   Cataldo's report included a number of attachments. These attachments were identified individually at trial, then were admitted, collectively, as exhibit 86.

10.   Even if the defendants had provided the judge with their written list of objections, by the time they did so, they had waived their objections to the overwhelming majority of the documents included in the list by failing to object to them when Cataldo testified about them. See Commonwealth v. Perryman, 55 Mass. App. Ct. 187, 192-193 (2002).