CARREÑO v. LEMAR (2020)

MEMORANDUM AND ORDER PURSUANT TO RULE 1:28

The plaintiff, Francisco Javier Carreño, brought this action against Rudolph Lemar, as trustee of the Rudolph Lemar Family Trust of 2008 (Trust), for breach of fiduciary duty, accounting, and a declaratory judgment that Carreño owns twenty-five percent of the Carrmar Group, LLC (Carrmar).³ Carrmar, a limited liability company, was formed pursuant to an operating agreement to manage four properties originally owned by Lemar and then each transferred to a “series” owned by Carrmar. Upon learning of the sale of one of the properties, Carreño demanded payment of his twenty-five percent interest. Lemar refused, asserting that Carreño's interest in Carrmar was contingent on his promise to manage Carrmar -- a promise, Lemar alleged, Carreño had breached.⁴ Following a four-day jury trial, the jury found in favor of Carreño. After judgment entered, Lemar filed a motion for a new trial, asserting that the verdict was against the weight of the evidence because Carreño's interest in Carrmar was either void or worthless under the operating agreement as properly construed. The judge denied Lemar's motion. Lemar appeals from the judgment and from the denial of his motion for new trial.

On appeal, Lemar alleges that the judge abused his discretion in denying his motion because, under his proposed construction, the operating agreement showed Carreño's twenty-five percent interest was void or worthless. At the least, Lemar contends, the operating agreement is ambiguous, and he should have been allowed to argue his construction of the document to the jury. We affirm.

Background.⁵ Faced with financial pressures in 2007 from mounting credit card debt and a pending litigation regarding one of his four Dorchester properties, Lemar approached Carreño, his stepson, with a business opportunity. Carreño, who had been providing loans to Lemar to assist him with his debts, agreed to provide additional capital and managerial assistance to renovate the properties; in exchange, Lemar promised to form a corporation in which Carreño would have an ownership interest.

Carreño invested approximately $50,000 to renovate Lemar's properties, hired two contractors to assist him, and largely managed the renovation. As a result, the properties (which had been largely uninhabitable) began to generate rental income.

The parties retained an attorney and, pursuant to the operating agreement, formed Carrmar, a Delaware limited liability company; the four properties were transferred each to a separate “series” of Carrmar, structured so as to limit the liability of any one series to the assets of that series, pursuant to 6 Del. C. § 18-215. “Membership Interest” in Carrmar was designated by “units.”⁶

At trial, the parties stipulated that Carrmar had 200 shares of stock (one hundred voting and one hundred nonvoting) and that in May 2008 (just after the company was formed) Lemar executed a certificate transferring fifty nonvoting shares to Carreño. Consistent with this stipulation, certificates showing Carrmar's 200 units (one hundred voting units and one hundred nonvoting units) initially issued to the Trust, as well as a certificate showing fifty nonvoting units to Carreño signed by Lemar as trustee for the Trust, were admitted as exhibits at trial.

The transfer of the fifty units to Carreño was documented in the “Advancement,”⁷ a document executed by Lemar “denomitat[ing] said gift [of the fifty units] as an advancement to be treated as such under the provisions of the [Trust].” The parties' lawyer described the parties' agreed ownership structure in a letter countersigned by both parties. The lawyer stated:

“The [Trust] will initially own 100% of the interest in [Carrmar]. You have decided to gift 25% of the LLC's nonvoting units to your son [Carreño]. As we discussed, a step up in cost basis to fair market value on the date of death will be lost. The gift is an advancement of [Carreño's] inheritance.”

Carreño was willing to accept the unfavorable tax treatment of the advanced inheritance in order to secure the twenty-five percent interest.

The parties' lawyer also advised them of the need for “[m]ulti member LLCs” to file partnership tax returns. For each of the years from its founding, Carrmar has issued K-1 forms to Carreño, showing his twenty-five percent interest in the company.

Carreño retained a management company to manage the properties. In 2009, Lemar became dissatisfied with the management company and sent a letter to Carreño demanding his resignation as Carrmar's manager. Carreño cooperated and transferred documents over to a new property manager.

In 2013, one of the properties was sold to Lemar's brother-in-law. Lemar refused to give Carreño an accounting of the transaction and to transfer to Carreño his share of the sales proceeds. This suit followed.

At trial, the parties stipulated to certain facts, including Carreño's twenty-five percent interest in Carrmar. Lemar's defense at trial was that Carreño's twenty-five percent interest was contingent on a lifetime agreement to provide management services to Carrmar.

Prior to closing arguments, Lemar sought leave to argue to the jury his construction of the operating agreement, pursuant to which the units transferred to Carreño were either void or valueless. The judge ruled that the construction of the operating agreement was a question of law and denied Lemar's request.

In a special verdict form, the jury found that Lemar breached his fiduciary duties to Carreño as a shareholder of Carrmar, and awarded Carreño $257,400.⁸ After judgment entered, Lemar filed a motion for new trial, arguing his construction of the operating agreement. The motion was denied. This appeal followed.

Discussion. “The granting or denying of a new trial on the ground that the verdict is against the weight of the evidence rests in the discretion of the judge.” Robertson v. Gaston Snow & Ely Bartlett, 404 Mass. 515, 520 (1989), cert. denied, 493 U.S. 894 (1989), quoting Bergdoll v. Suprynowicz, 359 Mass. 173, 175 (1971). The judge should only set aside a verdict as against the weight of the evidence when it is determined that the jury “failed to exercise an honest and reasonable judgment in accordance with the controlling principles of law.” Id., quoting Hartmann v. Boston Herald–Traveler Corp., 323 Mass. 56, 60 (1948). “Judges are not, however, permitted simply to substitute their own view of the evidence for that of the jury.” Passatempo v. McMenimen, 86 Mass. App. Ct. 742, 746 (2014). The test is whether the verdict induces “the strong belief that it was not due to a careful consideration of the evidence, but that it was the product of bias, misapprehension or prejudice.” Turnpike Motors, Inc. v. Newbury Group, Inc., 413 Mass. 119, 127 (1992), quoting Scannell v. Boston Elevated Ry., 208 Mass. 513, 514 (1911). We review the denial of a motion for a new trial for an abuse of discretion. Id.

On appeal, Lemar first contends that Carreño's fifty units in Carrmar were without any value because the units, as shown on the face of the certificates, are units in Carrmar itself and not units in any of Carrmar's four series. Lemar maintains that, because the operating agreement does not reference membership interests in Carrmar itself, the units must have been transferred by the Trust in its role as “Founder” -- a member of Carrmar “not associated” with a series, which, pursuant to section 2.01(c) of the operating agreement, “shall have no Membership Interest.”

Lemar's position falters on its premise. Contrary to Lemar's position, section 8.05 of the operating agreement specifically references membership interests in Carrmar itself, providing that “[a]ll Membership Interests in the Company shall be denominated in Units, which may be Voting Units or Non-Voting Units” (emphasis added). In turn, “Membership Interest” means “a Member's entire limited liability company interest in [Carrmar] with respect to a Series.” Read together, these provisions of the operating agreement mean that a “unit” shows a member's interest in Carrmar with respect to each of Carrmar's series. Thus, the fact that the certificates show units in Carrmar does not render them worthless. The units instead show Carreño's membership interest in Carrmar with respect to each of the four series.

Indeed, the fact that a “unit” in Carmarr represents a member's interest in each of the four series is supported by the operating agreement's requirement that a member's percentage interest in each series be identical across Carrmar's four series, providing that “[a]ny change in a Member's Percentage Interest with respect to any Series ․ shall require (i) the same change in such Member's Percentage Interest in all other Series ․” The operating agreement also provides in section 10.01 that “Membership Interests” are transferrable, but a member transferring a Membership Interest in one series “shall also” transfer to that transferee “the same proportion of his or her Membership Interests in each other Series.” Thus, Carreño's fifty units in Carrmar represent a twenty-five percent interest in each of the four Carrmar series.

In addition, Lemar's conclusion that the transferred units are void because they were transferred by the Trust in its role as “Founder” ignores section 2.01(c), which provides that a “Founder” may become a Member associated with a series and acquire membership interest in that series. Accordingly, the Trust became both a Founder of Carrmar (with no membership interest) and a member associated with each of the four series (initially with one hundred percent membership interest in each of the four series). There is no support for Lemar's contention that the transfer was void because the Trust acted in its role as Founder (not associated with a series and thus with no membership interest). To the contrary, the only reasonable construction is that the Trust as transferor acted in its role as a member associated with a series and thus could (and did) transfer fifty units to Carreño. Because Lemar's contrary construction is unsupportable, the judge properly precluded Lemar from presenting this argument to the jury.⁹ See Balles v. Babcock Power Inc., 476 Mass. 565, 571 (2017) (interpretation of terms in contract is question of law).

The plain reading of the operating agreement set forth supra is consistent with the parties' contemporary understanding as set forth in two documents -- the “Advancement” and the parties' attorney's letter. The “Advancement” signed by Lemar indicated that the Trust transferred fifty units of its membership interest as a gift to Carreño. The attorney's letter confirms this transaction, noting the Trust's initial ownership of one hundred percent interest in Carrmar, of which twenty-five percent in nonvoting units were gifted to Carreño.

The construction is also consistent with the parties' subsequent conduct. Specifically, Carreño received annual tax documents from Carrmar indicating his twenty-five percent ownership interest. This is consistent with the attorney's letter at the founding of Carrmar, advising the parties of the need for “[m]ulti member LLCs” to file partnership tax returns. Next, Lemar asserts that the transfer was not perfected because the parties did not comply with the provisions requiring the transferee to execute the operating agreement and the separate series agreement. This argument is untenable because the operating agreement anticipates just such a failed protocol, providing that in such a scenario the transferee becomes a nonvoting assignee of the series. As such, any failure by Carreño to perfect the transferred units resulted in his ownership of the interest as an assignee. Accordingly, the jury's verdict finding in favor of Carreño is not against the weight of the evidence, and the judge did not abuse his discretion in denying Lemar's motion for a new trial.¹⁰⁹ ,¹¹

Judgment affirmed.

Order denying motion for new trial affirmed.

FOOTNOTES

3.   Carreño voluntarily dismissed a claim for dissolution of Carrmar.

4.   Lemar filed counterclaims based on this alleged promise.

5.   As Lemar acknowledges, we must summarize the facts in the light most favorable to Carreño, the prevailing party. See Charles v. Leo, 96 Mass. App. Ct. 326, 328 (2019).

6.   Section 8.05 of the operating agreement provided that “[a]ll Membership Interests in the Company shall be denominated in Units, which may be Voting Units or Non-Voting Units.”

7.   The twenty-five percent interest in Carrmar was an advance on his inheritance. He has three siblings.

8.   The jury found against Lemar on his counterclaims. These claims are not before us on appeal.

9.   Thus, we review the operating agreement's language de novo. See EventMonitor, Inc. v. Leness, 473 Mass. 540, 549 (2016).

10.   Lemar waived his claim that Carreño's work receipts are fraudulent. Lemar and Carreño stipulated to entering those receipts as exhibits below. See R.W. Granger & Sons, Inc. v. J & S Insulation, Inc., 435 Mass. 66, 73 (2001) (court need not consider claim asserted for first time on appeal).

11.   Carreño's request for appellate attorney's fees and costs is denied.