Villar v. Kernan
695 A.2d 1221, 1997 ME 132, 1997 Me. LEXIS 133 (1997)
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Rule of Law:
Under Maine law, 13-A M.R.S.A. § 618 requires shareholder agreements that relate to the corporation's affairs, such as shareholder employment or salaries, to be in writing to be enforceable, even between the parties to the agreement.
Facts:
- In 1988, Frederick Villar and Peter Kernan agreed to start a brick oven pizza business.
- Villar was responsible for operating the business, and Kernan handled the finances.
- They incorporated their business as Ricetta’s, Inc., with Villar receiving 49% of the shares and Kernan receiving 51%.
- Villar and Kernan orally agreed that as owners, they would never receive salaries, only distributions.
- Ronald Stephan later became a 2% shareholder, obtaining 1% from both Villar and Kernan.
- The business was successful, but the relationship between Villar and Kernan deteriorated.
- Villar and Stephan attempted to buy Kernan out, but the buyout failed, and Stephan subsequently allied with Kernan.
- In March 1994, Kernan entered into a “consulting agreement” with Ricetta’s, providing him $2,000 per week, which was ratified at a shareholders’ and board of directors’ meeting where Villar was not present.
- Pursuant to this agreement, Kernan received $90,000 in consulting fees in 1994 and $24,000 in early 1995.
Procedural Posture:
- In May 1995, Frederick Villar filed a complaint in the United States District Court for the District of Maine, asserting six counts against four defendants, including Peter Kernan.
- Peter Kernan filed a motion for judgment on the pleadings or for a summary judgment.
- The District Court dismissed all of Villar’s claims except the breach of contract claim against Kernan.
- A nonjury trial on Villar’s breach of contract claim was held in August 1996 in the District Court.
- The District Court concluded that an oral agreement between Villar and Kernan prohibiting Kernan from receiving a salary existed.
- The District Court certified two questions of state law to the Supreme Judicial Court of Maine, including whether 13-A M.R.S.A. § 618 precluded enforcement of such an oral agreement.
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Issue:
Does Maine law, specifically 13-A M.R.S.A. § 618, preclude an action for breach of an oral contract between two shareholders of a closely held corporation that prohibits them from receiving salaries from the corporation?
Opinions:
Majority - Dana, Justice
Yes, Maine law, specifically 13-A M.R.S.A. § 618, precludes an action for breach of an oral contract between two shareholders of a closely held corporation that prohibits them from receiving salaries from the corporation. The court held that the plain language of § 618(1), which begins with "No written agreement will be invalid...", indicates a legislative intent to validate only written agreements that meet the statute's requirements. The oral agreement between Villar and Kernan, prohibiting salaries, directly relates to the "affairs of the corporation" by affecting the "employment of shareholders" and potentially the distribution of dividends, thus falling within the scope of § 618(1). Since the agreement relates to corporate affairs covered by § 618, it must adhere to the statute's specifications, including the express writing requirement. The court further clarified that § 618(2), which allows enforcement of agreements between parties despite failing certain conditions of subsection (1) (like being in articles or having universal written assent/notice), does not waive the fundamental requirement that the agreement itself must be in writing. Therefore, only written agreements, even if they fail other formalities, can be enforceable under § 618(2).
Analysis:
This case establishes a strict interpretation of Maine's corporate statutes, particularly for closely held corporations, regarding shareholder agreements that affect corporate governance or finances. It underscores the critical importance of reducing such agreements to writing to ensure their enforceability, preventing parties from relying on oral promises, even when made between original shareholders. The decision limits the availability of equitable remedies, such as specific performance to overcome the Statute of Frauds, when a specific corporate statute mandates a written agreement for validity. This ruling promotes certainty and predictability in corporate dealings but requires shareholders in closely held corporations to be diligent in formalizing their internal agreements.
