In re: Mi-Lor Corp.; Professional Brushes, Inc. v. Robert Gottsegen; Michael Gottsegen; Lori Gottsegen Zinman; Dorothy Gottsegen

United States Court of Appeals
For the First Circuit
Nos. 02-2578, 02-2659
IN RE: MI-LOR CORP.; PROFESSIONAL BRUSHES, INC.,
Debtors.
JAMES M. LISTON; JOHN J. MONAGHAN, as Creditors Trustees,
Plaintiffs-Appellants, Cross-Appellees,
v.
ROBERT GOTTSEGEN; MICHAEL GOTTSEGEN;
LORI GOTTSEGEN ZINMAN; DOROTHY GOTTSEGEN,
Defendants-Appellees, Cross-Appellants.
CROSS-APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Rya W. Zobel, U.S. District Judge]
Before
Boudin, Chief Judge,
Siler,* Circuit Judge,
and Lynch, Circuit Judge
Howard M. Brown, with whom Frank F. McGinn and Bartlett
Hackett Feinberg P.C. were on brief for plaintiffs-appellants,
cross-appellees.
Stephen F. Gordon, with whom Ronald W. Dunbar, Jr., Leslie F.
Su, Gordon Haley LLP and Henry Mark Holzer were on brief for
defendants-appellees, cross-appellants.

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November 3, 2003
_____________________
*Of the United States Court of Appeals for the Sixth Circuit,
sitting by designation.

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LYNCH, Circuit Judge. This case explores the
Massachusetts law of close corporations and the ability of those
corporations to give releases of claims of self-dealing. A jury
found that the defendants, an officer/director and the controlling
shareholders in two close family corporations, had unjustly
enriched themselves from corporate funds in the sum of over
$380,000. This appeal concerns whether that liability was
extinguished by a release in favor of the defendants that was
executed by the corporation and its remaining directors and
shareholders on March 31, 1990, as part of mutual releases given in
connection with a stock redemption of the defendants' shares. If
liability is extinguished, then the plaintiffs, who are creditors
in bankruptcy standing in the shoes of the corporation, cannot
recover on the jury verdict.
The district court did not reach the questions about the
validity and enforceability of the release because it ruled that
the creditors could not assert such claims -- essentially, that
they lacked standing. While that standing analysis has some
attraction, it is ultimately unpersuasive. The questions about the
release will have to be addressed on remand because this record
does not permit their resolution. No Massachusetts case is
directly on point as to the standards to be used. This opinion
attempts to provide guidance for the case on remand, in an area of
law marked by ambiguity and inconsistency.

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1 Stuart is Robert's brother and Lawrence is Robert's
cousin.
2 Arthur Gottsegen, John Bambera, and Anthony Glydon were
stockholders initially, but they sold their stock in the 1980s.
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I.
Mi-Lor Corporation was in the business of manufacturing,
distributing, and selling plastic dental and hair products, such as
toothbrushes and combs. The company was formed under Massachusetts
law in 1977 by three family groupings -- the Robert Gottsegen
family, the Stuart Gottsegen family, and the Lawrence Gottsegen
family1 -- and an individual named Larry Wald. Robert was the
president of the company, and he, Stuart, and Wald served as Mi-
Lor's directors. Lawrence was primarily responsible for sales;
Wald was responsible for Mi-Lor's financial operations.
Robert's children, Lori and Michael, and Robert's ex-
wife, Dorothy, were stockholders of the company, as were Stuart,
Lawrence, and Wald.2 Two trusts, one for the benefit of Michael
and one for the benefit of Lori, also owned Mi-Lor stock. Lawrence
was the trustee of both trusts. Although Robert did not own Mi-Lor
stock, he effectively controlled the company in his capacity as the
sole voting trustee of a voting trust that owned sixty-five percent
of Mi-Lor's voting stock. Wald was the only stockholder who was
not a member of the voting trust. The voting trust included all of
the stock held by Dorothy, Lori, Michael, and the two trusts. To
the extent that Robert's interests were aligned with the interests

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3 Initially, Wald became president and Lawrence filled the
director position vacated by Robert. Then, after Wald died in
1991, Stuart became president and Steven, Lawrence's son, filled
the vacant director position. After Wald's death, Lawrence
allegedly first discovered and investigated Wald's misuse of
corporate funds. Mi-Lor filed suit in state court against Wald's
estate in July 1992.
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of the other members of his family unit, the Robert Gottsegen group
effectively functioned as one unit in three intertwined capacities:
as the president, as a director, and as the majority shareholder of
Mi-Lor.
Professional Brush, Inc. ("Pro Brush") was formed in 1987
and was in the business of manufacturing, distributing, and selling
toothbrushes and other dental care products. Robert was president
and a director of the company; Lawrence, Stuart, and Wald were the
other directors. Michael and Lori owned Pro Brush stock, as did
Steven Gottsegen, Stuart, and Wald.
In 1989, Robert suffered a heart attack. On March 31,
1990, pursuant to a stock redemption agreement, Mi-Lor redeemed all
of the shares held by Michael, Lori, Dorothy, and the two trusts.
As of the same date, the voting trust was terminated, Robert
resigned as both president and director, and the management of the
corporation changed accordingly.3 As part of the redemption
agreement, in exchange for 2,480 shares of stock and for other
consideration (including "consulting, confidentiality and
noncompetition" agreements with Robert and Dorothy, and
"confidentiality and noncompetition" agreements with Lori and

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4 Several agreements were executed ancillary to the Mi-Lor
stock redemption agreement. Pursuant to a consulting agreement,
for example, Robert remained connected to Mi-Lor. Within a year of
the stock transaction, Robert instituted an arbitration proceeding
to force Mi-Lor to pay him according to the terms of the consulting
agreement. The parties settled and Mi-Lor agreed to pay Robert.
5 The remaining principals were Wald, Stuart, Lawrence,
Joan Gottsegen, Steven Gottsegen, and four trusts (two for which
Lawrence served as trustee and two for which Sandra Gottsegen
served as trustee).
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Michael), Mi-Lor assigned to Michael, Lori, Dorothy, and the
trustee of the two trusts the proceeds (totaling approximately $1
million) from the merger of Solo Products, Inc. into Mi-Lor and
granted them entitlements to receive certain other payments.
Also on March 31, 1990, Michael and Lori entered into a
stock redemption agreement with Pro Brush, whereby Michael and Lori
each received twenty-five dollars in exchange for the 625 shares of
Pro Brush stock that each held. Pursuant to a provision in this
redemption agreement, Robert resigned as president and director of
Pro Brush.
As part of the Mi-Lor stock redemption agreement,4
Robert, Dorothy, Lori, Michael, and the two trusts (the "Redeeming
Principals" or the "Robert Gottsegen group") also entered into an
Agreement of Mutual Release (the "Release") with the company and
its remaining principals5 on March 31, 1990. Under its terms, Mi-
Lor and its remaining shareholders agreed to release the Redeeming
Principals from "any and all actions, causes of action, damages, .
. . claims or demands of whatever kind or nature . . . which the

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Company and Remaining Principals ever had or claimed to have"
relating to "any act, omission, cause or thing done or omitted"
with respect to the "formation, incorporation or operation of the
Company . . . ." The Release excluded claims related to "the
continuing obligations owed by the Redeeming Principals . . . under
the terms . . . of the Redemption Agreement ... and the collateral
. . . agreements" and claims arising from "any legal proceeding
initiated by Alfred Stauble." The Release was signed by all of Mi-
Lor's shareholders and all of its directors. It is this release
that is at issue here.
In June 1994, the Redeeming Principals sued Mi-Lor in
state court alleging that they were owed additional payments under
the stock redemption agreement based on Mi-Lor's attainment of a
specified level of pre-tax earnings. They also alleged fraud on
the part of Mi-Lor in the termination of the voting trust. A
default judgment was entered against Mi-Lor for $226,984.80, and
the voting trust was reinstated. On February 10, 1995, the
Redeeming Principals and Mi-Lor entered into a settlement agreement
whereby the voting trust was again terminated and Robert was
elected a director but agreed not to prevent Mi-Lor from filing for
bankruptcy.
On March 3, 1995, Mi-Lor and Pro Brush voluntarily filed
Chapter 11 petitions. On February 28, 1997, Mi-Lor and Pro Brush,
as debtors-in-possession, brought an adversary proceeding against

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6 It was through the discovery proceeding in the state suit
against Wald's estate (see supra note 3) that Lawrence claims to
have first learned of Robert's misuse of Mi-Lor funds.
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the Redeeming Principals alleging a host of claims. Among other
things, the complaint alleged that the Redeeming Principals had
caused Mi-Lor to pay for their personal expenses and make other
expenditures for their benefit that had no legitimate corporate
purpose.6 The defendants' affirmative defenses included the
Release and the statute of limitations.
On November 2, 1998, the bankruptcy court confirmed the
Second Amended Liquidating Joint Plan of Reorganization of the
Debtors. The court's order established that all property of the
Mi-Lor and Pro Brush bankruptcy estates would thereafter be vested
in the Creditors Trust and that the trustees of the Creditors Trust
would succeed to the debtors' right to bring or continue causes of
action. Subsequently, James M. Liston and John J. Monaghan, in
their capacity as Creditors Trustees, replaced Mi-Lor and Pro Brush
as plaintiffs in the corporations' suit against the Redeeming
Principals.
The defendants moved for summary judgment based on the
release and statute of limitations defenses, and the bankruptcy
court denied the motion on February 26, 1999. On May 7, 1999, the
bankruptcy court sua sponte vacated its February 26 order and
granted partial summary judgment to the plaintiffs on the statute
of limitations defense. Discovery ensued. The defendants filed a

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7 The special verdict did not specifically characterize the
finding as one of "unjust enrichment." The district court's August
17, 2001 memorandum and order stated that the "jury found in favor
of the plaintiffs on the unjust enrichment claim." The defendants
did not raise an objection to the characterization of the jury
verdict as a finding of unjust enrichment and have waived the
issue.
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motion to vacate the May 7 order in December 2000, and the district
court denied that motion on January 25, 2001 after de novo review.
During the five day trial in April 2001, the parties
disagreed, among other things, about the extent to which the
defendants had received personal payments, about whether the
defendants had reimbursed the company for the payments of personal
expenses they did receive, and about whether the defendants had made
loans to the company. There was general agreement, however, that
Mi-Lor funds were indeed used to pay the personal expenses of the
defendants in the first instance, and that other
directors/shareholders in Mi-Lor also received payments of personal
expenses. By agreement, the release defense was not submitted to
the jury.
In a special verdict, the jury found that Mi-Lor had paid
$380,807.66 of the Redeeming Principals' personal, non-business
expenses and that the Redeeming Principals had not reimbursed Mi-Lor
for such payments.7 Among the allegedly unreimbursed payments shown
to have been made to Robert and other members of his family unit
were country club dues and expenses; payments to pharmacies for
medications; automobile expenses; payments for telephone calls from

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Robert's home in Bermuda; legal fees for litigation to which Mi-Lor
was not a party; payments to Robert's divorce lawyers; monthly
payments to Robert's mother; rent payments for an apartment occupied
by Michael; and monthly payments to Dorothy.
The parties filed motions for judgment as a matter of law
under Rule 50 regarding whether the Release should bar the unjust
enrichment claim, and the district court scheduled an evidentiary
hearing on that issue. The parties then agreed to have the district
court decide the issues pertaining to the Release without hearing
further evidence, so the district court cancelled the hearing.
The district court's memorandum and order on the parties'
respective motions for judgment as a matter of law concluded,
against the plaintiffs, that the Release was (1) executed by Mi-Lor,
because there was sufficient evidence that Mi-Lor had assented to
it, despite its formal shortcomings, and (2) enforceable, because
it was executed at a time when no duties were owed to Mi-Lor's
creditors. The district court entered judgment in favor of the
defendants.
The Creditors Trustees appeal the district court's
decisions to deny their motion for judgment as a matter of law
regarding the Release and to allow the defendants' motion for
judgment as a matter of law. The defendants' cross-appeal on the
statute of limitations ruling argues that their statutory and

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8 The plaintiffs argued that no one had signed the Release
specifically on behalf of Mi-Lor. The plaintiffs' attack is
without merit. There was ample evidence to support the district
court's factual determination.
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constitutional rights were violated when the bankruptcy court sua
sponte granted summary judgment to the plaintiffs on May 7, 1999.
II.
A. Creditors Trustees as Plaintiffs
The district court construed the question of the validity
and enforceability of the Release as an issue of law. It first
determined that the Release had been executed by the corporation,
even though no signature qua corporation was designated.8 It also
determined that the broad scope of the Release would cover the
unjust enrichment claims, if the Release was deemed valid and
enforceable.
The district court then explained that the corporation's
shareholders could have brought a derivative action if the unjustly
enriched participants had acted to the detriment of the corporation
in executing the Release. However, the court held that the
plaintiffs here were creditors and could not bring an action
challenging the Release unless its execution contributed to the
corporation's insolvency or took place while the corporation was
insolvent. Because the corporation was not insolvent at the time
of the Release and there was no evidence suggesting that the Release
contributed to its subsequent insolvency, the court ruled:

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While shareholders may have been able to object to the
Release, in fact, every shareholder signed it. The fact
that Mi-Lor is presently insolvent does not mean that the
Release suddenly becomes invalid as a result of duties
owed to creditors or to the corporation on behalf of the
creditors. Invalidating the Release years after its
execution because of its adverse effects on creditors'
interests would create fiduciary duties to creditors
where they simply do not exist.
Accordingly, the court did not reach the questions raised about the
validity and enforceability of the Release.
On appeal, the plaintiffs argue that the court applied the
wrong analytical principles in choosing to deny creditors the
ability to pursue claims as substitute plaintiffs for the
corporation. They argue that the company, as debtor-in-possession,
properly filed an adversary proceeding against the defendants
pursuant to the rules of the federal bankruptcy system. This
position is correct. A corporation may bring an action against its
directors, current or former, for self-dealing. See Boston
Children's Heart Foundation, Inc. v. Nadal-Ginard, 73 F.3d 429 (1st
Cir. 1996) (applying Massachusetts law). And a debtor-in-possession
may commence an action without court approval. Collier on
Bankruptcy ¶ 323.01 (15th ed. rev.).
The Creditors Trustees then argue that, by order of the
bankruptcy court, they properly stepped into the shoes of the
corporation as plaintiffs. In those shoes, they are asserting the
corporation's right to recover to the estate the amount of the
unjust enrichment. That they, as creditors, would be the real

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9 Frequently, the statute of limitations will bar claims by
creditors pursuing actions in the capacity of the corporation when
those claims reach back to transactions from years earlier. In
addition, some claims of this sort may trigger a successful laches
defense. But here, the district court correctly determined that
the statute of limitations was no bar, and no laches defense was
raised.
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beneficiaries of any recovery is, they say, happenstance and does
not alter the fact that they sue in the shoes of the company. The
defendants do not contest this proposition; indeed, no objection was
made to the bankruptcy court when it permitted the creditors to sue,
and the case was characterized to the jury as just explained.
While the district court's contrary view is a well-
reasoned position,9 it ultimately must give way on the question of
standing. The court's intuition does, though, inform the analysis
later.
The Creditors Trustees may properly stand in the shoes of
the corporation and its shareholders for purposes of the suit
because they are continuing the corporation's cause of action, not
initiating a separate action on behalf of creditors. See Collier
on Bankruptcy ¶ 541.08 (15th ed. rev.) ("The trustee . . . stands
in the shoes of the debtor corporation in prosecuting a cause of
action belonging to the debtor . . . ."); id. ¶ 323.01 ("A trustee
appointed in a chapter 11 case . . . is automatically substituted
as a party in any pending action, proceeding or matter and therefore
has the same rights and obligations as the . . . debtor in
possession."). When a corporation sues its fiduciaries or a

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10 In some circumstances, the Donahue doctrine permits
stockholders of close corporations to sue for direct injuries and
recover personal relief for breaches of fiduciary duties owed
directly to them. See Donahue v. Rodd Electrotype Co., 328 N.E.2d
505, 515 (Mass. 1975). Such a suit for personal relief is
appropriate where it would be difficult to establish a breach of
duty owed to the corporation, as in the case of a freeze-out of
minority shareholders. Id. at 514-15. The Creditors Trustees,
however, do not sue as Donahue plaintiffs.
11 This result explains why the plaintiff in Bessette
refused to assert a derivative rather than a direct claim.
Bessette involved a company on the verge of bankruptcy, and as one
commentator explained: "The plaintiff presumably wanted personal
relief because he feared the corporation's creditors, not its
stockholders, would reap the benefits of any recovery in a
derivative action." Richard W. Southgate & Donald W. Glazer,
Massachusetts Corporation Law & Practice § 16.5(b) (2003 Supp.).
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stockholder brings a derivative suit against corporate fiduciaries
to enforce the corporation's rights, any recovery for the fiduciary
breach belongs to the corporation.10 See, e.g., Bessette v.
Bessette, 434 N.E.2d 206, 208 (Mass. 1982) ("It is a basic principle
of corporate law that if a majority shareholder receives corporate
cash distributions and a salary in excess of the reasonable value
of services rendered, the right to recover the overpayments belongs
to the corporation."). Sums recovered by a corporation in such
suits are paid first to creditors, before any distributions are made
to shareholders.11 See Bagdon v. Bridgestone/Firestone, Inc., 916
F.2d 379, 383 (7th Cir. 1990) ("Recoveries [in derivative suits]
pass through the corporate treasury, a process that both protects
creditors (who get first dibs) and avoids questions of apportionment
. . . ."). As a result, the issues pretermitted by the district

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court about the validity and enforceability of the release must be
reached.
In one sense it is quite true that the other shareholders
were the victims of the unjust enrichment and of any failure to make
adequate disclosure to them in securing the Release, and they are
not complaining about either. But to the extent that unjust
enrichment occurred, it was through a misuse of the corporation's
assets; and the Release, although ratified by the shareholders, was
a corporate act surrendering a claim of the corporation. Whatever
right the corporation may have to recover for unjust enrichment,
through the invalidation of the Release, is an asset of the
corporation and now belongs to the creditors.
B. Standard for Determining the Enforceability of the Release
In essence, this case involves two claims of fiduciary
breach. The first, on which the jury found for the plaintiffs, is
that the Redeeming Principals had unjustly enriched themselves from
the corporation's coffers. The second claim is that the Redeeming
Principals committed a fiduciary breach that renders the Release
unenforceable. The plaintiffs argue that the Release is
unenforceable at a minimum because the defendants failed to disclose
the material details of their unjust enrichment to Mi-Lor's
remaining shareholders and directors when seeking the Release. They
also argue that the Release is unenforceable because the defendants
have not demonstrated that the Release was fair to the company.

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12 Massachusetts does not prohibit a company from releasing
directors from claims of self-dealing. Massachusetts does prohibit
a corporation from including in its articles of organization a
provision that eliminates or limits the liability of a director:
(1) for any breach of the director's duty of loyalty to the
corporation or its stockholders; (2) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing
violation of law; (3) for illegal distributions to stockholders and
improper loans to directors or officers; or (4) for any
transactions from which the director derived an improper personal
benefit. Mass. Gen. Laws ch. 156B, § 13(B)(1.5). And a
Massachusetts corporation may not enact a by-law that conflicts
with either a statute or its articles of organization. Ch. 156B,
§ 16; Assessors of Boston v. World Wide Broadcasting Foundation of
Mass., Inc., 59 N.E.2d 188, 191 (Mass. 1945) (noting that by-laws
may not enlarge or alter the powers conferred by the articles of
organization or by statute).
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At issue, then, is the standard for determining the
enforceability of a release, executed by a close corporation and its
directors and shareholders, of claims later proven to a jury that
certain corporate directors and shareholders unjustly enriched
themselves at the expense of the corporation. There is no
Massachusetts case directly on point.
Corporations, whether close or public, have a strong
interest in being able to give valid and enforceable releases. A
release of claims by a close corporation in particular, even a
release of self-dealing claims against its controlling shareholders,
may benefit the close corporation by allowing it to resolve internal
disputes in a swift and cost-effective manner and by enabling it to
facilitate the termination of the involvement of its principals.12
Close corporations like Mi-Lor also present fewer concerns about
possible injury to the investing public from the actions of

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corporate directors and shareholders than do public corporations or
charitable corporations. And where all of the shareholders (as
opposed to the directors) of a close corporation execute a release
after having received full disclosure, there are self-evident policy
reasons to enforce such a release.
Even so, within close corporations there are fiduciary
duties imposed on directors, officers, and, for some purposes,
shareholders, in connection with their respective dealings with, and
on behalf of, the close corporation and its shareholders. See
Demoulas v. Demoulas Super Mkts., Inc., 677 N.E. 2d 159, 179-80
(Mass. 1997); Donahue v. Rodd Electrotype Co., 328 N.E. 2d 505, 515-
16 (Mass. 1975). The release transaction involved here was not
entered into by two or more independent business entities, but
rather, was an entirely intra-corporation transaction -- entered
into by the close corporation itself (acting through the
ratification of its shareholders) with its own principals. The
intra-corporation nature of the transaction, the plaintiffs argue,
gave rise to certain fiduciary obligations by the Redeeming
Principals.
In Demoulas, the most recent Massachusetts case about
self-dealing, the plaintiff brought a derivative action against the
president/director/voting trustee of a close corporation and certain
affiliated persons and entities, alleging that the defendants had
diverted corporate opportunities and engaged in self-dealing. 677

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N.E.2d at 165-66. The Supreme Judicial Court explained that a
corporate fiduciary is not entirely barred from pursuing a corporate
opportunity or entering into a self-dealing transaction. When such
actions are taken, though, the corporate fiduciary has a duty to
disclose the details of the opportunity/transaction to the corporate
decision-makers and, at least when the decision-makers are
interested directors, has the burden of proving that the opportunity
or transaction is fair. Id. at 180-82. The court summarized the
standard as follows:
In short, to meet a fiduciary's duty of loyalty, a
director or officer who wishes to take advantage of a
corporate opportunity or engage in self-dealing must
first disclose material details of the venture to the
corporation, and then either receive the assent of
disinterested directors or shareholders, or otherwise
prove that the decision is fair to the corporation.
Id. at 182.
It is clear from Demoulas that Massachusetts imposes on
corporate fiduciaries a duty of full disclosure of material facts
in connection with self-dealing. Material information about the
self-dealing transaction is needed to make an educated decision
about whether to allow it, and in the case of a self-dealing
release, information about the conduct of the potential recipients
of the release is necessary for deciding whether to grant the
release encompassing such conduct. Thus, the Demoulas rule protects
decision-makers by giving them information.

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13 It is unclear from the quoted language from Demoulas
whether the term "disinterested" modifies only "directors" or
modifies both "directors" and "shareholders." That is, can
shareholders assent only if they are disinterested? If the
modifier applies to both words, then, apparently, interested
shareholders cannot, even upon full disclosure and unanimous
agreement, approve self-dealing by corporate fiduciaries.
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But Demoulas does not explicitly address the question of
whether full disclosure to interested shareholders suffices in the
context of a release given with unanimous shareholder consent.13
And more generally, Demoulas leaves open the question of the effect
of ratification by interested shareholders and the question of what
role fairness plays when interested shareholders have ratified.
The law in this area is a tangled web. Language from
cases in both the Supreme Judicial Court and in this court could,
if lifted out of context, be taken to mean that a showing of
fairness is always a requirement. See Winchell v. Plywood Corp.,
85 N.E.2d 313, 316-17 (Mass. 1949) (requiring a self-dealing
corporate fiduciary to prove full disclosure and fairness to the
corporation); Boston Children's Heart Foundation, Inc. v. Nadal-
Ginard, 73 F.3d 429, 433-34 (1st Cir. 1996) (same, applying
Massachusetts law). This language in modern opinions, which seems
to invoke a universal requirement of showing fairness, is at odds
with older cases saying that transactions between corporations and
their fiduciaries that are open and informed may be approved by the
express "consent of all the stockholders." Warren v. Para Rubber
Shoe Co., 44 N.E. 112, 113 (Mass. 1896) (holding that a corporation

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14 It is true that Massachusetts has not always followed
Delaware law on corporations. Compare Donahue, 328 N.E.2d at 515
& n.17 (creating a new fiduciary duty of utmost good faith and
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could contract with directors when the contract was made openly and
with the assent of all the stockholders and the stockholders were
not ignorant of the terms of the contract or of the self-dealing
relationship between the contracting parties). Until Massachusetts
addresses these questions directly, we are left to work out the
issue.
On balance, we conclude the wiser rule is that where there
is unanimous and fully informed shareholder approval in a close
corporation, such approval suffices (subject to special rules for
insolvency). If there is not full disclosure and unanimous
approval, the question arises whether a showing of fairness alone
would suffice to validate the Release. This appears to be the rule
in most jurisdictions, Gevurtz, Corporation Law 324 (2000); yet a
very literal reading of Demoulas' language quoted above might
suggest the need for both full disclosure and fairness -- although
this variation was not decided there. Quite possibly the question
need not be answered in the present case (and we do not seek to do
so) because, if the transaction embracing the Release was fair,
arguably this means that the corporation has already been properly
compensated for its unjust enrichment claim.
The rule we adopt is close to the non-exclusive rule in
the Delaware statute14 that a self-dealing transaction may be

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loyalty among the stockholders of Massachusetts close corporations
that is more exacting than the duty traditionally owed by corporate
directors and officers), with Nixon v. Blackwell, 626 A.2d 1366,
1379-81 (Del. 1993) (noting that directors have the same fiduciary
duties under Delaware law whether or not a corporation is closely
held and declining to fashion "a special judicially-created rule
for minority investors" in close corporations). Massachusetts'
independent view expressed in Donahue does not address how the
duties imposed on fiduciaries in close corporations might be
affected where there is unanimous ratification by informed
shareholders. The applications of fiduciary duties in Donahue and
in Demoulas do not involve second-guessing the unanimous decision
of informed shareholders, so neither of those cases reaches as far
as this case requires.
15 Under the Delaware statute, a self-dealing transaction
may be approved by the consent of a majority of fully-informed and
disinterested directors; by the consent of fully-informed
shareholders; or by a showing that "the contract or transaction is
fair to the corporation as of the time it is authorized, approved
or ratified, by the board of directors, a committee or the
shareholders." Del. Code Ann. tit. 8, § 144(a)(3). Delaware case
law suggests that the approval of a majority of informed
shareholders is sufficient under the statute, but the cases
disagree about whether interested shareholders may be counted
towards the majority.
16 One commentator has noted the weaknesses of relying on
shareholder approval in public corporations to protect investors'
interests. See R. Clark, Corporate Law 180-183 (1986).
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approved by the consent of all shareholders -- whether interested
or not -- so long as there is disclosure to those shareholders of
all material facts concerning the self-dealing.15 See Del. Code
Ann. tit. 8, § 144(a); R. Clark, Corporate Law 168 (1986). That
statutory rule is modified by Delaware case law, but the case law
regarding the effect of the fully informed consent of shareholders
in various contexts16 has been described by the Delaware Chancery

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Court as "not a model of clarity." Solomon v. Armstrong, 747 A.2d
1098, 1113 (Del. Ch. 1999).
Here, there was unanimous shareholder approval, so the
case does not present the question of what to do where a majority
of shareholders approve but that majority is controlled by or
composed of the defendants. If fully informed shareholder approval
were simply by a majority, then different rules and shifting burdens
might apply, see, e.g., Wachsler, Inc. v. Florafax Int'l, Inc., 778
F.2d 547, 552 (10th Cir. 1985), because then, "even an informed
shareholder vote may not afford the minority sufficient protection
to obviate the judicial oversight role." In re Wheelabrator Techs.,
Inc. S'holders Litig., 663 A.2d 1194, 1204 (Del. Ch. 1995). That
rationale for requiring an additional fairness showing -- the
protection of dissenting minority shareholders who, perforce, have
brought a derivative action -- is inapplicable where the fully
informed shareholder owners of a close corporation, even if
interested, unanimously consent to the giving of a release.
As a practical matter, many close corporations are family
corporations and/or do not have any disinterested shareholders or
disinterested directors. Because the shareholders are the owners,
if all of the owners, "interested" or not, of a close corporation
agree to allow a release of claims of self-dealing after receiving
full information about it, then they have had the opportunity to
protect their own interests and there are no dissenting shareholders

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who may need further protection. It would ordinarily be unwise to
involve courts in reviewing the informed and unanimous decisions of
the owners, absent special circumstances.
Massachusetts, of course, may choose a different path in
the future. It may, for example, feel that creditors of close
corporations deserve protection against the mutual looting of
corporate assets by all of a close corporation's shareholders. The
law, however, already provides a degree of such protection. As the
district court aptly recognized, a corporation may not act to
release claims when that action would cause the corporation to go
into insolvency or would take place during insolvency. See Mass.
Gen. Laws ch. 109A, § 5; In re Tufts Elecs., Inc., 746 F.2d 915, 917
(Mass. App. Ct. 1984) (explaining that "prejudice [to creditors]
arises where the transaction is a fraudulent conveyance or one which
led to corporate insolvency").
If there has not been adequate disclosure to the remaining
Mi-Lor shareholders, then there may be defenses available such as
lack of causation or lack of damages, the availability or force of
which we need not determine.
C. Burden of Proving the Enforceability of the Release
The fact of a release is an affirmative defense, and the
party seeking to have a release enforced usually bears the initial
burden of pleading and proving the existence of that release. See

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17 We need not decide who has the burden of showing
enforceability when there is an unadjudicated claim of an
underlying breach of fiduciary duty by the corporate fiduciary. As
a federal court sitting in diversity, we prefer to make narrow
rulings on issues of state law. See, e.g., V. Suarez & Co., Inc.
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Sharon v. City of Newton, 769 N.E.2d 738, 742-43 (Mass. 2002). That
was done here.
Once the burden of proving the existence of an executed
release has been met, the burden of proving or disproving its
enforceability may lie with either party, depending on the context
in which the release was given. The defendants argue that the
Release is a contract and cannot be nullified absent the plaintiff's
proving "fraud, misrepresentation, mutual mistake, breach of
fiduciary duty, or undue influence" or "that at the time the release
was given the corporation was insolvent or became insolvent as a
result of the release." The last ground for nullification does not
apply on the facts here. As to the other grounds for nullification,
the burden of proof is generally on the plaintiff in non-fiduciary
duty situations. See, e.g., Sharon, 769 N.E.2d at 743 n.6. The
defendants argue that the plaintiffs have the burden on the
enforceability issue here.
The defendants' argument ignores the special fiduciary
context of the Release: that the Release goes to a proven breach
of fiduciary duty by a corporate officer/director and shareholders.
At least where an underlying claim of breach of fiduciary duty has
been proven,17 we conclude that Massachusetts would place the burden

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v. Dow Brands, Inc., 337 F.3d 1, 8-9 (1st Cir. 2003).
18 Even were it not waived, the ruling is fully supportable.
A director or officer may be "interested" under Massachusetts law
if she is a party to the transaction; has a business, financial, or
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of showing the enforceability of a release on the corporate
fiduciary who relies on that release to extinguish any recovery for
the underlying breach. Two doctrines converge to place this burden
on the corporate fiduciary. First, Massachusetts adopts the rule
that "[a] release executed in favor of one standing in a fiduciary
relation to the one executing the release will be subjected to the
closest scrutiny by the court." Allen v. Moushegian, 71 N.E.2d 393,
400 (Mass. 1947) (involving a release issued by a client to her
attorney). Second, Massachusetts refers to the law of trusts in
cases involving corporate fiduciaries, see, e.g., Demoulas, 677
N.E.2d at 171 ("Trust law applies . . . to the management of
corporations."), and under trust law, a release of a trustee is
"subjected to the closest scrutiny," Akin v. Warner, 63 N.E.2d 566,
570 (Mass. 1945); Restatement (Second) of Trusts § 217(2).
D. Application of the Standards to the Mi-Lor Release
The trial court held in an earlier order, on August 17,
2001, that those who executed the Release were not disinterested.
The defendants have not argued this issue on appeal, other than
simply stating in a footnote that "there was adequate evidence in
the record to show . . . that the recipients of the release were
disinterested." The issue is waived.18

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familial relationship with a party to the transaction; has a
material pecuniary interest in the transaction; or is subject to a
controlling influence by a party to the transaction who has a
material pecuniary interest. Harhen v. Brown, 730 N.E.2d 859, 864
& n.5 (Mass. 2000) (adopting the definition of "interested" stated
in 1 ALI Principles of Corporate Governance § 1.23 (1994)). A
shareholder is "interested" if she is a party to the transaction or
is also an interested director or officer. Id. The directors and
shareholders who approved the Release had interconnected familial,
financial, and business relationships with parties on both sides of
the Release.
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Defendants argue that the record establishes that they
made full disclosure of all material facts about the Release. There
is no formal ruling on this issue, either in the November 20, 2002
memorandum entering judgment for defendants on the Release or
elsewhere. Defendants point to the following comment made by the
trial judge during a colloquy with counsel on April 20, 2001: "Full
disclosure as to what? . . . [T]hey all played the same game.
There certainly was full disclosure. Everybody knew that everybody
was doing 'it,' whatever it is." This comment is far from a ruling
and, in any event, does not foreclose the disclosure issue.
First, the defendants' argument does not logically follow.
The fact that Mi-Lor's remaining directors and shareholders also had
expenses paid by the corporation means that they were most likely
not disinterested, because they benefitted from a practice of
corporate largesse. But it certainly does not mean that the
Redeeming Principals fully disclosed all material details regarding
their own self-dealing.

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Second, we cannot say that the record establishes full
disclosure, thus resolving the issue. At oral argument, this court
asked defendants' counsel to indicate what evidence was in the
record to show that the defendants had made full disclosure.
Counsel replied that Mi-Lor's bookkeeper had testified that he knew
of the details of the unjust enrichment. The bookkeeper's knowledge
does not even come close to establishing full disclosure, which must
be made to the remaining shareholders.
The plaintiffs, in turn, contend that they are entitled
to judgment because the defendants have the burden of proof and did
not prove that they made full disclosure of their self-dealing. The
argument is premature. No one yet has had the benefit of the full
analysis of this issue from the distinguished judge who sat through
the trial and has lived with this case for some years. This opinion
clarifies the applicable standards and burdens, and whether to
accept additional evidence on this or any other matter is an issue
for the trial judge. The defendants bear the burden on remand of
establishing full disclosure.
Plaintiffs also urge us to hold as a matter of law that
the Release was unfair because there was no consideration given for
it. They cite cases which they say hold that redemption of stock
never benefits a corporation. See In re Roco Corp., 701 F.2d 978
(1st Cir. 1983); In re Main St. Brewing Co., Ltd., 210 B.R. 662
(Bankr. D. Mass. 1997). Those cases do not stand for that

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proposition at all. Instead, Roco essentially says that when a
corporation is insolvent on the date it redeems shares of its stock,
the corporation receives nothing of value, 701 F.2d at 982, and Main
St. Brewing says that stock redemption claims in bankruptcy are
subordinated to the claims of creditors, 210 B.R. at 664-65. In
March 1990, when Mi-Lor redeemed the stock of the defendants, the
company was not insolvent and its stock was not worthless. And the
equitable subordination issue in Main St. Brewing is not at all
relevant to the fairness of the Release. Furthermore, agreements
by a corporation to purchase its own stock are generally
enforceable. Winchell, 85 N.E.2d at 317.
There was no finding on fairness by the district judge and
the record does not, from our reading of it, readily provide an
answer. In theory, the Release could have benefitted both parties.
The corporation, for its part, received stock back, which enhanced
the value of its remaining shares and which conceivably could have
led to some benefit to it; it also received cooperation and non-
compete agreements from the defendants, a release from the
defendants of claims against it, and miscellaneous benefits. In
turn, the corporation paid out $1 million for the redeemed shares
and other consideration and gave up claims that, eleven years later,
led to a judgment of $380,807.66 (exclusive of interest). It is not
clear what the value of the shares was or how to assess the expected
value of the unjust enrichment claim at the time the Release was

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signed, given the risks and costs of litigation and other factors.
In short, it is better to have the trial court determine this matter
on remand. Cf. Lawton v. Nyman, 327 F.3d 30, 51 (1st Cir. 2003).
III.
In their cross-appeal, the defendants argue that their
statutory and constitutional rights were violated when the
bankruptcy court sua sponte granted summary judgment to the
plaintiffs on the statute of limitations defense in response to the
same defendants' motion that the bankruptcy court had denied over
two months earlier.
The cross-appeal is close to frivolous. The district
court reviewed the bankruptcy court's summary judgment ruling de
novo after both a hearing and the completion of discovery and
affirmed the bankruptcy court's order. Any deficiency in the sua
sponte nature of the bankruptcy court's decision was cured by the
district court's de novo review.
IV.
Conclusion
The underlying sum involved here is approximately
$380,000, and considerable counsel fees have been spent to this
point. We urge the parties to settle this case before the
additional costs of further proceedings become a reality.
The decision of the district court that the Release is
valid and enforceable is reversed; entry of judgment for the

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defendants is vacated; the decision of the district court on the
statute of limitations is affirmed; and the case is remanded to the
district court for further proceedings consistent with this opinion.
Costs are awarded to the Creditors Trustees. So ordered.

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