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Villar v. Kernan
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MAINE SUPREME JUDICIAL COURT					Reporter of Decisions
Decision: 	1997 ME 132
Docket:  	Fed-96-600
Argued: 	May 6, 1997 
Decided: 	June 11, 1997

Panel:	 	WATHEN, C.J.,  and ROBERTS, GLASSMAN, CLIFFORD, RUDMAN, DANA, and
		LIPEZ, JJ.

FREDERICK VILLAR 

v.

PETER KERNAN

DANA, J.

	[¶1]  Pursuant to 4 M.R.S.A.  § 57 (1989) and M.R. Civ. P. 76B, the
United States District Court for the District of Maine (Hornby, J.) has
certified the following questions of state law to this Court:

(1)  Does Maine law, including but not limited to 13-A M.R.S.A.
§ 618, preclude an action for breach of an oral contract between
two shareholders of a closely held corporation prohibiting their
receipt of salaries from the corporation? 
 
(2)  If the answer to the first question is "no," what factors are
to be considered in determining whether specific performance
is available to take an oral contract outside the statute of frauds
provision, 33 M.R.S.A. § 51(5), for contracts not to be performed
within one year?

	[¶2]  Pursuant to M.R. Civ. P. 76B(b), the United States District Court
has prepared a statement of findings of facts.  These facts disclose that in
1988 Frederick Villar and Peter Kernan agreed to go into the brick oven
pizza business.  Villar was responsible for operating the new business and
Kernan assumed responsibility for the business's finances.  When Villar and
Kernan incorporated their business as Ricetta's, Inc., Villar received 49
percent of the shares and Kernan received 51 percent.  According to
Kernan, the parties agreed that "there would never be salaries.  In other
words, as owners [they] would never get salaries, just distribution."  At some
point Ronald Stephan, the manager of the restaurant, became a two percent
shareholder of Ricetta's, Inc., obtaining one percent from both Kernan and
Villar.  
	[¶3]  The parties' pizza restaurant succeeded as a business but their
relationship deteriorated.  Villar and Stephan attempted to buy Kernan out,
but the buyout was unsuccessful and ultimately Stephan became allied with
Kernan.  
	[¶4]  In March 1994 Kernan entered into a "so-called consulting
agreement" with Ricetta's.  The agreement provided for automatic payments
to him of $2,000 per week.  The agreement was ratified at a shareholders'
and board of directors' meeting at which Villar was not present.  Kernan's
obligations pursuant to the agreement were not specified, but the
corporation's rights were restricted.  For example, Kernan's compensation
could be increased but not decreased by a majority vote of the board of
directors, and his services could be terminated only for criminal violation
involving dishonesty, fraud, breach of trust, or for willful engagement in
misconduct in the performance of his duties.  Pursuant to the agreement
Kernan received $90,000 in consulting fees in 1994 and $24,000 in early
1995.
	[¶5]  In May 1995 Villar filed a complaint in the United States District
Court asserting six counts against four defendants.  On Kernan's motion for a
judgment on the pleadings or for a summary judgment, the 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. 
The court concluded that there was an oral agreement between Villar and
Kernan that prohibited Kernan from receiving a salary from Ricetta's.  The
court determined that unless 13-A M.R.S.A. § 618 (1981){1} precluded the
enforcement of an oral shareholder agreement, the agreement could be
enforceable in equity despite the statute of frauds.  Finding no controlling
precedent in Maine regarding section 618 or the factors the court should
consider when determining whether enforcement of an oral agreement
within the statute of frauds is appropriate, the court certified the two
questions.  Our exercise of jurisdiction in this case is proper because there
are no clear controlling precedents and our answer will, in one alternative,
be determinative of the case.  See Dasha v. Maine Medical Ctr., 665 A.2d
993, 995 (Me. 1995).  We answer the first question in the affirmative and,
therefore, do not address the second question.
	[¶6]  When the language of a statute is clear and unambiguous, we will
give the statute its plain meaning.  Stanley v. Tilcon Maine, Inc. 541 A.2d
951, 952 (Me. 1988) (citation omitted).  We also consider the "'whole
statutory scheme of which the section at issue forms a part so that a
harmonious result, presumably the intent of the Legislature, may be
achieved.'"  Jordan v. Sears, Roebuck & Co., 651 A.2d 358, 360 (Me. 1994)
(quoting Davis v. Scott Paper Co., 507 A.2d 581, 583 (Me. 1986)).  The
fundamental rule in the interpretation of a statute is that the intent of the
Legislature, as defined from the statute's language, controls.  State v. Butt,
656 A.2d 1225, 1227 (Me. 1995) (citation omitted).
	[¶7]  Section 618 operates to validate agreements that would be
unenforceable under traditional notions of acceptable corporate practice.{2}   
In short, the statute provides that written agreements between shareholders
are enforceable even if they (1) relate to a phase of affairs of the corporation,
such as the management of the corporation, payment of dividends, or
employment of shareholders, (2) restrict director discretion, or (3) transfer
management duties to shareholders, as long as such agreements satisfy
certain conditions.  13-A M.R.S.A. § 618(1).  Specifically, the agreement
must be included in the articles of incorporation or expressly assented to by
all shareholders, and after the agreement is made anyone who acquires
shares must have notice or actual knowledge of the agreement. § 618(1)(A),
(B).  Even if those specific requirements are not met, however, the
agreement may still be enforceable between the parties to the agreement if
the rights of any third parties who intervene and object to the enforcement
of the agreement are not prejudiced.  § 618(2).
	[¶8]  Kernan contends that the language in the first sentence of
section 618(1) implies that shareholder agreements validated by section
618 must be in writing.  We agree.  Because the language of subsection (1)
refers to written agreements between shareholders, stating that "[n]o
written agreement will be invalid . . . ", it is logical to conclude that the
Legislature intended to validate only written agreements that meet the
requirements of the statute.  To conclude otherwise would nullify the word
"written" in the opening sentence of that subsection.
	[¶9]  Villar argues that the parties' agreement is simply an agreement
between shareholders that does not affect the corporation and that it need
not rely on section 618's validation provision for its validity.  We disagree. 
Their agreement affects the corporation's affairs because it effectively
prohibits the corporation from hiring Kernan as a consultant.  We are not
persuaded by Villar's characterization of the agreement, asserted at oral
argument, as one that would allow the corporation to hire Kernan but then
require him to pay Villar half of the salary that he received from the
corporation.  Such an interpretation would effectively rewrite the parties'
agreement.
	[¶10]  Kernan contends that the agreement at issue falls within the
reach of section 618's validation provision because it relates to the affairs of
the corporation by affecting the employment of shareholders.  We agree.   
The potential scope of the validation provision of section 618 is broad. It
states that an agreement is not invalid because it "relates to any phase of
affairs of the corporation, including, but not limited to . . . [e]mployment of
shareholders by the corporation . . . ." § 618(1)(E).  The agreement between
Villar and Kernan relates to the corporation's affairs because it prohibits
Kernan from receiving a salary and effectively precludes his employment by
the corporation.  In addition, the agreement may affect the declaration and
payment of dividends because money that is not distributed to Kernan in a
salary may be distributed as dividends among the three shareholders. 
§ 618(1)(B).  Because the agreement must rely on section 618 for its validity
and falls within the validating provision of section 618(1), it must meet the
section's specifications and therefore must be in writing to be enforceable.{3} 
	[¶11]  Subsection (2) of section 618 does not allow enforcement of the
agreement at issue here because that subsection does not excuse the
requirement in subsection (1) that the agreement be in writing to be
validated.  Subsection (2) provides that "[n]otwithstanding a failure to satisfy
the conditions set out in subsection 1, paragraphs A and B, such an
agreement shall be valid and enforceable between the parties thereto . . .
unless it is affirmatively shown that its enforcement would be prejudicial to
the rights of third parties . . . ."  Although subsection (2) reflects an intent to
allow enforcement of shareholder agreements despite their failure to
comply with the formalities of subsection (1), the language of the subsection
does not excuse the writing requirement specified in the first sentence of
that subsection.  Thus, only written agreements that fail to meet the
requirements of subsection (1) may be enforceable among the parties to the
agreement by virtue of subsection (2).
	[¶12]  Because we conclude that to be enforceable section 618
requires a shareholder agreement prohibiting the shareholders' receipt of
salaries from the corporation to be in writing, we answer the first certified
question in the affirmative and do not answer the second question.
                                                               
Attorney for plainitff:	
Ralph A. Dyer, Esq. (orally)	
	
Law Offices of Ralph A. Dyer, P.A.	
477 Congress Street, Suite 1010	
Portland, ME 04101	

Attorneys for defendant:
Gerald F. Petrucelli, Esq. (orally)
John A. Anderson, Esq.
Petrucelli & Martin
P O Box 9733
Portland, ME 04104