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John J. Donovan Loses Again: Court Rules that Award in Derivative Action be Distributed Based on Shareholders’ Investment to Avoid Windfall to Disloyal Fiduciary
John J. Donovan Loses Again: Court Rules that Award in Derivative Action be Distributed Based on Shareholders’ Investment to Avoid Windfall to Disloyal Fiduciary

In Brining v. Donovan, the latest blow to former MIT business professor, John J. Donovan, Judge Davis held that shareholders in Donovan’s failed internet start-up, SendItLater (SIL), could recover more than $700,000 in attorneys’ fees in addition to a December 2019 award of $1.57 million in damages. Relying on equitable principles, Judge Davis also prohibited Donovan’s company and SIL shareholder, Securenet Holdings, LLC (Securenet), from sharing in the award. Judge Davis also ruled that the award must be distributed to the remaining shareholders based on each shareholder’s investment, rather than per-share basis, so as to render shares obtained by Donovan’s wife, Linda Donovan, under “suspect” conditions effectively worthless.

Brief background: In 2016, Jennifer Brining brought a shareholder derivative action against Donovan alleging breach of fiduciary duty, fraud, and unjust enrichment due to his actions as managing director of SIL, including Donovan’s alleged use of corporate funds for his personal benefit. In 2019, after a three-day jury-waived trial, Judge Davis awarded SIL’s shareholders approximately $1.57 million in damages. 

Brining then filed two post-verdict motions, the subject of this post. She filed a motion for attorneys’ fees. She also filed a motion to cancel certain shares owned by Mr. Donovan, Securenet, and Mrs. Donovan.

Motion for Attorneys’ Fees 

Brining requested approximately $700,000 in attorneys’ fees and costs under G.L. c. 156D, § 7.46, a statute authorizing a court to order a corporation to reimburse the reasonable expenses incurred by a plaintiff-shareholder who provides a substantial benefit to the corporation. Opposing Brining’s motion, Donovan asserted that Brining’s fees were excessive, both in terms of counsel’s billing rates (Donovan argued the rates exceeded the rates charged by his own counsel) and the number of hours expended on the matter.  Judge Davis disagreed. 

As to the billing rates, Judge Davis observed that the rates were “commensurate with the rates charged, in this day and age, by other civil litigators in the Boston metropolitan area and [were] otherwise reasonable.” 

As to the approximately 1,355 hours expended by Brining’s counsel over the course of the three-year litigation, Judge Davis ruled that the hours were reasonable. Judge Davis noted that Donovan’s misconduct was “brazen and pervasive,” including his “misappropriation of millions of dollars of SIL funds” to pay for personal expenses, such as “the cost of his haircuts, his home real estate taxes, and his Myopia Hunt Club and Netflix membership fees[,]”; the use of corporate resources to support Donovan’s other entrepreneurial endeavors and maintain his personal Wikipedia page; and the “creation of various fraudulent promissory notes, leases, and invoices.” Judge Davis also noted that “investigating, understanding, documenting, and ultimately proving Mr. Donovan’s extensive wrongdoing at trial presented a formidable task.”

Motion for Cancellation of Shares 

Brining also requested that the court exercise its equitable powers to cancel certain SIL shares held by Donovan, his wholly-owned company, and his wife. Brining further requested that any recovery be distributed among SIL’s shareholders pro rata, based on “dollars actually invested,” as opposed to a distribution based on percentage of shares owned. Donovan opposed the motion, claiming that it would be inequitable to cancel the shares of Securenet and Linda Donovan, who were not parties to the litigation.

Judge Davis granted the motion as to Donovan and Securenet because “Mr. Donovan, as a disloyal fiduciary, is not entitled to gain, directly or indirectly, from his own wrongdoing.” Judge Davis refused to cancel Linda Donovan’s shares, however, despite noting that the “circumstances under which Mrs. Donovan acquired her shares are undeniably suspect.”  Denying the motion as to Mrs. Donovan, Judge Davis reasoned that she was not a party to the action and there was no finding at trial that her shares were fraudulently obtained. Judge Davis also acknowledged that he was “not confident that her interests were adequately represented” by her husband.   

Finally, Judge Davis granted Brining’s request that the award be distributed to the shareholders pro rata, in proportion to the amount of money each had invested, rather than by the number of shares owned. Judge Davis noted that Donovan had “manipulate[ed] the transfer and/or sale of SIL stock … to certain investors, including his wife” which, in Judge Davis’ words, “undeniably distort[ed] the relative share percentages of SIL’s various investors.” Judge Davis ruled that allocating the award based on monetary investment was “a more equitable and more accurate means of compensating all SIL investors (excluding Securenet) for their actual, out-of-pocket losses.”

The Business Litigation Session of the Massachusetts Superior Court: BLS1

Docket Number: 1684CV03422-BLS1

Case Name: Brining v. Donovan

Date of Decision: May 29, 2020

Judge’s full name: Judge Brian A. Davis

Justice: Justice Davis

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