Demoulas v. Demoulas SuperMarkets, Inc.: A Case Study in Business Ventures Going Bad

Market Basket

The Demoulas dispute started with a trusted family relationship that went bad.  Partly what made it infamous was probably a result of the parties’ wherewithal – they have been able to fund decades of litigation. As the years passed and millions in fees accrued, the animosity built.

In 1917, Arthur Demoulas opened a local grocery store in Lowell.  He and his wife operated it for some 40 years and then handed it over to their sons, George and Telemachus (“Mike”).  The brothers grew the business quickly and their families were very close.  In 1964, Mike and George executed wills, stating that if either brother died, the surviving brother would take care of the other’s family.  Seven years later, George died unexpectedly.  For years after George’s death all seemed well, and presumably George’s family trusted Mike to do right by them, but in 1987, the Massachusetts Department of Revenue noticed an irregularity in a tax filing of George’s oldest son, which his uncle Mike submitted.  As George’s family dug deeper into Mike’s dealings, it turned out that all was not as it seemed.

Prior to George’s death, Mike and George were 50/50 partners in the supermarket chain.  It turns out that in the years since George’s death, Mike secretly had been transferring George’s family’s shares to himself and his family, leaving George’s family with only an 8% share while amassing 92% of the company for his family.  In 1990, George’s family sued Mike for fraud, alleging losses of nearly $800 million.  They also brought a shareholder derivative claim arguing that Mike wrongfully diverted $1 billion of company assets into new companies, such as Market Basket, Inc.  Discovery was contentious and carried on for roughly four years, but the first several trials finally began in January 1994.

The first trial, concerning the fraud claim, included a fist fight in the courtroom between the sons of George and Mike, Arthur S. and Arthur T. Demoulas.  The second trial, concerning the derivative claim, included allegations of judicial bias and the parties being represented by 22 different lawyers.  The third suit included allegations that Arthur S. had wiretapped the defendants and led to charges that a juror offered to “fix” the trial for a payment of $200,000.  All three suits were decided in favor of the plaintiffs, resulting in the judge awarding George’s family 51% of the company.

Of course, years of appeals ensued.  In 2000, the Supreme Judicial Court rendered its final decision, affirming each underlying decision in favor of the plaintiffs and effectively ending the grueling Demoulas saga…. for the time being.  In 2002, Arthur S. sought to place his shares in a trust seeking to compete with the company, claiming that his sister in law sided with Arthur T. so as to give him effective control of the company, despite the judge’s ruling.

In 2008, the effects of the Demoulas case were still rippling through the legal community.  The Massachusetts Board of Bar Overseers disbarred two of the defendant’s attorneys for their unscrupulous actions during the litigation, which included luring the trial judge’s law clerk to Boston, New York and Nova Scotia with a sham job offer, in an attempt to demonstrate the judge’s alleged bias.  Instead of providing the attorneys with evidence, the clerk went to the FBI and agreed to wear a wire and record their subsequent conversations.

Just recently, in 2011, Arthur S. and his siblings, as beneficiaries, filed a new lawsuit against their cousin, Arthur T. and others, as trustees of the Demoulas profit sharing plan alleging that the trustees made irresponsible investments in Fannie Mae and Freddie Mac.  Thus, even today the dispute lives on.

The Demoulas cases were (and are) some of the most drawn out and costly pieces of litigation in Massachusetts history.  There are many takeaways from this series of cases, but the most important are:  litigation is always uncertain, very costly, and can drag on for many years; trust does not protect you; and, even after years of litigation, in larger companies with multiple shareholders you may still be in a situation where you have to work together with your opponent in running the company.  The Demoulas dispute is an extreme example of a relationship once built upon trust that went completely awry.

Relationships built on trust sour all the time, and often lead to lawsuits (which generally do not last as long as the Demoulas saga!).   Have you lost faith in your business partner?  Give us a call and we’ll talk about it.

Comments

Demoulas v. Demoulas SuperMarkets, Inc.: A Case Study in Business Ventures Going Bad — 7 Comments

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  2. I don’t see how Arthur S. Demoulas can say Arthur T. Demoulas made bad investments he didn’t steel
    from other family members like Arthur S. Demoulas giving it to his family and himself. Arthur T. Demoulas
    Is out to better the Market Baskets taking care of the employees and customers and keeping prices low, and taking care of the community. They need to get Arthur T. Demouls back in order for the Market baskets to run smoothly. If not they are going to lose all there long time employees that has been there since high school.
    It was wrong of Arthur S. Demoulas to wire tap the defendants that tells story in itself. Arthur S. Demoulas
    was trying to pay off people to make it go his way.
    The original Arthur Demoulas would of wanted to see employees taken care of and customer service and low prices like Arthur T. Demoulas philosophy of running the stores.

  3. Arthur is what I want and I’m just in a different union that will be in full force Sunday!

  4. I was 4 years old when I first entered the Demoulas store I Lowell ! Coming from a family of 21 kids yes one mom and dad !!! Going to that store was like a vacation ! Mr Demoulas would always hug me and give us kids a cookie and to this day I only shopped at that family market ! The shame that the fathers would have if they saw this !!!! It is true money is the route of all evil!!! I till this day will not shop there even if that awful Arthur s bring new employees aboard my money will be spent some where else and I’m not alone he will get his wish bringing this family business deep in the ground !!! How much money does one person need ???? Does he really think he will live a happy healthy life after this hey btw god sees everything GIOD LUCK

  5. This is the part that no one seems to remember. It is no wonder Arthur S wants Arthur T out. I really have no sympathy for either the workers or the business. After a life time of Arthur T’s family currying favor from the employees, it is no surprise that the employees back Arthur T. BUT This all stems from the fact that no one has given Arthur S’s family a chance to run the business which the court has ruled is 51% owned by his family. Arthur T’s family is cunning, but not particularly adept at picking their attorneys, picking their fights, and understanding the law. In the end Arthur T will lose again. His attorneys will be all the richer, and his following, the employees will have no job. Kind of like the pied piper f Hamlin. The difference of course is that the rat is leading the employees to destruction

  6. I have shopped at Market Basket since moveing back to ma, from Florida 12 yrs ago. Will never change markets. I like the employees , help you get if you need any and it just is so good and relaxing to shop there. Like the Market Basket Brands in most all products.