JUDGE ORDERS NEW BOARD FOR DEMOULAS SUPERMARKETS

RUSSELL REDMAN

TEWKSBURY, Mass. -- In the latest chapter of an ongoing family dispute over control of Demoulas SuperMarkets here, a judge last week ordered the creation of a new board of directors that must exclude three of its four current members, including company president Telemachus "Mike" Demoulas.

The Aug. 20 decision by Superior Court Justice Maria I. Lopez -- if it survives an expected appeal -- also mandates the appointment of new officers to replace the 53-store Boston-area chain's president, chief financial officer D. Harold Sullivan and general counsel James T. Curtis, court documents said.

In addition, the ruling ordered the return of Demoulas SuperMarket stock to family members of George A. Demoulas, Telemachus Demoulas' late brother. Such a move would give George Demoulas family members 51% control of the company vs. 49% for Telemachus Demoulas family members, attorneys for both sides said.

However, counsel for Telemachus Demoulas told SN an earlier related ruling could bolster the case for appeal and possibly change the Aug. 20 decision. According to court documents dated Aug. 14, U.S. District Court Judge Patti B. Saris granted a new jury trial in connection with alleged bugging of the chain's headquarters involving Arthur S. Demoulas, Telemachus Demoulas' nephew. Attorneys for Arthur S. Demoulas said they have not yet decided whether to appeal that decision.

No board or company officer changes, if any, would occur until after appeals and related legal actions are settled, attorneys for both sides said.

The new judgments stem from years of legal wrangling over control of the company between Demoulas family factions, pitting Telemachus Demoulas and members of his family vs. family members of George Demoulas, who died in 1971. George Demoulas is the father of Arthur S. Demoulas. In 1954, Telemachus and George Demoulas bought the business from their parents Arthur and Ephrosine, who founded the company, in 1917.

In May 1994, a jury found Telemachus Demoulas guilty of breach of fiduciary duty, fraud and conversion by defrauding George Demoulas family members of company stock and real estate interests between 1971 and 1987 -- in effect taking away equal control of the company. At George Demoulas' death, a 50-50 ownership split had existed, but attorneys for both sides told SN last week the ratio now stands at 92% to 8%, in favor of the Telemachus Demoulas family.

Also, in a trial in the fall of 1994, Arthur S. Demoulas was found not guilty of involvement in an alleged conspiracy to bug Demoulas SuperMarkets' headquarters to purportedly intercept information on the defense's legal strategy in the fiduciary duty case against Telemachus Demoulas. The plaintiff in the fall 1994 trial was Michael L. Kettenbach, son-in-law of Telemachus Demoulas and president of Leland Properties, which manages the real estate where most Demoulas and Market Basket stores are located.

Under a shareholder derivative action in August 1995, Justice Lopez ordered Telemachus Demoulas and members of his family to return hundreds of millions of dollars in assets to the family of George Demoulas. In that ruling, Lopez determined that Demoulas SuperMarkets usurped corporate opportunities by diverting assets and opening stores under a separate corporation.

Currently, there are 41 Market Basket stores and 12 Demoulas units. Demoulas SuperMarkets' estimated total sales at the end of 1995 were $1.5 billion.

In ordering the formation of a new board, which will be elected by shareholders, Justic Lopez said in court documents that must include two members of the George Demoulas family or their nominees, including Arthur S. Demoulas; two members of the Telemachus Demoulas family or their nominees; and three independent directors. The Aug. 20 order also said that "Telemachus Demoulas, D. Harold Sullivan and James T. Curtis be removed from their positions as director/officer of Demoulas SuperMarkets."

Demoulas SuperMarkets' current board includes Telemachus Demoulas and his son, Arthur T. Demoulas, plus Sullivan and Curtis, attorneys said.

"Clearly, Telemachus Demoulas is not going to be an officer of the corporation, and you will not see Harold Sullivan, the chief financial officer [as an officer]," Robert C. Gerrard of the Boston firm Davis, Malm & D'Agostine, counsel for George Demoulas family members, told SN. "My clients hope that most people [corporate officers] will stay on, that there will be an orderly transition and that the company now -- with the Market Basket assets put back in -- is much stronger than ever before and is poised for real competition and expansion."

Jerome Gotkin of the Boston firm Mintz Levin Cohn Ferris Glovsky and Popeo, counsel for Telemachus Demoulas family members, said he expects a reversal of the Aug. 20 order on appeal, which he estimated would take roughly a year. The appeal would be filed pending other motions against the Aug. 20 ruling, he said, without giving a possible date.

"Judge Lopez, in my judgment, has gone far beyond the [1994] jury verdict and has rendered a very unjust opinion," Gotkin told SN. "I would be very surprised if it's affirmed."

The Aug. 20 decision also directed Deloitte & Touche, an accounting firm, to investigate and determine the total payment of dividends and distributions owed to George Demoulas family members. Gerrard told SN that figure is estimated at $175 million. Gotkin, however, told SN he questions that amount.

Regarding the bugging case, Judge Saris' Aug. 14 order called for a new trial based on the admission of new evidence from a tape recording, which Gotkin contends could implicate Arthur S. Demoulas in a bugging scheme and possibly reverse the Aug. 20 order for a new board and the return of stock.

"As far as I'm concerned, it [the Aug. 14 order] bars the other action [on Aug. 20], so argued. It was quite a significant interim victory," Gotkin said.

Attorney Carol Cohen of Davis, Malm & D'Agostine told SN the Aug. 14 decision for a retrial of the bugging case does not threaten the Aug. 20 order. "They have absolutely no possibility of making the showing they'd have to make," she said. "They would have to show that Arthur S. Demoulas intercepted discussions that affect the outcome of the trial [in 1994 vs. Telemachus Demoulas]."

The retrial of the bugging case would begin this November or December, pending related legal actions.