Harris Acquisition Trust, et al. v. Botwinik, et al. (Lawyers Weekly No. 09-059-17)

COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
CIVIL ACTION
No. 17-01214-BLS1
HARRIS ACQUISITION TRUST1 & others2
vs.
DAN BOTWINIK & another3
MEMORANDUM OF DECISION AND ORDER ON
DEFENDANTS’ PARTIAL MOTION TO DISMISS
This case presents a dispute between two investors regarding a real estate opportunity in
Maine. Plaintiff, Jeffrey S. Baker, alleges various wrongdoings by defendant, Dan Botwinik. In
his First Amended Complaint (FAC), Baker asserts relief under twelve (12) separate counts. The
counts include claims for breach of fiduciary duty, breach of contract, breach of the covenant of
good faith and fair dealing, intentional and negligent misrepresentation, violation of G.L. c. 93A,
negligence and conversion. Defendants move to dismiss under Mass. R. Civ. P. 12(b)(6) only
two of those counts: Counts VII (violation of Chapter 93A) and VIII (negligence). For the
reasons stated below, defendants’ motion to dismiss will be allowed, in part, and denied, in part.
BACKGROUND
The facts as revealed by the FAC, and the documents attached to the FAC, are as follows.
1 By its trustee Jeffrey S. Baker.
2 Salem Real Estate Investment, LLC; First Day Realty Trust, by its trustee Jeffrey S.
Baker; and Jeffrey S. Baker.
3 Cougar Capital Management, Inc.
Botwinik is engaged in the business of real estate investment, acquisition, and
management related to commercial real estate throughout New England. Botwinik is the founder
and principal of defendant, Cougar Capital Management, Inc., through which Botwinik operates.
Cougar is, essentially, the alter ego of Botwinik, so the two defendants will be referred to
collectively as “Botwinik” in this memorandum unless more specificity is required. Botwinik
seeks investors to provide capital for real estate acquisition and development.
In the spring of 2016, Botwinik had a contract to acquire a residential apartment building
located at 25 Hartford Street, Rumford, Maine (Property). The Property was formerly a hotel.
During April and May of 2016, Botwinik had numerous telephone conferences and meetings in
Boston4 with Baker regarding a potential acquisition of the Property. Initially, Botwinik sought a
$ 200,000 investment from Baker to assist in the acquisition of the Property. In exchange, Baker
would receive equity in the project. Botwinik provided a written offering memorandum to Baker,
which represented returns of up to 17% per annum on the investment. Botwinik also represented
that he would secure additional financing to provide the remaining funds necessary for
acquisition and construction. Baker represented that he had the financing lined up. Finally,
Botwinik represented that he had the experience and expertise to develop the property.
Baker agreed to invest $ 200,000 in the project in reliance upon Botwinik’s
representations. Botwinik formed Maine Coon Management, LLC (MCM) to be the vehicle to
hold title to the Property. The membership interests of MCM were divided between Botwinik
(20%) and Baker (80%).
Before the deal could close, Botwinik informed Baker that there would be a delay in
4 All plaintiffs and defendants are located in Boston, Massachusetts.
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obtaining a loan from a local bank needed to acquire the Property. Botwinik explained to Baker
that they needed a short-term bridge loan to allow the parties to acquire the Property. Botwinik
asked Baker if he would loan additional monies needed to complete the acquisition. Botwinik
represented to Baker that he would refinance the Property after the acquisition and repay the loan
to Baker, with interest.
Baker agreed to provide a short-term bridge loan in the amount of $ 410,000 in order to
fund the acquisition of the Property. Botwinik also agreed to loan an additional $ 205,000 to fund
the acquisition. In connection with pursuing their plan to acquire the Property, Botwinik and
Baker formed Harris Acquisition Trust, a plaintiff in this action. The Harris Trust was executed
on June 13, 2016, the same date as the closing on the Property. The co-trustees of the Harris
Trust are Botwinik and Baker. The beneficiaries of the Harris Trust are Botwinik (33.33%) and
Baker (66.66%). The FAC alleges that the Harris Trust was established in order to facilitate the
loans from Baker and Botwinik because the individuals wanted to create a separate legal entity to
enter into an arm’s length transaction with MCM. Botwinik, as manager of MCM, executed a
promissory note and mortgage to Harris Trust. Botwinik also executed a personal guaranty. In
total, Harris Trust provided a $ 615,000 bridge loan to MCM.
Botwinik and Baker also entered into an Agreement for Acquisition of 25 Hartford Street,
Rumford, ME (Harris Hotel). That document, hereinafter the “Agreement”, was executed on the
same day as the Harris Trust, June 13, 2016. The Agreement was intended to supersede and to
modify the terms of the MCM operating agreement. The Agreement referenced the bridge loans
and detailed the parties’ respective ownership interests. Baker’s 80% interest in MCM was to be
held by First Day Realty Trust and Salem Real Estate Investment LLC (two entities owned and
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controlled by Baker) up to 18%. The remaining 62% of Baker’s 80% interest was to be held by
Botwinik in trust for Baker. Botwinik’s interest was 20%. The parties expressly acknowledged
that Botwinik shall owe a fiduciary duty to Baker. The Agreement also provided that Botwinik
agreed to personally guarantee the bridge loan and any other bank loans needed to obtain
financing for the Property. Moreover, the Agreement provided that when the bridge loan was
repaid in full to Harris, Baker and his associated entities would then, and only then, be required
to invest capital in the amount of $ 200,000. Also, once the bridge loan was repaid in full, Baker
would provide an additional $ 50,000 loan, on a temporary revolving basis. Under the Agreement,
Botwinik made all daily decisions as to the management of MCM, but was required to consult
with Baker on a regular basis.
In June of 2016, the parties completed their acquisition of the Property. MCM took title
to the Property, subject to the mortgage to Harris.
Immediately thereafter, Botwinik decided to replace the Property’s roof and repair the
elevator. Botwinik did not obtain a construction loan to finance the new roof. Instead, he used
existing operating revenues. Baker claims that Botwinik breached the terms of agreements
between the parties with respect to use of funds. Baker claims that Botwinik grossly mismanaged
MCM’s finances and that MCM has not made any monthly payments on the promissory note to
Harris.
Botwinik was also unable to obtain bank financing to pay off the entire $ 615,000 bridge
loan. In February of 2017, however, Franklin Savings loaned MCM $ 410,000, which was used to
repay part of the bridge loan. The bridge loan was paid back in proportion to the respective
beneficial interests of Baker and Botwinik in the Harris Trust. FAC, ¶ 131. Later, however,
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Baker and Botwinik became embroiled in a dispute about, among other things, how the $ 410,000
should be distributed. See FAC, ¶¶ 132-153. Botwinik allegedly made bad management
decisions causing MCM’s reserve funds to go to zero. Botwinik failed properly to manage the
Property, demanded more money from Baker, threatened to sell the Property at a loss, and
interfered with Baker’s other businesses.
On April 20, 2017, Baker filed this action against Botwinik. In Count VII, Baker
incorporates all previous paragraphs of the FAC, and alleges that Botwinik’s misrepresentations
caused him to invest in the project and to become a party to the deal to acquire and develop the
Property. Baker alleges that such conduct is a violation of Chapter 93A. In addition, Baker
alleges that Botwinik wrongfully and fraudulently siphoned off assets and resources from MCM,
and misrepresented cash flows, rents, returns, tax credits, and other aspects of the project
involving the Property.
Count VIII is a claim of negligence against Botwinik. Baker alleges that Botwinik’s acts
and practices in the operation, management, and financing of the Property are “substandard and
unprofessional.” FAC ¶ 297. Botwinik allegedly failed “to comply with the standard of a good,
reasonable and prudent manager in New England and, more particularly, in the local geographic
region of Maine where the property is located.” FAC, ¶¶ 301-303.
DISCUSSION
To survive a motion to dismiss, the plaintiff’s “[f]actual allegations must be enough to
raise a right to relief above the speculative level . . . [based] on the assumption that all the
allegations in the complaint are true (even if doubtful in fact) . . . .” Iannacchino v. Ford Motor
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Co., 451 Mass. 623, 636 (2008), citing Bell Atl. Corp. v. Twombly, 127 S. Ct. 1955, 1964-1965
(2007). In other words, “[w]hile a complaint attacked by a . . . motion to dismiss does not need
detailed factual allegations . . . a plaintiff’s obligation to provide the ‘grounds’ of his
‘entitle[ment] to relief’ requires more than labels and conclusions . . . .” Iannacchino, 451 Mass.
at 636, quoting Bell Atl. Corp., 127 S. Ct. at 1966. The court must, however, accept as true the
allegations of the complaint and draw every reasonable inference in favor of the plaintiff. Curtis
v. Herb Chambers I-95, Inc., 458 Mass. 674, 676 (2011).
Violation of Chapter 93A (Count VII)
Botwinik moves to dismiss the Chapter 93A claim in Count VII based on two arguments.
First, Botwinik asserts that the Chapter 93A claim should be dismissed because the parties’
Agreement is governed by Maine law. Botwinik argues that Chapter 93A cannot apply because
of this choice of law provision. Second, Botwinik argues that even if the parties’ relationship is
governed by Massachusetts law, the Chapter 93A claim fails because the entire dispute is one
between parties to a single, private venture.
In his opposition, however, Baker states that he does “not claim 93A violations in the
management of the company or anything else under the purview of the Agreement, rather the
Defendants[’] conduct and behavior in the negotiations, all of which occurred in Massachusetts”
is the basis for the Chapter 93A claim. Plaintiffs Opposition at 15. Baker points to the
allegations in the FAC of misrepresentations by Botwinik prior to entering into the Agreement,
allegedly to induce Baker to make the investment. Those misrepresentations are the basis for the
claim of unfair and deceptive acts under the statute. Because I find that Baker’s claims, even
those based on misrepresentations made prior to the Agreement, are not covered by Chapter 93A,
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it is unnecessary to address Baker’s first argument concerning the Maine choice of law provision.
It is indisputable that Chapter 93A is applicable only to business dealings between
discrete, independent business entities, not to disputes between parties in the same joint venture.
Szalla v. Locke, 421 Mass. 448, 451 (1995) (“It is well established that disputes between parties
in the same venture do not fall within the scope of G.L. c. 93A, § 11.”). See also Selmark
Assocs., Inc. v. Ehrlich, 467 Mass. 525, 549-551 (2014) (explaining that Chapter 93A does not
cover internal intra-enterprise disputes). As evidenced by the FAC and the documents attached
to the FAC (the Agreement and the Harris Trust), Baker and Botwinik did not engage in a
discrete transaction, such as the purchase and sale of goods or services. Instead, they entered into
a joint plan, working together inside MCM and the Harris Trust, to invest in the Property. At the
time of Baker’s first investment (the bridge loan), in June 2016, the parties had been working
together for months to advance the interest of their joint enterprises.
Baker’s argument that Botwinik engaged in conduct that violated Chapter 93A prior to the
formation of MCM or their Agreement is to no avail. The Supreme Judicial Court in Szalla v.
Locke addressed a similar argument. The Court, after noting that there was no alleged exchange of
goods or services to invoke Chapter 93A, held that alleged misrepresentations by the defendant to
induce the plaintiff to enter into the joint venture did not invoke Chapter 93A. Szalla, 421 Mass.
at 452. The alleged misrepresentations occurred in the course of developing the parties’ mutual
association which culminated in an agreement and exchange of property and services. “The
association between the plaintiff and the defendant in the interests of forming a business venture
together is not the kind of commercial transaction regulated by the statute.” Id. Stated another
way, discussions in contemplation of a joint venture act to forfeit any Chapter 93A protection for
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misrepresentations. Petricca Development Ltd. Partnership v. Pioneer Development Co., 214 F.
3d 216, 224 (1st Cir. 2000). See also DSF Investors, LLC v. Lyme Timber Co., 18 Mass. L. Rptr.
411, 2004 WL 3414427, at *18 (Mass. Super. Ct. Dec. 22, 2004) (Botsford, J.) (“It is true that an
association between two parties to form a business together, at least when that association
ultimately results in an agreement between them, is not the kind of commercial transaction
regulated by c. 93A, and the statute will not apply even where some of the alleged unfair conduct
occurred prior to the formation of the venture but in the course of its mutual creation.”).
Accordingly, the Chapter 93A claim in Count VII must be dismissed.
Negligence (Count VIII)
Botwinik moves to dismiss Baker’s negligence claim in Count VIII on the ground that it is
barred by the economic loss doctrine. “The long-standing rule in this Commonwealth, in
accordance with the majority of jurisdictions that have considered this issue, is that ‘purely
economic losses are unrecoverable in tort and strict liability actions in the absence of personal
injury or property damage.’” Herbert A. Sullivan, Inc. v. Utica Mut. Ins. Co., 439 Mass. 387, 413
(2003), quoting FMR Corp. v. Boston Edison Co., 415 Mass. 393, 395 (1993). See Garweth
Corp. v. Boston Edison Co., 415 Mass. 303, 305 (1993) (“The traditional economic loss rule
provides that, when a defendant interferes with a contract or economic opportunity due to
negligence and causes no harm to either the person or property of the plaintiff, the plaintiff may
not recover for purely economic losses.”). “The rule is intended to preclude recovery for
intangible and unknown damages for lost contract or economic opportunity.” Wyman v. Ayer
Properties, LLC, 469 Mass. 64, 71 (2014).
There are, however, acknowledged exceptions to the economic loss doctrine. First, the
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doctrine does not preclude recovery for economic losses resulting from negligent
misrepresentation. Nota Constr. Corp. v. Keyes Assocs., Inc., 45 Mass. App. Ct. 15, 20 & n.1
(1998). Second, the economic loss doctrine does not apply to claims of negligence against a
fiduciary. Clark v. Rowe, 428 Mass. 339, 342 (1998).
Here, Baker pleads negligent misrepresentation in Count VI, and Botwinik’s motion does
not challenge that count. Baker’s claim of “negligence” in Count VIII also survives because
Botwinik specifically acknowledged his fiduciary duties to Baker. As a result, the motion to
dismiss Count VIII must be denied.
CONCLUSION
Defendants’ Motion to Dismiss is ALLOWED, in part, and DENIED, in part. Count VII
(violation of Chapter 93A) is dismissed. Count VIII (negligence) survives this motion.
By the Court,
______________________________
Edward P. Leibensperger
Justice of the Superior Court
Dated: December 21, 2017
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