Beninati, et al. v. Borghi, et al. (Lawyers Weekly No. 12-086-17)
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COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
CIVIL ACTION
NO. 12-1985 BLS2
Consolidated with
NO. 13-1772 BLS2
ELIZABETH BENINATI and JOSEPH MASOTTA,
Plaintiffs,
vs.
STEVEN BORGHI, et al.
Defendants
MEMORANDUM OF DECISION AND ORDER
ON VARIOUS MOTIONS
This is an action primarily derivative in nature brought on behalf of fourteen limited liability companies that operate health clubs under the trade name “Work out World” in the New England area (collectively, WOW New England or WOW). Following a jury waived trial, this Court on July 9, 2014 issued findings and rulings that ultimately resulted in a $ 4.1 million award of damages to the plaintiffs on those counts against the defendants alleging breach of fiduciary duty (the July 2014 Decision). As to the count against the defendant Harold Dixon alleging a violation of G.L.c. 93A §11, this Court ruled that he could not be held liable under that statute as a matter of law. The plaintiffs appealed from that ruling. In a rescript opinion dated October 24, 2016, the Appeals Court affirmed the judgment in all respects except for this Court’s ruling on the 93A claim against Dixon. Beninati v. Borghi, 90 Mass.App.Ct. 556 (2016). It remanded the case for further proceedings.
The case is now before the Court on two sets of motions. The first set of motions addresses the question of Dixon’s liability under G.L.c. 93A. As to that issue, plaintiffs have
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moved for further findings and more specifically ask this Court to conclude that the 93A violation was willful and knowing, warranting multiple damages. Dixon has filed an opposition and has further asked to supplement the trial record. The second set of motions concerns the extent to which the defendants Steven and Linda Borghi should be required to contribute to the damages award on the non-93A claims. These motions also raise the question of whether and to what extent this Court can or should take steps to prevent the Borghis, as members of WOW England, from sharing in the award of 93A damages. This Court will discuss each set of motions in turn.
A. Liability of Dixon under G.L.c. 93A
The fact findings underlying this Court’s July 2014 Decision were extensive. They detailed a course of conduct whereby Dixon, a businessman with no prior experience in the fitness industry, allied himself with the defendants Steven and Linda Borghi, both members of WOW New England, to open a chain of competing health clubs in the same geographic area operated through Dixon-controlled entities (collectively, Blast). Dixon accomplished this, with the Borghis’ assistance, by misappropriating WOW’s confidential information, using WOW’s resources, and engaging in other activity that promoted the interest of Blast at the expense of WOW New England. Based on these findings, this Court concluded that this provided ample factual basis for an award of damages against Dixon for breach of fiduciary duty: although, unlike the Borghis, he was not himself a member of WOW New England and thus would not otherwise have any fiduciary obligations to those entities, he had aided and abetted the Borghis in breaching their obligations and therefore was jointly and severally liable to the plaintiffs for the damages that flowed from that breach. As to the 93A claim, however, this Court concluded that, because the Borghis themselves could not be held liable under that
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statute (Chapter 93A being inapplicable to intra-corporate disputes), neither could Dixon. It was on this point that the Appeals Court disagreed and reversed. The Appeals Court noted that, having erroneously determined that Chapter 93A was inapplicable, this Court had not attempted to asses Dixon’s level of culpability under Chapter 93A. It therefore remanded the matter “for a determination whether Dixon and the Blast defendants violated c.93A and, if so, whether single or multiple damages are warranted.” 90 Mass.App.Ct. at 567. The Appeals Court left undisturbed this Court’s fact findings and otherwise affirmed my rulings in the case.
In opposing plaintiffs’ request for entry of judgment against him on the 93A count, Dixon makes several arguments as to why the elements of a 93A claim have not been established. First, he contends that his actions were not sufficiently egregious to constitute the kind of unfair and deceptive conduct prohibited by G.L.c. 93A §2. This Court disagrees. Contrary to Dixon’s contention that all he gained was a “head start,” this Court found that Dixon aided and encouraged the Borghis in misappropriating WOW New England club membership data, revenue information, reports that analyzed the demographics of the WOW New England membership base, employee training manuals, payroll data, and a list of the clubs’ vendors. Dixon accomplished this by infiltrating WOW New England under the guise of being a consultant; he knew of the Borghis’ fiduciary obligations to other WOW members, who were left in the dark about Dixon’s role until it was too late. Dixon also used WOW assets to open up competing clubs, piggybacked on WOW advertising and marketing efforts, and used his knowledge of the arrangement by which WOW New England obtained permission to use the WOW name in order to obtain unfair advantages for himself and his companies. All of these facts were laid out in the Court’s July 2014 Decision. If that was not clear enough, the Court was explicit in a later decision on plaintiff’s Motion for Reconsideration, stating that ‘Dixon’s
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conduct was – standing alone – unfair and deceptive as defined by G.L.c. 93A §2.” See page 8 of Memorandum of Decision and Order on various Post-trial Motions, dated October 17, 2014 (the October 2014 Decision). This Court continues to adhere to this conclusion.
Dixon’s second argument is that the Court’s fact findings fail to demonstrate that WOW New England suffered some “loss of money or property” within the meaning of G.L.c. 93A §11. Instead, they show only that Blast unfairly benefited; this unfair benefit (it is argued) is not enough to trigger the statute. This Court concludes that Dixon reads too much into that phrase; that is, he construes Section 11 to be more restrictive in its reach than it actually is. Although it is certainly true that Dixon unfairly benefited from his wrongful acts, that benefit also came at WOW New England’s expense. Precisely what monetary loss WOW New England sustained may be difficult to quantify, but that does not mean that Chapter 93A is inapplicable.
The Appeals Court recognized as much in Specialized Tech.Res. Inc. v. JPS Elastomeric Corp., 80 Mass.App. Ct. 841, (2011) in upholding a judge’s Chapter 93A award of damages against a defendant who, like Dixon, had misappropriated plaintiff’s confidential information. Although the Court acknowledged that the plaintiff’s monetary loss was difficult to determine with any specificity, it was fair to infer that the plaintiff suffered some loss of sales when it faced competition from another entity using plaintiff’s trade secrets. The same can be inferred here. “Having satisfied the requirement that it demonstrate some monetary loss, the use of disgorgement of profits to compensate [the plaintiff] for the defendant’s misuse of the trade secret was entirely appropriate.” 80 Mass.App.Ct. at 850. In other words, damages that are based on the benefit that defendant received could be awarded on a claim brought under Section 11 once the threshold requirement of some monetary harm (however imprecise) was established.
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That threshold requirement was met in the instant case.1
Dixon argues more generally that this Court must separately analyze each and every act by Dixon, and assess the particular damages attributable to that specific act rather than simply use the same $ 4.1 million figure as the basis for a damages award. This Court disagrees. In its July 2014 decision, this Court carefully analyzed the evidence presented at trial and concluded that plaintiffs had proved that the defendants caused harm to WOW New England in an amount totaling $ 4.1 million. Dixon’s conduct when considered as a whole amounted to unfair and deceptive conduct within the meaning of 93A and supports the same $ 4.1 million damages award. In short, there is no basis to award anything less than that same amount on the 93A claim.
Third, Dixon contends that that the conduct at issue did not occur in the course of “trade of commerce” as required by G.L.c. 93A §11. The basis for this position is Dixon’s claim that Blast and WOW New England are not separate and distinct entities engaged in arm’s length transactions but are intertwined by virtue of their overlapping ownership and control. Although maintaining that this is “another, different argument” from the one that Dixon made before the Appeals Court as to why he could not be held liable under 93A, this Court agrees with the plaintiffs that it is in fact the same. Clearly, the Appeals Court would not have rejected this Court’s conclusion on the 93A count and remanded for further findings regarding the nature of the conduct at issue if Chapter 93A were inapplicable.
1 This Court also finds it significant that the Appeal Court — which had this Court’s fact findings before it — did not give any indication that Section 11 relief was not available because WOW New England suffered no “loss of money or property” within the meaning of the statute. If this were indeed a problem, then the failure to meet this requirement would have been another way for the Appeals Court to affirm this Court’s conclusion that Chapter 93A did not apply.
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What the Appeals Court could not decide and quite properly remanded to this Court to determine was whether this Court regarded Dixon’s conduct as “unfair” or deceptive” and if so, whether the damages award should be multiplied. The fact findings that this Court made in its July 2014 Decision amply support the conclusion not only that Dixon’s conduct was unfair and deceptive but also that it was intentional and willful, justifying an award of multiple damages. Plaintiffs have accurately cited those portions of the trial record that support this conclusion. See Memorandum in Support of Further Findings at pages 4 through 7, together with Appendix submitted in support. To the extent that such evidence consisted of witness testimony, this Court finds that testimony to be credible.2
In reaching the conclusion that multiple damages are warranted, this Court has not considered Dixon’s affidavit, where he claims to have lost millions on the Blast business. That affidavit was submitted in support of Defendant’s Motion to Supplement the Record, which is Denied. This Court’s award of damages is factually supported and is not subject to revision based on events taking place after the trial was over, nor does this Court have any desire to reopen the evidence.
As to whether to double or treble the damages, this Court concludes that doubling the damages is sufficiently punitive at the same time that it is proportional to the wrongdoing at issue. In so concluding, this Court takes into account the fact that Dixon was acting in concert with the Borghis. Had it not been for the Borghis’ willful breach of their own fiduciary obligations, Dixon would not have had the access he did to WOW New England confidential information or have been able to use that information as effectively had he been acting on his own. Certainly, Dixon is culpable, but the Borghis – who put their own self-interest ahead of
2 This Court also finds and concludes that Dixon’s violations of Chapter 93A should be imputed to CapeCapital, LLC and Auburndale Fitness, LLC, for the reasons stated at pages 8 through 9 of Plaintiff’s Memorandum.
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their fiduciary obligations — are no less responsible for the harm that was inflicted on WOW New England.
B. The Borghis’ Contribution Obligation on the Common Law Count and their Ability to Share in any 93A Award to WOW
The second set of issues – raised by way of two motions–pertains to the Borghis. The first motion, entitled “Harold Dixon’s Motion for Entry of Judgment for Contribution from Defendant Steven and Linda Borghi,” asks this Court to reaffirm what I thought I had already decided — namely, that the Borghis are responsible for fifty percent of the judgment entered in favor of WOW New England on December 30, 2014. That judgment was on the common law claim for breach of fiduciary duty. In order to forestall the accumulation of interest of that judgment, Dixon sought leave to pay the full amount of that judgment, plus accumulated interest; obtaining that leave, he paid $ 4,806,631 into the court on February 11, 2015. Dixon now seeks to recover contribution from the Borghis in accordance with G.L.c. 231B §§1(b) and 3(b) (permitting one tortfeasor to enforce his right of contribution in the same action which gave rise to the judgment against both). He also seeks to “clarify” the Borghis’ pro rata share. The Borghis not only oppose Dixon’s request but cross move to dismiss the contribution claim on the grounds that it is barred by a general release (the Release) contained in an earlier agreement of the parties. This Court discussed the impact of this Release first.
The Release appears in the last of a series of agreements that restructured the relationship between the Borghis and Dixon. The first agreement was entered into when it was clear that litigation among the parties was imminent. The final agreement was executed before the trial took place. The result of these agreements was that Steven Borghi went from holding a majority position in Blast, which ran sixty clubs nationwide, to being the owner of a small handful of those clubs. See July 2014 Decision at pages 31-32. Although not particularly relevant to the
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Court’s ultimately rulings on the legal claims before me, it seemed clear that this was an attempt on Dixon’s part to distance himself from the Borghis.
The agreement relevant to the motion now before this Court is the Purchase and Redemption Agreement dated July 22, 2013 (the P&R Agreement). Subsection 7(d) of the P&R Agreement states that the Blast entities (including Dixon) discharge Steven Borghi and his affiliates (described as the “Borghi Released Parties”) from any actions, claims, or causes of action “whether known or unknown, contingent or otherwise, which [Blast]…had, has or may have had at any time based upon events, agreements, actions or occurrences occurring in the past until and including the Closing Date against the Borghi Released Parties…” Such claims included “any claims which relate to or arise out of [Blast’s] prior relationship” with the Borghi Released Parties…” In Subsection 7(a) of the P&R Agreement, Borghi agreed to do the same as to any claims he or related entities had or may have had against Blast.
The jury waived trial began in October 2013. Following this Court’s July 2014 decision finding the Borghis and Dixon jointly and severally liable to WOW New England on the claim of breach of fiduciary duty, Dixon asked this Court to apportion damages among the defendants as permitted by G.L.c. 231B. Oral arguments on this request (and on other post-trial motions) was held on October 7, 2014 (the October 2014 Hearing). The Borghis’ counsel argued at that hearing that, because Steven Borghi had no interest in certain Blast clubs as a consequence of the P&R Agreement, he should not be liable for a certain portion of the damages. At no time did counsel suggest that the P&R Agreement absolved the Borghis from any and all liability to Dixon in contribution in the event that Dixon paid the judgment first. In a Memorandum of Decision and Order dated October 17, 2014 (the October 2014 Decision) this Court determined that Dixon’s pro rata share of the damages award of $ 4.112,376 was fifty percent, with the
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Borghis responsible for the remaining fifty percent. Dixon sought and obtained leave to pay the full judgment plus accumulated interest, totaling $ 4,806,631 into Court. The Chapter 93A claim against Dixon was dismissed on the grounds that the statute did not apply as a matter of law.
For the next year, the parties litigated their appeal from this judgment: plaintiffs complained of this Court’s 93A ruling, and the Borghis cross appealed as to this Court’s decision upholding a vote by WOW members to remove the Borghis from their management positions. The Borghis did not appeal this Court’s ruling allocating responsibility among the parties for payment of the judgment. The first time the Borghis raised the P&R Agreement’s Release was in response to the motion for contribution now before this Court.
Dixon argues – quite persuasively – that the Release does not bar the contribution claim since it was executed prior to the time that the claim accrued. But see Sword & Shield Restaurant, Inc. v. Amoco Oil Co., 11 Mass.App.Ct. 832 (1981) (holding that release with similar language barred joint tortfeasor claim for contribution even though claim did not become ripe until the joint tortfeasor paid more than his share of a judgment). Moreover, the Borghis’ construction of the Release would lead to nonsensical results: there is no right of contribution until one joint tortfeasor pays more than his fair share of a judgment but, because mutual releases were executed, whoever paid the judgment first (whether voluntarily or involuntarily) would necessarily give up his right to seek contribution against the other. At the very least, the Release is ambiguous, and would require the Court to hear evidence regarding the parties’ intent. That is not necessary, however, since I conclude that Dixon’s second argument regarding waiver is dispositive on this issue.
A release is an affirmative defense that should be raised at the earliest opportunity. See Rule 8(c), Mass.R.Civ.P.; see also Sharon v City of Newton, 437 Mass. 99, 103 (2002) (the
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omission of an affirmative defense from an answer generally constitutes a waiver of that defense). Here, the Borghis could have raised the issue of the Release at multiple junctures in the post trial process but did not. The most obvious time would have been at the October 2014 Hearing concerning apportionment of damages pursuant to G.L.c. 231B. At that hearing, the Court was asked to allocate responsibility among the defendants in a manner that was consistent with the purposes of that statute as applied to the facts of the case before me. At no time in their pleadings or during oral argument did the Borghis’ counsel mention the mutual Releases and how they might affect any right of contribution of one defendant against another. Indeed, the Borghis’ counsel – appearing to acknowledge that Dixon did have some right of contribution — sought only to minimize the amount of the Borghis’ pro rata percentage. If the mutual Releases had been raised, then clearly Dixon would have acted differently than he did: no one would have rushed in to pay the full amount of the judgment — or permitted the plaintiffs to execute on the judgment– until and unless this Court had fully resolved the issues as to the Releases’ impact on any contribution right. The Borghis’ Motion to Dismiss Dixon’s claim for contribution is therefore Denied and Dixon’s Motion of Entry of Judgment of Contribution is Allowed.
Dixon also asks that I “clarify” my decision as to the amount of the Borghis’ pro rata contribution. Specifically, he argues that he should be entitled to recover an additional amount of contribution from Steven Borghi to account for the fact that, as a member of WOW New England, Steven Borghi will receive 37.93 percent of the net recovery to WOW on the common law claim of breach of fiduciary duty. The so-called “windfall” that Steven Borghi would receive as result of that judgment was necessarily known to all parties well before the October 2014 Hearing: as Dixon concedes, it is well settled that, in a derivative action such as this one where one shareholder alleges that another shareholder breached his fiduciary duties to the
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corporation, the wrongdoer shareholder both pays damages and participates in the recovery through his continued ownership in the corporation. Not only did Dixon’s counsel not raise this issue at the October 2014 Hearing but he then joined in submitting a proposed judgment for this Court to sign following this Court’s October 2014 Decision. That proposed judgment – which this Court adopted — by its terms does not limit Borghi’s subsequent proportionate participation in the recovery in any way. This Court sees no reason to amend that judgment at this late date. Dixon’s Motion for Clarification of Judgment Concerning Pro Rata Contribution from the Borghis is therefore Denied.
As to whether Steven Borghi should, together with other WOW members, share in the 93A award,3 that issue has been raised in a timely fashion and in fact seems to have been anticipated by the Appeals Court when it reversed this Court on its 93A ruling. Specifically, the Appeals Court stated in a footnote to its opinion:
We recognize the irony that Steven, as a shareholder of WOW New England, may stand to benefit from any additional damages that Dixon and the Blast defendants are required to pay. Any such inequity is a matter between erstwhile partners Steven and Dixon, and the trial judge is free to take the equities into account in fashioning any remedy under c. 93A.
90 Mass.App.Ct. at 567, n. 11. Notwithstanding the Appeals Court’s suggestion to the contrary, Dixon would not appear to have any legal recourse against Steven Borghi, for the additional damages that Dixon will be required to pay WOW on the 93A count: the Borghis cannot be held jointly and severally liable (and thus cannot be required to contribute to the 93A award pursuant to G.L.c. 231B) because Chapter 93A does not as a matter of law apply to them.
3 Plaintiffs are recovering compensatory damages on the common law count, and on that count, this Court can and does take into account the Borghis’ conduct by requiring them to contribute to the damages pursuant to G.L.c. 231B. Plaintiffs are not entitled to double recovery. Thus, what is at issue on the 93A count is that amount over and above compensatory damages that WOW New England will receive in damages by virtue of this Court’s decision to award double damages.
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As the Appeals Court went on to say, however, this Court can take steps that it believes are necessary to address the inequity that would result if Steven Borghi were to receive almost 40 percent of a 93A award that is based on conduct in which Borghi himself was an active participant.
Plaintiffs join with Dixon in offering the best suggestion as to how to deal with this unique situation – a suggestion that this Court adopts. In entering judgment on the 93A count, this Court will direct that WOW New England shall not permit Borghi to benefit in any way from that amount of damages that WOW receives pursuant to 93A over and above the compensatory damages awarded on the common law count. See fn. 3, supra. Thus, If WOW New England decides to split the award among WOW members as a distribution to each of them according to their percentage ownership, then Steven Borghi would not be entitled to receive any distribution.4 At the same time, other members of WOW should not receive more than their fair share; thus, to prevent an undeserved windfall to them, this Court must reduce the amount that Dixon has to pay to WOW by the percentage of Steven Borghi’s membership interest – that is, by 37.93 percent. This Court recognizes that this means that WOW itself will receive less than it would have received had Steven Borghi not participated with Dixon in the conduct that forms the basis for the 93A claim. But then Dixon would not have been able to do what he did without Steven Borghi either. Moreover, this Court’s approach seems the only way to prevent Steven Borghi from affirmatively benefiting from his misconduct without overcompensating other WOW members. It is also worth noting that WOW New England will receive the substantial benefit of being relieved of its obligation to pay attorney’s fees. Those fees are now Dixon’s
4 As this Court understands it, a distribution is indeed the way that WOW intends to handle the proceeds from this case. As to how the Borghis will be excluded from benefiting from any recovery on the 93A claim if WOW chooses to use the award in some other way, this Court will leave that to WOW to figure out.
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financial responsibility and to the extent that WOW has already paid the fees, it will be entitled to be reimbursed for them by Dixon.
CONCLUSION AND ORDER
For all the foregoing reasons, this Court rules as follows:
1. Defendants’ Motion to Supplement the Record is DENIED;
2. Defendant Harold Dixon’s Motion for Entry of Judgment for Contribution from Defendants Steven and Linda Borghi is ALLOWED;
3. Steven and Linda Borghi’s Cross-Motion to Dismiss Dixon’s Contribution Claim is DENIED;
4. Defendant Harold Dixon’s Motion for Clarification of Judgment Concerning Pro Rata Contribution from the Borghis is DENIED;
5. Plaintiffs’ Motion for Further Findings and Entry of Judgment is ALLOWED, and it is hereby ORDERED that judgment enter on Count XXV of the Second Amended Complaint against Harold Dixon, CapeCapital, LLC and Auburndale Fitness Group Investment, LLC (together with any other Blast entities identified as defendants in that count) in an amount twice the compensatory damages, together with attorney’s fees, pursuant to G.l.c. 93A §11. The parties shall submit a proposed form of judgment on or before July 21, 2017 in line with this opinion.
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Janet L. Sanders
Justice of the Superior Court
Dated: June 30, 2017
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