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Mooney, et al. v. Diversified Business Communications, et al. (Lawyers Weekly No. 09-030-18)

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COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT.
1684CV03726-BLS2
1784CV03423-BLS2
____________________
JOHN J. MOONEY and MORGAN D. WHEELOCK and JOHN SQUIRE and MACGREGOR INVESTMENTS CORPORATION
v.
DIVERSIFIED BUSINESS COMMUNICATIONS; DBC PRI-MED, LLC; THEODORE WIRTH; KATHY WILLING; and OAKLEY DYER
____________________
MEMORANDUM AND ORDER ON DEFENDANTS’ MOTIONS TO DISMISS FIVE OF SIX CLAIMS IN EACH ACTION
The four Plaintiffs are former minority members of a closely-held Delaware company called DBC Pri-Med, LLC. The majority member is and was defendant Diversified Business Communications. The three individual defendants are all managers of Pri-Med; none of them has any ownership interest in the company.1
In January 2017 Pri-Med called Plaintiffs’ shares, as expressly permitted in Pri-Med’s operating agreement. This LLC Agreement provides that an appraisal firm to be selected by the parties shall determine the value of any called (or put) shares, based on a valuation of Pri-Med as a going concern and without discounting that value for the illiquidity or minority nature of any shares.
Plaintiffs allege that Defendants carried out a scheme to artificially deflate the value of Pri-Med in order to avoid paying Plaintiffs a fair and proper price for redeeming their shares. According to Plaintiffs, this scheme involved artificially decreasing Pri-Med’s assets by selling off its major subsidiary (a company called Amazing Charts) and artificially increasing the company’s liabilities by inflating its expenses and debt.
1 The ownership of Pri-Med was divided into three classes of shares. The Series A shares were voting shares. The Series B-1 and B-2 shares were not. Diversified controlled the company because it held roughly 93 percent of the Series A shares. Each of the Plaintiffs held roughly 1.7 percent of the Series A shares. The four Plaintiffs each held one-fourth of the Series B-1 shares, which gave them certain approval rights. Four other individuals held the Series B-2 shares, which had no approval rights.
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Each set of Plaintiffs asserts six claims.2 Count One seeks a declaratory judgment that the sale of Amazing Charts violated the LLC Agreement, and therefore is null and void, because Defendants did not obtain Plaintiffs’ approval. The other claims are for breach of the LLC Agreement, breach of the implied covenant of good faith and fair dealing in the same contract, breach of fiduciary duty, aiding and abetting a breach of fiduciary duty, and certain equitable relief.
Defendants have moved to dismiss all of the claims under Mass. R. Civ. P. 12(b)(6) except for the claims in Count Two for breach of contract. The Court will order that declaratory judgment enter in Defendants’ favor on Count One of each complaint, deny the motions with respect to the claim for breach of the implied covenant of good faith and fair dealing in Count Three, dismiss with prejudice the claims for breach of fiduciary duty and aiding and abetting a breach of fiduciary duty in Counts Four and Five, and dismiss without prejudice the separate claim for equitable relief in Count Six.
1. Alleged Implausibility of Claims. Defendants make an overarching argument that Plaintiffs’ basic theory of their claims—which is that Defendants deliberately stripped Pri-Med of value in order to avoid paying Plaintiffs the proper redemption price—is “absurd” and “nonsensical.” Defendants contend that the complaints must therefore be dismissed because they fail to allege facts plausibly suggesting any entitlement to relief. See generally Lopez v. Commonwealth, 463 Mass. 696, 701 (2012) (to survive a motion to dismiss under Mass. R. Civ. P. 12(b)(6), a complaint or counterclaim must allege facts that, if true, would “plausibly suggest[] … an entitlement to relief”) (quoting Iannacchino v. Ford Motor Co., 451 Mass. 623, 636 (2008), and Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557 (2007)).
This argument is unavailing. Defendants misconstrue Twombly and Iannacchino. A trial court judge cannot dismiss claims because it considers the underlying factual allegations to be unbelievable. To the contrary, in deciding a Rule 12(b)(6) motion, a court must “accept as true the allegations in the complaint, draw
2 Plaintiffs Mooney and Wheelock filed their complaint first; it was docketed as civil action 1684CV03726-BLS2. Plaintiffs Squire and Macgregor Investments filed a separate complaint; it was docketed as civil action 1684CV03423-BLS2. The two complaints are very similar and assert the same claims.
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every reasonable inference in favor of the plaintiff, and determine whether the factual allegations plausibly suggest an entitlement to relief under the law.” Barbuto v. Advantage Sales & Mktg., LLC, 477 Mass. 456, 457–58 (2017). The Court must assume “that all the allegations in the complaint are true” even if they are “doubtful in fact.” Iannacchino, 451 Mass. at 636, quoting Twombly, 550 U.S. at 555.
So long as the facts alleged in a complaint plausibly suggest that the plaintiffs may be able to prove their claims, the complaint is not subject to dismissal even if the allegations appear to be “nonsensical,” “extravagantly fanciful,” “unrealistic,” or otherwise “improbable.” See Ashcroft v. Iqbal, 556 U.S. 662, 681 (2009) (“To be clear, we do not reject these bald assertions on the ground that they are unrealistic or nonsensical. … It is the conclusory nature of [the plaintiff’s] allegations, rather than their extravagantly fanciful nature, that disentitles them to the presumption of truth.”); Twombly, 550 U.S. at 556 (“[A] well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of the facts alleged is improbable.”).
“Put another way, Twombly and Iqbal expressly declined to exclude even outlandish allegations from a presumption of truth except to the extent they resembled a ‘formulaic recitation of the elements of a … claim’ or other legal conclusion.” Connelly v. Lane Const. Corp., 809 F.3d 780, 789 (3d Cir. 2016), quoting Iqbal, supra, quoting in turn Twombly, 550 U.S. at 555. And Iannacchino adopted the same standard under Massachusetts law.
2. Delaware Law Governs. The substantive claims in this case are governed by Delaware law. Pri-Med was formed under the Delaware Limited Liability Act. The breach of fiduciary duty claims are therefore governed by Delaware law. See Harrison v. NetCentric Corp., 433 Mass. 465, 469-472 (2001). In addition, the parties’ LLC Agreement provides that it “shall be construed and enforced in accordance with the laws (other than the law governing conflict of law questions) of the State of Delaware. This provision is enforceable. See Hodas v. Morin, 442 Mass. 544, 549–550 (2004) (“As a rule, ‘[w]here the parties have expressed a specific intent as to the governing law, Massachusetts courts will uphold the parties’ choice as long as the result is not contrary to public policy.’ ”) (quoting Steranko v. Inforex, Inc., 5 Mass. App. Ct. 253, 260 (1977)).
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3. Declaratory Judgment—Count One. Defendants are entitled to judgment in their favor on the claims for declaratory judgment as to whether Pri-Med could sell its Amazing Charts subsidiary, or the InLight assets of that subsidiary, after January 1, 2017, without the prior written consent of the Plaintiffs.
3.1. Construing the Contract. Section 7.9 of the LLC Agreement provided that certain corporate actions required prior consent of at least three of the four Plaintiffs, while they still owned the B-1 Shares of the company. This provision states, in relevant part, that “without the prior written consent of the Members holding a majority of the Series B-1 Shares, the Company and the Series A Members agree that they shall not:
(a) materially change the business focus of the Company;
* * * or
(e) prior to January 1, 2017, sell all or substantially all of the Company’s business whether by asset sale, stock sale or merger.”
It is undisputed that Pri-Med did not sell Amazing Charts or the InLight assets before January 1, 2017. Pri-Med represents, and it appears to be undisputed, that it sold Amazing Charts in September 2017. Pri-Med did not seek or obtain the approval of the Plaintiffs, as the B-1 shareholders, before selling this subsidiary. Plaintiffs allege that this sale materially changed the business focus of the Company by eliminating the health records part of the business. It is undisputed that the sale of Amazing Charts constituted the sale of substantially all of Pri-Med’s business.
The controversy at issue in the declaratory judgment claims turns on a question of contract interpretation. Defendants contend that Pri-Med could sell Amazing Charts without the B-1 shareholders’ approval pursuant to § 7.9(e) because the sale of substantially all of Pri-Med’s business did not require such approval after January 1, 2017. In response, Plaintiffs say that they “do not rely on § 7.9(e),” but instead are entitled to challenge the sale of Amazing Charts on the ground that it was a material change in the business focus of Pri-Med and therefore B-1 shareholder approval was required under § 7.9(a).
The proper interpretation of an unambiguous written contract is a question of law that may be resolved on a motion to dismiss or a motion for judgment on the pleadings. See, e.g., Gershen, ; Strougo v. Hollander, 111 A.3d 590, 594 (Del. Ch.
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2015); Allied Capital Corp. v. GC-Sun Holdings, L.P., 910 A.2d 1020, 1030 (Del. Ch. 2006). “Contract language is not ambiguous merely because the parties dispute what it means.” Alta Berkeley VI C.V. v. Omneon, Inc., 41 A.3d 381, 385 (Del. 2012). To the contrary, “[a] determination of whether a contract is ambiguous is a question for the court to resolve as a matter of law.” Kelly v. Blum, civ. action 4516-VCP, 2010 WL 629850, at *7 n.43 (Del. Ch. 2010), quoting HIFN, Inc. v. Intel Corp., civ. action 1835-VCS, 2007 WL 2801393, at *9 (Del. Ch. 2007).
To make sense of the disputed provisions, the Court must consider the contract as a whole and construe each provision in context, not in isolation. Stonewall Ins. Co. v. E.I. du Pont de Nemours & Co., 996 A.2d 1254 (Del. 2010). And it must interpret the contract in a manner that gives “meaning and effect” to each word and provision, under the reasonable assumption “that the parties would not include superfluous verbiage in their agreement.” Zimmerman v. Crothall, 62 A.3d 676, 691 (Del. Ch. 2013). In sum, the Court must “reconcile or harmonize all of the contract’s provisions.” Hampton v. Turner, civ. action 8963-VCN, 2015 WL 1947067, at * 3 (Del. Ch. 2015).
The Court concludes that Pri-Med was free to sell Amazing Charts or its InLight Assets after January 1, 2017, without obtaining approval from any of the Plaintiffs, as a matter of law. It construes paragraphs (a) and (e) of § 7.9 of the LLC Agreement as requiring B-1 shareholder approval (a) for any material change in Pri-Med’s business focus other than the sale of all or substantially all of the company’s business, without any time limitation and (e) for any sale of all or substantially all of the company’s business that took place before January 1, 2017.
Plaintiffs cannot evade the time limit established by agreement in § 7.9(e) by instead seeking to invoke § 7.9(a). Almost by definition, a sale of all or substantially all of Pri-Med’s business would inevitably result in a material change in Pri-Med’s business focus. The time limit for seeking approval to sell substantially all of the business in § 7.9(e) would not mean anything if such a transaction still required approval of the B-1 shareholders under § 7.9(a). As a result, the best and only reasonable way to harmonize the two provisions is to read § 7.9(a) in the manner described above.
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3.2. Declaring Rights versus Dismissing Claim. Plaintiffs argue that the Court should not dismiss the declaratory judgment claims, but instead should declare the rights of the parties under § 7.9 of the LLC Agreement.
The appellate case law regarding whether and when a claim for declaratory judgment should be dismissed instead of declaring rights in favor of the defendant has become surprisingly muddled.
For years it had been well established that when a plaintiff seeks declaratory relief, that claim has been “properly brought” (meaning that the plaintiff had standing and there was an actual controversy between the parties), and a court determines that the plaintiff is not entitled to relief in its favor, “there must be a declaration of the rights of the parties” rather than merely a dismissal of the claim. City of Lynn v. Lynn Police Ass’n, 455 Mass. 590, 599 (2010); accord, e.g., Mscisz v. Kashner Davidson Securities Corp., 446 Mass. 1008, 1010 (2006) (rescript) (vacating judgment denying request for declaratory relief, and ordering declaration of rights in defendant’s favor); Coraccio v. Lowell Five Cents Savings Bank, 415 Mass. 145, 147-148 & n.3 (1993); Cherkes v. Town of Westport, 393 Mass. 9, 12 (1984) (vacating dismissal and ordering declaratory judgment in defendants’ favor); Pina v. Liberty Mut. Ins. Co., 388 Mass. 1001, 1002 (1983) (rescript) (same); Gleason v. Galvin, 374 Mass. 574, 577 (1978); Attorney General v. Kenco Optics, Inc., 369 Mass. 412, 418 (1976) (vacating dismissal and ordering declaratory judgment in defendants’ favor); see also Massachusetts Federation of Teachers v. Bd. of Education, 436 Mass. 763, 770 & n.10, 782 (2002) (affirming Superior Court’s entry of declaratory judgment in favor of defendant, in lieu of granting defendant’s motion to dismiss under Rule 12(b)(6)); Nelson v. Comm’r of Correction, 390 Mass. 379, 387-388 (1983) (same).
At least twice, however, the Supreme Judicial Court has held that dismissal of a complaint under Rule 12(b)(6) “does not constitute a decision on the merits, and therefore, declaratory judgment should not enter” where a complaint fails to state a claim upon which declaratory relief may be granted in favor of the plaintiff. Harvard Crimson, Inc. v. President and Fellows of Harvard College, 445 Mass. 745, 748 n.5 (2006); accord Wallerstein v. Bar Examiners, 414 Mass. 1008, 1009 (1993) (rescript).
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The decisions in Harvard Crimson and Wallerstein cannot be squared with the other SJC holdings discussed above. Nor can they be squared with the Appeals Court’s repeated holdings that “[u]nder Massachusetts law, as elsewhere, a dismissal for failure to state a claim, under Mass. R. Civ. P. 12(b)(6), operates as a dismissal on the merits, see Mass. R. Civ. P. 41(b)(3), with res judicata effect.” Mestek, Inc. v. United Pacific Ins. Co., 40 Mass. App. Ct. 729, 731, rev. denied, 423 Mass. 1108 (1996), quoting Isaac v. Schwartz, 706 F.2d 15, 17 (1st Cir. 1983); accord TLT Const. Corp. v. Anthony Tappe and Assocs., Inc., 48 Mass. App. Ct. 1, 10 (1999).
In any case, Harvard Crimson and Wallerstein seem to have been superseded by City of Lynn and Mscisz.
Since the weight of authority requires that the Court declare the rights of the parties rather than dismiss the declaratory judgment claims, the Court will do what the Plaintiffs have requested. It will order that when final judgment enter it shall declare that Defendants had the right under the LLC Agreement to sell Amazing Charts or its assets after January 1, 2017, without first obtaining consent from any of the B-1 shareholders.
4. Implied Covenant of Good Faith and Fair Dealing—Count Three. Plaintiffs claim that Defendants’ alleged scheme to artificially deflate the value of Pri-Med violated the implied covenant of good faith and fair dealing that is part of the company’s LLC Agreement. The Court will deny the motions to dismiss these claims.
Under Delaware law, every contract includes an implied covenant of good faith and fair dealing. See, e.g., Dunlap v. State Farm Fire and Cas. Co., 878 A.2d 434, 442 (Del. 2005). This implied covenant “requires ‘a party in a contractual relationship to refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits’ of the bargain.” Id., quoting Wilgus v. Salt Pond Inv. Co., 498 A.2d 151, 159 (Del. Ch. 1985).
In Delaware, “implied covenant of good faith and fair dealing involves … inferring contractual terms to handle developments or contractual gaps that … neither party anticipated.” Nationwide Emerging Mgrs., LLC v. Northpointe Holdings, LLC, 112 A.3d 878, 896 (Del. 2015), quoting Nemec v. Shrader, 991 A.2d 1120, 1125 (Del. 2010). It “is well-suited to imply contractual terms that are so
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obvious — like a requirement that the general partner not engage in misleading or deceptive conduct … — that the drafter would not have needed to include the conditions as express terms in the agreement.” Dieckman v. Regency GP LP, 155 A.3d 358, 361 (Del. 2017).
Defendants argue that they cannot be sued under the implied covenant because all of the acts or omissions challenged in these claims, including the sale of Amazing Charters, are subject to express provisions of the LLC Agreement. They rely on the principle that “[t]he implied covenant will not infer language that contradicts a clear exercise of an express contractual right.” Nationwide Emerging Mgrs., 112 A.3d at 899, quoting Nemec, 991 A.2d at 1127.
This argument is without merit. Plaintiffs have plausibly alleged that Defendants undertook a course of action in a deliberate attempt to deny Plaintiffs the fruits of their bargain, by artificially depressing the value of their Pri-Med shares as of the time they were redeemed. They have therefore stated a viable claim for breach of the implied covenant.
Although the LLC Agreement gave Pri-Med and Diversified the sole discretion to sell all or substantially all of Pri-Med’s business after January 1, 2017, the implied covenant requires that such discretion by exercised in good faith and not used to deprive the minority members of the value of their shares. See generally Gerber v. Enterprise Products Holdings, LLC, 67 A.3d 400, 419 (Del. 2013) (implied covenant requires that when party is “exercising a discretionary right, [it] must exercise its discretion reasonably”); Airborne Health, Inc. v. Squid Soap, LP, civ. action 4410-VCL, 984 A.2d 126, 146-147 (Del. Ch. 2009) (“When a contract confers discretion on one party, the implied covenant requires that the discretion be used reasonably and in good faith.”).
Delaware courts have held that factual allegations that a contracting party has artificially inflated the value of a company’s accounts receivable or stock before completing a merger, in order to inflate the amount paid by the buyer, state a viable claim for breach of the implied covenant of good faith and fair dealing. Aviation West Charters, LLC v. Freer, civ. action N14C-09-271WCC CCLD, 2015 WL 5138285,
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at *10 (Del. Supr. 2015) (accounts receivable); Kelly v. McKesson HBOC, Inc., civ. action 99C-09-265WCC, 2002 WL 88939, at *10 (Del. Supr. 2002) (stock value).
Here, Plaintiffs claim that Defendants artificially deflated the value of Pri-Med in order to decrease the amount that Pri-Med had to pay to redeem Defendants’ shares. That similarly states a viable claim for breach of the implied covenant.
5. Fiduciary Duty—Counts Four and Five.
5.1. Direct versus Derivative Action. Defendants argue that the claims against them for breach of fiduciary duty, or for aiding and abetting such a breach, may only be asserted as derivative claims on behalf of Pri-Med and may not be asserted as direct claims on behalf of the four former B-1 shareholders. The Court disagrees. If Plaintiffs had viable claims for breach of fiduciary duty they could assert them as direct claims on their own behalf.
As a general matter, Defendants are correct that alleged mismanagement of a limited liability company may only be challenged in a derivative action if the alleged harm was a fall in the value of the company or its stock. Under Delaware law, “actions charging ‘mismanagement which depress[] the value of stock [allege] a wrong to the corporation; i.e., the stockholders collectively, to be enforced by a derivative action.’ ” Kramer v. W. Pac. Indus., Inc., 546 A.2d 348, 353 (Del. 1988), quoting Bokat v. Getty Oil Co., 262 A.2d 246, 249 (Del. Supr. 1970); accord Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1038 (Del. 2004); Litman v. Prudential-Bache Properties, Inc., 611 A.2d 12, 16 (Del. Ch. 1992).
In this case, however, Plaintiffs allege that Defendants breached their fiduciary duties by deliberately taking actions to depress Pri-Med’s value as of the time that Pri-Med redeemed Defendants’ shares, solely to reduce the amount that Pri-Med had to pay Defendants for their shares. Since Plaintiffs are alleging a breach of a duty owed to them rather than to the corporation, and are asserting that the alleged breach resulted in a long-term windfall benefit to Defendants and caused Plaintiffs to suffer damages not incurred by other shareholders, they may bring their breach of fiduciary duty claims in a direct action on their own behalf. See Tooley, 845 A.2d at 1039; In re TD Banknorth Shareholders Litig., 938 A.2d 654, 667 (Del. Ch.
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2007); Anglo American Security Fund, L.P. v. SR. Int’l Fund, L.P., 829 A.2d 143, 153 (Del. Ch. 2003).
Contrary to Defendants’ argument, this is not a case in which “all of a corporation’s stockholders are harmed and would recover pro rata in proportion with their ownership of the corporation’s stock solely because they are stockholders,” which would mean that “the claim is derivative in nature.” Feldman v. Cutaia, 951 A.2d 727, 733 (Del. 2008); accord El Paso Pipeline GP Company, LLC v. Brinckerhoff, 152 A.3d 1248, 1264 (Del. 2016). Instead, this is a case in which Plaintiffs have alleged facts plausibly suggesting that they “suffered some individualized harm not suffered by all of the stockholders at large,” which means they may assert direct claims. Feldman, supra.
5.2. Relationship to Contract Claims. The Court concludes, however, that it must dismiss the fiduciary duty claims because Defendants’ alleged malfeasance may only be changed in a claim for breach of contract.
“Delaware law does not impose a heightened fiduciary duty on shareholders in a close corporation;” it differs from Massachusetts law on this point. Harrison, 433 Mass. at 472, citing Riblet Prods. Corp. v. Nagy, 683 A.2d 37, 39 (Del. 1996) (noting that Delaware has not adopted duty of utmost good faith and loyalty established in Wilkes v. Springside Nursing Home, Inc., 370 Mass. 842, 848-849 (1976)), and Nixon v. Blackwell, 626 A.2d 1366, 1380-1381 (Del. 1993) (declining “to fashion a special judicially-created rule for minority investors”). “Instead, under Delaware law, minority shareholders can protect themselves by contract (i.e., negotiate for protection in stock agreements or employment contracts) before investing in the corporation.” Id. at 469.
Consistent with this principle, under Delaware law a claim by a corporate shareholder for breach of fiduciary duty against the corporation or its members, managers, or directors must be dismissed if the plaintiff has a viable claim that the same conduct constituted a breach of the LLC’s operating agreement. The plaintiff could sue for breach of contract under those circumstances, but could not also sue for breach of fiduciary duty. “ ‘[W]here a dispute arises from obligations that are expressly addressed by contract, that dispute will be treated as a breach of contract
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claim’ and thus ‘any fiduciary claims arising out of the same facts that underlie the contract obligations would be foreclosed as superfluous.’ ”AM General Holdings LLC on behalf of Ilshar Capital LLC v. Renco Group, Inc., Del. Ch. C.A. No. 7639-VCN, 2013 WL 5863010, *10 (Del. Ch. 2013), quoting Nemec v. Shrader, 991 A.2d 1120, 1129 (Del. 2010)).
“This treatment of corresponding fiduciary duty and contract claims reflects Delaware’s perception that allowing ‘a fiduciary duty claim to coexist in parallel with [a contractual] claim, would undermine the primacy of contract law over fiduciary law in matters involving … contractual rights and obligations.’ ” CIM Urban Lending GP, LLC v. Cantor Commercial Real Estate Sponsor, L.P., civ. action 11060-VCN, 2016 WL 768904, at *3 (Del. Ch. 2016), quoting Grayson v. Imagination Station, Inc., civ. action 5051-CC 2010 WL 3221951, at *7 (Del. Ch. 2010). That is why Delaware “does not allow fiduciary duty claims to proceed in parallel with breach of contract claims unless ‘there is an “independent basis for the fiduciary duty claims apart from the contractual claims.” ’ ” Renco Grp., Inc. v. MacAndrews AMG Holdings LLC, civ. action 7668-VCN, 2015 WL 394011, at *7 (Del. Ch. 2015), quoting Grayson, supra, quoting in turn PT China LLC v. PT Korea LLC, civ. action 4456-VCN, 2010 WL 761145, at *7 (Del. Ch. 2010).
Nemec, like this case, concerned the exercise of a corporation’s right to redeem shares held by a minority shareholder. The corporation had the right to redeem plaintiff’s stock at any time at book value. 991 A.2d at 1123. In early 2008 the board of directors were negotiating the sale of a large part of the business. The directors redeemed plaintiffs’ shares in April 2008. They expected that the anticipated sale of part of the company would occur within days or weeks. That transaction closed in May 2008. Id. at 1124-1125. The fact that plaintiffs’ shares had already been redeemed “added nearly $ 60 million to the proceeds” received by the remaining stockholders. Id. at 1124.
The Delaware Supreme Court held that the Nemec plaintiffs could not sue the corporation’s directors for breach of fiduciary duty, because that claim arose “from a dispute relating to the exercise of a contractual right—the Company’s right to redeem the shares of retired nonworking stockholders” (emphasis in original). Id. at 1129.
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It reasoned that “the nature and scope of the Director’s duties when causing the Company to exercise its right to redeem shares covered by the Stock Plan were intended to be defined solely by reference to that contract,” and thus that “[a]ny separate fiduciary duty claims that might arise out of the Company’s exercise of its contract right … were foreclosed.” Id.
The Court concludes that this case is indistinguishable from Nemec and that the Court must therefore dismiss Plaintiff’s fiduciary duty claims. Those claims are based on the same facts and the same alleged bad faith as Plaintiffs’ contract claims, especially the claim under the implied covenant of good faith and fair dealing. Plaintiffs may press their claims that Defendants violated the LLC Agreement, including the implied covenant. But under Delaware law they may not assert that the same acts and same alleged scheme also constitute a breach of fiduciary duty.
If anything, the principle that claims for breach of fiduciary duty are foreclosed where the dispute arises from obligations addressed by contract applies more clearly in this case than it did in Nemec. Here, the LLC Agreement expressly provides (in sections 7.4 and 11.1) that Pri-Med’s members would have the fiduciary duties imposed by the Delaware Limited Liability Company Act and that its managers would have the same fiduciary duties that are applicable to directors of a corporation organized and existing under the Delaware General Corporation Law. Since the LLC Agreement itself specifies the fiduciary duties that apply here, any claim that those duties were breached can be resolved as part of Plaintiffs’ claim for breach of contract. In addition, as explained above, Plaintiffs have stated a viable claim for breach of the implied covenant of good faith and fair dealing, unlike the plaintiffs in Nemec. See 991 A.2d at 1125-1128 (affirming dismissal of implied covenant claim).
Plaintiffs’ assertion that they should nonetheless be allowed to assert claims for breach of fiduciary duty against the three individual defendants (Wirth, Willing, and Dyer), because the LLC Agreement only imposes contractual obligations upon Pri-Med and its members but not on its managers, is without merit. Since the three individual defendants admit that they are managers of the company, under Delaware law they are all deemed to be “a party to” and are bound by Pri-Med’s LLC Agreement, even though the Agreement does not state that the managers are parties and none of
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the individual defendants signed the contract on their own behalf. CompoSecure, L.L.C. v. CardUX, LLC, civ. action 12524-VCL, 2018 WL 660178, at *25 & n.299 (Del. Ch. 2018); 6 Del. C. § 18-101(7) (“A member or manager of a limited liability company or an assignee of a limited liability company interest is bound by the limited liability company agreement whether or not the member or manager or assignee executes the limited liability company agreement.”).
In sum, the Court concludes that it must dismiss Counts Four and Five in both complaints with prejudice.
6. Equitable Relief—Count Six. Defendants are also entitled to dismissal of Count Six of the complaints, which ask for different kinds of equitable relief.
Plaintiffs are not entitled to any of the proposed relief that is specified in Count Six. Plaintiffs may not seek or obtain an injunction barring the sale or transfer of Amazing Charts or its InLight assets, or unwinding any such transaction. The Court has ruled above that, as a matter of law, Pri-Med did not have to obtain written consent of the B-1 shareholders in order to sell the subsidiary Amazing Charts or its InLight assets after January 1, 2017. Similarly, Plaintiffs may not seek or obtain an injunction mandating judicial oversight of the contractual appraisal process. The Court has ruled on February 2, 2018, that requiring such oversight “would be inconsistent with the terms of the LLC Agreement and inconsistent with the governing Delaware law.” See Closser v. Penn Mutual Insurance Co., 457 A.2d 1081, 1087 (Del. 1983) (contract requiring parties to resolve valuation disputes through final and binding appraisal process “provide[s] a mandatory form of arbitration, precluding recourse to the courts”).
To the extent that Count Six seeks other unspecified equitable relief, it merely “states a claim for a remedy, not a cause of action.” Unitrode Corp. v. Linear Tech. Corp., No. 98-5983, 11 Mass. L. Rptr. 145, 2000 WL 281688, at *5 (Mass. Supr. 2000) (Botsford, J.). To the extent that Defendants prevail on their remaining claims they are entitled to seek equitable relief, if appropriate. But Count Six “adds nothing to the complaint that is not already there” in the prayer for equitable relief on the other claims. Id.
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“Injunctions are a form of relief, not a cause of action.” Quadrant Structured Products Co., Ltd. v. Vertin, 102 A.3d 155, 203 (Del. Ch. 2014) (dismissing claims); accord Long v. Dell, Inc., 93 A.3d 988, 1004 (R.I. 2014) (“An injunction is a remedy, not a cause of action.”) (affirming dismissal of claims); Goerlitz v. City of Maryville, 333 S.W.3d 450, 455 (Mo. 2011) (en banc) (same, affirming summary judgment). “There is no such thing as a suit for a traditional injunction in the abstract. For a traditional injunction to be even theoretically available, a plaintiff must be able to articulate a basis for relief that would withstand scrutiny under” a motion to dismiss for failure to state a claim. Alabama v. U.S. Army Corps of Engineers, 424 F.3d 1118, 1127 (11th Cir. 2005), quoting Klay v. United Healthgroup, Inc. 376 F.3d 1092, 1097 (11th Cir.2004).
The Court will therefore dismiss the standalone claims for equitable relief without prejudice.
ORDER
Defendants’ partial motions to dismiss are ALLOWED IN PART and DENIED IN PART as follows. (a) The motions are ALLOWED as to the requests for declaratory relief in Count One in each complaint. When final judgment enters, it shall include a declaration that DBC Pri-Med, LLC, had a contractual right to sell the company known as Amazing Charts or the so-called InLight assets of that company after January 1, 2017, without obtaining written consent from any of the holders of B-1 Shares of DBC Pri-Med. (b) The motions are DENIED with respect to the claim for breach of the implied covenant of fair dealing in Count Three. (c) The motions are ALLOWED with respect to the claims for breach of fiduciary duty in Count Four and for aiding and abetting a breach of fiduciary duty in Count Five. Those claims are dismissed with prejudice. (d) The motions are ALLOWED with respect to the requests for equitable relief in Count Six, which are hereby dismissed without prejudice.
March 2, 2018
___________________________
Kenneth W. Salinger
Justice of the Superior Court read more

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Posted by Massachusetts Legal Resources - April 3, 2018 at 7:45 am

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Mooney, et al. v. Diversified Business Communications, et al. (Lawyers Weekly No. 09-014-18)

COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT.
1684CV03726-BLS2
1784CV03423-BLS2
____________________
JOHN J. MOONEY, MORGAN WHEELOCK, JOHN SQUIRE, and MACGREGOR INVESTMENTS CORPORATION
v.
DIVERSIFIED BUSINESS COMMUNICATIONS; DBC PRI-MED, LLC; THEODORE WIRTH; KATHY WILLING; and OAKLEY DYER
____________________
MEMORANDUM AND ORDER ALLOWING CERTAIN DEFENDANTS’ MOTION TO COMPEL APPRAISAL
The four plaintiffs were minority owners of defendant DBC Pri-Med LLC, which is a Delaware limited liability company. Defendant Diversified Business Communications is the majority member of Pri-Med. In January 2017 Pri-Med called all of Plaintiffs’ membership shares, as expressly permitted in § 13.1(a) of Pri-Med’s operating agreement. This LLC Agreement provided for an appraisal firm to be by the parties to determine the value of any called (or put) shares. That appraisal process has not yet begun because Plaintiffs have refused to agree upon an appraisal firm.
Pri-Med and Diversified have moved for specific performance of the third-party appraisal provision. Plaintiffs John Mooney and Morgan Wheelock filed a written response stating that they “have no objection to an independent appraisal,” but asking the Court to establish a new process under which a special master would select the appraiser and schedule (and perhaps conduct) evidentiary hearings before the appraiser. Plaintiffs John Squire and Macgregor Investments Corporation filed a written response joining in the arguments by the Mooney Plaintiffs. At oral argument, however, the Squire Plaintiffs suddenly reversed course and asserted for the first time that no appraisal should be conducted, either ever or for now.
Defendants have the better of these arguments. Under Delaware law Defendants are entitled to enforce the contractual appraisal process, subject only to limited judicial review of the appraiser’s final decision. It would be inappropriate for the Court to arrogate to a special master the power to select the appraisal firm or to schedule or conduct hearings. The Court will ALLOW the motion to compel.
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The Court must apply Delaware law in deciding this motion. The parties agreed in § 15.5 of the LLC Agreement that this contract “shall be construed and enforced in accordance with the laws … of the State of Delaware.” The provision is enforceable. See Hodas v. Morin, 442 Mass. 544, 549–550 (2004) (“As a rule, ‘[w]here the parties have expressed a specific intent as to the governing law, Massachusetts courts will uphold the parties’ choice as long as the result is not contrary to public policy.’ ”) (quoting Steranko v. Inforex, Inc., 5 Mass. App. Ct. 253, 260 (1977).
The appraisal provision of the LLC Agreement that Pri-Med and Diversified seek to enforce states as follows:
In the event that the Company [i.e., DBC Pri-Med LLC] and the selling Employee Member fail to agree on a price for the selling Employee Member’s Shares on or before the thirtieth (30th) day following the delivery and receipt of the Put or Call Notice, as applicable, the selling Employee Member’s Shares shall be appraised by a mutually agreeable, independent, certified, business valuation and appraisal firm (the “Appraisal Firm”), whose fees and expenses shall be shared equally between the Company and the selling Employee Member. The valuation of the subject Shares shall be based on a valuation of the Company as a going concern and shall not be discounted for the illiquidity or minority nature of such Shares. The Appraisal Firm shall be instructed to deliver its appraisal report within sixty (60) days of the engagement. The Appraisal Firm’s appraisal of the value of the subject Shares shall be final and binding on the parties as the Redemption Price.
No party has suggested that this provision is ambiguous, or sought to offer any extrinsic evidence regarding its meaning.
Under the schedule established in this contractual provision, the appraisal process should have begun a year ago and finished a few months after that. Pri-Med delivered its call notices in early January 2017. The parties did not agree upon a redemption price within thirty days. Both sides had an obligation to select a mutually agreeable appraisal firm and to instruct that firm to deliver its final appraisal report within sixty days after its formal engagement. It is undisputed that Plaintiffs have not agreed to any of the appraisal firms proposed by Defendants or proposed an alternative. They refuse to do so unless and until there is judicial oversight of the appraisal process.
The Court does not believe it would be appropriate for it to appoint a special master and oversee the appraisal process. Doing so would be inconsistent with the
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terms of the LLC Agreement and inconsistent with the governing Delaware law. To the extent that the Court has the discretion under Delaware law to appoint a special master and take control of the appraisal process, it declines to do so.
Plaintiffs are contractually bound to allow an agreed-upon appraisal firm determine the value of Pri-Med and thus the value of their shares. Under Delaware law, a contractual agreement to resolve valuation disputes through a final and binding appraisal process, where invoked (as here), “provide[s] mandatory form of arbitration, precluding recourse to the courts.” Closser v. Penn Mutual Insurance Co., 457 A.2d 1081, 1087 (Del. 1983) (emphasis added). A party’s unwillingness “to proceed with the appraisal process does not entitle him to seek recourse in the courts instead.” Nahill v. Raytheon Co., 84 Mass. App. Ct. 1129, 2014 WL 183961, *3 (2014) (unpublished opinion) (applying Closser and Delaware law).
The appraisal provision of the contract is silent regarding what process the appraisal firm should follow to obtain information and argument from the parties. This means that the parties are free to agree upon a particular process when they retain the appraisal form. In the absence of such agreement, the contract implicitly authorizes the appraisal firm to establish a fair and appropriate process, without judicial oversight. See Prettinaro Const. Co., Inc. v. Harry C. Partridge, Jr., & Sons, Inc., 408 A.2d 957, 963 (Del. 1979) (where dispute is subject to arbitration, substantive and procedural disputes should all be decided by the arbitrator, not by a court); LG Electronics, Inc. v. InterDigital Communications, Inc., 98 A.2d 135, 140 (Del. Ch. 2014) (Laster, Vice C.) (same).
The Mooney Plaintiffs are asking the Court to get involved in the appraisal process in a manner that seems inconsistent with the appraisal provision that the parties agreed to in their LLC Agreement. “When parties bargain to have a contractual payment turn on the on the valuation of [a business or some] property, the parties are free to set whatever level of judicial review” and other judicial involvement “they like.” Senior Housing Capital, LLC v. SHP Senior Housing Fund, LLC, C.A. No. 4586-CS, 2013 WL 1955012, *26 (Del. Ch. 2013) (Strine, C.). In this case the parties agreed that they would select an appraiser, and that the appraiser’s valuation of Pri-Med “shall be final and binding on the parties as the Redemption
– 4 –
Price.” Under Delaware law, that leaves very little room for judicial involvement in the appraisal process or result.
Judicial review of the appraiser’s final decision is quite limited under a contract like this. Where the parties have agreed that an appraiser will determine the value of a business or property, to be used as an input in determining what one party is to be paid, “there is no judicial review if no provision for such review is provided in the contract itself.” Id. *24. “When a contract plainly says that a contractual input (the value of a certain [business or] property) will be determined by an appraiser selected in accordance with the contract’s terms, that is what it plainly means. It is contrary to such a plain reading for the appraiser’s value to be subject to judicial second-guessing.” Id.
The only exception arises if an aggrieved party believes that the appraiser’s final decision has been unfairly tainted in some way, for example because one side provided the appraiser “with false financial statements;” in such a case the aggrieved party may assert a claim that the other side “had breached the contract’s implied covenant of good faith and fair dealing.” Id. at *26. “Thus, judicial review is not unavailable, but is restricted to considering a claim that the appraisal is unworthy of respect because it does not, as a result of contractual wrongdoing, represent the genuine impartial judgment on value that the contract contemplates.” Id. That sort of limited challenge to a final appraisal is only available, by definition, after the appraisal is complete—as the additional cases cited by the Mooney Plaintiffs make clear. See PECO Logistics, LLC v. Walnut Investment Partners, L.P., C.A. No. 9978-CB, 2015 WL 9488429, *11 (Del. Ch. 2015) (Bouchard, C.); JPMorgan Chase & Co. v. Am. Century Cos. Inc., C.A. No. 6875-VCN, 2012 WL 1524981, *8 (Dec. Ch. 2012) (Noble, Vice C.).
Since the parties opted by contract to leave it up to an appraiser chosen by the parties to decide the value of Pri-Med, and therefore the value of any redeemed shares, it would be inappropriate for the Court to arrogate to itself or to a special master the selection the appraisal firm or the manner in which information and argument is presented to the appraiser. The Plaintiffs need to comply with their obligation to help choose an appraisal firm. And the Court is going to order them to
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do so. Plaintiffs may not condition their participation on a material alteration of the appraisal provision they agreed to as part of their contract.
The Mooney Plaintiffs’ observation that historically Delaware courts sometimes appointed special masters to assist with or even to conduct statutory appraisal proceedings in court is unavailing for several reasons.1 The Mooney Plaintiffs point to Cinerama, Inc. v. Technicolor, Inc., No. 7129, 1999 WL 135242, *1 (Del. Ch. 1999) (Chandler, C.), in which the Delaware Court of Chancery declined to reconsider its order appointing a special master to hear a statutory appraisal proceeding. But the prior appointment order was reversed by the Delaware Supreme Court, which held that “[i]n the specific context of a statutory appraisal proceeding, we now conclude that the Court of Chancery’s authority to appoint a special appraiser has been eliminated by statute.” See Cede & Co. v. Technicolor, Inc., 758 A.2d 485, 493 (Del. 2000). Since Cinerama was reversed on appeal, it hardly supports the Mooney Plaintiffs’ position.
In any case, the ability of courts to use special masters in their own proceedings has nothing to do with the contractual delegation of an appraisal to a private appraisal firm, as the parties agreed to do in this case. When the parties entered into their LLC Agreement, they “specifically anticipated and expressly provided for the possibility of a dispute about valuation. The Court’s obligation is to enforce the procedure to which the parties agreed.” Nahill v. Raytheon Co., No. Suffolk Sup. Ct. no. 2006-03883-BLS2, 2009 WL 909813, *4 (Mass. Super. Ct. 2008) (Fabricant, J.), aff’d, 84 Mass. App. Ct. 1129 (2014).
The Court declines to consider the additional arguments that the Squire Plaintiffs raised for the first time at oral argument. It considers those arguments as having been waived, for several reasons.
1 “[T]he merger provisions of the Delaware General Corporation Law permit the majority stockholders to ‘cash-out’ the minority stockholders. If the minority stockholders are ‘cashed-out,’ one way that the Delaware General Corporation Law protects such stockholders is by providing them with the statutory remedy of appraisal.” Jay W. Eisenhofer & John L. Reed, Valuation Litigation, 22 Del. J. Corp. L. 37, 40–41 (1997) (citations omitted). Such a statutory appraisal is conducted by the Court of Chancery. See 8 Del. Code § 262.
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First, these new arguments were never presented in the written memoranda filed or adopted by the Squire Plaintiffs. In the Superior Court, a party that opposes a written motion is required to submit a memorandum that includes “a statement of reasons, with supporting authorities, why the motion should not be allowed[.]” Sup. Ct. Rule 9A(a)(2). This requirement is in part an “an ‘anti-ferreting’ rule designed to assist a trial judge” in identifying what legal arguments are being pressed by each party. Cf. Dziamba v. Warner & Stackpole LLP, 56 Mass. App. Ct. 397, 399 (2002) (same as to requirement in Rule 9A(b)(5) that summary judgment motions be accompanied by joint statements of material facts). In addition, this requirement also ensures that the moving party receives proper notice of the opposing party’s arguments and thus has the opportunity to respond in a written reply memorandum, as permitted in Rule 9A(a)(3), and at any oral argument. It would be unfair to consider entirely new arguments raised by the Squire Plaintiffs for the first time at oral argument, especially arguments that contradict the position taken by the Squire Plaintiffs in their prior written submission, since Defendants have had no meaningful opportunity to respond The Court deems these arguments to be waived. Cf. Board of Reg. in Med. v. Doe, 457 Mass. 738, 743 n.12 (2010) (argument raised for first time at oral argument, in violation of rule requiring that parties’ contentions on appeal must be presented in written brief, is waived); Metro Eqpt. Corp. v. Commonwealth, 74 Mass. App. Ct. 63, 64 n.2 (2009) (same).
Second, even at oral argument the Squire Plaintiffs made only passing reference to their new arguments. They failed to explain these points in meaningful detail and failed to cite any kind of legal authority to support them. Since this “leav[es] the court unable to adequately assess their claim,” the Court exercises its discretion to deem these arguments as having been waived for this reason as well. See Commonwealth v. Johnson, 470 Mass. 300, 319 (2014) (holding that trial court judge “acted well within his discretion” in declining to consider unsupported and undeveloped argument in support of motion by criminal defendants); see also Jordan v. Superintendent, Massachusetts Correctional Institution, Cedar Junction, 53 Mass. App. Ct. 584, 587 n.6 (2002) (where party mentions statute but “fails to develop any argument” under it, claim under statute “has been effectively waived”); McCullen v. Coakley, 571 F.3d 167, 182 n.3 (1st Cir. 2009), cert. denied, 130 S.Ct. 1881 (2010)
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(“avoiding waiver requires more than a hint that a particular theory may be lurking; it necessitates some developed argumentation addressed to that particular theory”).
ORDER
The motion by defendants DBC Pri-Med LLC and Diversified Business Communications to compel the third-party appraisal procedure required under the Pri-Med operating agreement is ALLOWED. The parties shall agree upon a mutually acceptable, independent Appraisal Firm by February 21, 2018. The Appraisal Firm shall determine the procedures it wishes to follow to carry out its mandate under the parties’ written contract. See the further order compelling an independent appraisal.
February 2, 2018
___________________________
Kenneth W. Salinger
Justice of the Superior Court read more

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Posted by Massachusetts Legal Resources - March 1, 2018 at 5:31 am

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Mooney, et al. v. Diversified Business Communications, et al. (Lawyers Weekly No. 09-015-17)

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COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
SUCV2016-3726-BLS2
JOHN J. MOONEY and MORGAN D. WHEELOCK,
Plaintiffs
vs.
DIVERSIFIED BUSINESS COMMUNICATIONS, DBC PRI-MED, LLC,
THEODORE WIRTH, KATHY WILLING, and OAKLEY DYER
Defendants
MEMORANDUM OF DECISION
ON PLAINTIFF’S MOTION TO DISQUALIFY THE FIRM
REPRESENTING THE DEFENDANTS IN THIS ACTION
This lawsuit was instituted in December 2016. Sullivan and Worcester, LLP (S&W), long-time counsel for the defendant Diversified Business Communications (Diversified) and its subsidiary Pri-Med, LLC (Pri-Med), filed an appearance on behalf of Diversified, Pri-Med and the three individual defendants. Seven months later and well into discovery in this case, the plaintiff John Mooney filed a Motion to Disqualify S&W on the grounds that he has been and remains an S&W client, so that the firm’s representation of the defendants in this litigation violates Rule 1.7 of the Massachusetts Rules of Professional Conduct. S&W denies any ethical violation and contends that the Motion is a “transparent and unacceptable litigation tactic.” After hearing, this Court concluded that there was no reason to disqualify S&W and on September 13, 2017, entered a margin endorsement on the Motion stating that it was denied. This Memorandum sets forth the reasons for that decision.
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BACKGROUND
In reaching its decision, this Court considered affidavits, with attached exhibits, submitted by both parties. Those submissions reflect the following facts that this Court views as material to resolution of the Motion before it.
In 1999, Mooney’s business partner Jack Connors suggested that Mooney should engage in sophisticated estate planning and recommended that Mooney work with Lisa Mingolla, an attorney in S&W’s trusts and estates department. Mooney took this suggestion and in 2002, retained the firm to represent him in connection with preparing a prenuptial agreement and estate planning documents. An August 29, 2002 engagement letter signed by both Mingolla and Mooney reflects the limited nature of that representation. Mingolla was paid a flat fee of $ 10,000 for Mingolla’s services. The letter stated that S&W would discard certain items from the file once work was completed but would retain Mooney’s estate planning documents in its vault for Mooney’s convenience.
Three years later in 2005, Mooney asked Mingolla if she would update his will and his estate plan, which she did. Mooney paid her approximately $ 20,000 for her work, which concluded in 2006. Mingolla did not perform any additional work for Mooney until September 2010, when she again updated Mooney’s estate planning documents at his request. Since July 2014, Mooney has not sought any legal advice from Mingolla. Over the twelve year period (2002-2014), Mooney paid Mingolla a total of $ 75,000.
During this same period of time, Carol Wolff, an S&W partner, was providing legal representation to Diversified. When Diversified formed Pri-Med as its wholly-owned subsidiary in November 2011, Wolff became Pri-Med’s primary outside counsel. Shortly after this, Diversified decided to hire as part of Pri-Med’s management team certain founders and former
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managers of Pri-Med’s predecessor entity, among them Mooney. In connection with this effort, Diversified, Mooney and others negotiated and entered into an Amended and Restated Limited Liability Agreement (LLC Agreement) signed in October 2012. Wolff represented Diversified and Pri-Med in the preparation of the LLC Agreement, while Mooney was represented by the firm of Schlossberg LLC. As a result of this transaction, Mooney acquired an equity interest in Pri-Med and became a member of Pri-Med’s Board of Managers.
In late 2016, disputes arose between Pri-Med and Mooney over the purchase price for his minority shares and Diversified’s conduct in the management of Pri-Med, including the impact of that conduct on Pri-Med’s value. Morgan Wheelock, another minority member, shared Mooney’s concerns. Both Mooney and Wheelock retained Jeffrey Robbins, an attorney with Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. (Mintz Levin). On September 22, 2016, attorney Robbins sent a letter to Diversified’s Chairman of the Board, Daniel Hildreth, and its President and CEO, Ted Wirth, in which he raised these concerns. The letter described various ways in which Diversified had violated the LLC Agreement, accused the company of taking these actions to “deflate” Pri-Med’s value so as to reduce the amount of any payout due to Pri-Med’s shareholders, and urged Diversified’s counsel to contact Robbins immediately.
Upon receipt of this letter, Hildreth and Wirth contacted Wolff, who in turn sought assistance from Laura Steinberg, a litigation partner at S&W and presently the lead defense counsel in this case. On September 30, 2016, attorney Steinberg wrote a letter to Robbins denying any wrongdoing by Diversified. The letter began:
Sullivan & Worcester represents DBC Pri-Med, LLC . . . and, accordingly, John J. Mooney in his capacity as one of the five Managers of the Company. I have been asked to respond on the Company’s behalf to your September 22, 2016 letter. . . .
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Robbins replied to Steinberg’s letter on October 5, 2016 (the October 5 Letter). His letter stated, among other things:
[A]s John Mooney’s counsel, I must inform you that you do not represent John, in any capacity whatsoever. Indeed, I understand that you have never represented him. Accordingly, it is my duty to tell you that he intends to hold you accountable for any actions that you have purported to take on his behalf.
At that time, Steinberg had no knowledge that S&W had ever represented Mooney other than in his capacity as a member of Pri-Med’s Board of Managers. Mooney received a copy of the letter but apparently made no attempt to correct Robbins and inform him that S&W had indeed represented him on his estate planning matters.
On December 5, 2016, Robbins filed the present action in this Court on behalf of both Mooney and Wheelock and emailed Steinberg a courtesy copy of the Complaint. Steinberg forwarded the Complaint to Wolff, who promptly ran a conflicts check in order to open a new litigation matter. The conflict report revealed that Mingolla had earlier represented Mooney in connection with some estate planning work. Upon learning this, Wolff spoke with Mingolla and consulted with S&W’s internal ethics counsel, who reviewed, among other things, Robbins’ October 5 Letter. Wolff concluded that Mooney was a former S&W client and that, because there was no ongoing relationship, there was no impediment to S&W’s representation of the defendants in the instant action. Steinberg filed an Answer on behalf of the defendants that asserted counterclaims against Mooney and Wheelock for breach of fiduciary duty (specifically, usurpation of corporate opportunity) and negligent misrepresentation.
The deposition of Wheelock was scheduled for June 20, 2017 and Mooney’s deposition was to take place two days later. On the morning of June 20, as Steinberg was conducting Wheelock’s deposition, Robbins sent her an email that for the first time raised the issue of
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S&W’s disqualification. That email stated that, contrary to Robbins’ statement in his October 5 Letter, S&W did represent Mooney, and not just in his capacity as a member of Pri-Med’s Board of Directors. Robbins asserted that this relationship appeared to be ongoing and that it was “imperative” that S&W provide him with certain information – “preferably today” – so that he could “try to understand the basis on which Sullivan and Worcester believes that there is not a conflict.” Later that same day, Robbins informed Steinberg that he was cancelling Mooney’s deposition. Two days later, S&W produced Mooney’s client files with a cover letter from Steinberg explaining why she did not believe disqualification was warranted. This Motion followed.
DISCUSSION
Conflicts of interest between attorneys and clients are governed by Mass. R. Prof. C. 1.7 and 1.9. Resolution of this dispute turns largely on which rule applies to the circumstances here. Rule 1.7 governs conflicts of interest between current clients and prohibits the representation of one client “directly adverse to another client” unless: (1) the lawyer reasonably believes that he or she will be able to provide competent and diligent representation to the affected clients; and (2) the affected clients give informed written consent. Mass. R. Prof. C. 1.7 (a). Rule 1.9, in contrast, governs conflicts of interest between former clients. It prohibits the representation of a client whose interests are “materially adverse” to a former client “in the same or substantially related matter” unless the attorney obtains consent from the former client. Mass. R. Prof. C. 1.9 (a). The rule also prohibits, regardless of whether a conflict of interest arises, the unauthorized use of a former client’s confidential information to the detriment of the former client or the advantage of a third party. Mass. R. Prof. C. 1.9 (c) (1).
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In moving to disqualify S&W, Mooney relies on Rule 1.7. Specifically, he contends that S&W continues to be his estate planning counsel and that, because he has not given his written consent, the firm cannot represent the defendants, whose interests in this litigation are clearly adverse to his. S&W argues that Rule 1.9 applies because any attorney-client relationship between S&W and Mooney terminated well before the inception of this litigation, which bears no relationship to the estate planning services provide to Mooney by Mingolla. This Court agrees with S&W.
The rules themselves do not assist the Court in determining whether Mooney is a current or former client, since neither provides any explicit guidance. Nor is this Court aware of any Massachusetts appellate decision which attempts to define when an attorney-client relationship ends. However, in a decision rendered when he was a Superior Court judge sitting in the BLS, Justice Ralph Gants looked to “logic, reason, experience, and basic principles of law” to set out a useful framework for making this determination. National Med. Care, Inc. v. Home Med. of Am., Inc., 2002 Mass. Super. LEXIS 342 at *11 (Sept. 12, 2002). Justice Gants observed that clients generally retain law firms for one of three purposes: (1) to act as “a general counsel” for them and handle all legal matters that arise; (2) to represent them in all matters regarding a specific practice area, e.g., litigation, tax, or employment matters; or (3) to represent them only as to a specific matter or matters. Id. at *12. As to the first two categories, the attorney-client relationship continues even without a pending matter “because the reasonable expectation remains that the law firm will handle matters in the future for that client as they arise.” As to the third category, however:
[T]he attorney-client relationship ends when the matter is concluded, because the representation was limited to that matter. Indeed, if the attorney were to continue to perform work for that client after the matter has been concluded, the client would be justified in refusing to pay for that work because it fell outside the
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scope of their agreement. Consequently, one measure of whether the attorney-client relationship has ended is whether the attorney needs to obtain permission from the client to continue to perform work on the client’s behalf.
Id. at *12-13. Applying this framework, the Court concludes that Mooney’s relationship with S&W ended well before December 2016, when the plaintiffs filed the present lawsuit.
Mingolla provided estate planning services to Mooney during three discrete periods: 2002, 2005-2006, and 2010-2014. Their relationship was limited to a particular matter: once Mingolla performed the services requested and Mooney paid for them, the relationship was, for all practical purposes, over. Between each period, Mingolla and Mooney had little or no contact, nor is there any credible evidence to suggest that Mingolla was expected to perform any work for Mooney (and bill him for it) until and unless he specifically requested it. Accordingly, this Court concludes that their relationship fell into the third category laid out by Justice Gants, terminating in 2014 when Mingolla completed the last round of estate planning services that Mooney had requested.
Even assuming the relationship extended beyond 2014, however, Robbins’ October 5 Letter left no doubt that any such relationship was over as of the fall of 2016. Although Robbins was replying to Steinberg’s statement that, by virtue of S&W’s representation of Pri-Med, S&W also represented the Board of Directors, including Mooney, his letter was quite clear: “you do not represent John, in any capacity whatsoever.” As if that were not enough, he added: “it is my duty to tell you that he [Mooney] intends to hold you accountable for any actions that you have purported to take on his behalf.” As a matter of law, Robbins’ statements are imputed to Mooney and thus, S&W was entitled to rely on Robbins’ statement. See Restatement of Law Governing Lawyers, §§ 26 and 27, Cmt. a and b; One-O-Six Realty, Inc. v. Quinn, 66 Mass. App. Ct. 149, 154-155 (2006); Burt v. Gahan, 351 Mass. 340, 342.
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Because Mooney is a former client, disqualification is appropriate only if Mooney can show that the present litigation is substantially related to the estate planning services Mingolla provided, or that S&W in fact used Mooney’s confidential information in connection with the litigation. See Mass. R. Prof. C. 1.9 (a), (c) (1). In seeking to disqualify S&W on this basis, Mooney takes on a heavy burden. The SJC has cautioned: “[A]court should not lightly interrupt the relationship between a lawyer and her client. ‘[D]isqualification, as a prophylactic device for protecting the attorney-client relationship, is a drastic measure which courts should hesitate to impose except when absolutely necessary.’” Adoption of Erica, 426 Mass. 55, 58 (1997), quoting Freeman v. Chicago Musical Instrument Co., 689 F.2d 715, 721 (7th Cir. 1982). With that in mind, this Court concludes that Mooney has not demonstrated that this litigation is substantially related to the estate planning work provided by Mingolla or that S&W has used confidential information acquired as a result of that earlier attorney-client relationship.
“Matters are ‘substantially related’ … if they involve the same transaction or legal dispute or if there otherwise is a substantial risk that confidential factual information as would normally have been obtained in the prior representation would materially advance the client’s position in the subsequent matter.” See Rule 1.9, comment 3. Here, Mooney’s claims concern actions allegedly undertaken by Diversified and the other defendants in 2015 and/or 2016 to manipulate the value of Mooney’s Pri-Med shares; defendants’ counterclaims concern Mooney’s alleged misrepresentation and usurpation of corporate opportunities. In contrast, the estate planning work that Mingolla performed—completed in 2014—did not involve any of these alleged actions. There is also no substantial risk that any confidential information Mooney provided to Mingolla would be useful to the defendants in connection with this litigation. The litigation does not concern Mooney’s personal assets.
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As to whether S&W has already used Mooney’s confidential information, Steinberg has submitted an affidavit stating under the pains and penalties of perjury that, other than to collect Mingolla’s files in order to transmit them to attorney Robbins on June 21, 2017, she has not had any access to Mingolla’s files, nor has she reviewed their contents.1 In a direct attack on this claim, Mooney argues that Steinberg did access the files, arguing that she admitted as much in her June 21 cover letter transmitting the files to Mintz Levin. Having reviewed the letter together with attorney Steinberg’s explanation of it, this Court concludes this is an unfair characterization of what the letter actually says. Taking this argument a step further in plaintiff’s Memorandum in support of the Motion, counsel contends that “the reason Ms. Steinberg reviewed Mr. Mooney’s client files was because she knew that its discussion of his assets, liabilities and business investments were particularly valuable to Diversified, her client” and that “any doubt on this subject is removed” by the fact that, after she received Mr. Robbins’ demand for the file on June 20, she spent much of that day examining Mr. Wheelock about Mr. Mooney’s assets. As explained by Steinberg in her affidavit, however, the materials that were the subject of questioning at the deposition were acquired through public corporate records databases and from emails found on Pri-Med’s email server. She had inquired about this information because it appeared to indicate that plaintiffs were engaged in other corporate ventures while working with Pri-Med, in breach of their duty of loyalty. This Court credits her explanation.
Indeed, plaintiff’s counsel’s attempts to paint a different picture—and thus implicitly attack attorney Steinberg’s honesty and integrity—raises a question of whether Mintz Levin has itself complied with the Rules of Professional Conduct. Before the instant motion was filed,
1 As to the possibility of any future use, S&W has set up an ethical screen within the firm to ensure that lawyers in the instant litigation do not communicate with Mingolla or have access to her files.
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S&W brought a motion seeking to disqualify Mintz Levin from acting as Mooney’s lawyer in any effort to disqualify S&W. The grounds for this request was that S&W is a client of Mintz Levin on unrelated immigration matters, and that Rule 1.7 prevented the firm from acting in a manner adverse to its current client (S&W). In support, S&W relied on ABA Formal Opinion 97-406, which states that, although Rule 1.7 does not as a general rule prevent a lawyer who represents one client from representing another client with interests adverse to the first, such representation would not be appropriate if it “requires the representing lawyer to attack the credibility or integrity of its opponent in the third party matter, when the opponent is also his client.” In opposing that earlier motion, Mintz Levin assured this Court that the motion to disqualify S&W would not involve any attack on the credibility or integrity of S&W lawyers. With these assurances, this Court refused to disqualify Mintz Levin. See Memorandum of Decision and Order dated July 25, 2017. Had this Court known that the firm would adopt the approach that it has on the instant motion, it might well have ruled differently.
CONCLUSION AND ORDER
For all the foregoing reasons and for other reasons articulated in S&W’s Opposition, the Plaintiff’s Motion to Disqualify S&W is DENIED.
______________________________
Janet L. Sanders
Justice of the Superior Court
Dated: September 28, 2017
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Posted by Massachusetts Legal Resources - October 4, 2017 at 10:39 pm

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Mooney, et al. v. Diversified Business Communications, et al. (Lawyers Weekly No. 12-116-17)

COMMONWEALTH OF MASSACHUSETTS

SUFFOLK, ss.                                                                                   SUPERIOR COURT

                                                                                                             SUCV2016-3726-BLS2

            JOHNJ. MOONEY and MORGAN D. WHEELOCK,

Plaintiffs

vs.

 

DIVERSIFIED BUSINESS COMMUNICATIONS, DBC PRI-MED, LLC,

THEODORE WIRTH, KATHY WILLING, and OAKLEY DYER

Defendants

MEMORANDUM OF DECISION AND ORDER

ON REMAING ISSUES RELATED TO

 PLAINTIFFS’ MOTION TO COMPEL

 

After a hearing on July 11, 2017, this Court allowed that part of the plaintiffs’ Motion to Compel which concerned the production of certain Board of Directors minutes of the defendant Diversified Communications. See Memorandum of Decision and Order on Plaintiffs’ Motion to Compel, dated July 20, 2017.    As to the remainder of the motion,  this Court concluded that the  defendants  could withhold certain documents based on a claim of privilege, provided that the privilege had been properly asserted as to those documents actually withheld (represented by both sides to be a couple of dozen); that  determination would be made by the Court after it reviewed  those documents in camera.   The Court also allowed the defendants time to respond to a last-minute assertion by the plaintiffs that any claim of privilege had been waived.  After a flurry of additional briefing and after conducting an in camera review, this Court concludes that the defendants need not to produce any additional documents and that the plaintiffs must return to the defendants those  documents that had been produced inadvertently. read more

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Posted by Massachusetts Legal Resources - August 31, 2017 at 7:21 pm

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Mooney, et al. v. Diversified Business Communications, et al. (Lawyers Weekly No. 12-102-17)

COMMONWEALTH OF MASSACHUSETTS

SUFFOLK, ss.                                                                                   SUPERIOR COURT

                                                                                                             SUCV2016-3726-BLS2

            JOHN J. MOONEY and MORGAN D. WHEELOCK,

Plaintiffs

vs.

 

DIVERSIFIED BUSINESS COMMUNICATIONS, DBC PRI-MED, LLC,

THEODORE WIRTH, KATHY WILLING, and OAKLEY DYER

Defendants

MEMORANDUM OF DECISION AND ORDER

ON PLAINTIFFS’ MOTION TO COMPEL

 

This case involves a dispute among members of a limited liability company. Plaintiffs, who own a minority interest in the company, are suing (among others) the entity holding a majority interest.  Also named as a defendant is the company itself.  The case is now before the Court on plaintiffs’ Motion to compel certain discovery.  Part of the motion raises routine issues regarding the relevance of materials sought; this Court’s resolution of those issues is contained in Part One of this opinion.  The motion also raises difficult questions concerning attorney client privilege—specifically, whether a former officer of a company can obtain communications between corporate counsel and the corporation exchanged when he still worked for the company but where he is now adverse to the corporation itself.  This Court concludes that neither plaintiff can claim to be a holder of the privilege so as to gain access to these communications.  The reasons for that conclusion are spelled out in Part Two of this opinion. read more

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Posted by Massachusetts Legal Resources - August 4, 2017 at 5:27 am

Categories: News   Tags: , , , , , ,

Mooney, et al. v. Diversified Business Communications, et al. (Lawyers Weekly No. 12-101-17)

COMMONWEALTH OF MASSACHUSETTS

SUFFOLK, ss.                                                                                   SUPERIOR COURT

                                                                                                             SUCV2016-3726-BLS2

            JOHN J. MOONEY and MORGAN D. WHEELOCK,

Plaintiffs

vs.

 

DIVERSIFIED BUSINESS COMMUNICATIONS, DBC PRI-MED, LLC,

THEODORE WIRTH, KATHY WILLING, and OAKLEY DYER

Defendants

MEMORANDUM OF DECISION

ON NON-PARTY SULLIVAN & WORCESTER LLP’S MOTION

TO PRECLUDE MINTZ LEVIN

FROM PROSECUTING PLAINTIFF JOHN MOONEY’S MOTION

 TO DISQUALIFY SULLIVAN &WORCESTER

In the instant case, Mintz Levin (Mintz) represents plaintiff John Mooney; it also represents the law firm of Sullivan & Worcester (S&W) — which is counsel for defendant Diversified — in unrelated immigration matters.  Mintz has served upon S&W a motion to disqualify it from this lawsuit based on its prior representation of plaintiff Mooney on personal matters.  S&W now asserts that Mintz is itself disqualified from prosecuting such a motion because that would run afoul of Rule 1.7 of the Rules of Professional Conduct.   This Court disagrees. read more

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Posted by Massachusetts Legal Resources - August 3, 2017 at 6:43 pm

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Winbrook Communications Services, Inc., et al. v. United States Liability Insurance Company (Lawyers Weekly No. 11-068-16)

NOTICE:  All slip opinions and orders are subject to formal revision and are superseded by the advance sheets and bound volumes of the Official Reports.  If you find a typographical error or other formal error, please notify the Reporter of Decisions, Supreme Judicial Court, John Adams Courthouse, 1 Pemberton Square, Suite 2500, Boston, MA, 02108-1750; (617) 557-1030; SJCReporter@sjc.state.ma.us

15-P-401                                        Appeals Court

WINBROOK COMMUNICATION SERVICES, INC., & others[1]  vs.  UNITED STATES LIABILITY INSURANCE COMPANY.

No. 15-P-401.

Suffolk.     March 8, 2016. – June 14, 2016.

Present:  Hanlon, Sullivan, & Massing, JJ.

Practice, Civil, Default, Summary judgment.  Insurance, Coverage, Insurer’s obligation to defend, Construction of policy.  Contract, Insurance, Performance and breach.  Damages, Negligent misrepresentation. read more

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Posted by Massachusetts Legal Resources - June 15, 2016 at 1:20 am

Categories: News   Tags: , , , , , , , , , , ,