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Kushner v. Wallace, et al. (Lawyers Weekly No. 09-005-18)

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COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT.
1784CV02473-BLS2
____________________
EVAN M. KUSHNER
v.
ROBERT V. WALLACE, JR.; WALLACE CAPITAL, LLC; and WALLACE LENDING CORPORATION f/k/a Wallace Property Company, Inc.
____________________
MEMORANDUM AND ORDER ON DEFENDANT’S MOTION TO DISMISS THE AMENDED COMPLAINT IN PART, PLAINTIFF’S MOTION TO FILE A SECOND AMENDED COMPLAINT, and PLAINTIFF’S MOTION TO COMPEL DISCOVERY
This decision resolves three pending motions. First, Defendants have moved to dismiss most of the claims asserted by plaintiff Evan M. Kushner in his first amended complaint. The Court will allow this motion in part. It will dismiss so much of Count IV that asserts claims against Robert Wallace and Wallace Lending Corporation to enforce a promissory note entered into by Wallace Capital, LLC. Mr. Kushner may assert that claim against Wallace Capital, but not against the other two defendants. The Court will also dismiss any claim that Wallace Lending Corporation acted in concert with Robert Wallace to divert income from Wallace Capital LLC, because any such claim must be brought as a derivative action on behalf of Wallace Capital and not as a personal claim by Mr. Kushner. And the Court will also allow the motion to the extent that it seeks a more definite statement of the claims for breach of fiduciary duty, and will order that Kushner is bound by the more definite statement that his counsel provided during the hearing and clarified in a subsequent written submission. The rest of the motion to dismiss Kushner’s remaining claims is denied. Second, the Court will deny Kushner’s motion for leave to file a second amended complaint because the proposed second amended complaint would not provide a “short and plain statement” of Kushner’s claims as required by Mass. R. Civ. P. 8(a), and because Kushner has not shown that there is any good reason to allow this further amendment.1 Third, the Court will also deny Kushner’s motion to compel discovery.
1 Plaintiff ignored his obligation under Rule 8(a) to file “a short and plain statement” of his claims in his first amended complaint as well. He instead filed an amended complaint that is 38-pages long, has 202 numbered paragraphs, and is very
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1. Defendant’s Motion to Dismiss the First Amended Complaint.
1.1. Note Claim. Count IV of the amended complaint is a claim to enforce and collect under a $ 1.25 million promissory note. Kushner asserts this claim against all three defendants—Wallace Capital, Robert Wallace, and Wallace Lending. The latter two argue to dismiss this claim as against them, arguing that they cannot be held liable on a note that by its terms is payable only by Wallace Capital.
The Court agrees that the amended complaint does not allege any facts plausibly suggesting that Mr. Wallace or Wallace Lending can be held liable under this promissory note, and that Count IV must therefore be dismissed to the extent that it asserts a claim against these two defendants. See generally Lopez v. Commonwealth, 463 Mass. 696, 701 (2012) (standard for dismissal under Mass. R. Civ. P. 12(b)(6)); Iannacchino v. Ford Motor Co., 451 Mass. 623, 636 (2008) (same).
The note provides that Wallace Capital, LLC, was the sole borrower and thus the only party that Kushner can sue for repayment. Mr. Wallace and Wallace Lending are not parties to the note, either as borrowers or guarantors. The complaint therefore fails to state a viable claim against those two defendants for repayment of the note.2
Although Kushner alleges in paragraph 161 of the amend complaint that Mr. Wallace and Wallace Lending guaranteed repayment of this note, that conclusory allegation does not state a claim against these defendants.
Unsupported and conclusory allegations that a defendant is liable for damages are not enough to state a claim. In deciding the motion to dismiss, the Court must
difficult to parse. Defendants could have moved to dismiss the first amended complaint without prejudice on the ground that it is so prolix that it fails adequately to inform Defendants “of the nature of [each] claim and the grounds on which [the plaintiff] relies.” Schaer v. Brandeis Univ., 432 Mass. 474, 477 (2000), quoting Garrity v. Garrity, 399 Mass. 367, 369 (1987), quoting in turn Druker v. Roland Wm. Jutras Assocs., 370 Mass. 383, 385 (1976). They chose not to do so.
2 Defendants attached a copy of this “subordinated promissory note” to their answer. The Court may consider this document in deciding the motion to dismiss even though it was not attached to the complaint, because it was referenced in the complaint, was used by Kushner in framing the complaint, and its authenticity is not in dispute. See Johnston v. Box, 453 Mass. 569, 581 n.19 (2009) (documents referenced in complaint) (dictum); Golchin v. Liberty Mut. Ins. Co., 460 Mass. 222, 224 (2011) (documents used by plaintiff in framing complaint); Simmons v. Galvin, 575 F.3d 24, 30 n.5 (1st Cir. 2009), cert. denied, 131 S.Ct. 412 (2010) (“documents the authenticity of which is not disputed”).
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“look beyond the conclusory allegations in the complaint and focus on whether the factual allegations plausibly suggest an entitlement to relief.” Maling v. Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, 473 Mass. 336, 339 (2015), quoting Curtis v. Herb Chambers I-95, Inc., 458 Mass. 674, 676 (2011). The amended complaint alleges no facts plausibly suggesting that either Wallace or Wallace Lending ever did anything to guarantee repayment of this note by Wallace Capital.
At oral argument, Kushner argued that he could cure this by further amending his complaint. More specifically, Kushner asserted that the guarantees he relies upon are set forth in a separate “Amended and Restated Subordination Agreement,” a copy of which is attached to Defendants’ answer. This assertion is without merit.3
The subordination agreement provides that certain specified debts owed by Wallace Capital to various creditors would be subordinated to other debts owed by Wallace Capital to other lenders that were represented by their agent CSE Mortgage LLC. It appears to be undisputed Mr. Kushner signed this agreement as a “Subordinated Creditor,” and thereby agreed that the amounts owed to him by Wallace Capital would be subordinated to the senior debt managed by CSE Mortgage.
Nothing in the subordination agreement made either Mr. Wallace or Wallace Lending a guarantor of the debt owed by Wallace Capital to Mr. Kushner under their promissory note. Kushner notes that the paragraph 12 of the subordination agreement addresses claims against any “Credit Party,” and paragraph 1 defines that
3 The interpretation of the parties’ unambiguous written contracts “is a question of law” that the court may resolve when deciding whether a party has asserted a viable claim for breach of contract. See, e.g., Eigerman v. Putnam Investments, Inc., 450 Mass. 281, 287 (2007) (affirming dismissal of complaint for failure to state a viable claim for breach of contract). Similarly, whether language used in a contract “is ambiguous is also a question of law for the court.” Berkowitz v. President & Fellows of Harvard College, 58 Mass. App. Ct. 262, 270, rev. denied, 440 Mass. 1101 (2003) (ordering dismissal of complaint for failure to state a viable claim for breach of contract). Where the material provisions of a contract are unambiguous, as they are here, a court “cannot accept the bare assertion in the plaintiff’s complaint,” or made in support of an oral motion to amend a complaint, that the opposing party violated the contract, when that assertion is based on a misreading of the contract. Eigerman, supra; accord Flomenbaum v. Commonwealth, 451 Mass. 740, 751-752 & n.12 (2008) (granting motion to dismiss contract claim because plain language of contract made clear that Commonwealth could terminate chief medical examiner before completion of full five year term).
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terms to include Wallace Capital as well as “any other Person who is obligated under any of … the Subordinated Debt Documents, including, without limitation, Wallace Property Company, Inc. and Robert V. Wallace, Jr.” But this definition does not create any legally enforceable rights. Since Wallace Lending (the former Wallace Property) and Mr. Wallace have no obligation under the terms of Kushner’s promissory note, they are not “credit parties” with respect to that note for the purposes of the subordination agreement.
Since the subordination agreement does not make Wallace or Wallace Lending a guarantor of Kushner’s promissory note, it would be futile to allow Kushner to further amend his complete to make such an allegation. The Court therefore denies Kushner’s oral motion to amend his complaint to allege that the subordination agreement made Wallace and Wallace Lending guarantors of the obligations of Wallace Capital to Kushner under their promissory note. See generally Johnston v. Box, 453 Mass. 569, 583 (2009) (“Courts are not required to grant motions to amend prior [pleadings] where ‘the proposed amendment … is futile.’ ” (quoting All Seasons Servs., Inc. v. Commissioner of Health & Hosps. of Boston, 416 Mass. 269, 272 (1993)); Thermo Electron Corp. v. Waste Mgmt. Holdings, Inc., 63 Mass. App. Ct. 194, 203 (2005) (affirming denial of motion for leave to assert counterclaim that would have been futile); Mancuso v. Kinchla, 60 Mass. App. Ct. 558, 572 (2004) (if amendment to add claim could not survive motion to dismiss, allowing amendment would be exercise in futility).4
4 The Court is not convinced by Defendants’ argument in the alternative that the claims against Wallace and Wallace Lending based on their alleged guaranty of the promissory note must be dismissed because the complaint does not identify any writing signed by those defendants that would satisfy the statute of frauds. See G.L. c. 259, § 1, clause Second (statute bars action brought “[t]o charge a person upon a special promise to answer for the debt, default, or misdoings of another” unless promise “is in writing and signed by the party to be charged” or by their agent).
The statute of frauds is generally not a basis for dismissing a claim under Mass. R. Civ. P. 12(b)(6). “The statute of frauds has not altered the rules of pleading.” Price v. Weaver, 79 Mass. (13 Gray) 272, 273-274 (1859). In other words, it does not require that a complaint must allege that a contract was in writing if the alleged contract would fall within the scope of the statute. Id.; accord Fiedler v. Smith, 60 Mass. (6 Cush.) 336, 340 (1850).
On the other hand, where a “complaint sets out with clarity and precision the detailed factual allegations [that] the plaintiff contends entitle him to relief,”
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1.2. Fiduciary Duty Claims. Defendants’ argued, quite correctly, that it is well-nigh impossible to tell from the First Amended Complaint which Defendants are alleged to have breached, or aided in the breach, of what fiduciary duties.
Mr. Kushner has in effect provided a more definite statement that fixes this problem. His counsel first provided a somewhat clearer statement of the fiduciary duty claims during oral argument. Kushner then reduced this more definite statement to writing, in his post-hearing supplemental brief. As specified in the following order, the Court rules that Kushner is bound by this clarification and that the claims for breach of fiduciary duty and aiding and abetting a breach of fiduciary duty are as restated in the Court’s order.5
The Court is satisfied that the facts alleged in the first amended complaint, if true, plausibly suggest that Mr. Kushner may be entitled to relief on the theories articulated in Kushner’s restated fiduciary duty claims. Those claims are therefore not subject to dismissal under Mass. R. Civ. P. 12(b)(6). See, e.g., Lopez, 463 Mass. at 701; Iannacchino, 451 Mass. at 636.
1.3. Direct versus Derivative Action. Defendants also argue that the claims asserted in the First Amended Complaint must be brought as derivative claims on behalf of Wallace Capital LLC rather than individual claims asserted by Mr. Kushner on his own behalf.
The Court agrees with Defendants in part. Paragraph 4 of the first amended complaint alleges that Wallace Lending Corporation acted in concert with Robert
dismissal is appropriate “if [those] allegations ‘clearly demonstrate that plaintiff does not have a claim.’ ” Fabrizio v. City of Quincy, 9 Mass. App. Ct. 733, 734 (1980), quoting 5 Wright & Miller, Federal Practice and Procedure: Civil § 1357 at 604 (1969); accord Harvard Crimson, Inc. v. President and Fellows of Harvard Coll., 445 Mass. 745, 748 (2006).
As a result, the statute of frauds provides a second reason why it would be futile for Kushner to amend his complaint to allege that the subordination agreement has the effect of making Wallace and Wallace Lending guarantors of Wallace Capital’s obligations under the promissory note. The subordination agreement was not signed by Wallace or Wallace Lending. A specific allegation that it made them guarantors would therefore fail as a matter of law under the statute of frauds.
5 The separate count for “acting in concert”—in other words, conspiracy—to breach fiduciary duty does not appear to add anything of substance to the claims for breach of fiduciary duty and aiding and abetting those alleged breaches.
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Wallace to divert income from Wallace Capital LLC. That appears to be part of the basis for the fiduciary claim as stated in the complaint. Any claim that income was diverted from Wallace Capital, if proved, resulted in harm to Wallace Capital and not to Mr. Kushner individually. Under these circumstances, Kushner is “required to file a derivative claim” rather than sue on his own behalf with respect to any claim that Defendants stole money from Wallace Capital. Fronk v. Fowler, 456 Mass. 317, 333 n.23 (2010) (emphasis in original).
Now that Kushner has clarified the nature of his claims for breach of fiduciary duty, it appears that the rest of those claims and the related claim for breach of the promissory note all seek compensation for economic injury suffered personally by Kushner, rather than a claim that may only be asserted derivatively. With respect to the Nantucket and Worcester Investments, Kushner claims that the relevant breaches of fiduciary duty were the alleged failures to distribute Kushner’s full share of profits. With respect to the Promissory Note, Kushner’s primary claim is that Wallace Lending breached the promissory note by failing to repay Kushner. His breach of fiduciary duty claim with respect to the Promissory Note is a claim in the alternative; it alleges that Kushner was personally harmed by the alleged failure to disclose to him that the promissory note was non-recourse.
Similarly, the claims for a declaratory judgment that the note purchase agreement is unenforceable, for violation of the Massachusetts version of the Uniform Securities Act, under G.L. c. 93A, for an equitable accounting, and for a constructive trust all seek relief personal to Kushner. Defendants have not shown that any of those claims may only be brought as a derivative action on behalf of some corporate or other legal entity.
1.4. Statute of Limitations. Finally, the Court is not convinced that the statute of limitations defense raised by Defendants can be resolved on a motion dismiss. Given the various fiduciary duties allegedly owed to Kushner by the Defendants, the normal discovery rule does not apply.
A claim for breach of fiduciary duty accrues once the “plaintiff has ‘actual knowledge’ that she has been injured by the fiduciary’s conduct.” Doe v. Harbor Schools, Inc., 446 Mass. 245, 254 (2006), quoting Lattuca v. Robsham, 442 Mass. 205, 213 (2004), and Demoulas v. Demoulas Super Markets, Inc., 424 Mass. 501, 521
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(1997). And the statute of limitations on Kushner’s other claims was tolled so long as Defendants concealed the existence of those claims in violation of their fiduciary duties. Harbor Schools, supra, at 254-255.
The Court cannot determine based on the allegations in the first amended complaint when Kushner learned he was injured by the alleged breaches of fiduciary duty and when he learned of the existence of his other claims. As a result these statute of limitations issues may be not resolved on Defendant’s motion to dismiss. Paragraphs 51 and 59, read together, allege that Wallace Capital never provided Kushner with any original promissory notes or copies of any such agreements, until December 2015, when Wallace Capital finally (and for the first time) gave Kushner copies of the promissory note, a “note purchase agreement,” and the subordination agreement discussed above. Assuming that these allegations are true, as the Court must at this stage of the case, Defendants are not entitled to dismissal on the ground that the note made clear on its face that Wallace Capital was the only entity from which Kushner could seek repayment.
2. Plaintiff’s Motion for Leave to File a Second Amended Complaint. While Defendants’ motion to dismiss the first amended complaint was pending, Kushner moved for leave to file a second amended complaint that would run some 40-pages long and include 236 numbered paragraphs.
A motion to amend a complaint “should be allowed unless some good reason appears for denying it.” Afarian v. Massachusetts Elec. Co., 449 Mass. 257, 269 (2007), quoting Castellucci v. United States Fid. & Guar. Co., 372 Mass. 288, 289 (1977).
The Court is convinced that there is a good reason not to allow Kushner to file yet another version of his complaint. The proposed second amended complaint would violate the requirement in Rule 8(a) that a complaint set forth a “short and plain statement” of the plaintiff’s claims. It would be unfair to force Defendants to respond to a further amended complaint that is even longer and even harder to parse than the current complaint unless there is some good reason for allowing a further amendment.
Kushner has not identified any good reason for allowing the proposed further amendment. Kushner states in his motion that the proposed amendment would not
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make “any substantive changes to the legal theories asserted against the Defendants.” He only articulates two justifications for seeking to further amend his complaint, neither of which is convincing.
Kushner says he wants to revise his complaint to state more clearly that he was not aware of the actual terms of the promissory note until December 2015, in order to respond to Defendants’ statute of limitations argument. As discussed above, however, the current version of the complaint already makes that allegation, which is why the Court has declined to dismiss any part of the current complaint on statute of limitations grounds.
In addition, Kushner says that he wants to further amend the complaint so that he can attach as exhibits various documents that are referred to in the complaint. That is unnecessary as well. As explained above, documents referred to in the complaint may be considered in deciding a motion to dismiss, and the Court has done so. And documents may be proved at trial, or in connection with any pre-trial motion, whether or not they were attached to the complaint.
3. Plaintiff’s Motion to Compel Discovery. Mr. Kushner’s motion to compel discovery is without merit.
Defendants represent that they have already produced all non-privileged documents that are responsive to request 1 through 32 that they have been able to located after a duly diligent search. This part of the motion is therefore moot.
The Court will not compel a further response to request no. 37 because responding to the request as written would be unduly burdensome. Mr. Kushner points out that his right of recovery under the promissory note is limited to a non-recourse pro rata share of a certain pool of assets based upon the initial contributions of each investor. That does not mean that Kushner needs to obtain all documentation identifying the dollar amount invested by every other individual investor in the pool. Kushner’s pro rata share can be calculated by knowing how much Kushner invested and dividing it by the total investment pool. There is no apparent reason to compel Defendants to locate 18 years’ worth of documentation regarding every other individual’s investment in the pool.
The Court will not compel a further response to request no. 46 because Mr. Wallace’s federal income tax returns “are subject to a qualified privilege” and Mr.
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Kushner has not met his burden of “showing a substantial need” for those documents. See Mass. Guide to Evidence § 519(b).
The Court will not compel a further response to request nos. 41, 42, or 43 because Mr. Kushner has not shown that those requests are reasonably calculated to lead to the discovery of admissible evidence. Kushner argues in his reply that he wants to look at the voluminous documentation regarding the “Senior Debt” to learn whether anywhere in there Robert Wallace or Wallace Lending Corporation guaranteed the obligations of owed by Wallace Capital LLC to Mr. Kushner under their promissory note. But Kushner provides absolutely no reason to believe that Wallace or Wallace Lending may have guaranteed a debt owed to Kushner in documents that had nothing to do with Kushner. As a result, compelling Defendants to search for, gather, and produce the requested mass of documents would be unduly burdensome.
To the extent that Mr. Kushner is seeking to compel further responses to any other document requests, that aspect of the motion is denied for failure to comply with Superior Court Rule 9C(b).
ORDERS
(1) Defendants’ motion to dismiss parts of the first amended complaint, or in the alternative for a more definite statement of Plaintiff’s claims for breach of fiduciary duty or aiding and abetting a breach of fiduciary duty, is ALLOWED IN PART and DENIED IN PART.
The motion is allowed to the extent that it seeks dismissal of so much of the Action on a Promissory Note (Count IV) that asserts claims against Robert Wallace and Wallace Lending Corporation. That part of Count IV is hereby dismissed with prejudice. Count IV shall proceed only against Wallace Capital LLC.
The motion to dismiss is also allowed to the extent that it seeks dismissal of so much of the breach of fiduciary duty claims that are based on the allegation in paragraph 4 of the first amended complaint that Wallace Lending Corporation acted in concert with Robert Wallace to divert income from Wallace Capital LLC. Any such claim is hereby dismissed without prejudice.
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In addition, the motion is allowed to the extent that it seeks a more definite statement of the fiduciary duty claims. Plaintiff is and shall be bound by its stipulation during oral argument, as clarified in Plaintiff’s supplemental brief in opposition to Defendants’ motion to dismiss, that Count I of the first amended complaint asserts the following claims and no others: (i) with respect to the so-called “Nantucket Investment,” a claim against Wallace Capital LLC for breach of fiduciary duty by allegedly withholding Kushner’s final distribution, and a claim against Robert Wallace for aiding and abetting that alleged breach of fiduciary duty by Wallace Capital; (ii) with respect to the so-called “Worcester Investment,” a claim against both Wallace Lending Corp. and Robert Wallace for breach of fiduciary duty by allegedly allocating income to Mr. Wallace that should have been allocated to Mr. Kushner and by failing to make proper distributions to Kushner, and a claim against Robert Wallace for aiding and abetting that alleged breach of fiduciary duty by Wallace Lending Corp.; and (iii) with respect to the “Subordinated Promissory Note,” a claim against both Wallace Capital LLC and Robert Wallace for breach of fiduciary duty by allegedly failing to disclose to Kushner that the promissory note was a non-recourse debt of Wallace Capital LLC, and a claim against Robert Wallace and Wallace Lending Corp. for aiding and abetting that alleged breach of fiduciary duty.
The motion to dismiss is denied to the extent that it seeks dismissal of the fiduciary duty claims as restated in this order, or of any other claims asserted in the first amended complaint.
(2) Plaintiff’s motion for leave to file a second amended complaint is DENIED.
(3) Plaintiff’s motion to compel discovery is DENIED.
January 29, 2018
___________________________
Kenneth W. Salinger
Justice of the Superior Court read more

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