Trematerra, et al. v. Major League Lacrosse, LLC, et al. (Lawyers Weekly No. 09-033-17)
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss SUPERIOR COURT
CIVIL ACTION
- 2017-01140-BLS2
PETER TREMATERRA &
ATLANTA LACROSSE CLUB, LLC,
Plaintiffs
vs.
MAJOR LEAGUE LACROSSE, LLC, LAX UNITED MARKETING, LLC,
MLL FOUNDING MEMBERS LLC, NEW BALANCE ATHLETICS, INC.,
DAVID GROSS and JAMES DAVIS,
Defendants
MEMORANDUMOF DECISIONAND ORDER
ON DEFENDANTS’MOTION TO DISMISS
Major League Lacrosse, LLC (MLL or the League) operates a professional outdoor lacrosse sportsleague. In 2014, Peter Trematerra entered into negotiations with MLL and its commissioner David Gross tointroducean Atlanta-basedteaminto the League. After a year of negotiations, Trematerra formed Atlanta Lacrosse Club, LLC (Atlanta Lacrosse), which purchased an equity interest in MLL and began to operate a team known as the Atlanta Blaze. In the instant action, Trematerra and Atlanta Lacrosse as the named plaintiffs allege that during these negotiations, Gross made several misrepresentations regarding MLL’s profitability and that he also failed to disclose, among other things, that the League had sold its broadcast and sponsorship rightsat far below market valueto companies owned or controlled by other MLL equity holders. Plaintiffsfurther allege that, after Atlanta Lacrosse became a MLL member, theLeague’sBoard of Managers and Grossbreached numerousfiduciary and contractualobligations. The defendants, which include Gross, MLL, and other individuals and entities, now 2
move to dismiss the Complaint pursuant to Mass R. Civ. P. 23.1 and 12(b)(6). For the reasons that follow, this Court concludes that the defendants’Motion must be Denied, in partand Allowedin part.
BACKGROUND
The following is drawn from the allegations in the Complainttogether with the exhibits attached thereto.
MLL currently has ten members, including Atlanta Lacrosse and MLL Founding Members LLC (MFM). MFM owns five of the League’s fourteen Teams Units, which equates to 35.72 percent of the membership equity in MLL. The remaining nine Team Units are each owned by Atlanta Lacrosse and eightother LLCs, which operate the League’s nine lacrosse teams.Defendant James Davis holds interests in some of these LLCs. EachMLLmember elects one individual to serve on MLL’s Board of Managers (the Board). Members approve or deny Board actions in proportion to their respectiveshares of equity.MLL is a Delaware LLC.
In April 2008,several yearsbefore Atlanta Lacrosse became a MLL member, the League entered a Broadcast and Digital Rights License Agreement (the Broadcast Agreement) with defendant Lax United Marketing, LLC (LUM). LUM is an entity that was created to produce, market, and license television, internet streaming, and broadcast rights to League games and otherLeague promotional events. At the time, Gross, the League’s Commissioner and COO, was the president of LUM.MFM, defendant New Balance Athletics, Inc. (New Balance), and Davis, who had a controlling interest in New Balance,held equity interests in LUM.1 UndertheBroadcastAgreement, the MLL engaged LUM (among other things) to produce all League games and events and create a League website. The plaintiffs allege that, because of the
1 The League also helda4.5% equity interest in LUM. 3
interconnection between LUM, Gross, Davis, and MFM, the League sold its broadcast rights to LUM for consideration that was not commercially reasonable.
MLLalso entered into Sponsorship Agreements with New Balance and two lacrosse equipment manufacturers, Warrior and Brine, Corp. This too took place before Atlanta Lacrosse became an MLL member. Warrior is a wholly-owned New Balance subsidiary; Brine, Corp., which was founded by one of MFM’s members,is currently controlled by Davis. The plaintiffsassert that, due to the interconnection between New Balance, Warrior, Brine, MFM, and Davis, the League sold itssponsorshiprights at far below market value.
In 2014, plaintiff Trematerra enteredinto negotiations to form an Atlanta based lacrosse team and join MLL. It is alleged that during these negotiations, Gross made variousmisrepresentations about the League’s profitability and presented Trematerra with information and documents that inaccurately reflected the League’s current and future prospects. Gross also failedto disclose, among other things:the BroadcastAgreement;the lack of monetary consideration given by LUM in connection with the Broadcast Agreement; Davis and MFM’s interest in LUM;theSponsorship Agreements with New Balance, Warrior, and Brine; and Davis’control of these entities.
In July 2015, Trematerra formed Atlanta Lacrosse and purchased an equity interest in MLL pursuant to a Unit Purchase Agreement (UPA). The parties to the UPA were Trematerra, Atlanta Lacrosse and MLL. At the sametime, Atlanta Lacrosse andMLL entered into a“Fifth Amended and Restated Limited Liability Company Agreement”(the LLC Agreement) and a Team Management Agreement (TM Agreement). The UPA,theLLC Agreement, and the TM Agreement are each governed by Delaware law. The LLC and TM Agreementsalso containarbitration provisions. The plaintiffs allege that since2015,Gross and the Boardare in breach of 4
these agreements and have also breached their fiduciary duties to plaintiffs.
In April 2017, plaintiffs filed this lawsuit. The Complaint assertsthe followingclaims: misrepresentation against Gross and MLL(Count 1); fraudulent inducement against Gross andMLL(Count 2); violation of G.L. c. 93A, § 11 against MLL(Count 3); breach of the LLC Agreement against MLL (Count 4); breach of the TM Agreementagainst MLL(Count 5); breach of fiduciary duty against Gross (Count 6); aiding and abetting Gross’s breach of fiduciary duty against Davis, MFM, and LUM (Count 7); breach of fiduciary duty against MLL (Count 8); aiding and abettingMLL’scontractual breach of fiduciary dutyagainst LUM and New Balance(Count 9); declaratory judgment against MLL(Count 10); conversion against MFM, Gross, Davis, LUM, and New Balance (Count 11); breach of the implied covenant of good faith and fair dealing against MLL(Count 12); andunjust enrichment against LUM and New Balance (Count13). Defendants move to dismiss all of these claims.
DISCUSSION
The plaintiffs’sprawlingthirteen-count Complaint has been pled in a disorganizedfashion,making itdifficultfor the Courtto analyze each claimseparately. The counts, however, appear to fall into three categories. Counts1 through 3each arise from alleged misrepresentations and omissions made by Gross to induce the Trematerra toenter into the UPA. Counts 4 and 6 through 13concern alleged failures by Gross andtheBoard to comply with their obligationsunder the LLC Agreement. These counts also challenge theirdecision to enter into the Broadcast and Sponsorship Agreements before AtlantaLacrosse was a League member. Finally, Count 5asserts that MLL breached Section 2.12 of the TM Agreement by requiring Atlanta Lacrosse to outfit Atlanta Blaze players in merchandise at commercially unreasonable prices. This Courtconcludesthat many –but not all –of these countsfail to state a claim upon 5
which relief can be grantedand explains its reasoning based on the three categories of counts outlined above.
- Counts 1 through 3
Counts 1 and 2 allege fraudulent misrepresentation and “fraudulent inducement” in connection with plaintiff Trematerra’s decision to purchase an interest in the League. Count 3 alleges a violationof Chapter93A and appears to be based at least in part on that same course of conduct. Defendants argue that plaintiffsare barred from pursuingthese claims, however, as a result of a specific provision in the UPA, which statesthat it “is being entered into after full investigation, no party relying upon any statement or representation not embodied in this Agreement made by others.” Section 14 of UPA, attachedto Complaint as ExhibitA. Section 4 of the UPA sets forth the specificrepresentations and warranties that are part of the agreementand none of them relate to any of the matters that form the basis for the misrepresentationclaims now made by plaintiffs. Defendantscontend that, as a result ofthis so-called “anti-reliance clause,” Counts1 through3 must be dismissed. The UPA is not as clear and unambiguous as the defendants assert, however.
The first sentence of Section 14 is a merger clause which states:“All understandings and agreements previously existing among the parties are mergedin this Agreement [UPA] and the LLC Agreement(including any amendments thereto) which alone fully and completely express their agreement.”(Emphasis added).Section 10 the UPA further provides that:
..the Unit, and any Transfer thereof, is being acquired subject to the terms and condition of that certain Fifth Amended and Restated Limited Liability Company Agreement . . . a copy of which has been provided to the Buyer [Atlanta Lacrosse] (the “LLC Agreement”). TheBuyer hereby joins in, and agrees to be bound by, and shall have the benefit of, and shall be subject to all obligations under, all of the terms and conditionsof the LLC Agreement to the same extent as if the Buyer was an original party to the LLC Agreement. 6
(Emphasis added). When read together, Section 10 and Section 14’s merger clausesuggestthat the UPA incorporates the LLC Agreementandthattherefore its provisionsare part ofthe UPA.SeePauley Petroleum, Inc. v. Continental Oil Co., 43 Del. Ch. 366, 377 (1967)(“When an executed contract refers to another instrument and makes the conditions of the other instrument a part of it, the two will be interpreted together as the agreement of the parties.”). This is significant, since the LLCAgreement does notcontain a similar “anti-reliance” clause. Indeed, it statesthat theparties to thatagreementhavebeen provided with information,and suggests (at leastinferentially) that the partiesare entitled to rely on thatinformation in determining whether to invest.Section 3.10(g) of the LLC Agreement, attached to Complaintas Exhibit B. 2 The Complaint alleges that at least at some of the misrepresentations made to Trematerra were contained in the documents that Section 3.10(g) appears to reference. Thus, if this section isincorporatedinto the UPA, it would notprevent the plaintiffsfrom complaining (as they do here) that the documentsthatthey were providedin makingtheir decision were misleading. At the very least, reading the UPA together with theLLCAgreement, this Court concludes that there are ambiguities whichcannot be resolved withoutlooking to evidenceregarding the intent of the parties. Dismissalof these counts is thereforeinappropriate.
2 Specifically, Section 3.10(g) of the LLC Agreement provides that:
…the Member has receivedand reviewedthis Agreement; it, its attorney and its accountant have had access to,and an opportunity to reviewall documents and other materials requested by the Company; it and they have been given an opportunity to ask any and all questions of, and receive answers from, the Company concerning the terms and conditions of the offeringand to obtain all information it or they believe necessary or appropriate to verify the accuracy of this Agreement and any otherdocuments and materials requested of the Company, and to evaluate the suitability of aninvestment in the Units; andin evaluating the suitability of an investment in the Units, it and they have not relied upon any representations or other information (whether oral or written) other than as set forth in the documents and answers referred to above. 7
Defendants arguemore generally that Count3, the 93A claim, must be dismissedbecause the underlying conduct(here, Gross’s alleged misrepresentationsand omissions)did not occur “primarily and substantially” in Massachusetts as required by G.L. c. 93A, § 11. Whether that threshold requirement is met is necessarilya fact intensiveinquiry, however, whichcan rarelybe decided at this early stagein thecase. Indeed, theSupreme JudicialCourt has statedthatitrequires the Court to makes findings of fact and then to consider those findings “in the context of the entire § 11 claim, [to] determine whether the center of gravity of the circumstances that give rise to the claim is primarily and substantially within the Commonwealth.”See Kuwaiti Danish Computer Co. v. DigitalEquip. Corp., 438 Mass. 459, 473 (2003) (reviewing trial court’s decision allowing summary judgment). Taking theallegations in the Complaintas true(as I must), this Court cannot concludesat this juncture that thisrequirement cannot be satisfied, particularly since MLL (presumably the source of the misrepresentationsat issue) is headquartered in Massachusetts.
- Counts 4 and 6 through 13
Count 4and Counts 6 through 13 concern failures by Gross and the Board to comply with a variety of obligations under the LLC Agreement after Atlanta Lacrosse joined the League. They also challenge the League’s decisionsto enter into theBroadcast and Sponsorship Agreements –decisions made before Atlanta Lacrosse was a League member. This Court concludesthat theall but threeof these counts mustbe dismissed because theyare derivative claimsand plaintiffshave not complied with the procedural requirements that must be satisfied in orderto assert those claims. As Count 8 –to one of three counts that assert a direct claim –there is an independent reason to dismiss it.
The parties agree that Delaware law applies to the issues before me. Applying 8
Delaware law, this Court determines whethera claimis derivativeor direct by answering two questions: 1) who suffered the alleged harm; and 2) who would receive the benefit of any recovery or other remedy? Tooleyv. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033, 1035 (Del. 2004) (Tooley). Where the alleged injury affects all stockholders as a function of and in proportion to their pro rata interests in the corporation, the claim is derivative. In re Digex, Inc. S’holders Litig., 789 A.2d 1176, 1189 (Del. Ch. 2000); Anglo Am. Security Fund, L.P. v. S.R. Global Int’l Fund, L.P., 829 A.2d 143, 150 (Del. Ch. 2003). Conversely, where the alleged injury is different fromthat ofother shareholders or involves contractual rights independent of the entity’s rights, the claimis direct.Anglo Am. Security Fund, L.P.,829 A.2d at 850. In other words, a claim is direct only if the claimed injury is “independent of any alleged injury to the corporation.” Tooley, 845 A.2d at 1039.
Counts 6, 7 9 and Counts 11-13are all based on alleged wrongdoing which affected all MLL members and are not particular to the plaintiffs. Each of these Counts restson the MLL Board’s decision to enter into the Broadcast and Sponsorship Agreements. Any harm flowing from those Agreements, however, was inflicted on MLL itself and affected itsmembers only secondarily in proportion to their pro rate investments. That defendantsMFM and Davismay have benefitedfinanciallyfrom these agreementsdoes not make these claims any less derivative. Both defendantswould have receivedthat benefit as a result of their interestsin LUM. As membersof MLL, however, they suffered the same injuryto their interest as Atlanta Lacrosse.3
3 Althoughthe defendants didnot emphasize thispoint either in their memoranda or at the argument on the motion, thesecounts suffer from anadditional defect. The decisionto enterinto these agreementswasmade before Trematerra even became a member of MLL. Thus, itwould appearthat Trematerra has no standing to complain about those decisions.
Counts 4 and 8 are largely –but not entirely –derivative in nature. Like the counts 9
discussed above, these two counts rest at least in part on allegationsrelating to the Broadcast and Sponsorship Agreementsand are therefore derivative. In addition, they allege that the Board artificiallyinflating League profits, failed to present apotential merger offer, did not properly document Board meetings,andfailed to prepare a proper AnnualLeague Budgetor retaincertified public accountantsto review the League’s financial statements. Any harm fromthese actions were suffered by all MLL members and only injured the plaintiffs to the extent of their proportionate interest in MLL.These claims are direct, however, to the extent they are based on allegations that the Board denied Trematerra access to the League’s books and records, improperly allocatedincomeand issued a 2015 K-1 to Atlanta Lacrosse, and overbilledAtlanta Lacrosse at commercially unreasonable prices for certain items in violation of the LLC Agreement. Count 10, which seeks a declaratory judgment that the League must provideplaintiffs with access to the its books and records, is also direct. These allegations concern contractual rights owed specifically to Atlanta Lacrosse and involveinjuries suffered by Atlanta Lacrossealone.
Althoughsome portion of Count 8 can be asserted as a direct claim, there is an independent reason to dismiss this count. Count 8 alleges that MLL breached its fiduciaryduties, but as the Complaintitself states, those duties arisefrom the LLC Agreement. Complaint at ¶ 139. That portion of Count 4 that survivesas a direct claim is based on the same course of conduct and is framed a claimforbreach of the LLC agreement. “Delaware respects the primacy of contract law overfiduciary law in matters involving contractual rights and obligations and 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 Group, Inc. v. MacAndrews AMG Holdings LLC, 2015 Del. Ch. 10
LEXIS 25, at*24-25 (January 29, 2015)(internal quotes omitted). Count 8 is thus duplicative of Count 4 and must be dismissed.
- Count 5
Count 5 alleges that MLL violatedSection 2.12 of the TM Agreement by requiring Atlanta Lacrosse to outfit Atlanta Blaze players in merchandise at commercially unreasonable prices. Section 7.1 of the TM Agreement, however, contains an arbitration clause, which provides that “all controversies, claimsor disputesof a monetaryvalue exceeding$ 50,000 arising out of, under, in connection with, or relating to (a) this Agreement, or any amendment hereof, [or] (b) the breach hereof . . . shall be determined and settled by arbitration . .. .” Plaintiffs do not maintain that the monetary value of theclaim falls outside the scope of the arbitration clause, which is clear and unambiguous. Count 5 must therefore be dismissed because this claim must be arbitrated.
CONCLUSION AND ORDER
For the forgoing reasons, the defendants’Motion to Dismiss is ALLOWEDas to Counts 6through 9 andcounts 11 through 13. It is DENIEDas to Counts 1 through 4 and Count 10.
________________________
Janet L. Sanders
Justice of the Superior Court
Dated:October 12, 2017