Case No. 16-10236-MSH Adversary Proceeding No. 18-01011
In re: BLAST FITNESS GROUP, LLC, Debtor GARY W. CRUICKSHANK, CHAPTER 7 TRUSTEE OF THE ESTATE OF BLAST FITNESS GROUP LLC, Plaintiff, v. HAROLD R. DIXON et al., Defendants.
Counsel Appearing: Ilyas J. Rona, Esq. Milligan Rona Duran & King LLC Boston, MA for the plaintiff, Gary W. Cruickshank, Trustee of the Estate of Blast Fitness Group, LLC Peter Sabin Willett, Esq. Morgan, Lewis & Bockius LLP Boston, MA for defendants, Goodwin Procter LLP, John R. LeClaire and Jeremiah J. Sullivan
Chapter 7 MEMORANDUM OF DECISION ON MOTIONS TO DISMISS OF GOODWIN PROCTER LLP, JOHN R. LECLAIRE AND JEREMIAH J. SULLIVAN AND MOTION FOR PARTIAL SUMMARY JUDGMENT OF GOODWIN PROCTER LLP AND JOHN R. LECLAIRE
In a thirty-count complaint, Gary W. Cruickshank, the chapter 7 trustee of the bankruptcy estate of Blast Fitness Group, LLC (“BFG”), seeks damages and injunctive relief against forty-seven named and dozens of unnamed John Doe defendants for allegedly depriving BFG of or diverting from it valuable assets and profit opportunities, ultimately leading to BFG’s filing of a petition under chapter 7 of the United States Bankruptcy Code on January 26, 2016. This adversary proceeding was commenced two years after the petition date on January 26, 2018.
As amended by a First Amended Complaint (ECF #130).
Since the filing of the complaint, four of the original named defendants have been dismissed from this proceeding by stipulation with the trustee.
All references to the Bankruptcy Code or the Code are to 11 U.S.C. § 101 et seq.
Several of the defendants, including the law firm of Goodwin Procter LLP (“Goodwin“), John R. LeClaire, a Goodwin partner, and Jeremiah J. Sullivan, a former Goodwin attorney (collectively, the “Goodwin Defendants”) have filed motions to dismiss with Goodwin and Mr. LeClaire also filing a joint motion for partial summary judgment.
Specifically, Goodwin and Mr. LeClaire jointly moved to dismiss count I (fraudulent transfer under Bankruptcy Code § 548(a)(1)(B)), count XII (legal malpractice), count XIII (breach of professional fiduciary duty), count XIV (violation of Mass. Gen. Laws. ch. 93A, §§ 2 and 11), count XXII (breach of contract pursuant to Bankruptcy Code §§ 544 and 550) and the correlative portions of count VII (turnover pursuant to Bankruptcy Code § 550), count VIII (unjust enrichment), count XXIX (attorneys’ fees) and count XXX (costs).
They moved for partial summary judgment with respect to count III (fraudulent transfer under Massachusetts Fraudulent Transfer Act (“MFTA”) § 5(a)(2)), count IV (fraudulent transfer under MFTA § 6(a)), count VIII (unjust enrichment) and the correlative portions of count VII (turnover pursuant to Bankruptcy Code § 550).
Mr. Sullivan seeks dismissal of all of the counts asserted against him, namely count VIII (unjust enrichment), count XII (legal malpractice), count XIII (breach of professional fiduciary duty), count XIV (violation of Mass. Gen. Laws. ch. 93A, §§ 2 and 11), count XXII (breach of contract pursuant to Bankruptcy Code §§ 544 and 550) and the correlative portions of count XXIX (attorneys’ fees) and count XXX (costs).
ECF ## 175, 213, and 177, respectively. These motions relate to the First Amended Complaint (ECF #130).
Goodwin is a named defendant in count I, and Mr. LeClaire is not.
Goodwin is a named defendant in counts III and IV, and Mr. LeClaire is not.
Goodwin and Mr. LeClaire seek both dismissal and summary judgment on counts VII and VIII.
The causes of action asserted against the Goodwin Defendants fall into two categories: legal malpractice claims and unjust enrichment claims. The legal malpractice claims, including those styled as breaches of fiduciary duty, breach of contract and violation of Mass. Gen. Laws ch. 93A, arise from 2012 and 2013 corporate transactions involving BFG, defendant Harold R. Dixon, who controlled BFG, and others.
Fees paid to Goodwin in 2013 form the basis for the unjust enrichment claims.
The legal malpractice claims are the subject of the Goodwin Defendants’ motions to dismiss while the unjust enrichment claims are the subject of the joint motion for partial summary judgment filed by Goodwin and Mr. LeClaire.
At the outset, I note that Trustee Cruickshank concedes that his claim under count I (fraudulent transfer under Bankruptcy Code § 548(a)(1)(B)) against Goodwin is time-barred and should be dismissed.
I will, therefore, enter an order granting Goodwin and Mr. LeClaire’s motion to dismiss count I as well as count VII, which seeks to effectuate any judgment that the trustee might recover under count I.
I will also enter an order allowing Mr. Sullivan’s motion to dismiss count VIII (unjust enrichment) against him as the trustee failed to plead that Mr. Sullivan received any compensation from BFG or that he was in any way enriched.
In addressing the remaining dispositive motions, I begin with the motions to dismiss.
Count VII for turnover under Bankruptcy Code § 550 is brought against the “Count I Defendants,” among others.
Count VII is thus applicable to Goodwin because of its status as a count I defendant.
Hence, dismissal of count I against Goodwin necessitates the dismissal of count VII against it.
The trustee’s other fraudulent transfer counts against Goodwin (counts III and IV) contain references to Bankruptcy Code §§ 544(b) and 550(a) and would enable the trustee, if successful on either of those counts, to recover fraudulently transferred property from Goodwin.
II. Motions to Dismiss
A. Legal Standards
In ruling on the motions to dismiss, I must accept all well-pleaded factual allegations in the complaint as true, drawing all reasonable inferences in the trustee’s favor. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); Langadinos v. American Airlines, Inc., 199 F.3d 68, 69 (1st Cir. 2000). A claim cannot be dismissed if the trustee has demonstrated a “plausible entitlement to relief.” Sanchez v. Pereira-Castillo, 590 F.3d 31, 41 (1st Cir. 2009) (citing Iqbal, 556 U.S. at 678). Conclusory or speculative allegations, however, must be disregarded. Ocasio-Hernandez v. Fortuno-Burset, 640 F.3d 1, 12 (1st Cir. 2011). B. Trustee’s Factual Allegations
Factual allegations are cross-referenced to the relevant paragraphs (symbol ¶) of the first amended complaint.
In 2010, Mr. Dixon met Steven Borghi, and the two discussed going into business together. ¶ 72. Mr. Borghi operated various Work Out World (“WOW”) health clubs with Tony Beninati and, when Mr. Beninati died, with his widow, Elizabeth Beninati. ¶ 71. Mr. Borghi allowed Mr. Dixon to learn about the discount fitness center business by giving him access to the offices and proprietary information of WOW. ¶ 73.
On February 14, 2011, CapeCapital LLC, a Massachusetts limited liability company (“CapeCapital”), formed BFG. ¶¶ 3, 74. CapeCapital was the sole manager of BFG, and Mr. Dixon, in turn, was the sole manager of CapeCapital. ¶ 3. At its peak, BFG owned and operated over sixty fitness clubs bearing its name throughout the United States. (Intro., p. 2). At all relevant times, BFG acted at the direction of CapeCapital and Mr. Dixon. ¶ 92.
Although not specifically pleaded in the complaint, there is no dispute that BFG is a Massachusetts limited liability company.
2. Dispute with Elizabeth Beninati
In 2011, Mr. Dixon and Mr. Borghi began operating various health clubs in New England using the WOW trade name, triggering a dispute with Ms. Beninati. ¶¶ 77, 79. Mr. Dixon, Mr. Borghi and BFG hired Mr. Dixon’s longtime personal lawyer, defendant Mr. LeClaire of Goodwin, to represent them in negotiations with Ms. Beninati in April 2011. ¶ 80. Negotiations failed, and Ms. Beninati commenced a Massachusetts state court lawsuit against Mr. Dixon, Mr. Borghi and BFG on May 24, 2012, seeking millions of dollars in damages. ¶¶ 79, 376. Goodwin represented Mr. Dixon, BFG and Mr. Borghi in that litigation. ¶¶ 107, 376. In July 2014, the state court entered judgment against Messrs. Dixon and Borghi. ¶¶ 88, 315. Final judgment against them in excess of $4.5 million entered on January 9, 2015. ¶¶ 90, 317.
3. The Bally Transaction
In addition to its work on the Beninati litigation, Goodwin attorneys did other legal work for BFG starting in 2011, including in connection with BFG’s acquisition and transfer of fitness clubs, the formation of various limited liability companies (LLCs) ancillary to these acquisitions and transfers and the drafting of corporate and transactional documents. ¶¶ 102-03, 105, 107. In 2012, while the Beninati dispute was going on, BFG was in negotiations with Bally Total Fitness Inc. to purchase thirty-nine work-out clubs and certain real estate. ¶ 105. The Goodwin Defendants acted as counsel to BFG and its wholly-owned subsidiary, Blast Fitness Acquisition, LLC (“Blast Acquisition”), in that transaction, and in that capacity participated in drafting an asset purchase agreement dated April 10, 2012. ¶¶ 106, 110, 113. Under the terms of the asset purchase agreement, BFG was to receive three pieces of commercial real estate from Bally located in Maryland Heights, Missouri, West Hartford, Connecticut and Irving, Texas which were to be “sold pursuant to the terms of a separate purchase agreement . . . for an aggregate purchase price of $1,000,000 to an entity identified by [BFG] prior to Closing.” ¶ 62, 118. Three of the thirty-nine work-out clubs being purchased by BFG operated at these locations. ¶¶ 114, 118.
According to emails exchanged between defendant Mr. Sullivan of Goodwin and Bally’s counsel on April 12, 2012, the Goodwin Defendants knew by that date that Mr. Dixon wanted to designate entities not owned by BFG to take title to the Bally real estate. ¶¶ 131-133. On April 25, 2012, Mr. Dixon formed CapeCapital Maryland Heights, LLC, a Missouri LLC, CapeCapital West Hartford, LLC, a Connecticut LLC, and CapeCapital Irving, LLC, a Texas LLC, all of which were managed by Mr. Dixon and effectively owned by him. ¶¶ 18, 20, 22, 62, 145, 152, 157, 164. None of these entities was owned by BFG. ¶¶ 62, 163-64.
To raise part of the cash needed to complete the Bally transaction, the members of BFG agreed to sell a preferred membership interest in BFG to the Dixon Family Limited Partnership (an affiliate of Dixon). ¶¶ 138-39. The Goodwin Defendants drafted and presented to BFG and its members a member consent dated April 27, 2012, which provided in part:
WHEREAS, the Members and Managers [of BFG] are seeking to raise additional capital for the Company for purposes including, but not limited [sic], financing the growth of the Company’s business through the acquisition, from Bally Total Fitness Corporation, a Delaware corporation (“Bally”) and certain of ts [sic] affiliates, of operating assets and real property associated with additional health club facilities (the “Bally Acquisition”) by a direct subsidiary of the Company. (Emphasis added).
Id. This consent was presented to BFG’s members at a time when Mr. Dixon and the Goodwin Defendants were already planning to transfer the Bally real estate to entities not owned by BFG. ¶ 140. Members of BFG, including Mr. Borghi, relied on the member consent when they approved the admission of the Dixon Family Limited Partnership as a member of BFG and allowed the Bally transaction to move forward. ¶ 142. They did so believing that BFG would receive the Bally real estate. Id.
The Bally transaction closed on April 30, 2012, and on or by that date, Bally had sold the Bally real estate to Mr. Dixon’s LLCs, CapeCapital Maryland Heights, LLC, CapeCapital West Hartford, LLC and CapeCapital Irving, LLC. ¶¶ 146, 153, 158. Mr. Dixon used BFG funds to subsidize his purchase of the Bally real estate. ¶¶ 63, 178. Following the closings, CapeCapital and Mr. Dixon directed BFG and/or its subsidiaries to make above-market lease payments for the BFG clubs operating at the three Dixon-controlled properties, enabling Mr. Dixon to receive rent payments from BFG at inflated rates. ¶¶ 63, 166, 181-83. By 2014, all three real estate properties had been sold to third parties for prices in excess of their purchase prices. ¶¶ 148, 154, 159.
This fact was not pleaded by the trustee but is not disputed.
4. The Lexfit and Newfit Transactions
In late 2012, while the Beninati litigation was pending, Mr. Dixon began transferring profitable BFG clubs to new entities in order to shield them from BFG’s creditors such as Ms. Beninati. ¶¶ 82, 273, 309. Lexfit, LLC, a Massachusetts LLC, and Newfit, LLC, a Delaware LLC, both managed by CapeCapital and Mr. Dixon, were two of these entities. ¶¶ 9, 10, 103, 273. On December 6, 2012, Mr. Dixon, Cape Capital and another defendant transferred sixteen of BFG’s more profitable fitness clubs to Lexfit for no or nominal consideration. ¶¶ 274, 276. Goodwin is not alleged to have been involved in this transfer. On January 30, 2013, Mr. Dixon, Cape Capital and another defendant transferred an additional eight of BFG’s more profitable clubs to Newfit. ¶ 283. Goodwin drafted the asset transfer agreement for the Newfit transfers. ¶ 288. BFG did not receive full consideration for these transfers. ¶ 285. Also on January 30, 2013, Lexfit transferred eight of the clubs received from BFG in the December 2012 transaction to Newfit for less than full consideration. ¶¶ 289, 291, 293. Goodwin drafted the transfer agreement even though BFG was not a party to the agreement. ¶ 292. Shortly after these transactions, in March 2013, Mr. LeClaire gave Mr. Dixon advice on how to protect his personal assets. ¶ 301. As late as December 2014, Goodwin had agreed to “move assets the right way out of BFG.” ¶ 203.
C. Trustee’s Claims Against the Goodwin Defendants
1. The Bally Transaction
The trustee alleges that Goodwin had a material, undisclosed and unwaivable conflict of interest in its dual representation of Mr. Dixon and BFG in connection with the Bally transaction which benefitted Mr. Dixon and harmed BFG. ¶¶ 65, 103, 137, 170-72.
He also claims that the Goodwin Defendants failed to advise BFG and its principals regarding the duties of loyalty, care and candor. ¶¶ 123, 126, 129, 167.
Specifically, the trustee alleges that the Goodwin Defendants knew the Bally real estate was being diverted away from BFG for the benefit of Mr. Dixon, they allowed the transfers to occur and they breached their duty to BFG when they failed to inform BFG and its members of Mr. Dixon’s plan, and in fact purposely concealed from them that plan. ¶¶ 65, 119, 130, 168-169.
According to the trustee, the Goodwin Defendants knowingly presented BFG’s members with a fraudulent and misleading member consent on April 27, 2012, a date after they learned of Mr. Dixon’s intention to divert the real estate. ¶ 141.
The Goodwin Defendants’ conduct, the trustee maintains, caused BFG significant damage in the form of inflated rent payments and lost cash used to subsidize Mr. Dixon’s acquisition of the Bally real estate and lost corporate opportunity as the properties were later sold for a significant profit by Mr. Dixon’s LLCs. ¶¶ 63, 143, 166, 178, 181-82.
The Goodwin Defendants argue that even assuming the allegations against them are true, the claims relating to the Bally transaction are time-barred by the three year statute of limitations governing malpractice actions under Mass. Gen. Laws ch. 260, § 4.
As the Goodwin Defendants note, the statute of limitations begins to run as soon as “the plaintiff knows or reasonably should know that he or she has been harmed by the defendant’s conduct.” Williams v. Ely, 423 Mass. 467, 473 (1996). “The plaintiff need not know the extent of the injury or know that the defendant was negligent for the cause of action to accrue.” Id.
According to the Goodwin Defendants, BFG should have realized that it had not acquired the Bally real estate as of April 30, 2012, when the Bally transaction closed or, at the latest, when it began paying rent to the Dixon entities which had acquired the properties. In their view the statute had run by mid-2015, many months before BFG’s bankruptcy filing.
The statute provides: “Actions of contract or tort for malpractice, error or mistake against attorneys . . . shall be commenced only within three years next after the cause of action accrues.” Mass. Gen. Laws ch. 260, § 4. Actions under Chapter 93A are subject to a four year statute of limitations. See Mass. Gen. Laws ch. 260, § 5A.
The trustee asserts that the statute of limitations was tolled. First he argues that under the doctrine of continuing representation, the statute of limitations did not begin to run until December 2014 when Goodwin, Mr. LeClaire, and presumably Mr. Sullivan, ended their representation of BFG. Thus, he argues, the statute of limitations under Mass. Gen. Laws ch. 260, § 4 had not run as of January 26, 2016, when BFG filed its bankruptcy petition, and was extended to January 26, 2018, by Bankruptcy Code § 108(a).
Code § 108(a), in part, provides: “(a) If applicable nonbankruptcy law . . . fixes a period within which the debtor may commence an action, and such period has not expired before the date of the filing of the petition, the trustee may commence such action only before the later of– (1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or (2) two years after the order for relief.” 11 U.S.C. § 108(a).
The continuing representation doctrine tolls the statute of limitations for professional malpractice claims until the professional has ceased its representation of the injured party. The Massachusetts Supreme Judicial Court summarized the doctrine in Lyons v. Nutt, 436 Mass. 244, 249-50 (2002).
The continuing representation doctrine, which we adopted in Murphy v. Smith, 411 Mass. 133, 579 N.E.2d 165 (1991), recognizes that a person seeking professional assistance has a right to repose confidence in the professional’s ability and good faith, and realistically cannot be expected to question and assess the techniques employed or the manner in which the services are rendered. . . . The doctrine has no application, however, where the client actually knows that he suffered appreciable harm as a result of his attorney’s conduct. If the client has such knowledge, then there is no innocent reliance which the continued representation doctrine seeks to protect.
Id. (internal citations and quotation marks omitted).
In order for the continuing representation doctrine to apply, however, the continuing representation must be with respect to the same matter. Hodas v. Sherburne, Powers & Needham, P.C., 938 F. Supp. 58, 60 (D. Mass. 1996) (holding that client’s complaint sufficiently invoked continuing representation doctrine where allegations of malpractice pertained to the “matters that form[ed] the basis of the allegations”); see also Cambridge Biotech Corp. v. Deliotte & Touche, Civ. A. No. 96-1480-A, 1997 WL 42516, at *2 (Mass. Super. Ct. Jan. 28, 1997) (quoting F.D.I.C. v. Deloitte & Touche, 834 F. Supp. 1129, 1148-1149 (E.D. Ark. 1992)) (“The continuous treatment we mean, however, is treatment for the same or related illnesses or injures, continuing after the alleged acts or malpractice, not mere continuity of a general physician-patient relationship.”); DeGiacomo v. Tobin & Assocs., P.C. (In re Inofin Inc.), No. 12-1091, 2012 WL 5457415, at *24 (Bankr. D. Mass. Nov. 8, 2012) (quoting Cambridge Biotech, 1997 WL 42516 at *2). Here it was not.
While the trustee points to Goodwin and Mr. LeClaire’s representation of BFG in the Lexfit and Newfit transactions and in the Beninati litigation which continued into 2014, these matters were separate and distinct from the Bally transaction, and they did not arise out of or relate in any way to the Bally transaction.
The Goodwin Defendants’ representation of BFG in the Bally transaction ended with the consummation of that transaction in April 2012. Thus, the continuing representation doctrine does not toll the statute of limitations here.
The trustee raises a second argument as to why the statute of limitations was tolled.
He asserts that knowledge of the alleged harm was fraudulently concealed from BFG thereby tolling the statute of limitations under Mass. Gen. Laws ch. 260, § 12. “When a defendant fraudulently conceals a cause of action from the knowledge of a plaintiff, the statute of limitations is tolled under G.L. c. 260, § 12, for the period prior to the plaintiff’s discovery of the cause of action.” Demoulas v. Demoulas Super Markets, Inc., 424 Mass. 501, 519 (1997).
The trustee relies on the Goodwin Defendants’ preparation of the member consent falsely stating that a direct subsidiary of BFG would be acquiring the Bally real estate. The trustee alleges that the Goodwin Defendants knew prior to the preparation of the member consent that Mr. Dixon intended to designate non-BFG entities to acquire the Bally real estate and that they “purposefully concealed” that plan from the members of BFG. ¶ 130-31.
The statute provides: “If a person liable to a personal action fraudulently conceals the cause of such action from the knowledge of the person entitled to bring it, the period prior to the discovery of his cause of action by the person so entitled shall be excluded in determining the time limited for the commencement of the action.” Mass. Gen. Laws ch. 260, § 12.
The Goodwin Defendants assert that BFG knew or should have known by April 30, 2012, when the Bally transaction closed, that BFG had not acquired the Bally real estate. They point to Mr. Dixon’s knowledge of the real estate transfers, which they assert should be imputed to BFG, and to BFG’s payment of rent to the Dixon-controlled owners of the properties. Additionally, they blame the inaccurate members’ consent on a “scrivener’s error.” These defenses are insufficient to overcome the tolling provisions of Mass. Gen. Laws ch. 260, § 12.
“Where a fiduciary relationship exists, the failure adequately to disclose the facts that would give rise to knowledge of a cause of action constitutes fraudulent conduct and is equivalent to fraudulent concealment for purposes of applying [Mass. Gen. Laws ch. 260,] § 12.” Demoulas, 424 Mass. at 519.
The Goodwin Defendants drafted the member consent and presented it to the members for signature as BFG’s attorneys. A fiduciary relationship existed between BFG and the Goodwin Defendants. Scrivener’s error or not, the Goodwin Defendants had a duty to inform the members of BFG other than Mr. Dixon that BFG was paying for but not acquiring the Bally real estate.
That BFG paid rent for the three locations is irrelevant as the disinterested members of BFG, even if they were aware of the rental payments, would not have been required to make independent inquiry to determine that the landlords were not BFG-controlled entities. Demoulas, 424 Mass. at 520.
Without the disinterested BFG members having had actual knowledge, the fraudulent concealment continued. Id. at 519.
With respect to the contention that Mr. Dixon’s knowledge about the real estate transfer should be imputed to BFG, “an agent’s knowledge of his own unauthorized acts is not imputed to the principal when the agent has acted fraudulently toward the principal and is engaged in an independent fraudulent act from which the principal does not benefit.” Sunrise Props., Inc. v. Bacon, Wilson, Ratner, Cohen, Salvage, Fialky & Fitzgerald, P.C., 425 Mass. 63, 67, (1997) (citing Tremont Trust Co. v. Noyes, 246 Mass. 197, 207, 141 N.E. 93 (1923) and Restatement (Second) of Agency § 282 (Am. Law Inst. 1958) (“[a] principal is not affected by the knowledge of an agent in a transaction in which the agent secretly is acting adversely to the principal and entirely for his own or another’s purposes . . . . “); see also GTE Prods. Corp. v. Broadway Elec. Supply Co., 42 Mass. App. Ct. 293, 299-300 (1997) (“Indeed in cases like this where the agent and a third party have colluded to defraud the principal, the agent’s knowledge generally is not imputed to the principal. . . . The rationale for imputing an agent’s knowledge to his principal in order to do justice to an innocent third party is totally lacking here.”) (emphasis in original).
In Demoulas, the Massachusetts Supreme Judicial Court recognized the “adverse domination” doctrine. “Under this doctrine, the statute of limitations is tolled while a corporate plaintiff continues under the domination of the wrongdoers.” Demoulas, 424 Mass. at 523 (citing 3A William Meade Fletcher et al., Law of Private Corporations § 1306.20 (perm. ed. 1994 & Supp. 1996)). As noted in Demoulas there are several versions of the doctrine.
The most common one is the “disinterested majority” test, under which the statute does not run until a majority of board members are disinterested and the board is therefore able to act on behalf of the corporation against the wrongdoers. . . . Other courts have proposed a stricter “complete domination” test, under which a plaintiff seeking to toll the statute of limitations must show that the culpable directors had full, complete, and exclusive control for the period at issue, so that there was no director or shareholder with knowledge who could have induced the corporation to bring an action.
Id. at 523-24 (internal citations omitted).
Although Mr. Dixon, the sole manager of CapeCapital, which, in turn, was the sole manager of BFG, knew BFG was not acquiring the Bally real estate, that knowledge is not enough to prevent the tolling of the statute of limitations.
The Goodwin Defendants’ motions to dismiss must be denied with respect to the counts in the complaint related to the Bally transaction.
2. The Lexfit and Newfit Transactions
The trustee alleges that Goodwin and Mr. LeClaire were in a conflict of interest position in violation of their duty of loyalty to BFG when they represented multiple parties in the Lexfit and Newfit transactions, which aided Mr. Dixon and harmed BFG. ¶¶ 288, 292. He adds that the Lexfit and Newfit transactions furthered fraudulent transfers by BFG and breaches of duty by Dixon that were already taking place. ¶ 292. The trustee alleges that this conduct gives rise to legal malpractice (count XII), breach of professional fiduciary duty (count XIII) and breach of contract (count XXII).
The parties dispute whether the complaint alleges sufficient facts to show that Goodwin’s actions in the Lexfit and Newfit transactions breached a duty to BFG and, if there was a breach, whether the breach caused harm to BFG.
Relying on Massachusetts Rule of Professional Conduct 1.2(a), the Goodwin Defendants allege that there was no breach of duty in the Lexfit and Newfit transactions because Mr. Dixon, through Cape Capital, BFG’s manager, directed the transfers.
The Goodwin Defendants maintain that the firm was simply carrying out the lawful instructions of its client, BFG.
Additionally, they argue that there was no conflict of interest in representing both BFG and Mr. Dixon, asserting that it is not unlawful to represent a Massachusetts LLC while simultaneously representing its controlling equity holder and that it is common for law firms to represent organizations in transactions designed to favor an equity holder.
The trustee, on the other hand, alleges that there are times when a lawyer must refuse to carry out his client’s instructions, and this was one of those times. He relies on Mass. R. Prof. C. 1.2(d) and alleges that Goodwin assisted Mr. Dixon in conduct it knew or should have known was fraudulent. He also asserts that BFG’s and Mr. Dixon’s business interests and objectives were in conflict— BFG desired to earn profit for its owners, while Mr. Dixon sought to enrich himself by shielding assets from creditors, including Ms. Beninati. This, he contends, was a conflict of interest that should have prevented Goodwin from representing both parties.
For a plaintiff to succeed on a legal malpractice claim, the plaintiff must show:
“(1) an attorney-client relationship; (2) a duty to exercise a reasonable degree of care and skill in the performance of the attorney’s legal duties; (3) a violation of this duty; and (4) reasonably foreseeable harm caused by the attorney’s negligence.”
The Rule provides in relevant part: “A lawyer shall seek the lawful objectives of his or her client through reasonably available means permitted by law and these Rules.” Mass. R. Prof. C. 1.2(a).
The Rule provides in relevant part: “A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent . . . .” Mass. R. Prof. C. 1.2(d).
Clearly Goodwin and Mr. LeClaire owed a duty of undivided loyalty to BFG, see Bartle v. Berry, 80 Mass. App. Ct. 372, 378 (2011) (“There is no question that an attorney owes a duty of undivided loyalty to his client.”), and the conflict presented by their simultaneous representations of other potentially adverse parties may have breached that duty.
It is enough at this stage of the proceeding that the complaint plausibly states such a claim.
Alternatively, the Goodwin Defendants argue that even if there was a breach of duty, there was no causation, and accordingly the malpractice claim must fail.
For causation to exist in a legal malpractice claim, the plaintiff must show that it would have been better off had the attorney not breached his duty. See, e.g., Shimer v. Foley, Hoag & Eliot LLP, 795 N.E.2d 599, 606 (Mass. App. Ct. 2003) (noting plaintiff must show that it suffered loss due to attorney’s negligence); McCann v. Davis, Malm & D’Agostine, 423 Mass. 558, 560 (1996) (denying relief because the plaintiff was not harmed by the lawyer’s negligence); Colucci v. Rosen, Goldberg, Slavet, Levenson & Wekstein, P.C., 515 N.E.2d 891, 895 (Mass. App. Ct. 1987) (“A client in a malpractice action based on an allegation of attorney negligence must show that, but for the attorney’s failure, the client probably would have been successful in the prosecution of the litigation giving rise to the malpractice claim.”).
The trustee alleges that there were two harms to BFG directly resulting from the Goodwin Defendants’ malpractice.
First, the trustee alleges that BFG was harmed by receiving less than fair market value for the clubs transferred in the Lexfit and Newfit transactions. ¶¶ 283-85, 306. Second, he alleges the transfers deprived BFG of the revenue from its most profitable clubs. ¶¶ 66, 283.
Goodwin argues that despite these allegations, the complaint does not adequately plead causation because it does not allege what would have happened had it acted differently.
The complaint, however, alleges that other unconflicted attorneys would not have let the transactions occur and without the transfers of its more profitable clubs, BFG would have been in a stronger financial position. ¶¶ 66, 68.
Therefore, the trustee’s amended complaint states a claim upon which relief can be granted, and the Goodwin Defendants’ motions to dismiss must be denied with respect to the Lexfit and Newfit transactions as related to counts XII, XIII, and XXII.
The three counts are so “inextricably intertwined” that as goes one, so go the rest. See Cholfin v. Gordon, No. CA 943623C, 1996 WL 1185106, at *4 (Mass. Super. Ct. Jan. 2, 1996); see also Herbert A. Sullivan, Inc. v. Utica Mut. Ins. Co., 439 Mass. 387, 397 n.7 (2003) (“There is little practical difference between the elements of proof in a tort action for negligence and a contract action for the negligent provision of legal services.”); Thomas v. Mass. Bay Transp. Auth., 389 Mass. 408, 409-410 (1983) (noting the overwhelming similarities between contract and negligent tort claims in personal injury suits).
3. Mass. Gen. Laws ch. 93A
To successfully state a claim under Mass. Gen. Laws ch. 93A, §11, a plaintiff must establish:
(1) that the defendant engaged in an unfair method of competition or committed an unfair or deceptive act or practice, as defined by G.L. c. 93A, § 2, or the regulations promulgated thereunder; (2) a loss of money or property suffered as a result; and (3) a causal connection between the loss suffered and the defendant’s unfair or deceptive method, act, or practice.
Courts have discretion in determining what constitutes an unfair or deceptive act or practice, but should consider: “1) whether the practice falls within the penumbra of common-law, statutory, or other established concepts of unfairness; 2) whether it is immoral, unethical, oppressive, or unscrupulous; and 3) whether it causes substantial injury to consumers, competitors, or other businessmen.” Bridge Over Troubled Waters, Inc. v. Argo Tea, Inc., 220 F. Supp. 3d 213, 220 (D. Mass. 2016) (quoting Boyle v. Int’l Truck and Engine Corp., No. 01-10039-DPW, 2002 WL 823810, at *6 (D. Mass. Apr. 23, 2002)).
Despite the court’s discretion in determining unfair or deceptive acts or practices, negligent legal representation alone does not satisfy the requirements of ch. 93A. See Meyer v. Wagner, 429 Mass. 410, 423-24 (1999).
Absent conduct involving dishonesty, fraud, deceit or misrepresentation, legal malpractice does not constitute a ch. 93A violation. Poly v. Moylan, 423 Mass. 141, 151 (1996); Spenlinhauer v. Kane, No Civ. A. 9601ST-044887, 1998 WL 474170, at *2 (Mass. App. Ct. Aug. 4, 1998); O’Brien v. Kelly, No. 05-P-1469, 2007 WL 121337, at *2 (Mass. App. Ct. Jan. 18, 2007).
The trustee alleges the Goodwin Defendants had a duty to act loyally to BFG due to their attorney-client relationship.
He points to the Bally, Lexfit and Newfit transactions as evidence of the breach of that loyalty, arguing that it is a fair inference that Goodwin and Mr. LeClaire consistently remained loyal to Mr. Dixon to the detriment of BFG and its members and that they intended to deceive BFG’s members by failing to inform them of their loyalty to Mr. Dixon, which was a violation of ch. 93A. ¶¶ 68, 167, 169, 171, 288.
By Goodwin’s representation of both Mr. Dixon and BFG in transactions to the detriment of BFG, the trustee’s complaint alleges sufficient facts to plausibly support the conclusion that the Goodwin Defendants had a conflict of interest that was unethical under Massachusetts law, see Mass. R. Prof. C. 1.7, coupled with an intent to deceive its client, BFG.
The trustee’s complaint therefore states a claim upon which relief can be granted under ch. 93A, and the Goodwin Defendants’ motions to dismiss will be denied with respect to that count.
See generally Karasavas v. Gargano, 31 Mass. L. Rptr. 624, (Mass. Super. Ct. 2014), aff’d, 87 Mass. App. Ct. 1125 (Mass. App. Ct. 2015) (holding that attorney’s charging of excessive fee and handling of client funds in violation of ethical requirements constituted unfair or deceptive acts or practices in violation of Mass. Gen. Laws ch. 93A).
The Rule provides:
(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if
(1) the representation of one client will be directly adverse to another client; or
(2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.
(b) Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if:
(1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;
(2) the representation is not prohibited by law;
(3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and
(4) each affected client gives informed consent, confirmed in writing.
Mass. R. Prof. C. 1.7.
4. Unjust Enrichment Claim Against Mr. Sullivan
The trustee asserts a claim for unjust enrichment (count VIII) against all defendants.
Although he specifically alleges that Goodwin and Mr. LeClaire received substantial payments from BFG to which they were not entitled, see ¶¶ 176, 369, he has not done so with respect to Mr. Sullivan and has identified him as a former Goodwin attorney, not a Goodwin partner.
In the absence of any allegation against Mr. Sullivan that he was unjustly enriched or received fees paid by or behalf of BFG, I will dismiss count VIII as against him.
III. Motion for Partial Summary Judgment
A. Legal Standards
Fed. R. Civ. P. 56 governs motions for summary judgment in bankruptcy proceedings, per Fed. R. Bank. P. 7056. “The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a).
“A ‘genuine’ issue is one supported by such evidence that ‘a reasonable jury, drawing favorable inferences,’ could resolve it in favor of the nonmoving party.” Triangle Trading Co. v. Robroy Indus., Inc., 200 F.3d 1, 2 (1st Cir. 1999) (quoting Smith v. F.W. Morse & Co., Inc. 76 F.3d 413, 428 (1st Cir. 1996)).
“Material” means that a disputed fact has “the potential to change the outcome of the suit” under the governing law if the dispute is resolved in favor of the nonmovant. McCarthy v. Nw. Airlines, Inc., 56 F.3d 313, 315 (1st Cir. 1995).
B. Claims Against Goodwin and Mr. LeClaire
It is undisputed that on January 25, 2013, BFG wired $175,000 to Goodwin, and on August 30, 2013, Blast Acquisition wired $375,000 to Goodwin.
The trustee seeks to avoid those payments as fraudulent transfers under sections 5 and 6 of the Massachusetts Fraudulent Transfer Act (“MFTA”) (counts III and IV) and to recover the payments under Bankruptcy Code § 550 (count VII). He also seeks to recover them on a claim of unjust enrichment from property of the estate (count VIII).
Section 5(a) of the MFTA provides, in part:
“A transfer made or obligation incurred by a debtor is fraudulent as to a creditor . . . if the debtor made the transfer or incurred the obligation: (1) with actual intent to hinder, delay, or defraud any creditor of the debtor; or (2) without receiving a reasonably equivalent value in exchange for the transfer or obligation . . . .” Mass. Gen. Laws ch. 109A, § 5(a).
Section 6(a) of the MFTA provides:
“A transfer made or obligation incurred by a debtor is fraudulent as to a creditor . . . if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.” Mass. Gen. Laws ch. 109A, § 6(a).
As stated above, count VII (turnover under Bankruptcy Code § 550) has been dismissed against Goodwin due to the dismissal of count I against it.
Notwithstanding the dismissal of that count, the trustee would still be able to recover fraudulently transferred property from Goodwin under counts III and IV (fraudulent transfers under MFTA) should he ultimately prevail against it on either of those two counts as they contain references to Bankruptcy Code §§ 544(b) and 550(a).
Goodwin and Mr. LeClaire seek partial summary judgment on these counts, asserting that BFG received reasonably equivalent value for both transfers in the form of legal services rendered by Goodwin and that the second transfer was not made by the debtor, BFG.
They also seek summary judgment with respect to the unjust enrichment count, asserting that it is nothing more than a recycled avoidance claim which fails as a matter of law because the trustee is not entitled to a declaration of an interest in transfers when he cannot avoid those transfers.
The trustee counters that additional discovery will permit him to demonstrate a genuine dispute over whether BFG or Blast Acquisition paid the $375,000 to Goodwin and whether there was reasonably equivalent value given for both transfers. See Fed. R. Civ. P. 56(d), made applicable to this proceeding by Fed. R. Bankr. P. 7056.
He maintains that he reasonably expects discovery to produce useful and material evidence on the claims in question, and that I should not permit Goodwin and Mr. LeClaire to parachute away from them before completion of discovery by using summary judgment to avoid claims they could not otherwise escape through a motion to dismiss.
Rule 56(d) provides:
d) When Facts Are Unavailable to the Nonmovant. If a nonmovant shows by affidavit or declaration that, for specified reasons, it cannot present facts essential to justify its opposition, the court may:
(1) defer considering the motion or deny it;
(2) allow time to obtain affidavits or declarations or to take discovery; or
(3) issue any other appropriate order.
Fed. R. Civ. P. 56(d). “[C]ourts should construe motions that invoke the rule generously, holding parties to the rule’s spirit rather than its letter.” Resolution Tr. Corp. v. N. Bridge Assocs., Inc., 22 F.3d 1198, 1203 (1st Cir. 1994).
A litigant who desires to invoke Rule 56(f) must make a sufficient proffer. In all events, the proffer should be authoritative; it should be advanced in a timely manner; and it should explain why the party is unable currently to adduce the facts essential to opposing summary judgment. . . .
When, as is often the case, the reason relates to incomplete discovery, the party’s explanation must take a special form: it should show good cause for the failure to have discovered the facts sooner; it should set forth a plausible basis for believing that specified facts, susceptible of collection within a reasonable time frame, probably exist; and it should indicate how the emergent facts, if adduced, will influence the outcome of the pending summary judgment motion.
Id. (internal citations omitted).
Resolution Tr. Corp. discusses then-Rule 56(f), which is now Rule 56(d). Rule 56(d) “carrie[d] forward without substantial change the provisions of former subdivision (f).” Fed. R. Civ. P. 56 advisory committee’s note to 2010 amendments. ——–
The trustee’s counsel submitted an affidavit setting forth his efforts to obtain discovery related to the two payments received by Goodwin as well as information as to the source of a third payment.
The trustee points to Blast Acquisition’s bank statement for August 2013 which reflects an incoming wire transfer of $375,000 on August 23, a week before the outgoing wire transfer to Goodwin, suggesting that Blast Acquisition was not the source of those funds.
The trustee seeks Goodwin’s invoices and detailed time records to determine the nature of the legal services and whether those services provided any benefit to BFG.
The trustee also pointed in his affidavit to a payment of $800,000 made by Newfit to Goodwin. The trustee seeks discovery to determine why and at whose direction that payment was made.
Goodwin and Mr. LeClaire point to the trustee’s delay of almost two years after his appointment before bringing this adversary proceeding as undercutting the trustee’s claim for additional discovery.
The relevant issue, however, is not whether the trustee waited two years to bring this adversary proceeding but whether, upon the commencement of the proceeding, the trustee delayed in seeking discovery. He clearly did not.
The affidavit of the trustee’s counsel establishes his diligent but as yet unsuccessful efforts to obtain documents responsive to his inquiry into whether BFG paid legal fees to Goodwin for services provided to others.
Until the trustee has been provided with the necessary discovery, the motion for partial summary judgment is premature and will be denied without prejudice.
Based on the foregoing, an order shall enter granting the motion to dismiss of Goodwin and Mr. LeClaire with respect to counts I and VII of the complaint against Goodwin, and denying the Goodwin Defendants’ motions to dismiss with respect to counts XII, XIII, XIV, XXII and the correlative portions of counts VIII, XXIX and XXX, except that an order shall enter allowing Mr. Sullivan’s motion to dismiss count VIII against him.
An order denying without prejudice the motion for partial summary judgment will also enter. Dated: January 8, 2019
By the Court,
Melvin. S. Hoffman
United States Bankruptcy Judge
Counsel Appearing: Ilyas J. Rona, Esq.
Milligan Rona Duran & King LLC
for the plaintiff, Gary W. Cruickshank, Trustee of the Estate of Blast Fitness Group, LLC
Peter Sabin Willett, Esq.
Morgan, Lewis & Bockius LLP
for defendants, Goodwin Procter LLP, John R. LeClaire and Jeremiah J. Sullivan
Alicea v. Commonwealth, 466 Mass. 228, 234 n.9 (2013).
UNITED STATES BANKRUPTCY COURT DISTRICT OF MASSACHUSETTS EASTERN DIVISION
In re: Chapter 7 Case No. 16-10236-MSH
BLAST FITNESS GROUP, LLC,
GARY W. CRUICKSHANK,
CHAPTER 7 TRUSTEE OF THE
ESTATE OF BLAST FITNESS
HAROLD R. DIXON et al.,
MEMORANDUM OF DECISION ON MOTION TO DISMISS OF NEWFIT, LLC
In a thirty-count complaint,1 Gary W. Cruickshank, the plaintiff and chapter 7 trustee of the bankruptcy estate of Blast Fitness Group, LLC (“BFG”), seeks damages and injunctive relief against over forty named and dozens of unnamed defendants, including Newfit, LLC,2 a Delaware limited liability company whose managers are defendants, Harold R. Dixon, who controlled BFG, and CapeCapital LLC, a Massachusetts limited liability company. CapeCapital, in turn, was BFG’s sole manager and was, itself, managed by Mr. Dixon. BFG filed a voluntary
1 As amended by a first amended complaint (ECF #130).
2 The complaint refers to Newfit, LLC while the motion to dismiss refers to NewFit, LLC.
petition under Chapter 7 of the United States Bankruptcy Code3 on January 26, 2016, at which time its debts exceeded $16 million. This adversary proceeding was commenced two years after the petition date on January 26, 2018.
Newfit has moved under Fed. R. Civ. P. 12(b)(6), per Fed. R. Bankr. P. 7012(b), to dismiss4 count VI (turnover under Bankruptcy Code § 542(b)), count XVI (conspiracy), count XVII (aiding and abetting), count XIX (fraud), count XX (intentional interference with contractual advantage), count XXI (tortious interference with contractual advantage), count XXIII (substantive consolidation), count XXIV (successor liability), count XXV (alter ego/piercing the corporate veil), and count XXIX (attorneys’ fees). Newfit does not seek dismissal of the remaining counts against it for constructive fraudulent transfer under Bankruptcy Code § 548(a)(1)(B) (count I), actual fraudulent transfer under Bankruptcy Code § 548(a)(1)(A) (count II), constructive fraudulent transfer under Massachusetts Fraudulent Transfer Act (“MFTA”) § 5(a)(2) (count III), constructive fraudulent transfer under MFTA § 6(a) (count IV), actual fraudulent transfer under MFTA § 5(a)(1) (count V), turnover (count VII), unjust enrichment (count VIII), preferential transfer under Bankruptcy Code § 547 and MFTA § 6(b) (count IX), statutory reach and apply under Bankruptcy Code §§ 544 and 550 and Mass. Gen. Laws ch. 214, § 3(8) (count X), establishment of a resulting/constructive trust (count XI), and costs (XXX), and it asserts it will deal with those counts either through summary judgment or at trial.
3 All references to the Bankruptcy Code or the Code are to 11 U.S.C. § 101 et seq.
4 ECF #171.
At the outset, I note that the trustee does not contest dismissal of count XIX (fraud), count XXIV (successor liability) or XXIX (attorney’s fees). I will, therefore, grant Newfit’s motion to dismiss those counts.
II. Procedural History
In addition to Newfit, other defendants, including Mr. Dixon, CapeCapital, the law firm of Goodwin Procter LLP (“Goodwin”) and two of its attorneys (collectively, the “Goodwin Defendants”), CapeCapital Maryland Heights, LLC, CapeCapital West Hartford, LLC, CapeCapital Irving, LLC (collectively, the “Cape Real Estate Entities”), and other defendants5 also filed motions to dismiss. A hearing was held on these motions on June 14, 2018. The Goodwin Defendants’ motions to dismiss were allowed in part and denied in part by my memorandum and order dated January 8, 2019. See Cruickshank v. Dixon (In re Blast Fitness Grp., LLC), No. 16-10236-MSH, 2019 WL 137109 (Bankr. D. Mass. Jan. 8, 2019) (“Blast I”).
The motions to dismiss of Mr. Dixon, CapeCapital, and the Cape Real Estate Entities were allowed in part and denied in part pursuant to separate memoranda and orders dated April 30, 2019 (Blast II, Blast III and Blast IV, respectively).6 A complete procedural history and recitation of the trustee’s factual allegations and my legal findings on certain of the trustee’s claims are set forth in Blast I, II, III, and IV, which are incorporated herein by reference. Nevertheless,
5 Defendants Juliet J. Dixon, and Thomas F. Walsh and Michael J. Craffey, as trustees of Harold Dixon IV GST Trust, George L. Dixon GST Trust, William A. Dixon GST Trust, John E. Dixon GST Trust, 31 Green Lane Nominee Trust and 63 Cart Path Road Nominee Trust also filed motions to dismiss which were allowed by separate memoranda and orders dated April 30, 2019.
6 See Cruickshank v. Dixon (In re Blast Fitness Grp., LLC), No. 16-10236-MSH, 2019 WL 1950002 (Bankr. D. Mass. April 30, 2019) (Blast II) and Cruickshank v. Dixon (In re Blast Fitness Grp., LLC), No. 16-10236-MSH, 2019 WL 1978344 (Bankr. D. Mass. April 30, 2019) (Blast III).
reiterate below some of those factual allegations and supplement them with additional allegations as necessary to determine Newfit’s motion to dismiss.7
III. Motion to Dismiss
A. Legal Standard
In ruling on the motion to dismiss, I must accept all well-pleaded factual allegations in the complaint as true, drawing all reasonable inferences in the trustee’s favor. Langadinos v. American Airlines, Inc., 199 F.3d 68, 69 (1st Cir. 2000). A claim cannot be dismissed if the trustee has demonstrated a “plausible entitlement to relief.” Sanchez v. Pereira–Castillo, 590 F.3d 31, 41 (1st Cir. 2009) (citing Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). A plaintiff’s obligation requires more than “labels and conclusions” and “a formulaic recitation of the elements of a cause of action will not do[.]” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).
Inquiry into plausibility is a two-step process. “First, the court must sift through the averments in the complaint, separating conclusory legal allegations (which may be disregarded) from allegations of fact (which must be credited).” Rodriguez-Reyes v. Molina-Rodriguez, 711 F.3d 49, 53 (1st Cir. 2013) (citing Morales–Cruz v. Univ. of P.R., 676 F.3d 220, 224 (1st Cir. 2012)). “Second, the court must consider whether the winnowed residue of factual allegations gives rise to a plausible claim to relief.” Id. “Plausible, of course, means something more than merely possible, and gauging a pleaded situation’s plausibility is a ‘context-specific’ job that
7 There are a number of other defendants in this adversary proceeding which have not answered or otherwise responded to the complaint, including certain BFG subsidiaries. These defendants are the subject of, among other claims, the trustee’s claim in count XXIII for substantive consolidation with BFG. Although those defendants have not yet been defaulted, I will assume for purposes of this decision that BFG and the BFG subsidiaries (including defendant Blast Fitness Acquisition, LLC) are consolidated.
compels us ‘to draw on’ our ‘judicial experience and common sense.’” Schatz v. Republican State Leadership Comm., 669 F.3d 50, 55 (1st Cir. 2012) (quoting Iqbal, 556 U.S. at 679). ‘“Moreover, each defendant’s role in the [adverse action] must be sufficiently alleged to make him or her a plausible defendant. After all, we must determine whether, as to each defendant, a plaintiff’s pleadings are sufficient to state a claim on which relief can be granted.’” Rodriguez- Ramos v. Hernandez-Gregorat, 685 F.3d 34, 40-41 (1st Cir. 2012) (quoting Ocasio-Hernandez v. Fortuno-Burset, 640 F.3d 1, 16 (1st Cir. 2011) (emphasis in original); see also Penalbert-Rosa v. Fortuno-Burset, 631 F.3d 592, 594 (1st Cir. 2011) (“[S]ave under special conditions, an adequate complaint must include not only a plausible claim but also a plausible defendant.”).
B. Trustee’s Factual Allegations
On February 14, 2011, CapeCapital, acting through Mr. Dixon, formed BFG, a Massachusetts limited liability company.9 ¶ 74. CapeCapital was the sole manager of BFG, and Mr. Dixon, in turn, was the sole manager and a member of CapeCapital. ¶ 3. At its peak, BFG owned and operated over sixty fitness clubs bearing its name throughout the United States. (Intro., p. 2). At all relevant times, BFG acted at the direction of CapeCapital and Mr. Dixon. ¶ 92. BFG owned, entirely or partially, seventeen subsidiaries through which it operated its business.10 ¶ 53. Fitness clubs at different locations were often operated through separate BFG
8 Factual allegations are cross-referenced to the relevant paragraphs (symbol ¶) of the first amended complaint.
9 Although not specifically pleaded in the complaint, there is no dispute that BFG is a Massachusetts limited liability company.
10 Each of the seventeen BFG subsidiaries is a defendant here. The subsidiaries are named in numerous counts of the complaint, including counts for fraudulent transfers, piercing the corporate veil/alter ego and substantive consolidation. None of the BFG subsidiaries has filed a responsive pleading to the complaint.
subsidiaries, and those subsidiaries were often the actual tenants under the applicable leases for the premises. ¶¶ 251, 256. At all times relevant to the claims and causes of action alleged in the complaint, BFG was insolvent and insufficiently capitalized. ¶¶ 310-12.
In 2011 and 2012, BFG, Mr. Dixon and Steven Borghi, Mr. Dixon’s business partner and a member of BFG, were mired in a dispute with Elizabeth Beninati, the widow of Mr. Borghi’s previous business partner in the discount fitness club business. ¶¶ 71, 73, 76-79. Mr. Dixon, Mr. Borghi and BFG hired Mr. Dixon’s longtime personal lawyer at Goodwin, John LeClaire, who is a defendant in this action, to represent them in negotiations with Ms. Beninati in April 2011. ¶ 80. Negotiations failed, and Ms. Beninati commenced a Massachusetts state court lawsuit against Mr. Dixon, Mr. Borghi and BFG on May 24, 2012, seeking millions of dollars in damages. ¶¶ 79, 376. Goodwin represented Mr. Dixon, BFG and Mr. Borghi in that litigation. ¶¶ 107, 376. In July 2014, the state court entered judgment against Messrs. Dixon and Borghi. ¶¶ 88, 315. Final judgment against them in excess of $4.5 million entered on January 9, 2015. ¶¶ 90,
2. Lexfit and Newfit
In late 2012, while the Beninati litigation was pending, Mr. Dixon began transferring profitable BFG clubs to new entities in order to shield them from BFG’s creditors such as Ms. Beninati. ¶¶ 82, 273, 308-309. Defendants Lexfit, LLC, a Massachusetts limited liability company, and Newfit, both managed by Mr. Dixon and/or CapeCapital, were two of these entities. ¶¶ 9, 10, 103, 273. Newfit was organized as a Delaware limited liability company after January 30, 2013 and before May of 2013. ¶¶ 180, 283.
3. Lexfit and Newfit Transactions
On December 6, 2012, Mr. Dixon, CapeCapital and another defendant transferred sixteen of BFG’s more profitable fitness clubs to Lexfit for no or nominal consideration. ¶¶ 274, 276.
On January 30, 2013, Mr. Dixon, CapeCapital and another defendant transferred an additional eight of BFG’s more profitable clubs to Newfit, which had not yet been created. ¶¶ 283-84, 289. BFG did not receive full consideration for these transfers. ¶ 285. Also on January 30, 2013, Lexfit transferred eight of the clubs received from BFG in the December 2012 transaction to Newfit for less than full consideration. ¶¶ 289, 291, 293.
On January 31, 2013, BFG assigned to Newfit all of its right, title and interest in a management agreement under which BFG managed three fitness clubs in Mashpee, West Roxbury and Needham, Massachusetts, which were owned by non-BFG entities.11 ¶¶ 350, 352. Under the management agreement, which BFG had the right to assign, BFG managed the three clubs in exchange for a management fee equal to 50% of gross revenue which was later increased to 75% with respect to the Mashpee and West Roxbury clubs. ¶¶ 350-354. The term of the management agreement ended in January 2018, and it provided for a $2 million fee payable to BFG if the club owners terminated the agreement. ¶ 351. BFG transferred the rights to receive the clubs’ gross revenues to Newfit in exchange for $10 while BFG retained the obligation to manage the clubs. ¶ 355.
4. Newfit and BFG
There was overlap between Newfit and BFG with respect to management, assets and operations. Both entities shared the same manager, CapeCapital, which, in turn, was managed by Mr. Dixon, who controlled BFG. Defendant Thomas Moran, who was BFG’s Director of Finance, held the same position with Newfit. ¶ 345. Newfit rented office space at the same Auburndale, Massachusetts location as BFG but paid a lower rent. ¶ 358. Newfit was
11 The complaint does not name the counterparties to the management agreement.
represented by BFG’s general counsel, Peter Fenn,12 in several matters. ¶¶ 12, 325. Newfit is also represented in this action by the same counsel representing Mr. Dixon, CapeCapital, the Cape Real Estate Entities and other Dixon-related entities and family members. On a date not specified in the complaint, BFG transferred all of its intellectual property in the fitness operation to Newfit without consideration. ¶ 329.
On March 18, 2013, Mr. LeClaire emailed Mr. Dixon about the creation of Newfit and related governance options, providing advice on how to “protect you better against things like what Beninati is doing.” ¶ 301. In May 2013, after the creation of Newfit, Mr. LeClaire was aware that cash of the specific fitness clubs and Newfit was treated as “fungible.” ¶ 180. Bank account records reflect multiple electronic transfers of funds between BFG and Newfit, demonstrating commingling of funds. ¶ 348-49. Goodwin advised Messrs. Dixon and Moran, in the context of the Beninati litigation, to avoid any discussion of Newfit and to maintain that the transfer of profitable clubs to a separate entity had “nothing to do” with the Beninati litigation and shielding assets from creditors. ¶ 180.
5. Landlords and Third Parties
BFG could not pay its debts as they arose and it implemented a strategy, through Mr. Dixon and CapeCapital, of shifting assets from one fitness club to another. ¶¶ 255, 312. A large number of BFG’s creditors are landlords who leased space to wholly-owned entities of BFG. ¶ 248. The landlords relied on guaranties from BFG, third party guarantors, or other obligors under the leases. ¶ 249. BFG purchased fitness clubs from sellers, assumed the sellers’ obligations under existing leases and often breached its obligations to remove the sellers as obligors under
12 Mr. Fenn is a named defendant in the complaint. On October 5, 2018, the court approved a settlement between Mr. Fenn and the trustee which provided for the dismissal of all claims against Mr. Fenn in exchange for his payment of a settlement amount.
the leases. ¶¶ 250, 359. When a club was shut down, the subsidiary, which was the actual tenant under the lease, would stop making rent payments to the landlord. ¶ 256. The landlord would sue the tenant, only to find that the assets of the tenant had been transferred to another subsidiary of BFG. ¶ 257. Landlords, guarantors, and obligors then pursued fraudulent transfer, indemnification and other claims against BFG and others. ¶¶ 198, 232, 257, 359-60.
From 2014 to 2016, BFG was involved in numerous lawsuits commenced by landlords and others for unpaid rents and other lease defaults. ¶¶ 186, 198-199, 231-33, 261. BFG could not satisfy its debts to landlords due to its insolvency. ¶ 186. On an unspecified date, Mr. Dixon forwarded an email from another principal of BFG to Goodwin advising that “I have gotten hammered today by many different vendors/contractors. I have threatening messages on my phone. . . .” ¶ 299.
6. 2015 Newfit Transactions
At the end of March 2015, Blast Fitness Acquisition, LLC, a BFG subsidiary and defendant in this action, transferred nine profitable health clubs worth between $7.6 (liquidation value) and $15.9 million (internal valuation based on a multiple of projected EBITDA) to Newfit in a cashless transaction, in exchange for which Newfit purported to retire $7 million of antecedent debt owed to it by Blast Acquisition. ¶ 319. Mr. Fenn represented both BFG and Newfit in the transaction. ¶ 212. The transfer was made to shield assets from creditors who had already begun to sue BFG. ¶ 320. On May 1, 2015, another cashless transfer from BFG to Newfit was made transferring the assets of a fitness club in Schaumburg, Illinois, valued at almost $600,000. Mr. Fenn represented Newfit in the transaction. ¶ 221.
After acquiring valuable clubs through Newfit, Mr. Dixon and another defendant then sold those clubs to Ed Eskandarian for a substantial markup, and Mr. Dixon continues to personally receive annual payments of $500,000 per year from Mr. Eskandarian. ¶ 331, 333.
IV. Trustee’s Claims Against Newfit
A. Count VI- Turnover-Bankruptcy Code § 542(b)
In count VI of the complaint, the trustee asserts that Newfit owes BFG a debt in an unspecified amount “that is property of the estate and that is matured, payable on demand, or payable on order.” 11 U.S.C. § 542(b). Newfit asserts it owes no debt to BFG within the meaning of Bankruptcy Code § 542(b).
1. Applicable Law
Bankruptcy Code § 542(b) provides:
(b) Except as provided in subsection (c) or (d) of this section, an entity that owes a debt that is property of the estate and that is matured, payable on demand, or payable on order, shall pay such debt to, or on the order of, the trustee, except to the extent that such debt may be offset under section 553 of this title against a claim against the debtor.
11 U.S.C. § 542(b). Debts are “matured,” “payable on demand,” or “payable on order” if they are presently payable, “as opposed to those that are contingent and become payable only upon the occurrence of a certain act or event.” A.J. Calhoun v. Copeland Corp. (In re Gordons Transports, Inc.), 51 B.R. 633, 636 (Bankr. W.D. Tenn. 1985). Bankruptcy Code § 542(b) explicitly references “property of the estate.” Bankruptcy Code § 541(a)(1) defines “property of the estate” as including “all legal or equitable interests of the debtor in property as of the commencement of the case[,]” 11 U.S.C. § 541(a)(1), and also includes “[a]ny interest in property that the trustee recovers” under specified Bankruptcy Code provisions, including Code550. 11 U.S.C. § 541(a)(3).
“A turnover action is not an action to recover damages for the taking of estate property but an action to recover possession of property belonging to the estate at the time of the filing. . . It invokes the court’s most basic equitable powers to gather and manage property of the estate.” Braunstein v. McCabe, 571 F.3d 108, 122 (1st Cir. 2009) (citing 5 Collier on Bankruptcy, ¶ 542.02) (Alan N. Resnick & Henry J. Sommer eds., 15th rev. ed. 2009)). Bankruptcy Code § 542(b) creates an action for turnover of matured debts owed to a bankruptcy estate. “These may be, for example, debts owed for accounts receivable, for judgments already obtained or for monies previously held in trust or in escrow.” Nat’l Enters., Inc. v. The Koger P’ship, Ltd. (In re Nat’l Enters., Inc.), 128 B.R. 956, 959 (E.D. Va. 1991).
The trustee identifies in his opposition to the motion to dismiss the debts that should be turned over to him under Code § 542(b) as the $500,000 annual payments received by Mr. Dixon from Newfit’s sale of fitness clubs to Mr. Eskandarian and the amounts Newfit allegedly deprived BFG from receiving under the assigned management agreement for the Mashpee, Needham and West Roxbury clubs. With respect to the latter contention, the trustee asserts that BFG remained liable under the contract to perform management services and that to the extent any management or termination fees are owed under that agreement, they belong to BFG.
The Eskandarian payments cannot form the basis of a claim against Newfit under Bankruptcy Code § 542(b) as the payments are alleged to have been made to Mr. Dixon, not Newfit, and I previously dismissed count VI against Mr. Dixon. See Blast II. To the extent, however, that on the bankruptcy filing date in 2016, any management or termination fees were owed to BFG under the management agreement in connection with the Mashpee, West Roxbury, and Needham clubs (which had a term ending in 2018), I find that such amount would have been matured and fixed as of the bankruptcy filing date and not contingent or payable upon the occurrence of a certain future act or event. I find sufficient facts alleged in the complaint to support a plausible claim for turnover of any such amount from Newfit, and thus I will enter an order denying Newfit’s motion to dismiss count VI.
B. Count XVI- Conspiracy
In count XVI, the trustee alleges that, beginning no later than 2012 and continuing at least through BFG’s bankruptcy filing date, Mr. Dixon and other count XVI defendants, including Lexfit, Newfit, CapeCapital, the Cape Real Estate Entities, and others, formed a “confederation” to siphon assets away from BFG, defraud BFG’s creditors, and convert and steal BFG’s assets, damaging its creditors. Newfit contends that the complaint provides no particulars about its conspiracy claims that are applicable to it.
1. Applicable Law
In Aetna Cas. Sur. Co. v. P & B Autobody, the United States Court of Appeals for the First Circuit, applying Massachusetts law, identified two types of civil conspiracy. 43 F.3d 1546, 1563-64 (1st Cir. 1994). The first is a “very limited” “coercive type” of conspiracy where “‘[i]n order to state a claim of [this type of] civil conspiracy, plaintiff must allege that defendants, acting in unison, had some peculiar power of coercion over plaintiff that they would not have had if they had been acting independently.’” Id. at 1563 (quoting Jurgens v. Abraham, 616 F. Supp. 1381, 1386 (D. Mass. 1985) and citing Fleming v. Dane, 304 Mass. 46 (1939)).
The second type of civil conspiracy, and the one upon which the trustee relies here, is “akin to a theory of common law joint liability in tort” where the word “conspiracy” is used to denote “vicarious liability” in tort for concerted action. Id. at 1564. The elements are (1) common design or agreement between two or more people to commit a wrongful act and (2) proof of some tortious act in furtherance of the agreement. Id. (citing Restatement (Second) of Torts § 876 cmt. b (Am. Law Inst. 1979)). “Where two or more persons act in concert, each will be jointly and severally liable for the tort.” Id. There is a three year statute of limitations for the tort of civil conspiracy. Kadar Corp. v. Milbury, 549 F.2d 230, 234 (1st Cir. 1977) (citing Mass. Gen. Laws ch. 260, § 2A) (applying a prior version of the statute which provided for a two year limitations period).13
The tort of aiding and abetting a breach of fiduciary duty requires that “(1) there must be a breach of fiduciary duty; (2) the defendants must know of the breach; and (3) the defendants must have actively participated or substantially assisted in or encouraged the breach to such a degree that they could not reasonably have been acting in good faith.” Baker v. Wilmer Cutler Pickering Hale & Dorr LLP, 91 Mass. App. Ct. 835, 847 (2017) (citing Arcidi v. Nat’l Assn. of Gov’t Employees, 447 Mass. 616, 623-624 (2006)). In the context of a claim for conspiracy for breach of fiduciary duty, “[t]he claim for civil conspiracy . . . similarly requires a showing that the defendants (1) knew that the conduct . . . constituted a breach of fiduciary duty and (2) substantially assisted in or encouraged that conduct.” Id. at 847-48 (citing Kurker v. Hill, 44 Mass. App. Ct. 184, 189 (1998)) (footnote omitted).14
13 The statute provides: “Except as otherwise provided, actions of tort, actions of contract to recover for personal injuries, and actions of replevin, shall be commenced only within three years next after the cause of action accrues.” Mass. Gen. Laws ch. 260, § 2A. See also Bankruptcy Code § 108, which provides, in part: “(a) If applicable nonbankruptcy law . . . fixes a period within which the debtor may commence an action, and such period has not expired before the date of the filing of the petition, the trustee may commence such action only before the later of–
the end of such period, including any suspension of such period occurring on or after the commencement of the case; or
two years after the order for relief.” 11 U.S.C. § 108(a)(1) and (2).
14 Newfit is a Delaware limited liability company. “Massachusetts applies the internal affairs doctrine, which ‘recognizes that only one State should have the authority to regulate a corporation’s internal affairs-matters peculiar to the relationships among or between the
Newfit contends that there is no indication in the complaint of any tort that was the subject of the conspiracy other than an alleged breach of fiduciary duty which would not be applicable to Newfit because it did not owe BFG a fiduciary duty. The trustee maintains that Newfit assisted Mr. Dixon in breaching his fiduciary duties to BFG.
There are numerous specific allegations in the complaint to support a plausible claim that CapeCapital and Mr. Dixon knowingly engaged in a plan under which they breached their fiduciary duties to BFG and its members and that they, along with Newfit in connection with the Newfit transfers effected within the statute of limitations period in 2013 and 2015, each knew of the breaches of fiduciary duties and substantially assisted the other in that conduct for Mr.
Dixon’s benefit and not in good faith. Indeed, a primary grievance of the complaint is that Mr. Dixon created entities such as Newfit in a coordinated effort to divert company assets from creditors to recover his investment in BFG and otherwise enrich himself. Accordingly, I will enter an order denying Newfit’s motion to dismiss count XVI.
C. Count XVII-Aiding and Abetting
In count XVII, the trustee asserts that certain defendants, including CapeCapital and Mr. Dixon, owed the members of BFG the fiduciary duty of care, loyalty and good faith, they
corporation and its current officers, directors, and shareholders-because otherwise a corporation could be faced with conflicting demands.’” Mariasch v. Gillette Co., 521 F.3d 68, 71–72 (1st Cir. 2008) (quoting Edgar v. MITE Corp., 457 U.S. 624, 645 (1982)). “The state with authority over a corporation’s internal affairs is the state of incorporation.” Id. (citing Harrison v. NetCentric Corp., 433 Mass. 465, 470 (Mass. 2001)). Newfit has not asserted in the motion to dismiss that any counts of the complaint should be considered matters pertaining to its internal affairs, and it has relied primarily on Massachusetts and First Circuit law in its brief. I will, therefore, not address Delaware law with respect to the counts it seeks to dismiss. See Scott v. NG U.S. 1, Inc., 450 Mass. 760, 766 n.13 (2008).
breached those duties when they defrauded BFG’s members and converted BFG’s funds and assets, and Newfit aided and abetted such breaches. Newfit contends it did not owe a fiduciary duty to BFG. For the reasons stated above with respect to count XVI, Newfit’s motion to dismiss count XVII will be denied.
D. Counts XX and XXI – Intentional and Tortious Interference with Contractual Advantage
With respect to counts XX and XXI, the trustee asserts that Newfit’s assumption of the benefits of BFG’s management agreement for the Mashpee, West Roxbury and Needham clubs, which left BFG responsible to perform the contract’s obligations while receiving none of its benefits, constituted tortious interference with a contractual advantage.
1. Applicable Law
To prevail in an action for intentional interference with contractual relations, a plaintiff must establish that “(1) he had a contract with a third party; (2) the defendant knowingly induced the third party to break that contract; (3) the defendant’s interference, in addition to being intentional, was improper in motive or means; and (4) the plaintiff was harmed by the defendant’s actions.” G.S. Enters., Inc. v. Falmouth Marine, Inc., 410 Mass. 262, 272 (1991) (citing United Truck Leasing Corp. v. Geltman, 406 Mass. 811, 812-817 (1990)); see also Psy- Ed Corp. v. Klein, 459 Mass. 697, 715 (2011) (setting forth the same standard for “tortious interference with contract” and citing G.S. Enters., Inc., 410 Mass. at 272). “A claim for intentional interference with contractual relations is one sounding in tort.” Pure Distribs., Inc. v. Baker, 285 F.3d 150, 154–55 (1st Cir. 2002) (citing United Truck Leasing Corp., 406 Mass. at 812).
From the facts alleged in the complaint, I cannot plausibly conclude that Newfit knowingly induced BFG or a third party to breach the management agreement. The complaint alleges that BFG exercised its assignment rights under the contract by transferring the right to receive management fees to Newfit while BFG maintained the burdens and liabilities of the agreement for little or no consideration. There are no allegations that the management agreement was breached as a result of Newfit’s involvement or interference, and the claims are more in the nature of fraudulent transfer and/or aiding and abetting breach of fiduciary duty claims which are asserted in other counts of the complaint. Accordingly, I will enter an order allowing Newfit’s motion to dismiss counts XX and XXI.
E. Count XXIII-Substantive Consolidation
In count XXIII, the trustee asserts that the assets and liabilities of BFG and the count XXIII defendants are intertwined and that inequity and harm would result to creditors if BFG were able to shed its liabilities while maintaining its assets through those defendants. He requests that the defendants’ assets and liabilities be substantively consolidated into BFG’s bankruptcy estate. Newfit notes disagreement among courts as to whether a debtor and non- debtor entity can be substantively consolidated. See, e.g., Helena Chem. Co. v. Circle Land and Cattle Corp. (In re Circle Land and Cattle Corp.), 213 B.R. 870, 876 (Bankr. D. Kan. 1997) (“There is doubt, however, whether the bankruptcy court has either subject matter or personal jurisdiction over a non-debtor.”). Newfit maintains that even where recognized, substantive consolidation should be used sparingly, citing In re Owens Corning, 419 F.3d 195, 208–09 (3d Cir. 2005) (footnotes omitted) (citing Union Savings Bank v. Augie/Restivo Baking Co., Ltd. (In re Augie/Restivo Baking Co., Ltd.), 860 F.2d 515, 518 (2d Cir. 1988)), as amended (Aug. 23, 2005), as amended (Sept. 2, 2005), as amended (Oct. 12, 2005), as amended (Nov. 1, 2007) (“Whatever the rationale, courts have permitted substantive consolidation as an equitable remedy in certain circumstances. No court has held that substantive consolidation is not authorized, though there appears nearly unanimous consensus that it is a remedy to be used ‘sparingly.’”).
1. Applicable Law
Substantive consolidation “has been long recognized . . . [as] a valid exercise of the courts’ equitable powers under § 105.” Gray v. O’Neill Props. Grp., L.P. (In re Dehon, Inc.), No. 02–41045, 2004 WL 2181669, at *3 (Bankr. D. Mass. Sept. 24, 2004); see also 11 U.S.C. §
105(a) (“The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.”). “Bankruptcy courts may substantively consolidate two or more related entities and thereby pool their assets. Substantive consolidation ‘treats separate legal entities as if they were merged into a single survivor left with all the cumulative assets and liabilities.’” Logistics Info. Sys., Inc. v. Braunstein (In re Logistics Info. Sys., Inc.), 432 B.R. 1, 10 (D. Mass. 2010) (quoting Genesis Health Ventures, Inc. v. Stapleton (In re Genesis Health Ventures, Inc.), 402 F.3d 416, 423 (3d Cir. 2005)).
In Woburn Assocs. v. Kahn (In re Hemingway Transp., Inc.), the First Circuit stated:
Consolidation is permitted only if it is first established that the related debtors’ assets and liabilities are so intertwined that it would be impossible, or financially prohibitive, to disentangle their affairs. . . The trustee may request consolidation to conserve for creditors the monies which otherwise would be expended in prolonged efforts to disentangle the related debtors’ affairs. . . Nevertheless, the bankruptcy court must balance the potential benefits of consolidation against any potential harm to interested parties.
954 F.2d 1, 11 n.15 (1st Cir. 1992) (internal citations omitted). The court added that because “[substantive] consolidation can cause disproportionate prejudice among claimants required to share the debtors’ pooled assets, the party requesting substantive consolidation must satisfy the bankruptcy court that, on balance, consolidation will foster a net benefit among all holders of unsecured claims.” Id. at 12 (footnote omitted) (emphasis in original); see also Lassman v.
Cameron Construction LLC (In re Cameron Construction & Roofing Co., Inc.), 565 B.R. 1 (Bankr. D. Mass. 2016) (noting that while substantive consolidation of two or more debtors’ estates is widely accepted, a court, in an appropriate case, may also order the substantive consolidation of a debtor and non-debtor).
As stated in Blast IV, I see no bar to substantive consolidation of a debtor and a non- debtor under appropriate circumstances, where, such as here, a complaint alleges with particularity a scheme among a principal and numerous entities he formed and controlled for the purpose of acquiring, diverting and transferring valuable assets and profit opportunities from a debtor to avoid the reach its creditors. See Gray v. O’Neill Props. Grp., L.P., 2004 WL 2181669, at *3 (“Large corporations, such as the Debtor, often use multi-tiered corporate structures, and substantive consolidation has been used to reach the assets and liabilities of a non-debtor subsidiary corporation.”). I find sufficient allegations in the complaint to plausibly support the conclusion that the assets and liabilities of BFG and Newfit were intertwined and that avoiding (already) protracted efforts to disentangle their affairs would be a net benefit to the estate. The complaint alleges with specificity that Newfit was organized in 2013 as a vehicle created by Mr. Dixon for the sole purpose of acquiring BFG assets (even prior to its legal existence) through a series of fraudulent transfers with BFG from 2013 through 2015 while BFG was being pursued by Ms. Beninati and then by landlords and other third parties over lease defaults. I find the trustee has alleged sufficient facts at this stage of the proceedings to support a plausible claim for substantive consolidation of Newfit and BFG. I will enter an order denying Newfit’s motion to dismiss count XXIII.
F. Count XXV-Alter Ego/Piercing the Corporate Veil
In count XXV, the trustee asserts that defendants including Mr. Dixon, CapeCapital, Newfit, Lexfit, the BFG subsidiaries, the Cape Real Estate Entities and others each exercised pervasive control over BFG (and each other) and engaged in confused intermingling of business activity, assets and management. He seeks an order piercing the corporate veils separating those defendants and BFG and an order finding them liable as “alter egos” and thus liable for BFG’s debts.
1. Applicable Law
In Massachusetts, corporations and their shareholders are generally deemed to be distinct legal entities. See Berger v. H.P. Hood, Inc., 416 Mass. 652, 657 (1993). Under unusual circumstances, however, a court may disregard the separateness of entities, particularly to defeat fraud or remedy an injury. See id. These efforts are often characterized as veil piercing or establishing alter ego status. “The doctrines of veil piercing . . . and alter ego are interrelated and litigants often use the terms interchangeably. Indeed, a party may seek to pierce a corporate veil under an alter ego theory which is equitable in nature.” Butler v. Candlewood Road Partners, LLC (In re Raymond), 529 B.R. 455, 471 (Bankr. D. Mass. 2015) (citing Weiss v. Lockwood, 499
B.R. 392, 394 (D. Mass. 2013) (citing Miranda v. Gonzalez (In re Gonzalez), No. 02–05485– BKT, Adv. P. No. 09–150, 2010 WL 3395677, at *2 (Bankr. D.P.R. Aug. 23, 2013) (footnote omitted)). “Nevertheless, veil piercing and alter ego can be distinguished.” The Patriot Grp., LLC v. Fustolo (In re Fustolo), 597 B.R. 1, 47 (Bankr. D. Mass. 2019) (citing U.S. Trustee v. Zhang (In re Zhang), 463 B.R. 66, 81 (Bankr. S.D. Ohio 2012)). ‘“The former asks a court to hold A vicariously liable for B’s debts, while the latter asserts that A and B are the same entity and therefore liability is direct.’” Id. (citing IUUA Local 600 v. Aguirre, 410 F.3d 297, 302 (6th Cir. 2005) (footnote omitted)).
In My Bread Baking Co. v. Cumberland Farms, Inc., the Massachusetts Supreme Judicial Court (“SJC”) considered “[t]he circumstances in which one corporation, or a person controlling it, may become liable for the acts or torts of an affiliate or a subsidiary under common control . .
. .” 353 Mass. 614, 618-19 (1968). It explained that it is appropriate to depart from the general principle of corporate separateness in two situations:
- when there is active and direct participation by the representatives of one corporation, apparently exercising some form of pervasive control, in the activities of another and there is some fraudulent or injurious consequence of the intercorporate relationship, or (b) when there is a confused intermingling of activity of two or more corporations engaged in a common enterprise with substantial disregard of the separate nature of the corporate entities, or serious ambiguity about the manner and capacity in which the various corporations and their respective representatives are acting. In such circumstances, in imposing liability upon one or more of a group of ‘closely identified’ corporations a court ‘need not consider with nicety which of them’ ought to be held liable for the act of one corporation ‘for which the plaintiff deserves ’
Id. (internal citation omitted).15
“The doctrine of corporate disregard is an equitable tool that authorizes courts, in rare situations, to ignore corporate formalities, where such disregard is necessary to provide a meaningful remedy for injuries and to avoid injustice.” Attorney General v. M.C.K., Inc., 432 Mass. 546, 555 (2000). In M.C.K, the SJC listed the factors to be considered when courts engage in an analysis of the My Bread principles:
15 See Riley v. Tencara, LLC (In re Wolverine, Proctor & Schwartz, LLC), 447 B.R. 1, 36 (Bankr. Mass. 2011) ( “Although the standards for piercing the corporate veil are articulated most frequently with respect to corporations, this Court concludes that the same principles would apply for alter ego liability to attach to members of limited liability companies.”).
The relevant factors are (1) common ownership; (2) pervasive control; (3) confused intermingling of business assets; (4) thin capitalization; (5) nonobservance of corporate formalities; (6) absence of corporate records; (7) no payment of dividends; (8) insolvency at the time of the litigated transaction; (9) siphoning away of corporation’s funds by dominant shareholder; (10) nonfunctioning of officers and directors; (11) use of the corporation for transactions of the dominant shareholders; and (12) use of the corporation in promoting fraud.
Id. at 555 n.19 (citing Pepsi-Cola Metro. Bottling Co. v. Checkers, Inc., 754 F.2d 10, 14-16 (1st Cir. 1985) (categorizing criteria set forth in My Bread); Evans v. Multicon Constr. Corp., 30 Mass. App. Ct. 728, 733 (1991)); see also Birbara v. Locke, 99 F.3d 1233, 1240 (1st Cir. 1996) (“My Bread sets the standard for deciding when to pierce the corporate veil under Massachusetts law; Pepsi-Cola elucidates some factors that may be considered when engaging in a My Bread analysis.”). “Massachusetts courts employ the alter ego doctrine to determine whether a principal of a corporation is its alter ego using the My Bread Baking Co. factors.” In re Fustolo, 597 B.R. at 50.
Since its ruling in My Bread, the SJC has observed that under Massachusetts law, the corporate veil will only be pierced in rare situations. See, e.g., Spaneas v. Travelers Indem. Co., 423 Mass. 352, 354 (1996) (“Only in rare instances, in order to prevent gross inequity, will a Massachusetts court look beyond the corporate form.”) (citing My Bread, 353 Mass. at 620).
With respect to count XXV, I find the trustee has alleged sufficient facts supporting “fraudulent or injurious consequence of the intercorporate relationship” and “confused intermingling” as a basis for corporate disregard of Newfit under My Bread, having specifically pleaded a number of the factors set forth in M.C.K. The gravamen of the complaint against Mr. Dixon and Newfit is the gross inequity and injury to BFG’s creditors resulting from alleged fraudulent and improper use of numerous entities Mr. Dixon controlled, including Newfit, to misappropriate and divert BFG’s assets beyond creditors’ reach while BFG was insolvent. The trustee has sufficiently supported his claims with specific allegations concerning Mr. Dixon’s pervasive control over Newfit (and its control over BFG), which was managed by him and CapeCapital, of which he was the sole manager and a member. Further, the trustee has sufficiently alleged that Mr. Dixon formed and/or used Newfit and other entities to promote fraudulent transactions in a common enterprise which benefited him and his affiliates. Lastly, he has included numerous allegations regarding intermingling of business activity and assets among BFG and Newfit. Both entities shared the same manager, office space, counsel, and director of finance, and Newfit’s assets such as profitable fitness clubs, intellectual property, and rights under the management agreement were all acquired from BFG and its subsidiaries. While mindful that veil piercing will be permitted in only rare situations, I find at the Rule 12(b)(6) stage, with all reasonable inferences drawn in the trustee’s favor, the allegations are sufficient to support a plausible claim for veil piercing and/or alter ego determination against Newfit and the numerous Dixon-controlled entities. I will enter an order denying Newfit’s motion to dismiss count XXV.
Based on the foregoing, an order shall enter granting Newfit’s motion to dismiss with respect to counts XIX, XX, XXI, XXIV, and XXIX of the trustee’s amended complaint and denying the motion with respect to counts VI, XVI, XVII, XXIII, and XXV.
Dated: May 24, 2019 By the Court,
Melvin. S. Hoffman
United States Bankruptcy Judge
Counsel Appearing: Ilyas J. Rona, Esq.
Milligan Rona Duran & King LLC Boston, MA
for the plaintiff, Gary W. Cruickshank, Trustee of the Estate of Blast Fitness Group, LLC
Joseph S.U. Bodoff, Esq. Rubin & Rudman LLP Boston, MA
for the defendant, Newfit LLC
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