Opinion
SUCV20171617BLS1
12-18-2017
ACCUTRAX, LLC v. FINNEGAN HENDERSON FARABOW GARRETT & DUNNER, LLP
File Date: December 20, 2017
MEMORANDUM AND ORDER ON DEFENDANT’S MOTION TO DISMISS
Edward P. Leibensperger, Justice
In this legal malpractice action the defendant law firm moves to dismiss on the ground that the plaintiff, Accutrax, LLC, was not the firm’s client. There is no question, however, that the law firm was engaged to perform the legal services described in the First Amended Complaint (FAC). There is also no question that the FAC adequately pleads a claim for professional malpractice and the other related claims, assuming that the plaintiff is the client of Finnegan. Thus, the issue presented is whether the sole plaintiff, Accutrax, LLC, has standing as a client to assert the claims.
BACKGROUND
The following facts are taken from the First Amended Complaint (FAC), and the documents attached to the FAC as exhibits.
Three individuals acted as partners, or joint venturers, to patent and market a razor utility knife. They agreed to form a Delaware LLC to pursue the project. One partner, Kildevaeld agreed to assign his ownership and patent rights to the LLC in exchange for contributions by the other two partners, Billado and Cumings, to commercialize and market the knife. The three partners went to defendant, Finnegan, Henderson, Farabow, Garrett & Dunner, LLP (Finnegan) to obtain legal counsel for their enterprise.
The partners informed Finnegan that they intended to form a Delaware LLC with the name " Contractor Trusted, LLC." They informed Finnegan that the LLC had not yet been formed. Nevertheless, Finnegan prepared an engagement letter for the legal representation, designating the client as " Contractor Trusted, LLC." The engagement letter, dated March 4, 2013, was signed by Billado on behalf of Contractor Trusted, LLC. The engagement letter made it clear that Finnegan’s client was Contractor Trusted, LLC and not any officer, director, shareholder or employee of the LLC. The engagement letter attached an invoice for $5,000. On March 6, 2013, the invoice was paid by a check from Billado.
The partners intended to market the knife under the name Accutrax. When they finally incorporated the anticipated LLC, they decided to name the corporation Accutrax, LLC, instead of Contractor Trusted, LLC. Accutrax, LLC was formed on June 6, 2013. No entity by the name of Contractor Trusted, LLC was ever formed. All three partners became members of Accutrax, LLC. " Finnegan had actual as well as constructive knowledge that Kildevaeld, Billado, and Cumings used the name Accutrax, LLC instead of Contractor Trusted, LLC for their LLC." FAC ¶ 35.
Finnegan proceeded to perform legal services. Billado provided to Finnegan a prior art search result that he had from another attorney. Invoices for April and May 2013 were sent by Finnegan to " Contractor Trusted, LLC" for attorney time and disbursements in connection with the patent application for, as noted on the bills, " Accutrax." The invoices were promptly paid by Billado. Accutrax, LLC alleges that " [b]etween March 2013 and August 2013, Billado paid Finnegan approximately $15,000 on behalf of the LLC for the engagement." FAC ¶ 38.
Accutrax, LLC alleges that, counter to the understanding when the partners engaged Finnegan, Finnegan prosecuted the patent application on behalf of Kildevaeld, not the LLC. A patent for the knife was issued to Kildevaeld, individually. Finnegan did not prepare and obtain an assignment of the patent rights from Kildevaeld to the LLC.
At some time later, after Accutrax LLC was formed, Finnegan took the position that it represented Kildevaeld, individually, not Accutrax, LLC. Finnegan denied that it represented any corporation in connection with the patent application for the knife. The three partners continued as members of Accutrax, LLC to seek marketing opportunities for the knife. In October 2014, Kildevaeld asserted that the patent belonged to him, and began to negotiate for a deal in his own right. Accutrax, LLC alleges that Finnegan assisted Kildevaeld with respect to his claim of ownership of the patent rights, in violation of Finnegan’s fiduciary duty to the LLC. The dispute between Accutrax, LLC and Kildevaeld caused Accutrax, LLC to be unable to secure marketing contracts, thereby causing damage to Accutrax, LLC.
The FAC indicates that Kildevaeld is no longer a member of Accutrax, LLC. At oral argument, reference was made to litigation (in another county in Massachusetts) between the original partners who formed Accutrax, LLC.
DISCUSSION
To survive a motion to dismiss, a complaint must set forth the basis for the plaintiff’s entitlement to relief with " more than labels and conclusions." Iannacchino v. Ford Motor Co., 451 Mass. 623, 636, quoting Bell A. Corp. v. Twombly, 550 U.S. 544, 555 (2007). At the pleading stage, Mass.R.Civ.P. 12(b)(6) requires that the complaint set forth " factual ‘allegations plausibly suggesting (not merely consistent with)’ an entitlement to relief ..." quoting Bell A. Corp., 550 U.S. at 557. The court must, however, accept as true the allegations of the complaint and draw every reasonable inference in favor of the plaintiff. Curtis v. Herb Chambers I- 95, Inc., 458 Mass. 674, 676 (2011).
Finnegan’s argument to dismiss Accutrax, LLC amounts to a contention that the individual partners should be substituted as plaintiffs. Finnegan understood that it was entering into a client relationship with a yet-to-be organized LLC. It began work knowing the corporation was not yet organized. " It is hornbook law" that a contract with a corporation not yet in existence may be enforced by and against the promoters of the corporation. Stonewood Capital Management, Inc. v. Giner, 2013 WL 49771 *2 (U.S.Dist.Ct., D.Mass. 2013); Island Transportation Co., Inc. v. Cavanaugh, 54 Mass.App.Ct. 650, 654 (2002) (promoter of nascent corporation is " liable upon, and entitled to the benefit of, contract that he had made in behalf of the corporation to be formed"). If the individual partners/promoters were the plaintiffs in this action, Finnegan’s motion to dismiss would fail. Finnegan owed a duty of loyalty to all three partners. If two of the three partners can prove that Finnegan acted to the detriment of those partners in order to benefit third partner, a valid claim is shown. That is the substance of the FAC.
That said, the question becomes whether the later-formed corporation may also enforce the contract. In this case, that question is whether the later-formed corporation may assert claims as a client of Finnegan.
Both parties cite the hoary decision of Chief Justice Holmes in Holyoke Envelope Co. v. United States Envelope Co., 182 Mass. 171 (1902) as authority for their respective positions. In that case, the Court articulated two theories under which a later-formed corporation could be held to be a party to a contract formed before the corporation existed. First, the later-formed corporation might have, after it came into existence, accepted what was an offer to contract by the opposite party. Second, the later-formed corporation may become a party to the contract pursuant to " an express or implied undertaking." Id. at 175. The Court concluded that a fact question was presented by those two legal theories and the case was remanded. id.
I read Holyoke Envelope to suggest that whether a later-formed corporation may sue or be sued under a contract executed before the corporation came into existence depends upon the reasonable expectations and intent of the parties. If the parties intended and agreed to enter into a contract with a corporation yet to be formed, and the later-formed corporation is consistent with the parties’ expectations, the later-formed corporation may become a party to the contract either by way of acceptance of the terms of the contract or by implication from conduct after the corporation is formed. Whether the parties reached an agreement is a fact question.
At the motion to dismiss stage, Accutrax, LLC pleads sufficient facts to support the inference that it became the client of Finnegan and is entitled to sue for malpractice. By the terms of the engagement letter, Finnegan expected that a yet to be formed LLC would be its client. In fact, Finnegan specified that the LLC, not the officers, directors, shareholders or employees, was the client. Further, Finnegan knew that the yet to be formed LLC would have as its members all three of the partners/promoters. The LLC that was formed by the three partners/promoters (Accutrax, LLC) was perfectly in line with Finnegan’s expectations. The mere fact that the anticipated name (Contractor Trusted, LLC) was changed to Accutrax, LLC by the partners/promoters is immaterial to the parties’ expectations and intent at the time of contract. There was no change in the parties’ obligations and no increase in burden or standard of care to Finnegan. Accepting the allegations of the FAC as true, Accutrax, LLC states cognizable claims arising from its status as a client of Finnegan.
Finnegan also argues that the FAC should be dismissed because, at the time of filing the initial complaint, Accutrax, LLC was not registered with the Massachusetts Secretary of State’s office under G.L.c. 156C, § 48. Finnegan concedes that Accutrax, LLC registered prior to filing the FAC. I find that such registration ends Finnegan’s argument. See G.L.c. 156C, § 54.
ORDER
For the reasons stated above, Finnegan’s motion to dismiss (Paper No. 8) is DENIED.