Summary
denying defendant's motion to dismiss where defendant's headquarters and the source of the alleged misrepresentations were in Massachusetts but where defendant did not make any in-person misrepresentations to plaintiff in any other location
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SUCV201701140BLS2
10-13-2017
Peter TREMATERRA et al. v. MAJOR LEAGUE LACROSSE, LLC et al.
Caption Date: October 12, 2017
MEMORANDUM OF DECISION AND ORDER ON DEFENDANTS’ MOTION TO DISMISS
Janet L. Sanders, Justice
Major League Lacrosse, LLC (MLL or the League) operates a professional outdoor lacrosse sports league. In 2014, Peter Trematerra entered into negotiations with MLL and its commissioner David Gross to introduce an Atlanta-based team into the League. After a year of negotiations, Trematerra formed Atlanta Lacrosse Club, LLC (Atlanta Lacrosse), which purchased an equity interest in MLL and began to operate a team known as the Atlanta Blaze. In the instant action, Trematerra and Atlanta Lacrosse, as the named plaintiffs, allege that during these negotiations, Gross made several misrepresentations regarding MLL’s profitability and that he also failed to disclose, among other things, that the League had sold its broadcast and sponsorship rights at far below market value to companies owned or controlled by other MLL equity holders. Plaintiffs further allege that, after Atlanta Lacrosse became a MLL member, the League’s Board of Managers and Gross breached numerous fiduciary and contractual obligations. The defendants, which include Gross, MLL, and other individuals and entities, now move to dismiss the Complaint pursuant to Mass.R.Civ.P. 23.1 and 12(b)(6). For the reasons that follow, this Court concludes that the defendants’ Motion must be Denied, in part and Allowed in part.
BACKGROUND
The following is drawn from the allegations in the Complaint together with the exhibits attached thereto.
MLL currently has ten members, including Atlanta Lacrosse and MLL Founding Members, LLC (MFM). MFM owns five of the League’s fourteen Teams Units, which equates to 35.72 percent of the membership equity in MLL. The remaining nine Team Units are each owned by Atlanta Lacrosse and eight other LLCs, which operate the League’s nine lacrosse teams. Defendant James Davis holds interests in some of these LLCs. Each MLL member elects one individual to serve on MLL’s Board of Managers (the Board). Members approve or deny Board actions in proportion to their respective shares of equity. MLL is a Delaware LLC.
In April 2008, several years before Atlanta Lacrosse became an MLL member, the League entered a Broadcast and Digital Rights License Agreement (the Broadcast Agreement) with defendant Lax United Marketing, LLC (LUM). LUM is an entity that was created to produce, market, and license television, internet streaming, and broadcast rights to League games and other League promotional events. At the time, Gross, the League’s Commissioner and COO, was the president of LUM. MFM, defendant New Balance Athletics, Inc. (New Balance), and Davis, who had a controlling interest in New Balance, held equity interests in LUM. Under the Broadcast Agreement, MLL engaged LUM to produce all League games and events and create a League website. The plaintiffs allege that, because of the interconnection between LUM, Gross, Davis, and MFM, the League sold its broadcast rights to LUM for consideration that was not commercially reasonable.
The League also held a 4.5 percent equity interest in LUM.
MLL also entered into Sponsorship Agreements with New Balance and two lacrosse equipment manufacturers, Warrior and Brine, Corp. This too took place before Atlanta Lacrosse became an MLL member. Warrior is a wholly-owned New Balance subsidiary; Brine, Corp., which was founded by one of MFM’s members, is currently controlled by Davis. The plaintiffs assert that, due to the interconnection between New Balance Warrior, Brine, MFM, and Davis, the League sold its sponsorship rights at far below market value.
In 2014, plaintiff Trematerra entered into negotiations to form an Atlanta-based lacrosse team and join MLL. It is alleged that during these negotiations, Gross made various misrepresentations about the League’s profitability and presented Trematerra with information and documents that inaccurately reflected the League’s current and future prospects. Gross also failed to disclose, among other things, the Broadcast Agreement, the lack of monetary consideration LUM gave in connection with the Broadcast Agreement, Davis and MFM’s interest in LUM, the Sponsorship Agreements with New Balance, Warrior, and Brine, and Davis’ control of these entities.
In July 2015, Trematerra formed Atlanta Lacrosse and purchased an equity interest in MLL pursuant to a Unit Purchase Agreement (the UPA). The parties to the UPA were Trematerra, Atlanta Lacrosse, and MLL. At the same time, Atlanta Lacrosse and MLL entered into a " Fifth Amended and Restated Limited Liability Company Agreement" (the LLC Agreement) and a Team Management Agreement (the TM Agreement). The UPA, the LLC Agreement, and the TM Agreement are each governed by Delaware law. The LLC and TM Agreements also contain arbitration provisions. The plaintiffs allege that since 2015, Gross and the Board are in breach of these agreements and have also breached their fiduciary duties to plaintiffs.
In April 2017, plaintiffs filed this lawsuit. The Complaint asserts the following claims: misrepresentation against Gross and MLL (Count 1); fraudulent inducement against Gross and MLL (Count 2); violation of G.L.c. 93A, § 11 against MLL (Count 3); breach of the LLC Agreement against MLL (Count 4); breach of the TM Agreement against MLL (Count 5); breach of fiduciary duty against Gross (Count 6); aiding and abetting Gross’s breach of fiduciary duty against Davis, MFM, and LUM (Count 7); breach of fiduciary duty against MLL (Count 8); aiding and abetting MLL’s contractual breach of fiduciary duty against LUM and New Balance (Count 9); declaratory judgment against MLL (Count 10); conversion against MFM, Gross, Davis, LUM, and New Balance (Count 11); breach of the implied covenant of good faith and fair dealing against MLL (Count 12); and unjust enrichment against LUM and New Balance (Count 13). Defendants move to dismiss all of these claims.
DISCUSSION
The plaintiffs’ sprawling thirteen-count Complaint has been pled in a disorganized fashion, making it difficult for the Court to analyze each claim separately. The counts, however, appear to fall into three categories. Counts 1 through 3 each arise from alleged misrepresentations and omissions made by Gross to induce Trematerra to enter into the UPA. Counts 4 and 6 through 13 concern alleged failures by Gross and the Board to comply with their obligations under the LLC Agreement. These counts also challenge their decision to enter into the Broadcast and Sponsorship Agreements before Atlanta Lacrosse was a League member. Finally, Count 5 asserts that MLL breached Section 2.12 of the TM Agreement by requiring Atlanta Lacrosse to outfit Atlanta Blaze players in merchandise at commercially unreasonable prices. This Court concludes that many- but not all- of these counts fail to state a claim upon which relief can be granted. I explain my reasoning based on the three categories of counts outlined above.
A. Counts 1 through 3
Counts 1 and 2 allege fraudulent misrepresentation and " fraudulent inducement" in connection with plaintiff Trematerra’s decision to purchase an interest in the League. Count 3 alleges a violation of Chapter 93A and appears to be based at least in part on that same course of conduct. Defendants argue that plaintiffs are barred from pursuing these claims, however, as a result of a specific provision in the UPA, which states that it " is being entered into after full investigation, no party relying upon any statement or representation not embodied in this Agreement made by others." See Section 14 of UPA, attached to Complaint as Exhibit A. Section 4 of the UPA sets forth the specific representations and warranties made by MLL that are part of the agreement and none of them relate to any of the matters that form the basis for the misrepresentation claims now made by plaintiffs. Defendants contend that, as a result of this so-called " anti-reliance clause, " Counts 1 through 3 must be dismissed. The UPA is not as clear and unambiguous as the defendants assert, however.
The first sentence of Section 14 is a merger clause which states: " All understandings and agreements previously existing among the parties are merged in this Agreement [the UPA] and the LLC Agreement (including any amendments thereto) which alone fully and completely express their agreement." (Emphasis added.) Section 10 of the UPA further provides that:
The Unit, and any Transfer thereof, is being acquired subject to the terms and condition of that certain Fifth Amended and Restated Limited Liability Company Agreement ... a copy of which has been provided to the Buyer [Atlanta Lacrosse] (the " LLC Agreement"). The Buyer hereby joins in, and agrees to be bound by, and shall have the benefit of, and shall be subject to all obligations under, all of the terms and conditions of the LLC Agreement to the same extent as if the Buyer was an original party to the LLC Agreement.(Emphasis added.) When read together, Section 10 and Section 14’s merger clause suggest that the UPA incorporates the LLC Agreement and that therefore its provisions are part of the UPA. See Pauley Petroleum, Inc. v. Continental Oil Co., 43 Del.Ch. 366, 377 (1967) (" When an executed contract refers to another instrument and makes the conditions of the other instrument a part of it, the two will be interpreted together as the agreement of the parties"). This is significant, since the LLC Agreement does not contain a similar " anti-reliance" clause. Indeed, it states that the parties to that agreement have been provided with certain information, and suggests (at least inferentially) that the parties are entitled to rely on that information in determining whether to invest. See Section 3.10(g) of the LLC Agreement, attached to Complaint as Exhibit B. The Complaint alleges that at least some of the misrepresentations made to Trematerra were contained in the documents and information that Section 3.10(g) appears to reference. Thus, if this section is incorporated into the UPA, it would not prevent the plaintiffs from complaining (as they do here) that the documents and information that they were provided in making their decision were misleading or contain false statements. At the very least, reading the UPA together with the LLC Agreement, this Court concludes that there are ambiguities which cannot be resolved without looking to evidence regarding the intent of the parties. Dismissal of these counts is therefore inappropriate.
Specifically, Section 3.10(g) of the LLC Agreement provides that:
... the Member has received and reviewed this Agreement; it, its attorney and its accountant have had access to, and an opportunity to review all documents and other materials requested by the Company; it and they have been given an opportunity to ask any and all questions of, and receive answers from, the Company concerning the terms and conditions of the offering and to obtain all information it or they believe necessary or appropriate to verify the accuracy of this Agreement and any other documents and materials requested of the Company, and to evaluate the suitability of an investment in the Units and in evaluating the suitability of an investment in the Units, it and they have not relied upon any representations or other information (whether oral or written) other than as set forth in the documents and answers referred to above.
Defendants argue more generally that Count 3, the 93A claim, must be dismissed because the underlying conduct (here, Gross’s alleged misrepresentations and omissions) did not occur " primarily and substantially" in Massachusetts as required by G.L.c. 93A, § 11. Whether that threshold requirement is met is necessarily a fact intensive inquiry, however, which can rarely be decided at this early stage in the case. Indeed, the Supreme Judicial Court has stated that it requires the Court to makes findings of fact and then to consider those findings " in the context of the entire § 11 claim, [to] determine whether the center of gravity of the circumstances that give rise to the claim is primarily and substantially within the Commonwealth." See Kuwaiti Danish Computer Co. v. Digital Equip. Corp., 438 Mass. 459, 473 (2003) (reviewing trial court’s decision allowing summary judgment). Taking the allegations in the Complaint as true (as I must), this Court cannot conclude at this juncture that this requirement cannot be satisfied, particularly since MLL (presumably the source of the misrepresentations at issue) is headquartered in Massachusetts.
B. Counts 4 and 6 through 13
Count 4 and Counts 6 through 13 concern failures by Gross and the Board to comply with a variety of obligations under the LLC Agreement after Atlanta Lacrosse joined the League. They also challenge the League’s decisions to enter into the Broadcast and Sponsorship Agreements- decisions made before Atlanta Lacrosse was a League member. This Court concludes that all but three of these counts must be dismissed because they are derivative claims, and plaintiffs have not complied with the procedural requirements that must be satisfied in order to assert those claims. As to Count 8- one of three counts that assert a direct claim- there is an independent reason to dismiss it.
The parties agree that Delaware law applies to the issues before me. Applying Delaware law, this Court determines whether a claim is derivative or direct by answering two questions: 1) who suffered the alleged harm; and 2) who would receive the benefit of any recovery or other remedy? Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033, 1035 (Del. 2004). Where the alleged injury affects all stockholders as a function of and in proportion to their pro rata interests in the corporation, the claim is derivative. In re Digex, Inc. S’holders Litig., 789 A.2d 1176, 1189 (Del.Ch. 2000); Anglo Am. Security Fund, L.P. v. S .R. Global Int’l Fund, L.P., 829 A.2d 143, 150 (Del.Ch. 2003). Conversely, where the alleged injury is different from that of other shareholders or involves contractual rights independent of the entity’s rights, the claim is direct. Anglo Am. Security Fund, L.P., 829 A.2d at 850. In other words, a claim is direct only if the claimed injury is " independent of any alleged injury to the corporation." Tooley, 845 A.2d at 1039.
Counts 6, 7, and 9 and Counts 11-13 are all based on alleged wrongdoing which affected all MLL members and are not particular to the plaintiffs. Each of these Counts rests on the MLL Board’s decision to enter into the Broadcast and Sponsorship Agreements. Any harm flowing from those Agreements, however, was inflicted on MLL itself and affected its members only secondarily in proportion to their pro rate investments. That defendants MFM and Davis may nave benefited financially from these agreements does not make these claims any less derivative. Both defendants would have received that benefit as a result of their interests in LUM, New Balance, Warrior, or Brine Corp. As members of MLL, however, they suffered the same injury to their interest as Atlanta Lacrosse.
Although the defendants did not emphasize this point either in their memoranda or at the argument on the motion, these counts suffer from an additional defect. The decision to enter into these agreements was made before Trematerra even became a member of MLL. Thus, it would appear that Trematerra has no standing to complain about those decisions.
Counts 4 and 8 are largely- but not entirely- derivative in nature. Like the counts discussed above, these two counts rest at least in part on allegations relating to the Broadcast and Sponsorship Agreements and are derivative for the reasons explained above. In addition, these counts allege that the Board artificially inflated League profits, failed to present a potential merger offer, did not properly document Board meetings, and failed to prepare a proper Annual League Budget or did not retain certified public accountants to review the League’s financial statements and prepare its tax returns. Any harm from these actions were suffered by all MLL members and only injured the plaintiffs to the extent of their proportionate interest in MLL, and therefore are derivative in nature. These claims are direct, however, to the extent they are based on allegations that the Board denied Trematerra access to the League’s books and records, improperly allocated income and issued a 2015 K-1 to Atlanta Lacrosse, and overbilled Atlanta Lacrosse at commercially unreasonable prices for certain items in violation of the LLC Agreement. Count 10, which seeks a declaratory judgment that the League must provide plaintiffs with access to its books and records, is also direct. These allegations concern contractual rights owed specifically to Atlanta Lacrosse and involve injuries suffered by Atlanta Lacrosse alone.
Although some portion of Count 8 can be asserted as a direct claim, there is an independent reason to dismiss this count. Count 8 alleges that MLL breached its fiduciary duties, but as the Complaint itself states, those duties arise from the LLC Agreement. Complaint at ¶ 139. That portion of Count 4 that survives as a direct claim is based on the same course of conduct as the direct portion of Count 8 and is framed as a claim for breach of the LLC Agreement. " Delaware respects the primacy of contract law over fiduciary law in matters involving contractual rights and obligations and does not allow fiduciary duty claims to proceed in parallel with breach of contract claims unless there is an independent basis for the fiduciary duty claims apart from the contractual claims." Renco Group, Inc. v. MacAndrews AMG Holdings, LLC, (January 29, 2015) (internal quotes omitted). Count 8 is thus duplicative of Count 4 and must be dismissed.
C. Count 5
Count 5 alleges that MLL violated Section 2.12 of the TM Agreement by requiring Atlanta Lacrosse to outfit Atlanta Blaze players in merchandise at commercially unreasonable prices. Section 7.1 of the TM Agreement, however, contains an arbitration clause, which provides that " all controversies, claims or disputes of a monetary value exceeding $50,000 arising out of, under, in connection with, or relating to (a) this Agreement, or any amendment hereof, [or] (b) the breach hereof ... shall be determined and settled by arbitration ..." Plaintiffs do not allege that the monetary value of the claim falls outside the scope of the arbitration clause, which is clear and unambiguous. Count 5 must therefore be dismissed because this claim must be arbitrated.
CONCLUSION AND ORDER
For the forgoing reasons, the defendants’ Motion to Dismiss is ALLOWED as to Counts 5 through 9 and Counts 11 through 13. It is DENIED as to Counts 1 through 4 and Count 10.