Venditto v. Cunningham
Filing
15
Judge Rya W. Zobel: Memorandum of Decision and ORDER entered granting 9 Motion to Dismiss for Failure to State a Claim in its entirety. Judgment may be entered dismissing the complaint. (Urso, Lisa)
Case 1:17-cv-11966-RWZ Document 15 Filed 07/27/18 Page 1 of 10
UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
CIVIL ACTION NO. 17-11966-RWZ
MICHAEL VENDITTO
v.
GLEN CUNNINGHAM
MEMORANDUM OF DECISION AND ORDER
July 27, 2018
ZOBEL, S.D.J.
In 2005, the parties, then longtime friends, formed a yoga business called
Sadhana, LLC. Plaintiff Michael Venditto, a Massachusetts resident, invested over
$200,000 in the venture and managed its two properties, as well as the accounting and
legal matters. Defendant Glen Cunningham, a New Hampshire resident, was a yoga
instructor responsible for day to day operations, employee oversight, and
recordkeeping. Although defendant claimed business was slow but improving, by 2016
the parties agreed to sell the business assets. As part of the sale, plaintiff purportedly
discovered that defendant had been using both Sadhana locations to generate income
he neither reported to, nor shared with, the business. In this lawsuit, plaintiff alleges
fraud and various related claims to recover his investment. Defendant moves to dismiss
all claims.
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I.
Factual Background
The facts are recited as alleged in plaintiff’s complaint (Docket # 1-1), see
Ocasio-Hernández v. Fortuño-Burset, 640 F.3d 1, 5 (1st Cir. 2011), augmented by
“documents annexed to it or fairly incorporated into it, and matters susceptible to judicial
notice.” Centro Medico del Turabo, Inc. v. Feliciano de Melecio, 406 F.3d 1, 5 (1st Cir.
2005). 1
With two others (Rolf and Mariam Gates), plaintiff and defendant registered
Sadhana, LLC, with the Massachusetts Secretary of State’s Office on March 1, 2005,
initially naming only Mariam Gates as manager. Three months later, they filed an
Amended and Restated Certificate of Organization designating plaintiff, defendant, Rolf
Gates, and Mariam Gates as managers. Nonetheless, Rolf and Mariam Gates departed
soon thereafter pursuant to a buy-out agreement dated October 1, 2005.
Because the managers executed no partnership agreement, operating
agreement, or loan documents, the buy-out agreement (“Buy-out”) drafted and signed
by all parties offers the most fulsome available description of their respective roles and
obligations. 2 The Buy-out arranged for the sale of the Gates’s “membership shares
back to [the] company,” leaving plaintiff and defendant as the sole remaining members
and owners. Docket # 11-3, at 2. The Buy-out and accompanying Promissory Note
outlined a “debt reduction strategy” between Rolf and Mariam Gates and Sadhana, LLC,
and contemplated payment to Venditto and Cunningham personally only in the event
1
In this case, the complaint relies upon the same documents attached to defendant’s
declaration in support of his motion to dismiss, Docket # 11, which are thus also incorporated in the
recitation of facts. See Watterson v. Page, 987 F.2d 1, 3–4 (1st Cir. 1993).
2
Although it is undisputed that there was no executed operating agreement, Compl. ¶12,
Docket # 10 at 9, the Redemption Agreement makes reference to a Draft Operating Agreement dated
April 12, 2005, not produced in this litigation. See Docket # 11-3, at 17.
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that both were “no longer owners of Sadhana LLC before the [Gates debt] is paid back
to the company in full.” Docket # 11-3, at 8. As of the date of the Buy-out, plaintiff had
invested $212,500 in the business and paid an additional $53,106.81 in out-of-pocket
expenses.
Sadhana, LLC, ran its yoga operations out of two locations, both owned by
plaintiff. Plaintiff was “primarily responsible for property upkeep and management,
corporate record keeping, partnership level accounting and legal matters of the
business.” Compl. ¶ 30. Defendant was responsible for day to day operations at both
locations, including but not limited to “employee oversight, scheduling and managing
yoga classes, arrangements for yoga teachers to teach classes, processing of
payments, day to day recording (sic) keeping and general fiscal management.” Compl.
¶ 29. Plaintiff “entrusted [defendant] with the entire responsibility of the Sadhana
locations based upon Cunningham’s representations that he had desire, knowledge,
expertise, and that he would provide investment returns for the contributions [plaintiff]
made.” Compl. ¶ 71. The business made some “interest payments” to its investors,
including plaintiff, with amounts contingent on income stream, but none issued after
2012.
At defendant’s urging, plaintiff made additional loans to the business, some of
which were used to pay defendant. Plaintiff had “occasional[] questions about
Cunningham’s financial accounting,” but accepted his representation that “business was
slow but that it was getting better.” Compl. ¶ 34. After several unsuccessful years,
however, plaintiff suggested that the parties sell the business, and defendant agreed.
Sadhana, LLC, sold its business assets and customer database for $25,000 on August
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15, 2016. The sale expressly excluded the corporate entity itself, and provided that
“Seller will be able to continue to operate the Sadhana, LLC business.” Docket # 11-5,
at 4.
After sale proceeds were applied to existing short-term debt, there remained
$22,330.12 in unpaid rent and amounts owed to yoga teachers, accountants, and
lawyers. In long-term debt, there remained $283,500 owed to investors, including
$195,000 to plaintiff and $3,500 to defendant. As evinced upon the 2005 exit of Rolf
and Mariam Gates, the parties intended that “any funds loaned to the business were to
be repaid by the remaining participants.” Compl. ¶ 53. Around the time of the 2016
sale, plaintiff and defendant confirmed their intention to pay all remaining short-term
debt, but defendant has since refused to do so. A post-sale audit revealed defendant’s
failure to distinguish between funds he earned personally and income attributable to
Sadhana, and defendant admitted to removing cash from the business to pay himself
for classes taught. He now works for the new owners out of the same locations in which
he previously operated with plaintiff.
Plaintiff filed a complaint in his personal capacity in the Massachusetts Superior
Court on September 6, 2017, claiming fraud, breach of fiduciary duty, breach of
contract, promissory estoppel, conversion, unjust enrichment, an accounting, and
seeking the imposition of a constructive trust. Based on diversity of citizenship,
defendant removed the action to this court and moved to dismiss the complaint for
failure to state a claim.
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II.
Standard of Review
“To survive a motion to dismiss, a complaint must contain sufficient factual
matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft
v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544,
570 (2007)). “A claim has facial plausibility when the plaintiff pleads factual content that
allows the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged.” Id. For purposes of a motion to dismiss, the court accepts all
well-pleaded factual allegations as true and draws all reasonable inferences in the
plaintiff's favor. See Rodríguez-Reyes v. Molina-Rodríguez, 711 F.3d 49, 52–53 (1st
Cir. 2013).
III.
Analysis
The gravamen of plaintiff’s complaint, brought in his personal capacity rather
than on behalf of Sadhana, LLC, is that he was fraudulently induced to invest in the
business in exchange for defendant’s knowing false promises of diligence and intent to
repay. Defendant contends that plaintiff’s claims are time-barred, and that plaintiff lacks
standing to assert them. He further asserts that the complaint does not satisfy the
heightened pleading requirements of Federal Rule of Civil Procedure 9(b), and that it
fails to allege various necessary elements.
A.
Statute of Limitations
Defendant argues that plaintiff’s fraud claims are barred by the three-year statute
of limitations because they accrued in 2012, when plaintiff stopped receiving interest
payments from the business. Mass. Gen. Laws ch. 260, § 2A. In the light most
favorable to plaintiff, however, notice of reduced income stream despite defendant’s
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best efforts, as plaintiff alleges he assumed in 2012, is not commensurate with notice of
defendant’s self-interested undermining of that income stream, as plaintiff alleges he
discovered only upon the sale of the business in August 2016. See Fin. Resources
Network, Inc. v. Brown & Brown, Inc., 754 F. Supp. 2d 128, 159 (D. Mass. 2010) (claim
accrues when “plaintiffs know or reasonably should have known that they were injured
as a result of the defendant’s conduct.”). Accordingly, plaintiff’s claims are not timebarred.
B.
Breach of Contract (Count III)
Plaintiff contends that defendant breached an oral contract formed when
defendant offered to “use best efforts to build and run a successful business” (id. ¶ 77),
and plaintiff “accepted by his actions in loaning money, agreeing to be in the business
venture and continuing to fund.” Docket # 14, at 7.
“[I]t is essential to state with ‘substantial certainty’ the facts showing the
existence of the contract and the legal effect thereof.” Doyle v. Hasbro, Inc., 103 F.3d
186, 194 (1st Cir. 1996) (quoting Pollock v. New England Tel. & Tel. Co., 194 N.E. 133,
136 (Mass. 1935)).
As in Doyle, the complaint here
fails to state the nature of the alleged contract with any specificity. There is
no presentation of the terms of a contract, its duration, or even when it was
formed. Nor does the [complaint] explain what obligations were imposed on
each of the parties by the alleged contract . . . Conclusory statements [of
breach] are insufficient to satisfy the pleading requirements.
Id. at 195. Even accepting plaintiff’s allegations as true, as I must at this stage, they are
too indefinite to state a contract. See Armstrong v. Rohm & Haas Co., 349 F. Supp. 2d
71, 81 (D. Mass. 2004) (allowing 12(b)(6) motion where “the alleged oral contract here
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is too imprecise to be enforceable as a matter of law.”). The motion to dismiss is
allowed as to Count III.
C.
Fraud and Promissory Estoppel (Counts I and IV)
Plaintiff further alleges that defendant made “false statements and
misrepresentations” “concerning the success of the business, concerning his desire to
run the business, his intention to repay loans to the company and his intention to honor
obligations to pay others.” Compl. ¶ 67. He claims to have relied on these statements
to his detriment, and pleads damages “in excess of $200,000.” Id. ¶¶ 68-69.
“In order to state a claim for fraudulent misrepresentation, the plaintiff must
allege: (1) that the statement was knowingly false; (2) that [defendant] made the false
statement with the intent to deceive; (3) that the statement was material to [plaintiff’s]
decision ...; (4) that [plaintiff] reasonably relied on the statement; and (5) that [plaintiff
was] injured as a result of [his] reliance.” Doyle, 103 F.3d at 193.
Here, plaintiff fails plausibly to allege several of these elements. The only
statement whose content is specifically alleged is defendant’s representation that
“business was slow but [] getting better.” Id. ¶ 34. The complaint otherwise alludes only
to defendant’s general representations that “he had desire, knowledge, expertise, and
that he would provide investment returns for the contributions made by Venditto,” id. ¶
71; that he would “use best efforts to build and run a successful business,” id. ¶ 77; that
“he was working diligently and in the best interests of the business in trying to grow the
seemingly struggling business,” id. ¶ 81; and that plaintiff’s investments “would be used
to make sound and professional business decisions in the running of Sadhana.” Id.
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Even assuming that the above allegations meet the particularity requirements of
Federal Rule of Civil Procedure 9(b), there is no allegation that any of the statements
were knowingly false or made with intent to deceive, nor is reasonable reliance plausibly
alleged. Plaintiff’s own role included “corporate record keeping, partnership level
accounting and legal matters of the business,” id. ¶ 30. His background involved
“owning, managing and developing commercial and residential real estate,” while
defendant’s consisted of “acting as a yoga instructor and teaching yoga classes.” Id. ¶
34. This disparity in business acumen, paired with the “questions” plaintiff alleges he
occasionally had “about Cunningham’s financial accounting,” id. ¶ 34, and the ample
opportunity for inquiry his corporate role afforded, contradict the assertion of reasonable
reliance. Because that element is defined similarly for claims of fraud and promissory
estoppel, plaintiff’s claim of promissory estoppel fails on the same grounds. See Coll v.
PB Diagnostic Sys., Inc., 50 F.3d 1115, 1125 & n.6 (1st Cir. 1995) (“An element of
promissory estoppel is that the party invoking it must have reasonably relied on the
alleged promise to his detriment.” (citation omitted)). Accordingly, the motion to dismiss
is allowed as to Counts I and IV.
D.
Breach of Fiduciary Duty, Conversion, Unjust Enrichment, and for an
Accounting (Counts II, V, VI, and VII)
In Counts II, V, and VI, plaintiff advances alternative causes of action concerning
defendant’s improper retention of funds, alleging that he (1) “breached the fiduciary duty
they (sic) owed to plaintiff by failing and refusing to return the money entrusted to him
and, upon information and belief, converting that money to his own use,” Compl. ¶ 73;
(2) “improperly exercised control over and converted for his own use the funds that
Venditto entrusted to, or allowed him control over, for specific purposes,” Compl. ¶ 85;
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and (3) has been unjustly enriched “by the amounts that Venditto and others provided to
them (sic) which Cunningham has refused and failed to return.” Compl. ¶ 88. He also
seeks an accounting (Count VII) “identifying how and where the funds loaned to the
business were used or spent.” Compl. ¶ 92.
Under Massachusetts law, however, “a member of an LLC cannot bring an action
in his own name to enforce the rights or redress the injuries of the LLC.” Laverty v.
Massad, 661 F. Supp. 2d 55, 62 (D. Mass. 2009); cf. Butler v. Winner Int'l Corp., 1995
WL 420004, *4, *11–12 (4th Cir. July 17, 1995) (plaintiff had standing where his claim
was not based on his status as a shareholder, but rather on the fact that the defendant
had made certain promises to him in order to induce him to personally guarantee the
corporation's loans). See Taylor v. Moskow, No.13-12675-FDS, 2014 WL 2573990, at
*4 (D. Mass. June 6, 2014) (“the proper entities to complain [of fiduciary breach and
unjust enrichment] are the LLCs that directly suffered harm, not its memberowners”), aff'd in part, appeal dismissed in part, 600 F. App'x 2 (1st Cir. 2015).
Plaintiff’s contributions were clearly made to the company. See, e.g., Compl. ¶
92 (demanding an accounting for defendant’s use of “the funds loaned to the business,”
(emphasis added)); Docket # 11-3, at 3 (Buy-out agreement identifying plaintiff’s
$212,500 contribution as among the “capital investments deposited into the Sadhana,
LLC account”). Because Sadhana, LLC, not plaintiff, is thus the properly aggrieved
party in any action for the misappropriation of those funds, the motion to dismiss is
allowed as to Counts II, V, VI, and VII.
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E. Constructive Trust (Count VIII)
Though styled as a cause of action, plaintiff’s final count seeks a particular remedy.
See Stevens v. Thacker, 550 F. Supp. 2d 161, 165 (D. Mass. 2008) (“A constructive
trust is, of course, a remedy rather than a cause of action”). Because his underlying
claims fail, the relief requested in Count VIII is unavailable.
IV.
Conclusion
For the foregoing reasons, defendant’s motion to dismiss (Docket # 9) is allowed in
its entirety. Judgment may be entered dismissing the complaint.
____July 27, 2018
DATE
_________/s/Rya W. Zobel ________
RYA W. ZOBEL
SENIOR UNITED STATES DISTRICT JUDGE
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