Baker v. Wilmer Cutler Pickering Hale & Dorr LLP

• Decision Date: 13 February 2017
• Docket Number: No. 16-P-639,16-P-639
• Parties: Christian BAKER & others v. WILMER CUTLER PICKERING HALE AND DORR LLP & others.
• Court: Appeals Court of Massachusetts

81 N.E.3d 782

Christian BAKER & others¹

v.WILMER CUTLER PICKERING HALE AND DORR LLP & others.²

No. 16-P-639

Appeals Court of Massachusetts, Suffolk..

February 13, 2017.

July 21, 2017.

Dana Alan Curhan for the plaintiffs.

Erin K. Higgins (Kathleen R. O'Toole also present) for Gunderson Dettmer Stough Villeneuve Franklin & Hachigian LLP & another.

Richard M. Zielinski for Wilmer Cutler Pickering Hale and Dorr LLP & another.

Present: Kafker, C.J., Carhart, & Desmond, JJ.³

KAFKER, C.J.

Minority members of a Massachusetts limited liability company seek to hold the company's attorneys liable for their involvement in an alleged "freeze-out" orchestrated by and on behalf of the majority members. According to the minority members, the majority members secretly retained the attorneys, one of whom is the daughter of a majority member, to, at least ostensibly, represent the closely held company. The attorneys then worked behind the scenes to assist the majority in merging the company with and into a newly created Delaware limited liability company, all for the purpose of eliminating significant protections afforded minority members under the Massachusetts company's operating agreement. By the time the attorneys' involvement came to light, the majority members had unfettered control of the resulting entity, with a new operating agreement that extinguished the minority's rights to, among other things, participate in management, access the company's records, and prevent dilution of their interests. The minority members, the plaintiffs in this action, responded by asserting claims against the attorneys and their respective law firms for breach of fiduciary duty, aiding and abetting tortious conduct, civil conspiracy, and violation of G. L. c. 93A. The matter now comes before this court for de novo review after a judge of the Superior Court, acting on motions filed by the defendants, dismissed the plaintiffs' claims against the attorneys and their law firms for failure to state a claim upon which relief can be granted. See Mass.R.Civ.P. 12(b)(6), 365 Mass. 754 (1974). For the reasons discussed below, we reverse the portion of the judgment dismissing those claims.

The Supreme Judicial Court has stated that counsel for a close corporation can owe a fiduciary duty to individual shareholders. See Schaeffer v. Cohen, Rosenthal, Price, Mirkin, Jennings & Berg, P.C ., 405 Mass. 506, 513, 541 N.E.2d 997 (1989) ( Schaeffer ). Whether such a fiduciary relationship exists in a particular case is largely a question of fact. Here, taking the facts alleged as true, and drawing all reasonable inferences therefrom in favor of the plaintiffs as nonmoving parties, we conclude that they have alleged enough to plausibly suggest that the defendants, acting as counsel for a limited liability company governed by an operating agreement providing significant minority protections, owed them a fiduciary duty. As the plaintiffs further allege that the defendants secretly worked to eliminate those protections, we conclude that they have done "enough to raise a right to relief [on their claim for breach of fiduciary duty] above the speculative level." Iannacchino v. Ford Motor Co ., 451 Mass. 623, 636, 888 N.E.2d 879 (2008), quoting from Bell Atl. Corp . v. Twombly , 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). We reach the same conclusion as to the claims alleging that, by their actions, the defendant attorneys knowingly aided and abetted and conspired with the majority members in breaching the majority's fiduciary duties to the plaintiffs. We also conclude that the G. L. c. 93A claim was dismissed prematurely.

Background . The following facts are derived from the first amended complaint (complaint) filed by the plaintiffs, W. Robert Allison (Allison), Christian Baker (Baker), and Blake P. Allison, as trustee of the W. Robert Allison 2003 Irrevocable Trust (Allison family trust). On January 28, 2000, Allison and Elof Eriksson (Eriksson) organized Applied Tissue Technologies, LLC, as a Massachusetts limited liability company (ATT-MA or company) for the purpose of developing and marketing wound

therapy technologies. At the time of formation, Allison and Eriksson acquired twenty-five and seventy-five percent membership interests in the company, respectively. Subsequently, Allison and Eriksson both created, and assigned a portion of their interests to, trusts for the benefit of their families—the Allison family trust and the Elof Eriksson Irrevocable Trust-2003 (Eriksson family trust). By the time of the events at issue, Allison and the Allison family trust owned a combined 22.5% interest in ATT-MA, Eriksson and the Eriksson family trust a combined 75.5% interest, and Baker, a former key employee of the company, a 2% interest. Given their combined 24.5% interest, the plaintiffs are collectively referred to in the complaint, and at times herein, as the "minority members."

At the time ATT-MA was formed, Allison and Eriksson also adopted an operating agreement to govern the company's affairs (ATT-MA agreement), which provided, in pertinent part, that:

1. All members have exclusive discretion in the management and control of ATT-MA's business;

2. All members are entitled to participate in management of ATT-MA by a vote proportionate to their interest;

3. The agreement cannot be amended without the unanimous written consent of Eriksson and Allison;

4. The agreement cannot be amended to alter the percentage interest of any member without the consent of each member adversely affected by such an amendment;

5. Members are entitled to examine ATT-MA's books and records at reasonable times;

6. Once having paid an initial capital contribution, no member could be required to make any further capital contributions or loans to the company; and

7. To the extent that any member did advance any further funds, it was to be treated as a loan.

The ATT-MA agreement further provided that each member owed a duty of utmost loyalty and good faith in the conduct of ATT-MA's affairs.⁴

By early 2012, ATT-MA was facing a financial shortfall, but Allison and Eriksson could not agree how to address it. Eriksson was prepared to contribute additional funds to the company, but while he had done so in the past in the form of loans, he was now demanding additional equity in return. Under the ATT-MA agreement, such a contribution would require the consent of Allison and any other members whose interests would be diluted. Allison, meanwhile, believed the company would be better served by hiring new management and developing a business plan. Thus, he was prepared to agree to dilute his interest only if the additional capital was provided by outside investors who were bringing new management to the company.

Around this time, Eriksson, with ATT-MA's chief executive officer, Karl Proppe, privately urging him to gain "control" of the company, reached out to the defendant Emma Eriksson Broomhead (Broomhead), an attorney at the defendant law firm of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian LLP (Gunderson). Broomhead is also Eriksson's daughter, and the two had a longstanding attorney-client relationship. Broomhead, in turn, introduced her father to another attorney at Gunderson, the defendant Gary Schall (Schall), who had experience working with emerging companies. On February 14, 2012, Proppe, in his capacity as chief executive officer (CEO), signed an agreement engaging Gunderson as counsel for the company. The agreement expressly provided that Gunderson would not represent any individual members of ATT-MA. Approximately two months later, Schall relocated his practice to the defendant law firm Wilmer Cutler Pickering Hale and Dorr LLP (WilmerHale). At that time, WilmerHale, like Gunderson, provided in its engagement agreement with ATT-MA that the firm would be representing only the company.

According to the complaint, Broomhead and Schall were aware that ATT-MA was a closely held company, whose members owed each other the duty of utmost loyalty and good faith. They were also familiar with the ATT-MA agreement and the protections it afforded to minority members. Indeed, they immediately set about devising and presenting a plan to Eriksson to both circumvent those protections and eliminate the minority members.⁵ All the while, according to the complaint, Broomhead and Schall deliberately concealed their engagement by ATT-MA, as well as their actions on behalf of Eriksson, from Allison and the other minority members.

Broomhead's and Schall's original plan was for Eriksson to offer to buy Allison's membership interest in ATT-MA, and if that failed, to sell the company to a new entity controlled by Eriksson. In furtherance of that plan, Broomhead, Schall, Eriksson, and Proppe secretly hired and worked with an appraiser to put a value on ATT-MA that could be used as the basis for the buyout offer. Schall then drafted an electronic mail message (e-mail) for Erikson to send to Allison, detailing the offer. Noting that the draft was written in his "style," Schall advised Eriksson to change it to reflect his own style before sending it to Allison. Eriksson did so and on May 6, 2012, e-mailed the offer to Allison and suggested they meet on May 10 to discuss it.

Allison responded to Eriksson's offer by e-mail on May 8, 2012, copying Proppe and Eriksson's wife, Gudrun Eriksson, who were the trustees of the Eriksson family trust. Allison, who remained unaware of Broomhead's and Schall's involvement, declined the offer and expressed a desire to work to maximize ATT-MA's value so that he could sell his interest at a later time, under more favorable circumstances. Allison further reminded the majority members of several of the minority protections in the ATT-MA agreement and suggested that all members meet to address the issues facing the company. In response, Eriksson cancelled the proposed May 10 meeting and threatened to dissolve ATT-MA.

Eriksson then began working in secret with Proppe, Broomhead,...