Cruickshank v. Dixon (In re Blast Fitness Grp., LLC)

• Decision Date: 24 May 2019
• Docket Number: Adversary Proceeding No. 18-01011,Case No. 16-10236-MSH
• Citation: 603 B.R. 654
• Parties: 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.
• Court: U.S. Bankruptcy Court — District of Massachusetts

603 B.R. 654

IN RE: BLAST FITNESS GROUP, LLC, DebtorGary W. Cruickshank, Chapter 7 Trustee of the Estate of Blast Fitness Group, LLC, Plaintiff,

v.Harold R. Dixon et al., Defendants.

Case No. 16-10236-MSH

Adversary Proceeding No. 18-01011

United States Bankruptcy Court, D. Massachusetts, Eastern Division.

Signed May 24, 2019

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

MEMORANDUM OF DECISION ON MOTION TO DISMISS OF NEWFIT, LLC

Melvin S. Hoffman, United States Bankruptcy Judge

I. Introduction

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 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.

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, I 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, 129 S.Ct. 1937, 173 L.Ed.2d 868 (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, 127 S.Ct. 1955, 167 L.Ed.2d 929 (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 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, 129 S.Ct. 1937 ). " ‘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 Allegations⁸

1. BFG

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 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, 317.

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...