Gary W. Cruickshank, Chapter 7 Tr. of the Eblast Fitness Grp. LLC v. Dixon (In re Blast Fitness Grp., LLC)
| Decision Date | 08 January 2019 |
| Docket Number | Case No. 16-10236-MSH,Adversary Proceeding No. 18-01011 |
| 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 |
In a thirty-count complaint,1 Gary W. Cruickshank, the chapter 7 trustee of the bankruptcy estate of Blast Fitness Group, LLC ("BFG"), seeks damages and injunctive relief against forty-seven named2 and dozens of unnamed John Doe defendants for allegedly depriving BFG of or diverting from it valuable assets and profit opportunities, ultimately leading to BFG'sfiling of a petition under chapter 7 of the United States Bankruptcy Code on January 26, 2016.3 This adversary proceeding was commenced two years after the petition date on January 26, 2018.
Several of the defendants, including the law firm of Goodwin Procter LLP ("Goodwin"), John R. LeClaire, a Goodwin partner, and Jeremiah J. Sullivan, a former Goodwin attorney (collectively, the "Goodwin Defendants") have filed motions to dismiss with Goodwin and Mr. LeClaire also filing a joint motion for partial summary judgment.4 Specifically, Goodwin and Mr. LeClaire jointly moved to dismiss count I (fraudulent transfer under Bankruptcy Code § 548(a)(1)(B)),5 count XII (legal malpractice), count XIII (breach of professional fiduciary duty), count XIV (violation of Mass. Gen. Laws. ch. 93A, §§ 2 and 11), count XXII (breach of contract pursuant to Bankruptcy Code §§ 544 and 550) and the correlative portions of count VII (turnover pursuant to Bankruptcy Code § 550), count VIII (unjust enrichment), count XXIX (attorneys' fees) and count XXX (costs). They moved for partial summary judgment with respect to count III (fraudulent transfer under Massachusetts Fraudulent Transfer Act ("MFTA") § 5(a)(2)), count IV (fraudulent transfer under MFTA § 6(a)),6 count VIII (unjust enrichment)7 and the correlative portions of count VII (turnover pursuant to Bankruptcy Code § 550). Mr. Sullivan seeks dismissal of all of the counts asserted against him, namely count VIII (unjust enrichment), count XII (legal malpractice), count XIII (breach of professional fiduciary duty), count XIV (violation of Mass. Gen. Laws. ch. 93A, §§ 2 and 11), count XXII (breach of contractpursuant to Bankruptcy Code §§ 544 and 550) and the correlative portions of count XXIX (attorneys' fees) and count XXX (costs).
The causes of action asserted against the Goodwin Defendants fall into two categories: legal malpractice claims and unjust enrichment claims. The legal malpractice claims, including those styled as breaches of fiduciary duty, breach of contract and violation of Mass. Gen. Laws ch. 93A, arise from 2012 and 2013 corporate transactions involving BFG, defendant Harold R. Dixon, who controlled BFG, and others. Fees paid to Goodwin in 2013 form the basis for the unjust enrichment claims. The legal malpractice claims are the subject of the Goodwin Defendants' motions to dismiss while the unjust enrichment claims are the subject of the joint motion for partial summary judgment filed by Goodwin and Mr. LeClaire.
At the outset, I note that Trustee Cruickshank concedes that his claim under count I (fraudulent transfer under Bankruptcy Code § 548(a)(1)(B)) against Goodwin is time-barred and should be dismissed. I will, therefore, enter an order granting Goodwin and Mr. LeClaire's motion to dismiss count I as well as count VII, which seeks to effectuate any judgment that the trustee might recover under count I.8 I will also enter an order allowing Mr. Sullivan's motion to dismiss count VIII (unjust enrichment) against him as the trustee failed to plead that Mr. Sullivan received any compensation from BFG or that he was in any way enriched. In addressing the remaining dispositive motions, I begin with the motions to dismiss.
In ruling on the motions to dismiss, I must accept all well-pleaded factual allegations in the complaint as true, drawing all reasonable inferences in the trustee's favor. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); 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 Iqbal, 556 U.S. at 678). Conclusory or speculative allegations, however, must be disregarded. Ocasio-Hernandez v. Fortuno-Burset, 640 F.3d 1, 12 (1st Cir. 2011).
In 2010, Mr. Dixon met Steven Borghi, and the two discussed going into business together. ¶ 72. Mr. Borghi operated various Work Out World ("WOW") health clubs with Tony Beninati and, when Mr. Beninati died, with his widow, Elizabeth Beninati. ¶ 71. Mr. Borghi allowed Mr. Dixon to learn about the discount fitness center business by giving him access to the offices and proprietary information of WOW. ¶ 73.
On February 14, 2011, CapeCapital LLC, a Massachusetts limited liability company ("CapeCapital"), formed BFG.10 ¶¶ 3, 74. CapeCapital was the sole manager of BFG, and Mr. Dixon, in turn, was the sole manager of CapeCapital. ¶ 3. At its peak, BFG owned and operatedover 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.
In 2011, Mr. Dixon and Mr. Borghi began operating various health clubs in New England using the WOW trade name, triggering a dispute with Ms. Beninati. ¶¶ 77, 79. Mr. Dixon, Mr. Borghi and BFG hired Mr. Dixon's longtime personal lawyer, defendant Mr. LeClaire of Goodwin, 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.
In addition to its work on the Beninati litigation, Goodwin attorneys did other legal work for BFG starting in 2011, including in connection with BFG's acquisition and transfer of fitness clubs, the formation of various limited liability companies (LLCs) ancillary to these acquisitions and transfers and the drafting of corporate and transactional documents. ¶¶ 102-03, 105, 107. In 2012, while the Beninati dispute was going on, BFG was in negotiations with Bally Total Fitness Inc. to purchase thirty-nine work-out clubs and certain real estate. ¶ 105. The Goodwin Defendants acted as counsel to BFG and its wholly-owned subsidiary, Blast Fitness Acquisition, LLC ("Blast Acquisition"), in that transaction, and in that capacity participated in drafting an asset purchase agreement dated April 10, 2012. ¶¶ 106, 110, 113. Under the terms of the asset purchase agreement, BFG was to receive three pieces of commercial real estate from Ballylocated in Maryland Heights, Missouri, West Hartford, Connecticut and Irving, Texas which were to be "sold pursuant to the terms of a separate purchase agreement . . . for an aggregate purchase price of $1,000,000 to an entity identified by [BFG] prior to Closing." ¶ 62, 118. Three of the thirty-nine work-out clubs being purchased by BFG operated at these locations. ¶¶ 114, 118.
According to emails exchanged between defendant Mr. Sullivan of Goodwin and Bally's counsel on April 12, 2012, the Goodwin Defendants knew by that date that Mr. Dixon wanted to designate entities not owned by BFG to take title to the Bally real estate. ¶¶ 131-133. On April 25, 2012, Mr. Dixon formed CapeCapital Maryland Heights, LLC, a Missouri LLC, CapeCapital West Hartford, LLC, a Connecticut LLC, and CapeCapital Irving, LLC, a Texas LLC, all of which were managed by Mr. Dixon and effectively owned by him. ¶¶ 18, 20, 22, 62, 145, 152, 157, 164. None of these entities was owned by BFG. ¶¶ 62, 163-64.
To raise part of the cash needed to complete the Bally transaction, the members of BFG agreed to sell a preferred membership interest in BFG to the Dixon Family Limited Partnership (an affiliate of Dixon). ¶¶ 138-39. The Goodwin Defendants drafted and presented to BFG and its members a member consent dated April 27, 2012, which provided in part:
WHEREAS, the Members and Managers [of BFG] are seeking to raise additional capital for the Company for purposes including, but not limited [sic], financing the growth of the Company's business through the acquisition, from Bally Total Fitness Corporation, a Delaware corporation ("Bally") and certain of ts [sic] affiliates, of operating assets and real property associated with additional health club facilities (the "Bally Acquisition") by a direct subsidiary of the Company. (Emphasis added).
Id. This consent was presented to BFG's members at a time when Mr. Dixon and the Goodwin Defendants were already planning to transfer the Bally real estate to entities not owned by BFG. ¶ 140. Members of BFG, including Mr. Borghi, relied on the member consent when theyapproved the admission of the Dixon Family Limited Partnership as a member of BFG and allowed the Bally transaction to move forward. ¶ 142. They did so believing that BFG would receive the Bally real estate. Id.
The Bally transaction closed on April 30, 2012,11 and on or by that date, Bally had sold the Bally real estate to Mr. Dixon's LLCs, CapeCapital Maryland Heights, LLC, CapeCapital West Hartford, LLC and...
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