Case 18-01011 Doc 282 Filed 01/08/19 Entered 01/08/19 16:04:41 Desc Main Document Page 1 of 23 UNITED STATES BANKRUPTCY COURT DISTRICT OF MASSACHUSETTS EASTERN DIVISION ________________________________ ) In re: ) Chapter 7 ) Case No. 16-10236-MSH BLAST FITNESS GROUP, LLC, ) ) Debtor ) ________________________________) ) GARY W. CRUICKSHANK, ) CHAPTER 7 TRUSTEE OF THE ) ESTATE OF BLAST FITNESS ) GROUP LLC, ) ) Plaintiff, ) Adversary Proceeding ) No. 18-01011 v. ) ) HAROLD R. DIXON et al., ) ) Defendants. ) ________________________________) MEMORANDUM OF DECISION ON MOTIONS TO DISMISS OF GOODWIN PROCTER LLP, JOHN R. LECLAIRE AND JEREMIAH J. SULLIVAN AND MOTION FOR PARTIAL SUMMARY JUDGMENT OF GOODWIN PROCTER LLP AND JOHN R. LECLAIRE I. Introduction 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’s 1 As amended by a First Amended Complaint (ECF #130). 2 Since the filing of the complaint, four of the original named defendants have been dismissed from this proceeding by stipulation with the trustee. Case 18-01011 Doc 282 Filed 01/08/19 Entered 01/08/19 16:04:41 Desc Main Document Page 2 of 23 filing 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 contract 3 All references to the Bankruptcy Code or the Code are to 11 U.S.C. § 101 et seq. 4 ECF ## 175, 213, and 177, respectively. These motions relate to the First Amended Complaint (ECF #130). 5 Goodwin is a named defendant in count I, and Mr. LeClaire is not. 6 Goodwin is a named defendant in counts III and IV, and Mr. LeClaire is not. 7 Goodwin and Mr. LeClaire seek both dismissal and summary judgment on counts VII and VIII. 2 Case 18-01011 Doc 282 Filed 01/08/19 Entered 01/08/19 16:04:41 Desc Main Document Page 3 of 23 pursuant 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. 8 Count VII for turnover under Bankruptcy Code § 550 is brought against the “Count I Defendants,” among others. Count VII is thus applicable to Goodwin because of its status as a count I defendant. Hence, dismissal of count I against Goodwin necessitates the dismissal of count VII against it. The trustee’s other fraudulent transfer counts against Goodwin (counts III and IV) contain references to Bankruptcy Code §§ 544(b) and 550(a) and would enable the trustee, if successful on either of those counts, to recover fraudulently transferred property from Goodwin. 3 Case 18-01011 Doc 282 Filed 01/08/19 Entered 01/08/19 16:04:41 Desc Main Document Page 4 of 23 II. Motions to Dismiss A. Legal Standards 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). B. Trustee’s Factual Allegations9 1. BFG 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 operated 9 Factual allegations are cross-referenced to the relevant paragraphs (symbol ¶) of the first amended complaint. 10 Although not specifically pleaded in the complaint, there is no dispute that BFG is a Massachusetts limited liability company. 4 Case 18-01011 Doc 282 Filed 01/08/19 Entered 01/08/19 16:04:41 Desc Main Document Page 5 of 23 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. 2. Dispute with Elizabeth Beninati 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. 3. The Bally Transaction 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 Bally 5 Case 18-01011 Doc 282 Filed 01/08/19 Entered 01/08/19 16:04:41 Desc Main Document Page 6 of 23 located in Maryland Heights, Missouri, West Hartford, Connecticut and Irving, Texas which were to be “sold pursuant to the terms of a separate purchase agreement .