Opinion
Civil Action CV-21-0453
06-24-2022
JEREMY MARSTON Plaintiff v. JOSHUA A. NAPPI and DANIEL E. TORREY Defendants
Plaintiff: Roy Pierce, Esq. Defendant Nappi: Erin Bucksbaum Esq./William Deane, Esq. Defendant Nappi: Michael Strauss, Esq. (visiting attorney) Defendant Torrey: Joseph Mavodones, Esq./Russell Pierce, Esq.
Plaintiff: Roy Pierce, Esq.
Defendant Nappi: Erin Bucksbaum Esq./William Deane, Esq.
Defendant Nappi: Michael Strauss, Esq. (visiting attorney)
Defendant Torrey: Joseph Mavodones, Esq./Russell Pierce, Esq.
ORDER
Thomas R. McKean Justice
Before the Court is Plaintiff Jeremy Marston's ("Marston") Motion to Dismiss Counts I and IV of Defendants Joshua Nappi and Daniel Torrey (individually "Nappi" and "Torrey", collectively "Defendants") counterclaims. For the reasons set forth herein, the Motion is DENIED.
FACTUAL BACKGROUND
The following factual background is derived from the allegations contained in Marston and Nappi's counterclaims, which are the only facts considered by the court when deciding a Motion to Dismiss. See Bussell v. City of Portland, 1999 ME 103, ¶ 1, 731 A.2d 862.
In April of 2011, Marston and Nappi founded a Cape Elizabeth based plumbing and heating company named Imperial to provide plumbing and heating services throughout southern Maine. Marston and Nappi operated Imperial as joint owners from 2011 until 2020 when they welcomed Torrey as a third owner. Torrey made a $5,000 capital contribution in exchange for a 10% ownership interest in the enterprise. Torrey and Nappi each retained a 45% interest. Torrey officially began working for Imperial on March 16th, 2020.
Twelve or so days prior, on or about March 4th, 2020, Marston purchased a new truck utilizing $8,000 of Imperial's liquid assets to do so. Marston then executed a leaseback agreement between himself and Imperial which required Imperial to cover his monthly truck payment at a rate of $693.05 a month.
On the day that Torrey started at Imperial - without any explanation - Marston stopped working and performing services for the company on a regular basis. Between March 16th, 2020, and August of 2020, Marston had little communication with Torrey and Nappi about the business and failed to generate any meaningful revenue.
In November of 2020, Imperial, along with another Maine based company Halcyon Built ("Halcyon"), purchased an investment property located in Westbrook. Each company owned 50% of the property with Imperial's share being split three ways among its members. Soon after the purchase, Marston decided, unilaterally, that he would spend a majority of his work hours at the Westbrook property.
In March of2021, Imperial and Halcyon decided they would purchase a trailer to help with renovations to their jointly owned property. Marston spearheaded the idea and was tasked with handling the purchase, as well as seeking 50% reimbursement from Halcyon. Since the purchase, Marston has retained exclusive possession of the trailer and has not sought reimbursement.
In May of 2021, frustrated by Marston's lack of revenue generation, Nappi asked Marston to separate from Imperial. At the time, Marston admitted he had no intention of resuming full time employment with Imperial and that he was unable to work. Over the next several months, Nappi and Torrey attempted to negotiate an amicable separation for Marston but were unable to do so. The last direct communication the parties had was via text message in May of 2021.
After the parties stopped communicating, Nappi and Torrey allege that Marston engaged in behavior detrimental to the company. On or about August 19th, 2021, they say Marston made an unauthorized $500 payment with an Imperial credit card. On or about August 27th, 2021, they claim that Marston shut down their use of the Imperial's credit card and prohibited them from accessing the company's online account or monthly statements.
On or about October 15th, 2021, Nappi and Torrey assert that Marston made an unauthorized $8,000 payment towards Imperial's credit card debt without regard to upcoming payroll processing. This payment threatened Imperial's ability to make payroll that week and resulted in a substantial overdraft of Imperial's accounts.
On or about November 30th, 2021, Marston attempted to use a company card to purchase gas in Vermont and on December 2nd, 2021, Marston sent $100,000 worth of invoices to customers for work which he had no involvement in. The invoices had already been paid and thus affected Torrey and Nappi's relationship with those customers. On or about December 6th, 2021, Marston made an unauthorized truck payment out of the imperial bank account. This forced Nappi to cancel all checks to avoid any further unauthorized payments by Marston.
After being effectively shut out of the business, Marston brought a one count complaint in the Cumberland County Superior Court on December 14t~ 2021. On March 14th, 2022, both Nappi and Torrey independently filed an answer and identical four count counterclaims against Marston. On March 31st, 2022, Marston filed a motion to dismiss counts I and IV of Nappi and Torrey's respective counterclaims. Nappi and Torrey filed a joint objection to dismissal on May 5th, 2022, and Marston filed his reply on May 18th.
LEGAL STANDARD
"A motion to dismiss pursuant to M.R. Civ. P. 12(b)(6) tests the legal sufficiency of [a counterclaim]." Seacoast Hangar Condo. IIAss'n v. Martel, 2001 ME 112, ¶ 16, 775 A.2d 1166 (quoting New Orleans Tanker Corp, v. Dep't of Transp., 1999 ME 67, ¶ 3, 728 A.2d 673). When the court reviews a motion to dismiss, "the [counterclaim] is examined 'in the light most favorable to the [counterclaim] plaintiff to determine whether it sets forth elements of a cause of action or alleges facts that would entitle the [counterclaim] plaintiff to relief pursuant to some legal theory.'" Lalonde v. Cent. Me. Med. Ctr., 2017 ME 22, ¶ 11, 155 A.3d 426, Allegations in the counterclaim are deemed true for the purposes of deciding a motion to dismiss. Id. "A dismissal should only occur when it appears beyond doubt that a [counterclaim] plaintiff is entitled to no relief under any set of facts that he might prove in support of his claim." Moody v. State Liquor &Lottery Comm 'n, 2004 ME 20, ¶ 7, 843 A.2d 43 (quoting McAfee v. Cole, 637 A.2d 463, 465 (Me. 1994)) (internal quotations omitted).
DISCUSSION
Nappi and Torrey's counterclaims each raise the same four counts. Count I alleges a breach of fiduciary duty, Count II alleges a breach of contract, Count III alleges a breach of the implied covenant of good faith and fair dealing, and Count IV seeks an order of judicial separation.
Marston hopes to dismiss Counts I and IV on 12(b)(6) grounds for failure to state a claim. The legal sufficiency of each Count is addressed in turn.
I. Breach of Fiduciary Duty
Marston seeks to dismiss Nappi and Torrey's first Count on the grounds that any claim against Marston for damage to Imperial must be brought as a derivative action in accordance with 31 M.R.S. § 1632 (2022) and Maine Rule of Civil Procedure ("M.R. Civ. P.") 23B. Marston alleges that those authorities prevent Nappi and Torrey from maintaining an action for individualized harm when all the harm complained of in their respective counterclaims can be characterized as harm to Imperial's bottom line or its operations. Nappi and Torrey respond by saying that Section 1632 does not apply to Imperial, a closely held limited liability company ("LLC"), and maintain that 31 M.R.S. § 1631, and/or 31 M.R.S. § 1637(3) authorizes their claims for breach of fiduciary duty.
A. Section 1632's Applicability
Marston's Section 1632 based argument for dismissal is defeated by the text of 31 M.R.S. § 1637. That statute provides that, in the case of a "closely held limited liability company," which is one with "fewer than thirty five members," "sections 1632 through 1636 do not apply." 31 M.R.S. § 1637 (2022). Section 1632 authorizes derivative actions. Accordingly, a member of a closely held LLC cannot bring one.
In this case, Imperial is an LLC with three members - Marston, Nappi and Torrey. Thus, it is a closely held LLC to which Sections 31 M.R.S. §§ 1632-1636 do not apply. Accordingly, Marston's argument that Nappi and Torrey must bring their suit as a derivative action under Section 1632 fails. Nappi and Torrey's counterclaims are not dismissed on this basis.
B. Section 1631
Nappi and Torrey also claim that their direct action against Marston is permitted by 31 M.R.S. § 1631 which offers an alternative to derivative suits in the context of a closely held LLC.
§1631. Direct action by member
1. Direct action against member. Subject to subsection 2, a member may maintain a direct action against another member, a manager or the limited liability company to enforce the member's rights and otherwise protect the member's interests, including rights and interests under the limited liability company agreement or this chapter or arising independently of the membership relationship.
2. Actual or threatened injury. A member maintaining a direct action under this section must plead and prove an actual or threatened injury that is not solely the result of an injury suffered or threatened to be suffered by the limited liability company.
31 M.R.S. § 1631 (2022).
As Marston points out, for Nappi and Torrey's first Count to persist under Section 1631, they must "plead an actual or threatened injury that is not solely the result of an injury suffered or threatened to be suffered by the limited liability company." Thus, the court must review Nappi and Torrey's counterclaim to see if there are allegations which properly invoke Section 1631. Viewing both counterclaims in a light most favorable to them, there are.
Both Nappi and Torrey detail harm suffered by each of them as a result of Marston's actions. Their respective counterclaims allege, inter alia, that Marston's breaches caused harm to* their professional reputations, caused overdraft penalties in their commercial accounts, and impacted their individual financial stability. (See Nappi Counterci. ¶¶ 31-32, 60, 71-76; Torrey Counterci. ¶¶ 44-46, 58, 66-67, 70, 81-82.) Viewing these allegations of harm in a favorable light to Nappi and Torrey, the court cannot say these alleged harms were solely the result of injury to Imperial. Accordingly, there exists a set of facts under which Nappi and Torrey may prove Section 1631 authorizes their claims.
C. Section 1637
Notwithstanding Section 1637's excision of Section 1632's applicability to closely held LLC's, Section 1637 offers an exception which allows a derivative action to be brought "if justice requires."
3. Exception to limitation on derivative actions.
If justice requires:
A. A derivative action commenced by a member of a closely held limited liability company may be treated by a court as a direct action brought by the member for the member's own benefit; and
B. Recovery in a direct or derivative action by a member of a closely held limited liability company may be paid directly to the plaintiff or to the closely held limited liability company if necessary to protect the interests of creditors and of other members.31 M.R.S. § 1637(3) (2022).
The facts alleged by Nappi and Torrey in support of their breach of fiduciary duty claim, seem to seek redress for actions which caused financial and reputational damage to Imperial. Both counterclaims, therefore, allege facts which could constitute a derivative action brought by Nappi and Torrey on Imperial's behalf. See Ross v. Bernhard, 396 U.S. 531, 538"39 (1970) ("In a shareholder's derivative suit, the wrong complained of is to the corporation, and the shareholder is merely a nominal plaintiff.") Thus, the heart of the argument under Section 1637(3) is whether, in this case, ''justice requires" allowing a derivative claim to proceed on behalf of Imperial. Marston argues it does not, while Nappi and Torrey argue it does.
With little case law concerning this statute, both parties direct the court to two cases, both captioned Cianchette v. Cianchette for authority in interpreting the phrase "if justice requires."
In Beaudry v. Harding, 2014 ME 126 ¶ 5, 104 A.3d 134, the Law Court held that a member of an administratively dissolved LLC may not bring a direct action when the harm alleged was not personal to him. Beaudry, however, is distinguishable. That case did not involve any claim for breach of fiduciary duties by members. The plaintiff in Beaudry was instead attempting to sue a lawyer who had previously represented the LLC for professional negligence. 2014 ME 126,r 3, 104 A.3d 134.1 In Beaudry v. Harding, 2014 ME 1261 5, 104 A.3d 134, the Law Court held that a member of an administratively dissolved LLC may not bring a direct action when the harm alleged was not personal to him. Beaudry, however, is distinguishable. That case did not involve any claim for breach of fiduciary duties by members. The plaintiff in Beaudry was instead attempting to sue a lawyer who had previously represented the LLC for professional negligence. 2014 ME 126, ¶ 3, 104 A.3d 134.
The first Cianchette case, Cianchette I, is cited by the Nappi and Torrey to support maintenance of their counterclaims under Section 1637(3). No. CV-16-249,2018 Me. Super. LEXIS 13 at **33-39 (Jan. 17, 2018). The second, Cianchette II, is cited by the Defendant, in support of their request for dismissal. No. BCD-CV-19-42, 2019 Me. Bus. &Consumer LEXIS 46 **15-16 (Dec. 16, 2019). Cianchette IImerely paraphrases the conclusions reached in Cianchette I that were relevant to the facts presented there. Accordingly, this court looks to Cianchette I for guidance in its analysis.
In Cianchette I, the court determined that justice did require permission of a derivative action as a direct action because the harm allegedly "involved oppressive action by majority shareholders against the interests of minority shareholders or alleged breaches of fiduciary duty owed to minority shareholders." No. CV-16-249, 2018 Me. Super. LEXIS 13 *34 (Jan. 17, 2018) (citing 2 O'Neal and Thompson's Close Corporations and LLCs § 9:26 (3d ed.) at n.35).
Here, Marston and Nappi each own a 45% share of Imperial, while Torrey owns 10%. Despite there being no individual majority shareholder, Nappi and Torrey's combined shares constitute a 55% majority stake. Thus, relying on Cianchette''s interpretation of the phrase "justice requires" as constituting "oppressive action" taken by majority shareholders against minority shareholders, is inappropriate on these facts. Such a definition contemplates a direct suit by a minority stakeholder.
The Cianchette 1 court also stated:
31 M.R. S. § 1637(3) essentially tracks § 7.01 (d) of the American Law Institute's 1994 Principles of Corporate Governance. ALI Comment (e) to § 7.01 suggests that direct actions by shareholders in closely held LLCs may be allowed if they will not (1) unfairly expose the corporation or the defendants to multiple actions, (2) prejudice the interests of creditors of the corporation, or (3) prejudice the rights of other shareholders.Id. at * 38 (citing Principles of Corporate Governance, § 7.01(d), cmt. e, Am. L. Inst. (1994)).
In this case, the factual allegations within both Nappi and Torrey's counterclaim do not suggest that continued suit will unfairly expose Imperial or Marston to multiple actions, will prejudice the interests of any creditors of Imperial, or prejudice the rights of other shareholders.
Courts undertaking this inquiry have noted that deciding whether "justice requires" a derivative action to be treated as a direct action is highly discretionary. See, e.g., Guajardo v. Hitt, 562 S.W.3d 768, 780 (Tx. Ct. App. 2018) ("[C]ourts have recognized that the decision whether justice requires the shareholder to recover directly under this statute is a matter left to the trial court's discretion."); Swank v. Cunningham, 258 S.W.3d 647, 666 (Tx. Ct. App. 2008) ("[T]he trial court has discretion to treat a derivative proceeding brought by a shareholder of a closely held corporation as a direct action brought by the shareholder for the shareholder's own benefit.")
At the 12(b)(6) stage, in consideration of the three factors laid out by the business court in Cianchette I and the highly discretionary nature of the Section 1637(3) analysis, the court concludes that - viewed in a light most favorable to Nappi and Torrey - each of their counterclaims allege set of facts which "may" require treating their otherwise derivative claims as direct actions. Accordingly, Nappi and Torrey's first count is procedurally proper.
D. Merits of Breach of Fiduciary Duty Claim
Finally, the court must determine whether it states a prima facie substantive claim. Under Maine common law, the elements of a breach of fiduciary duty claim are (1) a fiduciary relationship between the plaintiff and another person, (2) a breach of the other person's fiduciary duty toward the plaintiff, and (3) damages incurred by the plaintiff proximately caused by the breach. See Sleeves v. Bernstein, Shur, Sawyer & Nelson, P.C., 1998 ME 210, ¶ 10 n.8, 718 A.2d 186.
Under Maine Law, a member of an LLC owes other members various fiduciary duties. See 31 M.R.S. § 1559 (2022). Those include duties of good faith, diligence, care and skill. 31 M.R.S. § 1559 (1) (2022). Here, as a 45% owner/member of Imperial, Marston owed a fiduciary duty to Nappi and Torrey. And, viewed in a light most favorable to Nappi and Torrey, each counterclaim does allege a breach, by Marston, of his statutorily required duties.
Accordingly, Count I of both Nappi and Torrey's respective counterclaims survives Marston's Motion.
II. Judicial Separation
Marston next seeks dismissal of Nappi and Torrey's fourth count which seeks an order of judicial separation from this court pursuant to 21 M.R.S. § 1582(5) (2022). Marston argues for dismissal on the premise that Section 1582 requires any action seeking judicially ordered expulsion of a member to be brought by the limited liability entity itself. Nappi and Torrey counter that, because Imperial was properly joined as a party-in-interest in each counterclaim under M.R. Civ. P. 13(h), the action brought under Section 1582 is proper.
A person is dissociated as a member from a limited liability company when:
5. Expulsion by Judicial Order. On application by the limited liability company, the person is expelled as a member by judicial order because the person:
A. Has engaged, or is engaging, in wrongful conduct that has adversely and materially affected, or will adversely and materially affect, the limited liability company's activities;
B. Has willfully and persistently committed, or is willfully and persistently committing, a material breach of the limited liability company agreement or the person's duty or obligation under this chapter or other applicable law; or
C. Has engaged, or is engaging, in conduct relating to the limited liability company's activities that makes it not reasonably practicable to carry on the activities with the person as a member.31 M.R.S. § 1582(5) (2022) (emphasis added).
Here, the plain text of Section 1582(5) supports Marston's assertion that any application for court ordered expulsion must be made by Imperial. However, the court agrees with Nappi and Torrey that Rule 13(h) permits them to join Imperial in the counterclaim for the purpose of seeking a judicial expulsion order.
"Persons other than those made parties to the original action may be made parties to a counterclaim or cross-claim in accordance with the provisions of Rules 19 and 20." M.R. Civ. P. 13(h). "A person who is subject to service of process shall be joined as a party in the action if (1) in the person's absence complete relief cannot be accorded among those already parties ..." M.R. Civ. P. 19(a)
M.R. Civ. P. 13(h), andM.R. Civ. P. 19(a) operate together to permit Imperial's inclusion as a Party-in-Interest in both Nappi and Torrey's counterclaims. Pursuant to Rule l 9(a), Imperial, a registered LLC in Maine, is subject to service of process, and is a necessary party to the pending counterclaims. Thus, Nappi and Torrey have properly joined Imperial in their counterclaims pursuant to M.R. Civ. P. 13(h). Accordingly, Count IV may proceed.
Entry is:
Plaintiff's Motion to Dismiss Counts I and IV of the Plaintiffs' counterclaims is Denied. The Clerk is directed to incorporate this order into the docket by reference pursuant to M.R. Civ. P. 79(a).