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Butler v. Moore

United States District Court, D. Massachusetts

March 26, 2015

JOSEPH G. BUTLER, as Chapter 7 Trustee, JOHN W. STRACHAN, and TIMBERLINE CONSTRUCTION CORPORATION, Plaintiffs,
v.
EDWARD T. MOORE, LAWRENCE W. ROSENFELD, EASTERN TOWERS, LLC, EASTERN PROPERTIES, LLC, HORIZON TOWERS, LLC, TOWER INVESTORS TRUST, GLOVER PROPERTY MANAGEMENT, INC., 5G TOWERS, LLC, and 5G INVESTMENT TRUST, LLC, Defendants.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

F. DENNIS SAYLOR, IV, District Judge.

I. INTRODUCTION

This is a dispute concerning a closely held business that developed towers for the cellular telephone industry. The principal dispute involves a series of transactions in which the majority owners of the business froze out the minority owners and appropriated assets and business opportunities for their own benefit. The matter also involves claims by the construction company that built the towers, which was not paid in full for its services.

John Strachan and Matthew Sanford had substantial experience and contacts in the cellular telephone industry, particularly in the siting of towers. In 2002, Strachan and Sanford decided to try to create a company to develop towers on their own. They had little experience operating a business, and did not have substantial financial resources or access to capital. They approached two wealthy and sophisticated businessmen, Edward Moore and Lawrence Rosenfeld, about joining forces in a new enterprise. Moore and Rosenfeld agreed to do so, and in February 2002, the four men founded a corporation called Eastern Towers, Inc. Each of the four men held an equal one-quarter interest in the new company.

Within a few weeks, and when the business had scarcely begun operations, Moore and Rosenfeld proposed a revised corporate structure. The new structure included the creation of a separate limited liability company that would own the towers, in which Moore and Rosenfeld would hold a combined 60% interest. Moore and Rosenfeld also proposed that the equity interests of Strachan and Sanford in the LLC would vest over time, and that the operating agreement for the LLC would provide that Moore and Rosenfeld could own interests in competing tower companies and did not have to present tower opportunities to the business. After a period of negotiation and discussion, Strachan and Sanford reluctantly agreed to the new arrangement.

An agreement embodying those changes was signed in April 2002. However, the new LLC-ealled Eastern Towers, LLC-was not actually created until September 2002. Furthermore, the evidence as to the intended, and actual, relationship between the corporation and the LLC is confused and contradictory. Moore and Rosenfeld claim that the LLC owned the corporation; Strachan thought that the corporation owned the LLC. In fact, neither owned the other, and the two entities existed in parallel while the business was in operation. Furthermore, the parties freely transferred funds between the two entities, and generally treated the two as a single business enterprise.

The business began to develop towers, but at a slower pace than anticipated. Moore and Rosenfeld provided virtually all of the working capital to the new business. For their part, Strachan and Sanford worked for free for six months, and transferred a tower site that they owned in Beverly, Massachusetts, to the business. By early 2003, it was clear that the company needed new capital or debt financing to survive.

Moore approached TD Banknorth, a bank with which he had a lending relationship, with a proposal to establish lines of credit to permit construction of towers and ongoing operations of the company. The bank approved a somewhat less favorable arrangement than Moore had proposed. Instead of seeking financing elsewhere, or attempting to negotiate further with the bank, Moore and Rosenfeld developed a plan that effectively permitted the two of them to acquire every completed tower at a discounted price, with little risk, and to the considerable disadvantage of Eastern Towers and its minority shareholders.

Moore and Rosenfeld created a new entity called Eastern Properties, LLC, in which Strachan and Sanford had no interest. Without telling Strachan and Sanford, they diverted part of the bank-financing opportunity to the benefit of their new company. They then caused Eastern Towers to enter into a "Tower Purchase Agreement" under which it was required to sell completed towers to Eastern Properties (that is, to Moore and Rosenfeld) at less than half their fair market value. Eastern Towers purportedly had an option to repurchase the towers under certain conditions. Those conditions, however, were so elaborate, and so onerous, that the option would never be exercised, and thus was essentially worthless.

The closing occurred on June 2, 2003. That same day, Moore and Rosenfeld withdrew virtually all of their capital from Eastern Towers-$520, 000-without the knowledge of the bank, and over the protests of Strachan and Sanford. That capital withdrawal permanently crippled Eastern Towers, leaving it insolvent or nearly so; by the end of the month, it had only $5, 000 in its bank accounts, about enough to sustain operations for four or five days. Also on June 2, four towers were transferred from Eastern Towers to Eastern Properties under the Tower Purchase Agreement.

Eastern Towers stayed in business for about another fourteen months. It developed five more towers after June 2003, all of which were sold to Eastern Properties under the Tower Purchase Agreement for less than half their true value. Relations between Moore and Rosenfeld, on the one hand, and Sanford and (particularly) Strachan on the other, deteriorated considerably.

One of the assets of Eastern Towers was a ground lease and other work-in-process for a site in Wayland, Massachusetts. In December 2003, the lessor sent a letter to Strachan purporting to terminate the lease. The letter proved to be defective as a notice, and the issue was ultimately resolved. Strachan, however, did not inform Moore and Rosenfeld about the letter, and sought to resolve the issue on his own. Moore and Rosenfeld soon learned of it and used the incident as a reason to terminate Strachan for cause. Strachan was fired on February 26, 2004. His ownership interest in the business remained, although it had not fully vested.

In June 2004, Eastern Properties purchased four towers in New Hampshire directly from third parties, without going through Eastern Towers. All of those towers had been identified as opportunities through the efforts of Eastern Towers employees, but all were diverted by Moore and Rosenfeld to their own company. In July 2004, Eastern Properties purchased four more towers, all in the Midwest.

By August 2004, the only valuable asset owned by Eastern Towers was the site in Wayland. The Wayland tower was considered by Sanford to be the potential crown jewel in the business, as a virtual-monopoly tower with coverage over some of metropolitan Boston's wealthiest suburbs. The tower was eventually developed, but not by Eastern Towers. Instead, Moore and Rosenfeld-using, among other things, an extortionate threat against Sanford-eaused Eastern Towers to sell the Wayland site to a new company that they had created called Horizon Towers for less than its fair market value.

By that point, Moore and Rosenfeld owned seventeen towers (through Eastern Properties) and the Wayland site (through Horizon). Moore and Rosenfeld had also set up new companies to acquire towers in other states, in order to keep them away from Eastern Towers-in other words, away from the enterprise in which Strachan and Sanford had an interest. By 2008, they had acquired fifteen additional towers.

During the period in which it was constructing towers, Eastern Towers used the services of Timberline Construction Company to erect the towers and perform related construction services. As Moore and Rosenfeld began to strip Eastern Towers of its assets, they also began to slow and eventually stop payments to Timberline. They nonetheless induced Timberline to keep working, and then tried to strong-arm it into accepting less than full payment. By April 2005, Timberline had filed suit for damages on its unpaid invoices.

Strachan, meanwhile, had also filed suit, alleging breaches of fiduciary duty and other claims against Moore, Rosenfeld, and their various entities. In November 2006, Moore and Rosenfeld caused Eastern Towers, Inc., to file a Chapter 7 bankruptcy petition.

At the end of the day, Moore and Rosenfeld (through entities they owned or controlled) had acquired 33 telecommunication towers. None of those entities had minority shareholders. Strachan and Sanford-who had contributed the Beverly tower to the enterprise, and who worked for free for six months-wound up with virtually nothing. And Timberline-which had constructed multiple towers, and performed all of its contractual obligations-was left with unpaid invoices of more than $264, 000.

The dispute is in this Court after a withdrawal of the reference to the Bankruptcy Court. It is a tangled case that has not proved simple to resolve. Among other things, Moore and Rosenfeld created multiple entities with different ownership structures, many of which were intended to own tower assets that were usurped or diverted from Eastern Towers. But they did not observe corporate formalities with care, and many of their arrangements were haphazard and sloppy. Furthermore, the case involves an overlay of multiple contracts, some of which modify, or purport to modify, the fiduciary duties at issue. As a result, the fair resolution of this dispute requires the use of some equitable devices and remedies-most notably, disregarding the separate identities of Eastern Towers, Inc., and Eastern Towers, LLC.

In any event, and for the reasons that follow, the Court finds that Moore and Rosenfeld violated their fiduciary duties to Eastern Towers and to Strachan as a minority shareholder, and violated Mass. Gen. Laws ch. 93A in connection with their dealings with Timberline.

II. NATURE OF PROCEEDINGS

As noted, this matter is here on a withdrawal of reference from the Bankruptcy Court. In November 2006, Moore and Rosenfeld caused Eastern Towers, Inc., to file a voluntary petition under Chapter 7 of the Bankruptcy Code. With two very minor exceptions, Strachan and Timberline are the only creditors. The reference was withdrawn in 2010, and the matter was then tried to the Court.

The case involves three sets of claims by three different plaintiffs. First, the bankruptcy Trustee has brought shareholder derivative claims against Moore and Rosenfeld on behalf of the debtor, Eastern Towers, Inc., for breach of fiduciary duty. The Trustee has also asserted claims against Moore, Rosenfeld, and various entities for avoidance and recovery of fraudulent or constructively fraudulent transfers. Second, Strachan has brought individual claims against Moore and Rosenfeld for breach of fiduciary duty, promissory estoppel, breach of contract, breach of the implied covenant of good faith and fair dealing, and wrongful termination. Third, Timberline Construction Corporation has brought claims against Moore and Rosenfeld for violations of Mass. Gen. Laws ch. 93A. The Trustee seeks various forms of declaratory, equitable, and monetary relief, including transfer of various properties to the estate, an accounting, and the imposition of a constructive trust; Strachan and Timberline seek money damages. Matthew Sanford is neither a plaintiff nor a defendant.

The following constitutes the Court's findings of fact and conclusions of law under Fed.R.Civ.P. 52.

III. FINDINGS OF FACT

A. The Parties

1. Eastern Towers, Inc., is a closely-held Massachusetts corporation with a former place of business in Marblehead, Massachusetts. (Sanford, 5:90; Ex. 21).

2. Eastern Towers, Inc., filed a bankruptcy petition under Chapter 7 of the Bankruptcy Code on November 6, 2006. (Third Amended Complaint (hereinafter Compl.) ¶ 2).

3. Plaintiff Joseph G. Butler is the Chapter 7 Trustee of Eastern Towers, Inc. (Compl. ¶ 3).

4. Plaintiff John Strachan is currently a mortgage broker. (Strachan, 2:106). He formerly served as President of Eastern Towers, Inc. (Strachan, 2:129; Ex. 19).

5. Plaintiff Timberline Construction Corporation is a construction company. (Strachan, 4:144-45).

6. Defendant Edward T. Moore is a self-employed businessman and real estate developer. He is an officer and director of Eastern Towers, Inc. (Moore, 15:115; Exs. 16, 20, 21, 146). He graduated from Harvard Law School and Harvard Business School in 1975, and has been a lawyer and a member of the Massachusetts bar since that time. (Moore, 16:146).

7. Defendant Lawrence W. Rosenfeld is a businessman. He is an officer and director of Eastern Towers, Inc. (Exs. 16, 19, 20, 21, 146). He has worked with a number of start-up companies and currently holds a number of officer, director, and management positions at several companies. (Rosenfeld, 11:5-8, 12-14, 25; 13:70-77).

8. Defendant Eastern Towers, LLC is a Massachusetts limited liability company. (Exs.45, 54).

9. Defendant Eastern Properties, LLC is a Massachusetts limited liability company. (Ex. 94).

10. Defendant Horizon Towers, LLC, formerly known as Eastern Towers, II, LLC, is a Massachusetts limited liability company. (Exs. 154, 165). At all relevant times, Moore owned an 85% interest in Horizon and the Joan Rosenfeld Trust f/b/o Lawrence W. Rosenfeld owned the remaining 15% interest. (Moore, 15:131-32; Ex. 509).

11. Defendant Tower Investors Trust is a nominee trust through which Moore and Rosenfeld hold their interest in Eastern Towers, LLC. (Moore, 15:129; Ex. 45). Moore holds a majority interest in Tower Investors Trust, and Rosenfeld holds a minority interest. ( Id. ).

12. Defendant Glover Property Management, Inc., is a corporation engaged in property management. (Moore, 15:139-42). At all relevant times, it was owned by Moore. (Moore, 19:55).

13. Defendant 5G Investment Trust is a Massachusetts nominee trust formed under a declaration of trust dated December 9, 2004, by Moore on behalf of Glover Property Management, Inc. (Moore, 15:130-32; Ex. 177). Moore has a 90% beneficial interest in the trust, and Rosenfeld has a 10% interest as beneficiary of the Joan W. Rosenfeld Trust. ( ld. ).

14. Defendant 5G Investment Trust, LLC is a Massachusetts limited liability company organized on July 7, 2006. (Ex. 190). Moore is the sole manager of 5G Investment Trust, LLC. ( Id. ). On July 18, 2006, its name was changed from 5G Towers, LLC to 5G Investment Trust, LLC. (Moore, 15:133-35; Ex. 191).

B. The Cell Tower Industry

15. A cellular telephone is a mobile device that uses radio signals to connect to a cellular network and allows the user to engage in voice and data communication while moving about a specific geographic area.

16. A cellular network consists of a series of "cells." A cell is a geographic area that contains a "base station" with which cell phones can communicate. The base station ordinarily consists of a tower, an antenna mounted on the tower, and a small building that contains equipment.

17. In a fully developed wireless carrier network, cells overlap and cell phones switch cells as they are carried through different geographic areas. Where cells do not overlap, there is a "coverage gap" in a wireless carrier's network-that is, an area with no cell service coverage or where coverage is less than acceptable. (Orlandi, 1:69-70).

18. During the early 2000s, several of the major cell carriers (such as AT&T, T-Mobile, Verizon, and Sprint) were trying to build out their networks in order to offer more comprehensive coverage to their customers. ( See Orlandi, 1:66-69; Moore, 18:111-12).

19. A "build-out" is an industry term used to describe the process of completing a wireless carrier network by filling coverage gaps. (Orlandi, 1:69-70).

20. In the early 2000s, carriers were particularly focused on building out their networks in areas with potentially high usage that had gaps in coverage. At the time, that included certain suburbs of major cities, popular vacation destinations, and areas along major highways. ( See Strachan, 1:129-30; Chandler, 4:23; Mallinson, 8:24).

21. For various reasons, some communities were reluctant to allow cell-tower construction. These locations are known as "hard-to-zone" sites. (Moore, 18:111).

22. The Telecommunications Act of 1996 prohibits communities from making zoning decisions that would effectively prohibit the provision of wireless communications services. 47 U.S.C. § 332(c)(7)(B)(i)(II). Ifa local zoning board denies a permit application, under the Act, the applicant has twenty days to appeal to the United States District Court. 47 U.S.C. § 332(c)(7)(B)(v). ( See Rosenfeld, 14:51). The Act requires that any decision to deny a request to construct personal wireless service facilities be in writing and supported by substantial evidence. 47 U.S.C. § 332(c)(7)(B)(iii).

23. Because of that regulatory framework, there is a significant economic advantage to obtaining the first tower in a "hard-to-zone" site. ( See Mallinson, 8:24-25; Moore, 18:110-11, 19:71-75).

24. A "search ring" is an identified area where there is a coverage or capacity gap in cellular service. (Orlandi, 1:70-71).

25. In the early 2000s, a typical process for filling a gap in coverage was as follows. First, the tower company would attempt to locate a suitable site where a landowner was willing to permit the construction of a tower. (Strachan, 1:136-37; Orlandi, 1:72).

26. When a suitable site was located, the tower company would enter into a ground lease with the landowner for the site. (Strachan, 1:118, 137; Orlandi, 1:82-83).

27. After a ground lease was signed, a tower company would attempt to obtain carrier support (that is, a commitment to lease space on the tower) before applying for zoning approval and building permits and starting construction. (Strachan, 1:137, 140-41; Orlandi, 1:82-83).

28. The tower company would then seek to obtain the necessary zoning and permit approval. ( Id. ).

29. If approval was obtained, the tower company would then build the tower and enter into one or more leases with the carrier for use of the tower. ( Id.).

30. Once zoning is approved and permitting is in place, construction of the tower is usually relatively simple. Depending on the type of tower, construction may take less than a day to six weeks. (Moore, 19:200-01). Maintenance is also relatively simple; costs vary depending on the type of tower and could range from nearly zero to approximately $1, 000 per year. ( See Moore, 18:123-25, 19:173-74).

31. In the early 2000s, it typically took about one year from the time a search ring was identified until a tower within the search ring was constructed and generating income. (Strachan, 1:135-36).

32. Normally, because the costs to construct and maintain a tower are fixed, the more carriers (or tenants) a tower company can secure on a tower, the greater the revenue and cash flow for the company. (Strachan, 2:22-23; Mallinson, 8:24-27).

C. John Strachan

33. John W. Strachan was employed as the Northeast Regional Marketing and Sales Manager at American Tower Corporation for a nine-month period in 2001. (Strachan, 1:114-15). American Tower was a company that developed, acquired, and owned cell towers. (Strachan, 1:115). Strachan's responsibilities included leasing tower space to wireless carriers and identifying areas in which they could build new towers. ( Id. at 115).

34. In the early 2000s, the major tower companies, including American Tower, had been building towers aggressively. Many companies had overestimated the cash flow and profitability of the towers they built, leading to significant financial problems. ( See Strachan, 1:125-26).[1] As a consequence, those companies began to drastically reduce the number of towers they built and became more selective, building only those towers they believed were likely to be profitable. ( See Strachan, 1:125-27).

35. In November 2001, Strachan was laid off by American Tower. (Strachan, 1:128).

36. Strachan believed that because the carriers' demand exceeded the limited number of towers being built by the major tower companies, there was an opportunity for smaller, independent tower development companies. (Strachan, 1:125-27; Rosenfeld, 13:82-83; see Wendt, 18:57-58).

37. While at American Tower, Strachan had developed relationships with several wireless carriers, particularly AT&T. He believed that he could use those relationships to start a small cell-tower company to help those carriers build out their networks. (Strachan, 1:124-30).

38. Strachan considered joining with Matt Sanford and Chris Hesse as potential partners in a new cell-tower venture. (Strachan, 1:142). Strachan originally decided to move forward with Hesse as a partner. (Strachan, 1:150-53; Hesse, 5:11-12).

39. Strachan and Hesse formed a limited liability company called U.S. Tower Group, LLC. From December 2001 to early February 2002, they spent significant time exploring potential locations for cell towers and talking to carriers. (Strachan, 1:144-47, 3:87).

40. Strachan and Hesse also contacted Citizens Bank and Brookline Savings Bank to seek financing for their new enterprise. (Strachan, 1:151-53). At some point, they met with Charles Devens of Brookline Savings Bank. Devens suggested that Strachan and Hesse meet with a client of his, with whom he had a relationship, named Edward Moore. (Strachan, 1:153-54).

D. Initial Discussions with Moore and Rosenfeld

41. On February 12, 2002, Strachan and Hesse met with Moore for the first time. (Strachan, 1:154). At the initial meeting, Strachan and Hesse explained they were looking for financing or capital for a tower company, and that they needed someone with experience who could provide it. (Strachan, 1:155-56; Hesse, 5:14-16).

42. Moore described his background, stating, among other things, that he was a real estate developer and was familiar with cell towers. He in fact owned one himself, in Marblehead. (Strachan, 1:155; Hesse, 5:16-17). Strachan described his relationships with carriers, his knowledge of their build-out plans, and what he saw was a "real opportunity to build a legitimate business." He also described the sites he had in progress. (Strachan, 1:156; Hesse, 5:14-16; Moore, 18:104-05).

43. After subsequent conversations, Strachan and Moore both decided that they did not want to go into business with Hesse. (Strachan, 1:160-61). Both agreed to speak further about the potential business opportunity, including bringing in other potential partners. (Strachan, 1:161-63). Strachan brought in Matthew Sanford, a friend who was employed in the wireless industry. Moore introduced Strachan to Lawrence Rosenfeld. (Strachan, 1:163).

44. The first meeting between Moore, Rosenfeld, Strachan, and Sanford occurred on February 15, 2002, at Moore's office in Marblehead. (Strachan, 2:8; Moore, 18:108-09; Rosenfeld, 11:23-24).

45. During the meeting, the parties discussed a number of topics, including what each of them believed they could contribute to the venture. (Strachan, 2:12-13; Sanford, 5:76-80; Moore, 18:115). Among other things, Moore discussed his business experience and legal background. He also advised that he had an assistant who could help with the formation of the business. (Strachan, 2:13; Sanford, 5:81-82). He stated that he had experience building and negotiating the leases for his Marblehead tower. (Moore, 18:110-12). Rosenfeld also discussed his business background and experience, and stated that he was experienced and capable at creating business models for companies. (Strachan, 2:9; Rosenfeld, 11:25).

46. As of February 2002, Strachan and Sanford had been negotiating a ground lease for a tower with Endicott College in Beverly, Massachusetts. (Strachan, 2:29; Sanford, 5:70-73). The college was prepared to sign such a lease. ( Id.).

47. Strachan described his background, his business relationships, and why he thought there was an opportunity to create a tower company. (Strachan, 2:11; Rosenfeld, 11:24-25). The parties specifically discussed the Beverly tower opportunity. (Strachan, 2:10-11). They also discussed Moore's existing cell tower, the advantages of hard-to-zone site opportunities, and potential carrier interest in general. (Moore, 18:110-12).

48. The parties continued discussing the opportunity over lunch. (Strachan, 2:11-12). At some point, Moore drew a circle on a napkin and divided it down the middle, with one side representing a 50% investor interest and the other a 50% working partner interest. He said that he and Rosenfeld "like to keep things simple, " and that "this is how we do our business." (Strachan, 2:12; see Rosenfeld, 11:30-31; Moore, 18:114).

49. The parties understood from the outset that Moore and Rosenfeld would provide the initial capital for the venture. (Moore, 18:115; Rosenfeld, 14:14, 16:9). Rosenfeld asked if Strachan and Sanford could contribute any capital to the venture; they responded that they were not in a position to do so. (Strachan, 2:13). Strachan and Sanford suggested that they could work for free for six months as their capital contribution. Rosenfeld responded that that "made sense." (Strachan, 2:13).

50. At the end of the meeting, Moore and Rosenfeld asked Strachan and Sanford to send them a proposal and a pro forma so that they could begin modeling the business. (Strachan, 2:14; Rosenfeld 11:31-32; Moore, 18:115). Rosenfeld wanted to use the proposal to learn more about the strengths of his potential partners. He also wanted to use it as a starting point to develop other models for the business. (Rosenfeld, 11:33-35). Rosenfeld was specifically interested in the number of towers Strachan and Sanford thought could be built over the short- and long-term. ( Id., 11:34-35).

51. On February 18, 2002, Strachan and Sanford sent Moore and Rosenfeld a letter by e-mail containing an investment proposal with a proforma for a business that they called "Northeast Towers." (Strachan, 2:14; Ex. 2). The proposal set forth projected income and expenses associated with the proposed business and also projected how the business might grow over time. (Strachan, 2:14-28; 3:103-04; Ex. 2).

52. The proposal included a model "based on signing twenty ground leases in the first year and adding additional ground leases until the fourth year." (Ex. 2 at 7).

53. The proposal indicated that the company would need between $300, 000 and $500, 000 in capital over the first five years. In exchange, the investors (Moore and Rosenfeld) would receive 50% ownership of the company. (Ex. 2 at 2). It also stated that Sanford and Strachan would commit five years to the business and work without pay for six months, that Strachan would be president, and that Sanford would be vice-president. ( Id. )[2]

54. In calculating the amount of initial capital needed, Strachan and Sanford believed that it would cost about $100, 000 to $125, 000 to construct a cell tower. They believed that as soon as a tower was constructed, the company would be able to utilize bank financing, obtained by borrowing against the cash flow of the tower, to fund the business as more towers were built. (Strachan, 3:110-11, 4:128; Sanford, 6:125-26).

55. On February 19, 2002, Strachan and Sanford set up a Delaware limited liability company called Eastern Towers, LLC. (This was a different entity than the Eastern Towers, LLC that is a defendant in this litigation.) (Strachan, 2:28-29; Ex. 3).[3]

56. Strachan and Sanford wanted to create an entity to sign the lease to ensure that they did not lose the opportunity. (Strachan, 2:29, 4:18).

57. On February 19, 2002, Eastern Towers, LLC (Delaware) entered into an option for a ground lease for the Beverly site. (Strachan, 2:29-30; Sanford, 5:71-73; Ex. 34; Ex. 900.201).

58. While on a ski vacation shortly afterward, Moore and Rosenfeld spent time creating a more sophisticated model of the business, among other things providing projections on a quarterly, rather than an annual, basis. (Rosenfeld, 11:33, 13:89-90; Moore, 18:120-21; Ex. 4).

59. While working on the model, Rosenfeld concluded that the 20-tower model in the proposal was not feasible as a projection for the new tower business, and worked to create a more realistic model. (Rosenfeld, 11:35, 52-53). Moore and Rosenfeld exchanged several drafts, revising the model; among other things, they reduced the projected number towers built during the first year to six. (Rosenfeld, 11:35; Exs. 4, 5, 6, 7, 8, 9).[4]

60. On February 25, 2002, the parties met again to discuss the proposed business. (Strachan, 2:32-33; Ex. 600). During that meeting, Strachan and Sanford reported that they had signed the ground lease for the Beverly site, using the Delaware LLC that they had formed. (Strachan, 2:33-34; Rosenfeld, 13:95-96).

61. The parties also discussed the financial model that Moore and Rosenfeld had created. (Strachan, 2:34-35; Moore, 18:130, 133-34; Sanford, 6:130; Rosenfeld, 11:46). Strachan and Sanford provided comments on the model based on their experience in the industry. (Strachan, 3:120; Rosenfeld, 11:53).

62. The refined model as of February 25, 2002, projected that the business would have two working towers by December 2002, five working towers by March 2003, nine working towers by June 2003, 13 working towers by September 2003, and 17 working towers by December 2003. (Ex. 9). The model also projected that substantial working capital would be required to form a viable business. ( Id. ).

63. All of the financial models prepared by Rosenfeld and Moore assumed that the new business would require financing over time in order to develop new towers. (Moore, 18:134; Exs. 4-9).

64. As of the February 25 meeting, it was undecided what organizational structure the new business would have. In particular, it was undecided whether the parties would use a "C" corporation, an "S" corporation, an LLC, or a combination of entities in a multi-level structure. Although any of those options would provide limited liability, they were not interchangeable. Among other things, there were various advantages and disadvantages from the standpoint of taxes and corporate governance.

65. Moore and Rosenfeld wanted to ensure that they had adequate protections before contributing a significant amount of capital to the business. (Rosenfeld, 11:57, 65, 70-73; id., 13:100-01). Among other things, they wanted to structure the business to avoid double taxation if they incorporated, but wanted to have two classes of equity ownership so that Moore and Rosenfeld could recover their capital investment before any profits were divided among the principals. (Rosenfeld, 11:61-63).

66. Moore and Rosenfeld contend that they discussed the organizational structure at the February 25 meeting. Among other things, they expressed concerns about possible self-employment tax consequences if only an LLC were used. (Rosenfeld, 13:92; Moore, 18:136-39). Strachan and Sanford deny that an organizational structure was discussed on February 25, other than the fact that a corporation would be created. (Strachan, 2:36, 39; Sanford, 6:131).

67. The agenda for the meeting also reflected that the four intended to discuss "vesting" and a "shareholder agreement." (Moore, 18:139-40; Ex. 601). Moore and Rosenfeld testified that the issue of vesting was discussed at the February 25 meeting. (Moore, 18:139-40; Rosenfeld, 13:96-97). Among other things, they contend that they indicated that the equity interests of Strachan and Sanford would have to vest over time if the two were not contributing any capital, and that a shareholder agreement would have to be put into place to establish the rights of the parties. ( Id. ). Strachan testified that he did not recall whether those subjects were discussed on February 25. (Strachan, 2:36). Sanford testified that the subject of vesting was introduced at a later point, although he did not provide a specific date. (Sanford, 5:96-99; id., 6:131-32).

68. At a minimwn, it seems clear that the subject of vesting was discussed at the February 25 meeting. Furthermore, and without resolving the dispute as to every detail, it is clear that the organizational structure of the new business, and whether the equity interests of Strachan and Sanford would vest over time, had not been resolved by February 25.

69. Moore and Rosenfeld were sophisticated businessmen who intended to contribute significant capital to the proposed enterprise. It is very unlikely that they would follow through on the creation of the business if the enterprise were not organized in a way to optimize tax and business advantage. It is also very unlikely that they would agree to an arrangement where Strachan and Sanford's equity interests would vest in full on the first day, notwithstanding the fact that Strachan and Sanford were essentially strangers to Moore and Rosenfeld and had contributed no financial capital to the enterprise.

E. Formation of Eastern Towers. Inc.

70. After the meeting on February 25, Rosenfeld sent Moore a copy of a revised version of the financial model, along with an agenda for a further meeting to be held on February 27. (Rosenfeld, 11:44-46; Exs. 10, 14). The model included information provided by all four parties. (Rosenfeld, 11:46; Strachan, 2:40; Sanford, 6:137-38).

71. The model contained the same tower construction projections as the previous model. It anticipated that, after about a year, about half of the working towers would be two-carrier towers, about half would be four-carrier towers, and that there would be one- and three-carrier towers as well. (Ex. 10; Strachan, 3:134-35; Moore, 19:7). The model also included a capital requirement of approximately $500, 000 and assumed that outside financing would be obtained for the acquisition and development of additional towers. (Rosenfeld, 13:99; Ex. 14 at 3).

72. On February 27, 2002, the parties met again. (Strachan, 2:39; Moore, 19:8; Ex. 602). They again discussed the business model that Moore and Rosenfeld had been refining. (Strachan, 2:40-41).

73. The agenda for the February 27 meeting listed, among other items, "vesting." (Ex. 602). Strachan and Sanford testified that the subject of vesting was not discussed at the meeting. (Strachan, 2:53; Sanford, 5:85). Rosenfeld and Moore testified that the subject was discussed, at least to a limited extent. (Rosenfeld, 11:66; Moore, 18:136-39, 19:11, 15). At a minimum, however, the fact that the subject was on the agenda indicates that the issue had not been finalized.

74. At that point, all four principals were willing to move forward, although many of the specific details of the business had not yet been settled. Among other things, there were no formal shareholder and employment agreements, and Moore and Rosenfeld had not yet made a substantial financial contribution to the business. ( See Strachan, 2:50-54; Sanford, 5:88; Rosenfeld, 11:94).

75. At some point, the parties had learned that the name Strachan and Sanford preferred, "Northeast Towers, " was taken. They discussed forming a new entity in part to save their second-choice name, which was "Eastern Towers." (Strachan, 3:131-32; Sanford, 6:132).

76. Strachan and Sanford were ready to start the business and expressed the need for the formation of an entity, so that when they contacted carriers and landowners they would have more credibility than if they were acting solely as individuals. (Rosenfeld, 11:73-76).[5]

77. According to Rosenfeld, the formation of a corporation would save the name "Eastern Towers" and allow Strachan and Sanford to pursue various opportunities while the parties worked to develop more comprehensive shareholder and employment agreements. (Rosenfeld; 11:63-64).

78. Strachan and Sanford testified that the principals did not discuss any other form of organizational structure at the February 27 meeting. (Strachan, 2:96; Sanford, 5:89). Rosenfeld and Moore testified that the subject was discussed. (Rosenfeld, 11:71-72; Moore, 19:10). Without resolving the dispute completely, it is nonetheless clear that the issue of the organizational structure of the enterprise had not been resolved by February 27.

79. The parties signed the necessary papers to form Eastern Towers, Inc., as a Massachusetts corporation during the February 27, 2002 meeting. (Rosenfeld, 13:100; Ex. 21). The documents were prepared by Moore's assistant, Laura Whitney, and were signed by the four principals. (Strachan, 2:46-47; Rosenfeld, 13:100; Moore, 19:9-10).

80. The parties conducted various corporate votes on February 27. Strachan, Moore, and Rosenfeld were elected as the directors of the corporation. (Ex. 16). Strachan was elected president; Rosenfeld was treasurer; and Toyo Johnson, one of Moore's assistants, was clerk. (Strachan, 2:39, 44, 47-49; Sanford, 5:84; Rosenfeld, 11:57; Exs. 16, 18, 19). Sanford was not included as an officer or director because at the time he was still employed at another firm in the wireless industry. (Strachan, 2:44, 3:141-42; Sanford, 5:83-84; Rosenfeld, 11:77-78).[6]

81. The Articles of Organization also established the voting rights and limited the liability of the directors. (Ex. 21).[7]

82. Toyo Johnson, as clerk, signed a document on February 27, 2002, titled "Issuance of Common Shares" that stated that the directors had "voted to issue 10, 000 shares of common class stock...." (Ex. 17; see also Strachan, 2:47-50; Sanford 5:84-87; Rosenfeld, 11:78-80). There were no classes of stock other than common stock.

83. The February 27 "Issuance of Common Shares" did not designate who received shares, or how many. (Ex. 17; Rosenfeld, 11:79-80; Moore, 19:10-11).

84. No stock certificates for shares of Eastern Towers, Inc., were ever created or provided to the shareholders. (Strachan, 2:50; Sanford, 5:85; Moore, 20:38).

85. There is no stock register or other corporate record indicating the ownership of the shares of Eastern Towers, Inc., as of March 1, 2002.

86. Under the circumstances, the ownership of the shares of Eastern Towers, Inc., must be inferred from the available evidence.

87. As of the end of February 2002, the parties understood and expected that the equity split in Eastern Towers, Inc., would be 25% each for Strachan and Sanford, and 50% between Moore and Rosenfeld. (Strachan, 2:43-44, 48; Sanford, 5:84-87; Moore, 20:38-39).

88. Accordingly, as of March 1, 2002, the ownership of shares of Eastern Towers, Inc., was as follows: each of four persons (Edward Moore, Lawrence Rosenfeld, John Strachan, and Matthew Sanford) owned 2, 500 shares, for a total of 10, 000 shares of common stock.

89. The parties also discussed the Beverly tower project at the February 27 meeting. Strachan and Sanford still owned the rights to build the Beverly tower through Eastern Towers, LLC (Delaware). (Moore, 19:17). Moore and Rosenfeld asked, and Strachan and Sanford agreed, to transfer those rights to the new enterprise. (Strachan, 2:51; Sanford, 10:158-60).

90. The parties intended (and apparently were under the impression) that the Beverly site would be transferred to the new business in April 2002. (Rosenfeld, 11:162-63). However, the Beverly site was not actually transferred until June 2003. (Rosenfeld, 11:160-63; Sanford, 10:160; Moore, 19:17).[8] As noted, the Delaware LLC had formally ceased to exist in January 2003. (Ex. 74).

91. On February 28, 2002, Moore contributed $5, 000 in capital to Eastern Towers, Inc. (Ex. 695; see Rosenfeld, 11:98-101, 165).

92. The articles of organization for Eastern Towers, Inc., were filed with the commonwealth on March 1, 2002. (Ex. 21).

F. The Beginnine of Operations

93. At some point after February 27, Strachan signed a lease on behalf of Eastern Towers, Inc., for office space in a newly-built, vacant office building at 40 Tioga Way in Marblehead, Massachusetts. An entity owned by Moore owned the building, and the company paid rent of approximately $1, 200 to $1, 300 per month to that entity. (Strachan, 2:37-38, 54-56; Sanford, 5:90; Rosenfeld, 12:129; Moore, 16:125).[9]

94. Glover Property Management, Inc., a corporation owned by Moore, performed accounting and bookkeeping services for Eastern Towers, Inc. (and, eventually, Eastern Towers, LLC). (Moore, 15:140-42, 19:55-58). Both entities paid Glover for its services. (Moore, 19:58-60).

95. Strachan and Sanford began reviewing potential tower sites in Massachusetts and New Hampshire and attempting to use their relationships and knowledge to begin developing business opportunities for the company. (Strachan, 2:75-80; Sanford, 5:93).

96. Among other things, Strachan met with representatives from AT&T (and AT&T's project manager, Bechtel), T-Mobile, and Cingular to seek business opportunities. (Strachan, 2:57-58, 77; Chandler, 4:24).

97. As a result of those meetings, Strachan received search rings and began conducting site visits to find potential sites for AT&T. (Strachan, 2:61-67).

G. The LLC Operating and Employment Agreements

1. The Negotiation of the Agreements

98. In early March 2002, Moore and Rosenfeld continued to discuss among themselves the organizational structure of the new enterprise. At some point, Moore and Rosenfeld decided to create a limited liability company in addition to the corporation.

99. During the same period, Moore and Rosenfeld began to discuss among themselves adjusting the equity split of the business. (Rosenfeld, 11:154-57, 13:112-13). They did not initially discuss that fact with Strachan or Sanford. (Sanford, 5:107; Rosenfeld, 11:153-55, 13:113-14).

100. After the February 27, 2002 meeting, Rosenfeld began working with attorney William Kelly at the Nixon Peabody law firm to create an LLC and to prepare detailed operating and employment agreements. (Rosenfeld, 11:69-70; Ex. 26).

101. Strachan was not aware at the time that Rosenfeld was communicating with a lawyer about creating a new entity and preparing various agreements. (Strachan, 2:97, 130).[10]

102. On March 4, 2002, Rosenfeld e-mailed a term sheet to Kelly and sent a copy to Moore. (Rosenfeld, 13:103-04; Ex. 26). It was not sent to Strachan or Sanford. (Ex. 26). The term sheet contained, among other things, terms that Moore and Rosenfeld wanted in the operating and employment agreements. ( Id. ). Neither Strachan nor Sanford received a copy of the March 4 e-mail. (Strachan, 2:96-97, 129-30; Sanford, 5:112; see also Ex. 26).[11]

103. On March 5, 2002, Kelly forwarded Rosenfeld a draft operating agreement for a new entity to be called Eastern Towers, LLC. Rosenfeld then forwarded it to Moore. (Ex. 27).

104. The draft operating agreement as of March 5 included a proposed § 5.2. That section would permit Moore and Rosenfeld to: "engage or have an interest in other business ventures which are similar to or competitive with the business of the Company." It also provided that Moore and Rosenfeld would not be "obligated to present an investment opportunity to the Company even if it is similar to or consistent with the business of the Company, " and would have the "right to take for their own account or recommend to others any such investment opportunity." (Ex. 27).

105. Rosenfeld called Strachan on March 11, 2002, to discuss a proposed vesting schedule and an insurance policy for Strachan and Sanford that he and Moore had been developing. (Rosenfeld, 11:128-29); Strachan, 2:91, 3:151). Rosenfeld proposed a vesting schedule of five years for equity in the LLC. (Rosenfeld, 11:111-12; see Ex. 29). He did not mention § 5.2.

106. Strachan thought vesting was inappropriate because he and Sanford had agreed to put the Beverly tower site into the company and to work six months without pay, and that to the extent that there would be vesting, a five-year-vesting schedule was too long. (Strachan, 2:91-92; Rosenfeld, 11:111-12).[12]

107. Neither Strachan nor Sanford objected at the time to the fact that a separate LLC would be created.

108. Rosenfeld told Strachan and Sanford that if they desired they could obtain advice from a lawyer before they signed the agreements. (Sanford, 10:166-67; Rosenfeld, 13:106-07).[13]

109. Although Moore was a lawyer, Strachan understood that Moore was not representing him personally. (Strachan, 2:133-34, 3:159). Sanford and Strachan understood that Moore was effectively serving as in-house counsel for the company. (Strachan, 2:13, 59-60, 133-35; see Sanford, 10:174).[14]

110. Strachan and Sanford did not seek outside counsel because they trusted Moore and Rosenfeld and were relying on Moore's legal training and experience. (Strachan, 2:133-34, 3:158; Sanford, 10:174).

111. After that discussion, Rosenfeld revised the draft term sheet to reflect a shorter vesting period of four years, with accelerated vesting for the first six months. (Ex. 29). Rosenfeld shared the revised term sheet with Moore, who accepted the change and directed Rosenfeld to send the term sheet to Kelly. (Ex. 30). The revised term sheet also identified the equity split as 50% between Moore and Rosenfeld and 50% between Strachan and Sanford. (Ex. 29). Rosenfeld did not send the revised term sheet to either Sanford or Strachan. (Rosenfeld, 11:124-25, 12:19-20, 14:114-15).[15]

112. Rosenfeld continued to work on the term sheets and sent copies to Kelly and Moore. (Exs. 32, 35). As late as March 23, the revised term sheets identified the equity split as 50% between Moore and Rosenfeld, and 50% between Strachan and Sanford. (Exs.32, 35).

113. The four principals met on March 26, 2002, to discuss the proposed operating and employment agreements. (Strachan, 2:93-95; Ex. 13). Rosenfeld shared the current version of the term sheet that he and Moore had developed with Strachan and Sanford and said that he would circulate drafts of the operating and employment agreements. (Strachan, 3:162; Rosenfeld, 11:107-08; Ex. 35).[16] It was the first time Strachan and Sanford had seen the term sheet. (Rosenfeld, 14:115). Rosenfeld did not provide copies of the draft agreements at the meeting. (Strachan, 2:96).

114. The term sheet described Eastern Towers, Inc., as a "Sub-S service" corporation and set out other key terms of the proposed business, including the creation of an LLC. (Ex. 35). Rosenfeld explained that having a separate "operating arm" for the business would be beneficial for tax reasons and to help the business obtain financing. (Strachan, 2:95-96).

115. The meeting on March 26, 2002, was the first meeting of the principals since the creation of Eastern Towers, Inc., on February 27. During that four-week period, Strachan had begun work for the new enterprise, but had also taken a family vacation that was apparently one week long. (Strachan, 2:93; Rosenfeld, 11:115).

116. On March 27. 2002, Rosenfeld circulated a draft of an LLC Operating Agreement for Eastern Towers, LLC to Strachan and Sanford. (Ex. 36). Strachan acknowledged receipt of the draft. (Ex. 37).

117. The draft LLC Operating Agreement included § 5.2, which permitted Moore and Rosenfeld to engage in competing business ventures. (Ex. 36, § 5.2).

118. The draft LLC Operating Agreement did not include a specific division of equity of the LLC among the principals. However, it listed Moore and Joan Rosenfeld Trust f/b/o Lawrence W. Rosenfeld as Class A members, and Strachan and Sanford as Class B members. It also provided a vesting schedule for the Class B members, with 25% vesting after six months and periodic vesting thereafter in three-month increments, with full vesting after four years. ( See id., Sched. A).

119. Rosenfeld also sent Strachan and Sanford a draft of an Executive Employment Agreement on March 27. (Strachan, 2: 103; Sanford, 10:26-27; Ex. 38).

120. None of the draft agreements that were circulated in March 2002 specifically addressed the ownership relationship, if any, between Eastern Towers, Inc., and Eastern Towers, LLC.

121. The draft Executive Employment Agreement was an agreement between Eastern Towers, Inc., and Strachan, as president of the corporation. (Ex. 38).

122. The draft Executive Employment Agreement also provided, among other things, that Strachan could be terminated with or without cause. ( Id. §§ 3.2, 3.3). The agreement was for a two-year term. ( Id. § 3.1).

123. Strachan and Sanford discussed the various provisions of the agreements, including § 5.2, the non-competition provisions, and the vesting terms. (Strachan, 2:99-104; Sanford, 10:15). Neither Strachan nor Sanford understood why § 5.2 was necessary or appropriate. (Strachan, 2:101-04).

124. On March 28, 2002, Moore contributed another $5, 000 in capital to Eastern Towers, Inc. (Ex. 695).

125. On March 30, 2002, Sanford e-mailed Moore and Rosenfeld his and Strachan's comments on the draft LLC Operating Agreement and the draft Executive Employment Agreement. (Strachan, 2:104-05, 4:43-44; Sanford, 10:16-18; Ex. 41).

126. In an attachment to the e-mail, Strachan and Sanford specifically identified § 5.2 of the LLC Operating Agreement as something they wished to discuss. (Ex. 41 at 2). They also requested clarification of the vesting provisions in the agreement, and addressed the employee benefit plan, Class A membership interests, and insurance. ( ld. ). Strachan and Sanford concluded by stating: "We are fine with all the other sections and language in the Operating Agreement." ( ld. ).

127. In that e-mail, Strachan and Sanford did not object to the creation of the LLC.

128. Strachan and Sanford addressed the Executive Employment Agreement in a separate attachment. (Ex. 41 at 3). Specifically, they expressed their concern that the non-competition provisions in the employment agreement should also apply to Moore and Rosenfeld. ( ld. ). They also expressed concern with the provisions regarding vacation time, benefits, the two-year term of the agreement, the termination provisions, the length of continuing assistance required if terminated for cause, and the two-year non-solicitation provision. ( Id. ). They concluded by stating: "Everything else in the Agreement is fine." ( Id. ).

129. On April 3, 2002, the parties met and discussed the issues Strachan and Sanford had raised with respect to the LLC Operating Agreement and the Executive Employment Agreement. (Strachan, 2:107, 4:45).

130. The discussion concerning § 5.2 at the April 3 meeting was "heated and emotional." (Sanford, 5:103, 10:19-20). Sanford and Strachan understood § 5.2 would allow Moore and Rosenfeld to compete against Eastern Towers. (Strachan, 2:101-02; Sanford, 5:102-03, 6:79). Strachan felt that this provision made "no sense" given their business plan; Sanford believed it was a "huge concern" and "fundamentally wrong" and wanted it taken out. (Strachan, 2:101-02; Sanford, 5:102-05).

131. Sanford testified that if he had known about § 5.2 in advance, "It would have made me look a lot harder at going into business... and who I was joining forces with... [and] whether I'd want to start a company with people who had the right to compete against that company." (Sanford, 5:110). Strachan testified that if he had known that Section 5.2 existed he "never would have gone ahead with these men." (Strachan, 2:133).

132. Moore and Rosenfeld told Strachan and Sanford that they had numerous investments and did not want to limit their investments only to those that did not compete with Eastern Towers. (Strachan, 2:107-09; Sanford, 6:79-80, 10:173-74; Rosenfeld, 11:151-52, 13:118-19; Moore, 19:37-38). Moore said that he already had a cell tower and was an investor in American Tower, and that he wanted to be free to continue to make investments in the cell tower industry. (Sanford, 10:173-74; Rosenfeld, 11:151-52). According to Rosenfeld, the vehicles for his venture capital investments often invest in a "theme" or similar companies, and he wanted to reserve the right to do so here. (Rosenfeld, 11:119-20).

133. Moore and Rosenfeld specifically represented to Strachan and Sanford that they did not intend to compete directly with Eastern Towers and that the provision was designed to protect their "existing interests" and allow them to invest in other tower companies, such as American Tower. (Sanford, 6:79-80, 10: 173-74; see Rosenfeld, 13:118-19; Moore, 19:38-39).[17]

134. After the discussion, Strachan and Sanford reluctantly agreed to include § 5.2 in the Operating Agreement. (Strachan, 2:108-09, 125; Rosenfeld, 13:119).

135. During the discussions, the parties also negotiated and amended the length of the non-competition provision in the Executive Employment Agreement from five years to two years. (Strachan, 3:154; compare Ex. 38 with Ex. 35).

136. On approximately April 2 or 3, 2002, Rosenfeld called Strachan to discuss adjusting the equity split of the business. (Strachan, 2: 120).[18] Rosenfeld told him that he and Moore wanted additional equity in the business because they were doing more work than they had originally planned. (Strachan, 2:120-21). As a result, Rosenfeld told him that he and Moore determined that a 60-40 split of the equity was appropriate. (Rosenfeld, 11:155, 13:115).

137. Strachan was not happy with the demand for a different equity split. He felt he had been "blind-sided, " that they had already started the business, and that he did not feel that the arrangement "was a very fair thing." (Strachan, 2:121). Rosenfeld told Strachan to talk with Sanford and get back to him. ( Id. ).

138. The parties had several "emotional" and "heated" discussions about the proposed change in the equity split. (Sanford, 5:107-08). Moore and Rosenfeld maintained that they would not move forward without the change. (Sanford, 5:111-12). Strachan and Sanford did not see the value in the work Moore and Rosenfeld had contributed, and thought they should make additional capital contributions or secure additional bank financing in exchange for the additional equity. (Strachan, 2:122-24).

139. As of the beginning of April 2002, Strachan and Sanford had not yet contributed the Beverly tower or any other assets to the company, and Sanford was still employed at another company. (Sanford, 10:37-40; Rosenfeld, 11:160-64; Moore, 20:26; see also Ex. 29).

140. Strachan testified that he felt that he could not walk away from the business because he had committed to contribute the Beverly tower and because he had used his relationship with AT&T to secure search rings and sites. (Strachan, 2:124). Sanford testified that he did not walk away because they "had committed the Beverly tower, " they had "committed other work product, " he intended to leave his job, and he had small children and a house. (Sanford, 5:106, 10:20-21).[19]

141. On April 8, 2002, Rosenfeld contributed $10, 000 in capital to Eastern Towers, Inc. (Ex. 695).

142. On April 9, 2002, at 10:02 a.m., Rosenfeld e-mailed attorney Kelly with revisions to the LLC Operating Agreement. (Ex. 48). In that e-mail, Rosenfeld informed Kelly "[b]y the way, we have changed the %'s to 60% for A and 40% for B." ( ld. ).

143. Rosenfeld also inquired about "[w]ho makes decisions about hiring and firing" for the company, and the impact of the equity change. ( ld. ).[20]

144. The April 9 e-mail from Rosenfeld to Kelly also asked: "Have we decided on the best stockholding and board structure for ET, Inc? It has been set up as a Massachusetts company and although it had originally been expected to be an S corp, we haven't made the election yet, so we can keep it as a C corp." (Ex. 48).

145. The parties appear to agree that they signed the LLC Operating Agreement on April 9, 2002. (Strachan, 2:125; Ex. 45).

146. Nonetheless, the LLC Operating Agreement, which is dated "as of' April 9, states (in the past tense) that "the Company [Eastern Towers, LLC] was formed as a limited liability company under the Massachusetts Limited Liability Company Act... on April 24, 2002." (Ex. 45 at 1).

147. In fact, Eastern Towers, LLC was not created until September 17, 2002, when its certificate of organization was filed with the secretary of the commonwealth. (Ex. 54). That document indicates that the certificate of organization was executed on April 30, 2002. ( Id. ).[21]

148. Strachan also signed the Executive Employment Agreement on April 9, 2002. (Ex. 44).

2. The Terms of the LLC Operating Agreement

149. The LLC Operating Agreement identified the members of Eastern Towers, LLC as Strachan, Sanford, and Tower Investors Trust (an entity owned and controlled by Moore and Rosenfeld). (Ex. 45 at Schedule A).

150. The agreement identified the managers of the LLC as Moore, Rosenfeld, Strachan, and Sanford.

151. The agreement provided for two classes of members: class A (Tower Investors Trust) and class B (Strachan and Sanford). (Ex. 45, § 2.3 and Schedule A).

152. The agreement stated that Tower Investors Trust owned 60% of the membership interests and Strachan and Sanford would eventually, after vesting, together own 40%. (Ex. 45, Scheds. A, B; see also Moore, 19:35).

153. Vesting for Strachan would begin in six months, on October 9, 2002, at 5%, and would increase every three months in increments of 1.072%. Strachan would be fully vested at 20% in four years.

154. The agreement further provided that "Class B Membership Interests may be held only by (i) employees, directors, officers, consultants or advisors of or to the Company, Eastern Towers, Inc., ... or entities affiliated with the Company or ETI ("Service Providers")." (Ex. 45, § 2.3(b)).

155. Under the agreement, "If for any reason (whether voluntary or involuntary) a Class Member ceases to be a Service Provider, the unvested portion of such Class Member's Membership Interest shall automatically be terminated." (Ex. 45, Sch. B). In the event of such a termination, the percentage membership interests of the other members would be increased pro rata. ( Id., § 2.3(b)).

156. If a Class B member ceased to be a "Service Provider, " the company could, at its option by giving written notice within six months, redeem that member's interest at a price set according to a formula based on certain financial data. ( Id., Sch. B).

157. The agreement indicated that Tower Investors Trust would make an initial capital contribution of $25, 000 and that it had made a "commitment to make additional capital contributions" in the amount of $475, 000. (Ex. 45, Schedule A)

158. Section 2.9 of the agreement provided that "[n]o member shall have any right... to receive any distribution or the repayment of his capital contribution except as expressly provided in this Agreement." (Ex. 45, § 2.9).

159. Section 6.2 of the agreement addressed capital contributions. (Ex. 45, § 6.2). Nothing in that section addressed capital withdrawal.

160. Sections 7.1 and 7.2(a) of the agreement provided as follows:

7.1. Capital Recovery.
For purposes of this Article VII, the term "Capital Recovery" with respect to a Member or class of Members, shall mean the receipt of cash and/or property with a value equal to the Contribution of such Member or class of Members.
7.2 Allocation of Profits and Losses.
(a) All profits realized by the Company arising from any source shall be allocated to the Members pro rata in accordance with their respective Membership Interests, provided that profits shall not be allocable to Class B Members until Capital Recovery by the Class A Members.

(Ex. 45, §§ 7.1, 7.2(a)).

161. Sections 7.3(c) and (d) of the agreement addressed distributions of net cash proceeds from the sale of capital assets. Specifically, those sections provided as follows:

(c) The Company shall promptly distribute to the Members the net cash proceeds it receives from the sale of capital assets, except to the extent that, in the opinion of the Managers, the Company is likely to require such proceeds to pay Company expenses. The Company may, at the discretion of the Managers, distribute to the Members at any time additional amounts in cash or in kind. All distributions pursuant to this Section 7.3(c) shall be made to the members pro rata in proportion to the balances of their respective Capital Accounts; provided, however, that no distributions pursuant to this Section 7.3(c) shall be made to Class B Members until Capital Recovery by the Class A Members.
(d) Anything in this Section 7.3 to the contrary notwithstanding, no distribution shall be made to any Member unless all liabilities of the Company to persons other than Members have been satisfied or, in the good faith judgment of the Managers, there remain assets of the Company sufficient to satisfy such liabilities.

(Ex. 45, §§ 7.3(c), (d)).

162. The agreement also contained provisions concerning transfer of membership interests and the dissolution and liquidation of the company. (Ex. 45, §§ 8.1-8.7, 9.1-9.2).

163. Under the agreement, membership interests in the LLC could only be transferred under limited circumstances, with a right of first refusal granted to the company and the other members, and with various other conditions, including consent of the managers to any assignment. (Ex. 45, §§ 8.1-8.7).

164. Taken as a whole, the LLC Operating Agreement "expressly" provided for recovery of capital contributions only under certain limited circumstances: as part of a distribution of profits (§§ 7.1, 7.2); as part of a distribution of proceeds from the sale of capital assets (§ 7.3); or upon liquidation or dissolution (§§ 9.1-9.2).

165. Nothing in the LLC Operating Agreement permitted the withdrawal of capital contributions simply on request or direction of the members.

166. The final version of the LLC Operating Agreement also included § 5.2, which provided in part as follows:

Any Manager, Officer or Member who is not an employee of the Company or ETI may engage or have an interest in other business ventures which are similar to or competitive with the business of the Company, and the pursuit of such ventures, even if competitive, shall not be deemed wrongful or improper or give the Company, its Managers or the other Members any rights with respect thereto. No Manager or Member who is not an employee of the Company or ETI shall be obligated to present an investment opportunity to the Company even if it is similar to or consistent with the business of the Company, and such Member, Officer or Manager shall have a right to take for their own account or recommend to others any such investment opportunity.

(Ex. 45, § 5.2).

167. The LLC Operating Agreement also stated that the LLC and Eastern Towers, Inc., had "entered into" a "Management Services Agreement." (Ex. 45, § 2.3(b)). No such agreement, however, was ever drafted or executed.

168. Section 2.7 of the agreement provided that "[t]he failure of the Company to observe any formalities or requirements relating to the exercise of its powers or management of its business or affairs under this Agreement or the [Massachusetts Limited Liability Company] Act shall not be grounds for making its Members or Managers responsible for the liabilities of the Company." (Ex. 45, § 2.7).

169. The LLC Operating Agreement also contained an integration clause. (Ex. 45, § 12.3).

3. The Terms of the Executive Employment A&reement

170. The Executive Employment Agreement was between Strachan and Eastern Towers, Inc. (Ex. 44).

171. The Executive Employment Agreement provided, among other things, as follows: "The Executive [Strachan] acknowledges that the principal business activity of the Company [Eastern Towers, Inc.] is the provision of management services to Eastern Towers LLC...." (Ex. 44 § 1.2).

172. The agreement provided that Strachan would work without pay for six months (from April 9 to September 9, 2002), after which he would be paid a salary of $75, 000. (Ex. 44 § 2.1).

173. The term of the agreement was two years (or until April 9, 2004), and could be extended by "mutual agreement between the Company and [Strachan]." (Ex. 44 § 3.1).

174. The agreement provided Strachan could be terminated for cause, based on the occurrence of one of the following:

(a) any single act or series of acts by the Executive to the material detriment of the Company or any of its affiliates, or in a manner otherwise inconsistent with the Company's policies or practices; (b) indictment for, or conviction of, a crime which materially adversely affects the reputation of the Company or any of its affiliates; (c) willful disloyalty to the Company; (d) substantial or continuing inattention to or neglect of duties and responsibilities reasonably assigned to the Executive by the Company's Board of Directors; (e) failure to comply with lawful directives of the Company's Board of Directors; or (f) the commission of an act of dishonesty or moral turpitude (including without limitation, embezzlement or misappropriate of Company property.

(Ex. 44 § 3.2).

175. The agreement also provided that Strachan could be terminated without cause, in which case he would be entitled to a severance payment of one month's salary followed by 60% of his salary for two additional months. (Ex. 44 § 3.3).

176. The agreement also contained a non-competition clause with a two-year term. (Ex. 44 § 4.3).

H. The Purported Ownership Relationship Between the Corporation and the LLC

177. As noted, none of the agreements or corporate records specifically addressed the ownership relationship, if any, between the corporation and the LLC.

178. According to Moore, it "was determined" at some point before April 2002 that Eastern Towers, Inc., would be a wholly-owned subsidiary of Eastern Towers, LLC. (Moore, 19:40). He testified that by March 26 or 27, 2002, "we all understood" that the LLC would be the parent of the corporation. (Moore, 20:44). He also testified that such a structure was discussed at a meeting between the four principals on April 3, 2002. ( ld. 19:42). The Court does not credit Moore's testimony in any of those respects.

179. Eastern Towers, Inc., occasionally represented to third parties, including the IRS in its tax returns, that Eastern Towers, LLC owned 100% of its shares. (Ex. 610 (draft of letter that was sent in substantially the same form to Charlie Devens of Brookline Savings Bank); Ex. 611 (e-mail to Sanford attaching Introduction to Eastern Towers); Ex. 659 (Introduction to Eastern Towers); Ex. 801 (TD Banknorth approval memo indicating that the bank understood that Eastern Towers, LLC owned Eastern Towers, Inc.); Ex. 68 (Eastern Towers, Inc., 2002 federal income tax return)).

180. On April 3, 2002, Moore gave Strachan a blank IRS Form 2553 (Election by a Small Business Corporation) and told him that he needed to sign it as the President of Eastern Towers, Inc., for tax purposes. (Strachan, 2:111, 116-17; Ex. 42).

181. The form was blank at the time, other than a hand-written "JS" next to the signature line at the bottom of the form. (Strachan, 2:116-17).

182. Moore had hoped that Eastern Towers, Inc., could elect to be treated as an S corporation for tax purposes. (Moore, 19:43-44).

183. Strachan signed the Form 2553. (Strachan, 2:116; Ex. 42).

184. Moore subsequently filled out the Form 2553 by hand, dated it April 4, 2002, and signed it as attorney for the corporation. (Ex. 42; see also Moore, 20:28).

185. In box "L" of Form 2553, Moore wrote that Eastern Towers, LLC had acquired 1000 shares of the stock of Eastern Towers, Inc., on February 27, 2002. (Ex. 42).

186. In fact, and as noted, Eastern Towers, LLC was not even formed until September 17, 2002. (Ex. 54; see also Rosenfeld, 12:24-25). Furthermore, the LLC never acquired any shares of the corporation.

187. Moore's representation to the IRS on Form 2553 concerning the ownership of shares of Eastern Towers, Inc., was false.[22]

188. Ultimately, on March 24, 2004, the IRS rejected the application of Eastern Towers, Inc., for S-corporation status. (Ex. 151). The reason given was that Eastern Towers, LLC, as a multi-member LLC, was not eligible under IRS regulations to be a shareholder of an S corporation. (Moore, 19:48-49; Ex. 151).

189. Although Moore testified that the parties intended that the LLC would own the corporation, there is no evidence that Strachan and Sanford ever agreed to that arrangement, or that the parties actually executed such an arrangement.

190. Sanford testified that he did not understand that the LLC owned the corporation. (Sanford, 6:143). Strachan testified that the thought the corporation was going to own the LLC. (Strachan, 2: 125-26).

191. There is no contemporaneous record that the LLC ever purchased, or was assigned, any stock of the corporation.

192. There was never a formal vote taken to issue shares of the corporation to the LLC, or to transfer shares of stock from any of the principals of the corporation to the LLC. (Rosenfeld, 12:24-25; Strachan, 2:114, 4:127; Sanford, 5:117).

193. There is no corporate stock register reflecting any transfer of shares from the corporation to the LLC.

194. There is no corporate record reflecting the issuance of any additional shares of the corporation after the initial issuance to the four principals.

195. The LLC Operating Agreement, signed on April 9, 2002, states that the corporation could own Class B membership interests in the LLC. (Ex. 45, § 2.3(b)). It does not state that the LLC owns shares of the corporation. ( See Ex. 45).

196. In June 2003, Moore and Rosenfeld affirmed that Eastern Towers, LLC had no subsidiaries when they signed the Revolving Construction Loan Agreement with TD Banknorth. (Ex. 801.8, § 4.2).

197. Accordingly, Eastern Towers, Inc., is a Massachusetts corporation that is owned in equal (25%) shares by four persons: Moore, Rosenfeld, Strachan, and Sanford. It is not owned, in whole or in part, by Eastern Towers, LLC.

198. Eastern Towers, LLC is a Massachusetts limited liability company that is owned by Tower Investors Trust, Strachan, and Sanford. It is not owned, in whole or in part, by Eastern Towers, Inc.

I. The Initial Months of Operation and the Need for FinancinK

199. At some point after April 2002, Sanford joined the new company. (Moore, 19:66). 200. Over the course of the next few months, Moore and Rosenfeld periodically contributed capital to Eastern Towers, LLC and Eastern Towers, Inc., on an as-needed basis, usually in $5, 000 or $10, 000 increments. (Ex. 695).

201. By May 22, 2003, Moore and Rosenfeld had contributed a total of $522, 000 to the two entities, comprising $270, 000 to Eastern Towers, LLC and $252, 000 to Eastern Towers, Inc. (Rosenfeld, 11:99-102; Ex. 695 (summarizing data from Ex. 206 and Ex. 309)).

202. During the early stages of the business, the principal role of Strachan and Sanford was to develop tower opportunities, in particular to try to acquire and develop hard-to-zone sites. (Moore, 19:60-61).

203. After April 2002, the four men held meetings approximately every week to manage the business. (Sanford, 10:49; Moore, 19:53).

204. During the first six months, the company was only able to generate a limited number of tower sites, and the pace of acquiring and building towers was slower than the men had expected. (Sanford, 10:45; Moore, 19:61-69, 69; see Ex. 607).

205. The first sites that the company developed were Beverly, Massachusetts; Franklin (Church), New Hampshire; Franklin (Industrial), New Hampshire; and Weare, New Hampshire. A carrier lease for the Beverly tower, however, was not executed until September 30, 2002, and the other three towers were not operational until 2003. (Ex. 900.301; see Ex. 614).

206. By October 2002, the overhead expenses were increasing substantially, because the company now had to pay Strachan's and Sanford's salaries after their six months of free work. (Moore, 19:66-67; see also Ex. 193 at 31-32). The business, however, was generating little or no revenue. (Moore, 19:66-67).

207. Strachan's annual salary, after the expiration of the six-month period, was $75, 000. (Ex. 44 at 1).

208. Beginning in October 2002, the company bought seven "hard-to-zone" sites from Hesse for $10, 000 each in an effort to jump-start construction of more potentially lucrative towers. (Sanford, 10:46; Rosenfeld, 13:130; Moore, 19:70-71). Four of those sites were located on Nantucket, and the remaining three were located in Ipswich, Lincoln, and Wayland, Massachusetts. (Rosenfeld, 13:130; Moore, 19:69-70).[23]

209. To grow, and take advantage of the available opportunities, it was clear that the company would need additional capital funding or financing. (Strachan, 2: 145-46; see Moore, 19:65-66; see also Ex. 58).

210. The four men discussed a number of financing options over the course of several months in late 2002. The options discussed included obtaining bank financing, additional capital contribution from the members, capital contributions from non-members, and cash from asset sales. (Strachan, 2:145-46, 3:6-8; Sanford, 10:59-60; Moore, 19:139-41).

211. One proposal that the four men discussed to increase revenues was the acquisition of cell towers built by another company, Turning Mill. Moore and Rosenfeld offered to invest additional capital in exchange for additional equity in order to permit Eastern Towers to acquire the Turning Mill towers. (Strachan, 2:151-53, 4:87; Moore, 19:80-84). Strachan did not want to further dilute his interest in the company, and Sanford did not like the terms of the deal; both rejected the proposal. (Strachan, 2:152-53, 4:86-89; Sanford, 10:63-64).[24]

212. By November 2002, the four men had become concerned about the cash flow of the business. (Strachan, 2:145; Ex. 56). After reviewing the LLC's financials, Strachan concluded that the funds from the initial $500, 000 capital contribution commitment would run out in February 2003. (Ex. 58). Because the business would need cash to start building towers, Strachan concluded that additional financing was necessary. (Strachan, 2:145).

213. Strachan and Sanford relied entirely on Moore and Rosenfeld to explore financing options and obtain additional financing. Neither Strachan nor Sanford had significant contacts with possible financing sources or substantial experience in obtaining financing.

J. Efforts to Obtain Bank Financing

214. Moore contacted two banks-Brookline Savings Bank and TD Banknorth-with which he had done business in the past. (Fenn, 7:30-31; Rosenfeld, 13:138-39; Ex. 61, 610 (admitted but not for truth)).

215. Brookline Savings was not receptive, so Moore pursued financing with TD Banknorth. Moore was the company's primary contact with the bank. (Moore, 19:133-34; Fenn, 7:30; see also Strachan, 4:77).

216. Moore had an extensive lending relationship with TD Banknorth arising out of his other business activities. As of February 14, 2003, the bank had more than $15 million in loan exposure for entities controlled by Moore. (Fenn, 7:12-14; Ex. 801).

217. Sanford, Moore, and Rosenfeld met with Peter Fenn from TD Banknorth on November 25, 2002. (Rosenfeld, 13:144-45; Ex. 60, 61). Fenn had known Moore since 2000. (Fenn, 7:7-8, 15). Strachan missed the meeting to be with his wife, who was having a baby. (Moore, 19:117; Rosenfeld, 13:145; Ex. 60).

218. Rosenfeld sent Fenn a proposed term sheet on December 1, 2002. (Moore, 19:119-20). He shared it with Moore, but not with Strachan or Sanford. (Strachan, 4:72-73). In it, he requested two lines of credit for Eastern Towers LLC: a revolving construction line for $1.5 million and a so-called "guidance" line for $4 million, providing long-term financing for constructed towers. (Ex. 61). To help secure the loans, Moore and Rosenfeld proposed a $500, 000 personal guarantee, split between the two of them ($300, 000 for Moore and $200, 000 for Rosenfeld) on the revolving line. (Moore, 19:120; Ex. 61).[25]

219. Fenn responded with a term sheet with different terms, including a requirement that Moore and Rosenfeld personally guarantee up to $1 million, limited to $500, 000 each to cover "all loans to Eastern Towers LLC...." (Ex. 62 at 2; Rosenfeld, 12:36-37; Moore, 19:124-26).[26] At the time, Fenn thought, based on his experience, that such an arrangememt would be approved by the bank. (Fenn, 7:116).

220. Strachan, Sanford, Moore, and Rosenfeld had several discussions about the bank's proposal. (Moore, 19:126-28; Rosenfeld, 13:148-49). Moore and Rosenfeld asked that Strachan and Sanford join in giving their personal guarantees for the TD Banknorth loans proportionate to their interest in Eastern Towers. Strachan and Sanford agreed to do so. (Strachan, 2:147-48; Rosenfeld, 12:40, 13:148-49; Moore, 19:127-28, 130).

221. Throughout January 2003, Moore and Rosenfeld continued to provide additional information to Fenn concerning Eastern Towers. (Fenn, 7:31-35; Rosenfeld, 12:45-46; Moore, 19:132; Exs. 72, 75, 76, 77).

222. The bank's credit department did not support Fenn's loan recommendation, as they viewed it as a relatively high-risk loan to a start-up company. (Fenn, 7:118-19). Nonetheless, the bank "had a very good relationship with Mr. Moore" and "wanted to find a way to do the deal." (Fenn, 7:119).

223. On February 14, 2003, the TD Banknorth Management Loan Committee approved financing for Eastern Towers, LLC, but on different terms than those in Fenn's recommendation. (Fenn, 7:49, 53-54; Exs. 801, 801.2). The approved terms included, among other things, (1) a $1.5 million construction line and a $4 million guidance line, (2) an unlimited personal guarantee from all four men for the full amount of both loans, and (3) a number of restrictive covenants. (Ex. 801; Rosenfeld, 13:152; Moore, 19:135).[27] The bank also noted that "[a]n additional $500[, 000] capital contribution will be required prior to the end of the first year in order to cover the projected shortfall in cash flow." (Ex. 801 at 9; cf. Fenn, 7:127-29, 132).

224. Moore provided all four men with a copy of the February 14 bank term sheet. The four men discussed it at a meeting in February 2003. (Strachan, 3:5-6; Moore, 19:139-40; Rosenfeld, 13:150).

225. On February 25, 2003, the Board Risk Committee of TD Banknorth approved the financing arrangement. (Fenn, 6:62-65; Exs. 90, 801.4).

226. Moore told Strachan and Sanford that the financing arrangement had been approved. (Strachan, 2:148).

227. Moore also advised Strachan and Sanford, in substance, that the financing as approved was not acceptable. (Strachan, 2:148-50; 3:8-9).

228. Moore told Strachan and Sanford that the construction loan was problematic because it would not fund "burn"-that is, the salaries and other overhead expenses of the business. (Strachan, 2:149-50, 3:5-6, 9; Sanford, 10:60-61).

229. Moore and Rosenfeld testified that they did not want to provide guarantees for the entire amount of the loans. Moore testified that such a guarantee was a "non-starter" and "just not something [he] was willing to do." (Moore, 19:139-40). Rosenfeld testified that he had serious concerns about such a guarantee, although he was willing to consider it if Strachan and Sanford would accept further dilution of their equity interests. (Rosenfeld, 12:59-61, 13:150-51). Moore and Rosenfeld did not, however, voice those concerns to Strachan and Sanford at the time.

230. At that point, only the Beverly tower was producing revenue. Building permits had been issued for the Franklin Church, Franklin Industrial, and Weare towers, but they were not yet operational. (Exs. 83, 801). Other towers, particularly in Webster, Carver, Pembroke, and Loudon, were in various stages of development. (Exs. 83, 801, 614).

K. The Proposed New Entity and Restructuring of the Bank Loan

231. Moore did not attempt to go back to TD Banknorth to seek more favorable terms, and did not attempt to obtain financing from any other source. (Moore, 20:60-62).

232. Instead, Moore proposed an alternative plan. (Moore, 19:142-43). He first outlined his plan in February 2003 and provided additional details in March 2003. (Strachan, 3:5-8; Sanford, 6:11-12; Rosenfeld, 13:154).

233. Moore proposed that a new company would be established that would buy any towers built by Eastern Towers. He and Rosenfeld would own the company. (Moore, 19:146).

234. Under Moore's proposal, Eastern Towers, LLC would sell all of its completed towers to the new company. Eastern Towers would continue to build and obtain tenants for the towers and manage the properties. It would also have the right to repurchase the towers from the new company at a specified multiple of the original sale price.[28] If the towers were profitable, the new company would receive a percentage and any additional profit would go to Eastern Towers. (Strachan, 3:7-8; Moore, 19:145-49; Ex. 85).

235. Moore told Strachan and Sanford that he would fund the new company with proceeds from the sale of a building he owned. Moore also told them that he would be able to take advantage of certain tax benefits from "bonus depreciation" on the towers after they were purchased. (Strachan, 3:6, 11-12; Sanford, 10:91-92; Ex. 801.4; see Moore, 19:158; Fenn, 7:57).

236. Strachan understood, based on his conversations with Moore and Rosenfeld, that Moore's plan was the "only option" for the company in light of the fact that the financing as approved by the bank would not fund "bum." (Strachan, 3:8).

237. At some point in late February 2003, Moore approached TD Banknorth about obtaining financing on different terms. Specifically, he sought to ascertain whether the bank would consider advancing credit to a new entity that would be newly capitalized and wholly owned by Moore and Rosenfeld. (Moore, 19:157-58; see Fenn, 7:54-56, 60-61; Exs. 313, 801.4). Moore informed the bank that he and Rosenfeld would fund the new entity's acquisition of the first four towers with $850, 000 of their own capital. (Fenn, 7:59-60, 135-36; Ex. 801.4).

238. Fenn testified that the proposed $850, 000 additional capital investment was a positive factor in considering the terms of the loan. ( See Fenn, 7:136).

239. The internal memorandum to the loan committee prepared by Fenn on March 19, 2003, concerning the restructured loan stated that "the proposed changes will facilitate much larger equity contributions from Edward Moore and Larry Rosenfeld" and that "[t]he additional equity will immediately improve Eastern Towers' cash flow and strengthen the Bank's collateral security on the guidance line." (Ex. 801.4). The bank's approval was based in part on the representation that Moore and Rosenfeld would make "much larger" equity contributions to the business. (Fenn, 7:59; Ex. 801.4).

240. In fact, however, and as described below, Moore and Rosenfeld withdrew $520, 000 in capital from Eastern Towers, Inc. the day the deal closed. Moore and Rosenfeld did not inform the bank at any point during the financing application process of their intention to withdraw the capital. Indeed, they represented the opposite: that the restructuring of the organization would enable them to make larger capital contributions. (Ex. 801.4).

241. Moore also proposed to the bank that the $4 million guidance line that had originally been approved for Eastern Towers, LLC be transferred to the new entity to buy the towers and that the construction line for Eastern Towers, LLC be reduced from $1.5 million to $1 million. (Ex. 801.4; Fenn, 7:60-61).

242. Moore did not disclose to Strachan or Sanford that he had proposed diverting part of the bank financing to the new entity that would be wholly owned by Moore and Rosenfeld. (Strachan, 3:9; Sanford, 6:13).

243. As noted, Moore had told Strachan and Sanford that the original financing proposal from TD Banknorth would not work because the loans would not fund "bum." Moore and Rosenfeld testified at the trial that the proposal would not work because of the guarantees.

244. Moore told Fenn at TD Banknorth, however, that the reason for the new proposal was to allow Moore and Rosenfeld to (1) take advantage of new tax legislation that allowed owners of certain assets built after September 11, 2002 to take bonus depreciation, and (2) recognize a return on their cash investment separate from Eastern Towers. (Fenn, 7:56-57; Ex. 801.4).

245. The March 19, 2003 memorandum prepared by Fenn did not state that Moore and Rosenfeld were reluctant to provide personal guarantees, or that such a reluctance played any role in their decision to modify their loan requests. (Ex. 801.4). Even after TD Banknorth agreed to transfer the $4 million guidance line to the new entity owned by Moore and Rosenfeld, Moore still had to provide an unlimited personal guarantee for that loan facility. (Ex. 801.3). While TD Banknorth did agree to limit Rosenfeld's personal guarantee for the guidance line to $800, 000, Fenn acknowledged that Moore's financial strength and personal guarantee were clearly a factor in that decision. (Fenn, 7:66). The construction line continued to be supported by unlimited guarantees from Moore, Rosenfeld, Strachan and Sanford. (Ex. 89).

246. The construction loan agreement that was ultimately executed with TD Banknorth specifically provided that the bank would fund up to 80% of the total direct and indirect costs of each tower site, including overhead and administrative costs. (Fenn, 7:146-49; Ex. 801.8).

247. On March 19, 2003, the Management Loan Committee of TD Banknorth approved the restructured financing arrangement proposedby Moore. (Ex. 89). At some point, a closing was set for June 2, 2003. (Ex. 801.5).

248. On April 24, 2003, the four men discussed financing at their weekly meeting. (Ex. 614.1). Strachan and Sanford had not been told at that point, more than a month later, that the bank had approved the restructured financing. (Strachan, 3:12; Sanford, 6:13). Strachan understood only that the company had not been able to obtain bank financing. (Strachan, 3:8-9).

L. The Proposed Withdrawal of Capital and Tower Purchase Agreement

249. During a meeting on May 1, 2003, Moore and Rosenfeld told Strachan and Sanford that they were considering taking back their original capital investment of $520, 000 when the transaction closed. (Strachan, 3:12, 14; Sanford, 6:14-16; Exs. 91, 614.2).[29]

250. Strachan and Sanford opposed the idea, given the company's need for capital at a critical time in its development. (Strachan, 3:13-14). Sanford suggested that Moore and Rosenfeld take back their capital in stages over the sale of the first ten to fifteen towers under the agreement. (Sanford, 6:15-16).[30]

251. Moore and Rosenfeld assured Strachan and Sanford that they "were just thinking about it" and that it was not a "concrete" plan. (Strachan, 3:13). They did not respond to Sanford's suggestion that the repayments be staggered over time. (Sanford, 6:17).

252. On May 22, 2003, Moore and Rosenfeld presented Strachan and Sanford with a draft "Agreement for Purchase of Transmission Towers" between Eastern Towers, LLC and a new company, to be called Eastern Properties, LLC. (Ex. 93; Rosenfeld, 13:154-55; Strachan, 3:14-15; see a/so Ex. 100 (final agreement)). It was the first time that Strachan and Sanford had seen a draft of the agreement. (Strachan, 3:14).

253. The draft Tower Purchase Agreement provided, among other things, (1) that Eastern Properties, LLC would purchase towers from Eastern Towers, LLC at a multiple of 7 times net operating income; (2) that Eastern Towers, LLC would have an option to repurchase the towers, but only in chronological order, and that the repurchase option would expire after fifteen years; and (3) that Eastern Towers, LLC would receive a commission "equal to the cumulative NOI" of the purchased towers, above 14.29% of the cumulative purchase price of all towers and closing costs multiplied by 1.03 each year after a tower's purchase. (Ex. 93).[31] The agreement also provided that, in the event the towers were sold during the fifteen years after the sale, the profits would go to Eastern Towers, LLC. (Ex. 93).

254. At the May 22 meeting, Moore discussed the proposal and addressed the purchase of the first four towers that would be constructed if the Eastern Properties proposal was executed. At that point, the Beverly, Franklin Church, and Franklin Industrial towers were complete or essentially complete, and the Weare tower was 90% complete.

255. Strachan and Sanford both expressed the view that the fixed multiple was too low. (Sanford, 6:21, 10:70-71; Rosenfeld, 13:156-57; Ex. 614.4; see also Strachan, 3:16).

256. Moore and Rosenfeld did not advise Strachan and Sanford at the May 22 meeting that they had decided to go ahead with their proposal to withdraw their $520, 000 capital contribution.

257. Following the May 22 meeting, the four men had further discussions concerning the provisions of the draft agreement. (Strachan, 3:15-17, 4:131; Sanford, 6:21-23; Rosenfeld, 13:155-58; Moore, 19:147-52, 182-83).

258. Strachan and Sanford objected to the concept of selling the towers and to what they believed was an unfairly low price. (Strachan, 3:8, 15, 4:139-40; Sanford, 10:77-80, 82; Moore, 19:151-52). Nonetheless, Moore and Rosenfeld proceeded with the plan.[32]

259. There was no formal vote of the members of Eastern Towers, LLC to approve the Tower Purchase Agreement. (Strachan, 3:16-17).

260. There was no discussion of obtaining a fairness opinion from an investment bank or other qualified expert as to whether the terms of the transaction were fair to the company or Strachan and Sanford. No such opinion was ever sought or obtained. ( Id. ).

261. On May 28, 2003, a new entity was created called Eastern Properties, LLC. (Ex. 94).

262. Moore owned a 90% interest in Eastern Properties through Redstone Realty, LLC (a company Moore owned with his wife), and Rosenfeld owned the remaining 10% interest through the Joan Rosenfeld Trust f/b/o Lawrence W. Rosenfeld. (Moore, 15:130; Ex. 806). The only manager of Eastern Properties, LLC was Glover Property Management, Inc., a corporation owned by Moore. (Ex. 94).

263. The night before the June 2 closing, Rosenfeld added another onerous provision to the Tower Purchase Agreement: a requirement that Eastern Towers, LLC begin to make nonrefundable deposits five years before it could actually decide whether to exercise its repurchase option. (Rosenfeld, 14:132-33; Ex. 102). Rosenfeld e-mailed that change to Moore after midnight on the night of June 1-2. (Ex. 102). He did not, however, provide a copy to Strachan or Sanford. ( Id. ).

264. Rosenfeld claims that he added the deposit provision to ensure that Eastern Towers, LLC would have enough cash set aside to exercise the option in Year 10. (Rosenfeld, 14:25-26). In fact, however, the purpose of the addition was to help ensure that the option would never be exercised.

M. The June 2 Closine

265. The closing, including the execution of the Tower Purchase Agreement and the TD Banknorth financing documents, occurred on June 2, 2003. (Strachan, 3:18, 21; Moore, 19:187; Rosenfeld, 13:11; Exs. 99, 100).

266. The closing took place at Moore's office at 8 Doaks Lane in Marblehead. (Strachan, 3:18).

267. On the morning of June 2, Moore told Strachan and Sanford to stay at the Eastern Towers office at 40 Tioga Way in Marblehead until he called them and told them to come down to his office. (Strachan, 3:18-20).

268. Strachan and Sanford were finally called down to Moore's office around noon, after waiting for several hours. (Strachan, 3:20-21).

269. When they arrived at the closing, Strachan and Sanford were asked to, and did, sign a variety of documents in quick succession. The entire signing process took about ten minutes. (Strachan, 3:31-32, 4:142-43).

270. There is no evidence that Strachan and Sanford were provided copies in advance of any of the documents they executed on June 2, other than the incomplete draft of the Tower Purchase Agreement that had been provided on May 22.

271. As they were going through the paperwork, Strachan and Sanford noticed checks issued from Eastern Towers, Inc. to entities owned or controlled by Moore and Rosenfeld. The checks purported to repay the $520, 000 in capital that Moore and Rosenfeld had contributed to the company up to that point. (Strachan, 3:21-22; Sanford, 6:19, 32-33; Rosenfeld, 11:98-103, 12:95-96, 124-27, 14:15; Moore, 15:130; id., 19:73, 178, 203; Ex. 695 (summarizing data from Ex. 206 and Ex. 309)).

272. Strachan and Sanford were "shocked" to see the two checks and protested to Rosenfeld. (Strachan, 3:21-23; Sanford, 6:19, 32-34; Rosenfeld, 12:95-96, 124). Strachan told Rosenfeld that the withdrawal of capital was "going to virtually kill our company." (Strachan, 3:22). Sanford told him that it "was going to leave the company in a bad place." (Sanford, 6:33).

273. Rosenfeld responded that he and Moore needed to take their capital out then because they would no longer be able to do so once the construction loan was in place. (Strachan, 3:22-23).

274. Notwithstanding § 7.3(d) of the LLC Operating Agreement, the managers of the LLC (Moore, Rosenfeld, Strachan, and Sanford) had not made a good-faith judgment, prior to the withdrawal of capital, that sufficient assets remained in the LLC to satisfy its liabilities. Similarly, § 7.3(c) of the LLC Operating Agreement specifically prohibited distribution of proceeds from the sale of capital assets if in the opinion of the managers of the company was likely to require such proceeds to pay company expenses. There was no discussion or vote as to whether the terms of the LLC Operating Agreement had been satisfied.

275. Rosenfeld told Strachan and Sanford that the closing could be delayed so that they could discuss the issue further. Despite their strong opposition, Strachan and Sanford felt they had no choice and reluctantly agreed to proceed with the closing. ( See Strachan, 3:22-23; Sanford, 6:33-34; Rosenfeld, 12:133).

276. Moore and Rosenfeld received, together, $520, 000 in cash on the day of the closing. One check was made out for $100, 000 from Eastern Towers, Inc. to the Joan Rosenfeld Trust f/b/o Lawrence Rosenfeld, which was controlled by Rosenfeld. One check was for $420, 000 from Eastern Towers, Inc. to Redstone Realty, LLC, which was owned by Moore and his wife. (Ex. 114; Rosenfeld, 12:126-27; Strachan, 3:25-27).

277. There is no evidence that Moore and Rosenfeld informed the bank of their $520, 000 capital withdrawal.

278. Prior to the June 2 closing, Moore and Rosenfeld had caused their attorney, Douglas Hausler, to prepare a document that removed Strachan and Sanford as managers of Eastern Towers, LLC. (Ex. 98).

279. Strachan and Sanford were not informed before the June 2 closing that Moore and Rosenfeld intended to remove them as managers.

280. Hausler represented Moore and Rosenfeld, and apparently Eastern Properties, LLC, at the transaction. (Rosenfeld, 12:120-21). It is unclear whether Hausler also purported to represent Eastern Towers, LLC or Eastern Towers, Inc.; certainly no counsel represented those entities independent of Moore or Rosenfeld.

281. Strachan and Sanford executed the document removing them as managers, which was titled "First Amendment to Operating Agreement of Eastern Towers, LLC, " at the closing. (Ex. 98).

282. Another document prepared by Hausler and executed by Strachan and Sanford on June 2 acknowledged a resolution and vote authorizing Rosenfeld and Glover Property Management, Inc. (a company owned by Moore), as managers of Eastern Towers, LLC, to execute documents carrying out the Tower Purchase Agreement. (Ex. 99).[33]

283. Because the documents were couched in legal language, Strachan and Sanford did not realize immediately that they had executed documents replacing them as managers of Eastern Towers, LLC. (Strachan, 3:33; Sanford, 6:26-27, 10:192-94).

284. Strachan and Sanford eventually noticed, however, that they were being removed, and protested to Moore and Rosenfeld. Rosenfeld claimed that he did not know why Strachan and Sanford were removed as managers. (Rosenfeld, 12:106-08).

285. At some point that day, Moore and Rosenfeld apparently agreed to reinstate Strachan and Sanford as managers. Hausler created a new document that would reinstate them as managers effective the following day. (Rosenfeld, 12:105-07).

286. Strachan and Sanford accordingly signed a document reinstating them as managers of Eastern Towers, LLC effective the following day. (Ex. 117; see a/so Strachan, 3:32-34; Rosenfeld, 12:116-17).

287. In the meantime, on June 2, the Tower Purchase Agreement (embodying the arrangement to sell towers to Eastern Properties) and the Purchase and Sale Agreement (selling the Beverly, Franklin Church, Franklin Industrial, and Weare towers to Eastern Properties) were signed by Moore (as President and Treasurer of Glover Property Management, Inc.) and Rosenfeld on behalf of Eastern Towers, LLC, and by Moore on behalf of Eastern Properties. (Exs. 100, 900.400).

288. Neither Strachan nor Sanford signed either the Tower Purchase Agreement or the Purchase and Sale Agreement.

289. At the June 2 closing, and pursuant to those agreements, Eastern Properties purchased the first four towers (Beverly, Franklin Church, Franklin Industrial, and Weare) from Eastern Towers, LLC for $818, 832. (Moore, 19:187, 193; Exs. 101, 900.400).

290. At the June 2 closing, Eastern Towers, LLC closed on its $1 million revolving construction line from TD Banknorth, and Eastern Properties closed on its $4 million guidance line. (Exs. 801.5, 801.8).

291. The construction line was supported by unlimited guarantees by Moore, Rosenfield, Strachan, and Sanford. (Exs. 801.9, 801.10, 801.11, 801.12).[34] The guidance line was supported by an unlimited personal guarantee by Moore and a limited guarantee of $800, 000 by Rosenfeld. (Exs. 801.6, 801.7).

N. The Tower Purchase Agreement

292. The final version of the Tower Purchase Agreement, which was executed on June 2, was nearly identical to the May 22 draft agreement, except for the addition of onerous terms concerning the payment of nonrefundable deposits. ( Compare Ex. 93 with Ex. 100).

293. Paragraph 1 of the Tower Purchase Agreement required Eastern Towers, LLC to sell, and Eastern Properties to buy, groups of two or more towers that had two or more existing carrier leases within 30 days of the completion of the towers. (Ex. 100 at ¶ 1). However, Eastern Properties had the option to purchase the towers singly or with only one carrier lease in place. ( Id. ). Specifically, paragraph 1 provided:

PROPERTIES hereby agrees to purchase from TOWERS and TOWERS agrees to sell to PROPERTIES, to be evidenced by a written purchase and sale agreement..., in groups of two (2) or more, all completed and operational transmission towers with two (2) or more existing Qualifying Carrier Leases (hereinafter defined in this Agreement) within thirty (30) days of completion by TOWERS. Between the date of this Agreement and December 31, 2004, TOWERS shall be obligated to offer to PROPERTIES either all such transmission towers constructed or transmission towers with a Purchase Price, as defined in Section 2 below, of Four Million Dollars ($4, 000, 000), whichever is lesser.
PROPERTIES shall be obligated to fund the lesser of all such purchases or Seven and One-Half Million Dollars ($7, 500, 000). PROPERTIES may at its election, purchase transmission towers singly or with one carrier lease in place.

( Id. ).

294. Paragraph 2 of the Tower Purchase Agreement provided that the purchase price would be "equal to the annualized Net Operating Income of each transmission tower multiplied by seven (7)." ( Id. at ¶ 2).

295. Paragraph 4 of the Tower Purchase Agreement provided that Eastern Towers, LLC would continue to serve as the leasing agent for all towers sold to Eastern Properties, LLC, but that Eastern Towers, LLC would not receive "any customary leasing commission" for that work. ( Id. at ¶ 4). Instead, Eastern Properties, LLC would receive a commission only to the extent that the net operating income for all towers sold exceeded (1) a "Cost of Capital" that started at 14.29% of the cumulative purchase price of all purchased towers plus closing costs, and increased by a multiple of 1.03 annually, plus (2) the sum of all previously paid commissions. ( Id. ). Specifically, paragraph 4 of the Agreement provided as follows:

TOWERS and PROPERTIES hereby agree that TOWERS shall be the leasing agent for all transmission towers purchased by PROPERTIES from TOWERS under this Agreement. TOWERS hereby agrees to use its best efforts to obtain additional carrier leases for such transmission towers without payment by PROPERTIES to TOWERS of any customary leasing commission. Provided, however, for a period of fifteen (15) years from the date of purchase by PROPERTIES from TOWERS of a transmission tower and so long as PROPERTIES owns that transmission tower purchased from TOWERS ("Commissioned Tower" or "Commissioned Towers"), PROPERTIES shall pay to TOWERS, quarterly before the 15th day following the end of each quarter, a commission equal to the cumulative NOI of all such Commissioned Towers from the date of purchase as aforesaid until such respective quarter end,
(i) less the cost of capital for all such transmission towers purchased as defined below, cumulated and pro rated from the time of purchase of each Commissioned Tower ...

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