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Baker v. Wilmer Cutler Pickering Hale and Dorr, LLP

Superior Court of Massachusetts, Suffolk, Business Litigation Session

February 17, 2016

Christian Baker et al. as Trustee of the W. Robert Allison 2003 Irrevocable Trust
Wilmer Cutler Pickering Hale and Dorr, LLP et al. as Trustee of the Elof Eriksson Irrevocable Trust-2003; and Karl H. Proppe, Individually and as Trustee of the Elof Eriksson Irrevocable Trust-2003 No. 132898

          Filed Date February 22, 2016


          Kenneth W. Salinger, J.

         This is the second lawsuit in which W. Robert Allison challenges an alleged conspiracy to freeze out the minority members of Applied Tissue Technologies, LLC (" ATT"). In the first action, Allison is suing the majority members of ATT, which are Elof Eriksson (" Eriksson") and the two trustees of The Elof Eriksson Irrevocable Trust-2003 (" Eriksson Trust"), Gudren Eriksson and Karl Proppe, who is ATT's chief executive officer and was also sued individually (the " Eriksson Defendants"). In this second action, the other minority members of ATT--Christian Baker, individually, and Blake Allison, as trustee of The W. Robert Allison 2003 Irrevocable Trust (" Allison Trust")--join Allison as plaintiffs. This complaint also adds claims against two lawyers and law firms that represented ATT and allegedly represented Eriksson. The new defendants are Wilmer Cutler Pickering Hale and Dorr, LLP (" WilmerHale"), Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP (" Gunderson"), Gary R. Schall, and Emma Eriksson Broomhead (the " Law Firm Defendants"). Defendants move to dismiss all claims in this action.

         The Court will ALLOW all three motions to dismiss. It will order that the claims against the Eriksson Defendants be dismissed without prejudice under Mass.R.Civ.P. 12(b)(9), and that the claims against the Law Firm Defendants be dismissed with prejudice under Rule 12(b)(6).

         With respect to the Eriksson Defendants, this action will be dismissed under Rule 12(b)(9) because there is a prior pending action against them that asserts the same claims. If Plaintiffs believe that the relief sought by Allison against the Eriksson Defendants in the 2013 Action cannot be granted unless Proppe and Gudren Eriksson join as plaintiffs, then they should move to add them as necessary parties to the prior action pursuant to Mass.R.Civ.P. 19(a).

         With respect to the Law Firm Defendants, this action is not subject to dismissal under Rule 12(b)(9) because there is no prior pending action that will resolve the claims against them. The claims against these defendants must nonetheless be dismissed for failure to state any claim upon which relief can be granted. The facts alleged do not plausibly suggest that the Law Firm Defendants owed any fiduciary duty to the Plaintiffs, that they knowingly conspired with or aided and abetted Eriksson in breaching his fiduciary duties to the minority shareholders, or that their provision of legal services in connection with an intrafirm dispute constitutes " trade or commerce" that implicates G.L.c. 93A.

         1. Factual Allegations

         Plaintiffs' first amended complaint alleges that the following facts are true.

         Eriksson and Allison formed ATT in 2000 to develop, market, and sell wound therapy technologies. ATT was created as a Massachusetts limited liability company. ATT has always been a closely held corporation because it has a small number of members, there is no ready market for its membership interests, and members holding a substantial majority of the membership interest have actively participated in company management. Eriksson contributed three-quarters of the initial capital and received a 75 percent membership interest in ATT; Allison contributed one-quarter and received a 25 percent interest. The ownership percentages changed over time as a result of transactions that are not relevant here. As of May 2012, Eriksson owned 55.5% of ATT, the Eriksson Trust owned 20%, Allison owned 14.66%, the Allison Trust owned 7.84%, and Baker owned 2%.

         ATT adopted an amended operating agreement in 2003 which provides, among other things, that: the members have exclusive management control over ATT, which they exercise by votes in proportion to their percentage interest in the company; the agreement cannot be amended unless both Eriksson and Allison agree in writing; the percentage interest of each member in net profits cannot be reduced or diluted without that member's consent; if any member choose to provide additional funds to the company, those advances are to be treated as loans for which ATT will pay interest at the prime rate; all members were entitled to examine ATT's books and records for purposes reasonably related to their interest in the company; and all members owed each other a duty of good faith.

         By early 2012 ATT was facing financial difficulties. Although the company's assets exceeded its liabilities, ATT was facing a cash crunch because its expenses continued to exceed its revenues. According to the complaint, " Allison and Eriksson held sharply divergent views as to how to proceed." Eriksson offered to invest more money in ATT in exchange for additional equity, but was unwilling to loan the company money. Allison would not accept any dilution of his interest in ATT unless additional capital was provided by new, outside investors who brought new management to the company. Proppe, who was ATT's chief executive officer, urged Eriksson to take control of ATT.

         Eriksson and Proppe retained lawyers to help Eriksson find a way to acquire a larger ownership interest in ATT in exchange for making additional capital contributions to the company. Eriksson reached out to Broomhead, his daughter, who was an associate at Gunderson. She introduced Eriksson to a second lawyer, Gary Schall, who was another Gunderson associate. Eriksson decided to hire them both. As a result, ATT (acting through Proppe) signed an engagement letter with Gunderson, specifying that the firm represented ATT and not any individual member. In early May 2012 Schall moved to WilmerHale, which was then also retained to represent ATT but no individual members.

         Schall and Broomhead in fact represented both ATT and Eriksson. In early 2012 they arranged for an appraiser to value ATT, and obtained necessary financial information about the company through Proppe. Plaintiffs do not allege that the appraiser was given inaccurate or incomplete information, or that the completed appraisal was inaccurate. Based on the results of that appraisal, Schall drafted an offer by Eriksson to purchase the minority members' ownership interests in ATT. Eriksson conveyed that offer to Allison on May 6, 2012, without revealing that he had been assisted by counsel. Allison rejected the offer on May 8, 2012. In response, Eriksson told Allison that he intended to dissolve and liquidate ATT.

         In May 2012, Schall and Broomhead helped Eriksson restructure ATT by merging it into a new corporate entity. They first created a new Delaware limited liability company with the same name (referred to as " ATT Delaware" in this decision) but a new operating agreement that did not contain the same protections for minority interest holders. Among other changes, the operating agreement for ATT Delaware centralizes control in Eriksson and the Eriksson Trust, virtually eliminates the voting rights of ATT's minority members, and eliminates the explicit fiduciary duty that all members owed to each other. Eriksson and the trustees of the Eriksson Trust voted to merge ATT into ATT Delaware. They did so without informing Allison and the other minority owners and without holding a member meeting. Eriksson and Proppe informed Allison of this transaction on May 29, 2012.

         Thereafter, Eriksson and the Eriksson Trust invested additional capital in ATT Delaware, increased their ownership interest in the parent, and substantially diluted the minority owners' interests. These transactions would not have been allowed under ATT's original operating agreement without the consent of Allison and the other minority owners.

         The complaint alleges that Schall and Broomhead " incorrectly advised" Eriksson and the Eriksson Trust " that the merger could be accomplished without holding a member meeting and without notice to the Minority Members." It also alleges that these two lawyers deliberately concealed their activities so that Eriksson could accomplish the alleged freeze-out before Allison and the other minority owners discovered what they had done.

         2. Rule 12(b)(9) Motions

         All of the Defendants have moved to dismiss this action under Mass.R.Civ.P. 12(b)(9) on the ground that there is a prior pending action arising from the identical facts and involving the same basic claims.

         2.1. Prior Civil Action

         Allison filed his first lawsuit against Eriksson, Proppe, and the trustees of the Eriksson Trust in May 2013. See Allison v. Eriksson et al., Suffolk Sup.Ct. no. 1384-01858-BLS1 (the " 2013 Action"). The complaint in the 2013 Action alleges that the Eriksson Defendants caused ATT to merge into ATT Delaware, and that this was an unlawful freeze out of ATT's minority members. Allison asserted claims for breach of contract, intentional interference with advantageous business relations, breach of fiduciary duty, and civil conspiracy against each of the Eriksson Defendants. Judge Kaplan granted partial summary judgment dismissing the intentional interference claim, dismissing the fiduciary duty claim as against Gudrun Eriksson and Proppe individually, and dismissing the conspiracy claim as against the trustees of the Eriksson Trust.

         In the 2013 Action, Allison seeks final judgment declaring that the merger of ATT into ATT Delaware is unlawful, null, and void, and ordering the Eriksson Defendants to take all actions necessary to revive ATT and to transfer all of the company's assets and business back ...

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