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Allison v. Eriksson

Superior Court of Massachusetts, Suffolk, Business Litigation Session

June 29, 2016

W. Robert Allison
v.
Elof Eriksson, Gudron Eriksson, Individually and 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. 134363

          FINDINGS OF FACT, RULINGS OF LAW AND ORDER FOR THE ENTRY OF JUDGMENT FOLLOWING A JURY WAIVED TRAIL

          Mitchell H. Kaplan, Justice

         INTRODUCTION

         This case arises out of a dispute between the members of Applied Tissue Technologies, LLC (ATT), a limited liability company originally organized under the laws of Massachusetts, but later merged with and into a Delaware limited liability company of the same name (ATT Delaware).

         The case was tried to the court on April 4, through April 7, 2016. Six witnesses testified and 140 exhibits were received in evidence. Notwithstanding this substantial evidentiary record, the court finds that very few material facts are in dispute. Rather, the very difficult questions raised by this case involve the legal consequences of the parties' conduct and the equitable relief that the court may appropriately enter.

         FINDINGS OF FACT

         The plaintiff, W. Robert Allison, is a graduate of Harvard College and Stanford University Law School. He practiced law in Boston for approximately 30 years, specializing in business and real estate matters. In 1997, he left the practice of law to become president of a software company, but lost that position two years later when the company was sold. In 1999, Allison was looking for another business opportunity, as he did not wish to return to the practice of law.

         The defendant, Elof Eriksson, M.D., Ph.D., was, until recently, Chief of the Division of Plastic Surgery at Brigham and Women's Hospital (BWH). He trained both in Sweden, where he was born, and in the United States, joining the BWH staff in 1986. He is listed as the inventor on several patents, including of relevance to this case, patents relating to the treatment of wounds.

         Allison and Eriksson first met in 1995, when Eriksson was referred to Allison as an attorney who could represent him in connection with a business opportunity. They met briefly, but Eriksson decided not to pursue the opportunity, and Allison never sent Eriksson an engagement letter or a bill for his time.

         Allison and Eriksson next encountered one another in 1999. Eriksson wanted to found a business based on intellectual property (IP) having to do with the treatment of wounds that he patented while at BWH and had purchased from BWH for approximately $150, 000. He contacted Allison who explained that he was no longer practicing law, but was himself looking for a business opportunity. After discussions, the two agreed that they would form ATT together. Allison contributed $15, 000 and Eriksson $45, 000 and the IP; in 2002 ATT reimbursed Eriksson the sum he had paid to BHW for the IP. Eriksson received 75% of the membership interests (or points) in ATT and Allison 25%.

         Allison formed ATT by filing its Certificate of Organization with the Massachusetts Secretary of State on January 28, 2000. He also prepared ATT's operating agreement which was signed by him and Eriksson on that same date. Allison used a very simple form of operating agreement as the template, which he obtained from the internet.

         The parties dispute whether Allison was acting as Eriksson's attorney in connection with the formation of ATT. The court finds that he was not. The court finds that Allison had decided before he and Eriksson first discussed ATT that he would no longer practice law. Eriksson may not have fully appreciated the distinction between managing the legal affairs of the LLC and acting as lawyer either for ATT or Eriksson or both; however, the court finds that no attorney/client relationship was established between Allison and Eriksson. In any event, Allison and Eriksson showed the operating agreement to attorney Sam Mawn-Mahlau, then with the firm of Edwards & Angell LLP, who found it acceptable for a company just starting-up. Mawn-Mahlau was an attorney with whom Eriksson had worked while at BVJH. Mawn-Mahlau went on to provide legal services for ATT through 2011. The court also notes that no material disputed issue of law or fact turns on the question of whether Allison was representing Eriksson.

         Of relevance to this action, the original operating agreement contained the following provisions. Eriksson and Allison were the only two members of ATT, and the company was to be managed by its members who voted based on their respective membership interests; there were no provisions either for managers nor a super majority vote for particular matters. However, additional capital contributions required the unanimous consent of all members. Eriksson argues that this provision was unfair to him. The court finds that such a provision is not uncommon in a joint venture involving two participants who agree that they must both consent to certain, fundamental business changes, even though they do not have equal interests in the profit and loss of the enterprise.

         Allsion became the president and chief executive officer of ATT, and was responsible for managing the business. ATT rented office space in Newton, where Allison worked. The parties agreed that Allison would receive compensation of $225, 000 a year to run the day-to-day affairs of the company and Eriksson $100, 000 a year as a consulting fee.[1]

         In September 2000, ATT entered into an agreement to license certain of ATT's IP with a third-party which generated $3.9 million in licensing and royalty revenues before it ended in 2005. During this time, substantial work was done on new technology and new patent applications were filed. The law firm Quarles and Brady represented ATT in connection with intellectual property matters. The parties began to take their salaries sometime in 2001. Additionally, during these years substantial distributions of cash were also made to each.[2] At some point, ATT hired a full-time employee, Christian Baker. Baker had worked for Eriksson at BWH as an operating room technician. In 2004, he was added as a member of ATT, receiving a 2% of the points from Allison and Eriksson, who each transferred interests to Baker according to their 25%/75% split.

         In late 2003, Allison and Eriksson decided to distribute some of their points in ATT to trusts established for the benefit of family members as an estate planning device. Mawn-Mahlau and one of his partners provided the legal work for this task. Allison and his son were the trustees of a Trust for the benefit of Allison's family (the Allison Trust) and Gudrun Eriksson (Eriksson's wife) and Dr. Karl Proppe, a physician and close friend of Eriksson, were the trustees of the Trust for the benefit of Eriksson's family (the Eriksson Trust).

         In connection with the transfer of these points to the Trusts, Mawn-Mahlau prepared a more lengthy and sophisticated " First Amended and Restated Operating Agreement" (the Operating Agreement) which the parties executed at the time the Trusts were admitted as members. Eriksson paid little attention to the preparation of the Operating Agreement, which he understood generally to carry-forward the arrangements agreed to in the original operating agreement. The Operating Agreement created the position of Manager who was to be elected by the Voting Members and provide the day-to-day management of ATT's affairs; Allison became the Manager. It also defined the term " Original Members" to be Eriksson and Allison. The Original Members had to agree to the addition of any new members of ATT, who could be either voting or non-voting. Notably, any change to the Operating Agreement also required the consent of the Original Members, and no change in the Operating Agreement that had the effect of reducing any member's interest in ATT or interest in distributions from a sale of its assets or cash flow could be made without the consent of the affected member. This provision therefore served to prevent the dilution of any member's interest in ATT, without that member's consent. This created somewhat more protection for minority members than had previously existed; however, with respect to Allison, it generally carried forward the provision in the original operating agreement that both he and Eriksson had to agree to any farther capital contributions. The Operating Agreement set the membership vote required for most significant business decisions at 60%, but as Eriksson and his family Trust continued to hold 75% of the points, this was not a significant change.

         By September 2005, ATT was no longer generating revenues and Allison and Eriksson agreed that ATT would stop paying their salaries. The parties are in sharp dispute as to whether they agreed that deferred salaries would accrue, to be paid at a later date when ATT was financially able to pay them, or simply discontinued, to be resumed at some time in the future. Their testimony is consistent that the decision was reached in a brief conversation and was not documented in any writing. The court finds that Eriksson and Allison may have different views as to exactly what was agreed upon, but also finds that there was no meeting of the minds that salaries would be deferred to some indefinite date in the future. There is no evidence that the topic was discussed again until late 2011. Further, ATT's financial records, maintained by Allison, never reflected deferred salaries as either a contingent or fixed liability.

         ATT continued to generate very little revenue. In 2007, it could no longer afford to pay Baker, and he was terminated. A dispute arose between Allison and Eriksson concerning the terms of Baker's departure. While the parties disagree concerning the facts underlying Baker's termination, they are not material to the outcome of this case. It is sufficient to state that Allison and Eriksson resolved their dispute concerning Baker's termination by Allison's transfer of 2% of his points to Eriksson. After that transfer, ATT's points were held by its members in these percentages: Eriksson-55.5%; Eriksson Trust-20%; Allison-14.66%; Allison Trust-7.84%; and Baker-2%.

         During the period, 2006 to 2008, Eriksson lent ATT $200, 000 to cover operating expenses, which was later repaid to him with interest accrued at 15%. In or around this period, Allison looked for work outside of ATT, which, as noted above, was not paying him, but found only a few weeks of work in a temporary placement. He did not seek work as a lawyer. The parties are in dispute concerning how many hours a week Allison worked on ATT's affairs between 2005 and 2011. There is insufficient evidence in the record from which the court can make any finding on this. It appears likely that during some weeks Allison devoted substantial time to ATT, and on other occasions it did not require very much of his attention.

         In December 2008, ATT entered into an asset purchase agreement with Wright Medical Technology, Inc. (Wright) pursuant to which ATT sold to Wright its interests in a wound care technology that the parties refer to as the XPansion product or kits. The purchase price was effectively $1, 000, 000, plus additional royalties to be paid ATT as Wright sold XPansion kits. Unfortunately, Wright did not sell very many kits and the royalty stream from this product was meager.

         In March 2010, Dr. Karl Proppe became the Chief Executive Officer of ATT. Allison relinquished that position, but continued on as President and Manager of ATT. How the duties of each would differ is not clear, but Proppe was intended to lead ATT in the development of a negative pressure wound treatment technology. Proppe did not make a financial contribution to ATT and did not receive any points. Allison continued to be responsible for the general management of ATT's business.

         In May 2011, Wright notified ATT that it was exiting the wound care business and would no longer be selling XPansion kits. Thereafter, Allison led negotiations with Wright for the reacquisition of Xpansion; he received legal assistance from Mawn-Mahlau. The repurchase agreement was finalized in September 2011. Under its terms, ATT was to pay Wright a 6% royalty on sales, capped at $1, 000, 000, and to purchase the 4, 445 XPansion kits that were then in Wright's inventory at a price of just over $100 each over the next year, a $450, 000 obligation. Allison attempted to find ...


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