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Burns v. Taylor

Superior Court of Massachusetts, Suffolk, Business Litigation Session

February 8, 2017

Christopher E. Burns
v.
Hugh R. Taylor et al

          MEMORANDUM OF DECISION AND ORDER ON DEFENDANTS' MOTION FOR SUMMARY JUDGMENT

          Mitchell H. Kaplan, Justice of the Superior Court.

         In early 2014, plaintiff Christopher Burns and defendants Hugh Taylor and Lisa Franks formed an investment advisory firm which they called Taylor Wealth Management Partners. Although they planned on entering into a formal written agreement that would define the terms of their business arrangement, they began their joint enterprise before they had agreed upon all of the terms and memorialized their agreement in a written contract. By December 2014, terms of their agreement were still being debated, the parties' relationship had soured, and Taylor, with Franks' consent and assistance, told Burns that he must leave the firm. Aggrieved by the termination, Burns filed this action against Taylor and Franks, alleging that their actions constituted a breach of contract and a breach of fiduciary duty. The matter is now before the court on the defendants' motion for summary judgment. For the reasons that follow, the motion is ALLOWED, in part, and DENIED, in part.

         BACKGROUND

         At some point in 2013, Taylor left the investment advisory firm that he had founded many years before. He discussed with Burns and Franks a plan to form a new investment advisory firm in which they would each be partners. Burns and Franks agreed to participate in Taylor's new venture. Although Taylor initially recommended that the firm name include each of their last names, the parties eventually decided to call the firm Taylor Wealth Management Partners (TWMP). Taylor contributed the capital necessary to start the firm and succeeded in bringing many of his former clients to the new firm. Franks and Burns contributed no capital. The record is not clear as to whether they brought any clients to the new firm, but certainly the vast majority of the clients had pre-existing relationships with Taylor.

         Taylor, Burns, and Frank hired Attorney Kim Taylor to assist them in organizing the firm; in particular, drafting an agreement to govern the parties' business relationship. Attorney Taylor, then asked Attorney Scott Pinarchick to provide tax advice to the group. On January 13, 2016, Attorney Taylor filed a certificate of organization with the Secretary of the Commonwealth establishing a limited liability company to be known as Taylor Wealth Management Partners, LLC.[1] The certificate listed Taylor as the manager and resident agent, and made no reference to Burns or Franks. Approximately two weeks later, Attorney Taylor drafted a preliminary summary term sheet for the LLC. The draft was titled " Summary of Terms--Taylor Wealth Management LLC" and bore the legend " FOR DISCUSSION PURPOSES ONLY." It contained provisions governing capital investments, distributions, compensation, buyout obligations, decision-making authority, and terminations.

         In mid-February 2014, Attorney Taylor prepared another draft of the term sheet following additional discussions among the parties. Unlike the previous draft, this one explicitly provided that Taylor would own 800 common units of TWMP and that Burns and Franks would each own 100 units. Soon thereafter, Taylor filed TWMP's initial Uniform Application Investment Adviser Registration on Form ADV with the Securities and Exchange Commission. He signed the form under penalty of perjury. The form identified Taylor as owning " 75% or more" of TWMP as of January 2014, Franks as owning " 10% but less than 25%" as of January 2014, and Burns as owning " 10% but less than 25%" as of February 2014. Attached to the form was a brochure prepared by Taylor which stated that Taylor owned 80% of the firm, while Burns and Franks each owned 10%. Taylor later filed two additional Forms ADV in June and December 2014 containing the same firm ownership information.[2]

         By February 2014, TWMP was up and running and each of the parties was actively working for the firm and dealing with its day-to-day business. Although it had been anticipated that Burns and Franks would contribute capital to the firm, the parties agreed that their contributions were unnecessary because the firm had been so successful in attracting Taylor's former clients and had sufficient cash to meet its needs.

         Over the next few months, the parties met several times to discuss revisions to the term sheet. Attorney Taylor prepared a number of iterations of the term sheet in March and May 2014 to reflect the parties' ongoing discussions. Each draft contained the header " FOR DISCUSSION PURPOSES ONLY" and each indicated that Taylor would own 80% of the firm, while Franks and Burns would each own 10%. Among the terms that remained the subject of continued negotiations was the so-called buyout provision. Taylor is substantially older than Burns and Franks. The parties had agreed that there would be a transfer of ownership from Taylor to Burns and Franks over the next few years and this provision was intended to govern the timing and manner in which Taylor's interest would be redeemed.

         On June 18, 2014, as negotiations continued, Franks sent an email to Attorneys Taylor and Pinarchick following a conversation with her accountant, Rick Eckstein. Franks wrote:

I spoke to my accountant yesterday and he wanted to verify your position on my 10% equity out of the gate from the formation of our Taylor Wealth Management business. I understood that since I was in at day 1 then there would be no value associated with my ownership that could have tax [sic] other than the retained earnings we had discussed where the business would pay the tax before distributions . . . While we have still yet to sign a partnership agreement our discussions have always led me to believe that there is a partnership set up (last Fall) with ownership that predates assets coming over from Taylor Investment Counselors [Taylor's former firm] to us at Taylor Wealth Management.

         Attorney Pinarchick replied on June 30, 2014, explaining that:

The way I see it is that that [sic] three of you sent [sic] up an LLC early this year. It is a partnership for tax purposes and the split is 80/10/10 between you and your partners. As you said [in your email], you have 10%. I would expect any income earned this year to be split on those percentages. You and the others will owe income tax on your share . . . When the agreement is finalized I would expect it to reflect all this [sic] items. At this point, the agreement is an oral one. You really need to have a written agreement in the event of any disagreements. The main sticking point with the agreement has been Hugh [Taylor]'s buy back and transition to you and Chris [Burns] over the next several years. I am [sic] hope we can finalize this soon and memorialize it in the agreement.

         Eckstein, who had been copied in the above email correspondence, subsequently wrote to Franks, addressing Attorney Pinarchick's remarks and discussing the tax implications of her ownership interest. In response, Franks replied " I am having a hard time following. Basically, Hugh [Taylor] would not have had a firm unless Chris [Burns] and myself were his partners. We earned the business therefore together."

         On August 15, 2014, Taylor emailed Burns asking him to provide feedback on the latest draft of the term sheet (apparently the May 2014 draft): In the email, Taylor expressed disappointment that it was taking so long to get a " corporate entity" established and noted that the delay was making marketing and trading difficult for the firm. He also indicated his hopes that the ...


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