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Turner v. Cheffers

Superior Court of Massachusetts, Suffolk, Business Litigation Session

April 11, 2018

Edward S. TURNER, Individually and as Designee of Shareholders comprising more than 15% of issued and outstanding shares of IVES Group, Inc., a Nevada Corporation
v.
Mark L. CHEFFERS et al.

          MEMORANDUM AND ORDER ON PLAINTIFF’S MOTION TO AMEND COMPLAINT

          Kenneth W. Salinger, Justice Superior Court

          Plaintiff Edward S. Turner is a minority shareholder of IVES Group, Inc., a closely-held Nevada corporation. In December 2017 the court (Sanders. J.) granted partial summary judgment in favor of Defendants on three claims based on the alleged diversion of corporate assets and opportunities. She dismissed claims for an accounting (count III), breach of fiduciary duty (count IV), and unjust enrichment (count V). Judge Sanders concluded that these claims could only be asserted as derivative claims on behalf of IVES. She also concluded that it would be futile to allow Turner to assert these three counts as derivative claims because a majority of the shareholders have voted to ratify the challenged transactions and to terminate these claims as not being in the best interest of the company.

         Turner now seeks leave to amend his complaint to add claims for "equity expropriation" (count VII), breach of a contractual obligation to pay post-employment compensation and benefits (count VIII), and intentional infliction of emotional distress (count IX). The Court will DENY this motion because the proposed amendment would be futile, in that the proposed new claims could not survive a motion to dismiss under Mass.R.Civ.P. 12(b)(6).

         1. Legal Standards

         "Courts are not required to grant motions to amend prior complaints where ‘the proposed amendment ... is futile.’" Johnston v. Box, 453 Mass. 569, 583 (2009), quoting All Seasons Servs., Inc. v. Commissioner of Health & Hosps. of Boston, 416 Mass. 269, 272 (1993)); accord Thermo Electron Corp. v. Waste Mgmt. Holdings, Inc., 63 Mass.App.Ct. 194, 203 (2005) (affirming denial of motion for leave to assert counterclaim that would have been futile).

         A proposed amendment that would add new claims to a complaint is futile if the new claims could not survive a motion to dismiss. Mancuso v. Kinchla, 60 Mass.App.Ct. 558, 572 (2004) (affirming denial of motion to amend).

         To survive a motion to dismiss under Rule 12(b)(6), and thus to avoid being futile under Rule 15, a complaint must allege facts that, if true, would "plausibly suggest[ ] ... an entitlement to relief." Lopez v. Commwealth, 463 Mass. 696, 701 (2012), quoting Iannacchino v. Ford Motor Co., 451 Mass. 623, 636 (2008), and Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557 (2007). For the purpose of deciding the pending motions to dismiss, the Court must assume that the factual allegations in the complaint and any reasonable inferences that may be drawn in Plaintiffs’ favor from the facts alleged are true. See Golchin v. Liberty Mut. Ins. Co., 460 Mass. 222, 223 (2011). In so doing, however, it must "look beyond the conclusory allegations in the complaint and focus on whether the factual allegations plausibly suggest an entitlement to relief." Maling v. Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, 473 Mass. 336, 339 (2015), quoting Curtis v. Herb Chambers I-95, Inc., 458 Mass. 674, 676 (2011).

         2. Futility of Proposed New Claims

         2.1. Equity Expropriation

         Turner’s proposed claim for "equity expropriation" would be futile because the amended complaint does not allege facts plausibly suggesting that Defendants extracted or expropriated value from Turner or other shareholders by diluting the value of their shares and transferring that value to the majority shareholders.

          This claim is governed by Nevada law because IVES is a Nevada corporation. See Harrison v. NetCentric Corp., 433 Mass. 465, 469-72 (2001) (Massachusetts applies "the law of the State of incorporation to internal corporate affairs").

         Under Nevada law, a claim for "equity expropriation claims involve a controlling shareholder’s or director’s expropriation of value from the company, causing other shareholder’s equity to be diluted." Parametric Sound Corp. v. Eighth Judicial District Court, 401 P.3d 1100, 1109 (Nev. 2017) (agreeing with Gentile v. Rossette, 906 A.2d 91, 99-100 (Del. 2006)). "[A] pure equity dilution claim" must be brought as a derivative action on behalf of the corporation, because the value of all shares is diluted equally and there is no distinct harm to particular shareholders. Id. But if a majority shareholder unfairly extracts or expropriates value from minority shareholders, causing them to suffer harm not shared by other shareholders by reducing the value of their shares and transferring that value to the majority owners, the injured minority owners may assert a direct claim on their own behalf. Id.; accord Gentile, supra, at 102 n.26.

         Although the amended complaint would repeat Turner’s allegations regarding alleged diversion of corporate assets or opportunities, those allegations do not support a claim for equity expropriation. Turner alleges that Cheffers usurped corporate opportunities that belonged to IVERS (by instead developing them through a separate company, Allen David Press, Inc.), that Cheffers caused IVES to pay Renda even when she stopped doing any work, and that Cheffers and Renda caused IVES to pay for their personal travel. These allegations were the basis for Turner’s claim for breach of fiduciary duty, based on a theory of that all shareholders were damaged by a decrease in the value of their shares. But they do not plausibly suggest a disproportionate reduction in minority shareholder value, and thus do not state a claim for equity expropriation.

         In paragraphs 110 to 115 of the proposed amended complaint, Turner makes conclusory allegations that all the elements of an equity expropriation claim are present. None of these allegations is supported by any underlying factual allegation, however. Nowhere does Turner identify any transaction or conduct that would qualify as equity expropriation. As a result Turner’s ...


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