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Freid v. In Good Health, Inc.

Superior Court of Massachusetts, Suffolk, Business Litigation Session

April 18, 2018

Gerald FREID


          Mitchell H. Kaplan, Justice of the Superior Court

         Defendant In Good Health, Inc. (IGH) was formed as a non-profit corporation by defendant Andrea L. Noble (Andrea) and her son, defendant David B. Noble (David), in May 2013 for the purpose of obtaining a license to operate a medical marijuana dispensary. In 2014, Andrea asked her brother, plaintiff Gerald Freid, to provide IGH with additional capital. Freid alleges that he agreed to loan IGH substantial funds, which eventually totaled $1, 189, 250, based on an express agreement among Andrea, David and him that he would be employed by IGH as its chief operating officer and, if, in the future, legislation was enacted permitting marijuana dispensaries to operate as for-profit corporations, he would receive a 25% equity interest in IGH. Such legislation was enacted as part of Chapter 55 of the Acts of 2017 which legalized the use of recreational marijuana in Massachusetts. Thereafter, IGH’s board voted to convert IGH to a for-profit entity; however, Freid’s employment with IGH was then terminated and Andrea told Freid that he would never own an interest in IGH. Freid has filed this action asserting claims against the defendants for Declaratory Judgment (Count I); Breach of Contract (Count II): Promissory Estoppel (Count III); Unjust Enrichment (Count IV): Breach of the Covenant of Good Faith and Fair Dealing (Count V); Count VI (Fraud and Deceit); Count VII (Negligent Misrepresentation): Wrongful Termination in Violation of Public Policy (Count VIII); Breach of Fiduciary Duty (Count IX) and Securities Fraud (Count X). The case is presently before the court on the defendants’ motion to dismiss all ten counts for failure to state a claim on which relief may be granted.

         For the reasons that follow, that motion is ALLOWED, in part, and DENIED, in part.


         The following facts are taken from Freid’s complaint and assumed to be true for the purposes of this motion to dismiss. The court also refers to the Promissory Notes pursuant to which Freid lent funds to IGH.

         The meeting at which Andrea and David made their proposal to Freid took place on October 30, 2014. They brought with them a Meeting Agenda (the Agenda) which stated in relevant part that: (i) "We are a non-profit therefore no ownership exits [sic] however as the sole investor Andrea has 100% control"; (ii) "It is the understanding that upon changing to for-profit when allowed by state all additional investors would get an equity conversion at no charge. Andrea under any scenario wishes to keep 75% interest for herself"; and (iii) "There is an opportunity for a position as the COO of [IGH] ... This position would fill a real need of having another reliable family member to help over see [sic] the business and allow CEO some flexibility."

         Freid accepted Andrea’s and David’s proposal and his investments were documented by instruments entitled "Promissory Note" (each a Note or collectively the Notes). The first several Notes bore interest at 15% per annum and the last at 18% per annum. Each had a term of 10 years. Principal and interest were to be paid only as IGH’s "financial resources permit" with all unpaid accrued interest and principal due at the end of the 10-year term. The first Note was dated December 3, 2014 and accompanied by a letter from Freid to David Noble as CEO and President of IGH in which Freid recorded his agreement to loan the funds-something like a subscription agreement. Acceptance of the offer by IGH was memorialized by David’s signature, as CEO, on the bottom of the letter. A copy of the letter was sent to the director of the Medical Use of Marijuana Program of the Massachusetts Department of Public Health (MDPH), the agency responsible for determining which applicants would receive licenses as Registered Marijuana Dispensaries (RMD). The letter included the following sentence: "Please note this commitment does not represent an equity stake in the organization."

         Freid began working at IGH shortly after this first investment and became a member of its Board. In July 2015, MDPH issued IGH a permit to operate a RMD and it opened for business on September 4, 2015. Thereafter, it was commercially very successful grossing approximately $11 million in 2017. In September 2017, all of the directors of IGH voted to convert IGH into a for-profit entity. At or about that time, "Freid began expressing concern to David about certain financial improprieties he perceived were ongoing at IGH." Thereafter, Andrea informed Freid that he would never "own any part of this business." When, through counsel, Freid expressed his position that he had "an enforceable right to his 25% equity stake in IGH upon its conversion," he was barred from IGH’s facilities and "effectively terminated."


         I. Standard for Motion to Dismiss

         When evaluating the legal sufficiency of a complaint pursuant to Mass.R.Civ.P. 12(b)(6), the court accepts as true all factual allegations in the complaint and all reasonable inferences that may be drawn in the plaintiff’s favor. Berish v. Bornstein, 437 Mass. 252, 267 (2002). To survive a motion to dismiss, a complaint must set forth the basis of the plaintiff’s entitlement to relief with "more than labels and conclusions." Iannacchino v. Ford Motor Co., 451 Mass. 623, 635-36 (2008), quoting Bell Atl. Corp. v. Twombly, 127 S.Ct. 1955, 1964-65 (2007). While factual allegations need not be detailed, they "must be enough to raise a right to relief above the speculative level ..." Id., quoting Bell Atl. Corp., 127 S.Ct. at 1964-65. At the pleading stage, a complaint must set forth "factual ‘allegations plausibly suggesting (not merely consistent with)’ an entitlement to relief ..." Id., quoting Bell Atl. Corp., 127 S.Ct. at 1966.

         II. Declaratory Judgment and Breach of Contract

         The defendants make essentially two arguments in support of their motion to dismiss Counts I and II asserting claims for declaratory relief and breach of contract, first, the joint venture agreement is too vague and uncertain to be enforceable; and second, the terms of the Notes preclude the claims. The court finds neither argument convincing.

         Andrea, David, and Freid met to discuss the terms set out in the Agenda. Andrea represented that she had provided all of the capital and financial guarantees for the enterprise to date and therefore controlled it. She asked Freid to invest substantial funds, explaining that he could have no equity in IGH in its present form because it was a non-profit. Rather, he would loan IGH money on similar terms that she had. However, if the law changed, and IGH could be converted, Freid would be entitled to 25% of the equity. The discussions and the written Agenda expressed some concerns over how Andrea’s guarantee of IGH’s indebtedness would be treated in measuring her investment against that which she was asking Freid to invest, but the alleged agreement was certainly clear enough: if Freid would loan money to the non-profit and it was converted, Andrea, who ...

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