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Venditto v. Cunningham

United States District Court, D. Massachusetts

July 27, 2018

MICHAEL VENDITTO
v.
GLEN CUNNINGHAM

          MEMORANDUM OF DECISION AND ORDER

          RYA W. ZOBEL, SENIOR UNITED STATES DISTRICT JUDGE.

         In 2005, the parties, then longtime friends, formed a yoga business called Sadhana, LLC. Plaintiff Michael Venditto, a Massachusetts resident, invested over $200, 000 in the venture and managed its two properties, as well as the accounting and legal matters. Defendant Glen Cunningham, a New Hampshire resident, was a yoga instructor responsible for day to day operations, employee oversight, and recordkeeping. Although defendant claimed business was slow but improving, by 2016 the parties agreed to sell the business assets. As part of the sale, plaintiff purportedly discovered that defendant had been using both Sadhana locations to generate income he neither reported to, nor shared with, the business. In this lawsuit, plaintiff alleges fraud and various related claims to recover his investment. Defendant moves to dismiss all claims.

         I. Factual Background

         The facts are recited as alleged in plaintiff's complaint (Docket # 1-1), see Ocasio-Hernández v. Fortuño-Burset, 640 F.3d 1, 5 (1st Cir. 2011), augmented by “documents annexed to it or fairly incorporated into it, and matters susceptible to judicial notice.” Centro Medico del Turabo, Inc. v. Feliciano de Melecio, 406 F.3d 1, 5 (1st Cir. 2005).[1]

         With two others (Rolf and Mariam Gates), plaintiff and defendant registered Sadhana, LLC, with the Massachusetts Secretary of State's Office on March 1, 2005, initially naming only Mariam Gates as manager. Three months later, they filed an Amended and Restated Certificate of Organization designating plaintiff, defendant, Rolf Gates, and Mariam Gates as managers. Nonetheless, Rolf and Mariam Gates departed soon thereafter pursuant to a buy-out agreement dated October 1, 2005.

         Because the managers executed no partnership agreement, operating agreement, or loan documents, the buy-out agreement (“Buy-out”) drafted and signed by all parties offers the most fulsome available description of their respective roles and obligations.[2] The Buy-out arranged for the sale of the Gates's “membership shares back to [the] company, ” leaving plaintiff and defendant as the sole remaining members and owners. Docket # 11-3, at 2. The Buy-out and accompanying Promissory Note outlined a “debt reduction strategy” between Rolf and Mariam Gates and Sadhana, LLC, and contemplated payment to Venditto and Cunningham personally only in the event that both were “no longer owners of Sadhana LLC before the [Gates debt] is paid back to the company in full.” Docket # 11-3, at 8. As of the date of the Buy-out, plaintiff had invested $212, 500 in the business and paid an additional $53, 106.81 in out-of-pocket expenses.

         Sadhana, LLC, ran its yoga operations out of two locations, both owned by plaintiff. Plaintiff was “primarily responsible for property upkeep and management, corporate record keeping, partnership level accounting and legal matters of the business.” Compl. ¶ 30. Defendant was responsible for day to day operations at both locations, including but not limited to “employee oversight, scheduling and managing yoga classes, arrangements for yoga teachers to teach classes, processing of payments, day to day recording (sic) keeping and general fiscal management.” Compl. ¶ 29. Plaintiff “entrusted [defendant] with the entire responsibility of the Sadhana locations based upon Cunningham's representations that he had desire, knowledge, expertise, and that he would provide investment returns for the contributions [plaintiff] made.” Compl. ¶ 71. The business made some “interest payments” to its investors, including plaintiff, with amounts contingent on income stream, but none issued after 2012.

         At defendant's urging, plaintiff made additional loans to the business, some of which were used to pay defendant. Plaintiff had “occasional[] questions about Cunningham's financial accounting, ” but accepted his representation that “business was slow but that it was getting better.” Compl. ¶ 34. After several unsuccessful years, however, plaintiff suggested that the parties sell the business, and defendant agreed. Sadhana, LLC, sold its business assets and customer database for $25, 000 on August 15, 2016. The sale expressly excluded the corporate entity itself, and provided that “Seller will be able to continue to operate the Sadhana, LLC business.” Docket # 11-5, at 4.

         After sale proceeds were applied to existing short-term debt, there remained $22, 330.12 in unpaid rent and amounts owed to yoga teachers, accountants, and lawyers. In long-term debt, there remained $283, 500 owed to investors, including $195, 000 to plaintiff and $3, 500 to defendant. As evinced upon the 2005 exit of Rolf and Mariam Gates, the parties intended that “any funds loaned to the business were to be repaid by the remaining participants.” Compl. ¶ 53. Around the time of the 2016 sale, plaintiff and defendant confirmed their intention to pay all remaining short-term debt, but defendant has since refused to do so. A post-sale audit revealed defendant's failure to distinguish between funds he earned personally and income attributable to Sadhana, and defendant admitted to removing cash from the business to pay himself for classes taught. He now works for the new owners out of the same locations in which he previously operated with plaintiff.

         Plaintiff filed a complaint in his personal capacity in the Massachusetts Superior Court on September 6, 2017, claiming fraud, breach of fiduciary duty, breach of contract, promissory estoppel, conversion, unjust enrichment, an accounting, and seeking the imposition of a constructive trust. Based on diversity of citizenship, defendant removed the action to this court and moved to dismiss the complaint for failure to state a claim.

         II. Standard of Review

         “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. For purposes of a motion to dismiss, the court accepts all well-pleaded factual allegations as true and draws all reasonable inferences in the plaintiff's favor. See Rodríguez-Reyes v. Molina-Rodríguez, 711 F.3d 49, 52-53 (1st Cir. 2013).

         III. Analysis

         The gravamen of plaintiff's complaint, brought in his personal capacity rather than on behalf of Sadhana, LLC, is that he was fraudulently induced to invest in the business in exchange for defendant's knowing false promises of diligence and intent to repay. Defendant contends that plaintiff's claims are time-barred, and that plaintiff lacks standing to assert them. He further asserts that the complaint does not satisfy the ...


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