Superior Court of Massachusetts, Suffolk, Business Litigation Session
Date: September 5, 2018
MEMORANDUM AND ORDER ON DEFENDANTSâ MOTIONS TO
Kenneth W. Salinger, Justice of the Superior Court
Plaintiffs all purchased and own Class A membership units in
a Delaware limited liability company called Kettle Black of
MA, LLC. They assert that defendants Terence Fracassa and
Frederick McDonald sold, were in control of a company that
sold, or materially aided the sale of these securities by
means of misleading statements, and are therefore liable
under the Massachusetts Uniform Securities Act, G.L.c. 110A,
§ 410 (the "MUSA"). Plaintiffs seek the
statutory remedy of rescinding their purchases by compelling
Fracassa and McDonald to pay Plaintiffs the full amount of
their investments in Kettle Black upon the tender by
Plaintiffs of their Kettle Black membership units.
have both moved pursuant to Mass.R.Civ.P. 12(b)(6) to dismiss
the claims against them. They assert that the complaint fails
to state a claim for which relief may be granted against them
under the MUSA.
survive a motion to dismiss under Rule 12(b)(6), a complaint
must allege facts that, if true, would "plausibly
suggest[ ] ... an entitlement to relief." Lopez v.
Commonwealth, 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 Plaintiffsâ favor from the facts alleged
are true. See Golchin v. Liberty Mut. Ins. Co., 460
Mass. 222, 223 (2011).
Court will DENY the motions to dismiss because the facts
alleged in the complaint plausibly suggest that: (i)
Defendants may both be liable under the MUSA for offering to
sell securities by means of statements that were misleading
because they failed to state material facts; (ii) McDonald
may also be liable because Kettle Black sold securities by
such means and McDonald, as a manager of the company, could
and did exercise control of Kettle Black; and (iii) Fracassa
may also be liable because he acted as an agent of Kettle
Black and materially aided such sales.
complaint alleges the following facts. Kettle Black was
formed in September 2015 for the purpose of funding
Commonwealth Pain Management Connection, LLC
("CPMC"). In turn, CPMC was formed to fund and
provide services to a non-profit registered marijuana
dispensary called Wellness Connection of MA, Inc. The Kettle
Black investors understood that Kettle Black would own 40
percent of CPMC. Plaintiffs collectively hold over 80 percent
of the issued and outstanding Class A membership units of
Kettle Black first purchased its 40 percent equity interest
in CPMC, only non-profit organizations like Wellness were
allowed to obtain licenses to grow and dispense medical
marijuana in Massachusetts. Such non-profits were allowed to
contract with for-profit management companies to obtain the
supplies, equipment, and services needed to cultivate and
dispense their products.
allege that they invested in Kettle Black in order to obtain
an indirect interest in CPMCâs expected profits from its
contract with Wellness. Indeed, they allege that CPMCâs
anticipated management agreement with Wellness "was the
only potential source of revenue for CPMC and thus Kettle
Black, and the sole means by which the Plaintiffs could
realize any return on their investment."
Fracassa and McDonald are the principals behind CPMC. They
actively helped Kettle Black sell its Class A membership
units to Plaintiffs and other investors, in order to raise
money for Kettle Black and thus indirectly for CPMC.
Defendants helped to prepare a private offering memorandum,
participating in "road shows" with potential
investors, and proving materials during the road shows
touting their central role in CPMC and their collective
experience in all aspects of the medical marijuana industry.
Defendants personally profited from Kettle Blackâs investment
in CPMC and thus, indirectly, from Plaintiffsâ investment in
claim that Fracassa and McDonald "intentionally withheld
and misrepresented material facts" while helping Kettle
Black raise capital that it would then invest in CPMC. In
particular, they claim that Defendants failed to disclose
that Fracassa "had signed a secret side agreement"
with Matthew Philbin, who was Wellnessâs landlord, that gave
Philbin "extensive rights" in as well as "de
facto control over" Wellness and the business of CPMC.
allege that the undisclosed information about the Side
Agreement was material because that contract gave Philbin
rights in CPMC that were inconsistent with what had been
disclosed to potential investors in Kettle Blackâs offering
memorandum. The complaint asserts that Philbin has refused to
execute CPMCâs Operating Agreement (which was disclosed to
investors) because it was inconsistent with his rights under
the Side Agreement (which was not disclosed). It further
alleges that as a result CPMC has been unable to secure
anticipated lending or to enter into any fee-for-service
agreement with Wellness.
MUSA "creates a strong incentive for sellers of
securities to disclose fully all material facts about the
security," and "provides strong protections for a
buyer who received misleading information from a seller of
securities." Marram v. Kobrick Offshore Fund,
Ltd., 442 Mass. 43, 51 & 52 (2004). It does so by
"rendering tainted transactions voidable at the option
of the defrauded purchaser," without the purchaser
having to prove that the misrepresentation caused them to
suffer any loss or even that they relied upon the
misrepresentation when they bought the security. Id.
at 51, 53, 57 n.24. "The buyerâs sophistication is also
irrelevant." Id. at 53.
statute "seeks not only to secure accuracy in the
information that is volunteered to investors, but also, and
perhaps more especially to compel disclosure of significant
matters that were heretofore rarely, if ever,
disclosed." Id. at 51-52, quoting Shulman,
Civil Liability and the Securities Act, 43 Yale L.J.
227, 227 (1933). The MUSA imposes a duty of full
disclosure on sellers of securities; the buyer has no
"duty to investigate or to âverify a statementâs
accuracy.â" Id. at 53, quoting Mid-America
Fed. Sav. & Loan Assân v. Shearson/American Express,
Inc., 886 F.2d 1249, 1256 (10th Cir. 1989).
MUSA imposes primary liability on any person or entity who
"offers or sells a security by means of" a false
statement or by omitting to disclose some material fact. See
G.L.c. 110A, § 410(a)(2). To state such a claim, a
plaintiff must allege facts plausibly suggesting that:
"(1) the defendant âoffers or sells a securityâ; (2) in
Massachusetts; (3) by making âany untrue statement of a
material factâ or by omitting to state a material fact; (4)
the plaintiff did not know of the untruth or omission; and
(5) the defendant knew, or âin the exercise of reasonable