Superior Court of Massachusetts, Suffolk, Business Litigation Session
Leo BERTOLINO et al.
Terence FRACASSA et al.
Date: January 3, 2019
MEMORANDUM OF DECISION AND ORDER ON DEFENDANT
FREDERICK MCDONALDâS MOTION TO DISMISS COMPLAINT OR TO STAY
COMPLAINT, AND TO COMPEL ARBITRATION
L. Sanders, Justice of the Superior Court
action arises out of plaintiffsâ investments in a Delaware
limited liability company called Kettle Black of MA, LLC
(Kettle Black) formed for the purpose of funding Commonwealth
Management Connection, LLC (CPMC), a planned medical
marijuana service company. Plaintiffs allege that defendants
Terence Fracassa and Frederick McDonald, CPMC principals,
actively assisted Kettle Black in selling membership units to
plaintiffs and other investors and in so doing, made
misleading misrepresentations and/or material omissions in
violation of the Massachusetts Uniform Securities Act, G.L.c.
110A, Â§ 410 (MUSA). Defendant McDonald now moves to compel
arbitration of the claims against him. This Court concludes
that the motion must be DENIED .
Plaintiffs all purchased and currently own Class A membership
units in Kettle Black. They allege that defendants, in their
efforts to raise necessary capital for Kettle Black, made
material misrepresentations and intentionally withheld
material facts in the course of "road shows" for
prospective investors and in a private Offering Memorandum
which they prepared. The Complaint seeks to rescind
plaintiffsâ investments. In seeking to compel arbitration,
defendant McDonald relies on two clauses, one in an Offering
Memorandum for the Class A units and the other in Kettle
Blackâs Operating Agreement. The Offering Memorandum states
that all investors must arbitrate "any dispute arising
out of their investment in the Company [Kettle Black] and
purchase of the Units ..." See Exhibit 1 to Complaint at
page 13. Article 17 of the Operating Agreement provides that
"any and all disputes and legal and equitable claims
arising between and among the Insider, the company, or any of
them ... which relate to the rights and obligations of such
Persons under the terms of this agreement ... shall be
submitted to binding arbitration ..."
Complaint was filed on December 29, 2017. After requesting
and receiving additional time to answer, both defendants
moved to dismiss the Complaint pursuant to Rule 12(b)(6),
Mass.R.Civ.P. No motion to compel arbitration was made at
that time. In a footnote to his own motion to dismiss,
however, McDonald stated that he was "reserving"
his right to do so. After hearing on May 30, 2018, this Court
(Salinger, J.) denied the motion to dismiss. See Memorandum
of Decision and Order dated August 30, 2018. In the interim,
there was no discovery conducted among the parties.
Plaintiffs, however, did subpoena certain documents from
third parties and filed a motion to compel when no production
was forthcoming. That motion to compel was allowed on the
same day that the Court denied the motion to dismiss.
opposing McDonaldâs motion to compel arbitration, plaintiffs
make two arguments. First, they contend that the arbitration
provisions upon which McDonald relies do not apply to
plaintiffsâ claims. Second, they argue that McDonald has
waived any right he had to seek arbitration by raising this
issue nine months into the litigation. Both of these
arguments support denial of the motion.
party can be forced to arbitrate only those issues that it
has specifically agreed to submit to arbitration.
Constantin v. Frechette, 73 Mass.App.Ct. 352, 354
(2008). Here, the question is whether the plaintiffs
expressly agreed to arbitrate the dispute which gives rise to
their request for rescission. This Court concludes that they
did not. Although the arbitration clause in the Offering
Memorandum is quite broad, the Memorandum is not itself a
contract but rather a summary of the investment opportunity.
It does not purport to impose any obligation on anyone, it is
not signed, nor is its language incorporated by reference in
any subsequent agreement. As for the Operating Agreement, it
requires arbitration of any dispute that relates to the
rights and obligations of the parties under the terms of that
agreement. Plaintiffs are not asserting any rights nor
alleging any breach of any partyâs obligations under the
Operating Agreement; they instead complain of pre-investment
conduct by the defendants in soliciting the sale of Kettle
Black securities. In short, this Court finds no contractual
basis for compelling arbitration.
waiver argument is a closer call. Assuming that arbitration
were required, then waiver of that right "is not to be
lightly inferred and mere delay in seeking [arbitration]
without some resultant prejudice to a party cannot carry the
day." Creative Solutions Group, Inc. v. Bentzer
Corp.,252 F.3d 28 (1st Cir. 2001), quoting Page v.
Moseley, Hallgarten, Estabrook & Weeden, Inc., 806 F.2d
291, 293 (1st Cir. 1986). Still, it does seem unfair for
McDonald to force plaintiffs to litigate a 12(b)(6)
motion— and to require this Court to expend judicial
resources in deciding that motion— before pressing his
arbitration claim. As Judge Salinger noted in another BLS
case where he was faced with similar tactics, the defendant
is pursuing a strategy of "head I win, tails you
lose" by seeking first to obtain complete victory in
court and then complaining that the court has no jurisdiction
to decide the matter in the first place. Shalaby v.
Aartict Sand Techs., Inc., 32 Mass.L.Rptr. 401 (2014).
The very purpose of arbitration is to provide the parties