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Bertolino v. Fracassa

Superior Court of Massachusetts, Suffolk, Business Litigation Session

December 28, 2018

Leo BERTOLINO et al.
Terence FRACASSA et al.

          File Date: January 3, 2019


          Janet L. Sanders, Justice of the Superior Court

          This action arises out of plaintiffs’ 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, § 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 plaintiffs’ 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 Black’s 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 ..."

         The 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.


          In opposing McDonald’s motion to compel arbitration, plaintiffs make two arguments. First, they contend that the arbitration provisions upon which McDonald relies do not apply to plaintiffs’ 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.

          A 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 party’s 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.

         Plaintiff’s 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 with ...

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