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Mooney v. Diversified Business Communications

Superior Court of Massachusetts, Suffolk, Business Litigation Session

February 25, 2019

John J. MOONEY et al.
v.
DIVERSIFIED BUSINESS COMMUNICATIONS et al. John Squire et al.
v.
Diversified Business Communications et al.

          File Date: February 28, 2019

          MEMORANDUM OF DECISION AND ORDER ON CROSS MOTIONS FOR PARTIAL SUMMARY JUDGMENT

          Janet L. Sanders, Justice of the Superior Court

          These two consolidated actions involves a dispute among members and former members of DBC Pri-Med, LLC (Pri-Med), a limited liability company. Plaintiffs, who at one time owned a minority interest in Pri-Med, are suing Pri-Med, certain of Pri-Med’s managers and the entity holding a majority interest in Pri-Med, Diversified Business Communications (Diversified). Among other claims, plaintiffs assert that Diversified extended more than $ 12 million of debt to Pri-Med in breach of Pri-Med’s LLC Agreement. They further allege that Pri-Med itself violated the LLC Agreement by incurring more than $ 3 million in non-budgeted unapproved expenditures. Plaintiffs contend that Pri-Med and Diversified undertook these actions in order to deflate the value of Pri-Med in anticipation of a buyout of plaintiffs’ shares.

          Now before the Court are two motions, both of them partially dispositive. The first is filed by plaintiffs and seeks summary judgment on the two claims described above, contending that the facts relating to them are undisputed. The second is filed by defendants and seeks a determination by this Court that plaintiffs are barred from litigating the propriety of the debts underlying these claimed breaches pursuant to the doctrine of res judicata . This Court concludes that both Motions must be DENIED .

          BACKGROUND

          The following facts are relevant to the motions before me. Both plaintiffs and the defendant Diversified are parties to Pri-Med’s LLC Agreement, which was signed in 2012 when plaintiffs were minority members and owners of Series B-1 Pri-Med shares. Pursuant to Section 13.1 of that Agreement, Pri-Med had the right to purchase plaintiffs’ shares (and plaintiffs had the right to require Pri-Med to purchase their shares) upon delivery of a written notice. In the event the parties could not agree to a sales price, the value of the shares was to be decided by an independent appraiser, who would determine Pri-Med’s value as a "going concern," without any discount for the illiquidity or the minority nature of the shares. Section 13.1(e) of LLC Agreement, attached as Exhibit A of Joint Appendix of Exhibits Relating to Defendants’ Motion for Partial Summary Judgment ("Joint App."). More generally, the LLC Agreement defines "fair market value" as "the price which a willing seller and a willing buyer, each being in possession of all relevant facts and neither being under any compulsion to buy or sell" would agree to pay for the shares. Article I of LLC Agreement. Whatever the independent appraiser determined to be the fair market value of the shares is "final and binding" on all parties. Section 13.1(e) of LLC Agreement.

          Beginning in late 2012, Diversified lent Pri-Med significant sums of money, in large part to enable Pri-Med to purchase and then to sustain what became its Amazing Charts subsidiary. By December 2016, Diversified had loaned Pri-Med a total of $ 42.3 million. The defendants assert that these loans were made pursuant to a Security Agreement dated November 16, 2012, which was approved by Pri-Med’s Board of Managers. The plaintiffs contend that the total amount that Diversified was authorized to lend Pri-Med was capped at $ 30 million and that any amount over and above that figure was in breach of the LLC Agreement. Noting that the amount above the cap was loaned to Pri-Med in the latter half of 2016, plaintiffs allege that this was part of an overall strategy to drive down Pri-Med’s value and thus depress the value of the plaintiffs’ shares. Defendants dispute that.

          In early 2016, Pri-Med reached an agreement with its outgoing COO, Lynn Long, to buy her equity in Pri-Med for $ 3 million. In late 2016, Pri-Med expended an additional $ 1.1 million as severance payments to its subsequent COO, John Sheehan. Plaintiffs assert that the LLC Agreement bars Pri-Med from incurring more than $ 100, 000 in non-budgeted expenses without the approval of Series B-1 shareholders like plaintiffs and that this breach (like the loans from Diversified) caused damage to plaintiffs by depressing their stock value. Defendants contend that neither the payment to Sheehan nor the buyout of Long is properly treated as an operating expense that would require the shareholder approval and thus deny any breach of the LLC Agreement.

          Pri-Med called plaintiffs’ equity as of right as of January 1, 2017. With a disagreement over the price to be paid for plaintiffs’ shares, Pri-Med obtained a court order that led to the designation of Duff & Phelps as the appraiser charged with determining the value of plaintiffs’ shares. Pursuant to its engagement letter, Duff & Phelps was to determine the fair market value of plaintiffs’ shares as of December 31, 2016, using the definitions (described above) provided by the LLC Agreement. Beginning in April 2018, Duff & Phelps requested specific information and documents from the parties and more generally invited them to submit any other information that they believed would "inform the valuation of Pri-Med as of the valuation date."

          The parties submitted thousands of pages of documents as well as written statements in support of their respective positions. Both parties understood that any valuation of Pri-Med would need to account for its debt. In its submission to Duff & Phelps dated May 9, 2018, plaintiffs described their position with regard to the $ 42.3 million in loans from Diversified "for contextual purposes relevant to the current valuation exercise" and as "background," noting that these loans (and their alleged illegality) were the basis for one of the claims in their lawsuit. See Exhibit E of Joint App. They went on to argue that Diversified had "conceded" it had exceeded a $ 30 million cap approved by Pri-Med’s Board of Managers and that "this concession bears significantly on the present valuation analysis" in that no more than $ 30 million in debt "should factor into Pri-Med’s net equity value." Exhibit E, pages 4-5. Plaintiffs also submitted the report of Charles River Associates (CRA), their damages expert in the instant litigation, in an attempt to show that Pri-Med would have been worth far more than the value that Diversified placed on Pri-Med had it not been for the "misconduct" of the Diversified defendants. Defendants initially objected to this report, then provided its own damages expert’s report and also replied to plaintiffs’ allegations regarding the cap.

          On July 31, 2018, Duff & Phelps circulated a draft report to the parties regarding its valuation conclusions and invited comments regarding any factual errors or omissions. See Exhibit Q of Joint App. In reply, plaintiffs’ counsel stated that she had none, adding, however, that there remained significant legal and factual disputes between the parties as outlined in their Second Amended Complaint in the litigation. See Exhibit S of Joint App. "To this end, the Minority Shareholders expressly reserve and do not waive their rights with respect to any and all factual and legal arguments" pertaining to those claims, including whether the $ 42 million in debt was incurred in violation of the LLC Agreement. Id.

          Duff & Phelps issued its Final Report on August 22, 2018. See Exhibit V of Joint App. With regard to Pri-Med’s debt, the report stated that this was "in dispute." Exhibit V, p. 64. For purposes of the present valuation, Duff & Phelps stated that it had reviewed certain emails from Pri-Med requesting debt funding from Diversified and determined that the requested amounts "reasonably reflect the cash needs" of Pri-Med. Id. It noted that it had "considered the ‘but for’ appraisal of Pri-Med" prepared by CRA "but did not rely upon it, considering it was prepared for a damages calculation and on a pro-rata equity value." Exhibit V, p.63. With regard to the buyout of Lynn Long, the report stated that this too was "in dispute." It concluded that, because Long’s shares were "retired (i.e. acquired by the Company [Pri-Med])," the buyout sum should be included in Pri-Med’s overall debt and that "it appears reasonable to assume the as-reported debt balance in calculating the equity value of the Company [Pri-Med] without adjustment." Exhibit V, p. 65. More generally, Duff & Phelps stated that it was using the following "guidance" in determining Pri-Med’s "actual cost of debt," not a market based cost of debt:

A company being appraised is valued "as is" under its current management, not as it might be run by a different party. The company, with all of its warts and diamonds, is valued in terms of the discounted free cash flow generated by the company’s assets and reinvestment opportunities. In measuring the value of the warts and diamonds, the warts are valued as warts and the diamonds as diamonds. The minority shareholders cannot claim that if the company was run differently or if a third party owned it, ...

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