Superior Court of Massachusetts, Suffolk, Business Litigation Session
John J. MOONEY et al.
DIVERSIFIED BUSINESS COMMUNICATIONS et al. John Squire et al.
Diversified Business Communications et al.
Date: February 28, 2019
MEMORANDUM OF DECISION AND ORDER ON CROSS MOTIONS FOR
PARTIAL SUMMARY JUDGMENT
L. Sanders, Justice of the Superior Court
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-Medâs 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-Medâs 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 plaintiffsâ shares.
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 .
following facts are relevant to the motions before me. Both
plaintiffs and the defendant Diversified are parties to
Pri-Medâs 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 plaintiffsâ 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-Medâs 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 Defendantsâ 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-Medâs 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-Medâs value and thus depress the value of
the plaintiffsâ shares. Defendants dispute that.
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 plaintiffsâ equity as of right as of January
1, 2017. With a disagreement over the price to be paid for
plaintiffsâ shares, Pri-Med obtained a court order that led
to the designation of Duff & Phelps as the appraiser charged
with determining the value of plaintiffsâ shares. Pursuant to
its engagement letter, Duff & Phelps was to determine the
fair market value of plaintiffsâ 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."
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-Medâs 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-Medâs 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 expertâs report and also replied to
plaintiffsâ allegations regarding the cap.
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, plaintiffsâ 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
Phelps issued its Final Report on August 22, 2018. See
Exhibit V of Joint App. With regard to Pri-Medâs 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 âbut forâ 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 Longâs
shares were "retired (i.e. acquired by the Company
[Pri-Med])," the buyout sum should be included in
Pri-Medâs 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-Medâs "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 companyâs 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, ...