Cruickshank v. Dixon (In re Blast Fitness Grp., LLC)

602 B.R. 208

IN RE: BLAST FITNESS GROUP, LLC, Debtor

Gary W. Cruickshank, Chapter 7 Trustee of the Estate of Blast Fitness Group, LLC, Plaintiff,

v.Harold R. Dixon et al., Defendants.

Case No. 16-10236-MSH

Adversary Proceeding Case No. 18-01011

United States Bankruptcy Court, D. Massachusetts, Eastern Division.

Signed April 30, 2019

Ilyas J. Rona, Esq., Milligan Rona Duran & King LLC, Boston, MA, for the plaintiff, Gary W. Cruickshank, Trustee of the Estate of Blast Fitness Group, LLC

Joseph S.U. Bodoff, Esq., Rubin & Rudman LLP, Boston, MA, for the defendant, CapeCapital LLC

MEMORANDUM OF DECISION ON MOTION TO DISMISS OF CAPECAPITAL LLC

Melvin S. Hoffman, United States Bankruptcy Judge

I. Introduction

In a thirty-count complaint,¹ Gary W. Cruickshank, the plaintiff and chapter 7 trustee of the bankruptcy estate of Blast Fitness Group, LLC ("BFG"), seeks damages and injunctive relief against over forty named and dozens of unnamed defendants, including CapeCapital LLC, a Massachusetts limited liability company, whose sole manager is defendant, Harold R. Dixon. CapeCapital was the sole manager of BFG. BFG filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code² on January 26, 2016, at which time its debts exceeded $ 16 million. This adversary proceeding was commenced two years after the petition date on January 26, 2018.

CapeCapital has moved under Fed. R. Civ. P. 12(b)(6), per Fed. R. Bankr. P. 7012(b), to dismiss 18 of 23 counts against it.³ Specifically, it seeks dismissal of count I (constructive fraudulent transfer under Bankruptcy Code § 548(a)(1)(B) ), count II (actual fraudulent transfer under Bankruptcy Code § 548(a)(1)(A) ), count III (constructive fraudulent transfer under Massachusetts Fraudulent Transfer Act ("MFTA") § 5(a)(2)), count IV (constructive fraudulent transfer under MFTA § 6(a)), count V (actual fraudulent transfer under MFTA § 5(a)(1)), count VII ("turnover" under Bankruptcy Code § 550 ),⁴ count VIII (unjust enrichment), count X (statutory reach and apply/ Bankruptcy Code §§ 544 and 550 and Mass. Gen. Laws ch. 214, § 3(8) ), count XI (establishment of a resulting/constructive trust), count XVI (conspiracy), count XVII (aiding and abetting), count XVIII (conversion and civil theft), count XIX (fraud), count XX (intentional interference with contractual advantage), count XXI (tortious interference with contractual advantage), count XXIII (substantive consolidation), count XXV (alter ego/piercing the corporate veil), and count XXIX (attorneys' fees). It does not seek dismissal of the remaining counts against it for breach of fiduciary duty (count XV and XXVI),⁵ corporate waste (count XXVII), breach of duty to preserve assets, deepening insolvency (count XXVIII), or costs (XXX).

At the outset, I note that the trustee does not contest dismissal of count XXIX. I will, therefore, grant CapeCapital's motion to dismiss that count.

II. Procedural History

In addition to CapeCapital, other defendants, including Mr. Dixon, the law firm of Goodwin Procter LLP ("Goodwin") and two of its attorneys (collectively, the "Goodwin Defendants") also filed motions to dismiss. At a hearing held on these motions and others on June 14, 2018, the trustee agreed to the dismissal of his claim against CapeCapital for substantive consolidation (count XXIII), and I will therefore grant the motion to dismiss that count. The Goodwin Defendants' motions to dismiss were allowed in part and denied in part by my memorandum and order dated January 8, 2019. See Cruickshank v. Dixon (In re Blast Fitness Grp., LLC) , No. 16-10236-MSH, 2019 WL 137109 (Bankr. D. Mass. Jan. 8, 2019) (" Blast I ").

Today, I have also issued a memorandum and order, allowing in part and denying in part Mr. Dixon's motion to dismiss ("Blast II "). A complete procedural history and recitation of the trustee's factual allegations, and my legal findings on certain of the trustee's claims are set forth in Blast I and II , which are incorporated herein by reference. Nevertheless, I reiterate below some of those factual allegations and supplement them with additional allegations as necessary to determine CapeCapital's motion to dismiss.

There are a number of other defendants in this adversary proceeding which have not answered or otherwise responded to the complaint, including certain BFG subsidiaries, as more fully discussed below. These subsidiaries are the subject of, among other claims, the trustee's claim in count XXIII for substantive consolidation with BFG. Although those defendants have not yet been defaulted, I will assume for purposes of this decision that BFG and its subsidiaries are consolidated.

III. Motion to Dismiss

A. Legal Standard

In ruling on the motion to dismiss, I must accept all well-pleaded factual allegations in the complaint as true, drawing all reasonable inferences in the trustee's favor. Langadinos v. American Airlines, Inc. , 199 F.3d 68, 69 (1st Cir. 2000). A claim cannot be dismissed if the trustee has demonstrated a "plausible entitlement to relief." Sanchez v. Pereira–Castillo , 590 F.3d 31, 41 (1st Cir. 2009) (citing Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ). A plaintiff's obligation requires more than "labels and conclusions" and "a formulaic recitation of the elements of a cause of action will not do[.]" Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).

Inquiry into plausibility is a two-step process. "First, the court must sift through the averments in the complaint, separating conclusory legal allegations (which may be disregarded) from allegations of fact (which must be credited)." Rodriguez-Reyes v. Molina-Rodriguez , 711 F.3d 49, 53 (1st Cir. 2013) (citing Morales–Cruz v. Univ. of P.R. , 676 F.3d 220, 224 (1st Cir. 2012) ). "Second, the court must consider whether the winnowed residue of factual allegations gives rise to a plausible claim to relief." Id. "Plausible, of course, means something more than merely possible, and gauging a pleaded situation's plausibility is a ‘context-specific’ job that compels us ‘to draw on’ our ‘judicial experience and common sense.’ " Schatz v. Republican State Leadership Comm. , 669 F.3d 50, 55 (1st Cir. 2012) (quoting Iqbal , 556 U.S. at 679, 129 S.Ct. 1937 ). " ‘Moreover, each defendant's role in the [adverse action] must be sufficiently alleged to make him or her a plausible defendant. After all, we must determine whether, as to each defendant , a plaintiff's pleadings are sufficient to state a claim on which relief can be granted.’ " Rodriguez-Ramos v. Hernandez-Gregorat , 685 F.3d 34, 40-41 (1st Cir. 2012) (quoting Ocasio-Hernandez v. Fortuno-Burset , 640 F.3d 1, 16 (1st Cir. 2011) (emphasis in original). See also Penalbert-Rosa v. Fortuno-Burset , 631 F.3d 592, 594 (1st Cir. 2011) ("[S]ave under special conditions, an adequate complaint must include not only a plausible claim but also a plausible defendant.").

B. Trustee's Factual Allegations⁶

1. BFG and CapeCapital

On February 14, 2011, CapeCapital, acting through Mr. Dixon, formed BFG, a Massachusetts limited liability company.⁷ ¶ 74. CapeCapital was the sole manager of BFG, and Mr. Dixon, in turn, was the sole manager and a member of CapeCapital. ¶ 3. At all relevant times, BFG acted at the direction of CapeCapital and Mr. Dixon. ¶ 92.

BFG owned, entirely or partially, seventeen subsidiaries through which it operated its business.⁸ ¶ 53. Fitness clubs at different locations were often operated through separate BFG subsidiaries, and those subsidiaries were often the actual tenants under the applicable leases for the premises. ¶¶ 251-52, 255-56. At all times relevant to the claims and causes of action alleged in the complaint, BFG was insolvent and insufficiently capitalized. ¶¶ 310-12.

2. The Bally Transaction

Under the terms of an asset purchase agreement dated April 10, 2012 between Bally Total Fitness, Inc. and BFG's wholly-owned subsidiary, Blast Fitness Acquisition, LLC ("Blast Acquisition"), Blast Acquisition was to acquire thirty-nine fitness clubs from Bally and BFG was to receive three pieces of commercial real estate from Bally located in Maryland Heights, Missouri, West Hartford, Connecticut and Irving, Texas which were to be "sold pursuant to the terms of a separate purchase agreement ... for an aggregate purchase price of $ 1,000,000 to an entity identified by [BFG] prior to Closing." ¶¶ 62-63, 114, 118. Additionally, under the terms of the asset purchase agreement, BFG was to receive 28 residual revenue streams associated with 28 closed Bally's fitness clubs which were derived from monthly electronic fund transfers of members of the closed fitness clubs. ¶ 115.

On April 25, 2012, Mr. Dixon formed CapeCapital Maryland Heights, LLC, a Missouri limited liability company, CapeCapital West Hartford, LLC, a Connecticut limited liability company, and CapeCapital Irving, LLC, a Texas limited liability company, all of which were managed by Mr. Dixon and effectively owned by him (collectively, the "Cape Real Estate Entities") in order to take title to the Bally real estate. ¶¶ 18, 20, 22, 62, 145, 152, 157, 164. None of these entities was owned by BFG. ¶¶ 62, 163-64.

To raise part of the cash needed to complete the Bally transaction, the members of BFG agreed to sell a preferred membership interest in BFG to the Dixon Family Limited Partnership (an affiliate of Dixon and also a defendant in this action). ¶¶ 138-39. The Goodwin Defendants drafted and presented to BFG and its members a member consent dated April 27, 2012, which provided in part:

WHEREAS, the Members and Managers [of BFG] are seeking to raise additional capital for the Company for purposes including, but not limited [sic], financing the growth of the Company's business through the acquisition, from Bally Total Fitness Corporation, a Delaware corporation ("Bally") and certain of ts [sic] affiliates, of operating assets and real property associated with additional health club

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