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

603 B.R. 219

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, Harold R. Dixon.

MEMORANDUM OF DECISION ON MOTION TO DISMISS OF HAROLD R. DIXON

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 defendants including Harold R. Dixon, who controlled BFG, and dozens of unnamed John Doe defendants. The trustee has pleaded facts which, if true, demonstrate the implementation of a plan by Mr. Dixon and other defendants he controlled to deprive, divert, and transfer valuable assets and profit opportunities from BFG, ultimately resulting in BFG's filing of 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.

Mr. Dixon has filed a motion to dismiss 19 of the 23 counts against him for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6), per Fed. R. Bankr. P. 7012(b).³ Specifically, Mr. Dixon 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 VI (turnover under Bankruptcy Code § 542(b) ), 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),⁵ count XVI (conspiracy), count XVII (aiding and abetting), count XVIII (conversion and civil theft), count XIX (fraud), 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 XXIX (attorneys' fees). He does not seek dismissal of the remaining counts against him for breach of fiduciary duty and theft of corporate opportunity (count XXVI), corporate waste (count XXVII), breach of duty to preserve assets, deepening insolvency (count XXVIII) and costs (XXX). He does not address count XV (breach of fiduciary duty) in his motion to dismiss, and I will not address that count here.

At the outset, I note that the trustee does not contest dismissal of counts VI, VIII, XVII, XX, XXI, XXIII or XXIX. I will, therefore, grant Mr. Dixon's motion to dismiss those counts.

II. 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

In 2010, prior to the formation of BFG, Mr. Dixon met Steven Borghi, and the two discussed going into business together. ¶ 72. Mr. Borghi operated various Work Out World ("WOW") health clubs with Tony Beninati and, when Mr. Beninati died, with his widow, Elizabeth Beninati. ¶ 71. Mr. Borghi allowed Mr. Dixon to learn about the discount fitness center business by giving him access to the offices and proprietary information of WOW. ¶ 73.

On February 14, 2011, CapeCapital LLC, a Massachusetts limited liability company ("CapeCapital"), formed BFG, acting through Mr. Dixon. ¶¶ 3, 74. BFG is also a Massachusetts limited liability company.⁷ CapeCapital, a defendant in this adversary proceeding, was the sole manager of BFG, and Mr. Dixon, in turn, was the sole manager and a member of CapeCapital. ¶ 3. At its peak, BFG owned and operated over sixty fitness clubs bearing its name throughout the United States. (Intro., p. 2). At all relevant times, BFG acted at the direction of CapeCapital and Mr. Dixon, who held himself out as CEO of BFG. ¶¶ 2, 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.

In 2011, Messrs. Dixon and Borghi were operating various health clubs in New England using the WOW trade name, which triggered a dispute with Ms. Beninati. ¶¶ 76-77, 79. Mr. Dixon, Mr. Borghi and BFG hired Mr. Dixon's longtime personal lawyer at the law firm of Goodwin Procter LLP ("Goodwin"), a defendant in this action, to represent them in negotiations with Ms. Beninati in April 2011. ¶ 80. Negotiations failed, and Ms. Beninati commenced a Massachusetts state court lawsuit against Mr. Dixon, Mr. Borghi and BFG on May 24, 2012, seeking millions of dollars in damages. ¶¶ 79, 376. Goodwin represented Mr. Dixon, BFG and Mr. Borghi in that litigation. ¶¶ 107, 376. In July 2014, the state court entered judgment against Messrs. Dixon and Borghi. ¶¶ 88, 315. Final judgment against them in excess of $ 4.5 million entered on January 9, 2015. ¶¶ 90, 317.

2. The Bally Transaction

In 2011, Goodwin performed additional legal work for BFG, including in connection with BFG's acquisition and transfer of fitness clubs, the formation of various limited liability companies (LLCs) ancillary to those acquisitions and transfers and the drafting of corporate and transactional documents. ¶¶ 102-03, 105-07. In 2012, at the time the Beninati dispute was active, BFG was engaged in negotiations with Bally Total Fitness Inc. to purchase from it thirty-nine work-out clubs and certain real estate. ¶ 105. Goodwin and two of its attorneys, who are also defendants (collectively the "Goodwin Defendants"), acted as counsel to BFG and its wholly-owned subsidiary, Blast Fitness Acquisition, LLC ("Blast Acquisition"),⁹ in that transaction, and in that capacity participated in drafting an asset purchase agreement dated April 10, 2012. ¶¶ 106, 110, 113. Under the terms of the asset purchase agreement, 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, 118. Three of the thirty-nine work-out clubs proposed to be purchased by BFG (through Blast Acquisition) operated at these locations. ¶¶ 114, 118.

On or prior to April 12, 2012, Mr. Dixon planned to designate entities not owned by BFG to take title to the Bally real estate. ¶¶ 131-133. On April 25, 2012, he 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"). ¶¶ 18, 20, 22, 62,...