Opinion
No. 217-2019-CV-00507
10-07-2019
William J. Leonard v. Paul E. Schneider and Brick River Technologies, LLC
ORDER
This civil action is brought by William J. Leonard ("Leonard"), against Paul E. Schneider ("Schneider)" and Brick River Technologies, LLC ("Brick River"), alleging that Leonard provided funds to be used as initial capital for Brick River and obtained an interest in the LLC and that Schneider refuses to acknowledge that interest. The Plaintiff's Complaint seeks preliminary injunctive relief. The Defendants have filed a Motion to Dismiss, to which the Plaintiff objects. A hearing on the request for injunctive relief and the Motion to Dismiss was held on October 1, 2019. For the reasons stated in this Order, the Defendants' Motion to Dismiss is DENIED and the Plaintiff's Motion for a Preliminary Injunction is DENIED.
Leonard is an Illinois resident, Schneider is a resident of Exeter, New Hampshire and Brick River has its principal place of business in Exeter, New Hampshire. Venue would be improper in Merrimack County but the Plaintiff has filed this action in the Business and Commercial Dispute Docket, pursuant to RSA 491:7-a. If the parties agree a case should proceed in the Business and Commercial Dispute Docket, a motion should be filed. Super. Ct. R. 207(V)(b). If a plaintiff seeks to proceed in the Business and Commercial Dispute Docket and seeks injunctive relief, he may file the case in the Court and it will remain in the Court unless the opposing party objects. Super. Ct. R. 207(V)(c). This case plainly meets the criteria of RSA 491:7-a and Defendants have filed no objection so the Court orders that the case may proceed in the Business and Commercial Dispute Docket.
I
Leonard alleges that from approximately May, 2005 through early 2006, Schneider was involved as an owner/shareholder and employee of a business called Christian Relationship Management., Inc. ("Christian"). (Compl. ¶ 8.) In that time frame, Schneider expressed to Leonard a desire to terminate his employment with Christian, to redeem his shares of common stock, and to regain ownership of intellectual property he had developed for and transferred to Christian. (Id. ¶ 9.) In January, 2006 Schneider and Leonard discussed acquiring the intellectual property that Schneider had developed for Christian and to establish a new business entity to own the intellectual property and operate the business (Id. ¶ 10.) According to the Complaint, the parties agreed that Schneider would be an owner/manager of the company and Leonard would be an investor/owner of the company, not actively involved in the day-to-day responsibilities (Id.) In February, 2006, Schneider and Leonard reached an agreement that in exchange for partial ownership of Brick River, Leonard would contribute $50,000-$i00,000 as a loan and $50,000 as a capital investment. (Id. ¶ 11.) The parties agreed that a third member would be brought in as an owner, Eugene Schneider, and that the ownership of the company would be 50% defendant Paul Schneider, 30% Leonard, 10% Eugene Schneider, and 10% unissued interests. (Id. ¶ 13.)
Following receipt of funds from Leonard, Schneider established Brick River as an LLC. (Id. ¶ 16.) The owners agreed to the ownership percentages and that Schneider would be the manager of the company and would operate it on a daily basis, subject to the advice and consent of a "Board" which would include Schneider, Leonard, and the third owner, Eugene Schneider. (Id. ¶ 18-19.) In March or April, 2006, Schneider, as manager of Brick River, engaged an attorney to memorialize the parties' operating agreement. (Id. ¶ 21.) A certificate of formation of Brick River as a New Hampshire LLC was filed on March 20, 2006 by Schneider, as Manager of the LLC. (Pl.'s Ex. 3.) A written operating agreement was drafted but was never executed. (Compl.¶ 22; Pl.'s Ex. 4.)
In 2008, Brick River paid Leonard $50,000 plus interest calculated on the $50,000 loan he had made. (Compl. ¶ 24.) In 2009, the parties agreed to amend their agreement to provide for distribution. (Id. ¶ 26.) Leonard alleges that he agreed to transfer one third, or 10% of his 30% ownership, to Brick River in exchange for the payment of $60,000, payable in equal quarterly installments of $15,000. (Id. ¶¶ 25-26.). The ownership interests in the LLC thus became Schneider 50%, Leonard 20%, Eugene Schneider 10%, and Brick River 20%. (Id. ¶ 28.)
In late 2018, Defendant Schneider, as Manager of Brick River, advised Leonard that Eugene Schneider had transferred his ownership interest to him. (Id. ¶ 32.) At the same time, Schneider informed Leonard that the company was taking in two new investor members, Eugene Schneider and Timothy Schneider. (Id. ¶ 34.) Each of them would contribute $50,000 in exchange for an ownership interest in the company. (Id.) Leonard did not consent to any new investor becoming a member of the company. (Id. ¶ 35.)
At oral argument, Plaintiff's counsel advised the Court that the parties are related. William J. Leonard is Paul E. Schneider's uncle, Eugene Schneider is Paul E. Schneider's father, and Timothy Schneider is Paul E. Schneider's uncle.
Leonard claims that in December, 2018 Schneider represented verbally and agreed that Leonard had 20% ownership in Brick River. (Id. ¶ 37.) He expected an agreement confirming his 20% ownership in Brick River. (Id. ¶ 38.) However, Schneider presented Leonard with a proposal in the concept of "phantom units" which did not include membership in Brick River and which did not include ownership of the company. (Id.) The agreement limited Leonard's interest to an opportunity to "share in the value of the company to the extent the value exceeded $1 million." (Id.) Schneider refuses to acknowledge that Leonard is an owner/member of Brick River. (Id.)
Leonard has brought this action alleging Fraud (Count I), Breach of Fiduciary Duties and Obligations (Count II ), Breach of Statutory Obligations (Count III), Breach of Contract (Count IV), and Unjust Enrichment (Count V). Leonard seeks a judicial determination that he is the owner of 20% of Brick River and seeks injunctive relief enforcing his rights and determining that transfers of interest in Brick River without his consent are null and void. He seeks dissolution of Brick River in accordance with the provisions of RSA 304-C:134 and, in the alternative, seeks that the Court order Brick River to pay Leonard the fair value of his interest in accordance with the provisions of RSA 304-C:161. He makes a general claim for damages, restitution, and attorney's fees.
On a preliminary basis, he seeks that the Court order Schneider to:
(i) refrain from admitting any new members or consummating the admission of a new member until further order of the Court;
(ii) prohibit the transfer of membership interests of Eugene Schneider to any other person;
(iii) maintain the status quo regarding ownership and investment in Brick River until further order of the Court;
(iv) order a receiver to take over the business and financial records of the company and provide a full and complete accounting of all business and financial activity for last 5 years;
(v) provide Leonard with information requested pursuant to RSA 304-C:55; and
(vi) not be provided any advancement of costs, including legal fees, to defend this action.(Compl. at 18.)
Defendants have filed a Motion to Dismiss Leonard's claims. The thrust of the Defendants' Motion is that Leonard premises his claims upon repeated assertions of an agreement as to the nature of his cash infusion, his ownership percentage, corporate governance, and the like but all of these representations were verbal and related to the ongoing operations of Defendant Brick River. As a result, Defendants assert that they are subject to the Statute of Frauds, RSA 506:2, and are therefore unenforceable. (Mot. Dismiss at 1.)
II
The Court's first task is to determine whether or not Leonard's Complaint states a claim. The standard of review on a Motion to Dismiss is whether or not the plaintiff's allegations are reasonably susceptible of a construction that would permit recovery. Perez v. Pike Industries, 153 N.H. 150, 159 (2005). In making this inquiry, a court must construe all reasonable inferences in the light most favorable to the plaintiff. Hilario v. Reardon, 158 N.H. 56, 61 (2012). The threshold inquiry involves testing the facts alleged in the pleadings against the applicable law. Williams v. O'Brien, 140 N.H. 595, 597-98 (1995). The trial court may also consider documents attached to the plaintiff's pleadings, or documents the authenticity of which is not disputed by the parties. Beane v. Dana S. Beane & Co., 160 N.H. 708, 711 (2010).
Defendant's Motion to Dismiss is based entirely upon its argument that the allegations of the Complaint do not satisfy the Statute of Frauds, RSA 506:2. The statute provides in relevant part:
No action shall be brought to charge an executor or administrator upon a special promise to answer damages out of his own estate or to charge any person upon a special promise to answer for the debt, default or miscarriage of another, or upon any agreement made in consideration of marriage or that is not to be performed within one year from the time of making it, unless such promise or agreement, or some note or memorandum thereof, is in writing and signed by the party to be charged or by some person authorized by him.RSA 506:2 (emphasis supplied). The Statute simply restates the common law and a cognate statute exists in virtually every jurisdiction. It is based upon the English Statute of Frauds, which applied to an action "upon any agreement that is not to be performed within the space of one year from the making thereof." Restatement (Second) of Contracts § 130 cmt. a at 328 (1981).
A
Plaintiff first argues that Count I, the Fraud claim, is barred by the Statute of Frauds because it:
[A]sserts liability based on Schneider's "assurances" his "treatment" of plaintiff as an owner, and a "course of conduct which amounted to intentionally representing to the plaintiff that he is an owner/member" (¶ 47). Entirely absent, however, is the allegation that any of these representations, etc., were ever reduced to an executed writing and, as such, they are entirely unenforceable.(Mot. Dismiss at 4.)
However, the Fraud claim, fairly read, is not a claim based upon an agreement; rather, it is a claim based on misrepresentation. Such a claim is a tort claim, not a contract claim. Liability arises when a misrepresentation is made fraudulently to induce another to enter into a transaction with the maker of the representation. See e.g., Tessier v. Rockefeller, 162 N.H. 324, 333 (2011); Restatement (Second) of Torts § 533 at 72-73 (1977). Defendants have not cited any case for the proposition that a fraudulent misrepresentation must be in writing. They raise no other grounds for their Motion to Dismiss Count I and it must therefore be DENIED.
47. The actions, assurances and verbal representations formed a course of conduct which amounted to intentionally representing to Plaintiff-Leonard that he is owner/Member.
48. The representations and course of conduct of the Defendant-Schneider was fraudulent in that the conduct and misrepresentations were intended to mislead Plaintiff-Leonard and did cause him to believe he is an owner/Member.
49. Plaintiff Leonard relied upon Defendant-Schneider's wrongful conduct and representations and continued his investment with the Company with the understanding that he is a proper owner/Member of the Company.
B
Defendants allege that Leonard's claims for Breach of Fiduciary Duty (Count II), Breach of Statutory Obligations (Count III), and Breach of Contract (Count IV), all fail for a lack of a writing, signed by the party to be charged, memorializing the ownership agreement in violation of the Statute of Frauds, RSA 506:2. (Mot. Dismiss at 5-6.) However, by the terms of the Statute, a writing is only required "upon any agreement. . . that is not to be performed within one year from the time of making it." Only contracts which cannot possibly be performed within a year are barred by the statute. Phillips v. Verax Corp., 138 N.H. 240, 246 (1994); see also Ives v. Manchester Subaru, Inc. 126 N.H. 796, 799 (1985) (An at will contract for life was not barred by the statute because it could have been performed within a year due to the death of a party or legitimate termination). The New Hampshire rule is the majority rule in the United States. Restatement (Second) of Contracts § 130(2) at 328 (1981).
Leonard alleges that in January, 2006 Schneider and Leonard agreed to establish a new business entity to acquire Christian's intellectual property and operate a business with Schneider as the owner or manager and Leonard as an investor owner, not actively involved in the day-to-day responsibilities. (Compl. ¶ 10.) Leonard alleges that in February, 2006 he and Schneider reached an agreement that in exchange for partial ownership of the company Leonard would contribute $100,000 as a capital investment. (Id. ¶ 11). The agreement could plainly be performed within one year and, in fact, it was performed within one year when Leonard contributed funds to Schneider. (Id. ¶ 14). Courts in other jurisdictions with common-law statutes like New Hampshire's have held that an oral agreement for ownership of a business entity is not barred by the Statute of Limitations. See e.g., Manwaring v. Martinez, 527 Fed. App'x. 390, 395 (6th Cir. 2013) (Oral agreement that plaintiff would become co-owner of a restaurant business not barred by the Statute of Limitations because it could have occurred within one year under Ohio law); Loan Modification Group, Inc. v. Reed, 694 F.3d 145, 150 (1st Cir. 2012) (Oral agreement to form a partnership could have been completed within one year and therefore was not barred by the Statute of Frauds under Massachusetts law); Silberstein v. Prod Fashions, Ltd., 137 A.D.2d 805, 806 (2d Dep't 1988) (The New York Statute of Frauds did not bar an oral agreement to form a corporation and divide stock equally: "The agreement contemplates organizing a corporation and issuing and delivering stock to the parties. Therefore, it could have been performed within one year.") Defendants' Motion with respect to Counts II, III and IV must be DENIED.
In fact, the Complaint alleges that the contract was performed within one year. New Hampshire follows the rule that if an agreement could be performed in one year and is fully performed, it is not within the Statute. McIntyre v. Woodall, 140 N.H. 228, 231 (1995). --------
C
As an alternative theory of recovery, Leonard makes a claim of Unjust Enrichment in Count V of the Complaint. Citing Clapp v. Goffstown School Dist., 159 N.H. 206, 210-11 (2009), Defendants argue that Leonard cannot make an Unjust Enrichment claim because there is a "valid, express contract covering the subject matter at hand." This argument would be meritorious if the parties agreed that a contract between them existed but Defendants deny that any contract exists. Leonard is pleading in the alternative, in the event the Court finds that the Statute of Frauds bars his Complaint.
Unjust Enrichment is a claim for restitution. The common-law principle of Unjust Enrichment supposed that "the gist of this kind of action is that the defendant, upon the circumstances of the case, is obliged by the ties of natural justice and equity to refund the money." Restatement (Third) of Restitution and Unjust Enrichment § 1 cmt. b at 3 (2011) (citing Moses v. Macferlan, 2 Burr 1005, 1012, 97 Eng. Rep. 676, 681 (K.B. 1760)). The modern view of Unjust Enrichment is much more limited; it is "narrower, more predictable, and more objectively determined than the implications of the words unjust enrichment." Axenics, Inc. v. Turner Constr. Co., 164 N.H. 659, 669 (2013). As the Restatement notes, "'[U]njust [E]nrichment' (in the natural and nontechnical sense of the words) might seem to be a pervasive fact of human experience—given any prior standard (such as a quality of merit) by which people's relative entitlements might be measured." Restatement (Third) of Restitution and Unjust Enrichment § 1 cmt. b at 3 (2011). The underlying principle of equitable restitution in modern law is more properly called unjustified enrichment. Instances of unjustified enrichment are both predictable and objectively determined because the justification in question is not moral but legal. It is "enrichment that lacks an adequate legal basis; it results from a transaction that the law treats as ineffective to work a conclusive alteration in ownership rights." Id. Thus, the Restatement provides that:
(1) A person who renders performance under an agreement that cannot be enforced against the recipient by reason of
Restatement (Third) of Restitution and Unjust Enrichment § 31 (2011).(b) The failure to satisfy an extrinsic requirement of enforceability such as the Statute of Frauds,
has a claim in restitution against the recipient as necessary to prevent unjust enrichment. . .
Leonard's claim of Unjust Enrichment, as an alternate claim to the statute of frauds is therefore appropriate. Of course, if Leonard's breach of contract claim is sufficient, the claim may not be maintained. Restitution is subordinate to contract as an organizing principle of private relationships, and the terms of an enforceable agreement normally displace any claim of unjust enrichment within their reach. Axenics, Inc. v. Turner Constr. Co., 164 N.H. at 669 (citing Restatement (Third) of Restitution and Unjust Enrichment § 2 cmt. c at 17 (2011)). But the fact that the Court has denied a Motion to Dismiss claims based on contract does not mean that the claims will survive summary judgment or trial. Accordingly, the Motion to Dismiss Count V of the Complaint must be DENIED.
III
"The issuance of injunctions, either temporary or permanent, has long been considered an extraordinary remedy." N.H. Dep't of Envt'l. Servs. v. Mottolo, 155 N.H. 57, 63 (2007) (citation omitted). "A preliminary injunction is a provisional remedy that preserves the status quo pending a final determination of the case on the merits." Id. (citation omitted). In order to obtain preliminary injunctive relief, a party must demonstrate: (1) it is in "immediate danger of irreparable harm," (2) "there is no adequate remedy at law," and (3) that it "would likely succeed on the merits." Id. (citations omitted).
Plaintiff's request for a preliminary injunction was made upon offers of proof and the Court makes no findings which would be binding on the parties. Essentially, Plaintiff's claim is made on documents and oral testimony which he asserts, when considered together, establish that an oral contract existed for ownership of shares in Brick River. However, even if the Court were to find that an oral agreement existed, it appears from the offers of proof that there is a significant dispute about what the terms of the agreement were.
Whether or not a contract exists is a factual question, which must be decided by the trier of fact. Durgin v. Pillsbury Lake Water Dist., 153 N.H. 820, 821 (2006). Contracts, both oral and written must be definite in order to be enforceable and the standard of definiteness is one of "reasonable certainty". Sawin v. Carr, 114 N.H. 462, 465 (1974). In making their offer of proof, Defendants pointed out that Leonard has produced no tax documents or other documents which would support his claim of ownership. They also represent that Leonard has been repaid his $100,000 investment in Brick River with interest. However, the Court need not determine whether or not Leonard has established a likelihood of success on the merits of his claims because he has not established that he will suffer irreparable injury if injunctive relief is not granted.
Leonard claims his interest in Brick River will be damaged absent injunctive relief: "if the Defendant is permitted to operate unabated, there is significant risk that the value of the company (and in turn Plaintiff's property interest) will be damaged or destroyed. (Mem. in Supp. of Pl.'s Requests for Prelim. Relief at7.) But "[i]rreparable injury based on financial loss alone will only be found where the potential economic loss is so great as to threaten the existence of the plaintiff's business or when 'financial ruin' will result." Anderson v. Lagos, No. 217-2012-CV-00063, 2013 WL 9883967 at 2 (N.H. Super. Jan. 18, 2013), aff'd 166 N.H. 752 (2014) (citation omitted). If, however, "damages can compensate a moving party, a preliminary injunction is not appropriate." Id. (quotation omitted). See also, DeNovellis v. Shalala, 135 F.3d 58, 64 (1st Cir. 1998); Vera, Inc. v. Tug "Dakota," 769 F.Supp. 451, 454 (E.D. N.Y. 1991). Injunctive relief is similarly "unwarranted where the harm will occur, if at all, only in the indefinite future." Bardsley v. Powell, Trachtman, Logan, Carrle & Bowman, P.C., 916 F. Supp. 454, 458 (E.D. Pa. 1996).
Moreover, Leonard's claim of financial harm is based in part upon speculation:
Unless the status quo is preserved, there is significant danger that the Defendant Schneider will attempt to transfer or hide the company's assets, given their intangible nature. That would cause the Plaintiff's property to be irreversibly diluted or destroyed. Furthermore, when company information has been requested by the Plaintiff, the Defendant Schneider has provided misleading or incomplete information.(Mem. L. in Supp. of Pl.'s Requests for Prelim. Relief at 8.) There is no evidence before the Court which would suggest that Defendants will attempt to transfer or hide the company's assets. Nor is there evidence that the company is in financial distress or unable to respond to a judgment for damages. In fact, Leonard has not even articulated the amount of damage he believes he would be entitled to. He has provided no basis from which the Court could reasonably find that, even if a transfer of shares of the company's stocks were made, he could not be made whole by a damage award.
Similarly, Leonard seeks the appointment of a receiver to operate the business. Appointment of a receiver is an equitable remedy available to a court to manage disposition of assets of an insolvent or potentially insolvent party. See generally, In re O'Neil. 159 N.H. 615, 624 (2012); Staples v. Dix & Staples Co., Inc. 85 N.H. 115 (1931). Appointment of a receiver may be appropriate where there is fraudulent conduct on the part of a defendant, imminent danger of the property will be lost or squandered, or available legal remedies are inadequate. Consolidated Rail Corp. v. Fore River Ry. Co., 861 F.2d 322, 326-327 (1st Cir. 1988). But the power to appoint a receiver is "a power to be exercised with great caution, and, if possible with the consent or acquiescence of the parties interested in the fund." Munsey v. G.H. Tilton & Son Co., 91 N.H. 51, 52 (1940). Leonard has made no showing that appointment of a receiver is necessary in the circumstances of this case.
Finally, Leonard claims that he has been deprived of documents to which he would be entitled under RSA 304-C:55 as a member of the LLC. Whether or not he is in fact a member of the LLC is the subject of this dispute; but, in any event, any documents which have any bearing on this litigation which will determine whether or not he has a member of the LLC can be obtained in discovery. Leonard plainly has a remedy at law to obtain any documents he believes are necessary and appropriate to enforce his rights; the equitable remedy of injunction is not necessary. Murphy v. McQuade Realty, Inc. 122 N.H. 314, 316 (1982).
In sum, even assuming without deciding that Leonard has established a likelihood of success on the merits, he is not entitled to injunctive relief as he has not established a likelihood that he will suffer irreparable harm if the extraordinary remedy of injunction is not provided him. Leonard's claims do not satisfy the standard for injunctive relief. His request for injunctive relief must be DENIED.
SO ORDERED
10/7/19
DATE
s/Richard B . McNamara
Richard B. McNamara,
Presiding Justice RBM/
(Compl. ¶¶ 47-49.)