Opinion
SUCV20190663BLS2
09-20-2019
MUSCLEPHARM CORPORATION et al. v. WHITE WINSTON SELECT ASSET FUND SERIES FUND MP-18, LLC et al.
MEMORANDUM OF DECISION AND ORDER ON DEFENDANTS’ MOTIONS TO DISMISS
Janet L. Sanders, Justice of the Superior Court
MusclePharm Corporation (MusclePharm) and its Board Chairman and CEO, Ryan Drexler, bring this action against White Winston Select Asset Fund Series Fund MP-18, LLC, White Winston Select Asset Fund, LLC (collectively, White Winston) as well as a company and certain individuals associated with White Winston. The plaintiffs allege that the defendants sought to coerce them into paying the defendants or buying back defendants’ MusclePharm stock by filing a groundless complaint in Nevada state court (the Nevada Action). The Complaint asserts claims for violation of G.L.c. 93A (Count I), tortious interference with contract (Count II), civil conspiracy (Count III), and abuse of process (Count IV). The defendants have moved to dismiss the Complaint pursuant to G.L.c. 231, § 59H, the anti-SLAPP statute, and Mass.R.Civ.P. 12(b)(6). For the reasons that follow, this Court concludes that the Motion to Dismiss is Allowed to the extent that it is brought pursuant to Rule 12(b)(6).
BACKGROUND
The following allegations are from the Complaint and taken as true for purposes of this motion. The Court also takes judicial notice of court records associated with the Nevada Action. See Jaroz v. Palmer, 436 Mass. 526, 530 (2002).
MusclePharm is a Nevada corporation that is headquartered in Burbank, California. It manufactures and markets sports nutritional products. Between 2015 and 2017, Drexler made three loans to MusclePharm totaling $18 million. The purpose of these loans was to provide MusclePharm with much needed liquidity. Seventeen million dollars of this debt was subject to two Convertible Secured Promissory Notes (the Convertible Notes) and one million dollars was subject to a Secured Demand Promissory Note (the Secured Note). The Convertible Notes were due to mature on November 8, 2017.
In September 2017, MusclePharm’s four-member Board of Directors formed a Special Committee to evaluate and negotiate options for refinancing the three notes. The Special Committee was comprised of the Board’s two independent directors. It retained Ladenburg Thalmann & Co. (Ladenburg) as its independent financial advisor and Ropes & Gray as its legal counsel.
The same month that the Board formed the Special Committee, defendant Amerop Holdings, Inc. (Amerop) a MusclePharm stockholder, expressed interest in making an equity investment in MusclePharm in an amount sufficient to retire the three notes. A member of the Special Committee informed Amerop’s principal, defendant Leonard Wessell, III, that it would be pleased to evaluate any proposal. During this same time period, however, the Special Committee was engaging in extensive negotiations with Drexler over the terms of a possible refinancing of the three notes.
In mid-October 2017, Amerop provided its proposal to the Special Committee, offering to purchase $18 million of MusclePharm stock on condition that MusclePharm replace senior management, including Drexler. The Special Committee asked Wessell to identify whom Amerop would bring on to manage the company and asked Amerop for evidence that it had the financial wherewithal to close the proposed transaction. Wessell did not comply with these requests. With the maturity date on the Convertible Notes fast approaching, the Special Committee broke off discussions with Amerop. Because of its negotiations with Drexler, however, MusclePharm was able to work out an agreement with Drexler to refinance all three notes, resulting in an Amended Note. The Amended Note gave Drexler the right to convert the debt into shares in MusclePharm. The Special Committee approved the refinancing.
Between January and June 2018, White Winston, at the direction of its principal, defendant Todd Enright, purchased all of Amerop’s MusclePharm stock. Amerop received cash and membership interests in White Winston in exchange for the sale. Because of this stock acquisition and the purchase of other MusclePharm stock not held by Amerop, White Winston became the owner of close to twenty percent of MusclePharm’s outstanding shares. According to the Complaint, White Winston together with the other defendants then "orchestrated an improper plan, including by use of judicial process, to obtain leverage over Drexler and the Company [MusclePharm], in an attempt to force plaintiffs to pay a ransom to defendants." ¶34 of Complaint. The "judicial process" to which the Complaint refers is the Nevada Action, White Winston Select Asset Fund Series Fund MusclePharm-18, LLC et al. v. MusclePharm Corporation et al., Case No. 18 OC 0020161B.
The Nevada Action was commenced by way of a complaint verified by defendant Enright. The named defendants were MusclePharm, Drexler, and the three other MusclePharm Board members. The Verified Complaint in the Nevada Action challenged the Special Committee’s approval of the Amended Note and alleged that MusclePharm’s Board members, in compliance with their fiduciary duty, should have attempted to refinance the debt on terms that were more favorable to MusclePharm and its stockholders. In particular, the Verified Complaint alleged that, in giving Drexler the right to convert the company’s debt to him into MusclePharm stock, the refinancing permitted Drexler to dilute the voting rights held by White Winston and other MusclePharm shareholders.
Simultaneous with the filing of the Verified Complaint, White Winston applied for a Temporary Restraining Order (TRO). Defendant Wessell submitted a declaration in support of the Application attesting to the authenticity of certain documents. The TRO Application sought to prevent Drexler from exercising his conversion rights under the Amended Note and to enjoin MusclePharm and its Board from issuing any conversion shares to Drexler. Plaintiffs allege that this application was based on misrepresentations both of fact and of law, and set forth those misrepresentations in Paragraphs 38-44 of their Complaint. On August 23, 2018, the Nevada Court, in reliance on those misrepresentations, issued a TRO, adopting in its entirety the proposed order White Winston had provided. The TRO was due to expire by its terms (as subsequently amended) on September 14, 2018.
While the TRO was in effect, White Winston amended its Verified Complaint to add as a plaintiff in the Nevada Action Brent Baker, a former MusclePharm employee. Baker (who is a defendant in the instant case) joined Enright in verifying the Amended Complaint. On September 14, 2018, the Nevada court held a hearing to determine whether to extend the TRO as a preliminary injunction. It declined to do so, concluding that White Winston could not demonstrate a reasonable probability of success on the merits or irreparable harm. It did not offer any specifics. White Winston appealed that decision. In the meantime, MusclePharm and Drexler filed a motion for fees and costs incurred in connection with having to defend against the TRO. The lower court did not act on that motion, instead deciding to stay any further proceedings regarding the allegations underlying the request for the TRO pending a resolution of the appeal by the Nevada Supreme Court. However, it did allow White Winston to obtained expedited discovery on that part of the case that sought the appointment of a receiver for MusclePharm.
The instant action was filed in February 2019. It essentially seeks to recoup as damages the same fees and costs it is seeking in the Nevada Action- namely, the cost of having to defend against the TRO. In support, the Complaint alleges that the TRO was issued as a result of White Winston’s misrepresentations and omissions, and that the litigation was part of a plan "seeking to prevent MusclePharm from honoring its financial obligation to Drexler." ¶1 of Complaint. That is, the Nevada action was filed "to pressure and coerce plaintiffs into providing value (likely in the form of a stock buy-out) to defendants, in exchange for defendants withdrawing the lawsuit." ¶¶34 and 35 of Complaint. There are no facts to back up that claim, however. The Complaint does alleges that the defendants "conspired" with Drexler’s brother-in-law, Bradford Billet (presently in the midst of a contentious divorce proceeding with Drexler’s sister) and that defendants are "coordinating their strategies with Billet in the hopes that they can extract financial payments from Drexler and Muscle Pharm." ¶50 of Complaint. Billet has separately sued MusclePharm and others in New York, but as the Complaint itself states, the New York litigation is wholly unrelated to the dispute between the parties here, as are the divorce proceedings.
The case was originally filed in a regular civil session. It was transferred to the BLS in April 2019.
The Complaint is more generally worded than that. In their Memorandum in Opposition to the Motion to Dismiss, however, plaintiffs insist that they are seeking to collect only those damages flowing from the TRO Application, which would be their attorneys fees and costs. See Plaintiff’s Memorandum in Opposition to Motion to Dismiss, p. 20.
In their opening brief, the defendants contended that Nevada law applies to all the claims. However, the Court perceives no conflict between Nevada and Massachusetts law and thus, analyzes the claims and the parties’ arguments under Massachusetts law. See Kaufman v. Richmond, 442 Mass. 1010, 1012 (2004) (court only resolves choice of law questions when there exists an actual conflict between the laws of different jurisdictions). The Court notes, moreover, that in their reply brief and at the motion hearing, the defendants largely relied on Massachusetts law.
The Court turns first to the Motion brought pursuant to Rule 12(b)(6). That rule requires that the complaint contain "allegations plausibly suggesting (not merely consistent with) an entitlement to relief ..." Iannacchino v. Ford Motor Co., 451 Mass. 623, 636 (2008), quoting Bell A. Corp. v. Twombly, 550 U.S. 544, 555-57 (2007). Although a complaint need not set forth detailed factual allegations, a plaintiff is required to present more than labels and conclusions and must raise a right to relief "above the speculative level." Id. Thus, dismissal is proper when a fair reading of the Complaint establishes that the facts alleged do not support a cause of action which the law recognizes. Nguyen v. William Joiner Center for the Study of War and Social Consequences, 450 Mass. 291, 295 (2007). The rule is designed to permit "prompt resolution of a case where the allegations in the complaint clearly demonstrate that the plaintiff’s claim is legally insufficient." Harvard Crimson, Inc. v. President & Fellows of Harvard Coll., 445 Mass. 745, 748 (2006).
In opposing this motion, plaintiffs have muddied the waters by offering various descriptions of what conduct by the defendants the plaintiffs are actually targeting. From this Court’s reading of the Complaint, plaintiffs are complaining about the statements that defendants made in obtaining the TRO in the Nevada Action. Certainly, this Court can conceive of no other basis for naming Baker as a defendant in the instant action since his only involvement was to verify the complaint filed in the Nevada Action. In their papers, plaintiffs characterize the Complaint as being based not just on these statements but also on the filing of the Nevada Action and the defendants’ having convinced the Nevada court to issue a TRO. They also argue more generally that the Nevada lawsuit was accompanied by other conduct of the defendants that was part of some scheme to extort money from the plaintiffs. This Court concludes that none of these arguments have merit, for several reasons.
The plaintiffs’ claims against Wessell are equally thin: Wessell’s only apparent role in the relevant events was to submit a declaration to the Nevada court regarding the authenticity of certain documents filed in support of the TRO Application.
First, the statements that the defendants made in the course of the Nevada litigation are subject to the litigation privilege, which is absolute. Sriberg v. Raymond, 370 Mass. 105, 108-09 (1976); see also Fisher v. Lint, 69 Mass.App.Ct. 360, 366 (2007). The plaintiffs do not disagree, but contend instead that this is not really what the counts set forth in the Complaint concern. A fair reading of the Complaint, however, belies this argument. A large part of the Complaint is devoted to reciting statements that defendants made in the TRO Application and to alleging that, had it not been for these statements, then the TRO would not have issued. ¶¶39-49 of Complaint. Counts I, II and III of the Complaint then specifically rely on these misrepresentations in their description of the conduct that plaintiff’s claim is unlawful. Since all of these statements are subject to the litigation privilege, these counts should be dismissed for that reason alone.
The plaintiffs attempt to avoid this outcome by arguing that these claims are based not just on those statements but also on the defendants’ filing of the Nevada Complaint and then convincing the Nevada court to issue a TRO. They contend that this was part of a larger scheme to coerce plaintiffs into paying the defendants or buying back their stock. Comparing these allegations to the elements of each count, however, this Court still remains convinced that the Complaint satisfies Rule 12(b)(6).
Count II alleges tortious interference with contractual relations. For that count to survive, the plaintiff must allege specific facts showing that "(1) he had an advantageous relationship with a third party (e.g., a present or prospective contract or employment relationship); (2) the defendant knowingly induced a breaking of the relationship; (3) the defendant’s interference with the relationship, in addition to being intentional, was improper in motive or means; and (4) the plaintiff was harmed by the defendant’s actions." Blackstone v. Cashman, 448 Mass. 255, 260 (2007). The Complaint does not explain how the filing of the Nevada Action (in particular, the Application for a TRO) is conduct intended to induce MusclePharm to do anything, much less that it disrupted its contractual relationship with Drexler. By the time the lawsuit was filed, the Special Committee had already approved the Amended Note. That the defendants chose to file a lawsuit challenging that decision cannot constitute tortious interference without more. See G.S. Enterprises, Inc. v. Falmouth Marine, Inc., 410 Mass. 262, 273-75 (1991) (filing of lawsuit in good faith effort to assert legally protected rights cannot support a claim of tortious interference with contractual relations). Moreover, even assuming an ulterior purpose, this Court fails to see how the filing of the lawsuit resulted in any harm that is causally related to any interference with a contractual relationship. Although that Note did give Drexler the right to convert the debt to him into equity, the Complaint contains nothing to suggest that, while the TRO was in effect, Drexler tried to exercise that right or that his inability to do so resulted in any harm to anyone.
Plaintiffs say that they have been injured because they had to expend fees defending against the TRO. But this alleged harm is not caused by the defendants having tortiously interfered with a contractual relationship.
Count I alleges a violation of G.L.c. 93A. That requires that plaintiffs plead facts sufficient to show that the defendants engaged in unfair and deceptive acts in the conduct of trade or commerce. Neither the filing of the Nevada Action nor the TRO Application would be enough to sustain this count in and of themselves. Plaintiffs argue, however, that this constitutes an unfair and deceptive business practice because it was part of a scheme to "prevent MusclePharm from honoring its financial obligations to Drexler." Certainly, there is case law to support the legal proposition that the filing of a groundless suit can constitute a 93A violation under certain circumstances- for example, where one party files a baseless lawsuit in an effort to gain an unfair advantage to which he would not otherwise be entitled. See, e.g., Fafard Real Estate & Dev. Corp. v. Metro-Boston Broad., Inc., 345 F.Supp.2d 147, 153-54 (D.Mass. 2004) (c. 93A claim where defendant brought suit and obtained a lis pendens for the ulterior purpose of obtaining leverage in the negotiations for the purchase of a related property). If the Complaint in the instant case actually contained specific allegations to back up its claim that the Nevada Action was part of an extortionate scheme, then Count I might possibly state a claim upon which relief could be granted. It does not, however. This is particularly significant, since the instant action was filed more than a year after the filing of the Nevada Action. And yet plaintiffs do not accuse the defendants of any specific extortionate act during that time period much less explain how the defendants unfairly used the Nevada litigation to obtain some advantage that they were not entitled to have.
Count III alleges civil conspiracy and requires that the allegations of the Complaint demonstrate concerted action on the part of the defendants to commit a tortious act against the plaintiffs. If Counts I and II fail to state a claim upon which relief may be granted, then it necessarily follows that Count III must also be dismissed, since there is no underlying tort.
Finally, Count IV alleging abuse of process is not supported by the factual allegations of the Complaint. That count requires that a plaintiff plead (and ultimately prove) that the defendant used legal process "to accomplish some ulterior purpose for which it was not designed or intended, or which was not the legitimate purpose of the particular process employed." Millennium Equity Holdings, LLC v. Mahlowitz, 456 Mass. 627, 636 (2010), quoting Quaranto v. Silverman, 345 Mass. 423, 426 (1963). See also Cohen v. Hurley, 20 Mass.App.Ct. 439, 442 (1985). Abuse of process occurs "where there is a form of coercion to obtain a collateral advantage, not properly involved in the proceeding itself, such as the surrender of property or the payment of money, by the use of the process as a threat or a club." Prosser & Keeton, Torts § 121, at 898 (5th ed. 1984). More is required than simply proof from the plaintiff that the defendant filed a lawsuit against the plaintiff. In the instant case, that means that the Complaint must set forth facts demonstrating that the Nevada Action was instituted for an ulterior purpose, not simply to resolve a legal dispute between the parties. But the Complaint contains only labels and conclusions with regard to this element: although it does allege that defendant has filed the Nevada Action to coerce a stock buy out, it contains no facts that would support that conclusory statement.
Because this Court concludes that the Complaint fails to state a claim upon which relief may be granted, it sees no need to resolve the issues surrounding the defendants’ second request (made in the same motion) to dismiss this case pursuant to the anti-SLAPP statute, G.L.c. 231 § 59H. This Court would note, however, that this case comes perilously close to fitting the criteria of a SLAPP suit. It arises from and is based solely on the defendants’ petitioning activity. The plaintiffs have failed to demonstrate that this petitioning activity (the Nevada Action) lacks any factual or legal basis: although the Nevada court did ultimately dissolve the TRO the Nevada lawsuit is ongoing. This Court would still have to deny the anti-SLAPP motion if plaintiffs (as the non-movants here) can demonstrate that their purpose in bringing this action was not to chill the defendants’/ movants’ legitimate exercise of their right to petition. Blanchard v. Steward Carney Hospital, 477 Mass. 141, 160 (2017). Plaintiffs contend that the purpose of this lawsuit was simply to recover their attorneys fees and costs incurred in connection with the defendants’ request for injunctive relief in the Nevada Action, not to prevent the Nevada lawsuit from going forward. This Court might be willing to scrutinize this argument more closely to determine if plaintiffs have met that burden if it had not decided to dismiss the Complaint under Rule 12(b)(6).
For the foregoing reasons, the Motion to Dismiss pursuant to Rule 12(b)(6) is ALLOWED and the complaint is hereby DISMISSED.