Opinion ID: 202048
Heading Depth: 2
Heading Rank: 1

Heading: Rulings Pertaining to the Dismissal of Claims Against HGI and Hay Acquisition

Text: 27 Plaintiffs first claim error in the district court's dismissal of their claims against the Domestic Defendants pursuant to Fed. R.Civ.P. 12(b)(6). The crux of all the claims is that HG Limited wrongfully failed to pay plaintiffs the full amount of their termination distributions and that, as a result, liability can be imposed upon Hay Acquisition and HGI, which are its third-and fourth-tier subsidiaries, respectively. 28 We review de novo and may affirm on any ground supported by the record. See Diva's Inc. v. City of Bangor, 411 F.3d 30, 40, 43 (1st Cir.2005). We accept as true all well-pleaded facts alleged by plaintiffs in their complaint and draw in their favor all reasonable inferences fitting their stated theories of liability. See Morales-Villalobos v. Garcia-Llorens, 316 F.3d 51, 52-53 (1st Cir.2003). [T]he threshold [for stating a claim] may be low, but it is real. Gooley v. Mobil Oil Corp., 851 F.2d 513, 514 (1st Cir.1988). Thus, plaintiffs are obliged to set forth in their complaint factual allegations, either direct or inferential, regarding each material element necessary to sustain recovery under some actionable legal theory. Id. at 515. 29 1. Dismissal of Breach of Contract, Breach of Implied Covenant of Good Faith and Fair Dealing, and Unjust Enrichment Claims 30 Plaintiffs asserted claims of breach of contract (i.e. the Agreement), breach of an implied covenant of good faith and fair dealing, and unjust enrichment against the Domestic Defendants. 31 Plaintiffs concede that neither HGI nor Hay Acquisition is a signatory to the Agreement. They allege, however, that Offshore Defendant HG Limited, as the Partnership's successor, is bound by the Agreement; that the Domestic and Offshore Defendants comprise a single enterprise, known as the Hay Group; that all the organizations in the enterprise have intermingled operations and finances; and that the entire enterprise is pervasively controlled by Chris Matthews and the Partnership. They thus argue that the corporate form should be disregarded so as to allow them to hold the Domestic Defendants liable for the Partnership's, now HG Limited's, alleged misdeeds. 32 We apply, as did the district court and the parties, Massachusetts law. 5 Under Massachusetts common law, disregarding the corporate form is permissible only in rare situations. United Elec., Radio and Mach. Workers v. 163 Pleasant St. Corp. (Pleasant St. I), 960 F.2d 1080, 1091 (1st Cir.1992) (citing Pepsi-Cola Metro. Bottling Co. v. Checkers, Inc., 754 F.2d 10, 15-16 (1st Cir.1985)). In fact, Massachusetts has been somewhat more `strict' than other jurisdictions in respecting the separate entities of different corporations. Birbara v. Locke, 99 F.3d 1233, 1238 (1st Cir.1996) (quoting My Bread Baking Co. v. Cumberland Farms, Inc., 353 Mass. 614, 233 N.E.2d 748, 752 (1968)) (internal quotation marks omitted). 33 My Bread, the seminal Massachusetts case on the corporate disregard doctrine, holds that the presumption of corporate separateness may be overcome only in rare particular situations in order to prevent gross inequity. 233 N.E.2d at 752. In determining whether circumstances warrant the use of this rare measure, we undertake an inquiry into the actual nature of the corporate interrelationship to evaluate whether the  Pepsi-Cola factors militate in favor of disregarding the corporate form. These factors are: 34 (1) common ownership; (2) pervasive control; (3) confused intermingling of business assets; (4) thin capitalization; (5) nonobservance of corporate formalities; (6) absence of corporate records; (7) no payment of dividends; (8) insolvency at the time of the litigated transaction; (9) siphoning away of corporation's funds by dominant shareholder; (10) nonfunctioning of officers and directors; (11) use of the corporation for transactions of the dominant shareholders; and (12) use of the corporation in promoting fraud. 35 Attorney Gen. v. M.C.K., Inc., 432 Mass. 546, 736 N.E.2d 373, 380 n. 19 (2000) (citing Pepsi-Cola, 754 F.2d at 14-16). 36 In support of their corporate disregard theory, plaintiffs allege the following in their complaint: (1) Matthews served in multiple roles, including as Chief Executive Partner of the Partnership, Chairman of the Board and President of HGI, and Chairman of the Board and CEO of Hay Acquisition; (2) surplus profits earned by HGI are siphoned upward to the Partnership for distribution to the partners as bonuses; (3) the partnership Agreement prevented partners from competing with any of the Hay Group entities, and HGI has sought to enforce the non-compete obligation; and (4) the Hay Group held itself out as one professional services firm on its website. They further allege: 37 All managerial decisions, even extending to the local level, were made by Matthews and the Partnership Management Committee. From time to time, at least twice, Matthews came to the Boston office to review local financial performance and to review progress on product development. He frequently supervised performance and profitability of the Boston office and other local offices acting as head of U.S. operations. Matthews also regularly placed telephone calls to Platten in Boston wherein he would give [Platten] instructions on management matters relating to the Boston office and they would discuss the Boston office's monthly performance, staffing issues and collection efforts. The Boston office had at least 100 clients located in Massachusetts. 38 Taken as true, these allegations do not meet the standard for disregarding the corporate form. 6 39 The circumstances here closely track those in Birbara, 99 F.3d 1233, in which we vacated a jury verdict on the ground that the evidence was insufficient to justify piercing the corporate veil. Here, as in Birbara, there is insufficient showing of confused intermingling or pervasive control. That Matthews (and Platten) sometimes acted on behalf of the Partnership and other times on behalf of its subsidiaries is to be expected when individuals serve as directors for both a parent and its subsidiary. Id. at 1239-40. Plaintiffs themselves acknowledge that Matthews was acting as head of U.S. operations when he supervised the Boston office's performance. It is also to be expected that when a subsidiary company profits, the parent company — in this case, the Partnership and its partners — will as well. Id. at 1240. 40 Despite their allegations of intermingling, plaintiffs have never alleged that they were confused about the identity of the legal entity with which they were contracting. 7 Indeed, the allegations are insufficient to show any fraudulent or injurious consequence of the intercorporate relationship. Id. at 1238 (quoting My Bread, 233 N.E.2d at 752). Plaintiffs were never misled about which corporate entity ... was obligated to them or was dealing with them. Id. at 1240, 233 N.E.2d 748. They acknowledged that their Agreement was with the Partnership and clearly understood that the Partnership was responsible for the payment of the distributions. In fact, Platten was once a member of the Partnership Management Committee that oversaw the distribution payment scheme. 41 Ultimately, plaintiffs do not allege, and the circumstances do not lead to an inference of, any gross inequity that would argue in favor of overriding the presumption of corporate separateness. See Commonwealth v. Beneficial Fin. Co., 360 Mass. 188, 275 N.E.2d 33, 91 (1971) (courts will only look through the corporate veil to accomplish ... essential justice); My Bread, 233 N.E.2d at 752 (limiting the application of the corporate disregard doctrine only to rare particular situations in order to prevent gross inequity); see also Birbara, 99 F.3d at 1239 (collecting sources). Plaintiffs would not have been in the position they are in now if they had sought relief directly from HG Limited by suing it in Bermuda. Mere inconvenience is simply not a sufficient ground for disregarding the corporate form. 42 Since Hay Acquisition and HGI are entities separate from HG Limited and are not parties to the Agreement, they cannot be held liable for breach of contract. 8 Having concluded that no contract exists, there can be no derivative implied covenant of good faith and fair dealing applicable to these parties. Mass. Eye & Ear Infirmary v. QLT Phototherapeutics, Inc., 412 F.3d 215, 229 (1st Cir.2005). Also, because the allegations are not sufficient to show that they were beneficiaries to the contract, the Domestic Defendants cannot be held liable for unjust enrichment. In any event, Massachusetts law does not allow litigants to override an express contract by arguing unjust enrichment. See, e.g., Zarum v. Brass Mill Materials Corp., 334 Mass. 81, 134 N.E.2d 141, 143 (1956) (The law will not imply a contract where there is an existing express contract covering the same subject matter.). We affirm the district court's dismissal of these three claims against the Domestic Defendants. 43 2. Dismissal of Interference with Contractual Relations and Civil Conspiracy Claims 44 Plaintiffs next contest the district court's dismissal of their claims against HGI and Hay Acquisition for interference with contractual relations and civil conspiracy. 45 We dispose first of plaintiffs' tortious interference claim. Under Massachusetts common law, [i]n an action for intentional interference with contractual relations, the plaintiff must prove that: (1) he had a contract with a third party; (2) the defendant knowingly induced the third party to break that contract; (3) the defendant's interference, in addition to being intentional, was improper in motive or means; and (4) the plaintiff was harmed by the defendant's actions. G.S. Enters., Inc. v. Falmouth Marine, Inc., 410 Mass. 262, 571 N.E.2d 1363, 1369-70 (1991) (citing United Truck Leasing Corp. v. Geltman, 406 Mass. 811, 551 N.E.2d 20, 21 (1990)). 46 Plaintiffs' principal argument on appeal is that the Domestic Defendants, by and through Matthews, took actions which induced the Partnership to break the Agreement. In support of this theory, they rely on nothing more than conclusory allegations that Matthews controlled the various Hay Group entities, that he acted with improper motives to retain income for himself and the Hay Group, and that he knew, or should have known, that the plaintiffs' termination distributions could not be rightfully withheld. Taking these allegations as true, plaintiffs still cannot make out a claim for interference of contract against the Domestic Defendants based on their theory of liability. 47 Under Massachusetts law, in evaluating whether the acts and intent of natural persons, be they officers, directors or employees, can be treated as the acts and intent of the corporation itself, Beneficial Fin., 275 N.E.2d at 77, a court must examine whether those natural persons have been vested with the authority to act on behalf of the corporation in the sphere of corporate business in which he commits the [alleged wrongful] act, id. at 80 (applying this test to a question of criminal liability, but deriving the test from civil and criminal cases). The record lacks any allegation or fact by which a reasonable inference can be drawn that Matthews was acting in the capacity and within the authority of his positions at Hay Acquisition and HGI when he allegedly interfered with the Partnership's contractual relationship with the plaintiffs. See, e.g., Stoneman v. Fox Film Corp., 295 Mass. 419, 4 N.E.2d 63, 66 (1936) (noting that the president of a corporation has not unlimited power but is restricted to doing those things which are usual and necessary in the ordinary course of the corporate business, and holding that, where the president committed wrongs while acting beyond the scope of his authority, the corporation is not civilly liable for resulting injuries). Moreover, as the district court intimated, plaintiffs essentially were hoisted by their own petard: crediting their allegation that all the Hay Group entities constituted one enterprise, it seems that the plaintiffs seek to hold the defendants liable for interfering with their own contract; [t]here is no such tort. 9 48 Similar problems beleaguer plaintiffs' civil conspiracy claim. They allege that Matthews organized and orchestrated a scheme by which employees of HGI would be invited to join the Partnership, required to make substantial capital contributions with promises of payment of termination distributions, and subsequently denied their distributions by false claims of violations of the non-competition obligations. 49 For liability to attach on this basis, there must be, first, a common design or an agreement, although not necessarily express, between two or more persons to do a wrongful act and, second, proof of some tortious act in furtherance of the agreement. Aetna Cas. Sur. Co. v. P & B Autobody, 43 F.3d 1546, 1564 (1st Cir. 1994). Plaintiffs make no factual allegations supporting the conclusion that the Domestic Defendants engaged in a common design or agreement with the Partnership to do a wrongful act; to the contrary, plaintiffs' allegation is that all the defendants comprise a single corporate enterprise. No civil conspiracy claim can lie under plaintiffs' theory because an entity cannot conspire with itself. There is also a risk in plaintiffs' argument of confusing a family relationship among corporations with a conspiracy; all that is shown here is a family relationship, and that is insufficient on its own to support a conspiracy claim. Cf. Gilbuilt Homes, Inc. v. Cont'l Homes of New Eng., 667 F.2d 209, 210 (1st Cir.1981) (holding that a vague reference to `inter-family relationships' was not enough to state a claim for conspiracy under Section 1 of the Sherman Act, 15 U.S.C. § 1). The district court properly dismissed the civil conspiracy claim. 50 3. Dismissal of Fraud, Negligent Misrepresentation, and RICO Act Claims 51 Plaintiffs contest the district court's dismissal of their fraud, negligent misrepresentation, and civil RICO Act claims against the Domestic Defendants. 52 The district court dismissed the three claims on the ground that plaintiffs failed to allege that they relied on the fraudulent misrepresentation or that their injuries stemmed from such reliance. On appeal, plaintiffs essentially concede that at the time the district court considered the claims, they had not made allegations sufficient to support them. They suggest that their success on appeal turns on the outcome of our review of the district court's November 23, 2004 denial of plaintiffs' motion to amend their complaint to cure acknowledged deficiencies in their original pleadings. Plaintiffs attached a copy of their proposed amended complaint to that motion; the court determined the motion was futile. 53 We review the denial of a motion to amend for abuse of discretion. See Hatch v. Dep't for Children, Youth, & Their Families, 274 F.3d 12, 19 (1st Cir. 2001). Within that standard, pure questions of law are reviewed de novo. Since denial of plaintiffs' motion as futile would be appropriate if the amended complaint still failed to state a claim sufficient to survive a motion to dismiss, our review in this instance is, for practical purposes, identical to review of a Rule 12(b)(6) dismissal based on the allegations in the amended complaint. See id. 54 Under Massachusetts law, to make out a claim for fraud, plaintiffs must show that the Domestic Defendants made a false representation of a material fact with knowledge of its falsity for purposes of inducing the plaintiff to act thereon, and that the plaintiff actually relied on the representation. See Slaney v. Westwood Auto, Inc., 366 Mass. 688, 322 N.E.2d 768, 779 (1975). For a claim for misrepresentation, plaintiffs must demonstrate that the Domestic Defendants (1) made false statements of material fact (2) to induce plaintiffs to enter into the Agreement, and (3) that they reasonably relied on those statements to their detriment. See Rodowicz v. Mass. Mut. Life Ins. Co., 192 F.3d 162, 175 (1st Cir.1999) (citing Zimmerman v. Kent, 31 Mass.App.Ct. 72, 575 N.E.2d 70, 74 (1991)). Both causes of action, then, require plaintiffs' reliance on defendants' representations. 55 In their proposed amended complaint, plaintiffs alleged that they were induced to enter into the Agreement by [certain] representations made in the Agreement, and that two individuals, Ken Martin and Jim Williams — each of whom was a partner in the Partnership — made representations in person or by phone as to the meaning of the non-competition provision of the Agreement. 56 These allegations do not suffice to hold Hay Acquisition and HGI liable for the fraud and misrepresentation claims. After all, plaintiffs did not allege any justified reliance on the misrepresentations. In fact, they stated that they entered into the Agreement because it was a condition of employment with the Hay Group. And, as the district court pointed out, their complaint states that they continued to demand their termination distributions even after some of the alleged misrepresentations were made. 57 As to the civil RICO Act claim, it fails because plaintiffs never alleged proximate cause between defendants' wrongful conduct and plaintiffs' injuries. As the district court observed, even if the Domestic Defendants can be held responsible for misrepresentations by mail or wire, plaintiffs did not rely on those misrepresentations. Therefore, their injuries, if proven, come not from those misrepresentations, but from HG Limited's alleged breach of the Agreement by failing to pay the three men their termination distributions. See George Lussier Enters., Inc. v. Subaru of New Eng., Inc., 393 F.3d 36, 51 (1st Cir. 2004) (Section 1964(c) of [18 U.S.C.] requires that the defendant's specified acts of racketeering were the proximate cause of the plaintiffs' injuries.). 58 Because the allegations in plaintiffs' proposed amended complaint would have been insufficient to make out fraud, negligent misrepresentation, and RICO Act claims against the Domestic Defendants, the district court did not abuse its discretion in denying the motion to amend the complaint as futile. Nor did the district court err in dismissing the underlying substantive claims under Fed.R.Civ.P. 12(b)(6). 59 4. Dismissal of Plaintiffs' Remaining Claims Against the Domestic Defendants 60 The remainder of plaintiffs' claims against the Domestic Defendants are plainly meritless, and we quickly dispose of them. 61 Plaintiffs argue that the district court erred in dismissing the plaintiffs' breach of fiduciary duty claims against the Domestic Defendants. They suggest that the Partnership's fiduciary duty should be extended to HGI and Hay Acquisition, on whose behalf Matthews acted. This agency theory fails for the reasons articulated above. The district court correctly determined that plaintiffs have alleged no [independent] source of a fiduciary duty as to these defendants and the claim thus fails as a matter of pleading. 62 Plaintiffs also contest the district court's dismissal of their claim under Mass. Gen. Laws ch. 93A, § 11, which provides for a cause of action against any unfair method of competition or . . . unfair or deceptive act or practice in the conduct of any trade or commerce. The theory of liability for this claim is the same as that underlying plaintiffs' misrepresentation claim, and the theory fails for the same reason the misrepresentation claim fails. Additionally, as the district court concluded, the alleged misrepresentations made by defendants did not arise out of any trade or commerce and thus do not fall within the purview of the statute. See Linkage Corp. v. Trs. of Boston Univ., 425 Mass. 1, 679 N.E.2d 191, 207 n. 33 (1997) (noting that the statute does not extend to intra-enterprise disputes, such as disputes between individual members of a partnership arising from partnership business, because they are more similar to purely private disputes and are not `commercial transaction[s]' (alteration in original) (quoting Szalla v. Locke, 421 Mass. 448, 657 N.E.2d 1267, 1269 (1995))). 63