Amorim Holding Financeria, S.G.P.S., S.A. v. C.P. Baker & Co.
AMORIM HOLDING FINANCERIA, S.G.P.S., S.A. v. C.P. BAKER & CO., LTD. and Christopher P. Baker
Attorneys
Anthony S. Fiotto, Goodwin Procter, LLP, Boston, MA, for Plaintiff., Daniel J. Dwyer, Murphy & King, PC, Boston, MA, for Defendants.
Full Opinion (html_with_citations)
MEMORANDUM AND ORDER
Amorim Holding Financeira S.G.P.S., S.A. (âAmorim Holdingâ) filed this suit against C.P. Baker & Co., Ltd. and its principal, Christopher P. Baker (collectively, âBakerâ), alleging violations of the Massachusetts Securities Act, fraud, negligent misrepresentation, breach of fiduciary duty, and unfair and deceptive trade practices in violation of Massachusetts General Laws chapter 93A in connection with certain investments Amorim made with Baker. Baker answered the complaint with counterclaims for misrepresentation, breach of warranty, and indemnification against Amorim. The parties have presented cross motions for summary judgment as to each otherâs claims.
I. BACKGROUND
A. Amorimâs Introduction to Baker
Amorim Holding Financeira S.G.P.S., S.A. (âAmorim Holdingâ)is a family-owned company located in Portugal. In 2003, the president of Amorim Holding, Americo Amorim (âAmorimâ), had fallen short on an investment in a company called FiNet. Bob Beuret, an employee of C.P. Baker & Co., Ltd., a Delaware investment management company with a principal place of business in Boston, suggested that Amor-im meet with Christopher Baker, the president and CEO of C.P. Baker & Co for help making up the deficit in the FiNet investment. Baker specialized in venture capital and private equity investments. After meeting Amorim and his representatives, Baker agreed to help Amorim with the FiNet investment.
In a February 2004 meeting with Amor-im, Baker explained his investment philosophy of leveraging his managerial expertise to create value in private companies. He highlighted his investment experience and successes, such as his investment of a few million dollars in a company called Zone Perfect that turned into a $165 million sale in 2003. Baker also gave Amorim a tour of his office in Boston. Amorim was impressed, and agreed to invest with Baker. Baker mentioned during the meeting that he was starting an.investment fund, called the Anasazi III Offshore Fund (âAnasazi IIIâ). By the end of the meet
1. Moms Holdings Invests with Baker
Shortly thereafter, a Gibraltar-based entity, Morris Holdings Ltd., invested $5 million in Anasazi III. Morris Holdings is a holding company for two Lichtenstein trusts, the beneficiaries of which are individual members of the Amorim family. Morris Holdings was represented by counsel for each of its investments, but is not a named plaintiff in this case.
From 2004 through 2006, Morris Holdings also invested in a number of start-ups and other privately held companies through Baker. It invested in On-Card Inc., a direct-mailing company; ZForce Partners LLC, a childrenâs action cartoon production company; American Entertainment Holding Company, LLC, a movies-cript intellectual property licensing company; and Chime Entertainment LLC, a music production company.
Each investment was subject to a purchase or subscription agreement, and Amorim Holding alleges that Baker made misrepresentations about each and every investment Morris Holdings made. Morris Holdings continues to hold some of the investments, has sold some, and has transferred others to other Amorim-affiliated entities. I summarize below the purchase or subscription agreements associated with each individual investment, along with the misrepresentations Baker allegedly made in connection with those investments. I also note the status of the investment as of the briefing and argument of the summary judgment motions. The parties have not further supplemented this information.
a. Anasazi III
i. The Investment
The Application Form Morris Holdings signed on April 2, 2004 as a part of its investment of $5 million in Anasazi III represented that it possessed âthe knowledge, expertise and experience in financial matters to evaluate the risks of investingâ in Anasazi III and understood âthe risks inherent in investingâ in Anasazi III, including âthe risk of loss of [its] entire investment.â Morris Holdings also received a private placement memo which, among other things, warned Morris Holdings that it could lose everything it invested in Anasazi III, and could not rely on any representation or warranty not contained in the written documents it had received or any representation or warranty relating to the economic return of Anasazi III.
The Application Form contained a section titled âIndemnification,â wherein Morris Holdings acknowledged that it would indemnify âthe Fund, the Manager, the Administrator and their respective directors, officers and employees against any loss, liability, cost or expense (including without limitation attorneysâ fees, taxes and penalties) which may result directly or indirectly, from any misrepresentation or breach of any warranty, condition, covenant or agreement set forth herein or in any other document delivered by the Investor to the Fund.â Baker was listed as the âManagerâ of Anasazi III.
ii. Alleged Misrepresentations
The private placement memo also represented that the value of the companies which Anasazi III had an interest in would be valued at a âfair value as determined in good faith by [Baker], in consultation with the Administratorâ of the Fund. Amorim Holding contends that Baker did not consult the Administrator of Anasazi III in valuing the companies Anasazi III had an interest in, nor did he provide a fair valuation in good faith.
Morris Holdings sold its shares of Anasazi III to Amorim Alternative Investments, a wholly-owned subsidiary of Amor-im Holding, for $1.8 million in the fall of 2008.
b. On-Card
i. The Investment
Morris Holdings made four separate investments in On-Card. These were in the amounts of $700,000 on November 23, 2004; $900,000 on December 9, 2004; $200,000 on November 3, 2005; and $100,000 on January 31, 2006.
Each investment involved execution of a Subscription Agreement with On-Card. By signing the On-Card Subscription Agreement, Morris Holdings ârecognize[d] that the [investment] involve[d] a high degree of risk.â The Agreement warned that the investments were illiquid, because âtransferability [was] extremely limited.â It also warned that Morris Holdings could lose its entire investment. Morris Holdings warranted that it was âsufficiently experienced in financial and business matters to be capable of evaluating the merits and risks of an investment in the companyâ and that it had, in fact, âevaluated the merits and risks of [its] proposed investment.â The Subscription Agreement also noted that Morris Holdings would have to hold the shares for an indefinite period of time.
Like many of the other agreements, the On-Card Subscription Agreement included an integration clause, stating that the âAgreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof. This agreement supersedes all prior negotiations, letters and understandings relating to the subject matter hereof.â It also included an indemnification clause, wherein Morris Holdings agreed to indemnify On-Card âand its affiliates, directors, officers, trustees, managers, employees and representatives ... from and against any Losses suffered, sustained, incurred or required to be paid by any such [party] due to, based upon or arising out of any material inaccuracy in, or any material breach of, a representation or warranty of the Subscriber contained in this Agreement.â Baker was defined in the agreement as On-Cardâs âPlacement Agent.â
ii. Alleged Misrepresentations
On October 25, 2004, Baker sent Amor-im Holding an email suggesting that it invest in On-Card because On-Cardâs âproduct margins are extremely attractive.â That email represented that Baker and the Anasazi Funds had already invested $900,000 in OnCard, and suggested that Amorim Holding and Baker âshould ... jointly invest a total of $1.4 million ($700k/ $700k)â more in OnCard. On June 11, 2005, Baker sent Amorim Holding an email suggesting that On-Card was âexploding,â and on October 21, 2005, continued to assert that On-Card had âgreat potential.â
Amorim Holding alleges that in a May 2006 meeting, Baker told it that On-Card would have an initial public offering within two years, and that such an offering would lead to a two to five times return on its initial investment. In late 2006, Baker also allegedly assured Amorim Holding
iii. No Transfer of Interest
Morris Holdings continues to hold the interest it purchased in On-Card in the four investments from 2004 through, 2006.
c. Z-Force
i. The Investment
As with the Anasazi III investment, Morris Holdings signed a Subscription Agreement for a $900,000 investment in Z-Force on December 28, 2004.
ii. Alleged Misrepresentations
In e-mails to Amorim, Baker suggested that the two were âpartnersâ and that Baker would match some of Amorimâs investments dollar for dollar. Amorim Holding claims that although it invested $900,000, Baker invested only between $800,000 and $500,000 in Z-Force, when Baker had said that the investment would be â[i]n keeping with our âfull partnerâ philosophy,â which Baker stated at his deposition meant that â[generally speaking, we would invest similar amounts of money in the deals.â
Amorim Holding claims that Baker represented to it in December 2004 that the minimum return on its investment in ZForce would be double its initial investment within two to three years, but that such a return has not come to light.
iii.Transfer of Interest
In 2007, Morris Holdings transferred its Z-Force shares for face value to AHFB-IV, a wholly owned subsidiary of Amorim Holding, through a simultaneous redemption/repurchase transaction.
d. American Entertainment Holding
i. The Investment
Morris Holdings invested $2.5 million in American Entertainment Holding on June 15, 2005. In a Subscription Agreement executed on that date, Morris Holdings represented that it carefully reviewed and understood all of the documents and records pertaining to the investment that it needed; that it had a reasonable opportunity to ask questions about the investment; and that it was sufficiently experienced in financial and business matters to make its own judgment about the investment. The American Entertainment Agreement also included an integration clause in which Morris Holdings agreed that the Subscription Agreement âsets forth the entire agreement and understanding among the parties hereto ... and supersedes any and
Under a provision titled âIndemnification,â Morris Holdings agreed to indemnify American Entertainment Holding âand its Managers against any and all Damages incurred in connection with.or arising out of or resulting from (i) any inaccuracy or breach of any representation or warranty made by [Morris Holding] in or pursuant to this Agreement....â Damages is defined in the agreement as âcosts, losses (including, without limitation, diminution in â value), liabilities, damages, lawsuits, deficiencies, claims, taxes and expenses ... including, without limitation, interest, penalties, reasonable attorneysâ fees and all amounts paid in investigation, defense or settlement of any of the foregoing.â Baker signed the agreement on behalf of American Entertainment Holding as its Managing Member, and is defined in the agreement as one of the âManagersâ of the Company.
ii. Alleged Misrepresentations
In an email dated October 6, 2004, Baker said that American Entertainment was âone of those truly great investments.â Amorim Holding alleges that Baker told it in June 2005 that American Entertainment was the type of deal that always makes money, and that a film fund of $100 million was being arranged. It also alleges that during a meeting in July 2006, Baker represented that American Entertainment was expected to have an initial public offering âin the very short term.â Amorim Holding contends that all of these statements were false.
iii. Transfer of Interest
On September 28, 2011, after the initial discovery deadlines in this case, Morris Holdings transferred its intgrest in American Entertainment Holding to AHFB-I, Inc., a wholly-owned subsidiary of Amorim Holding, for $250,000.
e. Chime
i. The Investment
Morris Holdings wired $1.5 million to Chime in installments between June 28, 2005 and September 6, 2005, and signed a purchase agreement on August 28, 2005. In the Chime Purchase Agreement, Morris Holdings acknowledged that it was âa sophisticated investorâ that âcould bear the economic risk of the investment, and has such knowledge and experience in financial or business matters in general and in particular with respect to this type of investment as to be capable of evaluating the merits and risks of an investmentâ in Chime. Morris Holdings explicitly acknowledged that its investment in Chime was âhighly speculative and involve[d] numerous risks and uncertainties,â and that it âevaluated and understood] the risks and terms of investingâ in Chime. The agreement also included an integration clause.
The Chime Purchase Agreement also included an exhibit titled âRisk Factorsâ disclosing the risks of investing in Chime. That exhibit began by warning Morris Holdings that it would âbe required to bear the financial risks of [the Chime investment] for [an] indefinite period of time,â and that the investment was âhighly speculative and involve[d] a high degree of risk.â The risk factors included things such as that the shares could not be transferred or resold except under a few exceptions; that the company had âno operating historyâ and thus âthere can be no assurance that the business of [Chime] will, over the long term, be a viable commercial enterpriseâ; and that the companyâs revenues came from a small number of properties and was seasonal, mainly dependant upon holiday sales, among other risks.
ii. Alleged Misrepresentations
Amorim Holding contends that in August 2005, Baker assured Amorim that any investment in Chime would have a minimum return of five times the initial investment -within two to three years. On December 13, 2005, Baker sent Amorim Holding an email stating that it â[ljooks like Chime will be working with Coca-Cola, Starbucks, and Starwood Hotels.â On January 18, 2006, Baker sent another email to Amorim Holding suggesting that it âconsider increasing [its] investmentâ in Chime because the company âis flyingâ and has been having âa large number of very positive things happening.â Amorim Holding contends that these statements were false.
iii. Transfer of Interest
In 2007, Morris Holdings transferred its Chime shares to AHFB-I, Inc., for face value, through a simultaneous redemption/repurchase transaction.
2. Sotomar Invests with Baker
Morris Holdings was not the only company affiliated with Amorim to invest with Baker. A company named Sotomar Em-preendimentos IndustriĂĄis E Imobiliarios, SA, invested through Baker in ĂĄ voice-over-IP telephony company called One IP Voice, then known as Farmstead Telephone Group.
2. The Investment
The February 8, 2006 One IP Voice Purchase Agreement, signed by Sotomar, contained a section of warranties made by Sotomar to One IP Voice. In that section, Sotomar acknowledged that it understood that the shares it was purchasing were not registered and therefore it would have to hold them âindefinitely unless they are registered,â and that âno public market now exists for any of the securities issued by [One IP Voice].â
The Purchase Agreement also contained an integration clause, which stated that the Purchase Agreement âconstitute^] the entire agreement between the parties ... and any and all other written or oral agreements existing between the partiesâ were thereby âexpressly canceled, and no party shall be liable or bound to any other party in any manner by any warranties, representations, or covenants, expect as specifically set forth herein.â Sotomar also agreed that it was ânot relying upon any person, firm or corporation, other than [One IP Voice] and its representatives, in
Unlike a number of the other purchase agreements, the One IP Voice agreement did not include an indemnification clause. It did include a provision specifying that â[i]f any action at law or in equity ... is necessary to enforce or interpret the terms .of any of the Transaction Documents, the prevailing party shall be entitled to reasonable attorneyâs fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled.â
2. Alleged Misrepresentations
Amorim Holding alleges that Baker told it that its investment in One IP Voice would yield a five-fold return within ten months, because another investor was lined up to redeem Amorim Holdingâs investment. Amorim Holding contends that this statement was false.
3. No Divestment
Sotomar continues to hold its interest in One IP Voice.
D. Amorim Holding Invests with Baker
Amorim Holding invested through Baker in two additional ways: by purchasing shares redeemed by Morris Holdings and through direct investments in four companies.
1. Purchases of Shares Redeemed by Morris Holdings
As noted above, in 2007, Morris Holdings redeemed its interests in Chime and Z-Force for face value. Simultaneously, Amorim Holding, represented by counsel, purchased the redeemed shares by executing new purchase contracts.
The new purchase agreements executed by Amorim Holdings contained essentially the same warnings, disclosures, and agreements as the original purchase agreements. Supplemental disclosure memo-randa were included, providing up-to-date disclosures concerning risks of the investment and the companiesâ financial conditions at the time of the new purchase agreements.
2. Direct Investments
In addition to purchasing shares redeemed by Morris Holdings, Amorim Holding directly invested in four companies during this time period through Baker: MySky Communications, Inc., a weather satellite software company; Chime; Z-Force; and Remote MDx, a medical bracelet company.
a. MySky
On December 30, 2005, Amorim Holding signed a Purchase Agreement to invest $500,000 in MySky. In that Agreement, Amorim Holding represented that it had an opportunity to discuss MySkyâs business, management, and financial affairs, as well as the terms and conditions of the Purchase Agreement, with MySkyâs management and that it understood that no public market existed for the MySky shares. The Purchase Agreement contained an integration clause which stated that the Purchase Agreement âconstitute[d] the entire agreement between the partiesâ and expressly canceled âany and all other written or oral agreements existing between the parties.â That clause also
Amorim Holding alleges that in January 2007, Baker represented to it that by 2009, its investment in MySky would double. It contends that this statement was false.
b.Chime
On December 15, 2006,
Amorim Holding alleges that in July 2006, Baker represented to it that he had secured additional sources of investment for Chime, which would improve the company. In an email on January 16, 2007, Baker proclaimed that Chime had â[l]ots of potential this year.â Amorim Holding contends this was false, because in February 2007, Baker had learned through an email that as of January 2007 Chime would not have enough cash to continue operating past February 2007.
c. Z-Force
In May 2007, Amorim Holding directly invested $900,000 in ZForce in a similar manner as Morris Holdings had done previously. Amorim Holding alleges that in July and October of 2006, Baker represented that he would replace Z-Forceâs management to improve the company. Unlike the Morris Holdings investment, the 2007 ZForce purchase agreement included an indemnification clause. That clause stated that Amorim Holding would hold harmless ZForce, âits managers, employees, consultants, affiliates and any employees thereof, and all past, current and future members of the Company ... from and against any and all payments, costs, liabilities, penalties, fines, taxes, damages, losses and other expenses (including, without being limited to, reasonable attorneysâ and accountantsâ fees) ... that are a result of the transaction contemplated in this Agreement.â
d. Remote MDx
By 2007, a number of Amorim Holdingâs investments had failed or substantially decreased in value, and Amorim Holding lost most of its investment in the various companies. Around this time, Baker offered Amorim an additional opportunity which he thought gave Amorim a chance to make up for his losses. That investment was to purchase $18.5 million of shares in a publicly-traded company, Remote MDx, and then sell a âputâ option to a third company, Yatas Holding GmbH. The put option required Vatas to purchase the Remote MDx shares for $21.5 million on July 31, 2008, if Amorim Holding desired to sell the stock on that date. Baker estimated that the return from selling the put would be $3 million, approximately offsetting some of the losses Amorim had already incurred
Before purchasing the Remote MDx shares, Amorim Holding employees reviewed financial data about Vatas and investigated the companyâs connections with some South African companies, including diamond mining operations. Amorim hired the law firm of Goodwin Procter LLP to review the put contract. After evaluating the information he had obtained, Amorim thought that Vatas was âan extremely solid group.â
Amorim Holding alleges that Baker assured it that the Remote MDx investment was going to be risk-free with a virtually guaranteed return. It also contends that Baker instructed it not to mention the investment to anyone else because it was such a good opportunity. Amorim Holding claims that Bakerâ was offering Amorim Holding the Remote MDx investment to compensate it for its losses on the other investments Baker had suggested.
Amorim Holding claims that Baker omitted to inform it that a âmarket-makerâ in Remote MDx was preparing to sell a âhuge blockâ of Remote MDx shares and thus dilute the value of Amorim Holdingâs interest in Remote MDx. It also alleges that Baker failed to disclose that he knew that Vatas would not be able to honor the put because it was over-extending itself in the market. However, there is virtually no evidence in the record regarding Bakerâs knowledgeâat the time he sold the Remote MDx investment to Amorimâof the prospective activity of the âmarket-makerâ or the inability of VATAS to honor the put.
Amorim Holding purchased the shares and sold the put option to Vatas. Vatas, however, declared insolvency and did not honor the Amorim put. Consequently, Amorim did not make any profit on its purchase of the Remote MDx shares and indeed, after, a drop in the price of the stock, Amorim lost most of its $18.5 million investment.
II. STANDARD OF REVIEW
A moving party is entitled to summary judgment when âthe movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.â Fed. R.Civ.P. 56(a). âA dispute is genuine if the evidence about the fact is such that a reasonable jury could resolve the point in the favor of the non-moving party,â and â[a] fact is material if it has the potential of determining the outcome of the litigation.â Farmers Ins. Exch. v. RNK, Inc., 632 F.3d 777, 782 (1st Cir.2011) (citation omitted). However, âeonclusory allegations, improbable inferences, and unsupported speculationâ are insufficient to create a genuine issue of material fact to survive summary judgment. Sullivan v. City of Springfield, 561 F.3d 7, 14 (1st Cir.2009) (quotation and citation omitted).
I âview the facts in the light most favorable to the party opposing summary judgment.â Rivera-Colon v. Mills, 635 F.3d 9, 10 (1st Cir.2011). Because I am addressing cross-motions for summary judgment, I âmust view each motion, separately, through this prism.â Estate of Hevia v. Portrio, 602 F.3d 34, 40 (1st Cir.2010).
III. BAKERâS MOTION FOR SUMMARY JUDGMENT
Amorim Holdingâs complaint asserts five causes of action: violation of the Massachusetts Securities Act, Massachusetts General Laws chapter 110A section 410 (Count I); fraud (Count II); negligent misrepresentation (Count III); breach of fiduciary duty (Count IV); and violation of Massachusetts General Laws chapter 93A (Count V). Baker has moved for summary
Baker contends that (A) all claims arising from purchases of securities by Morris Holdings or Sotomar fail because Amorim Holding is not the real party in interest. He further argues that (B) the Massachusetts Securities Act claims fail because (i) Amorim Holding has not tendered or sold its Remote MDx shares; (ii) if any misrepresentations were made with regard to Remote MDx, Amorim Holding knew they were false, and (iii) Amorim Holding was not the original purchaser of the Morris Holdings and Sotomar investments in Anasazi III, Chime, Z-Foree, American Entertainment Holding, or On-Card. In addition, Baker contends that (C) the fraud and negligent misrepresentation claims fail because (i) no misrepresentations were made as to Remote MDx; (ii) Amorim Holding did not reasonably rely on representations Baker did make with regard to Remote MDx; (iii) the Purchase and Subscription Agreements fully disclosed the risks of each investment that Amorim Holding made; and (iv) many of the alleged misrepresentations post-dated the investments and are therefore not actionable. Baker also argues that (D) the breach of fiduciary duty claims fail because they are derivative and the complaint fails to meet the requirements of Federal Rule of Civil Procedure 23.1. Finally, Baker contends that (E) the chapter 93A claim fails because all the other claims of deception or unfair practices have failed. I address each of Bakerâs multifold arguments in turn.
A. Real Party in Interest
1. Legal Background
Baker contends that Amorim Holding is not the real party in interest with respect to investments made between 2004 and 2006 by Morris Holdings and Sotomar. Under Federal Rule of Civil Procedure 17, â[a]n action must be prosecuted in the name of the real party in interest,â that is, in the name of the person who is entitled to enforce the right asserted under the governing substantive law. Fed.R.Civ.P. 17(a)(1); 6A Charles Alan Wright & Arthur R. Miller, Federal Practioe & Prooedure § 1543 (3d ed.). Because I sit in diversity in this case, I look to the state substantive law governing Amorim Holdingâs claims of violations of the Massachusetts Securities Act, fraud, negligent misrepresentation, breach of fiduciary duty, and violation of Massachusetts General Laws chapter 93A, to shape determination of the federal procedural question whether Amorim Holding is the real party in interest. See generally Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). Ultimately, real party in interest status and the consequences which flow from that are procedural matters of federal law. See University of Rhode Island v. A.W. Chesterton Co., 2 F.3d 1200, 1205 n. 8 (1st Cir.1993) (citing Moor v. Alameda Cnty., 411 U.S. 693, 720, 93 S.Ct. 1785, 36 L.Ed.2d 596 (1973)).
2. Analysis
a. Massachusetts Securities Act Claims
The Massachusetts Securities Act provides in part that âany person who ... offers or sells a security by means of any untrue statement of a material fact or any omission to state a material fact ... is liable to the person buying the security from him.... â Mass. Gen. Laws ch. 110A § 410(a)(2) (emphasis added).
It is undisputed that Morris Holdings and Sotomar were the formal parties to the 2004-2006 purchase and subscription agreements through which the Anasazi III, Chime, Z-Force, American Entertainment Holding, On-Card, and One IP Voice investments were made. The record also demonstrates that the funds for each of those investments came from Morris Holdings or Sotomar, or from one of their parent companies, Foundation Pamalu or Foundation Lumapa. Thus, Morris Holdings and Sotomar were the âbuyersâ for purposes of the Massachusetts Securities Act, and Morris Holdings and Sotomar, not Amorim Holding, are the real parties in interest with regard to the listed 2004-2006 investments.
This deficiency, however, is not fatal to Amorim Holdingâs claim. Authorized representatives of Morris Holdings, Sotomar, and various other holding companies, have ratified this action by Amorim Holding and thus Amorim Holding contends that it is a real party in interest under Fed.R.Civ.P. 17(a)(3). Rule 17(a)(3) provides that a âcourt may not dismiss an action for failure to prosecute in the name of the real party in interest until, after an objection, a reasonable time has been allowed for the real party in interest to ratify ... the action.â Fed.R.Civ.P. 17(a)(3).
Baker contends that the ratifications did not come within a reasonable time and consequently should be treated as ineffective. This issue comes as no surprise to Amorim Holding. Baker first objected that Amorim Holding was not the real party in interest in his motion to dismiss filed in mid-2009. Baker maintained its objection in its motion for summary judgment, filed January 9, 2012. The ratifications provided by Morris Holdings and others were not filed until March 2012, after the close of discovery, in the middle of summary judgment motion practice, and close to three years after Baker first objected that Amorim Holding was not the real party in interest.
As the Wright & Miller section on Rule 17(a)(3) notes, âRule 17(a)(3) is designed to avoid forfeiture and injustice when an un-derstandĂĄble mistake has been made in selecting the party in whose name the action should be brought....â 6A Weight & Miller, Federal Practice & Prooedure § 1555. Baker claims that Amorim Holding did not make an âunderstandable mistake,â but instead deliberately avoided bringing suit Morris Holdings as a plaintiff. This choice was made because as Maria Amorim disclosed at her deposition, âMorris [Holdings] works as a cash safeguard, as an equity safeguardâ for the Amorim family. Baker claims Amorim did not bring suit in Morris Holdingsâ name to protect personal assets from counterclaims.
When Baker first argued that Amorim Holding was not the real party in interest in its motion to dismiss, Judge Gertner denied the motion by margin note, ruling that Amorim was the real party in interest to all claims raised in the complaint. After the case was transferred to my docket in
b. Fraud, Negligent Misrepresentation, and 9SA Claims
As to the fraud and negligent misrepresentation claims, under Massachusetts law â[o]ne who makes a fraudulent misrepresentation
c. Breach of Fiduciary Duty Claims
As to the breach of fiduciary duty claim, under Massachusetts law, a plaintiff must show (1) the existence of a duty of a fiduciary nature, based upon the relationship of the parties, (2) breach of that duty, and (3) a causal relationship between that breach and some resulting harm to the plaintiff. Hanover Ins. Co. v. Sutton, 46 Mass.App.Ct. 153, 705 N.E.2d 279, 288-89 (1999). Amorim Holding contends' that Baker was acting as its investment advisor ĂĄnd thus owed it a fiduciary duty, which Baker breached in the various misrepresentations and omissions it alleges he made. Under these circumstances, as with the fraud and misrepresentation claims, Amorim Holding is a proper real party in interest under Rule 17(a) for its breach of fiduciary duty claim.
B. Massachusetts Securities Act Claims
1. Legal Background
The Massachusetts Uniform Securities Act provides that any person who
offers or sells a security by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading, the buyer not knowing the untruth or omission, and who does not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of the*296 untruth or omission, is liable to the person buying the security from him.
Mass. Gen. Laws ch. 110A § 410(a)(2). Thus, for a plaintiff to recover under § 410, he must show (1) that the defendant offered or sold a security in Massachusetts; (2) by (a) making an untrue statement of material fact, or (b) omitting a material fact necessary to make a statement not misleading; (3) that the plaintiff (a) did not know was false or (b) did not know was omitted; and (4) the defendant knew or should have known in the exercise of reasonable care was untrue or misleading. Id.
Once the prima facie case has been made, the statute employs a burden-shifting mechanism whereby the defendant must prove (1) he did not know of the statementâs falsity or that its omission would make his statement misleading, or (2) he could not in the exercise of reasonable diligence have discovered either the statementâs falsity or the misleading-causing nature of the omission. See, e.g., Adams v. Hyannis Harborview, Inc., 838 F.Supp. 676, 688 (D.Mass.1993) (noting that under the Massachusetts Securities Act the seller bears the burden to establish his lack of negligence).
2. Analysis
Baker raises three defenses to Amorim Holdingâs Massachusetts Securities Act claim. To the extent it is based on the Remote MDx investment, Baker argues it fails because (i) Amorim Holding has not tendered or sold its Remote MDx shares, and (ii) if any misrepresentations were made with regard to Remote MDx, Amor-im Holding knew they were false and therefore cannot make out a Massachusetts Securities Act violation. As to the Morris Holdings and Sotomar investments in Anasazi III, Chime, Z-Force, American Entertainment Holding, On-Card, and One IP Voice, Baker argues the Securities Act claim fails because (iii) Amorim Holding is not the original purchaser. Baker also implicitly makes a fourth argument: that many of the alleged misrepresentations were made post-investment, and thus cannot give rise to Massachusetts Securities Act liability. I address each argument in turn. I also take up the timing of the misrepresentations in connection with the fraud and misrepresentation claims in Section III.C.2.d, infra.
a. Lack of Tender or Sale
Baker contends that Amorim Holdingâs Massachusetts Securities Act claim fails with regard to the Remote MDx shares because Amorim Holding has not tendered or sold its shares as required by Massachusetts General Laws ch. 110A § 410(a)(2). While he is correct that Amorim Holding has not yet tendered or sold its shares, and it appears that such tender or sale is required to recover under section 410(a)(2), the statute provides that â[a]ny tender specified in [section 410] may be made at any time before entry of judgment.â Mass. Gen. Laws ch. 110A § 410(c). Because Amorim Holding still has time to tender or sell its shares, Bakerâs first defense to Amorim Holdingâs Securities Act claim fails at this point.
b. Amorim Knew Remote MDx Misrepresentations were False
Under the Massachusetts Securities Act, if a buyer knows the alleged misrepresentations are false, his claim is barred. Mass. Gen. Laws ch. 110A § 410(a) (requiring that the buyer ânot know[] of the untruth or omissionâ to make out a claim).
Amorim Holding points to a number of pre-investment misrepresentations that it alleges Baker made about Remote MDx as the basis for its Massachusetts Securities
Baker contends that Amorim Holding knew that the investment was not risk free and did not have a virtually guaranteed return. Baker also claims he did not know that Vatas could not honor the put. The record supports Bakerâs contentions.
Amorim Holding acknowledged that on occasion before the Remote MDx investment, Baker had informed it that Baker â[could not] assure today an investment return in the future,â because of securities regulations. When asked at its 30(b)(6) deposition whether, Baker had ever âtold [it] in so many words that [Remote MDx] was a risk free investment,â Amorim Holdingâs representative said âNo, I donât think he ever said this was a risk free investment.â
The record also contradicts the omissions and concealed facts Amorim Holding alleges. At his deposition, the managing director of Vatas stated repeatedly that he never talked to Baker about whether Va-tas was giving other put options to investors holding Remote MDx stock. He directly stated that he did not talk to Baker about Vatasâs ability to honor the puts given to Amorim Holding, and that such information was not otherwise publicly available to Baker.
Thus, because the record is devoid of a misrepresentation or omission respecting
c. Not the Original Purchaser
Related to the real party in interest issue above, but distinct, is the requirement under the Massachusetts Securities Act that the plaintiff be âthe person buying the securityâ from the defendant. Mass. Gen. Laws ch. 110A § 410(a). The parties agree that this language has been interpreted to mean that the plaintiff must be the immediate purchaser, not a remote subsequent purchaser, of the security. See Joseph C. Long, 12A Blue Sky Law § 9:40 h. 1.
Relying on this construction, Baker argues that Amorim Holdingâs Massachusetts Securities Act claim fails as to investments made between 2004 and 2006 by Morris Holdings and Sotomar, since they, not Amorim Holding, were âthe person[s] buying the securit[ies].â Amorim Holding argues that because it is made up of the same individuals to whom Baker made the alleged misrepresentations that form the basis of its Massachusetts Securities Act claim, Amorim Holding as well as Morris Holdings and Sotomar should be treated as âthe person buying the security.â
In support of its position, Amorim Holding cites an example from Joseph Longâs Blue Sky Law treatise which states that where âa parent corporation pays for the securities and, for unrelated business reasons, elects to have the title pass to one of its subsidiaries,â then both the parent corporation and the subsidiary should be treated as original purchasers (people âbuying the securityâ) for purposes of the Massachusetts Securities Act. Id. § 9:40. Although that particular example is distinguishable from the facts here because we are dealing here with a somewhat looser organizational affiliation than a strict parent-subsidiary relationship, I am nevertheless persuaded that the Amorim-affiliated entities that currently hold the investments should be treated as the original purchasers in the circumstances of this case.
In 2007, Morris Holdings redeemed its shares in Chime and ZForce for face value, and simultaneously Amorim Holding purchased those shares by executing new purchase and subscription agreements with Chime and Z-Force. Although the shares in both companies were illiquid and Morris Holdings had no right to redeem them, the parties agree that the simultaneous redemption/repurchase transactions were permitted as a courtesy to Mr. Amorim, who sought to transfer ownership of the securities between entities under his control, purportedly for tax reasons. In 2008, Morris Holdings sold its shares in Anasazi III to a company called Amorim Alternative IĂąvestments for $1.8 million. On September 28, 2011, after the initial discovery deadlines had passed, Morris Holdings sold its shares of American Entertainment Holding to a wholly-owned Amorim Holding subsidiary for $250,000. Sotomar continues to hold the interest in One IP Voice, and Morris Holdings continues to hold the interest in On-Card.
As to the Chime and Z-Force shares that it redeemed in 2007, Morris Holdings was âthe person buying the security,â and thus the party who could sue under the Massachusetts Securities Act. Baker contends that, assuming Amorim Holding could sue in Morris Holdingsâ name as a result of the Rule 17(a)(3) ratification discussed above, Morris Holdings would be without a remedy because Morris Hold
As to the Anasazi III, American Entertainment Holding, and On-Card shares, because Morris Holdings has ratified Amorim Holdingâs claim and Morris Holdings was âthe buyer of the security,â Amorim Holdingâs Massachusetts Securities Act claim may go forward as to the On-Card shares.
Likewise, as to the One IP Voice shares, because Sotomar has ratified its claim and given Amorim Holding permission to sue on it, and Sotomar was âthe buyer of the security,â Amorim Holdingâs Massachusetts Securities Act claim may go forward as to the One IP Voice shares.
d. Not the âMeans ofâ the Securities Sales
As noted below, infra part III. C.2.d, some of the alleged misrepresentations that form the basis for Amorim Holdingâs fraud and negligent misrepresentation claims were post-investment. The focus of the Massachusetts Securities Act is on pre-investment information disclosure. Cf. Marram, 809 N.E.2d at 1025-27. The language of the Act itself focuses on the sale and the information available to the buyer during that period in time. See Mass. Gen. Laws ch. 110A § 410(a)(2) (creating liability for any person who âoffers or sells a security by means of any untrue statement of a material factâ or omission). Post-investment misrepresentations, unconnected to the offer or sale of a security, then, cannot give rise to liability under the Massachusetts Securities Act, and any claims based on such misrepresentations fail as a matter of law.
C. Fraud and Negligent Misrepresentation Claims
1. Legal Background
Under Massachusetts law, to make out a fraud claim a plaintiff must show that (1) he is a person or within the class of persons as to whom (2) the defendant intended, or had a reasonable expectation would act (3) in reasonable reliance upon (4) a knowingly false statement made
Some general observations may be made about the requirements of the fraud and negligent misrepresentation torts.
First, it is beyond debate that for a misrepresentation to be actionable, it must have, in fact, been false.
Second, under Massachusetts law, âinformation is âmaterialâ only if its disclosure would alter the âtotal mixâ of facts available to the investor and âif there is a substantial likelihood that a reasonable shareholder would consider it importantâ to the investment decision.â Milton v. Van Dorn Co., 961 F.2d 965, 969 (1st Cir.1992) (quoting Basic, Inc. v. Levinson, 485 U.S. 224, 231-32, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988)). The inquiry is an objective one. Id. at 970. Puffery is not actionable because it is so vague and general as to be unimportant in the total mix of information. See, e.g., Glassman, 90 F.3d at 635-36.
Finally, both causes of action require a showing of reasonable reliance. The First Circuit has looked to a number of factors in determining whether reliance was reasonable, including:
(1) The sophistication and expertise of the plaintiff in financial and securities matters; (2) the existence of long standing business or personal relationships; (3) access to the relevant information; (4) the existence of a fiduciary relationship; (5) concealment of the fraud; (6) the opportunity to detect the fraud; (7) whether the plaintiff initiated the stock*301 transaction or sought to expedite the transaction; and (8) the generality or specificity of the misrepresentations.
Kennedy v. Josephthal & Co., Inc., 814 F.2d 798, 804 (1st Cir.1987). The First Circuit has held that no reasonable investor would rely on âoptimistic predictions of future potential,â as long as the predictions are not, in fact, promises about certain future performance. Suna v. Bailey, 107 F.3d 64, 70-72 (1st Cir.1997);
2. Bakerâs Asserted Defenses
Baker contends that Amorim Holdingâs fraud and negligent misrepresentation claims fail. As to those claims based on the investment in Remote MDx, Baker claims (i) no misrepresentations were made, or (ii) if any were made, Amorim Holding did not reasonably rely on them. Third, for claims arising out of the investments in Anasazi III, Chime, Z-Force, American Entertainment Holding, On-Card, and One IP Voice, Baker seeks shelter in the risk disclosures of the Purchase and Subscription Agreements. Finally, he argues that any misrepresentations that were made post-dated the investments and are therefore not actionable. I address each argument in turn.
a. No Misrepresentations Made as to Remote MDx
Amorim Holdingâs fraud and misrepresentation claims based on the Remote MDx investment must fail for the same reason that the Massachusetts Securities Act claim arising from that investment fail: that the record discloses that Baker did not represent that the investment would be free of risk.
b. Amorim Holding did not Reasonably Rely on Statements Regarding Remote MDx or Knew They Were False
Even if a misrepresentation was made, Baker argues that Amorim Holding did not rely on it because it made its own investigation into the Remote MDx investment and agreed thereafter to invest. As noted above, before purchasing the Remote MDx shares, Amorim Holding employees reviewed financial data about Vatas and its connection to the Hersov family, aâ wealthy diamond-mining family in South Africa. After reviewing the information they had uncovered, Amorim Holding employees and Amorim himself felt comfortable that Vatas was a legitimate business with substantial levels of equity, in excess of $200 million. An Amorim Holding employee expressed the companyâs comfort with Vatas to Baker directly in an email, stating that Amorim Holding âalready gathered information about Vatas and feel comfortable about their role as guarantors of the put.â In other words, as the January 24, 2008 Amorim Holding meeting minutes revealed, Amorim Holding felt that Vatasâs âcredibility was assuredâ after Amorim Holding had done the work ânecessary to ensureâ its credibility.
Amorim Holdingâs meeting minutes also disclose that Amorim Holding explicitly contemplated and created a contingency plan in the event that Vatas did not honor the put. The meeting minutes reveal that
Baker thus argues that Amorim Holding cannot now claim that it' relied on any statements Baker made about the return on the investment being guaranteed, or Vatas being able to honor the put, since Amorim Holding performed its own investigation of the facts it thought were necessary to make its investment decision and explicitly contemplated the possibility that Vatas would not honor the put. Amorim Holding claims that its investigation did not, and could not, have uncovered the information Baker allegedly knew that Va-tas could not have honored the put.
As noted above, a number of factors are relevant in determining whether a plaintiffs reliance was reasonable under the circumstances of the case: â(1) The sophistication and expertise of the plaintiff in financial and securities matters; (2) the existence of long standing business or personal relationships; (3) access to the relevant information; (4) the existence of a fiduciary relationship; (5) concealment of the fraud; (6) the opportunity to detect the fraud; (7) whether the plaintiff initiated the stock transaction or sought to expedite the transaction; and (8) the generality or specificity of the misrepresentations.â Kennedy, 814 F.2d at 804.
Although Amorim claims that it is not sophisticated, its namesake is one of the wealthiest men in Portugal and it controls millions of dollars in investments. No reasonable juror could find that Amorim was not a sophisticated investor. While Baker and Amorim Holding had a longstanding, arguably fiduciary relationship as of the time of the Remote MDx investment, it is undisputed that Baker did not and could not have known that Vatas was not going to be able to honor the put. Thus, Baker did not have any information that Amorim Holding did not have as a result of its investigation, did not conceal any alleged fraud, and Amorim Holding had the same opportunity to detect it as Baker did. Furthermore, Amorim Holding explicitly contemplated that Vatas would not honor the put, and under the above factors no reasonable jury could conclude that Amor-im Holding reasonably relied on Bakerâs alleged misrepresentation that the investment was a risk-free, virtually guaranteed return.
Thus, because no reasonable jury could find that Amorim Holding reasonably relied on the alleged affirmative misrepresentations or omissions of Baker, summary judgment is appropriate regarding Remote MDx.
c. Risks were Fully Disclosed in Purchase Agreements
Baker next argues that the risk disclosures and integration clauses in the purchase and subscription agreements make any reliance by Amorim Holding on any alleged misrepresentations unreasonable as a matter of law. Thus, Baker contends, Amorim Holdingâs fraud and negligent misrepresentation claims must fail.
Generally, an integration or merger clause will not bar a fraud claim, Sound Techniques, Inc. v. Hoffman, 50 Mass.App.Ct. 425, 737 N.E.2d 920, 924 (2000), but will be enforced against a negligent misrepresentation claim, id. at 926-27. However, in the securities context, the Massachusetts Supreme Judicial Court has held that where a purchase or subscription âagreement implicitly acknowledges [the defendantâs] pre-investment oral statements to be part of the mix of pre-investment information available for
All of the investments except for the Morris Holdings investment in Z-Force and the Amorim Holding investment in Remote MDx included integration clauses in their purchase or subscription agreements. With the exception of the Anasazi III agreement, all of the investment agreements featuring integration clauses also included acknowledgments that the investor had an opportunity to obtain information from the company or its management before signing the agreement, such that they arguably could come within the scope of Marram concerning claims of negligent misrepresentation. Therefore, summary judgment on this basis is appropriate on Amorim Holdingâs negligent misrepresentation claims as to Anasazi III only. I now turn to the applicability of the Marram exception to the other investments.
Section 2.2(h) of the 2005 Chime , purchase agreement entered into by Morris Holdings contains a representation from the Investor âthat it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Purchased Interest....â The agreement defines the âCompanyâ as Chime Entertainment, LLC. Baker is defined as a âManagerâ of the Company in the Agreement. In the 2006 Chime purchase agreement entered into by Amorim Holding, that clause reads: âthe Company had provided the undersigned with any assistance the undersigned has requested in connection therewith.â Accordingly, the Marram exception applies, and the integration clause does not bar Amorim Holdingâs negligent misrepresentation claim regarding Chime.
One IP Voiceâs purchase agreement similarly included a warranty that the âPurchaser has had an opportunity to discuss the Companyâs business management, financial affairs and the terms and conditions of the offering of the Securities with the Companyâs management.â The âCompanyâ is defined in the agreement as Farmstead Telephone Group, Inc. (the pri- or name of One IP Voice). Baker is named as the âPlacement Agent,â and is therefore a representative of One IP Voice. Accordingly, the Marram exception applies, and the integration clause does not bar Amorim Holdingâs negligent misrepresentation claim regarding One IP Voice.
On-Cardâs subscription agreement included an acknowledgment by the Subscriber (Morris Holdings) that it:
had conducted, or been afforded the opportunity to conduct, an investigation of the Company and has been offered the opportunity to ask representatives of the Company questions about the Compa*304 nyâs financial condition and proposed business and that Subscriber has obtained such information as Subscriber has requested, to the extent Subscriber has deemed necessary, to permit Subscriber to fully evaluate the merits and risks of an investment in the Company. Representatives of the Company have answered all inquiries that Subscriber has put to them concerning the Compa- . ny and its proposed activities, and the offering and sale of the Notes.
The agreement defines the âCompanyâ as On-Card, Inc., and like the One IP Voice agreement, defines Baker as the âPlacement Agent.â Accordingly, the Marram exception applies, and the integration clause does not bar Amorim Holdingâs negligent misrepresentation claim regarding On-Card.
MySkyâs purchase agreement included an acknowledgment by the Purchaser (Amorim Holding) that it âhas had an opportunity to discuss the Companyâs business, management, financial affairs and the terms and conditions of the offering of the Securities with the Companyâs management.â The âCompanyâ is defined in the Agreement as MySky Communications, Inc. Baker is not mentioned in the Agreement. There is no evidence that Baker was part of MySkyâs management or otherwise acting as an agent or representative of MySky. Thus, the Marram exception does not apply, and the integration clause bars Amorim Holdingâs negligent misrepresentation claim as to the MySky investment.
In summary, summary judgment is appropriate on Amorim Holdingâs negligent misrepresentation claims arising from the Anasazi III and MySky investments because they each had purchase agreements containing integration clauses, and for the reasons stated above the Marram exception does not apply. In contrast, the Mar-ram exception applies to the Chime, One IP Voice, and OnCard investments, and summary judgment is thus _ inappropriate on this basis with respect Amorim Holdingâs negligent misrepresentation claims arising from those investments.
d. Any Misrepresentations were Post-Investment and Therefore Not Actionable
Baker also argues that all alleged misrepresentations that occurred post-investment are not actionable because they could not have causally influenced Amorim Holdingâs decision to invest in the companies recommended by Baker. Furthermore, Baker argues, since the securities are illiquid and no public market exists for them, no damages can accrue for post-investment statements Baker allegedly made.
A number of the alleged misrepresentations were clearly made post-investment, and summary judgment is appropriate to the extent that Amorim Holdingâs fraud and misrepresentation claims are based on those alleged misrepresentations. Bakerâs alleged statement that an American Entertainment initial public offering was âin the very short termâ was communicated after Morris Holdingsâ investment in the company, and thus cannot have been causally related to the decision to invest in the illiquid security. Likewise, claims that an On-Card IPO was imminent with a two to five times return on Amorim Holdingâs initial investment; that Baker would replace the On-Card CEO; that MySky would double Amorim Holdingâs investment by 2009;
Amorim Holding bears the burden of proving that the alleged misrepresentations were pre-investment in this case, and it failed to meet that burden with its undated allegation that at some point Baker stated that an investment in One IP Voice should yield five times return, so fraud and negligent misrepresentation claims based on that alleged misrepresentation must also fail.
As to the remaining alleged misrepresentations, there are genuine issues of material fact as to whether they were made pre-or post-investment. There are also genuine issues of material fact with regard to the question of the application of the First Circuitâs reasonable reliance factors for those statements that were made pre-investment. Thus, as to the remaining alleged misrepresentations, summary judgment on the grounds that they were post-investment will be denied.
e. Many Alleged Misrepresentations Are Not Otherwise Actionable
As noted above, the First Circuit has held that no reasonable investor would rely on âoptimistic predictions of future potential,â as long as the predictions do not veer into the territory of promise. Suna, 107 F.3d at 70-72. In the words of the First Circuit, â[fjorecasts are not guarantees of, or insurance policies for, a firmâs future performance, nor are they understood as such by reasonable investors.â Computervision, 90 F.3d at 626. And it is well established that mere puffery is not actionable because it is too vague to be relied upon by reasonable investors. See Suna, 107 F.3d at 72.
Here, a number of Bakerâs alleged misrepresentations fall into these categories of representations which are not actionable under either fraud or negligent misrepresentation causes of action. For example, Bakerâs characterizations of American Entertainment Holding as a âgreat investmentâ and the âtype of deal that always makes moneyâ are not the type of statement relied upon by reasonable investors. Nor does Bakerâs characterization of On-Card as âexplodingâ and having âgreat potentialâ with âextremely attractive product marginsâ give rise to fraud and negligent misrepresentation liability. Likewise, Bakerâs claim in 2007 that Chime had âlots of potential this yearâ is a future forecast akin to a prediction, not a promise. Suna, 107 F.3d at 70-72. Thus, to the extent that Amorim Holdingâs fraud and negligent misrepresentation claims are based on these alleged misrepresentations, they fail.
D. Breach of Fiduciary Duty Claims
As to Amorim Holdingâs breach of fiduciary duty claims, Baker argues that they must be dismissed because they are derivative, not direct, and fail to meet the requirements of Federal Rule of Civil Procedure 23.1. He also argues that because no misrepresentations were made or material facts omitted with regard to Remote MDx, no breach of fiduciary duty claim may stand as to that investment.
As noted above, to make out a claim for a breach of fiduciary duty in Massachusetts, Amorim Holding must
1. Remote MDx
Because the record discloses no genuine issue of material fact to support Amorim Holdingâs contention that misrepresentations were made or material facts omitted by Baker with respect to Remote MDx, Amorim Holdingâs breach of fiduciary claim arising from the Remote MDx investment fails.
2. Derivative Claim
With respect to the other investments, Baker argues that Amorim Holdingâs breach of fiduciary duty claims are derivative and thus must meet the requirements of Federal Rule of Civil Procedure 23.1. That rule requires that for actions brought by shareholders to enforce the rights of a corporation, the complaint must (1) be verified; (2) make certain allegations that the plaintiff was a shareholder at the time of the facts giving rise to the complaint; and (3) state with particularity efforts to obtain action from the board of directors and the reasons for not obtaining the action. Fed. R.Civ.P. 23.1(b). Baker contends that Amorim Holdingâs claim fails to meet those requirements and therefore summary judgment is appropriate.
Whether a claim is direct or derivative, and thus whether Rule 23.1 is implicated, turns on two inquiries. First, who suffered the alleged injury? And second, who will recover if the claim is successful? Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del.2004).
Here, Amorim Holding put has forth a number of bases for its breach of fiduciary duty claim. First, it claims Baker made misrepresentations about the companies Baker recommended Amorim Holding invest in, and thus breached his fiduciary duty to Amorim Holding. Second, Amorim Holding accuses Baker of making âunreasonably high valuations of Anasazi [III] and the Portfolio companies that enriched [Baker] at Amorimâs expense.â Third, it contends that Baker âcharged excessive management, consulting, performance, and brokerage fees to the Portfolio Companies, thereby bleeding them of necessary money, contrary to the interests of Amorim and therefore in breach of [his] fiduciary duty to Amorim.â Fourth, Amorim Holding contends that Baker âconcealed from Amorim certain financial interests [Baker] had that conflicted with Amorimâs interestsâfor example, Baker encouraged Amorim to invest more
The first through fourth bases for Amorim Holdingâs breach of fiduciary duty claim allege direct, not derivative, claims, and therefore need not meet the requirements of Rule 23.1. The party harmed by the alleged breaches of fiduciary duty was Amorim Holding, and Amorim Holding is the party that would recover if its claims were successful. However, to the extent that the mismanagement (fifth) allegation is not duplicative of the misrepresentation (first) basis for Amorim Holdingâs claim, it is derivative because the harm was to the Portfolio Companies and any resulting award would benefit the Companies themselves. Thus, as a derivative claim, it triggers the requirements of Rule 23.1. Failing to meet those requirements, Amorim Holdingâs breach of fiduciary duty claim based on mismanagement fails. As to the other bases for the fiduciary duty claim, genuine issues of material fact exist as to the duty, if any, owed by Baker and whether Baker breached that duty. Summary judgment is therefore inappropriate as to all surviving misrepresentations.
E. Chapter 93A Claim
Amorim Holdingâs chapter 93A claim is based on its fraud, negligent misrepresentation, and breach of fiduciary duty claims. As such, to the extent that those claims survive summary judgment, the 93A claim survives summary judgment as well.
IV. AMORIMâS MOTION FOR SUMMARY JUDGMENT
In his answer to Amorim Holdingâs complaint, Baker filed three counterclaims: misrepresentation (Count I), breach of warranty (Count II), and indemnification (Count III). Amorim Holding has moved for summary judgment on all of Bakerâs counterclaims.
As to the misrepresentation and breach of warranty claims, Amorim Holding contends that Baker has failed to assert cognizable damages. As to the indemnification claim, Amorim Holding contends that the indemnification clauses (1) are unenforceable as a matter of public policy, and (2) provided insufficient notice that attorneysâ fees in a securities fraud lawsuit were contemplated as within the scope of the clauses. Amorim Holding also argues that under any cause of action, Baker cannot recover for emotional distress or reputa-tional harm damages because Baker has failed to provide any evidence of such damages.
A. Misrepresentation and Breach of Warranty Claims
Amorim Holding contends that Baker failed to allege recoverable damages, or to provide any cognizable evidence of harm, and therefore his misrepresentation and breach of warranty claims must fail.
As to emotional damages, Baker stated during his deposition that the stress of the lawsuit had strained his marriage and had caused him to start taking heart medications. Amorim Holding notes that emotional damages are not generally available in breach of contract actions. See John Hancock Mut. Life Ins. Co. v. Banerji, 447 Mass. 875, 858 N.E.2d 277, 288 (2006) (noting that under Massachusetts law, âdamages for mental suffering are generally not recoverable in an action for breach of contractâ and â[djamages for emotional distress may be recovered if they result from physical harm or are the result of intentional or reckless conduct of an extreme and outrageous natureâ (citation omitted)). Here, no allegations of physical harm or extreme or outrageous conduct have been made. Thus, Baker cannot recover for emotional distress. Even if such allegations had been made, they would result not from Amorim Holdingâs alleged misrepresentations in the contract, but from the lawsuit itself, and thus the causal connection between Bakerâs emotional distress and the contract would be lacking.
As to reputational harm, Baker stated during his deposition that since the lawsuit was filed against him, he had gone from earning between $60 million and $80 million over the prior fifteen years to having a âdifficult time making ends meet.â He said that potential investors were âfad[ing] away at a much higher percentageâ than what Baker had previously experienced, and claimed that the increased rate of âfade awayâ (that is, his decreased business) was linked to Amorim Holdingâs allegations that he had deceived an unsophisticated investorâthe very alleged misrepresentation that Baker based his counterclaims on. While he could not identify a specific person who had said that he or she was not doing business with Baker as a result of the misrepresentations alleged in Bakerâs counterclaim, Baker did say that potential clients had brought up the lawsuit and its allegations to him and inquired whether they were true.
Amorim Holding argues that these repu-tational harms are too speculative for recovery. ThĂŠ First Circuit has noted that in contract actions, âdamages for injury to reputation are usually not available ... because such damages are remote, speculative, and not within the contemplation of the parties.â Flynn v. AK Peters, Ltd., 377 F.3d 13, 22 (1st Cir.2004) (quotation and citation omitted). Such damages only become available âwhen plaintiffs have provided evidence of specific harm that is proximately related to their reputational injury.â Id. And to the extent that Baker measures his reputational damages by his
Here, Bakerâs future profits are speculative and cannot be proven with any degree of reasonable certainty. As the popular saying goes in the securities business (and this case), past performance does not predict (yet alone guarantee) future results. Nor do the alleged harms to Bakerâs reputation stem from Amorim Holdingâs alleged misrepresentation. Instead, they were proximately caused by Amorim Holdingâs lawsuit, thus severing the causal connection between the misrepresentations in the purchase agreements and Bakerâs rep-utational damages.
Finally, as to attorneysâ fees, Amorim Holding asserts that unless a statute or contractual provision provides otherwise, under the so-called âAmerican rule,â attorneysâ fees are not recoverable under either a misrepresentation or breach of warranty common law cause of action. See Alyeska Pipeline Serv. Co. v. Wilderness Soc., 421 U.S. 240, 256, 95 S.Ct. 1612, 44 L.Ed.2d 141 (1975) (noting âthe general rule that, absent statute or enforceable contract, litigants pay their own attorneysâ feesâ). Here, although no fee-shifting statute applies, a number of the investments include provisions for attorneysâ fees. As to those investments, Bakerâs claim for attorneysâ fees collapses into his indemnification claim, to which I now turn.
B. IndemniĂącation
Baker contends that Amorim Holding must indemnify him for any damage award and his attorneysâ fees stemming from Amorim Holdingâs lawsuit as a result of indemnification clauses contained in many of the purchase agreements. Amorim Holding argues that these indemnification provisions are unenforceable as a matter of public policy.
Amorim Holding suggests that indemnification provisions such as those in the purchase and subscription agreements here, are unenforceable in the securities fraud context as a matter of public policy because they would deter plaintiffs from bringing meritorious securities fraud claims and thus undermine the purpose of the securities laws.
The limited case law across the country is split on the question. Some courts have held that indemnification clauses in securities fraud cases violate public policy because they would have a chilling effect on plaintiffs and deter them from bringing meritorious suits. See, e.g., Doody v. E.F. Hutton & Co., 587 F.Supp. 829, 833 (D.Minn.1984) (holding that the indemnity provision âwould discourage prospective plaintiffs from bringing securities fraud actions whenever there is an integration clause in a subscription agreement Prospective plaintiffs would be discouraged because the plaintiffs would be running the risk of incurring substantial liability for attorneysâ fees and costs. Since the securities laws are a remedial measure intended to encourage the prosecution of securities fraud actions, the Court refuses to enforce this indemnity provision,â but allowing the provision to âbe used at trial as
Others have held that in situations similar to those presented here, â[t]he only potential chilling effect is on those investors who make representations in a subscription agreement which they later repudiate. It would discourage such investors from using their own fraudulent conduct in order to bring unjustified lawsuits.â Zissu v. Bear, Stearns & Co., 627 F.Supp. 687, 693 (S.D.N.Y.1986), aff'd on other grounds, 805 F.2d 75 (2d Cir.1986); see Barnebey v. E.F. Hutton & Co., 715 F.Supp. 1512, 1522 (M.D.Fla.1989) (analyzing the split and âfindfing] the reasoning of the Zissu to be more persuasive on the issue of public policyâ and therefore denying summary judgment on an indemnification counterclaim).
The Massachusetts Supreme Judicial Court has not expressly held that indemnification clauses are unenforceable as a matter of public policy in the securities fraud context, but in dicta it has cited a case which so held. Marram, 809 N.E.2d at 1029 (citing Doody, 587 F.Supp. at 833, as supporting the proposition that âOther jurisdictions have held that written contract terms, including an integration clause, cannot be construed to waive the plaintiffs rights under Federal or State securities lawâ). Relying on Mass. Gen. Laws ch. 110A, § 410(g), which prohibits a person from waiving compliance with any provision of the Massachusetts Securities Act, the SJC has also made eminently clear âthat an integration clause [which disavows a plaintiffs reliance on any representations made by a defendant seller of securities] cannot release [a] defendant] from liability under [the Act].â Marram, 809 N.E.2d at 1029. In the words of the SJC: âIndeed to permit the seller of securities to discharge, or to defeat, his statutory obligation of truthfulness to the buyer merely by attaching an integration clause to a subscription agreement would enfeeble the statute.â Id. at 1028.
On remand from the SJCâs decision in Marram, then-Judge'Gants of the Superi- or Court inferred from the Supreme Judicial Courtâs decision that it would bar indemnity clauses in securities fraud cases on public policy grounds. Marram v. Kobrick Offshore Fund. Ltd., 2009 WL 1015557, at *15 (Mass.Super.Ct. Jan. 30, 2009). In granting summary judgment invalidating an indemnification clause similar to the one at issue in this case, Judge Gants observed that:
If the Supreme Judicial Court was not going to permit an integration clause in a Subscription Agreement to âenfeebleâ the Act for fear that it would result in its âvirtual nullification,â it certainly would not share Zissuâs view that the plaintiffs in these eases are simply investors repudiating written representations ' in a subscription agreement who should never have brought a securities claim. Put bluntly, Zissu recognizes that enforcement of the indemnification provision will chill these federal securities claims but it wants them chilled; Massachusetts law recognizes the chilling effect but does not wish to discourage comparable state securities claims.
Id. As further support, Judge Gants noted that the Massachusetts Securities Act provides that only the plaintiff investor may be awarded attorneysâ fees if he prevails on his claim, which is distinct from federal securities law which provides for attorneysâ fees for the prevailing party as long as the losing partyâs case was âwithout merit.â Id. âThis distinction reflects the legislative recognition that, if the buyer bore the risk that he may have to pay the sellerâs attorneyâs fees if he were to lose, the downside risk of bringing such a claim would discourage all but the most confi
On appeal following entry of judgment in the Superior Court, the defendant in Marram challenged Judge Gantsâ invalidation on summary judgment of the indemnification clause. See Crown v. Kobrick Offshore Fund, Ltd., 85 Mass.App.Ct. 214, 8 N.E.3d 281 (2014). Relying on the SJCâs discussion in Marram, the Massachusetts Appeals Court agreed with Judge Gants that enforcing an indemnification clause thatâlike the indemnification clause in this case, effectively required the plaintiff to pay the defendantsâ legal fees regardless of whether or not the plaintiff prevailed on his Massachusetts Securities Act claimsâwas invalid as contrary to public policy. See id. at 291-93. While the Appeals Court readily and perhaps predictably dispatched the portion of the clause requiring a prevailing plaintiff to indemnify the defendant against all costs incurred in defending a meritorious litigation, see id. at 291-92, it also concluded that the âloser paysâ portion of the clause was invalid as contrary to Massachusetts public policy because such clauses discourage the bringing of potentially meritorious claims under a remedial statute that is intended to encourage the prosecution of securities fraud actions. Id. at 295 (citing Marram, 809 N.E.2d at 1029).
Although I conclude that Marram and Crown compel the invalidation of the indemnification clause in this case, I note that the support provided by those cases directly extends only to claims made under the Massachusetts Securities Act. Even if an indemnification clause is unenforceable as against public policy with regard to claims under the Massachusetts Securities Act, there is no apparent conflict between such a clause and Amorim Holdingâs claims for fraud, negligent misrepresentation, and breach of fiduciary duty.
V. CONCLUSION
For the reasons set forth above, Bakerâs Motion for Summary Judgment (Dkt. No. 119) is GRANTED as to all claims arising from the Remote MDx, One IP Voice, and MySky investments. Bakerâs motion is further GRANTED as to Amorimâs claim for negligent misrepresentation with respect to the Anasazi III investment, and so much of Amorimâs claims that arise from alleged misrepresentations that are non-actionable, as described herein, because they either occurred post-investment or constitute statements of opinion or prediction. Bakerâs motion is further GRANTED as to so much of Amorimâs claim for breach of fiduciary duty as rests on a theory of mismanagement. Finally, Bakerâs motion is GRANTED as to Amorimâs claim under Chapter 93A only to the extent that it is based on claims for fraud, negligent misrepresentation or breach of fiduciary duty that have not survived sum
Amorimâs Motion for Summary Judgment on Bakerâs counterclaims (Dkt. No. 110) is GRANTED as to so' much of Bakerâs alleged damages as are premised on emotional distress and reputational harm, and GRANTED insofar as Amorim owes no duty to indemnify Baker in connection with claims brought by Amorim under the Massachusetts Securities Act. Amorimâs motion is otherwise DENIED.
. The money for the first investment was wired in two installments, on November 5, 2004 and November 15, 2004. The money for the second investment was wired on December 7, 2004. The money for the final two investments was wired on October 25, 2005. All transfers occurred before the respective Subscription Agreements were signed by the parties.
. Amorim Holding wired the money for the investment on November 15, 2004, before signing the subscription agreement.,
. Sotomar wired $1 million to One IP Voice on February 22, 2006. Sotomar purchased an additional $ 1 million worth of stock in One IP Voice on March 17, 2006.
. It appears this was done for reasons related to Portuguese tax considerations.
. Amorim Holding wired $500,000 to Chime on December 14, 2006.
. As is relevant here, it also imposes joint and several liability on "every broker-dealer or agent who materially aids in the sale.â Mass. Gen. Laws ch. 110A § 410(b).
7. Massachusetts cases variously refer to the tort of fraud as "intentional misrepresentation,â "fraudulent misrepresentation,â and "deceit.â See In re Access Cardiosystems, Inc., 404 B.R. 593, 638 n. 60 (Bankr.D.Mass.2009).
. Amorim Holding also alleges that Baker concealed that he owned Remote MDx shares, but that allegation is contradicted by the record which reveals that an email was sent to Amorim Holding in January 2007, one year before Amorim Holdingâs investment in Remote MDx, listing C.P. Bakerâs $2.8 million investment in Remote MDx.
. The same representative also admitted that when the Remote MDx investment was proposed, it was proposed as an opportunity "to offset the previous, the first two million [of One IP Voice], and [Baker] said that he was going to try to make it happen.â (emphasis added). To try to attain a result, of course, is not to guarantee that result.
. I recognize, of course, that the sophistication of the buyer is not a per se defense to a claim under the Massachusetts Securities Act. Marram v. Kobrick Offshore Fund, Ltd., 442 Mass. 43, 809 N.E.2d 1017, 1027 (2004). Here, I do not factor the buyer's sophistication into the mix but I do consider the buyerâs admission that no representationâ was made that the investment was actually risk free.
.Amorim Holding makes much of the fact that Bakerâs employee, Bob Beuret, claimed in his deposition in this case that he knew the Remote MDx investment was a loser and never would have recommended it to Amorim. But there is absolutely no evidence in the record to suggest that Mr. Baker was aware of Mr. Beuret's opinion or the information on which it was based when he recommended the investment to Amorim.
. It is undisputed that Morris Holdings redeemed its Chime and Z-Force shares at face value, for a gain or loss of $0.
. I note however that in the case of the Anasazi III and American Entertainment Holding shares, the price received when those shares were sold, at substantial losses to other Amorim-affiliated entities, will bear on the question of damages.
. This element is common to the Massachusetts Securities Act claim as well. See Mass. Gen. Laws ch. 110A § 410(a)(2).
. This only applies to affirmative representations. Omissions are only actionable (1) where the defendant has a legal duty to disclose material information (e.g., as a fiduciary) and fails to do so, or (2) where the-omission causes an otherwise accurate statement to be misleading at the time it was made. See In re Access Cardiosystems, Inc., 404 B.R. at 642-44 (collecting cases).
. Although Suna involved claims arising under the Securities Act of 1933 and the Securities and Exchange Act of 1934, "similar elements of common-law claims for fraud and negligent misrepresentation are interpreted in accord with both federal and state securities laws.â In re Access Cardiosystems, Inc., 404 B.R. at 641 n. 64.
. Because this is the only misrepresentation alleged to have been made with regard to MySky, all of Amorim Holding's claims based on that investment-Massachusetts Securities
. As with the alleged misrepresentation involving MySky, because this is the only misrepresentation alleged ' concerning One IP Voice, and it fails, all other claims based on that misrepresentation fail as well.
. Whether an action is direct or derivative is determined by the law of the state of incorporation.
. I note at the outset that while Baker brought claims for negligent or intentionalâ misrepresentation sounding in tort law, and for breach of warranty sounding in contract law, all of the claims concern alleged misrepresentations made by Amorim Holding in the terms of the purchase agreements. Thus, I look to principles of contract law, not tort
. Baker asserts a fourth source of damages in this case: the offset of any damage award which may result from Amorim Holdingâs suit. This fourth source of damages is only relevant to Bakerâs indemnification claim.
. Relying on the SJC's analysis in Marram with respect to the integration clause, the Appeals Court implicitly rejected the argument that the relative sophistication of the investor was relevant to the validity of the indemnification clause, at least with respect to Massachusetts Securities Act claims. Crown, 8 N.E.3d at 294.
. Of course, it goes without saying that such indemnification clauses would not apply if Baker is ultimately found to have made fraudulent representations.