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BioConvergence, LLC v. Menefee

Court of Appeals of Indiana

June 1, 2018

BioConvergence, LLC, and Alisa K. Wright, Appellants-Defendants,
v.
Julie Menefee, Appellee-Plaintiff.

          Appeal from the Monroe Circuit Court No. 53C01-1309-PL-1742 The Honorable Judith A. Stewart, Special Judge

          Robert L. Burkart Jean M. Blanton Ziemer Stayman Weitzel & Shoulders, LLP Attorneys for Appellants

          Darren A. Craig Michele Lorbieski Anderson Frost Brown Todd LLC Attorneys for Appellee

          Brown, Judge.

         [¶1] BioConvergence, LLC ("BioConvergence") and Alisa K. Wright ("Alisa") appeal the trial court's January 12, 2017 order addressing summary judgment and denying their request for attorney fees and the trial court's July 14, 2017 order denying their claim for attorney fees. BioConvergence and Alisa raise two issues which we consolidate and restate as whether the trial court clearly erred or abused its discretion in denying their request for attorney fees. We affirm.[1]

         Facts and Procedural History

         [¶2] Julie and Greg Menefee met Alisa and her husband, Lance, in 1992 and became friends. BioConvergence, a service provider to the life sciences industry, was organized in 2004 by Alisa, Lance, John Brooks, and Jeff Schwegman, had its grand opening in April 2006, and had its first full year of doing work in 2007. Since its inception, Alisa was a majority member of BioConvergence. In October 2005, Greg accepted Alisa's invitation to join BioConvergence's Board of Advisors. After joining the Board of Advisors, Greg signed a confidentiality agreement on October 18, 2005.

         [¶3] In late 2007, Alisa contacted Greg and asked if he and Julie would be able to loan BioConvergence $400, 000. Alisa told Greg and Julie that she had an agreement with "Chase for a line of credit that they backed off of and so she needed the money to be able to have operating capital for BioConvergence." Transcript Volume 4 at 96-97. On November 21, 2007, Alisa sent Greg an email message, which stated in part: "As you and Lance are meeting later this morning, you'll want to take a look at this when you talk. This is a draft valuation and Blue & Co is doing a review on it. Based on the discussion I had with Blue, the valuation is in the ballpark." Plaintiff's Exhibit 60.

         [¶4] On December 19, 2007, Alisa sent an email to Greg, which was addressed to"Greg and Julie" and stated in part:

On behalf of the [BioConvergence] owners, we welcome you to our group and appreciate your contributions as we go about making [BioConvergence] a successful business venture!
The plans are for the Menefees to become owners in Jan 2008. Until that time, they will help us meet short term cashflow needs by loans under promissory notes. Some additional details and action items are:
* * * * *
3. Other
a. Greg and Julie to decide who will make the capital contribution (Greg & Julie, Greg, Julie, Julie's trust, etc.)
b. Current valuation of the company confirmed by Blue & Co, BioC's accounting firm, in December 2007 at $9, 267, 841 - setting the new value per unit at $131.05.
c. $400, 000 $131.05/unit = 3052.39 B1 units or approximately 4% of the company (total could vary based on interest accrued and how it is handled) Plaintiff's Exhibit 68. In December 2007 and February 2008, Julie and Greg loaned BioConvergence $400, 000 evidenced by promissory notes which were unsecured.

         [¶5] On November 17, 2008, Julie, as the individual "in which Subscription is made, " and Alisa, CEO of BioConvergence, entered into a "BIOCONVERGENCE LLC CLASS B-1 UNIT SUBSCRIPTION AGREEMENT" (the "Subscription Agreement"). Plaintiff's Exhibit 9. The agreement provided in part that Julie "subscribes for and agrees to purchase 3, 333 Class B-1 Units of membership interest (the 'Units') of BioConvergence LLC, an Indiana limited liability company (the 'Company'), at a price of $120.00 per Unit, for a total purchase price of $400, 000.00 (the 'Purchase Price')." Id.

         [¶6] The Subscription Agreement states:

2. Representation and Warranties of Undersigned. The undersigned hereby represents and warrants as follows:
(a) All information provided to the Company by the undersigned is true and correct in all respects as of the date hereof.
(b) The undersigned has sufficient knowledge and experience in business and financial matters to evaluate the merits and risks of an investment in the Company.
(c) The undersigned has been afforded access to all material books, records and contracts of the Company, and the undersigned has had an opportunity to ask questions of and receive answers from the Company, or a person or persons acting on its behalf, concerning the terms and conditions of this investment; and all such questions have been answered to the full satisfaction of the undersigned.
* * * * *
(e) The undersigned understands that the sale of the Units has not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or any state securities law in reliance on an exemption therefrom for non-public offerings and further understands that the sale of the Units has not been approved or disapproved by the United States Securities and Exchange Commission, or any other federal or state agency.
(f) The undersigned is acquiring the Units for the undersigned's own account, for investment purposes only, and not with a view to the sale or other distribution thereof, in whole or in part, and is aware that there are substantial restrictions on the transferability of the Units. The undersigned must bear the economic risk of an investment in the Units for an indefinite period of time because the sale of the Units has not been registered under the Securities Act, and therefore, the Units cannot be sold unless such sale is subsequently registered under the Securities Act or an exemption from such registration is available. The undersigned has no right to require the Company to (i) register the Units under federal or state securities law at any time, or join in any future registration, or (ii) take the action required to make Rule 144 under the Securities Act available for resale of the Units.
(g) The undersigned agrees that the Units purchased will not be sold, transferred, pledged or hypothecated without registration under the Securities Act and any applicable state securities laws, or until the undersigned has obtained an opinion of counsel satisfactory to the Company that such registration is not required in connection with such transaction.
(h) The undersigned agrees that any certificate representing the Units may contain the following legend:
"THE SECURITIES REPRESENTED HEREBY WERE ACQUIRED FOR INVESTMENT ONLY AND NOT FOR RESALE, SUCH SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW (COLLECTIVELY, THE "SECURITIES LAWS").
SUCH SECURITIES MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS (1) THE SALE OF SECURITIES IS FIRST REGISTERED UNDER THE SECURITIES LAWS, OR (2) THE COMPANY SHALL HAVE RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION UNDER THE SECURITIES LAWS IS NOT REQUIRED."
The undersigned further agrees that the Company may issue stop transfer instructions to its transfer agent (if any) or make a notation to such effect on its appropriate records.
(i) The undersigned agrees that no commission or other remuneration shall be paid to any person in connection with the offer or sale of the Units.
(j) The undersigned falls within one or more of the categories indicated below by the Subscriber's initials next to each applicable category (INITIAL ALL THAT ARE APPLICABLE):
Individual $1, 000, 000 Net Worth Test. Any natural person whose net worth, or joint net worth with that person's spouse, at the time of the Subscriber's purchase exceeds $1, 000, 000.
Individual $200, 000 Income Test. Any natural person who had an individual income in excess of $200, 000 in each of the two most recent years or a joint income with that person's spouse in excess of $300, 000 in each of those years and who has a reasonable expectation of reaching the same income level in the current year.
Other Persons. Persons not meeting any of the above, but otherwise acceptable to the Company. Not more than 35 such other persons may be accepted.
The foregoing representations and warranties shall be true and accurate as of the date hereof, and as of the date of delivery of the Purchase Price to the Company and shall survive such delivery.
3. Representations and Warranties of the Company.
* * * * *
5. Indemnification.
(a) The undersigned acknowledges that the undersigned understands the meaning and legal consequences of the representations and warranties contained in paragraph 2 hereof, and he hereby agrees to indemnify and hold harmless the Company and each director, officer, employee and agent thereof from and against any and all loss, damage or liability due to or arising out of breach of any representation or warranty of the undersigned contained in this Subscription Agreement.
(b) The Company acknowledges that the Company understands the meaning and legal consequences of the representations and warranties contained in paragraph 3 hereof, and hereby agrees to indemnify and hold harmless the undersigned and his heirs, personal representatives and assigns from and against any and all loss, damage or liability due to or arising out of breach of any representation or warranty of the Company contained in this Subscription Agreement.

Id.

         [¶7] In July 2012, Alisa called Greg and asked for Julie, but she was not there, and Alisa told Greg that the unit value for BioConvergence had dropped to $15.50. Greg received a power of attorney and requested documents from BioConvergence.

         [¶8] On August 12, 2013, Julie filed a complaint against BioConvergence and Alisa asserting: Count I, injunction to compel production of corporate books and records; Count II, securities fraud; Count III, fraud; and Count IV, breach of fiduciary duty. Julie's complaint alleged that facts common to all counts included in part that Alisa, on behalf of BioConvergence, represented that the value of the class B units was $120 per unit pursuant to a valuation prepared by Blue & Company, LLC, but "[o]n information and belief, Blue & Company did not prepare a valuation of [Julie's] Class B Units." Appellants' Appendix Volume 2 at 64.

         [¶9] On December 8, 2014, Julie filed an amended complaint alleging: Count I, securities fraud; Count II, fraud; and Count III, breach of fiduciary duty. With respect to Count I, securities fraud, Julie cited Ind. Code § 23-19-5-1 and alleged that BioConvergence and Alisa omitted to state a material fact necessary in order to make the statements not misleading, Alisa knew the valuation was not prepared by Blue & Company when she made the statement to her, Alisa knew that Julie's units were not worth $120 a unit when she sold her 3, 333.33 units for $400, 000, and Julie relied on Alisa's false statements when she purchased the class B units. With respect to Count III, breach of fiduciary duty, Julie alleged that Alisa, as an officer and majority member in BioConvergence, owed fiduciary duties to Julie, a minority member in BioConvergence, and that Alisa breached her fiduciary duties by intentionally misrepresenting the value of Julie's units, intentionally misrepresenting that Julie's units were valued at $120 a unit by Blue & Company, and "willfully mismanaging BioConvergence, among other breaches." Id. at 73.

         [¶10] On January 30, 2015, BioConvergence and Alisa filed an answer to Julie's amended complaint and a counterclaim which alleged that Julie breached the Subscription Agreement. BioConvergence and Alisa denied that Alisa told Julie that a valuation was prepared by Blue & Company. They asserted twenty-one affirmative defenses. They also asserted a counterclaim alleging that the Subscription Agreement included representations by Julie that she had access to all BioConvergence records and the opportunity to ask questions concerning the investment which were answered to her satisfaction and that she agreed to indemnify BioConvergence and its officers, directors, agents, and employees due to any breach of representation in the Subscription Agreement. They asserted that on November 4, 2014, Julie testified in a deposition that her "claims relating to her purchase of the [BioConvergence] B-1 Units in November 2008 and her ownership thereof are based on information lacking from [BioConvergence] in November 2008, that [BioConvergence] documents available to her in November 2008 which she chose not to review were not accurate and an alleged diminution of value of her [BioConvergence] B-1 units." Id. at 83. They asserted that, "[a]s a result of her actions and omissions, Julie [] has breached the Subscription Agreement" and that they were "entitled to relief under the Subscription Agreement including indemnity by Julie [] and to recover their damages, including attorneys' fees and expenses, incurred in defending Julie['s] Complaint as a result of Julie['s] breach of the Subscription Agreement." Id.

         [¶11] In her Supplemental Answers to Defendants' Third Set of Interrogatories dated June 1, 2015, Julie was asked to "[s]pecify in detail each fact upon which [she] base[d] the allegation in Count III of [her] Amended Complaint that Alisa [] willfully mismanaged [BioConvergence], the person from whom [she] obtained information concerning the same, and the date of each act or omission [she] claimed constitutes willful mismanagement." Id. at 189. Julie answered:

Answer:
[Julie] objects to this interrogatory as duplicative of questions that were asked and answered by Julie Menefee and Greg Menefee (in his capacity as Power of Attorney for Julie Menefee) at their depositions in this matter. [Julie] further objects to this interrogatory as seeking premature disclosure of expert opinions from [Julie].
Supplemental Answer:
Subject to, and without waiving her objections, [Julie] states that Alisa [] willfully mismanaged [BioConvergence] by misrepresenting that [BioConvergence's] accounting firm, Blue & Co., performed valuations of [BioConvergence] that Blue & Co. did not perform; setting the price of [BioConvergence] units without a rational basis (For example, Alisa [] approved [BioConvergence's] purchase of units from her husband, Lance Wright in 2010 and 2011 for $140 per unit and sold the same units to Kathy Eddy in 2010 and 2011 for $140 per unit, but only paid Kathy Eddy $15.50 per unit when [BioConvergence] bought back those same units from Kathy Eddy in 2012.); manipulating [BioConvergence's] financials to make it appear that [BioConvergence] was profitable when it was not; failing to be present at [BioConvergence's] offices; failing to stay informed about [BioConvergence's] operations; failure to make decisions regarding the direction of [BioConvergence]; paying above-market rent to Great Oak Tree (a company that is partially owned by Alisa []); withholding information from members of [BioConvergence] about [BioConvergence's] financial condition; not holding annual member meetings; misrepresenting the valuation of [BioConvergence] during member meetings; firing key [BioConvergence] staff members without cause; filling all of the positions on [BioConvergence's] board of directors beyond her own position with paid consultants; taking actions to alienate [BioConvergence's] major client Eli Lilly; and spending excessive [BioConvergence] funds on attorneys' fees.

Id. at 189-190.

         [¶12] On July 17, 2015, BioConvergence and Alisa filed a motion for summary judgment. On September 18, 2015, Julie filed a response in opposition to the motion.

         [¶13] On April 6, 2016, the trial court entered an order which states:

Plaintiff's Motion for Summary Judgment on the Amended Counterclaim for Breach of Contract and Defendants' Cross Motion for Summary Judgment on the Amended Counterclaim as to Liability
[I]n her complaint, Julie Menefee does not claim that prior to her purchase of the units the Defendant failed to provide her with the valuation or that Julie Menefee otherwise did not have access to the records. In the Subscription Agreement, she does not represent that she reviewed all of the available records. Her claim that the valuation was fraudulent is not a breach of the representations she made in Section 2(c) of the Subscription Agreement.
Defendants also assert Julie Menefee breached her representations in Section 2(c) of the Subscription Agreement by claiming in her Amended Complaint that she relied on an alleged representation that BioConvergence, LLC's accounting firm "prepared" the $120 valuation. Defendants argue Julie Menefee had access to all BioConvergence, LLC records; through her power of attorney she had received the $120 valuation; and she was advised BioConvergence, LLC prepared the valuation and the accountant only reviewed it. Consequently, Defendants argue her claim that she relied on who prepared the valuation rather than the valuation itself breaches Section 2(c) where she represented she had access to the valuation and the opportunity to review it and ask questions of BioConvergence, LLC or the accountant.
Again, the court finds no genuine issue of material fact with respect to this claim. In her complaint, Julie Menefee does not claim that prior to her purchase of the units she did not have access to the valuation nor that she did not have the opportunity to review it or ask questions regarding the valuation. In the Subscription Agreement she does not represent that she relied only on the records she reviewed and/or were available to her. Her claim that Alisa Wright represented to her that the accountant prepared the valuation and that she relied on this verbal representation does not constitute a breach of Section 2(c) of the Subscription Agreement.
Defendants' Motion for Summary Judgment on the Amended Complaint
Defendants assert Plaintiff's fraud claims and breach of fiduciary duty claim are not actionable as Plaintiff cannot rely on expressions of opinion and because Plaintiff had access to all information necessary to review the valuation methodology. Defendants claim Plaintiff's willful mismanagement claim fails because Plaintiff is attempting to assert a derivative claim without requisite authority and because she lacks evidence to support the claim.
1. Count I Securities Fraud
In Count I of her complaint, Plaintiff alleges the Defendants violated the Indiana Securities Act, I.C. 23-19-5-1 by informing Plaintiff before her purchase of the units of BioConvergence, LLC that the units were valued at $120 per unit by Blue & Co., LLC. Defendants first assert that because valuations and opinions of value are not actionable, a representation as to who prepared the valuation is not material and cannot form the basis for a securities fraud claim. "Expressions of opinion cannot be the basis for an action in fraud." Wheatcraft v. Wheatcraft, 825 N.E.2d 23, 30-31 (Ind.Ct.App. 2005) (internal citation omitted). Because statements of value are regarded as mere expressions of opinion, Plaintiff cannot state a claim for actionable fraud based upon Defendants' representation regarding the units' valuation. Id. The court does not read Count I of the Amended Complaint to assert a claim for securities fraud based on the Defendants' alleged misrepresentation of the value of the BioConvergence, LLC units, rather on the alleged misrepresentation that the valuation was prepared by Blue & Co., LLC. However, to the extent Count I may be read to assert a claim for securities fraud based on the Defendants' alleged misrepresentation of the value of the BioConvergence, LLC units, Defendants are entitled to summary judgment.
The court further finds, however, that Defendants are not entitled to summary judgment on Count I to the extent it asserts a claim for securities fraud based on the alleged misrepresentation that the $120 valuation was prepared by Blue & Co., LLC. The court finds the Defendants have not met their burden on summary judgment of establishing that this factual issue is not material under the summary judgment standard or under the standard applied to securities fraud claims.
Defendants also assert Plaintiff could not reasonably rely on any representations because she had access to all BioConvergence, LLC information and failed to conduct any due diligence in assessing her investment in BioConvergence, LLC. Defendants assert that liability under the securities laws exists only when there is a substantial likelihood that the misrepresentation significantly altered the total mix of information that the investor possessed.
In general, a person relying on a representation, "is bound to use ordinary care and diligence to guard against fraud; however, the requirement of reasonable prudence in business transactions is not carried to the extent that the law will ignore an intentional fraud practice(sic) on the unwary." Soft Water Utilities, Inc. v. LeFevre, 308 N.E.2d 395, 398 (Ind. App. 1974). See also, Teamsters Local 282 Pension Trust Fund v. Angelos, 762 F.2d 522 (7thCir. 1985). The Plaintiff claims such an intentional fraud, claiming that Defendant Wright represented Blue & Co, LLC had prepared the valuation when Ms. Wright knew the representation to be false.
However, the courts in both LeFevre and Angelos recognized that liability is not absolute even with an intentional misrepresentation. The Seventh Circuit in Angelos recognized three circumstances under which even lies are not actionable. However, none of those circumstances have been shown to exist in this case so as to warrant summary judgment. Defendants' designated materials do not establish that any lie was contradicted by written truthful information; that the alleged lie or omission did not significantly affect the total mix of Plaintiff's information; or that the missing information was more readily accessible to Plaintiff than to Defendant. See, Angelos, 762 F.2d at 530. In LeFevre, the court noted that "[a] person has a right to rely upon representations where the exercise of reasonable prudence does not dictate otherwise." Soft Water Utilities, Inc. v. LeFevre, supra, at 398, citing, Voorhees v. Cragun, 112 N.E. 826 (Ind. App. 1916) (emphasis added.) The court finds that a genuine issue of material fact exists as to whether Plaintiff's asserted reliance on Defendant Wright's alleged intentional misrepresentation occurred "where the exercise of reasonable prudence does not dictate otherwise." Id. Consequently, Defendants have not met their burden on summary judgment.
Defendants also assert that Plaintiff's securities fraud claim is time barred. Pursuant to I.C. 23-19-5-9(g), Plaintiff was required to bring her action for securities fraud within three years of Plaintiff's discovery of the violation. Defendants' designated materials do not establish that Plaintiff should have known of the injury prior to July 2012 when Plaintiff was informed the value of her units had dropped from $140 to $15.50. The action ...

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