Court Finds Partners in Breach of Fiduciary DutyComments Off on Court Finds Partners in Breach of Fiduciary Duty
The United States District Court of Massachusetts recently found two cell tower company partners in breach of their fiduciary duty against a former partner. In 2002, John Strachan and Matthew Sanford decided to create a tower company, but did not have substantial financial resources or access to capital, according to the court document. The two approached Edward Moore and Lawrence Rosenfeld about joining forces to create Eastern Towers, Inc., which the four of them did in February 2002. Each of the four men held an equal-quarter interest in the new company. The court document goes on to explain, “Within a few weeks, and when the business had scarcely begun operations, Moore and Rosenfeld proposed a revised corporate structure. The new structure included the creation of a separate limited liability company that would own the towers, in which Moore and Rosenfeld would hold a combined 60% interest. Moore and Rosenfeld also proposed that the equity interests of Strachan and Sanford in the LLC would vest over time, and that the operating agreement for the LLC would provide that Moore and Rosenfeld could own interests in competing tower companies and did not have to present tower opportunities to the business. After a period of negotiation and discussion, Strachan and Sanford reluctantly agreed to the new arrangement.”
This new agreement was signed in April 2002; however the new LLC, called Eastern Towers, LLC, was not created until September 2002. The relationship between Eastern Towers Inc., or “the corporation,” and Eastern Towers, LLC, referred to as the “LLC” was complicated. Moore and Rosenfeld claim that the LLC owned the corporation; Strachan thought that the corporation owned the LLC. In fact, neither owned the other, and the two entities existed in parallel while the business was in operation. Furthermore, the parties freely transferred funds between the two entities, and generally treated the two as a single business enterprise.
Business began slowly, and Moore and Rosenfeld provided almost all of the working capital to the new business. Essentially, Strachan and Sanford worked for free for six months, and ended up transferring a tower site they owned in Beverly, Massachusetts to the business. When the company needed additional capital, Moore approached TD Banknorth, but was provided with a less than favorable agreement than Moore originally proposed. Moore and Rosenfeld created a new entity called Eastern Properties, LLC, so they could acquire every completed tower at a discounted price, with little risk, and to the considerable disadvantage of Eastern Towers and its minority shareholders, the document explained.
“Without telling Strachan and Sanford, they diverted part of the bank-financing opportunity to the benefit of their new company. They then caused Eastern Towers to enter into a “Tower Purchase Agreement” under which it was required to sell completed towers to Eastern Properties (that is, to Moore and Rosenfeld) at less than half their fair market value,” the brief explained. “Eastern Towers purportedly had an option to repurchase the towers under certain conditions. Those conditions, however, were so elaborate, and so onerous, that the option would never be exercised, and thus was essentially worthless. The closing occurred on June 2, 2003. That same day, Moore and Rosenfeld withdrew virtually all of their capital from Eastern Towers-$520,000-without the knowledge of the bank, and over the protests of Strachan and Sanford. That capital withdrawal permanently crippled Eastern Towers, leaving it insolvent or nearly so; by the end of the month, it had only $5,000 in its bank accounts, about enough to sustain operations for four or five days. Also on June 2, four towers were transferred from Eastern Towers to Eastern Properties under the Tower Purchase Agreement.”
Eastern Towers was able to stay in business for about 14 more months, developing five more towers after June 2013, which were all sold to Eastern Properties under the Tower Purchase Agreement for less than half their real value. “In June 2004, Eastern Properties purchased four towers in New Hampshire directly from third parties, without going through Eastern Towers. All of those towers had been identified as opportunities through the efforts of Eastern Towers employees, but all were diverted by Moore and Rosenfeld to their own company. In July 2004, Eastern Properties purchased four more towers, all in the Midwest,” according to the document. By August 2004, the only valuable asset owned by Eastern Towers was the site in Wayland, Massachusetts, which was considered by Sanford to be the crown jewel in the business, as it covered the majority of metropolitan Boston’s wealthiest suburbs.
The tower was eventually developed, but not by Eastern Towers. Instead, Moore and Rosenfeld-using, among other things, an extortionate threat against Sanford–caused Eastern Towers to sell the Wayland site to a new company that they had created called Horizon Towers for less than its fair market value. By that point, Moore and Rosenfeld owned seventeen towers (through Eastern Properties) and the Wayland site (through Horizon). Moore and Rosenfeld had also set up new companies to acquire towers in other states, in order to keep them away from Eastern Towers-in other words, away from the enterprise in which Strachan and Sanford had an interest. By 2008, they had acquired fifteen additional towers. (Court Document)
After a long and complicated court process, the Court found that Moore and Rosenfeld did not observe corporate formalities with care, and made many arrangements haphazardly. “Furthermore, the case involves an overlay of multiple contracts, some of which modify, or purport to modify, the fiduciary duties at issue. As a result, the fair resolution of this dispute requires the use of some equitable devices and remedies-most notably, disregarding the separate identities of Eastern Towers, Inc., and Eastern Towers, LLC. 10 Case 1:10-cv-10207-FDS Document 117 Filed 03/26/15 Page 10 of 205 In any event, and for the reasons that follow, the Court finds that Moore and Rosenfeld violated their fiduciary duties to Eastern Towers and to Strachan as a minority shareholder,” the court brief explained. To read the entire document, click here.