Headfirst Baseball LLC v. Elwood

Citations: 239 F. Supp. 3d 7; 2017 WL 875765Docket: Civil Action No. 2013-0536

Court: District Court, District of Columbia; March 2, 2017; Federal District Court

Original Court Document: View Document

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The civil case Headfirst Baseball LLC v. Robert Elwood involves multiple claims and counterclaims between former friends and business associates, with a bifurcated jury trial focusing on liability nearing completion. The damages phase is scheduled to start on March 28, 2017. The Court is currently addressing three interconnected motions that will influence which claims proceed to the damages phase. 

The specific motions include: 
1. Headfirst Professional Sports Camps LLC's motion for judgment and proposed findings.
2. Elwood's motion for judgment on partial findings concerning Headfirst Professional Sports Camps LLC's counterclaim.
3. Brendan Sullivan III and Headfirst Professional Sports Camps LLC's motion for judgment as a matter of law regarding damages.

The Court has reviewed various submissions related to these motions and determined that Headfirst Professional Sports Camps LLC's motion and Elwood's Rule 52 motion will be granted in part and denied in part, while the motion regarding damages will be fully granted. The Court's decision is supported by extensive filings, including proposed findings, oppositions, and supplemental briefs from all parties involved. Detailed findings of fact will be outlined in a subsequent section, alongside a summary of the jury's verdict from the liability phase.

On May 3, 2013, Headfirst Professional filed a lawsuit against Robert Elwood in the Superior Court of the District of Columbia, which included a motion for a preliminary injunction. This lawsuit was voluntarily dismissed on July 10, 2013, and a new lawsuit was filed without seeking injunctive relief. Concurrently, on April 21, 2013, Brendan Sullivan III, Headfirst Camps LLC, and Headfirst Baseball LLC initiated a separate lawsuit against Elwood, who then counterclaimed against Sullivan and Headfirst Professional, bringing them into this case. The Superior Court case initiated by Sullivan and Headfirst Professional was stayed pending resolution of the current dispute.

Key jury findings relevant to the motions included: the jury found that Elwood and Sullivan had a partnership, each owning 50%; Sullivan and Headfirst Professional breached obligations under their operating agreement by excluding Elwood from management in December 2012; Elwood breached the implied covenant of good faith and fair dealing by converting funds prior to his termination; and that Sullivan and Headfirst Professional violated the District of Columbia Limited Liability Company Act by excluding Elwood from management.

Regarding Rule 50 motions, the Court may grant judgment as a matter of law if the evidence does not support a reasonable jury finding for the non-moving party. The Court must view evidence favorably toward that party without weighing credibility, and a motion can only succeed if evidence overwhelmingly favors the moving party, not merely based on the absence of evidence.

Federal Rule of Civil Procedure 52 mandates that in nonjury trials, courts must specifically find facts and state legal conclusions separately. These can be recorded during the trial or in a memorandum. When a party has been fully heard and the court finds against them, it may enter judgment based on the issues at hand, provided there is a favorable finding required by the law. A judgment on partial findings necessitates that the court provides adequate findings of fact and legal conclusions. In considering motions under Rule 52(c), the court cannot favor the non-moving party but must objectively evaluate evidence and resolve conflicts.

In the case of Headfirst Professional, both Elwood and Sullivan are 50% owners of the entity formed in 2010. Sullivan and his brother own two other companies: Headfirst Baseball (established in 1997) and Headfirst Camps (operational since 2012). Evidence presented at trial indicated that Elwood made unauthorized personal withdrawals from the funds of Headfirst Baseball and Headfirst Camps, totaling over $174,000 without Sullivan's consent, while falsifying entries to conceal these actions. Elwood claimed to have authorization for these expenditures based on an agreement with Sullivan; however, the jury found this defense unconvincing, holding Elwood liable for the unlawful conversion of funds. Additionally, Elwood took out loans amounting to $600,000 from Headfirst Camps, exceeding the single $200,000 loan Sullivan had approved, which Sullivan testified he was unaware of at the time.

Elwood repaid a $600,000 loan on November 9, 2016, but during the fall of 2012, he convinced Sullivan and Ted Sullivan to secure a $300,000 line of credit from Bank of America for Headfirst Camps and Headfirst Professional to manage bills and payroll. Sullivan discovered Elwood's unauthorized expenditures in November 2012 after discussions with the bookkeeper, leading to a confrontation on December 1, 2012, regarding the loan. Further investigation revealed Elwood's unauthorized credit card purchases, prompting Sullivan to send a letter seeking clarification. Elwood's unsatisfactory responses led to Sullivan terminating his relationship with all Headfirst companies on December 28, 2012, citing potential violations of a "morals clause" in contracts with the Red Sox, although he later admitted he lacked explicit authority under the operating agreement to terminate Elwood's membership.

In April 2013, Elwood disrupted Headfirst Professional's camper registration website and communicated with Bank of America, resulting in the freezing of the company's bank account containing $600,000 for about two months. The account was unfrozen only after Sullivan agreed to indemnify the bank against claims from Elwood. Additionally, in August 2013, Elwood restricted Headfirst Professional's access to its Google AdWords account, which was crucial for recruiting campers. Elwood justified his actions by asserting they were within his rights as a manager and member of Headfirst Professional.

Elwood contends that Headfirst Professional's claims of breach of fiduciary duty and breach of contract lack sufficient evidence of harm or irreparable injury necessary for injunctive relief. Headfirst Professional’s claims require demonstration of injury or damages, as established in Randolph v. ING Life Ins. Annuity Co. Although Headfirst Professional has provided evidence during the liability phase, it does not intend to present additional evidence on damages, as its claims seek only injunctive relief. A breach of fiduciary duty must result in injury to the beneficiary or profit to the fiduciary, and a breach of contract claim necessitates proof of a valid contract, a breach, and resulting damages. The criteria for injunctive relief include a substantial likelihood of success on the merits, potential for irreparable harm, favorable balance of equities, and public interest considerations, as outlined in relevant case law.

Headfirst Professional's claims primarily stem from actions taken by Elwood, including sabotaging the Active.com registration system and causing Bank of America to freeze the company’s bank account. Elwood argues that Headfirst Professional has not demonstrated any harm from the shutdown of the Active.com system, noting that there was no evidence of lost registrations due to the brief interruption in April 2013. Consequently, the court rejects Headfirst Professional's claims of fiduciary breach and breach of contract based on this alleged conduct as insufficient for the requested relief.

Sullivan claimed that the freezing of Headfirst Professional’s bank account led to no transactions for two months. However, the Court found Elwood’s argument compelling, noting that Headfirst Professional provided no evidence of actual harm, such as a lack of operating capital or unpaid bills. Additionally, while Sullivan mentioned signing a 'hold harmless' agreement to unfreeze the account, there was no proof that this caused any detriment to either Sullivan or Headfirst Professional. Consequently, the Court dismissed the fiduciary breach and breach of contract claims related to the bank account.

Regarding the Google AdWords account, Sullivan testified that its shutdown hindered marketing efforts and incurred costs to create a new account, while also losing the benefits of the original account's longevity. However, the Court noted that no evidence was presented to quantify the value of the prior account or the expenses related to the new one. Sullivan's assertions suggested a potential loss of customers but lacked concrete evidence of decreased enrollment due to the account's termination. As a result, the Court accepted Elwood’s argument that Headfirst Professional failed to demonstrate harm from losing the Google AdWords account, leading to a rejection of the related fiduciary breach and breach of contract claims.

The Court will also assess whether there is sufficient evidence under the District of Columbia Limited Liability Company Act to justify Elwood's expulsion from Headfirst Professional. To succeed, plaintiffs must prove that Elwood engaged in wrongful conduct materially affecting the company, committed persistent breaches of the operating agreement, or acted in a way that makes it impractical to continue company operations with him as a member.

The Court rejects Headfirst Professional’s expulsion claim based on the first prong of the expulsion provision, which necessitates proof of Elwood's wrongful conduct adversely affecting Headfirst Professional's activities. However, the Court allows for expulsion under the second prong, which requires evidence of Elwood's willful or persistent material breach of the operating agreement. Determining whether Elwood's actions constitute a material breach involves a fact-intensive analysis, focusing on whether the breach relates to a vital aspect of the agreement and undermines its fundamental purpose.

The trial evidence indicated that Elwood misappropriated funds from Headfirst Baseball and Headfirst Camps, leading the jury to conclude this constituted a breach of the implied covenant of good faith and fair dealing within the operating agreement. Given Elwood's management role alongside Sullivan in these entities, his misconduct significantly impacted Sullivan's reliance on Elwood's good faith as a business partner. Consequently, the Court finds sufficient grounds for expelling Elwood from Headfirst Professional under D.C. Code 29-806.02(5)(B).

Elwood argues against retroactive expulsion, claiming the Court lacks discretion for such a remedy and that it improperly seeks to thwart evidence of damages related to his claims against Sullivan and Headfirst Professional. While there is no specific D.C. case law on retroactive expulsion, the Utah Court of Appeals case Holladay v. Storey provides relevant insights. In that case, a member was expelled retroactively due to misconduct, and the appellate court affirmed this decision, noting that a trial court has the discretion to backdate expulsions based on the member's poor conduct, contingent upon the other members' compliance with the operating agreement.

A court can retroactively expel a member of a limited liability company (LLC) like Elwood, but must consider the unique circumstances of each case rather than applying a rigid standard. The court agrees with the Utah Court of Appeals, rejecting Elwood's claim that it has no discretion to backdate his expulsion. Headfirst Professional seeks to retroactively expel Elwood effective December 28, 2012, the date of his management termination, but delayed over four months before filing the lawsuit, suggesting the motivation was Elwood's later actions rather than the initial termination. Consequently, the court determines that May 3, 2013, the date of the lawsuit filing, is the correct retroactive expulsion date.

The court will enter judgment favoring Elwood on the breach of fiduciary duty and breach of contract claims while granting Headfirst Professional's claim for judicial expulsion under D.C. Code 29-806.02(5)(B), retroactive to May 3, 2013. Regarding Sullivan and Headfirst Professional's Rule 50 motion, they argue Elwood’s partnership claim should fail due to unclean hands, lack of assets, and the assertion that Sullivan dissociated from the partnership upon terminating Elwood’s association in December 2012. The court previously rejected the unclean hands argument and will not revisit it. It will focus on the other two claims: the assertion of immediate partnership dissolution and the lack of assets, which would eliminate the need for accounting.

Partnership dissolution occurs upon specific events, notably in a partnership at will when a partner expresses a desire to withdraw. Elwood contends that plaintiffs cannot invoke Sullivan’s dissociation from the Headfirst partnership as a defense against his claims, as this argument was not included in their responses to his counterclaim. The court agrees, deeming the "dissociation" theory untimely since it should have been raised earlier and would improperly amend their pleadings.

Regarding the Headfirst partnership's assets, plaintiffs reiterate previously dismissed claims that it lacked assets because they belonged to related LLCs. Elwood counters that the partnership's value lies in its goodwill, which was significant during a multi-million dollar buyout offer. However, plaintiffs argue that the court's denial of Elwood's motion to amend his counterclaims—specifically regarding Sullivan's alleged misappropriation of goodwill—precludes the introduction of this evidence. The court concurs, stating that presenting this evidence would undermine its prior ruling. Consequently, as goodwill is the sole evidence Elwood wishes to present for his claims, the court grants plaintiffs' motion for judgment concerning damages on those claims.

Elwood's counterclaim under the District of Columbia Limited Liability Company Act asserts potential entitlement to damages for the period from December 28, 2012, to May 3, 2013, following a jury finding that Sullivan and Headfirst Professional violated the LLC Act by terminating Elwood’s management role. The court has determined that while judicial expulsion of Elwood is appropriate retroactively to May 3, 2013, Elwood may be compensated for his ownership share in Headfirst Professional, subject to the company's debts and obligations.

The plaintiffs argue that Elwood’s claims are undermined by his breach of the operating agreement, asserting that contractual defenses should apply to his statutory claims, and that his rights as a member are governed by the operating agreement rather than the LLC Act’s default provisions. However, the court distinguishes between Elwood's breach of contract and LLC Act claims, affirming that the jury supported Elwood's claim that he was illegally excluded from management without judicial order.

Elwood also claims damages due to Sullivan allegedly diverting over $2,795,000 of Headfirst Professional's profits to related entities after his termination. The court notes that although the claims are factually related, they are legally distinct and will not allow contractual defenses to negate Elwood's LLC Act claim based on the existence of the operating agreement.

Plaintiffs argued that evidence regarding the alleged diversion of Headfirst Professional’s profits should not be presented to the jury because the Court previously denied Elwood’s June 2016 motion to amend his counterclaim, which was based on the same alleged diversion. The proposed amendment included allegations that Sullivan diverted funds from Professional Sports LLC to Headfirst Baseball LLC and/or Headfirst Camps LLC, which Sullivan reportedly claimed as his own profits. The Court concurred that permitting Elwood to introduce this evidence would circumvent its September 2016 ruling that denied his motion to amend as untimely. The Court found that Elwood did not demonstrate good cause for the late amendment, as established in a prior decision. Consequently, as Elwood depended on the “diversion” evidence for his damages claim under the LLC Act, the Court ruled in favor of the plaintiffs on that claim. The Court concluded by granting judgment for Sullivan and Headfirst Professional regarding damages, partially granting and denying motions under Rule 52 from both Headfirst Professional and Elwood. The decision was formally issued on March 3, 2017, by Judge Reggie B. Walton, with a contemporaneous order to follow.