Headfirst Baseball LLC v. Elwood

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
____________________________________
)
HEADFIRST BASEBALL LLC, et al., )
)
Plaintiffs, )
)
v. )
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ROBERT ELWOOD, )
)
Defendant. )
____________________________________)
ROBERT ELWOOD, )
)
Counterclaim Plaintiff, )
)
v. ) Civil Action No. 13-536 (RBW)
)
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BRENDAN V. SULLIVAN III, et al., )
)
Counterclaim Defendants. )
____________________________________)
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HEADFIRST PROFESSIONAL SPORTS, )
CAMPS LLC, )
)
Counterclaim Plaintiff, )
)
v. )
)
ROBERT ELWOOD, )
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Counterclaim Defendant. )
____________________________________)
MEMORANDUM OPINION
This civil case, which involves a myriad of claims and counterclaims asserted by multiple
parties, including two former friends and business associates, is nearing its resolution, following
the first half of a bifurcated jury trial on the issue of liability with respect to each claim and
counterclaim, with the damages phase of the trial scheduled to commence on March 28, 2017.
Currently pending before the Court are three inter-related motions that will determine which
claims remain for the damages phase of trial. See generally Headfirst Professional Sports Camps
LLC’s Motion for Judgment and Proposed Findings of Fact and Conclusions of Law, ECF No.
244 (“Headfirst Prof’l’s Mot.”); Elwood’s Motion for Judgment on Partial Findings as to
Headfirst Professional Sports Camps LLC’s Counterclaim and Memorandum in Support, ECF
No. 222 (“Elwood’s Rule 52 Mot.”); Brendan Sullivan III and Headfirst Professional Sports
Camps LLC’s Motion for Judgment as a Matter of Law Regarding Damages, ECF No. 246 (“Pls’
Damages Mot.”). Upon careful consideration of the parties’ submissions, 1 the Court concludes
that Headfirst Professional Sports Camps LLC’s (“Headfirst Professional”) motion for judgment
and Elwood’s Rule 52 motion must be granted in part and denied in part, and that Brendan
Sullivan and Headfirst Professional’s motion regarding damages must be granted.
1
In addition to the filings already identified, the Court considered the following submissions in rendering its
decision: (1) Headfirst Professional Sports Camps LLC’s Proposed Findings of Fact and Conclusions of Law, which
is attached as Exhibit A to Headfirst Professional’s Motion (“Headfirst Prof’l’s Proposed Findings”); (2) Elwood’s
Memorandum in Opposition to Headfirst Professional Sports Camps LLC’s Motion for Judgment and Proposed
Findings of Fact & Conclusions of Law (“Elwood’s Opp’n to Headfirst Prof’l’s Mot.”); (3) the Reply in Support of
Headfirst Professional Sports Camps LLC’s Motion for Judgment and Proposed Findings of Fact & Conclusions of
Law (“Headfirst Prof’l’s Reply”); (4) Headfirst Professional Sports Camps LLC’s Opposition to Elwood’s Motion
for Judgment on Partial Findings Under Rule 52 (“Headfirst Prof’l’s Opp’n to Elwood’s Rule 52 Mot.”); (5)
Elwood’s Opposition to Brendan Sullivan III and Headfirst Professional Sports Camps LLC’s Motion for Judgment
as a Matter of Law Regarding Damages (“Elwood’s Opp’n to Pls.’ Damages Mot.”); (6) the Reply in Support of
Brendan Sullivan III and Headfirst Professional Sports Camps LLC’s Motion for Judgment as a Matter of Law
Regarding Damages (“Pls.’ Damages Mot. Reply”); (7) Brendan V. Sullivan III and Headfirst Professional Sports
Camps LLC’s Supplemental Brief Regarding Beacon Theatres v. Westover (“Pls.’ Supp. Mem.”); (8) the
Supplemental Memorandum Regarding Beacon Theatres v. Westover in Further Opposition to Sullivan and
Headfirst Professional Sports Camps LLC’s Motion for Judgment as a Matter of Law Regarding Damages
(“Elwood’s Supp. Mem.”); (9) Brendan V. Sullivan III and Headfirst Professional Sports Camps LLC’s Reply
Supplemental Brief Regarding Beacon Theatres v. Westover (“Pls.’ Supp. Reply”); (10) the Counterclaim Against
Brendan V. Sullivan III and Headfirst Professional Sports Camps LLC (“Elwood’s Countercl.”); (11) Headfirst
Professional Sports Camps LLC’s Answer, Affirmative Defenses, and Counterclaim to the Counterclaim Submitted
by Robert Elwood (“Headfirst Prof’l’s Countercl.”); (12) Elwood’s Motion for Leave to File Second Amended
Complaint Against Sullivan and Headfirst Professional Sports Camps LLC and Memorandum in Support
(“Elwood’s Mot. to Amend”); (13) the Transcript of the February 2, 2017 Motions Hearing, ECF No. 278 (“Feb. 2,
2017 Hearing Tr.”); (14) the Transcript of the December 9, 2016 Status Conference (“Dec. 9, 2016 Hearing Tr.”);
(15) the various trial transcripts generated in this case, which will be cited herein in the following format: “[date]
[AM/PM] Trial Tr.”; and (16) the jury’s Verdict Form.
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I. BACKGROUND
The Court’s detailed findings of fact are set forth herein, infra Part III.A.1; however, for
purposes of resolving the several pending motions, an overview of the history of this dispute
prior to this Court’s involvement, and a summary of the jury’s verdict in the liability phase of the
trial, are useful.
A. Proceedings in Superior Court
On May 3, 2013, Headfirst Professional filed a lawsuit against Robert Elwood
(“Elwood”) in the Superior Court of the District of Columbia (“Superior Court”), which included
a motion for a preliminary injunction. See Docket Sheet, Headfirst Professional Sports Camps
LLC v. Robert Elwood, Case No. 2013 CA 003108 B. On July 10, 2013, Headfirst Professional
voluntarily dismissed that lawsuit, and simultaneously filed a new lawsuit in the Superior Court,
but did not seek injunctive relief in the new case. See Docket Sheet, Headfirst Professional
Sports Camps LLC v. Robert Elwood, Case No. CA 004682 B; Feb. 2, 2017 Hearing Tr. at 25:2–
4. 2
Meanwhile, Brendan Sullivan III (“Sullivan”), Headfirst Camps LLC (“Headfirst
Camps”), and Headfirst Baseball LLC (“Headfirst Baseball”), initiated this lawsuit against
Elwood on April 21, 2013. Complaint, ECF No. 1 (Apr. 21, 2013). Elwood then filed a
counterclaim against Sullivan and Headfirst Professional, thus bringing Headfirst Professional
into this lawsuit as a party. See generally Elwood’s Countercl. The Superior Court case initiated
by Sullivan and Headfirst Professional was stayed and has remained in that status pending the
2
The Court takes judicial notice, as it can, of the Superior Court proceedings. See, e.g., Dupree v. Jefferson, 666
F.2d 606, 608 n.1 (D.C. Cir. 1981) (noting that the court has the “authority to judicially notice related proceedings in
other courts”).
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resolution of the parties’ dispute in this Court. See Docket Sheet, Headfirst Professional Sports
Camps LLC v. Robert Elwood, Case No. CA 004682 B.
B. The Jury’s Liability Phase Verdict
Of utmost relevance to the resolution of the pending motions are the following jury
findings: First, the jury found in favor of Elwood on his claim that a Headfirst partnership
existed between him and Sullivan and that each owns a 50% share in that partnership. Verdict
Form (Questions 3 & 4 and the jury’s verdict). The jury also found that by excluding Elwood
from managing Headfirst Professional in December 2012, Sullivan and Headfirst Professional
breached their obligations owed to Elwood under the Headfirst Professional operating
agreement. Id. (Questions 10 & 11 and the jury’s verdict). However, the jury determined that
Elwood’s conversion of Headfirst Baseball’s and Headfirst Camps’ funds, which occurred prior
to Elwood’s termination, constituted a breach of the Headfirst Professional operating
agreement’s implied covenant of good faith and fair dealing. Id. (Question 12 and the jury’s
verdict). Finally, the jury also concluded that Sullivan and Headfirst Professional violated the
District of Columbia Limited Liability Company Act by excluding Elwood from the
management of Headfirst Professional. Id. (Questions 13 & 14 and the jury’s verdict).
II. STANDARDS OF REVIEW
A. Rule 50 Motions
Pursuant to Federal Rule of Civil Procedure 50(a), the Court may grant a motion for
judgment as a matter of law if “a reasonable jury would not have a legally sufficient evidentiary
basis to find for the party on that issue.” Fed. R. Civ. P. 50(a)(1). “[A] court may not assess the
credibility of witnesses or weigh the evidence” when considering such a motion, Hayman v.
Nat’l Acad. of Scis., 23 F.3d 535, 537 (D.C. Cir. 1994), and the Court must consider the
4
evidence in the light most favorable to the non-moving party, see McGill v. Munoz, 203 F.3d
843, 845 (D.C. Cir. 2000) (“Judgment as a matter of law is appropriate only if ‘the evidence and
all reasonable inferences that can be drawn therefrom are so one-sided that reasonable men and
women could not’ have reached a verdict in [the non-moving party’s] favor.” (quoting Duncan v.
Wash. Metro Area Transit Auth., 201 F.3d 482, 485 (D.C. Cir. 2000))).
That is not to say, however, that a mere scintilla of evidence will defeat a Rule 50
motion. “The question is not whether there is literally no evidence supporting the
party against whom the motion is directed but whether there is evidence upon which
the jury might reasonably find a verdict for that party.”
Robinson v. Wash. Metro. Area Transit Auth., 941 F. Supp. 2d 61, 67 (D.D.C. 2013) (quoting
9B Wright & Miller, Federal Practice and Procedure § 2524 (3d ed. 2008)), aff’d, 774 F.3d 33(D.C. Cir. 2014).
B. Rule 52 Motions
Federal Rule of Civil Procedure 52 provides that
[i]n an action tried on the facts without a jury or with an advisory jury, the court
must find the facts specially and state its conclusions of law separately. The
findings and conclusions may be stated on the record after the close of the evidence
or may appear in an opinion or a memorandum of decision filed by the court.
Fed. R. Civ. P. 52(a). Further,
[i]f a party has been fully heard on an issue during a nonjury trial and the court
finds against the party on that issue, the court may enter judgment against the party
on a claim or defense that, under the controlling law, can be maintained or defeated
only with a favorable finding on that issue.
Fed. R. Civ. P. 52(c). “A judgment on partial findings must be supported by findings of fact and
conclusions of law as required by Rule 52(a).” Id. “In its determination of a motion made in
accordance with Rule 52(c), ‘a district court may not draw any special inferences in favor of the
non-movant’; rather, ‘the court must weigh the evidence, resolve any conflicts in it, and decide
where the preponderance lies.’” Burke v. Record Press, Inc., 951 F. Supp. 2d 26, 31 (D.D.C.
5
2013) (quoting United States ex rel. Ervin & Assocs. v. Hamilton Sec. Grp., 298 F. Supp. 2d 91,
92–93 (D.D.C. 2004)).
III. ANALYSIS
A. Headfirst Professional’s Rule 52(a) and Elwood’s Rule 52(c) Motions
1. Findings of Fact
The evidence adduced at trial established the following: Elwood and Sullivan are each
members and 50% owners of Headfirst Professional, which was formed on July 16, 2010. PX-
0112.001, .017. Sullivan and his brother Edward (“Ted”) Sullivan are the sole co-owners and
members of two other limited liability companies, Headfirst Baseball, which was formed in
1997, and Headfirst Camps, which commenced operations in 2012. Nov. 8, 2016 PM Trial Tr. at
11:3–5, 27:10–29:25, 61:14–64:2 (Sullivan’s testimony describing the two companies).
For several years prior to December 2012, Elwood made purchases with and withdrawals
of Headfirst Baseball’s and Headfirst Camps’ funds for personal purposes that were not
authorized by Sullivan or his brother, Ted Sullivan. See, e.g., Nov. 10, 2016 AM Trial Tr. at
31:11–24 (Sullivan summarizing $43,000 in unauthorized rental payments); id. at 55:15–57:9
(Sullivan describing $33,850 in unauthorized payments made to Elwood’s personal handyman);
id. at 74:21–75:15 (Sullivan describing over $98,000 in unauthorized payments related to
Elwood’s Naylor Court property). Sullivan testified that Elwood concealed his unauthorized
purchases and loans by making false entries into Headfirst Baseball’s and Headfirst Camps’
books and records. See, e.g., Nov. 10, 2016 AM Trial Tr. at 138:16–141:15 (Sullivan describing
Elwood’s purchase of personal entertainment tickets from StubHub and his instructions to the
company’s bookkeeper to record, or “code,” the purchase as a business expense for promotional
materials). Elwood maintained at trial that he believed he was authorized pursuant to an
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agreement he had with Sullivan to use Headfirst Baseball’s and Headfirst Camps’ funds for
personal expenses, see Nov. 16, 2016 PM Trial Tr. at 23:1–21, but the jury rejected his testimony
and found Elwood liable for the unlawful conversion of those funds, see Verdict Form
(Questions 1 & 2 and the jury’s verdict).
During 2012, Elwood also made several loans to himself totaling $600,000 from
Headfirst Camps, although Sullivan had authorized only a single $200,000 loan. See Nov. 8,
2016 PM Trial Tr. at 89:9–91:3 (Sullivan reciting a March 2012 email in which Elwood asked
for a $200,000 short-term loan and testifying that he, Sullivan, did not authorize any other loans
to Elwood in 2012); Nov. 9, 2016 AM Trial Tr. at 10:6–15 (Sullivan’s testimony that he was not
aware that Elwood had borrowed $600,000). Elwood subsequently repaid the $600,000, Nov. 9,
2016 AM Trial Tr. at 42:13–14; however, while Elwood still had the $600,000 loan outstanding
during the fall of 2012, he persuaded Sullivan and Ted Sullivan to obtain a $300,000 line of
credit from Bank of America to enable Headfirst Camps and Headfirst Professional to pay bills
and make payroll, see Nov. 28, 2016 AM Trial Tr. at 51:13–84:12 (Elwood’s testimony
regarding a series of events culminating in a $300,000 line of credit being provided to pay
outstanding invoices and payroll).
Sullivan first learned about Elwood’s unauthorized expenditures in November 2012, after
a conversation with the company’s bookkeeper alerted him to Elwood’s unauthorized loans.
Nov. 9, 2016 AM Trial Tr. at 26:6–24. Sullivan confronted Elwood about the unauthorized
loans on December 1, 2012. Id. at 33:21–34:21 (Sullivan recounting a telephone conversation
with Elwood regarding the $600,000 loan). A further investigation uncovered Elwood’s credit
card purchases. Id. at 50:14–52:16 (Sullivan’s testimony about a letter he sent to Elwood
regarding Sullivan’s investigation of Elwood’s credit card purchases). After receiving an
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unsatisfactory response from Elwood about his expenditures, id. at 54:8–55:14 (Sullivan stating
that Elwood never explained the credit card charges about which Sullivan confronted him in
December 2012), Sullivan terminated Elwood’s relationship with all Headfirst companies,
including Headfirst Professional, on December 28, 2012, effective December 31, 2012, id. at
57:15–59:1. Sullivan testified that he took this action because he believed that Elwood’s thefts
constituted a violation of the “morals clause” contained in the agreement between Headfirst
Professional and the Red Sox major league baseball organization, which would have permitted
the Red Sox organization to terminate its contract with Headfirst Professional. Nov. 15, 2016
AM Trial Tr. at 144:5–145:2 (Sullivan’s testimony regarding his understanding of the “morals
clause” in Headfirst Professional’s contract with the Red Sox organization). Sullivan admitted,
however, that the Headfirst Professional operating agreement did not authorize him to terminate
Elwood’s membership in the company. See id. at 16:19–23 (Sullivan’s testimony that he could
not identify a provision in the operating agreement allowing him to terminate Elwood as a
member of Headfirst Professional).
Thereafter, in April 2013, Elwood caused Headfirst Professional’s camper registration
website to be shut down for several days. Nov. 14, 2016 PM Trial Tr. at 86:10–87:18, 91:9–10
(Sullivan’s testimony describing the circumstances culminating in the freezing of the registration
website). However, it was not typical for any Headfirst employee to access registered campers’
information until the day before or the same day summer camps began in the month of June.
Nov. 22, 2016 PM Trial Tr. at 24:12–26:6 (Elwood’s testimony regarding Headfirst camp
procedures). Also in April 2013, Elwood exchanged communications with Bank of America that
resulted in that institution freezing Headfirst Professional’s bank account, which at the time
contained $600,000. Nov. 14, 2016 PM Trial Tr. at 77:4–79:3 (Sullivan’s testimony describing
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the freezing of Headfirst Professional’s Bank of America account); see also Nov. 22, 2016 PM
Trial Tr. at 27:11–19. The funds in that account were therefore inaccessible for approximately
two months between April and June 2013, Nov. 14, 2016 PM Trial Tr. at 80:13–15, and the
account was unfrozen only after Sullivan agreed to hold Bank of America harmless from any
claims Elwood might pursue against it, id. at 80:5–12. Finally, in August 2013, Elwood deprived
Headfirst Professional of its access to its Google AdWords account, an advertising tool Headfirst
Professional used to recruit potential campers. Id. at 55:7–58:11, 62:20–71:3 (Sullivan
describing the function of the Google AdWords account, the changes made to the account in
August 2013 that shut off Sullivan’s access to the account, and Sullivan’s efforts to regain
access). Elwood testified that in taking these actions, he “was simply trying to accomplish and
exercise [his] right as a manager and member of [Headfirst Professional].” Nov. 22, 2016 PM
Trial Tr. at 28:9–10.
2. Conclusions of Law
a. Headfirst Professional’s Request for Injunctive Relief
Elwood argues that Headfirst Professional’s breach of fiduciary duty and breach of
contract claims fail to provide a basis for the relief requested because there is no evidence that
Headfirst Professional has made the requisite showing of harm or injury resulting from either
claim, or that it has suffered or will suffer any irreparable injury that would justify the entry of
injunctive relief. See Elwood’s Opp’n to Headfirst Prof’l’s Mot. at 4–15. 3 Headfirst
Professional’s fiduciary breach and breach of contract claims require a showing of injury or
damages. See Randolph v. ING Life Ins. & Annuity Co., 973 A.2d 702, 709 (D.C. 2009)
3
Headfirst Professional has stated that it does not intend to introduce any additional evidence as to damages because
its claims seek only injunctive relief. See Headfirst Prof’l’s Mot. at 1 (“Headfirst Professional submitted evidence in
support of all of its claims in the liability phase of trial. Because Headfirst Professional is not pursuing damages, the
claims do not require any additional showing of proof.”).
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(“[B]reach of fiduciary duty is not actionable unless injury accrues to the beneficiary or the
fiduciary profits thereby.” (alteration in original) (quoting Beckman v. Farmer, 579 A.2d 618,
651 (D.C. 1990))); Tsinstolas Realty Co. v. Mendez, 984 A.2d 181, 187 (D.C. 2009) (“To prevail
on a claim of breach of contract, a party must establish (1) a valid contract between the parties;
(2) an obligation or duty arising out of the contract; (3) a breach of that duty; and (4) damages
caused by [the] breach.” (emphasis added)). And it is axiomatic that a party seeking the
extraordinary remedy of injunctive relief must establish a substantial likelihood of success on the
merits and the threat of irreparable harm. See Sherley v. Sebelius, 644 F.3d 388, 392 (D.C. Cir.
2011) (“A plaintiff seeking a preliminary injunction must establish [1] that [it] is likely to
succeed on the merits, [2] that [it] is likely to suffer irreparable harm in the absence of
preliminary relief, [3] that the balance of equities tips in [its] favor, and [4] that an injunction is
in the public interest.” (first, third, fifth, and seventh alterations in original) (quoting Winter v.
Nat. Res. Def. Council, Inc., 555 U.S. 7, 20 (2008))); Cobell v. Norton, 391 F.3d 251, 258 (D.C.
Cir. 2004) (because they are “extraordinary remed[ies],” injunctions “should be granted only
when the party seeking the relief, by a clear showing, carries the burden of persuasion” (citing
Mazurek v. Armstrong, 520 U.S. 968, 972 (1997))).
Headfirst Professional’s claims rely primarily on the acts of “sabotage” perpetrated by
Elwood after Sullivan terminated his employment in December 2012, namely, shutting down the
company’s Active.com registration system and Google AdWords account, and causing Bank of
America to freeze the company’s bank account. See Headfirst Prof’l’s Proposed Findings at 2–3
(setting forth Elwood’s conduct with regard to Active.com, Bank of America, and Google
AdWords); see also id. at 2 ¶ 8 (“Based on that conduct by Elwood, on May 3, 2012, Headfirst
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Professional filed a lawsuit in D.C. Superior Court . . . .” (emphasis added)). Each act of
“sabotage” is discussed below.
i. The Active.com camper registration system: Elwood argues persuasively that
Headfirst Professional has failed to offer any evidence of any harm resulting from shutting down
the Active.com registration system in April 2013. See Elwood’s Opp’n to Headfirst Prof’l’s
Mot. at 7–8 (arguing that “there was no evidence adduced at trial that [Headfirst] Professional
. . . lost a single camper as a result of the brief interruption to its online registration portal in
2013, or that Elwood’s conduct even interfered with a single attempted registration” and citing
evidence that “registration data was typically printed the week that [Headfirst] Professional . . .
was holding the camp (i.e., sometime in the summer) and therefore would not have been used
during the period of April 2013 in any event”). The Court therefore rejects Headfirst
Professional’s fiduciary breach and breach of contract claims to the extent that they rely on this
conduct as the basis for obtaining the requested relief.
ii. The Bank of America account: Although Sullivan testified that freezing Headfirst
Professional’s bank account resulted in the company having “zero transactions for a period of
two months,” Headfirst Prof’l’s Mot., Ex. A (Headfirst Prof’l’s Proposed Findings) at 3 ¶ 22, the
Court is persuaded by Elwood’s contention that Headfirst Professional failed to put forth any
evidence that freezing its bank account caused any harm, see Elwood’s Opp’n to Headfirst
Prof’l’s Mot. at 9 (“[Headfirst] Professional . . . did not adduce any evidence that it was deprived
of operating capital or that any bill went unpaid or purchase unmade.”) And although Sullivan
testified that he was forced to sign a “hold harmless” agreement in order to unfreeze the bank
account, Headfirst Prof’l’s Mot., Ex. A (Headfirst Prof’l’s Proposed Findings) at 3–4, there is no
evidence that entering into this agreement resulted in Headfirst Professional or Sullivan
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sustaining any harm, see Elwood’s Opp’n to Headfirst Prof’l’s Mot. at 10 (contending,
accurately, “that there is no evidence that anything ever happened to Sullivan because of [the
hold harmless agreement]”). The Court therefore also rejects Headfirst Professional’s fiduciary
breach and breach of contract claims as grounds for awarding the requested relief based on the
freezing of Headfirst Professional’s bank account.
iii. The Google AdWords account: Sullivan testified that Headfirst Professional’s
marketing efforts were hampered in August 2013 by Elwood shutting down Headfirst
Professional’s Google AdWords account, which required him to expend resources to open a new
account, and resulted Headfirst Professional losing the benefits derived from the longevity of the
terminated account. See Headfirst Prof’l’s Mot., Ex. A (Headfirst Prof’l’s Proposed Findings)
at 3 ¶ 20. However, no evidence was presented of the value derived from the longevity of the
terminated account or whether there was an expense incurred to open a new account. Further,
Sullivan’s testimony regarding the impact of losing the Google AdWords account only raised the
specter of a potential loss of customers, but Headfirst Professional adduced no evidence that
fewer parents enrolled their children for participation in Headfirst Professional’s camps as a
result of losing the prior AdWords account. The Court therefore credits Elwood’s argument that
Headfirst Professional has failed to put forth any evidence of harm arising from the loss of its
Google AdWords account, and the Court rejects Headfirst Professional’s fiduciary breach and
breach of contract claims as the basis for awarding the relief requested.
b. Whether Sullivan and Headfirst Professional Have a Sufficient
Basis to Obtain a Judicial Order of Expulsion
The Court must determine whether the evidence adduced at trial warrants Elwood’s
judicial expulsion from Headfirst Professional pursuant to the District of Columbia Limited
Liability Company Act’s (“LLC Act’s”) expulsion provision. See D.C. Code § 29-806.02(5).
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To obtain relief under this provision of the District of Columbia Code, the plaintiffs must show
that Elwood: (1) “[e]ngaged . . . in wrongful conduct that has adversely and materially affected”
Headfirst Professional, id. § 29-806.02(5)(A); (2) “[w]illfully or persistently committed . . . a
material breach of the operating agreement,” id. § 29-806.02(5)(B); or (3) “[e]ngaged . . . in
conduct relating to the company’s activities which makes it not reasonably practicable to carry
on the activities with the person as a member,” id. § 29-806.02(5)(C). 4
First, consistent with the “actual harm” analysis above, the Court rejects Headfirst
Professional’s expulsion claim to the extent that it relies on the first prong of the expulsion
provision, which requires a showing that Elwood “[e]ngaged . . . in wrongful conduct that has
adversely and materially affected” Headfirst Professional’s activities and affairs. D.C. Code
§ 29-806.02(5)(A) (emphasis added). However, the Court may base its judicial expulsion order
on the second prong, which requires a showing that Elwood “willfully or persistently
committed . . . a material breach of the operating agreement.” Id. § 29-806.02(5)(B).
Whether Elwood’s conduct constitutes a “material breach” of Headfirst Professional’s
operating agreement is a fact-intensive inquiry. See 3511 13th St. Tenants’ Ass’n v. 3511 13th
St., N.W. Residences, LLC, 922 A.2d 439, 445 (D.C. 2007) (“Whether a particular breach of a
contract is ‘material’ is a classic issue of fact.”). “A breach is material only if it relates to a
matter of vital importance or if it goes to the essence [of the contract] and frustrates substantially
4
Elwood’s counsel asserted that Headfirst Professional’s expulsion counterclaim, by its language, did not include a
claim for expulsion under D.C. Code § 29-806.02(5)(C), and that the counterclaim is limited to subsections (A) and
(B) of that provision. See Feb. 2, 2017 Hearing Tr. at 20:7–21:11. In opposition, Headfirst Professional directed the
Court to paragraphs 32 through 41 of its counterclaim, which set forth factual allegations about Elwood’s conversion
of Headfirst Camps’ and Headfirst Baseball’s funds, which are incorporated into Headfirst Professional’s LLC Act
claim by paragraph 69 of the counterclaim. See Feb. 2, 2017 Hearing Tr. at 34:19–36:9; see also Headfirst Prof’l’s
Countercl. ¶¶ 32–41, 69. While the Court understands this argument to mean that Elwood’s conversion would
justify his expulsion under subparagraph (C), see Headfirst Prof’l’s Countercl. ¶¶ 69–72 (containing language that
mirrors subparagraphs (A) and (B) only), the Court agrees with Elwood that a remedy under that subparagraph is not
sufficiently pleaded in Count V of Headfirst Professional’s counterclaim, and the Court will therefore disregard
subparagraph (C) in its analysis.
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the purpose for which the contract was agreed to by the injured party.” Kreisch v. Vilsack, 931
F. Supp. 2d 238, 253 (D.D.C. 2013) (quoting America v. Mills, 714 F. Supp. 2d 99, 100 (D.D.C.
2010)). The evidence adduced at trial showed that Elwood converted Headfirst Baseball’s and
Headfirst Camps’ funds, and the jury concluded that this conduct constituted a breach of the
implied covenant of good faith and fair dealing contained in Headfirst Professional’s operating
agreement. Given the circumstances of this case, in which the operation of the several Headfirst
entities was closely managed by both Elwood and Sullivan, the Court finds that Elwood’s
conversion of Headfirst Baseball’s and Headfirst Camps’ funds—companies Elwood managed in
conjunction with Sullivan—and his acts of “sabotage” in 2013 with respect to Headfirst
Professional—a company Elwood co-owned with Sullivan—relate to a matter of vital
importance to the agreement between them, i.e., Sullivan’s ability to rely on Elwood to act in
good faith as a business associate. The Court therefore finds that Elwood’s conduct warrants his
expulsion as a member of Headfirst Professional pursuant to D.C. Code § 29-806.02(5)(B).
Elwood contends that, if the Court agrees that his judicial expulsion is proper, the Court
lacks discretion to expel him retroactively, Elwood’s Opp’n to Headfirst Prof’l’s Mot. at 19–22,
and that Headfirst Professional’s request to retroactively expel him is an improper effort to
prevent evidence of damages on Elwood’s claims against Sullivan and Headfirst Professional
from reaching the jury, id. at 16–18. 5 Although the Court is unaware of any District of Columbia
5
At oral argument, Elwood raised, for the first time, the specter of a “Beacon Theatre[s] problem” should the Court
retroactively expel him from Headfirst Professional, see Feb. 2, 2017 Hearing Tr. at 85:9–25, but having reviewed
the applicable case law and the parties’ supplemental briefs on the applicability of the Beacon Theatres rule to this
case, the Court agrees with the plaintiffs that no such “problem” exists. The Beacon Theatres decision stands for the
proposition that “[i]f there are factual issues common to both legal and equitable claims joined in the same suit, any
party has a right to a jury trial determination of those issues before the court rules on the equitable claim.” Dawson
v. Contractors Transp. Corp., 467 F.2d 727, 733 (D.C. Cir. 1972) (citing Beacon Theatres, Inc. v. Westover, 359
U.S. 500 (1959), and Dairy Queen, Inc. v. Wood, 369 U.S. 469 (1962)). No such commonality of factual issues
exists here because the Court’s determination of Elwood’s judicial expulsion as a member of Headfirst Professional
turns on facts relating to his conversion and post-termination conduct, whereas the jury’s determination of damages
relating to Sullivan and Headfirst Professional’s exclusion of Elwood from management of Headfirst Professional
would turn on the finding that has already been made, i.e., that Sullivan did not have the authority under the
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case law on the issue of retroactive expulsion, the opinion of the Court of Appeals of Utah in
Holladay v. Storey, 307 P.3d 584 (Utah Ct. App. 2013), is instructive. In that case, two members
of an LLC sought to expel the third member of the company due to his misconduct in connection
with his management of the company. Id. at 588. The trial court expelled the third member and
backdated his expulsion “to December 31, 2005, based on the parties’ conduct,” concluding that
“this date was appropriate due to [the member’s] mismanagement, misconduct, dishonesty,
breach of fiduciary duty, and lack of success as a manager as of that date.” Id. at 589. The court
also stated that “it was not until 2005” that the other two members “started to ‘seriously’ follow
the [operating agreement] and statutes.” Id. The Utah Court of Appeals affirmed the trial court’s
retroactive expulsion, stating that the trial court
could have backdated [the member’s] expulsion as early as 2003 based on his
misconduct. Yet, the trial court also found that [the other two members] did not
conduct themselves according to the [operating agreement] or the [Utah LLC] Act,
or seek to remove [the member] as a member before 2005, when they first requested
a preliminary injunction.
Id. at 593. Holladay illustrates that although a court has discretion to retroactively expel a
member of a limited liability company, it should do so only after taking into consideration the
circumstances present in each case, instead of employing a formulaic or rigid application of the
statute. The Court agrees with the Utah Court of Appeals’ approach and therefore rejects
Elwood’s argument that it lacks discretion to backdate Elwood’s expulsion.
Here, Headfirst Professional seeks an order expelling Elwood as of December 28, 2012,
the date on which Sullivan terminated Elwood’s management of Headfirst Professional.
Headfirst Prof’l’s Mot. at 2. But Headfirst Professional waited for over four months before filing
its lawsuit in the Superior Court. See Headfirst Professional’s Proposed Findings at 3 (stating
Headfirst Professional operating agreement or the LLC Act to unilaterally terminate Elwood’s membership in
December 2012, see Verdict Form, Questions 10 & 11.
15
that Headfirst Professional did not file its suit until May 3, 2013). This delay suggests that the
filing of Headfirst Professional’s lawsuit was prompted not by Elwood’s conversion of funds
from Headfirst Baseball and Headfirst Camps, which led to the termination of his management
of the company in December 2012, but by his post-termination acts of “sabotage,” two of which
occurred shortly before Headfirst Professional filed its lawsuit in the Superior Court. See supra
at 8–9 (setting forth the Court’s findings of fact regarding Elwood’s conduct in April and August
2013). Just as the court in Holladay based its determination of the appropriate expulsion date on
the parties’ conduct, and in light of the circumstances present in this case, the Court concludes
that May 3, 2013, the date Headfirst Professional filed its complaint in Superior Court, is the
appropriate retroactive date for Elwood’s judicial expulsion.
Accordingly, the Court will (1) enter judgment in favor of Elwood on Headfirst
Professional’s breach of fiduciary duty and breach of contract claims; and (2) enter judgment in
favor of Headfirst Professional on its claim for judicial expulsion pursuant to D.C. Code
§ 29-806.02(5)(B), retroactive to May 3, 2013. 6
B. Sullivan and Headfirst Professional’s Rule 50 Motion
1. Elwood’s Partnership and Accounting Counterclaims
In their Rule 50 motion, Sullivan and Headfirst Professional argue that Elwood’s
partnership claim should fail for three reasons: (1) the claims are equitable in nature and thus
barred by Elwood’s unclean hands; (2) the partnership owns no assets; and (3) the partnership
6
Because Elwood’s arguments in his Rule 52 motion essentially track the arguments made in his opposition to
Headfirst Professional’s Rule 52 motion, discussed above, see generally Elwood’s Rule 52 Mot.; see also Feb. 2,
2017 Hearing Tr. at 46:20–24 (defense counsel agreeing with the Court that Elwood’s arguments in opposition to
Headfirst Professional’s motion also address Elwood’s Rule 52 motion), the Court will issue an order: (1) granting
Elwood’s Rule 52 motion with respect to Headfirst Professional’s breach of fiduciary duty and breach of contract
claims; and (2) denying Elwood’s Rule 52 motion with respect to Headfirst Professional’s judicial expulsion claim.
16
was “wound up” as soon as Sullivan terminated Elwood’s association with the Headfirst LLCs in
December 2012, which effected Sullivan’s dissociation from the partnership. Pls.’ Damages
Mot. at 2–7. Because the Court previously considered and ultimately rejected the plaintiffs’
unclean hands argument in a prior Rule 50 hearing, see Dec. 9, 2016 Hearing Tr. at 36–59
(argument and ruling on the plaintiffs’ motion for judgment on Elwood’s partnership claim), and
in light of the fact that the Court submitted the partnership claim to the jury, see Verdict Form
(Question 3), the Court will not revisit at this stage arguments that were previously rejected. The
Court will therefore focus its analysis on the latter two arguments.
a. Sullivan’s “Dissociation” from the Headfirst Partnership
The plaintiffs contend that on December 28, 2012, Sullivan dissociated himself from the
partnership-at-will the jury concluded he and Elwood had created, when he sent Elwood a letter
terminating Elwood’s relationship with all of the Headfirst LLCs, Pls.’ Damages Mot. at 6, and
as a result, the partnership was immediately dissolved and wound up, and because the
partnership has no assets (as asserted by the plaintiffs), no accounting is necessary because there
are no profits to distribute, id. at 7 (citing D.C. Code § 29-608.01(1) (“A partnership is dissolved,
and its activities and affairs shall be wound up, only upon the occurrence of the following
events . . . (1) In a partnership at will, the partnership’s having notice from a partner . . . of that
partner’s express will to withdraw as a partner, or on a later date specified by the partner.”); see
also D.C. Code § 29-601.02(11) (“‘Partnership at will’ means a partnership in which the partners
have not agreed to remain partners until the expiration of a definite term or the completion of a
particular undertaking.”).
In opposition, Elwood asserts that the plaintiffs should not be allowed to rely on
Sullivan’s dissociation from the Headfirst partnership as a bar to Elwood’s partnership and
17
accounting claims because this theory was never raised in the plaintiffs’ answer or defenses to
Elwood’s counterclaim. See Elwood’s Opp’n to Pls.’ Damages Mot. at 18 (“Sullivan could
have, but never pled in the alternative that, were a partnership to exist, he withdrew from that
partnership.”) The Court agrees that the “dissociation” theory, raised for the first time in the
plaintiffs’ Rule 50 motion, is untimely because it should have been pleaded in the plaintiffs’
responsive pleadings, and at this late juncture, would constitute an improper amendment to the
plaintiffs’ pleadings. See Fed. R. Civ. P. 12(b) (“Every defense to a claim for relief in any
pleading must be asserted in the responsive pleading if one is required.”).
b. The Headfirst Partnership’s Assets
To support their argument that Elwood’s partnership and accounting claims should not
proceed to the damages phase, the plaintiffs largely revisit their previously-rejected arguments
that the Headfirst partnership and the several Headfirst LLCs could not coexist. See Pls.’
Damages Mot. at 3–6 (arguing that the Headfirst partnership has no assets because all of the
business assets belong to the various Headfirst LLCs). In opposition, Elwood argues that the
Headfirst partnership was a “service business” whose “value comes from its power to attract
returning customers year after year, an intangible asset called goodwill,” Elwood’s Opp’n to Pls.’
Damages Mot. at 8; see also id. (“This is the asset that was valuable to STEEL when it made a
multi-million dollar offer to Elwood and Sullivan to purchase all of the Headfirst business and
not a particular LLC.”), and that he should be permitted to present the value of this asset to the
jury, see id.In response, the plaintiffs assert that any evidence based on the alleged value of the
Headfirst partnership’s goodwill is precluded by the Court’s denial of Elwood’s motion to amend
his counterclaims to include allegations regarding Sullivan’s alleged misappropriation of that
18
asset. Feb. 2, 2017 Hearing Tr. at 76:15–20; see also Elwood’s Mot. to Amend, Ex. B, ¶¶ 160,
162, 174–77 (proposed amended allegations asserting that Sullivan misappropriated the
Headfirst partnership’s goodwill); Headfirst Baseball LLC v. Elwood, ___ F. Supp. 3d ___, ___,
2016 WL 4574622, at *5–6 (D.D.C. Sept. 1, 2016) (Walton, J.) (denying as untimely Elwood’s
motion to amend his counterclaim to add, inter alia, the same allegations regarding Sullivan’s
alleged misappropriation of goodwill). The Court agrees that any evidence relating to Sullivan’s
alleged misappropriation of goodwill cannot be presented in the damages phase of the trial,
because allowing that evidence to be presented to the jury would in effect vitiate the Court’s
previous ruling on Elwood’s motion to amend. Because evidence of Headfirst partnership’s
goodwill is the only evidence Elwood seeks to present in the damages phase regarding his
partnership and accounting claims, see generally Elwood’s Opp’n to Pls.’ Damages Mot. at 7–8,
the Court will grant the plaintiffs’ motion for judgment with respect to damages on these claims. 7
2. Elwood’s Counterclaim under the District of Columbia Limited
Liability Company Act
Having concluded that judicial expulsion of Elwood as a member of Headfirst
Professional is appropriate, but retroactive only to May 3, 2013, see supra at 15, the Court
concludes that Elwood is potentially entitled to damages for the period between December 28,
2012, and May 3, 2013, as a result of the jury’s finding that Sullivan and Headfirst Professional
violated the LLC Act by terminating Elwood’s management of the company. See Verdict Form
(Questions 13 & 14 and the jury’s verdict). The plaintiffs contend, however, that “the same
7
In any case, as the Court has indicated during hearings on several occasions, it appears that the evidence
establishes only that the Headfirst partnership functioned as a management company dedicated to managing and
growing the business of the various Headfirst LLCs. As such, the Court fails to appreciate how such a management
company would have any assets or value beyond those generated by the underlying LLCs, and therefore, even under
Elwood’s assertion that “goodwill” comprises the Headfirst partnership’s assets, the Court cannot conceive of a
circumstance in which the value of that goodwill should not be credited to the underlying Headfirst LLCs that
actually comprised the camps that the Headfirst partnership merely managed.
19
[contractual] defenses that apply to Elwood’s breach of the Headfirst Professional operating
agreement claim should apply to his statutory claim,” and therefore, that Elwood’s LLC Act
claim is defeated by the jury’s finding that Elwood breached the implied covenant of good faith
and fair dealing by converting Headfirst Baseball and Headfirst Camps funds. See Pls.’
Damages Mot. at 8. In a similar vein, the plaintiffs also argue that they are entitled to judgment
with respect to damages on Elwood’s LLC Act claim because Elwood’s rights as a member of
Headfirst Professional are governed by the Headfirst Professional operating agreement, and not
by the default provisions of the LLC Act. See id.
The plaintiffs’ arguments conflate Elwood’s breach of contract claim with his LLC Act
claim. Elwood’s LLC Act claim sought to establish that Sullivan and Headfirst Professional
unilaterally excluded Elwood from the management of Headfirst Professional without first
obtaining a judicial order, in violation of the LLC Act, see Elwood’s Countercl. ¶ 96, a claim the
jury credited, see Verdict Form (Questions 13 and 14 and the jury’s verdict), which consequently
entitles him to be “compensated . . . for the value of his ownership share in [Headfirst]
Professional . . . , subject to debts, obligations, or liabilities owed to the other members in”
Headfirst Professional, Elwood’s Countercl. ¶ 99. In support of his position, Elwood references
provisions of the LLC Act pertaining to what occurs after a person is dissociated from his
membership in a limited liability company. See id. ¶ 100 (citing D.C. Code § 29-806.02(5)
(setting forth the grounds for judicial expulsion of an LLC member); § 29-806.03 (detailing the
effect of a member’s dissociation from an LLC, including that “any transferable interest owned
by a person immediately before dissociation in the person’s capacity as a member is owned by
the person solely as a transferee”); and § 29-805.01 (providing that a “transferable interest is
personal property”)). Thus, although Elwood’s breach of contract and LLC Act claims share a
20
factual nexus—Sullivan’s termination of Elwood from his association with Headfirst
Professional—the Court finds these claims to be distinct and will therefore reject the plaintiffs’
assertions that their contractual defenses apply equally to Elwood’s LLC Act claim and that this
claim is precluded by the existence of the Headfirst Professional operating areement.
The inquiry does not end there, however. Elwood seeks to prove, as damages he is
entitled to recover based on his LLC Act claim, that after he was terminated, Sullivan diverted
“in excess of $2,795,000 of [Headfirst Professional’s] profits to Headfirst Baseball LLC and
Headfirst Camps LLC,” Elwood’s Opp’n to Pls.’ Damages Mot. at 24. At oral argument, the
plaintiffs opined that evidence of the alleged diversion of Headfirst Professional’s profits cannot
be presented to the jury because the Court denied Elwood’s June 2016 motion to amend his
counterclaim, which had as its basis the same alleged diversion. See Feb. 2, 2017 Hearing Tr. at
55–57; see also Elwood’s Mot. to Amend, Ex. B ¶¶ 102, 111 (proposed additional allegation that
Sullivan “[d]ivert[ed] funds of Professional Sports LLC to Headfirst Baseball LLC and/or
Headfirst Camps LLC, the profits of which Sullivan has wrongfully claimed as his own”). The
Court agrees that allowing Elwood to introduce evidence of the alleged diversion of funds from
Headfirst Professional to Headfirst Baseball and Headfirst Camps would permit an end-run
around the Court’s September 2016 opinion denying Elwood’s motion to amend his
counterclaim as untimely. See Headfirst Baseball, ___ F. Supp. 3d at ___, 2016 WL 4574622, at
*6 (concluding that Elwood failed to establish good cause for his request to amend his
counterclaim long after the Court’s scheduling deadlines had passed). Therefore, because
Elwood relies on the “diversion” evidence to support his claim for damages on his LLC Act
claim, see generally Elwood’s Opp’n to Pls.’ Damages Mot. at 23–24, the Court will grant
judgment in favor of the plaintiffs on Elwood’s LLC Act claim.
21
IV. CONCLUSION
For the foregoing reasons, the Court will grant Sullivan and Headfirst Professional’s
motion for judgment as to damages, grant in part and deny in part Headfirst Professional’s Rule
52 motion, and grant in part and deny in part Elwood’s Rule 52 motion. 8
SO ORDERED this 3rd day of March, 2017.
REGGIE B. WALTON
United States District Judge
8
The Court will contemporaneously issue an Order consistent with this Memorandum Opinion.
22