Les Dens de Justice (Honore Daumier, 1845)
It’s true you lost your case…but at least you had the pleasure of hearing me make my plea.
Online flat fee buyers’ brokerage CondoDomain has been sued in Massachusetts Superior Court by two of its minority shareholders. The gist of the lawsuit is a breach of contract and breach of fiduciary duty.
Plaintiffs, who are so-called “traditional” real estate brokerages in Boston, allege they invested in CondoDomain only as a residential condominium search portal deriving ad income and that the company’s expansion into online flat fee brokerage is a breach of their contract because it is outside the “core business” of the agreement and done without their consent or proper company vote. They claim they would not have invested in a company that competes with their own. Full complaint here.
CondoDomain has yet to file an Answer in reply but published this post on the company blog, along with links to other documentation. CondoDomain founder and principal owner, Anthony (Tony) Longo calls it as a fight between a deep pocket traditional brokerage trying to keep down a startup “discount” broker.
In my opinion, based on my reading of the lawsuit, plaintiffs’ case is weak.
Some observations:
1. Plaintiffs state the promise not to compete with their brokerages was “implied” (Complaint Introduction at b). When you walk into court on a breach of contract claim, you do not want to rely on “implied” promises. You know the old saying about “assumptions”.
But is the question : Does CondoDomain’s online brokerage compete with plaintiffs’ brokerage ? I think the legal question is, instead: Does it compete with CondoDomain as a search portal? I think the answer to that is NO. If the online brokerage does not compete with the search portal, then I’d argue it’s “complementary”, and in accordance with the agreement between the parties. See points 4 & 6 below. This is the major weak point to plaintiffs’ case, in my opinion, so if you’re busy (or missing Twitter), you can skip reading the rest of the post. Case dismissed.
2. According to the Investor (Exhibit A) “individual investors shall play no role in company decisions…” Based on a letter of March 2007, the initial investment of plaintiffs was a loan. It was then converted to shares. As minority shareholders, plaintiffs still could not control company decisions by vote.
3. As minority shareholders, plaintiffs are afforded legal relief for oppressive actions by the majority that harms their position in small corporations (freeze outs). Unless the online brokerage caused monetary damages to the real estate portal (and credible evidence is provided), it appears difficult (read impossible) to claim harm to the minority shareholders. It appears to me the plaintiffs are concerned more with the harm to their business than CondoDomain.com, the portal.
4. In breach of fiduciary duty cases involving minority shareholders and majority business decisions, the courts’ desire to protect the minority stockholder is weighed against the rights of management to have discretion to make good business decisions.
5. The business purpose, as stated in the agreement attached to the Complaint states that business may be “complementary with the Core Business“. It also reads “In addition, the Company may do other such acts and things as are permitted to be done by a limited liability company in the Commonwealth of Massachusetts”. I’m pretty certain, that online buyers’ brokerage is a “thing” permitted to be done in MA.
If I was the attorney drafting this agreement to prevent CondoDomain.com from setting up a brokerage (to protect my business as a brokerage) I would have said THAT, and not have used gray language like “core business” and “complementary”. If you know what you don’t want, spell it out clearly– do not leave it to lawyers to argue the meaning of general terms. In any case, I certainly would have deleted the “In addition” sentence. But hey, that’s just me.
6. Even if the real estate portal was the core business, there seems no reason why a brokerage could not be a reasonable expansion of that business. Since it is obviously not competitive, it should be considered “complementary”.
7. As for the failure to take a vote/get consent, if CondoDomain did not take a formal vote, they could. Since the plaintiffs own a minority stake, it is unlikely a vote would change the outcome so I’d be surprised if this technicality would have any effect.
8. If plaintiffs thought bringing a case for breach of fiduciary duty would work to get them their money back on a buy-out remedy according to Brodie v Jordan (where the Court ordered this remedy), they ought know that case was subsequently reversed.
9. Plaintiffs do not argue they were directors or managers of the company, who control all management decisions. As a Monday morning lawyer, I would have insisted on a seat as a Manager. Oopsie.
10. According to the agreement, Tony Longo may engage in other business so long as it is not directly competitive to the core business of the portal. It does not prevent him from competing with the plaintiffs’ brokerage business:
If plaintiffs wanted to prevent Longo from competing as a broker, they could have amended this language and said so. They didn’t.
That’s it for now folks. I’m sure more insights will come to mind after I get a cup of coffee. If they do, I will update this post.
Disclosures for the diligent reader.
Although I am an attorney licensed to practice law in New York and Texas, I am not licensed in Massachusetts (down with all licensing, it is a government conspiracy to oppress the consumer), so this post does not consitute a legal opinion. It is merely a blogger’s blab. Besides, I’m not getting paid. The reader should also know I have known Anthony Longo for several years. He is, in my ofttimes humble opinion, a man of the highest integrity and honor. So read in any bias accordingly. Anyhoot, I have written what I believe to be accurate observations of this tragic event. My advice to the parties is to get out of the courtroom and into a room and work it out as gentlemen– for you ought know that courts are no place for gentlemen.
