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Vireo Systems, Inc. v. Htg Ventures, LLC

United States District Court, M.D. Tennessee, Nashville Division

April 27, 2015

VIREO SYSTEMS, INC., Plaintiff,
v.
HTG VENTURES, LLC, JOHN T. LEWIS, JR., AND TIMOTHY KENSINGER, Defendants.

MEMORANDUM

KEVIN H. SHARP, District Judge.

Before the Court are Plaintiff Vireo Systems, Inc.'s Motion for Temporary Restraining Order and Preliminary Injunction (Docket No. 7) and Defendants HTG Ventures, LLC, John T. Lewis, Jr., and Timothy Kensinger's Motion to Dismiss for Failure to State a Claim (Docket No. 36). On March 25, 2015, the Court heard oral argument on Plaintiff's Motion. For the reasons set forth below, both pending motions will be denied.[1]

I. SUMMARY OF THE FACTS

Plaintiff Vireo Systems, Inc. ("Vireo") is a Tennessee corporation owned by Mark Faulkner. Its principal place of business and manufacturing facilities are located in Tennessee. Vireo manufactures "dietary supplements, chemical compounds, and nutraceuticals based on a molecule created by Mr. Faulkner, creatine hydrochloride ("C-HC1"). C-HC1 is the main component of CON-CRET, an exercise supplement that advertises benefits including development of lean muscle, accelerated muscle recovery, and improved endurance. CON-CRET is sold in dietary supplement stores and fitness facilities in Tennessee and the rest of the United States.

Defendant HTG Ventures ("HTG") is a limited liability company with its principal place of business in Massachusetts. Defendants Lewis and Kensinger each hold an ownership interest in HTG and affiliate companies including Harvest Trading Group and Harvest Trading Group Technologies.

In 2007, the Parties' mutual contact Brian O'Neill, a resident of Tennessee, connected Mr. Faulkner with Mr. Lewis and Mr. Kensinger to explore marketing opportunities for Vireo products. The Parties, along with Mr. O'Neill, formed ProMera, a Massachusetts limited liability company, to acquire, develop, license, market, and distribute dietary and health supplements. To this end, Mr. Faulkner assigned the CON-CRET trademark to ProMera. Initially, ProMera's members entered into an "oral exclusive marketing and distribution agreement" under which Vireo manufactured the products that were then marketed and distributed by ProMera. (Docket No. 65 at 9). ProMera's three members held the following ownership interests: (1) HTG Ventures 51%, (2) Vireo 42%, and (3) Mr. O'Neill 7%.

In January 2010, the Parties and Mr. O'Neill signed an Operating Agreement setting forth the rights and obligations of ProMera's members. This contract designated Messrs. Lewis, Kensinger, and Faulkner to oversee the company "as the Mangers acting based on majority votes (at least two votes from the three Managers) among the Managers." (Docket No. 65-1 at 2, Operating Agreement § 1(a)). It also set forth the Managers' responsibilities, with Mr. Lewis and Mr. Kensinger "primarily responsible for the sales, marketing, distribution, logistics, support staff, administration and accounting for the Company Operations" and Mr. Faulkner "primarily responsible for the scientific development, licensing and oversight of the inventory control of the raw materials and products." (Id. at 4, § 2(c)). Managers and members agreed "to exercise sound business judgment and good faith in all aspects of their decisions" and to act with "the same fiduciary duty to the Company and each other as directors and shareholders of a corporation under Massachusetts law." (Id. at 2, § 1(b)). The Operating Agreement further empowered the Managers with,

the exclusive power and authority to (i) make all decisions with respect to the business and affairs of the Company; (ii) exercise all the powers and privileges granted by the Act or any other law or this Operating Agreement, together with any powers incidental thereto, so far as such powers are necessary or convenient to the conduct, promotion or attainment of the business, trade, purposes or activities of the Company and... (iv) to take any other action not prohibited under the Act or other applicable law.

(Id., § 1(a)).

Section 2 of the Operating Agreement addressed capital contributions, providing that, "if any additional capital contribution is required for operation of the Company, HTG and Vireo shall make such required contributions which are proportionate to the Percentage Interests, " and that capital calls would be "subject to review verification and approval by the Managers." (Docket No. 65-1 at 4, Operating Agreement §§ 2(a), 2(b)). Aside from these circumstances, however, "no Member [would] be obligated to contribute any additional capital to the Company." (Id., § 2(d)).

On March 22, 2011, Vireo and ProMera entered into a second contract, the Product Development Marketing Agreement ("PDMA"), which "memorialize[d] the parties' understanding of the Oral Agreement, memorializing the current structure of the transaction as well as restructuring it." (Docket No. 65-2, PDMA ¶ M).

According to the Amended Complaint, products manufactured by Vireo are bought by ProMera and resold at cost to Harvest Trading Group, an HTG affiliate. Harvest Trading Group then sells the products to third-party health food and nutraceutical companies at a mark-up more than four times the price in the initial, internal sales. Despite this sizeable return, HTG affiliate companies charge ProMera a 6% fee on gross revenues, 5% sales commission on all ProMera products sold, and an unspecified fee of up to 5.5% on all sales. Plaintiff claims these arrangements, undertaken without its knowledge or consent, have resulted in a boon of hundreds of thousands of dollars to Mr. Lewis and Mr. Kensinger, and "very substantial undisclosed revenues" to HTG and its affiliates. (Docket No. 65 at 11). Plaintiff alleges Defendants concealed ProMera's true financial activity by recording its financial information in Harvest Trading Group's books.

Early in 2014, the Parties began to discuss the sale of ProMera to a third party, or alternatively, a buyout by one of its members. To increase the company's value in anticipation of the sale, they considered revising the PDMA to make it more favorable to ProMera. In a November 24 email to Defendants and Mr. O'Neill, Mr. Faulkner contemplated selling his share and stated, "It may be a good time for me to exit for a variety of reasons." (Docket No. 65-3). To this end, Mr. Faulkner thanked Defendants for their recent transmittal of ProMera financial information and asked them to coordinate with his accountant to review it.

The next day, November 25, Mr. Lewis sent Mr. Faulkner a Capital Contribution Notice via email, explaining,

[t]he Managers of ProMera have considered our financial position carefully and determined that the Company requires capital in order to continue its operations. In the past the Company has funded its operations through advances from [HTG]. As of the date hereof the Company is indebted to HTG in the amount of $46, 209. HTG no longer intends to advance funds to the Company to enable it to continue operations.

(Docket No. 65-5). Mr. Lewis listed a number of reasons why the capital infusion was necessary, including: (1) the recent flood of cheaper competitors to the market and the resulting decline in sales; (2) the need for further research and development on new products; and (3) plans to fund ...


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