The opinion
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF TENNESSEE
AT KNOXVILLE
JEFFREY KLEIN, et al., )
)
Plaintiffs, )
) Case No. 3:20-cv-393
v. )
) Judge Atchley
PRONOVA SOLUTIONS, LLC, )
) Magistrate Judge Poplin
Defendant. )
TRIAL OPINION
This matter came before the Court for a bench trial on February 13, 2024. At issue is
whether Defendant ProNova Solutions, LLC (“ProNova”) is liable to Plaintiffs for breach of
contract. Upon consideration of the evidence presented at trial and the parties’ post-trial briefing,
the Court finds for Defendant ProNova and concludes that this matter must be DISMISSED
WITH PREJUDICE.
I. PROCEDURAL BACKGROUND
On September 1, 2020, Plaintiffs filed this lawsuit against ProNova and two of its corporate
officers, Dr. Terry Douglass and Mr. Joseph Matteo. Plaintiffs asserted claims against Defendants
for breach of contract, fraud, breach of fiduciary duty, and violation of the Tennessee Consumer
Protection Act. [Doc. 1 at ¶ 21–30]. These claims stem from Plaintiffs’ $775,000.00 investment in
ProNova, which came pursuant to a Private Placement Memorandum (“PPM”) and accompanying
subscription agreements. [Id. at ¶ 7–10].
The Court narrowed the issues remaining for trial through its rulings on multiple dispositive
motions. First, the Court granted Defendants’ Motion for Partial Dismissal, which resulted in
dismissal of Plaintiffs’ Tennessee Consumer Protection Act and breach of fiduciary duty claims
on statute of limitations grounds. [Doc. 32 at 3]. Second, and lastly, the Court granted in part and
denied in part Defendants’ Motion for Summary Judgment. [Doc. 70]. That Order dismissed
Plaintiffs’ fraud claim and breach of contract claim, but the breach of contract claim was dismissed
only as to Individual Defendants Dr. Douglass and Mr. Matteo. [Id. at 15]. Remaining for trial,
then, was Plaintiffs’ claim against ProNova for breach of contract.
II. FINDINGS OF FACT
The trial saw testimony from two witnesses—Mr. Patrick Marsh and Dr. Terry Douglass.1
Mr. Marsh, along with the other five Plaintiffs, invested $775,000.00 in ProNova. [Trial Tr. at
123]. ProNova is in the business of proton therapy, a form of cancer treatment. [Id. at 16]. Through
their investment in ProNova, Plaintiffs purchased LLC units and gained a membership interest in
the company. [Trial Ex. 2]. The 2013 PPM outlined the terms of Plaintiffs’ investment and
ProNova’s business plan. [Id.].
Based on the PPM and the testimony at trial, ProNova sought to generate investor returns
from three sources: the sale of ProNova proton therapy equipment, maintenance of that same
equipment, and development of ProNova Proton Therapy Centers (the “Centers”). [Trial Tr. at 69,
103]. The PPM outlines numerous risk factors that could cut off these potential revenue streams.
[Trial Ex. 2 at 20–33]. At the time of Plaintiffs’ investment in 2013, ProNova’s key piece of
equipment, the SC360, had not yet received FDA approval. [Trial Tr. at 59–60]. Other risk factors
included that ProNova was a startup company and may not be able to accurately predict its future
operating expenses. [Id. at 58–59]. Mr. Marsh, having decades of experience in the financial
industry, testified that he read and understood these risk factors before deciding to invest. [Id. at
13–14, 58]. He acknowledged that the investment was risky. [Id. at 57].
1 The parties stipulated that of the six Plaintiffs, only Mr. Marsh and Mr. Klein would offer trial testimony in this case.
[Doc. 41]. Mr. Klein was unable to attend trial, meaning that Mr. Marsh’s testimony is on behalf of all Plaintiffs.
In addition to the risk factors identified, the PPM includes a “Use of Proceeds” section,
which explains how ProNova expects to spend the funds it raises. [Trial Ex. 2 at 34]. The section
specifically indicates that if ProNova hits its target of raising $76,300,000.00, the company
“expect[s] to use the net proceeds for general corporate and working capital purposes and to fund
between six (6) ProNova Proton Therapy Centers.” [Id.]. The PPM allocates $33,000,000.00
towards investments in the Centers, which constitutes the single largest line-item in the Use of
Proceeds section. [Id.]. According to Mr. Marsh, potential ownership of Centers and the PPM’s
numerous references to them led him to invest in ProNova. [Trial Tr. at 17].
Notwithstanding the PPM’s many discussions of the Centers, the document couches those
discussions with cautionary and discretionary language. One of the risk factors listed just before
the Use of Proceeds section states that ProNova’s management “will have broad discretion in the
application of the net proceeds.” [Trial Ex. 2 at 32]. Moreover, the Use of Proceeds section only
indicates how ProNova “expect[s]” to use the funds raised, and the PPM earlier states that uses of
the word “expect” are to signal forward-looking statements that should not be unduly relied upon.
[Id. at 3, 34]. Regarding this language, Mr. Marsh conceded at trial that the PPM contains no
specific promise to open Centers. [Trial Tr. at 67–68].
ProNova ultimately exceeded its target and raised more than $85 million. [Id. at 24].
Notwithstanding that accomplishment, ProNova did not invest in or open any Centers. [Id. at 90].
Of concern to Plaintiffs is the fact that Dr. Douglass simultaneously serves as Chairman of the
Board for Provision Healthcare, LLC, other Provision entities, and ProNova. [Id. at 78–79]. Other
individuals also served on the boards of Provision entities and ProNova. [Id. at 29–30]. It is
Plaintiffs’ contention that ProNova board members prioritized their roles with Provision
Healthcare and invested in Centers with that entity, to the detriment of ProNova. [Doc. 90 at 7–8].
Plaintiffs assert that this strategy unfolded without their knowledge. [Id. at 9–10]. As Mr. Marsh
testified, beyond sending out K-1 forms, ProNova provided him and the other Plaintiffs with no
updates after they first invested. [Trial Tr. at 25–26].
Even with the overlapping membership on the boards of Provision entities and ProNova,
the entities themselves are different. ProNova is a for-profit entity whereas many of the Provision
entities are not-for-profit. [Trial Tr. at 107]. This difference meant that ProNova could not invest
in Centers through tax-exempt bond financing; only not-for-profit entities could pursue that
method of financing. [Id. at 106–08]. Consequently, various not-for-profit Provision entities, rather
than ProNova, invested in the Centers in Nashville and Orlando through tax-exempt bond
financing. [Id. at 90–91, 116]. ProNova did not hold an ownership interest in either of those
Centers, and it instead sold two units of its SC360 to those Centers. [Id. at 97–98]. Those two sales
account for the approximately $85 million ProNova generated.
Though tax-exempt bond financing was unavailable to ProNova, Dr. Douglass testified
that he and others made many attempts to launch ProNova Centers. Dr. Douglass explained that
ProNova’s business model involved selling SC360 units to a provider entity and partnering with
that provider entity to invest in and develop the Centers. [Id. at 103–04]. According to Dr.
Douglass, ProNova had a marketing and sales team that attempted to locate investment partners.
[Id. at 106]. Dr. Douglass himself traveled to China twenty times, and ProNova developed a
prospect list that included approximately three dozen potential investment partners in the United
States, Asia, and elsewhere. [Id.]. Despite these efforts, ProNova was unable to secure an
investment partner. [Id.]. Dr. Douglass indicated that market forces dictated this outcome. [Id. at
117]. He specifically testified the market was such that tax-exempt bond financing, clearly
unavailable to ProNova, provided the only avenue to obtain financing for the Centers. [Id.].
Because ProNova did not obtain an investment partner for the Centers, all of the funds it
raised were spent on research and development, equipment manufacturing, capital expenditures,
administration, and marketing. [Id. at 110–11]. Dr. Douglass testified that all funds raised from
the 2013 PPM were spent on ProNova and never diverted to another company, such as the
Provision entities. [Id.]. In fact, Dr. Douglass noted that Provision Healthcare provided a $70
million line of credit to fund ProNova’s operations when it was struggling financially. [Id. at 101,
111]. And Vision Investments, Dr. Douglass’s family partnership, initially invested $37.5 million
in ProNova. [Id. at 112]. At the same time, as these funds flowed into ProNova, Dr. Douglass
testified that he has never cashed out on any of his investments in Provision Healthcare or Vision
Investments. [Id.].
III. APPLICABLE LAW
For a contract to be enforceable under Tennessee law, it must result from a meeting of the
minds and be supported by consideration. Peoples Bank of Elk Valley v. ConAgra Poultry Co., 832
S.W.2d 550, 553 (Tenn. Ct. App. 1991) (citation omitted). “Consideration may take a number of
different forms, including a return promise.” Cumberland Props., LLC v. Ravenwood Club, Inc.,
2011 WL 1303375, at *9 (Tenn. Ct. App. Apr. 5, 2011) (citing Est. of Hordeski v. First Fed. Sav.
and Loan Ass’n of Russell Cnty., Ala., 827 S.W.2d 302, 304 (Tenn. Ct. App. 1991)). “Nonetheless,
‘a promise constitutes consideration for another promise only when it creates a binding
obligation.’” Walker v. Ryan’s Fam. Steak Houses, Inc., 289 F. Supp. 2d 916, 929 (M.D. Tenn.
2003) (quoting Floss v. Ryan’s Fam. Steak Houses, Inc., 211 F.3d 306, 315 (6th Cir. 2000)). A
promise will not create a binding obligation when it is illusory, meaning it promises nothing at all
or allows the promisor to decide whether or not to fulfill the promise. Id. (citations omitted). In
essence, an illusory promise is one that by its terms makes “performance entirely optional with the
‘promisor.’” Cumberland Props., LLC, 2011 WL 1303375, at *9 (citing Restatement (Second) of
Contracts § 77, cmt. a.)).
Notwithstanding the illusory promise doctrine, courts generally endeavor to avoid its
application. Id. (citation omitted). To do so, courts will imply a duty of good faith and fair dealing,
which Tennessee law recognizes as applicable to every contract. Dick Broad. Co. of Tenn. v. Oak
Ridge FM, Inc., 395 S.W.3d 653, 661 (Tenn. 2013) (citations omitted). The implied duty of good
faith specifically protects against actions that would prevent the innocent party from receiving the
fruits of the contract or the benefit of the bargain. Evans v. Vanderbilt Univ. Sch. of Med., 589 F.
Supp. 3d 870, 900 (M.D. Tenn. 2022). “What this duty consists of, however, depends upon the
individual contract in each case.” Wallace, 938 S.W.2d at 686 (quoting TSC Indus., Inc. v. Tomlin,
743 S.W.2d 169, 173 (Tenn. Ct. App. 1987)).
To determine whether a party has satisfied its duty of good faith, “the court must judge the
performance against the intent of the parties as determined by a reasonable and fair construction
of the language of the instrument.” Id. (citing Covington v. Robinson, 723 S.W.2d 643, 645–46
(Tenn. Ct. App. 1986)). Importantly, the duty of good faith “does not extend beyond the terms of
the contract and the reasonable expectations of the parties under the contract.” Regions Bank v.
Thomas, 422 S.W.3d 550, 560 (Tenn. Ct. App. 2013) (citations omitted). Though the precise
contours of the duty remain unclear, courts often say that it prevents contracting parties from acting
in bad faith or pursuing a dishonest purpose. Dick Broad Co. of Tenn., 395 S.W.3d at 674–75
(Koch, Jr., J., concurring) (citations omitted).
IV. CONCLUSIONS OF LAW
Plaintiffs offer three arguments as to how ProNova breached its duty of good faith. Their
first two arguments are related and take issue with ProNova’s lack of investment in the Centers.
[Doc. 90 at 5–9]. Specifically, Plaintiffs contend that ProNova violated its duty of good faith when
it invested no capital into Centers and instead funded their development through Provision
Healthcare. [Id.]. Plaintiffs’ final argument is that ProNova breached its duty of good faith upon
failing to keep investors informed of the company’s investment strategies. [Id. at 9–10]. For the
reasons explained below, none of these arguments establish that ProNova violated its duty of good
faith by a preponderance of the evidence.
At the outset, the Court has serious doubts as to whether the PPM contains an enforceable
promise to invest in Centers. Courts make clear that a claim for breach of the duty of good faith
requires a valid underlying claim for breach of contract. Berry v. Mortg. Elec. Registration Sys.,
2013 WL 5634472, at *7 (Tenn. Ct. App. Oct. 15, 2013) (citations omitted). Without an
enforceable promise to open Centers, Plaintiffs would lack any valid claim for breach of contract,
and their claim based on the duty of good faith would necessarily fail. The Court’s doubts on this
issue stem largely from Mr. Marsh’s own testimony, through which he conceded that the PPM
does not promise to open Centers. [Trial Tr. at 67–68]. The PPM’s discussion of risk factors and
inclusion of cautionary language both lend support to Mr. Marsh’s view. That is, the PPM’s overall
structure suggests that there is no specific promise to invest in or open Centers.
Notwithstanding these concerns, the Court can resolve this case on another ground. In
particular, even assuming the PPM contains an enforceable promise to invest in Centers, Plaintiffs
failed to prove at trial that ProNova breached its duty of good faith. The scope of ProNova’s duty
is determined based on a fair reading of the PPM’s language. Wallace, 938 S.W.2d at 686 (citing
Covington, 723 S.W.2d at 645–46). That language unequivocally provides ProNova’s Board with
“broad discretion” over the use of proceeds. [Trial Ex. 2 at 32]. The key question, then, is whether
ProNova acted in bad faith when it exercised its “broad discretion” to not invest in Centers.
The testimony and evidence at trial did not establish that ProNova acted in bad faith when
it failed to invest in Centers. Bad faith usually requires some dishonest purpose or sinister
intention, and ProNova’s actions fail to clear this threshold. ProNova’s failure to invest in Centers
appears to be the result of market forces and unsuccessful efforts, not bad faith. At trial, Dr.
Douglass explained that market conditions made it such that tax-exempt bond financing,
unavailable to for-profit entities such as ProNova, provided the only way to obtain financing for
Centers. [Trial Tr. at 117]. Even though market conditions made it difficult for ProNova to obtain
financing, the company still made efforts to secure investment partners. ProNova maintained a
marketing and sales team, developed a prospect list of approximately three dozen investment
partners, and sent Dr. Douglass on twenty trips to China in an effort to generate business. [Id. at
106]. These actions are not indicative of a company looking to deprive its investors of their
contractual expectations. Rather, these actions suggest that ProNova made many efforts to invest
in Centers, but those efforts simply proved unsuccessful.
That Provision entities invested in Centers instead of ProNova does not prove bad faith,
either.2 It is true that Dr. Douglass and others served on the boards of Provision entities and
ProNova. [Id. at 29–30]. But this arrangement is insufficient standing alone to establish a lack of
good faith. It seems more likely to the Court that Provision entities invested in Centers rather than
ProNova because of the market conditions discussed above, not because Dr. Douglass and others
had nefarious intentions to undermine ProNova. After all, Provision entities invested in and loaned
millions of dollars to ProNova, including when Provision Healthcare provided ProNova with a $70
million line of credit to fund the then-struggling company’s operations. [Id. at 101, 111]. This level
2 Plaintiffs specifically contend that ProNova breached the duty of good faith when it “chose to invest in centers with
another company, Provision Healthcare LLC.” [Doc. 90 at 7]. However, it does not appear that Provision Healthcare
had an ownership interest in either the Nashville or Orlando Centers. Those Centers were instead owned by other not-
for-profit Provision entities, such as Provision Trust. [Trial Tr. at 91].
of financial support undermines Plaintiffs’ theory that various board members prioritized the
interests of Provision entities over ProNova’s. It would make little sense for Provision entities to
financially support ProNova while simultaneously working to outmaneuver and harm the
company. For these reasons, the duty of good faith was not breached simply because ProNova did
not invest in Centers while various Provision entities did.
Nor did ProNova breach the duty of good faith based on its alleged failure to keep investors
informed. Though Mr. Marsh testified that ProNova provided him with no updates after he
invested, there were no documented instances of Plaintiffs being denied access to information they
requested. [Id. at 25–26]. Moreover, Dr. Douglass testified that ProNova never informed its
investors that it would not be investing in Centers because the company was and still is willing to
do so. [Id. at 99–100]. Based on the evidence presented at trial, the Court declines to conclude that
ProNova acted in bad faith because of Plaintiffs’ general allegation regarding a lack of
transparency.
V. CONCLUSION
The Court can understand Plaintiffs’ frustration. They made an investment with major
aspirations only to see it not turn out as they had hoped. Still, personal dissatisfaction does not rise
to the level of bad faith. Considering the entire record and the evidence presented at trial, Plaintiffs
have failed to prove by a preponderance of the evidence that ProNova breached the duty of good
faith. Accordingly, this matter is DISMISSED WITH PREJUDICE.
SO ORDERED.
/s/ Charles E. Atchley, Jr. c
CHARLES E. ATCHLEY, JR.
UNITED STATES DISTRICT JUDGE