The opinion of the court was delivered by: SHADUR
FINDINGS OF FACT AND CONCLUSIONS OF LAW
This Court's conduct of a March 1998 bench trial in this action has been followed by the submission of proposed findings of fact and conclusions of law by counsel for plaintiffs Richard Mussetter ("Mussetter") and his wife Kimberly (collectively "Mussetters") and counsel for defendants Richard Lyke ("Lyke") and Axiom Financial Services, Inc. ("Axiom"), followed in turn by each side's submission of a response to the other side's initial proffer. This Court has given full consideration to the parties' submissions and to its own trial notes (in aid of a partial transcript and its own independent recollection), and what follows are this Court's Findings of Fact ("Findings") and Conclusions of Law ("Conclusions") in accordance with Fed. R. Civ. P. ("Rule") 52(a). To the extent (if any) that the Findings as stated may be deemed conclusions of law, they shall also be considered Conclusions. In the same way, to the extent (if any) that matters later expressed as Conclusions may be deemed findings of fact, they shall also be considered Findings. In both of those respects, see Miller v. Fenton, 474 U.S. 104, 113-14, 88 L. Ed. 2d 405, 106 S. Ct. 445 (1985).
1. In August 1988 Illinois citizen Lyke became a member of the Board of Directors ("Board") of already-existing Delaware corporation HealthTek, Inc. ("HealthTek")(Stip P5
). In or about July 1990 Lyke became Chairman of the Board (Stip. P8). At some time before 1992 Lyke followed the recommendation of a friend (whom he had brought onto the HealthTek Board) in selecting Howard C. Goode, Esq. ("Goode") to become HealthTek's general counsel (Tr. 96-98
2. On or about June 10, 1991 HealthTek received notice from the National Association of Securities Dealers ("NASD") stating that HealthTek's shares would be delisted from NASDAQ unless it provided NASD with documentation demonstrating that it met certain capital and surplus criteria. To comply with those criteria, in September 1991 the Board authorized the issuance of 2 million shares of $ .25 preferred stock to Lyke, and as of October 4 HealthTek issued those shares to Lyke (P. Ex. 13 at 12). As payment for the shares Lyke agreed to the cancellation of a HealthTek $ 500,000 short term note payable to him (P. Ex. 14). As of December 31, 1991 Lyke owned approximately 48.1% of the outstanding HealthTek shares (Stip. P10).
3. In 1991 Lyke also began a series of discussions with Garry Prime ("Prime") concerning a HealthTek merger with, or the acquisition of HealthTek by, a company controlled by Prime (Prime Dep. 51-66). During those conversations Prime suggested to Lyke that HealthTek should be restructured and that it should use less manufacturing space and should employ fewer personnel (id. at 63, 77).
4. On or about March 5, 1992
HealthTek entered into a License Agreement with Xomed-Treace, Inc. ("Xomed")(P. Ex. 7) in exchange for a percentage royalty based upon sales. HealthTek granted a license to Xomed to manufacture and sell a certain medical device known as a "scope scrubber" (Stip. P9).
5. On or about March 23 California citizens Mussetters entered into an Industrial Real Estate Lease ("Lease," D. Ex. 3) with HealthTek (Stip. P11) demising approximately 12,000 square feet in an Auburn, California facility for a term of three years and one month beginning March 23, 1992 and ending April 23, 1995 (Stip. P12).
6. On March 27 HealthTek announced the total recall of all unused ("ADFuse") medical devices that it had previously manufactured and sold to customers. Sales of ADFuse devices had accounted for 9% of HealthTek's total 1991 sales (Stip. P14). After the announced recall Lyke had more than one conversation with Roger Molina ("Molina"), then a HealthTek employee, in which Lyke expressed concern about the impact that the ADFuse recall would have upon his investment in HealthTek (Molina Dep. 22-23).
7. On or about April 13 Lyke (among others) signed and HealthTek filed its Securities and Exchange Commission ("SEC") Form 10-K for the year ended December 31, 1991 (P. Ex. 108), reporting $ 911,000 in secured indebtedness to Lyke as of December 31, 1991 (id. at 30).
8. On May 22 Mussetters leased an additional 2,000 square feet of space at the Auburn, California facility to HealthTek for six months with an option to renew (P. Ex. 26 at 7). On or abut that date HealthTek completed a move of equipment and inventory into the Auburn facility (id.).
From that date until approximately December 13 HealthTek conducted manufacturing operations at the Auburn facility.
9. On or about June 15 Lyke and HealthTek executed a certain Forebearance [sic] Agreement prepared by Goode, which purported to rescind HealthTek's September 1991 issuance of the 2 million shares in preferred stock to Lyke and to reinstate the cancelled $ 500,000 in HealthTek's indebtedness to Lyke (P. Ex. 14). But despite Lyke's testimony to the contrary, which this Court discredits, the transaction contemplated by the Forebearance Agreement was not consummated and the $ 500,000 indebtedness remained cancelled (Lofvenholm Dep. 97-98, 114-15 and P. Ex. 26 at 3, 12, 13 (HealthTek's contemporaneous SEC Form 10-Q for the quarter ended June 30, 1992, showing the preferred stock as still outstanding and the company's indebtedness to Lyke at the reduced figure).
10. In the late spring or early summer of 1992, HealthTek's President and Board member Anders Lofvenholm ("Lofvenholm") told Lyke that HealthTek's bylaws required that an annual shareholders meeting be held. Lyke responded that he did not want to have such a meeting at that point because there were many issues that should be resolved before holding the meeting and before making a presentation to the shareholders. One of those issues was the formation of a company to be known as U.S. Medical, Inc. ("U.S. Medical"). HealthTek never held its annual shareholders meeting for 1992--its last annual meeting was in 1991 (Lofvenholm Dep. 120-23).
11. On or about July 30 Lofvenholm prepared and transmitted to Lyke a Memorandum entitled "Value of Royalty Agreement with Xomed-Treace, Inc. for the Scope Scrubber a.k.a EndoScrub" (P. Ex. 17). There Lofvenholm said:
Considering uncertainty in projections and a possible shorter life span of the product a fair value of the agreement today is estimated at $ 1,000,000.
12. On or about July 31 Articles of Incorporation for U.S. Medical were filed with the North Carolina Secretary of State (P. Ex. 18). Before that date Lyke and Lofvenholm had a number of conversations as to several different ways to set up a system for the preservation of Lyke's investment in HealthTek, and they had eventually agreed on the formation of U.S. Medical (Lofvenholm Dep. 20-21). It was Lyke's belief and intention that U.S. Medical would operate as a sales organization to sell products to be manufactured by codefendant Axiom Financial Services, Inc. ("Axiom")(Lyke Dep. 37).
13. U.S. Medical's original shareholders and directors were Lyke, Lofvenholm, William H. Chase, III ("Chase," who was then a HealthTek employee) and Molina (P. Exs. 22, 31). As of August 3 U.S. Medical's records reflect an organizational shareholders' meeting, with all of its original shareholders, including Lyke, present in person or by proxy (P. Ex. 31). Though Lyke signed the minutes, he testified that he did not attend any U.S. Medical meeting until 1993. In the meantime, however, Lyke became a 25% shareholder on November 1 or 11 (P. Ex. 30, 31).
14. On about August 8 HealthTek filed its SEC Form 10-Q for the quarter ended June 30 (P. Ex. 26), reporting that as of June 30 the amount of its indebtedness to Lyke was $ 1.378 million (id. at 13). Elsewhere in the same Form 10-Q, however, HealthTek reported that the total debt in notes payable to shareholders was $ 1.207 million (id. at 3). HealthTek did not disclose to SEC, in that Form 10-Q or elsewhere, the facts (1) of U.S. Medical's organization, (2) of Lofvenholm's involvement in organizing and operating U.S. Medical or (3) of Lyke's involvement as a U.S. Medical shareholder and director. Any requirement of such disclosure would be questionable in light of the fact that those events had occurred after June 30. But that cannot be said as to other clearly material matters: HealthTek did not apprise SEC, in that Form 10-Q or elsewhere, of the fact that it had entered into an agreement with Lyke to rescind its 1991 issuance of preferred stock to Lyke.
Finally, HealthTek did not disclose to SEC, in that Form 10-Q or elsewhere, the fact that it had entered into the Xomed License Agreement.
15. On or about August 14 Goode filed with the California Secretary of State a Release by which HealthTek's only secured creditor other than Lyke released his security interest in HealthTek's assets (Stip. P17).
16. In August Lofvenholm told Lyke that he intended to move to North Carolina (Tr. 25-26, 31). On or about August 31 Lofvenholm transmitted to Lyke, via fax, a document outlining the basis for a contractual agreement between "HealthTek, Inc. and/or its successor" and U.S. Medical (P. Ex. 27), along with a document entitled "Detailed Duties of U.S. Medical" (P. Ex. 28). before that date Lyke and Lofvenholm had held discussions about such an agreement (Lofvenholm Dep. 163).
17. In August or September Molina began a process of seeking bids from other companies to manufacture HealthTek's products with manufacturing equipment that belonged to HealthTek and was located at the facility owned by Mussetters (Molina Dep. 19).
18. In late September a judgment was entered against HealthTek in an Ohio state court (P. Ex. 13 at 12). Lyke had been in attendance at the trial (Tr. 100-01). That judgment triggered Lyke's decision to call the loans owed to him by HealthTek (Lofvenholm Dep. 90-91). In October Lyke inquired of HealthTek's general counsel Goode as to how he could go about calling the loans owed to him by HealthTek (Tr. 24). Goode began to represent Lyke in connection with his efforts to foreclose on such loans, even though Goode continued to serve as HealthTek's general counsel (Tr. 93).
19. On or about October 1 Lofvenholm and Lyke agreed that U.S. Medical would take over responsibility for invoicing and collecting HealthTek's accounts receivable (Lofvenholm Dep. 165). Lofvenholm then prepared a document reflecting such an agreement (P. Ex. 29) and transmitted that document to Lyke for his signature.
20. In October Lofvenholm did move from California to North Carolina so that he could operate U.S. Medical (Lofvenholm Dep. 16). As of October 1 Lofvenholm was still HealthTek's President and a Board member. Upon Lofvenholm's departure Molina became HealthTek's general manager (Molina Dep. 9).
21. During October and November (before November 28) HealthTek received bids from several other companies to manufacture HealthTek's products with manufacturing equipment that belonged to HealthTek and was located at the facility owned by Mussetters (Molina Dep. 32-34). Ultimately Lyke selected Medical Molding Corporation of America ("CIMCO") to conduct such manufacture (Tr. 49).
22. At some time between October 1 and November 30 HealthTek informed its customers by letter that payments owing to HealthTek were to be paid to U.S. Medical (Lofvenholm Dep. 168-72).
23. On or about October 15 HealthTek sold certain of its manufacturing equipment for making flexible plastic containers to a company known as "Plasco," with Plasco entering into a long term agreement to supply such containers to HealthTek (P. Ex. 13 at 13). Plasco's purchase price was $ 240,000, with $ 100,000 as a down payment and the $ 140,000 balance to be paid with certain inventory to be manufactured by Plasco with the equipment (Lofvenholm Dep. 102-05). Lyke himself negotiated and "set up" the transaction (Tr. 47-48) and signed the agreement as HealthTek's "chairman of the board" (D. Ex. 50). Although Lyke contends that $ 100,000 of the purchase price was allocable to a tool--a "vented spike mold"--that the agreement referred to as owned by Lyke and leased to HealthTek, this Court discredits that testimony:
(a) No allocation of any part of the purchase price to the spike mold was contained in the agreement. Agreement § 5.1 provided that the entire purchase price, including the $ 100,000 to be paid in cash as well as the $ 140,000 to be taken as a credit against future manufactures ordered by HealthTek, was payable to HealthTek and not to Lyke.
(b) Lyke had ordered the spike mold in late September 1991, to be delivered 16 to 18 weeks later, for a purchase price of $ 58,850. When Lyke later asked for and received the $ 100,000 payment directly (see Finding 24), he did not reflect his receipt of the $ 100,000 as the proceeds of sale of the spike mold on his income tax return.
In light of Lyke's control of both sides of the transaction (including his lawyer Goode's wearing of two hats in the relationship between Lyke and HealthTek), the inferences are to be drawn against Lyke: What he did was to coopt up to $ 100,000 of HealthTek's money (see Finding 24), an amount that should have been credited against its indebtedness to him.
24. On or about October 15 Lyke told Lofvenholm that he wanted Plasco's $ 100,000 down payment to be sent directly to Lyke and not HealthTek (Lofvenholm Dep. 102). Plasco did pay Lyke that sum directly between that date and December 18. Plasco later paid the $ 140,000 balance with inventory supplied to U.S. Medical (id. 105).
25. On or about October 29 Lyke drafted a form of letter for Molina's signature, sending it via fax from Glenview, Illinois to Molina in Auburn, California. Molina then caused the letter (P. Ex. 65) to be typed on HealthTek letterhead and to be transmitted to Mussetters on October 30 (Molina Dep. 36-37). HealthTek's letter (a) notified Mussetter that it intended to vacate the additional 2,000 square feet it had leased (see Finding 8) on November 23 (at the conclusion of the six month lease) and (b) requested a prompt return of HealthTek's security deposit when it vacated the space. But HealthTek's letter (c) did not disclose that HealthTek intended to vacate, or to discontinue paying rent on, the remainder of the space (misleadingly stating instead that the added space had "greatly assisted us in becoming resettled in your [Mussetters'] building" and (d) also falsely stated that Lofvenholm was "absent on an extended business trip," when Lofvenholm had in fact already permanently relocated his residence to North Carolina.
26. On about November 16 HealthTek filed its SEC Form 10-Q for the quarter ended September 30 (P. Ex. 13), reporting that as of September 30 the amount of its indebtedness owed to Lyke, including accumulated interest, was $ 1.532 million (id. at 6, 13). Elsewhere in the same Form 10-Q, however, HealthTek reported that the total debt in notes payable to shareholders was $ 1.318 million (id. at 3). Nor did HealthTek disclose to SEC, in that Form 10-Q or elsewhere, the fact that it had entered into the Xomed License Agreement with Xomed.
27. By definition HealthTek did not ever disclose to SEC the value of its rights under the Xomed License Agreement. Before November 16 Lofvenholm had frequent discussions with Lyke as to whether that value should be disclosed to SEC in HealthTek's Form 10-Q. In those discussions Lofvenholm took the position that such a disclosure should be made, while Lyke took the position (which was ultimately followed) that no such disclosure should be made (Lofvenholm Dep. 137-39).
28. Lyke resigned from HealthTek's Board effective November 10 (P. Ex. 13 at 13). Lyke's testimony during the citation-to-discover-assets proceeding following Mussetters' obtaining of a judgment against HealthTek (see Finding 46) was that he had actually resigned during the summer of 1992 in anticipation of the transfers at issue (Citation Tr. 64-66):
Q. When did you most recently cease serving as a member of the board of directors of HealthTek?
A. I think it was in the summer of '92 I probably resigned, to the best of my recollection.
A. I was dissatisfied with the operation of the company.
Q. With whose operation of the company?
A. Well, the company's fortunes appeared to be dismal.
Q. How did your resignation have anything to do with that, sir?
A. How did it have any connection with that?
A. I certainly was giving consideration to calling the loans I had to the company, and I'd be a creditor of the company.
Q. You resigned as a director of the company because you wanted to exercise your right as a creditor of the company, isn't that right?
A. I thought there was a conflict in me being a creditor pressing for payment at the same time I'm sitting on the board responding to that pressing of the claim.
This Court does not credit that testimony as to a claimed summer of 1992 resignation, finding instead that Lyke's fiduciary obligations as a HealthTek director continued at least until the effective date of his resignation referred to in this Finding 28. At least as importantly, that formal and nominal severance was not mirrored in the reality of the relationship. Indeed, given HealthTek's insolvency and Lyke's dominant position with the company even after that resignation, coupled with the other related factors reflected in these Findings, this Court finds that his fiduciary obligations continued with respect to his conduct in the enforcement of the debt owed to him by HealthTek--at least through the sale of HealthTek's assets to himself.
29. On or about November 17 Mussetter learned through reading a newspaper article that appeared in the Sacramento Bee, that HealthTek soon planned to discontinue operations and to go out of business. Of course both Lyke and Lofvenholm had already known that HealthTek was going to cease operations soon and that its assets were going to be transferred to Lyke or to a corporation to be wholly owned by him. For that purpose Lyke and Lofvenholm made a business trip to Europe and New York City during November to introduce Lyke to certain of Lofvenholm's business contacts. Despite the trip's intended benefit to Lyke, HealthTek paid the costs associated with the trip (Lofvenholm Dep. 198-200).
30. On November 23 Lyke and Goode caused the organization of Axiom, an Illinois corporation with its principal place of business in Illinois, for the purposes of acquiring and holding the assets of HealthTek that Lyke intended to cause to be transferred to him. From the time of its organization to the present, Lyke has owned all of the Axiom shares (Tr. 29-30).
31. On the same November 23 date Lyke published a legal notice in an Auburn, California newspaper announcing w November 30 UCC sale of HealthTek's assets. Lyke published no other advertisement relating to the sale (Tr. 93).
32. On November 25 HealthTek was already delinquent in rent owed to Mussetters. Accordingly they then caused HealthTek to be served with a certain "Three (3) Day Notice To Pay Rent or Quit" (P. Ex. 91), claiming an amount of delinquent rent.
33. At least as of November 28, each of HealthTek's distributors had been informed that U.S. Medical would be the distributor's future contact for HealthTek products (Lofvenholm Dep. 205).
34. Meanwhile, at some time between October 1 and November 28 Lyke had asked Lofvenholm to prepare a list ascribing a value of $ 750,000 to HealthTek's assets (Lofvenholm Dep. 184-86). Accordingly, on November 28 Lofvenholm transmitted from North Carolina to Lyke in Glenview, Illinois a seven-page "Asset List" (P. Ex. 33) with a two-page cover letter (P. Ex. 32). Those documents ascribed the following likely liquidation values (or "real values") to certain of HealthTek's assets:
(a) HealthTek's accounts receivable other than those owed by Plasco: $ 150,000 (P. Ex. 33, Lofvenholm Dep. 228-29);
(b) inventories: $ 150,000 (P. Ex. 33);
(c) cash in the approximate amount of $ 40,000 (id.);
(d) office equipment, furniture, fixtures, molds and tools: $ 85,540 (id.); and
(e) machinery and equipment: $ 151,340 (id.).
35. Before November 30 Lofvenholm had made repeated suggestions to Lyke that HealthTek should be represented by an attorney other than Goode, who (as Lofvenholm understood correctly) also represented Lyke. Lyke refused the suggestion and directed that Goode should continue to represent HealthTek (Lofvenholm Dep. 181-83).
36. On November 30 HealthTek was insolvent (Stip. P22). During October, November and/or December, after it had become known that HealthTek intended to transfer its assets to Lyke or to a corporation wholly owned by him, HealthTek incurred certain trade payables in excess of $ 72,970.17 that had not been paid as of March 1993 (P. Ex. 50).
37. On November 30 four or five men appeared at HealthTek's facility in Auburn, California in a group (Molina Dep. 53-54). Although it is not clear how that came about, it appears that they were HealthTek shareholders who wanted to learn what was going on and whether they could tour the company's facility (id. 54, Lofvenholm Dep. 217-18). Molina telephoned Lofvenholm in North Carolina for instructions and then led those persons on a plant tour. None of them was provided any information about HealthTek's financial affairs, its accounts receivable or the Xomed License Agreement, though Molina believes he told them there was a $ 750,000 bid for the company (Molina Dep. 55-56). Molina was not aware if he was there to receive bids (id. 57). Lyke was not present--indeed, he was not in the State of California that day (id. 60).
38. Thereafter on the same day Lofvenholm communicated with either Lyke or Goode by telephone, and Lofvenholm was told that a sale of HealthTek's assets to Lyke had been completed that day in Chicago. According to Lyke's trial testimony, on that day he telephoned a $ 750,000 successful bid for HealthTek's assets to Molina (Tr. 72, 88). Neither Lyke nor HealthTek had the assets appraised (Citation Tr. 43). Instead Lyke picked the $ 750,000 figure "out of the air" (id. 43, 44).
39. From November 30 through December 13 manufacturing operations continued at the Auburn, California facility, using the equipment and inventory that had purportedly been transferred to Lyke or to Axiom on November 30 (Molina Dep. 62-65). From December 7 through Sunday, December 13 output at the facility was actually increased through the use of certain additional, temporary assembly workers provided by a temporary employment agency, which went unpaid for its services (id. 66-67; see also P. Ex. 102 (the Worknet invoices) and P. Ex. 50).
40. Shortly after November 30, all of HealthTek's cash on hand on November 30 (D. Ex. 54 shows that to have totaled $ 32,744) was transferred to U.S. Medical (Lofvenholm Dep. 208). On December 10 U.S. Medical transferred $ 20,000 back to HealthTek for payroll purposes (P. Ex. 95).
41. On or about December 9 Molina met with representatives of CIMCO at the Auburn facility to demonstrate to those CIMCO representatives HealthTek's manufacturing processes and to show those representatives equipment that was to be moved to the facility operated by CIMCO in Costa Mesa, California (Molina Dep. 76-78). On December 18 HealthTek vacated the Auburn facility. With Lyke's authorization (Tr. 34) all of the physical assets that had been housed there were removed through the use of three semis: one destined for CIMCO's facility, another destined for HealthTek's Utah warehouse and the other destined for Plasco in Gurnee, Illinois. After December 18 all mail addressed to HealthTek was forwarded to U.S. Medical in North Carolina.
42. On December 18 Mussetters began a civil action against HealthTek in the Superior Court of California, County of Placer (the "California Action"), asserting their rights under the Lease. HealthTek was served with summons and complaint through Molina later that day (Stip. P24).
From December 18 through April 23, 1995 the space that Mussetters demised to HealthTek pursuant to the Lease remained vacant (Stip. P23).
43. At some time after November 30 U.S. Medical began exercising control over the Utah facility, taking over the lease there, making payments on HealthTek's behalf and assuming employment of the warehouseman who was responsible for that facility (Molina Dep. 68-69).
44. After November 30 and before February 1994, Lyke met periodically with Lofvenholm to discuss the status of the assets that had been transferred from HealthTek to Axiom (Lyke Dep. 29). On or about December 31 Axiom and Lyke entered into a Manufacturing Agreement with CIMCO (P. Ex. 68, Stip. P25). Among other things that Manufacturing Agreement provided for CIMCO's manufacture of product for Axiom with equipment that had purportedly been transferred to Axiom by HealthTek and that had previously been located at the Auburn facility. In or about December 1992 or January 1993 Lyke met with Molina and with CIMCO representatives at CIMCO's Costa ...