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Timothy & Thomas LLC v. Viral Genetics

August 10, 2010

TIMOTHY & THOMAS LLC, PLAINTIFF,
v.
VIRAL GENETICS, INC. AND HAIG KELEDJIAN, DEFENDANTS.*FN1
VIRAL GENETICS, INC., COUNTERCLAIM PLAINTIFF,
v.
TIMOTHY & THOMAS LLC, COUNTERCLAIM DEFENDANT.



The opinion of the court was delivered by: Blanche M. Manning United States District Judge

MEMORANDUM AND ORDER

Plaintiff Timothy and Thomas LLC ("T&T") sued Viral Genetics, Inc. ("VGI") and Haig Keledjian (VGI's CEO) asserting breach of contract and fraud claims arising out of agreements between the parties regarding the development and commercialization of thymus nuclear protein as a treatment for HIV/AIDS. In response, VGI filed eleven counterclaims against T&T and its members Timothy Wright and Thomas Little (collectively the "T&T Parties") alleging fraud, conspiracy to commit fraud, multiple breaches of contract, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, tortious interference with contract, tortious interference with prospective economic advantage, trade libel, and unfair business practices. The T&T Parties' motion for summary judgment on all of VGI's counterclaims is before the court. For the following reasons, their motion is denied in part and granted in part.

I. Background

A. Local Rule 56

Local Rule 56.1 requires a party seeking summary judgment to submit a statement of material facts as to which the party contends there is no genuine issue and which entitle it to judgment as a matter of law. The rule also allows a responding party to submit a statement of additional facts that require the denial of summary judgment. The statements of fact must be concise and consist of "short numbered paragraphs." Without leave of court, the moving party's statement of fact cannot exceed 80 paragraphs, while the responding party is limited to 40 paragraphs. Both parties' submissions fail to comply with the rules governing summary judgment motions.

VGI submitted a statement of additional facts containing paragraphs that often addressed multiple unrelated facts and stretched on for nearly two pages each. See, e.g.,VGI's Additional Facts (Doc. 190) VGI Resp. to T&T Facts and VGI Additional Facts [docket #186] at ¶ 18. Its effort is neither concise nor short. The kitchen sink approach also subverts Local Rule 56.1's goal of providing a structure that allows for efficient resolution of summary judgment motions. See Markham v. White, 172 F.3d 486, 489 (7th Cir. 1999) ("the kind of organization the rules require must occur sooner or later, and the system as a whole is better served if it happens sooner").

With respect to the T&T Parties, they did not consistently attach the cited evidence supporting their denials of VGI's statements of fact as an exhibit to their response. Rule 56(e)(1) requires them to do so, and the failure to attach cited evidence makes it inadmissible for purposes of the summary judgment motion. See Comm 2000, LLC v. Southwestern Bell Mobile Systems, LLC, No. 05 C 457, 2009 WL 1851130, at *5 (N.D. Ill. Jun. 29, 2009).

In addition, the T&T Parties accuse VGI of deluging the court with irrelevant facts and responses, but nevertheless submitted 137 objections to VGI's statement of additional facts, the vast majority of which were unfounded. See T&T Response to VGI's Additional Facts [dkt. #190]. For instance, VGI's additional fact three states in its entirety: "VGI needed funding and had no choice but to sell T&T its distribution rights in Africa." Despite VGI's commendable brevity, the T&T Parties contend that this fact is not short and concise.

Nevertheless, in the interests of expeditiously resolving the pending motion for summary judgment in this 2006 case, the court will not require the parties to redo their filings. It thus turns to the parties' objections to the opposing side's statements of fact. In doing so, it acknowledges that its discussion of specific objections prior to a summary of the facts is likely confusing to the reader. However, due to the generally chaotic state of the record, the court will forge on.

B. Objections

1. VGI

The T&T Parties' ¶ 12 states that the FDA rejected VGI's pre-IND meeting information package and cites to the testimony of Monica Ord, who was a consultant hired by VGI to raise funds for VGI.*fn2 T&T Facts in Supp. of SJ [dkt. #18], Ex. 11 at 108:8-22. VGI contends that this paragraph misrepresents the cited testimony and that Ord lacks personal knowledge. See Fed. R. Evid. 602. In the cited testimony, Ord refers to the FDA's rejection of the IND, but does not specify whether she is referring to the pre-IND. Moreover, Ord's position at VGI required her to recruit investors, board members and scientists, so VGI has not provided the necessary foundation for Ord's testimony about the FDA approval process. See VGI Opp. to T&T MSJ [dkt. #185], Ex. 37 at 37:3-6. Accordingly, the T&T Parties' ¶ 12 is stricken.

Second, VGI objects to the portion of the T&T Parties' ¶ 25, which provides that, "Ord has no evidence that the T&T Parties did anything to create the recruitment problems affecting the trial and Ord admits the trial was not delayed or destroyed as a result of Wright's handling of the amendment to the endpoint."*fn3 See T&T Facts in Supp. of SJ [dkt. #184]. According to VGI, this portion of ¶ 25 misrepresents Ord's testimony, is not supported by personal knowledge, and is inadmissible hearsay.

When asked if Wright exacerbated the recruitment problems, Ord responded, "[c]ould be. I don't know. From what I know, yes, could be." VGI Opp. to T&T MSJ [dkt. #185], Ex. 37 at 90:6-9. The statement "Ord has no evidence" is literally true, as based on the current record, Ord stated that she did not know who was responsible for the recruitment problems and at best speculated that Wright caused them. The court will not consider Ord's speculation.

The second part of T&T's ¶ 25 states that Ord admits the trial was not delayed by Wright's handling of the amendment to the endpoint. This is also a fair characterization of Ord's testimony. See T&T Facts in Supp. of SJ [dkt. #184], Ex. 11 at 211:22-212:4. Nevertheless, as noted by VGI, Ord lacks authority to make a binding admission given the scope of her employment as a consultant for VGI. Therefore, Ord's testimony on this issue reflects her opinion and is not an admission by VGI.

2. The T&T Parties

The T&T Parties raise the following objections to VGI's statement of additional facts. Objection No. 1 -- ¶¶ 1-40 are not short and concise as required by Local Rule 56.1

The court agrees that portions of VGI's statement of additional facts are neither short nor concise. However, as discussed above, given the age of this case and in the interests of economy, the court will not require the parties to redo their briefs. Thus, this objection is overruled.

Objection No. 2 --¶¶ 1, 2, 3, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 17, 18, 26, 27, 28, 30, 31, 32, 34, 36 & 37 contain facts that are irrelevant

The T&T Parties do not attempt to parse out the allegedly irrelevant facts and the court declines to speculate as to what their arguments might have been. In any event, objections to facts based on relevancy are improper. Keefe v. Mega Enterprises, Inc., No. 02 CV 5156, 2005 WL 693795, at *1 (N.D. Ill Mar. 23, 2005). Thus, this objection is overruled.

Objection No. 3 -- The evidence cited in ¶¶ 2, 4, 5, 6, 7, 8, 10, 12, 13, 14, 15, 16, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35, 36, 37, 38, 39 & 40 does not support the fact asserted.

The T&T Parties again failed to specifically identify the allegedly inaccurate portions of the specified paragraphs. Nevertheless, the court has carefully reviewed the parties' Rule 56.1 statements and the corresponding portions of the record. To the extent that any fact is not supported by the evidence cited in support, it will be disregarded.

Objection No. 4 -- ¶¶ 4, 10, 21, 28, 30, 34 & 39 contains hearsay or lack foundation

Yet again, the T&T Parties' general objection forces the court to speculate as to which portions of the record are, in their view, improper. To ensure that its ruling is based on admissible evidence and determine if genuine issues of material fact warrant a trial, the court will nevertheless comment on evidentiary issues to the extent that it can do so based on the parties' briefs. To the extent that the court has not correctly determined the basis for the T&T Parties' objections (for all of its objections, not just this particular group), any further objections raised in a motion to reconsider will be deemed waived.

The objection to ¶¶ 10 and 30 appears to take issue with Exhibit 27, a summary of damages memorandum prepared by Michael Capizzano (VGI's former Vice President of Finance, Business and Corporate Development). Because this document is not the sole basis for the facts in these paragraphs, the objection is overruled.

With respect to ¶ 21, the T&T Parties appear to be arguing that Exhibit 3, VGI's Form 10-KSB, is hearsay. See T&T Facts in Supp. of SJ [dkt. #184], Ex. 3. This form is regularly made in the course of a publicly traded company's business and thus falls within the "records of regularly conducted activities" hearsay exception. See Fed. R. Evid. 803(6). It is also subject to judicial notice. See, e.g., Benhabib v. Hughes Electronics Corp., No. CV-04-0095, 2007 WL 4144940 (C.D. Cal. 2007). This objection is, therefore, overruled.

Paragraph 28 is based on Keldejian's testimony that HPC Capital told him it would not loan another $2 million because the stock price dropped. See VGI Opp. to T&T's MSJ [dkt. #185], Ex. 1 at ¶ 57; T&T Facts in Supp. of SJ [dkt. #184], Ex. 5 at 645. HPC Capital's statement of why it chose not to loan additional money to VGI is an out of court statement made by someone other than the declarant (Keledjian) offered for the truth of the matter asserted. See Fed. R. Evid. 801(c) Therefore, this portion of ¶ 28 is hearsay and hence inadmissible.

Similarly, in VGI's ¶ 30, it states that according to Keledjian, "[it] had several prominent members in the pharmaceutical research industry on its Scientific Advisory Board and had obtained commitments from each of them, and others to be introduced to major drug companies for strategic partnership opportunities . . . ." See VGI Opp. to T&T MSJ [dkt. #185], Ex. 1 (Keledjian Aff.) at ¶ 65; VGI Opp. to T&T MSJ [dkt. #185], Ex. 32 at 666: 5-22. Keledjian may not testify about what members of the Scientific Advisory Board told him given that VGI is offering those statements for the truth of the matter asserted. See Fed. R. Evid. 801(c). Therefore, this objection is sustained and the portion of ¶ 30 addressing commitments to introduce VGI to drug companies is stricken.

The T&T Parties next challenge VGI's ¶ 34, which reflects Keledjian's personal opinion regarding what would have happened at VGI in the absence of the T&T Parties' alleged wrongful conduct. While speculative, this fact is supported by Keledjian's own testimony and hence is not hearsay. See Fed. R. Evid. 801(b)-(c).

With respect to ¶ 38, the T&T Parties provide a specific objection and contend that the portion of this paragraph asserting that IDG backed out of a $4 million distribution deal with VGI because of the T&T Parties' conduct is based on hearsay. Their objection then falters as they provide an id. cite in support of their objection. This is unhelpful as the previous citation contains five citations, most of which appear to be unrelated to the contention at issue. The only reasonable option is Keledjian's statement that "[IDG] signed a term the term sheet. They did their due diligence, and they came back and talked about some of our reputation problems . . ." VGI Opp. to T&T MSJ [dkt. #185], Ex. 32 at 676:12-677:8. Keledjian's recitation of IDG's purported statements as to why it abandoned the deal is offered for the truth of the matter asserted and thus is inadmissible hearsay. See Fed. R. Evid. 801(c).

Finally, the T&T Parties take issue with VGI's ¶ 39, which states that the T&T Parties directly communicated with potential VGI investors and convinced them not to invest. This is based on VGI officers Keledjian and Capizzano's recitation about what investors told themand hence is inadmissible hearsay. See Fed. R. Evid. 801(c).

Objection No. 5 -- ¶¶ 4, 5, 12, 13, 14, 13, 15, 18, 20, 22, 27, 36, 37, 38 are supported by evidence that is not certified or otherwise authenticated.

The T&T Parties' fifth objection states in its entirety: "The T&T Parties object to VGI's Statement of Additional Facts in whole and in part to the extent the Additional Facts are based on purported evidence that is not certified or otherwise authenticated." Each of the listed paragraphs cite to multiple sources of evidence. This sweeping objection does not provide even a glimmer as to its basis and hence is overruled.

The court also notes that many of the paragraphs within the ambit of this objection are deposition transcripts that include a certification by a court reporter. A party does not act in good faith if it objects to a document it knows is authentic. See Fenje v. Feld, 301 F. Supp. 2d, 781, 789 (N.D. Ill. 2003) (noting that such an objection is merely obstructive). There is no discernable basis for a challenge to the authenticity of deposition transcripts, so these objections are not well taken. Moreover, this kind of objection is particularly ill-advised given the general state of the record. The T&T Parties' attorneys proceed at their own risk if they continue in this vein.

Objection No. 6 -- ¶¶ 4, 10, 24, 25, 26, 27, 33, 35 contain improper lay opinion

Yet again, the T&T Parties' blanket objection fails to identify what evidence is allegedly improper lay opinion. To the extent that the cited paragraphs cite to Keledjian and Capizzano's testimony, the objection is overruled as their opinions are based on their personal knowledge. See Fed . R. Evid. 701. To the extent that any other portions of these paragraphs allegedly are based on improper lay testimony, the objection is overruled as the court declines to look at all of the testimony in the cited paragraphs, locate opinions in that testimony, construct arguments as to the propriety of the opinions, and then rule on its own objections.

Objection No. 7 -- ¶¶ 10, 22, 24, 25, 26, 27, 29, 35, 39 and the evidence supporting them were not disclosed in the course of discovery

In their final group of objections, the T&T Parties contend that certain paragraphs about damages must be stricken because VGI failed to supplement its disclosures. See Fed. R. Civ. P. 26(a)(1)(A)(iii). The court cannot ascertain what evidence allegedly flows from a discovery violation so the T&T Parties have waived this argument.

With these procedural ground rules in place, the court turns to the substance of the parties' Local Rule 56.1 submissions.

C. Facts

1. The Parties

Plaintiff/counterclaim defendant T&T is an Illinois limited liability company with its principal place of business in Chicago, Illinois. T&T's members are Timothy W. Wright III and Thomas Little, both of whom are Illinois citizens. Defendant/counterclaim plaintiff VGI is a publicly owned drug development company organized under Delaware law with its principal place of business in California. Defendant/counterclaim plaintiff Haig Keledjian is VGI's president, CEO, and CFO and is a California citizen. Michael Capizzano served as VGI's Vice President of Finance, Business and Corporate Development for approximately six years and continues to act as a consultant.

2. Initial Relationship Between the Parties

VGI was founded in 1995 and is engaged in the research and development of immune based therapies for HIV/AIDS. VGI pursued the development of an HIV/AIDS therapy based on drug compounds containing thymus nuclear protein ("TNP"). The particular drug compound at issue in this case was VGV-1. VGI stopped development of drugs based on TNP in mid-2006.

Dr. Harry Zhabilov, Sr. performed some of the earliest research into TNP-based treatments for HIV/AIDS. Zhabilov Sr. was VGI'S founder and its chief scientific officer. Zhabilov Sr. developed a secret, proprietary process for the extraction of TNP from thymus tissue. After Zhabilov Sr. died in 2003, his son, Harry Zhabilov, Jr., was the only person who knew how the process worked. In 2003, VGI employed Zhabilov Jr. to continue his father's work.

In early 2003, Richard Dent, former football player for the National Football League's Chicago Bears, introduced an unidentified person at VGI to attorney Timothy Wright. On April 3, 2003, VGI and Wright entered into a consulting engagement agreement under which Wright agreed to, among other things, advise VGI regarding potential financing alternatives and assist VGI to develop strategic partnerships. The consulting agreement contained a choice-of-law provision which stated, "[t]his agreement shall be governed by the law of the State of California without regard to choice-of-law provisions." VGI Opp. to T&T MSJ [dkt. #185], Ex. 2 at 2-8, ¶ 7.01.

During a trip to Africa in June of 2003 to promote VGI's product, Wright introduced unspecified VGI officers to Thomas Little, a principal of a large American demolition company who appears to have been vacationing in Africa at the time. In October of 2003, Little agreed to loan $200,000 to VGI in the form of a convertible debenture, which is a debt instrument that can be converted into stock at the option of the holder or the issuer.

3. African Trial Approved

In February of 2004, the Medicine Control Council of South Africa gave VGI approval to conduct a Phase III human clinical trial using VGV-1, which is an injectable form of TNP. The trial was designated TNP-001. VGI hired Dr. Ronald Moss to head VGI's scientific advisory board ("SAB") and provide advice for the clinical trial. VGI contends that at this time, it began to realize that its previous principal financier (a private citizen whose son had AIDS) would not be able to fund the trial. T&T Facts in Supp. of SJ [dkt. #184], Ex. 2 at ¶ 124.

4. T&T Negotiations

On April 11, 2004, Wright told Keledjian that he intended to form a partnership with Little for the purpose of acquiring the distribution rights to VGV-1 in Africa from VGI. At approximately the same time, Little asked VGI to repay his $200,000 loan. According to VGI, it had no choice but to agree to the give up the distribution rights because it did not have funds to repay the loan. The T&T Parties dispute this assertion.

a. Africa Agreement

On May 7, 2004, T&T and VGI signed an agreement memorializing their discussions regarding the sale of the distribution rights for VGV-1 in Africa (the "Africa Agreement"). At an unspecified point, Viral Genetics South Africa ("VGSA") came into being. In exchange for the distribution rights, T&T agreed to fund up to $2,000,000 of VGSA's activities in Africa and to devote a portion of the $2,000,000 to "assure completion of the Clinical Trials provided the total cost of Clinical Trials shall not exceed $1,200,000." The parties dispute whether the reference to "Clinical Trials" in the Africa Agreement was limited to TNP-001.

The Africa Agreement also allowed VGI to elect to receive money from T&T in exchange for an assignment of VGI's ownership rights in VGSA to T&T. T&T Facts in Supp. of SJ [dkt. #184], Ex. 7 at 2. It further provided:

Upon VGI's election to receive payment from [T&T] under this Agreement in the amount of $520,000, assign 90 percent of its ownership rights in VGSA to [T&T] and extend to [T&T] a perpetual right to purchase at any ownership rights [sic] to VGSA retained by VGI and later offered by VGI to any third party at terms and conditions offered to such third party.

Id.

b. The Distribution Management Agreement

In December of 2004, VGI and T&T entered into the Distribution Management Agreement ("DMA"). T&T Facts in Supp. of SJ [dkt. #184], Ex. 8. The DMA superseded the Africa Agreement, but does not mention VGSA. T&T paid VGI $650,000 under the DMA.

The DMA defines "Clinical Trial" as:

The multi-center, randomized, double blind, placebo-controlled human clinical trial of a product named VGV-1 as approved by letter dated February 27, 2004, from the Medicines Control Council of South Africa to be performed in accordance with an agreement between Viral Genetics, Inc. and Virtus Clinical Development (Pty) Ltd. Dated August 1, 2003 including any amendments thereto.

T&T Facts in Supp. of SJ [dkt. #184], Ex. 8. at 2. The DMA also contains a choice-of-law provision which states it "shall be construed and interpreted under the laws of the State of California, without regard to conflicts of law principles." T&T Facts in Supp. of SJ [dkt. #184], Ex. 8. at 17.

Like the Africa Agreement, the DMA contained a provision requiring T&T to pay for portions of the Clinical Trial. Specifically, ¶ 15 of the DMA states:

A) T&T shall pay $1,600,000 [USD] to complete the Clinical Trial. T&T shall pay any additional costs in excess of $1,600,00 [USD] incurred to complete the Clinical Trial. VGI shall reimburse T&T in an amount equal to one half of any such additional costs in excess of $1,600,000 [USD] incurred to complete the Clinical Trial. Said reimbursements shall be tendered by VGI to T&T on a monthly basis on or before the 10th day of each calendar month in which said costs are paid to T&T.

B) T&T will cooperate and provide all assistance, and will cause each Distributor to cooperate and provide all assistance, reasonably requested by VGI in the design and implementation of any and all test, ...


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