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Reiniche v. Martin

October 28, 2010

JEFFREY S. REINICHE, DR. ARTHUR CHAUSMER, AND GARY POST, DERIVATIVELY ON BEHALF OF HEALTH ALLIANCE HOLDINGS, INC., DERIVATIVELY ON BEHALF OF HA HOLDINGS, INC., PLAINTIFFS,
v.
JAMIE MARTIN, CURTIS LANE, ANDREW M. PAIL, KEVIN SWAN, MTS HEALTH ALLIANCE, LLC, ASHCROFT ASSOCIATES, LLC, JAMES KELLY, ALLEN PALLES, JOHN HENNESSY, JOHN SABALASKEY, M-1, LLC, SCOGGIN CAPITAL MANAGEMENT, L.P. II, SOUTHERN DIVERSIFIED BUSINESS SERVICES, INC., JON KAIDEN, SELECT CAPITAL VENTURES I., L.P., E.B. MARTIN, JR., HA ACQUISITION, LLC, AND EBM VENTURES, LLC, DEFENDANTS.



The opinion of the court was delivered by: Judge James B. Zagel

MEMORANDUM OPINION AND ORDER

I. BACKGROUND

Plaintiffs Reiniche, Chausmer and Post ("Individual Plaintiffs") have been shareholders of Health Alliance Holdings, Inc., ("HAH") a Delaware corporation, since 2002. They bring suit to compel HAH to sue derivatively on behalf of HA Holdings ("Holdings"), a Delaware corporation, for breaches of fiduciary duty by the directors and shareholders of HA Holdings. This is essentially a double derivative suit.

The complicated facts of this case require extensive explanation. The story begins with Health Alliance, LLC ("Health Alliance"), an Illinois company, which is not a party to this action. Health Alliance was formed in 1997 by Mark Swift to sell by mail diabetic and asthma patient care products and medicines to Medicaid beneficiaries and other enrollees. Health Alliance contracted with states to process orders and deliver supplies at a discounted rate. In 1998 Swift formed American Disease Management Group, Inc. ("ADMG"), a Delaware corporation, to provide Health Alliance with additional capital. This money would be used to fill the gap between the time the prescriptions were purchased, and the time of reimbursement by the state, approximately a thirty-five to sixty-day period. ADMG acquired 100% of the membership interest of Health Alliance.

In 2001, after acquiring several new contracts with various states, Health Alliance required another infusion of capital. ADMG, along with Defendant Jamie Martin and others founded HAH to raise the necessary capital. HAH acquired the membership interest in Health Alliance from ADMG, and ADMG became a majority 53.88 percent shareholder in HAH.

In May 2002, HAH, Health Alliance, ADMG, and others, entered into a Securities Purchase Agreement with MTS Health Alliance, L.L.C. ("MTS") and Ashcroft Associate, LLC ("Ashcroft"). Pursuant to this agreement, MTS and Ashcroft invested $11 million in HAH, and were each granted three seats on the HAH board of directors. The other five seats on the board were to be designated by a majority-in-interest of the existing shareholders, who at the time consisted of ADMG. The directors initially representing ADMG were Mark Swift, John Hennessey, Jamie Martin, Douglas Cook, and Robert Kominsky. The original MTS directors were Terrence Quinn, Curtis Lane, and Allen Palles. The original Ashcroft directors were Andrew Paul, Malcom Kostuchenko, and H. Bradley Sloan.

In May 2003, Holdings was formed to acquire 100% of HAH's membership interest in Health Alliance. As a result, HAH was a 45% shareholder in Holdings. In November 2004, Holdings sold its interest in Health Alliance to H A Acquisition, LLC ("Acquisition") for $10, plus certain debt relief, the exact amount of which has not been disclosed to Plaintiffs. It is this transaction that is the subject of this suit. Plaintiffs claim that in May 2004, Holdings valued Health Alliance at $35 to $38 million. They alleged that in October 2004, two other companies, Chronic Care Solutions and DeliverMed, which was associated with Swift, made offers to purchase certain assets of Health Alliance. Chronic Care's offer was $200 per patient for 10,000 of the 45,000 total patients, amounting to $2 million. DeliverMed offered to pay $275 per patient and $0.25 on the actual invoice dollar cost of inventory of certain Health Alliance pharmacies. No vote was taken on either of these offers.

At the time of the transaction, Defendant Palles, Swift, and Malcom Kostuchenko were directors of HAH (prior to May 2003, the board consisted of nine members including Defendants Lane, Paul, and Defendant Jamie Martin). Defendants Jamie Martin, Swan, Paul, and Lane (collectively "Defendant Directors") were the directors of Holdings. MTS, Ashcroft, Jamie Martin, Kelly, Palles, Swan, Hennessey, Sabalaskey, M-1, Scoggin, SDBS, Kaiden, and Select Capital (collectively "Defendant Shareholders") were shareholders of Holdings who voted for the November 2004 transaction. Plaintiffs also claim that during the relevant period Defendants were involved in many other joint business ventures and relationships with one another, alleging (1) Defendant Swan was an employee or agent of Defendant MTS; (2) Defendant Jamie Martin, wife of Defendant E.B. Martin, was a member and manager of EBM Ventures, LLC, an investor in Acquisition; (3) E.B. Martin is the manager and a member of EBM Ventures; (4) Lane of MTS and Paul of Ashcroft together founded MTS Health Partners, L.P., an entity affiliated with MTS; (5) MTS Health Partners, L.P. handles investments for SDBS and directed it to invest in Holdings; (6) Hennessy was an agent of the Martins who handled the transaction and was named Executive Vice President of Acquisition after the November 2004 transaction; (7) Kaiden and Paul are members of private equity firm Sopris Capital, its current portfolio includes MTS Health Partners, Inc.; (8) Paul is also on the Advisory Board of Select Capital, a shareholder of Holdings; (9) Jamie Martin and E.B. Martin are involved in substantial business dealings with Enhanced Capital Partners, LLC, which was founded by Paul and of which Paul is the Chairman of the Board of Directors; (10) Palles was a consultant and shareholder of Holdings and HAH and was affiliated with MTS Investors, LLC, CIB Marine Capital, LLC, and CIB Bank, which had provided financing for the entities and held outstanding warrants for Health Alliance Holdings; (11) both MTS and Palles became Series A preferred stockholders in Holdings after the 2003 reorganization; (12) Palles is employed by MTS; (13) Kostuchenko is also affiliated with MTS, and Kostuchenko and MTS Investors are investors in many other businesses with the Martins.

Plaintiffs maintain that beginning in 2002, Defendant Directors and Shareholders sought to freeze them and other HAH shareholders out through a series of "ultra vires, wasteful, unfair, and illegal acts," and Defendants Acquisitions and its investors EBM and E.B. Martin, knowingly participated in these acts. According to Plaintiffs, there was no shareholder vote for the May 2003 transaction, HAH was denied its right to seat a member on the Holdings board of directors, and due to mass resignations, there was no quorum present for the Holdings board meeting during which the November 2004 transaction was approved, invalidating the transaction. After the board approval, it issued a Memorandum of Agreement between Health Alliances, Holdings, Acquisition, and EBM for the sale of Holdings' membership interest in Health Alliance to Acquisition. Pursuant to the Agreement the Holdings shareholders were to confirm their agreement to transfer and execute a release of Health Alliance, Acquisition, and EBM from any claims. Plaintiffs claim that HAH, as shareholder of Holdings never agreed to the transfer, and neither Swift nor HAH signed any release. According to Plaintiffs, a release bearing Swift's signature is a forgery.

The complaint alleges that the November 2004 transaction was "an insider transaction made by the Defendant Directors and Shareholders to benefit the Martins and to further the interests of the other Defendant Directors and Defendant Shareholders in their continued business dealings with the Martins and each other." Plaintiffs maintain that a majority of the Defendant Directors were interested parties and that they breached their duty of loyalty to the shareholders. Their knowledge of their breaches of fiduciary duty is, according to Plaintiffs, evidenced by the executed releases from liability.

Plaintiffs claim that because the board of HAH consisted of Swift, Palles, and Kostuchenko, and because a majority of them - Palles and Kostuchenko - were interested in the complained-of transaction, any demand on the HAH board would have been futile and should be excused. Palles and Kostuchenko held the meeting without Swift, even though he requested that the meeting be postponed due to his unavailability (according to Plaintiffs, Swift was given less than 24 hours notice of the meeting). Plaintiffs also contend that it was futile to make a demand on the Holdings board prior to filing suit since at least three of the board members were interested in the transaction. Furthermore, HAH was refused its seat on the Holdings board, and the Holdings board failed to submit the two other purchase offers to the shareholders. When the offers were raised for discussion, Lane reportedly stated: "F--- Swift," (with whom DeliverMed is associated) "give [Health Alliance] to Jamie [Martin]." Plaintiffs maintain that this hostility demonstrates the futility of any demand that would have been made.

Plaintiffs allege three counts against Defendants: (1) breach of fiduciary duty against Directors of Holdings, including allegations of lack of quorum, waste, no shareholder ratification, unfair sale by uninterested directors, and entering into unfair releases; (2) breach of fiduciary duties against shareholders of Holdings; and (3) participation in breach of fiduciary duties against purchasers. Defendants now move to dismiss these counts arguing that the complaint is deficient for the following five reasons: (1) Plaintiffs lack standing because their double-derivative action is prohibited by Delaware law; (2) Plaintiffs lack standing to assert derivative claims because both Holdings and HAH are insolvent; (3) Plaintiffs' claim is untimely under Delaware law, which requires that suits against "void" corporations be filed within three years from date of voiding; (4) Plaintiffs' allegations of futility of demand are insufficient as a matter of law; (5) the business judgment rule and consent by a majority of shareholders bar Plaintiffs' claims; (6) none of the individual defendants owns a majority of Holdings' stock or controlled the corporate conduct. For the following reasons, Defendants' Motions to Dismiss are granted.

II. STANDARD OF REVIEW

A Motion to Dismiss under Rule 12(b)(6) requires that I analyze the legal sufficiency of the complaint, and not the factual merits of the case. Autry v. Northwest Premium Servs., Inc., 144 F.3d 1037, 1039 (7th Cir. 1998). I must take all facts alleged in Plaintiffs' complaint as true and draw all reasonable inferences from those facts in favor of the Plaintiff. Caldwell v. City of Elwood, 959 F.2d 670, 671 (7th Cir. 1992). Plaintiff, for her part, must do more than solely recite the elements for a violation; she must plead with sufficient particularity so that her right to relief is more than a mere conjecture. Bell Atl., Corp. v. Twombly, 550 U.S. 544, 555 (2007). Plaintiff must plead her facts so that, when accepted as true, they show the plausibility of her claim for relief. Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009). ...


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