Estate of Soler v. Rodriguez

• Citation: 63 F.3d 45
• Decision Date: 09 November 1994
• Docket Number: No. 94-1405,94-1405
• Parties: Fed. Sec. L. Rep. P 98,835 ESTATE OF Jaime SOLER, Plaintiffs, Appellants, v. Joaquin RODRIGUEZ, et al., Defendants, Appellees. First Circuit. Heard
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

Page 45

63 F.3d 45

Fed. Sec. L. Rep. P 98,835

ESTATE OF Jaime SOLER, Plaintiffs, Appellants, v. Joaquin RODRIGUEZ, et al., Defendants, Appellees.

No. 94-1405.

United States Court of Appeals,

First Circuit.

Heard Nov. 9, 1994.

Decided Aug. 15, 1995.

Pedro A. Jimenez, with whom Katarina Stipec Rubio and Gonzalez Oliver, Correa Calzada, Collazo Salazar, Herrero & Jimenez were on brief, for appellants.

Jorge E. Perez Diaz, with whom Jorge I. Peirats and Pietrantoni Mendez & Alvarez were on brief, for appellee Centro Medico Del Turabo, Inc.

Eli B. Arroyo, for appellee Universidad de Ciencias Medicas San Juan Bautista, Inc.

Before BOUDIN, Circuit Judge, CAMPBELL, Senior Circuit Judge, and BOYLE, ^* Senior District Judge.

LEVIN H. CAMPBELL, Senior Circuit Judge.

In this shareholder's derivative suit brought on behalf of Centro Medico del Turabo, Inc. ("CMT"), Plaintiffs-Appellants Ivette Perez Vda. de Soler, Marie Ivette Soler Perez, Jaime A. Soler Perez, and Antonio Soler Perez (as representatives of the Estate of Dr. Jaime Soler, or the "Soler Estate") and Dr. Jose A. Badillo appeal from the district court's Opinion and Order and Order on Reconsideration dismissing their verified complaint under Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief may be granted. ¹ Estate of Soler ex rel. Soler v. Rodriguez, 847 F.Supp. 236 (D.P.R.1994). The district court held that appellants failed to plead the "in connection with" requirement of a cause of action under Section 10(b) ² and Rule 10b-5, ³ but rather alleged only a case of breach of fiduciary duty and corporate mismanagement under Puerto Rico law. We reverse.

I. FACTS.

The facts alleged in the complaint--extending every reasonable inference in plaintiffs' favor, see Coyne v. City of Somerville, 972 F.2d 440, 443 (1st Cir.1992)--are as follows. CMT is a private, for-profit Puerto Rico corporation organized in 1978 to offer medical services in the eastern central region of Puerto Rico. Through its subsidiary, Turabo Medical Center Partnership, ⁴ CMT owns and operates the Hospital Interamericano de Medicina Avanzada ("HIMA"), a hospital located in Caguas, Puerto Rico.

The individual plaintiffs are the widow and children of Dr. Jaime Soler, one of CMT's founders, and Dr. Jose Badillo, the other founder of CMT. Prior to the disputed sale of securities described below, Dr. Badillo owned 217,500 shares of common voting stock of CMT, which constituted 16.81% of the total 1,293,942 shares of common voting stock of the company then issued and outstanding. In 1990, Dr. Soler passed away, leaving his 435,000 shares, which constituted 33.62% of CMT's common voting stock, to the Soler Estate. Appellants thus collectively owned 50.43% of CMT's common voting stock.

Appellee Joaquin Rodriguez was originally hired by Drs. Soler and Badillo to manage CMT and eventually became a minority shareholder as well as the chairman of its board of directors. The founders gave Rodriguez full administrative, financial, and operational control over all of the affairs of CMT. On November 14, 1991, Mrs. Soler replaced her deceased husband on the board. The other directors during the relevant periods were appellant Dr. Badillo and appellees Juan Chaves, Carlos M. Pineiro, and Dr. Jose J. Vargas-Cordero. Rodriguez was CMT's president; Dr. Badillo its vice-president; Chaves its secretary; and Pineiro its treasurer. Appellee Fernando E. Agrait was an attorney hired by Rodriguez to handle the in-house legal affairs of CMT. Appellee Luis Garcia Passalacqua was owner of Miramar Construction, Inc., which had a pending business deal with CMT.

Appellees Chaves and Vargas-Cordero were also respectively the owner and dean of appellee Universidad de Ciencias Medicas San Juan Bautista, Inc. ("UCMSJB"), a non-profit company operating an independent school of medicine at HIMA. Appellees Rodriguez and Pineiro were trustees of UCMSJB. UCMSJB operated its medical school from a space rented from CMT for $1.00 per year. Prior to the disputed sale, UCMSJB also owned 10,000 shares, or 0.77%, of CMT's common voting stock.

In 1987, CMT's shareholders authorized the issuance of 300,000 common voting shares of CMT and the placement of those shares in a public sale at $10 per share, subject to registration under the Blue Sky laws of Puerto Rico, and for distribution solely to residents of Puerto Rico. This sale was not successful; very few of the shares were sold. Sometime between 1991 and the fall of 1993, Rodriguez told Dr. Ramon Carlos, a physician with privileges at HIMA who had approached him to purchase shares in CMT, that the public sale had been closed and that CMT's shares were no longer for sale.

During all of 1992 and until October 1993, shareholders meetings of CMT were not held, because, according to Rodriguez, the audited financial statements of the company were not ready. In 1993, Mrs. Soler and Dr. Badillo [the "plaintiff directors"] decided that outside experts should be hired to analyze CMT's future plans, and felt that no corporate assets should be conveyed or encumbered until this was done and the board was fully informed.

Notwithstanding this decision, Rodriguez insisted upon the sale of surface rights over HIMA's parking facility to Miramar Construction for the development of a doctor's office building. Mrs. Soler opposed this sale at a meeting of CMT's board of directors held on September 9, 1993. At this same meeting, Rodriguez reiterated a prior request for approval of a three-year lease to UCMSJB of land managed and partly owned by CMT. Mrs. Soler and Dr. Badillo opposed the lease because of the nominal yearly rent of $1.00, because no independent evaluation of the best use of that land had ever been performed, and because no outside independent advice had ever been obtained as to the financial benefit to CMT of having UCMSJB's school of medicine, long unaccredited by the nationwide accrediting body, affiliated with CMT. The plaintiff directors also felt that the transaction between CMT and UCMSJB, which was effectively controlled by Chaves, Rodriguez, and Dr. Vargas, needed to be independently analyzed for conflicts of interest.

Unbeknownst to the plaintiff directors, to the board of CMT, and to CMT as a corporate entity, Rodriguez and Chaves had designed a scheme to deprive plaintiffs of their historic majority ownership in the company and gain control of CMT for themselves. The scheme consisted of the issuance by Rodriguez and Chaves, on September 16 1993, without prior knowledge or approval of the board of directors, of 200,000 shares of CMT stock to UCMSJB at a price of $10 per share, for a total price of $2,000,000. UCMSJB made a down payment of $500,000, and agreed to pay CMT the balance through eight promissory notes in the amount of $100,000 each, payable consecutively on August 1 and February 1 through February, 1997, at 6% annual interest, and a promissory note in the amount of $700,000 on the same terms due on August 1, 1997. ⁵ These notes were secured by an assignment of a contract between the Department of Health of the Commonwealth of Puerto Rico and UCMSJB by virtue of which UCMSJB was to receive monthly payments of $249,864.08. This collateral is alleged to have been "fictitious" because the contract in question was supposedly non-assignable under Puerto Rico law. The purposes of the scheme were allegedly to,

a) secure control by Rodriguez and Chaves and approval of the lease with UCMSJB at CMT's expense, b) to procure and finance a substantial block of shares to UCMSJB at a wholly inadequate price and with fictitious collateral, c) to entrench management and validate sweetheart deals and/or situations of conflicts of interest, d) to dilute and eliminate plaintiffs' majority ownership in CMT, e) to evict plaintiffs from the corporate board, and f) to prevent the appointment of independent outside directors to the company board at the annual shareholders' meeting.

At the next board meeting on September 29, 1993, Rodriguez again insisted that the three-year lease be approved at no charge, ostensibly in order to free up other space occupied by the medical school in the hospital. The plaintiff directors decided at this point firmly to oppose the lease until independent analysis could be done. No mention was made at this meeting of the sale of shares to UCMSJB.

In early October 1993, the plaintiff directors noticed that certain statements contained in the minutes of the September 29th meeting were inaccurate or misleading. Specifically, the minutes stated that Mrs. Soler had moved for approval of the minutes of the September 9th meeting, which she had not done; reflected a motion made by Mrs. Soler and Dr. Badillo setting forth certain requirements for consideration of the sale of surface rights to Miramar Construction, but omitted the principal requirement that such sale not be approved until it was independently determined that it was in CMT's best interest; and reflected that Dr. Badillo had proposed approval of the lease to UCMSJB, when both he and Mrs. Soler had strongly opposed such lease.

The plaintiff directors decided that the only way to deal with the increasing conflicts of interest was to appoint to CMT's board reputable and experienced independent outside directors at the upcoming shareholders' meeting, to be held on October 28, 1993, and to do so in such a manner that these outside directors would hold a determinative vote in case of an impasse. Dr. Badillo also considered selling the plaintiff shareholders' majority block as a means of ending the tense situation, but the Soler Estate decided that until such time as outside directors were appointed, it would not consider or decide whether it wished to sell its shares in CMT.

The plaintiff directors formalized their position in a letter dated October 7, 1993, a copy of which was hand-delivered to the directors of CMT at a board meeting held on that date. The letter stated their...