Connelly v. General Medical Corp.

• Decision Date: 27 March 1995
• Docket Number: Civ. A. No. 3:94CV637.
• Citation: 880 F. Supp. 1100
• Parties: Frances H. CONNELLY, Executrix of the Estate of Thomas M. Connelly, Plaintiff, v. GENERAL MEDICAL CORPORATION, and Steven B. Nielsen, Defendants.
• Court: U.S. District Court — Eastern District of Virginia

880 F. Supp. 1100

Frances H. CONNELLY, Executrix of the Estate of Thomas M. Connelly, Plaintiff, v. GENERAL MEDICAL CORPORATION, and Steven B. Nielsen, Defendants.

Civ. A. No. 3:94CV637.

United States District Court, E.D. Virginia, Richmond Division.

March 27, 1995.

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John Tracy Walker, IV, Paul Wilbur Jacobs, II, Christian, Barton, Epps, Brent & Chappell, Richmond, VA, for plaintiff Frances H. Connelly, Executrix of the Estate of Thomas M. Connelly.

John Waller Harrison, Earle Duncan Getchell, Jr., Robert Luther Hodges, McGuire, Woods, Battle & Boothe, Richmond, VA, for defendants General Medical Corp., Steven B. Nielsen.

MEMORANDUM OPINION

SPENCER, District Judge.

Plaintiff Frances H. Connelly, as executrix of her deceased husband's estate, has sued General Medical Corporation and its chief executive officer, Steven Nielsen, for defrauding and misleading her in connection the sale of certain securities. Set for a one day jury trial on April 6, 1995, this case is currently before the Court upon the plaintiff's Motion for Leave to Amend and the defendants' Motion for Summary Judgment.

For the reasons stated herein, the Court will GRANT the plaintiff's Motion For Leave to Amend and GRANT the defendants' Motion for Summary Judgment.

FACTS

A Virginia corporation, defendant General Medical Corporation ("General Medical") is one of the nation's largest distributors of medical and surgical products to hospitals. Compl. ¶ 5. General Medical is the successor-in-interest to Rabco Health Services, Inc. ("Rabco"), a Delaware corporation. Id.

Thomas M. "Tom" Connelly ("the decedent"), joined General Medical in 1976. Id. ¶ 7. In 1987, Rabco, a privately-held corporation, acquired General Medical as a subsidiary. Id. ¶ 8. Like many General Medical managers, or "partners" as they were known in Rabco parlance, the decedent purchased Rabco common stock after the acquisition, subscribing to 12,000 shares at $.01 per share. Id.; Dep. of Steven B. Nielsen at 24.

The decedent's ownership rights were governed by a March 31, 1987, stock subscription agreement ("the Agreement"). Compl. ¶ 10, Ex. 1.¹ Among other provisions, the Agreement entitled Rabco to purchase at a set price the entirety, but only the entirety, of the decedent's shares upon his death. Compl. ¶ 11, Ex. 1, at ¶ 2.2. To exercise this option, Rabco was required to provide written notice to the decedent's personal representative within six months of his death. Compl. ¶ 11.²

The Agreement also contained a "clawback" provision. This clause was to apply if Rabco exercised its option on the decedent's stock and, within 550 days of that purchase, either (1) merged or consolidated with an unaffiliated entity, or (2) went public. Compl. ¶ 12, Ex. 1, at ¶ 2.7. In the event one of these situations came to pass, Rabco was obligated to pay the decedent's estate the same consideration the estate would have received from the merger or sale if the company had never exercised its option. Compl. ¶ 12. In other words, the Agreement gave the estate a form of stock price protection guarantee.

Finally, the Agreement granted Rabco a five-year purchase option. Compl., Ex. 1., at ¶ 2.5. This provision was similar to the six-month option in that it limited Rabco to purchasing not less than all of the estate's stock, and gauged the price for such a sale by reference to the adjusted shareholders equity. Id. This option could be exercised "at any time after the fifth anniversary of the date of termination" of employment. Id.

The decedent occasionally discussed his Rabco stock with the plaintiff. Dep. of Frances H. Connelly at 67. She understood from these talks that "if the company was sold or if the stock went public ... we would realize an amount of ... money." Id. at 68. However, the plaintiff never pushed him to elaborate: "he never went into, and I didn't ask, I mean, that was business, and I just left it up to him." Id. Still, she was aware that efforts had been made to sell the company. Id. at 67.

The decedent died of an abdominal aneurysm on August 29, 1992. Compl. ¶ 8; Aff. of Frances H. Connelly ¶ 2. He had risen to the rank of Vice President at General Medical and, by virtue of additional subscriptions and stock splits, he owned 86,400 shares of Rabco common stock at the time of his death. Compl. ¶ 8-9. Named the executrix of the estate, the plaintiff hired an accountant to settle its affairs. F. Connelly Dep. at 19-22, 23-24. She had never personally made any investment decisions or participated in stock transactions. F. Connelly Aff. ¶ 5. Thus, her 25 year-old son Brian, an insurance salesperson, coordinated the life insurance proceeds to ensure an income for his mother. Dep. of Brian Connelly at 4-5, 9-10.

On September 3, 1992, defendant Steven B. Nielsen, President and CEO of General Medical and Vice President and Member of the Board of Directors of Rabco,³ wrote a letter of condolence to the plaintiff, assuring her that "you are very special and we want you to know that the Nielsen's sic and General Medical are here for you. Our love is a constant that you will always be able to count on." Pl.'s Brief in Opp. to Defs.' Mot. for Summ.J., Ex. 4, at 2. That same day, Nielsen wrote to Rabco Chairman Richard Bernstein and suggested that Rabco transfer the decedent's stock to the estate. See Mem. in Supp. of Defs.' Mot. for Summ.J., Ex. 4, at 1. Nielsen claims he wrote the letter to ensure that the "estate and the Connelly family were treated fairly by all concerned." Nielsen Dep. at 39-40. However, in the letter he told Bernstein that transfer would be both "an appropriate and proper gesture" of thanks for the decedent's contributions to General Medical, and "a profound statement of loyalty and trust to the remaining General Medical partners." Mem. in Supp. of Defs.' Mot. for Summ.J., Ex. 4, at 1.

Apparently, Bernstein initially dismissed the idea. Nielsen Dep. at 42. Eventually, however, Rabco's management elected to make a proposal to the estate. In February 1993, Nielsen was informed, either by Rabco's Executive Vice President, Treasurer, and Chief Financial Officer, Stuart Turner, or by its Vice President for Legal Affairs, James A. Cohen, that Rabco was willing to purchase only one-half of the estate's shares, provided that the estate waive its rights to merger or sale consideration as to those shares. Id. at 47. As Nielsen understood it, the estate would be entitled to keep the remaining one-half with all other rights under the Agreement. Id. He was asked to call the plaintiff "and act as an intermediary" between Rabco and the estate. Id. He recalls that he was to convey a sense of urgency in the request, that Rabco "wanted to meet with her and they wanted to do it relatively quickly." Id. at 57-58. This exigency arose from Turner's realization that Rabco's option under the Agreement was to expire on February 28. Dep. of Stuart Turner at 35.

Thus, on Thursday, February 25, Nielsen telephoned the plaintiff. Compl. ¶¶ 6, 14. In a five minute conversation, he told her to expect a letter from Rabco asking for her permission to purchase one-half of the decedent's shares. Id. ¶ 14; F. Connelly Dep. at 37; Nielsen Dep. at 54. Nielsen told the plaintiff that the proposal affected certain portions of the Agreement, and directed her to the specific paragraphs for her own perusal. Compl. ¶ 14; Nielsen Dep. at 55.

Nielsen told the plaintiff that, in his opinion, the estate should get all the stock. F. Connelly Dep. at 35; F. Connelly Aff. at ¶ 9. However, when the plaintiff asked Nielsen what he thought of the proposal, he responded that it was "a reasonable — reasonably good thing to do." Nielsen Dep. at 55. Nielsen asked that the plaintiff read the Agreement, and call Turner or Cohen if she had any questions. F. Connelly Dep. at 33; Nielsen Dep. at 56. He concluded by suggesting that she consult an attorney or financial advisor for input. F. Connelly Dep. at 36-37; Nielsen Dep. at 55.

Nielsen's telephone call was the first time anyone had mentioned the Rabco stock to the plaintiff since her husband's death. F. Connelly Dep. at 33. After talking to Nielsen, she located the Agreement and attempted to read it, highlighting the provisions that Nielsen had mentioned. Id. at 39; F. Connelly Aff. at 10. She had never seen the document before and apparently understood neither its terms nor what Nielsen was asking of her. Compl. ¶ 14; F. Connelly Dep. at 26, 35, 38, 41-44, 46.⁴ She called her son Brian for advice, but since the Agreement was not in front of him, he could not help her. F. Connelly Dep. at 47-48.

The anticipated letter arrived by Federal Express on Friday, February 26. F. Connelly Dep. at 55-56. Dated the day before, it bore Cohen's signature and indicated that Nielsen had been sent a copy. Compl., Ex. 2. In rather spartan fashion, the letter requested that the plaintiff consent to the following modifications:

1. That Section 2.2(a) of the Shareholders Agreements is hereby amended to provide Rabco with the option to purchase up to one-half of the shares owned by the shareholder (the "Purchased Shares").

2. Section 2.2(a) of the Shareholders Agreements is further amended so that the purchase price paid for the Purchased Shares shall not be subject to any adjustments pursuant to Section 2.7 of the Shareholders Agreements or otherwise. Rabco shall be relieved of any obligation it may have pursuant to Section 2.7 of the Shareholders Agreements.

3. Section 2.2(a) of the Shareholders Agreements is further amended to allow Rabco to extend its' sic option to purchase the shares from 6 months to 225 days.

4. Except as modified hereby, the Shareholders Agreements shall remain in full force and effect.

Id., at 1-2. The letter offered no explanation or interpretation of the proposal.

The plaintiff read the letter but did not understand its import. Compl. ¶ 16; F. Connelly Dep. at 49; F. Connelly Aff. ¶ 11. Accordin...