Mussetter v. Lyke

• Citation: 10 F.Supp.2d 944
• Decision Date: 24 June 1998
• Docket Number: No. 96 C 7657.,96 C 7657.
• Parties: Richard E. MUSSETTER, et al., Plaintiffs, v. Richard E. LYKE, et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

10 F.Supp.2d 944

Richard E. MUSSETTER, et al., Plaintiffs, v. Richard E. LYKE, et al., Defendants.

No. 96 C 7657.

United States District Court, N.D. Illinois, Eastern Division.

June 24, 1998.

COPYRIGHT MATERIAL OMITTED

Frank P. Tighe III, Oak Brook, IL, for Plaintiffs.

Howard C. Goode, Northbrook, IL, for Defendants.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

SHADUR, Senior District Judge.

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, 106 S.Ct. 445, 88 L.Ed.2d 405 (1985).

Findings of Fact

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 ¶ 5¹). In or about July 1990 Lyke became Chairman of the Board (Stip.¶ 8). 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. 96-98²).

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.¶ 10).

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. 63, 77).

4. On or about March 5, 1992³ 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.¶ 9).

5. On or about March 23 California citizens Mussetters entered into an Industrial Real Estate Lease ("Lease," D.Ex. 3) with HealthTek (Stip.¶ 11) 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.¶ 12).

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.¶ 14). 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).⁴ 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.⁵ 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.¶ 17).

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...