Partners v. Englard
| Decision Date | 15 December 2010 |
| Docket Number | C.A. No. 4476-VCL. |
| Citation | 11 A.3d 1180 |
| Parties | HAMILTON PARTNERS, L.P., a New Jersey limited partnership, Plaintiff, v. Murry ENGLARD, Howard Berg, Yoram Hacohen, and Yitz Grossman, Defendants, and New York Healthcare, Inc. and The Bio Balance Corp., Nominal Defendants. |
| Court | Court of Chancery of Delaware |
Ronald A. Brown, Jr., Marcus E. Montejo, Prickett, Jones & Elliott, P.A., Wilmington, Delaware; Attorneys for Plaintiff.
Martin S. Lessner, Alex D. Thaler, Young Conaway Stargatt & Taylor, LLP,Wilmington, Delaware; Howard Kleinhendler, Meagan Zapotocky, Wachtel & Masyr, LLP, New York, New York; Attorneys for Defendants Murry Englard, Howard Berg, Yoram Hacohen, New York Health Care, Inc., and The Bio Balance Corp.
Neal J. Levitsky, Seth A. Niederman, Fox Rothschild LLP, Wilmington, Delaware; Stuart A. Blander, Alan A. Heller, Heller, Horowitz & Feit, P.C., New York, New York; Attorneys for Defendant Yitz Grossman.
LASTER, Vice Chancellor.
Plaintiff Hamilton Partners, L.P. owns approximately 4% of the common stock of nominal defendant New York Health Care, Inc. ("NYHC"), a de-listed New York corporation. Nominal defendant The Bio Balance Corp. ("Bio Balance"), a Delaware corporation, is a wholly owned subsidiary of NYHC. Three of the individual defendants—Murry Englard, Howard Berg and Yoram Hacohen (the "Director Defendants")—serve as directors of both NYHC and Bio Balance. The second amended complaint (the "Complaint") asserts a derivative claim on behalf of NYHC and a double derivative claim on behalf of Bio Balance, each for breach of fiduciary duty by the Director Defendants. The Complaint also asserts a claim for conspiracy (which I construe as a claim for aiding and abetting a breach of fiduciary duty) against Yitz Grossman, the principal beneficiary of the underlying transaction challenged in the case.
The defendants have filed motions to dismiss for (i) lack of personal jurisdiction over Grossman, (ii) lack of personal jurisdiction over parties necessary to adjudicate the derivative actions, (iii) failure to make demand or plead demand futility, and (iv) failure to state a claim on which relief can be granted. They also rely on the doctrine of forum non conveniens.
This Court lacks personal jurisdiction over the Director Defendants in their roles as directors of NYHC, and the Complaint is dismissed to the extent it asserts a standard derivative action on behalf of NYHC. Otherwise, the motions are denied.
The facts are drawn from the well-pled allegations of the Complaint, which are assumed to be true at this stage of the proceeding, and from the documents that the Complaint incorporates by reference. The non-movant plaintiff receives the benefit of all reasonable inferences. I take judicial notice of NYHC's public filings, the pleadings in a prior lawsuit in New York, and the complaint in a related action in this Court.
Defendant Grossman is a convicted felon who pled guilty to perpetrating a pump-and-dump scheme involving the stock of NYHC. Grossman's conviction and subsequent 41-month prison term capped a checkered career as a broker and promoter in the securities industry. Two prior incidents of fraud stand out. In 1984, Grossman was found guilty of misappropriating customer funds. In 2002, Grossman was held liable for violating Florida's Blue Sky Laws while promoting the shares of Buzzeo, Inc.
One of Grossman's long-time colleagues is non-party Harry Datys, an individual previously convicted of criminal possession of narcotics with intent to distribute. Datys worked as a broker for A.S. Goldmen & Company, a now-defunct firm whose name became synonymous with securitiesfraud. Compl. ¶ 48. 1 From 1995 until 2002, Datys worked for Joseph Stevens & Company, another shuttered brokerage firm whose business practices led to criminal indictments.2 During that time, Datys was the subject of four customer complaints that settled, respectively, for $550,000, $195,000, $52,500, and $45,000. While an additional charge was under review, Datys moved on to Sterling Financial Investment Group, Inc. There, Datys was the subject of a customer complaint that led to litigation in the Western District of Texas. Datys then became a broker with Westpark Capital, Inc., where he stipulated to a denial of his license in Colorado after being charged with securities fraud by the Colorado Division of Securities. He also was fined $6,000 and had his securities license denied by the New Jersey Bureau of Securities for violating a supervisory agreement.
Grossman and Datys have worked together frequently. They solicited investors together for Buzzeo (the transaction on which Grossman was convicted of violating Florida's Blue Sky Laws), as well as for Vizacom, Inc., Sagemark Companies Ltd., Multi Media Tutorial Services, Mark Solutions, Inc., and Amanda Co. Compl. ¶ 48. Recently they have participated in organizing a series of thirty-three structurally identical Delaware corporations formed to access the public markets through transactions with registered penny stock issuers. 3 Compl. ¶¶ 50-51.
Over the years, a number of individuals have repeatedly invested in transactions organized or promoted by Grossman and Datys. Just as Michael Milken was able to assemble a consortium of investors who could be counted on to buy junk bonds issued by Drexel Burnham clients, enabling him to perfect the "highly confident" letter, so too Grossman and Datys have assembled a stable of associates who back their schemes. Many of the same investors appear in every one of the thirty-three recent blank check transactions, including defendant Berg, Kathleen Datys, Timothy J. McCartney, Jeffrey Rubin (through his entity J & N Invest LLC), Frederic Colman, John O. Forrer, Samuel Soloman, Richard & Donna Hoefer, David C. Katz, Paul Northcutt, Marvin Rosenblatt, Steven Rothstein, Fredrick and Rebecca Utter, and David Clarke. Members of the Grossman-Datys stable who have participated in other transactions include defendant Englard and his wife Lemore Englard, Grossman's wife Lisa Grossman, Grossman's father-in-law Irv Bader, family member Zachary Grossman, and Grossman's sister Mina Bartfeld. Compl. ¶¶ 50-52.
In summer 2001, Grossman formed Bio Balance 4 to acquire the intellectual property rights to "biobalance," a health product marketed as a treatment for irritable bowel syndrome. In July 2001, Grossman succeeded in procuring the rights to "biobalance." Funding for the purchase was provided by familiar Grossman-Datys associates, including defendant Berg. The purchase agreement required that Bio Balance enter into a business combination with a publicly traded company or complete an initial public offering by January 2, 2003.
During the same period, Grossman caused Bio Balance to enter into a consulting agreement with himself and Emerald Asset Management, Inc., a New York corporation wholly owned by Grossman (the "Consulting Agreement"). Pursuant to the Consulting Agreement, Grossman committedto provide part-time consulting services to Bio Balance. In return, Bio Balance committed to provide Grossman with $250,000 in annual cash compensation, bonuses as determined by the Bio Balance board of directors, warrants to purchase 200,000 Bio Balance shares, an office in New York City with secretarial support, a luxury automobile and payment for any related expenses, and medical, dental, life and disability insurance for Grossman and his immediate family.
The Consulting Agreement was dated June 1, 2001, and had a term of eight years. Either party could terminate the Consulting Agreement at will, but if Bio Balance terminated the agreement without cause, then Grossman would be entitled to a lump sum cash payment of $750,000 plus three times his highest bonus from the preceding three years. His insurance benefits would continue for five years unless Bio Balance substituted an up-front payment equal to their present value. Alternatively, Bio Balance could terminate the Consulting Agreement for cause, "without any further liability hereunder to Emerald, [Grossman] or his estate," in the event of "[f]raud, misappropriation or embezzlement by Emerald [or Grossman] in connection with the Company; or ... [c]onviction by a court of competent jurisdiction in the United States of a crime which involves moral turpitude." Compl. ¶ 18.
On October 11, 2001, Bio Balance entered into an agreement for a stock-for-stock merger with NYHC, whose shares were registered on the Boston Stock Exchange and traded publicly on the NASDAQ Small Cap Market. Bio Balance's counsel at the time was Edward Grushko, an attorney previously disbarred in New York (although later readmitted) after pleading guilty in Las Vegas federal court to conspiracy to commit securities fraud. Compl. ¶ 45. The transaction eventually closed on January 2, 2003, the day of the deadline set in the purchase agreement for Bio Balance to access the public markets. As a result of the transaction, Bio Balance's 278 stockholders exchanged their unregistered shares of a non-public entity for approximately 89.7% of the issued and outstanding common stock of NYHC.
On November 19, 2003, the United States Attorney for the Southern District of New York indicted Grossman and a colleague for conspiring to manipulate the price and demand of NYHC's common stock. The illegal acts dated back to February 2003, just after Bio Balance merged with NYHC. According to the indictment, Grossman met with an undercover FBI agent posing as the manager of a hedge fund and proposed that the hedge fund purchase 1.325 million shares of NYHC for approximately $7 million, representing a price of approximately $5.28 per share. In exchange, NYHC would secretly issue to the agent warrants to purchase 500,000 shares of NYHC common stock at an exercise price of $2.50 per share. To conceal the...
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