Schmidt v. Skolas

Decision Date17 October 2014
Docket NumberNo. 13–3750.,13–3750.
Citation770 F.3d 241
PartiesAlan W. SCHMIDT, on behalf of himself and in a representative capacity on behalf of all others similarly situated and derivatively on behalf of Genaera Corporation, Appellant v. John A. SKOLAS; Leanne Kelly ; John L. Armstrong, Jr.; Zola B. Horovitz, Ph. D.; Osagie O. Imasogie; Mitchell D. Kaye ; Robert F. Shapiro ; Paul K. Wotton; Robert Deluccia; David Luci; Steve Rouhandeh; Jeffrey Davis; Mark Alvino; Genaera Liquidating Trust; Biotechnology Value Fund, Inc.; Ligand Pharmaceuticals, Inc.; Xmark Capital Partners, LLC; Argyce LLC ; Ohr Pharmaceuticals ; John L. Higgins ; Genaera Corporation; SCO Financial Group ; Dipexium Pharmaceuticals, LLC ; Macrochem Corporation; Access Pharmaceuticals, Inc.; Mark N. Lampert.
CourtU.S. Court of Appeals — Third Circuit

Howard J. Bashman, Esq., (argued), Willow Grove, PA, Lee Squitieri, Esq., Squitieri & Fearon, LLP, New York, NY, for Appellant.

Katherine U. Davis, Esq., Carolyn E. Isaac, Esq., Michael L. Kichline, Esq., (argued), Dechert LLP, Christopher M. Guth, Esq., Blank Rome LLP, Amy C. Lachowicz, Esq., Joseph E. Vaughan, Esq., O'Hagan LLC, John S. Summers, Esq., Robert A. Wiygul, Esq., Hangley, Aronchick, Segal, Pudlin & Schiller, Joshua N. Ruby, Esq., Jeffrey G. Weil, Esq., (argued), Cozen O'Connor, Paul G. Nofer, Esq., Klehr Harrison Harvey Branzburg LLP, Philadelphia, PA, Donald A. Corbett, Esq., Richard C. Wolter, Esq., Lowenstein Sandler LLP, Joseph P. Dever, Jr., Esq., Tamar S. Wise, Esq., Cozen O'Connor, New York, NY, Denean K. Sturino, Esq. O'Hagan LLC, Chicago, IL, Michael D. Blanchard, Esq., (argued), Christopher M. Wasil, Esq., Bingham McCutchen, Hartford, CT, Jordan D. Hershman, Esq., Bingham McCutchen, Boston, MA, John T. Ryan, Esq., (argued), Stephanie Grace, Esq., Colleen C. Smith, Esq., Latham & Watkins LLP, San Diego, CA, for Appellees.

Before: RENDELL, GREENAWAY, JR. and SLOVITER, Circuit Judges.


SLOVITER, Circuit Judge.

Alan Schmidt, a former shareholder in the now-defunct Genaera Corporation (Genaera), appeals from the District Court order dismissing his complaint on statute of limitations grounds. Genaera was a biotechnology company that dissolved in June 2009 and liquidated its assets. On June 8, 2012, Schmidt brought suit in the United States District Court for the Eastern District of Pennsylvania on behalf of himself and all other former Genaera shareholders against the liquidating trustee (Argyce, LLC (“Argyce”)); the Genaera Liquidating Trust; John Skolas, who served as Argyce's CEO and Genaera's former CFO; former major Genaera shareholders Xmark Capital Partners, LLC (“Xmark”) and Biotechnology Value Fund, Inc. (“BVF”); former directors and officers of Genaera (“D & O defendants); and the purchasers of certain Genaera assets. The essence of Schmidt's complaint is that the liquidating trustee and the D & O defendants breached their fiduciary duties by disposing of promising drug technologies in tainted insider deals for far less than their true value. He also alleges that Xmark and BVF, Genaera's two largest shareholders, aided and abetted this behavior so that companies they controlled could acquire Genaera's assets at fire sale prices. All defendants except for SCO Financial Group (“SCO”) moved to dismiss Schmidt's complaint as untimely under the applicable two-year statute of limitations.

Schmidt did not dispute the applicability of the two-year statute of limitations and acknowledged that he filed suit more than two years after the relevant assets were sold. Instead, he argued that the statute of limitations should be tolled under Pennsylvania's discovery rule because he could not have been aware of the insider nature of the sales or that the assets were sold for far below their actual value until he learned the details of the sales, and certain subsequent market events suggested to him that the assets were quite valuable. The District Court rejected this argument and held that Schmidt had all the information he needed to file the suit more than two years before he filed. Schmidt timely appeals.1


Genaera was a biotechnology company that developed pharmaceutical drugs and held licenses to patents and other intellectual property. In April 2009, Genaera's board of directors concluded that the company's prospects were dim, and announced their intent to dissolve the company. On April 18, 2009, the board unanimously approved, and recommended that the shareholders approve, a plan of dissolution to dispose of the company's assets through a liquidating trust. On May 14, 2009, the board submitted a proxy statement to shareholders regarding the dissolution plan and filed that proxy statement with the SEC. The proxy statement warned shareholders that they should expect to receive only 1/5 of a penny to 1.7 cents per share once the assets were liquidated. The complaint alleges that the proxy statement contained misrepresentations about whether any Genaera officers or directors would profit from the dissolution, and that it was flawed in various ways. The shareholders approved the dissolution plan on June 4, 2009, and Genaera filed articles of dissolution with the Delaware Secretary of State on June 12, 2009. Pursuant to the dissolution plan, the company's assets were transferred to the Genaera Liquidating Trust, with defendant Argyce as liquidating trustee.

Three of Genaera's assets that were ultimately sold, with the proceeds being distributed to shareholders, are relevant to this appeal. The allegations related to each of those assets are discussed in turn.

A. The Aminosterol Assets

The Aminosterol Assets consisted of compounds used for treating macular degeneration

. The trustee sold the Aminosterol Assets in May 2009 for $200,000 to BBM Holdings, Inc. (“BBM”), the predecessor to defendant Ohr Pharmaceuticals (“Ohr”). The complaint states that in August 2009, “the Trustee publicly reported that the Aminosterol Assets inventory had been sold for a nominal sum.” App. at 106a. It is not clear from the complaint whether the trustee's announcement named the purchaser or the sale price. Ohr filed a Form 8–K in August 2009 announcing the purchase, with the purchase agreement (including the sale price) attached.

The complaint avers that the purchaser, BBM, is a shell company that arranged financing for the purchase before Genaera's shareholders even formally voted to dissolve the company. The complaint further alleges that Argyce and Skolas breached their fiduciary duties by agreeing prematurely to this offer instead of marketing the assets properly. The complaint also asserts that the Aminosterol Assets were worth far more than the $200,000 sale price, citing a May 2012 presentation in which defendant Ohr, the successor to BBM, estimated the potential market for drugs based on the compounds at 1.75 million U.S. patients.

B. Pexiganan

Pexiganan was a topical cream for the treatment of diabetic foot infections. MacroChem Corp. (“MacroChem”) licensed the right to develop Pexiganan from Genaera in 2007. Under the terms of the license, Genaera would receive payments totaling $7 million upon the achievement of certain development milestones, up to $35 million for reaching certain sales milestones, and 10% of sales as royalties. The complaint alleges that at some point in 2008, “MacroChem abruptly reversed course on Pexiganan,” App. at 86a, spending only $45,110 on development of Pexiganan that year. Defendant Access Pharmaceuticals acquired MacroChem in 2009, and ceased development of Pexiganan. The complaint alleges that Genaera had a right under its agreement with MacroChem to demand the return of Pexiganan if MacroChem ceased development, but the D & O defendants, in breach of their fiduciary duties, failed to exercise that right. Pexiganan was ultimately returned to Genaera Liquidating Trust in December 2009, after Genaera's dissolution. The complaint implies that demanding the return of Pexiganan earlier and continuing its development could have staved off the need to dissolve Genaera.

The complaint further alleges that the liquidating trustee ultimately sold Pexiganan in an improper, self-dealing transaction. Specifically, certain insiders from MacroChem founded a new company, Dipexium, which bid on Pexiganan in liquidation. The liquidating trustee set a short deadline for bidding, announcing the availability of Pexiganan on January 11, 2010, and setting a deadline of February 12, 2010, for bids. The complaint alleges that this short deadline favored the MacroChem insiders associated with Dipexium because they were already familiar with Pexiganan. Meanwhile, outside bidders had to await receipt of a “confidential information package,” review it, and perform pharmacological, regulatory, and valuation analyses, all in just one month before submitting their bids. Although Pexiganan's sales potential for Genaera was allegedly estimated to exceed $100 million, Dipexium ultimately acquired the rights to Pexiganan for a “minor purchase price” and free of any royalty and milestone payment obligations. The complaint does not contain the exact date of the sale. And, Schmidt contends that the earliest he could have known of Pexiganan's sale price was 2011, when Argyce publicly issued unaudited financial statements for the year ended December 31, 2010, which, according to the complaint, evidences that Pexiganan was sold for approximately $252,000. The complaint alleges that about ninety days after buying the rights to Pexiganan, Dipexium raised $1.07 million in funding to develop the asset, and raised another $1.4 million ninety days after that.

C. Interlukin 9 (“IL9”)

IL9 was an antibody program for asthma

. Genaera had licensed the technology to MedImmune, LLC (“MedImmune”). Under its agreement with MedImmune, Genaera could have received up to $54 million in payments and royalties if IL9 reached certain development milestones. The complaint alleges that defendant Skolas had previously...

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