In re Access Cardiosystems, Inc.

404 B.R. 593

In re ACCESS CARDIOSYSTEMS, INC., Debtor Access Cardiosystems, Inc., North American Enterprises, Inc., John Moriarty and Associates, John J. Moriarty, Richard F. Connolly, Jr., and Joseph R. Zimmell, Plaintiffs Official Committee of Unsecured Creditors of Access Cardiosystems, Inc.,

Plaintiffs-Intervenors,¹ v. Randall Fincke, Defendant.

Bankruptcy No. 05-40809-HJB.

Adversary No. 05-4076-HJB.

United States Bankruptcy Court, D. Massachusetts, Central Division.

April 17, 2009.

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Anthony J. Fitzpatrick, Jeffrey D. Sternklar, Duane Morris LLP, Boston, MA, Jerry E. Benezra, Melrose, MA, for Plaintiffs.

David G. Sobol, Diane N. Rallis, Ieuan G. Mahony, John J. Monaghan, Holland & Knight, LLP, Boston, MA, for Defendant.

Christian J. Urbano, Hanify & King, P.C., Jesse I. Redlener, Proskauer Rose LLP, Boston, MA, for Plaintiffs-Intervenors.

MEMORANDUM OF DECISION

HENRY J. BOROFF, Bankruptcy Judge.

Before the Court, after trial on the question of liability only,² is the "Third Amended Complaint" (the "Complaint") filed by Access Cardiosystems, Inc. ("Access"), four of its individual investors (the "Investors"), and the corporate entities through which several of those investments were made (together, the "Plaintiffs") against Randall Fincke, former Access shareholder, officer, and director. The Plaintiffs accuse Fincke of breach of fiduciary duty, fraud, negligent misrepresentation, and securities fraud under Massachusetts securities laws. Fincke responds with counterclaims against the Plaintiffs for breach of fiduciary duty, breach of contract, promissory estoppel, and declaratory judgment. The following constitute the Court's findings of fact and conclusions of law on liability under these claims, pursuant to Federal Rule of Bankruptcy Procedure 7052.

I. FACTS AND TRAVEL OF THE CASE

Access Cardiosystems, Inc. filed a voluntary petition seeking relief under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code" or the "Code")³ on February 8, 2005. From 2000 to 2004, Access developed, marketed, and sold a portable automated external defibrillator (the "Access AED" or "AED"). The present controversy stems from a pre-petition suit filed in the Massachusetts Superior Court by Access and the Investors against Fincke, one of Access's founders, former stockholder, and former Access director and officer.⁴ The allegations underlying the Plaintiffs' claims and Fincke's counterclaims require a step back, nine years from the time of this writing, to the year 2000, beginning with the actions of Randall Fincke.

Fincke describes himself as driven by a mission to expand market access to automated electronic defibrillation technology.⁵ Trial Tr. day 1, 43. His work experience certainly lends credence to this claim. By the year 2000, Fincke had worked with several medical device companies on various AED products and was the named inventor on twelve patents in the defibrillator field.⁶ And, in the early part of that year, Fincke was focused on the development of a new AED product. Simultaneous with his burgeoning idea, however, Fincke was embroiled in litigation brought by his former employer, Zoll Medical ("Zoll"). Zoll alleged that Fincke, in conjunction with Cadent Medical (a company founded by Fincke after leaving Zoll; "Cadent"), had misused⁷ Zoll's intellectual property and violated a noncompetition agreement.

Although the litigation was a highly contentious affair, Fincke continued to work on developing the new AED, individually and not through Cadent. In early 2000, Gregory Baletsa agreed to assist Fincke in forming a business framework to develop the new product and invested $50,000 of his own funds as the initial capital for the venture.⁸ Other individuals — including Kyle Bowers, an electrical engineer, and David Barash, a former emergency room physician — were recruited to assist in developing the technology. They, like Fincke and Baletsa, understood that compensation for much of their initial work would come later, in the form of stock in the to-be-formed corporation that would produce, market, and sell the final product.

In June 2000, the litigation between Zoll, Cadent, and Fincke finally came to an end. The Plaintiffs allege that Fincke represented to one or more of them that the judgment was a "vindication," as Zoll had not prevailed on a majority of the counts against him. Zoll did prevail on other counts, however, and a $650,000 judgment was issued against Fincke personally, later paid by Cadent. The litigation having ended, Cadent was sold to an unrelated third party (Cardiac Sciences), and Fincke was free to pursue his new endeavor.

On July 5, 2000, Fincke and Baletsa incorporated their new business under the name "Acelex," later changing the name to Access Cardiosystems, Inc.⁹ Baletsa was initially named as the company's president, with Fincke acting as the vice president and treasurer. In conjunction with the incorporation of Access, Baletsa and Fincke executed a stockholders agreement (the "Stockholders Agreement"), which contained various restrictions on the transfer of stock and allowed Access to buy back stock in the event a stockholder's employment was terminated. At that time, Baletsa and Fincke were the only officers, directors, and stockholders in Access — Fincke held approximately 85% of the outstanding shares.¹⁰ Baletsa eventually left his position as president of Access in April 2001.¹¹ Fincke remained Access's sole director, president, and treasurer until early 2003.

Access's initial funding in early 2000 was not sufficient to sustain the company. Between January and June 2001, Fincke advanced an additional $325,000 of his own money to fund Access's operations.¹² According to Michael Elefante, Access's corporate counsel,¹³ he and Jack Carucci, Access's original accountant, discussed whether these funds should be considered debt or equity in the new company. Ultimately, it was decided that $2,000 of Fincke's investments would be characterized as an investment in the company's stock and the remaining amount characterized as loans to Access. Trial Tr. day 8 37. Beginning in August 2001, and continuing through September 2003, Fincke withdrew sums of money from Access. These payments were reflected on Access's books and records as payments on his loan account. By the time of trial, a substantial portion of Fincke's loans to Access had been repaid; only $43,465 of Fincke's $325,000 investment remained outstanding.

Fincke did not keep his work at Access a secret. He discussed the new company and the Access AED with various friends, some of whom expressed interest in making investments in Access to ensure its success. Plaintiffs John J. Moriarty and Richard F. Connolly, Jr. were particularly interested in Fincke's plans for the company, and they became the first outside investors to fund Access's operations.

Moriarty's and Fincke's families had long been close friends, even sharing a ski lodge together for some time. Moriarty characterized his conversations with Fincke regarding Access as "discussion[s] ... in [the] driveway" — informal discussions about the progress of the company. Trial Tr. day 6, 85. Moriarty had been aware of the Zoll litigation and knew it had concluded; when told that Fincke had won 14 out of 17 counts, he "mistakenly took that as a victory." Trial Tr. day 6, 84. Moriarty testified that before he advanced any funds to Access, he first asked whether there were any "problems like the last time" (presumably referring to the Cadent litigation). Trial Tr. day 6, 84-85. Having received assurances that there were not, Moriarty wrote a personal check to Access for approximately $50,000 sometime between March and June 2001.¹⁴

On July 13, 2001, Moriarty made a second investment¹⁵ of $1,000,000 in Access.¹⁶ According to Moriarty, he relied on several representations by Fincke in making this second investment, namely: the approval for sale of the Access AED in Europe,¹⁷ orders from and good distribution network in Europe, and Fincke's purported plan to use a contract manufacturer to build the product. Trial Tr. day 8, 88-89. And Moriarty made an additional $500,000 investment in Access in December 2001.¹⁸

Fincke also discussed Access and its progress with Connolly during 2001. Connolly was aware of Moriarty's investments in Access, Trial Tr. day 9, 8, and expressed an interest in helping the company by providing an additional investment. Fincke responded positively. According to Connolly, Fincke also told him that he did not need a lot of money, just enough to "get him over the ... existing hump...." Trial Tr. day 9, 8. Further, Fincke allegedly said the Access AED was mature, stable, and very well received in Europe and told Connolly that he had developed a sales force to cover the European market. Connolly testified that Fincke also explained that product manufacturing would be outsourced to a company in Concord, Massachusetts. Trial Tr. day 9, 16. Like Moriarty, Connolly was aware of the Zoll litigation, but not privy to the details. Trial Tr. day 9, 8-9. Following his discussions with Fincke, Connolly invested $500,000 in Access in November 2001.¹⁹

By the turn of the year, the Access AED had advanced considerably. A provisional Patent Application in the United States had been filed to cover the Access AED technology; Access had completed its ISO 9000 certification²⁰ and was awaiting approval to market and sell its products in Europe; and the European market was responding positively to the Access AED even before formal approval. In February 2002, Access began signing distribution agreements (the ...