Court Opinion

ID: 2790230
Source: CourtListenerOpinion
Date Created: 2015-03-31 15:03:20.315808+00
Date Added: 2024-06-11T11:28:53.573759
License: Public Domain

Mar 31 2015, 10:30 am

      ATTORNEY FOR APPELLANT                                    ATTORNEY FOR APPELLEE
      Peter H. Drumm                                            Kevin M. Quinn
      Benadum, Cecil & Drumm                                    Bose McKinney & Evans, LLP
      Muncie, Indiana                                           Indianapolis, Indiana

                                                  IN THE
          COURT OF APPEALS OF INDIANA

      Rapkin Group, Inc., as a                                  March 31, 2015
      minority member on behalf and                             Court of Appeals Case No.
      for the benefit of The Eye Center                         18A02-1408-CT-563
      Group, LLC, and Surgicenter                               Appeal from the Delaware Circuit
      Group, LLC,                                               Court
                                                                The Honorable Thomas A. Cannon,
      Appellant-Plaintiff,                                      Judge

              v.                                                Cause No. 18C05-1007-CT-009

      Cardinal Ventures, Inc.,
      successor in interest to Cardinal
      Health Partners, LLC,
      Appellee-Defendant.

      Mathias, Judge.

[1]   Rapkin Group, Inc. (“Rapkin”) appeals the order of the Delaware Circuit Court

      granting summary judgment in favor of Cardinal Ventures, Inc. (“Cardinal”), in

      a shareholder derivative suit brought by Rapkin on behalf of The Eye Center

      Court of Appeals of Indiana | Opinion 18A02-1408-CT-563 | March 31, 2015                      Page 1 of 13
      Group, LLC (“ECG”) and Surgicenter Group, LLC (“SCG”) against Cardinal,

      in which Cardinal was alleged to have breached a fiduciary duty and committed

      constructive fraud upon ECG and SCG. On appeal, Rapkin claims that genuine

      issues of material fact precluded the grant of summary judgment.

[2]   We reverse and remand.

                                       Facts and Procedural History

[3]   The underlying facts of this case were set forth in our earlier memorandum

      decision involving the same lawsuit:

                 ECG/SCG are closely-held, limited liability companies incorporated
                 in April of 1994.1 Cardinal Health Partners (“Cardinal Health”)[2]
                 owned 21.93% of ECG and 33.07% of SCG. The balance of the shares
                 between the two companies were owned by ophthalmologists and
                 optometrists, including Rapkin, whose principal member is Dr. Jeffrey
                 Rapkin (“Dr. Rapkin”). Dr. Roch was chief executive officer of
                 ECG/SCG from its founding in 1994 until July 31, 1999. ECG/SCG
                 had two long time employees: D. Frank [Winconek] (“[Winconek]”),3
                 who held the positions of assistant administrator and director of
                 finance before being promoted to chief executive officer, and Stephanie
                 Carrick (“Carrick”), who held many positions with ECG/SCG
                 culminating with her appointment as the company’s chief financial
                 officer. Dr. Watkins joined ECG/SCG in 2004 and was invited to
                 become an owner and a member of the board of directors in December
                 of 2005.
                 Around July of 2007, some of the ophthalmologists and optometrists
                 voiced a desire to share in more of the companies’ profits because of

      1
       Though the companies have separate names and operating agreements, both appear to be managed as one
      company.
      2
       Cardinal Ventures is the successor in interest to Cardinal Health. Throughout this opinion, we will refer to
      both as “Cardinal” unless it is necessary to distinguish between the two entities.
      3
          Our prior opinion misspelled Winconek’s name as “Winecock.”

      Court of Appeals of Indiana | Opinion 18A02-1408-CT-563 | March 31, 2015                          Page 2 of 13
        the amount of work they were doing. Hoping to improve relations
        within the company, Cardinal Health sold some of its shares to the
        ophthalmologists and optometrists. Rapkin purchased additional
        shares at this time. Dr. Roch did not sell any of his shares to the
        ophthalmologists and optometrists nor did he purchase any shares
        offered by Cardinal Health.
        Blue and Co., LLC (“Blue”) performed yearly audits of ECG/SCG’s
        finances. The usual practice was for Blue to present its findings to
        [Winconek] and Carrick. [Winconek] and Carrick would then report
        those findings to the board of directors. In 2007, Blue submitted the
        2006 financial report after April 15th, causing some physicians to file
        extensions for their tax returns. Though the reports were submitted
        late, [Winconek] and Carrick mentioned no problems when presenting
        the report to the board of directors.
        ECG/SCG hired a new auditing firm in 2008; Katz, Sapper & Miller
        (“KSM”). On March 14, 2008, KSM submitted a partial financial
        report for 2007. This was due in part to ECG/SCG converting their
        accounting methods. After the board received the completed report,
        Dr. Watkins reviewed it with her husband and noticed some
        inconsistencies. Because of those inconsistencies, Dr. Watkins sent an
        email to [Winconek] and Carrick with questions about the report. She
        also requested to see ECG/SCG’s current balance sheets. About the
        same time, ECG/SCG began experiencing difficulties paying quarterly
        salaries and dividends on time. [Winconek] and Carrick told the board
        of directors that the problems were due to accounting errors and
        delayed payments from commercial payers. Dr. Watkins did not
        receive the requested balance sheets until around November 2008. At
        the same time, [Winconek] sent an email to the board of directors
        expressing confidence in the finances of the company. However, Dr.
        Watkins’s review of the balance sheets she received showed
        inconsistencies in the companies’ debt to equity ratio.
        In January of 2009, Dr. Watkins and fellow board director Robert
        Gildersleeve (“Gildersleeve”) spent several hours reviewing the
        balance sheets. Their review led them to talk to KSM directly about
        the companies’ finances. On or about January 12, 2009, [Winconek]’s
        administrative assistant, Melita Flowers, informed Dr. Watkins that a
        staff accountant at ECG/SCG had hired an attorney to discuss
        concerns about the financial practices at the companies. On January
        29, 2009, Dr. Watkins spoke with Jennifer Abrell (“Abrell”), counsel

Court of Appeals of Indiana | Opinion 18A02-1408-CT-563 | March 31, 2015      Page 3 of 13
              for ECG/SCG. Dr. Watkins wanted to set up a meeting with the
              accountants at KSM to discuss ECG/SCG’s financial state. Abrell
              informed Dr. Watkins that KSM also desired to meet with company
              leadership to discuss its concerns about [Winconek] and Carrick.
              On February 3, 2009, Dr. Watkins, Gildersleeve, and Abrell met with
              KSM. KSM conveyed its concerns regarding improper accounting
              practices to the board of directors. KSM told the directors that it would
              need access to all of ECG/SCG’s accounting records to confirm its
              suspicions. The next day, the board of directors placed [Winconek] on
              personal leave and gave KSM all of the information requested to
              perform its investigation. The directors and a representative of KSM
              also met with Carrick. At that meeting, Carrick revealed that she and
              [Winconek] engaged in fraudulent practices with the companies’
              finances. KSM’s investigation revealed that the company had no cash
              on hand, little available lines of credit for operations, and flawed
              financial reporting. Specifically, KSM found that the financial reports
              for ECG/SCG contained intentionally overstated figures for accounts
              receivable, inventory, and unapplied cash. ECG and SCG had been
              insolvent since December 2006 and July 2008 respectively. Proceeds
              from loans rather than profits from company operations were used to
              pay salaries and dividends, making shares in the company virtually
              worthless. The board of directors terminated [Winconek] on February
              18, 2009 and Carrick on March 13, 2009.

      Rapkin Grp., Inc. v. Roch, 2014 WL 808866, No. 18A02-1302-CT-193, slip op. at

      2-5 (Ind. Ct. App. Feb. 27, 2014), trans. denied (“Rapkin I”).4

[4]   Rapkin filed a complaint on April 28, 2010, alleging that Dr. Roch, Dr.

      Watkins, Cardinal, Winconek, Carrick, and Blue’s “willful misconduct,

      recklessness, breach of fiduciary duty, mismanagement and/or fraud” caused

      Rapkin to lose the value of its investment in the LLCs. On the defendants’

      motion, the trial court dismissed this claim as a direct action, and Rapkin

      4
       Winconek ultimately pleaded guilty to five counts of Class D felony theft. See Winconek v. State, No. 18A05-
      1204-CR-184 (Ind. Ct. App. Sept. 20, 2012).

      Court of Appeals of Indiana | Opinion 18A02-1408-CT-563 | March 31, 2015                         Page 4 of 13
      thereafter filed an amended complaint as a shareholder derivative action but

      with substantially the same claims.

[5]   Several of the defendants filed motions for summary judgment. At issue in our

      earlier decision was the motion for summary judgment filed by Drs. Roch and

      Watkins on April 7, 2012. The trial court granted this motion for summary

      judgment, and Rapkin appealed. In our memorandum decision, we affirmed

      the trial court’s judgment, concluding that the designated evidence

      demonstrated: (1) that Dr. Roch5 made no statement that was relied upon by

      Rapkin; (2) that Dr. Roch did not know about the LLCs’ precarious financial

      situation or the fraudulent acts committed by Winconek and Carrick; and (3)

      that neither Dr. Roch nor Dr. Watkins breached a fiduciary duty to Rapkin. Id.

      at 9-13.

[6]   On March 26, 2013, after our memorandum decision in Rapkin I was issued,

      Cardinal filed a motion for summary judgment. The trial court granted

      Cardinal’s motion on July 31, 2014, and Rapkin now appeals.

                                Summary Judgment Standard of Review

[7]   The standard of review we apply on review of a trial court’s order granting or

      denying summary judgment is well settled:

                 We review summary judgment de novo, applying the same standard as
                 the trial court: Drawing all reasonable inferences in favor of . . . the
                 non-moving parties, summary judgment is appropriate if the

      5
          Rapkin conceded on appeal that Dr. Watkins committed neither actual nor constructive fraud. Id. at 7.

      Court of Appeals of Indiana | Opinion 18A02-1408-CT-563 | March 31, 2015                          Page 5 of 13
              designated evidentiary matter shows that there is no genuine issue as
              to any material fact and that the moving party is entitled to judgment
              as a matter of law. A fact is material if its resolution would affect the
              outcome of the case, and an issue is genuine if a trier of fact is required
              to resolve the parties’ differing accounts of the truth, or if the
              undisputed material facts support conflicting reasonable inferences.
              The initial burden is on the summary-judgment movant to
              demonstrate [ ] the absence of any genuine issue of fact as to a
              determinative issue, at which point the burden shifts to the non-
              movant to come forward with contrary evidence showing an issue for
              the trier of fact. And [a]lthough the non-moving party has the burden
              on appeal of persuading us that the grant of summary judgment was
              erroneous, we carefully assess the trial court's decision to ensure that
              he was not improperly denied his day in court.

      Hughley v. State, 15 N.E.3d 1000, 1003 (Ind. 2014) (citations omitted).

                                        Discussion and Decision

[8]   On appeal, Rapkin claims genuine issues of material fact with regard to

      whether: (A) Cardinal breached a fiduciary duty owed to the LLCs, and (B)

      Cardinal committed constructive fraud upon the LLCs. We address each

      contention in turn.

      A. Breach of Fiduciary Duty

[9]   Rapkin first claims a genuine issue of material fact with regard to whether

      Cardinal breached a fiduciary duty owed to the LLCs. As we explained in

      Rapkin I, a claim for breach of fiduciary duty requires proof of three elements:

      (1) the existence of a fiduciary relationship; (2) a breach of that duty owed by

      the fiduciary to the beneficiary; and (3) harm to the beneficiary. Farmers

      Elevator Co. of Oakville, Inc. v. Hamilton, 926 N.E.2d 68, 79 (Ind. Ct. App. 2010),

      trans. denied. It does not appear Cardinal denies that, as a shareholder and

      Court of Appeals of Indiana | Opinion 18A02-1408-CT-563 | March 31, 2015          Page 6 of 13
       director of a closely held corporation, it owed a fiduciary duty to the other

       shareholders, including Rapkin. Instead, at issue is whether Cardinal breached

       this fiduciary duty.

[10]   The standard imposed by a fiduciary duty is the same whether it arises from the

       capacity of a director, officer, or shareholder in a closely held corporation. G &

       N Aircraft, Inc. v. Boehm, 743 N.E.2d 227, 240 (Ind. 2001). The fiduciary has a

       duty to deal fairly, honestly, and openly with his corporation and fellow

       stockholders and must not be distracted from the performance of his official

       duties by personal interests. Id. As explained in Boehm:

               Although directors must act with absolute good faith and honesty in
               corporate dealings, Indiana Code section 23-1-35-1(e) provides that:
                        [a] director is not liable for any action taken as a
                        director, or any failure to take action, unless: (1) the
                        director has breached or failed to perform the duties of
                        the director’s office in compliance with this section; and
                        (2) the breach or failure to perform constitutes willful
                        misconduct or recklessness.
               In other words, Indiana has statutorily implemented a strongly pro-
               management version of the business judgment rule. A director is not to
               be held liable for informed actions taken in good faith and in the
               exercise of honest judgment in the lawful and legitimate furtherance of
               corporate purposes. The rule includes a presumption that in making a
               business decision, the directors of a corporation acted on an informed
               basis, in good faith and in the honest belief that the action taken was in
               the best interests of the company. By statute, negligence is insufficient
               to overcome the presumption; recklessness or willful misconduct is
               required.

       Id. at 238 (citations and quotations omitted).

       Court of Appeals of Indiana | Opinion 18A02-1408-CT-563 | March 31, 2015        Page 7 of 13
[11]   In the present case, Rapkin claims that he designated evidence sufficient to

       establish a genuine issue of material fact with regard to Cardinal’s knowledge of

       the precarious financial state of the LLCs. Specifically, Rapkin refers to

       Winconek’s affidavit in which he averred that Gildersleve, the director of the

       LLCs appointed by Cardinal, was aware that the LLCs had been required to

       borrow money to pay dividends to the shareholders from 2006 to 2009. Rapkin

       also notes that Cardinal began to divest itself of shares of the LLCs during this

       same time, ultimately reducing its holdings from a 45.67% interest to a 28.05%.

       From this, Rapkin claims that a reasonable inference can be drawn that

       Cardinal began to divest itself of its shares in the LLCs because of Gildersleve’s

       knowledge of the use of loans to pay the dividends and that Cardinal chose not

       to disclose to the physician shareholders that the LLCs were using loans to pay

       the dividends.6

[12]   Cardinal, however, claims that Winconek’s affidavit is too vague with regard to

       when Gildersleve knew about the loans, who told him, and whether he knew

       the extent of the LLCs’ indebtedness. We disagree. Winconek’s affidavit, while

       6
        Cardinal claims that Rapkin may not now argue any facts inconsistent with those set forth in our decision in
       Rapkin I under the law-of-the-case doctrine. Generally speaking, the law-of-the-case doctrine provides that an
       appellate court’s determination of a legal issue binds both the trial court and the appellate court in any
       subsequent appeal involving the same case and substantially the same facts. Murphy v. Curtis, 930 N.E.2d
1228, 1234 (Ind. Ct. App. 2010). The law-of-the-case doctrine is based upon the sound policy that once an
       issue is litigated and decided, that should be the end of the matter. Id. However, unlike the doctrine of res
       judicata, the law-of-the-case doctrine is a discretionary tool. Id. Moreover, “[w]hen additional information
       distinguishes the case factually from the case decided in the first appeal, the law of the case doctrine does not
       apply.” Parker v. State, 697 N.E.2d 1265, 1267 (Ind. Ct. App. 1998). At issue in the first appeal was Rapkin’s
       claims against Drs. Roch and Watkins. Subsequent to our decision, Rapkin submitted additional designated
       evidence in support of his claims—specifically, the Winconek affidavit. Because of this additional evidence,
       we decline to apply the law-of-the-case doctrine. See id. (declining to apply the law-of-the-case doctrine to
       issue of propriety of search and seizure where prior case was based on evidence submitted in pre-trial motion
       to dismiss, whereas the case at bar was based on additional evidence presented during trial).

       Court of Appeals of Indiana | Opinion 18A02-1408-CT-563 | March 31, 2015                            Page 8 of 13
       not particularly detailed, claims that Gildersleve knew about the LLCs taking

       out loans in order to pay dividends from 2006 to 2009. Dividends are typically

       paid out of corporate profits, not loan proceeds. If a corporation is taking out

       loans to pay dividends, it is reasonable to assume that the corporation is not

       profitable. To the extent that Cardinal claims that Winconek’s affidavit should

       not be credited because of Winconek’s criminal activities as CEO of the LLCs,

       this is a credibility issue that should be decided at trial, not at summary

       judgment.

[13]   Cardinal also counters Winconek’s affidavit by referring to Gildersleve’s

       affidavit, in which he claims that it was the physician shareholders who

       indicated a desire to own more shares of the LLCs so that they could claim a

       larger share of the dividends; Gildersleve also averred that Cardinal decided to

       sell some of its shares in order to improve its relationship with the physician

       shareholders. However, this is in direct conflict with the affidavit of Dr.

       Michael Scanemeo (“Scanemeo”), who stated that it was Gildersleve who

       encouraged the physician shareholders to purchase additional shares of the

       LLCs from Cardinal. If, as Rapkin’s designated evidence indicates, Gildersleve

       was encouraging the physicians to purchase more shares at the same time that

       he knew that the LLCs were borrowing funds in order to pay dividends, a

       reasonable inference could be drawn that Gildersleve was not dealing openly

       and honestly with the physician shareholders. To the extent that Gildersleve’s

       affidavit conflicts with the affidavits of Scanemeo and Winconek, these are

       simply factual issues that are properly resolved at trial, not on summary

       Court of Appeals of Indiana | Opinion 18A02-1408-CT-563 | March 31, 2015      Page 9 of 13
       judgment. See Hughley, 15 N.E.3d at 1004-05 (noting that even a “perfunctory

       and self-serving” affidavit of dubious credibility can be sufficient to establish a

       genuine issue of material fact sufficient for trial).

[14]   We therefore agree with Rapkin that a genuine issue of material fact exists

       regarding whether Cardinal, through its appointed director Gildersleve, knew of

       the precarious financial situation of the LLCs, as evidenced by the need to

       borrow money to pay dividends, yet still encouraged its fellow shareholders to

       purchase additional shares from Cardinal, thus breaching a fiduciary duty. See

       id. at 1004 (noting that “defeating summary judgment requires only a ‘genuine’

       issue of material fact—not necessarily a ‘persuasive’ one.”).

       B. Constructive Fraud

[15]   Rapkin also claims a genuine issue of material fact with regard to whether

       Cardinal committed constructive fraud7 vis-à-vis Rapkin and the other

       physician shareholders. As we explained in Demming v. Underwood, 943 N.E.2d
878, 892 (Ind. Ct. App. 2011), trans. denied, constructive fraud arises by

       operation of law from a course of conduct which, if sanctioned by law, would

       secure an unconscionable advantage, irrespective of the existence or evidence of

       actual intent to defraud. The five elements of constructive fraud are: (i) a duty

       owing by the party to be charged to the complaining party due to their

       relationship; (ii) violation of that duty by the making of deceptive material

       misrepresentations of past or existing facts or remaining silent when a duty to

       7
        Rapkin makes no cognizable argument on appeal that the trial court erred in granting summary judgment in
       favor of Cardinal with regard to the claim of actual, as opposed to constructive, fraud.

       Court of Appeals of Indiana | Opinion 18A02-1408-CT-563 | March 31, 2015                    Page 10 of 13
       speak exists; (iii) reliance thereon by the complaining party; (iv) injury to the

       complaining party as a proximate result thereof; and (v) the gaining of an

       advantage by the party to be charged at the expense of the complaining party.

       Id. (citing Rice v. Strunk, 670 N.E.2d 1280, 1284 (Ind. 1996)). A plaintiff alleging

       the existence of constructive fraud has the burden of proving the first and last of

       these elements. Id. Once a plaintiff satisfies this burden, the burden shifts to the

       defendant to disprove at least one of the remaining three elements by clear and

       unequivocal proof. Id.

[16]   Here, no dispute appears to exist with regard to the first element, i.e., the

       existence of a fiduciary duty between the shareholders of a closely held

       corporation. See Boehm, 743 N.E.2d at 240. Rapkin claims that the designated

       evidence is also sufficient to create a genuine issue of material fact with regard

       to the last element, i.e., whether Cardinal gained an advantage at the expense of

       the physician shareholders. Again, we are inclined to agree. Winconek’s and

       Scanemeo’s affidavits support a reasonable inference that Gildersleve knew

       about the precarious financial condition of the LLCs and, instead of informing

       the physician shareholders of this information, encouraged them to purchase

       more shares, thus divesting Cardinal of a substantial portion of its interest in the

       insolvent LLCs. The existence of a fiduciary duty and the gaining of an

       advantage are the only two elements that Rapkin is required to prove. See

       Demming, 943 N.E.2d at 892.

[17]   Still, Rapkin’s designated evidence would also support an inference with regard

       to the remaining elements of constructive fraud. If Gildersleve knew that the

       Court of Appeals of Indiana | Opinion 18A02-1408-CT-563 | March 31, 2015   Page 11 of 13
       LLCs were borrowing money to pay dividends, yet still encouraged the

       physician shareholders to purchase shares from Cardinal, this could be seen as a

       violation of the fiduciary duty by remaining silent when he should have spoken.

       Also, Scanemeo’s affidavit supports a reasonable inference that the physician

       shareholders purchased shares in reliance on Gildersleve’s encouragement to do

       so, which ultimately resulted in Cardinal selling what were essentially worthless

       shares for over $1.6 million.

[18]   Given this designated evidence, we must conclude a genuine issue of material

       fact does exist with regard to whether Cardinal, through Gildersleve,

       committed constructive fraud on the physician shareholders. This is not to be

       taken as a comment on the strength of Rapkin’s case. As our supreme court

       explained in Hughley:

               Summary judgment is a desirable tool to allow the trial court to
               dispose of cases where only legal issues exist. But it is also a blunt . . .
               instrument, by which the non-prevailing party is prevented from
               having his day in court[.] We have therefore cautioned that summary
               judgment “is not a summary trial; and the Court of Appeals has often
               rightly observed that it is not appropriate merely because the non-
               movant appears unlikely to prevail at trial. In essence, Indiana
               consciously errs on the side of letting marginal cases proceed to trial
               on the merits, rather than risk short-circuiting meritorious claims.
       Hughley, 15 N.E.3d at 1003-04 (citations and internal quotations omitted). All

       we hold is that Rapkin’s designated evidence is sufficient to create genuine

       issues of material fact with regard to the issues of whether Cardinal breached a

       fiduciary duty and committed constructive fraud.

       Court of Appeals of Indiana | Opinion 18A02-1408-CT-563 | March 31, 2015          Page 12 of 13
                                                   Conclusion

[19]   The evidence designated by Rapkin is sufficient to create genuine issues of

       material fact with regard to whether Cardinal breached a fiduciary duty owed to

       its fellow shareholders and with regard to whether Cardinal committed

       constructive fraud by remaining silent about the LLCs financial state and

       encouraging its fellow shareholders to purchase worthless shares of the LLCs.

       Accordingly, we reverse the order granting summary judgment in favor of

       Cardinal and remand for proceedings consistent with this opinion.

[20]   Reversed and remanded.

       Najam, J., and Bradford, J., concur.

       Court of Appeals of Indiana | Opinion 18A02-1408-CT-563 | March 31, 2015   Page 13 of 13