There is sufficient evidence to create genuine issues of material fact as to whether a shareholder breached its fiduciary duty owed to other shareholders and whether it committed constructive fraud by remaining silent about two businesses’ financial states, the Indiana Court of Appeals ruled Tuesday.
In Rapkin Group, Inc., as a minority member on behalf and for the benefit of The Eye Center Group, LLC, and Surgicenter Group, LLC v. Cardinal Ventures, Inc., successor in interest to Cardinal Health Partners LLC., 18A02-1408-CT-563, Rapkin Group appealed summary judgment in favor of Cardinal Ventures on its claims of breach of fiduciary duty and constructive fraud in a shareholder derivative lawsuit. Cardinal Health Partners owned nearly 22 percent and 33 percent, respectively, of The Eye Center Group LLC and Surgicenter Group LLC. Other shares in EGC and SCG were owned by ophthalmologists and optometrists, including the Rapkin Group. Inconsistencies in financial reports were discovered in 2008 through an audit by Katz Sapper & Miller. It turned out that ECG/SCG’s chief executive officer D. Frank Winconek and chief financial officer Stephanie Carrick engaged in fraudulent practices with the companies’ finances. Proceeds from loans rather than from profits were used to pay salaries and dividends.
Rapkin brought its complaint in April 2010 against several defendants, and at issue in Tuesday’s appeal is summary judgment granted to Cardinal. Rapkin claimed that it designated evidence to show an issue of material fact with regard to Cardinal’s knowledge of the state of the finances of the LLCs. Rapkin pointed to Winconek’s affidavit in which he averred that Robert Gildersleve, the director of the LLCs appointed by Cardinal, was aware that the EGC and SCG were required to borrow money to pay dividends from 2006 to 2009. It was also at this time that Cardinal began to divest itself of shares of the LLCs. It sold shares to the doctors and did not disclose the loan information.
The COA agreed with Rapkin that a genuine issue of material fact exists on the question of whether Cardinal breached its fiduciary duty, noting that a reasonable inference could be drawn that Gildersleve was not dealing openly and honestly with the physician shareholders.
Rapkin’s designated evidence also would support an inference that Cardinal, through Gildersleve, committed constructive fraud by remaining silent about the LLCs’ financial states and encouraged fellow shareholders to purchase worthless shares.
The judges noted that its ruling is not to be taken as a comment on the strength of Rapkin’s case, but merely that there are questions as to whether Cardinal breached a fiduciary duty and committed constructive fraud. The case is remanded for further proceedings.