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Rapkin Group, Inc. v. Cardinal Ventures, Inc.

Court of Appeals of Indiana

March 31, 2015

Rapkin Group, Inc., as a minority member on behalf and for the benefit of the Eye Center Group, LLC, and Surgicenter Group, LLC, Appellant-Plaintiff,
v.
Cardinal Ventures, Inc., successor in interest to Cardinal Health Partners, LLC, Appellee-Defendant

Page 753

Appeal from the Delaware Circuit Court. The Honorable Thomas A. Cannon, Judge. Cause No. 18C05-1007-CT-009.

ATTORNEY FOR APPELLANT: Peter H. Drumm, Benadum, Cecil & Drumm, Muncie, Indiana.

ATTORNEY FOR APPELLEE: Kevin M. Quinn, Bose McKinney & Evans, LLP, Indianapolis, Indiana.

Mathias, Judge. Najam, J., and Bradford, J., concur.

OPINION

Page 754

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 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

Page 755

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 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 for ECG/SCG. Dr. Watkins wanted to set up a meeting with the accountants at KSM to discuss ECG/SCG's financial ...

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