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SOLANO v. DELMED

February 26, 1991

DR. JOSE T. SOLANO and JOSE T. SOLANO CHILDREN'S TRUST, Plaintiffs,
v.
DELMED, INC., AMIN S. KHOURY, WILLIAM F. FRADO, JR., ADDISON L. EVERETT, LEHMAN BROTHERS KUHN LOEB INCORPORATED, FREDERICK FRANK, DOMINIQUE G. LAHAUSSOIS, JOHN DOE, JANE DOE, and JOHN DOE, INC., Defendants



The opinion of the court was delivered by: HARRIS

 This matter is before the Court on two separate motions to dismiss filed by defendants. *fn1" For the reasons set forth below, the Court concludes that the RICO four-year statute of limitations bars plaintiffs' claims and, accordingly, the complaint must be dismissed.

 Background

 In considering a motion to dismiss, the Court must accept as true the factual allegations of plaintiffs' complaint and any ambiguities are resolved in plaintiffs' favor. See Doe v. United States Dept. of Justice, 243 U.S. App. D.C. 354, 753 F.2d 1092, 1102 (D.C. Cir. 1985). Accordingly, the following facts are taken from the complaint.

 Plaintiffs, Dr. Jose T. Solano ("Solano") and the Jose T. Solano Children's Trust ("Children's Trust"), have brought this action to recover damages for alleged violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968. *fn2" Dr. Solano is a nephrologist who created and, during the time period relevant to this case, owned most of the stock of the Mid-Atlantic Nephrology Center, Ltd. ("MANC"). MANC was created in 1973 for the purpose of delivering quality dialysis services to kidney patients. Plaintiff Children's Trust is an irrevocable trust for the benefit of Dr. Solano's children. The trust also owned shares of common stock of MANC during the relevant time period.

 Defendants are the following: Delmed, Inc., a Massachusetts corporation; Amin S. Khoury, director, chairman and CEO of Delmed; William F. Frado, vice president and general counsel of Delmed; A.L. Everett, senior vice president, treasurer, and chief financial officer of Delmed; Lehman Brothers Kuhn Loeb Incorporated, a Maryland corporation; Frederick Frank, managing partner of Lehman Brothers; Dominique G. Lahaussois, a vice president of Lehman Brothers; and certain unidentified "John Doe Defendants."

 Having previously identified MANC as a potential candidate for acquisition, in late spring of 1983 Delmed expressed an interest in "working together" with MANC and Solano. In response, Solano, by telephone, enlisted defendants Lehman Brothers and Frank to assist in the potential sale. In July 1983, Frank and Lehman Brothers recommended divestiture of MANC for a price of $ 10 - 13 million. On August 15, 1983, Lehman Brothers, through defendants Lahaussois and Frank, gave Solano and other MANC officers a presentation in which they stressed Delmed's financial strength. At that time, Frank recommended the sale of MANC to Delmed, and Solano instructed Frank to enter into negotiations for the sale.

 On August 26, 1983, Solano signed an agreement engaging the services of Lehman Brothers and Frank for advice in connection with the sale. On the same day, the parties, represented by counsel, reached an agreement in principle to sell MANC to Delmed in a stock for stock transaction, with Frank again stressing the strong financial state of Delmed and recommending the sale. In the next three months, Solano had a number of telephone conversations with defendants Frank and Lahaussois at Lehman Brothers concerning the sale of MANC to Delmed. During those months, Solano also made and received a number of telephone calls to and from defendant Khoury. Khoury described Delmed's strengths, including its unique capability as a manufacturer of several intravenous as well as dialysis solutions, and its strategic plan to be a vertically integrated provider of dialysis and other parenteral products and services. Solano relied on Khoury's representations in making his ultimate decision to sell MANC.

 Over the next four months, representatives of Delmed made numerous requests for information and documents from MANC. Lehman Brothers and Frank did not, however, request similar information from Delmed.

 In September 1983, and unbeknownst to plaintiffs, Delmed was advised by the United States Health Care Financing Administration that (1) Delmed's "rebate offer" to hospitals for assignment of patient accounts to Delmed constituted kickbacks in violation of federal criminal law, and (2) Delmed was being challenged for grossly overcharging Medicare in New Jersey. Additionally, Delmed closed three manufacturing facilities, also without plaintiff's knowledge. Defendants never advised plaintiffs of these actions during contract negotiations or at closing.

 On October 26, 1983, Solano, Children's Trust, MANC, and the MANC Retirement Trust Ltd., as sellers, and Delmed and Mid-Atlantic Acquisition, Inc., a new Maryland company created by Delmed for the purpose of the acquisition, as buyers, entered into an Acquisition Agreement. Under the terms of the Acquisition Agreement, Solano and Children's Trust were to transfer all of their shares in MANC to Delmed for a total acquisition price of $ 10 million. As consideration for the MANC stock, Delmed would transfer to Solano and Children's Trust such number of Delmed shares of common stock as would equal $ 10 million, calculated on the basis of the market value of Delmed shares. The Acquisition Agreement identified $ 9.875, the market price of Delmed shares on the Acquisition Agreement date, as the "Signing Price."

 Although plaintiffs were to receive unregistered stock, the Acquisition Agreement gave them "piggyback" registration rights. It furthermore required Delmed to register such number of Delmed shares as would provide plaintiffs with profits of not less than $ 3 million, within one year of closing. The Acquisition Agreement also provided that Solano would enter into a two-year consulting agreement with Delmed and that he would continue to be involved in its activities.

 In November 1983, defendant Frank told Solano that Delmed had asked Frank and Lehman Brothers to represent their interests in the potential sale of Delmed to a major company. Frank acknowledged that their representation of Delmed presented a potential conflict, but urged Solano to consent to the representation, adding that such a sale would add value to plaintiffs' Delmed stock. Solano agreed to the representation.

 On November 15, 1983, Delmed filed with the Securities and Exchange Commission (SEC) a Form 10-Q for the third quarter ending October 1, 1983. The report anticipated Food and Drug Administration (FDA) approval of Delmed's new production facility in Ogden, Utah, during 1984 and showed positive operating profit and net income. During November and December 1983, defendant Khoury represented to Solano that Delmed would soon be obtaining FDA licensing of its new production facility in Ogden, Utah, and that Delmed had become an attractive target for acquisition by a large company. Khoury represented to Solano that both of these events would increase the value of Delmed stock for all its shareholders.

 The closing on the Acquisition Agreement was held on December 29, 1983, with buyer and seller represented by counsel. At that time, Delmed provided an officer's certificate, signed by defendant Everett as chief financial officer of Delmed, which purported to confirm that all representations and warranties were true as of closing, but stated that "as a result of the circumstances disclosed on Form 10-Q [for the fiscal quarter ending October 1, 1983], Delmed expects to experience a substantial loss from operations in the fourth quarter of fiscal 1983." However, the officer's certificate was located in the middle of voluminous closing ...


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