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Priestley v. Comrie

November 29, 2007


The opinion of the court was delivered by: Hon. Harold Baer, Jr., District Judge*fn1


Plaintiff Katherine Priestley brings this action individually, and derivatively on behalf of and for Defendant PanMedix, against Defendants McDonald Comrie, Chief Executive Officer and President of PanMedix, Inc. and President of Electronic Knowledge Publishing, Inc.; Phillip Yee, Director and technology officer of Defendant PanMedix; Dr. David Erlanger, Chief Scientific Officer of Defendant PanMedix; PanMedix, Inc, a Delaware company with its main offices in New York; Electronic Knowledge Publishing, Inc., a Delaware company with its main offices in New York; and Headminder, Inc., a New York company that maintains its offices in New York. Plaintiff seeks individually to obtain repayment, plus interest, of two loans made to Defendant PanMedix that are now overdue. Additionally, Plaintiff seeks to recover derivatively for breaches of fiduciary duties of loyalty and due care by Defendants Comrie, Yee, and Erlanger.

Defendants move to dismiss Plaintiff's claims pursuant to Fed R. Civ. P. 12(b)(6) and Fed. R. Civ. P. 41(a). Defendants contend that Plaintiff's individual claims to recover on the promissory note should be dismissed under the "two dismissal rule" of Fed. R. Civ. P. 41(a) and that the derivative claims should be dismissed because Plaintiff is unfit to adequately and fairly represent PanMedix shareholders in a derivative action.

I. Background

Plaintiff Katherine Priestley ("Priestley") is the holder of a Senior Promissory Note issued by Defendant PanMedix ("PanMedix"), and is owner of 18.85% of PanMedix's common stock. Pl.'s Mem. of Law in Opp'n to Def.'s Mot. to Dismiss ("Pl.'s Opp'n") 5. PanMedix is a start-up company in the business of developing technology for healthcare industries, pharmaceutical companies, and research and academic institutions. Mem. of Law in Supp. of Def.'s Mot. to Dismiss 2-3. Defendant McDonald Comrie ("Comrie") is the Chief Executive Officer and President of PanMedix Inc., and President of Defendant Electronic Knowledge Publishing, Inc ("EKP"). Compl. ¶ 4. Defendant Phillip Yee ("Yee") is Director and Technology Officer of PanMedix. Id. ¶ 5. Defendant Dr. David Erlanger ("Erlanger") is the Chief Scientific Officer of PanMedix. Id. ¶ 6.

In 1997, Plaintiff became a shareholder in PanMedix's predecessor company, Xcape, Inc.,*fn2 which in 2000 was restructured into PanMedix and a wholly-owned subsidiary, EKP. Pl's Opp'n 5.

In March 2001, PanMedix needed operating capital, and Comrie asked Plaintiff to provide financing to PanMedix. Decl. of Pl. in Opp'n to Def.'s Mot. to Dismiss ("Priestley Decl.") ¶ 7. At that time, Comrie also asked Plaintiff to be a member of the Board of Directors of PanMedix; subsequently, on March 15, 2001, a Consent of Shareholders was executed and Plaintiff became one of the Directors of PanMedix. Id. ¶ 8.

In April 2001, Plaintiff loaned PanMedix $750,000.00, subject to the terms of a one-year Senior Secured Promissory Note issued by PanMedix.*fn3 Pl.'s Opp'n 5. Comrie signed the Senior Secured Promissory Note in his capacity as PanMedix's President, and also signed an Unconditional Agreement of Guarantor in his capacity as EKP's President. Compl. ¶ 25.

In August 2001, Plaintiff acquired 20,777 shares of PanMedix common stock for $100.00, and consequently became owner of 18.85% of PanMedix shares. Priestley Decl. ¶ 12.

In March 2002, Comrie met with Plaintiff and informed her that PanMedix was able to make interest payments for the previous year, but could not repay the principal. Id. Thus, on April 6, 2002, when the $750,000 principal of the Senior Secured Promissory Note was due to be repaid, PanMedix was unable to repay Plaintiff. Id. ¶ 13. Furthermore, Plaintiff was told that if she called the Note due, PanMedix would become bankrupt and cease operations, and that as a result the value of the collateral would not be close to the value of the loan. Id. Plaintiff then agreed to loan PanMedix an additional $85,000, subject to the terms of the Senior Secured Promissory Note,*fn4 upon President Comrie's representation that this loan would give management time to seek funding and recapitalize the business. Id. ¶ 14-15.

The new loan notwithstanding, by 2003, PanMedix continued to suffer from undercapitalization and insufficient revenue generation from product sales. Pl.'s Opp'n 5. On June 23, 2003, Plaintiff sent the first of three Notices of Default*fn5 to PanMedix. Priestley Decl. ¶ 23. In May and September 2003, Plaintiff Priestley discussed several potential opportunities and strategies for raising venture capital with PanMedix management, both orally and in writing. Id. ¶¶ 18-19, 25. By 2005, though, PanMedix business had not improved, and capital had not been raised. Pl.'s Opp'n 5.

In the summer of 2005, Defendants Comrie, Yee, and Erlanger took steps to acquire the assets of another financially troubled biotech company, Sention, Inc. Pl.'s Opp'n 5. Plaintiff asserts that Defendants attempted to acquire Sention's assets in a separate company, to their own personal benefit but to the detriment of PanMedix. Pl.'s Opp'n. 5-6.*fn6

As of December 7, 2005, PanMedix's balance sheet showed retained earnings of around negative $2.8 million, and total equity of around negative $1.16 million. Priestley Decl. ΒΆ 42. Around the same time, Plaintiff sent two additional Notices: a Notice of Default on November 20, 2005, and a Notice of Court Action, ...

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