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Paradigm Biodevices, Inc. v. Centinel Spine

May 1, 2013

PARADIGM BIODEVICES, INC.
PLAINTIFF,
v.
CENTINEL SPINE, INC. AND JOHN J. VISCOGLIOSI,
DEFENDANTS.



MEMORANDUM OPINION AND ORDER

Plaintiff Paradigm BioDevices, Inc. ("Paradigm"), a Massachusetts corporation, entered into an exclusive distribution agreement with Surgicraft, Ltd. ("Surgicraft"), a U.K. manufacturer of medical devices. (Proposed Fourth Amended Complaint ("FAC") ¶¶ 1, 8). The agreement provided that Surgicraft would provide a payment to Paradigm if Surgicraft were ever acquired by a company that terminated the agreement. (Id. ¶¶ 10-11). Thereafter, Surgicraft was acquired by Defendant Centinel Spine, Inc. ("Centinel"), which subsequently terminated the distribution agreement. (Id. ¶¶ 27, 42). The High Court of Justice Chancery Division in the U.K. held that as a result of this acquisition, Paradigm was entitled to a payment from Surgicraft and entered judgment on behalf of Paradigm for over fifteen million dollars. (Id. ¶¶ 60-64). Paradigm alleges that Centinel rendered Surgicraft insolvent in an effort to avoid having to make the change-of-control payment. (Id. ¶ 72).

Based on these facts, Paradigm, in its Third Amended Complaint - the complaint under which the case is currently proceeding - alleged two claims: (1) fraudulent transfer (Third Amended Complaint (Docket No. 82) ¶¶ 61-67); and (2) unfair, deceptive, and unlawful acts and unfair methods of competition in violation of Massachusetts General Law c.93A (id. ¶¶ 69-72). On March 15, 2013, Paradigm moved to amend its complaint a fourth time to (1) pierce the corporate veil and add Viscogliosi Brothers, LLC ("VB") as a defendant; and (2) add a breach-of-contract claim. (Mot. Leave File Am. Compl. (Docket No. 133)). For the reasons explained below, the motion is GRANTED with respect to Paradigm's piercing-the-corporate-veil claim and request to add VB as a defendant and DENIED with respect to its breach-of-contract claim.

LEGAL STANDARD

Under Federal Rule of Civil Procedure 15, "a party may amend its pleading only with the opposing party's written consent or the court's leave. The court should freely give leave when justice so requires." Fed. R. Civ. P. 15(a)(2). Rule 21 provides that "the court may at any time, on just terms, add or drop a party." Fed. R. Civ. P. 21. "[T]he showing necessary under Rule 21 is the same as that required under Rule 15(a)." Johnson v. Bryson, 851 F. Supp. 2d 688, 703 (S.D.N.Y. 2012). "Under both Rules 15 and 21, leave to amend may be denied where the proposed amendment would be futile or where it would result in prejudice to the opposing parties." Soroof Trading Dev. Co., Ltd. v. GE Microgen, Inc., 283 F.R.D. 142, 147 (S.D.N.Y. 2012). Because Paradigm moves to amend the complaint after the deadline for doing so provided by the scheduling order (see Docket No. 96), Paradigm must also demonstrate "good cause" for the amendment. Fed. R. Civ. P. 16(b)(4).

Thus, Paradigm's motion to amend the complaint should be granted if: (1) amendment would not be futile; (2) it will not prejudice the opposing parties; and (3) Paradigm has demonstrated "good cause." Paradigm's proposed amendments adding a piercing-the-corporate-veil claim and VB as a defendant meet this standard; its breach-of-contract claim does not.

DISCUSSION

I.Piercing the Corporate Veil

A.Futility

"An amendment to a pleading is futile if the proposed claim could not withstand a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6)." Lucente v. Int'l Bus. Machines Corp., 310 F.3d 243, 258 (2d Cir. 2002). To survive a Rule 12(b)(6) motion, the plaintiff must plead sufficient facts "to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 556). Because Centinel is a Delaware corporation, the parties agree that Delaware law governs whether Paradigm can state a claim for piercing the corporate veil. (Pl's. Mem. 15; Defs'. Mem. 7 n.2). See also Soroof, 283 F.R.D. at 150.

"Delaware courts take the corporate form . . . very seriously," disregarding it "only in the exceptional case." Case Fin., Inc. v. Alden, Civ. A. No. 1184-VCP, 2009 WL 2581873, at *4 (Del. Ch. Aug. 21, 2009) (internal quotation marks omitted). "In an appropriate case, however, the corporate veil may be pierced." Harco Nat. Ins. Co. v. Green Farms, Inc., 15 Del. J. Corp. L. 1030, 1038 (Del. Ch. 1989). Consideration of whether to pierce the corporate veil is "a fact intensive inquiry." Case Fin., Inc., 2009 WL 2581873, at *4. Delaware courts consider several factors, "none of which [is] dominant." Id. In particular, courts examine whether: (1) the company was adequately capitalized; (2) whether it was solvent; (3) whether corporate formalities, such as recordkeeping, the payment of dividends, and the proper functioning of officers and directors, were observed; (4) whether corporate funds were siphoned or intermingled; and (5) whether, in general, the company functioned as a facade for the controlling shareholder. See, e.g., id.; MicroStrategy Inc. v. Acacia Research Corp., Civ. A. No. 5735-VCP, 2010 WL 5550455, at *11 (Del. Ch. Dec. 30, 2010); Mason v. Network of Wilmington, Inc., Civ.A. No. 19434-NC, 2005 WL 1653954, at *3 (Del. Ch. Ct. July 1, 2005). Even if there are sufficient indicia that the corporations at issue "actually functioned as a single entity," Soroof, 283 F.R.D. at 148 (internal quotation marks omitted), piercing the corporate veil "may be done only in the interest of justice, when such matters as fraud, contravention of law or contract, public wrong, or where equitable consideration among members of the corporation require it, are involved," Pauley Petroleum, Inc. v. Cont'l Oil Co., 43 Del. Ch. 516, 521 (1968).

Under this framework, Paradigm's allegations are sufficient to survive a motion to dismiss. Paradigm alleges that Centinel "was grossly undercapitalized, insolvent and in financial distress." (FAC ¶ 34). Centinel, Paradigm alleges, not only owed millions of dollars in debt at its inception (id. ¶ 89) - including eight million dollars owed on financing it obtained in 2008 and 2009 (id. ¶ 54) and fifteen million dollars owed to Surgicraft shareholders (id. ¶ 34)*fn1 - but

it also merged with Raymedica, which "was losing $500,000 to $600,000 a month" (id. ¶ 34). Nevertheless, Centinel "did not have any working capital or an equity line to support operations" (id.), nor did it "have any systems in place to sell product or account for inventory" (id. ¶ 35).

Paradigm also contends that Centinel failed to observe corporate formalities, alleging, for example, that "[n]o financial reports have ever been supplied to Centinel's shareholders" (id. ¶¶ 56, 90) and that "Centinel has not had any directors' meetings," let alone taken any "minutes of any directors' meetings" (id. ¶ 56). In addition, Paradigm alleges other facts that, if true, suggest that VB "exercises complete dominion and control over" Centinel. Soroof, 283 F.R.D. at 148 (internal quotation marks omitted). For example, Paradigm alleges that John Viscogliosi, a principal and member of VB, serves as the "Chairman and Chief Executive Officer of Centinel" (id. ¶ 33); that Centinel's board of directors is comprised of only two people, the Viscogliosi brothers (id. ¶ 56); that "Centinel has been staffed with various employees of VB and its affiliates" (id.); and that "Centinel shares office space with VB" (id.).

Furthermore, the FAC alleges not only that VB and Centinel intermingled funds, but also that Centinel siphoned funds to VB. Paradigm alleges that "VB has supplied a significant amount of Centinel's financing" (id. ΒΆ 56); that "VB and its affiliates have transferred substantial sums of money to and from Centinel without any documentation or formal approval process" (id.); and that Centinel has paid VB and its affiliates ...


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