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Rubin v. Hodes

United States District Court, E.D. New York

January 13, 2020

ROBERT M. RUBIN, Plaintiff,
v.
ROBERT HODES, COST CONTAINMENT GROUP, INC., TRACY BOURANDAS, COST CONTAINMENT GROUP, INC. EMPLOYEE STOCK OWNERSHIP PLAN, WILMINGTON TRUST RETIREMENT AND INSTITUTIONAL SERVICES COMPANY, Itself, and as Trustee of the Cost Containment Group, Inc. Employee Stock Ownership Trust, UHP-DELAWARE, INC., a/k/a United Health Programs of America, Inc., PATRIOT HEALTH, INC. and JOHN DOES 1 through 10, Defendants.

          ORDER

          SANDRA J. FEUERSTEIN UNITED STATES DISTRICT JUDGE.

         I. Introduction

         On or about August 25, 2018, plaintiff Robert M. Rubin (“plaintiff” or “Rubin”) commenced this action against (i) defendants Robert Hodes (“Hodes”), Cost Containment Group, Inc. (“CCG”), and Tracy Bourandas (“Bourandas”) (collectively, the “CCG Defendants”); (ii) defendants Cost Containment Group, Inc. Employee Stock Ownership Plan (“ESOP”) and Wilmington Trust Retirement and Institutional Services Company (“WTRISC”)[1], itself and as trustee of the Cost Containment Group, Inc. Employee Stock Ownership Trust (the “Trust”) (collectively, the “Removing Defendants”); and (iii) defendants UHP-Delaware, Inc. (“UHP”), a/k/a United Health Programs of America, Inc., Patriot Health, Inc. (“Patriot Health”), and several unidentified defendants designated as “John Does 1-10, ” in the Supreme Court of the State of New York, County of Nassau (“the state court”), asserting claims, inter alia, seeking damages and equitable relief for fraudulent inducement, aiding and abetting fraud, securities fraud and payment on certain promissory notes. On December 27, 2018, the Removing Defendants filed a notice of removal removing the action to this Court pursuant to 28 U.S.C. § 1441(a) on the basis that this Court has original subject matter jurisdiction over plaintiff's state law claims against them because they are preempted by the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001, et seq. Pending before the Court is plaintiff's motion to remand this action to the state court pursuant to 28 U.S.C. § 1447(c). For the reasons set forth below, plaintiff's motion is granted.

         II. Background

         A. Factual Allegations in the First Amended Complaint[2]

         The first amended complaint (“FAC”) alleges, inter alia, (i) “[u]pon information and belief, ” that UHP was incorporated in 1992 and “is a predecessor in interest to CCG[, ] or has been treated by CCG as a predecessor in interest to CCG, ” (FAC, ¶ 14); (ii) that beginning in or about 1993, plaintiff “became associated with UHP[, ] . . . restructured and funded UHP[, ] and performed other services on behalf of UHP, ” as a result of which he became “the majority shareholder of UHP, owning at least eighty-five (85%) percent of the common shares of UHP, ” (id., ¶ 16); (iii) that from in or about 1993 through 2004, plaintiff “was a director of UHP and . . . remained as a director thereafter, ” (id., ¶ 21); (iv) that “[a]ccording to the corporate filings with the State of Delaware Secretary of State, Division of Corporations, UHP is only authorized to issue common shares and is not[, ] and has never been[, ] authorized to issue preferred shares, ” (id., ¶ 17; see also Id., ¶ 138); and (v) that in or about July 1996, plaintiff loaned UHP the sum of two hundred fifty thousand dollars ($250, 000.00), with interest at eleven percent (11%) per annum, which is evidenced by a promissory note (the “UHP Loan”). (Id., ¶ 28).

         The FAC further alleges, inter alia, (i) “upon information and belief, ” (A) that Patriot Health was incorporated in 2001 and “has been treated as an affiliate or wholly owned subsidiary of UHP, ” (FAC, ¶ 23), and (B) that from in or about 2001 through the present, Hodes was the chief executive officer (“CEO”), and Hodes and Bourandas were directors and “exercised control, ” of UHP and Patriot Health, (id., ¶¶ 18, 20, 22, 24, 25, 27); (ii) that from in or about 2001 through 2004, plaintiff “was a director of Patriot Health and . . . remained as a director thereafter, ” (id., ¶ 26); (iii) that on or about February 15, 2001, plaintiff loaned Patriot Health the sum of one hundred thousand dollars ($100, 000.00), with interest at eleven percent (11 %) per annum, which is evidenced by a promissory note (the “Patriot Health Loan”), (id., ¶ 29); (iv) that by letter dated March 1, 2005, Hodes, UHP and UHP's auditor “confirmed that the records of UHP reflected that at year end, December 31, 2004, UHP owed Rubin $100, 000 in principal on the UHP Loan and that no interest had been paid, ” (id., ¶ 30); and (v) that by letter of that same date, Hodes, Patriot Health and “UHP's and Patriot Health's auditor[] confirmed that the records of Patriot Health reflected that at year end, December 31, 2004, Patriot Health owed Rubin $89, 788 in principal on the Patriot Health Loan and that no interest had been paid.” (Id., ¶ 31).

         The FAC also alleges, inter alia, “[u]pon information and belief, ” (i) that Hodes and Bourandas “caused CCG to be formed and incorporated” in or about August 2005, and controlled CCG “from its inception to at least September 2012, ” (FAC, ¶¶ 39-40); (ii) that CCG “is in the business of providing medical savings programs, serving to discount medical, dental, chiropractic and other services to its members, ” (id., ¶ 13); (iii) that Bourandas, “[a]t all times mentioned[, ] was and is an officer of CCG, UHP and Patriot Health, ” (id., ¶ 19); (iv) that “shares of CCG were initially issued to Hodes and Bourandas[, ] and Rubin received no shares of CCG, ” (id., ¶ 41); (v) that Hodes and Bourandas formed CCG for the purpose of acquiring the businesses of UHP and Patriot Health “to the exclusion of Rubin, ” (id., ¶ 42); (vi) that “in or about August 2005, Hodes and Bourandas began conducting the business of UHP and Patriot Health under CCG, ” (id., ¶ 43); and (vii) and that from in or about August 2005 through the present, CCG “acted as if it acquired the business, . . . assets . . . [and] shares or equity of UHP and Patriot Health[, ] . . . [and] treated UHP and Patriot Health as if it had acquired the assets . . . [and] shares or equity of UHP and Patriot Health.” (Id., ¶¶ 44-45). However, according to plaintiff, “the purported CCG 2005 acquisition of both UHP and Patriot Health . . . was never undertaken, let alone consummated, ” and “no valid documentation exists” therefor, (id., ¶¶ 96-97, 99); and Rubin “never endorsed his shares of UHP to CCG or even knew of the CCG acquisition of UHP and Patriot Health.” (Id., ¶ 98).

         In addition, plaintiff alleges, inter alia, (i) “[u]pon information and belief, ” that from in or about 2002 through the present, no meetings of the board of directors of UHP and Patriot Health were either held or “duly noticed, ” (FAC, ¶¶ 32-35); and (ii) that even though he was a director, creditor, shareholder and majority shareholder of UHP, and a director and creditor of Patriot Health, he never received notice of a UHP shareholders meeting; of “any merger, sale of the shares or sale of the assets of” UHP or Patriot Health; or “that the business, the assets or the equity or shares of UHP and Patriot Health were to be transferred[, ] were being transferred to[, ] or had been transferred to CCG.” (Id., ¶¶ 36-38, 46; see also Id., ¶ 47 [alleging that no such notice was ever sent to plaintiff from CCG, Hodes or Bourandas]). According to plaintiff, he never sold, transferred or exchanged his shares of UHP to or for shares of CCG, (id., ¶¶ 48, 136); and “[f]rom in or about 2002 through August 2012, [he] had very little contact with Hodes, Bourandas, UHP or Patriot Health[, ] and was never advised as to the state of the business of UHP and Patriot Health.” (Id., ¶ 49). Plaintiff also alleges, “[u]pon information and belief, ” that “from in or about 2002 through in or about August 2012, [he] believed that UHP and Patriot Health were in business, but were not doing well and were not profitable.” (Id., ¶ 50).

         Plaintiff further alleges, inter alia, “[u]pon information and belief, ” (i) that the ESOP “is an employee stock ownership plan created for the benefit of the employees of CCG and other entities owned or controlled by CCG, ” (FAC, ¶ 6); (ii) that the Trust was established in 2012 “specifically to purchase a majority interest in the equity of CCG on behalf of the ESOP, ” (id., ¶ 8); (iii) that Wilmington acted as trustee of the Trust, (id., ¶ 7); (iv) that Hodes and CCG misrepresented to the ESOP and Wilmington that CCG had acquired UHP and Patriot Health, (id., ¶¶ 100-101); and (v) that “[b]ut for such misrepresentation . . . the ESOP Purchase of CCG shares would not have occurred.” (Id., ¶ 102).

         According to plaintiff, in or about August 2012, after having no contact with him “for many years, ” Hodes: (i) advised him (A) that CCG, “the successor to and new name of UHP[, ] . . . had been very successful the past several years and that Rubin's stock interest in [the company] had become valuable, ” (FAC, ¶ 51), (B) “that an employee stock ownership plan, composed of the employees of [CCG] had almost completed the purchase of the stock of [CCG] or most of the stock of [CCG] for about $32, 000, 000 (the ‘ESOP Purchase') and that Rubin's share of the purchase was about $2, 650, 000, ” (id., ¶ 53), and (C) “that the net, fair market value of [CCG] was $40, 000, 000, ” (id., ¶ 54); and (ii) led him to believe (A) that CCG “was the same corporate entity as UHP, and that UHP was operating under the name Cost Containment Group, rather than under its former names, ” (id., ¶ 52), and (B) “that his shares of UHP were being offered for sale, along with the shares of Hodes and one other person.” (Id., ¶ 55; see also Id., ¶¶ 111, 145). According to plaintiff, at that time he “had no knowledge that CCG existed as a separate corporation distinct from UHP, especially since [he] had never received shares of CCG or had ever transferred his shares of UHP.” (Id., ¶ 56).

         In or about September 2012, when Rubin questioned Hodes about why his equity interest in CCG was so small, Hodes responded that it was because a few years earlier, he “had purchased a significant amount of debt held by a certain creditor of UHP and, thereafter, had converted such debt into equity of UHP for himself, which represented approximately 85% of the equity of UHP and that Rubin's interest in [CCG] had been substantially diluted as a result.” (FAC, ¶ 57; see also Id., ¶¶ 111, 145). “Hodes, without further explanation, then advised Rubin that he was entitled to about $6, 000, 000 from the $32, 000, 000 ESOP purchase of most of the equity of [CCG].” (Id., ¶ 58). The ESOP Purchase “was through the means of notes from the ESOP or its trustee to Hodes, Rubin and Margery Rubin, as well as to one other person.” (Id., ¶ 68).

         Rubin believed Hodes because he knew him; he “was aware that there was an investor in UHP, who, prior to 2000, invested in the form of a loan[;] . . . [he] believed that UHP had not been doing well . . . [and, thus, ] believed that Hodes, after acquiring such debt, could have converted it into a majority interest in UHP because the price per share would have been very low[;] . . . [and] he believed that if Hodes was acting in bad faith, he would never have told him of the ESOP purchase of [CCG] and/or would have diluted Rubin even more.” (FAC, ¶¶ 59-62).

         According to plaintiff, “[f]or purposes of the ESOP Purchase, [he] assigned one-quarter of his interest in UHP to Margery Rubin [‘Margery'], ” (FAC, ¶ 65), but Margery assigned “any and all claims she may have regarding the ESOP Purchase, as well as any and all claims against the Defendants” to him. (Id., ¶ 67). In purported reliance upon Hodes's representations, Rubin and Margery executed the ESOP Purchase Documents, “accepted notes from the ESOP and Wilmington in the amount of approximately $6, 105, 000, less a pre-payment[, ]” and “acknowledged to the ESOP and Wilmington that they had no shares of [CCG] after receiving the notes for $6, 105, 000.” (Id., ¶¶ 69, 110).

         Plaintiff alleges, upon information and belief, inter alia, (i) that “the ESOP Purchase was a scheme by Hodes to cash out a portion of his equity for at least $25, 000, 000, while maintaining a 20% equity interest in CCG and the contingent contractual right to a acquire [sic] majority interest in CCG[, ]” (FAC, ¶ 107); and (ii) that “based upon CCG's ability to pay out $32, 000, 000, after taxes, on the notes to purchase the CCG shares, plus interest, over approximately a 4 year period, CCG had a market value of at least $200, 000, 000, rather than the $40, 000, 000 represented in the ESOP Purchase.” (Id., ¶ 108). According to plaintiff, the CCG Defendants and the Removing Defendants misrepresented the market value of CCG to him as being forty million dollars ($40, 000, 000.00), and/or concealed from him that the actual market value of CCG was at least two hundred million dollars ($200, 000, 000.00)[3]. (Id., ¶¶ 109, 111, 145). Plaintiff alleges that his “equity interest in UHP and/or CCG, in or about September 2012 was worth at least $170, 000, 000, ” (id., ¶ 112), and, thus, he “sustained damages in the amount of at least $163, 895, 000. . . .” (Id., ¶¶ 113, 121).

         Plaintiff alleges, “[u]pon information and belief, ” that on or about September 5, 2012, Hodes and Bourandas caused UHP Acquisition Corp. (“UHPAC”) to be formed and incorporated, (FAC, ¶ 92), “for the purposes of acquiring the equity or assets of UHP and completing the ESOP Purchase of CCG shares, all to the detriment of Rubin.” (Id., ¶ 94). However, according to plaintiff, “[i]nstead of using [UHPAC], Hodes and Bourandas were able to complete the ESOP [P]urchase . . . by fraudulently inducing Rubin to execute the documents consummating the ESOP Purchase of CCG shares (the ‘ESOP Purchase Documents').” (Id., ¶ 95; see also Id., ¶ 114).

         “In 2017, payments on the notes securing the ESOP Purchase were completed to Rubin and Margery Rubin, who received principal in the amounts of approximately $4, 495, 000 and $1, 610, 000, respectively, . . . [and] interest in the amounts of approximately $283, 000 and $101, 000, respectively.” (FAC, ¶ 71). In or about August of that same year, plaintiff inquired of Hodes and CCG as to the amounts he was still owed on the UHP Loan and the Patriot Health Loan (collectively, the “Loans”) and when those notes would be paid. (Id., ¶ 72). According to plaintiff, Hodes initially told him that the Loans had been paid, but when he was unable to provide any evidence of payment, he subsequently advised Rubin that the Loans “had been converted to shares of UHP and Patriot Health in 2004.” (Id., ¶¶ 73-74).

         By email dated August 14, 2017, Hodes provided plaintiff with “a copy of the minutes of a purported board of directors meeting of UHP held on December 31, 2014 [sic] [the ‘BOD Minutes'], ”[4] which plaintiff contends are fictitious and fraudulent. (FAC, ¶¶ 75, 85, 111, 115, 145). The BOD Minutes, which contain the purported unnotarized signatures of Hodes, Bourandas and Rubin, reflects, inter alia, (i) the conversion of Hodes's four hundred sixty-five thousand (465, 000) shares of purported Preferred Stock of UHP, which allegedly had a fair market value of two dollars ($2.00) per share, to nine million three hundred thousand (9, 300, 000) of UHP's Common Stock, which purportedly had a fair market value of ten cents ($0.10) per share; (ii) the conversion of a debt UHP allegedly owed to Hodes for a loan in the outstanding aggregate principal amount of twelve thousand dollars ($12, 000.00), plus accrued interest thereon in the amount of fourteen thousand three hundred dollars ($14, 300.00) (the “Hodes Debt”), to two hundred sixty-three thousand (263, 000) shares of Common Stock of UHP; (iii) the conversion of UHP's debt to plaintiff for the UHP Loan in the outstanding aggregate principal amount of one hundred fifty thousand dollars ($150, 000.00), plus accrued interest thereon in the amount of one hundred seventy-eight thousand seven hundred fifty dollars ($178, 750.00) (the “Rubin Debt”), to three million two hundred eighty-seven thousand five hundred (3, 287, 500) shares of UHP's Common Stock “in full payment of the Rubin Debt and the accrued interest thereon;” and (iv) the conversion of one hundred seventy eight thousand dollars ($178, 000.00) of a purported “outstanding liability [of UHP] to Hodes for unpaid compensation in the aggregate amount of” three hundred fifteen thousand thirty dollars ($315, 030.00), to one million seventy hundred eighty thousand (1, 780, 000) shares of UHP's Common Stock to Hodes. (Id., Ex. A). According to plaintiff, Hodes, thus, committed fraud in or about September 2012, when he allegedly misrepresented to Rubin that he had acquired his majority interest in the Common Stock of UHP by purchasing and acquiring debt, and then converting the debt. ...


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