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Musumeci v. Mullin

Superior Court of Connecticut, Judicial District of Stamford-Norwalk, Stamford

August 18, 2016

Robert Musumeci et al.
v.
Patrick Mullin et al

          MEMORANDUM OF DECISION ON MOTION TO DISMISS

          Donna Nelson Heller, J.

         The plaintiffs Robert Musumeci (Musumeci) and RTA International, Inc. (RTA) commenced this action, returnable December 29, 2015, against the defendants Patrick Mullin (Mullin), Rufus Cole (Cole), and Hippo Investments, LLC (Hippo Investments). As discussed more fully below, the plaintiffs seek a declaratory judgment that, inter alia, they have complied fully with their contractual and fiduciary obligations to Next Health, LLC (Next Health) and applicable law.

         On December 30, 2015, the defendants moved to stay this action pending the resolution of a lawsuit that they initiated in Delaware after they were served in this action, [1] styled Patrick Mullin et al. v. Robert Musumeci et al., C.A. No. 11754-VCMR (the Delaware action) (#102.00). The plaintiffs objected to the motion to stay on January 8, 2016 (#109.00). On March 22, 2016, the court (Heller, J.) denied the motion to stay (#102.01).

         On March 8, 2016, while their motion to stay was pending, the defendants filed a motion to dismiss the complaint (#116.00), together with a supporting memorandum of law (#117.00). The plaintiffs filed a memorandum of law in opposition on April 1, 2016 (#123.00). On April 5, 2016, the defendants filed a supplemental memorandum with exhibits in further support of their motion to dismiss (#128.00; #129.00; #130.00). On July 18, 2016, the plaintiffs submitted a supplement to their memorandum of law in opposition in which they reported that the Delaware action had been stayed on July 12, 2016 in favor of this action (#168.00).

         The parties were before the court on the May 9, 2016 short calendar. The court heard argument from counsel and reserved decision at that time. For the reasons set forth below, the motion to dismiss is denied.

         I

         The plaintiffs allege the following in their complaint: Next Health developed and patented a complex mechanical health care product designed to transfer bedridden patients. A group of private investors, solicited by Next Health's founder, John Madigan, III (Madigan), provided funding for the company and became its initial shareholders. The defendants are three of the initial shareholders of Next Health.

         In 2012, Next Health required additional funding to continue the development of its product and preserve the investment of the initial shareholders. Madigan sought and obtained funding and technical support from the plaintiff RTA and its principal, the plaintiff Musumeci. RTA lent $3.5 million to Next Health in 2012. From 2013 through 2015, the plaintiffs lent more than $9 million to Next Health.

         Next Health's shareholders approved a recapitalization transaction in late 2012, under which a portion of the plaintiffs' loans to Next Health was converted to equity in the company. As a result, the plaintiffs together owned a majority of the issued and outstanding shares of Next Health. The shareholders also approved an amended operating agreement, which effectively transferred management and majority ownership of Next Health from its founder and the initial shareholders to RTA and Musumeci. The defendants were among the initial shareholders who approved the transaction.

         Soon thereafter, the defendants started challenging the terms on which the plaintiffs had loaned funds to Next Health and extended trade credit, as well as the terms of the management agreement under which RTA had assumed operational control of the company. Beginning in late 2014, the defendants attempted to insert themselves into the management of Next Health. By letter dated June 4, 2015, the defendants challenged the fundamental business terms of the 2012 recapitalization transaction and demanded that the plaintiffs return $2 million to Next Health, restructure their loans to Next Health, and modify the management agreement between Next Health and RTA.

         In an effort to compel the plaintiffs to acquiesce in their demands, the defendants threatened to sue the plaintiffs in the Delaware Chancery Court.[2] The defendants sent the plaintiffs a draft complaint in which they alleged, inter alia, that the plaintiffs had wrongfully lent funds to Next Health; provided false information to the defendants regarding the fees and interest paid to them by Next Health; wrongfully benefitted from certain transactions with Next Health; fraudulently transferred assets from Next Health to themselves; and improperly influenced the Next Health board of directors. The plaintiffs contend that each of these allegations is demonstrably false, and they claim that the defendants' demands and threats to assert claims against the plaintiffs in Delaware interferes with their ability to manage and operate Next Health.

         The plaintiffs allege that an actual bona fide and substantial dispute exists between the parties regarding the plaintiffs' compliance with their contractual and fiduciary duties to Next Health and its shareholders; the validity and enforceability of the plaintiffs' loans to Next Health; the plaintiffs' purported obligation to disgorge monies to Next Health; the validity and enforcement of the management agreement; and the plaintiffs' compliance with applicable law, including federal securities law. The plaintiffs seek a declaratory judgment that they have fully complied with their contractual and fiduciary duties to Next Health and its shareholders; that their loans to Next Health and the terms upon which RTA has extended trade credit to Next Health are valid, effective, and enforceable; that they have no obligation to disgorge monies to Next Health; that the management agreement under which RTA assumed operational control of Next Health and Musumeci became Next Health's majority shareholder is valid, effective, and enforceable; that Next Health and RTA have complied with the terms of the management agreement; and that their actions with respect to Next Health have fully complied with applicable law.

         The defendants have moved to dismiss this declaratory judgment action for lack of subject matter jurisdiction. They contend that the court does not have subject matter jurisdiction because the plaintiffs' claims are not justiciable or ripe for declaratory relief. In addition, they argue that the plaintiffs cannot pursue their claims in a declaratory judgment action because they have not included all persons having an interest in the subject matter of the complaint as parties. In response, the plaintiffs maintain that their ...


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