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Paasch v. INVO Bioscience, Inc.

Superior Court of Massachusetts, Suffolk, Business Litigation Session

October 17, 2016

Ronald Paasch et al. [1]
INVO Bioscience, Inc. et al. [2] No. 135382

         October 18, 2016, Filed



          Edward P. Leibensperger, Justice

         This case arises out of the 2006 auction of the assets of the Medelle Corporation (Medelle), a Delaware business corporation formed in or about 1996 to develop and market products to treat human infertility. Plaintiffs Ronald Paasch, Francis C. Gleason, Jr., and Jo Ann Gorge, minority shareholders of Medelle, claimed that the sale was improper and filed the present lawsuit against Medelle, INVO Bioscience, Inc. (INVO), Bio-X-Cell, Inc. (Bio-X-Cell), [3] Claude Ranoux, and Kathleen Karloff. Medelle never appeared and was defaulted under Mass.R.Civ.P. 55(a). Plaintiffs subsequently moved for an assessment of damages and default judgment under Rule 55(b)(2) but the court deferred a hearing on the motion. As the case proceeded, the other defendants filed motions to dismiss, which the court granted in full as to INVO, Bio-X-Cell, and Karloff but only in part as to Ranoux. Plaintiffs now renew their motion for entry of default judgment and assessment of damages against Medelle. In response, INVO and Bio-X-CelI have filed an opposition to plaintiffs' renewed motion and have also filed, along with Karloff, a motion seeking an entry of final judgment of dismissal as to the claims asserted against them. For the reasons that follow, plaintiffs' motion is DENIED and defendants' motion is ALLOWED.


         For several years, Medelle sought FDA approval for an intra-vaginal incubation device invented by Claude Ranoux, Medelle's founder, president, chief scientist, and a director of the company. This effort, however, proved unsuccessful and by the autumn of 2006, the company was heavily in debt, almost out of cash, and unable to raise additional capital. As a result, in November 2006, Medelle's directors voted unanimously to assign the company's assets for the benefit of creditors.

         An auction was held on December 22, 2006, during which time Ranoux, the only bidder, submitted the winning bid. Ranoux subsequently conveyed the assets to Bio-X-Cell, a corporation that Ranoux had formed following the auction. Bio-X-Cell eventually became a wholly-owned subsidiary of INVO. INVO (through Bio-X-Cell) continued to develop Ranoux's device. Ranoux is currently INVO's president and an INVO director.

         In December 2009, plaintiffs brought this action against INVO, Bio-X-Cell, Medelle, Ranoux, and Kathleen Karloff (Medelle's former vice president and INVO's current CEO). They claimed that defendants purposely failed to inform them of the auction in order to prevent them from participating in it. Plaintiffs asserted claims for: successor liability against INVO (Count I); breach of fiduciary duty against Ranoux (Count II); aiding and abetting breach of fiduciary duty against Karloff, Medelle, INVO, and Bio-X-Cell (Count III); fraud against Ranoux, Karloff, Medelle, INVO, and Bio-X-Cell (Count IV); civil conspiracy against Ranoux, Karloff, Medelle, INVO, and Bio-X-Cell (Count V); and violation of G.L.c. 93A against Medelle, INVO, and Bio-X-Cell (Count VI). Plaintiffs' claims against INVO and Bio-X-Cell were premised solely on their contention that INVO and Bio-X-Cell were the successors to Medelle by de facto merger and therefore they had successor liability for Medelle's alleged wrongful conduct.

         In spring 2010, plaintiffs requested and obtained a Mass.R.Civ.P. 55(a) entry of default against Medelle, which was no longer an operating company, for failure to appear in this case. They subsequently moved for an assessment of damages and default judgment against Medelle pursuant to Mass.R.Civ.P. 55(b)(2), but the court (Hinkle, J.) deferred a decision on the motion after INVO argued that no assessment of damages should be made prior to its pending motion to dismiss was decided. In opposing the motion to assess damages, INVO contended that because it asserted legal defenses in its motion to dismiss that were equally applicable to Medelle, an assessment of damages would risk premature and inconsistent judgments. The court agreed.

         A few months later, in November 2010, the court (Hinkle, J.) ruled on defendants' motions to dismiss. The court allowed Ranoux's motion in connection with plaintiffs' civil conspiracy and c. 93A claims but denied his motion with regard to plaintiffs' fraud and breach of fiduciary duty claims. The court allowed the motions to dismiss of Karloff, INVO, and Bio-X-Cell in their entirety. With regard to INVO and Bio-X-Cell, who were being sued on a theory of successor liability of Medelle, the court concluded that plaintiffs' claim for fraudulent nondisclosure (Count IV) failed because Medelle had no fiduciary duty with respect to informing shareholders of the auction, the c. 93 claim (Count VI) failed because the allegations involved the internal affairs of Medelle, and the aiding and abetting and civil conspiracy claims (Counts III and V) failed because the allegations used to support them were too conclusory.[4]

         Following the court's ruling, defendants moved to vacate the entry of default against Medelle and substitute dismissal of all counts against Medelle based upon the court's determination that the complaint failed to state a claim against INVO and Bio-X-Cell. The court (Lauriat, J.) denied the motion in May 2011, concluding that, as defendants and their counsel did not represent Medelle, they had no standing to assert the motion. A subsequent motion to reconsider was also denied.

         As their trial date approached, Ranoux and plaintiffs jointly moved for leave to pursue binding arbitration in connection with the remaining claims against Ranoux (fraud and breach of fiduciary duty), which the court allowed. The claims were subsequently arbitrated at the JAMS Boston office. After five days of hearings, the arbitrator issued an Award dated February 15, 2013, in favor of Ranoux and against plaintiffs. In the Award, the arbitrator concluded that: (1) although Gleason and Gorge did not receive notice of the auction in advance, Paasch did receive notice; (2) Section 271 of the Delaware Corporations Act did not apply to an assignment for the benefit of creditors and therefore, no notice, meeting, or shareholder's vote was required; (3) the board acted reasonably, independently and in good faith in deciding to undertake an assignment for the benefit of creditors; and (4) Gorge and Gleason would not have been able to commercialize and gain market acceptance of Medelle's technology had they acquired it, and it was doubtful that they would have wanted to make the additional investment required.

         In April 2013, plaintiffs filed a motion to vacate the arbitration award and, in response, Ranoux filed a motion to confirm the award. This court (Billings, J.) denied plaintiffs' motion and confirmed the award in an August 2013 decision. Shortly thereafter, the clerk, without motion from either party, entered a final judgment under Rule 58(a) (the 2013 Judgment). The judgment states:

JUDGMENT CONFIRMING ARBITRATION AWARD For reasons set forth in the Memorandum and Order on cross motions regarding Arbitrations [sic] Award dated Aug 21, 2013 plffs. motion to vacate Arbitration Award is DENIED and deft. Claude Ranoux's motion to confirm Arbitration Award and for entry of Judgment is ALLOWED. Judgment to enter enforcing Award entered on docket ...

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