By Nathan Hale

Law360 (February 23, 2021, 4:42 PM EST) -- Adventist Health System can pursue claims over a soured $57.5 million deal to buy personal protective equipment during the COVID-19 pandemic, after a federal court ruled the hospital owner has sufficiently alleged a $2 million fraud conspiracy by an asset management company and its legal counsel.

In a 24-page order released Monday, U.S. District Judge Paul G. Byron denied motions to dismiss from Los Angeles-based Tomax Capital Management Inc., its principal Yehoram Tom Efrati, California attorney Michael H. Weiss and Weiss' firm.

In addition to allowing Florida-based AdventHealth's claims for breach of contract, conversion, breach of fiduciary duty, civil theft and civil conspiracy to move forward, the Orlando-based judge also ruled that the court has authority to exercise personal jurisdiction over Weiss and Efrati under the state's long-arm statute.

"Plaintiff sufficiently pleads facts supporting the existence of a civil conspiracy that caused injury in Florida," the order said.

"Indeed, the alleged torts of conversion and fraud 'could not have occurred but for Mr. Efrati's [and Mr. Weiss's] misrepresentations to AdventHealth's officers and representatives who reside, work, and control the company's finances in Florida,'" the court added, quoting AdventHealth's response.

The health care system, which has hospitals in nine states, alleged in its May 28 complaint that when Tomax failed to deliver on an April 8 contract to provide 10 million 3M N95 ventilator masks to protect its workers from the coronavirus, it asked for the money in escrow to be returned. According to the suit, Weiss sent just $55.5 million and told AdventHealth the remaining $2 million was in Tomax's possession, while Tomax never returned the rest, despite assurance from Efrati that it would.

Weiss and Efrati both argued that they were shielded from possible individual liability because they were operating as agents for their respective companies, but Judge Byron said AdventHealth sued them not as agents but as direct and personal participants in the alleged conspiracy to commit conversion and fraud.

"There is 'substantial authority' for the proposition that corporate officers may be sued for tortious acts in which they are alleged to have 'personally participated,'" Judge Byron said, citing several cases.

In ruling that the defendants can be hauled into court in Florida, the judge noted that if a plaintiff successfully alleges that any member of an alleged conspiracy committed tortious acts in the state to further the scheme, then all of the conspirators are subject to personal jurisdiction. The complaint alleges Efrati and Weiss made written and verbal misrepresentations to AdventHealth personnel in Florida regarding the location and return of the missing escrow funds, prolonging the alleged wrongful deprivation of AdventHealth's funds, he said.

"Although Weiss and Efrati will be burdened by having to travel to Florida for mediation and trial, the court notes that such travel is probably already baked into the cake," he added, pointing out that neither Tomax nor Weiss' firm disputed the court's jurisdiction, so Efrati and Weiss would probably have to attend a trial either as witnesses or company representatives anyway.

Tomax argued in its motion to dismiss that the conversion claim fails because AdventHealth's complaint failed to establish that it ever had possession of the escrow funds, but Judge Byron said the health system's uncertainty over the exact chain of possession of the money does not sink its claim at this stage, and he pointed out that AdventHealth alleged that Efrati and Weiss made statements indicating that Tomax had possession.

AdventHealth did not bring a count for fraud but alleged it only within its conspiracy claim, which the judge said appears to be sufficient. In his analysis, he found that the health system pled fraudulent inducement with sufficient particularity, alerting the defendants of the "precise misconduct with which they are charged" and alleging that each made specific misrepresentations to conceal the funds.

"The court recognizes that fraudulent inducement claims are premised upon a party's 'pre-contractual fraudulent behavior.' Still, defendants' post-contractual obfuscations bolster the inference that their pre-contractual representations were intended to defraud," Judge Byron said.

The judge also found the conspiracy allegations themselves to be adequately pled.

"At this stage, plaintiff need not 'allege the terms of the agreement, when it was entered, what benefit [each defendant] expected to obtain from the conspiracy, or other particularities,'" he said. "It is sufficient to plead, as plaintiff has done, facts which raise a reasonable expectation that discovery will reveal evidence of agreement."

Additionally, the judge rejected the defendants' argument that the conspiracy claims fail due to the "intracorporate conspiracy doctrine," which holds that employees of a company cannot conspire with their company or one another.

While he agreed with Weiss that he cannot conspire with his firm, Judge Byron said the firm and Tomax are separate entities, and the defendants' argument that their paymaster agreement created an agency relationship that triggered the doctrine "stretches the doctrine beyond the bounds of reason."

Counsel for Tomax declined to comment on the ruling. Counsel for AdventHealth and Weiss did not immediately respond to requests for comment Tuesday.

AdventHealth is represented by Mayanne Downs, Jason A. Zimmerman and Joshua Bachman of GrayRobinson PA.

Tomax and Efrati are represented by Laurence J. Pino and Sean M. Southard of Pino Nicholson PLLC.

Weiss and his firm are represented by David R. Keller of Keller Landsberg PA.

The case is Adventist Health System Sunbelt Healthcare Corp. v. Michael H. Weiss PC et al., case number 6:20-cv-00877, in the U.S. District Court for the Middle District of Florida.

--Additional reporting by Carolina Bolado, Rosie Manins and Kevin Penton. Editing by Ellen Johnson.

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