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Martin E. Shmagin v. Urigen Pharmaceuticals

October 5, 2012


The opinion of the court was delivered by: Jacqueline Scott Corley United States Magistrate Judge

United States District Court Northern District of California


Now pending before the Court is Defendant's Motion to Set Aside Default. After carefully 20 considering the papers submitted by the parties and having had the benefit of oral argument, 21 the Court GRANTS Defendant's Motion to Set Aside Default for good cause shown. 22


Plaintiff Martin E. Shmagin ("Plaintiff" or "Shmagin") was an employee of Urigen Pharmaceuticals, Inc. ("Defendant" or "Urigen"), a Delaware Corporation, with its principal 25 place of business in Wilmington, Delaware. (Dkt. No. 5 ¶¶ 2, 3). Urigen is involved in the 26 development of medical products, and is currently developing a drug known as URG101 for the 27 treatment of painful bladder syndrome and interstitial cystitis. (Dkt. No. 5 ¶ 7). Urigen's only 28 sources of income at this time "are investment capital and income of URG101 for 'compassionate use.'" (Dkt. No. 5 ¶ 8.) While URG101 has completed Phase 2 of the clinical 2 trials necessary for FDA approval, it has not yet progressed to Phase 3 or Phase 4. (Dkt. No. 5 3 ¶ 9.) 4

In August 2008, Urigen and Plaintiff entered into an Employment Agreement ("Agreement"). (Dkt. Nos. 5-2). The Agreement provided that Plaintiff was to be hired as CFO of 6 Urigen with an annual base salary of $225,000. (Dkt. No. 5 ¶ 12, No. 5-2). In addition, Plaintiff 7 was entitled to receive an annual bonus at the Board of Directors discretion, benefits, prompt 8 reimbursement for reasonable expenses, and a paid annual vacation of four weeks and other 9 fringe benefits, "and certain specified payments in the event he terminated the Employment 10

Agreement for Good Reason." (Dkt. No. 5 ¶ 12). 11

12 made to replace him as CFO with a part-time CFO based in New Jersey and to transition Plaintiff to a consulting role where he would be compensated on an hourly basis without benefits, for an 14 unspecified number of hours, and the responsibilities of the consulting role were left unclear. 15

(Dkt. No. 5 ¶ 17). Defendant's decision amounted to a material reduction in Plaintiff's 16 responsibilities, compensation, and title, which, under the Agreement, was listed as a "Good 17

Reason" for which Plaintiff could terminate the Agreement. (Dkt. No. 5 ¶ 20). 18

Plaintiff gave his notice of termination of employment for Good Reason on May 4, 2011.

(Dkt. No. 5 ¶ 20). Urigen has not paid Plaintiff the monies he is entitled to under the 20

Employment Agreement. (Dkt. No. 5 ¶¶ 22-24). 21


Plaintiff filed his initial Complaint ("Complaint") on May 22, 2012. (Dkt. No. 1). On June 1, 2012, he filed an Amended Complaint. (Dkt. No. 5). Plaintiff's causes of action can be divided 24 into two categories: those he has as a former employee, and those he has as a shareholder. As to 25 the former, he makes a claim for breach of the Employment Agreement. As for the latter, he 26 alleges breach of fiduciary duty based upon Urigen's failure to keep its corporate filings with 27 the Securities and Exchange Commission ("SEC") current, which resulted in the inability to 28 manage or negotiate the shares Plaintiff owns. (Dkt. No. 5 ¶¶ 30-32). Plaintiff also alleges that

Defendant informed Plaintiff in or about March and April of 2011, that a decision was Urigen breached its fiduciary duty by failing to advance the clinical trial process of URG101 2 through the Food and Drug Administration ("FDA"). (Dkt. No. 5 ¶¶34-37). 3

Plaintiff served Defendant with the Summons and FAC by substituted service on June 15, 2012. Counsel for Plaintiff and Defendant began e-mail, voicemail, and postal mail 5 communications on June 28, 2012, when Defendant contacted Plaintiff to request a two-week 6 extension of time to file a responsive pleading in light of the approaching response date and 7 Independence Day holiday. (Dkt. Nos. 9 ¶7). Plaintiff refused to grant the extension on the 8 ground that he believed Urigen could not defend itself in the action because its corporate status 9 reflected as "Forfeited" on the California Secretary of State's website. (Dkt. No. 12-2, p. 9). 10

Defendant replied the next day, on June 29, stating that although the registration in California 11 had been forfeited, Urigen is still a valid corporation in Delaware (the state of incorporation) 12 and that Urigen plans to file a responsive pleading. (Dkt. No. 12-2, p. 12). Plaintiff responded the

same day, contending that Urigen did not have the capacity to defend itself in California due to 14 its forfeited registration, and that Plaintiff would move to have a default entered if the corporate 15 status is not resolved before the day a responsive pleading is due. (Dkt. No. 12-2, p. 14). On July 16

3, Defendant responded that it is working to cure the forfeited status expeditiously and asked 17

Plaintiff not to take further action, including a motion for default, for at least forty-five days. 18

(Dkt. No. 12-2, p. 16). Plaintiff's counsel responded the same day that she would attempt, but 19 could not guarantee, that she would reach her client to ...

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