New England Biz Law Update
A shareholder/physician who was terminated from a medical group could bring a breach-of-fiduciary-duty claim against its president, a Superior Court judge in Massachusetts recently ruled.
Plaintiff Stephen Punzak was an anesthesiologist in an 83-person professional corporation, defendant Anesthesia Associates of Massachusetts, P.C., in which each doctor was an equal shareholder and there were no non-physician shareholders. AAM’s president, defendant James English, claimed Punzak was terminated for interpersonal issues while Punzak alleged he was fired was because he vocally criticized management for circumventing corporate procedures in entering certain transactions on the company’s behalf.
After being fired, Punzak, who was forced to sell back his shares for an allegedly undervalued price, sued English for breach of fiduciary duty, breach of contract, wrongful termination, and bad faith.
English moved for summary judgment, arguing that under Int’l Bhd. of Elec. Workers Local No. 129 Benefit Fund v. Tucci, a 2017 Supreme Judicial Court decision holding that corporate officers owe a fiduciary duty only to the corporation itself (except in the case of a closely held corporation or where the officer is a majority shareholder), he owed no duty to Punzak as a shareholder.
But Judge Mitchell H. Kaplan, sitting in the Business Litigation Session, disagreed. He noted that while AAM was not a closely held corporation, it acted like a close corporation or a partnership, and English, while not a majority shareholder, had similar authority given his control over who sits on the board.
“The court notes that in Tucci, the SJC explained that there were ‘at least’ two exceptions to the rule that officers of a corporation do not owe fiduciary duties directly to shareholders,” wrote Kaplan. “The court finds that in this case where AAM and English have attributes similar in nature to a closely held corporation and a controlling majority shareholder, respectively, another exception to the general rule applies.”
The 19-page decision is Punzak v. McIvor, et al.
Filling a gap
Plaintiff’s counsel Paul K. Flavin of Milton said the ruling fills a long-problematic gap in the case law regarding fiduciary obligations amongst shareholders in a professional corporation.
“Professional corporations have similar characteristics of a partnership or close corporation and their growth in members due to their success as an organization should not change the fact that all the shareholders are employed by the business and share in the profits equally [and] owe a duty to one another, which they should,” Flavin said. “This gap needed to be filled and Judge Kaplan had the foresight to address it in his ruling.”
David C. Kurtz of Boston, who represents the defendants, said the judge, in creating a new exception to the rule that officers and directors owe a fiduciary duty only to the corporation itself, “got this one wrong.”
“Only two years ago, in the Tucci case upon which Judge Kaplan relies, the SJC expressly rejected the opportunity to expand the duties owed by corporate directors to shareholders,” said Kurtz, whose client plans to seek interlocutory review in the Appeals Court.
However, James L. Rudolph, a Boston attorney who handles fiduciary cases, agreed with the decision.
“[Kaplan] did not attempt to expand the definition of a closely held corporation and make new law, yet he ruled that the facts considered for the summary judgment decision were sufficient to find that there may have been a breach of fiduciary duties,” he said. “If it looks like a duck, walks like a duck and acts like a duck, it’s a duck.”
Boston attorney Joseph L. Bierwirth Jr. said the ruling appears to open a new avenue for direct fiduciary claims by shareholders in non-close corporations against directors or controlling shareholders.
“To me, critical to the determination was that the shareholders all practiced the same profession as anesthesiologists, they relied on income from the corporation for their livelihoods and did not expect to derive any value from their ownership interests other than salary,” he said.
Michael F. Connolly of Boston said that if this case were to reach the SJC, the court might in fact deem AAM to be a closely held corporation.
“This is your classic small medical practice that just grows over time, and to me it seems like it has all the indicia of a closely held corporation except that it has too many shareholders,” he said.
Bitter departure
AAM is a professional corporation of practicing anesthesiologists. All of its shareholders are anesthesiologists, many of them refer to one another as “partners,” and they each earn the same annual base pay and share equally in profits.
AAM’s board of directors is elected by shareholder vote, but a five-person nominating committee chooses the slate. As president, English has a seat on the committee and picks two of the other four members, giving him control of a majority of its seats.
In 1990, AAM formed a separate corporation, Plexus Management Corp., to perform billing services for the company. It was initially a professional corporation owned entirely by AAM shareholders, although in October 2012 it became a C corporation with some shareholders who weren’t AAM physician shareholders.
Punzak joined AAM in 1992 and became a shareholder in 1995. In in his first few years he allegedly ran into interpersonal conflicts resulting in complaints and a memo in his file. Nonetheless, he eventually obtained a seat on the Plexus board.
In January 2006, Plexus and AAM agreed to change the manner in which Plexus was paid for its services, allegedly without AAM board or shareholder approval and without Plexus board members being given relevant financial statements.
In August 2012, a private equity firm offered to buy Plexus for $28 million. This is when Punzak allegedly first became aware of the 2006 agreement, and at this point he emailed other AAM shareholders with concerns about both the offer price and AAM/Plexus governance.
A month later, in response to Punzak’s demands for more information English allegedly emailed Plexus president Robert McIvor, who was neither a physician nor shareholder of AAM, and said that Punzak had declared “open warfare,” “we should go on the offensive” and “it’s him or us.”
Several months later, Punzak was allegedly placed on a performance improvement plan, apparently without board knowledge. Then in December 2013, Punzak sent a sarcastic “reply all” email suggesting that management spent all its time on the golf course in response to an officewide email announcing new software to track personnel whereabouts.
Punzak was terminated in December 2013, apparently without unanimous board approval. After his departure, English allegedly asked other AAM physicians not to recommend Punzak for future employment, and some apparently suggested to local hospitals that they not hire him.
After Punzak’s departure, his shares in the two companies were involuntarily purchased by the corporations at an undervalued rate pursuant to shareholder agreements that he alleged were unsigned and contained redline edits, additions and strikeouts.
In 2015, Punzak sued English, McIvor and the two companies in Superior Court for breach of fiduciary duty, breach of contract, wrongful termination, and intentional interference.
The defendants moved for summary judgment.
New exception
Kaplan granted summary judgment to McIvor and Plexus but found that the fiduciary claim against English could proceed even if AAM was not itself a close corporation.
“[T]he attributes of a closely held corporation … are strikingly similar to those that pertain to professional corporations like AAM,’ said the judge. “Given the resemblance of this kind of professional corporation to a partnership, the principles announced in [prior SJC cases] certainly suggest that a president of AAM ought to have fiduciary obligations to each of his fellow physicians to treat them fairly.”
Additionally, said Kaplan, “although English was not a majority shareholder of AAM, he had acquired significant power and authority over the other shareholder/physicians.”
Further, since Tucci stated there were “at least” two exceptions to the rule that corporate officers do not owe fiduciary duties directly to shareholders, that suggested more exceptions could exist. Kaplan found that this situation presented such an exception.
The judge went on to deny summary judgment regarding Punzak’s contract, employment, and business-tort claims.
