Lynd v. Marshall Cnty. Pediatrics, P.C.

Docket: 1160683

Court: Supreme Court of Alabama; April 27, 2018; Alabama; State Supreme Court

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Tara Lynd, a physician, is appealing a summary judgment from the Marshall Circuit Court that favored Marshall County Pediatrics, P.C. (MCP) in her bid to determine the valuation of her shares in MCP. The case originates from MCP's formation in 1978 by Dr. John M. Packard, who later sold the practice in 2013 to Dr. Lynd and three other physicians, each purchasing 25% of his shares for $25,000. They paid $1,000 initially, with the balance to be paid over time. No stockholder agreement was executed, despite the bylaws referencing one, and the physicians accepted the bylaws as is. Following Dr. Lynd's notice of her intent to leave MCP in early 2014, she resigned on May 16, 2014, and was subsequently removed as a director and officer on December 29, 2014. Dr. Lynd, who is no longer licensed to practice in Alabama, asserts she is owed her share of receivables and production bonuses, which Dr. Rhodes confirmed amounted to $43,783.60. Additionally, Dr. Lynd had made partial payments totaling $12,261.40 towards her stock purchase. She demanded MCP buy her shares at "fair value" according to the bylaws. The court reversed the previous judgment and remanded the case for further proceedings.

Article VI. 4 of MCP's bylaws outlines conditions under which a shareholder loses voting rights and entitlement to dividends, including ceasing to be licensed to practice medicine in Alabama, accepting restricted employment, death, adjudication of incompetency, or unauthorized involvement with another professional service corporation. Additionally, scenarios such as bankruptcy filings or liens on shares also trigger the loss of rights, leading to the mandatory transfer or redemption of the shares according to an existing shareholders' agreement, which can be amended without changing the bylaws. 

Dr. Lynd and three other physicians disputed the method for valuing Dr. Lynd's shares, with Dr. Lynd advocating for a "fair value" assessment per Ala. Code 1975, § 10A-4-3.02. This statute stipulates that upon the death or disqualification of a shareholder, the corporation must either transfer shares to a qualified person or purchase them at a price deemed fair by the corporation within a specified timeframe. Based on this statute, Dr. Lynd estimated her shares to be worth $230,000.

Three physicians argued for valuing Dr. Lynd's shares based on the "book value" according to the repealed Ala. Code 1975 § 10-4-228, which was referenced in the bylaws. This section stated that shares must be purchased by the professional corporation within 90 days of a shareholder's death or disqualification, with the price determined based on the book value from the month before the triggering event. The three physicians assessed Dr. Lynd's shares at $6,275 using this valuation method. Subsequently, Dr. Lynd filed a breach of contract lawsuit against MCP in the Marshall Circuit Court on April 21, 2015, seeking specific performance for the purchase of her stock and a declaration for "fair value." 

MCP responded, and both parties filed for summary judgment. On December 27, 2016, the trial court granted MCP's summary judgment and set the stock value at book value as of Dr. Lynd's departure from the practice. Dr. Lynd's motion to alter or vacate the ruling was denied on March 31, 2017, affirming the court's previous decision that her stock value was 25% of the book value, totaling $6,275. Dr. Lynd then appealed the ruling.

The appellate court reviews summary judgments de novo, determining if the movant has shown no genuine issue of material fact and is entitled to judgment as a matter of law. The burden shifts to the nonmovant to provide substantial evidence to create a genuine issue of material fact. Substantial evidence is defined as evidence of sufficient weight that a reasonable person could infer the fact sought to be proved. Legal questions arising in summary judgments are also reviewed de novo.

Dr. Lynd argues that the trial court incorrectly decided to use book value for valuing her stock in MCP, claiming that the bylaws, legislative law, and principles of equity do not support this method. The trial court is said to have inferred that the bylaws mandated adherence to the valuation standard outlined in 10-4-228, despite not explicitly stating this in its orders. MCP concurs that the trial court applied 10-4-228 based on its reference in the bylaws, specifically in Article VI, Section 4. This section indicates that upon a shareholder's severance from the corporation, their shares lose voting rights and must be redeemed according to the existing stockholder agreement, which can be amended without changing the bylaws. It also states that the method for valuing shares of a deceased, retired, or bankrupt stockholder supersedes the provisions of 10-4-228.

Two key issues arise from Article VI, Section 4: 1) whether Dr. Lynd is entitled to redeem her shares and 2) the appropriate valuation method for redemption. The bylaws appear to suggest that, without a stockholder agreement, Dr. Lynd is not entitled to redeem her shares. However, the trial court ruled in her favor, determining that she is entitled to redeem her shares for 25% of the net book value, amounting to $6,275. MCP acknowledges this compensation despite the bylaws suggesting otherwise. Therefore, the question of Dr. Lynd's entitlement to redemption is accepted for the purposes of the appeal.

The second issue focuses on the valuation method for redeeming her shares. MCP argues that the bylaws require the use of the book value method outlined in 10-4-228, viewing the bylaws as a contract reflecting the members' expectations. Conversely, Dr. Lynd contends that the language of Article VI, Section 4 indicates that the original directors rejected using 10-4-228 for valuing redeemed stock.

The court affirms that the constitution, bylaws, and regulations of a voluntary association act as a binding contract among members, as established in Turner v. W. Ridge Apartments, Inc. and other precedents. Corporate documents such as bylaws are equivalent to contracts, requiring adherence to standard contract interpretation principles. When interpreting these documents, courts must consider their plain language and avoid rewriting the contracts. In the case at hand, Article VI. 4 of the bylaws outlines that a stockholder agreement should dictate the valuation of shares of a deceased, retired, or bankrupt stockholder, replacing the provisions of Alabama Code § 10-4-228. However, the absence of such an agreement leads to a dispute. MCP argues that the parties would have expected 'book value' to apply in the absence of a stockholder agreement, suggesting that the bylaws imply this methodology. The court finds two issues with this argument: first, Article VI. 4 clearly indicates an expectation that a stockholder agreement would be executed, which would govern the valuation method; second, the bylaws do not provide guidance for scenarios where no agreement exists. "In lieu of" is defined as "instead of," further supporting that the bylaws anticipated an executed agreement to dictate share valuation.

The term "in lieu of" signifies "instead of" or "in place of." The final sentence of Article VI. 4 indicates that the valuation method for share redemption will be defined in the stockholders' agreement, explicitly rejecting the method outlined in 10-4-228. MCP's assertion that the reference to 10-4-228 serves as a fallback provision without a stockholders' agreement misinterprets the bylaws' language. The bylaws were intended to avoid a "book value" valuation, opting instead for a method agreed upon by the parties. 

Contracts inherently reference existing law at the time of execution. When the bylaws were adopted in 1978, 10-4-228 was the default valuation provision for shares of deceased or disqualified shareholders in public corporations. To opt out of this default, it was sufficient for the stockholders to express a desire for an alternative valuation method, which they did in the bylaws. The phrase "in lieu of" cannot be construed to imply a perpetual fallback to 10-4-228 if no stockholders' agreement is in place.

Furthermore, in 1984, the legislature replaced 10-4-228 with 10-4-389, establishing "fair value" as the new default method for valuing shares upon a shareholder's death or disqualification if not otherwise specified in corporate documents or private agreements.

In 2009, Alabama's legislature amended and renumbered § 10-4-389 to § 10A-4-3.02, allowing for the transfer of shares from deceased or disqualified shareholders of domestic professional corporations to qualified persons. If shares are not transferred, the corporation must redeem them using available funds. If the share price isn’t predetermined by governing documents or agreements, the corporation must make a written offer within specified timeframes based on fair value as of the triggering event. The amendment retained fair value as the default valuation method for share redemptions.

Additionally, § 10A-4-5.08(a) applies to corporations organized under the former Article 11 of Chapter 4, Title 10, which includes MCP, confirming that § 10A-4-3.02 governs its stock redemption valuation. MCP argues that its bylaws prioritize a stockholder agreement's valuation method but misinterpret the bylaws' language regarding the applicability of prior law. The bylaws state that the stockholder agreement method supersedes Title 10, Chapter 4, § 228, which was replaced by the fair-value provision. Furthermore, MCP's reading incorrectly applies to Dr. Lynd, who was not removed due to death, retirement, or bankruptcy, thus the valuation method under § 10-4-228 is inapplicable to his case. The bylaws' final sentence only pertains to deceased, retired, or bankrupt stockholders, excluding Dr. Lynd from such categorizations.

Article VI, Section 4 of the bylaws does not necessitate the application of Alabama Code § 10-4-228, which favors book value for the redemption of Dr. Lynd's stock, leading to the conclusion that the trial court's judgment on this matter is erroneous. Dr. Lynd argues the trial court incorrectly denied her summary judgment motion, asserting that the fair-value method should be utilized for valuing her stock in MCP. Normally, a denial of a summary-judgment motion is nonappealable; however, if cross-motions are filed, the denied party can seek review upon an appeal from the granted motion. Dr. Lynd must demonstrate her legal entitlement to fair value for her shares. She argues that Alabama Code § 10A-4-3.02 mandates fair value for share redemption, but to invoke this statute, she must prove she is a "disqualified person." This term, as per § 10A-4-1.03(1), refers to anyone not qualified to provide professional services, which relates to Dr. Lynd's professional licensing status. Although she is no longer licensed in Alabama, she has not shown disqualification in any "qualified state." Consequently, she has not met the burden required for summary judgment based on this statute. Additionally, Dr. Lynd claims that fair value is an equitable method of stock valuation, citing precedents where Alabama courts upheld fair value in divorce and dissenting shareholder cases.

Dr. Lynd argues for the necessity of invoking equitable powers for a fair valuation of her stock in MCP, citing the corporation's bylaws, which mandate the purchase of her stock but do not specify a valuation method. However, the bylaws indicate that a stockholder agreement would establish the valuation method, and since Dr. Lynd and the other stockholders did not execute such an agreement, there is no basis for the court to supply one. The court emphasizes that it cannot create contracts for parties and must uphold existing agreements. Furthermore, to qualify for equitable relief, a complainant must show the absence of a plain and adequate legal remedy, which Dr. Lynd has failed to do. Consequently, while the trial court erred in applying a specific code section that led to a summary judgment favoring MCP at book value, Dr. Lynd has not substantiated her claim for fair value as a legal right. Therefore, the appellate court reverses the summary judgment favoring MCP and remands for further proceedings, acknowledging the distinction between book value and fair market value, with the latter not accounting for company goodwill or asset depreciation. The relevant provisions of the Alabama Business Corporation Law apply to this case.

Article ten of the articles of incorporation stipulates that if a shareholder becomes legally disqualified to practice medicine in Alabama, their financial and employment interests in the corporation will terminate, and their shares will be disposed of according to the corporation's By-Laws or any existing written agreement among shareholders. Article thirteen mandates that all shareholders must also be employees of the corporation. Dr. Lynd, after leaving Alabama for Oklahoma, became licensed to practice medicine there but did not contest in the trial court or provide evidence that Oklahoma is not a "qualified state" under Alabama law. Additionally, the legal precedent from Ex parte Borden emphasizes that failing to argue a point or provide relevant legal citations can lead to a waiver of that argument in appellate proceedings.