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, appeals a summary judgment from the Marshall Circuit Court favoring Marshall County Pediatrics, P.C. (MCP) regarding the valuation of her shares in MCP. The case's background includes the incorporation of MCP in July 1978 by Dr. John M. Packard, who established bylaws but did not execute a stockholder agreement. Dr. Lynd joined MCP in 2005 and, after Dr. Packard's retirement in 2013, she and three other physicians purchased his shares, each paying $25,000 in total. They accepted the existing bylaws without changes and did not complete a stockholder agreement, despite intentions to do so. Following her notice to leave MCP in 2014 for personal reasons, Dr. Lynd resigned on May 16, 2014, and was subsequently removed as a director and officer of MCP. Dr. Lynd affirmed that she was no longer licensed to practice in Alabama. Dr. Rhodes, another physician, indicated that there was no dispute regarding Dr. Lynd’s entitlement to receivables and production bonuses, noting that MCP paid her $43,783.60. At the time of her departure, Dr. Lynd had paid Dr. Packard $1,000 and an additional $11,261.40 towards her total stock purchase price. The court reversed and remanded the case for further proceedings.

Dr. Lynd demanded that MCP purchase her shares in the practice at fair value, citing the corporation's bylaws. According to Article VI.4, various events trigger the loss of voting rights and entitlement to dividends for shareholders, including cessation of medical licensure, employment conflicts, bankruptcy, and unauthorized share transfers. In such cases, the shares must be transferred or redeemed as per an existing stockholder agreement, which can be modified without changing the bylaws. This agreement outlines the valuation method for shares of a deceased, retired, or bankrupt stockholder, superseding Alabama law provisions. Dr. Lynd and the other physicians disagreed on the valuation method, with Dr. Lynd advocating for a fair value assessment based on Alabama Code § 10A-4-3.02. This code stipulates that upon a shareholder's death or disqualification, shares must be purchased at fair value, with a written offer issued within specific timeframes if not otherwise determined by governing documents or private agreements.

Dr. Lynd valued her shares at $230,000 based on 10A-4-3.02, but the other three physicians contended that the valuation should adhere to the book value outlined in the former 10-4-228, Ala. Code 1975, which was referenced in the bylaws. This method requires shares to be purchased at book value as of the month before a shareholder's death or disqualification. The other physicians calculated Dr. Lynd's shares at $6,275. 

On April 21, 2015, Dr. Lynd initiated a lawsuit against MCP in the Marshall Circuit Court for breach of contract, seeking specific performance for MCP to purchase her stock and a declaration of her entitlement to fair value for the shares. Both parties filed motions for summary judgment, and on December 27, 2016, the court granted MCP's motion, affirming that Dr. Lynd's stock value was based on book value at the time she left the practice. 

Dr. Lynd's subsequent motion to alter, amend, or vacate this order was denied on March 31, 2017, with the court reaffirming that her stock value was determined to be 25% of book value, equating to $6,275. Dr. Lynd then appealed the decision. The standard of review for summary judgment involves assessing whether the movant has shown no genuine issue of material fact and is entitled to judgment as a matter of law, with evidence viewed favorably towards the nonmovant. If the movant meets this burden, the nonmovant must produce substantial evidence to create a genuine issue of material fact.

Questions of law in summary judgment are reviewed de novo. Dr. Lynd argues the trial court erred by valuing her stock in MCP using book value, asserting that the bylaws, relevant law, and principles of equity do not support this method. The trial court seemed to conclude that the bylaws mandated adherence to the valuation standard in 10-4-228, despite not explicitly stating so. MCP agrees with this interpretation, referencing Article VI.4 of the bylaws, which outlines the consequences for a severed stockholder. Article VI.4 specifies that shares of a severed stockholder must be redeemed according to the stockholder agreement in effect at that time, which is not present in this case, suggesting Dr. Lynd may not be entitled to redemption based on the bylaws' plain language. However, the trial court found her entitled to redeem her shares and awarded her 25% of the net book value, amounting to $6,275. MCP concedes compensation is owed to Dr. Lynd, thus not challenging her right to redemption in this appeal. The remaining issue is the valuation method for redeeming her shares, with MCP asserting that the bylaws require using the method in 10-4-228, viewing the bylaws as a contract that reflects the members' understanding that stock rights would be valued per that statute.

Dr. Lynd contends that Article VI.4 explicitly indicates that the original directors rejected using Code 10-4-228 for valuing redeemed stock. The court recognizes that the constitution, bylaws, and regulations of a voluntary association form a binding contract among its members, as established in prior cases. The court must interpret contracts based on their plain language and cannot create or alter contracts for the parties involved. Article VI.4 specifies that valuation methods for shares of a deceased, retired, or bankrupt stockholder should be determined by a stockholder agreement, which has not been executed in this case. MCP asserts that in the absence of such an agreement, the default method should be 'book value,' arguing this aligns with the parties' expectations. However, the court identifies critical issues with this argument: first, the clear intent of Article VI.4 is that a stockholder agreement should be executed to dictate valuation methods. Second, the article does not provide guidance on valuation in the absence of an agreement. The term "in lieu of" is defined to mean "instead of," further underscoring that the bylaws intended for a stockholder agreement to be in place for valuation procedures.

The final sentence of Article VI.4 indicates that the method for share valuation in the context of redemption will be outlined in the stockholders' agreement, rejecting the valuation method specified in 10-4-228. MCP's claim that 10-4-228 serves as a fallback provision in the absence of a stockholders' agreement misinterprets the bylaws' intent. The bylaws explicitly favor a valuation method mutually agreed upon by the stockholders, thereby avoiding a default 'book value' approach. It is established that contracts reference existing law at the time of execution, and provisions governing corporate operations include the corporation’s articles of incorporation, bylaws, and relevant statutory sections. In 1978, 10-4-228 was the default valuation provision for shares of deceased or disqualified shareholders. MCP's bylaws clearly express a desire to deviate from this default method. The language "in lieu of" in Article VI.4 does not imply that 10-4-228 remains as a perpetual fallback. Additionally, in 1984, the legislature replaced 10-4-228 with 10-4-389, which outlines procedures for share transfer and redemption upon the death or disqualification of a shareholder, emphasizing the need for a fair value offer within specific timeframes if no valuation is predetermined by corporate documents or agreements.

As of 1984, fair value became the standard method for valuing shares during redemption in professional corporations. In 2009, Alabama's legislature amended relevant statutes, renumbering 10-4-389 to 10A-4-3.02. This statute stipulates that upon a shareholder’s death, disqualification, or transfer of shares by law or decree, the shares must be offered for sale or redeemed by the corporation using fair value determined as of the relevant event date if not specified otherwise in the governing documents. The amendment retained fair value as the default valuation method.

Furthermore, 10A-4-5.08(a) states that these provisions apply to all corporations formed under previously repealed laws, confirming that MCP, organized under the former Title 10, must adhere to 10A-4-3.02 for share redemption valuation. MCP's interpretation of its bylaws, specifically Art. VI.4, incorrectly asserts that an outdated valuation method should apply despite legal changes. The bylaws state that if a stockholder agreement is not in place, the valuation method of 10-4-228 is nullified in favor of the stockholder agreement. This indicates a rejection of prior statutes, including 10-4-228, which was replaced by the fair-value methodology long before the current shareholders joined MCP.

MCP's argument further falters as it misapplies the bylaws to Dr. Lynd's situation; the bylaws' provision for valuation applies only to deceased, retired, or bankrupt shareholders, none of which pertain to Dr. Lynd’s circumstances. Therefore, under any interpretation, the valuation method specified in the bylaws does not apply to him, as he was not separated from MCP through any of the stated triggers.

Art. VI.4 of the bylaws does not necessitate the application of 10-4-228 regarding 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 court also erred by not applying the fair-value method for her stock's valuation in MCP, essentially claiming that her summary judgment motion should have been granted. Typically, an appeal cannot be made from a denied summary judgment motion, which is considered interlocutory. However, when cross-motions for summary judgment are filed, the party whose motion is denied may have it reviewed if the opponent's motion is granted.

Dr. Lynd must legally establish her entitlement to fair value for her shares. She asserts that 10A-4-3.02 mandates the fair value method for share redemption in professional corporations. However, for this provision to apply, she must prove her status as a disqualified person, as outlined in the statute. The statute specifies that shares must be redeemed upon the death of a shareholder or if they become disqualified. Dr. Lynd claims disqualification because she is no longer an employee of MCP and lacks a medical license in Alabama.

However, disqualification under 10A-4-3.02 pertains specifically to a person's professional licensing status, not strictly to the corporate bylaws. While it is undisputed that Dr. Lynd is not licensed to practice medicine in Alabama, she has not shown she is unlicensed in any qualified state. To obtain summary judgment, she needed to prove her disqualified status universally under 10A-4-3.02(a), which she failed to do. Additionally, Dr. Lynd argues that the fair-value method is an equitable approach for stock valuation, referencing Alabama cases that support this method in divorce and dissenting shareholder contexts.

Dr. Lynd's argument for the court to invoke equitable powers for valuing her stock lacks persuasive authority and legal necessity. She claims the Bylaws mandate MCP to purchase her stock but do not specify a valuation method. However, the Bylaws indicate that a stockholder agreement would determine this method, which Dr. Lynd and the other shareholders failed to establish. Consequently, she seeks the court to create a contract that the parties did not finalize, which is against legal principles that prevent courts from drafting contracts for parties. Additionally, for equity jurisdiction to be applicable, a complainant must show no adequate legal remedy exists, a requirement Dr. Lynd has not satisfied. The trial court's denial of her motion for summary judgment was therefore appropriate. While the trial court was found to have erred in applying a specific statute leading to the redemption of her shares at book value, Dr. Lynd has not proven her entitlement to the fair value of her stock under the law. The court reversed the summary judgment in favor of MCP and remanded the case for further proceedings, emphasizing that book value, while simple, does not equate to fair market value as it does not account for goodwill or other intangible assets. The relevant provisions of Alabama law regarding fair value were also noted.

Article ten of the articles of incorporation stipulates that if a shareholder is legally disqualified from practicing 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 existing written agreements among shareholders. Article thirteen mandates that all shareholders must be employees of the corporation. Dr. Lynd, who relocated from Alabama to Oklahoma, is now licensed to practice in Oklahoma but did not contest in the trial court or provide evidence to this Court that Oklahoma fails to meet the qualifications outlined in 10A-4-1.03(7), Ala. Code 1975. This lack of argumentation aligns with Rule 28(a)(10), Ala. R. App. P., which indicates a waiver of arguments not adequately presented, as highlighted in Ex parte Borden, 60 So.3d 940, 944 (Ala. 2007).