Clark v. Lubritz

• Decision Date: 05 September 1997
• Docket Number: No. 27528,27528
• Citation: 113 Nev. 1089,944 P.2d 861
• Parties: Robert CLARK, M.D., Alan Feld, M.D., Jack Hirsh, M.D., and Armand Scully, Appellants, v. Joel LUBRITZ, M.D., Respondent.
• Court: Nevada Supreme Court

Page 861

944 P.2d 861

113 Nev. 1089

Robert CLARK, M.D., Alan Feld, M.D., Jack Hirsh, M.D., and Armand Scully, Appellants, v. Joel LUBRITZ, M.D., Respondent.

No. 27528.

Supreme Court of Nevada.

Sept. 5, 1997.

Morton R. Galane, Las Vegas, for Appellants.

Donald J. Campbell & Associates and J. Colby Williams, Las Vegas, for Respondent.

OPINION

PER CURIAM:

This is an appeal from a judgment pursuant to a jury verdict for plaintiff-respondent in the amount of $470,942.17 for breach of contract and breach of fiduciary duty. Defendants-appellants assign several of the district court rulings as error. We affirm the district court's judgment.

FACTS

Robert Clark, M.D., Alan Feld, M.D., Joel Lubritz, M.D., Jack Hirsh, M.D., and Armand Scully, M.D. specialized in different areas of medicine. In 1983, they formed a preferred provider organization called Nevada Preferred Professionals (NPP).

They agreed orally that they would each initially invest $15,000 in NPP. Lubritz testified that they agreed to share any profits or losses equally and that if necessary, each would be liable for another $10,000. ¹

Soon after making their initial agreement, the five doctors opted to incorporate NPP. On June 30, 1983, Lubritz signed the sixty-day list of NPP's officers, directors and agent. He listed himself as president and each founder as a director. He also represented that NPP's stockholders owned $2,500 of NPP common stock, but testified at trial that he did not think stock was ever actually issued to anyone.

The corporation's articles of incorporation were filed and the five doctors adopted bylaws. ² However, Lubritz testified on direct examination that incorporating did not alter their original agreement to share profits and losses equally even though NPP "actually started business after the corporation was formed." He claims that NPP was incorporated for tax and legal reasons only. He also claims that all of the doctors continued to refer to each other as partners. In fact, at trial, both Scully and Dr. Elias Ghanem testified that after NPP was incorporated, the five physicians asked Ghanem to be a partner and share equally. Although Ghanem originally accepted the offer, he left NPP when he was told that he could not be on the board, but could still receive an equal share because he put in an equal share.

John Busse became NPP's first executive director in June of 1983. Busse testified that he "learned that the physicians are all equal partners, put the same amount in, and were going to be paid or receive the same benefits." He also testified that Dr. Clark introduced Dr. Scully to him as "one of our partners." Finally, each of the five physicians received an equal year-end distribution characterized as a "consultation fee" during NPP's first six years of operation.

Lubritz testified that he, Feld and Clark initially took special interest in the day-to-day running of the business. In fact, Scully testified that Lubritz worked "like a dog," clearly harder than anyone else in the early years. ³ However, testimony indicated that running the business was a team effort because Hirsh and Scully contributed highly respected reputations.

In 1986, the doctors began to develop serious differences of opinion regarding the way NPP's benefit plan should be sold. On August 25, 1986, Lubritz tendered his resignation from the board in an effort to impress upon the others the gravity of his feelings. Specifically, he resigned from the board of directors and as president, and anticipated "just being a stockholder." Lubritz claims, and the other doctors agree, that he continued to perform limited services for NPP after his resignation from the board.

In 1986, 1987, 1988, and 1989, Scully, Feld, Hirsh and Clark (hereinafter referred to as "the appellants") continued to equally divide the year-end proceeds with Lubritz. However, in 1990, the appellants fixed a higher payment for each of themselves and a lower payment for Lubritz. The appellants, after consulting the bylaws, opted not to inform Lubritz that his share was significantly less than theirs. ⁴ Likewise, in 1991 and 1992 the four appellants received higher year-end payments than did Lubritz.

In early 1993, Lubritz learned that his payments were smaller and on March 4, 1993, he filed a complaint against Scully, Hirsh, Clark, and Feld for one-fifth of the total payments less the amount he had already received. With the lawsuit pending, the board again distributed the 1993 earnings unequally. This payment was accompanied by a letter which informed Lubritz that this "payment will be the last based on the contributions in terms of time and energy in the formative years." The appellants claim that the equal distributions were compensation for Lubritz's extreme contributions in the early years, while the lesser payments reflected Lubritz's lesser contributions in the latter years.

Lubritz claims that the appellants ignored several sections of their bylaws. Stocks were not issued, annual shareholders meetings were not held, and officers and directors were not elected. Lubritz testified that to form the corporation, Clark went to the attorney's office and simply filled in officers' names. Further, he testified that the parties did not use the bylaws in operating NPP. Feld testified that although they were not lawyers, they tried to do things as much as possible within the confines of the bylaws.

On February 1, 1991, the Secretary of State of Nevada revoked NPP's corporate charter for failure to file its annual list of officers and directors pursuant to NRS 78.175. Apparently, Dr. Clark, as resident agent, failed to file the list. On September 2, 1993, the charter was reinstated.

The jury returned a verdict in favor of Lubritz. They awarded a single sum, $195,942.17, in compensatory damages for both breach of contract and breach of fiduciary duty, $200,000 in punitive damages, and $75,000 in attorney's fees. The appellants unsuccessfully moved for judgment notwithstanding the verdict, and this appeal ensued.

DISCUSSION

Breach of Contract

The appellants argue that the district court judge erroneously allowed the jury to find a breach of the oral agreement because it is legally impermissible for a business to be conducted as a corporation and a partnership at the same time. They claim that the incorporation of NPP necessarily precludes Lubritz from recovering for breach of contract. ⁵ We disagree.

This court determines questions of law de novo. City of Reno v. Van Ermen, 79 Nev. 369, 381, 385 P.2d 345, 351 (1963). Although this court has not yet addressed this issue, courts in other states are of the opinion that "when joint adventurers use the corporate form for convenience in carrying out their project, their mutual rights and liabilities will be determined in furtherance and in harmony with their joint purpose rather than with the form of their operation, and the corporate entity will be recognized or ignored accordingly." Schaffer v. Eighty-One Hundred Jefferson Avenue E. Corporation, 267 Mich. 437, 255 N.W. 324, 327 (1934); accord Wabash Ry. Co. v. American Refrigerator Transit Co., 7 F.2d 335, 343-44 (8th Cir.1925) (courts will ignore form to discern the real intent of individuals forming the organization, and, if no third parties are involved, will give effect to the real purpose of the organization in order to promote square dealing and effectuate justice); Denny v. Guyton, 327 Mo. 1030, 40 S.W.2d 562, 570 (1931) (joint venture agreement providing for division among partners of those profits realized from the operation of their corporation did not unlawfully encroach on corporation's power); Seaboard Air Line R. Company v. Atlantic Coast Line R. Co., 240 N.C. 495, 82 S.E.2d 771, 782-83 (1954) (settlement of disputes among shareholders of joint venture company is to be decided against the background of their agreement as joint venturers and not necessarily by reference to ordinary corporate practices).

Additionally, although not in effect when the parties entered the oral agreement, Chapter 78A of the Nevada Revised Statutes is consistent with Nevada law at that time.

NRS 78A.070 states:

1. All shareholders of a close corporation who are entitled to vote may agree in writing to regulate the exercise of the corporate powers and the management of the business and affairs of the corporation or the relationship among the shareholders of the corporation.

2. An agreement authorized by this section is effective even if the agreement:

....

(c) Treats the corporation as a partnership.

In addition, NRS 78A.080 provides:

A written agreement among stockholders of a close corporation ... that relates to any phase of the affairs of the corporation ... is not invalid on the ground that it is an attempt by the parties to the agreement ... to treat the corporation as if it were a partnership or to arrange relations among the stockholders or between the stockholders and the corporation in a manner that would be appropriate only among partners.

While NRS 78A.080 requires that the agreement be in writing, "[t]here is a general presumption in favor of prospective application of statutes." McKellar v. McKellar, 110 Nev. 200, 203, 871 P.2d 296, 298 (1994). Therefore, the parties in this case are not subject to the writing requirement of NRS 78A.080 because in 1983 they had no notice of such a requirement. Based on the foregoing, we hold that the oral agreement was not invalid per se when the parties formed the corporation. Thus, the district court properly allowed the jury to determine whether the parties breached the oral agreement.

This court will not disturb a jury's verdict if it is supported by substantial evidence. Steen v. Gass, 85 Nev. 249, 253, 454 P.2d 94, 97 (1969). Lubritz testified that all five physicians expressly agreed to divide the year-end profits or losses equally. Further, Ghanem testified that the five physicians asked him to join NPP and share the year-end...