Horne v. Radiological Health Services, P. C.

• Decision Date: 23 June 1975
• Citation: 83 Misc.2d 446,371 N.Y.S.2d 948
• Parties: Kenneth W. HORNE, Plaintiff, v. RADIOLOGICAL HEALTH SERVICES, P.C., Joseph Arcomano, et al., Defendants.
• Court: New York Supreme Court

Page 948

371 N.Y.S.2d 948

83 Misc.2d 446

Kenneth W. HORNE, Plaintiff, v. RADIOLOGICAL HEALTH SERVICES, P.C., Joseph Arcomano, et al Defendants.

Supreme Court, Special Term, Suffolk County, Part III.

June 23, 1975.

Mars & Burton, Patchogue, for plaintiff.

Steven E. Pegalis, Great Neck, for defendants RHS, P.C., Wunderlich, Manfieri, Trachtenberg, Mack, Fiore, Glen & Mahar.

McNulty & Di Pietro, Riverhead, for defendant Fiore.

Gordon, Kotler & Kushnick, Huntington, for defendants Baum, Barnett & Arcomano.

MEMORANDUM

LEON D. LAZER, Justice.

The plaintiff in this action, a shareholder and former employee of the defendant Radiological Health Services, P.C. ('RHS'), seeks dissolution of the corporation, an injunction against enforcement of the covenant not to compete contained in his employment contract and rescission of an agreement which severed a portion of the corporate medical practice and left it in the hands of former shareholder-employees against whom the restrictive covenant has not been enforced. The corporate defendant has counterclaimed for enforcement of the restrictive covenant against the plaintiff and for an accounting. Damages are sought by both plaintiff and the corporation.

The Facts

Plaintiff is one of twelve doctors who in 1970 formed RHS as a professional corporation to supplant their then existing partnership in the practice of radiology. Until mid-summer of 1974, the area covered by this practice included most of Suffolk County as well as the eastern portion of Nassau. The shareholders were divided into three 'regions' or groups which separately serviced the eastern, central and western portions of the practice and, until plaintiff's resignation, all of them were under contract as employees of RHS. All of the contracts contained a covenant restricting a withdrawing or terminated employee from competition for a period of two years.

When plaintiff joined the partnership in 1960 he brought to it the radiological practice he had previously established as an independent practitioner in eastern Suffolk County and thereafter he continued his service as Director of Radiology at the Southampton Hospital and his association with the Hampton Medical Center and the East Hampton Medical Group. As the practice grew in both forks of the eastern area, the partnership and its corporate successor assigned additional radiologists to serve in that region. A personality conflict which arose between the plaintiff and another partner in the area resulted in the transfer of the defendant Dr. Fiore, in 1968, from the central to the eastern group at plaintiff's request. Dr. Fiore moved his family to Southampton and, until 1973, plaintiff and he practiced together in relative tranquility. In the summer of 1973, the shareholders decided to explore the feasibility of dissolving RHS and it is apparent from the evidence that from that point forward the plaintiff became concerned that he would be compelled to share the practice in the south fork of Suffolk County with Dr. Fiore in any regional entity which might succeed RHS. In July of 1973, plaintiff made his first complaint to the corporation concerning his colleague and stated he would not accept Dr. Fiore as a partner in the event of dissolution. Plaintiff's hostility toward Dr. Fiore is the obvious genesis of this litigation.

Although plaintiff disclaimed any charge of incompetence against Dr. Fiore, he testified that he had received various 'complaints' about him and that these had increased in August of 1973. He also accused Dr. Fiore of a refusal to accept criticism from him in his capacity as Chief of Radiology at Southampton Hospital. This testimony was almost wholly conclusory in nature and although the eleven complainants were ultimately named they were not produced and the nature of their compaints was not revealed. An X-ray technician at the Hospital, called by plaintiff, testified concerning some of Dr. Fiore's practices but she displayed such obvious bias on the witness stand that nothing more was established by her testimony than the existence of a fierce personal conflict between the two doctors. As a result of plaintiff's recriminations against Dr. Fiore, the board of directors of RHS established a grievance committee to hear his complaints. After hearing both doctors on September 14, 1973, the committee warned them that they would be held liable if the corporate contract with Southampton Hospital was lost because of their bickering and recommended that they endeavor to obtain a joint contract with the Southampton Hospital in preparation for the pending dissolution of the corporation. Instead, the plaintiff approached the Hospital seeking a contract for himself, and after his rejection in this effort the corporation did not consult him when it sought to renew its agreement with the Hospital in the fall of 1973.

The theory of plaintiff's case is that RHS and the named defendant shareholders engaged in a conspiratorial effort to delay dissolution in order either to compel his acceptance of Dr. Fiore as an associate following dissolution, or to 'grab' his practice by excluding him as a competitor of Dr. Fiore by enforcing the restrictive covenant. It is plaintiff's contention that the original interest in dissolution was motivated by intra-mural hostilities and the inability of the shareholders to work together. He testified that Dr. Mangieri, another member of the eastern group, was the disrupting personality but offered no evidence to support this conclusion. The witnesses for the defendants testified, however, that dissolution was contemplated primarily due to income inequities resulting from lack of productivity by the western group. It is clear from the evidence that as a result of financial losses incurred in that region, the high salaries received by the three west and radiologists were being subsidized by the other two groups. Nevertheless, the three western practitioners also were dissatisfied with RHS because their salaries were not as high as others of equal seniority because of a productivity formula adopted to compensate for regional production inequities.

In any event, problems of portability of pension rights resulted in a discontinuance of interest in dissolution in 1973 but on May 16, 1974, facing an impending first quarter loss of $39,045 by the west end group, a majority of the shareholders (which did not include plaintiff and Dr. Fiore) approved a resolution to dissolve and to terminate operations as of June 30, 1974. Nevertheless, no further corporate action to effectuate dissolution was taken and RHS continued in existence. On July 30th dissolution was deferred to August 16th and at a meeting of shareholders held on August 15, 1974 the dissolution resolution was rescinded and an agreement was approved severing the western group from the corporation and waiving enforcement of the covenant not to compete against the three radiologists who would thus leave RHS.

Although the fact that dissolution was rejected at the same time severance was accepted suggests that the problems in the west were the cause for the interest in dissolution, it is plaintiff's position that the severance agreement was evolved at 'clandestine' meetings and was a part of a conspiracy first to saddle him with Dr. Fiore and then to dissolve. Prior to the vote on the severance issue, plaintiff wrote to the directors of RHS alleging the agreement was illegal but demanding that he be permitted to resign on the same terms. At the August 15th meeting he cast the only negative vote and resigned as an employee. Attempts to dissuade him were fruitless and on August 19, 1974 the corporate attorney wrote him stating that his employment contract required ninety days notice of termination and contained a covenant not to compete and that if any portion of the eastern practice was lost to the corporation legal redress would be sought. Despite the fact that he was still a shareholder and, for another ninety days, a salaried employee of RHS, plaintiff immediately renewed his efforts to secure a separate contract from the Southampton Hospital. Upon receipt of a letter from the RHS attorney advising it of the restrictions contained in plaintiff's contract of employment, the Hospital rejected plaintiff's proposal.

Plaintiff has continued the south fork practice since his resignation and has received proceeds of corporate operations at the East Hampton Medical Group and the Hampton Medical Center and deposited them in a special account in his name, conceding at the trial that some of the funds deposited were for services rendered by Dr. Fiore. Plaintiff has apparently also made disbursements from his special account, allegedly for business purposes, but he testified that he has not cashed the salary checks remitted to him by RHS during the termination period. Payments by the Southampton Hospital have been deposited by the Hospital in an escrow account. The parties seek a judicial determination with respect to all of the funds accumulated.

The Dissolution Issue

Plaintiff's first cause of action demands judgment dissolving the corporation on the ground that it is paralyzed by dissension and is being held together solely for the purpose of forcing an unwanted associate upon him.

There is no explicit statutory authority for judicial dissolution of a corporation at the request of a minority shareholder. Under Business Corporation Law §§ 1102, 1103 and 1104 dissolution may be decreed only on petition of a majority of the board or of the shareholders or, in the case of a deadlock, on petition of the holder of 50% Of the stock. However, relief is available on the petition of a minority shareholder as a matter of judicial sponsorship where it is alleged that the directors and others in control are looting assets thereby enriching themselves at the expense of minority shareholders or are continuing the corporation's existence for the sole purpose of benefiting those in ...