Kern v. Arlington Ridge Pathology, S.C., 1-07-2615.

• Decision Date: 07 August 2008
• Docket Number: No. 1-07-2615.,1-07-2615.
• Citation: 893 N.E.2d 999
• Parties: Susan B. KERN, Plaintiff-Appellant, v. ARLINGTON RIDGE PATHOLOGY, S.C., and Richard Regan, Defendants-Appellees.
• Court: United States Appellate Court of Illinois

893 N.E.2d 999

Susan B. KERN, Plaintiff-Appellant, v. ARLINGTON RIDGE PATHOLOGY, S.C., and Richard Regan, Defendants-Appellees.

No. 1-07-2615.

Appellate Court of Illinois, First District, Fourth Division.

August 7, 2008.

Herman J. Marino, Esq., Chicago, IL, for Plaintiff-Appellant.

Diane M. Kehl, Frederic T. Knape, Michael J. Waters, Vedder Price P.C., Chicago, IL, for Defendants-Appellees Arlington Ridge Pathology, S.C.

Thomas J. Reed, Paul J. Voss, Law Offices of Thomas J. Reed, Ltd., Chicago, IL, for Richard Regan, M.D.

Justice MURPHY delivered the opinion of the court:

Plaintiff, Susan B. Kern, M.D., brought an action on October 27, 2005, seeking an injunction against the action of defendant, Richard Regan, M.D. (Regan), and Arlington Ridge Pathology, S.C. (Arlington). The Arlington board of directors with Regan as president of the board amended Arlington's articles of incorporation (articles) on October 21, 2005, to be effective on October 26, 2005. The amendment modified the percentage of shareholder votes required to amend or alter Arlington's corporate bylaws. On October 26, 2005, Regan issued notice of a special meeting and proposed changes to the bylaws. Plaintiff later amended her complaint for injunctive relief by adding counts for breach of fiduciary duty and conspiracy. On January 18, 2007, the trial court granted defendants' motion for summary judgment, finding that the board legally amended the articles.

On appeal, plaintiff asserts several grounds in support of her argument for reversal. Plaintiff argues that the trial court erred in its interpretations of the bylaws and the Business Corporation Act of 1983(Act) (805 ILCS 5/1 et seq. (West 2004)) in finding a proper quorum existed to allow amendment of the articles. Plaintiff contends that, as a beneficiary of the amendment, Regan had the burden, but failed, to show the transaction was fair and in good faith. Plaintiff also asserts that questions of material fact remain on all counts because various issues were not sufficiently addressed in affidavits and other evidentiary submissions. For the following reasons, we affirm the holding of the trial court.

I. BACKGROUND

On March 1, 1994, Arlington was incorporated under the laws of the State of Illinois for the purpose of the study, diagnosis and treatment of human ailments and injuries. Plaintiff and Kishen Manglani, M.D. (Manglani), were among the original six pathologists that were shareholders in Arlington. Arlington maintained an exclusive services agreement with Northwest Community Hospital (Northwest) in Arlington Heights, Illinois. Arlington's offices are located in the Northwest facilities and plaintiff performed her duties at this location.

On January 11, 2000, plaintiff was elected vice president and secretary of the board. In 2002, Regan was admitted as a shareholder. Regan later became president for the relevant transactions of October 2005. In 2005, only plaintiff, Regan, and Manglani remained as shareholders of Arlington, holding 166, 170, and 166 shares, respectively. Plaintiff, Regan, and Manglani were also the only directors during the relevant times.

The articles do not contain provisions regarding the configuration of the board or quorum requirements for the board to transact business. Section 3.2 of the bylaws, the variable range requirement, provides that the board shall consist of between four and nine directors, each of whom is required to be a licensed physician and shareholder employee of Arlington. Section 3.9 of the bylaws sets a quorum for the transaction of business as a majority of the directors, except where provided otherwise.

The articles are also silent on the requirements for board actions and the bylaws again provide guidance. Under section 3.3(b) of the bylaws, with notice that a meeting will be held to vote on the removal of a director, the board may remove a director with the vote of 80% of outstanding shares. Section 9.3 of the bylaws requires a vote of persons holding at least 67% of outstanding shares for any of several listed "Major Decisions" to be valid. Included among the major decisions are amending or modifying the bylaws and several decisions with financial implications. However, Article XIV of the bylaws provides, "[e]xcept to the extent otherwise provided in the Articles of Incorporation, these bylaws shall be subject to alteration, amendment or repeal, and new bylaws may be adopted only by the affirmative vote of persons holding eighty percent (80%) of outstanding shares of the Corporation."

Despite the variable range requirement, outside of a period of time in 2002, Arlington has operated with a three-person board since 1999. Plaintiff stated in her supporting affidavits that during this period, there were no regular or annual board meetings, the bylaws were never amended by the board, and only two special meetings of the board were called in 2000. Furthermore, all actions of the board were by unanimous vote of the three board members. These actions included the election of plaintiff as vice president and secretary, setting the value of a retirement gift for a shareholder physician, and actions regarding Arlington's pension and profit-sharing plans.

Also during this time, plaintiff alleges that a dispute arose between her and Bruce Crowther, chief executive officer of Northwest. Plaintiff was elected president of the Northwest medical staff in 2001. Plaintiff alleged that her relationship with Crowther was always strained and that it grew contentious in a dispute regarding Northwest's use of hospitalist physicians. Plaintiff alleges that she subsequently was the victim of verbal abuse by Crowther. In response, plaintiff filed an incident report with Northwest's board of directors on September 12, 2001.

Plaintiff alleges that since that time, Crowther harbored ill-will and animus against her and sought revenge. Although not of record, and allegedly was never made available to plaintiff, an Arlington employee who had been disciplined by Arlington for conduct detrimental to the corporation filed an occurrence report with Northwest in or around June 2005. The report included accusations that plaintiff acted inappropriately and unprofessionally in expressing Arlington's dissatisfaction with the employee. In response, plaintiff alleges that Northwest conducted a "circus investigation." In August 2005, Crowther met with Regan, who asserted the issue was an internal matter for Arlington to handle.

In order to avoid the due process and procedural rights afforded plaintiff under Northwest's grievance procedure, plaintiff claims that Northwest decided to exercise its rights under its agreement with Arlington. Crowther issued a letter to Regan on August 24, 2005, outlining the occurrence report and investigation of plaintiff. Crowther indicated that plaintiff exhibited threatening and abusive behavior and created a hostile work environment. Accordingly, pursuant to the agreement between the parties, Crowther threatened to terminate Arlington's exclusive services agreement if plaintiff was not sent to professional counseling or if her employment with Arlington was not terminated.

Plaintiff alleges that she was informed that Crowther and Regan discussed the necessity of manipulating Arlington's articles and bylaws to allow for plaintiff's termination. On October 17, 2005, Regan issued notice of a special board meeting on October 21, 2005, at 1:30 p.m., that did not include an agenda or stated purpose. On October 21, 2005, Regan and Manglani met prior to the scheduled time with Arlington's counsel and voted to adopt a resolution to amend the articles.

Plaintiff arrived at the scheduled time and connected her counsel via speaker phone, as agreed by the parties. Plaintiff was given the minutes of the earlier meeting, including a proposed amendment to the articles that would permit alteration, amendment or repeal of the bylaws with a two-thirds vote of holders of outstanding shares. Plaintiff was also presented with a copy of a five-day notice of shareholder consent to the proposed amendment pursuant to section 7.10 of the Act. 805 ILCS 5/7.10 (West 2004). Plaintiff and her counsel objected that no meeting or debate had occurred as scheduled. Arlington's counsel stated that the meeting had already occurred and the directors knew plaintiff's position. Therefore, she was not needed for such an action.

The five-day notice included a notice for a shareholder's written consent, in lieu of a special meeting, to approve the resolution. Regan and Manglani signed the written consent to the amendment of the articles to allow amendment of the bylaws by a two-thirds vote of outstanding shareholders. On October 26, 2005, plaintiff received notice that the amendment to the articles had been approved and another five-day notice seeking shareholder approval of several amendments to the bylaws. The proposed amendments included a change in the voting requirements to two-thirds of outstanding shares for the bylaws with respect to removal of a director, termination of corporate and physician employment, limitations on board actions for major decisions, and the alteration, amendment or repeal of the bylaws. Plaintiff promptly filed this action on October 27, 2005, to enjoin the board action of October 21, 2005. As noted above, plaintiff later amended her complaint to add counts for damages for conspiracy and breach of fiduciary duty for defendants' allegedly improper attempts to terminate her.

The trial court granted defendants' joint motion for summary judgment and denied plaintiff's motion to reconsider. The trial court also ordered mediation following argument on each motion, which was unsuccessful. The trial court found that, by the years of operation with three shareholders, Arlington adopted a method of operation that abrogated the bylaws and a quorum was present on October 21, 2005. Accordingly, the trial court held that the amendment of the...