Kortum v. Johnson

• Decision Date: 28 August 2008
• Docket Number: No. 20070186.,20070186.
• Citation: 2008 ND 154,755 N.W.2d 432
• Parties: Cynthia KORTUM and Cynthia Kortum Enterprises, Ltd., Plaintiffs and Appellants v. Steve JOHNSON, Therese Johnson, Tracy Martin, Michelle Radke-Hella, and Independent Family Doctors, LTD., Defendants and Appellees.
• Court: North Dakota Supreme Court

755 N.W.2d 432

2008 ND 154

Cynthia KORTUM and Cynthia Kortum Enterprises, Ltd., Plaintiffs and Appellants v. Steve JOHNSON, Therese Johnson, Tracy Martin, Michelle Radke-Hella, and Independent Family Doctors, LTD., Defendants and Appellees.

No. 20070186.

Supreme Court of North Dakota.

August 28, 2008.

Craig E. Johnson, Johnson, Ramstad & Mottinger, PLLP, Fargo, ND, for plaintiffs and appellants.

Sara K. Sorenson, Ohnstad Twichell, P.C., West Fargo, ND, for defendants and appellees.

MARING, Justice.

[¶ 1] Cynthia Kortum and Cynthia Kortum Enterprises, Ltd. (collectively "Kortum") appeal a district court judgment entered in favor of Steve Johnson, Therese Johnson, Tracy Martin, Michelle Radke-Hella, and Independent Family Doctors, Ltd. (collectively "Shareholders") after a bench trial.

[¶ 2] Kortum and the individual Shareholders are all physicians. They were the founding, and the only, shareholders of Independent Family Doctors, Ltd. ("Corporation"). Kortum filed a complaint alleging the Shareholders wrongfully expelled her from the Corporation. She claimed the Shareholders acted in a manner unfairly prejudicial to Kortum by breaching the fiduciary duty they owed Kortum as a shareholder in a close corporation, thus entitling her to relief under N.D.C.C. ch. 10-19.1. The district court entered a judgment dismissing Kortum's complaint and awarding costs and disbursements to the Shareholders. The district court concluded Kortum was an at-will employee of the Corporation, and she bargained away any claim for breach of fiduciary duty by signing a shareholder buy-sell agreement ("Agreement") contemplating the involuntary termination of employee shareholders of the Corporation. Thus, the district court concluded she was entitled to no statutory relief for her termination. The district court further concluded that, under the Agreement, Kortum had to sell her shares of stock in the Corporation to the Corporation for $1.

[¶ 3] Kortum appeals, arguing she is entitled to relief under N.D.C.C. ch. 10-19.1 and the district court misinterpreted the stock purchase price provisions of the Agreement. We hold that the Shareholders owed Kortum a duty of utmost loyalty and good faith. Kortum did not "bargain away" the duty she was owed by the Shareholders by signing the Agreement. The Agreement is, however, presumed to reflect Kortum's reasonable expectations. We reverse and remand for further fact-finding and for application of N.D.C.C. ch. 10-19.1 to Kortum's claims. We further hold that if, on remand after making the relevant findings of fact, the district court concludes Kortum is not entitled to relief under N.D.C.C. § 10-19.1-115, Kortum will be entitled only to the share price provided in the Agreement which we conclude is $0.04 per share.

I Facts

[¶ 4] The record shows that Kortum and the other four physicians were all previously employed by MeritCare in Fargo. They were concerned that practicing medicine in a large corporation was not a good fit for their individual practices, so they decided to open an independent clinic in the spring of 2002. In April 2002, each of the five physicians made a non-refundable contribution of $25,000 toward executing this plan. On July 16, 2002, the physicians entered into the Agreement. Under the Agreement, each physician was issued 5,000 shares in the Corporation for a total of 25,000 shares issued.

[¶ 5] After entering into the Agreement, the record reveals that the physicians each provided an additional $50,000 to cover the clinic's operating expenses for the initial five months of operation. Once that money was exhausted, the physicians began proportionately dividing the operational costs among themselves. The physicians shared equally in the income from lab fees generated at the clinic. They served their own patients and collected income from their own practices. Each physician's monthly pay consisted of the revenue generated by the physician's own practice, less one-fifth of the clinic's operational costs, plus one-fifth of the lab income.

[¶ 6] None of the physicians had employment contracts with the Corporation. However, the Agreement addresses termination of a shareholder's employment. Paragraph 3 of the Agreement provides:

3. Termination of Employment. If any Shareholder shall voluntarily or involuntarily terminate his employment with the Corporation, for any reason whatsoever, he shall sell his shares under the terms and conditions as set forth in paragraph 1 hereof.

A. Employment defined. The term "employment" as used in this paragraph shall include full or part-time employment with the Corporation or employment by the Corporation on a consulting basis or as a consultant.

B. Waiver. A majority of the outstanding shares of the Corporation, excluding the shares owned by the Shareholder whose employment is terminated, may waive or modify the requirements of this paragraph.

Paragraph 1 of the Agreement outlines the procedures to be followed in the event of a sale of shares and indicates that the purchase price for the shares of the Corporation "shall be as set forth in paragraph 6 or 7 hereof whichever is applicable." Paragraph 6 addresses share prices:

6. Purchase price. The price of each share to be sold under this Agreement is hereby stipulated to be $.04 per share ($1.00 for $25,000), subject, however, to the adjustments herein provided.

A. Review of price. At each annual meeting of the Shareholders of the Corporation or more frequently, at the option of the Shareholders, the price of a share of stock, including the worth of the company as a going concern, shall be fixed by the decision of a majority of the outstanding shares of the Corporation represented at the annual meeting, and shall be endorsed as Schedule "A" attached to the counterpart of this Agreement delivered to and held by the Corporation, on which each share value so fixed shall be verified by the signatures of the president or a vice president and of the secretary of the Corporation....

B. Default provision. If at the annual meeting of the shareholders of the corporation, the shareholders are unable to agree upon a price as set forth in subparagraph A above, the price of each share to be sold under this Agreement shall be its book value. The term book shall mean the value of a share of the corporation as shown on the balance sheet of the corporation at the end of the month proceeding the date of offer, the date of death, or the date of termination of employment, which ever is applicable.

Schedule A of the Agreement, also dated July 16, 2002, states that "the Shareholders have set the price of each share to be sold under this Agreement, subject to the adjustments provided in this Agreement as follows: ... One share of common stock is valued at $.04, upon the retirement, disability, or other lifetime transfer of a share of stock."

[¶ 7] The record indicates that, in March 2005, Kortum confronted another shareholder regarding sexual harassment of a female lab technician employed at the clinic. Following a June 2005 meeting of the Shareholders, one of the Shareholders confronted Kortum with several alleged patient complaints. In August 2005, the female lab technician who complained of sexual harassment was fired after taking extra vacation days without obtaining permission from her supervisor. Kortum asserted the lab technician was treated unfairly and asked the Corporation to rehire her. Kortum testified that she supported the lab technician at an unemployment compensation hearing. Other shareholders disagreed and opposed an award of unemployment benefits to the lab technician.

[¶ 8] Kortum's employment with the Corporation was terminated in December 2005 by the Shareholders. On December 7, 2005, Kortum was instructed to be out of the clinic by the end of the month. The Shareholders offered her $1.00 in return for her stock. She refused their offer and brought a claim against the Shareholders on December 22, 2005.

[¶ 9] Kortum sought an injunction and monetary damages. The district court denied her request for equitable relief concluding she could avail herself of legal damages. She sought damages in the amount of the fair value of her stock, her lost income, and other benefits. The Shareholders denied any wrongdoing and sought a judgment determining that the Agreement required Kortum to sell her shares of stock to the Corporation and to assign her stock interest accordingly.

[¶ 10] A bench trial was held. The parties presented conflicting evidence regarding Kortum's conduct as a shareholder and clinic physician. Kortum alleged that she had not been made adequately aware of the other shareholders' dissatisfaction with her performance. She testified that she expected to work with the Corporation until her retirement. She asserted that she expected to set her own schedule, have her own nurse, and participate in office management. Kortum also said she practiced the same at the clinic as she had prior to joining the clinic and the other physicians knew how she operated. She also contended her support of the fired lab technician motivated the other shareholders' vote to terminate her.

[¶ 11] The Shareholders testified that Kortum used foul language within earshot of patients, name-called, stored Botox in refrigerators designated to hold only vaccinations, misdiagnosed several patients, frequently took days off without notice, failed to fulfill her duties while on call, failed to regularly attend meetings, and did not present a "united front" to clinic employees when she disagreed with a majority of the physician shareholders regarding a clinic decision. The Shareholders further testified that all the physician shareholders understood from the beginning that they would receive only a nominal amount in return for their shares if they left the clinic. The Shareholders also testified that Kortum had not suffered a loss of capital because the money the physicians paid up-front was used for...