McGinnis v. The Iowa Clinic, No. 9-156/08-1005 (Iowa App. 8/6/2009)
| Decision Date | 06 August 2009 |
| Docket Number | No. 9-156/08-1005,9-156/08-1005 |
| Parties | WILLIAM L. MCGINNIS, HEYOUNG L. MCBRIDE, and JOSEPH L. RHOADES, Plaintiffs-Appellants, v. THE IOWA CLINIC, P.C., et al., Defendants-Appellees. |
| Court | Iowa Court of Appeals |
Appeal from the Iowa District Court for Polk County, Glenn E. Pille, Judge.
The plaintiffs appeal from the district court order granting summary judgment in favor of the defendants on one count and dismissing another count. AFFIRMED.
Nick Critelli and Tre Critelli of Law Chambers of Nicholas Critelli, P.C., Des Moines, for appellants.
John F. Lorentzen, Patrick B. White, and Matthew R. Eslick of Nyemaster, Goode, West, Hansell & O'Brien, P.C., Des Moines, for appellees.
Heard by Vaitheswaran, P.J., and Potterfield and Doyle, JJ.
A group of radiologists filed a multiple-count petition against the Iowa Clinic, P.C. (the Iowa Clinic) and other defendants. They alleged that they terminated their employment with the Iowa Clinic and went into business on their own after the clinic entered into a joint venture with their competitors for the purchase and operation of radiation equipment known as the Cyberknife.
The petition contained three claims: (1) a claim styled "shareholder derivative action for disgorgement," (2) a damage action for breaches of the defendants' claimed "fiduciary duties of loyalty, good faith and fair dealing," and (3) a claim seeking a declaration that the radiologists were not subject to a non-compete clause in their employment agreements because of the defendants' "obligations to the Plaintiffs in their Shareholder Employment Agreement, and/or. . . fiduciary duties of loyalty, good faith and fair dealing owed the Plaintiffs as fellow shareholders of the Iowa Clinic, PC, a close corporation."
The Iowa Clinic filed a counterclaim asserting in part that the radiologists violated the non-compete provisions of their employment agreements. Additionally, the Iowa Clinic and all the remaining defendants, except a company known as Cyberknife, L.L.C., moved to dismiss the "shareholder derivative action for disgorgement."
The district court granted the motion. The court also granted summary judgment for the defendants on the radiologists' breach of fiduciary duty claims against the corporation and its directors, shareholders, and officers. The court denied the defendants' motion for summary judgment as to the radiologists' "breach of contract claim against the Clinic based on the implied covenant of good faith and fair dealing."
Following a bench trial, the district court concluded that the radiologists failed to prove their breach-of-contract claim. The court further concluded that the radiologists violated the non-compete provision of their employment agreements. The court ordered them to pay liquidated damages to the Iowa Clinic.
The radiologists appeal these rulings.
A district court ruling on a motion to dismiss is reviewed for errors of law. Iowa Telephone Ass'n v. City of Haywarden, 589 N.W.2d 245, 250 (Iowa 1999).
The "derivative" count of the radiologists' petition alleged in pertinent part that (1) "Defendants breached the fiduciary duties owed to Plaintiffs as fellow shareholders in a closely held corporation," (2) the Iowa Clinic allowed its professional name and logo to be used by competitors, which "directly benefitted those competitors at expense and costs to its own members," and (3) the Iowa Clinic directed business to its competitors, which "directly benefitted those competitors at expense and costs to its own members." The count also contained a relevant sealed allegation.1 Finally, the count alleged that "defendants' conduct was oppressive and coercive to the Plaintiffs." The "derivative" count sought a variety of equitable relief including the disgorgement of "any ownership, revenue, control or economic interest in and from" the joint venture, and removal of the officers and directors of the Iowa Clinic.
The court granted the defendants' summary judgment motion on the grounds that (1) the radiologists did not comply with statutory prerequisites to the filing of a derivative action and (2) "[a]llowing Plaintiff's derivative suit [as a common law action] would eviscerate the comprehensive (and consequently exclusive) scheme the legislature adopted for derivative actions."2
On appeal, the radiologists only challenge the court's second conclusion. They argue that "common law recognizes a derivative action by a shareholder of a closely held corporation who has been personally damaged as a result of a breach of fiduciary duty by fellow shareholders." The radiologists resort to the common law because they wish to avail themselves of remedies associated with derivative actions while escaping the requirements associated with statutory "derivative proceedings." They characterize their common law action as a "derivative direct action."
The defendants respond that a "derivative direct action" is "an oxymoron." They assert,
[a] shareholder claim is either derivative, in which case it is a representative action brought to remedy injury to the corporation, or it is direct, in which case it is brought to remedy an injury to the particular plaintiff bringing the claim.
In their view, the claim cannot be both derivative and direct. We agree.
A derivative action has been characterized as follows:
[E]quity permits a stockholder, as a representative of the corporation and of all other stockholders, and for the primary benefit of the corporation, and the secondary, indirect and derivative benefit of stockholders similarly situated, to bring action in his name. Such an action is known as a stockholders' derivative or representative action, in which the corporation is made a nominal defendant though it is in fact, the real plaintiff in interest.
State ex rel. Weede v. Bechtel, 244 Iowa 785, 811, 56 N.W.2d 173, 187 (1952). "As a matter of general corporate law, shareholders have no claim for injuries to their corporations by third parties unless within the context of a derivative action." Cunningham v. Kartridg Pak Co., 332 N.W.2d 881, 883 (Iowa 1983) (citations omitted).
There is "a well-recognized exception to the general rule: a shareholder has an individual cause of action if the harm to the corporation also damaged the shareholder in his capacity as an individual rather than as a shareholder." Id. (citations omitted). This exception applies as follows:
[I]n order to bring an individual cause of action for direct injuries a shareholder must show that the third-party owed him a special duty or that he suffered an injury separate and distinct from that suffered by the other shareholders.
In short, a derivative action is a vehicle to redress harm to the corporation, while an individual action is a vehicle to redress harm to the shareholder that is separate and distinct from that suffered by other shareholders.3 Iowa common law does not recognize a "derivative direct action."
We must next determine whether the count raises a derivative claim or an individual claim. While the caption "Shareholders' Derivative Action for Disgorgement, Constructive Trust and Removal" indicates it is a "derivative" count, captions do not necessarily control the disposition of a motion to dismiss and reliance on them may elevate form over substance. See Jones v. Iowa State Highway Comm'n, 207 N.W.2d 1, 2 (Iowa 1973) (); Lee v. Coon Rapids Nat'l Bank, 166 Iowa 242, 248, 144 N.W. 630, 632-33 (1913) () Therefore, we will examine the substantive allegations contained within the count.
The first key allegation, that defendants "breached the fiduciary duties owed to Plaintiffs as fellow shareholders in a closely held corporation," includes within its ambit shareholders other than the plaintiffs. The second key paragraph, alleging harm based on the use of the clinic's name and logo at the "expense and costs to its own members," refers to harm affecting all the shareholders. The same is true of the third key allegation, referring to business that was directed to the clinic's competitors at "expense and cost to its own members," as well as the fourth sealed paragraph. All these allegations are derivative in nature. See C Plus Northwest, Inc. v. DeGroot, 534 F. Supp. 2d 937, 942 (S.D. Iowa 2008) (); Whalen v Connelly, 545 N.W.2d 284, 292-93 (Iowa 1996) (). Additionally, the count seeks relief that is plainly derivative in nature. For example, the petition's general summary of the relief requested in this count states:
Plaintiffs, as shareholders and for and on behalf of all fellow shareholders, bring action against the individual Defendants, all officers, directors and/or shareholders of The Iowa Clinic, PC for the establishment of a constructive trust against all assets, income or revenue relating to or emanating from the Defendant Central Iowa Cyberknife, LLC.
This paragraph plainly seeks redress for harm suffered by the corporation. See First Nat'l Bank v. Fireproof Storage Bldg. Co., 199 Iowa 1285, 1294, 202 N.W. 14, 18 (1925) ( ...
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