McKnight v. Midwest Eye Institute of Kansas City, Inc., WD

• Citation: 799 S.W.2d 909
• Decision Date: 30 October 1990
• Docket Number: No. WD,WD
• Parties: Scott J. McKNIGHT, Respondent, v. MIDWEST EYE INSTITUTE OF KANSAS CITY, INC., Appellant. 42375.
• Court: Court of Appeal of Missouri (US)

Page 909

799 S.W.2d 909

Scott J. McKNIGHT, Respondent, v. MIDWEST EYE INSTITUTE OF KANSAS CITY, INC., Appellant.

No. WD 42375.

Missouri Court of Appeals Western District.

Oct. 30, 1990.

Motion for Rehearing and/or Transfer to

Supreme Court Denied Dec. 4, 1990.

Application to Transfer Denied Jan. 9, 1991.

Michael P. O'Keefe, North Kansas City, for appellant.

Thomas E. Hankins, Gladstone, for respondent.

Before SHANGLER, P.J., and CLARK and BERREY, JJ.

SHANGLER, Presiding Judge.

The plaintiff McKnight, an ophthalmologist, engaged his professional services to the defendant Midwest Eye Institute of Kansas City. The original contract for year 1987 contained a restrictive covenant that at the termination of the term of employment McKnight would not practice medicine within a defined area for a period of three years. A new agreement concluded between them for year 1988 imposed the same restriction. McKnight and Midwest undertook negotiations for yet another employment term for year 1989. That proposal, however, contained a restrictive covenant more expansive in territory, and without a termination date. In the course of negotiations, it became evident that a new agreement was unlikely before the current one expired. One impediment to contract was the insistence by Dr. Hagan, Midwest director and principal, that McKnight agree to purchase Midwest stock by payment of $3 million over time, but with the voting rights retained by Hagan for twenty years. It was made clear to McKnight that Midwest intended to enforce the restrictive covenant should agreement on a new contract fail. Midwest draws the preponderance of its patient base from Clay and Platte Counties. McKnight practiced in Clay County during the stint with Midwest, and continues to practice in that locale.

The negotiations at impasse, Midwest invoked the restrictive covenant before the termination of the current contract on June 30, 1989. Midwest proceeded to notify all hospitals and patients which McKnight served that he would be leaving the Kansas City area at the expiration of the contract term. Midwest also terminated his on-call duties, prohibited the treatment and consultation of patients, canceled surgeries McKnight was scheduled to perform, refused him any others, and locked his office. Midwest in effect consigned McKnight to a compulsory vacation for the rest of the contract term.

McKnight thereupon brought a petition to enjoin Midwest from the enforcement of the restrictive covenant of the employment contract, and for a declaration that the covenant was null and void as overbroad and otherwise contrary to public policy. Midwest, in turn, counterclaimed to enjoin McKnight from the breach of the restrictive covenant and the consequence of irreparable injury and, separately, for damages for breach of contract.

The trial court adjudged that the covenant not to compete was reasonable, but determined that the actions by Midwest informing hospitals and patients and physicians that McKnight was no longer practicing in the area, prohibiting his access to patients for treatment or surgery and other performance of medical duty--all before the termination of the contract term--prevented McKnight from the exercise of his profession when he was entitled to that practice and so constituted a material breach of the agreement. It was an adjudgment, implicitly, that the validity in law of the restrictive covenant notwithstanding, the conduct of the defendant in breach of the constitutive agreement foreclosed to Midwest the equity of injunction to enforce the noncompetition provision.

Accordingly, the court sustained the petition of plaintiff McKnight to enjoin Midwest from enforcement of the restrictive covenant of the employment contract with Midwest and denied any relief on the counterclaim. The defendant Midwest appealed from that judgment.

Midwest accepts the declaration of the trial court that the restrictive covenant was a valid contractual obligation, reasonable in scope, geography and time, and not otherwise violative of public policy. Midwest contends however that the refusal of the trial court to enforce the restrictive covenant on the ground that the termination of McKnight's services before the expiration of the employment contract constituted a material breach of the agreement was not only contrary to the weight of the evidence, but also erroneous as a matter of legal principle. Midwest argues that the prerogative of the management to idle McKnight or otherwise direct his employment service during the last month of the contract term was a provision explicit in the employment agreement, and thus could not have constituted a breach.

Midwest finds that prerogative in the contract term:

Employment. Effective from and after July 1, 1988, through June 30, 1989, the Doctor shall faithfully serve the Corporation in the regular ordinary course of the business of the Corporation in such capacity and perform such duties as the executive officers of the Corporation shall determine and direct from time to time.

It is the argument that this provision embodies the business judgment doctrine: that the business judgment of a corporation vests in the directors and shareholders wide latitude for its exercise in the conduct of the affairs of a corporation, an exercise with which courts will not usually interfere. ¹ Accordingly [the argument goes], the judgment of the trial court that Midwest's redirection of McKnight's professional activity during the last month of the employment was a breach of agreement not only misconstrues the contract, but also unduly subjects management decision to judicial oversight, contrary to the business judgment rule.

The contention intermixes two disparate principles of powers and liabilities. The business judgment rule protects the directors and officers of a corporation from liability for intra vires decisions within their authority made in good faith, uninfluenced by any other consideration than the honest belief that the action subserves the best interests of the corporation. Herbik v. Rand, 732 S.W.2d 232, 234[2-4] (Mo.App.1987); 19 C.J.S. Corporations § 482 (1990). It makes immune from court interference such an exercise of independent discretion. H. Henn, Law of Corporations § 242 (2d ed. 1970). The business judgment rule, however, does not operate to relieve a corporation of an obligation of contract merely because the managers hold the honest and disinterested belief that the action benefits the corporation. A corporation, no less than a natural person, is bound by a contract entered with proper authority, and no less than a natural person, may not repudiate the undertaking. Wynn v. McMahon Ford Co., 414 S.W.2d 330, 336[7-11] (Mo.App.1967); 14 W. Fletcher, Cyclopedia of the Law of Private Corporations § 2564 (rev. perm. ed. 1989). These principles apply with equal effect to a corporation employment contract. Orchard Container Corp. v. Orchard, 601 S.W.2d 299, 303[1-3] (Mo.App.1980).

The obligation to perform under a contract is measured by the intention of the parties as gathered from the terms as a whole, and not from a solitary provision--as Midwest proposes. Village of Cairo v. Bodine Contracting Co., 685 S.W.2d 253, 264[20, 21] (Mo.App.1985). It is an intention, moreover, that manifests from the object, nature and purpose of agreement, as well. Wilshire Constr. Co. v. Union Elec. Co., 463 S.W.2d 903, 906 (Mo.1971).

Midwest argues nevertheless that, if not validated as a business judgment, then the decisions not to schedule McKnight to work after June 1 until the end of the contract term on June 30, 1989--either as "on call" or by cancellations of surgery and other patient care--but to place him on vacation during that interim--and to change the office locks and inform patients and hospitals that McKnight's services would not be provided after June 2, were all performances sanctioned by the contract. It is an argument that the Employment provision [already cited] granted the employer Midwest the unqualified right to determine the hours of employee work, the location of the services and the professional duties to be performed. It is an argument, in effect, that the contract allowed Midwest to use or not use McKnight's services "as it s[aw] fit", provided Midwest discharged the salary obligation imposed upon it. It is an argument, once again, that the "best interests" of the corporate employer were paramount--in this case, interests served "by idling its employee, even though paying his salary, regardless of whether called 'vacation' or by some other name." This exercise of rights, bargained to the employer by the employee in exchange for the contract emoluments [the argument concludes], could not constitute a breach of contract.

The concomitant of the emoluments under the contract, however, were the medical services--particularly the highly specialized eye surgeries--performed by the employee as scheduled by Midwest. The basic compensation due McKnight under the agreement was $9,583.33 per month. There was also a separate provision termed additional compensation--spoken of in the testimony as a "production incentive bonus." It entitled the employee to fifty percent of total net fees in excess of $400,000 collected by the corporation for the employee services to patients during the year July 1, 1988 to June 30, 1989. Midwest canceled five eye surgeries scheduled for McKnight for the month of June, 1989 and refused to schedule some twenty-five others, although they were medically necessary. McKnight had generated to Midwest net collections of $546,691.25 by May 30, 1989, or an average of some $50,000 per month during the contract term.

It is evident that the idling of Dr. McKnight for the month of June effectively deprived the employee of performance under the contract and the additional $25,000 compensation that would yield. It was a consequence readily acknowledged by Dr. John Hagan, corporation principal...