Preferred Physicians Mut. Management Group v. Preferred Physicians Mut. Risk Retention
| Decision Date | 23 January 1996 |
| Docket Number | No. WD,WD |
| Parties | PREFERRED PHYSICIANS MUTUAL MANAGEMENT GROUP, Appellant, v. PREFERRED PHYSICIANS MUTUAL RISK RETENTION, et al., Respondent. 51107. |
| Court | Missouri Court of Appeals |
Appeal from the Circuit Court of Jackson County; Thomas C. Clark, Judge.
James Maxwell Yeretsky, Kansas City, for Appellant.
John Muir Kilroy, Thomas Scott Stewart, Kansas City, for Respondent.
Before FENNER, C.J., P.J., and BRECKENRIDGE and SMITH, JJ.
Preferred Physicians Mutual Management Group, Inc., ("Management Company") appeals from the trial court's March 15, 1995 Order sustaining the Motion to Dismiss All Claims of respondents Gerald F. Tuohy, M.D., Edward C. Mills, and Gerald F. Tuohy Management Services ("TMS"), as to Management Company's claims of breach of fiduciary duty, tortious interference with a contract, negligence, and civil conspiracy in its First Amended Petition.
In 1987, David A. Schoenstadt, M.D., and James R. Jorgensen, C.P.A., formed Management Company and Preferred Physician Mutual Risk Retention Group ("Insurance Company") to provide medical malpractice insurance to high quality, low-risk anesthesiologists. From their inception, the two companies have had an interwoven existence. Dr. Schoenstadt and Jorgensen recruited a group of investors to contribute, primarily in the form of surplus notes and loan guarantees, the large amount of funds needed for the capital and reserve requirements of the new Insurance Company. In conjunction with the formation of Insurance Company, Management Company was created to provide exclusive, comprehensive management and operational services to Insurance Company and to provide a vehicle for the recoupment of the investors' financial investment in Insurance Company. The shareholders in Management Company provided all of the capital required to start Insurance Company business.
From the inception of Insurance Company in 1987 until March 1994, the business relationship between Management Company and Insurance Company was continuous and ongoing. Since its inception, Management Company has derived all or substantially all of its revenues from its contractual arrangements with Insurance Company. The business relationship was initially governed by management agreements that were replaced in July 1991 by a service contract between the two entities. The contract provided that Management Company was to provide all requisite services and employees to accomplish the business purposes of Insurance Company, including the provision of a claims department, an underwriting service, a department for processing and servicing policies, an accounting department, a marketing department, data processing services, office services, investment services, reinsurance placement, and the hiring of all employees for Insurance Company. Management Company's hiring duties included the hiring of individuals to be elected as officers of Insurance Company who were to act solely as officers of Insurance Company and subject to the control of Insurance Company board of directors. The initial term of the service contract was to run until January 1, 1995, and automatically renew for five year terms thereafter unless terminated pursuant to grounds within the contract.
The relationship between the companies appeared successful, as Insurance Company rapidly grew with the assistance of Management Company, insuring approximately 2,300 physicians. During this initial growth period, Management Company, with the personal guarantees of its principals, assigned the management contract with Insurance Company in order to secure a loan in excess of $3 million to provide necessary additional capital and surplus for Insurance Company.
From the time of the inception of the companies until his death in December 1991, Dr. Schoenstadt monitored the day-to-day operations of Insurance Company pursuant to the management agreements and service contract, closely supervised and managed the key office employees, was responsible for all Management Company and Insurance Company operations, and served as the interface between Management Company and Insurance Company. In December 1991, in light of a sudden terminal illness, Dr. Schoenstadt approached Dr. Tuohy and asked him to "help take care of the company," as Tuohy was a shareholder of the closely-held Management Company and a member of Insurance Company board of directors. Schoenstadt asked Tuohy to assume a number of executive responsibilities that Management Company had delegated to Schoenstadt under the service contract.
Prior to Dr. Schoenstadt's death, Tuohy's role in the two companies was limited. He was a shareholder of Management Company, but did not serve in an executive position. As a shareholder, he received dividends totalling over $175,000 as a direct result of the performance of Management Company under the service contract. Tuohy was also President of Insurance Company, and sat on the board of directors as the company president. Management Company clams that Tuohy's activities as Insurance Company president were limited to lending his name to ghost-written marketing letters and serving in the peer review program that screened applicants for insurance.
Tuohy accepted Schoenstadt's offer to provide executive services on behalf of Management Company to fulfill duties under the service contract, and along with Dr. Steven Kanter and Jorgensen, continued to fulfill the duties and obligations of Management Company through the summer of 1993. Pursuant to his acceptance of Schoenstadt's offer, Tuohy negotiated with Jorgensen, acting on behalf of Management Company, to receive an amount of $5,000.00 per month as personal compensation for Tuohy's management services, to be paid directly to TMS, Tuohy's management corporation. In return, Tuohy exercised personal executive authority for Management Company in providing management services to Insurance Company, including, but not limited to, relations with Insurance Company's board of directors on behalf of Management Company, personal supervision of key operating personnel, whether employed directly by Management Company or Insurance Company, interaction with legal counsel, regulatory officials, and competitors, and supervision of claims review, underwriting review, and some marketing activities.
During the time Tuohy was serving as the primary management consultant from Management Company to Insurance Company, Mills was the chief executive officer of Insurance Company and president of Management Company, exercising his power at Management Company to issue and sign checks to the shareholders, including Tuohy, in payment of fees earned from Insurance Company.
During the summer of 1993, Kanter, Jorgensen, and the shareholders of Management Company began to question the management style and ability of Mills as CEO of Insurance Company, specifically questioning his underwriting policies, claims handling, and budget control. Management Company sought a merger partner for Insurance Company, but these efforts were met with hostility on the part of Insurance Company.
At this same time, Management Company alleges that Tuohy was secretly negotiating an employment relationship directly with Insurance Company to the exclusion of Management Company, claiming that Tuohy's new compensation and employment relationship with Insurance Company was formalized at the October 1993 meeting of Insurance Company board of directors. After the October board meeting, Tuohy and Mills began to demand sweeping changes in the service contract with Management Company. Management Company claims that Tuohy and Mills began to secretly and systematically interfere with Management Company's efforts to review, monitor, and direct the activities of its employees, and to withhold financial and other information needed for proper operation of its business affairs, causing the relationship between the two companies to deteriorate. Management Company alleges that while subverting the relationship between the companies, Tuohy and Mills continued to outwardly project to Management Company and its shareholders that they were faithfully and loyally performing their duties to Management Company as obligated by their positions and contracts with it.
Finally, Management Company claims that Tuohy, for personal motive of prestige and financial gain, induced or caused to be induced, the board of directors of Insurance Company to unilaterally terminate the business relationship with Management Company. In July 1993, Insurance Company converted all of Management Company's employees to its own use, effectively locking Management Company out from performing its management duties for the Insurance Company.
Management Company filed suit against Insurance Company on April 1, 1994, seeking specific performance and damages for an alleged breach of the service contract. On September 30, 1994, Management Company filed its First Amended Petition naming Tuohy, TMS, and Mills as individual defendants for the first time. The claims against these defendants are based on the alleged oral agreement between Tuohy and Management Company for Tuohy to provide executive services for Management Company and to fulfill duties under the service contract on behalf of Management Company. Management Company alleged that Tuohy and TMS breached their fiduciary duties to Management Company, that they tortiously interfered with Management Company's business expectancy derived from the relationship with Insurance Company, and that if such relationship was terminated because of Management Company's failure to provide management services as alleged by Insurance Company, the failure was directly and proximately caused by the negligence of Tuohy and TMS in failing to provide adequate management services as delegated to them...
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