Berman v. Physical Medicine Associates, Ltd. , 225 F.3d 429 ( 2000 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
WILLIAM S. BERMAN, M.D.,
Plaintiff-Appellant,
v.
PHYSICAL MEDICINE ASSOCIATES,
LIMITED, A Virginia Corporation;
No. 99-1043
ABRAHAM A. CHERRICK, M.D.; MAYO
FRIEDLIS, M.D.; VIRGIL BALINT,
M.D.; JAMES JOHNSEN, M.D.;
RODNEY DADE, M.D.,
Defendants-Appellees.
Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
James C. Cacheris, Senior District Judge.
(CA-98-346-A)
Argued: April 4, 2000
Decided: August 23, 2000
Before NIEMEYER, MICHAEL, and KING, Circuit Judges.
_________________________________________________________________
Affirmed by published opinion. Judge Niemeyer wrote the opinion,
in which Judge Michael and Judge King joined.
_________________________________________________________________
COUNSEL
ARGUED: Emil Hirsch, FREEDMAN, LEVY, KROLL &
SIMONDS, Washington, D.C., for Appellant. Frank Douglas Ross,
III, ODIN, FELDMAN & PITTLEMAN, P.C., Fairfax, Virginia, for
Appellees. ON BRIEF: Patrick J. Kearney, FREEDMAN, LEVY,
KROLL & SIMONDS, Washington, D.C., for Appellant.
_________________________________________________________________
OPINION
NIEMEYER, Circuit Judge:
After Dr. William S. Berman, who was a stockholder, director, and
employee of a close corporation providing medical services, submit-
ted his resignation as an employee, effective nine months later, the
board of directors of the corporation terminated his employment,
effective 30 days later, claiming that their preemptive decision was
justified by "reasonable cause." Berman brought this diversity-
jurisdiction action against the corporation's directors and stockhold-
ers, who were essentially the same people, as well as the corporation
itself, alleging that they had breached his employment agreement and
severance benefit agreement and that the directors and stockholders
had breached fiduciary duties owed to him. At trial, the district court,
applying Virginia law, granted the defendants' motion for judgment
as a matter of law on Berman's fiduciary-duty claims and allowed the
breach-of-contract claims to go to the jury. After the jury returned a
verdict in favor of Berman on his contract claims, he appealed the dis-
trict court's ruling dismissing his fiduciary-duty claims. For the rea-
sons that follow, we affirm.
I
Physical Medicine Associates, Ltd. ("PMA") is a Virginia corpora-
tion, located in Fairfax County, which provides medical services.
During the period relevant to this case -- 1997-98-- the corporation
employed six doctors, including Dr. William S. Berman, who were
both employees and its only stockholders. Five of the six doctors,
including Berman, were also directors of the corporation. Each of the
doctors had an employment agreement with the corporation and an
agreement for the payment of severance benefits should the doctor
leave the practice. Finally, the doctors had a stockholder agreement
among themselves and with the corporation providing that when a
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doctor left the practice, the corporation would buy his stock for
$50,000.
PMA provided medical services to a nursing home in Arlington,
Virginia, under a contract that provided the practice with about a third
of its patients. In late December 1997, while Berman was working at
the nursing home, he had two encounters with nursing-home person-
nel involving patient care. One of the incidents was witnessed by the
nursing-home director. On January 5, 1998, the nursing-home director
complained to PMA about the incidents, explaining that Berman had
yelled at nurses, patients, and patients' families and was rude. The
nursing-home director stated that she did not want Berman to return
to the nursing home anymore and that if he did come back, PMA's
doctors would be asked to stop seeing patients at the nursing home.
The complaint from the nursing home was not the first that PMA had
received about Berman's yelling at nurses.
On the same day PMA received the nursing-home complaint, one
of PMA's directors told Berman about it and demanded that he apolo-
gize and make amends. As Berman related it, he was told that he
would have "to crawl on [his] knees and make amends"; he would
have "to fix it." He was admonished that if he did not fix the problem,
he could be voted out of the practice. On learning of the complaint
and PMA's insistence that he make amends, Berman canceled his
patients' appointments for the next day, visited his attorney, and sub-
mitted a letter of resignation to PMA, dated January 6, 1998, effective
nine months later. The letter read:
Pursuant to Paragraph I of the Severance Benefit Agreement
dated July 1, 1997, I hereby give you notice of my with-
drawal as an employee of the Corporation effective October
6, 1998.
By delaying the effective date of his resignation nine months, Berman
sought to become entitled to severance benefits, which were available
only to a doctor who gave nine months' notice of his withdrawal from
the practice.
After receiving Berman's letter, PMA included the subject of Ber-
man's resignation on the agenda for the corporation's next board
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meeting, scheduled for January 21, 1998. Before that meeting, one of
the other doctors at PMA observed to another that Berman did not
deserve his full severance benefit because his conduct at the nursing
home was unprofessional and could cause PMA to lose its contract
there. These two doctors discussed informally their view that if Ber-
man were unable to repair his relationship with the nursing home,
"then it [would be] reasonable and justifiable to vote to fire him." By
the time of the January 21 board meeting, Berman's relationship with
the nursing home had not been repaired, and on the evening before
the meeting, the stockholders of PMA, except Berman, met and
decided that at the directors' meeting the next day, Berman's employ-
ment would be terminated.
At the board meeting on January 21, with Berman present, the
board discussed the incident at the nursing home and the complaint
about Berman's conduct. Berman stated that he had done nothing
wrong, comparing his behavior to that of another local physician who
frequently yelled at nurses. He acknowledged that"his behavior
might have been intemperate" but expressed his opinion that he had
"not done anything unreasonable." One of the doctors then produced
a letter written by the nursing-home director, indicating that the nurs-
ing home's relationship with PMA would be in jeopardy if Berman
were to return to the nursing home. As it became apparent to Berman
that his employment would be terminated, Berman objected to Dr.
Rodney Dade's presence because he was only a stockholder and not
a board member, but Dade did not leave. The participants at the meet-
ing, including Dade, then voted unanimously to dismiss Berman for
cause, effective 30 days later.
The employment agreement between Berman and PMA provided
that the corporation could discharge Berman "for reasonable cause,"
but it required that all other board members vote for the action. The
agreement defined "reasonable cause" to "mean that the physician has
conducted himself in an unprofessional, unethical, immoral or fraudu-
lent manner . . . or the physician's conduct discredits the Corporation
or is detrimental to the reputation or standing of the Corporation."
The severance benefit agreement between Berman and PMA pro-
vided him with the right to a severance benefit upon his withdrawal
from the practice equal to 1.5 times his average annual earnings for
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the best three of his previous five years as an employee of the corpo-
ration. Under the terms of the agreement, the benefit became vested
on a gradually increasing basis over a period of nine years. To receive
the benefit, however, Berman would have to give PMA nine months'
written notice of his withdrawal.
The stockholder agreement among the stockholders of PMA and
the corporation provided that a stockholder of PMA could not transfer
his shares to anyone else and that if the stockholder's employment
with PMA terminated, the corporation would purchase his stock for
$50,000.
Shortly after being discharged by the corporation, Berman filed this
action complaining that PMA, its directors, and its stockholders had
breached Berman's employment agreement, severance benefit agree-
ment, and stockholder agreement. Berman demanded over $100,000
in lost salary, over $370,000 in severance benefits, and $50,000 for
his stock. Berman also alleged that the directors of PMA had
breached their fiduciary duties of loyalty and due care, owed to him
as a "director, shareholder and employee of PMA," by failing to con-
duct an adequate investigation into the cause for his termination and
acting without a reliable factual basis in terminating his employment
for cause; by conducting a secret meeting to orchestrate his termina-
tion; by failing to give him adequate advance notice of the charges
against him and concealing the fact that they would seek his termina-
tion for cause; by allowing Dade, who was not a director, to vote on
his termination; and by terminating Berman's employment for their
own personal gain in order to avoid paying him benefits due under his
various agreements with PMA. Berman alleged in a separate count
that Dade had aided and abetted in breaching the directors' fiduciary
duty by participating in the board meeting and voting to discharge
him. For the breach-of-fiduciary-duty counts, Berman demanded
$500,000 in compensatory damages and $1 million in punitive dam-
ages. Berman also sued two of the doctors for defamation but later
withdrew those claims.
Following Berman's presentation of evidence to a jury, the district
court granted PMA's motion for judgment as a matter of law on the
fiduciary-duty claims. The court concluded that while the directors
owed a fiduciary duty to the stockholders as a class, they owed no
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such duty to Berman as an individual stockholder. The court also
rejected Berman's argument that, because PMA had conducted itself
as a partnership, the directors owed Berman the fiduciary duties owed
by partners. At this stage of the trial, the parties informed the court
that they had settled Berman's claim for breach of the stockholder
agreement, and the court thus dismissed that claim as well. The
claims for breach of the employment agreement and severance benefit
agreement proceeded to verdict, and the jury awarded Berman
$4,970.25.
Berman appeals only the district court's ruling granting judgment
as a matter of law on the fiduciary-duty claims.
II
Berman contends that the district court erred in rejecting, as a mat-
ter of Virginia law, his fiduciary-duty claims when it concluded: (1)
that the directors of PMA did not owe Berman a fiduciary duty as an
individual stockholder, and (2) that PMA did not operate as a partner-
ship and therefore its stockholders did not owe each other fiduciary
duties as partners. We address these points in order.
A
Berman argues first that because he was a stockholder of PMA, the
directors of PMA owed him a fiduciary duty. He devotes a substantial
portion of his brief to his contention that in Virginia directors of a
close corporation owe a fiduciary duty to stockholders as individuals
and not only to the stockholders as a class. He argues that therefore
he was owed a fiduciary duty and that the directors, in terminating his
employment, breached this duty by failing to follow fair and estab-
lished corporate procedures. By having brought this breach-of-
fiduciary-duty claim, Berman sought to have the jury consider not
only compensatory damages but also punitive damages.
The question whether the fiduciary duty of a director of a close cor-
poration runs to stockholders individually, as well as to stockholders
as a class, does not appear to have been decided in Virginia. Compare
Byelick v. Vivadelli, 79 F. Supp. 2d 610, 624-25 (E.D. Va. 1999) (pre-
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dicting that the Virginia Supreme Court would recognize a claim
against an inside director by a minority shareholder in a close corpo-
ration), with American Gen. Ins. Co. v. Equitable Gen. Corp., 478 F.
Supp. 721, 740-41 (E.D. Va. 1980) (holding that the fiduciary duty
of directors under Virginia common law attaches only to dealings
with the shareholders as a class). We need not resolve this question
here because we reject Berman's claims on different grounds. Even
if PMA's directors owed a fiduciary duty to Berman as an individual
stockholder, that duty would apply only to their dealings with Berman
in his role as a stockholder. But Berman's only claim directly impli-
cating his status as a stockholder is that PMA failed to repurchase his
stock, in violation of the stockholder agreement. Berman and PMA
settled this claim, agreeing that if Berman tendered his shares to
PMA, PMA would pay him $50,000 as provided in the stockholder
agreement. After PMA terminated his employment and before reach-
ing this settlement, Berman remained a stockholder and could have
exercised all the rights available to him as a stockholder, none of
which he alleged to have been denied.
Berman's other claim for breach of fiduciary duty-- that the direc-
tors did not follow fair procedures in deciding to terminate his
employment -- implicates his status not as a stockholder, but as an
employee. Specifically, Berman alleged that PMA's directors failed
to conduct an adequate investigation into whether there was reason-
able cause for the termination of his employment; they conducted a
secret meeting to orchestrate his termination at the directors' meeting;
they failed adequately to notify him that they would be seeking to ter-
minate him for reasonable cause; and they allowed Dade, a nondirec-
tor, to vote on his termination. However, Berman has identified no
injury caused by the process by which the directors reached their
decision, as distinct from injuries caused by the decision itself. And
any injury caused by the termination decision itself would be an
injury to his interests as an employee, not as a stockholder. Any injury
to his interests as an employee would arise from breach of contractual
duties by the corporation, not from breach of any fiduciary duties by
the directors. Berman's contractual claims for breach of the employ-
ment agreement and breach of the severance benefit agreement were
submitted to the jury, which found for Berman and awarded him dam-
ages.
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Moreover, as to Berman's claims under the employment agreement
and severance benefit agreement, only the corporation owed Berman
a contractual duty; the directors individually owed Berman no con-
tractual duty. Nor did the directors owe Berman as an employee a
fiduciary duty; directors cannot act as fiduciaries in their relationship
with employees and at the same time discharge their fiduciary duties
to the corporation of which they are directors. See Va. Code Ann.
§ 13.1-690 ("A director shall discharge his duties as a director . . . in
accordance with his good faith business judgment of the best interests
of the corporation"); Va. Code Ann. § 13.1-727.1 ("With respect to
any action or any failure to act by the board of directors, the provi-
sions of § 13.1-690 shall apply"); see also United States v. Byrum,
408 U.S. 125, 138 (1972) (applying Ohio law) (Directors "have a
fiduciary duty to promote the interests of the corporation"); Byington
v. Vega Biotechnologies, Inc., 869 F. Supp. 338, 345 (D. Md. 1994)
(applying Delaware law) ("Any contrary rule [imposing on directors
a fiduciary duty to employees] would place intolerable and irreconcil-
able conflicts of interest upon the directors").
B
Berman also argues that the stockholders of PMA owed him a fidu-
ciary duty because the stockholders functioned as partners, and part-
ners traditionally owe a fiduciary duty to each other. To impute
partnership law to persons in a corporate structure, Berman relies on
Boyd, Payne, Gates & Farthing, P.C. v. Payne, Gates, Farthing &
Radd, P.C., 422 S.E.2d 784 (Va. 1992), which held that the members
of a law partnership, which converted to a corporation for tax pur-
poses but otherwise continued to function as a partnership, were sub-
ject to duties imposed by partnership law. But Boyd, Payne involved
circumstances far different from those presented to the district court
in this case. In Boyd, Payne, the original law partnership continued
to function as a law partnership except to the extent that it needed to
satisfy corporate-law requirements to obtain tax benefits. The partner-
ship did not operate differently after adopting corporate status; its
assets were not merged into the corporation; it continued to file part-
nership tax returns; and tax liability was apportioned on the basis of
partnership percentages rather than stock ownership. See id. at 785-
86. In this case, while the doctors at PMA referred to themselves at
times as partners, they nevertheless clearly elected to function through
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the corporate form, and they adhered to that choice virtually without
exception. The corporation operated under articles of incorporation
and bylaws; the corporation was capitalized through the issuance of
stock, and the stock had real value; the corporation was operated by
directors and officers, and the directors met regularly; the doctors'
rights and obligations were defined by employment agreements with
the corporation and stockholder agreements among themselves and
the corporation; the corporation maintained corporate books, report-
ing its income on corporate tax forms; and the corporation filed
annual corporate reports with the Commonwealth of Virginia. These
circumstances do not manifest any intent to operate as a partnership,
contrary to the situation in Boyd, Payne.
III
At bottom, Berman's claims are garden-variety contract claims for
breach of an employment agreement and breach of a severance bene-
fit agreement. He cannot, simply by calling his colleagues at PMA
fiduciaries, convert these claims into anything more than what they
are. His breach-of-contract claims were presented to the jury and fully
resolved, and the jury's verdict has not been appealed.
Accordingly, we affirm the judgment of the district court.
AFFIRMED
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