bernard-feldman-v-richard-kim-pulin-pandya-r-emmett-mcdonald-juan ( 2012 )

Motion for Rehearing Denied, Memorandum Opinion of January 10, 2012
Withdrawn, Reversed and Remanded and Substitute Memorandum Opinion filed
April 24, 2012.
In The
Fourteenth Court of Appeals
___________________
NO. 14-11-00184-CV
___________________
BERNARD FELDMAN, Appellant
V.
RICHARD KIM, PULIN PANDYA, R. EMMETT MCDONALD, JUAN STERN,
HOUSTON UROLOGY PARTNERS, P.A., 2724 YALE STREET PARTNERSHIP,
L.P., AND 2724 MANAGEMENT COMPANY, L.L.C., Appellees
On Appeal from the 129th District Court
Harris County, Texas
Trial Court Cause No. 2008-46468
SUBSTITUTE MEMORANDUM OPINION
Appellees, Richard Kim, Pulin Pandya, R. Emmett McDonald, Juan Stern, Houston
Urology Partners, P.A., 2724 Yale Street Partnership, LP, and 2724 Management
Company L.L.C., filed a motion for rehearing. Their motion is denied; however, we
withdraw our memorandum opinion of January 10, 2012, and the following substitute
memorandum opinion is issued in its place.
In this shareholder oppression suit, appellant Bernard Feldman challenges the
traditional summary judgment granted in favor of the defendants. Because we conclude
that the defendants failed to meet their summary judgment burden, we reverse the
judgment and remand the case.
I. FACTUAL AND PROCEDURAL BACKGROUND
In 2004, Dr. Bernard Feldman learned of an opportunity to develop a medical office
exclusively for the provision of medical services that were ancillary to his urology practice.
Eventually, fellow urologists Richard Kim, Pulin Pandya, R. Emmett McDonald, and Juan
Stern joined in the business venture and formed Houston Urology Partners, P.A.
(“HUPPA”). Each doctor made a capital investment of approximately $280,000 in
exchange for 1,000 shares of HUPPA. Feldman also had found a building for HUPPA to
lease at 2724 Yale Street, so at the same time the doctors formed HUPPA, they also formed
2724 Yale Street Partnership, LP (“Yale Street”) and 2724 Management Company L.L.C.
(“the Management Company”). Yale Street purchased the building and leased it to
HUPPA. Each physician owned 19.8% of Yale Street; the Management Company, which
was the general partner in the limited partnership, owned the remaining 1%. Each doctor
also owned 20% of the Management Company and of HUPPA. None of the five doctors
who owned HUPPA actually worked for the company; they instead maintained their
independent clinical practices and referred patients to HUPPA for ancillary services such
as radiation, radiology, and pathology.
HUPPA quickly became profitable. Its bylaws provide that the board of directors,
which consists of all five owners, has the discretion to declare dividends, but the doctors’
Buy-Sell Agreement requires a two-thirds vote of the outstanding shares or of the board of
directors before any dividend or distribution can be declared or paid. Its organizational
documents do not specify how HUPPA’s revenues and expenses are to be allocated among
the owners, so the five doctors meet annually to decide allocation issues.
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In 2005, the doctors decided to distribute HUPPA’s earnings to the doctors with
each receiving an equal share. In 2006 and 2007, HUPPA began allocating its revenues
and expenses among the doctors in proportion to each doctor’s “productivity,” i.e., the
extent of that doctor’s patient referrals to HUPPA. Because Feldman’s patient load was
smaller, his proportionate payments from HUPPA were lower than those made to the other
four doctors.
In early 2008, Feldman informed the other doctors that he planned to wind down his
practice and retire. In response to this announcement, the other four doctors voted at a
meeting of the board of directors to change HUPPA’s accounting to allocate its expenses
equally among all five owners so that each would be responsible for 20% of HUPPA’s
expenses. 1 They did not change the system of allocating revenues in proportion to
productivity. As Feldman’s retirement neared, his medical practice generated less than
20% of the referrals to HUPPA; thus, the 20% of HUPPA’s expenses allocated to him
exceeded his proportionate share of HUPPA’s revenue. As a result, HUPPA began billing
Feldman for his share of the operating expenses. Feldman is the only one of the doctors
whose monthly allocation of revenue is a negative number. The other doctors also refused
to repay $25,000 of a $50,000 loan that Feldman had made to HUPPA. They justified this
action by asserting that they were offsetting the loan repayments against Feldman’s share
of HUPPA’s expenses. Finally, Yale Street began withholding payment of Feldman’s
share of the building rent.
On May 30, 2008, Feldman wrote to the other doctors proposing to resign his
position and retire from the practice of medicine, and asking them to buy his shares in
HUPPA for $200,000. The other doctors generally agreed with Feldman’s proposal, but
1
This meeting was held on February 21, 2008, but Feldman did not attend. Faced with Feldman’s
protest of the vote occurring in his absence, a second meeting was held on April 7, 2008 with all five owners
present. The vote was 4 – 1 to change the method of allocating expenses to an equal allocation among the
five owners.
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with one exception: they maintained that the purchase price was governed by the terms of
the Buy-Sell Agreement. They therefore offered Feldman $70,000 for his shares. He
rejected the offer and filed suit against the other four doctors, HUPPA, Yale Street, and the
Management Company (collectively, “the defendants”), alleging that they had engaged in
oppressive conduct designed to freeze him out of HUPPA and thereby defeat his legitimate
and reasonable expectations for investing in it.
The defendants moved successfully for traditional summary judgment on
Feldman’s shareholder oppression claim, and Feldman timely appealed.2
II. ISSUES PRESENTED
In three issues, Feldman challenges the trial court’s grant of summary judgment.
In his first issue, he contends that there is a genuine issue of material fact concerning the
reasons for changing HUPPA’s compensation scheme in 2008. In his second issue,
Feldman argues that the trial court erred in concluding that, as a matter of law, HUPPA’s
actions did not constitute shareholder oppression. He asserts in his third issue that the trial
court erred in ignoring the possibility that the majority shareholders’ actions violated
federal law.
III. STANDARD OF REVIEW
We review the trial court’s grant of a summary judgment de novo. Ferguson v.
Bldg. Materials Corp. of Am., 295 S.W.3d 642, 644 (Tex. 2009) (per curiam) (citing Tex.
Mun. Power Agency v. Pub. Util. Comm’n of Tex., 253 S.W.2d 184, 192 (Tex. 2007)). We
consider all the evidence in the light most favorable to the nonmovant, crediting evidence
favorable to the nonmovant if a reasonable factfinder could, and disregarding contrary
evidence unless a reasonable factfinder could not. See Mack Trucks, Inc. v. Tamez, 206
2
The defendants had filed counterclaims for breach of contract and for declaratory judgment, but
nonsuited these claims after they prevailed in their summary-judgment motion.
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S.W.3d 572, 582 (Tex. 2006). We must affirm the summary judgment if any of the
movant’s theories presented to the trial court and preserved for appellate review are
meritorious. Provident Life & Accident Ins. Co. v. Knott, 128 S.W.3d 211, 216 (Tex.
2003).
The movant for traditional summary judgment has the burden of showing that there
is no genuine issue of material fact and that it is entitled to judgment as a matter of law.
TEX. R. CIV. P. 166a(c); Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289
S.W.3d 844, 848 (Tex. 2009). A defendant who moves for traditional summary judgment
must conclusively negate at least one essential element of each of the plaintiff’s causes of
action or conclusively establish each element of an affirmative defense. Frost Nat’l Bank
v. Fernandez, 315 S.W.3d 494, 508 (Tex. 2010). Evidence is conclusive only if
reasonable people could not differ in their conclusions. City of Keller v. Wilson, 168
S.W.3d 802, 816 (Tex. 2005). Once the defendant establishes its right to summary
judgment as a matter of law, the burden shifts to the plaintiff to present evidence raising a
genuine issue of material fact. Centeq Realty, Inc. v. Siegler, 899 S.W.2d 195, 197 (Tex.
1995). On appeal, the summary-judgment movant still bears the burden of showing that
there is no genuine issue of material fact and the movant is entitled to judgment as a matter
of law. Rhone-Poulenc, Inc. v. Steel, 997 S.W.2d 217, 223 (Tex. 1999).
IV. ANALYSIS
Texas recognizes a cause of action for shareholder oppression. See Ritchie v.
Rupe, 339 S.W.3d 275, 289 (Tex. App.—Dallas 2011, pet. filed) (stating Texas law
authorizes a trial court to order a buyout of an oppressed minority shareholder as an
equitable remedy for shareholder oppression); Redmon v. Griffith, 202 S.W.3d 225, 234
(Tex. App.—Tyler 2002, pet. denied); Willis v. Donnelly, 118 S.W.3d 10, 32 n.12 (Tex.
App.—Houston [14th Dist.] 2003) (noting definition of “oppressive conduct”), aff’d in
part, rev’d in part on other grounds, 199 S.W.3d 262 (Tex. 2006); Willis v. Bydalek, 997
S.W.2d 798, 801 (Tex. App.—Houston [1st Dist.] 1999, pet. denied) (recognizing the
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existence of a shareholder-oppression cause of action); Davis v. Sheerin, 754 S.W.2d 375,
381 (Tex. App.—Houston [1st Dist.] 1988, writ denied) (recognizing that the Texas
Business Corporation Act provides a cause of action based on oppressive conduct). The
doctrine of shareholder oppression protects the close corporation minority stockholder
from the improper exercise of majority control. Allen v. Devon Energy Holdings, L.L.C.,
No. 01-09-00643-CV, 2012 WL 880623, at *25 (Tex. App.—Houston [1st Dist.] March 9,
2012, no pet. h.).
There are two non-exclusive definitions of shareholder oppression:
(1) majority shareholders’ conduct that substantially defeats the minority’s
expectations that, objectively viewed, were both reasonable under the
circumstances and central to the minority shareholder’s decision to join the
venture; or
(2) burdensome, harsh, or wrongful conduct; a lack of probity and fair
dealing in the company’s affairs to the prejudice of some members; or a
visible departure from the standards of fair dealing and a violation of fair
play on which each shareholder is entitled to rely.
Redmon, 202 S.W.3d at 234 (quoting Willis, 997 S.W.2d at 801). “A claim of oppressive
conduct can be independently supported by evidence of a variety of conduct.” Id. (citing
Davis, 754 S.W.2d at 381). “Because any one of a variety of activities or conduct can give
rise to shareholder oppression, the fact that there may be a lack of evidence to support the
existence of one such activity does not defeat the claim so long as there is evidence to
support another such instance of conduct occurred.” Id. at 234 n. 3. Therefore, to be
entitled to summary judgment, the defendants in a shareholder oppression suit must
conclusively prove that their conduct does not fall within either definition.
Oppressive conduct is an independent ground for relief that does not require a
showing of fraud, illegality, mismanagement, wasting of assets, or deadlock. Davis, 754
S.W.2d at 381–82. In deciding whether conduct rises to the level of oppression, we
exercise caution, balancing the minority shareholder’s reasonable expectations against the
corporation’s need to exercise its business judgment and run its business efficiently;
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however, we take a broad view of oppressive conduct to a shareholder in a closely held
corporation, where oppression may more easily be found. Redmon, 202 S.W.3d at 234;
Willis, 997 S.W.2d at 801; Davis, 754 S.W.2d at 381.
Liability for shareholder oppression may occur when controlling shareholders
squeeze-out a minority shareholder from the business returns but continue to share in the
corporate earnings themselves. Allen, 2012 WL 880623, at *25; Redmon, 202 S.W.3d at
235.
While disputed in part, Feldman presented the following summary judgment
evidence:
Doctors Kim, Pandya, McDonald, and Stern became dissatisfied with the
way in which HUPPA’s revenues and expenses were allocated because they
believed that Feldman had been overcompensated in the past.
Their dissatisfaction grew stronger when Feldman announced his plan to
retire.
They then voted to change the allocation method to use one set of criteria
when allocating expenses, but different criteria when allocating revenue.
Feldman’s associates took this action knowing that it would increase their
returns at Feldman’s expense—literally.
Although HUPPA was economically profitable in 2008, Feldman’s
associates caused HUPPA to refuse to repay half of the funds it had
borrowed from Feldman.
Feldman’s associates also caused Yale Street to stop paying him his share of
the rent on the building it leased to HUPPA.
When this evidence is viewed in the light most favorable to Feldman, it cannot be
said that, as a matter of law, the defendants’ conduct falls outside the definition of
shareholder oppression. We therefore conclude that the defendants failed to meet their
summary judgment burden. See Redmon, 202 S.W.3d at 236.
The defendants’ arguments to the contrary are not persuasive. They contend that
their actions were not oppressive because they voted to apportion expenses equally among
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the owners. This method, however, is—and was designed to be—inconsistent with the
method for allocating revenue, placing Feldman in the position of subsidizing returns for
his associates while receiving none himself. This fact, even if taken alone, is sufficient to
defeat summary judgment. See id. at 235–36.
The defendants also argue that HUPPA was not intended to be a passive investment
vehicle, but instead was founded on the assumption that its owners would continue actively
practicing medicine. There is summary judgment evidence to raise a fact issue on this
assumption. HUPPA is in the business of delivering medical services that are ancillary to
its owners’ medical practices and that none of its owners perform. Moreover, HUPPA’s
organizational documents require only that an owner be a licensed physician, and the
defendants cite no evidence or authority that a person who retires from the active practice
of medicine ceases to be a licensed physician.3
The defendant physicians additionally contend that they changed HUPPA’s
allocation methods “in response to a perceived unfairness” in that they believed that
Feldman had been overcompensated in the past. They maintain that the question of
whether the various allocation methods that HUPPA has used actually are unfair “is a
matter of business judgment for the members to decide through their voting.” In effect,
they assert that “fairness is in the eye of the beholder,” and is to be determined from the
point of view of the very individuals whose conduct is alleged to be unfair. We disagree.
“Shareholder oppression” is defined in objective terms rather than by the perception of the
majority that are claimed to benefit from the alleged oppression. See Willis, 997 S.W.2d
at 801.
3
HUPPA’s Articles of Association provide, “Each of the original members of the association is
licensed to perform the type of professional service for which the association is formed.” Under its
bylaws, “Only natural persons who are duly licensed to practice medicine in the State of Texas and no other
person or party shall be qualified to be a member . . . of the Association and to hold shares representing
ownership interests therein.” Finally, the Buy-Sell Agreement between the owners does not list retirement
from the active practice of medicine as an event that gives HUPPA or the other owners the preemptive right
to force the sale of the retiring owner’s shares.
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Finally, each of the defendants’ arguments fails to account for a critical and
undisputed fact: Feldman’s associates did not merely change HUPPA’s expense-allocation
method; they also caused HUPPA to stop repaying funds borrowed from Feldman, and
caused Yale Street and the Management Company to stop paying Feldman his share of the
rent—even though these are separate transactions from the allocation of HUPPA’s revenue
and expenses.
Viewing the evidence favorably to Feldman as the summary judgment respondent,
we hold that the defendants failed to prove as a matter of law that they did not commit
shareholder oppression. We therefore sustain Feldman’s second issue.
V. CONCLUSION
Because the defendants failed to meet their summary judgment burden to establish,
as a matter of law, that their conduct did not fall within either definition of shareholder
oppression, we reverse the trial court’s summary judgment and remand the case without
addressing the remaining issues. See TEX. R. APP. P. 47.1.
/s/ Tracy Christopher
Justice
Panel consists of Chief Justice Hedges, Justice Christopher, and the Honorable Robert
Schaffer, Judge of the 152nd District Court of Harris County, sitting by assignment
pursuant to section 74.003(h) of the Government Code. See TEX. GOV’T CODE ANN.
§ 74.003(h) (West 2005).
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