Mallinga v. Harvey Family Medical Center

FOURTH DIVISION
December 11, 1997




No. 1-96-1387

STEPHEN MALLINGA, ) Appeal from the
) Circuit Court of
Plaintiff-Appellant, ) Cook County.
)
v. )
)
HARVEY FAMILY MEDICAL CENTER, )
SOUTH SHORE MEDICAL GROUP, )
TERROLD B. BUTLER, LAVERNE A. )
CURRIE and LOWELL M. ZOLLAR, ) Honorable
and CHICAGO HMO, LTD., ) Ellis Reid,
) Judge Presiding.
Defendants-Appellees. )


JUSTICE SOUTH delivered the opinion of the court:

Plaintiff filed a complaint against defendants, Harvey
Family Medical Center, South Shore Medical Group, Terrold B.
Butler, Laverne A. Currie, Lowell M. Zollar and Chicago HMO,
Ltd., alleging that defendants greatly diminished corporate
assets resulting in great personal gain to themselves and to the
detriment of plaintiff, and that defendants failed to provide
compensation to plaintiff for medical services he rendered to
health maintenance organization patients. Harvey Family Medical
Center and Chicago HMO, Ltd., were voluntarily dismissed from the
litigation. On October 27, 1993, the remaining defendants moved
to strike counts I and II of the complaint. The court entered an
order dismissing count I of the complaint with prejudice and
count II without prejudice with leave for plaintiff to file an
amended count II.
On November 3, 1993, plaintiff filed an amended complaint.
Defendants filed a motion to strike and dismiss plaintiff's
amended complaint, and the court granted defendants' motion with
prejudice on December 14, 1993. Plaintiff filed a motion to
reconsider and for leave to file a second amended complaint on
January 13, 1994. On March 29, 1994, the court denied
plaintiff's motion for leave to file a second amended complaint
but granted plaintiff leave to file a third amended complaint.
Plaintiff filed a third amended complaint on April 4, 1994,
and the cause proceeded to trial, after which the court entered
judgment in favor of plaintiff for $18,613. Thereafter,
plaintiff filed a motion to reconsider alleging that the judgment
was substantially lower than the damages proven. On March 12,
1996, the circuit court denied plaintiff's motion to reconsider
the judgment. This appeal followed. We affirm as modified.
In 1983, managed health care and health maintenance
organizations (HMOs) were in their initial stages. In order to
provide adequate care to their subscribers, HMOs would only
contract with organizations that could provide a group of doctors
that offered a full range of primary care services and to whom
the HMO would issue one monthly check.
In order to procure such contracts, on June 16, 1983,
plaintiff and the three individual defendant doctors formed a
corporation called the South Shore HMO Management Group, Inc. (SS
HMO). Each of them was a 25% shareholder of SS HMO. The
articles of incorporation stated the original purpose of SS HMO
as follows:
"The South Shore HMO Management Group, Inc. is
a management group organized and incorporated
to assist in the coordination and
administration of non-medical activities for
health maintenance organizations."
Shortly after the formation of SS HMO and procuring a
contract with Chicago HMO, the doctors each formed a primary care
unit (PCU). Dr. Zollar's and Dr. Butler's PCUs each offered
pediatric care, Dr. Currie's and plaintiff's PCUs offered adult
care, and plaintiff offered obstetrical/gynecological (OB/GYNE)
care. Each PCU maintained a separate and independent medical
practice with a separate lease, legal status, expenses,
malpractice insurance, medical supplies, medical equipment and
the like.
SS HMO was a medical management and administrative entity
that maintained a separate and independent office from the PCUs.
SS HMO had a separate lease, expenses, personnel and office
equipment. Its office contained no medical equipment or
examination rooms but was equipped solely to serve the PCUs.
In 1984, as a result of a telephone conversation Dr. Zollar
had with the Illinois Secretary of State's office, the name of SS
HMO was changed to South Shore Medical Group, P.C., an Illinois
corporation (SSMG), and the purpose of the corporation was
amended, in relevant part, as follows:
"To practice the profession of medicine,
rendering that type of professional services
and services ancillary thereto. All
shareholders, directors and officers must be
licensed to practice the profession for which
the corporation is organized."

SSMG operated exactly the same as SS HMO. It continued to serve
the PCUs in the same manner. The shareholders and directors
remained the same, and SSMG continued to operate from the same
location as SS HMO.
In 1985, plaintiff informed the other three doctors that he
no longer wanted to function as a primary care physician.
Thereafter, plaintiff brought in Dr. Thomas to run his PCU, and
plaintiff became an OB/GYNE consultant to SSMG. Dr. Thomas ran
plaintiff's PCU for approximately one year and then left.
Following Dr. Thomas' departure, plaintiff elected not to
bring in another doctor to run his PCU but instead turned over
all of his patients to Dr. Currie. There was no consideration
paid by Dr. Currie to plaintiff for these patients, and no
writing exists as to what, if any, understanding they had.
Plaintiff, however, argues that there was an understanding
between him and the other three doctors that they would refer all
OB/GYNE HMO patients to him, with the exception of patients who
objected to Jackson Park Hospital, which was where plaintiff was
affiliated.
Between 1985-86, SSMG relocated it's office to 2011 East
75th Street, Chicago, Illinois. Each PCU also moved to the same
location. SSMG and each of the PCUs executed separate leases and
continued to maintain separate identities.
In 1987, the Secretary of State of Illinois, unbeknownst to
the four doctors, administratively dissolved SSMG for failure to
file its annual reports and pay its annual franchise tax.
Nevertheless, the doctors continued to operate under the mistaken
belief that SSMG was a corporation in good standing.
In April 1990, plaintiff resigned as chairman of the
department of obstetrics and gynecology at Jackson Park Hospital.
June Dunne, an employee of SSMG, testified that she
attempted to contact plaintiff for a referral from Dr. Currie's
PCU in 1991. Ms. Dunne was notified by plaintiff's former
secretary that plaintiff had resigned from Jackson Park Hospital.
Ms. Dunne was not given any forwarding address for plaintiff, and
she was unable to locate him. Ms. Dunne also attempted to
contact plaintiff for medical treatment during her own pregnancy
but was unsuccessful.
Ms. Dunne further testified she was responsible for
coordinating and forwarding notices of shareholders and directors
meetings for SSMG, and in April or May of 1991, she tendered
notice of a joint board of directors and shareholders meeting for
SSMG to all four shareholders. Notice of the meeting was mailed
to plaintiff's residence because Ms. Dunne did not have his
office location.
Dr. Zollar testified that during this same time period he
also attempted to contact plaintiff in writing and by telephone
on at least three occasions but without success.
In May 1991, a joint meeting of SSMG was held. Drs. Zollar,
Butler and Currie were present. Plaintiff was not present.
During this meeting, SSMG was restructured. Although plaintiff
remained a 25% shareholder in SSMG, only Drs. Zollar, Butler and
Currie were nominated and elected as directors and officers.
By 1993, defendants had become aware of the administrative
dissolution of the original SSMG and formed a new corporation
without plaintiff. The name of the corporation remained as SSMG.
Further, the assets of the original SSMG, which included
plaintiff's 25% shareholder interest, were converted into the new
corporation.
It is undisputed that there was no contact between plaintiff
and any of the defendant doctors from May 1991 through the date
of the filing of this suit. It is also undisputed that plaintiff
has an interest in the converted assets of the original SSMG.
The central issue to be resolved by this court is the scope and
valuation of that interest.
Plaintiff first argues that subsequent to the Secretary of
State's administrative dissolution of SSMG, plaintiff and the
defendants operated as a partnership. Plaintiff notes, correctly
so, that the requisites of a partnership are that the parties
have joined together to carry on a trade or venture for their
common benefit, that each contributed property or services, and
that they have a community of interest in the profits; as between
the parties, the existence of a partnership is a question of
intent based on all the facts and circumstances. Bonni Seidmon
v. Mark Harris, 172 Ill. App. 3d 352, 526 N.E.2d 543 (1988).
Defendants do not deny that the legal form of SSMG after the
administrative dissolution was that of a partnership but argue
that plaintiff voluntarily withdrew himself as a partner.
The record makes clear that from the time SSMG was initially
formed, plaintiff was a 25% shareholder. After 1984, plaintiff
closed his PCU, turned over all of his patients to Dr. Currie,
and established an outside OB/GYNE consultant relationship in
order to receive referrals from SSMG. These actions did not
negate or dissipate plaintiff's 25% equity interest in SSMG.
Furthermore, the dissolution of SSMG in 1987 did not destroy
plaintiff's 25% equity interest. Subsequent to that
administrative dissolution, plaintiff retained a 25% equity
interest in the partnership.
Nevertheless, plaintiff did not become a shareholder of the
new corporation formed in 1993 and has no interest in the new
SSMG. In a derivative suit, a shareholder derives the power to
sue directly from the unexercised authority of the corporation.
Mann v. Kemper Financial Cos., 247 Ill. App. 3d 966, 618 N.E.2d 317 (1992). Since plaintiff is not a shareholder of the new
SSMG, he lacks shareholder standing to bring a derivative action
against the corporation.
However, majority stockholders who, after dissolution,
convert corporate property and assets to their own use become
equitable trustees of that property for the benefit of corporate
creditors. Mid-American Elevator Co. v. Norcon, Inc., 287 Ill.
App. 3d 582, 679 N.E.2d 387 (1997). After the corporate
creditors rights are satisfied, shareholders are entitled to the
residue of corporate funds. Lasday v. Weiner, 273 Ill. App. 3d
461, 652 N.E.2d 1198 (1995). Thus, as a 25% shareholder of the
original SSMG, plaintiff is entitled to a 25% share of the
original SSMG assets.
Plaintiff next contends that SSMG was a medical practice and
that the assets of SSMG must be valued on that basis. A
reviewing court will not disturb the court's findings unless such
a finding is against the manifest weight of the evidence. Whyte
v. Estate of Whyte, 244 Ill. App. 3d 746, 614 N.E.2d 372 (1993).
Review of the record indicates that SSMG continuously maintained
separate leases, expenses, personnel and office equipment from
the PCUs, which treated HMO patients. SSMG had no medical
equipment, examination rooms or doctors on site. Its operations
were limited to administrative work, quality assurance, peer
review, file storage and liaison between the PCUs and various
HMOs.
Based upon the record, there was sufficient evidence
supporting the court's finding that SSMG operated solely as a
flow-through service corporation and not as a medical practice.
Thus, it cannot be held that the court's finding on this issue
was against the manifest weight of the evidence.
Plaintiff further argues that the court abused its
discretion by failing to accept the valuation placed on SSMG
assets by the plaintiff's expert. Stock valuation becomes
increasingly difficult and complex where, as in this case, the
company at issue is closely held and its stock is not publicly
traded. Superior Investments & Development Corp. v. Devine, 244
Ill. App. 3d 759, 614 N.E.2d 302 (1993).
While there are no precise rules for determining the fair
market value of a company's stock, courts have held that a proper
valuation mandates the exercise of a court's judgment after
considering all relevant factors. Superior, 244 Ill. App. 3d
759, 614 N.E.2d 302. Factors to be considered include the book
value of the stock, the nature of the business, the economic
outlook of the industry, the earnings capacity of the company,
the possible goodwill of the company and the market price of the
stock. Stewart v. D.J. Stewart & Co., 37 Ill. App. 3d 848, 346 N.E.2d 475 (1976). The particular weight to be accorded each
factor is particularly a matter for the trial judge. Taxy v.
Worden, 181 Ill. App. 3d 97, 536 N.E.2d 901 (1989).
While appraisals are to be considered by the court in
arriving at a fair market value, they are not binding as a matter
of law and are but one source of information to be weighed and
evaluated. Moreover, courts have properly rejected the
appraisals of the parties where the record reveals that such
appraisals are not completely accurate. Independence Tube Corp.
V. Levine, 179 Ill. App. 3d 911, 535 N.E.2d 927 (1988).
In the present case, plaintiff's expert, John Hayes, based
his valuation of plaintiff's claim of loss of future profits on
the basis that plaintiff had an exclusive right to all referrals
of OB/GYNE patients SSMG received. The evidence, however, did
not support plaintiff's contention that an exclusive OB/GYNE
referral agreement existed. There was no writing establishing an
exclusive referral agreement.
Further, the evidence established that OB/GYNE referrals
were also made to several other outside consulting doctors.
Therefore, plaintiff's valuation based upon an exclusive right to
all SSMG referrals of OB/GYNE patients is not accurate. On this
basis, the court properly rejected plaintiff's valuation of SSMG.
Just as the court may adopt the valuation rendered by an
appraiser, it may also reject all outside appraisals and render
its own per-share value for the stock at issue. Institutional
Equipment & Interiors, Inc. v. Hughes, 204 Ill. App. 3d 922, 562 N.E.2d 662 (1990). After evaluating the evidence presented, the
court declined to accept the valuation of either party. Rather,
the court chose to render its own value of plaintiff's claim
based upon compensation plaintiff could have realistically
expected for actual work done in either a consultant or referral
relationship with SSMG. We find no abuse of discretion in the
court's action.
However, we do find that, in addition to the court's award,
plaintiff is entitled to a 25% share of the profits defendants
divided in 1992. The record reflects that plaintiff received
OB/GYNE consultant payments from SSMG through 1991. In 1992,
however, plaintiff's OB/GYNE referrals from SSMG were
substantially reduced and ultimately terminated.
Defendants testified that they were collectively paid
approximately $110,000 during 1992. Although defendants referred
to the payments as director fees, they also acknowledged that
this was merely a way of dividing the profits of SSMG. Because
plaintiff retained a 25% equity interest in 1992, and OB/GYNE
consultant referrals from SSMG were substantially reduced, we
find that plaintiff is entitled to a 25% share of the $110,000
defendants were collectively paid in 1992.
Finally, plaintiff contends that the court erred in finding
that SSMG was a flow-through corporation when, during the early
stages of the trial, the court represented that SSMG was a
medical practice and plaintiff relied on the court's earlier
representation. In a bench trial, it is the court's function to
weigh the evidence and make findings of fact. Resolution Trust
Corp. v. Hardisty, 269 Ill. App. 3d 613, 646 N.E.2d 628 (1995).
The burden of producing evidence, as well as persuading the trier
of fact that certain facts are true, is on the parties. Ambrose
v. Thornton Township School Trustees, 274 Ill. App. 3d 676, 654 N.E.2d 545 (1995).
In the instant case, plaintiff was aware that the purpose of
SSMG was a contested issue. Therefore, plaintiff had a duty to
present evidence to prove his position. Moreover, the record
indicates that before plaintiff rested, the court expressed its
opinion that SSMG was a flow-through business. Thus, plaintiff
had an opportunity to present additional evidence to support his
position that SSMG was a medical practice but failed to do so.
In view of the facts of record, the court did not err in finding,
after weighing all the evidence presented, that SSMG was a flow-
through business.
For the foregoing reasons, the order of the circuit court
awarding plaintiff $18,613 is affirmed. In addition, plaintiff
is awarded $27,500, representing a 25% share of the $110,000 that
defendants were collectively paid in 1992. Accordingly,
plaintiff is awarded a total of $46,113 against all defendants,
jointly and severally.
Affirmed as modified.
HOFFMAN, P.J., and HOURIHANE, J., concur.