CYNTHIA REUTTER v. MICHAEL E. DALSEY, D.O.

(NOTE: The status of this decision is .)
 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-2610-07T32610-07T3

CYNTHIA REUTTER, Individually

and as Executrix of the ESTATE

OF THOMAS REUTTER, D.O.,

deceased,

Plaintiff-Respondent,

v.

MICHAEL E. DALSEY, D.O., REUTTER-

DALSEY ASSOCIATES, P.A., a New

Jersey Professional Association,

BECKETT FAMILY PRACTICE, a New

Jersey Partnership, and DEPTFORD

FAMILY PRACTICE, a New Jersey

Partnership,

Defendants-Appellants.

_______________________________________

 

Argued November 18, 2008 - Decided

Before Judges Winkelstein, Fuentes and Gilroy.

On appeal from Superior Court of New Jersey,

Law Division, Gloucester County, Docket No.

L-492-05.

Douglas F. Johnson argued the cause for

appellants (Earp Cohn, attorneys; Mr. Johnson

and Kristin J. Telsey, on the brief).

David M. Hollar (Villari, Brandes & Kline) of

the Pennsylvania Bar, admitted pro hac vice,

argued the cause for respondent (Villari, Brandes &

Kline, attorneys; Paul D. Brandes, Peter M. Villari

and Mr. Hollar, on the brief).

PER CURIAM

Defendants Dr. Michael Dalsey and Reutter-Dalsey Associates, P.A., ("the medical practice") appeal from the order of the Law Division granting the summary judgment motion filed by plaintiff Cynthia Reutter, individually and in her capacity as the executrix of the Estate of Thomas Reutter, and denying defendants' cross-motion seeking similar relief in their favor. The issue before the trial court concerned the compensation that plaintiff is entitled to receive under a Shareholders Agreement that called for the purchase of the shares owned by the late Thomas Reutter in the medical practice he formed with Dalsey.

The trial court held that the Shareholders Agreement was a unitary contract, unambiguously providing that decedent's shares be valued through the life insurance clause in the Shareholders Agreement, as opposed to their book value. In reaching this conclusion, the court rejected defendants' argument that the Shareholders Agreement and the Deferred Compensation Agreement were intended by the principals to create a comprehensive benefits scheme, allowing for a maximum payment of $400,000.

In this appeal, defendants argue that the trial court erred by denying their application to present parol evidence to show the true intent of the principals at the time they signed these two agreements. Specifically, defendants sought to present the testimony of the attorney who drafted both the Shareholders Agreement and the Deferred Compensation Agreement, and a letter he wrote contemporaneous to the drafting of these two agreements. Through this letter, the attorney emphasized that the purpose of these agreements was to create a maximum benefits package of $400,000, available to the principal leaving the medical practice, by either retirement, disability, or death.

After reviewing the record before us, and in light of prevailing legal standards, we agree with defendants' position and reverse. Under the standards established by the Supreme Court in Conway v. 282 Corporate Center Associates, 187 N.J. 259 (2006), defendants are entitled to present parol evidence to show what the principals intended when they entered into these agreements. Summary judgment was thus improvidently granted.

I

For nearly thirty years, Drs. Reutter and Dalsey were the sole officers and directors of Reutter-Dalsey, a medical practice and provider of professional medical services. In the early 1990's, the two physicians met with their corporate attorney Lee Sherman and retained him to draft a coordinated plan of benefits, triggered by the purchase of the shares owned by a physician who separated from the practice by retirement, disability, or death. The goal was to minimize the tax consequences associated by such separation, from the perspective of both the recipient of the benefits, and the person or entity paying it.

By letter dated March 31, 1993, Sherman transmitted to the principals originals and copies of a Shareholders Agreement and a Deferred Compensation Agreement, which he prepared "in accordance with our prior communications." Sherman also included "additional copies of this letter so that each of you shall have a set of documents and explanations." (Emphasis added). The letter, consisting of eleven single-spaced, typewritten pages, describes in detail the tax considerations that drove the drafting of both agreements. Relevant to the issues presented here, the letter contained the following description with respect to the benefits available under the agreements:

GENERAL CONCEPT

The result we are attempting to achieve on your behalf is to take a portion of what you would like to receive from your Corporation when you withdraw or become long term disabled (so that you will effectively not return to the Corporation), and allocate it between valuation of stock (a non-deductible expenditure by the Corporation upon purchase of your stock thereby creating taxes for the Corporation when paying for the stock) and deferred compensation, a deductible item.

Consequently, if we allocate your total numbers between stock and deferred compensation we would hope to achieve a portion of the money a selling Shareholder receives as a tax deductible item for the Corporation with the resultant effect being a significant federal tax savings for the Corporation. In any event, we would still have to have a reasonable valuation attributable to stock, but since there are so many theories at determining value in close corporations such as yours, the most conservative determination for that number with a larger number being attributable to rewarding your personal efforts on behalf of the Corporation through deferred compensation, is what we are trying to achieve.

The Deferred Compensation Agreements tie in with the Shareholders Agreement in that, if a Shareholder terminates his relationship with the Corporation because of disability for eighteen months or retirement at age fifty-five or older, the Shareholder being bought out receives payments pursuant to both the Shareholders Agreement and the Deferred Compensation Agreement. In the Shareholders Agreement, the value of the stock is based upon book value only. Because each Shareholder owns 50% of the stock, upon a buy-out pursuant to the Shareholders Agreement, the purchasing Shareholder or Corporation would have to pay the seller an amount based on 50% of the total book value of the Company. We have allocated the amount of money which would be attributable to the goodwill of the Corporation (in a valuation of the Company's stock) to the Deferred Compensation Agreements. (Emphasis added).

. . . .

If a Shareholder leaves in circumstances other than through disability or retirement, there is no deferred compensation and that Shareholder will receive a buy-out of the stock only at a value much less than the value of the combined stock purchase and deferred compensation. This is appropriate in all circumstances except in the event of the death of a Shareholder. Death creates additional tax planning for us since if a death buy-out is pursuant to the Shareholders Agreement, the deceased Shareholder's estate does not have to pay income tax on the purchase price because the estate gets a step up in the basis of the stock so there is no gain and hence no tax is generated. However, if death were included in the Deferred Compensation Agreement the estate of the deceased Shareholder would have to pay income taxes on the money as it is received. Thus, you can easily see that from the point of view of the estate it is best to make the buy-out pursuant to the Shareholders Agreement. What our office recommends with regard to this issue is to have sufficient insurance to fund a death buy-out which pays the estate the combined value of a stock buy-out and the deferred compensation but to place that buy-out provision in the Shareholders Agreement to avoid income tax to the estate. If there is sufficient life insurance the Shareholder's estate is protected since it will be receiving full value.

If, for any reason, you do not have sufficient insurance proceeds to fund both the stock purchase and the deferred compensation and you do not plan to purchase sufficient life insurance by the time you execute these Agreements please notify me immediately.

The two physicians signed both agreements on November 16, 1994. Under the Deferred Compensation Agreement, the principal separating from the medical practice due to either disability for more than eighteen months or retirement at age fifty-five or older, would receive $6,570.00 per month, for a maximum period of sixty months. The first installment would be payable on the first day of the month following the principal's separation. The principal leaving the medical practice by retirement or disability is required to offer his shares of stock to the remaining principal/shareholder.

Under paragraph 6(a) of the Shareholders Agreement, the price of those shares must be either book value, or at the terms offered by the seller, whichever is less. It is undisputed that at all times relevant to this case, the shares owned by decedent had a negative book value. Thus, the maximum benefits payable to a principal under the Deferred Compensation Agreement is $394,200 ($6,570 x 60 payments).

The Deferred Compensation Agreement does not include a provision covering the death of a principal who is still active in the practice. On its face, the Agreement is intended to apply only to scenarios in which a principal has decided to retire or otherwise separate from the practice due to disability for a period of eighteen months. If the retired/disabled principal dies before collecting all of the sixty $6,570 monthly installments, the Agreement directs that the remaining payments be paid to his designated beneficiary.

The Deferred Compensation Agreement included an arbitration provision giving its signatories the right to submit to arbitration any controversy or claim arising out of, or related to, the agreement. The arbitration clause also provided that "a judgment upon the award may be entered in any court having jurisdiction thereof."

In contrast to the Deferred Compensation Agreement, the Shareholders Agreement speaks directly to the scenario involving the death of a principal still active in the medical practice. Under paragraph 5, upon the death of a shareholder, the surviving shareholder has thirty days to decide to exercise his option to purchase decedent's shares. If the surviving shareholder does not exercise his option within thirty days after death, the medical practice becomes obligated to purchase decedent's shares. Paragraph 6(b) fixed the purchase price of decedent's shares at book value.

Paragraph 6(e) of the Shareholders Agreement provides for a different method of valuation of the shares of a deceased shareholder. This valuation method ties the price of the shares to the proceeds of a policy insuring decedent's life.

Life Insurance. In the event that life insurance is purchased to fund the buy-out in this Agreement upon death, and in the further event that the life insurance proceeds less any estimated corporate tax attributable to those proceeds due to the Alternative Minimum Tax on Corporations ("AMT") if any, exceed the value determined pursuant to Paragraph 6(b) above (or in lieu thereof, the value determined pursuant to Schedule "B," as the case may be), the purchase price for the Decedent's stock shall be the amount of the insurance proceeds less any estimated corporate tax attributable to those proceeds due to the AMT.

The medical practice purchased three life insurance policies insuring the lives of the two principals. A policy issued on October 10, 1985, by National Life of Vermont, insures Dr. Dalsey in the amount of $100,000; a second policy issued on December 11, 1997, by CM Life Insurance Co., also insures Dr. Dalsey in the amount of $300,000; and a policy issued on December 15, 1997, by CM Life Insurance Co., insured Dr. Reutter in the amount of $300,000.

II

Against this backdrop, we next review the events that led to this litigation. By letter dated March 26, 2004, Dr. Reutter notified his medical practice and his life-long associate and colleague Dr. Dalsey, that he "became disabled on or about June 6, 2003." The letter continued: "I also hereby elect to retire effective immediately. I would appreciate you forwarding all amounts due to me under the deferred compensation agreement dated 11/16/94, the shareholder's agreement dated 11/16/94, and any other amounts and benefits to which I am entitled . . ."

Under paragraph 2 of the Shareholders Agreement, Dr. Dalsey had thirty days to exercise his option to purchase Dr. Reutter's shares. At the end of this thirty-day period, the medical practice would have been obligated to acquire the shares.

Dr. Reutter died on April 4, 2004. Because Dr. Reutter died before the end of Dr. Dalsey's thirty-day option period, Dr. Reutter's Estate became the legal owners of his shares in the medical practice. The Estate, acting through Dr. Reutter's widow, took the position that it was entitled to receive both the sixty monthly $6,570 installments due under the Deferred Compensation Agreement, and the $400,000 death benefit valuation under paragraph 6(e) of the Shareholders Agreement.

The matter came before the Law Division by way of plaintiff's motion for summary judgment. After considering the arguments of counsel, the court held in favor of plaintiff's position; invoking the arbitration provision in the Deferred Compensation Agreement, the court also directed that: (1) the dispute arising out of the Deferred Compensation Agreement be submitted to mandatory arbitration; and (2) the proceeds from the policy insuring decedent, which the court denoted as "$400,000 plus interest," be released to the Estate.

The claims arising out of the Deferred Compensation Agreement were decided at arbitration in plaintiff's favor. The arbitrator found that the Deferred Compensation Agreement is "completely integrated . . . unambiguous and render[s] any separate agreements irrelevant." The arbitrator emphasized that, on its face, the benefits payable under the Deferred Compensation Agreement were "independent of, and in addition to, any other employment agreement that may exist from time to time." The arbitrator thus awarded plaintiff the full sixty $6,570 installment payments, for a total of $394,200.

The matter finally returned to the trial court on January 5, 2007. After noting that the Shareholders Agreement makes "no provision for what occurred in this case, the retirement and then death within a week," the court concluded that plaintiff was entitled to recover both the benefits under the Deferred Compensation Agreement, (as previously ruled by the arbitrator), and the insurance proceeds under paragraph 6(e) in the Shareholders Agreement.

III

Defendants argue that the trial court erred by finding that parol evidence is not necessary to resolve this contractual dispute. We agree. From the record developed before the court, it is plausible to find that, from the planning stage through the actual execution of the documents, these two physicians intended that the Deferred Compensation Agreement and the Shareholder Agreement provide a safety net of benefits, consisting of a maximum award of approximately $400,000, in the event either one of them separated professionally from the other.

Counsel's detailed memorandum accompanying these two contracts was unmistakably intended to serve as an interpretive guide to decipher what these men intended to create when they commissioned Sherman to prepare these contracts. The probative value of this evidence is enhanced considerably by the fact that this letter was written contemporaneously with the drafting of the agreements. Equally as valuable is Sherman's deposition testimony, in which he states that it was never his purpose or intent, (consistent with the instructions he received from his clients), to create a benefits scheme in which the principal separating from the medical practice receives both the death benefit under paragraph 6(e) of the Shareholders Agreement, and the retirement benefit under the Deferred Compensation Agreement.

Our analysis here is informed by Conway, supra, 187 N.J. at 262, in which the Court expressly sanctioned the use of extrinsic evidence to explain a provision in a retainer agreement entitling an attorney to a bonus in a zoning case. By so doing, the Court reaffirmed the expansive and liberal standard used to determine the admissibility of extrinsic materials, as declared in Atlantic Northern Airlines, Inc. v. Schwimmer, 12 N.J. 293 (1953):

[e]vidence of the circumstances is always admissible in aid of the interpretation of an integrated agreement. This is so even when the contract on its face is free from ambiguity. The polestar of construction is the intention of the parties to the contract as revealed by the language used, taken as an entirety; and, in the quest for the intention, the situation of the parties, the attendant circumstances, and the objects they were thereby striving to attain are necessarily to be regarded. The admission of evidence of extrinsic facts is not for the purpose of changing the writing, but to secure light by which to measure its actual significance. Such evidence is adducible only for the purpose of interpreting the writing--not for the purpose of modifying or enlarging or curtailing its terms, but to aid in determining the meaning of what has been said. So far as the evidence tends to show, not the meaning of the writing, but an intention wholly unexpressed in the writing, it is irrelevant. The judicial interpretive function is to consider what was written in the context of the circumstances under which it was written, and accord to the language a rational meaning in keeping with the expressed general purpose.

[Conway, supra, 187 N.J. at 269 (quoting Schwimmer, supra, 12 N.J. at 301-02).]

When considered against this standard, Sherman's testimony as the drafter of these two contracts and his contemporaneous explanatory writing, are clearly admissible tools for ascertaining what the principals intended when they signed these agreements. It is reasonable to assume that neither the principals or the drafter of these agreements anticipated the scenario presented here: the death of a principal just nine days after serving his retirement notice.

When viewed together with the drafter's guide, acceptance of retirement benefits under the Deferred Compensation Agreement can be read as an election of benefits, binding the shareholder so choosing to a book-value method of valuation for the shares he owned at the time. It can be argued that the higher valuation method in paragraph 5(e) of the Shareholders Agreement is thus reserved to a principal who dies while still active in the practice.

Summary judgment must be granted "if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact challenged and that the moving party is entitled to a judgment or order as a matter of law." R. 4:46-2. To determine whether there exists a "genuine issue as to any material fact" the court must "consider whether the competent evidential materials presented, when viewed in the light most favorable to the non-moving party, are sufficient to permit a rational factfinder to resolve the alleged disputed issue in favor of the non-moving party." Coyne v. State Dep't of Transp., 182 N.J. 481, 490 (2005) (quoting Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995)). We review a trial court's grant of summary judgment by applying the same standards used by the trial court. EMC Mortgage Corp. v. Chaudhri, 400 N.J. Super. 126, 136 (App. Div. 2008) (citing Liberty Surplus Ins. Corp. v. Nowell Amoroso, P.A., 189 N.J. 436, 445-46 (2007)).

We are satisfied that defendants have presented sufficient evidence to survive summary judgment. Defendants must be given the opportunity to present extrinsic relevant evidence to assist the trier of fact in determining what these two physicians intended when they signed the two agreements at issue here. We are also satisfied that the arbitrator's award construing the Deferred Compensation Agreement in plaintiff's favor does not affect the trial court's authority to construe the Shareholders Agreement. The question before the trial court concerns only the interpretation of the Shareholders Agreement.

Reversed and remanded. We do not retain jurisdiction.

 

The use of the pronoun "we" refers to the law firm of Sherman, Silverstein, Kohl, Rose, & Podolsky.

Due to Dr. Reutter's deteriorating health at the time, defendants initially challenged the authenticity of this letter before the trial court. The issue was resolved at the arbitration of the Deferred Compensation Agreement.

(continued)

(continued)

16

A-2610-07T3

June 18, 2009