Suffolk Anesthesiology Assoc., P.C. v Verdone
Decided on April 25, 2012
Supreme Court, Suffolk County
Suffolk Anesthesiology Associates, P.C., by its Board of Directors consisting of ELLIOT ROSSEIN, M.D., ANTHONY BONANNO, M.D., BENJAMIN KIRSCHENBAUM, M.D., and JAMES SUAZO, M.D., et al., and OFFICE BASED ANESTHESIA, PLLC., and UNITED ANESTHESIA, P.C., Plaintiffs,
Matthew J. Verdone, D.O., Defendant.
MATTHEW J. VERDONE, D.O., individually and as a minority shareholder of SUFFOLK ANESTHESIOLOGY ASSOCIATES, P.C., OFFICE BASED ANESTHESIA, PLLC., and UNITED ANESTHESIA, P.C., Plaintiffs, -against-
SUFFOLK ANESTHESIOLOGY ASSOCIATES, P.C., by its Board of Directors consisting of ELLIOT ROSSEIN, M.D., ANTHONY BONANNO, M.D., BENJAMIN KIRSCHENBAUM, M.D., and JAMES SUAZO, M.D., et al., Defendants.
Robert M. Calica, Esq.
Rosenberg, Calica & Birney, LLP
100 Garden City Plaza, Suite 408
Garden City, New York 11530-3200
Thomas J. Spellman, Esq.
Devitt Spellman Barrett, LLP
50 Route 111, Suite 314
Smithtown, New York 11787
Paul B. Sweeney, Esq.
Certilman Balin Adler & Hyman, LLP
90 Merrick Avenue
East Meadow, New York 11554
Joanne L. Oweis, Esq.
Jaspan Schlesinger, LLP
300 Garden City Plaza
Garden City, New York 11530
Emily Pines, J.
DECISION AFTER TRIAL
In these two actions, joined for trial, the Plaintiffs in Action # 1, the Boards of Directors and Shareholders of three related companies dedicated to the practice of anesthesiology as well those same shareholders as individuals against a terminated member of the practice, seek a Declaratory Judgment setting forth that the termination of the Defendant in Action # 1 (Dr. Verdone) was "for cause", due to the Defendant's breach of contract, breach of fiduciary duty and tortious interference [*2]with the companies' business relations. Such a finding would result, according to Plaintiffs, in the Defendant's forfeiture of his Deferred Compensation under the parties' Employment Agreements. In connection therewith, Defendants in Action # 2 (the Shareholders of the three related entities) seek a concomitant declaration that under the parties' Shareholders' agreements, the termination of Dr. Verdone resulted in a "Call Event" requiring Dr. Verdone's turn over of shares in all the related entities and a finding that such, when viewed in light of the Dr. Verdone's material breach of the parties' Agreements, relinquishes the Defendant's rights to any further compensation and/or distributions from the three entities.
In his Counterclaims in Action #1 and his Plenary Action # 2, the Counterclaim- Defendant/Plaintiff, Dr. Verdone, a terminated employee of the three anesthesiology practices, seeks a declaration that his termination was not "for cause" and that such was motivated solely as a result of Defendant's role as a whistle blower against improper business practices and a vocal opponent to the purchase of an outside surgical facility as against the best interests of the subject companies. He asserts that in any event, the Defendants in Action # 2 have breached the parties' Shareholders and Employment Agreements by denying him both deferred compensation as well as shareholder distributions. Should the Court find for Dr. Verdone on these issues, he seeks both his deferred compensation under the Employment Agreements and his share of distributions and benefits under the Employment Agreements, from the date of his termination as well as a finding that he should continue in the future to receive the same. In addition, Plaintiff in Action # 2 sues derivatively on behalf of the related entities, for misappropriation of corporate assets as well as dissolution of the same. Defendants in Action #2 counterclaim against the Plaintiff in that action asserting entitlement to liquidated and/or actual damages as a result of Dr. Verdone's alleged breach of a non-solicitation provision contained within the Employment Agreements.
In a third action, which was severed by this Court, the terminated anesthesiologist seeks an accounting of the entities' income and expenses over the years in question, which would require another trial should this Court find that he is entitled to the ongoing distributions he seeks.
The parties herein have stipulated that Dr. Verdone is entitled to return of his investment in an outside facility discussed in this Decision.
Although the Appellate Division, Second Department has upheld Dr. Verdone's termination "without cause" at 83 AD3d 1152, 925 NYS 2d 898 (2011), it left open all the substantive issues concerning the remaining claims in this case.
The three entities that are at the core of these joined actions are Suffolk Anesthesiology P C ("SAA"), Office Based Anesthesia, PLLC ("OBA"), and United Anesthesia PC ("United"). At all relevant times in the context of this litigation, the same twelve shareholders were the owners of each of these entities, all of which carried out the practice of anesthesiology within Suffolk County and the metropolitan area. The Board of Directors of the three organizations at the times in question consisted of Elliot Rossein, MD, Anthony Bonanno, MD, Benjamin Kirschenbaum, MD and James Suazo, MD. The terminated shareholder who is the Defendant in Action #1 and the Plaintiff in [*3]Action # 2 is Matthew J. Verdone D. O.
During eleven days, the Court heard from fifteen witnesses and admitted well over one hundred exhibits into evidence. The Court had ample opportunity to view each witness and adjudge his/her credibility.
Steven Stolzenberg ("Stolzenberg"), CPA, provided tax and other accounting and bookkeeping services for the related entities during the relevant period between 2002 and 2008. He was aware that SAA provided anesthesiology services to an ambulatory surgery center located in the Bronx, known as Surgicare. According to the witness, sometime in 2006, he learned from his clients that the Surgicare facility, then owned by gastroenterologists, was being placed up for sale and that SAA's contract with that facility (Plaintiff's 2) , scheduled to expire in July, 2008, would likely end. He thereafter learned that a purchase agreement was entered into between the individuals, who were the shareholders of SAA and Surgicare, for the purchase of such facility by the individuals. The purchase agreement is dated April 5, 2007 but does not set forth when it was signed; however, it does contain the signatures of all twelve shareholders (Plaintiff's 14). According to Stolzenberg, the purchasers were to acquire the stock of the Surgicare for $6.1 million, and would be liable for the existing debt of the entity in the amount of $1.3 million, requiring a total payment of $7.4 million. The purchase agreement called for progress payments on an ongoing basis and had a purchase deadline of October 6, 2008 (Plaintiff's 14). Stolzenberg set forth that by the Summer of 2008 he was the CFO of the related entities and the shareholders solicited his aid in seeking bank financing for approximately $5.3 million, constituting the remainder of the purchase price at the time.
Stolzenberg claims that the four lending institutions he contacted insisted that one of the institutions, rather than the twelve individuals, be named as the borrower on the loan based upon their assets, and that the individual shareholders would act as guarantors. He set forth that it was his recommendation to the shareholders of the related entities that OBA, the one LLC, be the listed borrower of the funds, because it is treated like a partnership for tax purposes and would thereby result in lowering the taxes due by the members on distributions in excess of the tax basis. Under the plan he was discussing with the Chase JP Morgan Bank, the money would be borrowed by OBA, distributed to the members, and then the members of the PLLC would utilize the funds to purchase the surgery center. He states further that the distribution by OBA shows up on the members' tax statements in their K-1's and, therefore, in his opinion, the loan ultimately is to the individuals. The proposals he received were placed into evidence dated from 9/9/08 through 9/19/08 and all required one of the corporate entities to act as the borrower with the other corporations and the twelve individuals acting as guarantors (Plaintiffs' 37, 38, 39, 46).
According to Stolzenberg, the best response he received was from J P Morgan Chase, where he first dealt with an Anne Gallagher. She insisted that SAA rather than OBA be named as the [*4]borrower, since that entity had the majority of the assets. As Stolzenberg preferred the tax treatment set forth above, she referred him to William Ayers, of the Private Wealth Management Group at J P Morgan Chase, which agreed to consider funding to OBA, with the individuals and other corporate entities acting as guarantors.In a series of e-mails from 9/26/08 through 9/29/08, Stolzenberg received initial approval for the OBA loan in the amount of 5.3 million subject to his superiors' approval and review of liquidity statements that were required to be submitted by the twelve individuals (Plaintiff's 52). In further e-mails, dated 10/2/08, Ayers sought further information on liquidity of two of the shareholders, and the witness states they were supplied and he was told that afternoon that sufficient liquidity was provided to secure the loan from the bank (Plaintiff's 56). He avers that Ayers told him on 10/2/08 that he would provide him with the bank's final determination on 10/3/08.
On the afternoon of 10/2/08, the witness states that he went to meet with the shareholders of the three entities to discuss both the tax advantages of the OBA borrowing and to explain the manner in which the loan would pass from the PLLC, be distributed to the shareholders, and would then be used with such funds or others possessed by the individuals to complete the purchase by the 10/6/08 deadline. He believes, but is not completely sure, that Dr. Verdone was present at the presentation. However, he states that he had previously explained to the shareholders at a prior meeting the advantages of the PLLC being the borrower.(Plaintiff's 22 meeting of 3/08 setting forth Stolzenberg's presence). On 10/2/08, the meeting minutes from all three entities demonstrate that the shareholder members of the three companies voted 11 in favor and 1 against the proposal he set forth (Plaintiff's 57). The 10/2/08 meeting does not mention that Stolzenberg is present; however, Stolzenberg testified that he was not present at the vote and was unaware of Verdone's opposition until he heard from representatives of J P Morgan Chase. On the other hand, contemporaneous e-mails demonstrate that Stolzenberg was aware that Verdone objected to participating in any guaranty of a loan to one of the corporate entities for the Surgicare purchase.
According to Stolzenberg, he received a voice mail from Ayers on 10/3/08. When he spoke to Ayers that day, Ayers assertedly told him that the bank had been contacted by Dr. Verdone; that Verdone informed them that he opposed the funding to OBA and that there would be litigation if the funding went through. He asserts that Ayers told him that based upon the telephone call from Verdone, the bank did not wish to fund the loan. The witness states that after the bank's action, all 12 shareholders of the three entities provided funds to permit the monies to be forwarded to Surgicare by the October 6, 2008 deadline. However, he explained that the final closing did not occur until January 2, 2009, as the parties were still awaiting final approval of the purchase, as required by the State Department of Health. He further states that a new entity, know as Alliance was formed which would be the entity employing those who provided the anesthesiology services for the Surgicare facility. Although an original entity, including Dr. Verdone, was created, after his termination, a second Alliance entity was created which did not include Dr. Verdone. In addition, Stolzenberg set forth that 11 of the 12 individuals involved in the transaction did receive loan proceeds from another lending institution; however, Dr. Verdone never received any share of such funds. [*5]
Dr. Elliot Rossein, a Board Certified anesthesiologist since 1989, testified that he has worked at what is now St Catherine's of Siena Medical Center since 1995. To date, SAA is the sole provider of anesthesiology services for that institution located in Smithtown, NY, a relationship that has lasted for over 30 years. The two other Plaintiff entities, OBA and UA were formed in 1997 and 2003, respectively, by the shareholders of SAA, essentially to broaden the provision of anesthesiology services to a number of outside locations. During his testimony, Dr. Rossein described some of the outside medical practices for which one of the Plaintiff entities would provide services. During the period between 2003 and 2007, according to the witness, the terms of these agreements were negotiated by then President of the Boards of the three entities, Dr. Kurlander. He set forth that between 2003 and 2006, during a portion of which period Dr. Verdone was on the Board of Directors, many of these outside practices and provision of services were discussed in Dr. Verdone's presence. Meeting minutes in 2003 (Plaintiff's 1 and Plaintiff's 3) demonstrate that the shareholders held discussions regarding provision of anesthesiology services at a gastroenterology practice in Brooklyn. According to Rossein, when presented with the opportunity by one of their shareholders (Dr. Kirschenbaum), all the shareholders embraced the opportunity to expand their practice. In addition, in July 2003 (Plaintiff's 2) they entered into an Agreement to provide such services to SurgiCare Ambulatory Center, Inc ("Surgicare") located in the Bronx, such agreement slated to expire in July 2007. Other meeting minutes from March 23 and June 22, 2005 (Plaintiff's 6 and Plaintiff's 7), during which Dr. Verdone was Vice President of the Board of Directors of all three entities and present, demonstrate discussions of the gross and net profits from various outside entities for which they were providing services, including Surgicare, Brooklyn Endoscopy, a Port Jefferson Endoscopy Center run by Drs. Gallo and Albert, a Huntington facility and a Queens Hillside facility. Meeting minutes of November 28, 2005 also demonstrate that Dr. Verdone, while a member of the entities' Boards, attended a meeting during which the potential expiration of the Surgicare agreement was discussed (Plaintiff's 8). According to Dr. Rossein, during no time between 2000 and 2006 did Dr. Verdone make any statements in opposition to and/or question in any manner, the provision of offsite anesthesiology services to other practices.
Throughout early 2007, according to the witness, and verified by Board meeting minutes, the issue of a proposal by SAA to purchase Surgicare was discussed and very favorably considered because the shareholders did not want to lose a lucrative revenue stream (Plaintiff's 11, 12 and 13). He set forth that the shareholders of the entities learned sometime in April 2007 that their Board President, Dr. Kurlander, had signed a purchase agreement, without their approval, for the purchase of Surgicare. He states that although the shareholders were surprised that this had occurred, they ultimately all agreed and signed the contract because they felt it was financially beneficial. The Stock Sale Agreement is dated April 7, 2007, the date it was signed by Dr. Kurlander, and according to this witness, signed by all other shareholders, as individuals, including Dr. Verdone. (Plaintiff's 14). In addition, all the individual shareholders signed a necessary Certificate of Need Application which would permit the transfer of the facility from its then owners by the NYS Department of Health. (Plaintiff's 16). A Project Narrative, attached to the application sets forth that each of the 12 physicians would become shareholders of Surgicare and would pay the sum of $6,111,032, to be guaranteed in large part by a loan to be repaid by the shareholders. He avers that the doctors all knew that the purchase would be accomplished via a loan. [*6]
The witness states that in December of 2007, Dr. Cohen, a member of the entities, recommended that an independent financial audit of the finances of the entities be performed and such was unanimously approved on December 11, 2007 (Plaintiff's 17). The witness claims that Dr. Verdone neither made such recommendation nor had any other role in this issue. Indeed, he testified that Dr. Verdone's only comment at the time was that the audit was a waste of money. He set forth that the then Board of Directors of the entities interviewed several forensic accounting firms and chose Holtz Rubinstein Remnick ("HRR"). In addition, the shareholders retained a health care consulting firm to review the governance and management of the entities and generated a report by two of its attorney members with MBA's (Plaintiff's23) on March 26, 2008. The consultant's report criticized the entities' lack of financial statements as well as the micromanagement of office operations at the same time not recommending the replacement of Dr. Kurlander as President of the Board since profits of the entities were so high (Plaintiff's 23). However, according to Dr. Rossein, he and not Dr. Verdone expressed concern over the statements in this report.
The HRR report and findings were received by the shareholders at their May 27, 2008 meeting (Plaintiff's 29) during which it was discussed, according to Dr. Rossein, at length by two accountants including Phil Kanyuk (a witness at trial). According to Dr. Rossein, the report was distributed to all shareholders and Dr. Verdone was present at the meeting. Dr. Rossein set forth that the HRR report focused on Dr. Kurlander's financial management of the entities and made several findings regarding certain unsubstantiated payments paid to certain outside physicians and for personal expenses. Copies of the report were collected at the end of the meeting in order to preserve confidentiality on the advice of counsel for the entities. He testified that all shareholders were permitted access to the report in the main office. It was Dr. Rossein's belief that the HRR report was obtained in order to improve the financial operations of the entities, but that distribution of such could become harmful to the entities if publicized to the outside. However, according to the witness, Dr. Verdone insisted on obtaining his own copy and Dr. Rossein started to become suspicious of his intentions. At the time, Dr. Verdone had resigned from the Board of the entities and become a member of Board of the hospital. It was Dr. Rossein's belief that Dr. Verdone wanted to use this position to become the Chief of Anesthesiology, a position he wished to divert from the existing Chief, Dr. Bonanno. When Dr. Verdone commenced an Article 78 litigation against SAA seeking a copy of the HRR report, Dr. Rossein signed an Affidavit in opposition in which he set forth that he believed the demand was made in bad faith as all 12 shareholders had been present at the discussion with the accountants, and all were told they could look at the report at any time (Defendant's G). At about this period, he began to believe that Dr. Verdone was interested in causing trouble for the practice for some ulterior motive.
According to Dr. Rossein, all the shareholders were aware that under their agreement to purchase Surgicare, funding had to be complete by October 6, 2008. They had been told by Stolzenberg both that he was starting to speak to various banks about the loan and he told all the shareholders that it was his advice that the PLLC, OBA, be the borrower due to tax advantages. In addition, all shareholders were sent loan proposals from all the banks with which Stolzenberg was communicating on September 12, 2008, all of which named one of the corporate entities, rather than the individual shareholders, as the entity they wanted to purchase Surgicare. Efforts were made to [*7]set up a shareholder's meeting in mid-September 2008. The SAA practice administrator sent e-mails to the various physicians asking that they waive the two week meeting notice so that the purchase terms could be discussed at a September 16, 2008 meeting (Plaintiff's 40). However, Dr. Verdone communicated that he would be on vacation and that he refused to waive the notice requirements, thereby delaying the meeting date until September 30, 2008 (Plaintiff's 41). Thereafter, new meeting notices were sent (Plaintiff's 43 and 44) and shareholders' meetings for all three entities were scheduled for October 2, 2008 (as the September 30 date fell on a religious holiday). On September 15, 2008, Dr. Rossein sent out a special meeting notice setting forth that the shareholders of the three entities would hold a meeting on October 2, 2008, at 6 p.m. to discuss an amendment of the entities' by-laws and the loan for the purchase of Surgicare (Plaintiff's 45).
On September 19, 2008, Dr. Verdone sent a letter to the shareholders of the three entities (Plaintiff's 47). The letter set forth that Dr. Verdone wished to withdraw from the Surgicare purchase and have the monies he had thus far invested returned to him. His essential objection was to the form of the purchase since it now appeared to encumber assets of one or more of the corporate entities instead of the individual shareholders as originally envisioned. Dr. Verdone sets forth in his letter that he had already objected to this form of purchase in an attorney's letter from January 2008, after which he was assured that the individuals and not the entities would be completing the purchase. He also warns that if the transaction proceeds as now planned, he will voice his objections both to the lending institution as well as the seller's attorney. In response to this letter, the Board consulted with its attorneys and wrote to Dr. Verdone on September 24, 2008 (Plaintiff's 48). This letter explains that the Sale Agreement does not permit any of the individuals to withdraw; however, it offers to purchase Dr. Verdone's shares of Surgicare within 5 days of closing, to indemnify Dr. Verdone as a guarantor on any loans and also offered to remove Dr. Verdone as a guarantor if the bank would agree. Dr. Verdone responded on September 27, 2008 (Plaintiff's 50) rejecting the various offers and setting forth that he would perform his individual obligations in connection with the purchase.
The Boards met as planned on October 2, 2008, and received a presentation from Stolzenberg, who informed them that he was confident the loan in an amount of approximately $5 million, would be approved on the next day. The Boards of all three entities (Plaintiff's 89) approved the purchase and the terms of the proposed loan from Chase by an 11 to 1 vote, Dr. Verdone dissenting. The meetings adjourned at 7:10 pm, and according to various e-mails, Dr. Verdone contacted Anne Gallagher from JP Morgan Chase by 7:25 p.m., attaching his letter of September 30 as well as prior letters of his private attorney and SAA's attorney from January and February 2008, setting forth that the purchase would not encumber the assets of the various corporations (Plaintiff's 20 and 21). He learned on October 3, 2008, from Stolzenberg and Dr. Buffa that Chase had become "spooked" by Dr. Verdone's correspondence and had declined to go forward with the loan. At that point the shareholders had three days to raise over $5 million. After much scrambling by the physicians, they came up with the money which was paid by the deadline. However, the Boards then met to discuss the deteriorating relationship between the entities and Dr. Verdone and determined that they could not continue to work with him.
On October 14, 2008, the Boards of the three entities sent out a meeting notice for a meeting [*8]to be held on November 3, 2008 to terminate Dr. Verdone's employment "with cause", based on the first lawsuit in this litigation (that had by then been commenced) and "without cause" under §§ 5(d) and 5(e) of the Employment Agreement (Plaintiff's 86). On October 22, 2008, Dr. Verdone was sent a letter setting forth his temporary suspension pending the November 3, 2008 meeting. After Dr. Verdone received a temporary stay, and such was lifted by the Court, a subsequent meeting notice to terminate Dr. Verdone was sent on November 25, 2008, for December 15, 2008 (Plaintiff's 67). At the meeting of the entities of December 15, 2008, the shareholders voted 11 to 0 to terminate Dr. Verdone's employment both with and without cause and to so communicate to his attorney. (Plaintiff's 72).
Dr. Rossein was cross examined at length regarding the various outside medical practices for which one or other of the entities provided anesthesiology services. According to Dr. Rossein, most of the agreements for such outside practice were not in writing until the Board removed Dr. Kurlander. Thereafter, under his presidency, the entities entered into many written service agreements. Dr. Rossein signed the agreement with Brooklyn Endoscopy (Plaintiff's 28) which is dated May 21 2008. According to the agreement, UA, the entity involved, paid the endoscopy practice for, among other items, space, administrative services, mail delivery, and office supplies for amounts in excess of $180,000 per year. In addition, in early 2010, OBA entered into agreements with two gastroenterology practices on Eastern Long Island, where the entities had never practiced before, based on agreements in which OBA paid the practices similar licensing and administrative fees, this time in the range of $150,000 per year (Defendants I and O). According to Dr. Rossein, fair market evaluations were performed for the entities before they entered into the East End agreements (Plaintiffs 94 and 95 ). Dr. Rossein was questioned regarding other outside practices, including a gastroenterology practice, where no fair market evaluation was prepared and the G I doctor received a percentage of OBA's revenues, in return for his provision of space and administrative services (Defendant's Q). One of the entities entered into an agreement after obtaining a fair market evaluation with another gastroenterololgist, Dr. Miah, for approximately $120,000 per year (Defendant's N). Under an agreement with a cardiovascular practice, that practice was receiving 46% of the OBA'S revenues, again without any fair market evaluation (Defendant's N). Under an agreement which lasted from 2005 through 2009, one of the entities paid Suffolk Gastroenterology over $157,000 per year for rent and administrative services (Defendant's K and L). Under yet another service agreement, which was signed by Dr. Rossein, a Huntington practice was paid $42,000 for similar services. Dr. Rossein states that he attempted to get written agreements with as many of these entities as he could and that after he became president all such agreements were drafted by counsel for one of the subject entities. He also states that based on the revenues generated for the subject entities in each case, he was satisfied that the agreement was fair and proper. It is his testimony that at no time did Dr. Verdone complain about any of these outside practices with which the entities dealt nor was he at all instrumental in realizing the significant reforms that have been implemented since Dr. Kurlander was forced to resign from the Boards of Directors.
With regard to the issues between the various entities and Dr. Kurlander following the HRR report, the Board met one day after its release and removed Dr. Kurlander as the President. Dr. Kurlander resigned from the Board of Directors, at which time Dr. Rossein became President of the [*9]Board, an office he continues to hold. Thereafter, the Board met with counsel for the entities, who prepared letters for them, which were sent by Drs. Rossein and Bonanno to Dr. Kurlander, essentially asking him to respond to the concerns raised in the HRR report (Plaintiffs' 31 and 32). Dr. Kurlander responded through his counsel by letter dated September 5, 2008, essentially setting forth that Dr. Kurlander had worked many unpaid hours for the practice and increased its revenues over the years. (Plaintiff's 35). Dr. Rossein states that Dr. Verdone made no comments whatsoever during the Summer of 2008 with regard to the HRR report . Ultimately, on November 19, 2009, SAA, OBA ans UA entered into a Settlement Agreement with Dr. Kurlander to resolve the financial issues raised in the HRR report (Plaintiff's 79). The agreement provided that Dr. Kurlander was to provide the entities with promissory notes in the amount of $500,000, which Dr. Rossein testified has now been paid in full. Approximately one year later, Dr. Kurlander resigned from the practice and as a shareholder of the entities, after the Board suspended him. Dr. Rossein set forth that the reason for Kurlander's suspension was essentially the findings of the HRR report.
It is Dr. Rossein's belief, as per his testimony, that as a result of the HRR report and under his term as President, a finance committee was created for the entities, outside counsel were retained to assure the entities' compliance with federal and State laws, Stolzenberg was given a more active role and made CFO of the entities; and an administrator with business experience was hired. He claims that Dr. Verdone had no participation in any of these issues.
Dr. Salvatore Buffa ("Dr. Buffa") testified that he is currently a shareholder of the three entities involved in this litigation and has been a shareholder of SAA since 1998. He is also a board certified anesthesiologist. Dr. Buffa states that he concentrates his practice at the Surgicare facility in the Bronx and is the medical director of such facility. According to Dr. Buffa, the SAA shareholders began discussing the possibility of purchasing Surgicare in 2006 as they were aware that if they lost their contract, they would lose the revenue stream they had obtained from such facility. He agreed with previous testimony that he was unaware that Dr. Kurlander had signed the purchase agreement until after such was accomplished nor was he told that SAA funds had been utilized to make the initial $610,000 down payment; however, he and all other shareholders did sign such within several weeks. He understood the price to be 7.3 million, based upon a contract price of $6.1 million and payment of $1.2 million in Surgicare's outstanding loans. He was also aware that the balance of the purchase price was to be paid by October 6, 2008. The physicians involved did discuss that a large portion of the purchase price would come from a loan, and after he received "letters of intent" from various banks in mid- September 2008, he forwarded them to all 11 other physicians.
Dr. Buffa set forth that he was a close colleague and personal friend of Dr. Verdone's and that he was aware that Dr. Verdone objected to any of the corporate entities utilizing their assets for the Surgicare purchase. Although Dr. Buffa states that he tried to change Dr. Verdone's mind, Dr. Verdone was adamant that the deal proceed his way. He believes that the Chase Bank loan did not come to fruition due to Dr. Verdone's statements and threats to the Bank personnel. According to the witness, each shareholder was obligated to pay, within one day, $446,601.58 to salvage the deal. At that juncture, the shareholders had paid approximately $2.1 million for the facility and he was [*10]concerned that the sellers would walk away and keep those funds if the deal was not consummated. Dr. Buffa states that he voted to terminate Dr. Verdone based on Verdone's actions impeding the group from obtaining financing for the purchase of Surgicare.
Dr. Buffa states that although he was present at the meeting between Dr. Kurlander and the sellers of Surgicare in 2007, he was not aware that a contract was going to be signed that evening, nor that funds from SAA were to be paid and not held in escrow. He left the meeting before any of the above occurred. He testified that in addition to the $6.1 million for the facility and the $1.2 million of Surgicare debt to be paid by the individual shareholders as a part of the purchase agreement, another contract was put in place for SAA to manage Surgicare and to bear the losses of such entity in the interim period between the purchase agreement and the closing. Approximately one month after the signing, he believes he saw a contract whereby SAA agreed to make funds available to Surgicare to pay its ordinary business expenses. (Defendant's V). He states that such payments, in the amount of approximately $1.3 million, have been recorded on Surgicare's books as loans and are in the process of being repaid to SAA. Although he was aware of the letter written on behalf of Dr. Verdone objecting to encumbrance of SAA's assets, the complaint was approximately 7 months after this Surgicare Purchase Agreement was executed.
With regard to the October 2, 2008, shareholders' meetings, Dr. Buffa insists that Dr. Verdone was present for the entire time, including the presentation by Stolzenberg. It is his belief that the reason the by-laws were amended at such meeting was to permit the various corporate entities to borrow the funds necessary and to guarantee loans necessary for the purchase.
Dr. Buffa avers that the corporation known as Alliance Anesthesia was formed in October 2008 for the purpose of acting as the servicing agent for Surgicare; however, following the termination of Dr. Verdone, a second such corporation was formed in order to remove Dr. Verdone as a shareholder of such entity.
Dr. Anthony Bonanno ("Dr. Bonanno"), an anesthesiologist since 1984, has been a shareholder of SAA since 1989 and the Chief of the Department of Anesthesiology at St Catherine's of Siena since 1997. He is also a Vice President on the Boards of the three entities involved in this litigation. In his role as Chief of Anesthesiology, Dr. Bonanno oversees the scheduling and work performed as well as assures that proper equipment is present when needed.
He repeated his colleagues' statements that the shareholders of the entities wanted to purchase Surgicare to maintain its revenue stream and that Kurlander's signing of the purchase agreement on his own in April 2007 was a surprise and not authorized. He was present at a meeting of the shareholders in January 2008 (Plaintiff's 18) during which they discussed the possibility of terminating the Surgicare purchase. SAA retained a consultant Steven Earnhardt, who addressed the shareholders at a March 6, 2007 meeting and stated that the purchase was a wise move, based on his review of all the issues involved (Plaintiff's 22). Although Dr. Verdone's name is not listed as present on the minutes of such meeting, he did make comments about the meeting and is listed as having set forth some concerns about the purchase. [*11]
Like the other shareholders who testified, Dr. Bonanno received the term sheets from the various banks from which the individual shareholders were seeking a loan for the purchase. Each one of them named one of the corporate entities as the borrower, rather than the individuals, (Plaintiff's 34, 37, 38, 39). In the same time frame, in mid September 2008, the Boards received Dr. Verdone's written refusal to waive the two week meeting notice, thereby leaving the group with a mere four business days before the deadline in the contract for the funding. He reiterated that all shareholders were present at the Stolzenberg presentation prior to the actual voting on the loan and by law amendments. He confirmed that all three entities approved the loan by a vote of 11 to 1, Dr. Verdone being the sole dissent. Dr. Bonanno states he was aware of the letters from Dr. Verdone in September 2008, setting forth that he wanted to withdraw from the purchase (Plaintiff's 47) and with the SAA response offering to purchase his share and indemnify him for any potential losses to SAA through its role as a guarantor of the loan (Plaintiff's 48). He had no idea that Dr. Verdone, after rejecting the Board's offer (Plaintiff's 50) and setting forth that he wanted to remain in the purchase, would contact the bank after the 10/2/08 vote.He also reiterated that the shareholders would have lost over $2 million if they had not personally financed the purchase and that each was forced to contribute $446,601 in the period between the bank's rejection on 10/3/08 and the funding deadline of 10/6/08.
He attended the meeting on 10/22/08 when the shareholders of the entities voted unanimously to suspend Dr. Verdone and ultimately to terminate him on 12/15/08 (Plaintiff's 52). Dr. Bonanno set forth that he voted for the termination based on Dr. Verdone's actions in going behind the back of his 11 co shareholders and threatening the bank. He states further that his reasons had nothing whatsoever to do with Dr. Verdone's earlier Article 78 proceeding in which he sought and received a copy a of the HRR report (Defendants' G,H,V,W,X) nor with the HRR report itself.
With regard to the issues the entities had with its prior President, Dr. Kurlander, Dr. Bonanno set forth that Kurlander was removed as president and resigned from the Board within a week of the HRR report. He also authored one of the letters, with the advice of counsel, to Dr. Kurlander in June 2008, asking Dr. Kurlander to respond to the allegations of mismanagement in the HRR report (Plaintiff's 32). Ultimately, SAA received $500,000 from Dr. Kurlander in settlement of any monetary disputes between the parties. Dr. Bonanno avers that Dr. Verdone took no part in seeking the financial audit, in seeking the health care analysis, nor did he set forth any complaints regarding the provision of medical services to outside facilities until he began litigating against the entities in mid 2008. He states that the only complaints he heard from Dr. Verdone over the years related to his view that the method of assigned calls was somehow unfair.
Dr. Michael Port, an anesthesiologist since 1986, who practices at Huntington Hospital as part of a group known as North American Partners in Anesthesiology ("NAPA") which provides such services to over 20 institutions in the Nassau County and western Suffolk County areas, testified. He interviewed Dr. Verdone for a position with one of the NAPA entities. During the interview, Dr. Port states that Dr. Verdone set forth that he was not yet in a position to accept a job due to his involvement in legal disputes with the SAA group. He did, however, state, according to the witness, that he was a member of the Board of Catholic Health Services and could assist NAPA, [*12]if it was interested, in taking over the anesthesiology practice at St Catherine's of Siena. As a result of the interview, Dr. Port e-mailed Lloyd Strauss, the President of the management arm of NAPA and stated that Dr. Verdone had said that SAA was so dysfunctional that he might be able to steer the anesthesia practice of St Catherine's to NAPA should the Board of the Hospital seek a request for proposals. (Plaintiff's 66). In a subsequent e-mail Lloyd Strauss indicated to Dr. Port that Dr. Verdone might be eligible for a position in a different NAPA hospital for a Chief of Anesthesia position. It is Dr. Port's opinion that Dr. Verdone had an excellent reputation as a physician.
Lloyd Strauss, the President and Chief Operating Officer of Management Services for NAPA, testified that the organization employs over 450 anesthesiologists and over 100 on Long Island. He reiterated the contents of the e-mail from Dr. Port regarding Dr. Verdone's statements concerning a NAPA takeover of the St Catherine's anesthesia practice (Plaintiff's 66). In his e-mails to Dr. Port he does suggest that Dr. Verdone would be a good candidate for a leadership role with NAPA. (Plaintiff's 66).
William Ayers, Vice President of the Private Wealth Management Group from JP Morgan Chase Bank in 2008, testified that his group was involved in developing business investment for high wealth individuals at the time he became involved in the prospective purchase of Surgicare by the shareholders of the subject entities. At the time he was referred that matter by Anne Gallagher, Vice President of Chase's Middle Market Group, the proposed borrower to finance the transaction was told to him to be OBA. He was first referred the prospective transaction on September 23, 2008. His group, unlike that of Anne Gallagher, was more interested in the cash flow and assets of the individuals as opposed to the corporate assets. He understood that the prospective loan, to be guaranteed by the other corporate entities as well as the individuals, was approximately $5.5 million and the deadline for the loan was October 6, 2008. Mr Ayers testified that a meeting had been scheduled for Friday October 3, 2008, by those at Chase required for final approval to determine whether his group was going to go forward with the loan. In order to approve the transaction, he states that he needed information concerning the assets of the individual shareholders, including their financial statements and brokerage accounts in order to determine their liquidity and that by October 2, 2008, he had most but not everything requested and/or needed. He did receive a copy of e-mails from the bank's underwriters stating that the underwriting for the $5 million request had been completed (Plaintiff's 56). Mr Ayers avers that he wanted the loan to be approved on October 3, 2008, and that it was his belief that it met with his group's goal of encouraging business on Long Island. However, he testified that he did not know if the loan would have been approved by the final authority on October 3, 2008, if the events occurring on the evening of October 2 and morning of October 3, 2008, had not occurred. In answer to the question "Was it Chase's plan, at least through your group, to fund that loan as of Friday morning, October 3, 2008?", Mr Ayers responded "No". He set forth that even absent the Verdone actions, the loan was not going to be automatic; but, rather, a subject of discussion in some detail with the final prospective approver. He states further that by the time Chase officials reached Friday morning, they did not yet have all the information they requested and one of their primary concerns was the liquidity of the investors as the economy had begun to falter by that time. He did state that they did have evidence of liquidity of over $12 for a $5 million loan. [*13]
Mr Ayers set forth that he was aware that only 11 of the 12 doctors involved were part of the transaction but it was his belief that the 12th was either junior, new or not otherwise involved; it did not concern him during the period of his review. On the morning of October 3, 2008, he received an e-mail from Anne Gallagher, containing the heading "trouble"with emails from Dr. Verdone to Ms Gallagher attached, in which Dr. Verdone strongly objected to the transaction going forward. The e-mails forwarded to him contained the January 2008 letter from Dr. Verdone's attorney threatening litigation should the assets of the subject entities be encumbered by the Surgicare purchase; however, he states that his major concern was his new understanding that there existed disharmony within the group of individual borrowers. Such could affect the ability of the guarantors to repay the loan. After receiving the e-mails on October 3, 2008, he spoke with his colleagues and they decided they were not going to proceed with any loan.
Dr. Matthew Verdone ("Dr. Verdone") testified that he is a board certified anesthesiologist and that he joined the staff of the predecessor to Saint Catherine's of Siena Hospital in 1994. He became a shareholder of SAA in 1997 and was elected President of SAA's Board in 2000 or 2001. Dr. Verdone was again selected to be on the Board of the entities in 2005 and remained there until mid 2006, when he became a member of the Board of Trustees for St Catherine's.
According to Dr. Verdone, he began to have questions in 2005 about the amount of extra administrative time that certain members of the medical practice were billing for, and; therefore, he asked the entities' practice administrator at the time to conduct a routine audit of the payroll and distributions to the various shareholders. When he received the results of such routine audit, he became more concerned because he found that the entities' president, Dr. Kurlander, was receiving large amounts of earnings in excess of the other shareholders. The witness asserts that he brought such up to other members of the Board at the time, which included Drs. Kurlander, Bonanno and Suazo. The result, according to the witness, was that Dr. Bonanno became angry with him, told him to "shut up and stop asking questions" and pushed him across a room.
Dr. Verdone set forth that he also began to have questions concerning certain outside practices with which the entities were involved. He had questions concerning the Brooklyn Endoscopy Center, which he described as a Public Health Law, Article 28 facility. The witness states that in such instances, in exchange for another group , such as UA, providing medical services, the Article 28 facility was entitled to a facility fee from the other practice, which would reimburse the facility for use of its space, utilities, janitorial service and similar expenses; however, such payments, according to the witness, was to be based on a fair market evaluation. Although UA had been providing services for years to Brooklyn Endoscopy, he didn't see anything in writing until late 2007. By that time, Dr. Verdone was on the Board of St Catherine's and had learned much about State and Federal regulations. He knew that an arrangement to provide medical services to an Article 28 facility required a fair market evaluation and when he received a copy of one in April 2008 [*14](Plaintiffs 25), he believed that amounts his practice was paying Brooklyn Endoscopy was unreasonably high. He has since learned that the agreement was signed during this litigation and backdated to December 1, 2006 (Plaintiff's 28). He complained about the retroactivity component as well as the problems with the fair market evaluation, for which he believes the entities fired him.
Dr. Verdone states that he believes that his concerns over the years, along with those of other shareholders, were responsible for the request for the HRR report and that he attended a meeting where Mr Kanyuk, one of the report's authors, presented the report in May, 2008. He states that the report continued to raise his concerns, not only with regard to Dr. Kurlander, but also concerning the payments being made by the entities to outside medical facilities and physicians. As a result, Dr. Verdone set forth that he wanted a complete review of all monies given by the entities to outside physicians and facilities; which he referred to as complete transparency. He also asked for a copy of the report as he was concerned that some of the arrangements violated Federal and State anti-kickback laws. When the entities refused to provide him with a copy, he states he was forced to bring an Article 78 proceeding, which culminated in an Order requiring that he be given a copy of the HRR report. Thereafter, Dr. Buffa did invite him to a private meeting with several other shareholders at Dr. Buffa's home, where he addressed his concerns regarding the Brooklyn Endoscopy arrangement, payments to Port Jefferson Doctors Albert and Gallo and the unauthorized payments to Dr. Kurlander, including an alleged $10,000 cash payment Dr. Kurlander had mentioned to him privately. He states at such meeting that if he did not get the transparency he required, he would resign from the practice by the end of 2008. Yet, they provided no response.
Dr. Verdone testified that he also had concerns with the process of the proposed purchase of the Surgicare facility in the Bronx. When he saw the agreement, dated April 5, 2007, signed by Dr. Kurlander, setting forth the purchase by the 12 shareholders of SAA, he was shocked because it had occurred without any meeting or approval by the group. In addition, although his name appears on one of the signature pages (Plaintiff's 14), he asserts that he never signed it. He and other members of the entities were concerned both with the unauthorized purchase agreement and with the fact that one of the entities, SAA, was investing corporate funds for payment of certain Surgicare expenses pending the finalization of the purchase. The witness states that sometime in late 2007, he and the other shareholders learned that SAA was subsidizing Surgicare pending the culmination of the purchase; and that Dr. Kurlander had somehow authorized a line of credit from SAA to Surgicare, which was already over $600,000. This act had somehow bypassed the required two-thirds vote of the shareholders under its by laws; and the original investment made by each of the individual shareholders in the amount of $650,000 had not been escrowed.
The witness avows that before the agreement had been signed by Dr. Kurlander, he had made his opposition to the prospective purchase known to the entities' counsel, Ms Masucci, as early as February 2007. He believes this is reflected in the minutes of the March 2007 shareholders' meetings which refers to the fact that one of the shareholders opposed the purchase. His opposition, even before the various agreements were revealed as a fait accompli, related to his view that Surgicare was not profitable, resulted in a zero cash flow, and provided no corporate opportunity. Dr. Verdone continued to make his opposition to the purchase known throughout 2008. In January 2008, he [*15]contacted his own counsel and had his attorney write to SAA, expressing his opposition to the Surgicare deal, based upon its improper use of corporate assets as set forth. (Plaintiff's 17). Within one month, the entities' attorney, Michele Masucci, answered on behalf of the entities and set forth that the individual shareholders are to be the purchasers of Surgicare and that they are exploring financing and intend to fully account to assure that no shareholder of SAA is financially compromised (Plaintiff's 18). It was and continues to be Dr. Verdone's position that the loans to Surgicare prior to the actual purchase, with no escrow, far too little interest being charged, and a potential of such being lost if the deal did not close, constituted an unlawful kickback in violation of Federal and State laws.
As a result of Dr. Verdone's strong opposition to the purchase, a shareholder's meeting was convened in April 2008 and a verbal deal was struck, according to the witness, whereby any shareholder that wanted the money invested back would be entitled to such as long as no one formally pulled out of the deal at that time. Therefore, the witness set forth that he remained and invested another $50,000 conditioned on the personal guarantee of all shareholders that any one of them could withdraw at any time and get their money back. According to the witness, although the purchase agreement did not set forth that one of the purchasers could withdraw, it also did not prohibit such; therefore, Dr. Verdone relied on the promises made at the April 5, 2008 meeting. Dr. Verdone states that he did not formally demand to be removed from the purchase until September 2008, because he was asked to remain in by Dr. Suazo, while the Department of Health approval was pending, due to his unique position on the Board of Trustees of the hospital. Thus, against his better judgment, he remained in the deal until the Health Department rendered its conditional approval in September 2008. The witness did see certain term sheets from banks in September 2008 and at some point saw one from JP Morgan Chase. It listed SAA as the borrower (Plaintiff's 46) and specifically stated that it was not a commitment to make a loan and was for discussion purposes only.
On September 19, 2008, Dr. Verdone wrote to the shareholders of the three entities, setting forth his demand to withdraw from the purchase of Surgicare and have his investment refunded. He demanded , in addition, that no action be taken by the entities to encumber the assets of any of the same; and, that if such should occur, he would have no choice but to voice his objections to the banks as well as to counsel for the seller (Plaintiff's 47). On September 24, 2008, SAA responded that the Sales Agreement did not permit the withdrawal of any of the purchasers (Plaintiff's 48) in violation of the earlier verbal agreement. Dr. Verdone then responded on September 24, 2008 setting forth that he does not agree to the involvement of SAA, OBA or UA in the purchase, and that he remains willing to sell his interest upon mutually agreeable terms.
On September 12, 2008, Dr. Verdone did receive the meeting notice for September 16, 2008, with an alternate date of September 30, 2008, should any of the investors refuse to waive the 30 days' notice. Dr. Verdone refused to waive the 30 days' notice requirement as the proposed meeting fell on his wedding anniversary, a fact well known to many of his co shareholders. He states that no attempt was made to have the meeting shortly thereafter. The purpose of the meeting set forth that it would be a discussion of loan funding for Surgicare investors (Plaintiff's 40). On September 13, 2008, a new notice was sent to the shareholders of SAA setting the meeting for the purpose of [*16]discussing the loan issue (Plaintiff's 43). Then, on September 15, 2008, yet another notice was sent to the shareholders of all three entities, setting forth a meeting date of October 2, 2008 at 6 pm for the purpose of discussing loans for the purchase of Surgicare and an amendment of the by-laws. (Plaintiff's 45). A copy of such proposed amendment was attached to the notice. On October 2, 2008, the witness states that he received a telephone call telling him the meeting had been pushed back to 6:30 pm, the time he arrived. He avows that Stolzenberg was not present and that the entire meeting lasted approximately 40 minutes. Dr. Verdone states that he vehemently opposed the by-law amendments as such removed the conflict of interest clause in the by-laws, which prevented a shareholder from voting on any business of the entities, where such shareholder had a personal interest in the transaction. He asked to table the amendment , his co shareholders refused and the matter was passed with his one vote opposed. The amendment to the entities' by-laws essentially provided that a contract between one of the entities and another party would not be invalidated by virtue of the fact that a director has an interest in the other party to the contract provided that such facts are known and disclosed to the directors of the corporation and they authorize the contract (Defendant's C). According to Dr. Verdone, the shareholders of the entities believed that by this amendment they would be able to go forward with a loan to one of the entities to fund the purchase of another entity in which they would be the owners.
At that meeting, he also received a copy of one proposed loan term sheet (Plaintiff's 46). Unlike the proposal he received in September 2008, this term sheet had the borrower as OBA, as opposed to the one he had been sent in September. He was the sole vote against the proposed loan. His reasons had been set forth clearly as early as his attorney's letter in January, 2008. After the meeting concluded, Dr. Verdone testified that he went home and e-mailed Anne Gallagher of Chase asking her to contact his attorney. He also attached his letter objecting to the loan that had been circulated to all the shareholders. The next morning, he asserts that he telephoned her to make sure she had received his e-mail. He described the conversation as polite. She stated that she didn't know he existed; and that she thought he was not involved as an investor in Surgicare. He sent her, thereafter, both his attorney's letter from January 2008 and the entities' attorney's letter from February, 2008 setting forth her pledge that the assets of the corporate entities would not be encumbered in this purchase. He does not believe that his communications with bank officials caused any default.
Thereafter, on October 3, 2008, Dr. Verdone received an e-mail from Dr. Buffa asking him to forward his portion of the purchase, which he did, in the sum of over $400,000. Despite the fact that he remains a shareholder of Surgicare, Dr. Verdone set forth that he has received neither reports nor dividends nor distributions from Surgicare other than a K-1 for some fiscal year stating that he earned $1603, an amount he never received. On October 14, 2008, a notice was sent to the shareholders to meet on November 3, 2008 to vote on termination of his employment for cause, the lawsuit in Action #1 herein having been commenced (Plaintiff's 65). He was then temporarily suspended by letter dated October 22, 2008 (Plaintiff's 65). After a court ordered stay of such action was lifted, a new notice was sent setting a meeting to consider terminating his employment both for cause and without cause under the parties' employment agreement (Plaintiff's 74) for December 15, 2008, (Plaintiff's 67). He was terminated at the meeting of December 15, 2008 and he was to be [*17]notified that he was no longer employed as an anesthesiologist at St Catherine's of Siena (Plaintiff's 72).
Since his termination, Dr. Verdone did look for other employment with NAPA but he denies ever stating that SAA was so dysfunctional that he could steer the St Catherine's employment to them. He has been employed at Southampton Hospital since sometime in 2009. He has not received and believes he is entitled to deferred compensation, a return of his investment in Surgicare, the distributions and value of benefits under his employment agreements due to his alleged wrongful termination, all of which are set forth in Court's Exh 2.
Dr. Fusco, a board certified anesthesiologist since 2004, testified that she was employed by SAA from 2003 through 2009. She worked both at St Catherine's of Siena and at one of the outside facilities for two gastroenterologists, Drs. Albert and Gallo, who had a financial arrangement with OBA. Dr. Fusco states that when that facility considered discontinuing OBA's services, Dr. Bonanno essentially blamed her for the loss of the contract, despite her belief that she was well-liked at such facility and did a good job. Dr. Fusco states that she considered Dr. Verdone a friend and felt disappointed when he was terminated from the practice. She also testified that she had certain concerns with the billing practices of the entities, as she found that bills for her services in Suffolk County were coming from an address in New York City. When she asked about the issue, she claimed that Dr. Bonanno told her it was none of her business.
Within a few months of the loss of the gastroenterology agreement, Dr. Fusco states that she was approached by Drs. Bonanno and Rossein and told they wanted her to leave, as they had heard she was looking for other positions. When she asked whether she could remain, she asserts that Dr. Rossein essentially threatened her. On cross examination, Dr. Fusco was asked whether she was aware that OBA and SAA had New York City P. O. Box addresses as such was the location of the entities' lock boxes at Chase Bank. (Plaintiff's 90). While she could not verify this, she asserts that she still believed the billing practices were improper and she states that she so reported to both the Federal Office of the Inspector General and the State Department of Health.
Dr. Fusco also claims that certain of the other doctors would complain about her physical appearance, including the fact that she wore jewelry. Dr. Fusco resigned her staff privileges at St Catherine's and all the monies owed her have been paid.
Dr. Silverberg, an anesthesiologist since 1989, board certified since 1996, testified that he is a member of two anesthesiology practices on the eastern end of Long Island, known as Advanced Office Anesthesia ("AOA") and East End Anesthesia ("East End"). East End provides anesthesia services for the Southampton Hospital, where Dr. Silverberg is the Chair of Anesthesiology. His practice hired Dr. Verdone in March 2009 . He states that his practice received two comments from SAA Dr. Suazo concerning Dr. Verdone. While the first was a positive recommendation, approximately six months later, according to the witness, the same physician gave East End a negative report. This occurred when East End was considering extending Dr. Verdone's contract; he testified that the turnaround caused them to ignore the negative report. [*18]
According to Dr. Silverberg, AOA administers anesthesia services to several off site facilities. However, in 2009 and 2010, AOA's contracts with these off site facilities were canceled when they both went into contract with OBA. In both instances, the amounts OBA offered to pay the facilities was far in excess of both what AOA had been paying for the administrative fees and also far in excess of AOA's fair market evaluations. (Defendant's I and Defendant's O). While AOA had been paying approximately $36,000 to Twin Forks and Peconic Gastroenterology, the amounts set forth in OBA's fair market evaluations were $150,000 and $119,999, respectively. According to Dr. Silverberg, he did not want to lose the income from this work and sought a consultant to determine a new fair market evaluation; but his consultant could not cone up with figures any higher than $70,000. Accordingly, he lost the business and suffered financially.
Dr. Silverberg set forth that Dr. Verdone has left his practice voluntarily and has stated to him that it was his desire to return to St Catherine's of Siena.
Dr. Kurlander testified that he was a shareholder in the subject corporate entities from 1994 through November 2010 when he resigned from SAA and its affiliates, shortly after being suspended from practice with such entities. He also testified that he was suspended from his position as president of the Board of such entities sometime around the end of May, 2008. He further states that approximately one and one-half years after the suspension, he entered into a financial arrangement with the subject corporations.
Dr. Kurlander was questioned extensively concerning the purchase of Surgicare. He set forth that from 2003 on, SAA had been providing anesthesiology services to that entity and that the decision to purchase Surgicare was always considered to be a purchase by the individual shareholders rather than by one of the subject corporations. He admits that he was present and signed the purchase agreement on April 5, 2007. He states that he was accompanied to the meeting which took place at the office of SAA's counsel, by Drs. Gambhir and Buffa and that they were both aware that the purpose of the meeting was to finalize and to enter into a purchase agreement. However, he did state that both those physicians left the meeting prior to his actual signing. Dr. Kurlander confirms that SAA loaned money to Surgicare in order to help that entity pay its expenses while the purchase agreement by the individual shareholders was pending and not yet closed; and states that eventually there was an accounting under which these monies were converted into a loan to Surgicare by SAA. He believed that such monies were really not encumbering the corporate assets since they were really funds that were treated as distributions to the individual shareholders on their tax returns. He explained that for convenience, the monies were transferred from SAA to Surgicare, but were really monies that could have been first transferred by SAA to the shareholders and then subsequently to Surgicare and that the real purpose of the transfers is that which is reflected on the individual shareholders' K-1's. Dr. Kurlander signed the credit note from SAA to Surgicare (Defendant's U), which states that the principal amount shall be "unlimited". By the time of the closing of the transaction, he admits that the amount borrowed was $2,586,546 (Defendant's U). He did not recall whether the shareholders of the entities ever got a full accounting of all the monies paid by SAA to Surgicare to keep it operating pending the closing of the sale to the shareholders. He also [*19]set forth that he was aware that under the purchase agreement, no monies paid by the shareholders for the purchase were escrowed pending the final approval of the Department of Health and that some of such funds could have been lost if the final approval had not been accomplished. According to Dr. Kurlander, Dr. Verdone supported the purchase of Surgicare but objected to a linking of one of the subject corporations to the purchase or the obligations in connection therewith. Ultimately, according to Dr. Kurlander, a decision was made to have one of the corporate entities borrow money for the purchase, distribute the loan proceeds to the shareholders, thereby providing the shareholders with the means, if necessary, to make the purchase as individuals. However, again, he did not consider this to be an encumbrance of corporate assets because the distribution was to the individual shareholders who would bear the tax consequences.
Dr. Kurlander states that during his tenure as president of the entities, they provided anesthesiology services to approximately five outside entities but that in no case were they governed by a written agreement; however, he admits that after he left the Board he learned that written agreements for such were necessary. With regard to the amounts paid by OBA to Drs. Albert and Gallo, gastroenterologists in Port Jefferson, he testified that they were for the purposes of renting space, storage space, personnel, including nurses and office staff as well as technicians. He did state that once confronted with a written agreement, that entity severed the parties' working relationships. According to Dr. Kurlander, Dr. Verdone never complained at any meetings or otherwise about the relationships between the entities and outside practices during any time, including the years he was on the Board. He also states that he was aware that after his suspension from the Board many written agreements between the entities and outside practices were prepared.
Dr. Suazo, a shareholder of the three subject entities and secretary/treasurer thereof from 2004 through the end of 2008, testified that he was the signatory on the agreement with Brooklyn Endoscopy, which is back dated, but could not confirm the date it was actually signed, although the document itself is dated May 21, 2008 (Plaintiff's 28). Although counsel showed Dr. Suazo his K-1's and W-2's for 2007 through 2010 for the three entities as well as for Surgicare and Alliance, (Defendant's Z) he was unable to state whether the 2011 documents, not yet filed at the time of trial, were within 10% of the 2010 figures. The Court did permit entry into evidence of Defendant's Z-1 which was a compilation of the relevant K-1's and W-2's for all the shareholders for the period in question for all the relevant entities for which Dr. Verdone is seeking distributions.
With regard to the Surgicare purchase, Dr. Suazo testified that he was aware on several occasions that Dr. Verdone wanted to withdraw from the Surgicare transaction; however, Dr. Suazo set forth that Dr. Verdone blew hot and cold, sometimes seeking to withdraw and then actively participated in the funding and the purchase. Although the witness testified that Dr. Verdone never formally withdrew from the transaction, he did author an e-mail to an attorney for the entities stating in June 2008 that Dr. Verdone had decided to withdraw from the transaction and asking the attorney to draft documents to accomplish this (Defendant's F). Dr. Suazo avers that this communication, never acted upon, was merely one of the times Dr. Verdone wanted out; and that he kept changing his mind. On the other hand, Dr. Suazo did state that it was his understanding that any of the [*20]shareholders had the right to withdraw from the transaction at any time if he wished to do so. While he stated on direct examination that a default in the purchase under the Agreement (Plaintiff's 14) could result in the loss of millions of dollars under a forfeit provision, he also stated that there was no reason one of the other shareholders would be prevented from purchasing Verdone's shares.
Dr. Suazo set forth that he was the person who spoke several times on the telephone with Dr. Muller, an anesthesiologist from the East End Anesthesiology Group, which had hired Dr. Verdone, following his termination from the subject entities. He states that while the first conversation in early 2009 was relatively favorable concerning Dr. Verdone's qualifications, once he learned of Dr. Verdone's alleged inappropriate actions concerning Huntington Hospital, he telephoned Dr. Muller in the Fall of 2009 to let him know that he believed that Dr. Verdone was "untruthful".
Anne Gallagher, former Vice President of the Chase Bank Middle Market Group, testified that while the prospective loan application by the shareholders for the purchase of Surgicare was being considered in her group, there was no commitment issued. When she received the communications from Dr. Verdone late Thursday, October 2, 2008, and before 7 a.m. on October 3, 2008, she states that she learned for the first time about his opposition to the corporate entities being involved in a loan transaction. She was surprised by the letter and found that the shareholders had not been honest with the bank. She did state that when Chase was first approached with the loan request it was on behalf of the individual shareholders, as borrowers, but that the bank required one of the corporate entities to be the borrower.
Philip Kanyuk, a partner at Holtz Rubenstein Remnick, certified public accountant and forensic accountant, testified concerning the May 27, 2008 HRR report issued at the request of various shareholders of the subject entities (Plaintiff's 30). He testified that his firm was asked by Drs. Bonanno and Rossein to perform a focused analysis concerning areas such as payroll and credit card spending. In particular, several of the shareholders did ask him to focus particularly on the spending of Dr. Kurlander, who at the time, was performing most of the entities' administrative functions. He did state that it was not his focus nor was he asked to examine the various agreements the entities had with outside practices such as Surgicare and Drs. Albert and Gallo. He was unaware that items set forth on his report as consultant fees to certain doctors may have been for administrative and rental fees in connection with use of those physicians' facilities and/or part of the purchase price of a facility.
Mr Kanyuk did attend a meeting with what he believed to be all the entities' shareholders, during which he presented the findings of his report for hours. He set forth that it was a detailed meeting and covered all the information in the report "from front to back". Although he recalls that there was some participation with the doctors, he states that the only memorable "back and forth" occurred between him and Dr. Kurlander, who raised issues with some of his findings.
Mr Kanyuk states that he came to the conclusion that the overall internal controls over cash disbursements were weak; that the support for credit card statements were not kept with the corresponding statements; and that verification of work shifts for the various physicians was lacking. [*21]He did label the report as an internal document meant for the shareholders of the entities only.
Michele Masucci, an attorney and partner with the law firm of Nixon Peabody, as well as group leader in that firm's health services practice, testified concerning her representation of the subject entities. She states that she was aware that the individual shareholders were listed as the purchasers of Surgicare in the 2007 stock purchase agreement as opposed to any of the corporate entities. It was also her opinion at the time of such agreement, as set forth in her own letter of February 2008 that none of the corporate entities were able to be the purchaser under the by laws as existed at the time of such agreement (Plaintiff's 21). She was not involved with the process of attempted bank financing of the purchase and states that if the corporations instead of the individuals were pursuing the financing for the purchase, that such would contradict her February correspondence to Dr. Verdone's attorney.
Ms Masucci did state, however, that under certain circumstances, posed to her in hypothetical form, a loan to one of the entities, the proceeds of which are given to the individual shareholders on an equal basis, approved as required by the BCL, could be lawful, so long as such was in compliance with corporate by-laws. She did opine, however, that she would be concerned if one of the shareholders were not in agreement, as it was her practice, especially when advising closely held corporations, to obtain consent of all involved. She also set forth that she would have concerns regarding the legality of the transaction if such would adversely affect the dissenting shareholder.
Ms Masucci states that she participated in the drafting of the agreement in 2003 under which SAA provided anesthesia services for Surgicare, prior to the purchase, and set forth that she saw nothing unlawful in the annual payment by SAA of $180,000 stating that such assumes that actual services were provided and that the number reflected the fair market value of such services. In addition, she set forth that she saw no illegality in the funding of the Surgicare practice by SAA pending the closing on the purchase, again provided there were a full accounting of such expenditures. Finally, upon being shown Exhibit 48, the entities' September 24, 2008, letter to Dr. Verdone, offering to buy out his interest in the Surgicare purchase and indemnify him from any losses he may sustain, that such was a reasonable attempt at accommodation by the shareholders to Dr. Verdone.
PLAINTIFF'S REBUTTAL WITNESSES
Dr. Gambhir, a board certified anesthesiologist, who obtained his license in 2003, testified that he became a shareholder of the entities in 2007. He was one of the shareholders appointed in 2008 to the newly constituted finance committee. According to Dr. Gambhir, the committee, which met until sometime in 2010, was formed to institute checks and balances and obtain a better handle on the financial operations of the entities, whether in the area of payroll, pension or any other such matter. According to Dr. Gambhir, he spoke often to Dr. Verdone, was present at the May 2008 [*22]presentation of the HRR report and that at no time during the Summer of 2008 did Dr. Verdone make any comment to him concerning the contents of the HRR report. Dr. Gambhir set forth that all shareholders were given the right to see the HRR report in the office and that he did not believe that it should have left the office. Dr. Gambhir was present at the meeting called by Dr. Buffa at his home in September 2008. He set forth that although Dr. Verdone brought a copy of the HRR report with him and had by that time obtained such report as a result of a lawsuit, that he said not one word about the contents of such report. He also alleges that not one word was mentioned regarding an alleged $10,000 cash payment by Dr. Kurlander to an outside physician. The only subject that was raised at the meeting was Dr. Verdone's dissatisfaction with the fact that Dr. Bonanno was in charge of the call schedule at Saint Catharine's of Siena and Dr. Verdone believed that the position should have rotated among the physicians.
With regard to the purchase of Surgicare, Dr. Gambhir set forth that he came up with the funds at the last moment by borrowing on a home equity line of credit and obtaining funds from his parents.
Dr. Makrides testified that he has been a licensed physician since 2000 and a board certified anesthesiologist since 2004. He has been a shareholder of the subject entities since early 2007 and has been the president of the medical staff at Saint Catherine's of Siena. Like Dr. Gambhir, Dr. Makrides states that although he saw Dr. Verdone at work following the issuance of the HRR report, Dr. Verdone never discussed it during the Summer of 2008. Dr. Makrides set forth that he also was invited to and did attend the private meeting with Dr. Verdone at Dr. Buffa's home in September of 2008. He set forth that the purpose of the meeting was to see if the doctors invited, who he considered to be friends of Dr. Verdone, could bring him back into the fold as a supporting member of the entities as opposed to an alienated figure within the practice. Like Dr. Gambhir, Dr. Makrides states that Dr. Verdone did not mention the HRR report once at the meeting but only complained about the call schedule and his desire to have Dr. Bonanno removed from the position of the coordinator of such. In addition, Dr. Makrides avers that Dr. Verdone never stated at this meeting that Dr. Kurlander had told him that he had made a $10,000 payment to another physician outside the group.
RELEVANT CONTRACTUAL PROVISIONS
The provisions of the parties' Shareholders' Agreements (Plaintiff's 85) and Employment Agreements (Plaintiff's 86), which are identical for the subject entities, as they pertain to the case at Bar, are as follows:
EMPLOYMENT AGREEMENT BETWEEN
MATTHEW VERDONE D.O.
SUFFOLK ANESTHESIOLOGY ASSOCIATES, P.C.
This employment agreement is made this 2nd day of March 1998, to be effective as of the Effective Date (as herein defined) by and between SUFFOLK ANESTHESIOLOGY ASSOCIATES, P.C. a New York professional corporation having its principal place of business at P. O. Box 694 , Smithtown, New York, 11787 (the "Corporation") and Matthew Verdone, D. O., an individual residing at 159 Hidden Pond Circle, Hauppauge, New York, 11788, (the "Physician").
. . .
4. (a) Amount and When Payable. As compensation for the services provided by the Physician under this Agreement, the Corporation shall pay the Physician an amount recommended by the Board of Directors and confirmed by the Shareholders. The Corporation shall pay the compensation due the Physician under this Agreement on a bi-weekly basis.
. . .
4.( c) (iv) Reimbursement for Business Expenses The Corporation shall reimburse the Physician for reasonable business expenses incurred in the performance of his/her duties and responsibilities under this Agreement which have been approved in advance by the Corporation, in accordance with the policies and procedures established by the Corporation.
. . .
4. (ix) Deferred Compensation Upon termination of this Agreement (for any cause), the Physician shall be entitled to Deferred Compensation (such term is defined herein) according to the following schedule:
a. If termination shall occur at any time prior to the end of the first year of Physician's employment by the Corporation, the Physician shall be entitled to no Deferred Compensation.
b. If termination shall occur at any time prior to the end of the second year of Physician's employment by the Corporation, the Physician shall be entitled to 20% Deferred Compensation.
c. If termination shall occur at any time prior to the end of the third year of Physician's employment by the Corporation, the Physician shall be entitled to 40% Deferred Compensation.
d. If termination shall occur at any time prior to the end of the fourth year of Physician's employment by the Corporation, the Physician shall be entitled to 60% Deferred Compensation.
e. If termination shall occur at any time prior to the end of the fifth year of Physician's employment by the Corporation, the Physician shall be entitled to 80% Deferred Compensation. [*23]
f. If termination shall occur at any time after the end of the fifth year of Physician's employment by the Corporation, the Physician shall be entitled to 100% Deferred Compensation.
For the purpose of this provision, the Physician's first year of employment by the Corporation began July 1, 1997.
Deferred Compensation shall be an amount equal to the Corporation's total accounts receivable on the date of termination divided by the number of shareholders on the date of termination (Deferred Compensation "). Deferred Compensation shall be reduced by any amounts paid by the Corporation during such time that the Physician may have been disabled, and/or any amounts paid to the Physician while the Physician was suspended pursuant to Section 5(f) hereof. An amount equal to twenty percent (20%) of Deferred Percent of Deferred Compensation shall be paid in cash or by certified check within two months after the Termination Date. The obligation to make payment of any portion of Deferred Compensation payable after the Termination Date shall be evidenced by a series of twelve (12) promissory notes to be delivered two months after the Termination Date. The first installment under such note shall be due two months after the termination Date and the remaining installments due monthly thereafter. These notes may be prepaid at any time without premium or penalty. Notwithstanding the foregoing, in the event that all payments for Deferred Compensation in the event of death, retirement, disability or otherwise exceed six percent (6%) of gross revenues of the corporation, then the payments to the Physician Employees shall be decreased proportionately and the time to pay extended accordingly so that the Corporation does not pay more than six percent (6 %) of its gross revenues per year to former Physician Employees, but that the full amount due each former Physician Employee is paid.
. . .
5(d)Termination Without Cause by the Corporation. The Corporation may terminate this Agreement, immediately, without cause, upon a vote of seventy - five per cent (75 %) of the Shareholders of the Corporation.
5(e) Termination With Cause by the Corporation. The Corporation, may, by a vote of sixty six and two-thirds percent (66 2/3%) of the Shareholders, terminate this Agreement immediately for any of the reasons listed below which shall be deemed to be "for cause".
. . .
(Any shareholder who has)
(A) engaged in any act of personal dishonesty, gross negligence, or willful misconduct that has a material adverse effect on the Corporation, its business operations, financial condition, assets, prospects or reputation. . .
( C ) materially breached any fiduciary duty to the Corporation involving personal profit. . [*24].
6. Covenant Not to Compete.
During the term of this Agreement and for a period of three (3) years after expiration of termination of this Agreement, the Physician shall not within a twenty (20) mile radius of any location where the Corporation provide services:
(i)Hold medical staff privileges at any other hospital or practice at any other facility of which anesthesia services, pain management or critical care medicine are rendered, engage or have any interest in any company, practice, business, partnership or venture engaged in the same or any similar business as the Corporation or any Affiliate of the Corporation (a Competing Practice") whether with a person, firm, association, trust, venture, corporation or other entity or enterprise, or whether such interest is as sole proprietor, partner, shareholder, agent, officer, director, employee, advisor, consultant, trustee, beneficiary or otherwise, in a Competing Practice. . .
. . .
7. Covenant Not to Solicit. For three (3) years following the termination of this Agreement, the Physician shall not:
(a) Directly or indirectly solicit, recruit or hire, or induce any party to solicit, recruit or hire any person who is an employee of, or who has entered into an independent contractor arrangement with, the Corporation or any Affiliate of the Corporation;
(b) Directly or indirectly, whether for himself /herself or for any other person or entity, call upon, solicit, divert, or take away, or attempt to solicit, call upon, divert or take away any of the patients, customers, business or clients of the Corporation or any Affiliate of the Corporation: or
( c) Directly or indirectly solicit or induce any party to solicit, any of the Corporation's Contractors or the contractors of any Affiliate of the Corporation, to enter into the same or a similar type of contract with any other party; or
(d) Disrupt, damage, impair, or interfere with the business of the corporation or any Affiliate of the Corporation.
. . .
This agreement (the "Agreement") made as of this 2nd day of March 1998, by and among Suffolk anesthesiology Associates, P. C., a corporation formed from under the laws of the state of New York, with a mailing address at 48 Route 25A, Smithtown, New York, 11787, (the Corporation) and all of the holders of shares of the Corporation's common stock. A list of such [*25]holders of shares and their respective holding of shares is attached hereto as Exhibit A. All shares of stock of the Corporation issued as of the date of this Agreement or in the future are referred to herein as the "Shares" and any of the holders of the Shares hereinafter referred to individually as a "Shareholder" or collectively as "Shareholders").
. . .
The purchase price (the "Purchase Price") shall be equal to the par value of Shares. In addition, the Shareholder shall be entitled to Deferred Compensation in accordance with the Shareholder's Employment Agreement.
. . .
Upon the occurrence of a Call Event (as defined in Section 4.3.1 below, ) the Corporation shall purchase all, but not less than all, of the Shares (the "Called Shares") held by the Shareholder that is the subject of the Call Event (the Outgoing Shareholder") for the Purchase Price (determined in accordance with Section 4.2.1 above) and in accordance with the following terms:
As used herein, the term "Call Event" shall mean the occurrence of any of the following:
(i)the death of a Shareholder;
(ii)the voluntary termination by a Shareholder of his or her employment by the Corporation;
(iii)the termination of the employment of a Shareholder with the Corporation by the Corporation for Cause (as defined in the Employment Agreement between the Corporation and such Shareholder);
(iv)the retirement of a Shareholder;
(v)a Shareholder becoming Disabled (as defined in Section 5 below);
(vi)the declaration by a court of law that a Shareholder has been judicially declared incompetent.
. . .
7.Payment for Shares; Deferred Compensation; Closing.
7.1.Unless otherwise indicated, Shares shall be purchased for the Purchase Price and shall be paid in cash or by certified check in full at the closing.
7.2.Deferred Compensation shall be paid in the manner set forth in the Employment Agreement. [*26]
7.3.At the closing, the Selling Shareholder shall deliver all certificates evidencing his or her Shares, duly endorsed for transfer with all necessary transfer stamps affixed thereto, to the Purchaser.
. . .
10.2. Covenant Not to Solicit. For three (3) years following the termination of this Agreement, the Shareholder shall not:
. . .
10.2.2.Directly or indirectly, whether for himself/herself or for any other person or entity, call upon, solicit, divert, or take away, or attempt to solicit, call upon, divert or take away any patients, customers, business or clients of the Corporation, any Affiliate of the Corporation.
. . .
12.12. Election of Remedies. The respective rights of the parties to this Agreement shall be cumulative. Each party shall have all other rights and remedies not inconsistent with this Agreement as law and equity may provide. No exercise by any party of any one right or remedy shall be deemed to be an exclusive election of rights or remedies.
. . .
The cause of action termed "breach of fiduciary duty" has always appeared to this Court to settle in the realm of somewhere between the areas of contract and tort law. In order to establish the same, as an independent cause of action, a party so claiming must demonstrate that the party sued stands in a fiduciary relationship with the Plaintiff; that the defendant had engaged in some misconduct demonstrating disloyalty to the plaintiff, and that the defendant's actions are directly interwoven with damages asserted. Kurtzman v Bergstol, 40 AD3d 588, 835 NYS 2d 644 ( 2d Dep't 2007). Whether a fiduciary relationship actually exists between the parties to a particular action is by necessity, always a question of fact. AG Capital Funding Partners LP v State Street Bank and Trust Co, 11 NY3d 146, 866 NYS 2d 578, 896 NE 2d 61 (2008); Marmelstein Kehillat New Hempstead, 11 NY3d 15, 862 NYS 2d 311, 892 NE 2d375 (2008); EBC I Inc v Goldman Sachs & Co, 5 NY3d 11, 799 NYS 2d 170, 832 NE 2d 26 (2005). Shareholders in closely held corporations undoubtedly owe a fiduciary duty to other shareholders in the corporation as well as to [*27]the corporate entity, often referred to as undivided and unqualified loyalty. Global Minerals and Metals Corp v Holme, 35 AD3d 93, 824 NYS 2d 210 (1st Dep't 2006 ).
The elements of a cause of action for breach of contract require the party asserting the same to demonstrate as follows: 1) formation of a contract between the parties; 2) performance by the plaintiff; 3) failure to perform by the party being sued; and 4) resulting damages. Furia v Furia, 116 AD2d 694, 498 NYS 2d 12 (2d Dep't 1986). In order to determine the meaning of a contract, the court must examine the entire instrument, which may include more than one document, and consider such in the context of the relation of the parties and the circumstances under which the contract was executed, with the wording itself to be considered in the light of the obligations as a whole and the intention of the parties as manifested by such obligations. Brad v New York, 17 NY3d 180, 928 NYS 2d 221, 951 NE 2d 743 (2011). All parts of a contract and/or integrated agreements must be read in harmony to determine their full meaning. Bombay Realty Corp v Magna Carta Inc, 100 NY2d 124, 760 NYS 2d 734, 790 NE 2d 1163 (2003).Primary attention is always focused on the purpose of the parties in making the contract, Greenfield v Philles Records, Inc, 98 NY2d 562, 750 NYS 2d 565, 780 NE 2d 166 (2002), and, in a commercial context, this includes the business purpose sought to be served. Madison Avenue Leasehold LLC v Madison Bentley Associates LLC, 30 AD3d 1, 811 NYS 2d 47 (1st Dep't 2006), aff'd, 8 NY3d 59, 828 NYS 2d 254, 861 NE 2d 69 (2006). When interpreting contracts utilized in a business setting, the tests to be applied include common speech as well as the reasonable expectation and purpose of the ordinary business person in the factual context in which terms of art and understanding are utilized, often also keyed to the sophistication of the parties involved in the dispute. BP Air Conditioning Corp v One Beacon Ins Group, 8 NY3d 708, 840 NYS 2d 302, 871 NE 2d 1128(2007); Uribe v Merchants Bank of New York, 91 NY2d 336, 670 NYS 2d 393, 693 NE 2d 740 (1998); see, Bombay Realty Corp. v Magna Carta Inc, supra.
The elements of interference with a prospective contract or business relationship are the following: 1)defendant's knowledge of plaintiff's business opportunity with another party; 2) defendant's intentional interference with such opportunity; 3) defendant's use of wrongful means or sole purpose of inflicting harm; 4) a showing that the contract or prospective business relationship would have been entered into but for defendant's interference, and 5) resulting damages. Carvel Corp v Noonan, 3 NY3d 182, 785 NYS 2d 359, 818 NE 2d 1100 (2004); NBT Bancorp Inc v Fleet/Norstar Financial Group Inc, 87 NY2d 614, 641 NYS 2d 581, 664 NE 2d 492 (1996); A S Rampell Inc v Hyster Co, 3 NY2d 369, 165 NYS 2d 475, 144 NE 2d 371 (1957); Gettinger Assoc LP v Abraham Kamber Co LLC, 83 AD3d 412, 920 NYS 2d 75 (1st Dep't 2011). The far more stringent requirements necessary to prove a case of tortious interference with a prospective contract than those set forth for the interference with contract tort are a product of the balance that courts have struck between society's interest and respect for the integrity of a contractual relationship on the one hand and society's interest in free and honest competition on the other. NBT Bancorp Inc v Fleet/Nortsar Financial Group Inc, supra, citing Guard-Life Corp v S Parker Hardware Manufacturing Corp, 50 NY2d 183, 428 NYS 2d 628, 406 NE 2d 445 (1980). [*28]
The Business Corporation Law § 908 authorizes a corporate entity to provide a corporate guarantee even if such is not in furtherance of corporate purposes, "(w)hen authorized at a meeting of shareholders by two-thirds of the votes of all outstanding shares invited to vote thereon".
As closely held corporations (and in the case of OBA, a PLLC) the shareholders/members thereof owed each other and the corporate entities an undivided duty of loyalty and trust. In the case at bar, the events leading to the ultimate purchase by the individual shareholders of the Surgicare ambulatory facility, via prospective loans and guarantees by the corporate entities, was approved by 11 of the 12 shareholders/members after numerous meetings, discussions and negotiations on their behalf with various lending institutions. While Dr. Verdone expressed his disagreement with the method of proposed funding for almost one year before the October 3, 2008 incidents, as was clearly his right, his co- shareholders/ members in the various entities disagreed with him. They voted, in addition, by a vote of a super majority, in accordance with BCL § 908, to change the by-laws of the various entities, to allow the borrowing by one of the corporate entities to occur.When Dr. Verdone telephoned and e-mailed bank officials, without the knowledge or acquiescence of his co-shareholders in the three entities, he clearly breached the required duty of loyalty. Although Dr. Verdone did not wish any of the corporate entities to encumber their assets in connection with the purchase, that is the decision the shareholders/ members made in Dr. Verdone's presence. In this context, the Court found most credible the testimony of both Stolzenberg and the many other physicians who testified that Dr. Verdone was present during the lengthy presentation by the entities' CFO, Stolzenberg, who informed the physicians that the tax consequences of allowing the PLLC to be the named borrower inured to the benefit of each of the members. In addition, the Court found extremely convincing the testimony of the corporations' former counsel, an expert in the area of health law, that by amending the by-laws and providing for an accounting, the purchase as structured to be based on loans and guarantees by the corporate entities could become legal. This Court finds, that the hypothetical facts the counsel was given, did in fact occur.
In addition, the Court finds that Dr. Verdone's termination was "for cause" under the provisions of the parties' agreements which define that term to include "(w)illful misconduct that has a material adverse effect on the Corporation, its business operations, financial condition, assets, prospects or reputation". Interestingly, in response to questioning, the bank officials both set forth that they were surprised by Dr. Verdone's intense opposition to the loan prospects and Anne Gallagher found that the corporate entities and shareholder/members thereof lacked candor and honesty in having failed to inform them of Dr. Verdone's position. That testimony, in conjunction with the amendment of the by-laws, and the testimony of Stolzenberg demonstrate to the Court that the corporate entities and the shareholders/ members thereof had an interest in the loan being accomplished through OBA, that Dr. Verdone violated his duty of loyalty both to the entity and its members by speaking privately both at night and in the early morning of October 3, 2008 to a bank official, and that his actions did cause damage to the reputations of the shareholders/members and the entities involved. The acts of Defendant in Action #1 also caused damage to each of the individual co-members of the PLLC, to the extent of a lost tax benefit. While it is true that these Plaintiffs have withdrawn their request for monetary compensation for such acts, they have still [*29]proved their entitlement to relief under the Employment Agreements for Dr. Verdone's breach of his fiduciary duty to his co-shareholders/members as well as his misconduct causing harm to the reputation of the corporate/company entities involved in this action.
The Employment Agreements include within their definition of a basis for "termination for cause" a breach fiduciary duty. In the Court's opinion, reading the documents as a whole in the context of their purpose, which was, at least, in part ,to create and sustain a relationship among co shareholders within a closely held group of entities, who practiced medicine and engaged in various business ventures to act with a degree of loyalty towards each other, the nighttime and early morning telephone calls clearly fall outside the duty of trust contemplated. A finding of breach of fiduciary duty sufficient to satisfy a termination for cause under the Agreements does not require proof of damages such as would be required as an independent element of the cause of action itself.
Based on this finding, the Court, upon review of the Shareholders Agreements and Employment Agreements, as set forth above, determines that the December 15, 2008 vote of the shareholders/members of the three entities constituted a "termination for cause" of Dr. Verdone based upon his breach of fiduciary duty, as set forth in sections 4.3.1(iii) (viii) (A and C) (Plaintiff's 85) and 5(e)(viii)(C)(Plaintiff's 86) .
While Dr. Verdone may have provided the Plaintiffs in Action # 1 with the basis for termination, the Court finds that Dr. Verdone has demonstrated that the entities have breached their Agreement with him in terms of his entitlement to compensation. Termination for any cause required the entities to make certain defined payments to Dr. Verdone and the failure of the Plaintiffs in Action #1 to accomplish this constituted a breach of the Shareholders' Agreements and Employment Agreements as set forth above. Under Section 4.3.1 of the Shareholders' Agreements, the termination for cause constituted a "Call Event", entitling Dr. Verdone to the benefits set forth in the Employment Agreements.
Thus, while the Plaintiffs in Action # 1 may have demonstrated entitlement to a Declaratory Judgment, resulting in certain relief as a result of a proper termination for cause, the Court does not find that Dr. Verdone has lost any entitlement to his benefits that accompany termination due to the discussion he had with the NAPA representatives. While such conduct, which the Court finds did occur, may have also been a breach the parties' agreements concerning non-solicitation, nothing occurred as a result. In addition, and more significant to the Court, the corporate entities did themselves engage in less than professional behavior in their takeover of outside practice anesthesiology services for the two east end practices, which they knew had hired Dr. Verdone after his termination from their practice and which were located in geographic locations into which they had not ventured in their many years of operation. In other words, it appears to the Court that each of the parties herein attempted to harm the other financially after the termination and during the pendency of these lawsuits.
To the extent that either party seeks damages from the other in either of the pending actions for this post-termination conduct, they are barred from accomplishing the same by the doctrine of [*30]in pari delicto. As a court of equity, this court will not sanction nor award such acts by either side of the equation.
Therefore, reading the Shareholders Agreements and Employment Agreements together, as they are inextricably related, the Court finds that the termination for cause constitutes a "Call Event", which entitles Dr. Verdone to the amounts set forth under the parties' agreements. To the extent that Dr. Verdone has received none of the monies to which he is entitled, and indeed that a refusal to pay such funds beginning at the end of December 2008 occurred, the Court finds that the corporate entities have breached their contracts with Dr. Verdone, causing him monetary damages. These damages constitute Dr. Verdone's deferred compensation under section 4(ix)(f) of the Employment Agreement and payment by the corporate entities to Dr. Verdone for his shares therein at the rates set forth in sections 4.2.1 and 4.3.1(iii) of the Shareholders' Agreements. In addition, under section 4 of the Employment Agreement, Dr. Verdone is entitled, for his services, to his compensation and expenses for his final year (2008). These are set forth in Court's 2. In connection therewith, Dr. Verdone is required to turnover his shares of the entities in accordance with section 7.3 of the Shareholders' Agreements. As the Court has determined that Dr. Verdone was properly terminated for cause and, therefore, had no rights other than as set forth above, as a shareholder/member of the subject entities, he lacks standing to make any derivative claims on behalf of those entities or to seek dissolution of the same as set forth in Action # 2 and such claims are therefore denied. As set forth, Plaintiffs claims in Action # 1 for declaratory relief and for relief as requested in connection therewith for breach of fiduciary duty are granted.
As the Plaintiffs in Action #1 have demonstrated their entitlement to relief as set forth, the Defendant in that action has not sustained his burden of demonstrating via counterclaim in Action #1 nor via his own plenary Action #2, that he was improperly terminated nor that the entities or individual shareholders/members breached fiduciary duties owed to him. Based on the testimony presented, the Court finds that Dr. Verdone was terminated solely for his actions in connection with the loans for Surgicare and not, as he insisted at trial, as a result of his role as a whistle blower. In this context, the Court found credible the overwhelming testimony of Drs. Rossein, Bonanno, Buffa, Suazo, Makrides, and Ghambir that Dr. Verdone was not instrumental in asking for the HRR report, nor in creating a finance committee, nor in any of the actions taken by the Board after Dr. Kurlander was removed, to create more financial transparency within the subject organizations. Most credible was the testimony of Dr. Buffa, a longtime ally and friend of Dr. Verdone's, who attempted to meet with him and certain other physicians privately to see if there was anything they could do to appease his apparent anger at the other shareholders and who stated truthfully that the only issue of concern to Dr. Verdone was the control over the call schedule.
In this context, the Court does not dismiss the concerns raised at trial by Dr. Verdone with regard to the outside practice requirements under federal and state laws. However, there exist governmental authorities charged with enforcement of the Stark laws and PHL Article 28. However, no one, including the attorneys in this matter, has set forth any analysis of such laws and what occurs if they are found to be violated. They are not even cited in the attorneys' post trial memoranda. The Federal anti-Kickback Law, 42 USCA § 1320-7b(1,2) provides, in relevant part, that it is illegal to: [*31]
"Knowingly and willfully solicit or receive . . .or knowingly and willfully offer or pay . . .any remuneration (including kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind . . . in return for referring an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under a Federal health care program".
The regulations adopted pursuant to this law provide a series of "Safe Harbors" which are essentially a set of procedures for parties to follow where it appears that the fee arrangement implicates this Anti-Kickback statute. 42 CFR § 1001.952. Yet, the Office of the Inspector General has stated that:
"Failure to comply with a safe harbor provision does not mean that an arrangement is per se illegal. Compliance with safe harbors is voluntary, and arrangements that do not comply with a safe harbor must be analyzed on a case-by case basis for compliance with the anti-kickback statute". Office of Inspector General, Office of Public affairs, Nov. 1999.
In this case, the entities assert that their outside practices are based on fair market evaluations, all conducted after the removal of Dr. Kurlander from the Board and that the entities have been represented by counsel in each of their endeavors. Dr. Verdone, on the other hand, has set forth that he does not believe these arrangements comply. It is for the appropriate authorities to make such determinations; and such has no effect on the parties' Shareholders or Employment Agreements, which are enforceable under the rules set forth by the Court of Appeals in Glassman v Prohealth Ambulatory Surgery Center, Inc, 14 NY3d 898, 904 NYS 342, 930 NE 2d 263 (2010). These rules sanction actions that are malum prohibitum .Thus, even if certain of the agreements were found to have violated fee splitting and or anti kick-back injunctions, such violations are not related to the employment and shareholder agreements which are at the center of this case and which are entitled to be enforced. As set forth by the Court of Appeals, "(f)orfeitures by operation of law are disfavored, and allowing parties to escape their contractual obligations, freely entered into is especially inappropriate where there are regulatory sanctions and statutory penalties in place to redress violations of the law". Glassman, Id. Thus, the allegations raised by Dr. Verdone, even if found to be true, do not excuse his actions under the parties' agreements that gave the Boards the authority to terminate him for cause.
In addition to the above, the Court finds that Plaintiffs have not demonstrated entitlement to their claim for tortious interference with prospective contract. While they have demonstrated that Dr. Verdone's actions were clearly a substantial factor in influencing the JP Morgan Chase officials to decline Plaintiffs' loan application in October 2008, Plaintiffs were unable to demonstrate that "but for" Dr. Verdone's actions, the loan would have been approved. The testimony of Anne Gallagher and William Ayers clearly demonstrates that there was no commitment to approve the loan on October 2, 2008 before the official got the e-mails and telephone call from Dr. Verdone. It was at least possible that certain liquidity statements were missing and that the ultimate approval authorities may have refused to authorize the loan. [*32]
In addition to Dr. Verdone's entitlement to damages, as set forth above, for the corporate entities' breach of the subject employment/shareholders agreements, Dr. Verdone has set forth a claim for breach of contract against the shareholders of Surgicare Inc, as he invested in such corporation, has received no distributions from such corporation since 2008 when he was terminated from the three other entities; and no attempt was made until trial, to return his investment in Surgicare with interest earned since its payment. Under the circumstances set forth, Dr. Verdone is entitled to repayment of his investment in Surgicare as well as his share of distributions from such corporation through the date of judgment, at which date, he shall be required to return his shares of that entity.
CALCULATION OF DAMAGES
The only evidence presented to the Court on the issue of damages in the event the Court found such were merited, consisted of the testimony of Dr. Verdone, calculations he provided and financial and tax information provided by counsel for the entities. Since the Court found the evidence of the actual numbers to be awarded somewhat lacking, it held one post trial telephone conversation with counsel for those entities.
Thereafter, the Court received a post trial letter from counsel for the entities, referring the Court to part of its record on appeal, with regard to a prior motion before another judge (Gazzillo,J.) (App Div Decision at 85 AD3d 1152).
Based upon the substantive determinations discussed in detail above, the Court finds that Dr. Verdone is entitled to damages as set forth in the parties' Agreements amounting to the following: 1) deferred compensation in the amount of $2,350,000 (Tr at 2177); 2) remaining distributions and income as a shareholder of the subject entities through his termination in 2008, if any, in an amount to be determined; 3) unpaid expenses for 2008 , through the date of termination, if any, in an amount to be determined; 4) return of Dr. Verdone's investment in Surgicare in an amount to be determined; 5) distributions for Surgicare up to the date of Judgment; and 6) pursuant to the Shareholders' Agreements, payment for Dr. Verdone's shares of the subject entities at the par value set forth in such Agreements, in an amount to be determined.
Counsel for the entities and for Dr. Verdone have set forth different figures for the amount remaining in the Surgicare investment. In addition, while Dr Verdone argues that he is owed $338,638 in 2008 distributions (Court's 2) and $41,000 in 2008 business expenses (Tr. 1932), the entities have submitted in a post trial letter, their argument as set forth in their brief on appeal, referred to above, that Dr. Verdone was actually overpaid for 2008. With regard to the par value of Dr. Verdone's shares of the subject entities, while the Agreements would make the figure $2500 (Plaintiffs' 85 and 86), the entities have again argued that such has already been paid. [*33]
The Court does find that the right (in amounts as already set forth or ,as stated, to be determined) of Dr. Verdone to all six of these categories of damages(unless already paid in certain instances as the entities argue) accrued, in full, due to the entities' breach of the subject Agreements, as of December 15, 2008. Therefore, upon the Court's determination of the final figures, the Court will order submission of Judgment and direct Dr. Verdone's turnover to the various entities, through their counsel, of his shares in all three entities as well as in the Surgicare entity. Counsel are directed to appear for the final hearing regarding the categories of damages described above on May 2, 2012 at 11 a.m. This hearing will not constitute an opportunity for any counsel to reargue the substantive determinations set forth in this Decision.
As a result of the Court's substantive determination, the Court does not find that Dr. Verdone is entitled to an accounting, as his damages are those described above, in certain instances the final amounts to be determined at the May 2, 2012 hearing. All other claims, counterclaims and/or applications for relief are denied.
This constitutes the Decision and Order of the Court.
Riverhead, New York
J. S. C.