CARDIOVASCULAR SPECIALISTS, P.S.C. VS. NICHOLAOS XENOPOULOS, M.D.
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RENDERED: NOVEMBER 24, 2010; 10:00 A.M.
TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2009-CA-001442-MR
CARDIOVASCULAR SPECIALISTS, P.S.C.
v.
APPELLANT
APPEAL FROM JEFFERSON CIRCUIT COURT
HONORABLE GEOFFREY P. MORRIS, JUDGE
ACTION NO. 09-CI-04817
NICHOLAOS XENOPOULOS, M.D.
APPELLEE
OPINION
VACATING AND REMANDING
** ** ** ** **
BEFORE: KELLER, MOORE, AND STUMBO, JUDGES.
KELLER, JUDGE: This is an appeal from an order of the Jefferson Circuit Court
directing Cardiovascular Specialists, P.S.C. (Cardiovascular Specialists) to provide
one of its shareholders, Nicholaos Xenopoulos, M.D. (Dr. Xenopoulos), with
certain documents and information. For the following reasons, we vacate and
remand.
FACTS
Cardiovascular Specialists is a professional service corporation
formed pursuant to Kentucky Revised Statutes (KRS) Chapter 274, and Dr.
Xenopoulos is a shareholder. On January 7, 2009, Dr. Xenopoulos’s counsel sent a
letter (the January 7th letter) to the President of Cardiovascular Specialists
requesting that Cardiovascular Specialists allow Dr. Xenopoulos to inspect certain
business records. Specifically, the letter stated that Dr. Xenopoulos wished to
inspect and copy the following records:
A.
The current articles of incorporation and bylaws of
the Corporation, together with any amendments or
addenda thereto;
B.
The minutes of all shareholders’ meetings, and
records of all action taken by shareholders without a
meeting since January 1, 2005;
C.
All written communications to shareholders
generally within the past three (3) years, including
financial statements. In the event that financial
statements have not been given to shareholders, then
demand is made alternatively under KRS 271B.16-200
for the financial statements for 2005-2008 inclusive.
Please provide, in addition to the companies’ financial
statements, federal, state and local tax returns for the
Corporation for 2007 and for 2008 upon completion.
D.
All minutes from any meeting of the board of
directors, records of any action of a committee of the
board of directors while acting in place of the board of
directors on behalf of the Corporation, records of action
taken by the board of directors without a meeting since
January 1, 2005; and
E.
All accounting records of the Corporation for
fiscal years 2005, 2006, 2007, and 2008.
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The letter stated that “Dr. Xenopoulos’ [sic] demands under
subsection (2) of KRS 271B.16-020 are made in good faith and for the purpose of
obtaining a true and accurate valuation of his shares in the Corporation.” It is
undisputed that Dr. Xenopoulos received all of the documents requested in the
January 7th letter.
On March 5, 2009, Dr. Xenopoulos’s counsel sent another letter (the
March 5th letter) requesting additional information. Specifically, the letter stated
that, after having reviewed the various materials previously provided by
Cardiovascular Specialists with Dr. Xenopoulos’s accountant, “it is apparent that
we need some additional information about a few items on the financial statements
. . . .” The following additional items were requested:
1.
We would appreciate receiving information
relating to any loans to the PSC’s shareholders, or
other entities, including but not limited to,
Kentuckiana Medical Center, and evidence of
repayment within the last five years.
2.
A detail of the rent and lease payments made to
landlords and lessors for 2007 and 2008. In
addition, we would like to know whether, and to
what extent, any of the shareholders have an
interest in entities leasing space or equipment to
the PSC.
3.
We would like to see the computation of
allocation of income and expenses resulting in the
amount paid to each of the shareholders for 2007
and 2008.
4.
Please forward a schedule of the staff which works
not only for the Practice but also for Kentuckiana
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Medical Center and/or Dr. Rumisek. In this
connection, we would like to see the allocation of
the hours of various members of the shared staff
and the allocation of their compensation to the two
entities.
5.
Finally, we would appreciate seeing a written
accounts receivable collection policy, if there is
one, and copies of uncollected invoices from all
the physicians currently over 180 days old as of
February 28, 2009.
Cardiovascular Specialists did not provide Dr. Xenopoulos with these
additional documents. On May 13, 2009, Dr. Xenopoulos filed a Verified Petition
For Order Enforcing Shareholder’s Right of Inspection in the Jefferson Circuit
Court, and on June 23, 2009, Dr. Xenopoulos filed a Motion for Order Compelling
Inspection of Corporate Records. On July 13, 2009, the trial court entered an order
granting Dr. Xenopoulos’s motion and directing Cardiovascular Specialists to
provide Dr. Xenopoulos with the requested documents within twenty days from the
date the order was entered. The trial court did not make any findings or provide
any reasoning for its decision in its order. This appeal followed.
STANDARD OF REVIEW
Matters of statutory construction are subject to de novo review and
this Court is not bound by the trial court’s interpretation. Halls Hardwood Floor
Co. v. Stapleton, 16 S.W.3d 327, 330 (Ky. App. 2000). However, when there are
questions of fact, or mixed questions of law and fact, we review the trial court’s
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decision pursuant to the clearly erroneous standard. Moore v. Asente, 110 S.W.3d
336, 354 (Ky. 2003). Under this standard, this Court will only set aside the
findings of fact of the trial court if those findings are clearly erroneous. The
dispositive question is whether the findings are supported by substantial evidence.
Id.
ANALYSIS
Cardiovascular Specialists contends that the trial court erred in
granting Dr. Xenopoulos’s motion. Specifically, Cardiovascular Specialists argues
that Dr. Xenopoulos did not have a statutory right to inspect the requested
documents.
As noted above, Cardiovascular Specialists is a professional service
corporation formed pursuant to KRS Chapter 274. Except as otherwise provided
under KRS Chapter 274, a professional service corporation has the “same powers,
authority, duties, and liabilities as a corporation formed under KRS Chapter
271B.” KRS 274.015(2). Because KRS Chapter 274 does not address a
shareholder’s right to inspect corporate documents, we must look to KRS Chapter
271B.
KRS 271B.16-020 creates two rights of inspection of corporate
records by a shareholder. The first, under KRS 271B.16-020(1), pertains to certain
documents which a corporation is required to have available at its principal office.
This includes the corporation’s articles of incorporation, bylaws, resolutions
regarding classes of shares, minutes or records of shareholders’ actions for the past
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three years, all written communications to the shareholders within the past three
years, including financial statements furnished to the shareholders, names and
addresses of current directors and officers, and the most recent annual report. See
KRS 271B.16-010(5). A shareholder has the right to inspect these corporate
records after giving five days’ notice. KRS 271B.16-020(1).
A separate right of inspection for other corporate documents is
provided under KRS 271B.16-020(2), which states that:
A shareholder of a corporation shall be entitled to inspect
and copy during regular business hours at a reasonable
location specified by the corporation any of the following
records of the corporation if the shareholder meets the
requirements of subsection (3) of this section and gives
the corporation written notice of his demand at least five
(5) business days before the date on which he wishes to
inspect and copy:
(a) Excerpts from minutes of any meeting of the board of
directors, records of any action of a committee of the
board of directors while acting in place of the board of
directors on behalf of the corporation, minutes of any
meeting of the shareholders, and records of action taken
by the shareholders or board of directors without a
meeting, to the extent not subject to inspection under
subsection (1) of this section;
(b) Accounting records of the corporation; and
(c) The record of shareholders.
Subsection (3) of KRS 271B.16-020 provides that:
A shareholder may inspect and copy the records
described in subsection (2) of this section only if:
(a) His demand is made in good faith and for a proper
purpose;
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(b) He describes with reasonable particularity his purpose
and the records he desires to inspect; and
(c) The records are directly connected with his purpose.
Based on the preceding, the first step in our analysis is to determine
whether documents requested by Dr. Xenopoulos are corporate records that a
shareholder is entitled to inspect. Dr. Xenopoulos argues that, pursuant to KRS
271B.16-020(2)(b), he does have a right to inspect all of the documents requested
in the March 5th letter because they are all “[a]ccounting records of the
corporation.” Cardiovascular Specialists contends that none of the documents
requested fall within any of the types of records a shareholder is entitled to inspect
and that Dr. Xenopoulos broadly characterized the additional documents as
“accounting records”.
As correctly noted by Cardiovascular Specialists, “accounting
records”, as set forth in KRS 271B.16-020(2)(b), is not defined. Because
“accounting records” is not defined, Cardiovascular Specialists points to KRS
271B.16-010(2) for guidance, which provides that a corporation must maintain
“appropriate accounting records.” In an attempt to define “appropriate accounting
records,” Cardiovascular Specialists cites to section 16.01 of the 1984 Model
Business Corporation Act.1 According to the Model Act’s official comment 2 for
that section:
1
The General Assembly enacted KRS 271B.16-010 in 1988, which models the 1984 Model
Business Corporation Act. With the exception of the references to section numbers, KRS
271B.16-010 is identical to section 16.01 of the Model Act.
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“Appropriate” records are generally records that permit
financial statements to be prepared which fairly present the
financial position and transactions of the corporation. In some
very small businesses operating on a cash basis, however,
“appropriate” accounting records may consist only of a check
register, vouchers, and receipts.
Cardiovascular Specialists argues that the documents Dr. Xenopoulos seeks are not
necessary for the preparation of Cardiovascular Specialists’ financial statements
and therefore do not fall within the Model Act’s definition of “appropriate”
accounting records. Thus, Cardiovascular Specialists contends that Dr.
Xenopoulos is not entitled to inspect the requested documents.
We note that, while KRS 271B.16-010(2) states that a corporation
must maintain “appropriate accounting records,” there is not a corollary statutory
right for a shareholder to inspect those records. Thus, that section is not relevant to
this appeal. We believe the relevant section in this case to be KRS 271B.16020(2)(b). Under this section, a shareholder has a right to inspect “accounting
records of the corporation,” under certain circumstances. Significantly absent from
the statutory language in that section is the word “appropriate.” Thus, the
definition of the word “appropriate” and the comment provided in the Model Act
are irrelevant to our determination of what constitutes an “accounting record”
under KRS 271B.16-020(2)(b). See Beckham v. Board of Educ. of Jefferson
County, 873 S.W.2d 575, 577 (Ky. 1994) (noting that our duty is to ascertain the
intent of the General Assembly and that we are not at liberty to add or subtract
language from a statute). Accordingly, we find Cardiovascular Specialists’
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argument that Dr. Xenopoulos is not entitled to inspect the requested documents
because they are not “appropriate” accounting records to be unpersuasive.
The determination of whether the documents requested by Dr.
Xenopoulos are accounting records of the corporation is a finding of fact to be
made by the trial court. However, it is unclear from the record whether the trial
court determined that the requested documents were accounting records, and the
trial court’s order is void of any such finding. Additionally, the March 5th letter
requesting the records, the complaint for inspection of the records, and the motion
to compel inspection of the corporate records do not contain any explanation as to
how the requested documents are accounting records of the corporation under KRS
271B.16-020(2)(b).
Even if the trial court had determined that the requested records are
accounting records of the corporation, the trial court did not make any findings
with respect to whether the requested records were “directly connected” to Dr.
Xenopoulos’s alleged proper purpose of valuing his shares. See KRS 271B.16020(3). As previously noted, subsection (3) of KRS 271B.16-020 provides that a
shareholder may inspect certain records if the demand is made in good faith and
for a proper purpose, if the shareholder describes which records he desires to
inspect with reasonable particularity, and if the records are directly connected to
the shareholder’s stated purpose.
Cardiovascular Specialists concedes that a good faith request for
corporate records for use in ascertaining a value on a shareholder’s stock is a
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“proper purpose” under KRS 271B.16-020(3)(a). Thus, it is not disputed that Dr.
Xenopoulos stated a proper purpose for requesting the documents. Further, having
reviewed the March 5th letter, we believe that Dr. Xenopoulos stated which
records he desired to inspect with reasonable particularity. However, the March
5th letter, the complaint for inspection, and the motion to compel inspection of the
corporate records do not contain any explanation by Dr. Xenopoulos as to why the
records are necessary for his stated purpose of stock valuation. Additionally, the
trial court did not make any findings with respect to whether the requested records
were directly connected to Dr. Xenopoulos’s alleged proper purpose of valuing his
shares.
Therefore, we vacate the trial court’s order granting the request for
inspection and remand this case to the trial court for specific findings as to whether
the requested documents are accounting records of the corporation. If the trial
court determines that the requested documents are accounting records of the
corporation, it should then make additional findings as to whether the requested
records are “directly connected” to Dr. Xenopoulos’s alleged proper purpose of
valuing his shares. The trial court may, if necessary, conduct additional
proceedings prior to making the required findings.
CONCLUSION
For the foregoing reasons, we vacate the trial court’s order and
remand for further proceedings consistent with the opinion.
STUMBO, JUDGE, CONCURS.
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MOORE, JUDGE, CONCURS IN RESULT ONLY.
BRIEFS FOR APPELLANT:
BRIEF FOR APPELLEE:
Robert B. Craig
Covington, Kentucky
Trevor L. Earl
Louisville, Kentucky
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