Dollinger v. Somers

A-5715-96T3 (N.J. Super. App. Div. 1998) (Unpublished)
  • Opinion Date: June 4, 1998

CORPORATIONS; VEIL PIERCING—A small corporation may be likened to a partnership. Therefore, use of the corporate form should not be allowed to shield a shareholder from personal liability to make buy-out payments to a fellow shareholder especially where the responsible shareholder gives continual assurances to the retiring shareholder.

In anticipation of retirement, a physician formed a medical corporation with a younger physician. Each was an equal shareholder. The older physician became “semi-retired” and the younger physician’s compensation became double or triple that of the other. Three years later, the two doctors realized that the younger physician could not handle the bulk of the practice by himself. Accordingly, they hired a new, inexperienced doctor as an employee. Eventually, she became a third, equal shareholder. Just before that happened, however, the original two doctors executed a buy-out agreement providing that the older doctor would be paid $150,000 over a five year period following his “official” retirement. When the corporation gained its third shareholder, all three doctors revised the buy-out agreement retaining the same $150,000 figure, but giving the original doctor the right to choose when his retirement would become effective.

About two years later, the original doctor advised the other two doctors that he planned to retire some time in the following year. Unfortunately, between the time of that announcement and the time for retirement, the two active doctors had a falling out. Many discussions took place among the parties and their attorneys. During most of that time, the retiring doctor was continually reassured that he would receive his buy-out payments. Despite these assurances, however, the doctor, now retired, was never paid. Following institution of his suit, the retired doctor and his original “partner” settled. As a result of the settlement, the original doctor agreed that he was only entitled to recover from the “newest” shareholder her pro rata share of the obligation to him.

At trial, the key issue was whether the “newest” doctor was personally liable to the retired doctor or whether the liability was solely that of the corporation.

The lower court judge entered judgment against the “newest” doctor, personally, on the theory that the corporate veil should be pierced. The lower court opined, and the Appellate Division agreed, that although the corporation was a closely owned personal service corporation, it was merely a device for achieving partnership purpose. Since the shareholders were, in essence, partners, the corporate form should not be used to defeat one partner’s rights. In addition, the lower court concluded (and the Appellate Division affirmed) that the now-retired doctor believed that the buy-out would be paid by the shareholders, individually, based upon the assurances made to him. That being the case, it was concluded that by continually reassuring the elder doctor that he would be paid, the “newest” doctor was obliged to perform her obligations in good faith and was equitably estopped from claiming that the senior shareholder should look to payment from the corporation alone.