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Litten v. Pennsauken Magnetic Resonance Imaging Center, P.C.

A-5578-01T5 (N.J. Super. App. Div. 2004) (Unpublished)

CORPORATIONS; SHAREHOLDERS; DISABILITY—Once a shareholder has filed for, and collected payments from, his or her disability carrier, the shareholder is estopped from denying that he or she is disabled and the remaining shareholders are able to enforce the disability provisions of their shareholder agreement without independently proving the disability.

Five medical groups with individual medical practices organized an imaging center. Each member’s practice referred patients to the center. The center also got referrals from unrelated physicians. Pursuant to the shareholder agreement, the profits from the center were to be distributed to the individual shareholders based upon the number of shares each held. The agreement provided for the shares to be further distributed to each medical group equally and then divided among each group’s respective member doctors. One of the groups was a sole practitioner, thus he had more shares of stock than any other individual doctor.

Over time, problems between the sole practitioner and the other groups developed, leading them to question his commitment to the practice, and whether or not he was practicing medicine on a full time basis. This became a crucial issue because a Summer distribution of the center’s dividends was made to all shareholders except the solo practitioner. The rest of the stockholders decided to withhold his dividends until he came forward and discussed his status. This resulted in the sole practitioner filing a suit and requesting an order to show cause. Attached to his supporting certification was an exhibit that purported to be a disability claim form sent by him to his insurance company. For some time, the solo practitioner had in fact been collecting disability which he had received in part by forging his own doctor’s signature on various policy forms. The other shareholders only learned of the doctor’s disability through this exhibit, which proved that he was not engaged in full-time practice.

The other shareholders, in turn, counterclaimed based upon their shareholder agreement. One section governed disposition of shares of a “Terminated Shareholder,” and required a notice of disability. In the case of a disabled shareholder, the other members of doctor’s practice group had the right to purchase all of the terminated shareholder’s shares and the center would purchase the balance of the shares. The date of disability was the “Termination Date.” To be “disabled” meant that a doctor was unable to substantially perform his normal full-time duties as a physician for six months by reason of physical impairment. A doctor was also considered professionally incapacitated if he retired from full-time medical practice. Either one of these events would trigger a termination of the affected shareholder’s status and would trigger a buy-out of his shares.

The Chancery Division rejected the terminated shareholder’s claim that the “full-time service” requirement could be satisfied by doing no more than coordinating, directing and consulting, writing prescriptions, and performing administrative and bookkeeping duties. Accordingly, if a physician was not personally interacting with patients, he was deemed not to be engaged in the practice of medicine. Furthermore, the lower court pointed out that the disability claim forms signed by the sole practitioner stated that he was “totally disabled from his job and any other work,” and provided specific dates that he was unable to work. Based on this information, the lower court concluded that he was not engaged in the full-time practice of medicine and therefore was professionally incapacitated. That made him a “Terminated Shareholder” pursuant to the agreement.

The sole practitioner also claimed that the other shareholders had not followed the agreement in determining whether or not he was actually disabled, which was a prerequisite to qualifying him as a “Terminated Shareholder.” The lower court, however, held that this was irrelevant. Since he had specifically stated that he was disabled, there was no need to require the corporation to get more proof. Thus, it was ordered that damages were owed to the other shareholders for the months that the doctor was considered a “Terminated Shareholder,” minus the profits the other shareholders made from his practices referrals. The decision of the lower court was upheld on appeal.

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