Skip to main content

Reutter v. Dalsey

A-2610-07T3 (N.J. Super. App. Div. 2009) (Unpublished)

CORPORATIONS; SHAREHOLDER AGREEMENTS; SHAREHOLDERS — It is possible for contemporaneously executed agreements, such as a shareholder’s agreement and a deferred compensation agreement, to provide for what might be considered as a “double” payment if there is sufficient evidence to show that the signatories intended that result.

For nearly thirty years, two doctors were the sole officers and directors of a medical practice. They entered into a Shareholders Agreement and a Deferred Compensation Agreement to provide a coordinated plan of benefits, triggered by the purchase of shares owned by a physician who separated from the practice by retirement, disability or death. The documents were sent to both physicians by the attorney who drafted the documents accompanied by a letter explaining the tax considerations and benefits available under the two agreements. Both doctors signed each of the agreements. The Deferred Compensation Agreement did not include a provision covering the death of a principal while still active in the practice. It provided for a monthly payout to a principal separating from the practice if the principal: (a) became disabled for more than eighteen months; or (b) retired at age fifty-five or older. It also included an arbitration provision if there was any controversy arising out of the agreement. The Shareholders Agreement stated that, upon the death of a shareholder, the surviving shareholder had thirty days to decide to exercise his option to purchase decedent’s shares at book value. The relevant section of this agreement relating to the setting the value of stock was as follows: “Life Insurance. In the event that life insurance is purchased to fund the buy-out in this Agreement upon death, and in the further event that the life insurance proceeds less any estimated corporate tax attributable to those proceeds due to the Alternative Minimum Tax on Corporations (AMT) if any, exceed the value determined to Paragraph 6 (b) above [which set the purchase price of decedent’s shares at book value] ***, the purchase price for the Decedent’s stock shall be the amount of the insurance proceeds less any estimated corporate tax attributable to those proceeds due to the AMT.”

One of the doctors sent the other notice that he was retiring due to a disability. Before the thirty day purchase option expired, the retiring doctor died. The estate for the deceased doctor claimed it was entitled to both the deferred payout described in the Deferred Compensation Agreement and the death benefit valuation under the Shareholders Agreement. When the surviving doctor refused to pay benefits to the estate under both agreements, the estate sued.

The lower court held that the dispute arising out of the Deferred Compensation Agreement had to be submitted to mandatory arbitration. It also ruled that the Shareholders Agreement provided that the proceeds from the policy insuring the decedent be released to the estate.

The arbitrator found that the Deferred Compensation Agreement was completely integrated and unambiguous. He found that the benefits under the agreement were independent of, and in addition to, any other employment agreement that existed. Thus, he awarded the estate the full set of installment payments.

The lower court then held that the estate was entitled to recover both the benefits under the Deferred Compensation Agreement and the insurance proceeds under the Shareholders Agreement. The surviving doctor appealed.

The Appellate Division reversed and remanded the matter to the lower court. It agreed with the surviving physician that parole evidence was necessary to resolve this dispute. The Court held that there was sufficient evidence to find that these two doctors intended that the two agreements set forth a maximum award in the event either one of them separated professionally from the other. The Court believed that the attorney’s contemporaneously prepared “explanation letter” was intended to serve as an interpretive guide to decipher what the party’s intended. It ruled that the attorney’s testimony at trial was equally valuable in determining the principals’ intent. The Court applied an expansive and liberal standard used to determine the admissibility of extrinsic materials. It held that when viewed together with the drafter’s guide, acceptance of retirement benefits under the Deferred Compensation Agreement could be read as an election of benefits, binding the shareholder so choosing to a book-value method of valuation for the shares he owned at the time. It also ruled that it could be argued that the higher valuation method set forth in the Shareholders Agreement was reserved to a principal who dies while still active in the practice. Therefore, the Court concluded that the attorney had to be given the opportunity to present extrinsic evidence to assist the lower court in determining what the two doctors intended when they signed the two agreements. It also noted that the arbitrator’s award construing the Deferred Compensation Agreement in the estate’s favor should not affect the lower court’s authority to construe the Shareholders Agreement, which was the only open question left for the lower court to decide.

66 Park Street • Montclair, New Jersey 07042
tel: 973-783-3000 • fax: 973-744-5757 •