A recent Court of Appeal decision (Dec. 2009) illustrates what happens when a group of doctors allege they were improperly forced out of their medical group. In such cases, early legal advice is essential since the corporate rules on who has standing to sue the corporation are complicated.
It is important for each shareholder to understand how to position themselves in the event of a legal battle. Some medical corporations are fun like fiefdoms with minority shareholders being deprived of their rights and earnings.
The case is Haro v. Ibarra, B213499. Although this is a technical legal discussion, it will assist shareholders in understanding how shareholder battles play out in the court system.
The plaintiffs in the case were physicians Carlos Haro, Carlos Meza, Marcos Lemor, Antonio Alarcon, Miguel Rodriguez and Jose Delgado. They claimed they were improperly forced out of their medical group and that an assessment of nearly $58,000 per share was illegal because it was not levied at a properly noticed meeting and because it was not levied on all shareholders.
The defendants include Fernando Ibarra, Alfonso Barragan, Manuel Figueroa, Maria Christina Hernandez and Omar Perez—all officers, directors and/or shareholders of AHP—as well as Alpha Medical Management, LLC, which manages AHP, and Medical Management Consultants LLC, which is the parent company of Alpha and is owned by Ibarra and Barragan.
Unfair Dealing Alleged
The plaintiffs allege that they collectively owned nearly 30 percent of AHP’s stock, that they had objected to what they believe was unfair dealing by Barragan and Ibarra—who owned one-third of AHP’s shares—and that Barragan and Ibarra had schemed to oust them from the corporation. To that end, they say, the pair declared Alarcon’s shares to be forfeited—without cause—and levied the assessment, warning the plaintiffs that they would be forced to sell their shares if they did not comply.
The stated purpose of the assessment, according to the pleading, was to fund the purchase of a medical practice in Mexico, which the plaintiffs alleged to be “a radical departure from the normal business of AHP.” They characterized the assessment as a violation of the corporation’s articles and bylaws, and as imprudent and fraudulent, and claimed that material information about the proposed acquisition was being withheld.
They also alleged derivative causes of action, charging that Ibarra and Barragan had damaged AHP through their control of its management company, and raised personal claims for conversion of their shares and for diminution of the value of the shares through manipulation of earnings and expenses.
Los Angeles Superior Court Judge Maureen Duffy-Lewis sustained demurrers to all causes of action, reasoning that since they no longer owned shares, the plaintiffs could not plead derivative claims, and that the remaining claims were barred by Corporations Code Section 423(m).
The statute provides that “[n]o action shall be maintained to recover shares sold for delinquent assessments, upon the ground of irregularity in the assessment, irregularity or defect of the notice of sale, or defect or irregularity in the sale, unless the party seeking to maintain the action first pays or tenders to the corporation, or the party holding the shares sold, the sum for which the shares were sold, together with all subsequent assessments which may have been paid thereon and interest on such sums from the time they were paid.”
Justice Victoria G. Chaney, writing for the Court of Appeal, said that with respect to the personal causes of action, the plaintiffs adequately pled an exception to the statute by alleging that the assessment was void. Justice Chaney was very well respected when she was a trial court judge in Los Angeles County Superior Court and her opinions are very well drafted and reasoned. Apart from being a legal scholar she is also pragmatic and understands the real world.
Justice Chaney cited Herbert Kraft Co. Bank v. Bank of Orland (1901) 133 Cal. 64 and Cheney v. Canfield (1910) 158 Cal. 342 is the leading authorities to be addressed. Both of these are old cases.
In Kraft, the California Supreme Court held that Section 423(m)’s predecessor did not apply to a claim that the plaintiff’s stock in a bank was forfeited when he failed to pay an assessment that was not levied on any other stock. The justices reasoned that if the allegation was correct, the assessment was void, and thus the plaintiff did not have to pay it as a prerequisite to bringing the action.
Justice Chaney, similarly, declined to apply the statute to a claim that an assessment had been levied at a board meeting at which a quorum was not present.
Justice Chaney declined to limit Kraft to the situation in which forfeited shares are sold to the directors who caused the shares to be forfeited. That argument, she said, was based on an out-of-context reading of the case.
With respect to the derivative causes of action, Justice Chaney also concluded that it was error to sustain the demurrers. While the usual rule is that the plaintiff must own the shares continuously from the time the cause of action arises to the time it is adjudicated, there are equitable exceptions, she said, concluding:
“Appellants have alleged equitable considerations that warrant an exception to the continuous ownership requirement, such as the allegations in the [second amended complaint] that other shareholders were not required to pay the assessment and yet did not have their shares forfeited.”
Posted by Tracy Green. Should you have any questions regarding your own situation or this post, you can email