It seems a bit exaggerated to liken the deterioration of a relationship between 50/50 business partners to a fatal disease, but in the case of Pathology Associates of Ithaca, P.C., recently pronounced dead by act of judicial dissolution, the comparison may be apt.
The story of Pathology Associate’s demise seems to be more about a clash of personalities than about the usual disputes over money, side dealing, freeloading, and succession plans. The lower court’s post-trial decision granting dissolution, recently affirmed on appeal, mentions the “mentor/mentee” and “healthy functional” relationships that existed between the two pathologists-shareholders — whom I’ll refer to as Dr. P and Dr. S — from the time Dr. P joined the more senior Dr. S’s practice as an employee in 2013. The working relationship blossomed in 2018 when Dr. S granted Dr. P a 50% interest in the practice. Yet within two short years, under the stress of new demands on the practice occasioned in large part by the COVID pandemic, the two doctors landed in court as adversaries when Dr. P sued in Tompkins County Supreme Court for judicial dissolution, claiming dissension and deadlock under Section 1104 of New York’s Business Corporation Law.
“Their Own Version of the Facts”
The trial court’s post-trial decision describes the two doctors as “hav[ing] impressive resumes and bring[ing] a specialized knowledge and expertise to the practice,” but then adds, “[b]eyond that, each party provides their own version of the facts.”
In Dr. P’s version, Dr. S “became withdrawn and erratic in behavior” starting in 2019 and throughout 2020 when, during the pandemic, he was “visibly absent,” contentious, rude, alienating, noncommunicative, and thwarted Dr. P’s COVID-related initiatives; that Dr. S behaved rudely at a COVID-testing collaboration meeting with the practice’s primary hospital client; and that on one occasion Dr. S humiliated Dr. P in front of colleagues.
In Dr. S’s version, he was unaware of any breakdown in communication with Dr. P; the need for the practice’s pathology services during the pandemic was greatly reduced due to cancellation of elective procedures; at all times he provided services consistent with their division of responsibilities and expertise; his concerns with proposed collaboration testing were well grounded; there was no deadlock between him and Dr. P as it pertained to Pathology Associates’ business and no breakdown of trust; and Dr. P complained about Dr. S in her private meetings with hospital administrators.
Dr. P Successfully Sues for Judicial Dissolution
In March 2021, after Dr. P offered to purchase Dr. S’s 50% stock interest to no avail, Dr. P filed a BCL § 1104 petition (read here) for judicial dissolution of Pathology Associates. The court held an evidentiary hearing in August 2021 and issued its decision granting the petition in December 2021 (read here). The court found “it is clear that the parties no longer have a good working professional or personal relationship”; that “[a]ll effective communication has ceased to exist”; and that it is “clear from the record that dissension has impeded the parties’ ability to function as partners within the shareholder agreement.”
The decision also highlighted the testimony of the president of the hospital where the practice was based, who said that Dr. S’s demeanor was “terse and disrespectful” and confirmed that a collaborating university hospital “would not work” with his hospital if Dr. S was involved. He also testified that he was “influenced” by Dr. P’s complaints about Dr. S but that he was more concerned about Dr. S’s ability to cooperate with others.
The decision only briefly mentions that, within three months after Dr. P filed her dissolution petition, she formed her own new pathology practice called Cayuga Pathology PLLC, after which the hospital terminated its contract with Pathology Associates and entered into a new services agreement with Cayuga. The decision also mentions that, in response, Dr. S filed a separate lawsuit against Dr. P in May 2021 for breach of restrictive covenants in the Pathology Associates shareholder agreement. In the court’s view, Dr. S’s lawsuit was the dissolution coup de grâce, stating that “[it] alone creates an irreconcilable barrier to the continued function of the partnership.”
The Appellate Court Affirms
Dr. S appealed to the Albany-based Appellate Division, Third Department which earlier this month handed down its decision affirming the trial court’s order of dissolution (read here). The appellate briefs are available here and here.
On the law, the decision recites basic principles concerning the standard for judicial dissolution under § 1104 which are worth quoting for those unfamiliar with the statute:
A corporation may be judicially dissolved pursuant to Business Corporation Law § 1104 (a) (3) when “there is internal dissension and two or more factions of shareholders are so divided that dissolution would be beneficial to the shareholders” (see Matter of Clever Innovations, Inc. [Dooley], 94 AD3d 1174, 1175 [3d Dept 2012]). Dissolution on this ground is appropriate when “[t]he evidence before the court demonstrate[s] that the dissension between the two shareholders ‘pose[s] an irreconcilable barrier to the continued functioning and prosperity of the corporation’ ” (Matter of ANO, Inc. v Goldberg, 167 AD3d 731, 732 [2d Dept 2018], quoting Matter of Kaufmann, 225 AD2d 775, 775 [2d Dept 1996]). The relevant issue is not the ” ‘underlying reason for the dissension . . . [but] the fact that dissension exists and has resulted in a deadlock precluding the successful and profitable conduct of the corporation’s affairs’ ” (Matter of ANO, Inc. v Goldberg, 167 AD3d at 732, quoting Matter of Goodman v Lovett, 200 AD2d 670, 670-671 [2d Dept 1994], lv dismissed 84 NY2d 850 ). “The determination whether a corporation should be dissolved is within the discretion of the [trial] court” (Matter of Cellino v Cellino & Barnes, P.C., 175 AD3d 1120, 1121 [4th Dept 2019]; see Business Corporation Law § 1111 [a]).
After summarizing the parties’ diametrically opposed contentions, the decision found that the trial court “properly granted the petition for judicial dissolution.” The court seemingly placed great weight on the testimony of the hospital president who “corroborated [Dr. P’s] position, testifying that he was ‘keenly award . . . [of] increased conflict’ between the parties by 2020” and that in his estimation, “the inability of [Dr. P] and [Dr. S] to get along had an adverse effect on the hospital and its staff.” The court also observed that “[t]he record makes abundantly clear that the deterioration in the parties’ relationship and their inability to agree on fundamental practice decisions had a negative impact on [Pathology Associate’s] contract with [the hospital] — the corporation’s biggest and most profitable client.”
Dr. S’s Separate Lawsuit Against Dr. P Goes On
As mentioned above, in May 2021, Dr. S filed suit against Dr. P for breach of the shareholder agreement’s non-compete and non-solicitation covenants, breach of fiduciary duty, and tortious interference with the contractual relationship between Pathology Associates and the hospital. His amended complaint (read here) alleges that Dr. P actively induced the hospital to terminate its contract with Pathology Associates and award a new contract to Cayuga, the latter of which occurred in June 2021 when Dr. P also resigned her employment with Pathology Associates.
Along with his complaint Dr. S filed a motion for a preliminary injunction and temporary restraining order preventing Dr. P from competing against Pathology Associates or inducing any third party from terminating its business relationship with Pathology Associates. The court denied the temporary restraint and, in August 2021, denied the preliminary injunction (read here).
A year later, Dr. P moved for an order of summary judgment dismissing the complaint. Dr. P’s motion argued that Dr. S’s claims for breach of the shareholder agreement and breach of fiduciary duty sought only injunctive relief and, therefore, were moot based both on the court’s prior order denying interim injunctive relief and on the order of dissolution in Dr. P’s lawsuit.
The court disagreed. Its decision and order last September (read here) noted that Dr. S’s complaint also sought damages and that the court’s prior denial of interim relief was not an adjudication on the merits. The decision also denied dismissal of Dr. S’s tortious interference claim as premature “because there is pending discovery which might reveal material facts in [Dr. P’s] exclusive knowledge, which includes evidence related to [Dr. P’s] communications with [Pathology Associates’] clients regarding the dissolution of [Pathology Associates], the pathology services agreement [with the hospital], and the provision of pathology services by [Dr. P] to these clients upon termination of the pathology services agreement.”
A Risk/Reward Calculation?
It’s not unusual in business divorce litigation for events on the ground to outpace events in the courtroom. I have to assume that Dr. P made a calculated decision that the benefit of forming Cayuga to take over the hospital contract after filing for dissolution of Pathology Associates outweighed the risk of Dr. S’s foreseeable lawsuit for breach of the shareholder agreement’s non-compete/non-solicitation covenants, for which Dr. S is seeking over $1 million damages.
Whether the presumed risk/benefit calculation pans out remains to be seen as Dr. S’s lawsuit moves forward. As Lenny Kravitz croons in his more amorous take on one of Yogi Berra’s most famous Yogisms, It Ain’t Over ’til It’s Over.