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Kansas Heart Hospital, L.L.C. v. Idbeis

May 16, 2008

KANSAS HEART HOSPITAL, L.L.C. AND CARDIAC HEALTH OF WICHITA, INC., APPELLEES,
v.
BADR IDBEIS, M.D, ET AL., DEFENDANTS/APPELLANTS,
v.
GREGORY F. DUICK, M.D., STEVEN A. HUTCHINSON, M.D., DOUGLAS J. MILFELD, M.D., AND LAYNE REUSSER, M.D., THIRD-PARTY DEFENDANTS/APPELLEES, AND CARDIAC ASSOCIATES OF WICHITA, INC., APPELLEE,
v.
BADR IDBEIS, M.D., ET AL., APPELLANTS,
v.
SHAKER DAKHILL, M.D., AND ROGER ROBERTS, D.O., THIRD-PARTY DEFENDANTS/APPELLEES.



Appeal from Sedgwick district court; DOUGLAS R. ROTH, judge.

SYLLABUS BY THE COURT

1. A corporate bylaw provision that restricts a shareholder's eligibility to own shares and requires those shares to be transferred to the corporation when eligibility is lost is a valid restriction on ownership under K.S.A. 17-6426.

2. The word "redemption" in a corporation's bylaw is susceptible to more than one meaning and, when considered in the context of the bylaw at issue in this case and Kansas' statutes, would be understood by a reasonably prudent person to mean a purchase of stock. A bylaw provision having this meaning does not violate K.S.A. 17-6401 or K.S.A. 17-6410.

3. Under the uncontroverted facts of this case, a corporate board of directors, in applying bylaw provisions restricting ownership, made a business judgment in good faith, with due care, and within the board of directors' authority.

4. In order to create a contract, an acceptance must be unconditional and unequivocal. Under the uncontroverted facts of this case, there is written evidence of an unconditional and unequivocal acceptance of a proposed corporate bylaw amendment, and that acceptance created a contract among the parties.

5. A bylaw provision that establishes a formula for the calculation of the price to be paid when a corporation reacquires stock from a shareholder is not a penalty, even if the formula varies depending upon the circumstances of the reacquisition and is not based upon current market value.

The opinion of the court was delivered by: Luckert, J.

Affirmed.

This case raises several issues related to the validity of a corporate bylaw provision that provided a corporation could redeem stock if a shareholder no longer met ownership eligibility requirements. The parties dispute whether the bylaw section is a restriction on stock and a redemption provision that must be in the articles of incorporation or a restriction on a shareholder's ownership of stock and a purchase provision that may be in the bylaws. We conclude the provision is a valid restriction on the transfer and ownership of stock and, under K.S.A. 17-6426, is a valid bylaw provision. We also conclude the provision was properly invoked, all the remaining parties to this litigation accepted the provision, and the provision was not an impermissible penalty.

Procedural Background

These issues arise from a dispute among shareholders of two Kansas corporations, Cardiac Health of Wichita, Inc. (CHW) and Cardiac Associates of Wichita, Inc. (CAW), which together own a controlling interest in Kansas Heart Hospital, L.L.C. (KHH). In 2005, CHW's board of directors learned that 14 physicians (Physicians), shareholders of both CHW and CAW, invested in the Kansas Medical Center, L.L.C. (KMC), a hospital that was to be constructed in Andover, Kansas. Based on these investments, the CHW board voted to redeem the Physicians' CHW stock under a provision in the corporate bylaws, adopted in February 2000, which prohibited a shareholder from owning any shares in a "competing health care facility." The investors were Badr Idbeis, M.D., Ravi Bajaj, M.D., Gary S. Benton, M.D., Michelle Brown, M.D., Assem Z. Farhat, M.D., Roger E. Evans, M.D., Hussam Farhoud, M.D., Robert H. Fleming, M.D., Randee E. Lipman, M.D., Prakash J. Raghavan, M.D., G. Whitney Reader, M.D., John D. Rumisek, M.D., Donald L. Vine, M.D., and Lyle F. Zepick, M.D.

Soon after the Physicians lost their CHW stock, CAW's board of directors voted to redeem the Physicians' shares in CAW because CAW's articles of incorporation and bylaws required that all of its shareholders also own shares in CHW.

Following the stock redemptions, multiple legal claims arose. Two separate actions were filed in which CHW and CAW sought declaratory judgments regarding the stock redemptions. Along with those actions, KHH alleged claims against Dr. Idbeis involving breach of fiduciary duty and interference with business opportunity. In addition, the parties filed cross-motions for partial summary judgment, and the Physicians filed third-party claims against the directors of CHW and two directors of CAW for breach of fiduciary duty for causing the stock redemption. The district court consolidated the cases, and one physician, Dr. Farhat, was dismissed from the suit with prejudice. For ease of reference, the plaintiffs (KHH, CHW, and CAW) may be referred to as "Corporations."

On February 22, 2006, the district court granted CHW's motion for partial summary judgment, ruling that the redemptions of all the Physicians' stock in CHW, except Dr. Farhat's, "were lawful, authorized and proper." Influenced, in large part, by its February 2006 decision, the district court later granted CAW's motion for partial summary judgment as well. Twelve of the remaining Physicians now appeal the district court's partial summary judgment rulings in favor of CHW and CAW.

Uncontroverted Facts

Our review is based upon the district court's findings that the facts material to summary judgment were uncontroverted. The parties do not dispute this conclusion, nor do they quibble with the district court's recitation of those facts. They do, however, argue about each other's statements of facts in their respective briefs. In fact, the Physicians filed a motion to strike portions of the appellees' factual statement. We have considered the record, the district court's findings, and the parties' arguments. Although the Physicians disagree with the appellees' interpretation of various aspects of the record, we do not find a basis to strike portions of the appellees' brief. The motion is denied.

We conclude that the district court correctly determined that the material facts were not controverted. We will, therefore, set out those findings of the district court that are material to the issues on appeal. (Because the district court's findings related to various motions, our recitation will not be in sequence numerically. We have continued with the district court's numbering to assist the court and counsel, however.) The district court found:

"1. The Kansas Heart Hospital, L.L.C., d/b/a Kansas Heart Hospital, referred to as KHH, is a hospital that provides specialized comprehensive cardiovascular health care to the public.

"2. KHH is partially owned by Cardiac Health of Wichita, Inc., (CHW), and Cardiac Associates of Wichita, Inc., (CAW), both of which were formed under the laws of the State of Kansas.

"3. The defendants in this case were shareholders of CHW and CAW.

"4. In 1999, the KHH management committee became concerned that its shareholders may be contemplating the investment in a health care facility to be located on Wichita's west side. The management committee saw this as presenting a potential conflict of interest for any CHW shareholder that chose to invest in that facility.

"5. The issue appeared as an agenda item for the management committee meeting of December 16, 1999, as 'Conflict of interest issues.'

"6. The minutes of the meeting of KHH management committee in December 1999 reflect a discussion of the conflict of interest issue. The minutes also reflect that the following resolution was passed:

'WHEREAS, equity ownership in the Company, either directly or through ownership of shares in Cardiac Health of Wichita, Inc. and Cardiac Associates of Wichita, Inc. is fundamental to the success of the Company; and

'WHEREAS, simultaneous ownership in the Company and a competing health care facility will expose the Company's methods, plans, or proprietary information to competitors which could be harmful to the Company.

'BE IT RESOLVED that any Member of the Company or any shareholder of Cardiac Health of Wichita, Inc. and Cardiac Associates of Wichita, Inc. is prohibited from either directly or indirectly from [sic] ownership in a competing health care facility engaged in cardiology, cardiothorasic [sic] surgery, or vascular surgery within One Hundred (100) miles from the city limits of the city of Wichita, Kansas.'

"Defendant Dr. Idbeis represented to the Board that this restriction be accomplished by amending the operating agreement of KHH, and by changing the corporate bylaws of CHW.

"7. On February 12, 2000, CHW held its Annual Shareholders Meeting. At that meeting, the shareholders discussed the adoption of the restriction on ownership of competing interests. The minutes of the meeting reflect that:

'Dr. Idbeis explained [that] due to proprietary data, information, education, and entrepreneurial learning experience available to shareholders of the Kansas Heart Hospital, L.L.C., its individual investors and its corporate investors (including the shareholders of the corporate investors), that it was in the best interest of the corporation to promptly enact such a restrictive covenant.'

"8. The bylaws provision for CHW was adopted at CHW's Annual Shareholders' Meeting on February 12, 2000. That provision provided:

'No shareholder of the corporation shall be permitted to own either directly or indirectly through any means of ownership, all or any portion of a competing health care facility located within one hundred (100) miles of the city limits of Wichita, Kansas. A "competing health care facility" is defined as any medical hospital or facility specializing in cardiac, cardiothoracic, or vascular care. Any shareholder agrees not to own or in any way, to operate, manage, or control any interest in any competing health care facility as defined above. For purposes of this restriction, any family member, is defined to include spouse, children, testamentary or inter vivos trust, or any entity controlled by the shareholder or spouse, children, or related entities, who shall hold any ownership, operate, manage, or control any competing health care facility. In the event a shareholder violates the terms of this restriction, the corporation may compel redemption of the shareholder's stock pursuant to Section 1.5(b) of these bylaws, however, the maximum redemption price shall not exceed Five Hundred Twenty-Five Dollars ($525.00) per share, increased or decreased by any percentage change in the Consumer Price Index. The intent is to prohibit ownership of a competing health care facility, not a limitation of anyone's group practice or facilities integrated within the practice. The Board of Directors shall issue such interpretations as are necessary to carry out the intent of this restriction.'

"The lead-in paragraph of Section 1.5 of the same CHW bylaw provides:

'Section 1.5--OWNERSHIP AND TRANSFER RESTRICTIONS. The corporation has been formed to organize, develop and own an interest in a limited liability company ("LLC") which will own and operate a single specialty free-standing cardiac, cardiothoracic and vascular care hospital ("the Hospital"). Because of this purpose, certain restrictions upon the ownership and transfer of stock of the corporation shall be imposed as follows:'

"9. At CHW's Annual Shareholders' Meeting on February 12, 2000, the shareholders further adopted an additional resolution to implement the bylaws provision:

'BE IT FURTHER RESOLVED, that notice be given to all shareholders of the [sic] Cardiac Health of Wichita, Inc. to provide that anyone who intends to hold an ownership interest in a Competing Healthcare Facility shall be given five (5) business days after notice to give notice of his or her intention to withdraw from the Corporation and ten (10) business days thereafter to tender his or her shares subject to the terms of the maximum redemption price stipulated in the Operating Agreement.'

"The resolution also included the following:

'The ten (10) day period to tender the shares may, upon written request, be extended at the discretion of the Corporation . . . .'"

In addition to these findings, the district court made the following findings regarding the February 12, 2000, shareholders' meeting:

"47. . . . Eleven shareholders were not present, including Drs. Zepick, Reader and Farhat, and did not vote personally or by proxy. The then existing bylaws of CHW allowed for a change in the bylaws upon a majority vote.

"48. At the February 12, 2000, meeting, the shareholders never mentioned, discussed, or voted on, any amendment to CHW's articles of incorporation."

Regarding events occurring after the February 12, 2000, meeting, the district court found:

"10. On February 16, 2000, Dr. Idbeis sent to all shareholders of Cardiac Health and Cardiac Associates a certified letter explaining the new bylaw provision, and the application of the resolution to any shareholder that intended to invest in any competing healthcare facility. The letter concluded: 'In the absence of receiving any notice from you, we presume that you do not wish to have the corporation(s) redeem your shares of stock under the offer presented and that you do not intend to hold an ownership interest in any Competing Healthcare Facility.'

"49. In November 2000, CHW's Board of Directors determined that CHW's articles of incorporation and bylaws needed to be modified to permit certain new shareholders.

"50. On November 12, 2000, CHW's Board adopted the following resolution:

'RESOLVED, that the second paragraph of Article Four of the Corporation's Articles of Incorporation be revised as is set forth in Exhibit A, and the Bylaws be revised as is set forth in Exhibit B, and that the proposed revisions be presented to the Shareholders of the Corporation for their approval.'

"51. The proposed revision of the articles of incorporation contained in Exhibit A expanded the eligibility requirements of shareholders. This revision did not contain the restrictive covenant. However, in December 2000, all of the defendants who were then shareholders, except Dr. Farhat, completed a Voting Form wherein they affirmatively approved the Amended and Restated Bylaws. . . . The Bylaws did contain the restrictive covenant. Dr. Farhat was the only defendant-shareholder who indicated his disapproval on the Voting form. The Voting Form provided:

'I, ___________, have read and understand the Proposed Revision to the Second Paragraph of Article Four of the Articles of Incorporation of Cardiac Health of Wichita, Inc. as attached in Exhibit A; and the Amended and Restated Bylaws for Cardiac Health of Wichita, Inc. as attached in Exhibit B.

'I hereby indicate my preference below and vote to:

___ Approve

___ Disapprove'

"52. CHW circulated the proposed revision to the articles of incorporation . . . and the amended and restated bylaws . . . to the shareholders with the voting form. A majority (92%) of the shareholders approved the expansion of shareholder eligibility and the amended and restated bylaws. (By December 2000, all the current defendants who were then shareholders (except Dr. Farhat) voted to approve the amended and restated bylaws.)

"53. On February 1, 2001, CHW filed an amended and restated articles of incorporation with the Kansas Secretary of State. The amended and restated articles contained Section 1.5(e) that prohibited shareholder ownership in a competing healthcare facility.

"54. CHW's Board of Directors did not adopt a resolution setting forth an amendment to its articles that included a stock restriction prohibiting shareholder ownership in a competing healthcare facility.

"55. CHW's Board of Directors did not adopt a resolution declaring advisability of adopting an amendment to its articles of incorporation to include a stock restriction that prohibited shareholder ownership in a competing healthcare facility.

"56. CHW's Board of Directors did not adopt a resolution calling a special meeting of the stockholders entitled to vote for consideration of an amendment to its articles of incorporation to include a stock restriction prohibiting shareholder ownership in a competing healthcare facility or directing that amendment be considered at the next annual meeting of the stockholders.

"57. At no time did CHW's Board of Directors send a shareholder meeting notice that contained either a stock restriction or a brief summary of one.

"58. At no time did CHW present to the shareholders for a vote, so the shareholders did not vote on, a proposed amendment to its articles of incorporation which contained a stock restriction that prohibited shareholder ownership in a competing healthcare facility. CHW's shareholders never voted in favor of an amendment to the Articles of Incorporation that included the stock restriction.

"59. At no time did CHW file a certificate with the Kansas Secretary of State setting forth an amendment to the articles of incorporation with a stock restriction that prohibited shareholder ownership in a competing healthcare facility and certifying that such amendment had been duly adopted in accordance with the provisions of K.S.A. 17-6602."

The district court also made several findings relating to the parties' understanding of the bylaw provision and their conduct under the provision:

"11. Dr. Idbeis testified when the bylaw was intended to be enforced:

'Q: All right. The restrictive covenant is supposed to be enforced in the first instance if a physician who owns stock invests in another competing entity in Wichita; correct?

'A: Health care entity, that is correct.'

"12. A restrictive endorsement was placed on the final 2001 CHW distribution checks. That endorsement provided:

'By endorsement and/or deposit of this check, I hereby acknowledge that I do not own either directly or indirectly through any means of ownership all or any portion of a competing health care facility as more fully set forth in Second Amended Operating Agreement or the Amended and Restated Bylaws.'

"All defendants, with the exception of Dr. Brown who did not own stock at that time, signed and/or deposited the distribution check without complaint. No formal resolution of the CHW Board of Directors or shareholders authorized the endorsement on the distribution check."

At some point, Dr. Idbeis, a shareholder in CHW, CAW, and KHH, became involved in the development of the Kansas Medical Center. The district court found:

"18. The Kansas Medical Center (KMC), 'has been formed to acquire land, plan, develop, license, permit, own and operate a full service general acute care hospital (providing among others, general surgery, cardiovascular treatment, gastroenterology . . .). The Hospital will be located in the State of Kansas in or around the City of Wichita.'

"22. Kansas Medical Center's Offering Memorandum projected it would earn 66% of its revenue from heart and vascular procedures. KMC projected in its revenue model that approximately 400 heart procedures would be conducted at its facility.

"25. After investing in KMC, two defendant doctors--at that time CHW shareholders--and Dr. Idbeis were elected as the board of KMC. One of the first actions taken by these directors at their inaugural meeting was to agree that KMC would defend and indemnify Dr. Idbeis in the lawsuit brought by KHH.

"26. Dr. [Gregory] Duick [a member of the management committee of KHH] learned of the possibility that Dr. Idbeis was forming a hospital to compete with KHH in the fall of 2004. On September 24, 2004, he wrote to Dr. Idbeis requesting a copy of 'your proposed Kansas Medical Center offering memorandum and any supplemental information which is intended for the evaluation of the merits and risks of your particular investment. I will need to share this information with the Management Committee ...


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