Klug v. Green

RAYMOND A. KLUG et al., Plaintiffs and Appellants, v. EDWARD GREEN III et al., Defendants and Respondents.

B296904

COURT OF APPEAL OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT DIVISION THREE

January 26, 2021

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(a). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115(a).

Los Angeles County Super. Ct. No. NC060795

APPEALS from judgments of the Superior Court of Los Angeles County, Mark C. Kim, Judge. Reversed and remanded with directions.

Tredway, Lumsdaine & Doyle, Roy J. Jimenez and Brandon L. Fieldsted for Plaintiffs and Appellants.

Diem Law and Robin L. Diem for Defendant and Respondent Edward Green III.

Andrade Gonzalez, Sean A. Andrade and Henry H. Gonzalez for Defendant and Respondent Derek T. Dee.

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INTRODUCTION

This case arises from a dispute among partners in a medical practice partnership. The partners are corporations wholly owned by individual physicians in the medical practice. After a disagreement arose concerning several accounting matters, one corporate partner and the physician-owner of that corporation (plaintiffs) sued the partnership, the other corporate partners, and their physician-owners. In addition to stating four substantive causes of action (e.g., breach of the partnership agreement, breach of fiduciary duty), the complaint alleged each corporate partner was the alter ego of its physician-owner.

Two defendant physicians brought motions for summary judgment and, in the alternative, summary adjudication as to the four causes of action stated in the complaint. They did not address the issue of alter ego liability, however. The court found in favor of the physicians on the four causes of action, granted their motions for summary judgment, and entered judgments of dismissal. Plaintiffs appeal.

Plaintiffs contend the court erred by entering judgments in the physicians' favor because the alter ego issue remains to be litigated. The physicians claim plaintiffs failed to allege alter ego sufficiently, therefore relieving them of the obligation to litigate the issue on summary judgment. We conclude plaintiffs' allegations were sufficient and that the court erred in granting summary judgment. Accordingly, we reverse the judgments and remand for further proceedings.

FACTS AND PROCEDURAL BACKGROUND

1. The Parties

The plaintiffs and appellants are Raymond A. Klug, M.D., Inc., and Raymond A. Klug (plaintiffs). Klug practiced in, and his eponymous corporation was a member of, the Greater Long Beach Orthopaedic Surgical and Medical Group (the partnership). The partnership was dissolved in late 2016.

The defendants in this case include the partnership, the other corporate members of the partnership, and the physicians who own those corporations. As pertinent here, the corporate partner defendants include Derek T. Dee M.D., a Professional Corporation (Dee Corporation) and Edward Green III, a Medical Corporation (Green Corporation). The owners of those corporations, physicians Derek T. Dee and Edward Green III, are also named defendants (physician defendants) and are the respondents in this appeal.

2. The Partnership

The partnership was governed by an amended partnership agreement dated October 1, 1980. As pertinent here, Section IX of the partnership agreement provides in pertinent part: "Temporary total disability occurs when a Fully Active Partner is suffering from a physical or mental incapacity as certified by a medical physician which prevents him from pursuing and devoting any of his time to the practice of medicine on behalf of the medical partnership. In the event any Fully Active Partner is absent from active practice because of an induction into the military service, or should become temporarily disabled due to illness or injury, as certified by a medical physician, the following terms and conditions shall apply: [¶] A. The partner shallcontinue to receive 80% of the average 12-month's income that he is entitled to receive under Paragraph VII above for a period of ninety (90) days. In the ensuing one hundred eighty (180) days, he shall receive one half (1/2) of said average net income that he is entitled to receive under said Paragraph VIII. Thereafter, he shall not be entitled to receive any income until such time as he is again working full time in the partnership medical practice."

In May 2016, Klug informed the partnership that he had been diagnosed with lymphoma and was temporarily totally disabled within the meaning of the partnership agreement.

3. The Primary Dispute

The partnership made several payments to plaintiffs between June and August of 2016. The parties did not agree, however, on whether the payments were properly characterized as disability payments or partnership distributions. Plaintiffs also objected to the redistribution of overhead expenses in a manner benefitting certain partners, the manner in which partnership meetings were held, and the withholding of partnership financial information.

4. The Complaint

On September 2, 2016, plaintiffs filed the present suit against the partnership, the other corporate partners, and the other individual physicians who owned the corporate partners. A few weeks later, a majority of the corporate partners voted to dissolve the partnership effective September 30, 2016.

The complaint sets forth four causes of action: breach of contract (i.e., the partnership agreement), breach of fiduciary duty, dissolution of the partnership, and accounting. Plaintiffs allege the defendants breached the partnership agreement aswell as their fiduciary duties to plaintiffs by failing to pay them the full amount of disability payments required under the partnership agreement, reallocating the partnership overhead in a manner detrimental to plaintiffs, and refusing to disclose partnership financial information upon request. Plaintiffs also sought to dissolve the partnership and requested an accounting of the partnership's finances.

In addition, and as pertinent here, the complaint includes the following general allegation:

"At all times mentioned, Defendant corporations were wholly owned and controlled by the individual doctors for which they are named. At all times mentioned, there was and is a unity of interest and ownership which existed between the Doctors and their individual corporations, such that the separateness of the individual and the corporations never existed. Adherence to such fiction will result in fraud and inequity upon those persons that seek relief from the corporations. By reason thereof, the corporate veil of the individual medical corporations should be set aside so that the partner doctors may be held personally responsible and accountable for all acts and transactions of [the Partnership.]"

Dee and Dee Corporation answered the complaint, as did Green and Green Corporation.

5. Summary Judgment Proceedings¹

5.1. Green's Motion

Green and Green Corporation (Green defendants) jointly filed a motion for summary judgment or, in the alternative, summary adjudication addressing plaintiffs' four causes of action. As pertinent here, the Green defendants contended that plaintiffs received all the disability payments owed under the partnership agreement. Accordingly, no breach of the partnership agreement or breach of fiduciary duty occurred in that regard. As to the reallocation of overhead expenses, the Green defendants noted that the complaint alleged Dee acted alone in that respect and plaintiffs confirmed that position in their discovery responses. Similarly, and with respect to the failure to provide requested financial information to plaintiffs, the Green defendants observed that plaintiffs had not alleged, nor had they indicated in their discovery responses, that they had requested any financial information from the Green defendants or that the Green defendants kept and maintained the partnership's financial records. Finally, the Green defendants asserted that the plaintiffs' causes of action for dissolution and accounting were moot because the partnership had been dissolved, had provided an accounting, and had made its final partnership distributions.

Plaintiffs opposed the motion. Mainly, plaintiffs focused on the interpretation of the partnership agreement and the proper characterization of payments made by the partnership to plaintiffs after Klug became temporarily disabled.

The parties appeared before the court and argued the case. After taking the matter under submission, the court issued its ruling. Although the Green defendants had not advanced distinct arguments as between themselves, the trial court addressed the potential liability of Green and Green Corporation separately. The court found that Green was not a partner in his individual capacity and, therefore, could not be liable for breach of either the partnership agreement or any fiduciary duty attendant to the partnership. The court further found that the dissolution claim was moot because the partnership had already been dissolved. The court also concluded that Green, individually, did not owe plaintiffs any accounting on behalf of the partnership.² After addressing each of the plaintiffs' four causes of action, the court granted Green's motion for summary judgment.

After the Green defendants gave notice of the court's ruling, plaintiffs objected to the entry of a judgment of dismissal in favor of Green. Plaintiffs noted that the operative complaint alleged alter ego liability, but Green had not addressed the issuein his motion. Expressing concern that a judgment of dismissal could bar them from litigating the alter ego issue in the future, plaintiffs asked the court to refrain from entering judgment in favor of Green. The record does not reveal whether or how the court addresse...