BAPTIST PHYSICIANS LEXINGTON, INC.; - BAPTIST HEALTHCARE SYSTEM, INC.; MICHAEL MCKINNEY, M.D.; GREGORY COOPER, M.D.; AND JAMES WINKLEY, M.D. APPELLANTS
THE NEW LEXINGTON CLINIC, P.S.C. APPELLEE
RENDERED: DECEMBER 19, 2013
ON REVIEW FROM COURT OF APPEALS CASE NOS. 2010-CA-001128-MR, 2010-CA-001129-MR 2010-CA-001182-MR AND 2010-CA-001183-MR FAYETTE CIRCUIT COURT NOS. 08-CI-01004 AND 09-CI-06390
COUNSEL FOR APPELLANTS BAPTIST PHYSICIANS LEXINGTON, INC., AND BAPTIST HEALTHCARE SYSTEM, INC.: Winifred Bryant Becker Anne Adams Chesnut Theodore R. Martin COUNSEL FOR APPELLANT MICHAEL MCKINNEY, M.D.: Gregg E. Thornton Licha Hannah Farah, Jr. Ashley Kristen Brown
COUNSEL FOR APPELLANTS GREGORY COOPER, M.D. AND JAMES WINKLEY, M.D.: Benjamin Kessinger, III Adrian M. Mendiondo COUNSEL FOR APPELLEE: Thomas W. Miller David Thomas Faughn
Appellants Michael McKinney, M.D, Gregory Cooper, M.D. and James Winkley, M.D. (the "Physicians") are former employees of The New Lexington Clinic ("NLC") who resigned from that medical practice in early 2008 to practice at a nearby facility opened by Baptist Healthcare System, Inc. through its subsidiary Baptist Physicians Lexington, Inc. (collectively "Baptist.") Although the Physicians' employment agreements allowed for their departure on sixty days' notice and, subject to certain conditions, even their competition with their former employer, NLC brought actions against all three men'for breach of fiduciary duties owed in their capacity as members of the NLC board of directors. NLC alleged that the Physicians used confidential information and recruited NLC personnel while still serving as NLC directors. Baptist was joined as a defendant on the grounds that it aided and abetted the Physicians' breaches. The trial court granted summary judgment dismissing the complaints on the ground that neither complaint properly invoked Kentucky Revised Statute (KRS) 27IB.8-300, a statute that court considered controlling as to all actions involving breach of a Kentucky corporate director's duties. The Court of Appeals agreed that the statute controlled but found the complaints sufficient to state a cause of action under Kentucky's liberal pleading standards and, thus, remanded for further proceedings.
Contrary to the lower courts' conclusions, KRS 27IB.8-300 does not abrogate common law fiduciary duty claims against directors in Kentucky but essentially codifies a standard of conduct and standard of liability for directors that is derived from business judgment rule principles. As it explicitly states, the statute applies to "any action taken as a director" and "any failure to take any action as a director." Preparing for and participating in a competing venture does not constitute the type of internal corporate governance conduct addressed in KRS 27IB.8-300 and consequently the statute does not apply. Accordingly, NLC properly pled common law fiduciary duty claims on these alleged facts and this action must be remanded. As for the trial court's alternative ground for granting summary judgment, the absence of any damages flowing from the alleged breaches, there remain issues of material fact as to what damages, if any, were caused by the alleged breaches. However, the Physicians and Baptist are correct that, given the rights accorded the Physicians under their employment agreements, NLC has overstated the scope of the injuries that can fairly be said to flow from the alleged breaches of fiduciary duty. .
NLC is a Kentucky professional services corporation with its principal place of business in Lexington. Since at least 1997, NLC, through its staff of doctors and other medical personnel, has provided medical care to individual patients at its facility in Lexington referred to as Veteran's Park. NLC also provides medical services at facilities in several other Kentucky communities. Beginning, respectively, in 1997, 2001, and 2003, NLC employed Drs. McKinney, Cooper, and Winkley at the Veteran's Park clinic. All three physicians also served on the corporation's board of directors. Throughout calendar year 2007 all three men were directors, with Drs. McKinney and Cooper remaining on the NLC board until early February 2008.
Baptist is a rival health care services provider, which, at some point prior to early 2007, commenced plans to open a clinic at Brannon Crossing in Jessamine County, just across the Jessamine-Fayette County line and less than two miles away from NLC's Veteran's Park facility. NLC alleges that in March 2007, Dr. McKinney met with a Baptist recruiter and soon thereafter agreed not only to accept a position at the soon-to-be Brannon Crossing clinic, but agreed also to help recruit other NLC physicians and staff. Throughout the rest of 2007 and into early 2008, according to NLC, Dr. McKinney, still an NLC director, revealed to Baptist confidential information about NLC's organization and revealed confidential salary information about NLC employees. NLC alleges that this information, in conjunction with Dr. McKinney's own recruiting efforts, ultimately enabled Baptist to hire away several NLC employees, including other physicians.
NLC maintains that Dr. McKinney deliberately deferred resigning from the NLC board so as to retain access to the confidential NLC information he shared with Baptist, and that his February 2008 resignation from the board and from his employment was followed in short order by the defection to Baptist of other NLC physicians and their staffs and by the transfer to Baptist of many of those physicians' patients. NLC's complaint alleges that Dr. McKinney's competitive acts and wrongful use of corporate information breached the fiduciary duty he owed the corporation as a director and that the breach caused financial harm to the corporation. The complaint charges Baptist with having aided and abetted Dr. McKinney's fiduciary breach. Against all of these defendants NLC seeks compensatory and punitive damages, and against Dr. McKinney it seeks unspecified injunctive relief.
NLC's complaint against Drs. Cooper and Winkley makes similar allegations of competition by a director, misuse of corporate information, and resulting damages. Baptist is again alleged to have aided and abetted the directors' wrongful conduct. In addition to compensatory and punitive damages, this complaint seeks restitution of the salaries paid to the doctors during the period of their alleged disloyalty as well as any profits the defendants may have garnered attributable to the alleged wrongdoing.
The complaints thus allege the basic elements of a breach-of-fiduciary-duty cause of action: (1) the existence of a fiduciary duty; (2) the breach of that duty; (3) injury; and (4) causation. Nevertheless, the trial court entered summary judgment dismissing all of NLC's claims because, in its view, "the only claims Plaintiff has pursued against the doctors are common law claims no longer viable as a matter of law, having been supplanted by [Kentucky Revised Statute (KRS) 27IB.8-300]."
KRS 27IB.8-300, in pertinent part, provides that "any action taken as a director, or any failure to take any action as a director, shall not be the basis for monetary damages . . . unless . . . the breach or failure to perform constitutes willful misconduct or wanton or reckless disregard for the best interests of the corporation and its shareholders." KRS 271B.8-300(5)(b). In response to Baptist's motion for summary judgment, NLC argued that the statute does not apply in this case because the disloyal acts alleged against the physicians were hot taken in each physician's capacity "as a director, " but solely in his capacity as an individual. The trialcourt rejected that argument and ruled that because NLC had not pled the statute and later contested its applicability, it was precluded from pursuing what, in the trial court's view, is now a strictly statutory cause of action.
The Court of Appeals reversed. It agreed with the trial court that KRS 271B.8-300 applies to NLC's damages claims, but it rejected the notion that either NLC's argument against applying the statute or its not having invoked the statute in its complaints somehow constituted a forfeiture of NLC's right to proceed under the statute. Baptist and the Physicians argue here, as they did successfully in the trial court, that NLC somehow "disavowed" a statutory claim by contending that KRS 271B.8-300 does not apply. We agree with the Court of Appeals that the trial court erred in granting summary judgment to Baptist and the Physicians but our grounds for so concluding are entirely different.
L The Trial Court Erred in Granting Summary Judgment as a Matter of Kentucky Corporate Law.
Under CR 56, of course, summary judgment is generally not appropriate unless, following discovery and viewing the record in the light most favorable to the party opposing the motion, there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Toyota MotorManufacturing, Inc. v. Epperson, 945 S.W.2d 413 (Ky. 1996). The party opposing a properly supported summary judgment motion cannot defeat it . without presenting at least some affirmative evidence showing that there is a genuine issue of material fact for trial, but the motion should be denied unless it appears that the non-movant has no realistic chance of ultimately prevailing. Welch v. American Publishing Company of Kentucky, 3 S.W.3d 724 (Ky. 1999) (discussing Steelvest, ...