Swart v. Pawar et al
Filing
175
SECOND MEMORANDUM OPINION AND ORDER. The Court DISMISSES, WITH PREJUDICE, Counts I and II of Swart's Complaint, as well as Counts I and V of Pawar's counterclaim. The Clerk is directed to enter a separate judgment order in this matter. Signed by District Judge Irene M. Keeley on 12/4/15. (mh)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
STEPHANY SWART, M.D.,
Plaintiff,
v.
//
CIVIL ACTION NO. 1:14CV10
(Judge Keeley)
SURENDRA PAWAR, M.D., MONONGALIA
RADIOLOGY ASSOCIATES, P.C.,
Defendants.
SURENDRA PAWAR, M.D., and MONONGALIA
RADIOLOGY ASSOCIATES, P.C.,
Counter-Claimants,
v.
STEPHANY SWART, M.D.,
Counter-Defendant.
SURENDRA PAWAR, M.D., and MONONGALIA
RADIOLOGY ASSOCIATES, P.C.,
Third-Party Plaintiffs,
v.
ERIC D. JOHNSON, M.D., and
CYNTHIA JOHNSON,
Third-Party Defendants.
ERIC D. JOHNSON, M.D., and
CYNTHIA JOHNSON,
Counter-Claimants,
v.
SURENDRA PAWAR, M.D., and MONONGALIA
RADIOLOGY ASSOCIATES, P.C.,
Counter-Defendants.
SECOND MEMORANDUM OPINION AND ORDER
I. INTRODUCTION
On November 19, 2015, the Court entered a Memorandum Opinion
and Order (the “first memorandum opinion and order”) on the
parties’ then pending cross motions for summary judgment. (Dkt. No.
162). The first memorandum opinion and order dismissed many of the
parties’ claims against one another, but it left for further
proceedings Swart’s claims against Pawar and MRA for breach of
fiduciary duty and fraud, as well as Pawar’s counterclaims against
Swart for breach of fiduciary duty and fraud.1
On November 20, 2015, the Court held a final pre-trial
conference with the parties. During that conference, the Court
heard argument from the parties on the legal bases for both
parties’ remaining claims of breach of fiduciary duty and fraud.
The Court questioned with doubt whether the parties had any such
legal bases for their claims. Counsel for Pawar and MRA agreed with
the
Court
that
there
was
no
basis
for
those
claims2
under
1
Pawar and Monongalia Radiology Associates, P.C. (“MRA”) had
filed a third-party complaint against Cynthia and Eric Johnson, to
which the Johnson’s counterclaimed. The first memorandum opinion
and order left those claims virtually intact, and the remaining
claims therein are not involved with the issues presented here.
2
Counsel for Pawar noted that, although they doubted the law
provided Pawar any bases for the claims, they asserted them as a
defensive action against Swart’s already filed claims.
2
SWART v. PAWAR, ET AL.
1:14CV10
SECOND MEMORANDUM OPINION AND ORDER
Pennsylvania law.3 Because the subject had not been previously
addressed in the parties’ filings, the Court directed them to
submit supplementary briefing on the subject.
II. BACKGROUND
The Court foregoes a full recitation of the factual and
procedural details of the case, as those may be found in the
Court’s first memorandum opinion and order. (Dkt. No. 162 at 3-29).
It does add, however, that the parties filed their respective
supplemental briefs on the relevant legal issues on November 23,
2015. (Dkt. Nos. 164 and 166).
A.
The Claims
Swart claims that Pawar breached his fiduciary duty by: (1)
“fail[ing]
to
properly
inform
[her]
of
partnership
matters,
committ[ing] various acts, errors and/or omissions which constitute
breach of fiduciary duty”; (2) “fail[ing] to properly maintain and
preserve the assets of [MRA] for the benefit of those that are
provided for in the operating agreement”; and (3) “fail[ing] to
keep [her] apprised of the business dealings and decisions of
[MRA].” (Dkt. No. 1-1 at 21).
Further Swart claims that Pawar committed fraud against her
3
The Court’s first memorandum opinion and order determined
that Pennsylvania law applied to claims relating to MRA because
that was its state of incorporation. See Dkt. No. 162 at 33-37.
3
SWART v. PAWAR, ET AL.
1:14CV10
SECOND MEMORANDUM OPINION AND ORDER
by: (1) failing to provide her corporate records;
fraudulent
expenses
misrepresenting
to
for
her
reimbursement
that
both
(2) submitting
through
Monongalia
MRA;
General
(3)
Hospital
(“MGH”) and Preston Memorial Hospital (“PMH”) required him to
receive
a
higher
salary
as
medical
director;
(4)
conducting
meetings with MGH without her knowledge or consent; (5) falsely
claiming she did not have all of her required Continuing Medical
Education
(“CME”)
credits;
and
(6)
creating
false
patient
complaints against her. (Dkt. No. 1-1 at 1-21).
For his part, in his counterclaim Pawar alleges that Swart
breached her fiduciary duty by: (1) exhibiting poor work habits;
(2) failing to maintain her required CME credits; (3) deliberately
blocking Pawar’s efforts to hire more doctors and improve the
practice; (4) refusing to sign a revised shareholder agreement
making Eric Johnson an equal shareholder; (5) collaborating with
Johnson to subvert MRA’s contract with MGH in hopes of securing it
for themselves; and (6) making derogatory comments about Pawar to
MGH staff. (Dkt. No. 10 at 25-30.
Further,
Pawar
because she: (1)
counterclaims
that
Swart
committed
fraud
misrepresented that “she would devote her time,
efforts, skills and abilities to the practice group, including
Pawar”; (2) “made [mis]representations to Pawar regarding her
4
SWART v. PAWAR, ET AL.
1:14CV10
SECOND MEMORANDUM OPINION AND ORDER
education,
abilities
and
her
continuing
medical
education
requirements”; (3) misrepresented that she would “cooperate with
Pawar in the operation of the practice and support him in the
practice” and (4) “[mis]represented that she would comply with the
requirements necessary to service the needs of the agreement to be
entered into with MGH.”4 (Dkt. No. 10 at 37).
B.
Alleged Damages
Both Swart and Pawar allege that the other’s actions caused
MGH and PMH to terminate their contracts with MRA for failure to
fulfill its contractual obligations. (Dkt. No. 1-1 at ; Dkt. no. 10
at 30). As a result, both parties seek the total combined amount
they
would
employment
have
received
contracts
with
as
income
MRA,
as
under
well
as
their
their
respective
anticipated
shareholder disbursements.5
4
Pawar also alleges that Swart misrepresented that she
voluntarily left West Virginia University, when she was, in fact,
terminated. (Dkt. No. 10 at 38). This portion of Pawar’s fraud
claim was addressed in the Court’s first memorandum opinion and
order and no further discussion of it is necessary.
5
Swart’s complaint claims she “has been damaged in an amount
to be determined at trial” on both claims. (Dkt. No. 1-1 at 21-22).
However, in the parties’ joint pre-trial order, Swart assigned a
value of $8,000,000 ($2,000,000 for each of the four lost years of
MRA’s contract) to her claim. (Dkt. No. 136 at 33). Pawar’s
counterclaim states that he “has been damaged and sustained damages
in excess of $4,000,000.00" as a result of Swart’s breach of
fiduciary duty, and “actual damages to be proven at trial” as a
result of her fraud. (Dkt. No. 10 at 30, 38).
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III. APPLICABLE LAW
“[U]nder established Pennsylvania law, a shareholder does not
have standing to institute a direct suit for ‘a harm [that is]
peculiar to the corporation and [that is] only [] indirectly
injurious to [the] shareholder.’” Hill v. Ofalt, 85 A.3d 540, 548
(Pa. Super. 2014) (quoting Reifsnyder v. Pgh. Outdoor Adver. Co.,
405 Pa. 142 (1961)).6 This is known as “[t]he derivative injury
rule,” which “states that a shareholder may not sue for personal
injures that directly result from injuries to the corporation.”
Clark Motor Co., Inc. v. Manufacturers and Traders Trust, Co., 2007
WL 2155528, at *3 (M.D.Pa. 2007) (citing In re Kaplin, 143 F.3d
807, 811-12 (3d Cir. 1998)). “This rule applies even if the
corporation is a closely-held corporation. The rule is premised on
6
Hill also cites “Hornbook law”:
The action is derivative if the gravamen of the complaint
is injury to the corporation, or to the whole body of its
stock or property without any severance or distribution
among individual holders, or if it seeks to recover
assets for the corporation or to prevent dissipation of
its assets.... If damages to a shareholder result
indirectly, as the result of an injury to the
corporation, and not directly, the shareholder cannot sue
as an individual.
Hill, 85 A.3d at 549 (citing 12B Fletcher Cyclopedia of the LAW of
CORPORATIONS § 5911 (2013); see also ALI Principles of Corporate
Governance § 7.01(a) (“[a]n action in which the holder can prevail
only by showing an injury or breach of duty to the corporation
should be treated as a derivative action”).
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SECOND MEMORANDUM OPINION AND ORDER
recognizing the separate legal existence of a corporation from its
shareholders.” Id. (citing In re Kaplan, 143 F.3d at 811-12).
In effect, “the derivative injury rule prevents [shareholders]
from piercing the corporate veil in reverse in order to recover
individually for the corporation’s] losses.” In re Kaplan, 143 F.3d
at 812
“Therefore, a shareholder must plead injuries that were
inflicted upon him individually rather than on the corporation to
avoid the derivative injury rule.” Clark Motor Co., Inc., 2007 WL
2155528, at *3
(citing In re Kaplan, 143 F.3d at 812). The injury
pleaded
be
“must
independent
of
any
alleged
injury
to
the
corporation.” Id. (emphasis added); see also Hvizdak v. U.S., 2015
WL 5098745, at *3 (W.D.Pa. Aug. 31, 2015) (“The injury must be
something separate and distinct from the injury inflicted upon the
corporation--something
more
than
diminution
in
value
of
investments.”) (citing multiple 3rd Cir. cases); In re Kaplan, 143
F.3d at 811-12. Moreover, “[t]o have standing to sue individually
. . .the shareholder must be entitled to receive the benefit of any
recovery.” Id. (collecting cases).
In
certain
circumstances,
however,
“[s]ome
courts
also
permit[] a cause of action in favor of the individual shareholder[]
where the alleged wrong violates a duty owed directly to the
shareholder. This exception to the derivative injury rule covers
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SECOND MEMORANDUM OPINION AND ORDER
dut[ies] owed to the individual independent of the person's status
as a shareholder....” In re Ressler, 597 Fed.Appx. 131, 135-36 (3rd
Cir. 2015). For example, in In re Kaplan, the court held that,
although the plaintiff was a shareholder, he was entitled to sue
the corporation for breach of a contract he signed with the
corporation in his personal capacity. 143 F.3d at 811-12.7
IV. DISCUSSION
Here, the injuries alleged by both Swart and Pawar against one
another all derive from injuries that directly injured MRA. The
gravamen of their alleged damages is that the other’s actions
resulted in the failure of MRA and the termination of its hospital
contracts.
The
lost
prospective
contract
value,
and
any
accompanying profit, is a loss suffered directly by MRA. Further,
any
alleged
lost
wages,
although
affecting
Pawar
and
Swart
personally, were also lost income suffered directly by MRA as a
result of the lost radiology contracts. The fact that those losses
then run to Swart and Pawar as lost personal employment income does
not change the fact that the losses still derive from losses
suffered by MRA. Swart’s and Pawar’s alleged damages are not
7
This leaves the question of whether Swart or Pawar could sue
MRA directly for breaching their employment contracts, which were
signed in their individual capacity. The Court need not address
that issue here, however, as neither Swart nor Pawar sued MRA for
breach of contract.
8
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“separate and distinct” those of from MRA.
Furthermore, Swart and Pawar would not be entitled to receive
the benefit of any lost contract revenue personally. All monies
derived from the hospital contracts belonged solely to MRA, the
corporate entity. Only upon MRA’s distribution of the proceeds of
the contract as salaries or shareholder distributions would Swart’s
and Pawar’s individual rights to those proceeds attach. Thus, they
are subject to the derivative injury rule.
Accordingly, the Court FINDS that neither Swart nor Pawar have
standing to bring their claims of breach of fiduciary duty and
fraud against one another. Therefore, the Court DISMISSES WITH
PREJUDICE Counts I and II of Swart’s complaint, as well as Counts
I and V of Pawar’s counterclaim.
It is so ORDERED.
The Court directs the Clerk to transmit copies of this
Memorandum Opinion and Order to counsel of record and to enter a
separate judgment order .
DATED: December 4, 2015
/s/ Irene M. Keeley
IRENE M. KEELEY
UNITED STATES DISTRICT JUDGE
9
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