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Doctors Get Second Opinion on Fiduciary Duties

Directors and LLC managers should consider whether their actions comply with their fiduciary duties.

Three doctors have received a “second opinion” from a court in Kentucky. It doesn’t look like an opinion they wanted to hear. An appeals court has reversed an initial trial court judgment in their favor. 

At issue is whether the doctors, who were on the Board of Directors of the New Lexington Clinic, breached their fiduciary duties by negotiating to move their practice to a new primary care clinic in neighboring Jessamine County. 

A corporate director must observe certain standards of care, loyalty and other requirements. These are known as fiduciary duties.  These duties aren’t confined to corporate directors. For example, business partners owe each other fiduciary duties and a trustee owes fiduciary duties to a trust beneficiary.) Fiduciary duties are defined in statutes and in court cases.  

There’s quite a bit of litigation over fiduciary duties. Often when businesses have internal disputes, there are accusations of breach of fiduciary duties. If directors or LLC managers are facing an important issue, they should consider whether their planned actions comply with their fiduciary duties. For example, they may owe duties to shareholders, employees or the company itself. 

According to the Kentucky Court of Appeals, Dr. Michael McKinney, an internist and pediatrician, was a director of the New Lexington Clinic (NLC) when he entered into negotiations with a recruiter for Baptist Healthcare System, Inc. and Baptist Physicians Lexington, Inc. The recruiter sought to induce Dr. McKinney and other NLC physicians and staff to leave NLC for the new Jessamine County clinic. NLC sued Dr. McKinney and eventually two other physician directors, claiming their actions were fiduciary violations. 

The new clinic was to be only a mile and a half from NLC, so NLC had cause for concern about patients leaving NLC. The court decision doesn't say whether the doctors had signed covenants not to compete.  

The doctors initially won, persuading the trial court that the law cited by the NLC had been overridden by statute. But the appeals court held that the statute was similar enough to prior law that NLC had the right to further develop and argue the case. 

The decision means that NLC can try to prove the doctors’ actions were fiduciary violations. That has not been litigated yet. One interesting assertion by some of the doctors is that this case is different from ordinary commerce cases because it involves a patient’s rights to choose a physician and maintain a professional relationship with that physician. 

Legal brief. The case discussed is New Lexington Clinic v. Cooper, (Ct. App. Ky. December 16, 2011). Appeal of summary judgment granted to defendants on claims of breach of fiduciary duty and tortious interference with contract. Held, reversed and remanded. Despite enactment of statute, Plaintiff properly asserted claim of fiduciary breach. Primary statutory change was heightened burden of proof; pleadings were sufficient to maintain action under statute and genuine issues of material fact exist, precluding summary judgment.

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