Filed 11/14/18 Zurcher v. Emergency Medical Services Group CA5

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIFTH APPELLATE DISTRICT

APPEAL from an order of the Superior Court of Kern County. Sidney P. Chapin, Judge.

Claypool Law Firm and Brian E. Claypool for Cross-defendants and Appellants.

Borton Petrini, George F. Martin and Michael J. Stump for Cross-complainant and Respondent.

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In this contentious business dispute between physicians who were in a medical practice together that provided emergency room physician services, appellants Kevin R. Schmidt, D.O., Garrett B. Lee, M.D., and Thomas M. Reilly, M.D. (Drs. Schmidt, Lee and Reilly or appellants), appeal from the trial court’s denial of their petition to compel arbitration of the 14th and 15th causes of action of the first amended cross-complaint filed by respondent Raymond Zurcher, M.D. (Dr. Zurcher or respondent). The trial court denied the petition because, prior to the hearing, respondent dismissed the 14th and 15th causes of action. We affirm the trial court’s order as clearly correct.

In response to the present appeal, respondent moved for immediate dismissal of the appeal and for monetary sanctions against appellants on the ground the appeal is frivolous on its face. Although a close question, on balance we deny respondent’s motion.

FACTS AND PROCEDURAL HISTORY

The Parties Form Emergency Medical Services Group

In 1996, after completing their emergency medicine residency at Kern Medical Center in Bakersfield, California, Doctors Schmidt, Lee, Reilly and Zurcher, among others, formed Emergency Medical Services Group, Inc. (EMSG), a California medical corporation. Originally, there were six doctors who were the shareholders of EMSG, but by the time of the present litigation, there were only four—the four individual parties to this appeal.

The corporate formation of EMSG included the execution of a shareholder agreement (the shareholder agreement) which contained provisions applicable in the event of a shareholder’s death, bankruptcy, withdrawal or termination from the corporation, including a buy-out provision. One of the occurrences triggering the buy-out provision is where a shareholder’s employment with the corporation has been terminated, in which case the corporation would be required to either liquidate and sell its assets or buy-out the interest of that shareholder. Under the buy-out provision, if the parties are unable to agree on a purchase price, an arbitration procedure would be used to decide the fair market value of the withdrawing party’s shares.

In the years following its formation, EMSG, through its physician shareholders, solicited and fulfilled contracts to provide emergency medical physician services at hospitals in Kern County. For example, at various periods of time, EMSG had contracts in place with Kern Valley Hospital, Bakersfield Family Medical Center, and San Joaquin Community Hospital (or SJCH) for the provision of emergency medical physician services. The contract with SJCH, which was in effect from 2000 to 2011, was apparently one of EMSG’s most profitable contractual relationships. A portion of the emergency room services provided by EMSG to SJCH were to prison inmates, and such services were allegedly billed to California Department of Corrections and Rehabilitation (CDCR) through a third-party physicians’ association known as Premier Physicians Alliance, Inc. (PPA).

Appellants’ Complaint

On February 18, 2011, EMSG filed a complaint for damages against respondent Dr. Zurcher. Allegedly, Dr. Zurcher, who was not only a director and officer of EMSG but also a director and officer of PPA, insisted that EMSG should bill PPA for services rendered to CDCR inmates rather than secure its own contract with CDCR, which it could have done. Among other things, Dr. Zurcher allegedly represented to EMSG that PPA would promptly process EMSG’s invoices for payment by CDCR and promptly reimburse EMSG when funds were received from CDCR, and that the reimbursement rate offered to EMSG (110 percent of Medicare) would be and was the maximum rate that PPA would offer to any other medical provider providing services to CDCR inmate patients. Based on these representations (and in part because Dr. Zurcher was a director and officer of EMSG), EMSG agreed to enter into a contract with PPA. Allegedly, the substance of this contract was that EMSG would treat CDCR inmate patients and bill PPA; PPA would then collect from CDCR on behalf of EMSG and reimburse it for the services it rendered at a rate of 110 percent of what Medicare would pay for the same services.

According to the complaint, contrary to the representations made by Dr. Zurcher, PPA did not promptly pay or reimburse EMSG and was late on many payments by more than one year. At the time EMSG filed its complaint, PPA allegedly owed to EMSG a sum in excess of $400,000 for services rendered to CDCR patients at the request of PPA. Further, funds paid to PPA by CDCR were allegedly (on information and belief) siphoned off to a new entity, Premier MSO, which was partly owned by Dr. Zurcher. Additionally, contrary to the representations made by Dr. Zurcher, PPA allegedly paid other medical providers 145 percent of Medicare, a reimbursement rate much higher than the rate paid to EMSG. Other questionable transfers of funds by PPA were alleged in the complaint. Based on these and similar allegations, the complaint filed by EMSG against Dr. Zurcher asserted causes of action for (1) fraud, (2) breach of fiduciary duties, and (3) fraudulent transfer.

Dr. Zurcher’s Original Cross-Complaint

On or about August 12, 2011, Dr. Zurcher filed his original cross-complaint against Drs. Schmidt, Lee and Reilly, among others. The cross-complaint alleged that Drs. Schmidt, Lee and Reilly each owned shares of common stock in PPA, until they sold their shares in 2011 (as to Drs. Lee and Reilly) and 2009 (as to Dr. Schmidt). According to the cross-complaint, in 2009, two shareholders of EMSG (Drs. Lee and Zurcher) expressed an interest in leaving EMSG and having EMSG purchase their interest in the company. EMSG determined that it could not continue to operate with only the two remaining physicians, and therefore, it decided to find a buyer for its principal asset, the interest it held in the contract with SJCH. Efforts to sell its interest in that contract were complicated by the fact that SJCH had to consent to any such sale. Additionally, SJCH could terminate the contract with EMSG without cause. Therefore, cooperation with SJCH in working toward a sale was imperative. Ultimately, on December 22, 2010, EMSG reached an agreement to sell its right and interest in the SJCH contract to a partnership known as California Emergency Physicians Medical Group (or CEP). CEP’s payments under the sale were to be made to EMSG, and not to the individual shareholders.

Soon thereafter, on February 3, 2011, a special meeting of the board of directors of EMSG was held, and it was decided (without a proper quorum) that Dr. Zurcher was removed from the board of directors and would no longer receive any financial distributions from EMSG. Further, on May 10, 2011, Dr. Zurcher was terminated from his employment with EMSG, but this action was also without a proper quorum. As a result of these actions, Dr. Zurcher allegedly was deprived of and excluded from his one-fourth share of the proceeds derived from the sale of the SJCH contract and any other assets and distributions of the company, due to him based on his interest as a one-fourth owner/shareholder. Further, Dr. Zurcher allegedly was denied access to corporate accounting books and records.

Based on these and other allegations of a similar nature, Dr. Zurcher’s cross-complaint set forth causes of action for (1) fraud, (2) constructive fraud (breach of fiduciary duty), (3) conversion, (4) breach of fiduciary duty against Drs. Schmidt, Lee and Reilly, (5) breach of fiduciary duty against Mr. Hilliard and The Hillard Group, (6) violation of right of privacy—intrusion into private affairs, (7) violation of right of privacy—public disclosure of private facts, (8) accounting, (9) invalidation of February 3, 2011 vote of the EMSG board of directors and reinstatement of Dr. Zurcher to the board, (10) invalidation of the May 10, 2011 notice of termination and reinstatement of Dr. Zurcher as an employee of EMSG, and (11) action to enforce right of inspection of corporate books and minutes.

Dr. Zurcher’s First Amended Cross-Complaint

On August 19, 2016, Dr. Zurcher filed a motion for leave to file a first amended cross-complaint. His motion was granted by the trial court on October 24, 2016, and the first amended cross-complaint was filed by the clerk on October 24, 2016, pursuant to the trial court’s order.

The first amended cross-complaint alleged the same foundational allegations as the original cross-complaint, but added several new causes of action. The new causes of action were the 12th, 13th, 14th and 15th causes of action, which were as follows: (12) conversion (violation of Penal Code, § 496), (13) intentional infliction of emotional distress, (14) breach of EMSG shareholder agreement, and (15) breach of covenant of good faith and fair dealing in EMSG shareholder agreement. The 14th and 15th causes of action alleged the existence of the shareholder agreement, which purportedly governed the rights and duties owed by and among the EMSG shareholders in the event of certain occurrences such as withdrawal of a shareholder from the corporation. Allegedly, Drs. Schmidt, Lee and Reilly breached the shareholder agreement in several respects, including by attempting to strip Dr. Zurcher of his ownership interest and of his right to distributions (including his share of the proceeds of the sale of the SJCH contract to CEP) without adhering to and in contravention of the terms of the shareholder agreement. The shareholder agreement contains an attorney fee provision, and therefore the 14th and 15th causes of action included a prayer for an award of attorney fees.

Motion or Petition to Compel Arbitration

On November 18, 2016, Drs. Schmidt, Lee and Reilly filed their motion to compel arbitration of the 14th and 15th causes of action of the first amended cross-complaint filed by Dr. Zurcher. The notice of motion unequivocally stated that the motion was made with reference to the 14th and 15th causes of action, seeking an order compelling Dr. Zurcher “to arbitrate the fourteenth cause of action for ‘Breach of Contract: EMSG Shareholder Agreement’ and the fifteenth cause of action for ‘Breach of the Covenant of Good Faith & Fair Dealing: EMSG Shareholder Agreement’ (‘Arbitrable Causes of Action’) asserted in the First Amended Cross-Complaint ….” Thus, according to the notice of motion, only the 14th and 15th causes of action were the “arbitrable” causes of action and the motion was directed to those causes of action only. The motion was made on the ground that “the EMSG Parties and Zurcher agreed to arbitrate their disputes in connection with the Arbitrable Causes of Action, as set forth in that certain Shareholder Agreement ….” The points and authorities filed in support of the motion likewise referred only to the 14th and 15th causes as the “Arbitrable Causes of Action.”

On December 23, 2016, Dr. Zurcher filed a request for dismissal of the 14th and 15th causes of action of the first amended cross-complaint, without prejudice, and the trial court clerk entered the dismissal of those causes of action.

On January 5, 2017, Dr. Zurcher filed his opposition to the motion to compel arbitration. The opposition primarily argued the motion should be denied because it was rendered moot by the dismissal of the arbitrable causes of action. Additionally, the opposition argued that the narrow scope of the arbitration provision was not intended to address the issues in the present controversy. Finally, the opposition argued that even if the arbitration provision might conceivably be applicable, the moving parties had waived their right to enforce the arbitration provision.

The moving parties (i.e., Drs. Schmidt, Lee and Reilly) filed a reply on January 12, 2017. The reply argued that Dr. Zurcher’s attorney had refused to verbally “confirm” to the moving parties’ attorney that Dr. Zurcher would not attempt to subsequently reassert or pursue the arbitrable causes of action, notwithstanding the dismissal.

The hearing on the motion was held on January 19, 2017. The trial court denied the motion, explaining that the “Notice of Motion and Motion only went to the 14th and 15th causes of action of the first amended cross-complaint [and] [t]hose causes of action have been dismissed.” In denying the motion, the trial court addressed from the bench the concern expressed by Drs. Schmidt, Lee and Reilly that Dr. Zurcher might try to re-assert claims under the shareholder agreement at trial, since the causes of action had been dismissed without prejudice. In effect, the trial court said it would not allow that to happen, stating as follows:

“Well, I noted the dismissal without prejudice so some of the concerns that you express came to mind; and, so the record is clear, in denying the motion to compel arbitration and with a dismissal without … prejudice, the Court will state that the Court will not entertain any motions to confirm—or conform pleadings to proof at time of trial and motions in limine, of course, should be filed with regard to any anticipated reference that may seek to put before the jurors issues arising out of the shareholder agreement. But this notice of motion is what it is and there is a dismissal that’s a right of dismissal and the motion to compel arbitration will be denied.”

On January 26, 2017, appellants’ notice of appeal from the order denying the motion to compel arbitration was filed. After the record on appeal was filed, respondent Dr. Zurcher filed a motion to dismiss the appeal and for monetary sanctions on the ground that the appeal is frivolous.

DISCUSSION

I. Standard of Review

We begin with our standard review of appellants’ appeal. “ ‘ “ ‘There is no uniform standard of review for evaluating an order denying a motion to compel arbitration. [Citation.] If the court’s order is based on a decision of fact, then we adopt a substantial evidence standard. [Citations.] Alternatively, if the court’s denial rests solely on a decision of law, then a de novo standard of review is employed. [Citations.]’ ” ’ ” (Avila v. Southern California Specialty Care, Inc. (2018) 20 Cal.App.5th 835, 839–840.) Here, in ruling on the motion, it appears that the trial court relied on the notice of motion, along with the other moving and opposing papers relating to the motion, and the pleadings on file in the case. There were no factual issues presented or decided. Therefore, we review the trial court’s order denying the motion to compel arbitration de novo.

We note appellants’ burden on appeal. Because a judgment or order of a lower court is presumed to be correct on appeal, error must be affirmatively shown. (Denham v. Superior Court (1970) 2 Cal.3d 557, 564.) Thus, an appellant must affirmatively show prejudicial error based on adequate legal argument and citation to the record. (Keyes v. Bowen (2010) 189 Cal.App.4th 647, 655; Yield Dynamics, Inc. v. TEA Systems Corp. (2007) 154 Cal.App.4th 547, 556–557.) When points are perfunctorily raised, without adequate analysis and authority or without citation to the record, we pass over them and treat them as forfeited. (Keyes v. Bowen, supra, 189 Cal.App.4th at p. 655; Placer County Local Agency Formation Com. v. Nevada County Local Agency Formation Com. (2006) 135 Cal.App.4th 793, 814.)

II. The Motion to Compel Arbitration Was Properly Denied

A party alleging the existence of a written agreement to arbitrate a controversy may petition or file a motion for an order compelling the other party to the arbitration agreement to arbitrate that controversy. (Code Civ. Proc., § 1281.2.) Here, appellants’ notice of motion and points and authorities filed in the trial court sought an order compelling arbitration of the newly alleged 14th and 15th causes of action of the first amended cross-complaint only—which alone were identified in the motion as the “arbitrable” causes of action of the first amended cross-complaint—on the ground that those two causes of action were premised upon the shareholder agreement which contained an arbitration provision. After the motion was filed, respondent Dr. Zurcher voluntarily dismissed the 14th and 15th causes of action of the first amended cross-complaint. Accordingly, the trial court denied the motion.

In the instant appeal, appellants argue the trial court erred because, even though the arbitrable claims were dismissed, respondent Dr. Zurcher failed to provide assurances that he would not “resuscitate them at the completion of trial.” Further, appellants vaguely assert that the “arbitrable issues” contained in the 14th and 15th causes of action were “sprinkled throughout” the first amended cross-complaint. We reject both lines of argument. Appellants’ subjective concerns or speculation about what respondent might attempt to do in the future is beside the point. The trial court properly ruled based on the pleadings and the motion before it. Further, appellants have not indicated where, in the first amended cross-complaint, arbitrable controversies were purportedly “sprinkled.” Such perfunctory contentions, unsupported by citation to the record and adequate legal argument, are forfeited on appeal. (Keyes v. Bowen, supra, 189 Cal.App.4th at p. 655.) That is the case here. In any event, as explained below, we conclude the trial court’s ruling was plainly correct.

In our review of the first amended cross-complaint, it appears that only the 14th and 15th causes of action were premised upon the terms and provisions of the shareholder agreement or a breach thereof. Accordingly, only the 14th and 15th causes of action were potentially within the scope of the arbitration provision of the shareholder agreement. That provision creates an arbitration procedure in the limited context where, in connection with a buy-out pursuant to the shareholder agreement, the parties are unable to agree on the precise value of the withdrawing individual’s shares.[1] The parties’ rights under the buy-out provisions, including the arbitration procedure to resolve a dispute over value in the context of such a purchase of the withdrawing member’s shares, are entirely contractual in nature, with the relevant contract being the shareholder agreement. Again, a breach of the shareholder agreement was alleged by respondent Dr. Zurcher only in the 14th and 15th causes of action, both of which were dismissed prior to the hearing.[2] Moreover, the sole and exclusive relief sought in appellants’ notice of motion and points and authorities was to compel arbitration of the 14th and 15th causes of action, which were identified as the “arbitrable” causes of action. When those causes of action were dismissed from the pleading, the relief sought by appellants’ motion was manifestly rendered moot. For all these reasons, the trial court’s order denying appellants’ motion to compel arbitration was clearly correct, and the order is affirmed.

III. Motion for Sanctions Denied

Respondent, Dr. Zurcher, requests that we dismiss the appeal and/or impose monetary sanctions against appellants and their attorney for filing and prosecuting a frivolous appeal. Code of Civil Procedure section 907 provides: “When it appears to the reviewing court that the appeal was frivolous or taken solely for delay, it may add to the costs on appeal such damages as may be just.” Our Supreme Court in In re Marriage of Flaherty (1982) 31 Cal.3d 637, has set forth the applicable standard: “[A]n appeal should be held to be frivolous only when it is prosecuted for an improper motive—to harass the respondent or delay the effect of an adverse judgment—or when it indisputably has no merit—when any reasonable attorney would agree that the appeal is totally and completely without merit.” (Id. at p. 650.) The two strands of the standard are often used together, with one providing evidence of the other. Thus, the total lack of merit of an appeal is viewed as evidence that appellant must have intended it only for delay. (Id. at p. 649.)

Respondent argues that the appeal was frivolous because appellants’ notice of motion sought to compel arbitration of the 14th and 15th causes of action only, and those causes of action were voluntarily dismissed.

Viewed in isolation, respondent’s argument is nearly convincing. On balance, however, we will stop short of holding that this appeal was frivolous. Respondent Dr. Zurcher acknowledges, in the context of arguing for a waiver of arbitration as an alternative ground for affirming the trial court’s order, that the value of his interest as shareholder of EMSG has been and still is an issue in this litigation to the extent that such value may be relevant to, or a component of, his damages as alleged under the cross-complaint and the first amended cross-complaint, regardless of the dismissal of the 14th and 15th causes of action. Furthermore, respondent’s first amended cross-complaint alleges the corporate majority terminated his employment with EMSG, albeit that decision was allegedly invalid as there was not a proper quorum. On this record, we cannot say that no reasonable attorney would have taken an appeal on the ground that the arbitration provision was potentially applicable to the remaining (i.e., not dismissed) causes of action of the first amended cross-complaint. Although we have construed the arbitration provision to be narrower in scope, in the sense that it applies in the limited context of the parties undertaking a buy-out of a withdrawing shareholder’s interest pursuant to the terms of the shareholder agreement, it was not patently unreasonable for appellants to argue for a broader application thereof under all the circumstances of this case. Accordingly, we cannot conclude that any attorney would agree the arguments raised on appeal were utterly and completely without merit.

Because the appeal was not objectively frivolous, we also conclude it was not taken solely for delay. For these reasons, the motion for dismissal and for monetary sanctions is denied.

DISPOSITION

The order of the trial court is affirmed. Respondent’s motion to dismiss appeal and for monetary sanctions is denied. Costs on appeal are awarded to respondent.

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LEVY, Acting P.J.

WE CONCUR:

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SMITH, J.

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DE SANTOS, J.