Healthcare is one of the largest components of our national GDP (17.4% in 2013). Doctor services are a large part of that, comprising $587 billion in 2013. Doctors traditionally operate through professional medical corporations in which they are the sole shareholder. It is the law in most if not all states that only other doctors can own a controlling interest in the corporation, and only doctors can be an officer or director. (See for example California Corp. Code Sections 13406-13408).
Major problems can and do arise when the sole shareholder dies prematurely and when the heirs or other interested parties try to wind down the corporation, handle sensitive medical records, and collect the corporation’s receivables.
I was an expert on a case where this exact scenario occurred and resulted in a major arbitration between the professional corporation of the deceased shareholder and another physician with whom the corporation shared an office. This article discusses some of the issues in the case and how to possibly handle the issues so the disputes can be avoided, or at least favorably resolved.
1. Obligations of A Medical Corporation After Death of Its Sole Shareholder and Medical Licensee.
Medical corporations are really no different than regular corporations with the exception mainly of the limitations on ownership. Generally they are subject to the same corporation code provisions, such as the need for board and shareholder meetings and the disclosure of information to shareholders. However, the shares can only be issued or sold to other licensed doctors. Upon death of the sole shareholder doctor, the corporation has a period of time (e.g., 6 months) in which to sell the shares or wind down the corporation.
The question in the case was whether the corporation was liable for expenses it incurred under an expense sharing agreement with another physician medical corporation. The agreement did not address what would happen in the event of the death of a shareholder. The corporation could not legally practice medicine after the death of its sole shareholder doctor, as there were no other doctors employed. The corporation argued that it could not be liable under the agreement because the agreement’s purpose, namely the use of the office overhead, was impossible now that the corporation could not practice medicine, and any overhead would be only for clerical work to wind down the corporation.
The corporation is liable for its debts and obligations as with any other corporation. However, it has an ability to possibly get out of its contracts that are unenforceable or “frustrated in purpose” since it can no longer practice medicine. This can be used to negotiate out of the agreements. If this argument fails, the corporation is liable for its debts, and only the corporation. As a general matter, neither the shareholder nor the shareholder’s estate is liable for the debts or obligations of the corporation. Thus, if the corporation is no longer viable and it cannot be sold, it could be bankrupted if needed to get out of its debts.
If the corporation cannot be sold, or should be wound down, and there are no other officers of directors, there is sometimes a procedure under state law for an officer to appoint an interim board of directors to wind down. The corporation’s bylaws also can address this issue.
2. Does A Medical Corporation Have Rights or Obligations to Patient Records and Data?
Another issue in the case was whether the corporation still had rights to the shared server in which all its billing information and some patient records were stored. A medical corporation is a legal person and its existence continues even after the death of its sole shareholder. A medical corporation has ownership of its files, records and data, and is legally obligated under HIPAA and state confidentiality laws to safeguard the privacy and integrity of its patient files. Those obligations do not stop for a medical corporation after the death of its sole shareholder. The corporation has a right to access its billing information as well, as that is needed to collect its receivables to properly wind down the corporation and pay its debts. With a joint server, the corporation would of course have to respect the privacy of other patients whose data is shared with its own.
The corporation would have to contact all of the patients or their representatives and tell them the practice has closed and that they are entitled to their patient files. Federal and state laws apply in this instance.
3. Can the heirs of the sole shareholder take control of the medical corporation to wind it down?
The stock of the corporation becomes part of the shareholder’s estate. The receivables collected inure to the estate. However, the trustees or executors of the estate do not necessarily have the right to run the corporation. Corporations are run by officers and directors and in medical corporations only qualified licensees generally can be officers or directors. The trustees or executors would have to have some authority to wind down the corporation, either as an officer or director, or via a court order. A power of attorney may facilitate the election of officers and directors as a stop gap measure to manage corporate affairs after the death of the sole shareholder, subject to state law.