Vasilios J. Kalogredis, left, and Katherine E. Ladow, right, of Lamb McErlane.

On Dec. 19, 2017, a group of New York physicians filed a verified complaint in the U.S. Supreme Court of the state of New York County of Westchester, challenging their partnership's merger with a large hospital practice. The physicians challenging the merger claim that the deal will reduce them to “indentured servants.”

Middletown, New York-based Crystal Run Healthcare LLP (Crystal Run Healthcare) entered into a merger agreement with Bronx, New York-based entity, Montefiore Medical Center to create a new entity named Crystal Run Healthcare Physicians LLP. The merger agreement states that the transaction would become effective as of Jan. 1, 2018 and all physician partners of Crystal Run Healthcare are required to sign new employment agreements with the newly created entity. Crystal Run Healthcare is a limited partnership entity consisting of 133 physician partners. Nine of the 133 physician partners dissented and disagreed with the Montefiore Medical Center merger. The nine dissenting doctors claim in their verified complaint that the merger is not in their best interests because the physicians were required to sign new employment agreements with Montefiore Medical Center which demoted them from partners to employees. The nine dissenting doctors further assert that the Montefiore Medical Center employment agreement contains highly unfavorable terms and “draconian noncompete clauses.” The dissenting doctors claim that the new employment agreement forces them to become “indentured servants” to Montefiore Medical Center.

Currently, the nine dissenting physicians are parties to a partnership agreement with Crystal Run Healthcare. The partnership agreement states that upon the occurrence of a “terminating event” (defined as the expulsion of any partner, with or without cause), the terminated partner shall be entitled to a redemption payout equal to the amount of the physician's capital contribution account plus 85 percent of the physician's residual collections. The partnership agreement further states that upon the occurrence of a “liquidating event” (defined as an event where two-thirds of the partners, with concurrence of the management committee, elect to dissolve Crystal Run Healthcare as a partnership upon the happening of an event that makes it unlawful or impossible to carry on the business of the partnership), the business shall be wound up and the net value of Crystal Run Healthcare's assets shall be distributed to the physician partners in accordance with their respective capital account balances. The partnership agreement contains a noncompete clause forbidding a physician from practicing medicine, treating patients or having an equity interest in a medical practice within 15 miles of a Crystal Run Healthcare facility for a period of one year. Pursuant to the partnership agreement, each partner also has the right to inspect, copy, and audit the partnership books and records during normal business hours. The new proposed employment agreement with the new entity, Crystal Run Healthcare Physicians would substantially alter the current terms of the physician's partnership agreement with Crystal Run Healthcare.

The proposed employment agreement would require the physicians to provide three years' notice before resigning from the new entity. The proposed agreement also requires physicians to refer all patients to Montefiore Medical Center for treatment regardless of whether the treating physician believes that is in the patient's best interest. The proposed agreement would also require the physician to move anywhere within the state of New York as the new employer may require. And lastly, the new agreement contains a noncompete clause that prohibits a physician from practicing medicine within 15 miles of any location in which the newly created combination of Crystal Run Healthcare and Montefiore Medical Center provides services for a period of two years.

The verified complaint seeks declaratory and injunctive relief for the redemption of the nine dissenting physicians' interests in Crystal Run Healthcare. The complaint contains seven counts: Declaratory Judgment—Terminating Event; Declaratory Judgment—Liquidating Event; Declaratory Judgment—Noncompete Provisions of Partnership Agreement; Declaratory Judgment—Proposed Employment Agreement Ineffective; Injunctive Relief—Barring Enforcement of Invalid Covenants; Breach of Contract—Redemption of Partnership Interests; and Equitable Relief—Access to Books and Records. The dissenting doctors allege that they are not obligated to enter into the new employment agreement with the new entity, Crystal Run Healthcare Physicians. The dissenting doctors allege that Crystal Run Healthcare's insistence that the physicians enter into the new agreement, and its impending termination of the physician's existing status as a partner, constitute a terminating event under the current partnership agreement. Further, the dissenting doctors contend that Crystal Run Healthcare's cessation of doing business in its current form constitutes a liquidating event under the current partnership agreement which requires a winding up of Crystal Run Healthcare's business and a distribution of its assets to its partner physicians.

Based on the allegations contained in the verified complaint, the merger agreement between Crystal Run Healthcare and Montefiore Medical Center is unusual and appears to breach the physician partners' existing contract with Crystal Run Healthcare. In many situations where a health care entity merges with another, the existing partnership agreements from the original entity contain provisions requiring unanimous consent (or a large “super-majority” vote) for major, business altering events such as a merger or sale. Partnership agreements can also can contain provisions allowing a committee to vote upon major, business altering events; however the committee is required to act in the best interest of the partners as the committee is a fiduciary to the physician partners.  In the instant case, it appears that the physician partners did not have a say in the merger with Montefiore Medical Center and that they were essentially blindsided by the transaction. The Crystal Run Healthcare physician partners had the option of resigning if they disapproved of the merger decision, but the resigning physician would lose his or her severance rights, would still be subject to any noncomplete clause from Crystal Run Healthcare's partnership agreement, and would lose his or her malpractice insurance coverage provided by Crystal Run Healthcare.

Health care practices should ensure that sufficient communication and information is provided to physicians, partners, employees, etc. when a practice decides to consider a major, business-altering event such as a merger or sale.

It is also recommended that practice “partnership” documents address matters such as this to minimize the chances that issues like this arise in the future.

To read the Sodha v. Crystal Run Healthcare, Dec. 19, 2017, complaint, visit, http://src.bna.com/vo1.

Vasilios (“Bill”) J. Kalogredis is Chairman of Lamb McErlane's Health Law Department. He represents many medical and dental groups and thousands of individual physicians and dentists.

Kattherine E. LaDow, an associate in the litigation department at the firm, concentrates her practice in the areas of state civil litigation, family law and health law.