Court Opinion

ID: 9529411
Source: CourtListenerOpinion
Date Created: 2023-08-07 03:50:32.328273+00
Date Added: 2024-06-11T13:27:46.068072
License: Public Domain

SPENCE, J., Dissenting.
I am in general accord with the views expressed in the dissenting opinion of Mr. Justice Edmonds but desire to add certain additional observations.
The majority opinion recognizes that the real question here does not involve primarily a determination of the general powers of a so-called nonprofit corporation but rather a determination of the legality of the general plan adopted as evidenced by the particular contractual arrangements existing between Complete Service Bureau and the other cross-defendants. As to the contract with Parmer, it is said: “We are here concerned with the operations of the cross-defendants under the contract”; and as to the lease with Group Property it is said: “Again, we are concerned in this action with the question whether the lease was a device for fee-splitting.” But having thus defined the real issues involved, the majority opinion ignores the uncontradicted evidence concerning these contractual arrangements and affirms a judgment which places *218the stamp of approval upon a plan whereby Parmer and certain lay associates developed a commercial venture for profit, in which venture Parmer and his lay associates solicited patients for a limited panel of doctors selected by them and split the medical fees and other income derived from these activities. In other words, the uncontradicted evidence conclusively shows that Parmer, acting individually and through Group Property, a profit corporation which he controlled, was intervening as a “middleman” for profit in establishing the professional relationships between a group of approximately ten doctors and members of the public. Arrangements of this type have been consistently condemned. (People v. Pacific Health Corp., 12 Cal.2d 156 [82 P.2d 429, 119 A.L.R. 1284]; Pacific Employers Ins. Co. v. Carpenter, 10 Cal.App.2d 592 [52 P.2d 992], and authorities cited.)
It seems entirely clear under the rules established by the cited authorities that the incorporators of the nonprofit corporation, as individuals, could not have lawfully developed the profit-making plan under the type of agreements disclosed by the evidence. It necessarily follows that the development of such profit-making plan could not be made lawful by the mere device of forming a so-called nonprofit corporation which corporation, rather than the individual or individuals, entered into similar unlawful agreements. In this connection, it is significant to note that nonprofit corporations formed under section 9200 of the Corporations Code can only be formed for “lawful purposes . . . for which individuals lawfully may associate themselves . . . subject to laws and regulations applicable to particular . . . lines of activity.” It should also be noted that if the mere device of forming such a corporation could legalize activities which were otherwise illegal, then such corporations could be organized for the purpose of permitting laymen and lay agencies, through similar contractual arrangements with such corporations, to intervene for profit in establishing the relations between members of the public and a single practitioner or a limited group of practitioners in any of the learned professions, including the legal profession. Heretofore such arrangements have always been declared to be against the public policy of this state, and if any change in policy is to be made, that change should be declared by the Legislature rather than by the courts.
EDMONDS, J.
The law applicable to associations which perform the service of bringing together licensed practitioners *219and persons desiring medical treatment has been reviewed in other cases. (See California Physicians’ Service v. Garrison, 28 Cal.2d 790 [172 P.2d 4, 167 A.L.R. 306] ; People v. Pacific Health Corp., 12 Cal.2d 156 [82 P.2d 429, 119 A.L.R. 1284].) Generally, there can be no valid objection upon legal grounds to the formation of a nonprofit corporation or cooperative association for the purpose of obtaining medical service for its members. Such service may be provided by contracting with a group of practitioners to supply it, whether upon the basis of fixed period payments or according to a schedule of charges. But the present record establishes additional elements of lay participation which, in my opinion, unquestionably constitute unlawful medical practice.
One of the charges made by the medical association against Parmer and Complete Service Bureau is that the financial arrangements made with the physicians employed by the bureau, in legal effect, amount to the splitting of fees with a layman or a corporation composed of laymen. It has been held that professional fee-splitting occurs “where a member of a profession divides the compensation he receives from a patient with another member of the same profession or any person who has sent the patient to him or has called him into consultation.” (Lieberman v. Connecticut State Bd. of Examiners in Optometry, 130 Conn. 344 [34 A.2d 213, 216].)
Fee-splitting agreements between professional men and laymen as a reward for procuring employment tend to commercialize the profession, are contrary to public policy and are void. (See anno. 86 A.L.R. 195.) Otherwise stated, the professions “are not open to commercial exploitation as it is said to be against public policy to permit a ‘middleman’ to intervene for profit in establishing the professional relationships between the members of said professions and the members of the public.” (Pacific Employers Ins. Co. v. Carpenter, 10 Cal.App.2d 592, 595 [52 P.2d 992].)
The record shows without contradiction these facts:
Each member of the nonprofit corporation pays to it a monthly membership fee of $2.50, for which he is entitled to receive certain hospital service. If he desires other medical service, he must pay to the bureau an additional amount based upon a fixed schedule of fees. Depending upon the type of treatments involved, the physicians on the bureau’s panel receive about 50 per cent of the amount paid to the corporation, which they distribute among themselves according to a unit system. These physicians also treat “pri*220vate” patients, unconnected with Complete Service Bureau, and pay to it about 50 per cent of the fees received from such patients.
Under his manager’s contract, Parmer, or the person who inherits his contractual rights, is entitled to receive 10 per cent of the membership dues, with a minimum guarantee of 25 cents per month per member. And, although since 1946 he has waived the right to claim it, under his contract he is entitled to an additional 25 per cent of the gross receipts of the bureau from all other sources. These rights stem from a contract under which there are no fixed duties to be performed by the manager, and which is expressly made assignable and inheritable.
Additionally, Group Property Incorporated, a stock corporation for profit of which Parmer, until his death, was president and majority stockholder, is entitled to receive as rent for the real property occupied by the bureau and for all the medical equipment used by it another 10 per cent of all income received from all sources.
Under this arrangement, the business manager of the bureau and the corporation, principally owned and controlled by him, receive a direct commercial advantage in establishing the relationship of doctor and patient. The legal devices of stock ownership, and a manager’s contract which fixes no duties should not obscure the significance of the arrangement as one in which a layman may use the professional relationship of doctor and patient as a source of commercial profit. That profit increases not only with the number of members in the bureau, but also with the frequency and extent of their medical treatments, factors which the manager as the controlling officer of the bureau is in a position to influence.
One reason suggested for holding that these practices do not amount to fee-splitting is that the present record does not show that Parmer and Group Property have received an excessive amount under the arrangement. It is suggested that Parmer has received no more than the average business manager, and Group Property has expended large sums in remodeling but has declared no dividends. But there is considerable doubt as to whether, in view of the vague nature of his duties, the amount paid Parmer under the contract can be said to be compensation. And it is not an answer to the charge of commercialization that Group Property has declared no dividends. Certainly, the net worth of the corporation has been increased by “rental” payments and the value *221of its property increased by improvements, and, as controlling shareholder, Parmer or his successor easily may tap those resources merely by declaring a dividend. In any event, it is a novel proposition of law that one who receives funds from an improper source, or gains them in an improper manner, may be excused from legal consequences if he does not take too much.
The nature of Parmer’s participation as one of commercial exploitation is made evident from a history of his dealings with the bureau, dealings which have been exceedingly profitable. His contract with the bureau enables him to maintain almost complete control of it. Almost continuously, Parmer has been president of the bureau and a member of its board of trustees. The trustees, other than Parmer, have been his secretary, and either a close friend of Parmer or one of his employees. His contract as manager has entitled him to a percentage of the bureau’s total income as well as a guaranteed minimum income from the dues of members.
The premises now occupied by the bureau, originally owned by Parmer, were sold to it in 1940 for $31,000, but with an option to Parmer to repurchase them and all fixtures and equipment owned by the bureau at their original price less depreciation. Six years later, he exercised the option, paying the bureau with stock of Group Property. He then resold the property to Group Property for $102,500 in stock. In short, these dealings demonstrate Palmer’s complete control and participation in Complete Service Bureau for commercial advantage.
The basis for the refusal of the trial court to consider these factors appears to have been its belief that the appellants were without standing to challenge them as an unlawful practice of medicine. In his memorandum opinion, the trial judge stated “what the terms of the management contract should be, what salary should be paid or is paid, what the rent should be, what property the corporation is to purchase, what the members shall pay as dues, what the employees shall do or what pay they shall receive, are matters for the stockholders or members of the corporation to decide, and are not open to inquiry by SDCMS, CPS, or any other corporation or person not connected with CSB. . . . The State, by a proceeding in the nature of quo warranto, may proceed to forfeit and dissolve the corporate existence for acts of usurpation of powers, or may proceed in like manner against any usurpation of franchise by any corporation or *222person, or the State or a shareholder may proceed by injunction against a corporation or its officers.”
By the present decision the cross-complainants are given legal standing to challenge Parmer’s participation in Complete Service Bureau as an unlawful medical practice, but it is held that the evidence supports the conclusion of the trial court that there was no fee-splitting. Plainly Parmer’s participation was not considered by the trial court in this connection.
Many people who advocate increased availability of medical service to persons of low or moderate incomes may welcome the establishment of plans similar to the present one without a discriminate inquiry into their business bases. However, in the long run, to ignore unlawful practices incident to them will benefit neither the public nor the profession. I would hold that Complete Service Bureau’s division of the medical fees received by it with its business manager and Group Property on a percentage basis constitutes an unlawful medical practice, and enjoin its continuance.
Appellants’ (San Diego County Medical Society et al.) petition for a rehearing was denied August 4, 1954. Edmonds, J., and Spence, J., were of the opinion that the petition should be granted.