Court Opinion

ID: 9587773
Source: CourtListenerOpinion
Date Created: 2023-08-21 23:26:06.939617+00
Date Added: 2024-06-11T13:33:15.526545
License: Public Domain

STEWART, Associate Chief Justice,
dissenting:
In construing the Utah Professional Corporation Act, the majority ignores critical language in § 16-11-10, misconstrues carefully drafted language in § 16-11-13, and reaches a result that is antithetical to the legislative intent of accommodating a modified corporate form of doing business with important ethical constraints on professional persons who use that form of doing business. The majority holds that a professional person has no right under § 16-11-13 to redeem his or her shares upon termination of the professional relationship with the corporation. Shareholders who have been terminated from practicing in such a corporation are thereby relegated to the role of “passive” shareholders, and their financial interest in the corporation is frozen indefinitely. More important, the majority’s position creates unavoidable and serious ethical problems for both professionals and professional corporations.
*372Section 16-11-13 of Utah’s Professional Corporation Act governs this case. It provides that “the professional corporation shall purchase the shares of a deceased shareholder or a shareholder no longer qualified to own shares in such corporation.” (Emphasis added.) The majority incorrectly reads the phrase “shareholder no longer qualified ” to mean “shareholder no longer licensed.” A careful analysis of the Act compels the conclusion that the Legislature knowingly and intentionally used the term “no longer qualified” rather than the term “no longer licensed” for important reasons. At bottom, the majority’s error lies in changing the meaning of the statutory term “shareholder ... disqualified” to “shareholder ... unlicensed” and then, ironically, in declaring that the Court has no power “to read into the Act” a substantive term. That substantive term was put in § 16-11-13 when the Legislature used the term “disqualified” instead of “unlicensed.”
I. HISTORY OF PROFESSIONAL CORPORATION ACTS
The history of professional corporation statutes sheds significant light on the legislative purpose behind the Utah Professional Corporation Act and how professional corporations differ from business corporations. Professionals traditionally practiced either as solo practitioners or in partnerships but not as corporations because of ethical standards inconsistent with a corporate form of doing business. As a consequence, professionals were denied a wide variety of federal and state tax benefits available to others who could incorporate. For example, professional practitioners could not deduct various business expenses from gross income or avail themselves of various retirement programs and other benefits entitled to favorable tax treatment under federal law. Such benefits were, however, available to other persons who provided personal services to the public and who were able to adopt a corporate form of business.
To obtain tax equality without violating the ethical standards of the various licensed professions, members of some professions began to form professional “associations,” which were intended to obtain the benefits of corporate status, but only for tax purposes. See United States v. Empey, 406 F.2d 157, 167 (10th Cir.1969). The watershed case from the federal tax perspective is United States v. Kintner, 216 F.2d 418 (9th Cir.1954). In that case, a group of doctors who had organized a noncorporate “association” to practice medicine were accorded corporate status for federal tax purposes. Id. at 428. In 1957, the IRS Commissioner acquiesced in that ruling and agreed to allow professional associations to be taxed as corporations. See Rev.Rul. 57-546,1957-2 C.B. 886. The Treasury Department, however, attempted to overrule Kinter by promulgating rules providing that professional entities should be treated as partnerships, not as corporations. Empey, 406 F.2d at 167-68. The Department’s motive in seeking to overrule Kintner was so transparent that the regulations it promulgated were generally referred to as the “Kintner Regulations.” Id. at 168.
In response to the Kintner Regulations, professional practitioners lobbied state legislators nationwide to enact statutes that would permit professionals to organize in a modified corporate form that would be recognized as a corporation for tax purposes while leaving professional ethical standards intact. Note, Professional Corporations & Associations, 75 Harv.L.Rev. 776-79 (1962). Although the IRS agreed to treat professional corporations created under state laws as corporations for federal tax purposes, Rev.Rul. 70-101 (1970), those corporations were fundamentally and significantly different from general business corporations. For example, personal liability of shareholders for negligence was not limited by the corporate form.
Thus, a professional corporation is by necessity a hybrid of the business corporate form and the partnership form of doing business. Vinall v. Hoffman, 133 Ariz. 322, 651 P.2d 850, 851 (1982) (en banc); see also Utah Code Ann. §§ 16-11-3, -7, -10. The professional corporation act had “to accommodate the special needs of the professional who chooses to associate and practice his or her profession,” because the corporate aspects of the professional corporation were simply to allow “professionals to take advantage of var*373ious federal tax provisions available to a corporation and its employees but not available to self-employed persons or partnerships.” Vinall, 651 P.2d at 851.
II. UTAH PROFESSIONAL CORPORATION ACT
Utah enacted its Professional Corporation Act in 1963. Utah Code Ann. §§ 16-11-1 to -15 (1991 & Supp.1993). The legislative purpose of the Act, consistent with the brief history outlined above, is to allow professionals in eighteen professions “the benefits of the corporate form for the business aspects of their practices while preserving the established professional aspects of the professional relationship between the professional person and those he serves.” Utah Code Am. § 16-11-3 (emphasis added). Professional corporation acts generally, and the Utah Act specifically, were not intended to make a professional corporation the legal equivalent of a business corporation.
The provisions of the Utah Act make explicit a number of fundamental differences between commercial and professional corporations. A professional corporation may not raise capital by issuing shares to investors or to the public generally. Shareholders in a professional corporation can only be “persons who are duly licensed to render the same specific professional services as those for which the corporation was organized.” Utah Code Ann. § 16-11-7. In addition, a professional corporation may render “one specific type of professional service and services ancillary thereto,” but may not otherwise engage in general business activities. Utah Code Ann. § 16-11-6. Thus, a professional corporation may not be used to manufacture products or provide banking or investment services or any other kind of personal service that is not professional in nature and of the specific type for which it was organized.
The purposes for which a professional corporation may be created are highly limited. Section 16-11-6 of the Code provides:
A professional corporation may be organized pursuant to the provisions of this act only for the purpose of rendering one specific type of professional service and services ancillary thereto and shall not engage in any business other than rendering the professional service which it was organized to render and services ancillary thereto; provided, however, that a professional corporation may own real and personal property necessary or appropriate for rendering the type of professional service it was organized to render and may invest its funds in real estate, mortgages, stocks, bonds and any other type of investments.
(Emphasis added.) Under § 16-11-9, the professional services provided by the corporation may be offered only by a duly licensed person: “A professional corporation may render professional services only through its officers, employees and agents who are duly licensed to render such professional services.”
A crucial provision in the proper construction of the Act is § 16-11-10. It provides that the law governing professional relationships, including but not limited to the law of personal liability of professionals, was not intended to be altered by the terms of the Act, notwithstanding general business law concepts that would otherwise govern. Section 16-11-10 provides, “This act does not alter any law applicable to the relationship behveen a person rendering professional services and a person receiving such services, including liability arising out of such professional services." (Emphasis added.)-
Thus, section 16-11-10 of the Act specifies that a professional corporate form of business cannot be used to violate “established professional aspects of the professional relationship.” Notwithstanding the primacy of that principle, the majority refuses to construe the Act in light of that principle and dismisses all ethical considerations that will inevitably result from its construction as “hypothetical.” In fact, however, the majority opinion itself causes one ethical violation, as discussed below.
Because plaintiff is denied a right to redeem her stock under § 16-11-13, she becomes a passive shareholder in a professional corporation, a status contrary to the intent of the Act. The Act provides that shares may be issued only to licensed professionals. *374Utah Code Ann. §§ 16-11-7, -10, -13. As Professor Bittker has stated, the Act does not “contemplate a passive investment in the stock of an association engaged in the practice of law or medicine by a person who, though licensed to practice the profession, is [deceased,] inactive or retired.” Boris I. Bittker, Professional Associations & Federal Income Taxation: Some Questions & Comments, 17 Tax L.Rev. 1, 17 (1961). A shareholder, like plaintiff, who leaves the corporation and retains her stock is a passive investor who is left “with an ownership interest in a professional corporation where [she] no longer works, where [she] no longer is notified of meetings or policy decisions, from which [she] no longer gets reports, and where [she] is no longer permitted to vote [with respect to the conduct of the business, or against the directors].” Vinall v. Hoffman, 133 Ariz. 322, 651 P.2d 850, 852 (1982) (en banc) (construing a similar redemption provision in the Arizona professional corporation act).
The section that specifically governs the instant case is § 16-11-13. It is intended to prevent a corporation from having passive shareholders. It states:
The articles of incorporation may provide for the purchase or redemption of the shares of any shareholder upon the death or disqualification of such shareholder, or the same may be provided in the bylaws or by private agreement. In the absence of such a provision in the articles of incorporation, the bylaws, or by private agreement, the professional corporation shall purchase the shares of a deceased shareholder or a shareholder no longer qualified to own shares in such corporation within 90 days after the death of the shareholder or disqualification of the shareholder, as the case may be.
Thus, pursuant to this provision, the corporation is required to purchase shares of a professional who is “no longer qualified ” to own shares, even if the corporation fails to provide for that in its articles or bylaws or by agreement.
The majority reads the term “disqualified” in § 16-11-13 to mean “unlicensed,” even though the Legislature expressly used a term other than “unlicensed” to distinguish between a professional who is licensed, see § 16-11-9, and a professional who is “licensed” but “disqualified.” The latter term, in the context in which it is used, clearly means a shareholder who may be licensed but is disqualified from owning shares in the corporation. If the term “no longer qualified” were intended to mean “no longer licensed,” as the majority holds, the Legislature would have said so; it did not, for compelling reasons.
In Vinall v. Hoffman, 133 Ariz. 322, 651 P.2d 850 (1982) (en banc), the Arizona Supreme Court addressed almost the same question that we have here. The critical Arizona statutory language was “resignation” rather than “disqualified.” A lower appellate court held, as the majority does here, that the professional corporation act did not provide a dentist shareholder who had resigned as an “employee” of the corporation a statutory right to have his stock redeemed because the statutory right of redemption was triggered by “resigning” from the profession, not from the corporation. The Arizona Supreme Court stated that the issue was “whether the Legislature intended for the word ‘resignation’ ... to mean resignation from a professional corporation or resignation from a profession altogether.” Id. 651 P.2d at 850. Even though the plaintiff and the other stockholders had entered into an agreement giving the corporation the option to buy back a resigning shareholder’s shares, an option the corporation declined to exercise, the court held that the court of appeals had erred and that the corporation had a statutory duty to redeem. The court stated that a professional corporation is a “hybrid” corporation that is different from business corporations and ruled that the statutory term “resignation” meant resignation from the corporation, not from the profession. The court reasoned that such a construction was necessary to protect professional ethical standards. The court stated:
To construe the statute as the Court of Appeals did would lead to an illogical result. Under the Court of Appeals’ reasoning Dr. Hoffman may very well be left with unmarketable shares of uncertain value. *375This leaves Dr. Hoffman with an ownership interest in a professional corporation where he no longer works, where he no longer is notified of meetings or policy decisions, from which he no longer gets reports, and where he is no longer permitted to vote. Dr. Hoffman might also re-' main liable for the actions of those still practicing in the corporation. Further, professional corporations rarely, unless they have accumulated large capital surpluses, declare dividends. Instead they dispose of most of the profits as salary. Thus, if the Court of Appeals’ reasoning was followed, Dr. Hoffman would own an interest in a professional corporation over which he exercises no control and from which he will likely receive no dividends. Absurdities could result because of this unique position.
Our holding requiring a corporation to redeem the shares of the resigning shareholder is equitable to the corporation. Otherwise, a withdrawing shareholder could refuse to sell his or her shares back to the corporation and possibly subject the remaining shareholders to liability for his or her malpractice or negligence after leaving the corporation at a1 time when the corporation has no supervisory control over the practitioner. See A.R.S. § 10-905.
Ethical considerations require the result we reach today. Principle 1 — (I) of the Principles of Ethics and Code of Professional Conduct of the American Dental Association provides that “Dentists shall not accept or tender ‘rebates’ or ‘split fees.’” See A.R.S. §§ 32-1297.07(A)(l) and 32-1201(10)(n). In Arizona a professional corporation cannot do what the person licensed to practice cannot do. A.R.S. § 10-909(A). Although the [Wisconsin] Court of Appeals did not have to reach this precise issue it offered guidance when it stated, “Ethical considerations may require when one member of a service corporation voluntarily leaves that service corporation, that he [or she] be compensated at a fair value.” Melby v. O’Melia, 93 Wis.2d 51, 55, 286 N.W.2d 373, 375 (App.1979). If the corporation paid a dividend to Dr. Hoffman ivhen he did not work there it could be subject to sanctions for splitting a fee for ivork not performed.
The Court of Appeals noted that “[i]n ordinary usage, ‘resignation’ refers to a voluntary, unilateral surrender of an office or position.” 133 Ariz. at 332, 651 P.2d at 860. In applying the rule of common sense meaning in interpreting words we believe the term “resignation” ivas intended to mean resignation from a professional corporation and not from a profession.
Id., 651 P.2d at 852 (footnote omitted) (emphasis added).
Because of the majority’s ruling, Berrett, contrary to her choice, is now a shareholder in two professional corporations where conflicts of interest, fee splitting, and other ethical difficulties are serious possibilities. In addition, an immediate violation of ethical rules occurs because of Berrett’s membership in two firms when she practices in only one. Under ABA ethical standards, it is improper for a lawyer to have membership in a firm in which he or she does not actively practice and participate. See generally Melby v. O’Melia, 93 Wis.2d 51, 286 N.W.2d 373 (App.1979).1 “A lawyer may be a partner in two law firms in different states provided he actively practices law at both locations.” ABA Comm, on Ethics and Professional Responsibility, Informal Op. 83-1499 (1983). While a lawyer may be associated with more than one law firm, a lawyer must (1) “actually practice at both locations”; (2) “avoid all possibility of misleading anyone as to the extent of your activity at each”; and (3) “avoid any activity or relationship [at both locations] that would impair the independent professional judgment to which each client is *376entitled.” ABA Comm, on Ethics and Professional Responsibility, Informal Op. 1253 (1972) (partnership in more than one firm). A shareholder who terminates employment but who retains shares in a firm cannot comply with that rule.
The result the majority adopts will also propel both Berrett and her former firm into a number of other likely ethical violations. Berrett appears to be a member of her old firm Purser & Edwards in violation of Utah Rule of Professional Conduct 7.5(d), which provides that a lawyer may state or imply that she practices in a law firm only when that is the fact. See also Model Code of Professional Responsibility DR 2-102(C). If Berrett is given access to the books, records, and client files of Purser & Edwards to protect her “investment,” that might well violate Utah Rule of Professional Conduct 1.6(a), which requires a lawyer to keep her client’s confidences. See also Model Code of Professional Responsibility DR 4 — 101(B)(1). In addition, Berrett and Purser & Edwards are likely to violate Utah Rule of Professional Conduct 1.7(a), which prohibits the same firm from representing clients with differing interests. See also Model Code of Professional Responsibility DR 5-105(B) & (D). Berrett now practices with a law firm that, like Purser & Edwards, specializes in insurance defense. It is likely that Berrett will represent clients with interests adverse to the majority shareholders at Purser & Edwards. Finally, if Purser & Edwards declares a dividend, it will be in violation of the prohibition against fee splitting with attorneys who are not partners or associates in the same firm. Utah Rule of Professional Conduct 1.5(e); see also Model Code of Professional Responsibility DR 2-107.
The majority downplays the importance of these ethical considerations by labeling them “hypothetical,” even though § 16-11-10 provides that the ethical rules of all professions should be protected. That prohibits professional corporations from having passive shareholders, even if they are licensed. A correct construction of § 16-11-13 would prevent a number of ethical dilemmas from arising out of the corporate form of business for professionals.
Finally, under the majority’s holding, Ber-rett’s assets as represented by her shares, whether contributed as cash up front or as a form of retained earnings that were invested in firm assets, are frozen until she either dies, is disbarred, or retires from the profession. Her shares, as a practical matter, cannot be sold or hypothecated. In effect, she is forced to make her assets available to the active shareholders in her former firm for their use and benefit with no compensation.
In my view, the majority’s interpretation of the term “no longer qualified to own shares” eviscerates a major principle underlying the Utah Professional Corporation Act. Neither professions, clients, patients, nor shareholders are well served by the result in this case.
I dissent.
DURHAM, J., concurs in the dissenting opinion of STEWART, Associate C.J.
JAMES Z. DAVIS, Court of Appeals Judge, sat to fill the vacancy on the court.

. The Rhode Island Supreme Court described the effect of Rhode Island's professional corporation act:
"In substance, insofar as the relationship of an attorney and client and of attorney and the general public is concerned, practice in corporate form will be as we have previously pointed out, substantially similar to the practice of law as it presently exists in firms operating as law partnerships.”
Melby, 286 N.W.2d at 374 (quoting In re Rhode Island Bar Assoc., 106 R.I. 752, 763, 263 A.2d 692, 698 (1979)).