It is settled law that corporate officers can be held responsible for damage they cause, even if the corporation itself is also found responsible. But what about shareholders of a corporation? Courts with equity powers (such as the DC courts) will deprive shareholders of the privilege of operating as a corporation and assign individual liability if the evidence shows misuse of the corporate form to perpetrate fraud or wrong. An egregious local example of shareholder liability for misuse of the corporate form is that of Mrs. Vuitch, ex-wife of abortion-purveyor Dr. Vuitch. His “clinic annex” was housed at their residence. Although Mrs. Vuitch moved out after their divorce, she remained as a shareholder in their business and as CFO. Educated in business and finance, she paid the bills for the vast clinic, and was aware of a brazenly illegal clinic policy that led to a gruesome injury and a jury finding of her personal liability, although she did not directly participate in the misconduct. The case was Vuitch v. Furr, 482 A.2d 811 (D.C. 1984).
The Vuitches operated (1) a surgical center, and (2) “clinic annex.” The two entities were incorporated separately for the purpose of skirting District of Columbia law.
Dr. Vuitch performed a dilation & curettage abortion on Andrea Furr in 1981 at the surgical center. He caused a laceration of the uterine wall, which he attempted to suture, and kept her overnight at the clinic despite knowing that the law under which the clinic was licensed (D.C. Ambulatory Surgical Treatment Center Licensure Act, D.C. Law 2-66, 24 D.C. Register 6836, Jan. 19, 1978) prohibited overnight stays, requiring that patients either be discharged in ambulatory condition, or be admitted to a hospital. The next night, Dr. Vuitch moved Ms. Furr to the “clinic annex” (his residence), then returned her to the surgical center the next day and discharged her.
The day after the discharge, Ms. Furr went to a local hospital in severe pain. Two obstetrician-gynecologists discovered that an unsutured laceration had caused pelvic and intestinal peritonitis (inflammation of the membrane lining the abdominal cavity) and infected the uterus. The doctors had to perform a total hysterectomy, during which they found a mass of unremoved dead fetal tissue that had traveled into the abdomen through the laceration.
Dr. Vuitch admitted that he regularly kept patients overnight at the surgical center and, if they suffered further complications, admitted them to the clinic annex (his home) because of the D.C. regulations that prohibited keeping patients overnight at the surgical center. The legislative history of the Licensure Act revealed its purpose was to close the gap in the licensure laws regarding non-hospital surgery, “to assure the highest level of skilled care was provided at such clinics.” The Court held that Dr. Vuitch admitted to
a knowing and intentional violation of the District of Columbia law pursuant to corporate policy, and the record indicates he used corporate property to carry out his policy. Courts will not allow the interposition of a corporation to defeat legislative policy. Vuitch, supra, at 819 (citing Anderson v. Abbott, 321 U.S. 349, 362-63 (1944)).
Mrs. Vuitch claimed she was just the business arm, and had no role in setting the medical policy. However, the evidence showed she was the second-ranking officer in a substantial for-profit medical enterprise, and that she knew about the illegal policy of moving patients to the clinic annex to treat complications. In fact, when she lived at the “clinic annex” during her marriage to Dr. Vuitch, Mrs. Vuitch with Dr. Vuitch had driven patients to the clinic annex from the surgical center for treatment. She even met with a lawyer after the licensing law was enacted in 1978 and assisted in obtaining equipment necessary to comply with the 1978 law. Although incorporated separately, the two entities (surgical center and clinic annex) had the same shareholders—Dr. and Mrs. Vuitch. For years, all of the surgical center’s bills were paid by the annex, and the surgical center’s employees were covered by the annex’s pension and trust plan; Dr. Vuitch used a car owned by the surgical center to transport patients to the annex; the annex (which wasn’t licensed to treat patients), served as his personal residence and the business office of the annex. The Court found:
The pattern of intermingling the identities and property of the two corporations and disregarding some corporate formalities is probative evidence that the two corporations did not have separate identities and were in fact the Vuitchs’ alter-ego for the operation of medical facilities for personal gain. (Footnote omitted). Vuitch, supra, at 817 (citations omitted).
Today D.C.’s licensing requirements for ambulatory surgical facilities don’t expressly prohibit overnight stays (or impose the requirement of “same-day” treatment, which was the focus through 2014), but continue to emphasize that ambulatory surgical facility treatment is unique in that it is “not hospitalization.” Hospitals, then and now, are regulated differently from “ambulatory surgical facilities” and “maternal centers.” This suggests that Vuitch v. Furr is still seminal on the subject of shareholder liability for misuse of the corporate form and that its sound reasoning had a lasting influence upon the D.C. Council.
The penalties for violating the licensing laws have changed as well. In 1978 the maximum penalty was $300 or 90 day’s imprisonment for violating the licensing laws; today, violations are charged as misdemeanors with penalties of up to $25,000 or 180 days’ imprisonment or both.