Strohmyer v. Papillion Family Medicine

Citation: 296 Neb. 884Docket: S-16-381

Court: Nebraska Supreme Court; June 9, 2017; Nebraska; State Supreme Court

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In the case of Strohmyer v. Papillion Family Medicine, the Nebraska Supreme Court addressed the legal dispute between Dr. Jeffry L. Strohmyer and Papillion Family Medicine, P.C. (PFM), along with his former partners, Dr. Robert G. Naegele and Dr. Edward M. Mantler. Strohmyer left PFM effective March 31, 2014, and subsequently filed suit against PFM for failing to buy out his shares and pay associated director fees, while also disputing the valuation of the company's stock, assets, and goodwill.

The district court ruled that PFM was not a corporation under Nebraska law, set Strohmyer's stock value at $104,220, awarded him $9,389.27 in unpaid compensation, and granted PFM $30,673 in damages on its counterclaim. The Supreme Court affirmed certain findings of the district court while reversing and remanding others for further proceedings.

Key legal principles established include the de novo review of factual questions in equitable actions, the fiduciary duty of corporate officers and directors, and the necessity for partners to act with utmost good faith for the benefit of the partnership. The court noted that breaches of fiduciary duty could lead to liability for damages resulting from such breaches. The case highlights the importance of corporate governance documentation, such as bylaws and buyout provisions, even when not formally signed.

Naegele drafted a document intended as a discussion draft for a directors' meeting. A separate document titled 'Bylaws of Papillion Family Medicine, P.C.' was signed solely by Mantler, who, as secretary, certified its adoption by the board on December 4, 2000. These bylaws stipulated that shareholder decisions required a majority of votes present unless a higher threshold was mandated by law, but they lacked provisions regarding a director's exit from PFM. A third document, identical to the first, was signed by Mantler on April 2, 2012, certifying the bylaws' adoption on October 16, 2000.

The bylaws included a 'Buy Out' section detailing compensation for a departing doctor or their estate. Payments would be made biweekly from collected accounts receivable, less one-third of corporate expenses, for six months, followed by a payment of one-third of total assets over the subsequent six months. Physician compensation was structured based on collected charges, with adjustments for common charges and expenses, resulting in a draw equal to 90% of the average collections over the previous four pay periods.

Article V of PFM’s articles of incorporation limits director liability for monetary damages, with exceptions for receiving unauthorized benefits, intentional harm, statutory violations, or intentional criminal acts. Article X mandates that any ineligible shareholder must promptly sell their shares back to the corporation or to another qualified individual under terms defined by shareholders and the Board.

Naegele and Mantler claimed a verbal agreement to work four days per week at PFM, which was never documented. Naegele testified that he never provided Strohmyer with a written requirement for a four-day work commitment, and no non-compete agreements were signed by the directors, indicating no formal liabilities were established amongst them regarding starting another practice.

Strohmyer served as an associate medical director for Uninet Healthcare Network before holding various leadership roles at Alegent Health from 2001 to 2008, eventually becoming the Campus Medical Director and Quality Officer, requiring 1.5 days of work weekly, and then the Medical Director in 2009, demanding two full workdays. His role as a hospitalist further limited his clinic availability to three days a week. Naegele indicated he never formally objected to Strohmyer’s involvement with Alegent or his external work prior to the lawsuit. 

Strohmyer sought relief under the Nebraska Wage Payment and Collection Act, which defines "employee" and "wages." The Act allows employees to sue for unpaid wages if not received within thirty days of the due date, entitling them to recover the full judgment amount and attorney’s fees of at least twenty-five percent of the unpaid wages.

Strohmyer's practice included Medicaid patients. A 2005 memo from Naegele noted the closure of Mantler’s patient list to new Medicaid patients, although Strohmyer and Naegele continued seeing existing patients. Meeting minutes from January 2006 indicated discussions about Naegele's decision to leave Medicaid, while Strohmyer maintained he was never instructed to stop accepting Medicaid patients.

In late 2012 or early 2013, Strohmyer ceased communication with Naegele and Mantler. He requested defined exit strategies in an April 2013 letter and received a response regarding buyout provisions from the bylaws. Strohmyer formally notified Naegele and Mantler of his departure from PFM effective March 31, 2014, to establish his own practice.

Naegele, as president of PFM, confirmed the company would adhere to the 'Buy Out' provisions from the October 16, 2000 bylaws. He transferred $90,000 from PFM to a trust fund, estimating that buying out a doctor would cost about $30,000 each for himself and Mantler upon retirement. This amount was classified as 'Buy-Out Escrow' in PFM's tax returns but was later refunded to PFM. On March 4, 2014, both Naegele and Mantler received $30,000 each from PFM. After Strohmyer announced his departure, Naegele undertook office upgrades, including new paint, carpet, and an x-ray machine, which Strohmyer claims he was unaware of and had not approved. Naegele justified the improvements as necessary for attracting a new doctor.

On March 7, 2014, Strohmyer's attorney asserted that using practice funds for these upgrades constituted misappropriation and breached the bylaws regarding compensation. Strohmyer demanded immediate payment of any cash on hand. On April 11, 2014, Naegele replied that due to expenses exceeding income, the net amount available for Strohmyer was zero, a conclusion he anticipated would continue. A subsequent letter on April 25 reiterated that expenses again exceeded income, maintaining that Strohmyyer's net amount remained zero.

On April 28, 2014, Strohmyer filed a lawsuit against PFM, Naegele, and Mantler, alleging breaches of the bylaws, violations of Nebraska statutes leading to grounds for judicial dissolution of PFM, refusal to pay wages and fees, breach of fiduciary duty due to unapproved capital expenditures, and failure to pay amounts owed to him, seeking declaratory and injunctive relief based on the bylaws.

PFM, Naegele, and Mantler filed an answer and counterclaim to Strohmyer's first amended complaint, alleging that Strohmyer did not participate in directors’ activities or attend meetings, thus should not receive compensation as a director. They claimed he breached his duty by performing services for Alegent and Uninet Healthcare Network instead of focusing on PFM, continued to treat Medicaid patients against an agreement among PFM physicians, and failed to meet the agreed-upon attendance of four days per week, which led to claims of unjust enrichment. In response, Strohmyer asserted several affirmative defenses: the lack of recent directors' meetings, defendants' acquiescence to his outside work, statutory protections against withholding his compensation, and defenses based on the statute of limitations, laches, estoppel, and the statute of frauds.

The district court ruled that PFM did not qualify as a professional corporation under the Nebraska Professional Corporation Act due to non-compliance in its articles of incorporation, absence of meetings minutes, and unsigned bylaws. It found the buyout clause ambiguous and unenforceable, determining that PFM was a business corporation and insufficient evidence existed for judicial dissolution. The court ordered a stay of proceedings until compliance with relevant statutes was achieved. Subsequently, Strohmyer filed a motion regarding ex parte communications, leading to a court order allowing PFM until July 13, 2015, to decide on purchasing Strohmyer's common stock. If PFM opts to purchase, an evidentiary hearing will be scheduled to resolve valuation disputes, with a 60-day period for the parties to negotiate the stock's gross value and payment terms. If unresolved, the court will intervene as necessary.

On July 13, 2015, defendants initiated the purchase of Strohmyer’s stock in PFM based on a July 7, 2015, agreement. The 60-day negotiation period for determining fair stock value ended without resolution. Following a court hearing on March 21, 2016, the court identified Exhibits #46 and #113 as crucial for assessing PFM's stock value as of April 1, 2014. Strohmyer's expert appraised the fixed assets at $79,495 (Exhibit #36), but the court found Naegele’s testimony, valuing the assets at $19,765 based on E-Bay costs, more convincing. Consequently, the court adjusted the fair stock value by $19.91 per share, resulting in values of $96.35 and $113.09 for Exhibits #46 and #113, respectively, leading to an average fair value of $104.72 per share, totaling $104,720 for Strohmyer’s stock. However, the court mistakenly fixed the stock value at $104,220. 

Additionally, the court ruled there was no goodwill associated with the medical practice due to a physician's departure with patients and staff. Under Nebraska statute § 48-1229, Strohmyer was not entitled to compensation for March 2014, as none of the physicians qualified as employees, given the absence of employment agreements, independent patient schedules, and lack of formal wage payments. Strohmyer was awarded $9,389.27 for unpaid compensation for that period, with director’s fees considered in stock valuation. The court concluded that Strohmyer did not breach fiduciary duty by working three days a week due to the lack of contracts, but he did breach fiduciary duty by treating Medicaid patients after a board decision to stop such treatments, resulting in damages to PFM of $30,673.

Strohmyer assigned multiple errors regarding the court’s stock valuation, goodwill findings, reliance on E-Bay values, denial of compensation as an employee, and fiduciary duty breaches. On cross-appeal, PFM contended the court erred in absolving Strohmyer of fiduciary duty for his part-time work while holding him accountable for continuing to accept Medicaid patients.

In an appeal of an equitable action, an appellate court reviews factual issues de novo, independently of the trial court's findings, while considering the trial judge's observations of witness credibility in cases of conflicting evidence. Legal questions, such as the existence and scope of fiduciary duties, are determined by the court. Strohmyer contends that the district court incorrectly calculated the value of PFM's shares, initially determining them to be worth $104,720 but later stating $104,220 due to a minor numerical error. The court's valuation was based on several exhibits prepared by Strohmyer's expert witness, Todd Lehigh, which included detailed reconciliations of assets. 

The trial court considered various exhibits: Exhibit 46 listed total adjusted assets at $348,767.90, while Exhibit 113 presented a net equity of $401,174.14. The court also reviewed appraisals from two experts, Doug Killion and Naegele, which valued fixed assets differently, leading the trial court to prefer Naegele's lower assessment. The court adjusted the values in Exhibits 46 and 113 based on the difference in fixed asset valuations and averaged the results to determine the share value at $104.72. Strohmyer argues that the district court's calculations were inconsistent and unjust, asserting that he is entitled to an additional $16,740 based on the discrepancies in the exhibits. The appellate court recognizes the trial court's credibility assessments but finds errors in the calculations regarding the share values.

The court identified several calculation errors in its valuation of fixed assets and shares. It misreported the value of fixed assets in exhibit 36 as $79,495 instead of the correct $79,545 and misstated Naegele's valuation at $19,765 when it should be $19,755. The court averaged the values from exhibits 46 and 113, despite exhibit 113 containing all items from exhibit 46, leading to an illogical comparison. Thus, under a de novo standard of review, the court should have relied solely on exhibit 113's valuation.

An error was also found in exhibit 113, where 'Account Payables' and 'Payroll Taxes' were incorrectly classified as assets instead of liabilities. Adjusting for these misclassifications, and using the fixed asset value from exhibit 98, the adjusted net equity value of exhibit 113 calculates to $312,230.68, leading to a share value of $104,077. This value is close to the court's valuation of $104,720, which is not deemed a material difference, resulting in no reversible error regarding the ultimate valuation.

Strohmyer contends that the lower court did not award him one-third of the 'Net Quarterly Director Fees,' which he claims should amount to $72,991.22. In exhibit 113, the 'Total Adjusted Equity Before Director Fees' was calculated as $620,147.82, from which the 'Net Quarterly Director Fees' were deducted. Lehigh derived the director fees amount by aggregating various financial components, ultimately concluding with $218,973.68 in director fees after subtracting $100,000 for operating capital.

The lower court found that Strohmyer and the Defendants were the sole Directors of the Corporation. Strohmyer had not attended Directors' meetings for two years prior to his departure. The court considered the director’s fees held in trust in its valuation of Strohmyer’s stock but did not include them in the valuation of PFM’s net equity per exhibit 46. In contrast, exhibit 113 reflected that director fees were deducted from the total net equity. Consequently, the court awarded Strohmyer only one-third of PFM’s value, having subtracted the director fees without separately determining the amount owed to him. The lower court concluded that Strohmyer was a director but not entitled to director fees due to his absence from meetings. This factual determination was upheld under a de novo standard of review.

Regarding goodwill, Strohmyer claimed an error in not awarding an additional $55,000 for intangible assets and in classifying them with goodwill. PFM argued that no goodwill existed upon dissolution since clients remained with the firm after his departure. The district court ruled there was no goodwill or intangible value in a medical practice when a physician leaves, taking patients and some staff. Referencing *Taylor v. Taylor*, the court differentiated between goodwill as a marketable asset, which is independent of an individual's presence, and goodwill tied to a specific individual, which lacks marketable value. The court asserted that for goodwill to be recognized as an asset in marital property division, it must possess independent marketable value. Thus, the existence and value of goodwill are factual questions.

The district court correctly determined that the plaintiff’s medical practice lacked compensable goodwill. In the case of Detter v. Miracle Hills Animal Hospital, the court reaffirmed that the existence of professional goodwill as a distributable asset is a factual question. It referenced the case of Thomas v. Marvin E. Jewell Co., where departing partners retained client files, leading to most clients staying with the firm that possessed those files. Consequently, both factions received their entitled goodwill based on the clients they retained at dissolution. 

Strohmyer's expert valued intangible assets at $165,000 but stated there was no business goodwill in the practice, identifying only tangible assets like the computer system and patient records. Strohmyer did not transfer patient files but informed patients of his departure, resulting in approximately 50% of them following him to his new practice. Additionally, nearly one-third of PFM's staff left with him, coinciding with a revenue drop of $543,578.22 at PFM after his departure, indicating that any goodwill was contingent on his presence.

The lower court favored the expert testimony indicating the absence of goodwill or unidentified intangible value, and under a de novo review standard, upheld its decision. Strohmyer’s claim regarding the absence of goodwill was deemed without merit.

Regarding the replacement cost for medical equipment, Strohmyer disputed the district court's acceptance of Naegele's testimony over that of his own expert. Relevant law states that an owner's opinion on property value must not be speculative or based on conjecture, and hearsay is inadmissible.

In the case of Strohmyer v. Papillion Family Medicine, the Nebraska Supreme Court addressed the admissibility of evidence concerning the value of chattels, emphasizing that an owner's testimony about value is insufficient if not based on adequate knowledge. The court referenced Iowa case law, stating that the price from a bona fide sale is competent evidence of value. It clarified that market value assessment does not require expert opinion alone; witnesses need only demonstrate sufficient knowledge of the property in question. The Nebraska Court of Appeals supported this view, noting reliance on valuation methods like garage sale prices.

At trial, testimony regarding the replacement cost of medical equipment was presented, including an accountant's report valuing the equipment at $113,502. Expert witness Killion estimated its fair market value at $79,545, while another witness, Naegele, calculated a replacement cost of $19,755, based on his experience purchasing items on platforms like eBay and Craigslist. The lower court found Naegele's testimony more persuasive, and under de novo review, the Nebraska Supreme Court upheld this finding, dismissing Strohmyer’s challenge.

Additionally, Strohmyer contended that the district court erred by not awarding attorney fees, director fees, and salary under the Act. However, the court determined that the physicians did not qualify as employees under the Act and that there was no evidence of payments classified as W-2 wages or 1099 compensation.

An individual is classified as not being an employee under the Act if they remain free from control or direction over their services, both contractually and in practice. Evidence showed that Strohmyer independently set his work schedule, limited his working days, and continued treating Medicaid patients against the wishes of PFM's leadership, who decided to stop treating such patients. Furthermore, Strohmyer lacked an employment agreement with PFM, reinforcing his status as independent under the Act. Thus, the district court correctly determined that Strohmyer was not an employee under the relevant statute.

Strohmyer challenged the district court's decision to award PFM $30,673 for his alleged breach of fiduciary duty concerning Medicaid patients, arguing that the damage calculation was speculative. An officer or director of a corporation has a fiduciary duty to the corporation and its shareholders, and breaching this duty can result in liability for damages. The court noted that unauthorized acts by a corporate officer could be ratified by the corporation through approval or inaction. 

Evidence included a memorandum from Naegele indicating that the practice would no longer accept new Medicaid patients, although Strohmyer was allowed to continue with existing patients. Despite Naegele's instructions for Strohmyer to stop treating Medicaid patients following a board decision, Strohmyer expressed his intent to continue treating them. Naegele, fearing a wrongful termination lawsuit, refrained from directly confronting Strohmyer about this issue until after Strohmyer left the practice.

Ratification of a corporate officer's unauthorized acts can be inferred from a corporation's silence and inaction when it has full knowledge of those acts. In this case, Naegele's memorandum and directors' meeting minutes reveal discussions among the physicians regarding the treatment of Medicaid patients, with an agreement allowing Strohmyer to continue treating such patients despite claims of an oral agreement mandating cessation. Naegele and Mantler were aware of Strohmyer's actions from 2006 until the complaint was filed in 2014 but did not act to disaffirm his conduct, which constitutes ratification of his unauthorized actions. Consequently, PFM, Naegele, and Mantler are held to have ratified Strohmyer's actions, leading to the conclusion that the order awarding PFM $30,673 must be vacated.

In PFM's cross-appeal, the court found that Strohmyer owed no fiduciary duty to work four days a week due to the absence of employment contracts outlining such terms. The court noted PFM's authority to terminate Strohmyer's employment but recognized that he performed similarly to his colleagues while working three days a week. Naegele asserted the existence of an oral agreement for the three doctors to work four days, a claim Strohmyer denied. Strohmyer had reduced his hours due to outside employment, which was discussed in directors' meetings, indicating support from Naegele and Mantler for his outside commitments.

No evidence was presented that other doctors attempted to enforce an alleged oral agreement for Strohmyer to work four days per week prior to the litigation, nor that his other employers competed with PFM. Following his employment at Alegent in 2008, Strohmyer’s patient charges at PFM decreased but remained comparable to those of his colleagues Naegele and Mantler between 2008 and 2013. It was concluded that Strohmyer’s employment with other employers and his three-day work schedule at PFM did not conflict with his corporate duties, and he did not breach any fiduciary duty by not working four days per week at PFM. 

The district court's valuation of Strohmyer’s shares was upheld, as was its finding that PFM had no goodwill for which Strohmyer deserved compensation. The court's reliance on eBay values for determining the replacement cost of medical equipment was also found appropriate, along with the decision not to award director fees or salary under the Act. However, the court was found to have erred in ruling that Strohmyer breached a fiduciary duty by accepting Medicaid patients and in holding him liable for a physician assistant’s ongoing treatment of those patients, as well as in its damage calculations related to these issues. The finding that Strohmyer did not breach fiduciary duty by working fewer days was affirmed. The decision was partially affirmed and partially reversed, with a remand for further proceedings consistent with this opinion.