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Strohmyer v. Papillion Family Medicine
Citation: 296 Neb. 884Docket: S-16-381
Court: Nebraska Supreme Court; June 9, 2017; Nebraska; State Supreme Court
Original Court Document: View Document
In the Nebraska Supreme Court case Strohmyer v. Papillion Family Medicine, Dr. Jeffry L. Strohmyer, along with Dr. Robert G. Naegele and Dr. Edward M. Mantler, formed Papillion Family Medicine, P.C. (PFM). Strohmyer announced his departure from PFM effective March 31, 2014, and subsequently filed a lawsuit against PFM and the other doctors due to PFM’s failure to buy him out and settle associated director fees. He also disputed the valuation of PFM’s stock, assets, and goodwill. PFM, along with Naegele and Mantler, counterclaimed. The district court determined that PFM was not incorporated under Nebraska law and found that Strohmyer's stock was valued at $104,220. The court awarded him $9,389.27 in unpaid compensation while granting PFM $30,673 in damages on its counterclaim. Strohmyer appealed the decision, leading to the Nebraska Supreme Court affirming part of the district court's ruling while reversing and remanding other aspects for further proceedings. The case highlights the fiduciary duties of corporate officers and the legal implications of breaches of trust and good faith among partners in a professional setting. Naegele stated he drafted a document he considered a draft for discussion at a directors’ meeting. A second document, titled 'Bylaws of Papillion Family Medicine, P.C.', was signed solely by Mantler, who certified the bylaws were adopted by the board on December 4, 2000. These bylaws stipulated that shareholder actions required a majority of shares represented at meetings unless otherwise mandated by law and did not outline a process for a director’s departure from the corporation. A third document, identical to the first, was signed by Mantler on April 2, 2012, certifying adoption of the bylaws as of October 16, 2000. The bylaws from October 16, 2000, included a 'Buy Out' provision stating that upon a doctor’s death or departure, payments would be made bi-weekly for six months, equaling collected accounts receivable minus one-third of corporate expenses, followed by payments of one-third of total assets divided equally over the next six months. They also detailed physician compensation, calculated based on actual collections, with specific deductions for common and personal expenses, allowing physicians to draw 90% of an average amount collected over the previous four pay periods. Article V of PFM’s articles of incorporation limits a director's personal liability for monetary damages unless specific conditions are met, such as receiving unwarranted financial benefits or intentional harm. Article X mandates that any shareholder who becomes ineligible must promptly sell their shares to the corporation or a qualified individual, under terms determined by shareholders and the Board of Directors. Naegele and Mantler claimed they had a verbal agreement to work four days per week, which was never documented, and Naegele acknowledged he had not provided Strohmyer with any written requirement for a four-day workweek prior to the lawsuit. Directors of PFM did not sign a noncompete agreement or any document that could establish mutual liability for starting another practice. Strohmyer testified about his prior roles, including working as an associate medical director for Uninet Healthcare Network and holding various leadership positions at Alegent Health from 2001 to 2009, where he was a hospitalist and limited his clinic time to three days per week. Naegele confirmed he never objected in writing to Strohmyer’s outside work. Strohmyer sought wages and attorney fees under the Nebraska Wage Payment and Collection Act, which defines an “employee” and outlines conditions for wage claims. Under the Act, employees can sue for unpaid wages after thirty days from the designated payday and are entitled to recover attorney fees of at least twenty-five percent of the unpaid wages. Strohmyer's practice included Medicaid patients, despite Naegele's 2005 memo closing Mantler’s patient list to Medicaid and later verbal instructions to close their practice to these patients; Strohmyer stated he was never informed he could not accept Medicaid patients. In late 2012 or early 2013, Strohmyer ceased communication with Naegele and Mantler, and in April 2013, requested the directors to define exit strategies for PFM, asking for formal documents related to the buyout provisions in the bylaws from October 16, 2000. On December 31, 2013, Strohmyer notified Naegele and Mantler of his intention to leave PFM effective March 31, 2014, to establish his own medical practice. Naegele, as president of PFM, acknowledged the 'Buy Out' provisions from the bylaws dated October 16, 2000. He then transferred $90,000 from PFM's account into a trust fund, which was categorized as 'Buy-Out Escrow' in tax returns. Naegele estimated that a buyout would cost about $30,000 for each doctor, with distributions of $30,000 made to both Naegele and Mantler on March 4, 2014. After Strohmyer’s notice, Naegele undertook office improvements, which Strohmyer claimed were unauthorized and constituted misappropriation, as outlined in a letter from Strohmyer’s attorney. Naegele defended the updates as necessary for attracting a new doctor. Subsequent correspondence indicated that expenses regularly exceeded income, leading Naegele to inform Strohmyer’s attorney that the net sum available for distribution was zero. On April 28, 2014, Strohmyer initiated legal action against PFM, Naegele, and Mantler, claiming breaches of the bylaws, concealment of funds, denial of access to financial records, misappropriation of income for capital improvements, and failure to pay wages and compensation. He also alleged violations of Nebraska statutes regarding judicial dissolution due to the defendants' actions, asserting that these constituted a breach of fiduciary duty and necessitated declaratory and injunctive relief for unpaid compensation. PFM, Naegele, and Mantler filed an answer and counterclaim against Strohmyer, arguing that he should not receive director compensation for failing to attend meetings and engage in director activities. They claimed Strohmyer violated his duty by providing services to Alegent and Uninet Healthcare Network while neglecting his responsibilities to PFM. They further alleged that after an agreement to avoid accepting Medicaid patients, Strohmyer continued to provide such services and only spent three days per week at PFM instead of the agreed four, resulting in his unjust enrichment. In his reply, Strohmyer asserted several affirmative defenses, including that the defendants had not held directors' meetings recently, that his work for Alegent and Uninet was accepted by the defendants, and that the Act prohibited withholding his compensation. He also claimed the statute of limitations barred recovery of director fees paid prior to 2010 and that the defendants' claims were subject to 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 with incorporation requirements and lack of proper bylaws. The court deemed the buyout clause ambiguous and unenforceable, classifying PFM as a business corporation instead of a professional corporation, and found insufficient grounds for judicial dissolution. It ordered a stay of proceedings until compliance with Nebraska statutes was achieved. On May 22, 2015, Strohmyer filed a motion to exclude ex parte communications and clarify the prior order. Following a hearing, the court mandated that the defendant corporation must decide by July 13, 2015, whether to purchase Strohmyer's common stock. If they chose to proceed, further hearings would be scheduled to resolve any remaining issues regarding stock valuation and payment terms, with an emphasis on reaching a mutual agreement within a designated 60-day period. On July 13, 2015, defendants initiated a stock purchase of Strohmyer’s shares in PFM, following a prior agreement. The 60-day negotiation period for fair value expired without resolution. After a hearing on March 21, 2016, the court identified Exhibits #46 and #113 as key in assessing PFM's stock value as of April 1, 2014. The court noted Strohmyer's appraisal of fixed assets at $79,495, based on Exhibit #36, but found Naegele's testimony more credible, valuing the assets at $19,765. Consequently, the court adjusted the share values, concluding $19.91 per share was appropriate, resulting in $96.35 per share for Exhibit #46 and $113.09 for Exhibit #113, averaging $104.72 per share and setting Strohmyer’s stock value at $104,720. However, it ordered a value of $104,220, revealing a discrepancy. The court also determined there was no goodwill or intangible value associated with the medical practice, especially with the departure of a physician taking patients and staff. Under statute 48-1229, Strohmyer was not entitled to March 2014 compensation, as none of the physicians were classified as employees due to the absence of employment agreements and the nature of their independent practices. Strohmyer was awarded $9,389.27 for unpaid compensation based on Exhibit #18. The court included director's fees in its valuation of Strohmyer’s stock. Additionally, it concluded Strohmyer did not breach fiduciary duty by working three days a week for four years due to the lack of employment contracts. However, he breached fiduciary duty by continuing to treat Medicaid patients after a board resolution to cease such treatments, resulting in damages to PFM of $30,673. Strohmyer claims the district court erred in (1) miscalculating PFM share value and Strohmyer’s due fixed assets, (2) denying compensable goodwill, (3) relying on eBay for equipment replacement costs, (4) denying compensation as an employee under the Act, and (5) holding him liable for breaching fiduciary duty regarding Medicaid patients. Conversely, PFM cross-appeals, asserting the court erred in ruling that Strohmyer owed no fiduciary duty regarding his schedule while still finding a breach concerning Medicaid patients. In an appeal regarding an equitable action, an appellate court reviews factual issues de novo, independently assessing the record while considering the trial court's credibility determinations when conflicting evidence exists. Legal questions concerning the existence and scope of fiduciary duties are decided by the court. Strohmyer contends that the district court incorrectly valued his shares in PFM at $104,720, noting a clerical error where the court stated the value as $104,220. The valuation was based on several exhibits, including: - **Exhibit 46**: The "Reconciliation of Assets" indicated total adjusted assets of $348,767.90, translating to $116.26 per share. - **Exhibit 113**: This exhibit provided a net equity figure of $401,174.14 before intangibles and included various asset values. - **Exhibits 35 and 36**: These contained a retrospective appraisal report valuing PFM's fixed assets at $79,545. - **Exhibit 98**: A calculation based on market conditions yielded a much lower fixed asset value of $19,755. The trial court deemed exhibits 46 and 113 credible for share valuation but found exhibit 98’s valuation more persuasive than the assessment in exhibit 36. Adjustments were made based on the differences in asset valuation, leading to share values of $96.35 and $113.09 for exhibits 46 and 113, respectively. An averaged share value of $104.72 resulted in the total valuation of $104,720 for Strohmyer’s shares. Strohmyer argues this calculation employed inconsistent accounting methods, resulting in an unjust outcome and claims he should have received an additional $16,740 based on a discrepancy between the exhibits. Although the appellate court respects the lower court’s credibility assessments, it identifies errors in the trial court's calculations, including a misstatement of the fixed asset value in exhibit 36, which was inaccurately recorded as $79,495 when it was actually $79,545. Naegele valued fixed assets at $19,765, slightly higher than the $19,755 listed in exhibit 98. The court averaged the values from exhibits 46 ($348,767.90) and 113 ($401,174.14), despite finding exhibit 113 credible, which included all items from exhibit 46. The court's averaging method was deemed illogical since all additional line items in exhibit 113 were verified as credible. Under de novo review, the court should have relied solely on exhibit 113. The adjusted value of exhibit 46 was noted to lack the fixed asset valuation from exhibit 35, which was $79,545, leading to a calculation of the adjusted net equity value of exhibit 113 at $341,384.14 after accounting for a $59,790 difference in fixed asset valuation. Further errors were found in exhibit 113, where 'Account Payables' and 'Payroll Taxes' were incorrectly classified as assets instead of liabilities. Correctly classifying these as liabilities and adjusting the fixed asset value according to exhibit 98 resulted in an adjusted net equity value of $312,230.68 for exhibit 113, suggesting Strohmyer's shares were worth $104,077. This figure was close to the court's valuation of $104,720, which was not materially different, thus no reversible error was found in the court’s valuation. Regarding director fees, Strohmyer claimed the court did not award him one-third of the 'Net Quarterly Director Fees,' amounting to $72,991.22. In exhibit 113, Lehigh calculated 'Total Adjusted Equity Before Director Fees' at $620,147.82, subsequently deducting director fees. He derived the total fees from various bank-related amounts, ultimately subtracting $100,000 for operating capital to arrive at $218,973.68 for director fees. The court acknowledged Strohmyer and the Defendants as the sole Directors, noting Strohmyer's absence from meetings prior to his departure. Director fees were not included in exhibit 46's net equity valuation but were subtracted in exhibit 113 during the equity valuation process. In calculating the net equity owed to Strohmyer, the court awarded only one-third of PFM's value, subtracting director fees without determining a specific amount owed to Strohmyer. The lower court found that although Strohmyer was a director, he was not entitled to director fees due to his absence from meetings. This factual finding was upheld under a de novo standard of review. Strohmyer also contended that the district court incorrectly denied an additional $55,000 for intangible assets, equating them with goodwill. PFM argued that no goodwill existed upon dissolution since clients remained with the firm and took their files. The district court ruled that no goodwill or intangible value was associated with the medical practice when a physician leaves with patients and staff. Referencing *Taylor v. Taylor*, the court defined goodwill as the additional value an establishment gains from public patronage, distinct from an individual's personal reputation. Goodwill is only considered a marketable business asset when it can exist independently of an individual’s presence. The court affirmed that goodwill must have a value that is not tied to a particular individual's reputation to be compensable under Nebraska law. Consequently, it concluded that the medical practice in question lacked any compensable goodwill. The *Detter v. Miracle Hills Animal Hosp.* case reaffirmed that the existence of professional goodwill as a distributable asset is a factual question, emphasizing that client retention after separation can affect the determination of goodwill. The court determined that both factions in the dissolution received their entitled goodwill, as they retained clients and available goodwill at the time. Strohmyer’s expert valued the intangible assets at $165,000 but indicated that no business goodwill existed in this practice; instead, identifiable intangible assets like PFM’s computer system and patient records were noted. Strohmyer did not take patient files but informed his patients of his departure, with about 50% following him to his new practice. Naegele testified that nearly one-third of PFM’s employees also left with Strohmyer, and PFM experienced a revenue decrease of $543,578.22 after Strohmyer's departure, suggesting that any goodwill was reliant on his presence. The lower court favored the testimony indicating a lack of goodwill or unidentified intangible value, concluding there was no goodwill in the medical practice, which Strohmyer failed to contest successfully. Regarding the replacement costs for medical equipment, Strohmyer argued the district court erred by accepting Naegele’s testimony over his expert's values. The law states that an owner’s value testimony must not be based on speculation or hearsay, but information partially derived from others can be acceptable. The Iowa Supreme Court has established that the sale price of personal property at a bona fide sale can serve as competent evidence of its value, and market value assessments can be made by individuals with adequate knowledge of the property in question. Witnesses do not need exhaustive knowledge of all details affecting value to provide opinion testimony. The Nebraska Court of Appeals upheld a lower court's reliance on personal property valuations based on garage sale and Craigslist prices during a marriage dissolution case. At trial, witnesses estimated the replacement cost of PFM's medical equipment, with Strohmyer's accountant valuing it at $113,502 and expert Killion estimating fair market value at $79,545. Naegele, another expert, calculated replacement value at $19,755 based on eBay prices and contested the definition of fair market value provided by Killion. The lower court favored Naegele’s testimony, and the appellate court found no error in this conclusion. Strohmyer contended that the district court wrongly denied his claims for attorney fees, director fees, and salary under the Act, arguing that the physicians should be classified as employees. However, the court determined that they did not fit the employee definition under the Act, as Strohmyer set his own schedule and limited his workdays, demonstrating independence. Thus, the court ruled Strohmyer was not an employee under the relevant statute. Additionally, Strohmyer argued against a $30,673 award to PFM for allegedly breaching fiduciary duty by continuing to treat Medicaid patients, claiming the damages were speculative. The court's findings on these matters were upheld, dismissing Strohmyer's assignments of error as without merit. An officer or director of a corporation has a fiduciary duty towards the corporation and its shareholders, and any violation of this duty constitutes a breach of trust, holding the trustee liable for resulting damages. In the case of D. J Hatchery, Inc. v. Feeders Elevator, Inc., it was established that a corporation may ratify an officer's unauthorized actions through conduct that implies approval, which can be express or inferred from inaction. If a corporation, after being fully informed of an unauthorized act, fails to disavow it within a reasonable timeframe, it is considered ratified. In a specific instance, Naegele communicated to clinic staff on April 18, 2005, that Mantler's patient list would close to Medicaid patients, while the minutes from a January 27, 2006, meeting indicated that Naegele and Mantler discussed discontinuing Medicaid treatment, with Strohmyer dissenting. Despite Naegele's assertion that he instructed Strohmyer to stop treating Medicaid patients, Strohmyer indicated he would continue his practice. Naegele expressed concerns about potential wrongful termination and did not confront Strohmyer directly. The documentation suggests that Naegele and Mantler were aware of Strohmyer’s actions, indicating a lack of an authoritative prohibition against his continued treatment of Medicaid patients. Strohmyer's actions of accepting patients without proper authorization were ratified by PFM, Naegele, and Mantler due to their inaction from 2006 until Strohmyer's complaint in 2014, which led to the vacating of an order awarding PFM $30,673. PFM's cross-appeal argued that the district court incorrectly determined that Strohmyer owed no fiduciary duty to work four days per week and failed to compensate PFM for this alleged breach. The court found no employment contracts outlining such terms, and noted PFM's authority to terminate Strohmyer’s employment, which it did not exercise. Strohmyer’s work output during his three-day workweek was comparable to that of his colleagues. Evidence did not support Naegele's claim of an oral agreement for a four-day workweek, nor did it indicate competition from Strohmyer’s outside employment. The court concluded that Strohmyer's reduced hours were not inconsistent with his corporate duties, and he did not breach fiduciary duty to PFM. The district court's valuations and findings regarding Strohmyer's shares and the absence of goodwill were upheld, while its errors regarding Strohmyer's acceptance of Medicaid patients and related liabilities were noted. The court affirmed in part and reversed and remanded in part for further proceedings consistent with its findings.