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, P.C., Dr. Jeffry L. Strohmyer filed a lawsuit against Papillion Family Medicine (PFM) and its fellow directors, Dr. Robert G. Naegele and Dr. Edward M. Mantler, after Strohmyer announced his departure from PFM to establish his own practice. He claimed PFM failed to execute a buyout and pay his director fees. PFM, along with Naegele and Mantler, counterclaimed, leading the district court to determine that PFM was not incorporated under Nebraska law. The court assessed 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 Nebraska Supreme Court affirmed some aspects of the district court's ruling but reversed and remanded parts for further proceedings. The court clarified that fiduciary duties exist between corporate officers and the corporation, emphasizing that any breach resulting in damages could render the trustee liable. Additionally, the formation of PFM included documentation concerning a buyout process, though it remained unsigned by the parties involved.

A document titled “Bylaws of Papillion Family Medicine, P.C.” was signed by Mantler as secretary, certifying the board's adoption on December 4, 2000. The bylaws stipulate that a majority of voting shares at a meeting constitutes shareholder action, but they lack provisions for a director's exit, such as a buyout. A second set of bylaws, identical to the first, was signed by Mantler on April 2, 2012, with certification of adoption on October 16, 2000. The bylaws include a "Buy Out" clause specifying that upon a doctor's death or departure, the doctor or estate is to receive bi-weekly payments based on actual accounts receivable for six months, followed by a distribution of one-third of total assets over the next six months. Physician compensation is based on collected charges, with specific deductions for expenses and a payout structure based on average collections over the last four pay periods. The articles of incorporation limit directors' personal liability to the corporation and shareholders, exempting certain actions like receiving unentitled financial benefits or intentional harm. Any shareholder who no longer qualifies must sell their shares as determined by the board. Furthermore, Naegele and Mantler assert a verbal agreement to work four days per week, which was not documented. There was no signed noncompete agreement among the directors. Strohmyer, who worked for Uninet Healthcare Network and later held leadership roles at Alegent Health, began a position requiring only 1.5 days of work per week in 2008.

Strohmyer served as Medical Director at Alegent starting in 2009, working two full days a week while also functioning as a hospitalist, limiting his clinic hours to three days weekly. Naegele, prior to the lawsuit, did not formally object to Strohmyer's role at Alegent or his external work. Strohmyer sought unpaid wages and attorney fees under the Nebraska Wage Payment and Collection Act, which defines "employee" and "wages," allowing claims for unpaid wages if not paid within thirty days of the designated payday, with attorney fees mandated at a minimum of twenty-five percent of the unpaid wages if the employee prevails in court.

Strohmyer’s practice included Medicaid patients despite Naegele's prior memorandum declaring Mantler’s patient list closed to new Medicaid patients. In 2006, Naegele verbally instructed Strohmyer and Mantler to stop seeing Medicaid patients, but Strohmyer maintained he was never explicitly told to stop accepting them. 

In late 2012 or early 2013, Strohmyer ceased communication with Naegele and Mantler, and on April 19, 2013, he requested clarification on exit strategies from PFM. By December 31, 2013, Strohmyer formally notified them of his departure, effective March 31, 2014, to start his own practice. Naegele confirmed that PFM would adhere to the "Buy Out" provisions from their bylaws, and on the same day, he transferred $90,000 from PFM to a trust fund, estimating buyout costs for a doctor at about $30,000 each for himself and Mantler upon retirement.

PFM categorized a certain amount in its tax returns as a "Buy-Out Escrow," which was subsequently refunded in full. On March 4, 2014, PFM disbursed $30,000 each to Naegele and Mantler. Following Strohmyer's departure from PFM, Naegele undertook office renovations, including new paint, carpet, and an x-ray machine, without Strohmyer's knowledge or approval. Naegele defended these updates as necessary to attract a new doctor. On March 7, 2014, Strohmyer’s attorney notified Naegele that the use of practice funds for renovations constituted misappropriation and a breach of bylaws, demanding immediate payment of any available cash to Strohmyer. On April 11, 2014, Naegele responded, asserting that expenses had exceeded income, resulting in a zero balance owed to Strohmyer under the bylaws, which prohibit charging a former partner for negative balances. A subsequent letter on April 25 confirmed ongoing expenses exceeded income. 

On April 28, 2014, Strohmyer filed a lawsuit against PFM, Naegele, and Mantler, alleging several breaches: failure to pay owed wages, concealment of $90,000, denial of access to financial records, and inappropriate use of income for capital improvements. He claimed violations of Nebraska statutes that warranted judicial dissolution of PFM, as well as breaches of fiduciary duty and failure to compensate him post-departure. In their counterclaim, PFM, Naegele, and Mantler argued that Strohmyer did not fulfill his director duties, violated his obligation to prioritize PFM, continued to see Medicaid patients against an agreement, and did not dedicate sufficient time to PFM, thereby unjustly enriching himself.

Strohmyer asserted several affirmative defenses in response to the defendants' counterclaim, including: (1) the defendants did not hold directors' meetings in recent years, and director fees were not contingent on attendance; (2) his work with Alegent and Uninet Healthcare Network was known and accepted by the defendants, not violating the articles of incorporation; (3) the Act prohibits the defendants from reducing or delaying his compensation; (4) recovery of director fees paid to him before 2010 is barred by the statute of limitations; (5) claims for income earned through his outside employment prior to 2010 are also barred by the statute of limitations; and (6) the defendants' claims are barred by 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 the articles of incorporation, lack of adopted minutes for alleged bylaws, and unsigned bylaws from October 16, 2000. The court deemed the buyout clause ambiguous and thus unenforceable, classified PFM as a business corporation, and found insufficient evidence for judicial dissolution. Consequently, proceedings were stayed pending compliance with Neb. Rev. Stat. 21-20,166.

On May 22, 2015, Strohmyer filed a motion to exclude ex parte communications and clarify the previous order. After a hearing, the court allowed the defendant corporation until July 13, 2015, to decide on purchasing Strohmyer's stock and mandated attempts to agree on the stock's gross value and payment terms during a subsequent 60-day period. The defendants elected to purchase the stock by the deadline, but the parties failed to reach an agreement on the stock's value.

Following a hearing on March 21, 2016, the court determined the stock's value based on compelling exhibits, finding an appraised value of fixed assets at $19,765 rather than the $79,495 proposed by Strohmyer. This adjustment led to a recalculated average fair value per share of $104.72, valuing Strohmyer's stock at $104,720. However, the court's final order stated the stock's value at $104,220, presenting an apparent contradiction with the earlier calculations.

The court determined that the medical practice lacked goodwill or intangible value due to a physician's departure, which resulted in him taking patients and staff. Strohmyer was found ineligible for compensation for March 2014 under Act 48-1229, as he did not meet the employee definition; there were no employment agreements detailing compensation, physicians set their own schedules, and payments were not classified as traditional wages. Strohmyer was awarded $9,389.27 for unpaid compensation based on Exhibit #18. The court noted that director fees held in trust were factored into Strohmyer's stock valuation. It ruled that Strohmyer did not breach fiduciary duties by working part-time for four years due to the absence of employment contracts, but he did breach such duties by continuing to treat Medicaid patients after a board decision to stop. This led to a calculated damage of $30,673 to PFM.

Strohmyer assigns multiple errors, including miscalculations regarding PFM's share value and fixed assets, the lack of recognized goodwill, reliance on eBay values for equipment, and wrongful conclusions about his fiduciary duties and compensation. PFM, on cross-appeal, contends the court erred by finding no fiduciary duty for Strohmyer to work four days a week while still holding him accountable for treating Medicaid patients.

In the standard of review, appellate courts assess factual issues de novo while considering the trial court's witness assessments. The existence and scope of fiduciary duty remain legal questions for the court. Strohmyer challenges the district court's valuation of PFM shares, asserting a miscalculation; the court initially valued his stock at $104,720 but later misstated it as $104,220. The valuation was based on specific exhibits detailing asset reconciliations drafted by Strohmyer's expert witness.

Exhibit 113 replicates the values of exhibit 46 and adds several financial metrics: prepaid supplies ($11,829.86), other fixed assets ($79,545 per exhibit 35), daily supplies ($31,774), adjusted accounts receivable ($143,043.60), accounts payable ($11,185.41), payroll taxes ($3,391.32), and salary due to Strohmyer ($9,389.27). Exhibit 36 includes notes from expert witness Doug Killion, whose appraisal values PFM’s fixed assets at $79,545 (detailed in exhibit 35). In contrast, exhibit 98, prepared by Naegele, values the same fixed assets at $19,755 based on comparable items from eBay and Craigslist.

The trial court deemed exhibits 46 and 113 as credible valuations of PFM’s corporate shares, but found Naegele’s valuation in exhibit 98 more persuasive than Killion’s in exhibit 36. Consequently, the court adjusted the values in exhibits 46 and 113 by subtracting the difference in fixed asset valuations (between exhibits 36 and 98) divided by 3,000 shares, resulting in a deduction of $19.91 per share. This led to adjusted share values of $96.35 for exhibit 46 and $113.09 for exhibit 113, averaging $104.72. With each director holding 1,000 shares, Strohmyer’s shares were valued at $104,720.

Strohmyer contends that the district court miscalculated the share values, arguing that inconsistent accounting and averaging produced an unjust outcome, and claims a difference of $16,740 between exhibits 46 and 113. Under a de novo standard of review, while giving weight to the lower court's credibility assessments, it was found that the district court erred in calculations. Specifically, the court misreported the fixed asset value in exhibit 36 as $79,495 instead of $79,545 and incorrectly stated Naegele’s fixed asset value as $19,765 instead of $19,755. The court also improperly averaged the values of exhibits 46 and 113, despite finding exhibit 113 credible and including all items from exhibit 46. The adjusted value of exhibit 46 does not account for the fixed asset valuation, leading to a recalculated adjusted net equity value of $341,384.14 for exhibit 113 after correcting the fixed asset difference. Additionally, the trial court treated 'Accounts Payables' and 'Payroll Taxes' as assets in exhibit 113, while they should be classified as liabilities, a discrepancy not addressed in Lehigh’s testimony.

'Account Payables' and 'Payroll Taxes' were classified as liabilities, leading to an adjusted net equity value of $312,230.68 in exhibit 113, resulting in a share value for Strohmyer of $104,077. This figure is close to the lower court's valuation of $104,720, indicating no significant error in the court's assessment. Strohmyer contended that he was owed one-third of the “Net Quarterly Director Fees,” amounting to $72,991.22, based on Lehigh's calculations of total adjusted equity, which included various financial components totaling $318,973.68 before subtracting operating capital. The lower court noted that Strohmyer had not attended director meetings for two years before his departure, resulting in a decision that he was not entitled to director fees. The court subtracted these fees from the net equity valuation without determining a separate amount owed to Strohmyer. The court's factual finding that Strohmyer was a director but not entitled to fees was upheld under a de novo review. Regarding goodwill, Strohmyer argued for an additional $55,000 for intangible assets, which PFM countered by stating there was no goodwill to divide upon dissolution since clients left with the departing physician. The district court agreed, stating that no goodwill or intangible value existed in the practice under such circumstances. A reference to the case Taylor v. Taylor was made, defining goodwill as the advantage gained beyond mere capital value due to public patronage and reputation.

Goodwill is recognized as a marketable business asset only when it is independent of an individual's personal reputation. In the context of marital property division under Neb. Rev. Stat. 42-365, goodwill must be an asset that can be sold or transferred without reliance on a particular person's presence. Determining the existence and value of goodwill is a factual question. The court upheld the district court's finding that the plaintiff's medical practice lacked compensable goodwill. In Detter v. Miracle Hills Animal Hospital, the court reaffirmed that professional goodwill as a distributable asset is also a question of fact. Evidence from a previous case showed that when partners left a firm, they retained the goodwill associated with clients they contacted, affirming that both factions received the goodwill available at dissolution. An expert testified that Strohmyer’s practice had identifiable intangible assets valued at $165,000, but no business goodwill. Although Strohmyer communicated his departure to patients, resulting in about 50% following him and a significant revenue drop at PFM, the evidence indicated that any goodwill was tied to Strohmyer’s continued presence. The lower court favored testimony asserting the absence of goodwill, and under de novo review, the district court's conclusion of no goodwill was upheld. Strohmyer's appeal on this issue was dismissed as meritless.

Strohmyer challenged the district court's acceptance of Naegele's testimony regarding the replacement costs of medical equipment, asserting it was erroneous compared to the valuations provided by Strohmyer’s expert. The relevant legal standard indicates that an owner’s opinion on property value must be based on informed judgment, rather than conjecture or hearsay. Market value can be established through actual sale prices, and expert opinions are not strictly required if the witness has adequate knowledge of the property.

During the trial, various witnesses evaluated the replacement cost of PFM’s medical equipment. Strohmyer provided an accountant's report valuing the equipment at $113,502, while Killion, Strohmyer’s expert, estimated it at $79,545. In contrast, Naegele defined fair value based on actual purchase or replacement costs, arriving at a figure of $19,755, supported by eBay and Craigslist listings. The district court found Naegele’s testimony more credible, leading to the conclusion that there was no error in the court's judgment.

Additionally, Strohmyer argued against the district court's refusal to award attorney fees, director fees, and salary under the Act, contending that the physicians qualified as employees. However, the court determined that the physicians did not meet the definition of employees under the Act and that there was insufficient evidence to support claims of payments categorized as W-2 wages or 1099 compensation.

An individual is not classified as an employee under the Act if they are free from control or direction regarding their service performance, both contractually and in practice. Evidence showed that Strohmyer set his own work schedule, limited his working days at Papillion Family Medicine (PFM), had no communication with Naegele and Mantler in the two years prior to his departure, and continued treating Medicaid patients despite PFM's decision to stop. Strohmyer did not have an employment agreement with PFM, thereby confirming his independence under the Act. The district court's conclusion that Strohmyer was not an employee was upheld.

Strohmyer also contested the district court's decision to award PFM $30,673 for his alleged breach of fiduciary duty regarding Medicaid patients, arguing the damages were speculative. Officers or directors of a corporation have fiduciary obligations to the corporation and its shareholders; a breach of these duties makes them liable for resulting damages. The court referenced the principle of ratification, indicating that unauthorized acts by corporate officers can be ratified by the corporation through implied approval or failure to disavow the act in a timely manner.

In communications from Naegele to staff, it was indicated that PFM would stop treating new Medicaid patients while allowing Strohmyer to continue seeing current ones. Despite explicit instructions to cease treating Medicaid patients, Strohmyer maintained he would act as he chose, leading to Naegele's concerns about potential wrongful termination claims, which contributed to a reluctance to confront Strohmyer on the issue during his tenure.

Ratification of a corporate officer’s unauthorized acts can be inferred from silence and inaction when the corporation has full knowledge of those acts. In this case, Naegele’s memorandum and directors’ meeting minutes show that in 2006, three physicians, including Strohmyer, discussed ceasing treatment of Medicaid patients but permitted Strohmyer to continue. Naegele did not present evidence of any oral agreement requiring all doctors at PFM to stop accepting Medicaid patients, and despite being aware of Strohmyer’s actions, Naegele and Mantler did not act against him until a complaint was filed in 2014. This inaction from 2006 to 2014 is deemed ratification of Strohmyer’s unauthorized actions, leading to the conclusion that PFM, Naegele, and Mantler ratified those actions. Consequently, Strohmyer’s fifth assignment of error is valid, and the award of $30,673 to PFM is vacated.

In PFM’s cross-appeal, it argues that the district court erred by finding that Strohmyer did not owe a fiduciary duty to work four days a week and by not compensating PFM for this alleged breach. The court determined there were no employment contracts defining the terms of Strohmyer’s employment, negating the existence of a fiduciary duty. Furthermore, the court noted that PFM had the authority to terminate Strohmyer’s employment but chose not to, and his productivity was comparable to that of his colleagues. Naegele claimed an oral agreement existed for all doctors to work four days a week, which Strohmyer disputed. Strohmyer reduced his hours from four to three days weekly due to outside employment, and meeting minutes indicated discussions about his potential outside positions and their impact on his work at PFM, with support from Naegele and Mantler.

No evidence was presented showing that other doctors sought to enforce an alleged oral agreement for Strohmyer to work four days a week prior to the litigation. Furthermore, there was no proof that Strohmyer’s other employers were in competition with PFM. Strohmyer’s patient charges at PFM decreased after he began working at Alegent in 2008, yet his charges remained comparable to those of his colleagues Naegele and Mantler between 2008 and 2013. Consequently, it was determined that Strohmyer's employment with other entities and his choice to work three days a week at PFM did not conflict with his corporate responsibilities, and he did not breach a fiduciary duty by not working the four days. The district court's findings regarding the valuation of Strohmyer's shares, the absence of goodwill for compensation, the reliance on eBay values for medical equipment, and the denial of compensation for director fees and salary were upheld. However, the court erred in determining that Strohmyer breached a fiduciary duty by treating Medicaid patients and in holding him liable for a physician assistant’s treatment of these patients, as well as in the calculation of damages based on those claims. The court affirmed some decisions while reversing others and remanding for further proceedings consistent with the findings.