Opinion
15-P-701
03-03-2016
RICHARD ALEXANDER v. ALAN D. SHOOPAK & another.
NOTICE: Summary decisions issued by the Appeals Court pursuant to its rule 1:28, as amended by 73 Mass. App. Ct. 1001 (2009), are primarily directed to the parties and, therefore, may not fully address the facts of the case or the panel's decisional rationale. Moreover, such decisions are not circulated to the entire court and, therefore, represent only the views of the panel that decided the case. A summary decision pursuant to rule 1:28 issued after February 25, 2008, may be cited for its persuasive value but, because of the limitations noted above, not as binding precedent. See Chace v. Curran, 71 Mass. App. Ct. 258, 260 n.4 (2008).
MEMORANDUM AND ORDER PURSUANT TO RULE 1:28
Dr. Alan D. Shoopak (Shoopak) and Alan D. Shoopak, D.M.D., Orthodontic Group, P.C./or LLC (Shoopak Orthodontic) (collectively, the defendants) appeal from an amended judgment entered by a judge of the Superior Court, sitting without a jury, for breach of contract and related torts arising from the sale of two Massachusetts orthodontic offices by the plaintiff, Richard Alexander, to the defendants. The defendants challenge the amended judgment for five reasons. First, the defendants contend that the judge committed clear errors of fact and clear errors of law by finding that Alexander did not commit a material breach of the asset purchase agreement (APA) when he made a "false demand" for $280,000. Second, the defendants argue that Alexander was required to mitigate damages by accepting an offer of part-time employment from Shoopak. Third, the defendants maintain that Alexander's claims are barred because of the doctrine of frustration of purpose. Fourth, the defendants maintain that Alexander violated G. L. c. 93A by breaching the implied covenant of good faith and fair dealing. Fifth, the defendants argue that the judge erred by finding Shoopak individually liable. We affirm.
The plaintiff was awarded $1,301,048.18 in damages. This award included prejudgment interest of $58,500.74 and attorney's fees of $260,150.73.
The plaintiff alleged the following claims against Shoopak: Count I, breach of contract for violation of an asset purchase agreement; Count II, breach of contract for violation of the terms of a promissory note; Count III, breach of the implied covenant of good faith and fair dealing; and Count XIV, violation of G. L. c. 93A. The plaintiff alleged the following claims against Shoopak Orthodontic: Count IV, breach of an asset purchase agreement; Count V, breach of the terms of a promissory note; Count VI, breach of the implied covenant of good faith and fair dealing; and Count XV, violation of G. L. c. 93A. The plaintiff voluntarily dismissed the remaining counts against the defendants. The defendants alleged the following counterclaims against the plaintiff: Count I, breach of contract seeking indemnification from the plaintiff; Count II, contract claim seeking attorney's fees; Count III, breach of the implied covenant of good faith and fair dealing; Count IV, misrepresentation relating to the availability of bank financing; Count V, violation of G. L. c. 93A; and Count VI, declaratory relief.
Alternatively, the defendants argue that if Alexander's breach is determined not to be material, they should still recover from Alexander because the breach was the cause of the lost profits suffered by Shoopak Orthodontic.
Background. We summarize the judge's comprehensive findings of fact reserving some facts for later discussion.
In early 2009, despite a growing and successful orthodontic practice, Alexander's financial situation worsened and he owed a substantial debt to the Internal Revenue Service (IRS). Alexander contacted Orthosynetics, Inc. (OSI), which provided financial services for his orthodontic practice, to discuss the purchase of the practice. When OSI and Alexander were unable to come to terms as to the purchase price, Alexander contacted Shoopak in order to discuss his potential purchase of the practice.
Shoopak, a Florida resident, had acquired thirty-four orthodontic practices by the time of trial. He had also retained Dennis Buchman, a dentist who had previously been employed with OSI, as a vice president involved in the evaluation of dental practices that were for sale. Buchman assisted in the acquisition of Alexander's practice. The parties negotiated the documents which related to the purchase and sale of Alexander's orthodontic practice to Shoopak. The documents, dated May 26, 2009, included the following, as set out by the judge:
None of the documents were prepared or reviewed by counsel, with the majority of them being drafted by Buchman. The judge found, "Poor draftsmanship substantially contributed to the various disputes which are presently the subject of this litigation . . . . Of particular concern is the failure of the documents to clearly identify the contracting parties."
"1. A document entitled 'Professional Asset Purchase Agreement and Bill of Sale' (the 'APA'), which essentially governs the sale of Alexander's orthodontic practices;
"2. A promissory note in the amount of $1,524,805.00 (the 'APA Note');
"3. A promissory note in the amount of $230,000.00 (the 'Alexander Loan Note')[;]
"4. A document entitled, 'Agreement for Professional Services' (the 'PSA')."
The performance of the negotiated agreements between Shoopak and Alexander began without any substantial difficulties. However, despite being paid $1,500 per a nine-hour work day, as required by Shoopak, as well as receiving profit shares, Alexander's financial troubles continued. These troubles led him to request several advances on his profit shares. As a result of Alexander's continued financial trouble and need for cash, Shoopak and Alexander met in Boston on January 13, 2010, to discuss a monthly advance in profit sharing. This meeting resulted in an electronic mail message (e-mail) from Buchman to Alexander on January 20, 2010, which modified their original agreements. On January 21, 2010, Alexander agreed to the terms set out in the January 20, 2010, e-mail.
The e-mail states: "Dick, "As per your discussions with Shoo, please review the following parameters as I understand them. "For as long as the OSI debt is being serviced by Shoo, we agree to the following commencing 2/1/10: "1. We will forward to you a $15,000.00 monthly profit sharing advance. "2. For that $15,000.00 profit sharing advance, you will give Shoo a relief of $25,000.00 on principal balance from the practice purchase promissory note, currently in place for the MASS practices, "3. As of approximately 10/2010, the 15 month term OSI note will be extinguished. At that time, a calculation will be made to the total 'relief dollars' that have been accumulated. We will then temporarily discontinue the buyout payment of the note to you until the total 'relief dollars' and any deficit has [sic] been realized. "4. The difference in the amount remaining between your ongoing buyout payment and the OSI note, will be credited to the interest you owe on the $230,000.00 loan, as well as any continued deficit. "5. Any monthly profit-sharing earned by you will be slated towards the arrearage currently present. "6. Once your deficit and the 15 month term OSI note is [sic] paid off, profit sharing will be distributed based as per the original professional services agreement. "I will need you send [sic] me your acceptance of these terms, via return email, before January 25th, so that we can plan our cash accordingly. "Regards, "Dennis"
In April, 2010, Alexander engaged counsel to issue a demand letter to Shoopak based on a default of the APA note, but instructed counsel not to send it until he received a buy-out proposal from Shoopak. When the buy-out proposal was unsatisfactory to Alexander because of its "take-it-or-leave-it" basis, Alexander's counsel sent the demand letter on April 21, 2010. Shoopak then sent an e-mail to Alexander, dated April 28, 2010, terminating his employment. The next day, Alexander e-mailed Shoopak attempting to "do what's best for everyone including the staff and patients in Massachusetts." Shoopak responded by saying he had been advised not to speak to Alexander.
The demand letter claimed an arrears with penalties and interest of over $280,000. Alexander acknowledged that he knew he was not owed this money, but wanted to use the demand letter to help with negotiations between the parties.
In September of 2010, Alexander filed this action against the defendants. The claims arising under the PSA were submitted to arbitration. The arbitration panel found that Alexander breached the PSA, and that the defendants properly terminated his employment. Following a jury-waived trial on the remaining claims, see note 3, supra, the judge found for Alexander.
The judge found the following to be preclusive, based on the arbitration, in the instant action: "(1) The arbitrators found that loans from OSI to Alexander which, at the end of May 2009, had principal balances of approximately $64,277 and $339,338 remained Alexander's personal obligations, but were also secured by the assets of the practice that were sold to Dr. Shoopak. "(2) The arbitrators found [that] '. . . OSI, as part of its financial services, controlled the cash for Dr. Alexander's practice both before and after it was sold to Dr. Shoopak. OSI received payments to the practice and paid the bills and so was in a position to pay itself directly each month.' "(3) [T]he arbitrators found, '. . . Dr. Alexander was aware that his practice could not be transferred without OSI's consent and, by his conduct, acquiesced in Dr. Shoopak paying OSI and offsetting those payments from the amounts otherwise due to Dr. Alexander under the Purchase Promissory Note.' This court finds that said determination is only issue preclusive in this action with respect to conduct by Shoopak, up to and including April 21, 2010. "(4) [T]he arbitrators [found that] '. . . at the time that the letter [of April 21, 2010] was written and directed to be sent, Dr. Alexander knew that the demand in the letter was inappropriate as nothing was owed to Dr. Alexander.' The court finds that this determination was necessary in connection with the propriety of Shoopak's actions in response to the letter of April 21, 2010. Such fact would be relevant and issue preclusive in this action solely as to whether, as of April 21, 2010, Shoopak was in breach of the APA due to allegedly permitting OSI to sweep the account in satisfaction of the two Alexander notes. It is not preclusive as to the total amount presently owed under the note."
Discussion. A. Breach of the asset purchase agreement. The defendants argue that the judge committed clear errors of fact and clear errors of law by finding that Alexander did not commit a material breach of the APA when he made the demand for $280,000. See note 7, supra. Rule 52(a) of the Massachusetts Rules of Civil Procedure, as amended, 423 Mass. 1402 (1996), provides in pertinent part, "Findings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge the credibility of the witnesses." A judge's findings of fact are accepted unless clearly erroneous. Anastos v. Sable, 443 Mass. 146, 149 (2004). A judge "is in the best position to judge the weight and credibility of the evidence" and testimony because "of his firsthand view of the presentation of the evidence." New England Canteen Serv., Inc. v. Ashley, 372 Mass. 671, 675 (1977). "A finding is clearly erroneous when 'although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.'" Green v. Blue Cross & Blue Shield of Mass., Inc., 47 Mass. App. Ct. 443, 446 (1999), quoting from Springgate v. School Comm. of Mattapoisett, 11 Mass. App. Ct. 304, 309-310 (1981). We will not reverse even if, when reviewing the record in its entirety, we would have weighed the evidence differently; when "there are two permissible views of the evidence, the factfinder's choice between them cannot be clearly erroneous." Edinburg v. Edinburg, 22 Mass. App. Ct. 199, 203 (1986), quoting from Anderson v. Bessemer City, 470 U.S. 564, 573-574 (1985). The judge's rulings on questions of law are reviewed de novo. T.W. Nickerson, Inc. v. Fleet Natl. Bank, 456 Mass. 562, 569 (2010).
The judge was not clearly erroneous when he determined that Alexander's demand for $280,000, which the arbitrators found to be a breach of the PSA, did not constitute a breach of the APA. Whether a contract breach is material is generally a question of fact. Lease-It, Inc. v. Massachusetts Port Authy., 33 Mass. App. Ct. 391, 396 (1992). It was plausible for the judge to find that the PSA and APA were two different agreements. The language of the APA sets forth the obligations of the parties as to the sale of Alexander's orthodontic practice while the PSA addresses Alexander's employment obligations.
In certain circumstances, separate documents can be considered one transaction and should be treated as part of a single integrated contract. See Gilmore v. Century Bank & Trust Co., 20 Mass. App. Ct. 49, 56 (1985) (courts look to "simultaneity of execution, identity of subject matter and parties, cross referencing, and interdependency of provisions" to determine if separate agreements should be treated as part of single integrated contract). Although the PSA was executed at the same time as the APA and both contain some overlap among parties, the subject matter is different, the PSA does not reference the APA, and there is no interdependency of any of the provisions of either document. Further, the defendants' employee, Buchman, did most of the drafting of the agreement and therefore any ambiguity is construed against the defendants. See Demoulas v. Demoulas Super Mkts., Inc., 424 Mass. 501, 570 n.72 (1997). See also Massachusetts Turnpike Authy. v. Perini Corp., 349 Mass. 448, 454 (1965). Therefore, although the arbitration panel found that Alexander breached the PSA, the judge was not clearly erroneous in determining that there was no breach of the APA.
B. Lost profits. The defendants argue that even if Alexander's breach of the PSA was not a material breach of the APA, they should be entitled to damages because the breach caused lost profits. The judge determined that there was no causal relationship between Alexander's departure (breach of the PSA) and the losses sustained by Shoopak Orthodontic. Contrary to the defendants' argument, the judge was not required to credit Shoopak's testimony, which attempted to establish Alexander as the cause of the losses sustained in the fiscal years 2011 and 2012. The judge was not clearly erroneous when he determined that Shoopak, applying the "Shoopak touch" to change the mode of operation of Alexander's practice, was the cause of the financial losses sustained in fiscal years 2011 and 2012, not the departure of Alexander. See First Pa. Mort. Trust v. Dorchester Savs. Bank, 395 Mass. 614, 621-624 (1985).
C. Shoopak's employment offer. The defendants argue that Alexander's refusal to accept Shoopak's employment offer in September, 2010, constituted a material breach of the APA and excused the defendants from further performance. In certain circumstances, there is a duty to mitigate damages caused by a breach of contract. See Ryan v. Superintendent of Schs., 374 Mass. 670, 673-674 (1978). However, as the judge correctly determined, Alexander had no duty to accept Shoopak's offer of employment. The offer from Shoopak was a conditional offer, i.e., "once we put this behind us." See Massachusetts Mun. Wholesale Elec. Co. v. Danvers, 411 Mass. 39, 45 (1991) ("A condition precedent defines an event which must occur before a contract becomes effective or before an obligation to perform arises under the contract"). Further, the terms of the employment offer were not substantially the same as the prior terms of employment; the offer was for part-time work without profit sharing. Alexander had no duty to accept a conditional offer that was not substantially similar to the original employment agreement.
Shoopak's offer to Alexander is as follows: "Do you still have any interest in working the Seekonk or Dartmouth offices once we put this behind us? I have decided to separate those offices in that I will have one doctor be responsible for one and another doctor be responsible for the other office respectively. I have hired another Orthodontist, but she has plans on moving before the years [sic] end. I wanted to give you the opportunity before I move forward. It would be approximately 8-10 days per month in one of the offices. "Let me know."
Even if the offer were unconditional and on the same terms as before, Alexander was not bound to accept the offer in order to "mitigate" his damages under the APA. Alexander's employment status is irrelevant to Shoopak's performance of the APA because the APA and PSA are separate.
D. Frustration of purpose. The defendants argue that the purpose of the APA was frustrated because Alexander's services for no less than three years was a basic assumption of the APA, thereby depriving Alexander of any right to recover. This doctrine has no application in the instant action because no event occurred that was "neither anticipated nor caused by either party, the risk of which was not allocated by the contract, [and which] destroys the object or purpose of the contract, thus destroying the value of performance." Chase Precast Corp. v. John J. Paonessa Co., 409 Mass. 371, 374 (1991). Alexander's breach of the PSA did not excuse the defendants from further performance of the APA. Furthermore, Alexander's departure from Shoopak Orthodontics was determined not to be the cause of the defendants' financial losses. Even assuming it was, this would not be a supervening event that excused performance under the APA. See id. at 374-375.
Frustration of purpose is also defined by the Restatement (Second) of Contracts § 265 (1981), as:
"Where, after a contract is made, a party's principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary."
E. General Laws c. 93A. The defendants claim that Alexander violated G. L. c. 93A by breaching the implied covenant of good faith and fair dealing. We disagree. The judge determined "that any alleged breach of contract by Alexander was not material, did not result in any harm, and did not rise to the level of a violation of G. L. c. 93A." We have consistently held that a mere breach of contract without more does not violate G. L. c. 93A. See Whitinsville Plaza, Inc. v. Kotseas, 378 Mass. 85, 100-101 (1979). Also, a negligent act, standing alone, does not give rise to a violation under G. L. c. 93A. See Walsh v. Chestnut Hill Bank & Trust Co., 414 Mass. 283, 288 (1993). Even if we assumed that the defendants established a technical violation of G. L. c. 93A, we agree with the judge that "Shoopak has failed to establish by a preponderance of the evidence that the alleged wrongful conduct of Alexander caused the Shoopak Defendants injury or harm, and that any claim relating to a causal relationship as to the lost profits is speculative at best." See Agoos Leather Cos. v. American & Foreign Ins. Co., 342 Mass. 603, 608 (1961) (damages must be established with reasonable certainty); Brewster Wallcovering Co. v. Blue Mountain Wallcoverings, Inc., 68 Mass. App. Ct. 582, 609 (2007) (claim of lost profits cannot be "remote, speculative, or hypothetical").
F. Shoopak's personal liability under the APA. Shoopak contends that the judge erred in holding him personally liable under the APA and that liability should have been limited to his later formed corporate entity, Shoopak Orthodontic. As stated above, a judge's findings of fact are accepted unless clearly erroneous. Anastos, 443 Mass. at 149. Because the judge's findings establishing Shoopak's personal liability are not clearly erroneous, we accept them. The APA, which was drafted by Shoopak's employee, listed both Shoopak Orthodontic, a limited liability company (LLC) and Shoopak individually. More importantly, Shoopak signed the APA as "President" on May 26, 2009, and did not form the LLC until August 13, 2009. An LLC is not formed until all formalities, including filing with the Secretary of State, are met. See G. L. c. 156C, § 12. Once the LLC is formed, it then becomes its own legal entity, which contains a liability shield for its members. See G. L. c. 156C, § 12(b). Because there was no LLC in existence when Shoopak signed the APA as "President," he could not be signing on behalf of the LLC, and therefore could not take advantage of the liability shield. He could only sign personally as a sole proprietor. An individual should not be allowed to escape personal liability by forming an LLC after the fact. Accord G. L. c. 156C, § 69(e), inserted by St. 2003, c. 4, § 45 ("The conversion of any other business entity into a domestic limited liability company shall not be deemed to affect any obligations or liabilities of the other business entity incurred prior to such conversion or the personal liability of any person incurred prior to such conversion"). Although this alone establishes a basis to hold Shoopak personally liable under the APA, Shoopak also held himself out as the purchaser of Alexander's practices in his communications. There was no evidence that Alexander looked solely to the LLC (Shoopak Orthodontic), and not to Shoopak personally, for performance of the defendants' obligations. These factors, considered together, are sufficient to support the holding that Shoopak was personally liable under the APA.
These findings include: "Shoopak has engaged in confusing, if not misleading conduct with respect to the entity, or entities, involved in the purchase of the Alexander practices. Furthermore, he has intertwined his personal dealings with the subject acquisition during negotiations, and thereafter"; "Shoopak was largely responsible for any ambiguity as to the manner and capacity in which he executed the relevant documents"; and "based on the evidence . . . it would be grossly inequitable to permit Shoopak to escape personal liability, and to allow Shoopak to hide behind the late formed LLC."
"An LLC is an unincorporated business structure that combines the business advantages of a corporation (a corporate-styled liability shield) with the income tax advantages of a partnership (income taxed directly to owners)." Bishop, Unincorporated Limited Liability Business Organizations: Limited Liability Companies and Partnerships, 29 Suffolk U. L. Rev. 985, 1004 (1995). The Massachusetts Business Corporation Act, G. L. c. 156D, § 2.04, inserted by St. 2003, c. 127, § 17, states, by way of analogy, "All persons purporting to act as or on behalf of a corporation, knowing there was no incorporation under this chapter shall be jointly and severally liable for all liabilities created while so acting." This principle is in accord with cases that were written prior to the Massachusetts Business Corporation Act becoming effective. See, e.g., Ward v. Brigham, 127 Mass. 24, 27 (1879) ("Those who acted as agents for the inchoate corporation acted without a principal behind them, because there was no body corporate capable of appointing agents, and so became principals in the transaction"); Productora e Importadora de Papel, S.A. de C.V. v. Fleming, 376 Mass. 826, 836 (1978) ("Under the law of Massachusetts, a promoter may be personally liable for breach of a pre-incorporation contract he makes on behalf of the nonexistent corporation unless the circumstances demonstrate that the other party looked only to the corporation for performance"). "Because the Act makes the process of incorporation simple and relatively inexpensive, a strong argument can be made that nothing short of filing articles of organization should create the shareholder privilege of limited liability." Comment to G. L. c. 156D, § 2.04.
G. Attorney's fees. The APA provides in relevant part, "If legal action is commenced to enforce this Agreement, the prevailing party in such action shall be entitled to recover its costs and reasonable attorneys' fees in addition to any other relief granted." The judge granted Alexander attorney's fees based on the APA. Accordingly, Alexander may recover reasonable attorney's fees and costs expended in connection with defending this appeal. Alexander may file with the clerk of this court materials detailing and supporting his request for such fees and costs within fourteen days of the issuance of the rescript in this case. The defendants will be allowed fourteen days from receipt of said filing to respond, and this court will then enter an appropriate order. See Beal Bank, SSB v. Eurich, 448 Mass. 9, 11-14 (2006).
Amended judgment affirmed.
By the Court (Trainor, Agnes & Massing, JJ.),
The panelists are listed in order of seniority.
/s/
Clerk Entered: March 3, 2016.