Opinion
C.A. No. 99-251 L
July 31, 2000
Report and Recommendation
Plaintiff John M. Demicco, M.D., a resident of Georgia, has filed this instant cause of action alleging a breach of contract, and names as defendants Medical Associates of Rhode Island, Inc., and Bristol County Medical Associates, Inc., two Rhode Island corporations. Defendant MARI, in turn, filed a counterclaim against Dr. Demicco.
Medical Associates of Rhode Island will hereafter be referred to as "MARI".
Bristol County Medical Associates will be hereafter referred to as "BCMA".
On April 26, 2000, U.S. District Judge Ronald R. Lagueux appointed me to serve as Master in this case, pursuant to Rule 53 of the Federal Rules of Civil Procedure. In Judge Lagueux's Order, he directed me to receive evidence and make a report on the following:
(1) Whether the stock purchase agreements are binding contracts;
(2) If the agreements are binding, determine if there was a breach of those agreements;
(3) If there was a breach, determine the amount of damages that should be awarded the plaintiff; and
(4) On any issues that arise during the course of the proceedings.
On June 26, 2000, this court, sitting in this diversity litigation, conducted hearings on the matter.
Background
Much of the background information is gleaned from the Joint Pretrial Stipulation of the parties, Exhibit 1-A.
Plaintiff John M. Demicco, M.D., an internist, joined Medical Associates of Rhode Island as a physician/employee in 1976. MARI is a professional service corporation which engages in the practice of medicine, in the town of Bristol, Rhode Island. MARI has been in existence for over thirty-five years. Bristol County Medical Associates is a Rhode Island Corporation which owns the property where the MARI practice is located. The shareholders of MARI and BCMA are the same.
This property, located at 1180 Hope Street in Bristol, RI, will hereafter be referred to as the "BCMA property".
As a part of his employment with MARI, Dr. Demicco signed an employment contract with the professional service corporation. Pursuant to this employment agreement, Dr. Demicco was to perform services as a physician at the BCMA facility in return for an annual salary. In addition, the employment agreement required Dr. Demicco to have all monies earned for professional services performed elsewhere conveyed directly to MARI. A portion of this additional income would then be issued to Dr. Demicco as a part of his salary.
This employment contract between Dr. Demicco and MARI will hereafter be referred to as the "employment agreement".
In June 1980, plaintiff was offered an opportunity to "buy in" as a shareholder of both MARI and BCMA. Plaintiff took this opportunity, and became a party to a series of agreements with MARI and BCMA, including the stock purchase agreements with each entity.
During Dr. Demicco's employment with MARI, he served as the medical director of two East Bay nursing homes, the Evergreen Nursing Home and the United Methodist Center. Pursuant to plaintiff's employment agreement with MARI, MARI received directly the compensation paid to Dr. Demicco.
In January, 1993, MARI discovered that Dr. Demicco had been instructing the nursing homes where he served as Director to forward the checks in payment of his services directly to him, instead of to MARI. This prompted a bitter dispute between MARI and Demicco, ultimately leading to the termination of his employment contract with MARI in October of 1993.
Following his termination of employment with MARI, Dr. Demicco and his family moved to Savannah, Georgia, where he obtained employment with a physician group. While in Savannah, Dr. Demicco obtained a divorce from his wife, which was finalized in June 1999. In May of 1999, he filed this action in this court to enforce his stock purchase agreements with MARI and BCMA.
Dr. Demicco is seeking the value of his shares, pursuant to those agreements. MARL and BCMA do not dispute that Dr. Demicco is entitled to be bought out as provided in those agreements.
For purposes of clarity, each agreement will be discussed in turn. The parties do not dispute that this court, sitting in diversity, should apply Rhode Island law.
THE MARI AGREEMENT.
1. Whether the MARI Agreement is a Binding Contract?
The essential elements of a contract have been long recognized by Rhode Island courts as competent parties, subject matter, a legal consideration, mutuality of agreement, and mutuality of obligation." Rhode Island Five v. Medical Associates of Bristol County, Inc., 668 A.2d 1250, 1253 (1996) (citing Black's Law Dictionary 322 (6th ed. 1990)); Lamourex v. Burrillville Racing Ass'n., 91 R.I. 94, 98 161 A.2d 213, 215 (1960)). To establish a contractual relationship, mutuality of agreement is established "through one party's offer and the other party's acceptance of the offer." Smith v. Boyd, 553 A.2d 131, 133 (R.I. 1989). For the agreement to be legally enforceable, it must reflect the objective intent of the parties to be bound. UXB Sand Gravel v. Rosenfield Concrete Corp., 641 A.2d 75, 79 (R.I. 1994). Legal consideration, under Rhode Island law, is defined as some right, interest or benefit accruing to one party or some forbearance, detriment or responsibility given, suffered, or undertaken by the other." Hayes v. Plantation Steel Co., 438 A.2d 1091, 1094 (R.I. 1982). Once these elements are satisfied, the parties have formed a legally enforceable contract.
Here the parties have demonstrated that the MARI stock purchase agreement is a valid and binding contract. The written agreement signed by the parties evidences MARI's offer to Dr. Demicco to buy into the corporation, and his subsequent acceptance of this offer, coupled with the payment of a monetary consideration for the shares of MARL stock.See Plaintiff's Exhibit 2. Further, both Dr. Demicco and representatives of MARL testified as to their intention to be bound by the terms of the contract requiring a stock buy-out. As a result, the stock purchase agreement existing between Dr. Demicco and MARI constitutes a valid, legally enforceable contract.
The transcript and exhibits in this instant case have been filed with the Clerk of Court.
2. If the MARI Agreement is Binding, was there a Breach?
A breach of contract has been defined as a "violation of a contractual obligation, either by failing to perform one's promise or by interfering with another party's performance." See Black's Law Dictionary, 182 (7th ed. 1999). The presumptive remedy for breach of contract is damages, intended to fulfill the expectation of the nonbreaching party by "plac[ing] the injured party in as good a position as if the parties had fully performed the contract." See Riley v. St. Germain, et al, 723 A.2d 1120 (R.I. 1999); Wells v. Uvex Winter Optical, Inc., 635 A.2d 1188, 1193 (R.I. 1994) (citing Rhode Island Turnpike and Bridge Authority v. Bethlehem Steel Corp., 119 R.I. 141, 166, 379 A.2d 344, 357 (1977)).
Here, the plaintiff has demonstrated that MARI is in breach of its stock purchase agreement with Dr. Demicco. Pursuant to the MARI Agreement, the employment corporation was required to buy back Dr. Demicco's shares of MARI stock upon the termination of his employment with the corporation. The contract provides that the price for the stock of a shareholder who voluntarily terminates his employment prior to retirement, or whose employment is terminated for cause, is to be set at twenty (20%) of that Stockholder's average net income for the three years prior to his leaving the corporation. See Plaintiff's Exhibit 2. Both parties agree that the three years to be used in calculating his average net income are 1990, 1991, and 1992. Additionally, both parties agree that MARI's 20% calculation of Dr. Demicco's average net income is accurate at $30,869.00. See Joint Exhibit A-1. Pursuant to the stock purchase agreement any deductions made in this figure are entirely discretionary on the part of MARI, and are not required to be resolved prior to performance. As a result, there was nothing preventing MARI from conducting their buy back of Dr. Demicco's shares at any point in time from the date of his termination. Therefore, I find that MARI has breached its stock purchase agreement with Dr. Demicco by failing to comply with the terms of the agreement. Dr. Demicco is entitled to have his MARI stock bought back by the corporation, which will place him in as good a position as he would have been if the parties had fully performed the contract.
3. If there was a Breach of the MARI Agreement, what Amount of Damages are Due Plaintiff?
Pursuant to the MARI Agreement, the value of Demicco's shares in MARI should be equivalent to twenty (20%) of his net income for the three years proceeding his termination. As stated above, both Dr. Demicco and MARI have stipulated that MARI's calculation of $30,869.00 accurately represents this figure. However, the agreement also provides that any "other indebtedness" owed by the plaintiff to MARL may, at the election of the corporation, be deducted from the total amount to be paid the shareholder "whether or not such indebtedness is then due." See Plaintiff's Exhibit 2. It is this question regarding the appropriate amount of "other indebtedness" that has stalled the performance of this contract, and has resulted in MARI's breach.
4. Any Other Issues that Arise: Debts owed to MARI by Dr. Demicco and Defendant MARI's Counter-claim.
The Defendant contends that, pursuant to the terms of the MARI Agreement, it is entitled to deduct any sums still owed MARI by Dr. Demicco from the value of his stock. According to MARI, this includes Demicco's share of a line of credit, an off-set for salary overpayments, and monies still owed to MARI by Dr. Demicco for nursing home fees he misdirected to himself rather than to the corporation, plus statutory interest as provided by R.I. Gen. Laws § 9-21-10(a). Demicco does not contest a deduction for his share of the line of credit in the amount of $18,308.00. He does, however, contest MARI's deduction of salary overpayments, its calculation of the amount owed for re-directed nursing home fees, and its application of interest to these unpaid remittances.
A. The line of credit and salary overpayments are proper deductions.
The plaintiff's attorney has argued before this court, and Dr. Demicco himself has testified that MARI's deduction for the line of credit and its deduction for salary overpayments are actually one and the same, and that he was thus being double billed for monies properly due only once. After hearing testimony about the nature of the line of credit and the deduction made for annual salary overpayments to doctors working for MARI, I find that these deductions are not duplicative of each other.
Dr. Harrop, current president of the board of directors at MARI, testified that the line of credit was taken out by MARI in the early 1990s to offset the financial difficulties that the corporation had incurred over the years due to general mismanagement, including such problems as overpaying its employee doctors. At the MARI board meeting on February 26, 1991, at which Dr. Demicco was present, the members of the board of directors voted unammously that all the shareholders would be responsible for the line of credit upon leaving the corporation. See Defendant's Exhibit H. Dr. Harrop testified that in connection with the line of credit being taken out MARI underwent a financial overhauling. Part of this process included instituting a mechanism to insure that the doctors working at MARI were paid a salary that reflected actual services rendered at the BCMA medical facility. MARI began evaluating the salaries of its doctors quarterly and adjusting them annually to reflect overpayments and underpayments made to the doctors by the corporation. As a result, each of the doctors working for MARI would have his or her salary evaluated at the end of each calendar year for the corporation to determine whether the doctor was being over or under paid for services rendered. MARI would then tabulate the monies owed and adjust the doctor's future salary accordingly.
MARI's financial statement for the year ending on December 31, 1993, shows that Dr. Demicco was overpaid $34,224.00 as of December 31, 1990, overpaid $2,019.00 in 1991, underpaid $4,678.00 in 1992, and overpaid $14,257.00 in 1993. These amounts are different from Demicco's responsibility for his share of the letter of credit. As Dr. Harrop testified, the money from the letter of credit was taken out by MARI to offset already existing debts and to cover the corporation's general operating expenses. Salary overpayments and underpayments are merely MARI's method of recognizing when an individual doctor has been wrongly recompensed and settling the debt. Therefore, Dr. Demicco owes MARI not only his share of the letter of credit, but also for the net amount he was overpaid while in its employ.
The plaintiff has proposed, alternatively, that the $34,224.00 MARI claims that Dr. Demicco was overpaid as of December 31, 1990, was already returned to MARI through Dr. Demicco's $38,000.00 salary reduction which went into effect the following year. This argument was first brought before the court in the plaintiff's post trial proposed findings of fact and conclusions of law, and is not supported by the testimony offered at trial. Both Dr. Demicco and Dr. Harrop testified that salaries were restructured in the late 80s and early 90s to more directly reflect what the doctors working for MARI actually collected for services rendered. In a letter to Susan LaPanne-Bangs, an administrator at MARI, Dr. Demicco described how many doctors left MARI due to the lower salaries which resulted from this restructuring. See Plaintiff's Exhibit 13. As a result, the court is not persuaded that Dr. Demicco's $38,000.00 salary reduction was in direct response to his overpayment balance. Further, even if Dr. Demicco's salary reduction was intended to offset his overpayment balance, the fact remains that MARI's records still indicate that he was overpaid for services rendered in 1991, the year following the salary reduction. overpayment Dr. Demicco' s adjusted salary was a more appropriate reflection of actual services rendered by the doctor in 1991 and the following years.
Mr. Rudolph Charpentier, MARI's Director of Finance, testified regarding the proper reduction of Dr. Demicco's overpayments for the last two months of 1993. It is logical that Dr. Demicco could not be overpaid for working at MARI during months in which he received no salary. The court does not agree with Mr. Charpentier's proposed addition of $7,922.00 representing "credits" that Dr. Demicco received during the months of November and December. Rather, I find that these costs are already included in Demicco's total overpayment of $14,257.00 for 1993. Mr. Charpentier testified that Dr. Demicco is responsible for expenses incurred by his "cost center" for only the ten (10) months the doctor was actually employed by MARI. As a result, no monies should be added to the 1993 overpayment figure for these months, regardless of what revenues were coming into Dr. Demicco's cost center after his termination was effectuated.
After reviewing the exhibits, I find that MARI's 1993 financial statement reflects Dr. Demicco's actual contribution to the common costs and income for the physician group for the year 1993, and the calculated overpayment on this statement reflects salary overpaid to Dr. Demicco for these purposes. Since MARI arrived at a final determination of the amount over or underpaid its doctors on an annual basis, and since these yearly over or underpayments were calculated based on actual services rendered at the BCMA facility, I have determined that Dr. Demicco owes MARI the entire overpayment of $14,257.00 reflected on MARI's December 1993 balance sheet. See Plaintiff's Exhibit 9. This payment reflects actual costs incurred and services rendered by Dr. Demicco during the year 1993 at the BCMA facility.
Accordingly, I find that Dr. Demicco is liable to MARI for overpaid salary in the total amount of $45,822.00, taking into account the $4,678.00 that he was underpaid in 1992. Additionally, Dr. Demicco is separately liable to MARI in the amount of$ 18,308.00 for his share of the line of credit as it existed on the date of his termination.
B. Defendant MARI's Counter-Claim: The nursing home director fees are proper deductions.
In addition, MARI is claiming that funds Dr. Demicco collected directly from the two nursing homes where he served as Medical Director while he was employed by MARI should be treated as set off and deducted from the total amount of his stock buy-out. Pursuant to Dr. Demicco's employment contract with MARI, all income the doctor collected for professional services rendered was the property of the corporation, and was to be remitted directly to MARI. See Plaintiff's Exhibit 1. Dr. Demicco protests deducting these sums from his stock buy-out, arguing that they are administrative fees and should not come under the scope of his employment contract.
Here, the plaintiff and defendant have demonstrated that the employment agreement between Dr. Demicco and MARI is a valid, binding contract. For an agreement to be enforceable it must evidence an offer and acceptance, illustrative of the parties' intent to be bound by the terms of the agreement. Smith v. Boyd, 553 A.2d 131, 133 (R.I. 1989). The agreement must also include a valid consideration. See Hayes v. Plantation Steel Co., supra. Dr. Demicco's employment contract with MARI consisted of the corporation's offer of employment as a physician at the BCMA facility, and Dr. Demicco's acceptance of this offer. In consideration, Dr. Demicco agreed to forward all payments he received for services rendered in a professional capacity directly to MARI, and in return MARI contracted to pay Dr. Demicco an annual salary. See Plaintiff's Exhibit 1. In addition, both Dr. Demicco and representatives of MARI testified as to their respective intent to be bound by the terms of the employment agreement. As a result, the parties have demonstrated that the employment agreement is a legally binding contract.
Based on the evidence and testimony before this court, I find that Dr. Demicco is in breach of his employment contract with MARI. Testimony was given by Dr. Harrop that many of the doctors working for MARI serve as the medical directors of nursing homes, and that these monies have always been considered to be the property of MARI. In fact, Dr. Demicco testified that he had instructed the nursing homes to remit any salary due him directly to MARI for approximately ten years prior to January 1993, when the doctor redirected the funds to his own pocket. Further, as Dr. Harrop testified, the position of a medical director, even if largely administrative, still requires a doctor's credentials. Therefore, I find such a position to be professionally related. The nursing home director fees collected by Dr. Demicco are the property of MARI, and thus should be remitted to MARI as is required by the employment agreement. Dr. Demicco is required to remit the $10,725.00 he personally collected for his services as medical director of Evergreen and United Methodist nursing homes to MARI.
The General Laws of Rhode Island § 9-21-10(a) provides that interest at a rate of twelve (12%) percent per annum should be calculated by the clerk of the court from the date that the cause of action accrued, and that this amount must be added to the amount of any pecuniary damages awarded in any civil action. The statute does not, however, apply to any contractual obligation in which interest is already provided. Since Dr. Demicco's employment agreement is silent on the amount of interest due MARI in the event of a breach on the part of the doctor, I find that MARI is entitled to statutory interest of twelve (12%) percent On the uncollected nursing home fees for the seven years that these funds were improperly withheld from MARI, in the amount of $9,009.00. The Rhode Island Supreme Court has stated that the addition of interest is peremptory once a claim for damages is reduced to judgment. See Kastal v. Hickory House. Inc., 95 R.I. 366 at 369, 187 A.2d 262 (R.I. 1963).
This interest amount is calculated by taking 12% of the $10,725.00 nursing home director fees and multiplying it by the seven years that Dr. Demicco improperly withheld the funds from MARI.
However, the funds collected by Dr. Demicco would have, if properly directed to MARI, resulted in a salary payment to Dr. Demicco reflecting this income. According to the testimony offered at trial, this would be equivalent to approximately fifty (50%) percent of the $10,725.00. As a result, Dr. Demicco is entitled to an offset in the above amount due MARI of $5,362.50, which represents fifty (50%) percent of the original figure due MARI and misdirected by the doctor. Dr. Demicco would not, however, be entitled to interest on this income, because his employment contract with MARI expressly indicates that no interest will accrue on any monies due Dr. Demicco by the corporation. See Plaintiff's Exhibit 1, § 10.
C. The value of Demicco's MARI shares pursuant to the stock purchase agreement.
Thus, I conclude that the proper value of Dr. Demicco's MARI stock should be $30,869.00, which is equal to twenty (20%) of his average salary for the three years prior to his termination, as is provided by the MARI stock purchase agreement. This total amount should be offset by $18,308.00 for Demicco's share of the letter of credit, $45,822.00 for salary overpayments due the corporation, and $14,371.50 for the misdirected nursing home fees, including statutory interest, and minus Demicco's salary due for the nursing home director fees. As a result, the overall value of Dr. Demicco's stock in MARI comes to negative $47,632.50. THE BCMA AGREEMENT.
See appendix for financial calculations.
1. Whether the BCMA Agreement is a Binding Contract?
As stated previously, the elements of a contract under Rhode Island law are mutual assent, mutual obligation, and a legal consideration. See Rhode Island Five v. Medical Associates of Bristol County. Inc., supra. Here, the parties have demonstrated that the BCMA Agreement is a valid, binding contract. Similar to the MARI agreement, the BCMA agreement consisted of an offer on the part of the corporation for Dr. Demicco to purchase shares of the real estate corporation in conjunction with his employment with MARI. The document offered into evidence by the parties illustrates Dr. Demicco's acceptance of this offer, and his payment of a valid, monetary consideration to BCMA in return for shares of its stock.See Plaintiff's Exhibit 3. Further, both parties testified as to their intent to be bound by the terms of the BCMA agreement, and the necessity that Dr. Demicco's shares be bought back by BCMA pursuant to this agreement. As a result, the parties have demonstrated that the BCMA stock purchase agreement is a legally binding contract.
2. If the BCMA Agreement is Binding, was there a Breach?
Pursuant to the terms of the BCMA agreement, plaintiff is required to sell his shares of stock back to BCMA, and BCMA is required to buy back those shares. The contract requires that the first payment towards the purchase of stock from a shareholder who has left MARI either voluntarily or for cause must be made within thirty (30) days ofdeparture. Dr. Demicco's employment with MARI was terminated as of November 1, 1993. As a result, the BCMA stock purchase agreement requires that he receive his first payment on or before November 30, 1993. However, the required buy-back has not yet occurred, and as a result Dr. Demicco has not received his first payment within thirty (30) days as required by the BCMA agreement. Therefore, I find that BCMA has breached its contract with Dr. Demicco, and that a buy-back of Demicco's shares is necessary under the BCMA agreement to cure this breach.
3. If there was a Breach of the BCMA Agreement, what Amount of Damages are Due Plaintiff?
As set forth in the BCMA agreement, the value of Demicco's stock is to be determined by establishing the fair market value of BCMA as of November 1, 1993. This is to be done by adding together all BCMA's assets and deducting from this total any liabilities owed by the corporation as of that same date. Assets of BCMA include the appraised value of its real estate as of November 1, 1993, as well as any fixtures, furniture, and stock pledges made as of that date. See Plaintiff's Exhibit 3.
Peter M. Scotti Associates performed an appraisal of the real estate held by BCMA on March 30, 1992, establishing the fair market value of the property at $1,765,000.00. Mr. Scotti testified that this appraisal was done at the request of Fleet Bank. The defendant asserts that the Scotti appraisal was accepted in 1992 by all the shareholders, including Dr. Demicco. The results of the Scotti appraisal were used by BCMA in connection with the 1992 buy-in of Drs. James and Antonia Ross to the BCMA corporation. The plaintiff now rejects this appraisal, and wishes to submit his own appraisal, performed by Roy Schaeffer in January, 2000, using 1993 appraisal values. It fixes the fair market value of the property held by BCMA at $2,500,000.00.
This appraisal will hereafter be referred to as the "Scotti appraisal."
This appraisal will hereafter be referred to as the "Schaeffer appraisal."
Defendants assert that the doctrine of estoppel bars the plaintiff from presenting his own appraisal, or in the alternative, that the plaintiff has waived his right to contest the 1992 Scotti Appraisal. For the reasons that follow, I find that estoppel in not applicable in this situation, but plaintiff, has, in fact, waived his right to contest the Scotti appraisal.
A. Estoppel is not applicable here.
The BCMA agreement requires that the BCMA property be appraised every two years. Once the shareholders have accepted such an appraisal, the BCMA agreement fixes the appraised property value of the real estate for buy-in and buy-out purposes. BCMA contends that Dr. Demicco's acceptance of the Scotti Appraisal in 1992, combined with his failure to submit an alternative appraisal until January, 2000, estops him from now contesting the Scotti appraisal.
Rhode Island courts have defined equitable estoppel, or estoppel in pais, as:
. . . an affirmative representation or equivalent conduct on the part of the person against whom the estoppel is claimed which is directed to another for the purpose of inducing the other to act or fail to act in reliance thereon; and secondly, that such representation or conduct in fact did induce the other to act or fail to act to his injury. The burden of proving the elements of such a claim is upon the one who asserts it. Lichtenstein v. Parness, 81 R.I. 135, 138, 99 A.2d 3, 5 (1953).
For estoppel to apply to this case, BCMA has the burden of proving that Demicco affirmatively represented that he accepted the appraisal, that such representations were designed to induce the defendant's reliance thereon, and that the defendant did actually and justifiably rely to its detriment. See El Marocco Club. Inc. v. Richardson, 746 A.2d 1228, 1234 (R.I. 2000); see also Clauson v. Smith, 823 F.2d 660, 661 (1st Cir. 1987). To invoke estoppel properly against a party "some definite unequivocal behavior must be shown-conduct fairly calculated to mask the truth or to lull an unsuspecting person into a false sense of security."Clauson, 823 F.2d at 663 (1st Cir. 1987). The key element estoppel is "intentionally induced prejudicial reliance." El Marocco Club, 746 A.2d at 1234.
BCMA has not persuaded this court that Dr. Demicco's acceptance of the Scotti appraisal constituted an intentional act calculated to lull the corporation into a false sense of security. Here, Dr. Demicco testified that he accepted the Scotti appraisal to facilitate the Ross buy-in, even though he felt that the fair market value it reflected was too low. No testimony was elicited that would indicate that Dr. Demicco accepted the Scotti appraisal for purposes of inducing BCMA to act in a detrimental manner or to lull the corporation into a false sense of security. Defendant has failed to establish that Demicco intended to induce detrimental reliance on the part of the defendants. Accordingly, estoppel is not applicable here.
B. Plaintiff waived his right to contest the 1992 Scotti appraisal.
However, I find that Dr. Demicco is in fact bound by his 1992 acceptance of the Scotti appraisal for buy-in and buy-out purposes for the two years following this acceptance, i.e. 1992 and 1993. The BCMA agreement, which binds both parties, outlines a procedure for a stockholder to contest an appraisal. According to the contract, the BCMA property is to be appraised in order to determine a fair market value of the property. This amount must then be mutually agreed on by each and every stockholder of the corporation. If an agreement cannot be reached, the agreement provides that the property should then be appraised by three different appraisers, one appointed by each party and a third appointed by the appraisers themselves. Any party desiring an appraisal must give written notice that he desires one, and provide the other party with the name of his chosen appraiser. See Plaintiff's Exhibit 3.
Here, the shareholders of BCMA accepted the Scotti appraisal when it was delivered to the corporation in 1992. Dr. Demicco was present at the meeting of the BCMA board of directors when the fair market value for the real estate of $ 1,765,000.00 was announced, and Dr. Harrop, who was also present, testified that he voiced no objection to this amount. Further, Dr. Demicco testified that he agreed with the other board members to use the Scotti appraisal in calculating the Ross buy-in. Dr. Demicco also testified that he thought the figure was low at the time, but agreed to it for the good of the corporation. Regardless of the doctor's reason for accepting the Scotti appraisal, the fact remains that he did accept it. According to the BCMA agreement, a stockholder may contest a property appraisal, but only if an agreement among the stockholders cannot be reached. Since Dr. Demicco originally had the right to object to the Scotti appraisal in 1992 and did not object, but rather accepted the appraisal, he has waived his right to contest it now.
Waiver has been defined by Rhode Island courts as "the voluntary, intentional relinquishment of a known right." Haxton's of Riverside. Inc. v. Windmill Realty, Inc. 488 A.2d 723, 725 (R.I. 1985) (quotingPacheo v. Nationwide Insurance Company 114 R.I. 575, 577, 337 A.2d 240, 242 (1975)). When a right is provided under contract, it may be waived "by conduct inconsistent with the express terms of the agreement." See Violet v. Traveler's Express Company. Inc. 502 A.2d 347, 349 (R.I. 1985). Here, the BCMA agreement specifically provided Dr. Demicco with the opportunity to contest the Scotti appraisal when it was presented to the stockholders if he disagreed with it for any reason. Dr. Demicco's ability to contest the Scotti appraisal when it was initially submitted is clearly provided by the BCMA stock purchase contract. Dr. Demicco chose to accept the Scotti appraisal. When he did this, he waived his right to contest the appraisal thereafter. Dr. Demicco's attempt to submit his own, significantly higher appraisal now, seven years later and eight months after the filing of this lawsuit, is conduct inconsistent with the express terms outlined in the BCMA agreement for objecting to an appraisal. Accordingly, the plaintiff is bound to his acceptance of the 1992 Scotti appraisal for buy-in and buy-out purposes. This includes the time period of his termination and subsequent stock buy-out.
C. The Scotti appraisal's income approach best reflects the fair market value of the BCMA property.
Although I have already determined that the plaintiff waived his right to contest the Scotti appraisal, I will briefly discuss the deficiencies in the Shaeffer appraisal, which plaintiff submits to the Court to consider. Plaintiff avers that the method used by the Shaeffer Appraisal is the preferred method in Rhode Island, and that it more adequately presents a fair market value for the BCMA property. I reject his assertions.
The 1992 Scotti appraisal provides three different fair market values for the BCMA property using three different approaches: the cost approach, the comparative sales approach, and the income approach. Mr. Scotti testified that he relied on the income approach in determining his figure of $1,765,000.00 for the fair market value of the BCMA property because he felt it was best supported by the data collected. The plaintiff has suggested that the preferred method of determining the fair market value of real estate in Rhode Island is the comparative sales method, and he cites cases in which this method was used by the Rhode Island Supreme Court in determining the fair market value of condemned properties, one of which employs the same appraiser that Demicco used in his recent appraisal of the BCMA property. See Serzan v. Director of the Department of Environmental Management, 692 A.2d 671 (R.I. 1997); see also Capital Properties, Inc. v. State, 636 A.2d 319, 321 (R.I. 1994);Warwick Musical Theatre, Inc. v. Rhode Island, 525 A.2d 905 (R.I. 1987);J.W.A Realty v. City of Cranston, 121 R.I. 374, 380 (1979).
However, since the cases cited by the plaintiff deal only with the Rhode Island court's treatment of condemned properties, I find that Mr. Scotti was not bound to use the comparative sales method in determining the fair market value of the BCMA property when requested to do so by private entities, here Fleet Bank and the shareholders of BCMA. The property at issue in Scotti appraisal did not concern property condemned by the government or other public agency, but rather a private appraisal to determine the fair market value of the BCMA property for use in its dealings with Fleet Bank. Since it is Mr. Scotti's professional opinion that the income approach best represents the fair market value of the BCMA property, I see no reason to alter his appraised property value in determining this case.
Additionally, I find Mr. Schaeffer's testimony regarding the fair market value of the BCMA property unpersuasive. As Mr. Schaeffer testified, he did not perform a complete appraisal of the subject property, but rather performed only an executive summary. This executive summary provided by Mr. Schaeffer has serious flaws which diminish its credibility with this court. First, as Mr. Schaeffer testified, he never examined the interior of the BCMA building while researching for his appraisal, but instead walked around only the building's exterior. As a result, Mr. Schaeffer was unable to offer his professional opinion at trial regarding such issues as whether the building, in 1993, complied with building codes or whether it complied with the strictures of ADA. Mr. Shaeffer was also unable to proffer his opinion about the nature of the fixtures inside. Mr. Schaeffer further admits that he never saw the unfinished basement of the BCMA building, yet he testified that he valued this storage space at $70.00 a foot, the same amount per square foot that Mr. Schaeffer attributed to the medical office space within the building. In fact, as Mr. Scotti testified, it is mostly the high value attributed to this unfinished basement space which results in the large discrepancy between the two appraisals provided to this court.
Additionally, there was testimony given at trial by both Mr. Scotti and Mr. Schaeffer regarding the proper amount the unfinished basement space in the BCMA building should contribute to the overall fair market value of the subject property. After reviewing the testimony, I find that the unfinished basement area of the BCMA building does have a value, and this amount should be included in the fair market value of the property. However, I am not persuaded that the square footage making up the unimproved basement area should be valued as equivalent to the medical office space, as Mr. Schaeffer suggests. Mr. Scotti testified that he took the unfinished basement area of the BCMA building into account in his income approach, assigning an appropriately lower projected rental value for the basement due to its unimproved condition. Accordingly, I find that Mr. Scotti's income appraisal approach, which he relied upon in determining the fair market value of the BCMA property, adequately reflects the difference in the value of the unimproved area versus the finished medical office space in the BCMA building.
D. The value of Demicco's BCMA shares pursuant to the BCMA agreement.
Consequently, I conclude that the Scotti appraisal's fair market value of $1,765,000.00 for the BCMA property should be used to determine the fair market value of Dr. Demicco's BCMA stock as of November 1, 1993. Deducted from this amount should be all liabilities of the corporation, and then this amount should be divided among the nine existing BCMA shareholders. This makes the value of Dr. Demicco's BCMA stock as of November 1, 1993, come to $182,476.00. This amount should be offset by $16,495.00, the amount of Dr. Demicco's remaining stock pledge, making the value of Dr. Demicco's BCMA stock on the date of his termination $165,981.00. See Plaintiff's Exhibit 10. Once this figure is offset by the negative $47,632.50 owed by Dr. Demicco to MARI for the value of his shares in the employment corporation, I find that BCMA owes Dr. Demicco a total of $118,348.50. E. The proper payment schedule consistent with the stock purchase agreements.
See appendix for financial calculations.
Pursuant to the BCMA agreement, plaintiff is to receive payment for his stock over ten (10) years in annual installments, without interest. However, plaintiff claims that he was entitled to start receiving payments within thirty (30) days of his initial termination under the BCMA agreement. As a result, the plaintiff claims that he is entitled to collect interest on the payments that would have been made to him on an annual basis since 1993. The General Laws of Rhode Island § 9-21-10(a) provides that interest in civil actions is governed by contract if the contract so provides. Here, the BCMA agreement specifically provides that no interest is due on the payments to be made to Dr. Demicco. As a result, although Dr. Demicco was entitled under the contract to start receiving payments as of November 30, 1993, he is not entitled to receive interest on these payments. However, I find that Dr. Demicco is entitled to receive immediately the payments that should have been delivered to him annually since November 30, 1993.
Conclusion
Accordingly, I find that Dr. Demicco is entitled receive immediately the sum of $82,843.95. This amount is then to be followed by three annual installments of $11,834.85, the first to be paid on November 30, 2000. These payments are to be without interest, pursuant to the two stock purchase agreements.
Any objection to this report and recommendation must be specific and must be filed with the clerk within ten days of its receipt. Failure to file timely specific objections to this report constitutes waiver of both the right to review by the district court and the right to appeal the district court's decision. United States v. Valencia-Copete, 792 F.2d 4 (1st Cir. 1986) (per curiam); Park Motor Mart, Inc. v. Ford Motor Company, 616 F.2d 603 (1st Cir. 1980).
APPENDIX Parentheses indicate negative values.
The MARI Agreement
Calculation of 20% of Dr. Demicco's salary years 1991, 1992, 1993 (undisputed): $30,869.00
Offset by "other indebtedness" to MARI:
1) Letter of Credit (undisputed): ($18,308.00)
2) Nursing Home Director Fees: ($10,725.00)
3) Statutory Interest on Nursing Home Fees (at 12% for seven years): ($9,009.00)
4) Amount Due Dr. Demicco back in salary (50% of original Director Fees collected): $5,362.50
5) Salary Overpayments/Underpayments:
1993: ($14,257.00)
1992: $4,678.00
1991: ($2,019.00)
As of 12/31/90: ($34,224.00)
TOTAL Value of Demicco's MARI Shares: ($47,632.50)
The BCMA Agreement
Value of BCMA Property using Scotti appraisal: $1,765,000.00
Additional assets of BCMA as of 11/1/93, including stock pledges(undisputed): $450,900.00
Less Liabilities existing as of 11/1/93 (undisputed): ($573,616.00)
Fair Market Value of BCMA as of 11/1/93: $1,642,284.00
Value of one share of BCMA stock (as divided by 9 shareholders): $182,476.00
Offset by Dr. Demicco's remaining stock pledge (undisputed): ($16,495.00)
TOTAL Value of Demicco's BCMA shares: $165,981.00
Value of the BCMA Stocks: $165,981.00
Total Amount Due Plaintiff: $118,348.50
Value of MARI Stocks: ($47,632.50) Payment Schedule
Payments of $11,834.95 were due annually to the plaintiff since 1993 pursuant to the Stock Purchase Agreements. Accordingly, plaintiff is entitled to:
Amount Immediately Due Plaintiff (November 30, 1993 through November 30, 1999): $82,843.95
Amount Due November 30, 2000: $11,834.85
Amount Due November 30, 2001 $11,834.85
Amount Due November 30, 2002 $11,834.85