Opinion
No. CV03 040 14 75
July 7, 2006
MEMORANDUM OF DECISION
This trial of this matter was held over two days on January 24 and January 25, 2006.
The court has reviewed the trial testimony, the trial exhibits and the parties' proposed findings of fact. From the evidence, the Court finds the following pertinent facts.
On July 31, 1991, the plaintiff, Steven Schwartz, D.D.S., and the defendants, Ken Epstein, D.D.S. and Peter Munk, D.D.S., along with Ken Epstein's father, Gerald Epstein, D.D.S., entered into a partnership agreement (agreement). All four were dentists by profession, and Schwartz, Munk and Ken Epstein are still practicing dentists. Pursuant to the agreement, they formed the defendant, Family Dental Group-Clinton Avenue. Neither of the Epsteins practiced at this location at any time subsequent to the formation of this partnership. Initially the Epsteins held a fifty percent interest in the practice, while Schwartz and Munk each held a twenty-five percent interest. Upon Gerald Epstein's death and/or retirement in 1995 or 1996, Schwartz approached Munk about securing additional shares of the practice.
Now deceased.
An agreement was reached whereby the ownership interest was changed to one-third each for Munk, Schwartz and Ken Epstein.
The final draft of the agreement contained the following pertinent terms: The partnership was to continue until the year 2051, unless the partners agreed to an early dissolution. The partners were looking to form an entity which would survive upon their death. The partners were to devote full professional time and attention to the partnership during the first five years of its inception. The two practicing partners, Schwartz and Munk, were to receive thirty-five percent of their collections. Additionally, any profit beyond expenses would be put into a profit pool of which the first twenty percent would be divided equally between all three partners and the remaining, if any, would be divided equally between Schwartz and Munk.
From its formation until the present, the partnership has been successful, with increasing profits every year except in the year 2005. During the first five years, Schwartz and Munk both maintained a full-time schedule. Ken Epstein was a non-practicing partner and has never practiced at the Clinton Street practice. In 1997, Schwartz decided to reduce his workload, decreasing his hours on Wednesdays and Thursdays, and eliminating Fridays. Another associate, Dr. Lutsky was hired. It is unclear, however, whether Lutsky was hired to take over Schwartz's hours. The defendants contend that he was not hired to supplement Schwartz's workload, while Schwartz contends that he was. Presently, Schwartz is working approximately thirty-one hours per week and does not work on Fridays. Schwartz testified that no one complained about his schedule at the time he altered it. Munk has maintained a consistent, full-time, work schedule since the formation of the partnership.
Around 1997, when Munk became aware of Schwartz's change in schedule, he became upset and ceased communicating with Schwartz. According to Munk's testimony, Schwartz was also to blame for their breakdown in communication. Munk was dissatisfied with Schwartz's management style, the way he conducted his practice, his refusal to accept HMOs, take emergencies and work on Saturdays. He was also unhappy with Schwartz's appearance, the condition of his workspace, and the amount of vacation time he took. He expressed his dissatisfaction to Ken Epstein through letters he wrote to him over the course of several years, however he did not approach Schwartz directly with his concerns. Despite Munks' unhappiness with him, Schwartz was able to function normally in the office and interact appropriately with the remaining staff. Ken Epstein often acted as the mediator between Munk and Schwartz.
Munk was also dissatisfied with both his compensation and Schwartz's refusal to expand the facilities. Munk wanted to change the agreement to alter his compensation or alternatively terminate Schwartz as a partner. At a meeting held in 1999 a proposal was made to allocate the twenty percent of profit in proportion to the collections of the practicing partners. Alternatively, Munk suggested that he should receive a management fee for his managerial duties. Schwartz did not accept either proposal and insisted that the parties submit to mediation pursuant to the agreement. The mediation resulted in an award of a management fee for Munk in the amount of two thirds of one percent of the gross revenue.
On October 28, 2002, Epstein and Munk offered to buy out Schwartz' shares of the practice, or alternatively, to keep him on as a graduated partner while eliminating his management responsibilities and his share of the profits. Epstein and Munk sent Schwartz an offer letter for a buyout which Schwartz refused.
Ken Epstein testified that there was a lot of "bickering and backstabbing" between Munk and Schwartz which affected the morale of the office. He testified that regular partnership meetings ceased around October 2002. In his opinion Munk and Schwartz's inability to get along hindered the growth of the practice and was another reason to terminate Schwartz in light of the fact that Munk was bringing in more money to the practice.
On February 26, 2003 a special meeting of the partners was held. At the meeting, Ken Epstein and Munk voted to terminate Schwartz from the practice. Schwartz was unaware that the purpose of that meeting was to discuss and resolve the dispute about his role in the practice. The termination was "without cause" and ninety days notice was provided. Dissolution was discussed but a judicial dissolution was not sought because the partnership could potentially lose a large sum of money if that action was taken. At the meeting Schwartz was purportedly terminated. Subsequently, Schwartz filed the instant action. As a consequence of this suit, the partnership is operating as it always has, and Schwartz continues to practice and receive compensation in the same manner in which he has since 1991.
On March 24, 2003, Schwartz filed a ten-count complaint against the defendants Family Dental Group, P.C., Peter Munk, D.D.S. and Family Dental Group-Clinton Associates. In count one, Schwartz seeks equitable relief pursuant to General Statutes §§ 34-339 and 34-362(b) and restoration of his partnership status. This is the only count presently at issue.
Schwartz argues that the defendants did not provide just cause for his expulsion from the partnership. He argues that though the defendants assert that he was terminated under section 12(a)(i) of the agreement, which does not require a cause for termination, that section relates only to a partner's voluntary withdrawal from the partnership. Schwartz argues that since he did not leave the practice voluntarily, the defendants must articulate a valid reason for his expulsion from the practice.
Schwartz also argues that though the defendants aver that there was cause to terminate him under section 12(e)(4), for "conduct harmful to the business," they did not provide a valid reason for dismissal under this section. He argues that the only apparent reasons for termination were his reduced work schedule and Munk's dissatisfaction with his role in the management of the practice. He argues that neither of these reasons translate to "conduct harmful to the business." He argues that the profitability of the practice supports his contention that his conduct has not been harmful to the business.
Schwartz further argues that the stated reasons for his termination under 12(e)(4) were submitted to binding mediation which, under Connecticut law, must be given the same force and effect as a binding arbitration. The reasons appear to be Munk's dissatisfaction with his compensation, Schwartz's reduction in hours and his management style, all of which were submitted to mediation. Schwartz argues that the defendants cannot re-visit these issues again as a reason for expulsion. Munk testified that the mediator did not make a decision as to Schwartz's change of schedule.
Schwartz argues that the partners owe each other a fiduciary duty, and both Munk and Epstein have breached their duty of loyalty to him by attempting to expel him from the practice without just cause. Until October 2002, when he received an offer letter for his shares of the practice, he was not aware that Munk was dissatisfied to the point that he wanted him expelled from the practice.
Schwartz argues that the language in the contract permits a reduction in work schedule after five years of practice. He testified that as he understood the agreement, after the first five years, during which he would have paid of his share of the practice, he would be in the same position as the Epsteins who were non-practicing partners. In fact, he argues, the agreement does not prohibit the partners from practicing dentistry elsewhere, after the first five years, if they so choose. He argues, moreover, that the compensation scheme, pursuant to which a partner who works more earns more, bolsters the argument that a potential reduction of work hours was contemplated. Also, according to Schwartz, prior draft agreements support this interpretation. Thus, Schwartz argues he has not breached his agreement by changing his work schedule because he is permitted to do so under the agreement.
Schwartz avers that he will suffer irreparable harm if the expulsion is permitted. He is currently fifty-three years old and has been practicing at the Clinton Street location for twenty years as a result of which he has built up a significant patient base. The agreement contains a non-compete clause which forbids him form working within five miles of the defendant's practice for a period of two years. He argues that this will affect his ability to earn a living as it will be difficult for him to establish a new practice or enter into a new partnership at his age and stage in his career. He argues that this loss cannot be monetarily compensated and that is why he is seeking injunctive relief. Finally, Schwartz argues that granting the injunction would not harm the defendants in that it would maintain its status quo since the partners have been working together for the past sixteen years with increasing profits.
Finally, Schwartz argues that Munk can withdraw from the practice if he is unhappy with the current situation. He also argues that if the parties are dissatisfied with the business they can seek judicial intervention with a possible dissolution and a winding down of the partnership.
The defendants' primary argument is that pursuant to section 12(a)(i) of the agreement, a partner's association with the partnership may be terminated without cause, as long as a ninety-day notice is provided. The defendants argue further that despite their right to terminate without cause, they have, pursuant to section 12(e)(4) of the agreement, provided sufficient cause for termination. Specifically, they argue that Schwartz' conduct has been harmful to the partnership resulting in a breach of the agreement. They argue that his reduction of working hours from full-time to part-time, consequent decrease in partnership profit, his reduction of managerial responsibilities and excess vacation time are all valid reasons for Schwartz' termination with cause. Munk testified that Schwartz did not act in good faith and with fidelity toward the partnership and breached his duty of good faith toward his partners. He added that in his estimation the result of Schwartz' cutting back hours and eliminating Fridays were damages in the amount of about one million dollars.
The defendants reiterate that when terminating a partner without cause, the agreement requires only that they provide ninety-days notice, which they did provide. They argue that to read section 12(a) as applying only to voluntary terminations would be to ignore the language of the provision which does not apply only to voluntary terminations. According to the defendant while section 11 of the agreement deals with termination for death or total disability and section 12(e)(4) is a "for cause" clause which lists reasons for termination, section 12(a)(i) allows termination for any reason including termination at the will of the majority of the partners.
Finally, the defendants argue, that the court must enforce section 12(a)(i) of the agreement as is. According to the defendants, the agreement provides that a partner may be terminated without cause, as long as the decision is made by a majority of the shares. They argue that that is the situation in this circumstance. Alternatively, the defendants assert that sufficient reasons were provided to terminate "with cause."
The court will grant Schwartz injunctive relief and enjoin the defendants from terminating him from the partnership. The court finds that the agreement allows for a reduction in workload after five years for the following three reasons: 1) By virtue of the fact that the agreement has a termination date of 2051, it is obvious to the court that a decrease in activity should be expected; 2) the requirement that partners devote their full professional time to the partnership within the first five years of the partnership necessarily implies that afterwards change is acceptable; and 3) the income structure in the agreement is such that if you work less you earn less but nonetheless you remain a partner.
The court finds that the partnership's termination date implies that a reduction in workload was contemplated. Under section 1 of the agreement, the partnership will terminate on December 31, 2051 unless the parties agree to an extension in writing, or agree to terminate at an earlier time. The court finds that this term in the contract implies that there naturally would be a reduction in the number of hours a partner would devote to the practice over the. years. Clearly, as the three partners get older they will want, or need, to decrease their workload. The agreement is structured to allow them to retain an equitable interest in a business to which they may not necessarily devote their full professional time. According to his testimony, Schwartz believed that after the first five years, even if he were to reduce his workload, he would be entitled to a share of the profits as long as the practice was operating, possibly even up to the year 2051. There is nothing in the agreement to indicate otherwise.
The court also finds that the requirement that partners devote their full professional time to the partnership within the first five years of the partnership necessarily implies that afterwards change is acceptable. Section 10(c) of the agreement states, in part, that "during the first five years of this agreement, each partner who is an individual agrees to devote his full professional time and attention and best efforts to the performance of professional services to the Practice and the administration of the Practice." This implies that after the first five years a decreased workload is acceptable. In the court's opinion this term strongly indicates that the parties contemplated that the partners would devote less time to the practice after fulfilling the requisite five-year term.
Section 10(c) continues: "His duty schedule shall be determined from time to time by agreement of the Partners and he shall provide such emergency, evening and weekend coverage of the Practice as shall be reasonably required by the Partners." The court finds that though Ken Epstein and Munk may have been unhappy with Schwartz's workload, they did not inform him of their concerns until right before the mediation in 1999. Furthermore, as a result of the mediation Munk was awarded a management fee. As Schwartz has testified, he believed he would be entitled to profits up to the year 2051 as long as he worked full-time during the first five years, as per the agreement. In fact, he testified that the five-year full-time term was negotiated so that he could control his own hours and it was agreed that he had the option to become a non-practicing partner once he had paid off his share to buy into the practice. He believed he could devote his full efforts to the partnership without working as a practicing partner if he chose to do so, while retaining his business interest in the practice. The agreement supports this contention.
The court also finds that the income structure is such that the greater number of hours you work, the greater your compensation, however this does not affect partnership status. Section 4(a)(ii) of the agreement provides the income structure of the partnership. Under this section, each practicing partner receives thirty-five percent of the gross collections for professional services rendered to the practice after payment of all laboratory fees and expenses and other payments. Section 4(b) of the agreement deals with the profit margin for each partner and states that after one year of the inception of the partnership, if there is a profit, each practicing partner would receive a minimum of four and a maximum of twenty percent of the collections of the practice. Therefore, the income structure provides that the practicing partner with higher collections would receive a greater amount of the profit and thus a greater income than the other practicing partner. Testimony revealed that at the time of trial Munk was grossing approximately $200,000 more than Schwartz. Munk out-produced Schwartz and thus earned a substantially higher income. The agreement provides for increased compensation for a practicing partner who works more, but the agreement does not specify, beyond the first five years, the number of hours a practicing partner must work in order to comply with the agreement. Though Munk may work more, he is compensated accordingly and there is nothing in the agreement requiring Schwartz to work a specific number of hours. If this is detrimental to the profitability of the practice, the defendants may request a judicial dissolution.
Finally, the court finds that the defendants' argument that section 12(a)(i) of the agreement provides for termination without cause, as long as a ninety-day notice is provided, is not persuasive. The court finds that the provision, standing alone, is unenforceable. The court concludes that no reasonable, educated person would sign an agreement whereby they could be stripped of their equitable interest in a business without a reasonable basis. Simply put, it is something a reasonably prudent person would not do. "When [doctors] pool their assets and skills to practice there must be a mutual expectation of good faith. That men, even highly educated and sophisticated men . . . might knowingly contract in a manner inimical to their interests, is accepted and, when done, the contract must be enforced. However, in the absence of contractual language affirming that intent, it should not be presumed that such men voluntarily elected to hazard their livelihood to the arbitrary whim of their associates . . . Men rarely consent to the role of hostage." Gelder Medical Group v. Webber, 53 App.Div.2d 994, 995, 385 N.Y.S.2d 867 (1976), (Mahoney, J., dissenting), aff'd, 41 N.Y.2d 680, 363 N.E.2d 573, 394 N.Y.S.2d 867 (1977). The court finds that section 12(a)(i) of the agreement does not clearly state that a majority of the partners can terminate another partner without any reasonable basis. Therefore, it is the court's opinion that a reasonable basis for Schwartz's termination must be provided. "A reasonable basis in this case would be one which reasonable partners, at the time they executed the agreement, would have envisioned as grounds for expulsion, such as professional incompetence, dereliction of duty, scandal threatening to the partnership's reputation, or such outrageous personal incompatibility that a reasonable colleague could not tolerate." Id., 996. The court finds that the defendants have not provided a reasonable basis for Schwartz's termination. The defendants have argued that a "for cause" termination is warranted and some of the reasons they provide include Schwartz's reduced schedule, his apparent abandonment of his managerial duties, and that he has exceeded his vacation time by ceasing to work on Fridays. Another main argument is the discord between Schwartz and Munk and the resultant dysfunction in the practice. The court finds that the practice has been able to survive and has been profitable despite the feud between Schwartz and Munk. Therefore there is no reason why they cannot continue to practice in this manner. It finds that the reasons for termination provided by the defendants are not sufficient to strip Schwartz of his equitable interest in the practice. Again, if the parties truly desire to end their association with each other they may petition the court for a judicial dissolution.
The court finds for Schwartz and grants injunctive relief thereby restoring his partnership status.