Medical Associates of Clinton, P.L.C. v. Christopher S.E. Martin, M.D. ( 2014 )

IN THE COURT OF APPEALS OF IOWA
No. 13-1358
Filed July 16, 2014
MEDICAL ASSOCIATES OF
CLINTON, P.L.C.,
Plaintiff-Appellant,
vs.
CHRISTOPHER S.E. MARTIN, M.D.,
Defendant-Appellee.
________________________________________________________________
Appeal from the Iowa District Court for Clinton County, Nancy S. Tabor,
Judge.
Medical Associates appeals from a district court judgment for a contract
action tried at law. AFFIRMED.
David M. Pillers and Ryan F. Gerdes of Pillers & Richmond, DeWitt, for
appellant.
Mark Schwiebert of Schwiebert Law, P.C., Rock Island, Illinois, for
appellee.
Heard by Vogel, P.J., and Doyle and Mullins, JJ. Tabor, J., takes no part.
2
MULLINS, J.
Medical Associates of Clinton, P.L.C., appeals the district court’s judgment
in favor of Dr. Christopher Martin, a former associate physician employed by the
clinic. Medical Associates argues (1) there was insufficient evidence to support
the district court’s finding that the clinic had breached its employment contract
with Martin, and (2) there was insufficient evidence to support the district court’s
finding that the clinic’s breach was the reason for Martin’s damages.
I. BACKGROUND FACTS AND PROCEEDINGS
In November 2006, Martin was completing his surgical residency in
Michigan when he was approached by a recruiter representing Medical
Associates of Clinton, Iowa.1 He subsequently visited the primary clinic in Clinton
to meet and interview with staff members. The clinic also arranged for a realtor
to show Martin and his wife several homes for sale in the Clinton area. Martin
and the staff of Medical Associates got along well, with one doctor referring to
him later as “[a] good surgeon, a good doctor and a good man.” Martin accepted
the clinic’s offer, purchased one of the homes the realtor had shown him, and
relocated his family from Michigan to Iowa.
The employment contract between Medical Associates and Martin was for
a period of two years, to commence on July 9, 2007. After two years of
employment as an associate, Martin would have the opportunity to apply to
purchase an ownership interest in the clinic. The contract stated that
1
Medical Associates is a private clinic jointly owned by its physicians who are full
members. Its primary clinic is located in Clinton, with four satellite clinics in Iowa and
Illinois. As of July 2013, Medical Associates had approximately 320 employees,
including thirty-eight physicians.
3
compensation was to be based on Martin’s pro-rata share of the clinic’s net
profits, the distribution of which was governed by “Policy Bulletin No. 6.”
According to the “Profit Distribution Formula” of Policy Bulletin No. 6, an
associate’s share of the net profits was distributed based on two factors: fifty
percent on the associate’s RVU production2 and fifty percent on the associate’s
professional adjusted charge production.3 During Martin’s first year as an
associate his distribution of the clinic’s net profits was guaranteed by the contract
to be no less than $250,000.
The contract also stated Medical Associates would provide Martin with
insurance coverage, to be included in his salary as taxable income. In the event
Martin terminated his relationship with Medical Associates during his first two
years, the contract stipulated the clinic would purchase tail insurance for Martin,
to be reimbursed by Martin or deducted from any amount the clinic owed him. In
such circumstances, the contract also forbade Martin from practicing medicine
within fifty miles of the city of Clinton for a period of two years.
For the first year of his employment Martin was paid a draw of $10,416.17
bi-weekly. After his first year ended in July 2008, the $250,000 minimum floor on
his salary expired and his compensation began to be calculated solely on his pro-
rata share of the clinic’s net profits, as governed by the formula explained above.
Nevertheless, Martin continued to receive the same bi-weekly draw he had
2
RVU stands for Relative Value Units. It is a system of value measurement for medical
service fees, as published and updated by the Federal Register. In short, it measures
the productivity level of a physician during a particular period of time.
3
A physician’s actual charges for professional medical services rendered as adjusted to
reflect net insurance carrier, third-party pay or discounts and/or reimbursements,
courtesy discounts, other discounts, and any uncollectable accounts.
4
received over the previous year. In September 2008, at the end of his first
quarter since being put on production in July 2008, Martin visited with the
company CFO (Chief Financial Officer) to inquire how his draw and production
were doing. Although every physician at Medical Associates received monthly
reports regarding their personal RVU productivity and adjusted charge
production, most relied on the administration and the CFO to determine their
draw versus their actual income. The CFO at the time of Martin’s employment
was James Holstein, who informed Martin in September that his production was
on track for him to receive at least the same income as the previous year. Martin
made the same inquiry in November, to which Holstein again told him everything
was fine. Finally, when Martin asked Holstein in January about his year-end
bonus, he was informed by Holstein that his account was overdrawn $48,000.
In response, Martin was told by a senior physician that the clinic would
need to decrease his bi-weekly draw “slightly” until the $48,000 was paid back.
However, his next draw check was the same as before, and he was soon
informed his account had become $68,000 overdrawn and as a result his draw
would be reduced by fifty percent. Concerned he would be unable to meet his
family’s living expenses on this reduced draw compensation, in February 2009
Martin handed in his resignation, to take effect in July 2009 when his two-year
contract was scheduled to expire. After accepting his resignation, Medical
Associates gradually stopped giving Martin referrals and removed the staff and
nurses assigned to him, before eventually reducing his draw to zero. This
essentially forced Martin to leave the clinic in May 2009. Due to the contract’s
5
competition clause forbidding him from practicing medicine within fifty miles of
Clinton for two years, Martin and his family sold their home and left the city. He
purchased tail malpractice insurance on his own in the amount of $52,782.
In August 2011, Medical Associates brought suit against Martin alleging
breach of contract, unjust enrichment, and amounts due under an open account.
The clinic alleged Martin had “with[drawn] funds in excess of the predetermined
formula,” in the amount of $108,445.75. Martin counterclaimed, alleging the
clinic itself had breached its contract with Martin by miscalculating his production
and erroneously reporting he had overdrawn his account. Martin sought general
and consequential damages as a result of the clinic’s alleged breach. After a
bench trial in July 2013, the district court dismissed Medical Associates’s claims
and ruled for Martin. The court held Medical Associates breached the contract
by failing to correctly calculate Martin’s income according to the language in the
contract and awarded damages to Martin.
The district court found several factors that demonstrated a contractual
breach by Medical Associates. First, there was no dispute Holstein had
erroneously deducted insurance costs from Martin’s income, instead of adding it
to his gross income as the contract required. James Dobbyn, the clinic’s current
CFO (Holstein had resigned shortly after Martin left), also confirmed Holstein had
calculated Martin’s compensation using a different ratio of RVU production and
adjusted charges than the ratio stipulated in Martin’s contract.4 In addition, the
4
While Martin’s contract required his distribution of the clinic’s net profits to be
determined by a calculation of 50% RVU production and 50% professional adjusted
charge production, in 2008 the clinic’s membership changed the formula to 25% RVU
6
court noted the contract did not contain any language authorizing a fifty percent
reduction of a physician’s draw or the proper procedure for overdrawn associates
to repay the clinic.
Furthermore, Alan Reusch, Martin’s expert,5 testified at trial that Holstein,
when calculating Martin’s distribution of the net profits, had erroneously
compared only five months of Martin’s RVU production to twelve months of
production by the entire clinic. According to Reusch, the result reduced Martin’s
RVU production by half and, when coupled with the insurance payments
wrongfully charged to Martin, caused Holstein to mistakenly believe Martin had
overdrawn his account. Reusch’s calculations further showed Martin had in fact
been underpaid by the clinic. The court found Reusch’s testimony convincing
and “the most appropriate considering the plain language of the employment
contract that applied to Dr. Martin.” The court also found the clinic’s removal of
support staff from Martin’s service and reducing Martin’s salary to zero to be a
breach of good faith and fair dealing. The court concluded that “Dr. Martin did
not breach his employment agreement by withdrawing funds in excess of the
predetermined formula, did not get unjust[ly] enriched and does not owe plaintiff
on an open account.” The court awarded Martin $13,819 for income owed him
production and 75% professional adjusted charge production. This new formula was
used to determine Martin’s income rather than the formula in his contract. The trial court
noted the difference but did not attach great weight to its effect on the calculations:
“While this factor may not be major in the overall calculations it is indicative of how Mr.
Holstein did not follow the contract provisions as they pertained to Dr. Martin’s written
agreement as an associate physician.”
5
Reusch is a CPA (certified professional accountant)licensed to practice in Iowa and
Illinois, with over twenty years of accounting experience involving medical and
professional practices.
7
by the clinic based on Reusch’s calculations, $15,111.90 in accounts receivables
that had not been credited to him since his departure, $16,600 for “the delay in
getting the home sold and the mortgage, insurance and real estate taxes paid
during that period,” and $52,782 for reimbursement of the tail insurance
purchased by Martin. Medical Associates filed a timely notice of appeal
challenging the sufficiency of the evidence in support of the court’s verdict.
II. SCOPE AND STANDARD OF REVIEW
This appeal is for a contract action tried at law. We review law cases of
the district court for correction of errors at law. Iowa R. App. P. 6.907. Factual
findings of the district court are binding if there is substantial evidence supporting
the verdict. Iowa Mortg. Ctr., L.L.C. v. Baccam, 841 N.W.2d 107, 110 (Iowa
2013). Evidence is considered substantial if a reasonable mind would accept it
as adequate to reach the conclusion of the district court. Smith v. State, 845
N.W.2d 51, 54 (Iowa 2014). “‘[T]he ultimate question is whether [the evidence]
supports the finding actually made, not whether the evidence would support a
different finding.’” Fischer v. City of Sioux City, 695 N.W.2d 31, 34 (Iowa 2005)
(quoting Raper v. State, 688 N.W.2d 29, 36 (Iowa 2004)). This determination is
made in the light most favorable to the district court’s judgment. Chrysler Fin.
Co. v. Bergstrom, 703 N.W.2d 414, 418 (Iowa 2005).
III. BREACH
Medical Associates alleges there is insufficient evidence to support the
district court’s holding that the clinic incorrectly applied the contract’s formula and
miscalculated Martin’s compensation account. The clinic points to the language
8
under “gross professional fee revenue” in Policy Bulletin No. 6, which states that
“regular accounting principles utilized by the membership” apply to its calculation.
Medical Associates argues it follows from this language that “all calculations
used in determining draws are based upon the accounting principles utilized by
the membership,” and therefore “[w]ithout an accounting standard or a relevant
contract term establishing the proper method, Martin failed to establish Medical
Associates miscalculated Martin’s compensation.”
In response, Martin contends error was not properly preserved on this
issue because Medical Associates failed to raise any relevant objections or
arguments at trial. However, as Medical Associates here is challenging the
sufficiency of the evidence at trial rather than the admissibility of said evidence,
error has been properly preserved for the sake of this appeal pursuant to rule
1.904(2) of the Iowa Rules of Civil Procedure.
To prove a breach of contract, a party must show:
(1) the existence of a contract; (2) the terms and conditions of the
contract; (3) that it has performed all the terms and conditions
required under the contract; (4) the defendant’s breach of the
contract in some particular way; and (5) that plaintiff has suffered
damages as a result of the breach.
Molo Oil Co. v. River City Ford Truck Sales, Inc., 578 N.W.2d 222, 224 (Iowa
1998). “A party breaches a contract when, without legal excuse, it fails to
perform any promise which forms a whole or a part of the contract.” Id. Contract
interpretation, that is the meaning of contractual language, is a legal issue for the
court to decide unless the interpretation is dependent on extrinsic evidence. Id.“The cardinal rule of contract interpretation is to determine what the intent of the
9
parties was at the time they entered into the contract.” Pillsbury Co. v. Wells
Dairy, Inc., 752 N.W.2d 430, 436 (Iowa 2008). The words of the contract are “the
most important evidence” in this determination. Id. “When there are ambiguities
in the contract, they are strictly construed against the drafter.” Dickson v.
Hubbell Realty Co., 567 N.W.2d 427, 430 (Iowa 1997).
At trial, Martin and Medical Associates sparred over the correct application
of the compensation formula found in the employment contract. The contract
clearly states compensation is calculated by applying a combination of a
physician’s RVU production and adjusted charges against the overall clinic’s net
professional income. However, it is silent as to whether the RVU production and
charges should be compared against the clinic’s numbers for the same time
periods. At trial, Martin’s expert demonstrated Medical Associates had compared
five months of Martin’s RVU production and adjusted charges against an entire
year of the clinic’s income. Martin contended this calculation was erroneous and
a breach of the contract. Medical Associates denied its calculation was wrong or
unfair to Martin.
Martin’s expert, Alan Reusch, has been a CPA for over thirty years. He
spends “sixty to seventy percent” of his time working with professional practices,
primarily physicians, and is familiar with compensation procedures based on
RVUs and adjusted professional charges. Reusch was provided with Medical
Associates’s records regarding Martin’s compensation account. At trial he
demonstrated in detail, using the clinic’s own figures and documents, why the
10
clinic’s calculations were incorrect and how they result in a misrepresentation of
Martin’s production and charges.6
Medical Associates argues its “accounting principles” control the income
calculations in the contract and that Reusch’s calculations are invalid because
they are not based upon these principles. However, nowhere in the contract, the
evidence at trial, or Medical Associates’s brief is there an explanation of what
“the accounting principles utilized by the membership” are. The record clearly
establishes Reusch used the formula from the express terms of the contract and
the numbers collected by the clinic, applied his longtime experience with
accounting standards customarily utilized in medical practices, and determined
Medical Associates had miscalculated Martin’s draw.
Our standard in reviewing the record is to determine whether substantial
evidence supports the verdict. Smith, 845 N.W.2d at 51. In other words,
whether a reasonable mind would accept the evidence as adequate to support
the verdict. Id. Even if we were to accept the clinic’s reading that “all
calculations used in determining draws are based upon the accounting principles
utilized by the membership,” it would not detract from the sufficiency of either
Reusch’s testimony or the overall evidence in support of the district court’s
6
Medical Associates was unable to explain with certainty the calculation methods used
by its then-CFO, James Holstein, as he had been voted out by the clinic’s membership
shortly after Martin left and did not appear before the district court at trial. Holstein’s
replacement, James Dobbyn, speculated at trial that his predecessor had compared five
months of Martin’s production to the entire clinic’s annual income because Martin’s five
months were from the latter half of the year, and traditionally the clinic’s income in the
back half of the year was greater than the front half. The record showed however that
the actual income from the time period in question, 2008-2009, was the same in the last
quarter of 2008 as the first quarter of 2009.
11
finding that Medical Associates breached its contract with Martin. We are
convinced by the record here that substantial evidence supports the court finding
a breach of contract by Medical Associates.
In addition to Reusch’s testimony that the clinic erroneously compared five
months of Martin’s production to an entire year of the clinic’s production, Medical
Associates did not challenge Martin’s assertion that it incorrectly deducted
insurance costs from Martin’s income, as the contract expressly states the costs
are to be included as taxable income. Furthermore, neither did the clinic deny it
had calculated Martin’s draw using a different ratio of RVU production and
adjusted charges than the ratio stipulated by the contract. Based on this record,
we find the district court did not err in ruling that Medical Associates failed to
correctly calculate Martin’s income and unpaid accounts receivables according to
the contract. Accordingly, we affirm the judgment for breach of contract and the
award of general damages of $13,819, the amount Reusch calculated Martin was
underpaid as a result of Medical Associates’ miscalculations, and $15,111.90 in
accounts receivables that had not been credited to him since his departure.
IV. CONSEQUENTIAL DAMAGES
Medical Associates next contends there is insufficient evidence of
causation to support the district court’s award of consequential damages totaling
$69,382. The clinic argues it should not have to reimburse Martin for expenses
incurred by Martin while his home was on the market or the cost of tail insurance
purchased by Martin after he left the clinic.
12
An injured party is “generally entitled to be placed in as good a position as
he or she would have occupied had the contract been performed.” Midland Mut.
Life Ins. Co. v. Mercy Clinics, Inc., 579 N.W.2d 823, 831 (Iowa 1998). Any
damages awarded must relate to the nature and purpose of the contract itself.
Id. Damages cannot be speculative:
[D]amages based on breach of a contract must have been
foreseeable or have been contemplated by the parties when the
parties entered into the agreement. Whether the damages were
reasonably anticipated by the parties when the contract was formed
may be discerned from “the language of the contract in the light of
the facts, including the nature and purpose of the contract and
circumstances attending its execution.”
Kuehl v. Freeman Bros. Agency, Inc., 521 N.W.2d 714, 718 (Iowa 1994)
(citations omitted) (quoting 22 Am. Jur. 2d Damages § 460, at 541 (1988)).
Damages may also be considered foreseeable if they arise from “the ordinary
cause of events” or “as a result of special circumstances . . . that the party in
breach had reason to know.” Royal Indem. Co. v. Factory Mut. Ins. Co., 786
N.W.2d 839, 847 (Iowa 2010) (quoting Restatement (Second) of Contracts § 351,
at 135 (1981)).
In considering whether any award of consequential damages was
appropriate, we must determine the nature of Martin’s voluntary resignation from
the clinic. Medical Associates contends Martin is not entitled to an award of
consequential damages arising from his resignation because it was “voluntary.”
While this may be true in a technical sense, the record shows Martin would not
have resigned from the clinic but for the breach of the contract by Medical
Associates. Martin resigned only after learning his draw would be reduced by
13
fifty percent, a result of the clinic miscalculating his compensation. As Martin
believed the adjusted draw would not provide him adequate compensation to
meet the needs of his family, he decided to resign and seek other employment.
Based on this record, we find his resignation was not “voluntary” but instead was
“forced” by the clinic’s breach of the contract. As a result, the circumstances of
Martin’s resignation do not preclude him from recovering consequential
damages.
In order to compensate Martin for the expenses he incurred pending the
sale of his home in Clinton, the district court awarded him damages for the
mortgage, insurance, and real estate taxes he paid while waiting for the home to
sell. Medical Associates alleges there is a lack of substantial evidence to find its
breach of contract caused these damages. The clinic contends the
miscalculation of Martin’s draw is not sufficiently related to the sale of his house,
and that such expenses were “neither foreseeable nor contemplated by the
parties when the agreement was signed.” Finally, Medical Associates argues
there is no evidence Martin would have become a member of the clinic absent
the breach, and thus “it cannot be assumed the sale of the house would not have
occurred without the breach of contract.”
The contract’s no-compete clause forbade Martin from practicing medicine
within fifty miles of the city of Clinton “[u]pon expiration of [the] Agreement or
termination of [his] employment with Medical Associates.” Because Martin’s
resignation was a direct result of the clinic’s miscalculation of his draw, the
consequence that he sell his home was caused by Medical Associates’s breach
14
of the contract. The sale of his home was a reasonably foreseeable
consequence of the clinic’s breach, which effectively forced Martin out of the
clinic. The no-compete clause was drafted by the clinic and is clearly expressed
within the contract. The clinic had previously enforced similar clauses against
former employees. In addition, there is no evidence to support a conclusion that
Martin would not have bought into the membership of Medical Associates but for
the clinic’s breach of the contract. Thus, we find substantial evidence supporting
the district court’s holding that the sale of Martin’s home was a reasonably
foreseeable result of the breach by Medical Associates.
Medical Associates argues even if the breach had not occurred Martin
would still be responsible for paying these costs as he would most likely still
occupy the home. This argument is unpersuasive. Martin was incurring costs on
an empty house, not a home he was occupying. And if Martin were still
occupying the home in Clinton and working at Medical Associates, it follows he
would have been receiving his salary from the clinic as well. As previously noted,
in order for an injured party to recover, damages based on a breach of contract
must have been foreseeable at the time the parties entered into the contract.
See Kuehl, 521 N.W.2d at 718. Because the sale of Martin’s home was a natural
and foreseeable consequence of Medical Associates’s breach, we affirm the
district court’s award of consequential damages for expenses incurred by Martin
in the sale of his home.
Medical Associates further alleges the purchase of tail insurance by Martin
is not a consequence of its breach. The clinic contends the contract expressly
15
requires Martin to reimburse it for tail insurance if he terminates his relationship
with the clinic before the end of the two-year contract. Medical Associates
argues Martin’s decision to resign, rather than the clinic’s breach, caused him to
purchase tail insurance.
As we have already established that Martin’s resignation was caused by
the contractual breach by Medical Associates, it follows that Martin’s purchase of
tail insurance was a direct consequence of the breach. The tail insurance clause
in the contract is clearly expressed, and it would have been readily apparent and
contemplated by both parties when they entered into the contract. See id. The
damages here were thus reasonably foreseeable. We therefore find substantial
evidence supporting the district court’s award for the cost of purchasing tail
insurance.
V. CONCLUSION
The record shows substantial evidence that Medical Associates failed to
correctly calculate Martin’s income according to the terms of the contract.
Accordingly, we affirm the district court’s finding that the clinic breached its
contract with Martin, and affirm the award of damages for unpaid compensation.
Because certain expenses associated with the sale of Martin’s home and his
purchase of tail insurance were direct and reasonably foreseeable results of
Medical Associates’s breach, consequential damages for these expenses
incurred by Martin should be awarded, and we find substantial evidence supports
the findings by the district court.
AFFIRMED.