Kenneth D. Parrish Dmd, ph.D., P.S.C. v. Robert Schroering Dmd ( 2021 )

RENDERED: APRIL 16, 2021; 10:00 A.M.
TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NOS. 2019-CA-0634-MR
AND
2019-CA-0692-MR
KENNETH D. PARRISH,
DMD, PH.D., P.S.C.; AND
KENNETH D. PARRISH,
DMD, PH.D. APPELLANTS/CROSS-APPELLEES
APPEAL AND CROSS-APPEAL FROM JEFFERSON CIRCUIT COURT
v. HONORABLE ANN BAILEY SMITH, JUDGE
ACTION NO. 11-CI-04100
ROBERT SCHROERING, DMD;
AND ADVANCED IMPLANT
CENTER, P.S.C. APPELLEES/CROSS-APPELLANTS
OPINION
REVERSING AND REMANDING APPEAL NO. 2019-CA-0634-MR
AND AFFIRMING CROSS-APPEAL NO. 2019-CA-0692-MR
** ** ** ** **
BEFORE: CLAYTON, CHIEF JUDGE; GOODWINE AND KRAMER,
JUDGES.
CLAYTON, CHIEF JUDGE: Kenneth D. Parrish DMD, Ph.D, P.S.C., and
Kenneth D. Parrish DMD, Ph.D, (“Parrish”) bring this appeal from the Jefferson
Circuit Court’s trial order and judgment in a lawsuit against Robert Schroering,
DMD, and Advanced Implant Center, P.S.C. (“Schroering”). Parrish and
Schroering were business partners in a dental implant practice. When Schroering
sought to retire in 2009, a lengthy and complex legal dispute ensued, culminating
in a trial in 2018. The primary issue on appeal concerns the buyout price Parrish
was required to pay to Schroering for his share of the practice under the terms of
their Partnership Agreement (“Agreement”). The Agreement provided for the
price to be based on the average of the closest two of three expert evaluations. The
jury found that the two closest appraisals, which when averaged resulted in a
negative value, were based on a demonstrable mistake of fact and awarded
$787,000 to Schroering. Parrish argues that the valuation method set forth in the
Agreement was unambiguous and binding and the trial court erred in allowing the
appraisals to be assessed by the jury. On cross-appeal, Schroering argues that the
trial court erred in allowing the jury independently to calculate the buyout price
rather than adopting the price set by the third appraiser. He further argues that the
trial court erred in granting a directed verdict on his claims of breach of good faith
and fair dealing and breach of fiduciary duty. Other disputed issues include the
amount of attorney’s fees, pre- and post-judgment interest, and a monthly
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allocation specified in the Agreement. Having reviewed the record and the
arguments of counsel, we reverse and remand Appeal No. 2019-CA-0634-MR and
affirm Cross-Appeal No. 2019-CA-0692-MR.
Background
In 1993, Schroering started a dental practice, Advanced Implant
Center, P.S.C., specializing in dental implant surgery and periodontics. In 2004,
Schroering advertised for an associate and ultimately hired Parrish, who became a
partner in 2005. Parrish purchased fifty percent of the practice for $800,000 and
assumed some short-term debt for approximately $180,000. Their partnership was
governed by the lengthy (82-page) and complex Agreement.
Article 8 of the Agreement contains the provisions governing the
retirement of a partner. A partner wishing to retire is required to provide two
years’ written notice. At the end of that period, the remaining, non-retiring party is
immediately required to purchase all “Practice Interest” of the retiring party.
Section (E) of Article 8, which is entitled Buyout Prices (Including Revalued
Buyout Prices) Defined, sets the Buyout Price to be used to purchase the retiring
partner’s Practice Interests at $975,000. Additionally, the retiring partner is
entitled to recover the fair market value of his interests in any Practice Interest
acquired after the date of retirement, as determined by a certified public accounting
firm. The final two sentences of the paragraph provide as follows: “Further, the
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fair market value shall be determined without consideration of any ‘marketability’
or ‘control’ or similar discount. Finally, the growth or increase in value of the
goodwill of the practice or Partnership shall not cause any increase in any Buyout
Price.”
A key point of contention in the subsequent litigation was whether
this ban on the consideration of goodwill applies only to the calculation of the fair
market value of the increase in Practice Interest acquired after retirement or if it
applies to any Buyout Price, including the Revised Buyout Price detailed in the
next paragraph.
The next paragraph states: “In supplement, and limitation” to the
foregoing provisions of Section (E), “it is further agreed that any Buyout Price, as
to any retiring Party, and its Shareholder, provided for hereinabove” shall be
disregarded if the retiring party does not sell its Practice Interests to a third party.
“In such event, the number of Parties and Shareholders shall be reduced, resulting
in an unanticipated reduction in the value of the practice and Partnership,
necessitating a revaluation of the Buyout Price[.]” In such an eventuality, the non-
retiring party can choose to pay the Buyout Price of $975,000 or have the Buyout
Price revalued. To arrive at the Revalued Buyout Price, the parties can agree on a
single appraiser to revalue the practice or they can each retain their own appraiser
to perform a valuation. These two appraisers will choose a third appraiser to
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perform a third valuation. The two closest appraisals of the three will be averaged
to arrive at the Revalued Buyout Price. The Agreement describes the task of the
appraisers as follows:
Such Appraiser, if mutually agreed upon and selected,
and all of such Appraisers, if three (3) such Appraisers
are so selected, shall utilize all documentation which may
be deemed appropriate, as well as the expertise and
experience of such Appraiser, or Appraisers, as well as
the written and oral opinions and statements of others, as
such Appraiser, or Appraisers, may deem appropriate,
and may also utilize, rely upon, and consider published
information, as such Appraiser, or Appraisers, may
determine to be applicable, and, shall consider the effect
of associates practicing in the practice, and especially any
associates retained, employed, or otherwise engaged to
practice in the practice, for the Partnership, or any of the
Parties, within ninety (90) days of the retirement of the
retiring Party, and its Shareholder, or otherwise retained,
employed or engaged, specifically to replace the retiring
Party, and its Shareholder, and, also shall especially
consider the future earning potential, from the practice,
as to the other Parties and Shareholders, subsequent to
the retirement of the retiring Party and its Shareholder.
If the non-retiring party does not immediately pay the retiring party
the Buyout Price or the Revalued Buyout Price, the Agreement provides the
retiring party with “the right immediately monthly thereafter to continue to receive,
as sole consideration and compensation, the retiring Party’s Share of the
Ownership Allocation . . . hereinafter called ‘Monthly Share,’ which shall continue
to be paid, for a period of ten (10) years subsequent to the date of the retirement.”
The “Ownership Allocation” is defined in the Agreement as fifteen percent of the
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total Practice Collections; hence, the retiring party in this case would receive 7.5
percent of the total Practice Collections. The Agreement specifies that the retiring
party will continue to receive the Monthly Share either until the relevant buyout
price is paid or ten years have elapsed.
On June 9, 2009, Schroering gave written notice to Parrish that he
planned to retire, with a retirement date of June 9, 2011, in accordance with the
Agreement. Schroering continued working in the practice and sought interested
buyers for his interest. According to Schroering, Parrish discouraged and rejected
these potential buyers. The relationship between Schroering and Parrish
deteriorated, and Schroering decided to rescind his retirement notice. He sent
Parrish a notice of rescission on December 9, 2009 and continued practicing in the
partnership.
Then, on January 24, 2011, Schroering sent Parrish a second notice of
retirement, which would have made his effective retirement date January 24, 2013.
He continued to seek a purchaser for his interest in the partnership. According to
Schroering, Parrish persisted in obstructing his candidates by treating them as
inferiors and assigning them all the “lower work.”
On March 28, 2011, Parrish notified Schroering that he intended to
hold him to the June 9, 2011 retirement date. According to Schroering, at no time
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before that had Parrish informed him that he would not accept the notice of
rescission.
On June 13, 2011, Schroering filed a complaint against Parrish in
Jefferson Circuit Court, seeking an accounting of the inventory of the practice.
The complaint claimed that Parrish had rejected each potential third-party
purchaser and, consequently, the method set forth in the Agreement (of using an
appraiser or appraisers) would be used to calculate a Revalued Buyout Price. The
complaint claimed that Parrish had prevented Schroering from conducting a
physical inventory of their offices, and it sought a restraining order or temporary
injunction to prevent Parrish from removing any assets from the offices.
Not surprisingly, Schroering and Parrish were unable to agree on a
single appraiser and embarked upon the three-appraiser process prescribed by the
Agreement. Schroering hired Harold Martin; Parrish hired David Fister. Fister and
Martin, at the recommendation of Martin, selected James Lloyd as the third
appraiser. The appraisers began the evaluation process in February 2012 and
produced their final reports in July 2013.
There was a wide disparity in the valuations due to the different
approaches used by the appraisers. Parrish’s evaluator Fister and the third
appraiser Lloyd used the asset approach of valuation, which calculates the
difference between the tangible assets and liabilities of the business to determine
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its value. Fister valued Schroering’s fifty-percent interest in the practice at
negative $77,179 and Lloyd valued it at $61,000. The reason for the discrepancy
was that Fister subtracted over $171,000 in prepayments that Schroering had
collected from patients from the value because the practice would either need to
refund the payments or perform the work for free.
Schroering’s appraiser, Martin, used an income approach to appraise
the practice at $1,207,000. The income approach includes intangible assets and
also considers future income to arrive at a value. Martin also provided an
alternative appraisal using the asset approach to arrive at a value of $367,000.
Under the terms of the Agreement, the two closest appraisals, those of
Fister and Lloyd, would be averaged, resulting in a Revalued Buyout Price of
negative $8,089.50.
Both Fister’s and Lloyd’s reports cited as guidance for their valuations
the provision from Section 8(E) of the Agreement, discussed above, which states
that the fair market value of any practice interest
shall be determined with consideration of any financing
or indebtedness secured thereby, subject thereto, or
otherwise allocable thereto, by a certified public
accounting firm to be selected by the parties, which shall
be binding on the parties and shareholders. Further, the
fair market value shall be determined without
consideration of any “marketability” or “control” or
similar discount. Finally, the growth or increase in value
of the goodwill of the practice or Partnership shall not
cause any increase in any Buyout Price.
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Martin’s report was accompanied by a letter which discussed the
disparity in the appraisals, stating in part as follows:
In reaching an opinion of value . . . we considered the
terms of the S&P [Schroering and Parrish] Partnership
Agreement. However, because certain terms of the S&P
Partnership Agreement are vague, the three appraisers
interpreted the S&P Partnership Agreement differently.
This resulted in the appraisers making different
assumptions and applying different valuation approaches
and methodologies which ultimately led to materially
different conclusions.
We understand that the other appraisers have elected to
use an asset approach for purposes of valuing S&P. In
order to have a common basis of comparison with the
other appraisers and to meaningfully participate in the
valuation process, we are presenting our opinion of the
value of S&P based on the asset approach. Using the
asset approach, the fair market value of AIC’s [Advanced
Implant Center] 50% ownership in S&P as of June 9,
2011, is $367,000. However, we should note that the
estimate of value derived using an asset approach only
considers the value of the Practice’s net tangible assets
and excludes consideration of the value of any intangible
assets such as the value of the relationships with referring
dentists, the assembled workforce, and practice goodwill.
Further, the value derived under the asset approach fails
to recognize the substantial income that has been realized
by Dr. Parrish since Dr. Schroering’s retirement and the
future income that Dr. Parrish will continue to receive.
Finally, the value derived using the asset approach results
in an anomaly when this value is compared to the amount
originally paid by Dr. Parrish to buy a 50% interest in
S&P, approximately $800,000, as well as the value
assigned to a 50% interest by the S&P Partnership
Agreement, $975,000.
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Notwithstanding the foregoing, given the terms of the
S&P Partnership Agreement and the actual
characteristics of the Practice, the most appropriate
approach for valuing S&P should have been the income
approach. Using the income approach, the fair market
value of AIC’s 50% ownership interest in S&P as of June
9, 2011, is $1,207,000. This value includes the value of
intangible assets and, further, considers the future income
that will be realized by the Practice.
The litigation meanwhile continued and expanded in scope.
Schroering amended his complaint to add claims for fraud, breach of fiduciary
duties as a partner, breach of the implied covenant of good faith and fair dealing,
breach of contract, defamation, unjust enrichment, and damage to property. In his
third amended complaint, filed on September 11, 2013, Schroering alleged Parrish
had a scheme for improperly influencing the value of the partnership and directly
challenged the appraisals on that basis. Parrish filed numerous counterclaims and
amendments, alleging breach of contract, conversion, fraud and intentional
misrepresentation, and unjust enrichment. On May 23, 2016, Schroering filed a
fourth amended complaint adding a claim to set aside the Fister and Lloyd
appraisals.
Parrish and Schroering filed cross-motions for summary judgment
regarding the proper valuation method and final valuation of the practice, both of
which the trial court denied. One of the issues raised was whether the Agreement
required the appraisers to factor into their appraisals the income-producing effect
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of any associates or of the practice’s future earning potential. The trial court
concluded that the Agreement only required the appraisers to “consider” these
factors. It further stated: “It is indisputable that Fister and Lloyd considered
Martin’s opinion on this issue and concluded, reasonably or not, that the asset
approach to valuation was called for. Lloyd and Fister stated specific reasons
supporting their valuation approach, reasons that create genuine issues of material
fact for the jury to decide and precluding the Court from disagreeing with their
conclusions as a matter of law.” Record (“R.”) at 5690.
Parrish thereafter petitioned the Court of Appeals for a writ to prohibit
the circuit court from enforcing its order denying the summary judgment and
allowing the question of the value of the dental practice to go to the jury. The
petition sought to compel the circuit court to enter an order enforcing the terms of
the Agreement designating how that value was to be determined on the grounds
that it was a binding, enforceable arbitration agreement. Parrish v. Smith, No.
2016-SC-000582-MR, 2017 WL 3632911, at *1-2 (Ky. Aug. 24, 2017). This
Court denied the writ, and the Kentucky Supreme Court affirmed, stating in part:
By the plain language of the Agreement [referring
specifically to Section 8(E)], the parties agreed to be
bound by the average amount of the appraised values, but
in no way did the parties agree that this valuation would
constitute a final arbitration, or to submit any dispute to
arbitration, especially regarding issues other than the
revalued buyout price.
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. . . An agreement to abide by the averaged
appraisal value of the two closest appraisers is
fundamentally different than the appraisers acting as
binding arbitrators of the Agreement. . . .
. . . Since this Agreement does not contain a
binding arbitration clause, Parrish has not established that
the Court of Appeals and circuit court acted erroneously
in allowing this question of valuation to go to a jury.
Id. at *3.
Thus, the Kentucky Supreme Court ruled that while the parties agreed
to be “bound” by the average of the two closest appraisals, they did not agree that
this amount constituted a final arbitration and, consequently, a jury could be
permitted to review the appraisals. Accordingly, the trial court ruled, in an order
entered on January 26, 2018, that while the appraisals by Fister and Lloyd were
valid and binding under the terms of the Partnership Agreement, they could be set
aside if a jury found they were reached “arbitrarily, dishonestly, or under a
demonstrable mistake of fact.” R. at 8196.
A trial was held from August 28 through September 10, 2018, during
the course of which the trial court entered a directed verdict against Schroering on
his claims of breach of fiduciary duty, fraud, and breach of the covenant of good
faith and fair dealing. According to Schroering’s expert witness Mark Dietrich,
Fister and Lloyd’s asset-based approach led them to ignore the value of various
intangibles such as future income, the referral base, the trained workforce, a non-
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compete agreement from Schroering, and most significantly, the practice’s
goodwill. The parties moved for directed verdicts on the issue of whether the
Partnership Agreement prohibited the appraisers from considering the value of
goodwill in determining the Revalued Buyout Price. On September 10, 2018, the
trial court entered an order interpreting Section 8(E). It found that no ambiguity
existed in the provision and held that the goodwill limitation applied only to
determining the fair market value of any Practice Interest component of the
“Buyout Price” of $975,000 and did not apply to the Revalued Buyout Price.
The trial court’s order states in part:
This conclusion is firmly supported by the first sentence
in the very next paragraph, which contains a “supplement
and limitation, to the foregoing provisions of this E of
this Article 8,” to the extent that “any Buyout Price . . .
shall be disregarded, if all, or substantially all, of”
Schroering’s “Practice Interests are not sold to a third
party . . .” When no sale occurs, which is what happened
in this case, this provision “necessitate[es] a revaluation
of the Buyout Price applicable to the retiring . . .
Shareholder . . . at the election of the other . . .
Shareholder.” The provisions that continue in this same
paragraph, for a full two pages, dictate the revalued
appraisal procedure that has played out in this case.
Nowhere in these revalued appraisal provisions are the
“Appraisers” prohibited from valuing goodwill. To the
contrary, these provisions give the Appraisers great
leeway, only requiring them, among other things, to
“utilize all documentation which may be deemed
appropriate, as well as the expertise and experience of
such Appraisers” and to “consider the effects of
associates practicing in the practice . . . and” to
“especially consider the future earning potential from the
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practice, as to the other . . . Shareholders.” The fact that
no goodwill limitation is placed on the Appraisers in the
revalued appraisal provisions inexorably leads the Court
to conclude that the Partnership Agreement intended no
such limitation.
The Court fully understands that . . . Fister and Lloyd
interpreted the Partnership Agreement differently and
rendered their appraisals in accordance with their
interpretation of it, at least in part. Whether they arrived
at this interpretation arbitrarily or due to a demonstrable
mistake of fact is for the jury to decide.
The jury instructions incorporated this holding and provided in pertinent part as
follows:
INSTRUCTION NO. 4
The Court has ruled that Section 8, Paragraph E of the
Partnership Agreement does not limit or otherwise
prohibit an appraiser from valuing the goodwill of the
Partnership when conducting its valuation of the revalued
buyout price. In rendering your verdicts to Instruction
No. 5 and Instruction No. 6, in addition to the other
evidence presented in this case you may consider
whether Mr. Fister and Mr. Lloyd interpreted this
contract provision arbitrarily or due to a demonstrable
mistake of fact.
INSTRUCTION NO. 5
The appraisals of the revalued buyout price of the
practice prepared by Mr. Fister and Mr. Lloyd are
binding upon Dr. Schroering and Dr. Parrish unless you
believe from the evidence that Mr. Fister and Mr. Lloyd
arrived at their conclusions in their appraisals arbitrarily.
The appraisers would have acted arbitrarily if their
actions were clearly erroneous, and clearly erroneous
means unsupported by substantial evidence. Substantial
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evidence means evidence of substance and relevant
consequence having the fitness to induce conviction in
the minds of reasonable people.
Do you believe from the evidence that Mr. Fister and Mr.
Lloyd arrived at the conclusions in their appraisals
arbitrarily?
The jury answered this instruction in the negative.
INSTRUCTION NO. 6
The appraisals of the revalued buyout price of the
practice prepared by Mr. Fister and Mr. Lloyd are
binding upon Dr. Schroering and Dr. Parrish unless you
believe from the evidence that Mr. Fister and Mr. Lloyd
arrived at the conclusions in their appraisals due to a
demonstrable mistake of fact. To constitute a
demonstrable mistake of fact, the mistake must be of
such character that a reasonable appraiser would correct
it when it is called to his attention.
Do you believe from the evidence that Mr. Fister and Mr.
Lloyd arrived at the conclusions in their appraisals due to
a demonstrable mistake of fact?
The jury answered this instruction in the affirmative.
INSTRUCTION NO. 7
If you answered yes to either Instruction No. 5 or
Instruction No. 6, or both, you shall disregard the
appraisals of Mr. Fister and Mr. Lloyd and determine
from the remaining evidence the amount of the revalued
buyout price of the practice in an amount not to exceed
$1,207,000. In arriving at this amount, in addition to the
other evidence presented in this case you may consider
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whether the value of the goodwill of the practice is to be
included in the revalued buyout price.
The jury found the amount of the revalued buyout of the practice to be $787,000.
Following the trial, Schroering filed a fifth amended complaint
seeking attorney’s fees under the Agreement. The parties briefed the issue, and the
trial court awarded $463,623.98 in attorney’s fees to Schroering. The trial court
then entered a judgment against Parrish totaling $1,250,624.98. This appeal and
cross-appeal followed.
Analysis
Parrish raises three main arguments: (1) the trial court erred as a
matter of law in allowing the jury to review the appraisals of the practice; (2) the
jury instructions were erroneous and resulted in a verdict unsupported by the law
or the evidence; and (3) the award of attorney’s fees was inflated and not
commensurate with the success of Schroering’s claims. Because we agree that the
trial court erred as a matter of law in allowing the jury to review the appraisals of
the practice, due to the insufficiency of the evidence, the latter two arguments are
rendered moot.
On cross-appeal, Schroering argues the trial court erred (1) in not
awarding him damages in the amount of Martin’s appraisal of $1,207,000, or in the
alternative, the Buyout Price of $975,000; (2) in dismissing his claims for breach
of the covenant of good faith and fair dealing and breach of fiduciary duty; (3) in
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failing to award him all costs, expenses, and attorney’s fees, and appropriate pre-
and post-judgment interest; and (4) in not awarding him the Monthly Allocation
for ten years and in excluding evidence of the Monthly Allocation at trial.
Schroering’s first and fourth arguments are rendered moot by our holding in this
case. His second argument is reviewed below, and the issue of attorney’s fees and
costs is remanded for further consideration by the trial court.
Judicial Estoppel
As a preliminary matter, Parrish contends that Schroering should have
been judicially estopped from disputing the appraisals because he raised the issue
for the first time several years after the commencement of the litigation. As further
evidence of Schroering’s dilatoriness, Parrish points to Schroering’s response to a
motion for summary judgment made more than a year after the appraisals were
complete, in which Schroering expressly stated he had not sought to set the
valuations aside.
“The doctrine of judicial estoppel evolved as an equitable principle
intended to protect the integrity of the judicial process by prohibiting a party from
taking inconsistent positions in judicial proceedings.” Mefford v. Norton
Hospitals., Inc., 507 S.W.3d 580, 584 (Ky. App. 2016) (citation omitted). On the
other hand, the consequences of judicial estoppel are “harsh and may bind a party
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to a position without regard to the truth-seeking function of the court.” Id.(internal quotation marks and citation omitted).
The trial court invokes this equitable doctrine at its discretion. Hisle
v. Lexington-Fayette Urban County Government, 258 S.W.3d 422, 434-35 (Ky.
App. 2008). The factors it may consider in exercising its discretion include the
following: “(1) whether the party’s later position is clearly inconsistent with its
earlier position; (2) whether the party succeeded in persuading a court to accept the
earlier position; and (3) whether the party seeking to assert an inconsistent position
would derive an unfair advantage or impose an unfair detriment on the opposing
party if not estopped.” Id.Schroering contends that none of these factors was present to justify
the exercise of judicial estoppel by the trial court. He contends that Parrish
manipulated and provided false information to his appraiser and that Fister and
Lloyd made patent errors based in part on this false information, resulting in an
improper valuation. He contends that he challenged the appraisals as soon as he
became aware of this situation.
Schroering could not have challenged the appraisals until after they
were complete. The appraisers’ final reports were submitted in July 2013,
approximately two years after he filed his complaint. Our review of the record
indicates that in his third amended complaint, filed on September 11, 2013,
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Schroering alleged misconduct within the Revalued Buyout Price valuation.
Although the basis of his attacks shifted over time, they remained consistent with
his earlier claims against Parrish. In light of the complex and evolving nature of
the litigation, the trial court did not abuse its discretion by not invoking judicial
estoppel to prevent the litigation of claims relating to the soundness of the
appraisals.
The Validity of the Appraisals
Parrish argues that Schroering’s challenge to the Lloyd and Fister
appraisals was based on their decision to use an asset-based rather than an income-
based approach to the valuation of the practice. He contends that this attack on
their professional methodology constituted insufficient grounds to set aside their
appraisals because the Agreement is an unambiguous contract which does not
specify a particular appraisal method.
Although there is no Kentucky case expressly setting forth the
standard for judicial review of a contractually mandated appraisal, the trial court
relied on Green River Steel Corporation v. Globe Erection Company, 294 S.W.2d
507 (Ky. 1956), which involved a dispute over a contract between a construction
company and a steel corporation to build a steel mill. The construction company
sued for damages stemming from the extra time it needed to build the mill because
of errors and mistakes in the drawings and specifications provided by the
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corporation. The contract provided that the decision of the architect or engineer as
to what did or did not constitute “extra work” was binding. The construction
engineer testified that the work was done within the terms of the contract. The
opinion held that in the absence of arbitrariness, dishonesty, or mistake, his
judgment was controlling, stating: “It is the general rule that the decision of the
architect or engineer as to what does or does not constitute extra work, where the
contract, as it does here, provides that his decision shall be final and binding, is
conclusive and controlling on both the owner and the builder, unless he acts
arbitrarily, dishonestly, or under a demonstrable mistake of fact.” Id. at 511
(citations omitted).
Other Kentucky cases cited by Parrish set forth a similar standard. In
Krebs v. McDonald’s Executrix, 266 S.W.2d 87 (Ky. 1953), for example, the Court
held a contractual agreement amongst shareholders regarding a stock valuation
could not be set aside without a showing of “fraud, mistake, or concealment” such
as “to render it plainly inequitable and against conscience that the contract should
be enforced.” Id. at 90 (citation omitted). An early Kentucky opinion states:
“[W]here a contract provides for a settlement of disputed items, arising under such
contract, by means of a determination through an outside authority, the subsequent
determination by such authority upon the questionable items is, in the absence of a
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showing of fraud or mistake, binding upon the parties to the contract.” National
Tool & Die Co. v. Wrege, 307 Ky. 568, 570, 210 S.W.2d 924, 925 (1948).
This standard is consonant with that applied in other jurisdictions,
which commonly require a showing of fraud, bad faith, material mistake, or some
combination of these to challenge a contractual appraisal provision. The Court of
Appeals for the Sixth Circuit has stated that “[g]enerally, a court will not interfere
with an appraisal award but, to the contrary, will indulge in every reasonable
presumption to sustain it in the absence of fraud, mistake, or misfeasance.”
Lakewood Mfg. Co. v. Home Ins. Co. of New York, 422 F.2d 796, 798 (6th Cir.
1970). This holding was echoed by the Supreme Court of Iowa, stating that an
“award will not be set aside unless the complaining party shows fraud, mistake or
misfeasance on the part of an appraiser or umpire.” Walnut Creek Townhome
Ass’n v. Depositors Ins. Co., 913 N.W.2d 80, 89 (Iowa 2018) (citation omitted).
The rationale for this approach is rooted in judicial deference to
contractual agreements:
The court’s role is not to determine whether the third
party [appraisers] accurately valued the item (as if the
court itself could do a better job), but whether the third
party experts understood and carried out the contractually
assigned task. The obvious point of contracting for an
appraisal process is to keep a jury or court out of that
decision. Courts have an obligation to enforce this aspect
of an agreement between the parties by asserting only
limited power to review appraisal awards.
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Calais Co., Inc. v. Ivy, 303 P.3d 410, 416 (Alaska 2013) (quoting Farmers Auto.
Ins. Ass’n v. Union Pacific Ry. Co., 768 N.W.2d 596, 607 (Wis. 2009)).
It is well-established in Kentucky “that a court cannot make a contract
for the parties, but can only construe the contract it finds they have entered into[,]”
and does not have “the authority to read words into a contract.” Sandy Company,
L.P. v. EQT Gathering, LLC, 545 S.W.3d 842, 847 (Ky. 2018) (citation omitted).
A court is not permitted to insert into the contract “terms and conditions the parties
never intended[.]” Id.Thus, “although appraisals are presumptively valid and should not be
lightly set aside, an appraisal may be set aside upon a showing of fraud, bad faith, a
material mistake, or a lack of understanding or completion of the contractually
assigned task.” Calais, 303 P.3d at 416-17 (emphasis in original) (citation
omitted). “Courts in the District of Columbia, Iowa, Massachusetts, and Texas
have reached similar conclusions and reviewed appraisals for fraud, bad faith,
mistake, or failure to complete the appraisal according to the contractually
prescribed appraisal procedures.” Id. at 417 (footnote omitted).
In the case before us, Schroering argued that Fister and Lloyd
misinterpreted Section 8(E) of the Agreement and proceeded on the mistaken
assumption that goodwill could not be considered as part of the appraisal process.
Consequently, they believed that an asset approach was mandated by the
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Agreement. According to Schroering, this approach to the valuation led Fister and
Lloyd to ignore a host of intangibles which should have been included in the
valuation, such as the practice’s referral base, the trained workforce, and the future
income of the practice. Thus, the demonstrable mistake of fact was really an
alleged failure to conduct the appraisal in accordance with the Agreement, rather
than a mistake of the type addressed in Elswick v. Justice, in which an appraisal
was set aside because the appraisers mistakenly valued only 80 acres whereas the
commissioner sold 176 acres. 287 Ky. 632, 154 S.W.2d 714, 715 (1941).
But there is no indication that Fister and Lloyd chose to perform asset-
based appraisals based on their misinterpretation of Section 8(E). Both Fister and
Lloyd explained that they chose an asset approach because the practice had
insufficient cash flow to justify an income approach. Lloyd testified that the
annual revenue of the practice was approximately $3 million. Fifty percent of this
revenue went to the doctors’ compensation and the other fifty percent to overhead
such as operating expenses for the offices and staff. He further explained that the
practice generated a very large amount of revenue from seminars presented by the
doctors. In 2010, for instance, over $300,000 was generated from the seminars.
He testified that this seminar revenue was not typically part of the operations of a
normal practice, so he eliminated it from his valuation. He testified that if the
seminar revenue was eliminated, the actual practice profit was negative. On this
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basis he concluded that “we could not use an income approach in this particular
case.”
Lloyd’s report similarly stated that the practice had insufficient cash
flow (besides the doctors’ compensation) to utilize the income approach.
Although Martin and Dietrich opined that the asset approach should
only be applied to calculate the liquidation value of a business and not to a going
concern, Fister and Lloyd’s rationale for applying the asset approach is not a
demonstrable mistake of fact. Lloyd testified that the asset approach is commonly
used to value physicians’ practices, particularly specialty practices whose revenue
is based on the physicians’ personal efforts.
Schroering also argues that Fister and Lloyd ignored the directive in
the Agreement that the appraisers consider the future earning potential from the
practice. It is clear, however, as the trial court explained in an earlier ruling
interpreting the language of the Agreement, that this is a recommendation only and
not mandatory. In any event, the record contains no evidence Fister and Lloyd
failed to consider potential future income. Lloyd specifically testified he did
consider it but rejected it because the significant seminar income was not a
sustainable cash flow.
Martin and Dietrich never claimed that the asset approach to valuation
is innately invalid, simply that it was not appropriate in this case. Fister and
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Lloyd’s decision to adopt the asset approach was similarly founded in their
professional judgment and cannot be described as a demonstrable mistake of fact.
There was no evidence of a demonstrable mistake of fact which would justify
setting aside the appraisals which were conducted in full accordance with the terms
of the Agreement.
Our decision is consistent with the directive of the Kentucky Supreme
Court in Parrish v. Smith, 2017-WL-3632911, supra, that the appraisals and the
appraisal process were subject to review by a jury. The Court did not, however,
provide the parameters for that review. The trial court applied the standard set
forth in Green River Steel Corporation, supra, which fully accords with the
standard applied in other jurisdictions for setting aside a contractually mandated
appraisal. That standard was not met in this case.
The Directed Verdict on Schroering’s Other Claims
Schroering argues that the trial court erred in granting a directed
verdict on his claims of breach of the covenant of good faith and fair dealing and
breach of fiduciary duty.
A directed verdict is granted on a claim only when “there is a
complete absence of proof on a material issue or if no disputed issues of fact exist
upon which reasonable minds could differ.” Toler v. Süd-Chemie, Inc., 458
S.W.3d 276, 285 (Ky. 2014), as corrected (Apr. 7, 2015) (citation omitted). The
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trial court granted Parrish’s motion for a directed verdict on Schroering’s claims of
fraud, breach of the covenant of fair dealing, and breach of fiduciary duty after
applying the appropriate directed verdict standard because Schroering had offered
no proof of the essential element of damages. The trial court observed that
Schroering had made no claim for damages and offered no proof or dollar amount
of damages for these claims.
Schroering argues that the record is replete with evidence supporting
his claims, including that Parrish gave false numbers to the appraisers, falsely
claimed Schroering had drained practice accounts while doing so himself, delayed
in notifying Schroering he would not allow the rescission of his original retirement
date, rejected or created a hostile environment for replacement candidates, and
locked Schroering out of the practice’s office. Schroering does not, however,
address the basis of the trial court’s decision to grant the directed verdict and does
not provide a reference to the record to indicate where he offered proof of
damages. Hence, the trial court’s grant of a directed verdict on these claims is
affirmed.
Attorney’s Fees and Costs
In regard to attorney’s fees and costs, Article 17(D) of the Partnership
Agreement provides: “If any action at law or in equity is necessary to enforce the
terms of this Agreement, the prevailing Party or Parties, or Shareholder or
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Shareholders, shall be entitled to reasonable attorneys fees and costs, in addition to
any other relief to which entitled.” Following the trial and verdict, Schroering
moved for attorney’s fees pursuant to this provision of the Agreement and filed a
bill of costs and memorandum claiming total costs and attorney’s fees of
$827,513.67. The defendants objected, and the trial court heard oral arguments on
the matter. The trial court thereafter granted the plaintiffs a total of $463,623.98 in
attorney’s fees and costs. Because the judgment is being reversed, this award of
attorney’s fees and costs is vacated, and the matter is remanded to the trial court
for reconsideration.
The Monthly Share and Pre- and Post-Judgment Interest
Schroering argues that Parrish was required to pay him the Monthly
Share in accordance with the Agreement for a total of ten years.
In 2013, the trial court granted summary judgment in favor of
Schroering to the extent the Monthly Share was granted to him for 120 days, which
was the period specified in the Agreement for the appraisals to be completed. The
trial court thereafter modified its order because of delays in the appraisal process.
Ultimately, it ordered Parrish to pay Schroering the Monthly Share from the date
of his retirement until the appraisers completed their work, with an offset for
delays caused by Schroering. The trial court calculated this period to be for the
months of July through October 2011 and the months of March through June 2013.
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It entered an order on September 23, 2013, ordering Parrish to pay Schroering to
pay a total of $87,467.
The trial court later ruled that Schroering would be permitted to argue
at trial that he was entitled to additional Monthly Share allocations. It set aside this
ruling in its order of January 26, 2018, however, and reaffirmed the earlier grant of
summary judgment on this issue. Its decision was founded on its earlier
interpretation of the Agreement that the Monthly Share was intended to be paid
from the effective date of retirement until the completion of the appraisal process
when Parrish would pay the Revalued Buyout Price. The trial court found “no
provision in the [A]greement that supports a finding that the monthly payments
should continue if Schroering refuses to accept Parrish’s offer of payment,
however unreasonable that payment might be.” R. at 8198. The trial court’s
interpretation of the Agreement in this regard is well-founded, and its decision is
affirmed.
Schroering is not entitled to pre- or post-judgment interest.
Conclusion
For the foregoing reasons, as to Appeal No. 2019-CA-0634-MR, we
reverse the trial order and judgment of the Jefferson Circuit Court and vacate the
award of attorney’s fees and costs. The case is remanded to the trial court (1) to
average the Fister and Lloyd appraisals in accordance with the terms of the
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Agreement and to enter a judgment to reflect this amount; and (2) to reconsider the
award of attorney’s fees and costs. As to Cross-Appeal No. 2019-CA-0692-MR,
we affirm.
ALL CONCUR.
BRIEFS FOR APPELLANTS/ BRIEFS FOR APPELLEES/
CROSS-APPELLEES: CROSS-APPELLANTS:
Charles J. Cronan, IV Gregg Y. Neal
Chadwick A. McTighe Taylor P. Sorrels
Michael W. Oyler Shelbyville, Kentucky
Ridley M. Sandidge, Jr.
Louisville, Kentucky Kevin C. Burke
Jamie K. Neal
ORAL ARGUMENT FOR Louisville, Kentucky
APPELLANTS/
CROSS-APPELLEES: ORAL ARGUMENT FOR
APPELLEES/
Chadwick A. McTighe CROSS-APPELLANTS:
Louisville, Kentucky
Gregg Y. Neal
Shelbyville, Kentucky
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