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DiPaolo v. Gross

2006 WL 1148386 (N.J. Super. Ch. Div. 2006) (Unpublished)

CORPORATIONS; SHAREHOLDERS; GOODWILL —In the absence of an enforceable agreement or an obligation imposed by promissory estoppel, as an equitable remedy, a departing shareholder is only entitled to the fair value of his, her or its shares upon withdrawal including a share of the corporation’s goodwill, if any.

Three doctors incorporated a medical practice. They were the only shareholders. There was no shareholder agreement, nor was there any other corporate governing document. In their agreements, the doctors agreed to a productivity based compensation system wherein each doctor would retain revenue from the services he or she offered and would receive a draw based on his or her respective previous year’s salaries. They would share expenses such as personnel, payroll, and fixed overhead. All three doctors’ accounts would be periodically reconciled and bonuses paid for any amounts over the draw due to them. Some time later, one of the doctors accepted a position in another state. The doctors held several meetings amongst themselves and with accountants to determine the amount owed to the departing doctor. All three agreed that the two remaining doctors would continue the care of the departing doctor’s patients. No resolution was reached on the amount of money owed to the departing doctor.

The departing doctor sued, claiming a settlement had been reached, or in the alternative that she was entitled to payment under the theory of promissory estoppel. The two remaining doctors claimed the departing doctor owed money since her expenses were in excess of the revenue she collected. Fundamental to contract law is the rule that acceptance to an offer must be unequivocal. Absent a meeting of the minds, there are no enforceable obligations. Despite the numerous meetings and correspondences between the doctors, the Court found no meeting of the mind as to any payment owed to or from the departing doctor. It found that the parties only agreed that one doctor would depart and the remaining doctors would care for her patients. There was no enforceable agreement to transfer the departing doctor’s shares to the remaining doctors, or to pay the departing doctor any monies in excess of her receivables. To create an obligation through the doctrine of promissory estoppel, the following four elements must be satisfied: (i) there must be a clear and definite promise; (ii) the promise must have been made with the expectation that the promisee would rely on it; (iii) the promisee must have reasonably relied on the promise; and (iv) the reliance must have resulted in substantial detriment. Here, the Court could not find any clear and definite promise by the remaining doctors to pay the departing doctor. The departing doctor’s decision to leave the practice was not initiated by any promise from the remaining doctors. As no promise was made to the departing doctor to pay her anything over her owed receivables, there could have been no expectation of reliance, nor any actual reliance.

In the absence of an enforceable agreement or an obligation imposed by promissory estoppel, the departing doctor was entitled to the fair value of her shares upon her withdrawal. This is an equitable remedy, and not imposed as the consequence of any promise made by either of the remaining doctors. Because the doctors did not have a shareholder agreement, the Court had to determine the value of the departing doctor’s shares at the time of her departure. Central to the value of her shares was the value of goodwill in the practice, if any. Goodwill is essentially the value of a business’s reputation that will probably generate future business. It is the right to continue the business at the same place in which it has been established and where its reputation has been made; together with either: (a) the probability that old customers will continue to return to the business even if the business changes its name, provided the service offered or goods sold remain satisfactory; or (b) the probability that old customers will return to the same business if the business continues use of the same business name. Goodwill includes the quality of management, the ability of the business to produce and market efficiently, capable staff, reputation for superior services and favorable reputation. After considering factors in favor of goodwill, such as: the business’s location; patient information, clinical records, and existing management staff; and weighing those against negative factors, such as: the fact that the business name was not branded, there was no favorable leasehold; the doctors did not have a covenant not to compete; there were no payments due for patient assignments; and no future income had been assigned, the Court found goodwill to exist and opined as to the departing doctor’s share.

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