Fitzpatrick v Animal Care Hosp., PLLC (2011 NY Slip Op 51518(U))

Fitzpatrick v Animal Care Hosp., PLLC

2011 NY Slip Op 51518(U) [32 Misc 3d 1231(A)]

Decided on June 30, 2011

Supreme Court, Broome County

Lebous, J.

Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.

This opinion is uncorrected and will not be published in the printed Official Reports.

This is an action by plaintiff Timothy L. Fitzpatrick, to recover money damages for breach of contract arising from the sale of his veterinary practice to defendants Animal Care Hospital, PLLC, Ted Sprinkle, Tom Butera and Lance Sprinkle (hereinafter collectively "defendants"), together with late charges, attorney's fees, costs and disbursements.^[FN1] Defendants interposed a Verified Answer with Counterclaim alleging that the suspension of their payments under the promissory note was justified based upon plaintiff's intentional conduct which violated the parties' Asset Purchase Agreement.

In 1993, plaintiff founded a veterinary practice known as Animal Care Hospital in Vestal, New York. Over the course of the next decade plaintiff, through his effort and hard work, built a thriving veterinary practice with a staff of sixteen. Throughout the course of this time period, plaintiff had personally become a well recognized practicing veterinarian in and around Broome County from his numerous radio and television appearances, as well as his professional efforts including running vaccine, spay and/or neuter clinics, establishing a senior discount for his senior citizen customers, establishing pet store discounts, engaging in mass mailings to his existing client base, preparing and mailing out newsletters, and sending reminders to his patients for follow-up and check-up visits.

By 2003, however, plaintiff was ready to move on and sought to sell Animal Care Hospital and relocate to the New Mexico area. In fact, throughout 2003 and 2004, plaintiff concedes he spent the majority of his time in New Mexico and used relief veterinarians to cover a majority of services at the veterinary practice in New York.

B.The Sale of Animal Care Hospital

In December 2004, plaintiff sold his veterinary practice to defendants which was memorialized by a variety of documents including, as pertinent here, an Asset Purchase Agreement and Promissory Note.

By way of the Asset Purchase Agreement, defendants agreed to pay plaintiff the total sum of $1,100,000 with $700,000 in cash and the execution of a $400,000 promissory note. Defendants also purchased the real estate housing plaintiff's veterinary practice for an additional $600,000 to be paid in cash at closing. Thus, at the time of the closing in December 2004, plaintiff received $1,300,000 cash ($700,000 for the practice and $600,000 for the building), [*2]together with a $400,000 promissory note. In return, defendants took title to the assets of the Animal Care Hospital.

Animal Care Hospital Allocation of Assets

Business Assets:

Inventory52,000

Equipment40,000

Intangibles:

Goodwill908,000

Trade Name50,000

Non-compete50,0001,008,0001,100,000

Real Estate Assets600,000

Total1,700,000

(Plaintiff's Exhibit No.2, Schedule II-E; emphasis added).

Thus, according to Schedule II-E, the parties valued the goodwill of the practice at $908,000.

Additionally, however, the terms of the Asset Purchase Agreement contained various obligations running to plaintiff, namely restrictive covenants requiring plaintiff to refrain from taking action which would impair the goodwill of the practice. Of particular note here is Section V entitled "Goodwill: Publicity" of the Asset Purchase Agreement which the court will review in further detail hereinbelow.

The Promissory Note (hereinafter sometimes "Note") provides that defendants would pay plaintiff $400,000 in monthly installments of $3,699.56 at 5% per annum over a twelve year period commencing on March 1, 2005 through February 1, 2017. The initial interest rate is listed as 5% per annum but, in the event of a default, it was agreed that the interest rate would increase by 5% to 10% per annum on the remaining balance. Additionally, the Note provided that there would be a 10% late penalty for any payment more than 20 days in arrears. Finally, the Note sets forth that in the event of a default of more than 30 days, the entire unpaid balance, with accrued interest, would immediately become due and payable, including attorney's fees, costs and expenses.

C.The Arrest and Conviction [*3]

All seemed to be going well until on or about March 27, 2005 when plaintiff was arrested in the State of Virginia for soliciting sex over the internet from an undercover police officer posing as a 13 year old girl. Plaintiff's arrest created a period of media interest in and around Broome County. Local television news broadcast the report of plaintiff's arrest, television crews appeared in the parking lot of the Animal Care Hospital, and reporters interviewed clients as they came and went from the practice soliciting reaction from patients of the hospital to the plaintiff's arrest.

On February 28, 2006, plaintiff was convicted after a jury trial in Fairfax, Virginia of using a computer to solicit a minor in violation of Virginia Code § 18.2-374.3(B).

D.Post-Arrest

After plaintiff's arrest, and based upon what defendants perceived as a breach of the restrictive covenant sections of the Asset Purchase Agreement, defendants refused to

make its April 1st, 2005 and May 1st, 2005 monthly payments to plaintiff due under the Note. On or about July 18, 2005, in response to defendants' non-payments, plaintiff exercised his right to accelerate payment on the Note and further advised that the default interest rate on the unpaid balance would be increased to 10% per annum pursuant to the terms thereof.

Defendants ultimately tendered the April and May 2005 payments, albeit late, and continued to make monthly payments thereafter until April 1, 2007 when they ceased making all payments due under the Note. This litigation ensued.

E.Animal Care Hospital

Meanwhile, by January 2005, defendants had begun the process of running Animal Care Hospital. The proof at trial established that defendants made various corporate changes to the running of Animal Care Hospital. Plaintiff presented the testimony of employees Amy Radlinsky and Jessica Bronson, both of whom worked at the veterinary hospital following the defendants' takeover of the business in January of 2005. These witnesses testified that immediately following the takeover a 10% across the board price hike was instituted and defendants began charging for items such as nail trimmings that plaintiff had previously provided free of charge; weekend hours were eliminated; no veterinarian was on call for the weekends; there was a high turnover of veterinarians at the facility; the manager of the kennel also left the facility; the facility itself deteriorated and was not kept clean; newsletters and advertising were cut back; and most significantly the new owners were rarely on site and hardly ever visited the facility. Plaintiff testified that after the sale he only appeared at Animal Care Hospital on two or three occasions to come in and perform several surgeries.

Plaintiff alleges that defendants have defaulted on the Note. It is undisputed that [*4]defendants initially withheld the April 2005 and May 2005 monthly payments, then resumed payments for nearly two years, but stopped making all payments as of April 2007. While plaintiff's proof at trial clearly establishes that defendants failed to make payments under the terms of the Note, as detailed below, the court finds merit in defendants' counterclaim that they were justified in suspending payments on said Note until such time as a court could ascertain the parties' contractual obligations.

Defendants claim that plaintiff's intentional conduct impaired the goodwill of Animal Care Hospital and that said conduct constituted a violation of the Asset Purchase Agreement, Section V, which entitled them to suspend the monthly payments under the Note.^[FN2]

The Asset Purchase Agreement, Section V, is entitled "Additional Covenants of the Seller, the Stockholder and the Purchaser" and, reads, in pertinent part, as follows:

agrees that each such party will not intentionally take or omit to take any action,

either before or after the Closing, and also represents that each such party has not

intentionally taken or omitted to take any action prior to the date hereof, which could

directly impair the goodwill of the Business or the business reputation or good name of

the Business so long as Purchaser and/or Guarantors are not in default under this or any

other agreement with Seller or Stockholder.

(Plaintiff's Exhibit #2, emphases added).

Incredulously, plaintiff attempts to distinguish his intentional conduct from the goodwill of Animal Care Hospital by arguing that his acts of soliciting a minor for sex over the internet and then attempting to meet that minor in person were not done by him "intentionally" in order to "directly" impair the business.

There is no question in this court's mind that plaintiff's conduct leading to his arrest and conviction was an intentional act on his part, violative of Section V of the Asset Purchase Agreement, and an intentional act that could, and did, directly impair the goodwill of defendants' business. The conduct was reprehensible. After years of developing a relationship of trust with his patients, plaintiff cannot now argue that trust to be meaningless. The selection of a veterinarian by people for their pets is very personal in nature and clearly reflective of a pet owner's trust in plaintiff. For plaintiff to argue that his actions were not intended by him to impair the business and that his actions and any consequence to the business was unintentional and indirect, is simply disingenuous. [*5]

Plaintiff's own testimony indicated that he spent more than a decade intentionally maintaining a high professional profile in the community in an attempt to obtain and maintain client's trust in support of his practice. The value of this trust is evidenced by the parties' designation of the value of the goodwill of this practice at $908,000 out of the total $1.1 million purchase price. Moreover, the proof established that the parties continued to recognize plaintiff's value or goodwill to the practice by deciding not to publically announce that the practice had been sold. Additionally, at the time of his arrest, plaintiff was still linked with Animal Care Hospital by performing occasional surgeries at the facility. Plaintiff himself conceded that his arrest and conviction for soliciting or attempting to solicit sex from a minor was an intentional act and such conduct could impair the goodwill that plaintiff sold to defendants in violation of the terms of the Asset Purchase Agreement.

In sum, plaintiff's actions in leading to his arrest and conviction as the face of Animal Care Hospital were clearly injurious to the name, reputation and goodwill of Animal Care Hospital, thereby constituting a violation of Section V of the Asset Purchase Agreement.

Consequently, the court finds that defendants have established that their suspension of payments under the Note were justified based upon plaintiff's breach of the Asset Purchase Agreement.^[FN3]

II.DAMAGES

As to the complaint, there is no doubt that plaintiff is due monies for the unpaid balance of the Note. That said, however, for the reasons stated above, the court also finds that defendants are entitled to recover on their counterclaim. The court will first address the issue of damages on the counterclaim before discussing the amount due on the Note.

Having found that plaintiff violated the goodwill provision of the Asset Purchase Agreement, the court must next determine the value of that loss of goodwill or the damages sustained by defendants due to plaintiff's actions. Generally, in a breach of contract, a party may recover for loss of goodwill, which is sometimes referred to as loss of future profits, or loss of customers, or damage to reputation (Robert T. Donaldson, Inc. v Aggregate Surfacing Corp. of Am., 47 AD2d 852, 853 [2nd Dept 1975], appeal dism 37 NY2d 793 [1975]). That having been said, however, proof of loss of goodwill associated with a business is difficult to quantify (Battenkill Veterinary Equine v Cangelosi, 1 AD3d 856, 859 [3rd Dept 2003]), but is recoverable upon adherence to stringent requirements of proof (Kenford Co. v County of Erie, 67 NY2d 257, 261 [1986]; Toltec Fabrics, Inc. v August Inc., 29 F3d 778, 780 [1994]). First, the loss of [*6]goodwill "must be capable of proof with reasonable certainty" and "may not be merely speculative, possible or imaginary" (Trademark Research v Maxwell Online, Inc., 995 F2d 326, 332 [1993]; Moran v Standard Oil Co., 211 NY 187, 195 [1914]). Second, the party must present objective proof of the amount of that loss (Kenford Co., 67 NY2d at 261; Trademark, 995 F2d at 332). Third, "[i]t must be demonstrated with certainty that such damages have been caused by the breach," and are "directly traceable to the breach, not remote or the result of other intervening causes" (Kenford Co., 67 NY2d at 261; Trademark Research, 995 F2d at 332). Finally, "[t]here must be a showing that the particular damages were fairly within the contemplation of the parties to the contract at the time it was made" (Kenford Co., 67 NY2d at 261).

At trial defendants called as their expert, Gary I. Glassman, a certified public accountant with the firm of Burzenski & Company, P.C., whose practice has focused extensively on the field of veterinary practice management and specializes in financial management and tax planning for veterinary practices and their owners. Mr. Glassman opined that the investment value of defendants' lost profits from April 1, 2005 through March 31, 2006 was $523,000. Mr. Glassman testified that his opinion was based upon defendants' investment strategy that projected revenue growth for the business at the rate of approximately 5% during the first year of ownership.^[FN4]

Mr. Glassman testified that he used the "seasonable approach" to veterinary practice valuation which compares revenue for a veterinary hospital for the current month to the same month of a previous year.^[FN5] Mr. Glassman found that after taking ownership as of January 1, 2005, revenue grew by 1.75% during the first three months of ownership and then decreased each month going forward through March of 2006 (Glassman Report, p 3). More specifically,

Mr. Glassman noted the following: March 2004 to March 2005

[*7]January 2004 to January 2005	8.03% decrease in revenue
February 2004 to February 2005	8.45% increase in revenue
4.65% increase in revenue

Next, Mr. Glassman compared the twelve month period of April 2004 to March 2005 as compared to April 2005 to March 2006 and found a 15.84% decrease in revenue (or $244,116) (Trial Exhibit K, III).

Using that twelve month period of April through March, Mr. Glassman calculated lost profits by use of the "yardstick method" which estimates amounts of revenues the profits of business would have received had a negative event not occurred. Mr. Glassman used data from plaintiff's actual financial records from April 2004 through March 2005 to calculate the expected revenue for April 2005 through March of 2006 as compared to the actual revenue for April 2005 through March 2006 . Mr. Glassman opined that his analysis revealed a lost revenue of $321,176 from which using various multipliers led to his conclusion of lost profits of $523,000.

Plaintiff offered the testimony of James E. Leonard, a certified public accountant, who concluded that the valuation of defendants' claim of damages and lost profits as a result of the negative publicity arising from plaintiff's arrest and conviction to be zero. Mr. Leonard states that because he was never provided any "direct evidence" of lost and/or disaffected clients he relied on plaintiff's own financials. Further, Mr. Leonard stated that he did not undergo his normal procedure of valuations because he deemed the procedures to be "unnecessary", but did review various revenue trendlines including a "trailing twelve months" format, a "trailing six months" chart, and a "trailing three months chart". In sum, Mr. Leonard concluded as follows:

[t]here is no evidence at all of any period of time affected directly by [plaintiff] without also being simultaneously affected by other factors that appear to have a much stronger influence on revenues. It is entirely reasonable to conclude these other forces were also at work during the period between February 2005 and March 2006.

Due to the lack of any direct evidence provided to me such as lists of specific clients with dates and the specific reason for leaving, and the lack of any indirect evidence of any timeframe which was impacted directly by [plaintiff], I have no choice but to conclude there was no such timeframe that was identifiable.

(Leonard Report, p 4).

First, with respect to defendants' counterclaim, it is well-settled that damages or lost profits may be awarded in a breach of contract action so long as they can be determined with [*8]certainty and are not contingent or conjectural even though the amount cannot be determined with absolute certainty (R & I Electronics, Inc. v Neuman, 66 AD2d 836, 838 [2nd Dept 1978]). Where it is certain that damages have been caused by a breach of contract and the only question is as to their amount, there can rarely be a good reason for refusing to grant on that account any damages whatever for the breach. A person violating his contract should not be permitted entirely to escape liability because the amount of damage which he has caused is uncertain. In that case, such as here, the trier of fact may apply experience and common sense to the facts proved so as to determine and award such damages as may be reasonably calculated resulting from the breach. Here, the parties could have inserted a specific liquidated damages penalty provision in their Asset Purchase Agreement in the event of a breach of the goodwill clause, but they did not. Nevertheless, the court finds that the fact the parties valued goodwill at nearly 90% of the purchase price of the practice indicates that damages were fairly within the contemplation of the parties to the contract at the time it was made (Kenford Co., 67 NY2d at 261).

With respect to lost profits, plaintiff's expert spent considerable energy attacking Mr. Glassman's methodology, but did not provide the court with any viable alternative instead choosing to throw up his hands and state that any analysis would be too tenuous. To the contrary, the court found Mr. Glassman's testimony and experience in valuing veterinary practices to be most credible. For instance, Mr. Glassman's use of plaintiff's actual income figures from April 2004 through March 2005 to form a basis for the calculation of lost profits from April 2005 through March 2006 based upon an expected 5% growth to be adequately supported. That said, however, the court did not find Mr. Glassman's use of a value multiplier to forecast lost profits beyond that time period to be supported by the record. Thus, the court finds that defendant established lost profits solely for that one-year period in the amount of $89,030.

The court will now turn back to the amount due from defendant to plaintiff on the unpaid note. Plaintiff has proposed three calculations:

The court finds a fourth option to be proper, namely the amount due on the note as of the last payment (April 2007) which is $344,354.79, without interest. In this court's view, defendant was justified in suspending its payments in April 2007 in response to plaintiff's intentional [*9]actions which impaired the goodwill of the practice in order to obtain court intervention to ascertain the parties' respective obligations. Quite simply, plaintiff should not financially gain from his intentional conduct by being able to accelerate the interest or charge, at any rate, interest on the unpaid amounts for the past four years of extensive negotiations and litigation which were instigated by his own intentional conduct. In this court's view, defendants were justified in engaging in self-help (e.g. suspending payments on the Note) in order to maintain the status quo while the parties engaged in extensive negotiations which ultimately failed and led to the litigation of these matters. Stated another way, the court finds the Note and Asset Purchase Agreement were so interlinked that plaintiff's own breach of the Agreement entitled defendants to suspend payments under the Note (Ingalsbe, 257 AD2d 894). Thus, defendants' suspension of payments did not amount to a breach of the Agreement and plaintiff was without basis to declare the note in default.

The court's determination will place these parties back into their respective positions as of that last payment in April 2007. Further, the court finds that neither party is entitled to interest on their respective claims from the respective dates of accrual until the date of this decision. As noted above, given the totality of the circumstance involving plaintiff's intentional conduct and defendants' resort to self-help by suspending payments on the Note, the court finds that an award of interest is not proper. Additionally, for the same reasons, the court declines to award costs and/or attorney's fees to either party.

In view of the foregoing, the court finds that plaintiff is entitled to the sum of $344,354.79 on his complaint, with an offset due defendants on their counterclaim in the amount of $89,030, for a net amount due plaintiff from defendants in the amount of $255,324.79, with interest at the statutory rate from the date of this decision.

This Decision shall constitute the order of the court. Submit Judgment on notice.

DATED:June 30, 2011