Cohen v. Orthalliance New Image, Inc.

• Decision Date: 24 March 2003
• Docket Number: No. 1:01 CV 352.,1:01 CV 352.
• Citation: 252 F.Supp.2d 761
• Parties: Ronald A. COHEN, D.D.S., M.S.D. Cohen Orthodontic Group, P.C. v. ORTHALLIANCE NEW IMAGE, INC.
• Court: U.S. District Court — Northern District of Indiana

Page 761

252 F.Supp.2d 761

Ronald A. COHEN, D.D.S., M.S.D. Cohen Orthodontic Group, P.C. v.ORTHALLIANCE NEW IMAGE, INC.

No. 1:01 CV 352.

United States District Court, N.D. Indiana, Hammond Division.

March 24, 2003.

Richard M. Goldstein, Thomas A. Connop, Roger B. Cowie, Christopher M. La-Vigne, Brian A. Colao, Locke Liddell and Sapp, Dallas, TX, William M. Pope, J. Michael Grubbs, Thomas F. Shea, Barnes and Thornburg, Indianapolis, IN, for Ronald A. Cohen, DDS MSD, Cohen Orthodontic Group PC, plaintiffs.

Sherry A. Fabina-Abney, Ice Miller, Indianapolis, IN, Stewart E. Niles, Jr., Joseph J. Lowenthal, Jr., Jones Walker Waechter Poitevent, Carrere and Denegre LLP, New Orleans, LA, for Orthalliance New Image Inc., defendant.

ORDER

MOODY, District Judge.

In this action, the parties have crossmoved for summary judgment.During the time allotted for briefing the motions, this action was transferred from the Fort Wayne Division to the Hammond Division, at which time the random judicial assignment system placed the case before the undersigned.Upon review of the record compiled by the parties, the court resolves the pending motions as explained in the remainder of this Order.

I.BACKGROUND

Cohen is a Doctor of Dental Surgery, who specializes in orthodontia.He practices his profession in Allen County, Indiana under the name Cohen Orthodontic Group, P.C.("Cohen Orthodontic"), of which Cohen owns all outstanding stock.(See PI.Desig.Of Evid. at Ex. B ("Complaint") at It 4-5.)

Orthalliance New Image, Inc.("New Image") is a Delaware corporation with its primary place of business in Torrance, California.(Seeid. at 113.)New Image manages orthodontic practices throughout the country.(SeeDef. Desig. of Evid. at Ex. 1 ("Summers Aff.")at 114.)As part of the furious consolidation experienced in the orthodontic practice management industry during 2000 and 2001, New Image was purchased by Orthalliance, Inc.¹ in an asset deal.(Seeid. at K 20.)See generallyTop Public Companies: Orthodontic Centers of America, OCA now dominates field,NEW ORLEANS CITY BUS., June 17, 2002, at 27, available at2002 WL 12346069.Orthalliance, Inc. was subsequently acquired by another competitor, Orthodontic Centers of America.Seeid.Thus, Orthalliance, Inc. acts as both the parent of New Image and the subsidiary of Orthodontic Centers of America.

The relationship between Cohen and New Image began in early 1997.At the time, New Image² was a corporate infant, but eager to take advantage of the expanding market for orthodontic practice services.Cohen agreed to retire all stock in the professional corporation under which he was practicing orthodontia at the time, and to sell the non-medical business assets of the operation.(See PI.Desig. of Evid at Ex.A ("Agreement and Plan of Merger") at § 2.2;PI. Design, of Evid. atEx. B.3, pp. 1.)In exchange, the precocious New Image tendered to Cohen 1,193,500 shares of preferred stock in New Image plus $511,500.00 cash.(Seeid.)Cohen also agreed to create a new professional corporation (which is the one appearing as a co-plaintiff in this action), and cause the new entity to execute a "Management Services Agreement" with New Image at Closing under which New Image would provide certain management services to the new professional organization Cohen agreed to establish for an initial period of forty (40) years.(Seeid. at § 2.8.)

On April 1, 1998, Cohen Orthodontic entered into the Management Services Agreement ("MSA")(Pl. Desig. of Evid. atEx. B.1).New Image promised to provide a series of management consulting and related business services to Cohen Orthodontic.New Image also agreed to furnish materials and supplies reasonably necessary for Cohen Orthodontic to fulfill its professional mission.(See M.S.A. § at §§ 1.2,2.1,6.1-6.7.)In exchange, Cohen Orthodontic promised to pay fees for these services, the precise amount of which would be a percentage of the "net revenue" to Cohen Orthodontic.(Seeid. at Art. 9("Financial Arrangements").)Consistent with the Agreement and Plan of Merger, the parties agreed to a natural termination date of April 1, 2038.(Seeid. at § 12.1("The term of this Agreement shall commence on the date of this Agreement and shall expire on the fortieth (40th) anniversary of such date, unless earlier terminated pursuant to the terms of this Agreement.").)Cohen Orthodontic has cast doubt on the legality of several of the contractual obligations New Image has agreed to undertake, on account of amendments to the Indiana Dental Practices Act ("IDPA"), 2000 Ind. ActsP.L. 102, § 2("2001Amendments"), enacted subsequent to the execution of MSA.³

Concomitant with the execution of MSA, Cohen Orthodontic also agreed to execute an employment contract with any affiliated orthodontist.Thus, on April 1, 1998, Cohen and Cohen Orthodontic did enter into such an agreement.(SeePL Desig. of Evid. atEx. B.2("Employment Agreement").)The fourteen-page document describes, in great detail, the parties' obligations.Noteworthy for purposes of this litigation is section 6.1, entitled "Covenant Not to Compete," which marks geographic and temporal limits on Cohen's for-profit orthodontic practice, should the present arrangement become unsettled.The enforceability of the covenant is an issue disputed by the parties in this summary judgment motion.

Also executed on April 1, 1998 was an Option Agreement.(SeePL Desig. of Evid. atEx. B.3("Option Agreement I").)In it, Cohen bestowed upon the "Optionee" a right to purchase all of Cohen's equity interest in Cohen Orthodontic.(Id. at pp. 1.)Since Cohen was the sole shareholder, he was ostensibly providing the "Optionee" with a right to buy Cohen Orthodontic in its entirety.Cohen himself was the "Optionee" of the call;⁴ New Image was expressly named "a third-party beneficiary of rights of the Optionee."(Id.)

Around February 1, 2000, another Option Agreement ("Option Agreement II") was executed.⁵(See PI.Desig. of Evid. at Ex. D ("Cohen Aff.") at U 9.)In it, Cohen granted Dr. John G. Hamilton(named "Optionee") a call option for 100% of Cohen's stock in Cohen Orthodontic, exercisable upon any "Triggering Event" as the parties defined that term in section 2.New Image was again expressly named "a third-party beneficiary of rights of the Optionee."(Option Agreement II at preamble.)Cohen disputes the legality of vesting a call in Dr. Hamilton, a person who, according to Cohen is not a person eligible to own an interest in an orthodontic professional corporation under Indiana law, due to a change in his physical condition occurring subsequent to the execution of Option Agreement II.(See Stip.Concerning Dr. Hamilton at H3 ("Since May 18, 2000, Dr. Hamilton has been unable to engage in the practice of dentistry as a result of a brain tumor.").)

Approximately two months after the 2001Amendments took effect, Cohen and Cohen Orthodontic (collectively referred to as "Plaintiffs") commenced this action in Allen County Superior Court.On September 26, 2001, New Image invoked its removal rights, placing this diversity case in the federal district court at Fort Wayne.On April 22, 2002, the undersigned issued an order in an unrelated case,⁶ spurning the invitation to end the contractual relationship between an orthodontic group and New Image's parent company.SeeOrthodontic Affiliates, P.C. v. OrthAlliance, Inc.,210 F.Supp.2d 1054(N.D.Ind.2002).Two weeks after the issuance of the opinion, New Image moved for a transfer of the action to the Hammond Division, 28 U.S.C. § 1404(a)("For the convenience of the parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought.").In an order dated June 24, 2002, Chief Judge Lee transferred this action to the Hammond Division, where it was exposed to the random judicial assignment procedure and routed to the undersigned.

The parties have submitted crossing summary judgment motions, asking the court to resolve whether Plaintiffs are entitled to a declaration on the future enforceability of this intricate contractual relationship Plaintiffs also ask the court to strike certain parts of the Summers Affidavit.

II.LEGAL STANDARD

The parties have cross-moved for summary judgment, which the court may grant if the "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law."Fed.R.Civ.P. 56(c).In a cross-motion posture, the court must bend any factual inferences in the direction of the party"against whom the motion under consideration is made."Metropolitan Life Ins. Co. v. Johnson,297 F.3d 558, 561-62(7th Cir.2002);Hendricks-Robinson v. Excel Corp.,154 F.3d 685, 692(7th Cir.1998).The local courtrule, N.D.Ind.L.R 56.1 plays a complementary role in summary judgment proceedings; the court draws the facts only from materials presented in substantial compliance with the local rule.AccordMetropolitan Life,297 F.3d at 562("[W]e have emphasized the importance of local rules and `have consistently and repeatedly upheld a district court's discretion to require strict compliance with its local rules governing summary judgment.' "(quotingBordelon v. Chicago Sch. Reform Bd. of Trustees,233 F.3d 524, 527(7th Cir.2000))).It is important to note that "interpretation of the terms of an unambiguous contract is traditionally a question of law and is particularly suited to disposition on summary judgment."Kailman v. Radioshack Corp.,315 F.3d 731, 735(7th Cir.2002);accordChurch v. General Motors Corp.,74 F.3d 795, 799(7th Cir.1996);Highhouse v. Midwest Orthopedic Institute, P.C,782 N.E.2d 1006, 1010(Ind.Ct.App.2003)("An unambiguous contract, i.e. one that does not require extrinsic...