McLelland v. Paxton

• Decision Date: 21 November 2019
• Docket Number: No. 35401-6-III,35401-6-III
• Citation: 453 P.3d 1,11 Wash.App.2d 181
• Parties: Bryan W. MCLELLAND, D.D.S. and Krista McLelland, husband and wife, and the marital community composed thereof, and Bryan W. McLelland, D.D.S., P.S., a Washington professional services corporation, Respondents, v. Mark C. PAXTON, D.D.S. and Diane S. Paxton, husband and wife, and the marital community thereof, and Mark C. Paxton, D.D.S., P.S., a Washington professional services corporation, Appellants.
• Court: Washington Court of Appeals

11 Wash.App.2d 181

453 P.3d 1

Bryan W. MCLELLAND, D.D.S. and Krista McLelland, husband and wife, and the marital community composed thereof, and Bryan W. McLelland, D.D.S., P.S., a Washington professional services corporation, Respondents,

v.Mark C. PAXTON, D.D.S. and Diane S. Paxton, husband and wife, and the marital community thereof, and Mark C. Paxton, D.D.S., P.S., a Washington professional services corporation, Appellants.

No. 35401-6-III

Court of Appeals of Washington, Division 3.

FILED NOVEMBER 21, 2019

Philip Albert Talmadge, Talmadge/Fitzpatrick, 2775 Harbor Ave. SW, Third Floor Ste. C, Seattle, WA, 98126-2138, David A. Kulisch, Attorney at Law, 2125 E Overbluff Rd., Spokane, WA, 99203-3759, Jenae Marie Ball, Randall Danskin, P.S., 601 W Riverside Ave., Ste. 1500, Spokane, WA, 99201-0653, for Appellant.

Michael H. Church, Attorney at Law, Hailey Louise Landrus, Stamper Rubens, P.S., 720 W Boone Ave., Ste. 200, Spokane, WA, 99201-2560, Catherine Wright Smith, Ian Christopher Cairns, Smith Goodfriend PS, 1619 8th Ave. N, Seattle, WA, 98109-3007, for Respondent.

Philip Albert Talmadge, Talmadge/Fitzpatrick, 2775 Harbor Ave. SW, Third Floor Ste. C, Seattle, WA, 98126-2138, David A. Kulisch, Attorney at Law, 2125 E Overbluff Rd., Spokane, WA, 99203-3759, Jenae Marie Ball, Randall Danskin, P.S., 601 W Riverside Ave., Ste. 1500, Spokane, WA, 99201-0653, for Other Parties.

PUBLISHED OPINION

Fearing, J. ¶ 1 We review a complicated dissolution, between two oral surgeons, of a professional limited liability company, which review includes the question of whether such a company can possess goodwill separate from the professional practitioners. We affirm all rulings of the trial court, including the finding of goodwill, except that we reverse the grant of prejudgment interest afforded respondent Bryan McLelland on the assets awarded him.

FACTS

¶ 2 Respondent Bryan McLelland is and appellant Mark Paxton was an oral and maxillofacial surgeon. Paxton died during the pendency of this appeal, and this court substituted the Estate of Mark Paxton as appellant. We will, however, still refer to the appellant as Mark Paxton. The facts of this appeal become complicated because of the various corporations and limited liability companies utilized by Paxton and McLelland when conducting an oral and maxillofacial practice. Despite the use of other business structures, the parties sometimes treat the dispute as one between partners. The parties alternatively label the dispute as centering around the dissolution of a professional limited liability company owned by corporations maintained by McLelland and Paxton or centering around the dissolution of a partnership between McLelland and Paxton. The parties alternatively refer to the relevant claimant as Bryan McLelland or McLelland P.S. and alternatively call the appellant Mark Paxton or Paxton P.S.

¶ 3 In March 2003, Mark Paxton hired Bryan McLelland as an associate in Paxton’s oral surgery practice. In March 2005, McLelland and another associate, Melanie Lang, each through his or her individual professional service corporation, respectively purchased a one-third interest in Paxton’s practice also owned by Paxton in a professional services corporation. We identify the three professional service corporations as Paxton P.S., McLelland P.S., and Lang P.S. McLelland P.S. and Lang P.S. each paid Paxton P.S. $619,835, for a total of $1,239,670, to purchase the interests in the oral surgery practice.

¶ 4 On March 25, 2005, the parties entered executed acquisition agreements to consummate the purchases. Under the agreement between McLelland P.S. and Paxton P.S., McLelland P.S. purchased an undivided interest in the assets of Paxton’s practice, "including equipment, furniture, and fixtures, accounts receivable, supplies, one of the buildings in which the practice is operated, goodwill , and patient files." Clerk’s Papers (CP) at 2215 (emphasis added). $261,667 of the $619,835 purchase price paid by McLelland was allocated for the practice’s goodwill. The acquisition agreement entered by Lang P.S. possessed similar language.

¶ 5 To define the rights and responsibilities attended to the three oral surgeons’ interests in the oral and maxillofacial practice, the three professional services corporations entered into a partnership agreement. We quote relevant portions of the lengthy partnership agreement, replete with a table of contents, entered by Paxton P.S., McLelland P.S., and Lang P.S. The terms of the agreement control some of the issues on appeal. The agreement, with a penchant for capitalization, read:

Unless otherwise agreed by the Parties and Shareholders, however manifested or evidenced, the goodwill of the Partnership shall be owned, or considered owned, by the Shareholders, in undivided interests, based on Percentage Ownership of the Partnership.

CP at 45 (emphasis added). The partnership agreement prohibited transfer to a third party of

any interest in the "contract receivables" (oral and maxillofacial surgery contracts in progress), accounts receivable, patient records, or goodwill of the practice , the Partnership, any of the Parties, or any of the Shareholders.

CP at 47 (emphasis added). The partnership agreement also declared that the partnership could

be terminated on at least six (6) months’ notice by any of the Parties, at or after the Initial Term, however, the termination date must correspond to an anniversary hereof.

CP at 35. The partnership agreement further read:

It is hereby acknowledged by the Parties and Shareholders that no definite and equitable methodology presently exists for dividing the jointly owned Practice Interests of the Parties and Shareholders, upon termination of this Agreement, for any reason. The Parties and Shareholders further appreciate that future economic and financial uncertainties further make it impossible to define such a methodology. Consequently, upon the termination of this Agreement, and the necessary division of the jointly owned Practice Interests, the Parties agree to negotiate, in good faith, so to divide such jointly owned Practice Interests. Further, the Parties will then determine which of the Parties will continue to practice at each of the places of business of the Partnership.

CP at 79.

¶ 6 The partnership agreement provided, in pertinent part:

Default; Dissolution and Reconstituting.

A. Default Defined. It is agreed that upon the occurrence of any of the following events, constituting defaults, this Agreement may be dissolved, either during the Initial Term, or any annual renewal period, at the option of the non-defaulting Party or Parties, except for those provisions expressly intended and provided for to survive. Such events are as follows:

....

(viii) Claim Against Other Parties or Shareholders. Any of the Parties or any of the Shareholders shall take any action, or fail to take any action, which results in any material claim, suit, or action being filed, or threatened or asserted in any way against any of the other Parties or Shareholders, except fully insured malpractice claims (the deductible of which shall be paid by the Party or Shareholder who treated the patient making such malpractice claim), or which results in any material damage to or material liability of any of the other Parties or Shareholders.

CP at 50-52.

¶ 7 One partnership agreement paragraph addressed an award of prejudgment interest. The paragraph reads:

B. Interest on Unpaid Monies. Whenever herein it is provided that a Party or a Shareholder shall pay any sums of money, either to any of the other Parties or other Shareholders, or to third parties, including, but not limited to ... all other sums required to be so paid hereunder, or under the terms of any other documentation entered into in connection herewith, notwithstanding any contrary terms thereof, if any of such sums are not paid, as and when due and payable to the other Parties or Shareholders, or to third parties, if the other Parties or Shareholders, in the case of sums being owed to third parties, shall be then, or at any time thereafter, required to pay the sums owed by such Party or Shareholder by whom such sums are owed, to any such third party, for any reason, including as a result of being jointly or severally liable for the payment of all or any portion of such sums, or in order to protect their own interests or assets, and including any pension plan for the benefit of employees, such sums shall bear interest at the highest lawful rate, from the due date, until paid.

CP at 82-83. Finally, a closing paragraph declared:

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 Shareholders, shall be entitled to reasonable attorneys fees and costs, in addition to any other relief to which entitled.

CP at 83.

¶ 8 In late 2005, after briefly existing as Paxton, Lang, and McLelland Oral and Maxillofacial Surgery Partnership, the three oral surgeons changed the business entity that conducted the surgery practice from a general partnership to a professional limited liability company, Spokane OMS, PLLC. Spokane OMS thereafter conducted business under the trade name Spokane Oral & Maxillofacial Surgery. Despite the formation of a limited liability company, the partnership agreement remained the governing document for the relationship between the three surgeons and their respective professional services corporations. The record does not show that they executed any operating agreement for the professional limited liability company or that the oral surgeons or any of their corporations entered any new agreement on the formation of the limited liability company.

¶ 9 Spokane OMS maintained two office locations in 2005: a Spokane Valley office and a South Hill office. Melanie Lang and Bryan McLelland created a separate entity, SOMFS Property Holdings, LLC when they purchased interests in the oral and maxillofacial practice. SOMFS bought a...