Plastic Surgery Assocs. of Kingsport Inc. v. Pastrick
| Decision Date | 19 May 2015 |
| Docket Number | No. E2014-01203-COA-R3-CV,E2014-01203-COA-R3-CV |
| Court | Tennessee Court of Appeals |
| Parties | PLASTIC SURGERY ASSOCIATES OF KINGSPORT INC v. GREGORY H. PASTRICK |
Appeal from the Circuit Court for Sullivan County
This action was filed against a surgeon for breach of an employment agreement by his employers, a group owned equally by four optometrists and one non-physician. The trial court found that the group was entitled to recover damages arising from the breach. The surgeon appeals. We affirm.
Russell W. Adkins and Frank A. Johnstone, Kingsport, Tennessee, for the appellant, Gregory H. Pastrick.
Thomas C. Jessee, Johnson City, Tennessee, for the appellee, Plastic Surgery Associates of Kingsport, Inc.
OPINIONPlastic Surgery Associates of Kingsport, Inc. ("PSA"), dba Southern Plastic Surgeons ("SPS"), was chartered in 1999 to meet patient demands for plastic surgery services in Kingsport, Tennessee. PSA's shares were owned by Specialty Medical Services, LLC ("SMS"), an entity that provides management services to the Regional EyeCenter ("EYE") and other entities. SMS is owned equally by the four physicians from EYE and Mr. John T. Williams, EYE's Chief Executive Officer. Mr. Williams is not a physician. The Board of Directors of PSA consisted of C. Robert Bice, Jr., M.D.; John L. Chapman, M.D.; Eric K. Smith, M.D.; Anthony D. Seaton, M.D.; and Mr. Williams. PSA, pursuant to a management agreement with SMS, agreed to pay 15% of its revenues as compensation for management services. PSA was incorporated as a general purpose corporation - not as a professional corporation.
Wellmont Health System ("Wellmont") assisted PSA in the initial recruitment of a plastic surgeon to join the new practice. According to the defendant, Gregory Pastrick, M.D., near the end of his residency, he received a letter from Wellmont advertising a job opportunity in Kingsport. Wellmont put him in contact with Mr. Williams, with whom he had several conversations regarding the position.1 After consultations with his attorney and counsel for PSA, Dr. Pastrick decided to join the practice. Mr. Williams worked closely with Dr. Pastrick to determine everything that would be needed for the clinical part of the business, and PSA spent a significant amount of time and money equipping the office with staff, equipment, and supplies.
Dr. Pastrick and PSA entered into an Employment Agreement ("the Agreement") on August 30, 1999, the terms of which extended through August 30, 2001. The Agreement provided that it would automatically extend for two more years absent written notice of non-renewal. Dr. Pastrick was permitted to terminate the Agreement for any reason upon 180 days written notice. The Agreement stated that in the event Dr. Pastrick breached the notice provision, Absent cause, Dr. Pastrick could be terminated upon 180 written days' notice.
Paragraph 8.1 of the Employment Agreement provided the amount of Dr. Pastrick's compensation for the first two years of employment. In accordance with Paragraph 8.1, Dr. Pastrick received $120,000.00 in the first year and $175,000.00 in the second year. After the initial two-year term of the contract, Dr. Pastrick's compensation was to be calculated by the formula set forth in Paragraph 8.2. Dr. Pastrick requested that additional language be included in Paragraph 8.2, to which PSA agreed. Accordingly, the terms of Paragraph 8.2, as modified by the parties, provided as follows:
8.2 After the initial two year term of this contract, Company shall pay Employee 80% of Net Profits as salary. "Net Profits" are defined as all amounts collected on behalf of Company on account of services provided to patients by Employee minus Employee's pro rata share of operating expenses, costs, reimbursements to patients or insurers and other bonuses as may be given to Employee. "Net Profits" also shall include the amount Company collects on behalf of other physician-employees which bears a substantial relationship to Employee's ownership interest in the Company.
Beginning August 30, 2001, Dr. Pastrick began drawing his salary calculated at 80% of Net Profits pursuant to the Agreement. According to PSA, the final calculation for the determination of income is done on a yearly basis. Thus, Dr. Pastrick was paid an amount in advance each month with any excess in income at the end of the year to be paid to Dr. Pastrick and any excess in expenses to be paid back to PSA.
Paula Smith, EYE's financial manager, testified as follows:
Q. Okay. Now explain to the Court how Dr. Pastrick was compensated according to the books and records of the company after August 30th, 2001 when this contract was just extended? So from August to December how was he paid?
A. From August to December he was continued to be paid at $175,000.00 base rate on a salary basis.
Q. Okay, would you agree with me that 8.2 provides that after the two years he was to be paid 80% of net profits as salary?
A. That's correct. Yes.
Q. Why did you not pay net profits from that point between August and December?
A. During that time . . . Dr. Pastrick and the owners of Southern Plastic were in negotiation as to buy-in and Dr. Pastrick had wanted . . . a higher cash flow than the hundred and seventy-five. There is no way to identify 80% of the profits on a monthly basis. This is 80% of an annual profit being a twelve month business cycle, not 80% of any one month, so there was really no way to identify what 80% of the profit would be on any given day.
Paragraph 12.1of the Agreement allowed that upon the completion of the first two years of employment, PSA could, within its sole discretion, provide Dr. Pastrick with an option to buy-in to the practice. The initial percentage of ownership to be purchased by the Employee was 50% of the Company's shares. As set forth in Paragraph 12.2 of the Agreement, the Employee's ownership interest in the practice would increase gradually until the Employee eventually would own 100% of PSA.
After the initial two-year period of Dr. Pastrick's employment, Mr. Williams notified him of the board's decision to offer him the buy-in option. According to Mr. Williams, at that time, Dr. Pastrick indicated a desire to become an owner and the parties began negotiating the terms of the purchase. Dr. Pastrick observed in his answer to the complaint that the proposal to become an owner was the first time he "became aware of the fact that the shareholders" of PSA "had little, if any, equity in the corporation, that the corporation was heavily in debt, and that without additional physicians in the practice . . . sufficient revenues would not be generated to meet the financial obligations of the business while providing [Dr. Pastrick] reasonable compensation."
By mutual verbal agreement, beginning December 1, 2001, PSA began paying Dr. Pastrick monthly in the amount of 30% of PSA's gross monthly receipts. Ms. Smith related the following regarding Dr. Pastrick's compensation:
Dr. Pastrick contends that Paragraph 8.2 became inapplicable during the negotiations, as the parties had agreed upon a new method of compensation. He asserts that PSA had agreed to compensate him based upon 30% of gross monthly receipts with PSA assuming full responsibility for the overhead obligations until such time as negotiations concluded. Mr. Williams observed, however, that Dr. Pastrick's annual compensation still remained at 80% of Net Profits as defined in Paragraph 8.2, the larger draws subject to a "trueing up" process at the end of the year. Mr. Williams remarked that compensation to Dr. Pastrick changed to an owner formula in accordance with Paragraph 11 of the Agreement.2 He testified further as follows:
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