Siegel v. Goldstein
| Decision Date | 09 December 2020 |
| Docket Number | CIVIL ACTION NO. 19-2890 |
| Parties | PHILIP T. SIEGEL, DDS, Plaintiff, v. MARK GOLDSTEIN, BRIAN SMITH, JOSEPH MULLIGAN, SAMER ABDELSAMIE AND DELAWARE VALLEY MAXILLOFACIAL AND ORAL SURGERY, P.C., Defendants. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
Plaintiff Philip T. Siegel is a retired dentist and former shareholder of Delaware Valley Maxillofacial and Oral Surgery, P.C. ("Delaware Valley P.C.") a dental practice. He has brought suit against the practice and its shareholders with whom he entered into a Shareholders Agreement, Mark Goldstein, Brian Smith, Joseph Mulligan, and Samer Abdelsamie, premised on the cancellation of his shareholder interest in the practice. The dispute has its genesis in Siegel's decision to retire and place his license into inactive status. While his former colleagues remained unaware that he no longer held an active dentistry license he continued to receive a share of the profits from the practice. But, when they learned of it, they cancelled his shares.
Upon Defendants' motion the matter was stayed pursuant to the Federal Arbitration Act, 9 U.S.C. § 3, while the parties arbitrated Plaintiff's legal claims pursuant to an arbitration clause in the Shareholders Agreement. The arbitrator concluded that Defendants properly cancelled Siegel's shares, and that Siegel was properly and fully compensated for his interest in the practice through shareholder distributions he received while his license was inactive, but before his shares were cancelled.
Following the arbitration, Plaintiff amended his complaint to include additional claims. Defendants filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), which is now before the Court. For the reasons that follow, Defendants' motion will be granted.
The story as relevant here begins in 2005 when Plaintiff Siegel and three of the individual defendants - Goldstein, Smith, and Mulligan - executed an Operating Agreement under which each would be an equal owner of a dentistry practice, Delaware Valley Maxillofacial and Oral Surgery, LLC ("DVLLC"). Article XVI of the Operating Agreement provided that "without the consent of the affected Member this Operating Agreement may not be amended so as to alter the interest of the affected Member in any Distributions or Allocations of Profit or Loss or other economic rights of such Member, unless such change affects each Member's economic right in the same manner on a pro rata basis."
In 2014, Siegel retired, and voluntarily placed his dental license in inactive status. Although he no longer worked at the practice, he remained a member and continued to receive profit distributions and other benefits. The arrangement appeared to be working well until April 2016 when DVLLC's accountant William Burns advised the practice's attorney Stuart Lundy that the entity should convert from an LLC to a professional corporation ("PC") for tax purposes. Lundy passed on Burns' recommendation to Siegel, Goldstein, Smith, and Mulligan. They were informed that the conversion from an LLC to a PC would "not affect any Member's continual right to their share (25%) of the monies distributed to all Members annually except now they will be shareholder distributions."
Although Siegel did not object to the conversion, neither did he participate in any discussions about how to effectuate it. Lundy prepared an agreement for the shareholders to sign. When Siegel reviewed it, he discovered that it did not include the protections of ArticleXVI of the Operating Agreement. Specifically, he became concerned that the proposed agreement would allow the other shareholders to amend or modify the agreement in a way that would disproportionately affect his percentage ownership in the PC. Accordingly, he refused to sign the proposed agreement unless it was amended to include the language of Article XVI or its equivalent.
After some negotiation, the parties hammered out their differences and came to an agreement. The terms of the Shareholders Agreement for the new entity - Delaware Valley P.C. - included in paragraph 24 the following language:
This Agreement may be modified or amended from time to time by the Shareholders upon a Majority Vote of the Shareholders provided, however, that without the written consent of the affected Shareholder, this Agreement may not be amended so as to alter a Shareholders' Proportionate Share, unless such changes affects each Shareholders' Proportionate Share in the same proportionate manner.
With this language included, Siegel, Goldstein, Smith, and Mulligan signed the Shareholders Agreement. Abdelsamie became a shareholder in Delaware Valley P.C. shortly thereafter, and was added as a party to the Shareholders Agreement.
The Shareholders Agreement contains two further provisions necessary to understand the dispute at issue here. First, paragraph 2(c), which defines the persons qualified to be shareholders of Delaware Valley P.C., provides that "no Shares shall be issued by the Corporation . . . except in accordance with the provisions of this Agreement and to a person licensed to render the Services in the State [of Pennsylvania]," and "[a]ny attempted issuance . . . in violation of this provision shall be void and ineffective." Second, paragraph 4(b), which sets out procedures for the "involuntary transfer" of a shareholder's shares, identifies a series of "Involuntary Transfer Event[s]," including, inter alia, if a shareholder "permanently lost his or her License for reasons bearing on such Shareholder's professional competence, professionalperformance, or financial integrity." If an Involuntary Transfer Event occurs, the Shareholders Agreement requires the "Transferring Shareholder" to sell their shares to the other shareholders or Delaware Valley P.C. for the "Purchase Price," an amount calculated via a formula set out in the Shareholders Agreement.
Before the conversion, no-one asked Siegel about the status of his professional license. In January 2019, however, Abdelsamie noticed the Shareholders Agreement's requirement that each shareholder be licensed to render services. Upon investigation he learned that Siegel's license was inactive.
On or about March 2019, an attorney for Defendant Goldstein informed Siegel's attorney that because of Siegel's inactive license, Siegel was subject to the Shareholders Agreement's Involuntary Transfer provision, and that accordingly Siegel was required to sell his shares to the practice. Siegel's attorney responded that the Involuntary Transfer provision did not apply to Siegel, but that, nevertheless, Siegel was willing to sell his shares if he received full payment of the purchase price up front, rather than over the 48-month period contemplated in the Shareholders Agreement. Defendants did not accept Siegel's counter-offer.
Instead, on June 5, 2019, Defendants sent a notice to Siegel that his shares "have been cancelled effective as of the date of their issuance." The reason provided was that, pursuant to paragraph 2(c) of the Shareholders Agreement, the issuance of shares was limited "to a person licensed to render the oral and maxillofacial surgery services in Pennsylvania," and voids issuance of shares "to a person not Licensed." The notice explained that Siegel's "voluntarily surrender" of his Pennsylvania dental license in December 2014, prior to the formation of Delaware Valley P.C., meant that he was not qualified to be a shareholder of the corporation at the time of its creation and that, accordingly, Siegel's shares were void at the time of theirissuance. The notice went on to demand that Siegel return all shareholder distributions, health insurance, and pension benefits in the amount of $825,830, required him to accept a buyout for his interest in DVLLC for $502,000, and concluded that he owed $324,000 to Delaware Valley P.C.
The procedural history of this matter must be seen through the lens of paragraph 21(b) of the Shareholders Agreement, an arbitration clause, which provides that "expedited arbitration shall be the exclusive remedy to resolve any dispute or alleged breach relating to this agreement, whether statutory or sounding in contract or in tort, excepting . . . actions in equity." Although the clause requires arbitration for most disputes, it carves out of its mandate any "actions in equity."
At the outset of the litigation, Defendants filed a motion to stay the case and compel arbitration on the theory that all of the claims set forth by Plaintiff are contractual or statutory non-equity claims and, thus, all of them must be decided by arbitration. Plaintiff, focusing on the remedies he is seeking rather than the claims he makes, asserted that he was seeking only equitable relief and that his complaint contained no claim for a remedy at law. The Court stayed the case allowing the parties to proceed to arbitration.
At arbitration, the issues to be decided were framed as: (1) whether Siegel's shares were properly cancelled under the Shareholders Agreement because he was not licensed to perform dental procedures in Pennsylvania; (2) whether a monetary award against Siegel for distributions he received when he was not licensed to receive such distributions should be made; and, (3) whether Siegel's share should be determined by the formula contained in the Shareholders Agreement or by a different determination. Defendants sought a declaration that Siegel's shareshad been properly cancelled as well as a monetary award in the amount of $323,830.16 - the balance of the shareholder distributions he received while not properly licensed less an amount for his buyout.
On April 27, 2020, the arbitrator issued her award concluding that Delaware Valley P.C. had legal right to cancel Siegel's shares and Siegel was not entitled to reinstatement of his shares, reasoning that Siegel's placement of his license into inactive status precluded him from...
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