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Woodbridge Medical Associates, P.A. v. Berkley


June 3, 2010


On appeal from the Superior Court of New Jersey, Law Division, Middlesex County, Docket No. L-9139-05.

Per curiam.


Argued May 12, 2010

Before Judges Axelrad, Fisher and Sapp-Peterson.

In this appeal, we examine the judge's non-jury findings rendered after a trial that involved numerous issues raised between and among the parties. With the exception of that part of the judgment that compelled arbitration of an issue that went undecided at trial, we affirm.

The record reveals that Woodbridge Internal Medical Associates, P.A. (WIMA) operated a medical practice, consisting of Howard Garson, M.D., Ann Pearl, M.D., Michael Hymanson, M.D., and Mary O'Donnell, M.D., in a converted residence on Green Street in Woodbridge. The Green Street property was owned by Woodbridge Internal Medical Management, L.L.C. (WIMM); WIMM's shareholders were Garson, Pearl and Hymanson.

Paul Berkley had served as WIMA's business manager since 1985. Berkley, through Health Management Systems, Inc. (HMS), entered into a contract with WIMA for the continuation of his services for three years, starting January 1, 1997. The contract provided for automatic renewals for three-year terms; it was renewed in both 1999 and 2002. The contract did not preclude Berkley from providing management services to other medical practices.

Richard A. Goldstein, M.D., joined WIMA's practice in July 1997 as an employee. Goldstein was required to sign an employment agreement, which barred him, for a two-year period following his departure, from competing with WIMA within ten miles of WIMA's offices or within five miles of the hospitals where WIMA's physicians maintained admitting privileges. In 2004, when he became a WIMA shareholder, Goldstein signed a shareholders agreement, which contained his promise not to compete, for two years following his departure, with WIMA or its successors by engaging in the practice of medicine within five miles of WIMA's offices or within three miles of the hospitals serviced by WIMA's physicians.

In January 1999, Berkley arranged for Carl L. Murray, M.D., a long-time friend with an established practice in Old Bridge, to join WIMA. Murray signed an employment agreement containing the same non-compete clause as contained in Goldstein's agreement. In 2004, Murray signed a shareholders agreement identical to that executed by Goldstein. WIMA leased office space in Old Bridge for Murray's practice.

In early 2004, O'Donnell, Goldstein, Murray and three other doctors who had become shareholders in the practice, approached the shareholders of WIMM -- Garson, Pearl and Hymanson -- about obtaining equity interests in WIMM. The WIMM shareholders refused, a decision that generated significant hard feelings and apparently triggered what followed.

In March 2004, Pearl resigned from WIMA and retired. Garson and Hymanson also resigned and opened a new office directly across the street from WIMA. At the same time, the remaining shareholders of WIMA had grown dissatisfied with Berkley's performance. At a board meeting in June 2004, WIMA informed Berkley that his contract would not be renewed and would, therefore, expire on December 31, 2005.

WIMA decided to relocate from its Green Street office, finding new space on Route 9 in Woodbridge. O'Donnell and Goldstein obtained a $500,000 loan to cover the cost of relocating and other related expenses and, on July 21, 2004, Goldstein signed, on behalf of WIMA, a lease for the new space.

WIMM then informed WIMA it owed approximately $200,000 in back rent. Berkley suggested that the WIMA shareholders form a new corporate entity to insulate themselves from WIMM's claims. WIMA authorized Berkley to consult with counsel in order to form a new entity.

On October 27, 2004, counsel filed a certificate of incorporation of Woodbridge Medical Associates, P.A. (WMA) and, two days later, filed a registration of alternate name, to permit WMA to continue conducting business as "Woodbridge Internal Medical Associates." Counsel also prepared bylaws for WMA, and WIMA's officers and directors were installed as officers and directors of WMA. On November 10, 2004, WMA obtained an employer identification number. WIMA did not, however, assign its contract with HMS, its lease with WIMM or the Old Bridge lease to WMA. WIMA also did not assign its employment agreements or shareholder agreements to WMA. The fixed assets of WIMA were transferred to WMA and entered into WMA's books at net book value without compensation to WIMA. WIMA ceased conducting business as of December 31, 2004, but continued to exist in order to collect receivables it retained and to retire debt. WMA began its operations on January 1, 2005. It retained WIMA's staff and personnel and continued to use WIMA's telephone number.

Certain of WMA's shareholders decided that they would sever WMA's relationship with Berkley. A new business manager was hired in May 2005, and Berkley was notified of his termination. However, WMA did not dispute its obligation to continue to compensate Berkley through December 31, 2005, and requested that he remain available to come into the office on an as needed basis.

Unhappy with Berkley's termination, Goldstein and Murray decided to leave WMA and start their own practice. On May 16, 2005, Goldstein enlisted Berkley's assistance. The next day, Berkley engaged an attorney to form a new corporation, Doctors' Office of Middlesex, P.C. (DOM), for Goldstein and Murray. A certification of incorporation was filed on May 20, 2005.

On July 15, 2005, Goldstein and Murray submitted letters of resignation effective September 30, 2005. Learning of Berkley's involvement with Goldstein and Murray, WMA refused to pay Berkley the remaining $26,000 due under his contract.

In August 2005, Berkley located office space for DOM in Woodbridge, less than two miles from WIMA's offices. DOM opened for business on October 19, 2005. Goldstein and Murray retained their shares in WMA, but were no longer notified of shareholder meetings.

On September 29, 2005, WMA filed suit in the Chancery Division against Goldstein, Murray and DOM, as well as Berkley and HMS, and others, seeking injunctive relief as well as damages. WMA alleged, among other things, that Goldstein and Murray breached the restrictive covenants contained in their agreements with WIMA and violated their common law duties of loyalty, and that Berkley and HMS breached the covenant of good faith and fair dealing by participating in Goldstein and Murray's actions in forming DOM and competing with WMA. The Chancery judge denied injunctive relief and transferred the matter to the Law Division. Thereafter, Goldstein, Murray, HMS and other defendants filed counterclaims against WMA, and a third-party action against WIMA and others.

The matter was eventually tried to a judge without a jury over the course of seven days in November 2008. Some claims were voluntarily dismissed at various stages throughout the trial. At the conclusion of plaintiff's case, the judge involuntarily dismissed WMA's action seeking enforcement of the restrictive covenants that WIMA had extracted from Goldstein and Murray. At the trial's conclusion, the judge: rejected WMA's breach of loyalty claims and other similar claims for damages against Goldstein, Murray and DOM; rejected WMA's claims against Berkley and HMS; awarded $26,000 to HMS for unpaid management fees; ordered WIMA to produce its books and records for examination; concluded Goldstein and Murray were entitled to the fair value of their shares in WMA but found insufficient proof regarding value; and, following a good faith effort by the parties to resolve that claim, ordered that the parties engage in binding arbitration regarding valuation.

WMA appealed, arguing that the trial judge erred: (1) in dismissing its claim of a breach of the restrictive covenants; (2) in holding that the former employees did not breach any duty of loyalty; (3) in awarding management fees to HMS; (4) in permitting Goldstein and Murray to amend their third-party complaint to seek the value of their shares in WMA; (5) in refusing to dismiss Goldstein and Murray's claims for fair value; and (6) in compelling the parties to submit to binding arbitration regarding valuation.

We find insufficient merit in WMA's first argument to warrant discussion in a written opinion. R. 2:11-3(e)(1)(E). We add only the following brief comments.

First, there is no question that the evidence failed to demonstrate the restrictive covenants WIMA extracted from Goldstein and Murray were actually transferred or assigned to WMA. And, because the record clearly demonstrates that WIMA continued to exist following the transfer of interests and the formation of WMA, the judge correctly rejected the contention that WMA had succeeded to those assets and liabilities of WIMA that were not actually transferred or assigned.

The judge also correctly rejected the claim of a de facto merger between WMA and WIMA. In determining whether entities have engaged in a de facto merger, courts consider whether there has been (i) continuity of management, personnel, physical location, assets, and general business operations; (ii) a cessation of ordinary business and dissolution of the predecessor as soon as practically and legally possible; [and] (iii) assumption by the successor of the liabilities ordinarily necessary for the uninterrupted continuation of the business of the predecessor. [Woodrick v. Jack J. Burke Real Estate, Inc., 306 N.J. Super. 61, 73 (App. Div. 1997) (quoting Glynwed, Inc. v. Plastimatic, Inc., 869 F. Supp. 265, 275-76 (D.N.J. 1994)), app. dis., 157 N.J. 537 (1998).]

Not all of these factors need be present in order to find a de facto merger, id. at 74, and, certainly, there was evidence to support a finding of a continuity of management, personnel and general business operations from WIMA to WMA. But the judge correctly emphasized that WMA was formed for the precise purpose of avoiding litigation and liabilities that would have or had already accrued. In addition, the judge found significant that "the accounts receivable were not transferred to the new entity but remain[ed] with the old entity to satisfy the liabilities of WIMA . . . which WMA did not wish to be associated with." Moreover, the judge determined that WMA's shareholders were conscious of the need for new employment and shareholder agreements upon the formation of the new entity but took no steps to extract them. The judge, thus, found there was insufficient evidence to support WMA's argument of a de facto merger. In short, the judge determined that WMA could not take those assets of WIMA that were of benefit, leave behind legitimate claims asserted or threatened against WIMA, and still maintain it either succeeded WIMA or merged with it. We, thus, affirm the judge's dismissal of WMA's claims for enforcement of WIMA's restrictive covenants.

We also find insufficient merit in all WMA's other arguments to warrant discussion in a written opinion, R. 2:11-3(e)(1)(E), with the exception of its sixth argument that the judge erred in compelling binding arbitration regarding Goldstein and Murray's claims to the fair value of their shares of WMA. We agree, and the parties concede, that the judge was not authorized to impose binding arbitration absent their agreement to arbitrate. Certainly, arbitration is a favored remedy, Wein v. Morris, 194 N.J. 364, 375-76 (2008), but it is a creature of contract and may not be "imposed by judicial fiat," Fawzy v. Fawzy, 199 N.J. 456, 469 (2009). Because the parties agree that there was no evidence in the record to suggest that they had ever agreed or consented to arbitrate, we vacate that part of the judgment which required arbitration of the fair-value dispute.

We remand so there may be further proceedings on the fair-value claims. The judge should permit whatever additional discovery, including the exchange of expert reports, that may be warranted so there may be a full and fair resolution of those claims.

Affirmed in part; reversed in part; and remanded for further proceedings in conformity with this opinion. We do not retain jurisdiction.


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