| Fitzpatrick v Animal Care Hosp., PLLC |
| 2013 NY Slip Op 02119 [104 AD3d 1078] |
| March 28, 2013 |
| Appellate Division, Third Department |
| Timothy L. Fitzpatrick, Respondent-Appellant, v AnimalCare Hospital, PLLC, et al., Appellants-Respondents. |
—[*1] Terrence R. Dugan, Endicott, for respondent-appellant.
Stein, J. Cross appeals from an order of the Supreme Court (Lebous, J.), entered June30, 2011 in Broome County, upon a decision of the court partially in favor of plaintiff.
In late 2004, plaintiff executed an asset purchase agreement (hereinafter APA) to sellhis veterinary practice located in the Town of Vestal, Broome County todefendants.[FN1] Defendants financed the purchase, in part, through a personally guaranteed promissorynote in the amount of $400,000, which called for monthly payments, with 5% interest.Defendants began managing and operating the practice in January 2005. However, it wascontemplated that plaintiff would continue to perform occasional veterinary services forthe practice.
In late March 2005, plaintiff was arrested and charged in Virginia with the crime of[*2]soliciting sex from a person over the Internet who hehad reason to believe was a minor.[FN2] Because plaintiff had been a well-known veterinarian in the Broome County area, hisarrest was covered by the local news, and his connection to the veterinary practice wasspecifically mentioned. Defendants failed to make the April and May 2005 payments onthe promissory note, prompting plaintiff to declare defendants in default and acceleratethe note. Defendants eventually made such payments and continued to make paymentsthereafter until April 2007, when they ceased payments altogether.
Plaintiff thereafter commenced this action to recover, among other things, theamount outstanding on the promissory note. Defendants answered and interposed acounterclaim alleging that plaintiff's arrest constituted a material breach of the APA andsought, among other things, damages for loss of the goodwill and revenue occasioned byplaintiff's conduct. Following a nonjury trial, Supreme Court determined that plaintiffhad breached the APA and awarded damages to defendants on their counterclaim in theamount of $89,030, representing lost profits sustained by the practice. Supreme Courtalso awarded plaintiff the amount due from defendants on the promissory note—tobe offset by the $89,030 in damages that defendants sustained—and denied theparties' demands for certain interest payments, late payments and counsel fees. Theparties now cross-appeal.
Upon review of a nonjury trial verdict, this Court " 'independently review[s] theprobative weight of the evidence, together with the reasonable inferences that may bedrawn therefrom, and grant[s] the judgment warranted by the record' " while accordingdue deference to the trial court's factual findings and credibility determinations (Ash v Bollman, 80 AD3d1115, 1117 [2011], quoting Shon v State of New York, 75 AD3d 1035, 1036 [2010];see Haber v Gutmann, 64AD3d 1106, 1107 [2009], lv denied 13 NY3d 711 [2009]). Addressing firstwhether plaintiff breached the APA, it is beyond cavil that "a written agreement that iscomplete, clear and unambiguous on its face must be enforced according to the plainmeaning of its terms" (MHRCapital Partners LP v Presstek, Inc., 12 NY3d 640, 645 [2009] [internalquotation marks and citation omitted]; see Stillwater Hydro Partners, LP v Stillwater Hydro Assoc.,LLC, 100 AD3d 1455, 1456 [2012]; Ruthman, Mercadante & Hadjis vNardiello, 260 AD2d 904, 906 [1999]).
As pertinent here, section V (A) of the APA provides, under the heading "Goodwill:Publicity," that neither party would "intentionally take or omit to take any action. . . which could directly impair the goodwill of the [b]usiness or thebusiness reputation or good name." In our view, such provision is susceptible to only onereasonable interpretation (seeZinter Handling, Inc. v General Elec. Co., 101 AD3d 1333, 1335 [2012]; Currier, McCabe & Assoc., Inc. vMaher, 75 AD3d 889, 890 [2010]), namely, that any intentional act that coulddirectly impair the goodwill of the practice would violate the APA. While plaintiffargues that he did not breach the APA because he did not intend his conduct to impairthe goodwill of the practice, such an interpretation is contrary to the plain meaning ofsection V (A), and Supreme Court properly determined that the conduct that led toplaintiff's arrest and conviction constituted a breach of the [*3]APA.[FN3]
Supreme Court also correctly found that plaintiff's breach entitled defendants to anoffset against their obligation on the promissory note. A breach of a related contract isgenerally not a defense to nonpayment of an instrument for money only (see Ingalsbev Mueller, 257 AD2d 894, 895 [1999]; A+Assoc. v Naughter, 236 AD2d655, 656 [1997]). However, where the note and the contract are "inextricablyintertwined" as part of the same transaction, a breach of the related contract may create adefense to payment on the note (Couch White v Kelly, 286 AD2d 526, 528[2001] [internal quotation marks and citation omitted]; see Ingalsbe v Mueller,257 AD2d at 895; A+Assoc. v Naughter, 236 AD2d at 656; see also Lorber v Morovati, 83AD3d 799, 800 [2011]; Vecchio v Colangelo, 274 AD2d 469, 471 [2000]).
Here, the promissory note was executed contemporaneously with the APA andrepresented partial consideration for the assets purchased by defendants. The APAspecifically refers to the promissory note, and a copy of the note was attached thereto(see Ingalsbe v Mueller, 257 AD2d at 895). Further, the note does not includeany waiver of the right to an offset for counterclaims. Inasmuch as we find the parties'rights and obligations set forth in the note and APA to be inextricably intertwined(see id. at 895), we agree with Supreme Court's determination that, as a result ofplaintiff's breach of the APA, defendants were entitled to offset their obligations dueunder the promissory note against any damages caused by plaintiff's breach.[FN4] Additionally, because the note and the APA were inextricably intertwined, defendants'suspension of payments on the note following plaintiff's breach of the APA did not causethem to be in default. Thus, we also concur with Supreme Court that plaintiff is notentitled to recover counsel fees, late fees or an increase in the applicable interest rateunder the terms of the note.
On the other hand, we find merit to defendants' argument that plaintiff was notentitled to accelerate the balance due on the promissory note. Although the express termsof the note permit acceleration upon defendants' failure to make payments in a timelymanner, Supreme Court ultimately determined that they were justified in suspendingpayments in order to maintain the status quo until the parties' respective obligations couldbe determined. In view of our finding that plaintiff's breach of the APA created a defenseto defendants' obligations under the note and justified their suspension of payments,acceleration was not appropriate and damages should be recalculated, accordingly.
Turning to the damages sought by defendants on their counterclaim, in order torecover lost profits, they had the burden of proving that the "damages were actuallycaused by the breach, [*4]that the 'particular damageswere fairly within the contemplation of the parties to the contract at the time it was made'and that the alleged loss is 'capable of proof with reasonable certainty' " (Awards.com v Kinko's, Inc.,42 AD3d 178, 183 [2007], affd 14 NY3d 791 [2010], quoting KenfordCo. v County of Erie, 67 NY2d 257, 261 [1986]; see Latham Land I, LLC v TGI Friday's, Inc, 96 AD3d1327, 1333 [2012]). "The rule that damages must be within the contemplation of theparties is a rule of foreseeability. The party breaching the contract is liable for those risksforeseen or which should have been foreseen at the time the contract was made"(Ashland Mgt. v Janien, 82 NY2d 395, 403 [1993]; see Kenford Co. vCounty of Erie, 67 NY2d at 261; Wathne Imports, Ltd. v PRL USA, Inc., 101 AD3d 83, 87[2012]; Crystal Clear Dev., LLCv Devon Architects of N.Y., P.C., 97 AD3d 716 [2012]).
Here, while the APA is silent with respect to damages, we apply a "commonsenserule" to determine "what the parties would have concluded had they considered thesubject" (Kenford Co. v County of Erie, 67 NY2d at 262; see Ashland Mgt. vJanien, 82 NY2d at 404). Notably, a substantial portion of the purchase price of thepractice was expressly attributable to goodwill. A purchaser of goodwill " 'acquires theright to expect that the firm's established customers will continue to patronize thebusiness' " (Bessemer Trust Co.,N.A. v Branin, 16 NY3d 549, 557 [2011], quoting Mohawk MaintenanceCo. v Kessler, 52 NY2d 276, 285 [1981]). Considering the "nature, purpose andparticular circumstances of the contract" (Kenford Co. v County of Erie, 73NY2d 312, 319 [1989]), we agree with Supreme Court that lost profit damages wereforeseeable by the parties at the time they executed the APA.
We reject plaintiff's challenge to Supreme Court's determination that the alleged lossof revenue was caused by plaintiff's breach and that the damages were proved withreasonable certainty. Defendants submitted proof that, after they began operating thepractice, the practice experienced an increase in gross revenue of 8.45% in February2005 and 4.65% in March 2005, consistent with industry trends and with theirexpectations. However, almost immediately after plaintiff's arrest in March 2005, thepractice's revenue abruptly declined and consistently followed a downward track for themonths that followed. Defendants' expert, Gary Glassman—a certified publicaccountant who specializes in evaluating veterinary practices—stated that, byMarch 2006, the practice experienced a 15.84% decrease in revenue compared to theprior year, and calculated lost profits between April 2005 and March 2006 to be $89,030.
Plaintiff's arrest and conviction were publicized in the community where the practicewas located, plaintiff was identified in the news broadcasts as either the owner or formerowner of the practice and, in fact, the news of his arrest was broadcast from its parkinglot. In order to maximize their purchase of the goodwill of the practice, defendants hadelected not to inform existing clients of the change in ownership or that plaintiff haddeparted from the practice prior to his arrest, making it even more likely that existingcustomers linked the negative publicity to the practice. Plaintiff's own testimonyestablished that he had invested years in familiarizing the community with himself as theface of the practice and he admitted that the publicity surrounding his arrest andconviction potentially had a negative impact on the practice.
Nonetheless, plaintiff submitted evidence that various changes were made bydefendants to the management of the practice and asserts that these changes could havenegatively affected its revenue. In addition, plaintiff's expert, James Leonard—acertified public accountant—concluded that there was no direct evidenceconnecting any lost revenue to plaintiff's arrest, as there was no testimony ordocumentation directly establishing that any particular client or clients left the practice asa result thereof. However, defendants denied that the alleged management [*5]changes were instituted and, while Glassman conceded thatsuch changes, if they did take place, could possibly affect the revenue of the practice, hedid not attribute the drastic and immediate decrease in revenue that occurred here to suchchanges. This testimony created clear questions of credibility, best resolved by the trialcourt. Under all the circumstances, we conclude that defendants proved to a reasonablecertainty that such decrease in revenue was caused by plaintiff's arrest (see CelebrityCruises Inc. v Essef Corp., 478 F Supp 2d 440, 447-452 [SD NY 2007]; WathneImports, Ltd. v PRL USA, Inc., 101 AD3d at 88-89; compare Kantor v 75 Worth St.,LLC, 95 AD3d 718, 719 [2012]). Moreover, plaintiff failed to offer any proofthat would establish the extent, if any, to which any efforts by defendants to mitigatedamages would have prevented such damages (see Cornell v T.V. Dev. Corp., 17NY2d 69, 74 [1966]; LaSalleBank N.A. v Nomura Asset Capital Corp., 47 AD3d 103, 107 [2007]).
However, we are unpersuaded by defendants' challenge to Supreme Court's rejectionof the use of a multiplier to determine the overall loss in the value of the practiceattributable to plaintiff's arrest. The accuracy of the multiplier used byGlassman—which was supplied by defendant Lance Sprinkle—was notverified by any outside source or by Glassman. Furthermore, all of the evidencepresented regarding defendants' damages was confined to the one-year period betweenplaintiff's arrest and conviction, and defendants presented no evidence that the lostprofits during that period were indicative of an overall decrease in the value of thepractice. In fact, the evidence showed that revenue increased after plaintiff's conviction.According deference to Supreme Court's credibility determinations, we find no reason todisturb that court's conclusion that Glassman's use of a multiplier to forecast future lossesattributable to plaintiff's arrest was not supported by the record.
Finally, we agree with defendants' contention that they were entitled to prejudgmentinterest on the damages caused by plaintiff's breach of the APA (see CPLR 5001[a]; J. D'Addario & Co., Inc. vEmbassy Indus., Inc., 20 NY3d 113, 117-119 [2012]). Likewise, plaintiff wasentitled to 5% interest on defendants' outstanding obligation as called for in thepromissory note. In light of our decision, we remit to Supreme Court for the calculationof appropriate judgments.
To the extent not specifically addressed herein, we have examined the parties'remaining contentions and find them to be without merit.
Rose, J.P., Spain and Egan Jr., JJ., concur. Ordered that the order is modified, on thelaw, without costs, by reversing so much thereof as accelerated the promissory note anddeclined to award interest to both parties; matter remitted to the Supreme Court forfurther proceedings not inconsistent with this Court's decision; and, as so modified,affirmed. [Prior Case History: 32 Misc 3d 1231(A), 2011 NY Slip Op51518(U).][*6]
Footnote 1: The total purchase pricewas $1,700,000, which included $600,000 for real estate, $908,000 for goodwill,$92,000 for inventory and equipment and $100,000 for the trade name and a noncompeteagreement.
Footnote 2: Plaintiff wassubsequently convicted of that crime in February 2006 (see Va Code Ann§ 18.2-374.3 [B]).
Footnote 3: We also agree withSupreme Court that section X (A) (a) (5) of the APA, falling under the noncompetitionagreement clause, was inapplicable here.
Footnote 4: However, becauseplaintiff's breach of the APA was not " 'so substantial that it defeat[ed] the object of theparties in making the contract' " (Robert Cohn Assoc., Inc. v Kosich, 63 AD3d 1388, 1389[2009], quoting Frank Felix Assoc., Ltd. v Austin Drugs, Inc., 111 F3d 284, 289[1997]), we reject defendants' claim that they were relieved of all outstandingobligations under the promissory note.