Taheri v. Khadavi, 2012 Cal. App. Unpub. LEXIS 312 (Jan. 17, 2012)
After establishing a successful dermatology clinic, two doctors decided to open a separate surgery center with a third doctor, an anesthesiologist. Without putting anything in writing, the three doctors agreed to invest equal amounts in the new clinic and share profits equally. They did not discuss the number of patients each would be expected to treat or the business each would be expected to generate.
Instead, they assumed that one of the doctors, who was independently involved in several other dermatology practices, would send his patients for treatment at the new center, for which it would charge a facility fee. Otherwise this doctor would not have any active role in the center’s daily operations or management.
A doctor defrauded
After a two-year wait, the surgery center finally underwent an inspection by the Accreditation Association for Ambulatory Health Care (AAAHC), which promised accreditation within two weeks. Despite the positive report, the two managing doctors told the third, nonactive partner that the surgery center had failed its AAAHC accreditation and that he needed to sell his interest "right away" to the anesthesiologist, who would use the clinic for minor procedures and extra office space. The sale price was $140,000.
Accordingly, in March 2006, the two dermatologists sold their 33.3% shares to the anesthesiologist for a total of about $283,000. Three weeks later, AAAHC awarded accreditation and the surgery center opened for business. The nonactive doctor had no idea of these events—or that six months later, the other doctor bought back into the practice for $282,700 (thus repaying the anesthesiologist what he’d just spent). In 2006, alone, the two partners withdrew a total of $600,000 in profits from the center. When their former, nonactive partner finally learned what they’d done in 2008, he sued for fraud and breach of fiduciary duty.
At trial, the plaintiff’s damages expert said he was entitled to recover over $5.3 million in lost profits, which represented one-third of the over $16 million in profits that the center had made from the three years since its inception to the time of trial. The expert based these calculations on the center’s financial records and included salary deductions (totaling over $1.9 million) for the still-practicing defendants.
The plaintiff’s expert also calculated the surgery center’s value under three methods. From this total, she deducted the amount the plaintiff received for the sale of his interest ($140,000) to calculate his proportionate (33.3%) share of business at $3.7 million. From a possible total of approximately $9 million in total lost profits and business value, the jury awarded the plaintiff just over $8 million, but then added nearly $1 million in punitive damages, and the defendants appealed.
Defendants could have put on their own expert
The defendants first argued that since the plaintiff had ratified the sales agreement, he could not recover lost profits, but was limited to recovering the actual value of his shares at the time of the sale. Under California law, however, when a plaintiff is defrauded by its fiduciaries, it is entitled to the "broader" measure of damages, including the actual value of the property that was taken as well as any prospective profits, the court held. In this case, given the defendants’ breach of fiduciary duties, the plaintiff could recover lost profits and the value of his shares at the time of trial.
Even if the plaintiff was entitled to lost profits, the defendants claimed, his evidence did not reliably support the jury’s award. But the court said despite having the opportunity, the defendants did not present a damages expert at trial to criticize the analysis, methods, and conclusions by the plaintiff’s expert. For these reasons, the appellate court found sufficient evidence to support the $8 million lost profits and lost business value award, plus $1 million in punitive damages.
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