BRYAN W. McLELLAND, D.D.S. and KRISTA McLELLAND, husband and wife, and the marital community composed thereof, and BRYAN W. McLELLAND, D.D.S., P.S., a Washington professional services corporation, Respondents,
MARK C. PAXTON, D.D.S. and DIANE S. PAXTON, husband and wife, and the marital community thereof, and MARK C. PAXTON, D.D.S., P.S., a Washington professional services corporation, Appellants.
review a complicated dissolution, between two oral surgeons,
of a professional limited liability company, which review
includes the question of whether such a company can possess
goodwill separate from the professional practitioners. We
affirm all rulings of the trial court, including the finding
of goodwill, except that we reverse the grant of prejudgment
interest afforded respondent Bryan McLelland on the assets
Bryan McLelland is and appellant Mark Paxton was an oral and
maxillofacial surgeon. Paxton died during the pendency of
this appeal, and this court substituted the Estate of Mark
Paxton as appellant. We will, however, still refer to the
appellant as Mark Paxton. The facts of this appeal become
complicated because of the various corporations and limited
liability companies utilized by Paxton and McLelland when
conducting an oral and maxillofacial practice. Despite the
use of other business structures, the parties sometimes treat
the dispute as one between partners. The parties
alternatively label the dispute as centering around the
dissolution of a professional limited liability company owned
by corporations maintained by McLelland and Paxton or
centering around the dissolution of a partnership between
McLelland and Paxton. The parties alternatively refer to the
relevant claimant as Bryan McLelland or McLelland P.S. and
alternatively call the appellant Mark Paxton or Paxton P.S.
March 2003, Mark Paxton hired Bryan McLelland as an associate
in Paxton's oral surgery practice. In March 2005,
McLelland and another associate, Melanie Lang, each through
his or her individual professional service corporation,
respectively purchased a one-third interest in Paxton's
practice also owned by Paxton in a professional services
corporation. We identify the three professional service
corporations as Paxton P.S., McLelland P.S., and Lang P.S.
McLelland P.S. and Lang P.S. each paid Paxton P.S. $619, 835,
for a total of $1, 239, 670, to purchase the interests in the
oral surgery practice.
March 25, 2005, the parties entered executed acquisition
agreements to consummate the purchases. Under the agreement
between McLelland P.S. and Paxton P.S., McLelland P.S.
purchased an undivided interest in the assets of Paxton's
practice, "including equipment, furniture, and fixtures,
accounts receivable, supplies, one of the buildings in which
the practice is operated, goodwill, and patient
files." Clerk's Papers (CP) at 2215 (emphasis
added). $261, 667 of the $619, 835 purchase price paid by
McLelland was allocated for the practice's goodwill. The
acquisition agreement entered by Lang P.S. possessed similar
define the rights and responsibilities attended to the three
oral surgeons' interests in the oral and maxillofacial
practice, the three professional services corporations
entered into a partnership agreement. We quote relevant
portions of the lengthy partnership agreement, replete with a
table of contents, entered by Paxton P.S., McLelland P.S.,
and Lang P.S. The terms of the agreement control some of the
issues on appeal. The agreement, with a penchant for
Unless otherwise agreed by the Parties and Shareholders,
however manifested or evidenced, the goodwill of the
Partnership shall be owned, or considered owned, by the
Shareholders, in undivided interests, based on Percentage
Ownership of the Partnership.
CP at 45 (emphasis added). The partnership agreement
prohibited transfer to a third party of
any interest in the "contract receivables" (oral
and maxillofacial surgery contracts in progress), accounts
receivable, patient records, or goodwill of the
practice, the Partnership, any of the Parties, or any of
CP at 47 (emphasis added). The partnership agreement also
declared that the partnership could
be terminated on at least six (6) months' notice by any
of the Parties, at or after the Initial Term, however, the
termination date must correspond to an anniversary hereof.
CP at 35. The partnership agreement further read:
It is hereby acknowledged by the Parties and Shareholders
that no definite and equitable methodology presently exists
for dividing the jointly owned Practice Interests of the
Parties and Shareholders, upon termination of this Agreement,
for any reason. The Parties and Shareholders further
appreciate that future economic and financial uncertainties
further make it impossible to define such a methodology.
Consequently, upon the termination of this Agreement, and the
necessary division of the jointly owned Practice Interests,
the Parties agree to negotiate, in good faith, so to divide
such jointly owned Practice Interests. Further, the Parties
will then determine which of the Parties will continue to
practice at each of the places of business of the
CP at 79.
partnership agreement provided, in pertinent part:
Dissolution and Reconstituting.
A. Default Defined. It is agreed that upon the
occurrence of any of the following events, constituting
defaults, this Agreement may be dissolved, either during the
Initial Term, or any annual renewal period, at the option of
the non-defaulting Party or Parties, except for those
provisions expressly intended and provided for to survive.
Such events are as follows:
(viii) Claim Against Other Parties or Shareholders.
Any of the Parties or any of the Shareholders shall take any
action, or fail to take any action, which results in any
material claim, suit, or action being filed, or threatened or
asserted in any way against any of the other Parties or
Shareholders, except fully insured malpractice claims (the
deductible of which shall be paid by the Party or Shareholder
who treated the patient making such malpractice claim), or
which results in any material damage to or material liability
of any of the other Parties or Shareholders.
CP at 50-52.
partnership agreement paragraph addressed an award of
prejudgment interest. The paragraph reads:
B. Interest on Unpaid Monies. Whenever herein it is
provided that a Party or a Shareholder shall pay any sums of
money, either to any of the other Parties or other
Shareholders, or to third parties, including, but not limited
to . . . all other sums required to be so paid hereunder, or
under the terms of any other documentation entered into in
connection herewith, notwithstanding any contrary terms
thereof, if any of such sums are not paid, as and when due
and payable to the other Parties or Shareholders, or to third
parties, if the other Parties or Shareholders, in the case of
sums being owed to third parties, shall be then, or at any
time thereafter, required to pay the sums owed by such Party
or Shareholder by whom such sums are owed, to any such third
party, for any reason, including as a result of being jointly
or severally liable for the payment of all or any portion of
such sums, or in order to protect their own interests or
assets, and including any pension plan for the benefit of
employees, such sums shall bear interest at the highest
lawful rate, from the due date, until paid.
CP at 82-83. Finally, a closing paragraph declared:
If any action at law or in equity is necessary to enforce the
terms of this Agreement, the prevailing Party or Parties, or
Shareholder or Shareholders, shall be entitled to reasonable
attorneys fees and costs, in addition to any other relief to
CP at 83.
2005, after briefly existing as Paxton, Lang, and McLelland
Oral and Maxillofacial Surgery Partnership, the three oral
surgeons changed the business entity that conducted the
surgery practice from a general partnership to a professional
limited liability company, Spokane OMS, PLLC. Spokane OMS
thereafter conducted business under the trade name Spokane
Oral & Maxillofacial Surgery. Despite the formation of a
limited liability company, the partnership agreement remained
the governing document for the relationship between the three
surgeons and their respective professional services
corporations. The record does not show that they executed any
operating agreement for the professional limited liability
company or that the oral surgeons or any of their
corporations entered any new agreement on the formation of
the limited liability company.
OMS maintained two office locations in 2005: a Spokane Valley
office and a South Hill office. Melanie Lang and Bryan
McLelland created a separate entity, SOMFS Property Holdings,
LLC when they purchased interests in the oral and
maxillofacial practice. SOMFS bought a two-thirds interest in
the Spokane Valley building, while Paxton P.S. held the
remaining one-third interest.
Paxton and his wife, Diane Paxton, owned a 20 percent
interest in South Stone, LLC, which originally leased the
South Hill location of the oral and maxillofacial practice to
Paxton P.S. After McLelland P.S. and Lang P.S. acquired an
interest in the practice, Spokane OMS paid rent to South
Stone for the South Hill location. In 2008, the three
doctors' respective professional service corporations
purchased a fractional interest in a third building, a Post
Falls, Idaho office, owned principally by another entity. The
practice opened a third location for the oral and
maxillofacial practice in the Post Falls office building.
2014, McLelland P.S. and Paxton P.S. each paid Lang P.S.
$265, 000, including $121, 250 in goodwill, to purchase her
interest in the practice. The three surgeons agreed to a
discounted price for Lang's interest after McLelland and
Paxton demanded that Lang exit the practice "for
significant reasons." Report of Proceedings (RP) at 87.
The record does not disclose those reasons. As a consequence
of the purchase of Lang P.S.'s interest, Paxton P.S. and
McLelland P.S. each owned an undivided one-half interest in
the assets of Spokane OMS, PLLC. Following Lang's
departure, McLelland and Paxton continued to operate the
practice from the three separate locations.
McLelland and Mark Paxton also encountered unknown
irreconcilable differences and began to discuss separation
and division of assets. On August 4, 2014, Bryan McLelland,
through counsel, sent a letter to Mark Paxton's counsel
declaring McLelland's intent to dissolve Spokane OMS in
six months, as allowed by the partnership agreement. The
lengthy letter also responded to an offer by Paxton with
regard to a division of the professional limited liability
company's assets. Consistent with the partnership
agreement, the two surgeons began negotiating the division of
the practice's assets, including assignments to the
surgeons of the locations where the limited liability company
held offices. Under the terms of the partnership agreement,
the oral and maxillofacial partnership contractually
dissolved on February 28, 2015, six months after Bryan
McLelland gave his notice.
23, 2015, Bryan McLelland's counsel sent a letter to
South Stone, LLC requesting that South Stone lease, in part,
the oral and maxillofacial practice's South Hill location
to McLelland, P.S. South Stone declined the request.
Accordingly, McLelland's and his corporation's
ability to practice at the South Hill location ended.
January 28, 2015, Bryan McLelland and McLelland P.S. sued
Mark Paxton and Paxton P.S. for breach of contract,
detrimental reliance, negligent misrepresentation, breach of
the implied duty of good faith and fair dealing, and breach
of fiduciary duties. As part of the action, Bryan McLelland
and his corporation sought dissolution of Spokane OMS, PLLC.
On March 20, 2015, the superior court, by stipulated order,
judicially dissolved the partnership of McLelland P.S. and
Paxton P.S. pursuant to RCW 25.15.275, a former limited
liability company statute. On that same day, the superior
court appointed a receiver to supervise the winding down
process and to preserve the professional limited liability
company's business as a going concern for a reasonable
period of time until a final division of Spokane OMS's
assets and liabilities between the owners of the company and
until Mark Paxton and Bryan McLelland could practice
separately. After the judicial dissolution, Paxton P.S. and
McLelland P.S. continued to utilize the limited liability
company's assets, including its equipment, location,
employees, name, website, and phone number. The two surgeons
divided the staff and files by agreement and continued to
practice in the same three locations. Meanwhile, the parties
continued to negotiate details of the dissolution, including
locations of the respective practices.
2015, without advance notice, South Stone, LLC, owned in part
by Mark Paxton, evicted Spokane OMS and McLelland P.S. from
the South Hill office. South Stone then entered into a new
long-term lease with Paxton P.S. for the location.
November 24, 2015, Mark Paxton and Paxton P.S. asserted
counterclaims against Bryan McLelland and McLelland P.S. for
(1) interference with contractual relationships, (2) breach
of contract for refusing to provide financial contributions
as agreed by the parties, (3) invasion of privacy for
intentionally intercepting and converting e-mail
communications between Paxton P.S. and its employees and
between Dr. Paxton and South Stone, LLC, (4) infringement of
intellectual property rights in a logo and tradename, (5)
breach of fiduciary duty and self-dealing because of
McLelland's treatment of patients with a device and
treatment protocol named NuCalm, in which McLelland owned an
interest, (6) and breach of the duty of good faith and fair
dealing in failing to inform Paxton of McLelland's
ownership interest in NuCalm and American Healthcare Lending.
On March 18, 2016, Bryan McLelland and McLelland P.S. amended
their complaint to include an allegation of constructive
fraud against Mark Paxton and Paxton P.S. for evicting
McLelland from the South Hill office.
trial, the parties presented competing motions for summary
judgment. The trial court granted McLelland P.S.'s motion
for partial summary judgment that determined Paxton P.S.
breached the partnership agreement, breached its fiduciary
duties, and committed constructive fraud by evicting Spokane
OMS and McLelland P.S. from the South Hill location in June
2015. A summary judgment order read that McLelland P.S.
withdrew its claims against Paxton P.S. for three incidents
of alleged theft of patients and for the alleged theft of
of the competing summary judgment motions, Paxton P.S. moved
for partial summary judgment on the issue of whether
McLelland P.S. can recover an amount for the goodwill of
Spokane OMS as part of the limited liability company
dissolution. Paxton argued that, as a matter of law, the oral
and maxillofacial practice lacked any goodwill after February
28, 2015, because the limited liability company was dissolved
and was no longer a going concern. The trial court ruled that
the existence and value of goodwill of Spokane OMS raised
questions of fact, and the court thereby denied the summary
remaining claims and counterclaims went to trial. Mark Paxton
and Bryan McLelland reached a settlement agreement on the
second day of trial regarding the logo and name of the
practice, with Paxton agreeing to pay $20, 000 for the rights
to both. The principal questions at trial surrounded the
existence and value of goodwill of the practice.
McLelland called to testify valuation expert Lenore Romney.
Romney testified that the oral and maxillofacial practice had
enterprise goodwill that an appraiser could value on a going
concern basis. Romney averred:
[McLELLAND COUNSEL:] And then the-the very next sentence in
that same paragraph, you state, "Since the assets would
continue in use, my opinions represent fair market value
on a going concern basis.'" Can you explain
that opinion to this court?
[ROMNEY:] So we-we have a unique situation in-in this-in this
case. It's unlike a-a corporation that we might value
where all of the assets are owned by the business we're
valuing, okay? So in this case, the way the parties set it up
is Dr. Paxton's professional corporation sold undivided
interests in these practice assets to the individual, Dr.
Lang and Dr. McLelland's, professional corporations; but
then they have a separate entity that's administering the
practice affairs, and that entity doesn't own any of
these assets. So it's-it's unlike maybe what you
might think of as the typical situation. So these assets that
we're talking about that have to be-that are still owned
in undivided interest, that now we have to figure out what to
do with that comprise the assets in use at the practice
locations, are actually owned in Dr. McLelland's PC and
Dr. Paxton's PC in undivided interest. So the only way we
can really think about them is that the assets are at the
locations, that that's what comprises the [S]OMS
practice; we have three locations, and all the assets that
were originally acquired by Dr. McLelland in 2005 are still
all in use at those offices today.
And so that's what "going concern" means, is
that you're going to continue using these assets. And so
this entity, the PLLC that ends up dissolving after
they're not going to practice together anymore, is
irrelevant, because it never owned the assets in the first
place. So-but that doesn't mean that the assets inside of
the two docs' professional corporations, they are still
being used, they are continued to use. So from the [S]OMS
practice standpoint, it's still a going concern, those
assets are being used.
RP at 273-74 (emphasis added). Romney testified that many of
the same features that the practice had on February 28, 2015,
still existed at the time of trial:
[T]he locations are still being used; ... the name that the
practice calls itself... is still... a presence; the website
is still active; the phone numbers are still in use; and . .
. many of the same . . . staff are still working at the
offices; and ... the systems and the procedures that the
parties used before [the] 3/1/2015 [dissolution] are still
RP at 267.
Romney declared that the value of goodwill of the oral and
maxillofacial practice could be calculated by assessing a
discrete value for each of the three practice locations.
While relying on a fair market approach, Romney calculated a
goodwill value of $821, 760 for the Valley office, $503, 470
for the South Hill office, and $497, 158 for the Post Falls
office, for a total goodwill value of $1, 822, 388. Romney
relied on "value indications" from the 1999
practice prospectus for Mark Paxton's solo practice, the
goodwill value used for the McLelland P.S. and Lang P.S. 2005
purchases of an undivided interest in the practice, the
McLelland P.S. and Paxton P.S. 2014 purchase of the Lang P.S.
interest in the limited liability company, and the 2014
Goodwill Registry, a recognized industry source that
reports on sales of professional practices. By employing the
2005 purchase price, Romney determined that patient files
represented 8.1 percent and goodwill represented 25.3 percent
of the value of the practice. When combined, the two
components equaled a total intangible value of the practice
of 33.4 percent. Romney then identified the net practice
production for each office and multiplied that number by 8.1
percent for the patient files. She then took the net
production for each office and multiplied that number by 25.3
percent for goodwill. Adding the two components, Romney
reached the total value of the practice to be $1, 822, 388.
Mark Paxton presented two valuation experts. Expert Charles
Wilhoite disputed Lenore Romney's conclusions that entity
goodwill existed, and he argued that her failure to consider
the earnings of the practice invalidated her opinion.
I didn't think there was any material level of
institutional goodwill based on the fact the practice
wasn't generating earnings sufficient enough to pay the
practitioners at a level equal to market-based compensation.
RP at 472.
Paxton's second expert, Scott Martin, valued only Spokane
OMS, PLLC, which purportedly held no assets itself, an
anomaly that neither party mentions in this appeal. On
cross-examination, Dr. McLelland's attorney asked Martin:
[COUNSEL:] ... I take it since you were valuing the PLLC and
instead of the entities that the assets were held in, you
weren't aware that the assets were actually owned in
undivided interest by Dr. McLelland and Dr. Paxton in their
professional service corporations; is that a fair conclusion?
[MARTIN:] I would say I didn't think about it that way
when I was doing my valuation, yes.
RP at 552. Martin also admitted that he did not perform any
valuation of assets of the practice as they existed as of
February 28, 2015, the date of contractual dissolution.
Nevertheless, Martin, even without considering the assets
owned by the parties' professional service corporations,
valued the practice's goodwill at $148, 111 in 2013. He
also found that, on April 30, 2014, the three locations of
the practice comprised entity goodwill totaling $206, 548.
Because Martin believed that the practice lacked any goodwill
after dissolution, he failed to provide any valuation for the
practice's goodwill on or after February 28, 2015.
his counsel's closing argument, Mark Paxton raised, for
the first time, a contention that Bryan McLelland violated
the partnership agreement by prematurely filing the lawsuit.
According to Paxton, a partner in the practice could not sue
for a division of assets until after the professional limited
liability company dissolved under the terms of the
partnership agreement. Spokane OMS was contractually
dissolved on February 28, 2015, but McLelland filed suit on
January 28, 2015. Counsel intoned during summation:
So if you go to Plaintiffs Exhibit 4, A at page 21, it
defines default and it basically says these are some of the
things that can be default and it lists out a number of them.
Well, one we 've never talked about in this case
is at page 22-23 in Section 7-(viii), "Claims Against
Other Parties or Shareholders." It states, "Claim
against other Parties or Shareholders. Any of the Parties or
any of the Shareholders"-and this is what-if they do it,
it's a bad thing-"shall take any action, or fail to
take any action, which results in any material claim, suit,
or action being filed or threatened or asserted in any way
against any of the other Parties or Shareholders. . ."
The plaintiffs jumped the gun. They filed their lawsuit
before the dissolution had occurred.
RP at 805 (emphasis added) (alteration in original).
trial court issued a letter ruling. In the ruling, the trial
court concluded that entity goodwill existed as of February
28, 2015. The court deemed location to be a critical factor
in the goodwill value of the practice. The trial court
adopted the goodwill value by location opined by Lenore
Romney and thus attached a total value of goodwill for the
practice at $1, 822, 388, to be split between the parties
depending on the location or locations awarded each.
letter ruling, the trial court awarded McLelland P.S. the
Post Falls location and Paxton P.S. the South Hill and Valley
locations. To ensure an equal distribution of the total value
of goodwill at the three practice locations, the trial court
ordered Paxton P.S. to pay McLelland P.S. $414, 036 as an
equalization payment. The trial court also awarded 12 percent
prejudgment interest on the equalization payment beginning
August 4, 2014, to remedy Paxton P.S.'s use of its
partner McLelland P.S.'s assets "without
remuneration." CP at 3089-90. The trial court granted
Paxton P.S.'s claim for reimbursement for certain
expenses at the Spokane Valley office and ordered McLelland
P.S. to pay Paxton P.S. $7, 587.99 for those expenses.
trial court denied the following claims asserted by Mark
Paxton against Bryan McLelland: (1) breach of fiduciary duty
by reason of treating patients with a device and treatment
protocol named NuCalm, in which McLelland held an interest,
(2) McLelland's failure to inform Paxton of
McLelland's ownership interest in NuCalm and American
Healthcare Lending, (3) breach of contract by reason of
McLelland's purchase of a Sullivan Road building, (4)
breach of fiduciary duty related to McLelland's purchase
of the Sullivan Road building, and (5) breach of the
partnership agreement by filing a complaint before
dissolution. Although the trial court already granted summary
judgment in favor of McLelland P.S. on its claims of breach