Opinion
Civil Action No. DKC 2004-1387.
January 21, 2005
MEMORANDUM OPINION
This case is before the court on appeal from the order of Bankruptcy Judge Duncan W. Keir, granting in part and denying in part the objection of debtor/appellants Yonas Zegeye and Hirut Seleshi to the proof of claim of appellee Kevork Keshishian, M.D., Case No. 97-22971-DK (hereinafter "Bankr. Proceeding"), paper no. 1000, and ordering that the claim in the amount of $307,500 with interest be paid pursuant to the Chapter 11 Trustee's Third Amended Plan of Reorganization. Bankr. Proceeding, paper no. 1369. Oral argument is deemed unnecessary because the facts and legal arguments are adequately presented in the briefs and record, and the decisional process would not be significantly aided by oral argument. See Fed.R.Bankr.P. 8012. For the reasons that follow, the court will affirm in part and reverse in part the bankruptcy court's ruling, and remand to that court for further proceedings consistent with this opinion.
I. Background
The following facts are undisputed except as noted. Keshishian, a licensed and board certified radiologist, practiced at a hospital in New Hampshire until 1996. During that period, Keshishian, who was trained and certified before CT scans came into general use, worked with other radiologists who read CT scans. On one occasion Keshishian read a CT scan incorrectly, whereupon the hospital recommended a two to three week continuing education course on CT scans, but Keshishian, not believing that such a course would be sufficient, instead ceased reading CT scans.
Sometime in late 1994 or early 1995, Keshishian and Zegeye met. Keshishian wanted to relocate to Maryland from New Hampshire, and Zegeye, who ran several MRI imaging centers in Pennsylvania but had himself relocated to Maryland, wanted to hire, or take on as a business partner, a radiologist for a new chain of medical services centers in Maryland. Zegeye alleges that "[i]t was discussed that Dr. Keshishian was going to read all CT scans" and that it was "critical to Dr. Zegeye . . . that Dr. Keshishian . . . be able to read CT scans at the center." Paper no. 5, at 4. Keshishian, on the other hand, alleges that, despite taking a month-long fellowship to learn more about CT scans, he "did not feel confident reading CT scans," and "[w]hen he began negotiations with Dr. Zegeye . . . he made clear to Dr. Zegeye that they needed to find other specialists to read these types of scans and it was agreed that this work would be outsourced." Paper no. 6, at 5.
On March 14, 1996, Keshishian and Zegeye entered into an employment agreement. See Bankr. Proceeding, paper no. 1000, Exh. B (hereinafter "Empl. Agreement"). That contract stated that "the Radiologist agrees to read and interpret, and the Company agrees to employ the Radiologist to read and interpret all non-MRI and non-invasive diagnostic radiology studies of the Facility, on an exclusive basis." Empl. Agreement at ¶ 1. The contract provided that Keshishian would be paid at least $12,500 per month, "paid as follows: . . . $9,500 by The Company . . . [and] $3,000 per month by a related medical company for which Radiologist shall act as Medical Director." Id. at ¶ 3. That "related medical company" was to be "owned by Yonas Zegeye." Id. at ¶ 7. The contract was to take effect on the earlier of the date the center opened for business or July 1, 1996, and continue for five years; another provision allowed Zegeye to postpone the start date under certain circumstances, "but in no case shall the term of this Agreement be later than September 1, 1996." Id. at ¶ 4. The contract required that Keshishian be "a duly licensed Radiologist in Maryland with Board Certification in Diagnostic Radiology. In addition, the Radiologist has and will maintain all professional and business licenses necessary and appropriate with respect to his practice of medicine and diagnostic interpretation of the Diagnostic Studies." Id. at ¶ 6(b).
On June 21, 1996, Zegeye entered into a lease with Prince George's Metro Center, Inc. ("PGMC") for office space for the planned business. Keshishian and Zegeye also did other work to prepare for the opening of the new business, including traveling to hospitals to locate specialists who would, according to Keshishian, read CT scans. The business, however, never opened. On May 22, 1997, Zegeye subleased the office space to Prince George's Imaging Center, Inc. ("PGIC"), an entity controlled by Keshishian, so that Keshishian could temporarily provide radiology services on his own while Zegeye continued to try to sell his Pennsylvania businesses in order to acquire the capital necessary for the new Maryland business. On October 16, 1997, Zegeye completed the sale of his Pennsylvania businesses. Zegeye alleges that, when the parties signed the sublease, "[I]t was further agreed that when and if Dr. Zegeye sold his imaging centers in Pennsylvania, then Dr. Zegeye would again take over the Premises, put in his CT scan, and complete his imaging center in the Premises." Paper no. 5, at 7. Zegeye further alleges that he approached Keshishian prior to October 16, 1997 to tell Keshishian that he was prepared to move forward as originally contemplated, but that Keshishian refused. Keshishian denies this allegation, and asserts that, because he was losing money on the temporary operation, he would have taken up any such offer. On October 28, 1997, without Zegeye's signature or consent, Keshishian signed a sublease addendum effectively entering into a direct arrangement with PGMC to use the office space. The total amount paid by Zegeye to Keshishian under the agreement was $17,500.
On November 14, 1997, Debtors filed a voluntary petition under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101, et seq. On April 22, 1998, Keshishian filed a proof of claim for $732,500 for payments Keshishian asserted were owed pursuant to the employment agreement, which, Keshishian asserted, was breached by Zegeye. On March 15, 2004, the bankruptcy court partially granted the claim, in the amount of $307,500. Bankr. Proceeding, paper no. 1369. The court found, inter alia, that (1) the employment agreement took effect on September 1, 1996, for a five year term; (2) Keshishian was due $12,500 per month from that date for the full five year term; (3) Zegeye paid Keshishian only a total of $17,500, thus breaching the employment agreement; (4) Keshishian never waived his right to be paid according to the terms of the employment agreement; (5) the employment agreement was terminated on October 28, 1997, when Keshishian signed the sublease addendum with PGMC, effectively starting his own radiology practice; (6) Keshishian's termination of the agreement was "done in an effort to reasonably mitigate the damages which Dr. Keshishian was suffering from non-payment under the agreement;" (7) the employment agreement imposed qualifications Keshishian was required to have, which he met, and those requirements did not include the ability to read CT scans; (8) the clear language of the employment agreement required that Keshishian read CT scans, but "he never failed to read a CT scan because none was ever there for him to read, so he "never failed to do the duties imposed by the contract;" and (9) because performance under the contract was terminated on October 28, 1997, under section 502(b)(7) of the Bankruptcy Code, 11 U.S.C. § 502(b)(7), his claim was valid through "one year following . . . the date on which the . . . employee terminated performance," or October 28, 1998. See Bankr. proceeding, paper no. 1368 (hereinafter "Transcript of Ruling"). The judge therefore allowed a claim including payment owed at $12,500 per month from September 1, 1996 through October 28, 1998, or 26 months, totaling $325,000; minus $17,500 already paid by Zegeye to Keshishian; for a total allowed claim of $307,500. See id.; Bankr. Proceeding, paper no. 1369. Debtors now appeal.
Section 502(b)(7) provides, in pertinent part:
(b) [if] objection to a claim is made, the court, after notice and a hearing, shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim in such amount, except to the extent that — . . .
(7) if such claim is the claim of an employee for damages resulting from the termination of an employment contract, such claim exceeds —
(A) the compensation provided by such contract, without acceleration, for one year following the earlier of —
(i) the date of the filing of the petition; or
(ii) the date on which the employer directed the employee to terminate, or such employee terminated, performance under such contract; plus
(B) any unpaid compensation due under such contract, without acceleration, on the earlier of such dates. . . .
II. Standard of Review
On appeal from the bankruptcy court, the district court acts as an appellate court and reviews the bankruptcy court's findings of fact for clear error and conclusions of law de novo. See In re Johnson, 960 F.2d 396, 399 (4th Cir. 1992); Travelers Ins. Co. v. Bryson Prop., XVIII ( In re Bryson Prop., XVIII), 961 F.2d 496, 499 (4th Cir.), cert. denied sub nom., Bryson Prop., XVIII v. Travelers Ins. Co., 506 U.S. 866 (1992).
III. Issues on Appeal
Debtors raise four issues on appeal, contending that (1) because Keshishian was unable to read CT scans, he did not satisfy a condition precedent to the employment agreement, and is therefore not entitled to be paid according to the agreement; and that even if the employment agreement were effective, (2) because the agreement was terminated on October 28, 1997, Keshishian is not entitled to payment for services rendered after that date; (3) Keshishian is entitled to, at most, $9,500 per month, not the $12,500 per month determined by the bankruptcy court; and (4) Keshishian waived his right to any claim under the agreement.
A. Ability to Read CT Scans As Condition Precedent to the Contract
Appellants first argue unpersuasively that "under basic principles of contract law, Dr. Keshishian is not entitled to any damages as the Employment Agreement included a condition precedent which Dr. Keshishian never satisfied." Paper no. 5, at 11. The bankruptcy court addressed this issue squarely and correctly:
Since Dr. Keshishian was to lead everything in the way of the diagnostic radiology studies except for invasive studies and MRI studies, the clear language of the radiology interpretation agreement would include CT scans.
But the document also clearly sets forth with precision the qualifications that Dr. Keshishian had to have. On page one of the agreement, under paragraph one, the third paragraph thereunder, the agreement states, and I quote, "The radiologist shall be duly licensed in the State of Maryland and shall hold board certification in diagnostic radiology. The radiologist has and shall maintain during the term of this agreement all professional and business licenses necessary or appropriate with respect to the radiologist's practice of medicine and interpretation of the diagnostic studies."
There is no evidence that would support a finding that Dr. Keshishian was unlicensed in the State of Maryland or that he was not board certified in diagnostic radiology. Indeed, the evidence is to the contrary.
What evidence is pointed to is first of all Dr. Keshishian's own statement that he did not feel that he should be reading CT scans and intended someone else to do so. Indeed, the contract provides that he could, as to his duties, designate a physician to read and interpret studies and if he so did, the designated physician would be paid by Dr. Keshishian.
Perhaps if there had ever been some CT scans for Dr. Keshishian to read, he would have done so, I do not speculate, but he never failed to read a CT scan because none was ever there for him to read.
This agreement does not state that he had to have some additional qualification beyond a license and a board certification. The combination therefore of these facts is as follows: Dr. Keshishian met the standards required in the contract and never failed to do the duties imposed by the contract. Transcript of Ruling, at 11-12. Oddly, Appellants' appeal brief does not refute any of the bankruptcy court's findings, but instead reiterates arguments they appear to have made already to the bankruptcy court. Simply put, it was not a condition precedent to the agreement that Dr. Keshishian be able to read CT scans, because he was not required to be able to do so at the time the agreement was made; rather, the agreement stated only that "the Radiologist agrees to read and interpret, and the Company agrees to employ the Radiologist to read and interpret all non-MRI and non-invasive diagnostic radiology studies of the Facility, on an exclusive basis." Empl. Agreement at ¶ 1. In other words, the agreement required Dr. Keshishian to be able to read CT scans, at the earliest, upon the first instance of actually needing to read one in the course of his employment. Had that need ever become imminent, Dr. Keshishian might have obtained the necessary qualifications in time to perform according to the terms of the agreement. Because that need never arose, he did not — indeed, could not — breach that part of the agreement.
B. Post-Termination Damages
The bankruptcy court found, and the parties do not dispute, that when he signed the sublease addendum on October 28, 1997, "Dr. Keshishian in effect terminated his employment as an employee and turned to a direct arrangement with the landlord." Transcript of Ruling, at 10. The bankruptcy court then found that Zegeye was liable for payment on the full five-year term of the contract, but that as a chapter 11 debtor, his liability was limited by 11 U.S.C. § 502(b)(7), see supra at 6, and thus awarded damages in the amount of the salary promised to Keshishian from the start date of the contract, September 1, 1996, through October 28, 1998, or one year after the termination of the contract. Appellants argue that Keshishian is not entitled to payment for services rendered after the termination date of the contract. Appellants assert that because Dr. Keshishian terminated the agreement, "no further compensation was due from [October 28, 1997] forward and the Bankruptcy Court erred in reaching that result." Paper no. 5, at 15.
Contract interpretation and the availability and measure of damages are questions of law. Hendricks v. Cent. Reserve Ins. Co., 39 F.3d 507, 512 (4th Cir. 1994) (contract interpretation); Wells v. Chevy Chase Bank, F.S.B., 768 A.2d 620, 629-30 (Md. 2001) (contract interpretation); Rice v. Community Health Ass'n, 203 F.3d 283, 287 (4th Cir. 2000) (damages); Baird v. Chesapeake Potomac Tel. Co., 117 A.2d 873, 879 (Md. 1955) (damages). This court therefore reviews the bankruptcy court's decisions on these issues de novo.
The bankruptcy court erred in concluding that Appellants were liable for the full five-year term of the agreement. The contract stipulates that "[t]he term of this Agreement . . . shall continue for a period of five years, unless sooner terminated as herein provided." Empl. Agreement at ¶ 4 (italics added). The employee was permitted to terminate the agreement "upon breach by the Company of any covenant, condition, [or] provision" that is not cured within thirty days of notice of that breach. Id. Neither party disputes Judge Keir's explicit finding that Keshishian terminated the agreement on October 28, 1997. As of the day of the termination, the term of the agreement was no longer five years; it came to an immediate end. The employer, therefore, is liable only for the fees due to Keshishian from September 1, 1996 until October 28, 1997, and the claim will be allowed only for those fees. Section 502(b)(7) is, then, inapposite, because the allowed claim, as modified today by this court, no longer "exceeds . . . the compensation provided by [the contract] for one year following" the date on which performance was terminated under the contract. 11 U.S.C. 502(b)(7)(A).
In determining that Zegeye was liable for the full five-year term of the contract, the bankruptcy court relied on Atholwood Dev. Co. v. Houston, 19 A.2d 706 (Md. 1941) and Lemlich v. Board of Trs, 385 A.2d 1185 (Md. 1978), two wrongful discharge cases. In Atholwood, the court stated that "[t]he measure of damages in an action for wrongful discharge is prima facie the employee's salary for the remainder of the period of employment," less mitigation. Id. at 708 (citations omitted). Keshishian, however, was not discharged, wrongfully or otherwise; it was he, not the employer, who ultimately terminated the contract. A party may not recover from another party under a contract unless the former has performed or is ready and willing to perform. Nat'l Micrographics Sys., Inc. v. OCE-Indus., Inc., 465 A.2d 862, 873 (Ct.Spec.App. Md. 1983). By terminating the agreement, Keshishian indicated that he was no longer "ready and willing to perform," so he cannot recover under his contract for payment due after that date.
C. Amount Due Each Month
Third, Appellants contend that Keshishian is entitled to, at most, $9,500 per month, not the $12,500 per month determined by the bankruptcy court. Appellants make no argument to support this contention beyond the nonsensical observation that because "[t]he `facility' [is] a separately defined term in the Employment Agreement, under the express language of the Employment Agreement, Dr. Zegeye's obligation was limited to $9,500 per month." The observation is nonsensical because the disputed $3,000 is owed not by the "facility," but by "a related medical company for which Radiologist shall act as Medical Director," Empl. Agreement at ¶ 3, and that paragraph of the agreement refers to the "facility" only to establish that "[t]he facility will be responsible for billing and collecting the Interpretation Fees and will pay fees due to the Radiologist . . . in no case less than $12,500 per month."
The court recognizes that perhaps Appellants meant to assert that "related medical company," not "facility," is a "separately defined term." If so, this issue was raised and disposed of by the bankruptcy court:
The related medical company spoken of in paragraph three is not a signatory to the agreement. The only promising party on behalf of the employer is Dr. Zegeye; thus all promises made by the agreement are made by Dr. Zegeye. What Dr. Zegeye promised to do in paragraph three as to this $3,000 per month figure is [to cause] a related medical company to pay it. That did not happen, so the Court finds that whatever the allowable damage should be, it is Dr. Zegeye who is [responsible], both for damages based upon the $9,5000 figure per month, as well as the $3,000 figure per month.
Transcript of Ruling, at 7. Appellant raises no argument to suggest otherwise.
D. Waiver
Lastly, Appellants argue that Keshishian waived his right to any claim under the agreement because, by signing the sublease addendum with PGMC in October of 1997 and refusing to return the office space to Zegeye, he caused (1) a novation of the original employment agreement, and (2) an express waiver of rights under the agreement. These arguments are without merit. First, to the extent that Appellants argue that Keshishian waived his right to post-termination fees, that question is moot for the reasons explained supra at III.B. Moreover, Keshishian's actions did not amount to a novation or a waiver of a claim for breach of contract prior to October of 1997.
A novation, as Appellants point out, requires "the agreement of all parties to [a] new contract." I.W. Berman Props. v. Porter Bros., Inc., 344 A.2d 65, 70 (1975). As noted supra at 9-10, however, the bankruptcy court found, and the parties do not dispute, that, by signing the addendum, Keshishian terminated the contract. Although a new contract was created when Keshishian signed the addendum, that new contract was between Keshishian and PGMC, not Keshishian and Zegeye. It was not, therefore, between "all parties" to the original agreement, so no novation occurred.
Appellants' contention that Keshishian's actions constitute an express waiver is equally unavailing. Initially, the court notes that, while the employment agreement states that "[n]o delays or omission by the Company or the Radiologist in exercising any right under this Agreement shall operate as a waiver of that or any other right," Empl. Agreement at ¶ 16, the bankruptcy court correctly cites Battista v. Sav. Bank of Baltimore, 507 A.2d 203, 209 (Ct.Spec.App. Md. 1986) for the proposition that parties may waive their contractual rights despite a non-waiver clause requiring a written waiver. See also Univ. Nat'l Bank v. Wolfe, 369 A.2d 570, 576 (Md. 1977) (noting the "well settled rule that the parties by their conduct may waive the requirements of a written contract").
"Whether or not the . . . conduct of the parties amounts to a waiver is a question of fact to be decided by the trier of the fact." Hoffman v. Glock, 315 A.2d 551, 555 (Ct.Spec.App. Md. 1974). Here, the bankruptcy court, as trier of fact, found that Keshishian's behavior with regard to the lease did not constitute waiver. Nonetheless, Appellants would have the court believe that, by terminating the contract, Dr. Keshishian, by his conduct, waived his right to make a breach of contract claim as to fees due prior thereto.
"Waiver is the voluntary and intentional relinquishment of a known right." Nichols v. Cities Serv. Oil Co., 171 F.Supp. 400, 409 (D.Md. 1959), aff'd 273 F.2d 415 (4th Cir. 1960). "The general rule is that a waiver must be supported by an agreement founded on a valuable consideration, or the conduct on which a waiver is predicated must be such as to preclude a party from insisting on performance of the contract or a forfeiture of the condition." Id. (citing cases). Here, no "valuable consideration" — in fact, no consideration at all — was given to Keshishian in exchange for his alleged waiver. Moreover, while his conduct in attempting to mitigate his losses through operating his own business might constitute waiver of the right to rescind the contract altogether, a waiver of the right to rescind is not in itself a waiver of the right to claim damages. McKeever v. Washington Heights Realty Corp., 37 A.2d 305, 311 (Md. 1944). His attempt to mitigate did not in any way "preclude [him] from insisting on performance of the contract." Nichols, 171 F.Supp. at 409. Even if Appellants had shown that Keshishian found and kept new, gainful employment, that act of mitigation would probably not constitute waiver of his right to the unpaid fees owed prior to termination of the contract. See Gray v. Mundelein Coll., 695 N.E.2d 1379, 1389 (Ill.App.Ct. 1998) (finding no cases in which acceptance of employment with a different entity amounts to waiver of breach of contract claim), appeal denied, 705 N.E.2d 436 (1998). Here, as noted supra at 11-13, Appellants have not carried their burden to establish that Keshishian either earned a profit or could have, but failed to mitigate his losses in any manner. The bankruptcy court's finding was therefore not in error, and Keshishian is entitled to the full value of the employment agreement through October 28, 1997.
IV. Sanctions
Appellee requests that fees and costs be awarded to the appellees for defending "this frivolous appeal." Fed.R.Bankr.P. 8020 provides, in pertinent part: "If a district court . . . determines that an appeal . . . is frivolous, it may, after a separately filed motion or notice from the district court or bankruptcy appellate panel and reasonable opportunity to respond, award just damages and single or double costs to the appellee." In making this request, however, Appellee "did not file a separate a motion as required by rule 8020, but rather included his rule 8020 for damages and costs in response brief. Consequently, [Appellee's] request for damages and costs is not properly before this court." Bass v. Parsons (In re Parsons), 272 B.R. 735, 758 (D.Colo. 2001); Marino v. Classic Auto Refinishing, Inc. (In re Marino), 234 B.R. 767, 770 (B.A.P. 9th Cir. 1999) (request for sanctions under Rule 8020 requires a "separately filed motion or notice from the court").
V. Conclusion
For the reasons stated above, this court affirms in part and reverses in part the ruling of the bankruptcy court, and remands to that court for proceedings consistent with this opinion. A separate Order will follow.