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SP22, Inc. v. Yurdumyan

California Court of Appeals, Second District, Eighth Division
Jan 28, 2008
No. B190193 (Cal. Ct. App. Jan. 28, 2008)

Opinion


SP22, INC., et al., Plaintiffs and Respondents, v. AVAG YURDUMYAN et al., Defendants and Appellants. B190193 California Court of Appeal, Second District, Eighth Division January 28, 2008

NOT TO BE PUBLISHED

APPEAL from a judgment of the Superior Court of Los Angeles County No. LC067829. Stanley Weisberg, Judge.

Law Offices of Maro Burunsuzyan, Maro Burunsuzyan and John C. Notti, for Defendants and Appellants.

Law Offices of Steven M. Sepassi, Steven M. Sepassi and Kimberly K. Offenbacher, for Plaintiffs and Respondents.

RUBIN, J.

Defendants Avag Yurdumyan, Neshan Moskovyan, Edvin Ovasapyan, and Arden Medical Pharmacy, Inc., appeal from the judgment entered after a bench trial where they were found liable for fraud and breach of contract in connection with their sale of a pharmacy to plaintiffs SP22, Inc., and Saeideh and Scott Parrish. We modify the judgment to correct a clerical error in the amount of the court’s damage award and affirm the judgment as modified.

FACTS AND PROCEDURAL HISTORY

Our statement of facts is taken in large part from the undisputed portions of the trial court’s statement of decision.

Scott and Saeideh Parrish were husband and wife pharmacists. In May 2003, they bought the Arden Medical Pharmacy in Glendale from Neshan Moskovyan and Avag Yurdumyan for $743,863.34. The sale agreement said that the purchase price was based in part on a goodwill value of $80,000 and a covenant by the sellers not to compete valued at $500,000. Respondents financed part of the purchase price by giving the sellers a note of $393,863.34, payable in monthly installments of $7,798.97. The balance of the purchase price ($350,000) was paid upfront in cash.

We will sometimes refer to Scott and Saeideh Parrish collectively as the Parrishes. The Parrishes operated through plaintiff SP22, Inc. (SP22), and will refer to the Parrishes and SP22 collectively as respondents. Although Moskovyan was the sole officer and shareholder of defendant Arden Medical Pharmacy, Inc. (Arden), the sales agreement listed Yurdumyan, Moskovyan, and Arden as cosellers. We will sometimes refer to Yurdumyan, Moskovyan, Ovasapyan and Arden as appellants. Yurdumyan is married to Maro Burunsuzyan, who is appellants’ counsel. Burunsuzyan once owned Arden but sold it to Moskovyan in October 2000. Yurdumyan continued to work for Moskovyan and managed Arden’s daily operations after that sale.

During negotiations, the Parrishes were told that the pharmacy had a net monthly income of $25,000. The Parrishes met with Yurdumyan and Edvin Ovasapyan, and were told that Ovasapyan was in charge of billing Medicare for prescription medical equipment and nutritional supplements that were required by Arden customers. They showed the Parrishes copies of Medicare records that purported to document net monthly profits of $12,000 to $14,000 from 53 customers who qualified for lifetime Medicare benefits for nutritional supplements.

When the Parrishes took over the pharmacy, they hired Ovasapyan to continue the Medicare paperwork in exchange for a percentage of those billings. The pharmacy was as profitable as promised until December 2003, when the Parrishes were notified by Medicare that a routine audit discovered some of their nutritional supplement billings were improper. The pharmacy’s Medicare claims prepared by Ovasapyan were routinely transmitted to Nicole Thiroux, who ran an independent company in the business of submitting Medicare claims from pharmacies. After learning of the audit, the Parrishes contacted Thiroux, who told them that a patient had to be fed through an abdominal tube in order to qualify for Medicare coverage of nutritional supplements. That was the first the Parrishes had heard of such a requirement. The Parrishes then investigated further and learned that Ovasapyan had been submitting false claims for patients who did not qualify for Medicare coverage of nutritional supplements because they were not tube-fed.

The parties and the court referred to these as enteral nutritional supplements.

Respondents sued Arden, Yurdumyan, Moskovyan, and Ovasapyan for breach of contract, fraud, negligent misrepresentation, and other related causes of action. During the April 2005 bench trial, the court heard testimony from patients or the doctors of patients whose names appeared on Medicare forms prepared by Ovasapyan. Distilled, their testimony showed that the patients did not require abdominal tube feeding and that the physician signatures on the forms had been forged. Dr. Valerie Aginsky testified as an expert witness concerning the ink used on four Medicare claim forms prepared by Ovasapyan. According to Aginsky, the ink used in the sections of the forms that were purportedly filled out by the doctors came from the same batch of ink that appeared in the sections of the forms filled out by Ovasapyan. Using mathematical formulae from the field of statistical probability, Aginsky concluded that there was a 96 percent chance that the physician and pharmacy sections of the four forms he examined – which were supposed to be filled out separately by the doctor and the pharmacy – had in fact been filled out with the same pen.

The breach of contract claim was based on a provision in the Arden sale agreement where appellants represented that they had been operating in compliance with the law applicable to Medicare claims.

Based on the evidence, the trial court found that Ovasapyan had been altering and forging Medicare claim forms for nutritional supplements as part of an ongoing scheme directed by and with the knowledge and agreement of Moskovyan and Yurdumyan. They concealed that fact from the Parrishes and instead falsely represented that Arden’s Medicare billings for nutritional supplements were both legitimate and lucrative. As part of its statement of decision, the court expressly found the testimony of Ovasapyan, Moskovyan, and Yurdumyan to be not credible and rejected their claims of innocence. The court accepted the Parrishes’s testimony that they relied on the misrepresentations as an inducement to buy the pharmacy and that their reliance was reasonable. The misrepresentations established appellants’ liability on not just the fraud related causes of action, but for breach of contract as well (except for Ovasapyan who was not a contracting party).

The court awarded respondents fraud damages (Civ. Code, § 3343) of $86,985 for the difference between the true value of the pharmacy and the purchase price and of $113,373 in lost profits, for a total of $200,358. The court also found that appellants were liable for punitive damages as follows: $10,000 from Ovasapyan; $50,000 from Moskovyan; and $150,000 from Yurdumyan.

The court calculated this figure by adding the $116,985 in monthly payments by respondents to their $350,000 downpayment, then subtracting from that total the pharmacy’s fair market value of $363,863. As respondents point out in their brief, this was a clerical error because the actual difference between the two figures is $103,122. Respondents ask us to correct this clerical error and modify the judgment by increasing it by $16,137, which is the difference between the amount stated in the judgment and the true amount. Appellants do not challenge that request, and we will therefore grant it. (Campbell v. Southern Pacific Co. (1978) 22 Cal.3d 51, 62-63.)

Appellants apparently contend the trial court erred because: (1) as a matter of law, the Parrishes were not entitled to rely on any misrepresentations concerning Medicare billing; (2) there was no evidence to support part of the trial court’s valuation of the pharmacy; (3) the court awarded a double recovery for lost profits; (4) Aginsky’s probability calculations were novel and untested and therefore inadmissible as an expert opinion; and (5) certain comments by the court demonstrated that it was prejudiced against appellants, thereby depriving them of a fair trial.

We say “apparently” because the arguments made in appellants’ briefs are muddled to the point of near incoherency. To the extent appellants might contend they have advanced any other issues apart from those we address, we deem them waived. (Berger v. Godden (1985) 163 Cal.App.3d 1113, 1117 [unintelligible argument deemed waived]; see In re S.C. (2006) 138 Cal.App.4th 396, 425 (S.C.) [instead of penalizing appellant because counsel advanced incoherent argument, appellate court extracted what appeared to be efforts to raise two particular issues].)

DISCUSSION

1. The Reliance Finding Was Proper

Appellants do not deny that they committed Medicare fraud before selling the pharmacy, that they concealed their scheme from the Parrishes and instead represented that the pharmacy’s Medicare nutritional supplement business was legitimate, and that Ovasapyan continued to commit Medicare fraud after the sale while continuing to work at the pharmacy. Instead, they attack the trial court’s finding that the Parrishes reasonably relied on their misrepresentations. This contention is two-fold. First, appellants point to the trial court’s finding that the Parrishes did not learn of Medicare’s tube-feeding requirement until Thiroux told them about it in early 2004. Second, they point to Business and Professions Code section 4328 (section 4328), which makes it a misdemeanor for a pharmacist to permit a nonpharmacist to compound or dispense prescriptions. From this, they conclude that the Parrishes should have known that tube-feeding was required and therefore could not have reasonably relied on Ovasapyan’s misrepresentations about the legitimacy of the pharmacy’s nutritional supplement business.

Setting aside for the moment the merits of this claim, we note that the issue of reasonable reliance is usually a factual one (Guido v. Koopman (1991) 1 Cal.App.4th 837, 843), calling into play the substantial evidence standard of review. (Ermoian v. Desert Hospital (2007) 152 Cal.App.4th 475, 501.) Under this standard of review, appellants were obligated to set forth in their opening brief all the material facts on this point that were admitted in evidence at trial, and not merely the evidence favorable to themselves. If this is not done, then the issue is deemed forfeited. (Cal. Rules of Court, rule 8.204(a)(1)(B), (C); S.C., supra, 138 Cal.App.4th at pp. 414-415.) Appellants have not supplied even a one-sided statement of facts. Instead, they have sprinkled discrete and disconnected segments of the evidence throughout their discussion section, and have supported those few with citations not to the official reporter’s transcript, but to some other transcripts not in our possession. They have also made many factual assertions without any attempt at a record citation. As a result, they have not described or directed us to any evidence concerning: what the Parrishes had to say about the sale transaction and appellants’ misrepresentations; what the Parrishes knew about the pharmacy business and Medicare’s coverage requirements at the time of the transaction; or appellants’ own testimony describing their conduct, statements, and role in handling prescriptions for nutritional supplements. We are not obliged to search the record for that evidence. (People v. Dougherty (1982) 138 Cal.App.3d 278, 283.) Without it, we are simply unable to evaluate the effect of section 4328 on the reasonableness of the Parrishes’s reliance on appellants’ fraudulent representations. Accordingly, we deem the issue waived.

Appellants argue that, as to their section 4328 contention, they are excused from the requirement to set forth all the material relevant facts because the issue they raise is one of pure law. Assuming for discussion’s sake that they are correct, however, they were still obliged to provide such a statement. (Western Aggregates, Inc. v. County of Yuba (2002) 101 Cal.App.4th 278, 290-291 [even legal issues arise out of facts, and failure to provide meaningful statement of facts waives any factual disputes underlying legal issues].) With this rule in mind, we alternatively affirm on the merits. First, section 4328 does nothing more than prohibit a nonpharmacist from dispensing or compounding prescription drugs, and we fail to see its relevance to the Parrishes’s knowledge at the time of the sale concerning Medicare’s coverage requirements for nutritional supplements. Second, the statement of decision says that Ovasapyan handled (and forged) the prescription claim forms, not that he ever prepared or dispensed the nutritional supplements. Apart from their naked assertion that Ovasapyan violated the statute, appellants have not described how Ovasapyan did anything other than fill out, forge, and process the Medicare form and have otherwise failed to make any cogent arguments on this point, leading us to deem the issue waived.

Finally, as a third alternative basis for affirming, we refuse to consider the issue because appellants did not raise respondents’ compliance with section 4328 at trial and because the question of whether Ovasapyan did anything to violate section 4328 involves disputed factual matters. (In re Marriage of Freeman (1996) 45 Cal.App.4th 1437, 1450-1451.)

2. The Damage Award

Appellants challenge the court’s compensatory damage award on the following grounds: (1) in determining the goodwill value of the pharmacy, the court made up its own figures for the value of the sales agreement’s noncompetition clause and for the value of the pharmacy’s Medicare billing number; (2) respondents’ accounting expert based his lost profits valuation on a 30-month period that was purely conjectural; and (3) the court permitted a double recovery by awarding damages for both the diminished value of the pharmacy and lost profits. We take each in turn.

The goodwill valuation issue is based on the court’s finding in the statement of decision that Kenneth Walheim, who was respondents’ accounting expert, had undervalued the pharmacy’s goodwill by failing to consider the values of both appellants’ covenant not to compete with respondents and of the pharmacy’s Medicare billing number. In its statement of decision, the court increased the value of the goodwill, and therefore reduced respondents’ damages, a fact of which appellants can hardly complain. According to Walheim, the pharmacy was worth $313,863 at the time of sale, based on assets and inventory totaling $163,863 and goodwill worth $150,000. The court found fault with the goodwill calculation because Walheim “failed to give any value to the covenant not to compete and to use of the sellers’ Medicare and Medi-Cal provider numbers. These clearly had value and the court finds that, when these are included in the calculation, the reasonable value of the goodwill received by plaintiffs increases to $200,000. Based upon this correction the court concludes that the actual fair market value of the business bought by plaintiffs was $363,863. The difference between the purchase price of $743,863 and the fair market value is $380,000.”

As discussed earlier in footnote 5, the court incorrectly reduced that figure to $86,985 by deducting the unpaid amount of the purchase price.

Appellants contend the court had no evidentiary basis for increasing the goodwill value of the pharmacy by $50,000 and ask us to reverse the damage award. Once more appellants have failed to set forth the relevant evidence on this point and we therefore deem the issue waived. We alternatively affirm on the merits. As respondents point out, the measure of damages for fraud includes the difference between what they paid for the pharmacy and its actual fair market value at the time of the sale. (Civ. Code, § 3343, subd. (a).) Walheim’s testimony was targeted to that issue, with him concluding that the fair market value at the time of sale was $313,863. The effect of the trial court’s finding was to increase the value of the pharmacy at the time of sale, thereby reducing the difference between what respondents paid for the pharmacy and what it was actually worth. In short, the trial court’s factual finding reduced the amount of damages. Therefore, even if the court erred, the error was favorable to appellants and we will not consider it. (Moss v. Underwriters’ Report, Inc. (1938) 12 Cal.2d 266, 273-274; S.C., supra, 138 Cal.App.4th at p. 414.)

Furthermore, respondents fail to point out that appellants objected to the court’s proposed statement of decision because it omitted the disputed factual finding, and that as a result, the finding appeared in the final statement of decision. Accordingly, if error occurred, it was invited, giving us another reason to not reach the issue. (Smith v. Royal Mfg. Co. (1960) 185 Cal.App.2d 315, 320.)

Walheim also testified that he was asked to calculate respondents’ lost profits. As part of this task, Walheim started with the assumption that appellants had falsely represented the existence of pharmacy customers who had a lifetime need for Medicare-covered nutritional supplements and then tried to determine the profit such customers should have generated. After deducting the first six months before respondents discovered the fraud and were still making their expected profits from that business, Waldheim determined that the lost profits were $3,779 a month.

Appellants do not challenge that conclusion, but instead take issue with the court’s decision to accept Waldheim’s testimony that those profits would have continued for 30 months, leading to a lost profits damage award of $113,373. Walheim testified that he used 30 months because he did not know the age or life expectancies of the 53 or so customers who were the subject of appellants’ fraudulent representations. In order to avoid dealing with those calculations, and in order to account for the fact that some of the customers might die, Walheim chose 30 months because it represented the time it would likely have taken respondents to find a new tenant and get out of their lease. Walheim testified that the time period chosen was subjective, not objective, but that he could also have chosen a longer time period based on the life of the lease or the note held by appellants to secure respondents’ payment of the remaining purchase price. According to Walheim, 30 months was a conservative figure.

Appellants seize on Walheim’s statement that the 30-month figure was subjective to argue that the lost profit damage award was based on speculation and conjecture, and not on substantial evidence. As noted, appellants do not dispute that they committed fraud when they told respondents that the pharmacy had 53 customers with a lifetime need for Medicare-covered nutritional supplements. Nor do they dispute that the amount of lost profits damages was $3,779 a month. As respondents point out, determining with precision how long 53 fictional lifetime customers might in fact remain as customers is fraught with uncertainty. As a result, so long as the fact of damage is certain, any uncertainties in proving the precise amount of damages is a risk that appellants must bear. (Hobbs v. Bateman Eichler, Hill Richards, Inc. (1985) 164 Cal.App.3d 174, 197.) Accordingly, we will not disturb the trial court’s finding that 30 months represented a reasonable time period for measuring lost profits.

Appellants cite four decisions in support of their contention that respondents’ expert evidence was insufficient: Natural Soda Prod. Co. v. City of L. A. (1943) 23 Cal.2d 193; Friedman v. McKay Leather Co. (1919) 179 Cal. 566; Pacific Etc. Co. v. Packers’ Assn. (1903) 138 Cal. 632; and Buell-Wilson v. Ford Motor Co. (2006) 141 Cal.App.4th 525.) These decisions either support our holding, do not stand for the propositions stated by appellants, or are factually inapplicable.

Finally, appellants contend that respondents obtained a double recovery when the court awarded damages for the pharmacy’s reduced value due to the misrepresentations concerning the nutritional supplement business, and then added to that the lost profits from the same business. Civil Code section 3343 states that a defrauded buyer of property may recover as damages both the difference between what was paid and what the property was actually worth at the time, along with additional damages of lost profits so long as the property was purchased with the intent to use it for a profit, the buyer reasonably relied on the fraud in both entering the deal and anticipating profits, and lost profits were proximately caused by the fraud and the buyer’s reasonable reliance on the misrepresentations. (Civ. Code, § 3343, subd. (a)(4).) Appellants do not dispute that these requirements were satisfied, but instead cite decisions that no do not apply because they are either factually inapplicable or predate the Legislature’s 1971 amendment that added lost profits as an appropriate element of damages. (Stats. 1971, ch. 943, p. 1850, § 1.) Because the undisputed facts show that respondents’ lost profits claim tracks the statutory requirements of Civil Code section 3343, we affirm the trial court’s award of those damages.

These include: Lazar v. Superior Court (1996) 12 Cal.4th 631 [concerning measure of damages in employee’s action for fraudulent inducement of employment contract and makes no mention of Civil Code section 3343]; Stout v. Turney (1978) 22 Cal.3d 718 [traced legislative history of section 3343, noted that lost profits were authorized as additional damages in 1971, and held that where there were no out-of-pocket losses, a plaintiff could still recover under section 3343 if his only damages were lost profits]; Channell v. Anthony (1976) 58 Cal.App.3d 290 [allowing defrauded sellers of ranch property to recover both out-of-pocket losses and lost profits because the sales agreement gave them contractual right to receive income and profits for continuing to manage the ranch]; and Oliver v. Benton (1949) 92 Cal.App.2d 853 [pre-dating 1971 amendment].

3. Aginsky’s Probability Testimony

In addition to testifying that the ink used to fill out the physician’s and pharmacist’s sections on four of the Medicare forms prepared by Ovasapyan came from the same batch of ink, Aginsky also testified that it was highly probable that the same pens were used to fill out both sections of the forms. Appellants contend the trial court should not have admitted this evidence because Aginsky’s model of mathematic probabilities constituted a new and novel scientific method that failed to meet the Kelly/Frye test. (People v. Kelly (1976) 17 Cal.3d 24; Frye v. United States (D.C. Cir. 1923) 293 F. 1013.) Appellants also contend that the evidence lacked foundation.

Under the Kelly/Frye test, evidence based on a new scientific method of proof must satisfy three requirements before it may be admitted: (1) the party offering the evidence must show that the technique is sufficiently established to have gained general acceptance in the field to which it belongs; (2) the proponent of the evidence must establish that the expert witness is properly qualified to give the opinion; and (3) the proponent must demonstrate that the correct scientific procedures were used by the expert. (People v. Diaz (1992) 3 Cal.4th 495, 526.) Distilled, appellants contend that Aginsky did no more than multiply the odds to derive his figure of a 96 percent probability, but did so without sufficient information concerning the distribution of ink and pens.

We reject appellants’ contention that Aginsky’s testimony called the Kelly/Frye rule into play. Instead, their contention is more properly viewed as a foundational one. (See People v. Collins (1968) 68 Cal.2d 319, 327.) Assuming for discussion’s sake only that a Kelly/Frye objection would have been proper, however, appellants do not contend and the record does not show that they ever made such an objection. Accordingly, we alternatively hold that the issue was waived. (Evid. Code, § 353, subd. (a) [no reversal for erroneous admission of evidence unless objection on specific ground appears in the record]; People v. Diaz, supra, 3 Cal.4th at pp. 527-528.)

As for their foundational challenge, although appellants initially raised such an objection, following discussion with the court they decided to reserve that objection until after their cross examination of Aginsky. However, they never renewed the objection and we therefore deem it waived as well. (Gallant v. City of Carson (2005) 128 Cal.App.4th 705, 712-713.)

Assuming for discussion’s sake only that error occurred and that proper evidentiary objections had been made, we also affirm because appellants have failed to show that a different result was reasonably probable had the evidence been excluded. (Evid. Code, § 353, subd. (b); Huffman v. Interstate Brands Corp. (2004) 121 Cal.App.4th 679, 692.) Appellants contend the evidence was prejudicial because the trial court found it persuasive and because “[w]hen physicians and other health care suppliers testified, they at best revealed discrepancies between what doctors prescribed and what some patients received.” The latter statement is unsupported by citation to the record and is wholly lacking in detail. It is important to remember that appellants have never challenged the trial court’s finding that they committed fraud and that they have failed to set forth any of the relevant evidence on that issue. As a result, their appellate argument is entirely insufficient to carry their burden of demonstrating prejudice from admission of the disputed evidence. As a result, our duty to examine the entire record for prejudice does not arise. (Paterno v. State of California (1999) 74 Cal.App.4th 68, 105-106.)

Alternatively, we note that two physicians testified at trial that their signatures had been forged on several prescription documents prepared at Arden, and that a handwriting expert testified Ovasapyan had forged portions of several such documents. Based on that evidence, we conclude that even if error occurred by admitting Aginsky’s testimony, the error was not prejudicial.

4. Claim of Judicial Bias

During discussions concerning appellants’ reserved foundational objection to Aginsky’s probability testimony, the court made comments indicating that if Aginsky were correct about the same ink having been used on all four documents, it seemed very unlikely that a different pen had been used to fill out the separate pharmacist’s and physician’s portions of those documents. Appellants contend these remarks demonstrated judicial bias so strong that it violated their due process rights and amounted to structural error that was reversible per se. Relying once more on inapplicable authority (Calhoun v. Superior Court (1958) 51 Cal.2d 257, 261 [judicial opinions expressed before trial begins]) appellants ignore that a court’s statements concerning the credibility of witnesses made as a result of observing them during the trial do not constitute bias. (Keating v. Superior Court (1955) 45 Cal.2d 440, 445-446.) Accordingly, we reject the contention.

DISPOSITION

For the reasons set forth above, we modify the judgment to increase the compensatory damage award of $200,358 by $16,137 to $216,495, and remand the matter to the clerk of the superior court to enter a new and different judgment that reflects this modification. The judgment as modified is affirmed. Respondents to recover their costs on appeal.

WE CONCUR: COOPER, P. J., FLIER, J.


Summaries of

SP22, Inc. v. Yurdumyan

California Court of Appeals, Second District, Eighth Division
Jan 28, 2008
No. B190193 (Cal. Ct. App. Jan. 28, 2008)
Case details for

SP22, Inc. v. Yurdumyan

Case Details

Full title:SP22, INC., et al., Plaintiffs and Respondents, v. AVAG YURDUMYAN et al.…

Court:California Court of Appeals, Second District, Eighth Division

Date published: Jan 28, 2008

Citations

No. B190193 (Cal. Ct. App. Jan. 28, 2008)