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Atkins v. Robbins, Salomon & Patt, Ltd.

Court of Appeals of Illinois, First District, Fourth Division

February 22, 2018

EDWARD ATKINS, M.D., S.C., Plaintiff-Appellant,
v.
ROBBINS, SALOMON & PATT, LTD., and ALAN WOLF, Defendants-Appellees.

          Appeal from the Circuit Court of Cook County, No. 12-L-6477; the Hon. Brigid Mary McGrath, Judge, presiding.

          David A. Novoselsky, of Novoselsky Law Offices, P.C., of Waukegan, for appellant.

          Karen Kies DeGrand, Donald J. Brown Jr., and Bradley E. Puklin, of Donohue Brown Mathewson & Smyth LLC, and Richard Lee Stavins of Robbins, Salomon & Patt, Ltd., both of Chicago, for appellees.

          PRESIDING JUSTICE BURKE delivered the judgment of the court, with opinion. Justices McBride and Gordon concurred in the judgment and opinion.

          OPINION

          BURKE JUSTICE

         ¶ 1 Plaintiff, Edward Atkins, M.D., SC (Corporation), filed a legal malpractice lawsuit against defendants, attorney Alan Wolf (Wolf) and his law firm Robbins, Salomon & Patt, Ltd. (Robbins) (collectively, defendants), for allegedly failing to include postemployment restrictive covenants in two employment contracts. As a result of these alleged omissions, two of the Corporation's former employees formed a company that contracted with River North Same Day Surgery, LLC, to provide anesthesia services that previously had been provided by the Corporation. The case eventually proceeded to a bench trial. Following the Corporation's case-in-chief, the Cook County circuit court granted defendants' motion for a directed finding on the issue of damages, ruling as a matter of law that an unprofitable business could not obtain damages for lost profits despite its sole shareholder being highly compensated as an employee, and accordingly entered judgment in favor of defendants.

         ¶ 2 The Corporation now appeals the judgment of the circuit court, contending primarily that the court erred in granting the motion for a directed finding due to its misapplication of Illinois law and federal tax laws. Because we find the court's ruling portrays an improper interpretation of the actual finances of professional corporations and would in all likelihood prevent such corporations from ever proving lost profits, we reverse and remand.

         ¶ 3 I. BACKGROUND

         ¶ 4 A. Pretrial

         ¶ 5 Dr. Edward Atkins, a licensed physician anesthesiologist, was the sole shareholder and officer of the Corporation. The Corporation was formed in 1984 as a business through which Dr. Atkins would provide anesthesia services to medical centers. In 1987, Dr. Atkins along with other business associates bought an outpatient surgical center called North Shore Same Day Surgery. The Corporation provided anesthesia services to the center. In the early 1990s, the Corporation hired its first anesthesiologist outside of Dr. Atkins. By 2003, Dr. Atkins owned an interest in several outpatient surgical centers, including the surgical center at issue in this appeal, River North Same Day Surgery, LLC (River North center). The Corporation had contracts with these surgical centers to be the exclusive provider of anesthesia services, which, in part, required it to staff the centers with anesthesiologists and nurse anesthetists. Dr. Robert Gay, an anesthesiologist, was one such person, and he signed an employment contract with the Corporation in 2003. That contract did not contain a postemployment restrictive covenant.

         ¶ 6 In 2004, Dr. Atkins and his business associates sold their interests in five surgical centers, including the River North center, to United Surgical Partners International (USPI). Following the sale, the Corporation negotiated contracts with USPI to continue providing exclusive anesthesia services to the five surgical centers. In particular, the contract between the River North center and the Corporation was for 3 years, beginning on October 15, 2004, but would automatically renew for an additional 3-year term unless either party gave 120 days' written notice before the current term expired. The River North center could also terminate the contract without cause provided that it gave six months' notice and had the approval of its corporate partner and the physicians who owned at least two-thirds of its outstanding equity interests.

         ¶ 7 In March 2005, Dr. Radha Sukhani, an anesthesiologist, signed an employment contract with the Corporation. That contract did not contain a postemployment restrictive covenant.

         ¶ 8 From the late 1980s through 2008, Dr. Atkins utilized Robbins, in particular Wolf, to perform various transactional work for the Corporation.

         ¶ 9 At some point in 2007, Dr. Atkins learned that USPI had changed its policy regarding the length of the anesthesia services contracts. Instead of using three-year terms, USPI decided to use one-year terms. In May 2007, USPI informed Dr. Atkins that it was terminating the River North center contract, as well as the other contracts with the Corporation, apparently based on the six months' notice provision. Concerning the River North center, USPI informed Dr. Atkins that it would solicit requests from other companies to provide anesthesia services but invited the Corporation to submit a bid for the new one-year contract, which the Corporation ultimately did. Dr. Atkins knew at least two other groups had submitted bids, including one from Evanston Hospital and one that had been formed by Dr. Gay and Dr. Sukhani, who both had regularly worked at the River North center.

         ¶ 10 In June 2007, USPI awarded the new contract with the River North center to Dr. Gay and Dr. Sukhani's company. USPI, however, renewed the remaining contracts with the Corporation at its other surgical centers on one-year terms. After losing the River North center contract, Dr. Atkins reviewed his employment contracts with Dr. Gay and Dr. Sukhani and observed that neither had a postemployment restrictive covenant. Initially, the Corporation filed a lawsuit against Dr. Gay and Dr. Sukhani for tortious interference with prospective economic advantage. Robbins began as the Corporation's attorneys in that case.

         ¶ 11 However, in April 2009, the Corporation sued Robbins and Wolf for legal malpractice for failing to include postemployment restrictive covenants in Dr. Gay and Dr. Sukhani's contracts. The Corporation voluntarily dismissed the case and refiled it in June 2012.

         ¶ 12 In the Corporation's first amended complaint, which frames this appeal, it claimed that Wolf had drafted several employment contracts between the Corporation and its employed anesthesiologists. The Corporation alleged that Wolf knew it was "imperative that each agreement contain a restrictive covenant provision that would preclude the anesthesiologist from rendering medical services as an anesthesiologist for a period of two (2) years after the termination of his or her employment." The Corporation asserted that Wolf had included these restrictive covenants in prior employment contracts he had drafted on its behalf and attached an example of one to the complaint. The Corporation highlighted that the employment contracts for Dr. Gay and Dr. Sukhani did not contain postemployment restrictive covenants and posited that Wolf had drafted the contracts. The Corporation alleged that Wolf had acted negligently by failing to include the provisions, which, in turn, caused it to lose the new contract with the River North center to Dr. Gay and Dr. Sukhani. As a result, the Corporation claimed that it suffered damages in excess of $50, 000, constituting the lost profits it would have earned had the contract with the River North center been retained beyond 2007.

         ¶ 13 Over the course of the next three years, the parties conducted discovery and filed various motions. During discovery, pursuant to Illinois Supreme Court Rule 213(f)(3) (eff. Jan. 1, 2007), the Corporation disclosed Dr. Stan Smith, who had a Ph.D. in economics, as a controlled expert witness. Dr. Smith authored a report in 2012, which estimated the loss of income to Dr. Atkins personally as a result of the non-renewal of the contract between the Corporation and the River North center. Dr. Smith estimated that, if Dr. Atkins worked full-time until age 67, he would have lost approximately $27 million in income.

         ¶ 14 In September 2015, as the case proceeded toward trial, defendants filed several motions in limine related to the Corporation's theories on causation and damages. In defendants' seventh motion in limine, they argued that the Corporation should be barred from recovering any alleged future lost profits because it could not calculate these damages with reasonable certainty. In support, defendants argued that the Corporation's proffered evidence for trial would be "based on imprecise and unreliable data, " therefore "amount[ing] to speculation." They also argued that the Corporation's documented financial history was "inconsistent" with a claim for lost profits given that its tax returns from 2003 to 2007 showed it did not yield any corporate profit. The circuit court denied the motion, finding that defendants' argument went to the "weight" of the Corporation's evidence to be presented at trial.

         ¶ 15 In defendants' eighth motion in limine, they argued that the Corporation should be barred from presenting the opinion testimony of Dr. Smith because his testimony would be based on improper assumptions and unsubstantiated conjecture. The circuit court denied the motion but noted that "some of his testimony will be impacted by [its] other rulings."

         ¶ 16 In defendants' ninth motion in limine, they argued that the Corporation should not be allowed to "mak[e] any reference to or elicit[ ] any testimony regarding" Dr. Atkins's "individual compensation as evidence" of the Corporation's "alleged lost profits." Defendants claimed that Dr. Atkins structured his business in the corporate form and compensated himself in a manner to reap certain corporate tax advantages. They therefore contended that the Corporation could not ignore its corporate structure to allege lost profits based on the compensation of Dr. Atkins and instead had to base such alleged lost profits on the Corporation's year-end income. The circuit court granted the motion, finding that the Corporation could not "disregard the difference between" it and Dr. Atkins personally and thus could not "use his personal salary as a basis *** to calculate the corporation's lost profits." The court did allow the Corporation to discuss "the fact that his accountants took carryover losses in determining corporate profit for some years to try to decrease the tax burden" and that "there would have been a profit in such and such year had he not taken a carryover loss."

         ¶ 17 In defendants' tenth motion in limine, they argued that, assuming arguendo the Corporation could prove damages, the recovery of such damages should be limited to only two years of alleged lost profits, the time period that would have been protected by the allegedly omitted restrictive covenants. The circuit court granted the motion.

         ¶ 18 In February 2016, the Corporation supplemented its Rule 213(f)(3) disclosure with a new report authored by Dr. Smith. In that report, Dr. Smith estimated the Corporation's lost profits by calculating its net income before officer compensation and then subtracting the value of services provided by Dr. Atkins to the business, which included his administrative work and as a practicing anesthesiologist one day per month. Dr. Smith estimated that, based on the Corporation losing the renewal of the River North center contract for the remainder of 2007 until 2009, its lost profits were approximately $3.3 million. The circuit court barred the presentment of Dr. Smith's new report as untimely.

         ¶ 19 The parties, however, agreed to a written stipulated offer of proof "for purposes of preserving the record" concerning Dr. Smith's excluded damages testimony. They agreed that, if Dr. Smith were called at trial, he would testify consistently with his 2012 report and deposition. They further agreed that, if he were called "at trial and not permitted to offer the opinions as expressed" in his 2012 report and deposition, he would testify consistently with his 2016 report.

         ¶ 20 In June 2016, approximately a week and a half before trial, defendants filed a motion to bar the Corporation from using several newly produced documents as exhibits during trial, including salary and bonus data for various employees of the Corporation as well as insurance payment data from each of the surgical centers with which the Corporation had contracts. Defendants asserted that the documents had not been produced during discovery and were produced recently only for the purpose of eliciting previously undisclosed opinions on the issue of damages. The circuit court granted defendants' motion.

         ¶ 21 B. Trial

         ¶ 22 At trial, Dr. Atkins testified that, in the spring of 2007, the River North center's busiest days were Tuesdays, Thursdays, and Fridays, and the Corporation would generally provide up to three anesthesiologists and one nurse anesthetist or two anesthesiologists and two nurse anesthetists on those days. In order to obtain payment from providing the anesthesia services, the Corporation's anesthesiologists and nurse anesthetists "filled" out "billing cards" for "every case, " which Dr. Atkins collected. He sent the cards to a company called Medical Financial Management, who would obtain any missing insurance information from the surgical centers and then bill the insurance companies on the Corporation's behalf. Medical Financial Management collected the money from the insurance companies and remitted the money, less a 5% collection fee, to the Corporation. According to Dr. Atkins, the River North center was the Corporation's most profitable contract.

         ¶ 23 As far as the Corporation's expenses, Dr. Atkins stated that it paid its employees on a monthly basis, including himself. The Corporation paid him a monthly salary of $50, 000. At the end of the year, he also received a bonus, which was based on "advice from [his] accountant." Dr. Atkins had the responsibility to ensure that everyone was paid properly and used the payroll system "ADP." He also performed other administrative responsibilities for the Corporation, including business development and "dealing with insurance contracts." Dr. Atkins performed the administrative functions out of his home, and as such, the business claimed a "minimal rent expense." In 2007, Dr. Atkins filled in as a practicing anesthesiologist when needed, usually working one day a month, but he would rarely work at the River North center.

         ¶ 24 Dr. Atkins discussed the Corporation's "Form 1120" tax returns from 2003 to 2007, which were introduced into evidence. In 2007, the Corporation reported gross profit of approximately $4.26 million. When the Corporation added its interest from a money market account of nearly $11, 000, its total income for the year was $4, 272, 918. The Corporation took several deductions, including for its employees' salaries and wages, taxes, retirement plans, other employee-benefit programs, and a $1.05 million deduction in the form of compensation to Dr. Atkins as a corporate officer. The deductions totaled $4, 291, 489, leaving the Corporation with a net operating loss of $18, 571. Dr. Atkins stated that the 2007 return's data only included 8½ months of anesthesia services to the River North center.

         ¶ 25 In 2006, the Corporation reported gross profit of approximately $4.58 million. When the Corporation added its interest from its money market account of nearly $9100, its total income for the year was $4, 584, 444. The Corporation again took several deductions, including for its employees' salaries and wages, taxes, retirement plans, other employee-benefit programs, and a $1.01 million deduction in the form of compensation to Dr. Atkins as a corporate officer. The ...


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