Disputes Between Physician Owners

Medical practices are usually formed by people who trained together, and they are usually formed without adequate documents, for the same reason. The equity split is agreed verbally. The compensation formula is worked out informally and adjusted over the years. Nobody writes down what happens if one partner cuts back to three days a week, brings in a spouse as office manager, or decides to leave and take the ultrasound machine and half the patients.

The Law Offices of Albert Goodwin represents physicians and other licensed professionals in New York City in ownership disputes with their partners.

What These Fights Are About

• Unequal effort and unequal pay. One partner's production has grown and the other's has declined, and the compensation formula, if there is one, no longer matches reality.
• Ancillary revenue. Imaging, laboratory, physical therapy, surgical facility fees, and dispensing revenue are frequently the most profitable part of a practice and the least clearly allocated. Note that how ancillary revenue is distributed among owners is constrained by federal law where federal program patients are involved, which limits what the partners may simply agree to.
• Expenses run through the practice. Family members on payroll, vehicles, travel, continuing education that looks like vacation, and personal expenses booked to the business.
• Control. Hiring associates, opening a second location, signing a lease renewal, taking on debt, or accepting a payor contract at reduced rates.
• The exit. One partner wants to sell to a platform or a hospital and the other does not, or one wants to retire and expects a buyout the practice cannot fund.
• The departure that becomes competition. A partner leaves, opens nearby, and the patients follow.

The Documents Decide, When They Exist

The first question in every one of these matters is what the governing documents say: the shareholders agreement for a professional corporation, the operating agreement for a PLLC, any employment agreements among the owners, and any buy-sell arrangement. Where they exist and address the situation, they generally control, and the dispute becomes about applying them.

Where they do not exist, the statutory defaults apply, and they rarely match anyone's expectations. Distributions and voting default to formulas the partners never chose, there is no agreed buyout mechanism, there is no valuation method, and there is no restrictive covenant preventing a departing owner from competing. The absence of a covenant is frequently the single most consequential gap, because the practice's value is in its patient and referral relationships, and nothing prevents a departing owner from taking them.

See operating agreements and buy-sell agreements.

Claims Available

• Breach of fiduciary duty. Owners of a closely held professional entity owe each other duties of loyalty and good faith. Diverting practice funds, taking an opportunity that belonged to the practice, and self-dealing are the recurring theories. See breach of fiduciary duty.
• Accounting. An equitable claim compelling a complete accounting of practice finances, valuable where one partner has controlled the books and the billing company reports to them.
• Books and records inspection, which is often the fastest way to obtain the financial picture needed to evaluate everything else, and which is enforceable when refused.
• Judicial dissolution. For a professional corporation, the Business Corporation Law provisions on deadlock and on oppression of minority shareholders apply, including the buyout election that a corporation or the other shareholders may make in response to a dissolution petition, which frequently converts a dissolution case into a valuation case. For a PLLC, dissolution requires showing that it is not reasonably practicable to carry on the business in conformity with the operating agreement, a standard New York courts apply narrowly. See business dissolution and minority shareholder oppression.
• Breach of contract on the compensation or buyout terms.
• Conversion and unjust enrichment for funds and property taken.

Valuation, Which Is Where Most of These End

Nearly every practice dispute resolves in a buyout, so the valuation methodology matters more than the theories of liability. Practice valuation involves:

• Accounts receivable, and the collection rate actually applied to them rather than face value.
• Tangible assets, which for equipment-heavy specialties can be significant, net of the financing that usually encumbers them.
• Goodwill, and the distinction between practice goodwill, which is transferable, and personal goodwill attached to an individual physician, which generally is not. This distinction does a great deal of work in physician buyouts, because a departing physician's personal following may have little value to the remaining practice.
• Normalized earnings, adjusting owner compensation to market rates and removing personal expenses run through the practice.
• Discounts for lack of marketability and lack of control, which can substantially reduce a minority interest's value and are frequently the largest single point of disagreement.

Where the agreement specifies a formula, book value, a multiple of collections, or an appraisal process, it generally controls even if the result seems unfair, which is why these provisions deserve attention when the practice is formed rather than when it dissolves.

Problems Specific to a Medical Practice

Several issues have no analogue in an ordinary business divorce.

Patient records. Records must be preserved and remain accessible regardless of what the owners do, and New York requires that records be retained for a defined period, with a longer period for minors. Patients have a right of access, and it cannot be conditioned on the outcome of the partners' dispute or on the patient's ability to pay a copying charge. Practically, the parties need an agreed custodial arrangement before the separation, addressing who holds the records, how each physician obtains what they need for continuity of care, and how patient requests are handled. See patient records and HIPAA.

Notifying patients. A departing physician generally may notify patients they treated of the departure and the new location, and interfering with that entirely is problematic given the profession's continuity of care obligations. But the manner of the notification, the list used, and whether practice resources were used to prepare it are all contested. Agreeing a joint notification protocol early avoids the most damaging phase of these disputes.

Payor contracts and credentialing. Contracts are usually held by the entity, and a departing physician must be credentialed anew, which takes months. Whether the practice cooperates with that process, or slows it, has real economic consequences and is a point of leverage on both sides.

Licensure and entity requirements. A professional entity's owners must be licensed. A dispute in which one owner loses or surrenders a license, or dies, triggers requirements about disposition of that interest within a statutory period.

Malpractice tail. Who pays for extended reporting coverage on separation, and who controls the defense of pending claims.

Referral relationships. Where the practice receives referrals from, or makes them to, related entities, restructuring the ownership can affect the analysis under the self-referral and anti-kickback rules. A buyout that leaves a departing physician with a continuing financial interest requires care. See Stark and anti-kickback compliance.

Practical Strategy

Practice disputes differ from other business divorces in one important respect: the business must keep operating and the patients are not a party to any of it. Litigation that paralyzes scheduling, billing, or staffing destroys the value both sides are fighting over, and it can create clinical and regulatory problems that dwarf the money at stake. We generally pursue an interim operating arrangement first, covering signature authority, access, and expenditures, then obtain the financial picture through inspection rights or expedited discovery, and negotiate the separation with litigation prepared but not necessarily filed. Where the agreement requires mediation or arbitration, that path is often faster and keeps a professional dispute out of the public record. See mediation and arbitration.

You can contact us by phone at 212-233-1233 or by email at [email protected].