Of Professional Services Corporations, Murder And Valuation
I doubt anyone will ever put a TV show together based on business entity law. My suspicion is that a large percentage of the viewing population would consider it too “boring.” I beg to differ, and this week’s post on the King and Mockovak dispute supports my view. When you read King and Mockovak Eye Center, Inc., P.S. v. Mockovak, No. 79290-3-I, 2020 WL 1952509 (Wn. App. April 13, 2020), (and the criminal case that discusses the murder mystery in detail), the drama is real.
Business Dispute Turns into Attempted Murder
In 2002, Dr. Joseph King (“King”) and Michael Mockovak (“Mockovak”) went into business together to practice Lasik eye surgery. They formed a Washington professional services corporation, King and Mockovak Eye Center, Inc. (“KMEC”). At one point, King and Mockovak were brother’s in-law and had a quality relationship. By all relevant factors, King and Mockovak appeared to be doing well. They had three locations throughout Washington, and additional offices owned by different entities in Canada. However, the Great Recession came along and demand for eye surgery crashed. As a result, KMEC suffered substantially.
In response to the business’s decline, the relationship between King and Mockovak deteriorated to the point Mockovak attempted to hire a “Russian mobster” to murder King, while King was in Australia. Mockovak’s grand plan was to murder King and collect on a $4 million key-man life insurance policy. Unfortunately for Mockovak, and fortunately for King, the person Mockovak dealt with to hire the “Russian mobster” turned out to be an informant for the FBI.
After all this took place, a lengthy dispute spanning more than 10 years ensued. There were two issues at the heart of the business litigation: 1) whether Mockovak breached his fiduciary duties by attempting to steal life insurance proceeds by attempting to have his partner murdered; and 2) whether KMEC and its shares were properly valued by the trial court.
The first issue was ultimately resolved by the trial court and affirmed on the first appeal in King and Mockovak Eye Center, Inc. v. Mockovak, No. 74544–1–I, 2017 WL 4898237 (Wn. App. Oct. 30, 2017). Resoundingly, the answer was yes, Mockovak’s actions constituted a breach of his fiduciary duties to KMEC, which comes as no surprise. Interestingly, for reasons not discussed, the trial court did not award damages for this breach.
The second issue was far more contentious and resulted in a remand after the first appeal from October 2017 and the second appeal issued earlier this year on April 13, 2020 (which is cited in the first paragraph of this post).
After Mockovak’s string of poor decisions, his license to practice medicine was revoked. The revocation of his license caused Mockovak to become ineligible to own shares in KMEC, as KMEC is a professional services corporation. RCW 18.100.116(1). As Mockovak became ineligible to own shares, he was deemed by statute to have exercised the right to dissent under RCW 23B.13. RCW 18.100.116(2). Dissenters have the right to payment of “fair value” for their shares under RCW 23B.13.250. If the dissenter is not paid, which is what happened in this case, the court will ultimately determine the fair value of the shares. RCW 23B.13.300. The plain language of RCW 23B.13.300 requires the court to make the ultimate valuation.
Upon remand, the trial court reviewed opposing valuations of KMEC from King’s expert, McDaniel, and Mockovak’s expert, Barrick. McDaniel used the “net asset” approach and considered two valuation dates: January 27, 2011, which was the statutory date of valuation, and December 31, 2009, which was just after Mockovak’s arrest. Barrick, on the other hand, used the “income” and “market” approaches, but neglected to value the KMEC shares on January 27, 2011.
The opposing valuations resulted in two very different numbers. McDaniel’s “net asset” approach valued KMEC at negative $467,168 on January 27, 2011. Significantly, Mockovak neglected to object to McDaniel’s testimony. Barrick’s “income” and “market” approaches valued KMEC at a positive $4.2 million.
The trial court ultimately found McDaniel’s valuation to be more convincing and determined that the fair value of Mockovak’s shares to be negative $233,584. As a result, KMEC did not have to make any payment to Mockovak. Mockovak appealed and the appellate court affirmed.
The appellate court was not required to take up Mockovak’s appeal considering Mockovak failed to object to McDaniel’s valuation testimony. However, the court decided to “humor” Mockovak’s arguments, but rejected them.
There are a few considerations from this mess of litigation, but I think it is worth knocking the easiest one off first: do not attempt to murder your business partner and collect from the insurance policy. Most lawyers shudder at the notion of giving free legal advice, yet I am bucking that trend in this post.
Another consideration for practitioners is to educate themselves on valuation issues. There are significant differences between “fair value,” “fair market value” and “going concern value.” There seems to be a general lack of understanding of valuation methodology, which is reflected in buy-sell, shareholder and LLC agreements.
There is nothing worse than a valuation provision that is so ambiguous that it renders valuation impossible because no one knows what it says. This goes for all agreements but is nevertheless worth repeating: clear and concise drafting can avoid many problems down the road.
For more Washington business entity law considerations, refer to this blog every Wednesday at 12 PM, noon.