Every now and then, a court case comes out that touches on things that could affect our dentist sellers. And here’s one of them.
It’s a BC case (so it’s not binding on Ontario courts) that just came out on August 30, 2023. The case is 1104318 BC Ltd. v Dr. Paul Wittenberg, Inc., 2023 BCSC 1520.
This case involved the purchase and sale of a dental practice based on purchase and sale agreement dated September 11, 2017 (see how long things take to get through the court system???). The closing (change over of ownership) occurred on October 31, 2017.
The buyer took over and billed FAR LESS in the first two months ($16k in November, $23k for December 2017 and $15k for January 2018) than was expected (i.e. $58k /month on average) per the financial statements of the dental practice. The buyer tried to supplement their income by offering discounts to groups of individuals and by working weekends and Friday afternoons. The buyer lost a lot of patients after taking over. The buyer didn’t consult with the seller about these difficulties (although the seller agreed to provide up to 6 months of consultation advice).
The buyer looked deep into the practice’s records and believed the seller was overbilling patients and that there may have been insurance fraud. The buyer tried to sell the charts to a large dental services organization, but to no avail. He eventually suffered a “breakdown stress situation”. In February 2018, the buyer closed the dental practice and submitted a proposal to creditors, which was rejected, so he made an assignment into bankruptcy in March 2018. The buyer relied heavily upon his lawyer and accountant for advice on buying the practice, but did not go after them legally.
Instead, the buyer went after the seller. The buyer claimed that the selling dentist seriously misrepresented the value of the dental practice and, in particular, falsely represented that the dental practice was legitimately capable of generating billings of approximately $700k per year. The buyer sued the dentist seller and sought the return of the $870k purchase price and consequential damages.
Lab Invoice Discrepancies
The buyer claimed that the operations and billing practices of the dental practice were fraudulently misrepresented.
Specifically, the buyer alleged that the selling dentist and his spouse (a certified dental assistant) made many claims about how the dental practice was run that were not supported by any documents and often in conflict with practice records. And the buyer even claimed that the seller was engaged in fraudulent billing practices which, when discontinued, significantly reduced the practices’ billings and thus the practice’s overall value.
For example, the buyer alleged that:
- The selling dentist and his spouse routinely falsified lab invoices to insurers for payment.
- Any lab work purportedly performed by a lab was not chargeable as lab fees.
- The selling dentist condoned patient recall appointments being future-dated so that insurance companies would provide coverage.
- The selling dentist routinely billed patients and their insurers for excessive units of scaling and other time-based procedures.
- The selling dentist did not charge his relatives co-payments in connection with appointments when he billed their insurers for the insured portion.
- The selling dentist routinely billed his general anesthesia patients for an impossible amount of work during their appointments.
The court reviewed the evidence and found insufficient evidence to support fraudulent misrepresentation. It came to that conclusion on the basis that:
- There were discrepancies in the lab invoices (internal vs. external), but those could be rectified by the buyer’s production of the full patient charts (which would have a breakdown of internal sum-total invoices and total laboratory fees charged to a patient by various laboratories in a particular case).
- It was unlikely the seller would go through 1000 charts and remove or modify billing or patient records.
- The buyer had access to the patient records from November 1, 2017, onwards (as the owner) but failed to produce or preserve the patient and business records dealing with the dental practice.
- The buyer continued to charge the same lab fees to patients after taking over.
Not Collecting Co-Pay For Family
On the issue of the selling dentist not collecting co-pay from his family, the court once again found insufficient evidence to support fraudulent misrepresentation.
Specifically, there was no evidence that the selling dentist told the collections person NOT to collect co-pay. The selling dentist testified that “he did not fail to collect co-payments from his patients, and there is, in fact, no evidence that he failed to collect co-payments from his patients.”
Further, the buyer failed to establish which particular patients were relatives of the selling dentist, contrary to the allegation.
Excessively Billing GA patients
The buyer alleged that the selling dentist systematically overbilled his general anesthesia patients. This was based on another dentist’s expert opinion that many procedures involved unnecessarily filling simple abfractions and that it was simply not possible to perform 19 fillings in a 1-hour operating period.
But the Court preferred the selling dentist’s evidence to the expert’s. For starters, the expert was accepted by the Court as an expert in general dentistry and not in anesthesia dentistry. Specifically, the expert’s experience to general anaesthesia was limited to a period from 1970-1974. So, there was a lack of expert evidence on the buyer’s side.
But the selling dentist gave evidence that his office did the most GA dental work in the city and that he had performed hundreds and hundreds of these procedures and was very efficient at it. Further, the selling dentist would pre-medicate the patient prior to GA, so while they were waiting, the selling dentist had time to perform scaling, recall exams, etc. There was no evidence to point to any wrongdoing by the selling dentist. Nor was there any forensic audit conducted by a qualified professional (the court rejected the buyer’s expert in this capacity) to establish fraudulent billing practices; instead, the Court was asked to draw large inferences of wrongdoing based on lawyer submissions and subset of the patient records, which it refused to do.
As such, the Court concluded that the buyer had not proven its allegation that the selling dentist excessively billed GA patients.
Breach of Purchase and Sale Agreement?
Since the buyer failed to establish fraudulent misrepresentation, the Court turned to whether the selling dentist had breached the purchase and sale agreement by making false representations.
Here, the Court needed to understand the intention of the parties and the scope of their understanding. So, it read the contract as a whole and gave the words their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time they formed the contract.
First, the buyer claimed, contrary to a clause in the purchase and sale agreement, that the financial statements did not truly and accurately reflect the financial position of the dental practice and its ordinary course of business. But the Court had already dealt with this issue previously that the buyer had not established that the revenues were illegitimate and the result of fraudulent billing practices. So, that claim was thrown out.
Second, the buyer claimed that, contrary to a clause in the purchase and sale agreement, the practice had not been operated in compliance with the rules and the Code of Conduct of the College of Dental Surgeons of BC. Once again, the buyer raised the allegation of fraudulent billing practices. But the Court already found that there was insufficient evidence to establish that claim, so it was thrown out as well.
Interestingly, there was a clause in the purchase and sale agreement that said that, with respect to the financial information being disclosed, the selling dentist made NO assurance that the purchaser would achieve the same or similar results. The clause said: “The Purchaser understands that the financial results shown in the Financial Statements are the result of the Vendor and Covenantor’s efforts, and there is no assurance by the Vendor or the Covenantor that the Purchaser will achieve the same (or similar) results.”
The selling dentist insisted that they would not have signed the purchase and sale agreement without this clause. And the buyer admitted that this clause was a sticking point for a while because it was an acknowledgment that the buyer was not relying on the average $700k annual gross billings of the practice. The Court relied upon this clause to shoot down the buyer’s claim of breach of contract based on misleading statements, etc. The Court wrote: “I do not find the defendants made misleading statements, nor that they omitted to tell the plaintiff anything necessary with regards to the financial statements. I also do not find the defendants omitted to tell the plaintiff anything they knew or ought reasonably to have known about the practice that would reasonably affect the plaintiff’s decision to proceed.”
As such, the Court found that the buyer had not proven breach of contract.
Trying to prove fraudulent misrepresentation (a tort) or breach of contract is not easy. You need a lot of evidence and experts. Here, a lack of evidence resulted in the buyer not being able to establish their claims, so the Court dismissed the lawsuit. And the Court ordered that the selling dentist (the successor) be entitled to receive costs of the lawsuit.
If you’re a dentist buyer, make sure to do proper due diligence with a team of experts well-versed in dental law. Also, make sure to have a marketing plan ready to go to attract and keep patients.
If you’re a dentist seller, make sure your patient and billing records are clean, that you collect co-pay from everyone, and that you’re not engaged in any unusual or excessive billing practices. Also, make sure to disclose as much information and documentation as is relevant and requested in the context of a sale so the buyer doesn’t come after you after the deal is done. Note: the buyer will have their chance to do due diligence, so they shouldn’t have the opportunity to complain about it later. In this case, having a clause that said that the seller’s past financial performance is no guarantee to the buyer’s future financial performance was key in having the breach of contract claim dismissed.