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Nadeau v. Pitman
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MAINE SUPREME JUDICIAL COURT					Reporter of Decisions
Decision:	1999 ME 104
Docket:	Cum-98-650	
Argued:	June 7, 1999	
Decided:	June  30, 1999

Panel:WATHEN, C.J., and  RUDMAN, DANA,  ALEXANDER, and CALKINS, JJ.

LAWRENCE A. NADEAU et al. v. JON P. PITMAN et al.
ALEXANDER, J.

	[¶1]  Jon P. Pitman, M.D., and Taylor, Pitman & Eule Radiology
Professional Associates, P.A., (collectively the "defendants") appeal from a
judgment entered in the Superior Court (Cumberland County, Brennan, J.)
concluding that the defendants were unjustly enriched by a refund of
insurance charges and ordering Pitman and Mark M. Eule, M.D.{1} to share
the refund equally with former stockholders, Lawrence A. Nadeau, M.D., and
Richard W. Taylor, M.D. (collectively the "plaintiffs").  The defendants argue
that the court erred in (1) applying the law of unjust enrichment because
there were contracts that governed the issue; (2) concluding that the
defendants were unjustly enriched; and (3) concluding that defendant
Pitman was individually liable.  We conclude that a contract governed the
financial arrangements between the parties, barring application of the unjust
enrichment doctrine.  Accordingly, we vacate the judgment.
	[¶2]  In 1974, Taylor, Pitman, Nadeau and another physician, John
Konecki formed a professional services corporation,{2} later known as
Radiology Professional Associates, P.A. (RPA), under which they conducted
their radiology practice.{3}   Konecki died in August 1976.  Eule joined the
practice in 1977 and became a stockholder in the corporation in 1978.  The
court found that "[t]hroughout the time these doctors worked together they
shared equally the benefits and burdens of their practice."  As such, they
"were equal partners in this enterprise."  From 1976 to 1981, RPA
purchased its medical malpractice insurance from Maine Medical and
Hospital Malpractice Joint Underwriting Association (JUA).{4}
	[¶3]  In January 1978, as equal shareholders in the corporation,
Taylor, Pitman, Nadeau and Eule entered into a stock purchase agreement. 
The agreement included the following formula by which the corporation
would redeem the value of a stockholder's shares when a stockholder
terminated his relationship with the corporation: 
	The purchase price for the shares of stock of a deceased,
disabled or retired stockholder shall be the book value
thereof, determined as set forth below as of the close of the
books of the corporation as of the last day of the month
preceding such death, disability or retirement.

	The purchase price of each share of common stock shall
be determined by the following formula.  Net worth as shown
on books of corporation less accounts receivable and less all
unrecorded liabilities as of immediately prior to such death,
disability or retirement.  The total value of all shares of
common stock as found by way of the foregoing formula shall
be divided by the total number of shares of common stock
outstanding, and thus the value of each share shall be
ascertained.

	Book value shall be determined by the accountant
servicing the corporation in accordance with generally
accepted accounting principles.  Notwithstanding the
foregoing, however, should the fair market value of any assets
of the corporation be greater than the amount carried on the
corporate books, then the fair market shall be used in
computing the value for these purposes.
	[¶4]  In 1986, Nadeau retired from RPA.  The shareholders and RPA
entered into a redemption agreement setting forth Nadeau's retirement
compensation.  In return for his fifty shares, RPA agreed to pay Nadeau
$80,000 over two years with interest.  The payment was calculated
according to the 1978 stock purchase agreement.  
	[¶5]  RPA's principal asset was its accounts receivable. RPA's
accountant calculated the payment to Nadeau by determining the gross
accounts receivable and then calculating how much of that total was likely to
be collected after discounting for payments by third parties such as
Medicare and Medicaid.  The accountant then divided the accounts
receivable by four and added unused vacation and sick time.  When
calculating the payment, the accountant did not consider the potential of a
refund from the JUA.  
	[¶6]  The redemption agreement with Nadeau provided that,
Seller acknowledges that upon payment of the Note attached
hereto in accordance with its terms, that Seller will have
received full and complete satisfaction of all duties and
obligations of Purchaser to him under [the 1978 stock
purchase agreement], and does hereby release all other
claims against Purchaser. 
	[¶7]  In 1987, in accordance with 24 M.R.S.A. § 2406(5), JUA issued
a check for $33,363.17 to RPA as a refund of stabilization reserve fund
charges paid from 1976 to 1981 plus interest.  Even though Nadeau had
already retired by the time the check arrived, Taylor, Pitman, Eule, and
Nadeau shared the refund equally.{5}
	[¶8]  In 1991, Taylor retired from RPA.  Pursuant to the 1978
contract, he received $60,000 in exchange for his shares in the corporation. 
Twenty-thousand dollars of this sum was placed in an escrow account as a
contribution to the potential settlement of a suit then pending against RPA
by a former RPA employee.{6}  Taylor's payment was calculated in the same
way as Nadeau's, but apparently there was no separate written redemption
agreement.  Again, the accountant did not consider a potential refund from
JUA in calculating the payment.  
	[¶9]  In August 1995, JUA made a final distribution of its surplus in
the stabilization reserve fund, and RPA received a check for $62,301.18.{7} 
After some communication among the four doctors, Pitman and Eule
decided not to share the refund.
	[¶10]  In October 1996, Nadeau and Taylor filed a complaint alleging
that the defendants had breached an express and implied contract to share
the refund and that the defendants had been unjustly enriched by retaining
the 1991 refund.  The court granted defendants' motion for a summary
judgment on the express and implied contract claims due to a lack of
consideration.  
	[¶11]  After a nonjury trial, the Superior Court determined that the
1978 contract under which the value of Nadeau's and Taylor's retirement
payments had been determined was affected by a mistake of fact because it
did not consider the potential for distribution of excess stabilization reserve
fund charges from JUA.   The court determined:
. . . that at the time Dr. Nadeau, and later Dr. Taylor, entered
into the stock repurchase agreements all parties labored
under the same misconception of a material fact. 
Specifically, that the Corporation had a significant contingent
asset, a potential refund of insurance premiums in excess of
$60,000.  This asset was very much like the accounts
receivable which Mr. Richards testified were the key to his
valuation.  It was totally ignored when the shares were
repurchased although it was fully paid in before either doctor
retired.  This mutual mistake of fact renders the contracts
unenforceable and permits an equitable remedy, if Plaintiffs
can establish their claims of unjust enrichment.
	[¶12]  In supplemental findings, the court stated that, "[t]he mutual
mistake of fact occurred at the time of performance under the stock
purchase agreement."   The court noted that "under these circumstances,
the 1981{8} stock purchase agreement should not bar the equitable relief
sought by plaintiffs."
	[¶13]  In its findings the trial court appeared to determine that
while the mutual mistake occurred at the time of calculation and
performance under the stock purchase agreement, those mistakes served to
void the effect of the 1978 agreement.  With the 1978 agreement ruled
ineffective, the court applied the doctrine of unjust enrichment to require
that the 1995 distribution from JUA be split evenly among Pitman, Eule,
Nadeau and Taylor.  The defendants filed a timely appeal from the court's
judgment.
	[¶14]  The remedy of "[u]njust enrichment describes recovery for
the value of the benefit retained when there is no contractual relationship,
but when, on the grounds of fairness and justice, the law compels
performance of a legal and moral duty to pay."  Paffhausen v. Balano, 1998
ME 47, ¶ 6, 708 A.2d 269, 271.  The existence of a contractual relationship,
"precludes recovery on a theory of unjust enrichment." June Roberts
Agency, Inc. v. Venture Properties, Inc., 676 A.2d 46, 49 n.1 (Me. 1996).	
	[¶15]  As a matter of law, the mistake of fact which the Superior
Court found-the failure to consider the potential for return of funds from
JUA, at the 1986 and 1991 times of performance under the 1978
agreement-could not void the 1978 agreement.  There may be other
remedies available for accounting errors or mistakes in calculations in the
performance of an agreement, but such errors are not a mutual mistake of
fact which voids the earlier agreement and justifies application of the
doctrine of unjust enrichment to cure errors in performance of a valid
agreement.  
	[¶16]  The stock purchase agreement and the repurchase formula
were developed in 1978.  The law then in effect recognized the possibility of
return of any overpayments of stabilization reserve fund charges being paid
to JUA.  See 24 M.R.S.A. § 2406(5).   A mutual mistake of fact to undermine
the validity of a contract must exist at the time of entry of the contract. 
Miller v. Lentine, 495 A.2d 1229, 1231 (Me. 1985).  Events which occur
subsequent to execution of a contract and are not contemplated by the
parties at the time of execution of the contract, are not a mutual mistake
rendering a contract unenforceable.  Dufort v. Bangs, 644 A.2d 6,7 (Me.
1994); Bouchard v. Blunt, 579 A.2d 261, 263 (Me. 1990).  If mutual
mistakes of fact which could void contracts were interpreted as any error in
performance or change in expectations after entry of a contract, then all
contracts could be undermined on mutual mistake of fact theory.  
	[¶17]  The decision of the JUA reached sometime in the 1980's to
begin repayments to policyholders of proceeds in the stabilization reserve
fund could not be a mistake of fact undermining a contract entered in 1978. 
Because the termination of the parties' financial relationship was governed
by a valid contract, the unjust enrichment theory could not be applied to
require readjustment of the retirement pay amounts for contingent benefits
not calculated in determining corporate value at the time of retirement, and
coming to the corporation after the time of retirement.  
	[¶18]  Because we conclude that the court erred in applying the
unjust enrichment remedy, we need not address defendants' other
contentions.
	The entry is:
	Judgment vacated.   Remanded to the Superior
	Court with direction to enter judgment for the
	defendants.

Attorneys for plaintiffs: Joel C. Martin, Esq., (orally) Petruccelli & Martin, LLP P O Box 9733 Portland, ME 04104-9733 Attorneys for defendants: Jennifer Nichols Ferguson, Esq. Anthony K. Ferguson, Esq., (orally) Fales & Fales, P.A. Lewiston, ME 04243-0889
FOOTNOTES******************************** {1} . Dr. Eule was an original named defendant and a party to this appeal, however, he was dismissed from this action prior to oral argument. {2} . Pursuant to 13 M.R.S.A. § 705 (Supp. 1998), [a]n individual or group of individuals duly licensed or otherwise legally authorized to render the same professional service within this State may organize and become a shareholder or shareholders of a professional corporation under the corporation laws for the sole and specific purpose of rendering the same and specific professional service. {3} . Apparently RPA's corporate status was suspended on June 14, 1995, pursuant to 13-A M.R.S.A. § 1302 (Supp. 1998) for failing to file an annual report with the Secretary of State. At oral argument it was indicated that the corporation has no effective existence. {4} . In 1975, the Legislature enacted the Maine Medical and Hospital Malpractice Joint Underwriting Association Act. See P.L. 1975, ch. 442, repealed by P.L. 1995, ch. 311, § 1. In order "to provide, until July 1, 1981, a market for medical malpractice insurance on a self- supporting basis without subsidy from its members" the Act created a temporary Joint Underwriting Association. 24 M.R.S.A. § 2403(2). Any insurer who had assets of $5,000,000 or more and who was "authorized to write and engage in writing, within this State on a direct basis, personal injury liability insurance" was required to be a member of the JUA. Id. § 2403(1). Once the superintendent had determined that medical malpractice insurance could not "be made readily available for physicians in the voluntary market," the JUA could commence underwriting operations for physicians. Id. § 2403(3). The JUA had "the power, on behalf of its members, to issue or to cause to be issued, policies of insurance to applicants . . . to underwrite such insurance and to adjust and pay losses with respect thereto or to appoint service companies to perform those functions, to assume reinsurance from its members and to cede reinsurance." Id. § 2403(4). In order to ensure the solvency of the JUA, the Act also created a "stabilization reserve fund." Id. § 2406. Each policyholder was required to "pay to the association a stabilization reserve fund charge equal to 1/3 of each premium payment for the insurance through the association." Id. § 2406(3). If a policyholder failed to pay the reserve fund charge, the association would cancel the policy. Id. The moneys received by the fund were to be "held in trust by a corporate trustee of a bank or trust company." Id. § 2406(5). The moneys held in trust were to be used "solely for the purpose of discharging when due any retrospective premium charges payable by policyholders of the association under the group retrospective rating plan authorized by [the Act]." Id. Any funds remaining after payment of all premium charges were to "be returned to policyholders under procedures authorized by the directors." Id. {5} . The doctors may have shared some of the refund with the widow of Dr. Konecki. {6} . The suit later settled for $171,000. Taylor did not contribute any more than the $20,000 in escrow. {7} . P.L. 1995, ch. 311, § 2 repealed 24 M.R.S.A. §§ 2401-14, authorized the JUA "to wind up its affairs," and ratified "the distribution of the net surplus of the joint underwriting association." 24 M.R.S.A. §§ 2401-14 (Pamph. 1998). {8} . The 1981 reference is unclear. Since there was no separate redemption agreement when Taylor retired in 1991, the only agreement governing valuation of his shares was the 1978 stock purchase agreement.