Fallahzedah v. Ghorbanian
Court of Appeals Division I
State of Washington
Opinion Information Sheet
Docket Number: 50766-4-I
Title of Case: Abraham Ghorbanian, et al., Appellant/X-Resp.
v. Akbar Fallahzadeh, et ux, Respondent/X-App.
File Date: 01/05/2004
SOURCE OF APPEAL
----------------
Appeal from Superior Court of King County
Docket No: 01-2-31149-2
Judgment or order under review
Date filed: 07/02/2002
JUDGES
------
Authored by H Joseph Coleman
Concurring: Marlin J. Appelwick
William W. Baker
COUNSEL OF RECORD
-----------------
Counsel for Appellant(s)
Kenneth Wendell Masters
Attorney at Law
241 Madison Ave N
Bainbridge Island, WA 98110-1811
Charles Edward Watts
Attorney at Law
850 Skyline Twr
10900 NE 4th St
Bellevue, WA 98004-5873
Charles Kenneth Wiggins
Attorney at Law
241 Madison Ave N
Bainbridge Island, WA 98110-1811
Counsel for Respondent/Cross-Appellant
Roger James Kindley
Attorney at Law
1201 3rd Ave Ste 3400
Seattle, WA 98101-3034
Robert Richard King
Ryan Swanson & Cleveland PLLC
1201 3rd Ave Ste 3400
Seattle, WA 98101-3034
Amicus Curiae on behalf of Washington Dental Association
John Craig Bjorkman
Preston Gates & Ellis LLP
925 4th Ave Ste 2900
Seattle, WA 98104-1158
Alan Wicks
Preston Gates & Ellis LLP
925 4th Ave Ste 2900
Seattle, WA 98104-1158
IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
AKBAR FALLAHZADEH, ) NOS. 50766-4-I
) 51363-0-I
Respondent, )
v. ) (Consolidated Cases)
)
ABRAHAM GHORBANIAN and JANE )
DOE GHORBANIAN, husband and wife, )
and their marital community composed ) DIVISION ONE
thereof; and ABRAHAM GHORBANIAN, )
D.D.S., P.S., )
)
Appellants. )
) Published Opinion
)
ABRAHAM GHORBANIAN and ZAHRA )
SOLTAN, husband and wife; and )
ABRAHAM GHORBANIAN, )
D.D.S., P.S., a Washington Personal ) FILED:
Service Corporation, )
)
Appellants, )
v. )
)
AKBAR FALLAHZADEH and JALEH )
MONTAZERIPOOR, husband and wife, )
)
Respondents. )
)
COLEMAN, J. Akbar Fallahzadeh prevailed in an unlawful detainer
action he commenced to collect unpaid rent from a dental practice, Abraham
Ghorbanian, DDS, PS. Ghorbanian's practice and Fallahzadeh owned as
tenants-in-common the building where the practice was located, but they
entered into a lease agreement for the practice to rent the building and
pay Fallahzadeh rent in the amount of 50 percent of the practice's net
profits. Ghorbanian contends on appeal that the trial court erred in
enforcing the lease because it constituted the illegal practice of
dentistry by his landlord, a non-dentist. We agree with Ghorbanian that
the lease constituted an illegal partnership between a professional and a
nonprofessional. We reverse and dismiss.
FACTS
Abraham Ghorbanian is a licensed dentist who was employed by Sunrise
Dental Family Center, Inc. Sunrise's owners offered him the opportunity to
purchase the dental practice and the building where it was located. Due to
his inexperience in business matters, Ghorbanian asked a senior member of
the Persian-American community, Akbar Fallahzadeh, to act as a partner in
purchasing the practice. Together they consulted an attorney, Greg Lucas.
Lucas informed Ghorbanian and Fallahzadeh that it was illegal to form
a partnership between a dentist and a non-dentist, but that they could be
partners in the purchase of the building, which could be leased to the
practice. Lucas agreed to represent the two after explaining the potential
conflict of interest and obtaining signed waivers. Lucas advised
Ghorbanian and Fallahzadeh to independently discuss and agree upon the
terms of their transaction. After Ghorbanian and Fallahzadeh discussed the
matter privately, they returned to Lucas and instructed him to draft a
lease agreement providing for Fallahzadeh to lease the building to the
practice in exchange for rent in the amount of 50 percent of the practice's
net profits. Net profits was defined as all profits after deducting
ordinary operating expenses but before deducting the mortgage payment or
Ghorbanian's salary. Lucas presented a draft commercial lease to
Ghorbanian and Fallahzadeh for their review in December 2000. They
executed the lease in March 2001 when they purchased the building.
In December 2000, Ghorbanian bought the dental practice, making a down
payment and executing a promissory note for the balance. Fallahzadeh
signed a $200,000 personal guaranty for the promissory note. Lucas
testified that the sellers demanded this guaranty as a condition of the
sale. Ghorbanian immediately began operating his practice and employed
Fallahzadeh as his office manager. As office manager, Fallahzadeh had
check-writing authority and handled the practice's accounts. Fallahzadeh
periodically deposited personal funds into the accounts as loans to the
practice. He routinely transferred funds, which included loan repayments,
rent, and his $5,000 monthly salary, from the practice's accounts to his
personal accounts.
Ghorbanian soon became concerned with Fallahzadeh's withdrawals from
the practice's accounts. On September 8, 2001, he called the Renton Police
to report possible embezzlement and instructed Fallahzadeh not to return to
the office, effectively terminating his employment. Fallahzadeh did not
return. On September 27, 2001, Fallahzadeh's attorney sent Ghorbanian a
letter demanding that he pay rent allegedly overdue since July 2001. After
receiving no response, Fallahzadeh filed an unlawful detainer action.
Ghorbanian's answer raised several defenses, including the illegality of
the agreement. He also filed a partition action and a declaratory judgment
action to declare the lease invalid. The trial court consolidated the
unlawful detainer and the declaratory judgment actions, but denied
Ghorbanian's request to consolidate the partition action. After a three-
day trial in February 2002, the court issued a letter ruling in which it
determined that the lease was legal. The court also found that there was
no unlawful detainer due to the practice's status as a tenant-in-common.
The court subsequently entered findings of fact and conclusions of law in
which it concluded that the practice owed Fallahzadeh $111,265.13 in rent
based upon the practice's profits from March 2001 until April 2002, plus
$40,000 in attorney fees. The court entered judgment in those amounts on
July 2, 2002, and further ordered that Fallahzadeh be paid 'minimum rent,'
defined in the lease as one-half of the market rate for the months in which
there was no profit. After a special master determined the minimum rent
due, the court entered a supplemental judgment for that amount, $28,875.43,
plus attorney fees. DISCUSSION
The legality of an agreement is a question of law that is reviewed de
novo. Morelli v. Ehsan, 110 Wn.2d 555, 558, 756 P.2d 129 (1988).
Under RCW 18.32.020(3), any person who 'owns, maintains or operates an
office for the practice of dentistry' is engaged in the practice of
dentistry. Unlicensed persons and entities may not engage in the practice
of dentistry. State v. Boren, 36 Wn.2d 522, 531, 219 P.2d 566 (1950).
This prohibition extends to most other learned professions, such as law,
medicine, and optometry, in which it is considered harmful to the welfare
of the public to permit unlicensed persons and entities to share a
beneficial interest in a professional service entity. Morelli, 110 Wn.2d
at 559.
Ghorbanian urges this court to examine the 'reality' of the parties'
business relationship, and conclude that his relationship with Fallahzadeh
resulted in an illegal partnership between a dentist and a non-dentist.
Fallahzadeh responds that it is common commercial practice to include rent
provisions based upon a percentage of the tenant's profits and that these
arrangements are legal and enforceable, as long as the tenant retains
complete professional control. Fallahzadeh's position relies upon several
non-Washington cases upholding percentage agreements applicable to
professional service providers, including Bd. of Optometry v. Sears,
Roebuck & Co., 102 Ariz. 175, 427 P.2d 126 (Ariz. 1967) (holding that rent
provision for 20 percent of optometrist's gross sales, repair work, and
services was not an illegal employment agreement); Wyoming State Bd. of
Examiners of Optometry v. Pearle Vision Ctr., Inc., 767 P.2d 969 (Wyo.
1989) (holding that 8.5 percent 'franchise fee' on gross revenues did not
violate statute prohibiting fee-splitting); and Bronstein v. Bd. of
Registration in Optometry, 403 Mass. 621, 531 N.E.2d 593 (Mass. 1988)
(holding that 15 percent rent provision for gross receipts over $500,000
did not constitute illegal fee-splitting). While we acknowledge that
percentage rent provisions are not per se illegal in leases to
professionals, none of these cases is particularly helpful because none
involves a percentage as large as 50 percent, none involves tenants-in-
common, and none addresses the issue here, which is whether this type of
leasing arrangement violates Washington's statute prohibiting a non-dentist
from owning, operating, or maintaining an office for the practice of
dentistry.
Factually, this case is similar to Boren, which addressed whether two
non-dentists were illegally owning and operating a dental practice. In
Boren, two non-dentists entered into a conditional sales contract with a
dentist who agreed to pay $55,000 for an on-going dental practice in $750
monthly installments. Boren, 36 Wn.2d at 523. The non-dentists had
previously engaged in partnerships that owned and sold other practices in
Western Washington. Under the contract, the dentist drew a $500 salary and
one of the non-dentists worked for $500 each month as office manager
''buying the supplies and watching the charts and making out the accounts
and payments, and general manager, and looking after the advertising.''
Boren, 36 Wn.2d at 524. The office manager also withdrew monthly bonus
payments 'in appreciation of the increase in business.' Boren, 36 Wn.2d at
524. The court held that these activities fell within the statutory
prohibition on owning, operating, or maintain an office for the practice of
dentistry. Boren, 36 Wn.2d at 532.
Many of the facts seen in Boren can also be seen here. Fallahzadeh
worked for nine months as Ghorbanian's office manager. In that capacity,
Fallahzadeh assumed sole responsibility for handling the practice's
finances to the extent that he routinely would transfer loan repayments,
rental payments, and salary payments from practice accounts to his personal
accounts.
Fallahzadeh argues that Boren is distinguishable because his firing
demonstrated that Ghorbanian retained complete control of all business and
professional activities for his practice. Under Washington law, however,
Fallahzadeh's noninvolvement in the delivery of professional services is
not determinative. In State ex rel. Standard Optical Co. v. Superior Ct.
for Chelan County, 17 Wn.2d 323, 334, 135 P.2d 839 (1943), the fact that an
optometrist retained complete professional control did not prevent the
Washington Supreme Court from concluding that his employer was illegally
maintaining and operating an optometry practice. Furthermore, this
distinction is not particularly persuasive in light of the 50 percent net
profit rent provision and the other terms of the lease. Regardless of
whether Fallahzadeh was employed by the practice, he still retained a
substantial beneficial interest in the practice's profits. In this
respect, the lease is no different than Boren's conditional sales contract,
which also guaranteed to the sellers a steady income stream from the
practice. Furthermore, Fallahzadeh reserved significant rights under the
lease as landlord. He had sole and exclusive discretion to approve any
changes, modifications, or alterations. Thus, his absence from the
practice's day-to-day operations did not affect his ability to control
certain aspects of Ghorbanian's practice, such as making physical
improvements to the premises that might be necessary for patient care. It
is exactly these public health and welfare concerns that were discussed in
Standard Optical as the basis for invalidating the employment relationship.
The ethics of any profession is based upon personal or individual
responsibility. One who practices a profession is responsible directly to
his patient or his client. Hence he cannot properly act in the practice of
his vocation as an agent of a corporation or business partnership whose
interests in the very nature of the case are commercial in nature.
Standard Optical, 17 Wn.2d at 332 (quoting Ezell v. Ritholz, 188 S.C. 39,
198 S.E. 419, 424 (1938)).
Fallahzadeh further argues that the profit-based rent provision is
legal because in Pritchard v. Conway, 39 Wn.2d 117, 234 P.2d 872 (1951),
the court approved profit-sharing between dentists and non-dentists, but
Pritchard is not on point. In Pritchard, a dentist's widow sold her
deceased husband's practice to another dentist. She reserved the right to
manage the office, to receive installment payments, and to receive net
profits of 70 percent the first year, 60 percent the second year, and 55
percent for years three through five. Pritchard, 39 Wn.2d at 118-19. Upon
viewing these profit-sharing provisions in context of the entire
transaction, the Pritchard court concluded that this arrangement was
entirely lawful as a means of transferring the good will of the practice.
Pritchard, 39 Wn.2d at 125. Furthermore, the seller's involvement in the
office management was limited to tasks routinely performed by
nonprofessional employees and was intended to facilitate transfer of the
practice's business operations to the buyer.
Pritchard found legitimate reasons for incorporating profit-sharing
provisions. In contrast, Fallahzadeh has offered no explanation for why he
and Ghorbanian agreed to a rent amount that grossly exceeded the market
rate. For the first six months of the agreement, monthly rent for the
building averaged at $21,916, based upon the special master's calculations.
The market rate for the building during this period was determined to be
approximately $3,700. When this disparity is viewed together with
Ghorbanian's inability to deduct standard expenses, such as the mortgage
payment or his salary, from his monthly profits before paying rent, it is
clear that the lease enabled Fallahzadeh to obtain a financial interest in
the partnership in violation of Washington law.1 The trial court's finding
that Fallahzadeh did not seek to create a sham partnership or act in bad
faith does not alter this outcome.
In reaching this decision, we acknowledge that percentage leases can
provide an efficient means of determining the value of commercial property,
even when health-related professions are involved. State ex rel. Bd. of
Optometry v. Sears, Roebuck & Co., 102 Ariz. 175, 427 P.2d 126, 128 (1967).
Of course, each case must be evaluated on its merits, with consideration of
all relevant factors to determine whether a particular transaction runs
afoul of the statutory prohibition. Here, the only reasonable explanation
for the 50 percent net profit rent provision is to allow Fallahzadeh to
realize the benefits of owning the practice. Consequently, the trial court
erred when it determine that the agreement was illegal. When a court
determines that an agreement is void against public policy, the rule is to
leave the parties in the positions where the court finds them, even if they
acted in good faith. Morelli, 110 Wn.2d at 561. 'If the parties are not
in pari delicto, however, the less culpable party may maintain an action
based on an illegal contract.' Morelli, 110 Wn.2d at 562. There is no
evidence here that the parties are not in pari delicto, as both entered
into this agreement willingly and with full knowledge of its provisions.
Accordingly, we decline to effect a judicial disposition of the parties'
debts, entitlements, or obligations. We also deny both parties' requests
for attorney fees.
Ghorbanian next contends that trial court erred when it denied his
motion to convert the unlawful detainer action to a suit for partition,
arguing that a tenant-in-common is incapable of being in unlawful detainer.
We are not necessarily convinced, however, that a tenant-in-common is not
subject to the same rules in unlawful detainer as other tenants once the
right to possess property has been altered pursuant to a valid lease. See
McGinley v. Cannon, 90 Wash. 311, 318, 155 P. 1047 (1916) (citing O'Connor
v. Delaney, 53 Minn. 247, 54 N.W. 1108 (1893)). Nevertheless, in part
because this case consisted of both unlawful detainer and declaratory
judgment actions and also due to the subsequent termination of the parties'
co-tenancy while this appeal was pending, we conclude that it is not
necessary to decide this issue.
We reverse and dismiss.
WE CONCUR:
1 There is also unique evidence in this case that suggests that Fallahzadeh
viewed his relationship to Ghorbanian's practice as more than just landlord
and tenant. It is undisputed that Fallahzadeh approached another dentist
to ask whether he would be interested in buying Fallahzadeh's share of the
practice.