Astria Health v. Cerner Corp. (In re Astria Health)

640 B.R. 758

IN RE: ASTRIA HEALTH, Remaining Debtor.

Astria Health, Plaintiff,

v.Cerner Corporation and Cerner Revworks, LLC, Defendants.

Case No. 19-01189-WLH11

Adv. Proc. No. 21-80005-WLH

United States Bankruptcy Court, E.D. Washington.

Signed June 2, 2022

Lesley D. Bohleber, Thomas A. Buford, James L. Day, Bush Kornfeld LLP, Seattle, WA, Anthony Bongiorno, Eric D. Wolkoff, Quinn Emanuel Urquhart & Sullivan LLP, Boston, MA, Susheel Kirpalani, Quinn Emanuel Urquhart & Sullivan LLP, New York, NY, for Plaintiff.

Jean Paul Bradshaw II, Mara Cohara, Patrick N. Fanning, Lathrop GPM LLP, Kansas City, MO, Kristina L. Burmeister, James Aaron Craig, Peak Litigation LLP, Kansas City, MO, Bruce K. Medeiros, Davidson Backman Medeiros, Spokane, WA, for Defendants.

MEMORANDUM OPINION

Whitman L. Holt, Bankruptcy Judge

Bankruptcy law confers the power to assume or reject certain agreements. This basic concept and the resulting choice are simple enough, but matters can become complicated when parties dispute the effects of assumption or rejection on a particular relationship. Despite important guidance from the Supreme Court, the statutory mechanism at issue carries the potential for complexity and confusion nearly unrivaled in the Bankruptcy Code.

The plaintiff in this adversary proceeding exercised its option to assume a certain executory contract during the underlying bankruptcy cases. Defendants, which include the contract counterparty, contend that this act constituted ratification of the contract or otherwise irrevocably bound plaintiff to a damages-limitation clause. Therefore, defendants assert, they are entitled to summary judgment on this issue. The court disagrees for the reasons detailed below.

BACKGROUND & PROCEDURAL POSTURE

The Astria-Cerner Relationship Generally

Plaintiff Astria Health is part of a corporate group that owned and operated three hospitals and associated healthcare clinics in eastern Washington.¹ Defendant Cerner Corporation provides electronic health records and other medical software, products, and solutions.² Defendant Cerner RevWorks, LLC was a subsidiary of Cerner Corporation during the period relevant to this litigation that offered business office services for medical billing management.³

One of Astria's predecessor entities and Cerner Corporation entered into a Cerner Business Agreement (or "CBA") with an effective date in June 2017.⁴ Pursuant to the CBA, Cerner, among other things, provides the Astria group with an electronic health records system.⁵ Section 5.7 of the CBA is an expansive limitation-of-liability clause stating that, among other things, "neither party is liable for any special, indirect, incidental, punitive, or consequential damages based upon breach of warranty, breach of contract, negligence, strict liability, or any other legal theory" and "Cerner's maximum liability for any claim or series of related claims arising under this Agreement is limited to the amount paid by [Astria] to Cerner for the affected solution or Cerner Services during the 18 months preceding the event giving rise to the claim."⁶

One of Astria's predecessor entities also entered into a separate contract with Cerner RevWorks (the "RevWorks Agreement") in June 2018, which entitled Astria to receive certain professional services, including in connection with medical billing processes.⁷

The Astria Bankruptcy Cases and Relevant Events Therein

In May 2019, Astria and numerous affiliated entities filed chapter 11 cases that were administratively consolidated before this court. The bankruptcy cases were complex and contentious, with numerous twists and turns culminating in confirmation of a chapter 11 plan in late December 2020.⁸

As the cases moved toward confirmation, various disputes between Cerner and the debtors began to percolate. Cerner filed a request for allowance and payment of an administrative expense claim based on amounts Cerner contended were due for services it provided under the CBA after the petition date.⁹ The debtors eventually objected to the request, contending they owe Cerner nothing, including based on allegations that Cerner failed "to perform its duties and obligations under and in connection with the arrangements that the [administrative expense request] asserts gives rise to Cerner's claim" and that Cerner had engaged in "representations and actions" which "rise to the level of fraud and intentional misrepresentation."¹⁰ The allegedly problematic representations noted by the debtors were specifically keyed to both the CBA and the RevWorks Agreement.¹¹

The debtors separately moved under Bankruptcy Code section 365(a) to reject the RevWorks Agreement and to assume the CBA (the debtors represented that they wanted to assume the latter because "[t]he services that Cerner provides under the CBA are critical to the Debtors’ operations and the maintenance of the high quality of care provided to patients").¹² Cerner opposed the assumption motion and filed a lengthy objection to confirmation of the debtors’ proposed plan that, among other things, raised issues about the amounts required to be paid under Bankruptcy Code section 365(b)(1)(A) as part of the assumption.¹³ At one of several hearings held during December 2020, the court noted the complexity of the issues raised by the various disputes between the debtors and Cerner and invited the parties to reach a resolution that deferred the significant and complex litigation obviously brewing.¹⁴

The debtors and Cerner, each represented by competent counsel, ultimately agreed on an arrangement detailed across several pages of the order confirming the debtors’ plan.¹⁵ The arrangement provides, among other things, that the debtors would assume the CBA and reject the RevWorks Agreement, that the parties would resolve the cure amount associated with assumption and other assorted issues in a forthcoming adversary proceeding, and that they would consensually resolve or promptly litigate which of various schedules and other documents are part of the CBA. The negotiated arrangement also includes broad reservations, such as by providing that "[n]otwithstanding anything in the Plan or this Order to the contrary, ... all prepetition and postpetition claims, obligations, causes of action or other rights existing between the Debtors and Cerner, including any cure and administrative claims asserted by Cerner, shall be included and determined in the Adversary Proceeding" and that "[n]othing in the Plan or this Order shall impair, prevent, or otherwise adversely affect any of the Debtors’ or Cerner's rights, remedies, claims, and defenses to Vendor Claims."¹⁶ Cerner and the reorganized debtors subsequently entered into a stipulation regarding which specific materials constitute the CBA, which stipulation underscored that the 5+ pages of the confirmation order reserving myriad issues for resolution in an adversary proceeding "remains in full force and effect."¹⁷

Posture of the Adversary Proceeding

This adversary proceeding is the expansive litigation contemplated by the language just discussed in the confirmation order. The operative complaint asserts a range of claims, including (i) fraud and negligent misrepresentation stemming from both the CBA and the RevWorks Agreement and (ii) avoidance actions under Bankruptcy Code sections 544(b) and 548 seeking to avoid all transfers and obligations related to both the CBA and the RevWorks Agreement.¹⁸

Defendants seek partial summary judgment, including on the ground that assumption of the CBA binds plaintiff to the limitations contained in section 5.7 of the CBA and means that "Astria cannot recover any indirect or consequential damages against Cerner Corporation for alleged misrepresentations made during the negotiation of the CBA, no matter how Astria attempts to position its theory of liability."¹⁹ Plaintiff disputes this conclusion and opposes summary judgment. The court has received the benefit of comprehensive briefing and oral argument regarding defendants’ motion and the matter is now ready for decision.

GENERAL PRINCIPLES

Jurisdiction & Power

The court has subject matter jurisdiction regarding this adversary proceeding pursuant to 28 U.S.C. §§ 1334(b) & 157(a) and LCivR 83.5(a) (E.D. Wash.). This court is a proper venue for this litigation as a result of the pendency of the underlying Astria Health bankruptcy cases in this district.²⁰ Both sides have expressly consented to the court's final adjudication of this litigation.²¹ Accordingly, the court may properly exercise the judicial power necessary to decide the pending motion.²²

Standard for Partial Summary Judgment

Federal Rule of Civil Procedure 56, which applies here through Bankruptcy Rule 7056, allows a party to move for complete or partial summary judgment. A court should grant relief only "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."²³ "The determination of whether a given factual dispute requires submission to a jury must be guided by the substantive evidentiary standards that apply to the case. To defeat summary judgment, the nonmoving party must produce evidence of a genuine dispute of material fact that could satisfy its burden at trial."²⁴

A summary judgment analysis requires the court to consider the evidence offered by the parties "in the light most favorable to the nonmoving party."²⁵ Summary judgment is generally disfavored in the context of intensely factual disputes.²⁶

Assumption & Rejection Under the Bankruptcy Code

Bankruptcy Code section 365(a) endows an estate representative with the option to assume or reject executory contracts and certain unexpired leases. To be considered executory, a contract generally must be one under which future performance remains due by both parties.²⁷ "Such an agreement represents both an asset (the debtor's right to the counterparty's future performance) and a liability (the debtor's own obligations to perform)."²⁸ The...