Lifespan Corp. v. New England Med. Ctr., Inc.

731 F.Supp.2d 232

LIFESPAN CORPORATION

v. NEW ENGLAND MEDICAL CENTER, INC., now known as Tufts Medical Center Parent, Inc., and New England Medical Center Hospitals, Inc., now known as Tufts Medical Center, Inc.andMartha Coakley, Attorney General for the Commonwealth of Massachusetts, Intervenor.

Civil No. 06-cv-421-JNL.

United States District Court, D. Rhode Island.

July 20, 2010.

Deming E. Sherman, Edwards Angell Palmer & Dodge LLP, Providence, RI, for Lifespan Corporation.

Eric Carriker, Assistant Attorney General, Jonathan C. Green, Assistant Attorney General, Attorney General's Office, Patrick J. Tarmey, Commonwealth of Massachusetts, Boston, MA, for Intervenor.

Bruce A. Singal, Michelle Peirce, Donoghue Barrett & Singal, P.C., Jeffrey T. Rotella, Adler Pollock & Sheehan, P.C., Boston, MA, David A. Wollin, Adler Pollock & Sheehan P.C., Providence, RI, for Defendants.

OPINION & ORDER

JOSEPH N. LAPLANTE, District Judge.

This case, transferred to this court from the District of Rhode Island, arises out of a dispute between a healthcare system and one of its former hospitals over the terms of their separation. Lifespan Corporation, which runs a network of hospitals in Rhode Island, sued New England Medical Center ("NEMC"), a Massachusetts hospital that had briefly joined Lifespan's system, alleging that NEMC failed to make various payments required by their disaffiliation agreement. NEMC, accusing Lifespan of gross misconduct during their affiliation, brought counterclaims for contractual indemnification, breach of fiduciary duty, unjust enrichment, and unfair business practices. NEMC also challenged the enforceability of one of the payment provisions. The Massachusetts Attorney General intervened on NEMC's side of the case and joined most of the counterclaims against Lifespan. This court has subject-matter jurisdiction under 28 U.S.C. § 1332(a)(1) (diversity).

The parties have each moved for partial summary judgment. See Fed. R. Civ. P. 56. Specifically, NEMC and the Attorney General moved for summary judgment on the issue of whether Lifespan owed a fiduciary duty to NEMC during their affiliation. Lifespan, in turn, moved for summary judgment on nearly all of the claims in the case. After hearing oral argument, this court concludes that Lifespan had a fiduciary relationship with NEMC and therefore grants summary judgment toNEMC and the Attorney General on that issue. This court also grants Lifespan's motion in part, concluding that NEMC released its tort counterclaims in the disaffiliation agreement and that there is no merit to the counterclaims challenging the enforceability of one of the payment provisions. The rest of the parties' claims will need to be resolved at trial.

I. Applicable legal standard

Summary judgment is appropriate where "the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c)(2). An issue is "genuine" if it could reasonably be resolved in either party's favor at trial, and "material" if it could sway the outcome under applicable law. Mulvihill v. Top-Flite Golf Co., 335 F.3d 15, 19 (1st Cir.2003). In making this determination, the "court must scrutinize the record in the light most flattering to the party opposing the motion, indulging all reasonable inferences in that party's favor." Id. On cross-motions for summary judgment, this standard is applied to each party's motion separately. See, e.g., Am. Home Assurance Co. v. AGM Marine Contractors, Inc., 467 F.3d 810, 812 (1st Cir.2006).

II. Background ¹

In 1997, Lifespan and NEMC entered into an Affiliation Agreement whereby NEMC, a non-profit hospital in Boston, agreed to join Lifespan's existing healthcare system. The system already included a network of hospitals in Rhode Island, where Lifespan is located, but Lifespan wanted to make inroads into Massachusetts as well. NEMC, whose financial position had weakened in recent years, hoped that Lifespan would be able to turn things around. As an added benefit, the transaction gave NEMC an opportunity to seek reimbursement from the Centers for Medicare and Medicaid Services ("Medicare") for its loss on sale, i.e., the realization of asset depreciation attributable to services provided to Medicare patients. See 42 C.F.R. § 413.134(f) (1997).

The parties structured their agreement so that a new holding company, Lifespan of Massachusetts ("LOM"), became NEMC's sole voting member, with the power to oversee NEMC's finances, strategic planning, policymaking, and key contractual negotiations, among other things. Lifespan had majority control over LOM and, through it, significant control over NEMC. In exchange for NEMC's agreement to join its healthcare system, Lifespan agreed to pay $87 million to NEMC over the next ten years and to use its best efforts to enhance NEMC's reputation. NEMC, in turn, agreed to pay Lifespan an annual fee for its corporate management services. The fee started at $10.3 million for the first year, but then steadily increased to $43 million by the fifth year.

After five years together, with NEMC still struggling financially and with the Medicare reimbursement issue still unresolved,² the parties decided in 2002 to sever their relationship through a Restructuring Agreement and to operate independently once again. The Restructuring Agreement required NEMC to makea series of payments to Lifespan totaling $30 million, plus half of "any recovery received from Medicare by NEMC ... for the loss on sale/depreciation recapture resulting from the Affiliation."

NEMC paid most of the $30 million. In 2006, however, it refused to pay the final two installments, totaling $3.66 million, claiming that it had sustained losses far in excess of that amount due to Lifespan's alleged misconduct during their affiliation, including (1) its gross mismanagement of NEMC's contracts with health insurers and its accounts receivable; (2) Lifespan's excessive corporate management fees; (3) its deliberate depletion of NEMC's assets and reserves; and (4) Lifespan's insistence that NEMC enter into an ill-fated interest rate swap without disclosing that the swap was deemed too risky for Lifespan's other hospitals and that Lifespan's chief financial officer, who recommended the deal, had a conflict of interest.

Lifespan brought suit against NEMC in the District of Rhode Island in 2006, alleging breach of contract and seeking to recover the $3.66 million. NEMC brought a counterclaim for recovery under the Restructuring Agreement's indemnification provision, which required Lifespan to indemnify NEMC for losses caused by Lifespan's misrepresentations, willful misconduct, or gross negligence during their affiliation. NEMC also brought counterclaims for breach of fiduciary duty, unjust enrichment, and unfair business practices. Although NEMC admitted that it had not paid the $3.66 million as contractually required, the district court refused to grant summary judgment to Lifespan on its contract claim, deeming it so "closely related" to NEMC's counterclaim for indemnification that they must be resolved together. See Lifespan Corp. v. New Eng. Med. Ctr., Inc., No. 06-421, 2008 WL 310967, at *2-3 (D.R.I. Feb. 1, 2008) (Torres, D.J.).

Shortly after that ruling, NEMC finally resolved its Medicare reimbursement claim and recovered about $20.5 million from Medicare for the asset depreciation that it had realized when the parties affiliated in 1997. Upon learning of that recovery, Lifespan amended its complaint to add a contract claim for half of it. NEMC responded with more counterclaims, asserting that the Medicare recovery provision in the Restructuring Agreement was inapplicable, unconscionable, contrary to public policy, lacking in consideration, a violation of the parties' original Affiliation Agreement, a breach of fiduciary duty, and an unjust enrichment.

This court was assigned to the case in 2009, after all of the judges in the District of Rhode Island recused themselves. Shortly thereafter, this court granted a motion for the Massachusetts Attorney General to intervene in the case, see Fed. R. Civ. P. 24, pursuant to her supervisory authority over public charities in Massachusetts. See Mass. Gen. Law ch. 13, §§ 8 and 8G. The Attorney General had approved the parties' affiliation in 1997 and had been notified of their disaffiliation in 2002, but had never approved the Restructuring Agreement. After intervening, the Attorney General joined in nearly all of NEMC's counterclaims against Lifespan (except for the indemnification claim and the unfair business practices claim). She did not assert any new claims of her own.

The parties have now cross-moved for partial summary judgment. See Fed. R. Civ. P. 56. Specifically, NEMC and the Attorney General move for summary judgment on the issue of whether Lifespan owed a fiduciary duty to NEMC during their affiliation. Lifespan, in turn, moves for summary judgment on its claim for half of the Medicare recovery and on nearly all of the counterclaims (except for NEMC's indemnification claim, which the partiesagree presents trialworthy issues). This court will analyze each of the parties' arguments in turn.

III. Analysis

A. Choice of law

The threshold issue, raised by both sides, is which state's law governs this case: Rhode Island or Massachusetts. As one might expect, Lifespan favors the law of its home state (Rhode Island), whereas NEMC and the Attorney General favor the law of their home state (Massachusetts). In resolving choice-of-law issues, a federal court sitting in diversity must apply the choice-of-law rules of the forum state. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 491, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941); Baker v. St. Paul Travelers Ins. Co., 595 F.3d 391, 392 (1st Cir.2010). Here, the forum state is Rhode Island. Like many states, Rhode Island has separate choice-of-law...