Opinion
IP 96-0024-C-M/S
August 20, 2001
ORDER ON PLAINTIFF'S MOTION IN LIMINE
This cause is before the Court on plaintiff's, Carl M. Reed's, M.D. ("Reed's"), motion in limine to prohibit the defendant, Methodist Hospital of Indiana, Inc. ("Methodist"), from mentioning or attempting to introduce any exhibits at trial that describe the liquidated damages provision of the February 5, 1992, physician agreement that is the subject of this suit. Reed argues that the liquidated damages clause of the contract is irrelevant to his claim against Methodist for breach of the physician agreement. In contrast, Methodist argues that the liquidated damages clause clearly applies to any breach of the agreement, including the one Reed alleges in his complaint.
The issues have been fully briefed and are ripe for ruling. For the reasons discussed herein, the Court SUSTAINS Reed's motion in limine.
I. BACKGROUND SUMMARY OF THE ARGUMENTS
On or about February 5, 1992, Reed and Methodist entered into a physician agreement. Am. Compl. Exh. A, Physician Agreement, Between Methodist Hosp. of Ind., Inc. and Carl M. Reed, M.D., Feb. 5, 1992 ("Physician Agreement"). The physician agreement provided that Methodist would compensate Reed a certain salary and benefits in exchange for his performance of the administrative, educational and professional duties outlined in the contract. Id., Physician Agreement, ¶ 2.1. According to the physician agreement, Methodist offered and Reed accepted an appointment as the "Medical Director, Pediatric Cardiology," reporting to the Medical Director, Pediatrics. Id. ¶ 1.1, id. Exh. A, Job Description, Methodist Hosp. of Ind., Inc., Med. Dir. Pediatric Cardiology, Dec. 31, 1991 ("Job Description"). The contract delineates the "Operation of Pediatric Cardiology Program," which describes the program the Medical Director, Pediatric Cardiology would help run. Id., Physician Agreement, ¶¶ 11.1-11.4. The specific provisions relevant here state:
11.1 [Methodist] shall employ, at its own expense, such physician and nonphysician personnel as it deems necessary for the effective operation of the Pediatric Cardiology Program. [Reed] shall assist [Methodist] concerning personnel needs and selection, retention and termination of such personnel.
11.2 [Methodist] shall furnish and maintain, at its own expense, such space, facilities, equipment, fixtures, supplies and services as it deems necessary for the effective operation of the Pediatric Cardiology Program. [Reed] shall assist [Methodist] in selecting new or replacement equipment, fixtures and supplies an in inspecting and evaluating equipment to assure safe and efficient maintenance.
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11.4 [Reed] shall establish procedures to assure the consistency and quality of all services for which he is responsible and shall participate in [Methodist's] overall quality assurance program. [Reed] shall promptly notify [Methodist] of any improperly functioning equipment, unsafe or unsanitary condition, negligent or unacceptable employee behavior, or other condition or practice that could result in substandard care.
Id., ¶¶ 11.1, 11.2, 11.4. The contract also incorporates by reference the job description for the Medical Director, Pediatric Cardiology. Id., Job Description. The job description states, in relevant part:
The incumbent is responsible for performing the practice of Pediatric Cardiology by accepted standards.
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The position is responsible for program development of Pediatric Cardiology services at Methodist Hospital. This will include but is not limited to the following responsibilities:
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d) Providing medical direction for all clinical Pediatric Cardiology Services of Methodist Hospital.
e) Directing the development of institutional expertise in cardiac catheterization for pediatric patients at Methodist.
f) Participating with other departments within the hospital (e.g. radiology, anaesthesia) to provide state fo the art care to all pediatric [sic] Cardiology patients.
Id. at 1-3.
By its terms, the physician agreement was effective from July 1, 1992, through June 30, 1997. Id., Physician Agreement, ¶¶ 6.1. However, "[e]ither party [could] terminate [the] agreement for good cause upon written notice to the other." Id. The contract also defines "good cause." Id. Specifically, the physician agreement states:
For purposes of this Agreement, good cause for termination shall include: (a) the substantial failure by either party to perform their duties hereunder; (b) the failure by the Physician to achieve his objectives as agreed upon with his supervisor; (c) the commission by the Physician of any act materially injurious to the Hospital; (d) the commission by the Physician of any act constituting fraud or a felony; or (e) the material failure by either party to comply with any provision of this agreement.
Id. ¶ 6.1.
By letter dated September 22, 1995, Reed informed Methodist that he was terminating the physician agreement for good cause, effective January 7, 1996. Pl.'s Mem. in Support of Mot. in Limine ("Pl.'s Mem. in Support"), Exh. A, Letter, From Thomas A. Brodnick, Mark K. Sullivan, Tabert Hahn Zanetis, P.C., to William J. Loveday, President, Methodist Hosp. of Ind., Inc., RE: Carl M. Reed, M.D., Sept. 22, 1995 ("Termination Letter"). The letter specifically stated that Methodist had not complied with the terms of the physician agreement by: (1) failing to provide Reed with the personnel, facilities, and equipment to adequately develop the Pediatric Cardiology program at Methodist; (2) preventing Reed from developing the Pediatric Cardiology program at Methodist; and (3) preventing Reed from gaining experiences, qualifications, and expertise in his chosen profession, benefits that should have been available to him as Medical Director, Pediatric Cardiology. Id.
The physician agreement contains a liquidated damages clause. See Am. Compl., Physician Agreement, Sec. 7. The clause states:
The parties agree that the termination of this Agreement by either [Methodist] or [Reed] prior to its expiration without cause or otherwise not in accordance with Section 6 of this Agreement shall constitute a breach of the Agreement. The parties further agree that the injury which would result from such a breach would be significant, but that the damages therefrom would be difficult to compute. Therefore, [Methodist] and [Reed] agree that the sum of one-half of [Reed's] current salary shall be established as liquidated damages to be paid by the party in breach to the other upon termination of this Agreement in any manner not in compliance with Section 6.
Id.
Plaintiff, Reed, argues that the liquidated damages clause of the physician's agreement between the parties does not apply to his claim for breach of contract because the clause only covers damages for unauthorized terminations. Pl.'s Mem. in Support, at 6. Reed avers that his breach of contract claim seeks damages for Methodist's interference with his ability to perform his duties under the contract, not for unauthorized termination. See id. Therefore, Reed argues, the Court should prohibit Methodist from discussing or entering evidence about the liquidated damages clause because it is irrelevant to his breach of contract claim and would confuse the jury about the damages available to him for Methodist's alleged breach.
In contrast, defendant Methodist argues that a harmonious reading of the contract provisions, including the liquidated damages clause, reveals that a termination of the contract is not distinct from a breach. Def.'s Resp. to Pl.'s Mot. in Limine, at 1 ("Def.'s Resp."). Further the physician agreement specifically states the material failure by either party to comply with any provision of the contract constitutes cause to terminate the agreement. See id. at 5. Methodist avers that Reed's allegation for breach is the same things as stating that Methodist failed to comply with a provision of the physician agreement and, therefore, Reed had "cause" to terminate the agreement pursuant to section 6.1. Id. Section 7 of the contract, Methodist continues, is the parties' agreement to a liquidated damages amount for any breach, including a breach that would provide "cause" for the other party to terminate the agreement. Id.
Therefore, Methodist concludes, the liquidated damages clause is relevant to facts in issue at trial: the measure of damages.
II. STANDARDS
Motions to exclude evidence that are made before trial are subject to a rigorous standard: the evidence must be "`clearly inadmissible on all potential grounds.'" See Dartey v. Ford Motor Co., 104 F. Supp.2d 1017, 1020 (N.D.Ind. 2000) (quoting Hawthorne Partners v. ATT Tech., 831 F. Supp. 1298, 1400-01 (N.D.Ill. 1993)). "Unless evidence meets this high standard, evidentiary rulings should be deferred until trial so that questions of foundation, relevancy and potential prejudice may be resolved in proper context." Hawthorne Partners, 831 F. Supp. at 1400. Therefore, a ruling on a motion in limine is preliminary in nature and subject to change during a trial on the merits. See Dartey, 104 F. Supp. 2d at 1020 (citing United States v. Connelly, 874 F.2d 412, 416 (7th Cir. 1989)).
Here, Reed avers that discussion of and evidence of the liquidated damages clause is irrelevant to his breach of contract claim. Federal Rule of Evidence 401 ("Rule 401") defines relevant evidence as "evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence." Fed.R.Evid. 401.
Moreover, the Court may exclude even relevant evidence if its probative value is substantially outweighed by the danger of unfair prejudice. See Fed.R.Evid. 403. The Court cannot make a determination of relevance in the instant case without interpreting the contract term or terms in question.
Contract construction is a matter for the Court. A court must interpret a contract so as to ascertain the intent of the parties at the time of contracting. See First Fed. Sav. Bank v. Key Markets, 559 N.E.2d 600, 603 (Ind. 1990). To ascertain this intent, the Court looks at the contract language that expresses the parties' rights and duties. See id. The Court will accept an interpretation of the contract that harmonizes its provisions. See id. If the meaning of the contract must be determined by extrinsic evidence, contract construction is a matter for the jury. See id. In any event, contract interpretation must give effect to the parties' reasonable expectations. See id.
III. DISCUSSION
The question of whether the liquidated damages clause in the physician agreement is relevant turns on whether it applies to any breach of the substantive contract terms or whether it applies only to termination of the contract not in compliance with section 6.
Reed argues that the liquidation damages clause in the physician agreement has a topic sentence that limits application of the clause to unauthorized terminations of the contract, or terminations without cause. The foundation for this argument is found in Art Country Squire, L.L.C. v. Inland Mortgage Corp., 745 N.E.2d 885 (Ind.Ct.App. 2001). Although the Court agrees that the topic sentence lends guidance about the meaning of contract terms, the court in Art Country focused on the meaning of the terms in the context of the entire contract, not just the topic sentence of the one term. A review of the analysis in Art Country is warranted.
In Art Country, a mortgagor defaulted on a loan for a building. Id. at 889. The mortgagee filed a complaint seeking, inter alia, foreclosure on the loan. See id. The mortgagee argued that it was entitled to a late payment charge on both untimely monthly payments and on an unpaid balloon payment. See id.
The mortgage note stated in pertinent part:
All monthly payments shall be due and payable on the first day of the month. If any payment due hereunder is not made on or before the 10th day after the date of such payment is due, a late payment charge equal to 5% of the delinquent payment shall be due and payable and the interest rate hereunder shall increase to the Default Rate on the entire outstanding principal sum and all accrued and unpaid interest thereon effective the date such payment was due until such default in payment is cured, which cure will include, but not be limited to, payment of such increased interest and the late payment charge.
Id. at 889-90. The Art Country court held that the late payment charge applied only to the untimely monthly payments, not to the unpaid balloon payment. Id. at 890.
In reaching this holding, the Art Country court reasoned that "[t]he opening sentence of the paragraph, typically called the `topic sentence,' indicates that the paragraph will address the topic of monthly payments." Id. Therefore, the second sentence must only apply to the topic of the paragraph.
See id. The court found this conclusion supported by the phrase "until such default in payment is cured," in the second sentence, which implies that after cure, the interest rate would revert back to the original interest rate. Id. The Art Country court stated that this phrase would make no sense when applied to the balloon payment because there would be no outstanding amount to which the original interest rate would apply after the balloon payment. Id.
But, the Art Country court did not stop its analysis with the paragraph at issue. It also looked at another paragraph of the mortgage describing the mortgagee's rights with respect to late payment. Id. The second paragraph gave the mortgagee "the right to (1) charge default interest, (2) impose a five percent late payment charge, and (3) accelerate the principal and all accrued and unpaid interest." Id. The court found that this paragraph also must apply only to the untimely monthly payments because acceleration would effectively abolish the balloon payment. Id.
Finally, the mortgagee argued that the term "any payment" should be interpreted to include the balloon payment too because the parties used the terms "monthly payment" and "balloon payment" when they meant either payment exclusively; therefore, "any payment" or "payment" must mean both payments. See id.
But, the Art Country court disagreed stating that if it accepted that argument, it "would have to ignore the clear context of the aforementioned paragraphs." Id. It appears to the Court that an analysis of a contract clause does not begin and end with the topic sentence of the clause as Reed suggests. To the contrary, it is the meaning of the clause in the context of the entire contract and/or the related relevant paragraphs that shape the analysis. Therefore, the liquidation clause in the physician agreement here must be construed in light of its context in the entire contract.
However, such an analysis does not necessarily preclude a finding that the liquidation damages clause in the physician agreement is limited to terminations either without cause or for reasons other than those delineated in section 6.
The liquidation clause in the physician agreement read in conjunction with section 6 of the agreement makes clear that the clause is effective when there is a termination of the agreement for reasons other than for the reasons stated in section 6. In other words, section 7 applies to terminations without "good cause" as that term is defined by section 6.1 or terminations for reasons other than those reasons delineated in sections 6.2, 6.3 or 6.4. The first sentence of the liquidated damages clause definitively makes a termination of the agreement that is not in accordance with section 6 a breach of the contract. This implies that there are breaches that would not be a termination. The second sentence confirms such an implication. It states: "The parties further agree that the injury which would result from such a breach would be significant, but that the damages therefrom would be difficult to compute." Am. Compl., Physician Agreement, Sec. 7. In the context of the clause, the phrase "such a breach" must refer to the specific type of breach defined in the first sentence of the clause: terminations of the agreement for reasons other than those delineated in section 6. The third sentence does not change this construction, rather it confirms that the type of breach for which liquidated damages will be paid is a "termination of [the] [a]greement in any manner not in compliance with [s]ection 6." Id. All three sentences of section 7 make clear that the intent of the parties was for the liquidated damages clause to apply to terminations of the agreement not in compliance with section 6. Accord Van de Leuv v. Methodist Hosp. of Ind., Inc., 642 N.E.2d 531, 533 (Ind.Ct.App. 1994), reh'g denied (construing, in part, a nearly identical liquidated damages clause in a Methodist physician agreement and stating that "[a] close reading of the Physician Agreement reveals that it is the termination of the Agreement, rather than the termination of [the plaintiff's] employment, that invokes the liquidated damages provision therein").
Furthermore, the context and content of section 6 does not change the plain meaning of section 7. Section 6 merely sets the time frame of the employment agreement and sets out valid reasons for either party to give notice to the other that the physician agreement will terminate. Methodist argues that the list of specific types of breach that constitute good cause for termination in section 6.1 makes clear that the parties intended for the liquidated damages clause to apply to any breach. The Court is not persuaded.
Section 6.1 clearly evidences the parties' intent that certain types of breach by either party would provide "good cause" for the other party to terminate the agreement. There is nothing in section 6 that implies a breach of any kind automatically terminates the agreement, nor does the common law of contract require that a breach automatically terminate a contract. Cf. Levee v. Beeching, 729 N.E.2d 215, 221-22 (Ind.Ct.App. 2000) (differentiating breach of contract from termination of employment stating "[a] party breaches a contract when he fails to perform all the obligations which he has agreed to undertake") (citing Worrell v. WLT Corp., 653 N.E.2d 1054, 1057 (Ind.Ct.App. 1995), trans. denied).
Arguably, when a party fails to perform a material provision of the agreement during the agreement's term, that failure would terminate the agreement "in any manner not in compliance with [s]ection 6" of the agreement because it would not be in writing and it would not be for "good cause." Id., Secs. 6 7. The failure to perform would also constitute a breach of the contract. In such a case, the breach acts as a "constructive termination" of the agreement and the liquidated damage provision would clearly apply. In addition, the failure to perform also provides the other party with "good cause" to terminate the agreement as to its or his own performance.
However, Reed does not argue that Methodist "constructively terminated" the agreement, he argues that Methodist breached sections 11.1, 11.2 and possibly 11.4 of the contract by not providing the requisite equipment, personnel and other support necessary for him either to perform according to accepted standards for pediatric cardiology or to develop Methodist's pediatric cardiology program as required by the agreement. Moreover, Methodist argues that it did not breach the physician agreement. It also argues that Reed terminated the physician agreement without cause. Unless one of the parties plans to argue that Methodist, by its breach, constructively terminated the physician agreement, the liquidated damages clause is not relevant to Reed's breach of contract claim. At this stage, neither party has evidenced its intent to argue a "constructive termination" theory. Therefore, the plain meaning of the contract language provides that the liquidated damages clause does not apply to Reed's breach of contract claim and evidence of the clause as applied to Reed's claim should be excluded.
The Court recognizes the thin line it is drawing between admissibility and inadmissability under the circumstances of this case, but the Court is unwilling to rewrite the physician agreement and undermine the intent of the parties as expressed therein. See Dvorak v. Christ, 692 N.E.2d 920, 924 (Ind.Ct.App. 1998). Because the line of inadmissability is so fine in this case, this ruling is preliminary in nature. Should the evidence and argument at trial reveal that either Reed or Methodist is arguing that Methodist's alleged breach constructively terminated the agreement, the Court will reconsider its ruling upon proper motion by one of the parties.
CONCLUSION
For the foregoing reasons, the plaintiff's motion in limine to prohibit the defendant from offering evidence about the liquidated damages clause in the physician agreement at issue is SUSTAINED.
However, this ruling is preliminary in nature. Should the evidence and argument at trial reveal that either party is arguing that the defendant terminated the physician agreement by its alleged acts or omissions, the Court will reconsider its ruling upon proper motion by one of the parties.