Opinion
Civil Action No. 3:99CV848.
July 17, 2000.
MEMORANDUM OPINION
This matter is before the Court on several motions, including: (1) the Plaintiff's motion for partial summary judgment as to liability; (2) the Defendant's first motion to amend its counterclaim; and (3) the Defendant's motion to amend its answer together with a second request to amend its counterclaim. The Defendant has also filed two additional motions (with supporting memoranda) since oral argument held on June 13, 2000, in regard to the aforementioned matters. Each of the motions has been filly briefed and argued by counsel and the issues are therefore ready for resolution. The Court will initially address the Defendant's non-dispositive motions (numbers two and three) because their resolution was considered in the disposition of the Plaintiff's dispositive motion for summary judgment on liability (number one). The remaining motions that were filed after oral argument are also resolved in the context of the the Plaintiff's motion for partial summary judgment.
Def.'s Mot. for Leave to File Supplemental Decl. in Supp. of it's Opp'n to Pl.'s Summ. J. Mot. (filed June 16, 2000) (hereinafter referred to as "Def.'s Mot. Re Supplemental Decl."); and Def.'s Mot. to Compel (filed June 26, 2000).
PROCEDURAL HISTORY
Plaintiff Bon Scours-St. Mary's Hospital of Richmond, Inc. (St. Mary's or Plaintiff) commenced this action against Aetna Health Management, Inc. (AHM or Defendant) on December 23, 1999, under the court's diversity jurisdiction. 28 U.S.C. § 1332 (a)(1). AHM answered and counterclaimed on February 4, 2000.
St. Mary's Complaint alleged a breach by AHM of their 1994 Facility Participation Agreement which included an Attachment A (Agreement). Specifically, St. Mary's contends that ARH failed to properly reimburse St. Mary's under the Agreement terms which provided for a 20% increase (the so-called "Kicker" proviso) in agreed reimbursement rates that was triggered by AHM's subsequent contractual relationship with a competing hospital (Henrico Doctor's or HDH) in the same designated market area (Henrico County, Virginia). St. Mary's specifically alleges that: (1) AHM failed to apply the 20% increase to outpatient and emergency room "percentage of charges" in addition to various "fixed" or "per diem" charges; and that (2) AHM otherwise failed to timely and properly reimburse St. Mary's for certain services provided to AHM Preferred Provider Organization (PPO) members. (Pl.'s Complaint, passim.)
AHM initially admitted in answer to the Complaint that it had "contracted with one or more hospitals in Henrico County, Virginia for the fill spectrum of acute care services for the AHM PPO Members, thereby triggering the twenty percent (20%) increase in the reimbursement rates and payments under the Facility Participation Agreement." (Def.'s Answer and Countercl. at 2, ¶ 14.) AHM further admitted that it failed and refused to apply the 20% increase to the "percentage of charges" reimbursement rates and other payments to St. Mary's during the relevant time period because: (1) the Plaintiff failed to engage in mediation as required by the Agreement; (2) Plaintiffs acceptance of a $1,450,065 payment "in accordance with a 1999 Agreement" constituted accord and satisfaction that extinguished all AHM obligations "to any allegedly remaining monies due to St. Mary's"; and (3) application of the Kicker to all reimbursement rates, including the "per diem" and "percentage of charges," would result in payments exceeding of 100% of St. Mary's published charges which thereby constitutes an unenforceable penalty on AHM. (Def.'s Answer and Countercl. at 3-4.)
AHM admits that it entered into its agreement with HDH on or about February 1, 1998. See Def.'s Am. Counterclaim. Thereafter, effective March 1, 1999, AHM and St. Mary's entered into a new Managed Care Agreement that replaced the Facility Participation Agreement that is the subject of this litigation. Therefore, the relevant time period for any application of the Kicker proviso is February 1, 1998, through February 28, 1999.
This "1999 Agreement" is not to be confused with the March 1, 1999, Managed Care Agreement.
Defendant AHM also filed a counterclaim alleging, among other things, that St. Mary's breached the 1994 Agreement by: (1) impermissibly increasing "its published charges each year and received reimbursement based on the increase in its rates, in contravention of the terms of the Facility Participation Agreement"; (2) that St. Mary's is obligated to return to AHM monies paid over and above that which is set forth in the Agreement; (3) that St. Mary's agreed in 1999 that reprocessed "per diem" claims would resolve all outstanding disputes; and (4) that St. Mary's refused to return to AHM $841,442.75 in overpayments for particular service charges. Id. at 4-8.
On February 4, 2000, Defendant AHM filed a Motion to Stay Litigation and to Compel Mediation. In denying AHM's motion on April 17, 2000, this Court ruled in part that while nonbinding mediation could be compelled in some cases, it would be futile to require the parties to engage in mediation in this dispute since the issues had been the subject of unsuccessful negotiation for over a year. (Mem. Op. at 3-4.) Because the law does not require the doing of a useless act, mediation could not be compelled. Id. On February 24, 2000, St. Mary's filed its answer and affirmative defenses to the Defendant's counterclaim, together with a motion to dismiss count one of the counterclaim in which it asserted that dismissal was required because the plain meaning of the Agreement permitted St. Mary's to raise the published rates as it admitted having done. At subsequent oral argument, however, St. Mary's agreed to withdraw its Motion to Dismiss in response to AHM's clarification on the record that its allegation was restricted to the concept that any increase in published charges was prohibited by the express terms of the Agreement.
ANALYSIS
I. Defendant's First Motion To Amend Its Counterclaim
The Defendant AHM has moved pursuant to Rules 13(e) and 15 of the Federal Rules of Civil Procedure to amend its counterclaim in order to seek recoupment of its direct and consequential damages attributed to the Plaintiff's alleged breach of an agreement to mediate the resolution of certain contract disputes. Without resolving whether the proposed amendment is premised on grounds that only "matured or [were] acquired by the pleader after serving a pleading "under Fed.R.Civ.P. 13(e) or whether the amendment would be futile — if not clearly frivolous on its face in light of the Court's April 17, 2000, ruling denying AHM's motion to stay the litigation and compel mediation the Court notes that the same allegation and proposed amendment is contained within the Defendant's subsequent Motion For Leave To File Amended Answer And Second Amended Counterclaim. The Court therefore construes the consecutive motions for leave to amend the counterclaim as having merged into one and thus it will refer to the combined product in singular terms as the Defendant's motion to amend its counterclaim.
An interesting approach, especially since the Court has already ruled against the Defendant at least as to its efforts to compel specific performance of the particular contractual provision on which the proposed claim rests. April 17, 2000 Mem. Op. at 2-4.
See Island Creek Cool Co. v. Lakeshore Inc., 832 F.2d 274, 279 (4th Cir. 1987), rev'd on other grounds, 884 F.2d 1388 (4th Cir. 1989); Johnson v. Oroweat Foods Co., 785 F.2d 503 (4th Cir. 1986).
II Defendant's Motion For Leave To File Amended Answer And Second Amended Counterclaim.
The Defendant seeks to amend its original answer and counterclaim to add: (1) a Count Four alleging a breach of the Agreement by St. Mary's due to its refusal to abide by the dispute resolution provision in the contract; (2) a Count Five which alleges that all money paid by AHM to St. Mary's pursuant to the 20% Kicker was by mistake because HDH did not provide a "full spectrum of acute care services" during the relevant time period to activate the Kicker proviso; and (3) a Count Six in which it is alleged that St. Mary's was unjustly enriched because it knew HDH did not offer the "full spectrum of acute care services." AHM also seeks to amend its original answer to the Complaint to now only admit that it did contract "with one additional hospital in Henrico County, Virginia" without admitting anything about the unidentified hospital's range of acute care services (obviously HDH). (Def.'s Am. Answer, ¶ 14.)
The proposed amended answer and the additional allegations of the proposed amended counterclaim reflect what AHM asserts to be its recent discovery (after what the Court can only assume to have been intense scrutiny including several months of ardent litigation) of the alleged fact and related legal conclusion that the basic premise of the Plaintiff's assertion that it is entitled to relief is fundamentally and fatally flawed because the Defendant did not contract with a competitor hospital offering the same range of services ("full spectrum of acute care") within the designated zone after all. The Defendant bases its argument on the opinions of an expert (Tompkins) and, most recently after the hearing, an employee (Hogue) of either Defendant's predecessor or an affiliated entity, who conclude that HDH did not, in fact, offer the same relevant range of acute care services as St. Mary's as defined by state regulatory law. Both affiants base their conclusions in large measure on HDH's unsuccessful efforts at obtaining what is represented to be required licensing approval in the form of a Certificate of Public Need (COPN) for certain specialized services. The expert also opined as to his understanding of and experience with similar contractual language in other scenarios in support of Defendant's efforts to utilize parole evidence and lay legal opinion to analyze the subject contractual language. (Affidavit of Richard F. Tompkins at 10-11, ¶¶ 31-38; Def.'s Mot. Re Supplemental Decl., Affidavit of Richard G. Hogue.)
The Defendant has not contested the factual allegation raised in regard to its earlier demand for what the Court dubbed "compulsory mediation" (and which the Court referred to as the epitome of an oxymoron) that the parties engaged in many months of good faith and most assuredly intense discussions. The Court is otherwise aware of the close scrutiny the matter has been given by the defense since the inception of the instant and related actions in late December, 1999, as demonstrated by the thorough motions challenge to every conceivable pretrial aspect of the case.
The expert's focus is on HDH's lack of acute care rehabilitation beds and acute care psychiatric beds while the latest submission addresses the failure of HDH to have a separate pediatric intensive care unit (PICU). As an aside, it is curious to the Court how the supposed expert missed what is now being touted in the Defendant's latest submission as a core requirement for a "full spectrum of acute care services."
AHM's proffer and related argument in support of its request to file an amended answer and counterclaim do not satisfactorily explain why such information was not available before the filing of the Plaintiff's motion for summary judgment. The Court finds, however, that it doesn't have to resolve that issue in any event in order to grant the request in the interest of justice as permitted by Fed.R.Civ.P. 15. The Court concludes that it should grant the requested relief because the new allegations (including the revised answer) are inextricably related to the original allegations and the Plaintiff cannot satisfy the Court that it has been prejudiced, at least to the extent that any detriment such as additional lawyer time and effort cannot be addressed by other means, including the awarding of fees and costs if the Defendant's efforts are established to be frivolous in substance and unduly burdensome to the Plaintiff. As emphasized by the Plaintiff, the Court has the discretion to deny the requested leave to amend if it concludes, as it does, that the effort is futile. (Pl.'s Reply to Def.'s Mem. in Opp'n to Pl.'s Mot. for Summ. J.; Pl.'s Mem. in Opp'n to Mot. for Leave to File Am. Answer and Second Am. Countercl. at 5-6 (citing cases)). At the same time, and in the interest of judicial expediency in avoiding fragmented litigation, the Court finds that it is appropriate to grant the request for leave to amend because of, and not in spite of, the futility of the effort in order to be able to resolve all issues in the same proceeding. The allegations of the proposed amendments, including the proposed amended answer, do not change anything material in the Defendant's position that may impact on ultimate relief because of what the Court concludes to be the clear meaning of the language of the Agreement as addressed in more detail hereafter. The Defendant's motion for leave to amend both its answer and counterclaim is therefore GRANTED.
The Court assumes that the Defendant's counterclaims as well as the Plaintiff's motion to dismiss count one of the Plaintiff's counterclaim can be readily resolved on the present record by summary motion of the Plaintiff since any prospective relief in favor of the Defendant would appear to be precluded by the Court's resolution of the issues involved in the disposition of the Plaintiff's motion for partial summary judgment. Although, for the same reason, the Court has the authority to dismiss the counterclaims (even as amended) outright at this same juncture, it is reluctant to do so because a disputed factual issue may yet linger somewhere in the forest of the Defendant's hyperbole.
However, the Defendant's request to file the supplemental declaration of Mr. Hogue is DENTED because of what the Court concludes to be the insufficient showing of "cause" and excusable neglect"for having failed to do so earlier, especially in conjunction with the prior filing of what is presented as an expert's comprehensive opinion on the relevant issue, namely, whether HDH provided a "full spectrum of acute care services during the subject time period. Fed.R.Civ.P. 6; Lujan v. National Wildlife Federation, 497 U.S. 871, 895-96 (1990). The Defendant justifies its latest effort on a comment and brief colloquy with the Court during the hearing on the Plaintiff's motion for partial summary judgment. Plaintiff's counsel invited the Court to review HDH's website to see the "spectrum" of services provided which then motivated the Defendant to do likewise after the hearing. In turn, AHM uncovered what it seems to think is such meaningful additional evidence as is the subject of Mr. Hogue's affidavit. Suffice it to say that the Court has not and will not rely on website content to resolve any issue in this matter. At the same time, although the Defendant may amend its long-standing position whether HDH offers a "full spectrum of acute care services" on the basis of the after-acquired evidence submitted by Mr. Tompkins, the latitude the Court has allowed to file supplemental pleadings ends there.
The Defendant also seeks to strike from the record a footnote reference by the Plaintiff as to whether the Defendant's assertions of what services are or where available at HDH includes the relevant time frame. The Court declines to enter the fray, not only because the motion to file the particular declaration containing the footnote is denied, but also because the issue is of no moment in any event. See n. 10, infra. and related discussion.
The Court also denies the motion because of the ultimate futility of the effort. The Court accepts the notion that HDH does not have every type of acute care service, but the issue is simply whether the contractual language is sufficiently plain on its face, having been agreed to by arms-length negotiation, to require activation of the Kicker proviso if the Defendant should contract with another hospital in the same county that provided a broad (full) range of short term, emergency-type (acute) care so as to make it a competitor — the obvious objective of the provision.
The Defendant also moved after the hearing for an order compelling the Plaintiff to respond to various discovery demands which the Plaintiff had indicated shortly after the hearing it would provide. (Def.'s Mot. to Compel.) However, before the Plaintiff produced the subject material, the Court contacted all counsel by telephone conference and suggested that all discovery efforts directed to at least liability issues be suspended pending the Court's resolution of the Plaintiff's pending motion for summary judgment. The Court was motivated to contact counsel to tell them that a comprehensive memorandum opinion would not issue in as timely fashion as the Court had hoped and it did not want to have either party incur unnecessary litigation expense and effort in the meantime. The Defendant's motion to compel is therefore DENTED, not only because the Court invited the very action of which the Defendant complains, but also because it has examined the nature and scope of the various discovery demands and is satisfied that any response (or logical derivative information) would not change or otherwise materially affect the resolution of the issue of liability. If necessary, any dispute concerning resulting damages and anything in regard to any surviving counterclaim of the Defendant can be addressed later in this same litigation.
See letter by Plaintiff's counsel to defense counsel, dated June 22, 2000, and attached as exhibit E to Def.'s Memo, in Supp. of its Mot. to Compel.
III Plaintiff's Motion For Summary Judgment As To Liability
The Plaintiff has moved for summary judgment as to liability, there apparently being at least a potential factual dispute as to the amount of any monetary relief to be awarded depending on the resolution of controlling legal issues.
The issues involving the amount due and owing should be readily determined by straightforward mathematical calculation given the Court's resolution of how the total is to be determined, i.e., all reimbursement rates (both "fixed" or "per diem" charges and "percentage of charges"), including cost of living adjustments (COLA), plus the 20% Kicker.
The standard for granting summary judgment is well known. It is only to be granted if there is no genuine issue of material fact after the non-moving party is given the benefit of every reasonable inference. See Celotex v. Catrett, 477 U.S. 317, 323 (1986); Matsushita Elec. Indus. Corp. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).
The Defendant objects to the granting of summary relief to the Plaintiff on the basis that there is a material factual dispute as to whether it contracted with another hospital (HDH) in the designated zone that had "a full spectrum of acute care services" so as to trigger the Kicker proviso of the contract in the first place. The Defendant also asserts that application of the Plaintiff's own interpretation of the Agreement, i.e, that the 20% increase applies to everything, requires the process to proceed to trial in order to determine if the amount of the resultant increase would result in an unenforceable penalty.
In a contract dispute, "only an unambiguous writing justifies summary judgment. . . therefore, as a threshold consideration, a court must find as a matter of law that a contract is unambiguous on its face in order to grant summary judgment. World-Wide Rights Ltd. V. Combe, Inc., 955 F.2d 242, 245 (4th Cir. 1992). For the writing to be unambiguous, there must not be "more than one permissible inference as to intent to be drawn from the language employed," otherwise "the question of the parties' actual intention is a triable issue of fact." Bear Brand Hosiery Co., v. Tights, Inc., 605 F.2d 723, 726 (4th Cir. 1979). In addition, the law of Virginia controls concerning the resolution of a given material dispute, not only because it is required by the subject contract (Agreement, Part V, ¶ 5.13), but also because Virginia is the forum state in a case based on diversity jurisdiction. Anderson v. Liberty, Inc., 477 U.S. 242, 248 (1986); Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78-79 (1938).
There are several basic principles of contract law that are well-established in Virginia jurisprudence that apply to this situation:
(1) The conclusion as to whether a "contract's terms are clear and unambiguous . . . is a question of law." Pollard Bagby v. Inc. v. Pierce Arrow, L.L.C., 258 Va. 524, 528, 521 S.E.2d 761, 763 (Va. 1999);
(2) A contract must be construed by "the intention of the parties as expressed by them in the words they have used." Dominion Savings Bank v. Costello, 257 Va. 413, 415, 512 S.E.2d 564, 566 (Va. 1999); accord Lansdowne Development Co. v. Xerox Realty Corp., 257 Va. 392, 399, 514 S.E.2d 157, 161 (Va. 1999); see also Island Creek Coal Co. v. Lake Shore. Inc., 832 F.2d 274, 277 (4th Cir. 1987);
(3) Contractual language must be construed under the plain meaning rule: "[w]here an agreement is complete on its face, is plain and unambiguous in its terms, the court is not at liberty to search for its meaning beyond the instrument itself." Westbury Coal Mining Partnership v. J.S. K. Coal Corp., 233 Va. 226, 229, 355 S.E.2d 571, 572 (Va. 1987); Dominion Savings Bank v. Costello, 257 Va. at 416, 512 S.E.2d at 566;
(4) A party cannot create an ambiguity simply by disagreeing with an otherwise unambiguous term. Stuarts Draft Shopping Ctr., L.P. v. S-D Assoc., 251 Va. 483, 488, 468 S.E.2d 885, 888 (Va. 1996); and
(5) Only if a writing, i.e, contract provision, is ambiguous may there be consideration of parole evidence. Cascades North Venture. Ltd. v. PRC, Inc. 249 Va. 574, 579, 457 S.E.2d 370, 373 (Va. 1995) (citing Amos v. Coffey, 228 Va. 88, 91-92, 320 S.E.2d 335, 337 (1984) for the rule that where a writing is explicit, it is the sole memorial and evidence of the agreement and therefore no parole evidence can be used to explain written terms).
The following issues that have been raised in conjunction with the Plaintiff's motion for summary relief must be resolved based on the foregoing (and related) principles of contract law:
1. What is the meaning of the 20% Kicker clause?
2. Does the potential 20% increase apply to all reimbursement rates, namely, both "fixed" or "per diem" and "percentage of charges," including COLA adjustments, or just the "per diem" charges?
3. Could the Plaintiff increase published charges at will?
4 If the 20% increase applies to all reimbursement rates, including COLA adjustments, does the result constitute an unenforceable penalty on the Defendant?A. The Interpretation of the Kicker Provision.
Additional references to Virginia precedent follow in regard to more specific issues, e.g., what standards a reviewing court must utilize in analyzing the enforceability of conditions precedent to a contract. See discussion infra at 23-25.
Section I.F of the Agreement (Attachment A) (Section F) provides as follows:
F. The Reimbursement Rates described hereinabove shall apply only during such time period that there are no more than one hospital in Henrico County, Virginia contracted for the full spectrum of acute care services. In the event that AHM enters into an agreement or other arrangement with more than one hospital in Henrico County during the term of this Agreement for the provision of the full spectrum of acute care services to Members, all of the foregoing reimbursement rates and payments shall be increased by twenty percent (20%).
Agreement, Attachment A, Sec. F (emphasis added).
The Agreement includes various terms and obligations, some of which are defined in Section I of the contract, including such common contractual terms as "member," "covered services", "participating provider," "payor," and "plan." However, there is no separate definition of the phrase "full spectrum of acute care services which controls the activation of the 20% increase. Nevertheless, the Court finds that the plain meaning and obvious import of the phrase is simply that the subject reimbursement rates of St. Mary's would be increased by 20% if the condition precedent were satisfied whereby AHM contracted with another hospital facility in the designated area that provided a broad range of emergency-care and/or short-term intensive care treatment. It is quite clear and reasonable that the purpose of the proviso was to compensate St. Mary's if AHM should, as was of course its right, contract with a competitor and that the invocation of the increase would be measured — absent a limiting delineation — by whether the new hospital offered comparable services so as to likely draw away patients from St. Mary's. Indeed, AHM confirms as much by asserting in its pleadings that:
The 20% Kicker was intended to compensate St. Mary's for the potential loss of revenue from an additional hospital in the AHM network available to its members.
. . .
Obviously, the provision was intended to compensate St. Mary's for its loss of revenue resulting from the added competition for AHM's Members.
. . .
Although contracting with another Hospital is not a breach of the Agreement, the provision is still intended to compensate St. Mary's for loss due to the new contract.
Def.'s Mem. in Supp. of it's Opp'n to Pl's. Mot. for Summ. J. at 2, 8.
Thus, for example, the Kicker provision would not be implicated if AHM contracted with health clinics in the same area that only offered out-patient services or even hospitals that did not provide facilities and corresponding expertise to adequately deal with a wide range of serious, potentially life-threatening scenarios on at least a short term (not more than thirty days), inpatient basis.
The Court holds that such an interpretation of Section F is correct for the following reasons:
1. The plain meaning of the phrase is substantiated by the context of the Agreement which was intended to provide St. Mary's with, in essence, an exclusive franchise in order to "participate in various Aetna health benefits products in accordance with the terms and conditions stated below";
2. The plain meaning of the phrase is substantiated by reference to consistent terminology in state licensing regulations; and
3. The plain meaning of the phrase is substantiated by the Defendant's consistent course of conduct before and during litigation, up to the eve of summary judgment.
Agreement, at 1.
Relevant portions of the Agreement provide that St. Mary's "will provide Covered Services [defined] to Members [defined] to the extent that such services are regularly available at the Facility at the time in question." (Agreement, Sec. II..) In return, AHM was required to provide for payment to the "Facility" for "Covered Services" properly rendered and billed pursuant to the Agreement. (Agreement, Sec. 3.5.) Such clear language was obviously intended to provide both parties with reciprocal benefit. For AHM, the benefit to it was to have a "Facility" (that it had by virtue of the Agreement approved as having sufficient, broad-based acute care services) provide its product; for St. Mary's, the benefit was having an exclusive territory in which to offer a competitive product. Therefore, if AHM decided to reduce or restrict St. Mary's market, it would have to compensate St. Mary's for the risk, if not probability, of losing business.
The Court also finds that the very regulatory language that AHM originally cited in support of its position in fact supports Plaintiff's assertions — and the Court's conclusion — that the Kicker proviso applies. Specifically, AHM argues (as supported by its expert, Tompkins) that HDH did not have the required "full spectrum of acute care services" during the relevant time period as defined by relevant regulatory authority because:
1. "acute care inpatient facilities" contain "acute care inpatient beds;" and
2. they "are located, among other places, in 'specialized intensive' care units. . ., "
3. "examples of which include units established for" rehabilitation, psychiatric, pediatric and burn treatment.
Def.'s Reply to Pl.'s Opp'n to its Mot. Re Supplemental Decl. at 4-5 (citing 12 VAC § 5-240-10) (emphasis added). Although the Court has denied the Defendant's request to file the supplemental declaration of Mr. Hogue, the supporting pleading more succinctly sets forth the Defendant's previously asserted position on the issue and, in any event, the Court accepts the premise that HDH does not have every type of acute care service. See n. 10, supra. In fact, the Court wonders whether any facility, including St. Mary's, meets the Defendant's definition of an acute care hospital having a "full spectrum" of such services. See also Def.'s Mem. in Supp. of its Opp'n to Pl.'s Mot. for Summ. J. at 3-4 (citing attached affidavit of Mr. Tompkins at ¶¶ 31-36).
In fact, the same definitional provision of the regulation also specifies that "'[a]cute care inpatient facility' means any hospital, ambulatory surgical center providing overnight accommodations, or other medical care facility which provides medical care and distinct housing of patients whose length of stay averages at most 30 days." 12 VAC § 5-240-10 (emphasis added). Moreover, "acute inpatient facility beds" that are utilized to provide acute care services are defined as "any beds included in the definition of "general medical/surgical beds'" which, in turn, are defined as those beds that are located in "general medical/surgical units that are organized facilities and services (excluding those for newborns) available for the care and treatment of patients, not requiring specialized services. . . . " Id. (emphasis added). No where does any definition of any relevant term require that particular acute care modalities be available (including rehabilitation and/or psychiatric) in order for the facility to qualify as an "acute care inpatient facility" that provides a "full spectrum of acute care services." In fact, the qualifying phrase in the definition of "general medical/surgical beds" (in units . . . not requiring specialized services") lessens the standard for measuring what constitutes a "full spectrum of acute care services." The Defendant in effect acknowledges the weakness of its position by arguing in its unsuccessful effort to file the supplementary declaration of Mr. Hogue that burn care and pediatric care units are but examples — not requirements — of "specialized intensive care units" that contain "intensive care beds" that constitute "acute inpatient facility beds" that, in turn, are located within an "[a]cute care inpatient facility." (Def.'s Reply to Pl.'s Opp'n to its Mot. Re Supplemental Decl. at 4.)
The applicability of the state regulatory scheme, including its definitional section, is questionable to begin with in defining and otherwise explaining the key contractual phrase "full spectrum of acute care services" which does not have a precise definition in the regulations. At the same time, the regulatory definition of "acute care inpatient facility" appears to be the closest term and it is defined in a generic sense that surely applies to HDH as any hospital that provides overnight accommodations with distinct housing of patients for average stays of at most 30 days. 12 VAC § 5-240-10. Thus, even though the regulatory references may not be binding, the fact that they are consistent provides support to the conclusion as to the clear meaning and reach of the Kicker proviso.
Furthermore, the Court takes specific note of evidence offered by the Defendant itself as evidentiary basis for this Court's conclusion that the Kicker proviso should be applied. Specifically, the successive applications by HDH for Certificates of Public Need (COPN) and related documents that were submitted in support of the Defendant's motion to amend and its opposition to the granting of summary relief detail the broad range — which the Court equates with the"full spectrum" — of services offered at the HDH facility, obviously including a breadth of acute care capabilities. (Def.'s Mem. in Supp. of its Mot. for Leave to File an Am. Answer and Second Am. Countercl., Exs. A-B; Def.'s Mem. in Supp. of its Opp'n to Pl.'s Mot. for Summ. J., Ex. B.) Certainly, the Court can consider such evidence on the record for any relevant purpose, regardless of the source or reason for its introduction, and the Court finds that the subject material is sufficient evidence to substantiate the core finding that HDH qualified as a competing entity so as to activate the Kicker proviso.
The evidence offered by AHM in the form of the supporting affidavit of Mr. Tompkins is also of no avail to the Defendant in attempting to create an ambiguity where none exists in the first place. In his Affidavit, Mr. Tompkins begins (in pertinent part) with the simple unassailable assertion that he has reviewed the subject Agreement and relevant pleadings. (Tompkins Aff., ¶ 6 30 at 10.) He claims to be familiar with the state hospital licensing regulations including the regulatory definitions of some of the terms and phrases which are used within the context of the Agreement. However, Mr. Tompkins then proceeds to apply his understanding of such legal and contractual concepts in ways that are inconsistent with the very references on which he relies.
Another error in Mr. Tompkins' analysis is that he refers to psychiatric and rehabilitation beds as being commonly referred to as "acute inpatient facility beds," but then he leaps to the conclusion that because a COPN is required for a facility to redesignate existing medical/surgical or other beds into new dedicated units, that such a facility does not offer those acute care services at all. The statutory definition of the term "acute inpatient facility beds" makes it clear that it applies to any beds within the broader definition of "general medical/surgical beds" and intensive care beds," thereby refuting Tompkins' argument. 12 VAC § 5-240-10. The remaining portions of the Tompkins affidavit are also of no moment. They either consist of efforts at introducing parole evidence to explain away a contract ambiguity that does not exist. (Tompkins Aff., §§ 37-38 at 11), or offers legal conclusions, e.g., that the 20% Kicker proviso constitutes an unenforceable penalty, that are the Court's alone to make. Id.
The Court also finds that the Defendant's consistent course of conduct up until the filing of Plaintiff's motion for summary judgment, both before and during litigation over a span of some two years, further supports the conclusion that the plain meaning of the Kicker proviso applies to AHM's contract with HDH. Specifically, as AHM outlines in several pleadings (together with its failure to deny other allegations of the Complaint), it obviously knew the subject condition precedent for activation of the Kicker proviso had been met. Although AHM argues otherwise, all of its actions, including payment of over $1 million dollars pursuant to the provision, and pleadings including its original and amended Answer, reflect what the Court concludes to be the plain meaning of the Agreement. Of course, the Court has allowed the Defendant's Answer to be amended to reflect what the Defendant alleges to have been a mistake in fact. However, just because the Court permitted the amendment as to the Defendant's characterization of the HDH contract, that does not preclude the Court from considering the undisputable evidence of AHM's consistent behavior as additional support of its intention and understanding of the Kicker clause. Surely, the course of conduct of the parties who negotiated and agreed to the subject language is relevant for interpretative purposes.
B. To Which Reimbursement Rates Does The 20% Kicker Apply?
The contractual language could not, even in hindsight, be clearer. If activated, the 20% increase obviously applies to all reimbursement rates, be they the "fixed" or "per diem" charges and the "percentage of charges." Such a conclusion is mandated by the plain wording of the Kicker proviso which commences with the all-inclusive language that any increase applies to "[t]he Reimbursement Rates described hereinabove" and both the "fixed charges" and percentage of charges" are "described hereinabove. It is equally clear that the COLAs apply to both the "per diem" and "percentage of charges" without restriction, where the pertinent clause (Attachment Sec. E) refers, again, to "[t]he Reimbursement Rates described hereinabove" which necessarily includes both the "fixed" and "percentage of charges." If it was intended by the Defendant that the COLA adjustments (which by definition are designed to only keep pace with anticipated cost increases and not to constitute any reward) would be excluded from the reach of the Kicker provision, such explicit exclusionary language would have been included in Section F which immediately follows the COLA clause in Section E.
Apparently, AHM does not argue that the use of capitalization with regard to the term reimbursement rates" signifies some sort of distinction among the different rates as that would impact on the issue of the applicability of the Kicker proviso. The Court would not accept such an argument in any event given the clear language of the contract, regardless of any variance in capitalization.
C. Could The Plaintiff Increase Reimbursement Rates At Will?
AHM argues that "[t]he cost of living adjustments provide a limitation on the amount St. Mary's can increase its chargemaster every year." (Def.'s Mem. in Supp. of its Opp'n to Pl.'s Mot. for Summ. J. at 6.) There is nothing in the clear language of the Agreement anywhere that indicates the COLA provision restricted, let alone prohibited the Plaintiff from raising or lowering the rates as it saw fit.
The issue is relevant at this juncture, not only because of its impact on the question of resultant damages to the Plaintiff, but also in regard to how it affects the Defendant's final argument that the end result of adding the 20% Kicker to all reimbursement rates as increased at will and with COLA adjustments constitutes an unenforceable penalty.
AHM argues that to hold that the Plaintiff's ability to raise its published charges was unrestricted would render the provision illusory because it would eliminate the bargained-for exchange contained within the reimbursement rate expressed as a percentage of charges. Id. Citing the Fourth Circuit's decision in Glascock v. Comm'r of Internal Revenue, AHM argues that St. Mary's ability to raise or lower its chargemaster (the published rates) is tantamount to its unlimited right to decide later the nature or extent of [its] performance" and is, therefore, "no promise." 104 F.2d 475, 476 (4th Cir. 1939). AHM therefore argues that the COLA adjustments constitute such a limitation in that they provide the extent to which St. Mary's could increase its published charges under the Agreement.
The Court rejects AHM's argument for two reasons. First, AHM retained the benefit of its bargain to pay a percentage of published charges at 84% — sixteen percent less than other customers who did not have the benefit of a contract with St. Mary's. Second, Glascock v. Comm'r of Internal Revenue is readily distinguishable in that there was no written agreement among the parties in interest and the right to determine the nature and extent of the amounts in controversy rested with one party who retained the ability to unilaterally decide not only the amount, but also whether it was a gift or a debt. Id. at 477.
Even though St. Mary's could vary its published charges at will, the Agreement still precluded it from demanding from AHM 100 percent of its published charges. Even then, AHM could terminate the contract without cause within ninety days if it objected for any reason. (Agreement Sec. IV.) Because the clause is so clear, there is no legal reason to go outside the "four corners" of the Agreement to vary or contradict it. Westbury Coal Mining Partnership v. J.S. K. Coal Corp., 233 Va. 226, 229, 355 S.E.2d 571, 572 (Va. 1987) (citing Pac. Tel. Tel. Co. v. Communications Workers of America, 199 F. Supp. 689, 693 (D.Or. 1961), "[t]he law will not insert by construction, for the benefit of one of the parties, an exception or condition which the parties, either by design or neglect, have omitted by their own contract" (citations omitted)).
D. Whether the Combined Increases Constitute An Unenforceable Penalty.
The Defendant argues in the alternative that the Kicker proviso is actually a liquidated damages provision that, when applied to all charges including "per diem" and "percentage of charges" together with the COLA adjustments, amounts to a penalty which renders the provision a nullity. (Def.'s Mem. in Supp. of its Opp'n to Pl.'s Mot. for Summ. J. at 6-9.)
Liquidated damages may be permitted where
parties to a contract may agree in advance about the amount to be paid as compensation for loss or injury which may result from a breach of the contract "when the actual damages contemplated at the time of the agreement are uncertain and difficult to determine with exactness and when the amount fixed is not out of all proportion to the probably loss.'301 Dahlgren Ltd. Partnership v. Bd. of Supervisors of King George County, 240 Va. 200, 202, 396 S.E.2d 651, 652 (Va. 1990) (citing Taylor v. Sanders, 233 Va. 73, 75, 353 S.E.2d 745, 746-747 (Va. 1987)).
The concept of liquidated damages is that it is a contractually agreed-to sum to be paid by a party to the contract upon its breach of the contract as a reasonable estimation of actual damages. Id.; Kirkland Dist. Co. of Columbia. S.C., v. United States, 276 F.2d 138, 145 (4th Cir. 1960); Black's Law Dictionary 395 (7th ed. 1999) (also triggered by "non-performance"); see also, Colonna Dry Dock Co. v. Colonna, 108 Va. 230, 61 S.E. 770, 774 (Va. 1908) (in determining whether a clause amounted to a liquidated damages provision or a penalty, the court relied on the rules "as laid down by Sedwick in his work on the Measure of Damages (citations omitted)" discussing three of the five "rules" to use in assessing whether such a clause is a penalty where the measure of damages resulting from breach is difficult to assess — even when it appears to be extravagant).
The principles in 301 Dahlgran Ltd. Partnership v. Bd. of Supervisors of King George County have been applied to other contract clauses that designated, for instance, compensation for "replacement costs" and not necessarily as "liquidated damages." See, e.g., Bennett Air Conditioning, Inc. v. Warren Mfg., 23 F.3d 399, 1994 WL 146024 at *5 (4th Cir. April 26, 1994) (holding where replacement costs were provided in the contract, but had not been incurred due to the breach, enforcement would have been unreasonable and 'all out of proportion'); and E.F. Coe t/a Cabana Motel v. Thermasol. Ltd., 785 F.2d 511, 513 (4th Cir. 1986) (holding a liquidated damages clause enforceable where even though there was a litany of 21 covenants that could trigger a liquidated damages clause upon default of any one of them, the court found the agreement to be enforceable "though [the default provisions are] several in number, [they] are interdependent . . . [and all have] one focal point.").
All citations to unpublished opinions are simply for illustrative value and are not to be considered for any other purpose.
AHM has not adequately demonstrated why the Court should extend the concept of liquidated damages to this Agreement, a contract that has not been breached but contains a condition precedent. See Standefer v. Thompson, 939 F.2d 161, 164 (4th Cir. 1994) (holding that no particular form of words is necessary to create an express condition. Whether a promise is conditional, and if so what is the nature of the condition, depends upon interpretation.'"). All agree that the Kicker clause provides that the reimbursement rates in the Compensation Schedule of Attachment A remained in effect as long as St. Mary's was the only hospital offering a "full spectrum of acute care services" in Henrico County with which AHM had contracted to provide Covered Services to members. The Agreement fully anticipated that AHM could contract with other hospitals and permitted AHM to decide unilaterally whether to do so. However, the parties also agreed in Section F that should that event come to pass, it would cause the reimbursement rate to be increased by the specified 20%. The modification of the earlier bargain was therefore triggered by an event contemplated by both parties to the Agreement, it was consistent with the purpose of the Agreement, and it was made by parties who were in the best position to craft language to approximate the liability that may arise from a future and uncertain event.
When referring to hospitals within the context of this section, the Court means hospitals offering a full spectrum of acute care services in Henrico County.
Therefore, the Kicker is not a liquidated damages clause, but a condition precedent that "kicked-in" AHM's liability. A condition precedent is a "future and uncertain event on which the existence or extent of an obligation or liability depends; an uncertain act or event that triggers or negates a duty to render a promised performance." Black's Law Dictionary 288 (7th ed. 1999). A condition is a very common concept in contract law where "both futurity and uncertainty are necessary elements . . . [i]f to their knowledge the event has either already happened or cannot possibly happen, the promise is either absolute or nugatory from the outset." Williston on Contracts § 38.1 at 369-370 (4th ed. 1992). A condition "may relate either to the formation of contracts or to liability under them." Williston on Contracts § 38.7 at 377.
Conditions premised under many different circumstances have been construed as valid and enforceable. See, e.g., Price v. Taylor, 251 Va. 82, 85, 466 S.E.2d 87, 88 (Va. 1996) (citingWalker Laberge Co. v. First Nat'l Bank of Boston, 206 Va. 683, 690, 146 S.E.2d 239, 244, for the rule that a "condition [precedent] must be neither inconsistent with the instrument itself nor of such a character that its performance would render the instrument wholly ineffective or nugatory."); Phillips v. Ferguson, 85 Va. 509, 8 S.E. 241, 242-243 (Va. 1888) (holding that where specific reasonable conditions are placed on a devise, they must be given meaning, even a condition annexed to a will restricting marriage was not void upon public policy grounds);Redstone Development Corp., v. Schmitz, 1991 WL 834876, at *3 (Fairfax County Cir.Ct. Mar. 21, 1991)(seller's warranties were conditions precedent to the contract for purchase of real property and where the seller knew warranty was false, the condition failed); Watzman v. Unatin, 101 W. Va. 41, 131 S.E. 874, 878 (W.Va. 1926) (holding that a comparatively or seemingly trivial condition is enforceable); see generally Williston on Contracts § 38.3 at 373-374.
See n. 19 supra.
Liquidated damages clauses will not be enforced under Virginia law when damages are readily ascertainable at the time of agreement or when the award is grossly in excess of actual damages. 301 Dahlgren Ltd. Partnership v. Bd. of Supervisors of King George County, 240 Va. at 202, 396 S.E.2d at 652. In this case, whether or when AHM would contract with another hospital and what economic impact that may have on St. Mary's was unknowable at the time the parties entered the Agreement. Even retrospectively, it remains so. There is simply no definite method by which to measure, for example, how many AHM Members elected to have inpatient, outpatient, emergency or other acute care services performed at HDH instead of St. Mary's following AHM's 1998 agreement with HDH. Likewise, the duration, frequency, or creation of customer loyalty attendant to any given patient or referral cannot be determined.
At the time the Agreement was made the parties arrived at mutually agreeable fixed charges and percentage of charges for specific covered services. Those amounts reflected what the parties determined for themselves to be fair, using whatever standard was agreed upon. It could have been the fair market value for service, minus some amount for the bargained-for exclusive agreement to provide the specified services. The parties agreed that a 20% increase in the reimbursement rates would fairly compensate St. Mary's for the loss of the exclusive right to provide covered services to AHM members. The economic loss to St. Mary's may have been much greater than that. The 20% Kicker may represent a 20% reduction in income, or it may represent a 20% reduction in patients, or something else. However, it is reasonable to conclude that using a known factor — the reimbursement rate for the relevant period that the condition was applicable — as a baseline creates some degree of certainty for both parties, not as to actual damages, but as to reasonable expectations for payables and receivables once the Kicker became applicable. See generally Lamont Television Systems. Inc. v. Gates Hudson Assoc., 1991 WL 170289, at *4 (4th Cir. Sept. 6, 1991).
See n. 19, supra.
AHM urges the Court that not only is the Kicker proviso an unenforceable liquidated damages clause, it is unenforceable because it is "'susceptible of definite measurement, or where the stipulated amount would be grossly in excess of actual damages.'"O'Brian v. Langley School, 256 Va. 547, 551, 507 S.E.2d 363, 365 (Va. 1998) (citing Brooks v. Bankson, 248 Va. 197, 208, 445 S.E.2d 473, 479 (Va. 1994)). AHM argues that because it opposes the imposition of the liquidated damages clause, it is therefore "entitled to conduct discovery and present relevant evidence that the damages resulting from breach of the contract are susceptible of definite measurement." Id. In carefully considering the issues raised by Brooks v. Bankson and O'Brian v. Langley School, the Court finds that even if it were to consider Section F a liquidated damages provision, discovery in this case is not warranted not only because the actual damages are not susceptible of definite measurement, but also because the scope and structure of the Agreement and the Kicker provision precluded St. Mary's from being able to mitigate its damages where mitigation or other economic impact would be relevant in determining whether the clause constitutes an unenforceable penalty provision.
An operative fact guiding the court in O'Brian v. Langley School was that the liquidated damages clause was triggered when parents withdrew their child from a private school several months before the beginning of the term, but twelve days after the contractually mandated cut-off for withdrawal. 256 Va. at 549, 507 S.E.2d at 364. Failure to properly notify the school caused immediate forfeiture of the entire year's tuition. Id. In order to determine whether the forfeiture of the full tuition was a penalty, the court held that the party opposing the clause had the burden to prove it was grossly out of proportion with its actual damages. Id. To do so, the parents should have been permitted to discover whether the school had made reasonable efforts to enroll a student in the spot vacated by their child.Id. In a case where there may have been no actual damages suffered by the school if they enrolled another child, then the full tuition (plus late fees) could be construed as an unenforceable penalty under Virginia law.
AHM argues that the Kicker provision constitutes an unenforceable penalty simply because the result may be that a payment will be required in excess of 100% of St. Mary's published charge. (Df.'s Mem. in Supp. of its Opp'n to Pl.'s Mot. for Surum. J. at 8); Humana Medical Plan, Inc. v. Jacobson, 614 So.2d 520 (Fla. 1992). The Humana case is neither binding nor instructive because it is readily distinguishable. The Florida court in Humana held that the subject agreement was specifically designed to prevent an individual doctor from entering into agreements with other health maintenance organizations but that a liquidated damages clause that was drafted to compel compliance with contractual terms had long been rejected. Id. at 522. In this case, the Agreement establishes an exclusive market, but it specifically provides a mechanism for AHM to contract with other hospitals. When the original Agreement was drafted, AHM received the benefit of its bargain that the reimbursement rate would remain in effect as long as St. Mary's was its exclusive provider in the designated area. Whether AHM contracted with one or twenty other hospitals in Henrico County, it would cause the Kicker to increase the reimbursement rates by no more than 20%.
Furthermore, the Humana court went on to find that: (1) the damages were easily ascertainable at the time the agreement was made because data was readily available as to its members — the measure by which the penalty was exacted; and (2) the agreement exacted a penalty against the individual doctor regardless of any action on his part. Id. at 522. In the present case, as already noted, damages were not ascertainable at the time of the making of the Agreement (nor are they now) and AHM voluntarily changed its position. Thus, even if the Court were to construe the Kicker proviso as a liquidated damage clause, it would not be an unenforceable penalty under Virginia law. See Taylor v. Sanders, 233 Va. 73, 75, 353 S.E.2d 745, 746-747 (Va. 1987). Additionally, because actual damages are not, as a matter of law, susceptible of definite measurement in this case, AHM cannot sustain an argument that it is entitled to discovery that would further delay a resolution of this matter.
AHM specifically argues that the end result of applying the 20% increase to all the reimbursement rates, including COLA adjustments, would be a 120% increase which is excessive and thereby unenforceable. (Def.'s Mem. in Supp. of its Opp'n to Pl.'s Mot. for Summ. J. at 8-9, n. 3.) However, the Defendant's calculations are premised using the 1994 reimbursement rates as a baseline (denominator) as opposed to 1998 rates (with applicable COLA adjustments) when the 20% increase would have accrued. The Defendant's analysis simply makes no sense, mathematically or logically. (See Pl.'s (i) Reply to Def.'s Memo. in Opp'n to Pl.'s Mot. for Summ. J. and (ii) Mem. in Opp'n to Mot. for Leave to File Am. Answer and Second Am. Countercl. at 8-10.)
AHM has also alleged that when St. Mary's accepted payments in 1999 under the Kicker provision, St. Mary's agreed to accept the partial payment as payment in full for "Covered Services." However, absent an expression of acceptance of payments already due and owing to it at that time, there can be no accord and satisfaction. See Masonite Corp. v. Norfolk Wester Ry.Co., 601 F.2d 724, 727 (4th Cir. 1979).
While the issue of accord and satisfaction may ultimately be more relevant to a measure of damages because of the partial payment by AHM to St. Mary's under the Kicker proviso, the Defendant has pled it as an affirmative defense and counterclaim and the Court otherwise finds it is appropriate to address and resolve it at this juncture.
First, the law of accord and satisfaction is that it is a separate contractual agreement and the burden lies with the debtor to prove its existence as governed by Virginia statute. Va. Code Ann. § 11-12 (1950); Standard Sewing Mach. Co. v. Gunter, 46 S.E. 690, 691 (1904).
The Virginia statute requires:
Part performance of an obligation, promise or undertaking, either before or after a breach thereof, when expressly accepted by the creditor in satisfaction of an agreement for that purpose, though without any new consideration, shall extinguish such obligation, promise or undertaking.
The burden that must be carried in this case for the affirmative defense of accord and satisfaction to apply is that the partial payment or performance of AHM's full obligation must be established to have been: (1) expressly accepted by St. Mary's; (2) in full satisfaction; (3) rendered pursuant to an agreement for that purpose. Atkins v. Boatwright, 204 Va. 450, 454, 132 S.E.2d 450, 453-454 (Va. 1963).
Thus, to find accord and satisfaction the Court must find that there was an agreement between AHM and St. Mary's to expressly extinguish all amounts due and owing under the Kicker provision by St. Mary's acceptance of the partial payment made pursuant to a "1999 Agreement." However, there is no written agreement reflecting that the parties intended the partial payment would extinguish other amounts due St. Mary's. Thus, the only remaining possibility is to establish that there was an oral agreement. In order to be binding, "the terms of an oral agreement must be reasonably certain, definite and complete to enable the parties and the courts to give the agreement exact meaning." Richardson v. Richardson, 10 Va. App. 391, 395, 392 S.E.2d 688, 690 (1990). Even construing the allegation most favorably to AHM, it has offered nothing but a conclusory statement in argument that by accepting the partial payment, St. Mary's agreed the debt was satisfied. The partial payment, in and of itself is insufficient, as a matter of law, to find accord and satisfaction. Kasco Mills., Inc. v. Ferebee, 197 Va. 589, 593-94, 90 S.E.2d 866, 870-871 (Va. 1956) (where there are disputed facts as to the accord, it is a proper jury question, however acceptance of a check or other remittance by creditor is not tantamount to accord and satisfaction, even when the check is inscribed with the words "'In full account'" or words of similar import.)
Defendant also pleads the affirmative defenses of estoppel (detrimental reliance), waiver (forgiveness), laches (prejudicial delay), set-off (partial satisfaction), and recoupment (unjust enrichment). In exploring all the pleadings, construed in light most favorable to AHM, the Court can find no set of potential facts to support any of these defenses and to the extent that any of them are implicated, they are resolved within the foregoing analysis.
The Court therefore concludes, based on the foregoing analysis, that there is nothing in the Agreement (including the Kicker proviso) that is ambiguous, unilateral, illusory, penal, unconscionable, or otherwise void so as to render it unenforceable in regard to the subject issues.
Conclusion
The Court GRANTS the Plaintiff's motion for summary judgment as to liability for the reasons stated and makes the following specific findings:
(1) Section I.F was activated when Defendant entered into its Agreement with HDH a hospital within the designated area offering a "full spectrum of acute care services as specified by the controlling Agreement giving rise to Defendant's liability for an increase in reimbursement rates by 20%;
(2) The 20% increase provided in Section I.F of the Agreement applies to all reimbursement rates, including both "fixed" and "per diem" as well as "percentage of charges"; and
(3) Any increases under Section I.F must include any annual COLA as provided for in Section I.E of the Agreement.
An appropriate order shall issue.