Natchez Regional Medical Center v. Quorum Health Resources, LLC et al
Filing
128
ORDER granting in part and denying in part 90 Motion for Summary Judgment; denying 93 Motion to Exclude; deferring ruling on 94 Motion in Limine; granting in part and denying in part 97 Motion in Limine Signed by Honorable David C. Bramlette, III on 7/18/2012 (PL)
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF MISSISSIPPI
WESTERN DIVISION
NATCHEZ REGIONAL MEDICAL CENTER
VERSUS
PLAINTIFF
CIVIL ACTION NO: 5:09-cv-207-DCB-JMR
QUORUM HEALTH RESOURCES, LLC,
JEFFREY S. WESSELMAN, AND MICHAEL
ANDERSON
DEFENDANTS
MEMORANDUM OPINION AND ORDER
This cause is before the Court on Defendants’ Motion for
Summary Judgment [docket entry no. 90], Defendants’ Motion to
Exclude [docket entry no. 93], Plaintiff’s Motion in Limine to
Exclude Testimony of Expert Witness John Czarnetzky [docket entry
no. 94], Plaintiff’s Motion in Limine to Exclude Certain “Opinions”
of Defense Expert J.W. Tillett, Jr., and to Strike Related Portions
of Tillet’s “Expert Report” [docket entry no. 97], Defendants’
Motion in Limine [docket entry no. 114], and Plaintiff’s Motion in
Limine and to Exclude Witness Testimony [docket entry no. 115].
Having carefully considered these Motions, the substantial record
in
this
case,
applicable
statutory
and
case
law,
and
being
otherwise fully advised in the premises, the Court finds and orders
as follows:
I. Overview and Procedural History
The present controversy arises out of the Defendants’ alleged
mismanagement of Natchez Regional Medical Center (NRMC). NRMC is a
not-for-profit hospital owned by Adams County, Mississippi, and is
established for the purpose of delivering quality healthcare to the
“Miss-Lou Region.”1 NRMC Bylaws at 3. As such, the Adams County
Board of Supervisors appoints permanent residents of Adams County,
Mississippi, to a seven-member Board of Trustees (Board) for a
three-year term. Id. at 3-4. The Board’s purpose is to oversee the
hospital’s maintenance, operation, and institutional planning. Id.
Quorum Health Resources, LLC is a private company that specializes
in providing management services to hospitals. Complaint ¶ 2. In
order to provide these management services, Quorum installs “Key
Personnel” into hospitals, including a CEO and CFO, to manage the
hospital’s daily affairs and assist the hospital in its short-term
and long-term fiscal management. Defendant Jeffrey Wesselman acted
as the CFO from September 2005 through April 2006, and then as the
CEO from April 2006 to March 2008. Complaint ¶ 4. Defendant Michael
Anderson was
the
CFO from
April
2006
through
February
2008.
Complaint ¶ 3.
NRMC entered into its first management agreement with Quorum
in
1992,
and
this
agreement
was
renewed
in
1999.
The
1999
Management Agreement (hereinafter referred to as “the Agreement” or
“Contract”) was still in effect at the time the present dispute
arose between the Parties, although they amended the Agreement
three times. Pursuant to the Contract, Quorum was obliged to
1
NRMC explains that the hospital’s primary service area
includes Adams, Franklin, Jefferson, and Wilkinson County
Mississippi, as well as the Louisiana parish of Concordia–an area
collectively known as the Miss-Lou Region. Complaint ¶ 7.
2
perform
certain
duties
for
NRMC,
which,
among
other
things,
included staffing the hospital with “Key Personnel,” submitting
budgets to the Board, supervising accounting, charging for hospital
services and receiving payments, and presenting management plans
and financial reports. See, e.g.,
Management Agreement (1999) at
3-7, docket entry 90-3. The effect of the Agreement was that NRMC
ceded to Quorum, or more specifically, its Key Personnel, control
over the day-to-day operations of the hospital.
Sometime in 2008, the Board grew dissatisfied with Quorum and
its Key Personnel’s performance and terminated the Contract. The
reasons for the Board’s dissatisfaction are explained in greater
detail below. Shortly thereafter, the Board replaced Quorum with
another management company, Healthcare Management Partners, LLC
(HMP), and with HMP’s assistance allegedly discovered that Quorum
and its representatives had been mismanaging the hospital as far
back as 2001. On December 9, 2009, NRMC filed a fifty-three page
Complaint in this Court, which has jurisdiction over the cause as
the matter is between citizens of different states and well exceeds
the Court’s $75,000 jurisdictional threshold. NRMC brings nine
separate causes of action, ranging from a run-of-the-mill breach of
contract claim to a less-frequently alleged corporate waste claim.
On August 20, 2010, the Court denied the Defendants’ Motion to
Dismiss. They now move for summary judgment pursuant to Federal
Rule of
Civil
Procedure
56.
Because the
3
case
was
originally
scheduled for July, the Parties have also filed their motions to
exclude and motions in limine. In response to the Defendants’
Motion to Exclude, the Court held a Daubert hearing on June 20,
2012, at the United States Courthouse in Natchez, Mississippi. See
May
24,
2012
Order.
At
that
time,
pursuant
to
the
Court’s
instruction, the Parties also engaged in oral argument as to the
enforcability of the exculpatory clause contained in the three
Amendments to the Agreement. See id. Considering all relevant
matters fully briefed and argued, the Court will address the
pending Summary Judgment Motion [docket entry no. 90] and the
multiple Motions to Exclude [docket entry nos. 93, 94, 97] but will
delay ruling on the remaining unresolved issues raised in the
Motions in Limine [docket entry nos. 114, 115], as identified in
the Stipulation and Consent Order [docket entry no. 126].
II. Defendants’ Motion for Summary Judgment
Summary judgment is apposite “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.” Fed. R. Civ. Pro. 56(a).
“A fact is ‘material’ if its resolution in favor of one party might
affect the outcome of the lawsuit under governing law. An issue is
‘genuine’ if the evidence is sufficient for a reasonable jury to
return a verdict for the non-moving party.” Ginsberg 1985 Real
Estate P’ship v. Cadle Co., 39 F.3d 528, 531 (5th Cir. 1994)
(citations omitted). The party moving for summary judgment bears
4
the initial responsibility of apprising the district court of the
basis for its motion and the parts of the record which indicate the
absence of a genuine issue of material fact. Celotex Corp. v.
Catrett, 477 U.S. 317, 323 (1986).
“Once the moving party presents the district court with a
properly supported summary judgment motion, the burden shifts to
the
non-moving
party
to
show
that
summary
judgment
is
inappropriate.” Morris v. Covan World Wide Moving, Inc., 144 F.3d
377, 380 (5th Cir. 1998). “The evidence of the non-movant is to be
believed, and all justifiable inferences are to be drawn in his
favor.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986).
But the nonmovant must “do more than simply show that there is some
metaphysical doubt as to the material facts.” Matsushita Elec.
Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986).
Moreover, “[t]he mere existence of a scintilla of evidence is
insufficient to defeat a properly supported motion for summary
judgment.” Anderson, 477 U.S. at 252. Summary judgment must be
rendered when the nonmovant “fails to make a showing sufficient to
establish the existence of an element essential to that party’s
case, and on which that party will bear the burden of proof at
trial.” Celotex Corp., 477 U.S. at 322.
1. Whether the Limitation of Liability Clause in the Management
Agreement Bars NRMC from Recovering Most of the Damages It Seeks
The Defendants first argue that the following limitation of
liability clause, found in the First, Second, and Third Amendments
5
to the Management Agreement, precludes the majority of damages
sought by NRMC:
Limitation of Liability for Quorum. To the extent
permitted by Mississippi law, Quorum, its employees
(including, without limitation, the Key Personnel),
agents, representatives and/or Affiliates shall have no
liability to NRMC for any indirect, consequential,
incidental, exemplary, special or punitive damages or
costs including, without limitation, lost profits or loss
of good will, even if such party has been advised, knew
or should have known of the possibility thereof.
First Amendment to the Management Agreement ¶ 10.2 Clauses which
limit liability historically have been viewed with disfavor in
Mississippi jurisprudence, but recently the Mississippi Supreme
Court has expressed a willingness to validate such agreements based
upon the now-dominant public policy that parties should be free to
contract. Kroger Co. v. Chimneyville Props. Ltd., 784 F. Supp. 331,
349 (S.D. Miss. 1991) (citing Cappaert v. Junker, 413 So. 2d 378,
381 (Miss. 1982)).
The Mississippi Supreme Court has explained its view of
limitations of liability clauses this way:
The law does not look with favor on contracts intended to
exculpate a party from the liability of his or her own
negligence although, with some exceptions, they are
enforceable. However, such agreements are subject to
close judicial scrutiny and are not upheld unless the
intention of the parties is expressed in clear and
unmistakable language.
Turnbough v. Ladner, 754 So. 2d 467, 469 (Miss. 1999). “Clauses
2
This clause
exculpatory clause.
is
frequently
6
referred
to
below
as
an
limiting liability are given rigid scrutiny by the courts, and will
not be enforced unless the limitation is fairly and honestly
negotiated and understandingly entered into.” Id. (quoting Farragut
v. Massey, 612 So. 2d 325, 330 (Miss. 1992)). Furthermore, even if
the
bargaining
process
withstands
this
“rigid
scrutiny,”
the
Mississippi Supreme Court has stated that a court must void an
otherwise honestly negotiated exculpatory clause if it contravenes
public policy. Cappaert, 413 So. 2d at 382. The standard for what
constitutes a violation of public policy is not always clear; thus
invalidating a clause as a violation of public policy is a judicial
power easily abused and should be done with an abundance of
caution. Id. at 381 (citing State ex rel. Knox v. Edward Hines
Lumber Co., 115 So. 598, 605 (Miss. 1928)).
A. Whether the Limitation of Liability Clause Incorporated
Into the Management Agreement Was Fairly and Honestly
Negotiated and Understandingly Entered Into
The Defendants argue that all evidence indicates the clause
was
fairly
and
honestly
negotiated
by
two
parties
of
equal
bargaining power. NRMC contends that the clause could not have been
fairly and honestly negotiated because Quorum was well aware of its
legal opinion
that
the
clause
violated
public policy.
It
is
undisputed that, before the limitation of liability clause was
signed, NRMC’s attorney researched the enforcability of exculpatory
clauses under Mississippi law and, relying on various opinions from
the Office of the Mississippi Attorney General (AG Opinions),
7
informed both NRMC and Quorum of his legal conclusion that the
clause was unenforceable in Mississippi. NRMC consented to the
inclusion
of the
clause only
upon
the condition
that
Quorum
incorporated the introductory phrase “to the extent permitted by
Mississippi law” into its boilerplate language. The phrase “to the
extent permitted by Mississippi law” was presumably taken from one
of two AG Opinions. In the latest Opinion on the subject, the
Mississippi Attorney General states:
With regard to your fourth question, this office has
previously opined that the addition of the phrase “to the
extent permitted by Mississippi law” to indemnity and
hold harmless clauses is not prohibited but, in our
opinion, has no legal effect on the State’s liability or
lack thereof. Such language may serve to notify the
contractor or vendor of the State’s lack of authority and
may thereby help insulate from personal liability the
state employee or official signing the agreement.
MS
AG
Op.,
Stringer,
Jr.,
(Jan.
25,
2006),
2006
WL
1900660
(citation omitted). Without specifically saying so, NRMC implies
that including the phrase “to the extent permitted by Mississippi
law” notified Quorum of its “lack of authority” and “insulate[d]
[it] from personal liability” Id.
In Turnbough v. Ladner, a scuba diver signed a waiver of his
right to bring a negligence cause of action against his scuba
instructor as a condition precedent to his enrollment in diving
certification classes. He signed the agreement despite the fact
that, shortly beforehand, he was informed by a classmate-attorney
that the waiver was unenforceable under Mississippi law. 754 So. 2d
8
467, 468 (Miss. 1999). Subsequently, following a dive, the diver
got
the
bends
and
brought
suit
against
his
instructor,
who
convinced the circuit court that the waiver barred the diver’s
negligence claims. Id. at 468. The Mississippi Supreme Court,
however, reversed on grounds that the clause was not fairly and
honestly negotiated. Id. at 470. Notably absent from the supreme
court’s analysis
was
the
fact
that
the
scuba-diver
had been
informed of the clause’s unenforcability but signed it anyway.3
As in Turnbough, this Court finds the Parties’ understanding
of the law irrelevant to its analysis of whether the clause was
fairly and honestly negotiated. The evidence suggests that the
Parties did indeed disagree as to the state of the law governing
limitations of liability clauses in Mississippi, but this same
evidence
indicates
that
both
Parties
fully
discussed
their
different legal positions. In other words, it appears that the
Parties failed to reach a mutual understanding with regard to the
law but
did arrive at a mutual understanding as to how the
limitation of liability clause would be included in the contract in
such a way to satisfy their concerns. What matters to this Court is
that the Parties, who were on equal footing during the bargaining
process, understood the effect of including the agreement and
3
Interestingly, then-Justice Mills argued that the diver’s
belief that the clause was unenforceable should be held against him
because he signed it with the intention not to honor it. See id. at
471 (Mills, J., dissenting). Quorum, citing the dissent in
Turnbough, took a similar position at the June 20 hearing.
9
voluntarily chose to enter into the agreement after negotiating
what each considered acceptable language. The core question is how,
if
at
all,
does
Mississippi
public
policy
factor
into
this
situation.
B. Whether the Clause Violates Public Policy
NRMC’s
primary
challenge
to
the
limitation
of
liability
clause is founded in the various AG Opinions, each of which respond
to inquiries regarding the propriety of a public entity executing
a liability limitation clause in a contract with a private party.
See MS AG Op., Stringer, Jr., (Jan. 25, 2006), 2006 WL 1900660; MS
AG Op., Thomas (Dec. 2, 2003), 2003 WL 22970528; MS AG Op.,
Chamberlin, (Oct. 18, 2002), 2002 WL 31663333; MS AG Op., Griffith,
(May 28, 1999), 1999 WL 535496; MS AG Op., Davis, (Mar. 3, 1993),
1993 WL 669150; MS AG Op., Morse Jr., (Aug. 3, 1981), 1981 WL
39498. Each AG Opinion takes the unequivocal position that a
Mississippi public entity cannot execute a clause which purports to
limit a private party’s liability to the state, its agents, or
municipalities. The AG Opinions, however, are not binding on this
Court, Freelance Entm’t, LLC v. Sanders, 280 F. Supp. 2d 533, 546
(N.D. Miss. 2003), and a close examination of these Opinions
reveals, if anything, a lack of binding legal authority directly on
point. In fact, the most persuasive authority cited in the Opinions
is a statute authorizing the executive director of the Mississippi
Department
of
Information
Technology
10
Services
to
agree
to
limitation of liability provisions when negotiating contracts for
the state. See Stringer Op., 2006 WL 1900660 (citing Miss. Code.
Ann. § 25-53-21(e)). But even this statute offers little guidance
in the present situation, other than to suggest, as Quorum argued
at the hearing, that an exculpatory clause entered into by the
state or its agencies does not violate public policy per se.
The Mississippi Supreme Court and the Mississippi Court of
Appeals have addressed the enforcability of exculpatory clauses in
a variety of contexts; however, in these cases, only one of the
contracting parties was a public entity, and only a handful were
invalidated explicitly for public policy reasons. See Turnbough,
754 So. 2d 467 (invalidating an agreement whereby a diving student
waived his right to recover for harms occurring during diving
class); Quinn v. Miss. State Univ., 720 So. 2d 843 (Miss. 1998),
overruled on other grounds by, City of Jackson v. Estate of Stewart
ex rel. Womack, 908 So. 2d 703 (Miss. 2005) (reversing the blanket
enforcement of a general waiver of liability for physical injury
incurred at a baseball camp); Cappert, 413 So. 2d 378 (voiding a
clause relieving a landlord from his common law duty to maintain
the common areas on the leased premises); Smith v. Smith, 375 So.
2d 1041, 1042 (Miss. 1979) (validating a commercial lease agreement
exonerating a property holder of liability for personal or property
damage occurring on the leased property); Rigby v. Sugar’s Fitness
& Activity Ctr., 803 So. 2d 497 (Miss. App. Ct. 2002), overruled on
11
other grounds by, City of Jackson v. Estate of Stewart ex rel.
Womack, 908 So. 2d 703 (Miss. 2005) (finding no evidence that a
waiver
releasing
the
defendant
from
liability
was
fairly
negotiated); Chimneyville Props. Ltd., 784 F. Supp. 331 (upholding
an exculpatory clause in a commercial lease agreement). “When state
law provides no definitive answers to the question presented, [the
district court] must make an educated Erie guess as to how the
Mississippi Supreme Court would resolve the issue. . . . [The
district court] may consult a variety of sources, including the
general rule on the issue, decisions from other jurisdictions, and
general policy concerns.” Travelers Cas. & Sur. Co. of America v.
Ernst
&
Young,
542
F.3d
475,
483
(5th
Cir.
2008)
(internal
citations and quotation marks omitted).
If a general rule can be extracted from the above cases, it is
this one: an exculpatory contract should not be invalidated on
public policy grounds unless the clause “is prohibited by the
Constitution, a statute, or condemned by some decision of the
courts construing the subject matter.” Cappaert, 413 So. 2d at 381
(citing Edward Hines Lumber Co., 115 So. at 598).4 When asked to
4
The rationale for this rule is expressed in Illinois
Central Railroad Co. v. Harris: “If this contract is valid and
binding on the employés of railroads, it will have the effect of
repealing some of the statutes of this state. It will nullify the
so-called comparative negligence section of our Code, so far as
railroad employés are concerned.” 67 So. 54, 56 (Miss. 1914)
(invalidating a contract wherein the employees of a railroad
company agreed to assume all risks incident to service).
12
invalidate a limitation of liability clause in conflict with a
“decision
of
the
courts
construing
the
subject
matter,”
the
Mississippi Supreme Court has focused specifically on how the
public, which is protected by a host of judicially-imposed commonlaw legal duties but is not a “party” to the contract, would be
impacted by one private party’s attempt to limit its liability to
another private party. See Cappaert, 413 So. 2d at 381. Put another
way,
the
Mississippi
Supreme
Court
has
analyzed
whether
the
exculpatory agreement ensures that one of the contracting parties
shoulders the legal duty imposed by common law and, relatedly, the
degree to which the public could be harmed if the contract has the
effect of exonerating both parties of this duty.
For instance, in Cappert v. Junker the Mississippi Supreme
Court was asked to void a hold-harmless provision in a residential
lease on the grounds that it violated public policy. Id. at 378-79.
The supreme court focused less on the fact that the lease immunized
the landlord from liability to the lessee and more on the fact that
the lease had the unwelcome consequence of exonerating the landlord
from his common-law duty to maintain the common areas on the leased
premises. The supreme court chose to invalidate the clause because
it
“contravene[d]
long
established
common
law
rules
of
tort
liability that exist in the landlord-tenant relationship.” Id. at
382. In reaching this conclusion, the supreme court, quoting at
length the Washington Supreme Court, explained,
13
[I]t cannot be said that such exculpatory clauses are
“purely a private affair” or that they are “not a matter
of public interest.” The real question is whether we
should sanction a technique of immunizing lessors of
residential units within a multi-family dwelling complex,
from liability for personal injuries sustained by a
tenant, which injuries result from the lessor’s own
negligence
in
maintaining
the
“common
areas”;
particularly when the technique employed destroys the
concept of negligence and the standard of affirmative
duty imposed upon the landlord for protection of the
tenant.
Id. at 381-82 (quoting McCutcheon v. United Homes Corp., 486 P.2d
1093, 1097 (Wash. 1971)). In other words, the supreme court looked
beyond the rights of the parties vis-a-vis the clause to examine
how “sanctioning” the exculpatory clause would nullify the typical
duties of a landlord and thus have the potential to injure other
members of the unsuspecting public.
In Kroger Co. v. Chimneyville Properties, LTD, a federal
district court used the same basic logic to arrive at the opposite
conclusion. In that case, the district court was asked to enforce
a limitation of liability clause pertaining to a commercial lease
agreement. The clause, rather than exonerating both parties of
liability, shifted the lessor’s common-law liability for damages to
persons and property on the leased premises to the lessee. 784 F.
Supp. at 349. Because the clause transferred the liability to the
commercial lessee, the lessee had every reason to ensure the safety
of the premises, whereas in Cappaert the duty to maintain the
common area fell to no one. Id. Moreover, the contract expressly
required the lessee to carry insurance, eliminating the possibility
14
that any injured party might go uncompensated. Id. For these
reasons, the district court distinguished Cappaert, concluding that
the clause did not impugn the public policy undergirding common-law
rules of tort liability and invoked mere private concerns, which
the parties had the right to bargain away in a contract. Id.
The
difficulty
this
Court
faces
is
how
to
apply
this
relatively straightforward analysis to a situation where public
interest
is
exculpatory
implicated
clause,
whenever
inasmuch
as
a
public
agency
a
public
agency
executes
acts
on
an
the
public’s behalf. The AG’s Office suggests that all exculpatory
contracts entered into by the state, its agents, or municipalities
are unenforceable as a matter of law because public interest is
always affected.5 The Court in its Erie-analysis, however, declines
to adopt such a broad holding, which, in any case, appears to be in
doubt in light of Miss. Code. Ann. § 25-53-21(e). Moreover, the
Court recognizes, at least in principle, that there are potential
benefits to the public in a public agency’s execution of an
exculpatory clause: the community (1) may receive an immediate
financial discount or (2) be able to procure certain services that
would otherwise
not
be
available
5
to it
without
some
advance
The AG Opinions do not explicitly state this conclusion, but
it is the only conclusion the Court can draw from reading the
Opinions. The logic therein, at least with respect to limitation of
liability for negligent acts, appears to be little more than: the
public’s interest is always implicated therefore the clauses are
unenforceable as a matter of law.
15
agreement limiting liability.6 The narrower and more appropriate
question to ask is whether the clause sub judice should be voided
as a matter of public policy.
The Mississippi Supreme Court has held that the provision of
healthcare
services
to
any
given
community
is
an
important
governmental function. City of Leland v. Leach, 86 So. 2d 363, 364
(Miss. 1956) (“[D]uties connected with the preservation of the
peace or health, or the prevention of the destruction of property
by fire are all governmental duties, without question.”). As such,
in Ferguson v. Watkins the Mississippi Supreme Court concluded in
the context of a libel suit that when a hospital is built with
public monies and operates with public funds “the operation of
[that] hospital is a matter of legitimate public interest.” 448 So.
2d 271, 279 (1984). To be specific, in Ferguson the supreme court
found that the county hospital’s decision not to renew the contract
of the hospital administrator was a matter of legitimate public
concern. Id.
Despite
Management
this
precedent,
Agreement
merely
the
Defendants
implicates
suggest
private
that
the
interests,
characterizing the Agreement as involving the routine concerns of
6
These benefits are raised by those seeking an official
opinion from the Mississippi Attorney General in their inquiries
about the propriety of executing exculpatory clauses. See, e.g.,
Thomas Opinion, 2003 WL 22970528 (“It is unlikely that we will be
able to find another vender who can provide the same quality of
service in a timely manner . . . .”).
16
two
sophisticated
business
partners.
This
characterization,
however, paints an incomplete picture. On a fundamental level, the
duties
imposed
on
Quorum
by
the
Management
Agreement
are
inextricably linked to NRMC’s ability to carry out its important
governmental function–the provision of quality healthcare services
to the local community–and by virtue of that Agreement Quorum’s
execution of those duties is clearly a matter of public concern.
The Management Agreement spells out Quorum’s role in carrying out
NRMC’s
mission:
“Quorum
shall
use
all
reasonable
efforts
to
implement the Board of Trustees’s policies and directives with the
goal
of
causing
the
Hospital
to
provide
quality
healthcare
consistent with the polices and directives dictated by the Board of
Trustees . . . .” Management Agreement (1999) at § 3.
To that end, Quorum and its Key Personnel were contractually
obligated
to
perform
including
presentation
functions
of
the
essential
yearly
to
budget,
NRMC’s
success,
management
of
accounting, billing, and payments, and administration of hospital
policies in hiring and firing employees. Id. Although the Contract
makes clear that the Board was responsible for NRMC’s policies and
ultimately its financial state, the effect of the contract was that
the Board ceded the day-to-day operation of the hospital to Quorum
and its Key Personnel, and therefore NRMC was entirely dependant
upon Quorum and its Key Personnel in order to fulfill its duties as
outlined in the Agreement. For example, Quorums’s appointed CEO and
17
CFO were responsible for presenting yearly budgets to the Board.
Thus, the Board’s ability to make prudent financial decisions was
in large part dependant upon the duty of the CEO and CFO to timely
and accurately execute their responsibilities.
In absolving any CEO or CFO of civil liability for their
negligent or intentional acts, there is the obvious danger of
fiscal irresponsibility. At the hearing, NRMC’s expert, Scott
Phillips, stated that under the Defendants’ direction NRMC executed
a bond which it did not have the finances or financial outlook to
support,
putting
the
taxpayers
on
the
hook
for
a
very
bad
investment. See also, Phillips Report at 35-37. But the attendant
harm caused by fiscal waste in this context is not primarily to the
public coffers. The public, of course, has a significant interest
in the hospital’s prudent administration of tax dollars, but in the
context of the preservation of health, the public harm stems from
the possible elimination of needed healthcare services should the
hospital be forced to close its doors because of a lack of
resources
or,
perhaps
worse,
the
provision
of
substandard
healthcare services under a poorly funded hospital. It is not
difficult to imagine the ills to befall the community should it be
unable to access quality healthcare.
Relatedly,
in
addition
to
any
pecuniary
interest,
the
taxpayers have an interest in a well-managed public hospital. See
Ferguson, 448 So. 2d at 279 n.8 (“[T]he public ought to care
18
because their tax dollars are being used to fund the operation of
the hospital.” (emphasis in original)). NRMC and its expert Scott
Phillips
describe
the
Quorum-managed
hospital
as
being
in
a
substandard and deteriorating condition. In his report, he claims
that:
a. The roof of the main patient tower leaked so badly
that the hallway of the patient unit on the fifth or top
floor had to be lined with garbage cans each time it
rained to catch the water coming through the roof.
b. The main parking lot was badly damaged and was not
safe for a patient or visitor using a walker to cross.
c. The exterior brick and stucco had not been regularly
resealed resulting in a catastrophic situation for the
entire community when Hurricane Gustave blew rainwater
through the exterior walls of the surgical suites forcing
the emergency shutdown of surgical services for three
weeks. NRMC operates 60% of the total number of hospital
operating rooms in Natchez, MS . . . .
d. Patient furnishings in the routine medical surgical
units had not been replaced since the Hospital had
opened. Many of the mattresses upon which the patients
lay were no longer serviceable and contained large holes
that were covered with duct tape in an effort to keep out
body fluids.
e. Half of the patients rooms on the fifth floor were
closed because they did not have a functioning nurse call
system as required by licensure and accreditation
guidelines.
f. Many patient rooms were not serviceable because they
did not have functioning air conditioning units.
g. In spite of being heavily overstaffed in the
housekeeping department, the carpeting in the hallways on
the medical surgical units was so worn, stained and
crusted with dirt that four large strips the pattern
[sic] in the carpeting was no longer visible.
h.
There
was
no
evidence
that
19
the
floors
and wall
surfaces in
maintained.
the
patient
rooms
had
been
regularly
Phillips Report at 8-9. It is, of course, for the fact-finder to
decide whether these factual allegations are true and whether the
Defendants’ alleged mismanagement actually played a role in these
events. For the purposes of policy determination, what is important
is the principle, and in principle, the Court can imagine other
hypothetical scenarios, not unlike the factual allegations in the
present case, that counsel against sanctioning exculpatory clauses
which involve “duties connected with the preservation of the peace
or health.” City of Leland, 86 So. 2d at 364; see also Cappaert,
413 So. 2d at 381-82.
If the Court were to validate the present agreement, it would
sanction a clause that disincentivizes the care with which a CEO
prepares the public hospital’s financial statements or the care
with which a CEO oversees a public hospital’s medical staff,
facilities, and equipment. Allowing the Defendants to be absolved
of their various legal duties connected with the preservation of
peace or public health shifts a serious and unacceptable risk of
harm to the public. This sort of risk-shifting is condemned by the
courts of Mississippi, and therefore the Court finds that the
present
exculpatory
clause
in
the
Management
Agreement
is
agreement
is
unenforceable as a matter of Mississippi law.
C. Scope of the Limitation of Liability Clause
Morever,
even
if
the Court
20
finds
that
the
enforceable as a matter of law, the Court notes, for the record,
that it is yet to be determined whether the majority of damages
NRMC seeks fall within the scope of the limitation of liability
clause. The clause purports to limit NRMC’s ability to recover
“indirect,
consequential,
incidental,
exemplary,
special
or
punitive damages.” Notably, direct damages are not named in the
exclusion. In its brief, NRMC argues that at least a portion of the
“lost profits” it seeks in connection with its claims are direct
damages. See Pl.’s Memo. in Opp’n to Summ. J. at 106 (citing
cases). The Parties have not fully briefed this issue, but at the
hearing the Defendants clearly articulated their contrary position
which is that the only damages recoverable as direct damages are
the fees NRMC paid to Quorum under the Agreement.
Also, the Court is skeptical of any attempted waiver of
punitive damages inasmuch as such damages are directly linked to
conduct
surpassing
11-1-65(1)(a)
ordinary
(establishing
negligence.
that
punitive
Miss.
Code
damages
Ann.
are
§
only
recoverable if a plaintiff can demonstrate actual malice, gross
negligence, or actual fraud). Restatement (Second) of Contracts §
195, an authority that has proven persuasive to the Mississippi
Supreme Court in the past, states: “A term exempting a party from
tort liability for harm caused intentionally or recklessly is
21
unenforceable on grounds of public policy.”7 In the present case,
the exclusion of punitive damages has the unquestionable effect of
limiting, but not necessarily totally exempting, Quorum’s liability
to
NRMC for
any actions
committed
with actual
malice, gross
negligence, or fraudulent intent and thus could be interpreted as
contrary to public policy. Had the Court validated the limitation
of liability clause, the separate issue of whether punitive damages
can be waived would be an issue in this case, as NRMC seeks
punitive damages related to some of its claims. Complaint at 51-52;
see also, Hurst v. Sw. Miss. Legal Servs. Corp., 708 So. 2d 1347,
1350 (Miss. 1998) (stating that punitive damages in a breach of
contract action “are recoverable where the breach results from an
intentional wrong, insult, or abuse as well as from such gross
negligence as constitutes an independent tort.”).
2. Whether NRMC’s Claims Arising Out of Conduct Occurring Before
February 12, 2006 Have Been Waived and/or Barred by the Statute of
Limitations
Next, the Defendants ask the Court to limit NRMC’s ability to
recover damages to the events occurring after February 12, 2006.8
7
This is the authority for the A.G. Office’s opinion that
clauses which purport to limit liability for intentional or
reckless conduct are void as a matter of public policy. See Davis
Op., 1993 WL 669150.
8
The Defendants rightly indicate that February 12, 2006, is
the date before which the claims would be barred, since NRMC filed
bankruptcy on February 12, 2009, which tolled the limitations
period. Young v. United States, 535 U.S. 43 (2002). NRMC filed suit
in December 2009.
22
They offer three reasons in support. First, they claim that the
Complaint is focused on events occurring just prior to September
30, 2006, and therefore any damages related to events occurring
before that time are not recoverable. Secondly, they argue each of
NRMC’s claims are subject to a three-year statute of limitations
and are therefore barred. Finally, they suggest that NRMC waived
the right to bring a cause of action related to Quorum’s pre-2005
conduct because the Board knew of the hospital’s deteriorating
financial condition but chose not to terminate the Management
Agreement. The Court will address these arguments in turn.
A. Whether the Complaint Asserts Facts Sufficient to Recover
the Damages Outlined in the Report of Scott K. Phillips
In support of its damages claim, NRMC produced a report from
its expert Scott Phillips, wherein he opines that NRMC incurred
damages as far back as the fiscal year beginning October 1, 2001.
The Defendants argue that the Complaint focuses almost exclusively
on events occurring between 2006 and 2007–the period during which
Defendants
Wessleman
and
Anderson
were
actively
running
the
hospital. NRMC retorts that, under the federal notice-pleading
standard, it pled sufficient facts to allow the recovery of damages
outlined in Phillips’s report.
Federal
Rule
of
Civil
Procedure
8
does not
require
the
plaintiff to “plead in his complaint every date, person, event and
other fact that must be proved to obtain a favorable judgment.”
Williams v. Louisiana State Univ. Health Sci., 2012 WL 444006, at
23
*1 (W.D. La. Jan. 12, 2012). Instead, it “requires only a short and
plain statement of the claim showing that the pleader is entitled
to relief. Specific facts are not necessary; the statement need
only give the defendant fair notice of what the . . . claim is and
the grounds upon which it rests.” See Erickson v. Pardus, 551 U.S.
89, 93 (2007) (internal quotations marks and citations omitted).
While the majority of the allegations in the Complaint do center
around events occurring in 2006 and 2007, the facts pled thereto
often refer specifically to pre-2006 conduct. For example, the
Complaint alleges that in 2005 Quorum’s off-site review of NRMC’s
fiscal
state
revealed
its
on-site
management
failed
to
appropriately monitor stale managed-care contracts. Complaint ¶ 77.
The Complaint further alleges that the hospital was overstaffed as
early as 2003 and claims that it was under-billing as early as
2001. Id. ¶ 80. The Court finds that these facts are sufficient to
give the Defendants fair notice that the damages NRMC seeks are not
limited strictly to events occurring after 2006.
B. Whether Any of NRMC’s Claims Are Subject to Mississippi’s
Three-Year Statute of Limitations
Next, the Defendants maintain that the damages recoverable for
each
of
the
counts
listed
in
the
Complaint
are
limited
by
Mississippi’s three-year general statute of limitations. See Miss.
Code Ann. § 15-1-49; see also Rankin v. Am. Gen. Fin., Inc., 912
So. 2d 725, 726 (Miss. 2005) (holding that claims for breach of
fiduciary duty, breach of implied covenant of good faith and fair
24
dealing, negligent misrepresentation, fraudulent misrepresentation,
and
negligence
are
subject
to
Miss.
Code
Ann.
§
15-1-49);
CitiFinancial Mortg. Co., Inc. v. Washington, 967 So. 2d 16, 19
(Miss. 2007) (finding the plaintiff’s breach of contract claim
subject to the three-year statute of limitations). In support of
this argument, the Defendants acknowledge, in a lengthy footnote,
that this Court has once rejected the notion that the statute of
limitations
can
run
against
any
subdivision
or
municipal
corporation of the State of Mississippi, see Aug. 20, 2010 Order;
therefore, they refashion their earlier position into a relatively
novel constitutional argument.
The Defendants argue that the Mississippi Supreme Court in
University of Mississippi Medical Center v. Robinson held that a
defendant has a vested right in a statute of limitations bar once
the statutory time period has run in its favor. 876 So. 2d 337
(Miss. 2004). While that is the holding in Robinson, the Court
finds no merit in the assertion that the Defendants have a vested
right in a statute of limitations defense. As stated in the August
20, 2010 Order, Section 104 of Article 4 of the Mississippi
Constitution expressly states that “statutes of limitations in
civil causes shall not run against the state, or any subdivision or
municipal corporation thereof.” (emphasis added); see also, Miss.
Code. Ann. 15-1-51 (codifying this protection). It is undisputed
25
that municipal hospitals, like NRMC, fall within this protection.9
Parish v. Frazier, 195 F. 3d 761, 764 (5th Cir. 1999); Enroth v.
Memorial Hosp. at Gulfport, 566 So. 2d 202, 206 (Miss. 1990). By
the express language of the Mississippi Constitution, no right
vested or could vest in the Defendants because the statute did not
run and could not run in their favor.10 Therefore, the Court
declines the Defendants’ invitation to declare Miss. Code Ann. §
15-1-49 unconstitutional because it deprives them of a vested right
without due process of law and elects not to certify this issue to
the Fifth Circuit, as the Defendants request in a footnote. The
Court finds that Mississippi’s three-year statute of limitations
cannot run against NRMC and therefore does not limit NRMC’s actions
occurring before February 12, 2006.
Moreover, even if statutes of limitation could run against
NRMC, the Defendants would not be entitled to summary judgment on
this issue. Mississippi has adopted the discovery rule, which
provides that the statutes of limitation begin to run only when the
plaintiff
discovers
or
should
have
discovered
the
alleged
9
To the extent that the Defendants argue that NRMC is not
entitled to the protections of Miss. Code. Ann. 15-1-51 because it
is engaged in a proprietary as opposed to governmental function, as
discussed above, the Mississippi Supreme Court has unequivocally
held that providing for the public’s health is an important
governmental function.
10
The Defendants’ attempt to distinguish their argument from
the one presented in Murphree v. Aberdeen-Monroe Cnty. Hosp., 671
So. 2d 1300 (Miss. 1996) based on their strained interpretation of
Robinson is unconvincing.
26
misconduct. Donald v. Amoco Production Co., 735 So. 2d 161, 166
(Miss. 1999). The fact that NRMC was aware of its precarious fiscal
state does not, as the Defendants argue, indicate that NRMC was
aware of any misconduct. The statute of limitation would begin to
run, if it could run, only when NRMC discovered or should have
discovered that the Defendants purportedly caused their financial
decline. There is a significant dispute in the record as to when
such knowledge was or should have been gained, and therefore a
disputed issue of material fact appropriate for presentation to the
fact-finder. To be clear, however, this is not an issue at trial
because the Court finds that the statute of limitations defense is
inapplicable in the present suit.
C. Whether NRMC Waived Its Right to Bring Any Cause of Action
Arising Out of Events Occurring Before 2005
Finally, with respect to their waiver-and/or-barred arguments,
the Defendants assert that NRMC waived any cause of action it might
have had against them by renewing the Management Agreement each
year between 2002-2005 because NRMC knew that the hospital’s
financial condition was slowly deteriorating. Specifically, on
January 17, 2006, an independent auditor prepared and issued to the
Board an Audit Report/Financial Statement for Fiscal Year 2005,
which indicated that NRMC incurred net losses of over $5.3 million
between 2001 and 2005. Shortly after receiving this information,
the Board inquired about the advantages and disadvantages of filing
bankruptcy but chose to carry on “business as usual” with Quorum.
27
The Defendants argue that the Board’s decision to continue to do
business with Quorum constituted a waiver of any claims it may have
had arising out of this time period. NRMC counters that it did not
intentionally waive any claims because it did not and could not
have known about the Defendants’ misconduct.
Under Mississippi law, “to establish waiver, a movant must
show
an
act
or
omission
which
evidences
an
intentional
and
voluntary surrender of a right.” Hauer v. Am. Pub. Life Ins. Co.,
2007 WL 892447, at *3 (S.D. Miss. Mar. 21, 2007) (citing Brent
Towing Co., Inc. v. Scott Petroleum Corp., 735 So. 2d 355, 359-60
(Miss.
1999)).
Similar
to
the
analysis
above
regarding
the
discovery rule, the Court finds that there is not enough evidence
to suggest that NRMC was aware or should have been aware that the
Defendants committed any misconduct. There is no question that
NRMC’s Board was well aware that the hospital was financially
backsliding. It does not follow, however, that NRMC’s Board knew or
should have known that the Defendants, as they allege in the
Complaint, caused this decline, especially since NRMC avers that
the Defendants often represented to the Board that the hospital’s
financial state was a consequence of factors outside of their
control. The Court cannot conclude that the evidence in this record
clearly demonstrates an “intentional and voluntary surrender of a
right,” and therefore finds that summary judgment is not warranted
as to this argument. See Brent, 735 So. 2d at 359-60.
28
3. Whether the Defendants Owed a Fiduciary Duty to NRMC (Count One
of the Complaint)
Next, the Defendants contend that they owe no fiduciary duty
to NRMC and thus are entitled to summary judgment on this claim.
The Court previously rejected this argument, which was raised in
their Motion to Dismiss. See Aug. 20, 2010 Order at 10-12. Now, the
Defendants maintain that additional facts uncovered during the
course of discovery should alter the Court’s earlier conclusion.
NRMC
challenges
this
characterization,
pointing
out
that
the
Defendants do not present any new evidence in support of their
claim and do little more than rehash the arguments this Court has
already repudiated. This Court agrees with NRMC. Not only did the
Defendants not present any new evidence in support of this claim,
they present no evidence, relying entirely on their interpretation
of the Management Agreement. For this reason, the Court need not
review the relevant case law or rearticluate the reasons why a
fiduciary duty exists, which can be found in the August 20, 2010
Order.
Briefly addressing the Defendants’ new argument, the Court
recognizes
that
the
Board
maintained
important
authority
and
control over NRMC’s operations. Even so, Wesselman and Anderson, as
the CFO and CEO of NRMC, simply by virtue of their positions also
maintained a significant level of control over NRMC. See, e.g.,
Derouen v. Murray, 604 So. 2d 1086, 1092 (Miss. 1992). This fact,
taken together with the other three factors which unquestionably
29
weigh in favor of finding that a fiduciary relationship existed,
compel this Court to conclude that a fiduciary relationship between
NRMC and the Defendants did in fact exist. See Booker v. Am. Gen.
Life and Accident Ins. Co., 257 F. Supp. 2d 850, 860 (S.D. Miss.
2003) (citing Univ. Nursing Assocs., PLLC v. Phillips, 842 So. 2d
1270, 1274 (Miss. 2003)).11
4. Whether There is a Genuine Issue of Fact to Support NRMC’s
Claims of Fraud and Negligent Misrepresentation (Counts Five and
Six of the Complaint)
The Defendants maintain that the claims of fraud and negligent
misrepresentation hinge on allegations in the Complaint arising out
of the Defendants’ alleged misrepresentations to the Board between
September 2006 and February 2008. As to the fraud claim, the
Defendants argue that NRMC cannot show by clear and convincing
evidence that they (1) knew the financial statements provided to
the Board during that period were false, (2) intended to mislead
the Board with the alleged misrepresentations, and (3) induced the
Board to rely on the misstatements. See Levens v. Campbell, 733 So.
11
To the extent that the Defendants maintain that Quorum had
a lesser degree of control than Wesselman and Anderson over
hospital operations and therefore did not have a fiduciary
relationship with NRMC, the Court notes that the other three
factors indicate a fiduciary relationship. Quorum acted for its own
benefit and for the benefit of the hospital; it shared a common
interest with NRMC and profited from the hospital’s success; and
NRMC and Quorum reposed trust in one another. Robley v. Blue
Cross/Blue Shield of Miss., 935 So. 2d 990, 995 (Miss. 2006).
Moreover, Quorum agreed to act as NRMC’s agent, which also
established fiduciary duties. See Van Zandt v. Van Zandt, 86 So. 2d
466, 469 (Miss. 1956).
30
2d 753, 761-62 (Miss. 1999) (listing all nine elements of a fraud
claim). With respect to the negligent misrepresentation claim, the
Defendants contend that NRMC cannot show reliance on any of the
alleged negligent misrepresentations, and even if they could, they
cannot be liable for any misrepresentations that should have been
obvious to or known by NRMC. Travelers Cas. & Sur. Co. of America,
542 F.3d at 483. NRMC responds that there is direct evidence to
contradict the Defendants’ assertion that the Board did not rely on
the
Defendants’
misstatements
and
circumstantial
evidence
to
indicate that the Defendants were aware of the falsity of their
statements and intended to mislead the Board.
As an initial matter, the Court agrees with NRMC that there is
enough evidence in the record to at least create a genunine issue
of material fact as to whether the Board relied on statements
produced by the Defendants. See, e.g, Godfrey Depo. at 22; Bland
Depo. at 63; Ernst Depo. at 39, 52, 68. The fact that some members
of the Board maintained doubts as to the accuracy of the financial
information provided, or distrusted Anderson, does not mean that
they knew or should have known of any alleged misrepresentations.
See Bland Depo. at 202; Ernst Depo. at 40. The Court, at this
point, cannot tell from the record if any of the Board members were
aware of any specific misrepresentations made by the Defendants.
Accordingly, the Court denies the Defendants’ Motion with respect
to NRMC’s negligent misrepresentation claim.
31
The more difficult question is whether there is circumstantial
evidence in the record indicating that the Defendants were aware of
the falsity of the statements and intended to mislead the Board
with
such
representations.
NRMC
avers
that
both
direct
and
circumstantial evidence exist, yet NRMC chooses not to identify
where any of this direct or circumstantial evidence can be found in
the record. The Court, however, having recently heard the live
testimony of Scott Phillips during the June 20 Daubert hearing, is
aware
that
he
is
of
the
opinion
that
Quorum
knew
of
and
intentionally overstated the reported value of net patient accounts
receivable on the balance sheet. See Phillips Report at 43-46. He
reached this conclusion based on the lack of any evidence to
substantiate the reported value of self-pay patient accounts. See
id. Questions of intent are always difficult to decipher, and where
some circumstantial evidence exists to support a claim, summary
judgment is improper. Jones v. Borden Co., 430 F.2d 568, 574 (5th
Cir. 1970). Accordingly, the Court will deny the Defendants summary
judgment on NRMC’s fraud claim.
5. Whether Quorum is Entitled to Summary Judgment as to NRMC’s
Aiding and Abetting Claim (Count Seven of the Complaint)
Count Seven of the Complaint alleges that Quorum should be
liable for aiding and abetting Anderson’s and Wesselman’s alleged
breach of fiduciary duties. The Defendants contend that, to the
extent that Mississippi recognizes the independent tort of aiding
and abetting, the claim is not proper against Quorum because
32
Anderson and Wesselman were its employees and thus it cannot aid
and abet itself.12 See Gallagher Bassett Servs., Inc. v. Jeffcoat,
887 So. 2d 777, 786 (Miss. 2004) (“Under Mississippi law, [a]
conspiracy
is
a
combination
of
persons
for
the
purpose
of
accomplishing an unlawful purpose or a lawful purpose unlawfully.”
(emphasis added) (internal quotation marks and citations omitted)).
NRMC counters that the Defendants’ civil-conspiracy argument is a
misapplication of the “general rule that the acts of the agent are
the acts of a corporation.” Frye v. Am. Gen. Fin., Inc., 307 F.
Supp. 836, 843 (Miss. 2004) (citations omitted).
As a practical matter, the positions NRMC takes with respect
to this claim and its breach of fiduciary claim are difficult to
reconcile, but they are not incompatible. First, NRMC claims that
Quorum owed fiduciary duties to NRMC, in part, by virtue of its
employment of Wesselman and Anderson. For instance, it argues that
Quorum is liable for the acts of Wesselman and Anderson under the
doctrine of respondeat superior. Billups Petroleum Co. v. Hardin’s
Bakeries Corp., 63 So. 2d 543, 546 (1953). In order to support its
aiding and abetting claim, NRMC argues that Wesselman and Anderson
may not have been acting as employees for Quorum inasmuch as the
motivations for breaching their fiduciary duties were for their own
12
Quorum does not dispute this Court’s holding in Dale v.
Alabama Acquisitions, Inc. that the Mississippi Supreme Court would
recognize an independent tort for aiding and abetting fraud. 203 F.
Supp. 2d 694, 700-01 (S.D. Miss. 2002).
33
personal profit. See Saucier v. Coldwell Banker JME Realty, 644 F.
Supp. 2d 769, 784 (S.D. Miss. 2007). It cites a number of examples
in the record where Wesselman and/or Anderson’s legal interests may
have diverged from those of Quorum. See NRMC’s Summ. J. Memo. at
30.
Based on the record before it, the Court finds that granting
summary judgment in favor of the Defendants on this issue would be
premature. The Defendants moved for summary judgment on this issue
based purely on a legal argument, and after considering the cases
cited by the Parties, the Court finds NRMC’s argument, at least in
theory,
persuasive.
Moreover,
NRMC
presented
the
Court
with
instances, taken from the record, of how Wesselman and Anderson, at
some time relevant to the present case, might have acted with
interests divergent from Quorum’s. But the Court fully recognizes
that, in the end, NRMC cannot have it both ways. If the evidence
presented at trial shows that Wesselman and Anderson were acting at
all times on behalf of Quorum, and therefore that Quorum could be
liable for their actions under the doctrine of respondeat superior,
then the Court will grant judgment as a matter of law to Quorum on
NRMC’s aiding and abetting fraud claim.
6. Whether NRMC Can Recover Its Payments to Quorum Under
Mississippi’s Version of the Uniform Fraudulent Transfer Act (Count
Eight of the Complaint)
In
Count
Eight
of
the
Complaint,
NRMC
attempts
to
use
Mississippi’s version of the Uniform Fraudulent Transfer Act (UFTA)
34
to recover payments made to Quorum pursuant to the Management
Agreement. The Defendants counter that NRMC misunderstands and
misapplies the UFTA. In an attempt to convey the ridiculousness of
NRMC’s argument, the Defendants call it the “Coca-Cola Taste
Infringement” argument,13 suggesting that for NRMC to recover as the
creditor, ultimately, it would have to sue itself–the debtor.
Further, the Defendants argue that even if NRMC could sue itself,
it cannot establish any of the fourteen factors necessary to show
that
the
transfers
circumvent
the
were
indeed
traditional
fraudulent.
debtor-creditor
NRMC
attempts
distinction
in
to
the
statute by claiming that, because it is a Chapter 9 Bankruptcy
debtor, it may stand in the shoes of a creditor in order to avoid
fraudulent transfers. As NRMC would have it, by virtue of its
standing in bankruptcy, it can become a creditor under the UFTA in
order to recover from Quorum.
While NRMC’s argument is a creative one, the Court finds that
it lacks merit. As the Defendants point out in rebuttal, there is
no authority for the proposition that 11 U.S.C. § 544(b)(1) is
applicable to Miss. Code Ann. § 15-3-1-1, et seq., and the Court
finds
that
its
novel
application
in
this
context
would
be
misguided. For instance, even if NRMC could apply the “strong-arm”
13
The reference is to the Coca-Cola Company’s widelydistributed commercials in which executives of the Coke brand
threaten to sue the purveyors of Coke Zero (Coca-Cola) for “taste
infringement.” See Stuart Elliot, Can’t Tell Your Cokes Apart? Sue
Someone, New York Times, Mar. 5, 2007, at C (2007 WLNR 4161486).
35
provision of the Bankruptcy Code to somehow become a “creditor” for
the purposes of Mississippi’s UFTA, the Court sees no conceivable
way the wording of the UFTA can be construed to make Quorum–the
party from which NRMC is attempting to recover–the “debtor.” Under
NRMC’s interpretation of the statute, the Defendants are right
about their “taste infringement” argument–for NRMC to recover for
transfers incurred “by the debtor,” it would have to sue itself.
See Miss. Code Ann. § 15-3-107. Accordingly, NRMC’s UFTA claim
against Quorum will be dismissed with prejudice.
7. Whether NRMC Can Recover for the Independent Tort of “Corporate
Waste” (Count Nine of the Complaint)
Finally, as to Count Nine of the Complaint, the Defendants
argue that Mississippi courts have never recognized the stand-alone
tort of corporate waste, and even if they had, NRMC has not alleged
facts sufficient to sustain a claim for corporate waste. After
reviewing the four cases cited by the Defendants, only two, the
Ohio bankruptcy case and the Delaware case, formally recognize the
propriety of pleading “corporate waste” as a separate claim. In re
Amcast Indus. Corp., 365 B.R. 91 (Bankr. S.D. Ohio 2007); Michelson
v. Duncan, 407 A.2d 211 (Del. 1979). Of those two, one court
expressly questioned whether a claim for corporate waste can be
distinguished from a breach of fiduciary duty claim. In re Amcast
Indus. Corp., 365 B.R. at 114 n.15. No court has directly addressed
whether a stand-alone tort claim exists under Mississippi law,
although a “corporate waste” claim appears to have been pled in one
36
case without success. Worldwide Forest Products, Inc. v. Winston
Holding Co., 1999 WL 33537093, at *18 (N.D. Miss. Jan. 13, 1999).
In that case, the district court did not appear to recognize the
claim as a stand-alone claim, viewing the phrase “corporate waste”
to be subsumed by the plaintiff’s breach of duty claim. Worldwide
Forest Products, Inc., 1999 WL 33537093, at *12, *18.14
In Delaware, to establish a stand-alone corporate waste claim,
“a [p]laintiff must show ‘an exchange of corporate assets for
consideration so disproportionately small as to lie beyond the
range at which any reasonable person might be willing to trade.’”
In re Appleseed’s Intermediate Holdings, LLC, 470 B.R. 289, (Bankr.
D. Del. 2012) (quoting Weiss v. Swanson, 948 A.2d 433, 450 (Del.
Ch. 2008)). In other words, a plaintiff must show something more
than the vague accusations that the defendants “wasted assets” or
were “fiscally irresponsible.” See Complaint ¶ 177. In this case,
NRMC has failed to argue that the Defendants exchanged corporate
assets for a disproportionately small consideration and has also
failed to indicate which facts in the record support this claim.
The Court chooses not to determine one way or another whether
14
In Worldwide Forest Products, the district court stated,
“[the defendant] may be held liable to the shareholders of the
corporation for breach of that duty and mismanagement of the
corporation’s business or waste of corporate assets if the proof
supports such a claim.” Id. at *12 (emphasis added). NRMC’s
omission of the phrase “breach of duty” in its citation of this
sentence indicates the shaky ground about upon which NRMC bases
this claim.
37
Mississippi
recognizes
a
separate
“corporate
waste”
claim,
particularly of the variety articulated by the Delaware courts, but
dismisses
with
prejudice
the
unique
“corporate
waste”
claim
espoused by NRMC as found in Count Nine of the Complaint.
III. Motions in Limine to Exclude Expert Testimony
The Court now turns to the three pending Motions to Exclude
[docket entry nos. 93, 94, & 97]. NRMC’s Motions to Exclude are
routine
and
will
be
quickly
addressed
below;
however,
the
Defendants’ Motion to Exclude the testimony of Scott Phillips
requires a more detailed analysis. Phillips’s testimony is critical
to NRMC’s ability to sustain certain of its alleged causes of
action and also forms the entire basis of its calculation of
damages. For this reason, the Court held a daylong Daubert hearing
in order to determine whether Phillips qualifies as an expert
pursuant to Federal Rule of Civil Procedure 702, and to further
inquire into the propriety of his methodology for calculating
damages, particularly, how he measured lost profits in this case.
At the hearing, the Court expressed its initial conclusion that
Phillips would indeed be allowed to testify, and that opinion has
not changed.
1. Motion to Exclude the Testimony of Scott Phillips
Scott Phillips is the founder, manager, and owner of HMP–the
company hired by NRMC to “turn around” the hospital following the
termination of its contract with Quorum. Phillips Report at 1.
38
Phillips served as the Chief Restructuring Officer (CRO) of the
hospital and was instrumental in NRMC’s decision to file for
bankruptcy. Phillips acted as NRMC’s CRO until March 2009. NRMC
filed the present suit against Quorum on December 7, 2009, and HMP
ceased daily operations at NRMC in January 2010.15 Buchanan Depo.
at 136. NRMC offers Phillips as its primary expert regarding
Quorum’s alleged fraudulent accounting practices and the profits
lost by NRMC as a result of the Defendants’ mismanagement. As to
his qualifications, Phillips has a background in accounting, spent
thirty-five years in the healthcare industry, and has supervised
numerous audits of healthcare providers and payors, including
hospitals. Phillips Report at 1-2 & Ex. 23. Furthermore, he has
acted as CEO, COO, CFO, and CRO for numerous hospitals and other
healthcare companies. Id. Phillips, however, does not hold an
active CPA license.
In their Motion to Exclude, the Defendants break down their
15
The Defendants imply that the overlap between Phillips’s
company and NRMC’s law suit renders him unduly prejudiced. In this
case Phillips’s potential for bias is best addressed during crossexamination. He should not be excluded based on his potential bias.
Brawhaw v. Mariner Health Care, Inc., 2008 WL 2004707, at *5 (N.D.
Miss. May 8, 2008) (“[T]he court’s primary duty in its gate-keeping
function is to determine whether the witness is qualified and
whether his opinions are relevant and reliable, not whether the
witness has a personal bias. . . . [T]he defendants are free to
bring out any alleged personal bias during cross examination.”);
Cruz-Vazquez v. Mennonite Gen. Hosp., Inc., 613 F.3d 54, 59 (1st
Cir. 2010) (holding that the district court abused its discretion
by excluding expert testimony “due to its own determination that
[the expert] would be a biased witness”).
39
objections to Phillips’s testimony into three broad categories: (A)
his
testimony
based
on
his
accounting
knowledge,
(B)
his
methodology regarding the calculation of damages, and (C) his legal
or
factual
conclusions.
gate-keepers
“Under
Daubert,
the
admission
overseeing
non-scientific
expert
testimony.”
trial
Burleson
of
v.
courts
act
scientific
Tex.
Dept.
as
and
of
Criminal Justice, 393 F.3d 577, 583 (5th Cir. 2004) (quoting Kumho
Tire Co. v. Carmichael, 526 U.S. 137, 147 (1999)). The analysis to
be undertaken in determining an expert’s reliability is a flexible
one and depends on the facts and circumstances of each case. Kumho,
526 U.S. at 150 (citing Daubert v. Merrell Dow Pharm., Inc., 509
U.S. 579, 594 (1993)). The Court should endeavor to ascertain
whether an expert, based on professional or personal experience,
applies the same level of “intellectual rigor” characterizing the
practice of an expert in the relevant field. Id.
A. Knowledge of Accounting
Phillips produced a lengthy Rule 26 report wherein he offers
his
opinion
leadership
that
and
the
hospital
outlines
was
numerous
mismanaged
specific
under
Quorum’s
instances
of
mismanagement. In reaching this opinion, he refers to specific
errors in the financial statements submitted to the NRMC Board. One
such statement is: “Defendants Wesselman and Anderson . . . caused
the preparation and distribution . . . of interim and full year
financial statements which consistently and materially overstated
40
the reported value of net patient accounts receivable on the
statements of financial condition (balance sheet) of the hospital.”
Phillips Report at 31. The Defendants object to this and other
similar statements because Phillips lacks an active CPA licence and
is not certified as a “forensic accountant” as defined by the
American Institute of Certified Public Accountants (AICPA).
The
Defendants’
argument
is
misguided.
Daubert
demands
reliability, not evidence of certification, and if nothing else,
experience indicates that the fact that someone holds a degree or
licence does not ipso facto indicate that he or she possesses
reliable knowledge. See Tuf Racing Prod., Inc. V. American Suzuki
Motor Corp., 223 F.3d 585, 591 (7th Cir. 2000) (calling this notion
“radically unsound”). Federal Rule of Civil Procedure 702 does not
impose the extra requirement of certification; rather it provides
that an expert should have specialized knowledge and anchor his
opinion on reliable principles or methods. Thus, the Defendants’
discussions of “forensic accounting” and certification by the AICPA
have no bearing on the reliability of Phillips’s knowledge or
methods. What matters to this Court is simply that he has the
requisite knowledge and used reliable methods in arriving at his
expert opinion.
At
the
hearing,
the
Court
paid
particular
attention
to
Phillip’s ability to testify about general accounting practices and
concludes
that
he
possesses
the
41
professional
experience
and
personal knowledge necessary to render reliable opinions regarding
hospital administration and finance, which requires a knowledge of
general accounting principles. See Phillips Report at 2. Phillips
apprised the Court of his distinguished accounting background and
explained how this background supports his expertise in hospital
management. For instance, Phillips explained that a hospital CEO is
routinely
asked to
sign
off
on the
hospital’s
audits, which
requires the CEO to aver that the audit was completed in compliance
with general accounting principles. Given Phillips’s knowledge of
and background in accounting, he may render testimony regarding his
interpretation
of
the
hospital’s
finances
and
balance
sheet,
including his opinion as to whether NRMC’s finance statements
comported with generally accepted accounting principles.
B. Calculation of Damages
The
Defendants
next
argue
that
the
methodology
used
by
Phillips in his damage calculations does not meet the threshold
level of reliability required by Daubert. The Mississippi Court of
Appeals case Benchmark Health Care Center, Inc. v. Cain provides a
succinct
overview
of
the
recoverability
of
lost
profits
Mississippi:
In Mississippi, a party may recover for loss of future
profits in a breach of contract action so long as such
profits are proved to a reasonable certainty and not
based on mere speculation or conjecture. The rule that
uncertain damages cannot be recovered applies only to the
nature, not the extent, of the damages. If the nature of
the damages is certain but the extent is uncertain,
recovery is not prevented. In Cain v. Mid-South Pump Co.,
42
in
the Mississippi
stating:
Supreme
Court
addressed
this
rule
[W]here it is reasonably certain that damage has
resulted, mere uncertainty as to the amount will
not preclude the right of recovery or prevent a
jury decision awarding damages. This view has been
sustained where, from the nature of the case, the
extent of the injury and the amount of damage are
not capable of exact and accurate proof. Under such
circumstances, all that can be required is that the
evidence-with such certainty as the nature of the
particular case may permit-lay a foundation which
will enable the trier of fact to make a fair and
reasonable estimate of the amount of damage. The
plaintiff will not be denied a substantial recovery
if he has produced the best evidence available and
it is sufficient to afford a reasonable basis for
estimating his loss.
The supreme court further provided that when a plaintiff
has suffered monetary damage and has produced the best
evidence available to him, he should not be denied
recovery simply because the amount of damages cannot be
ascertained with the same precision as an ordinary claim
for damages.
912
So.
2d
Therefore,
175
the
(Miss.
only
App.
rule
Ct.
in
2005)
(citations
Mississippi
with
omitted).
regard
to
demonstrating lost profits is simply that they must be proved with
reasonable certainty.
As
an
initial
matter,
the
present
dispute
over
whether
Phillips employed the proper methodology goes to the extent of the
damages, not their nature. That is, the Defendants do not appear to
challenge that NRMC could have suffered damages in the form of lost
profits if NRMC prevails on the merits of one or more of its
43
claims.16 Instead, the Defendants contest the amount of NRMC’s
damages,
arguing
that
Phillips’
lost-profits
valuation
is
speculative and improper. See, Tillet Report at 26 (estimating a
much
lower
lost-profits
damage
amount
than
what
Phillips
estimates). Thus, the question here is not whether damages for lost
profits are proper, but whether the amount of lost profits to which
Phillips contends NRMC is entitled is founded on a judiciallyrecognized methodology.
Turning
to
Phillips’s
methodology,
no
Mississippi
case
prescribes (or proscribes) a particular method for determining what
damages are reasonably certain. Applying Texas law, the Fifth
Circuit has stated, however, that there are two basic methods for
proving lost profits: (1) the before-and-after approach, and (2)
the yardstick approach. See Lehrman v. Gulf Oil Corp., 500 F.2d
659, 668 (5th Cir. 1974). The before-and-after approach compares a
business’s past profitability with its profitability after the
damaging incident, and the yardstick approach compares one business
to another similarly-situated business. Mississippi has expressly
sanctioned the before-and-after approach, see Warren v. Derivaux,
996 So. 2d 729, 737 (Miss. 2008), but no Mississippi court has
recognized the use of the yardstick approach to determine lost
profits. The yardstick approach, however, does not appear to be
16
Of course, this conclusion does not discount the Defendants’
position that lost profits are consequential damages barred by the
limitation of liability clause.
44
foreclosed by Mississippi law, as the only rule is that damages
must be proved with reasonable certainty.
The yardstick approach has been used when a business has no
track record. G.M. Brod & Co., Inc. v. U.S. Home Corp., 759 F.2d
1526, 1538 (11th Cir. 1985). In this case, Scott Phillips testified
that he did not have reliable records of NRMC’s pre-2001 finances
and chose to calculate damages by comparing NRMC’s profitability
with the profitability of another privately-owned, Natchez-based
hospital, Natchez Community Hospital.17 At the hearing, he provided
the Court legitimate reasons for doing so. He explained that the
hospitals
provided
the
same
basic
services–although
this
is
factually in dispute–and could have charged the same basic rates
for those services. He claimed that NRMC’s participation in the
Mississippi
Public
significantly
Employee
impact
the
Retirement
hospital’s
System
(PERS)
profitability.
did
He
not
also
suggested that the difference between a not-for-profit hospital and
a for-profit hospital should not affect the hospital’s net income.
Finally, he explained why he thought two publically-owned hospitals
nearby, King’s Daughters Hospital and Mississippi Medical Center,
17
Scott Phillips’s report uses two alternative methods to
calculate damages: (1) Lost Profit Opportunity Methodology, and (2)
Lost Revenue and Excess Cost Methodology. Both methods relied on
the yardstick approach, i.e., both models rely on Natchez Community
as a so-called “comparable.” The Lost Profits Methodology compares
the two hospitals’ profit margins; the Lost Revenue and Excess Cost
Methodology compares revenue on a “per-bed” basis and also accounts
for a variety of other factors.
45
were not suitable for comparison.
After considering Phillips’s testimony, the Court sees no
reason to discount the yardstick approach because Scott Phillips
did not compare Natchez Regional to another similarly-situated
public hospital. It is difficult to tell whether a different
hospital
would
be
a
better
“comparable,”
particularly
after
considering the Rule 26 report of the Defendants’ expert witness,
J.W. Tillet; however, Scott Phillips will be allowed to explain how
NRMC and Natchez Community Hospital are similar and how he accounts
for the differences. The appropriate level of damages is an issue
to be presented to the finder of fact, and thus, the fact-finder
should
determine
the
appropriate
yardstick
after
hearing
the
testimony of the experts. See, Cummins v. BIC USA, Inc., 2011 WL
2633959, at *6 (W.D. Ky. July 5, 2011) (denying a motion to exclude
expert testimony over a dispute about an expert’s use of comparable
hospitals); Cooper v. Pacific Life Ins. Co., 2007 WL 430693, at *1
(S.D. Ga. Feb. 6, 2007) (denying motion to exclude expert testimony
regarding the reasonableness of the costs of variable annuity
contracts based on a comparison of the annuities with mutual funds,
where the motion was based on an argument that the expert’s
comparison was not “apples-to-apples”); EEOC v. Morgan Stanley &
Co., 324 F. Supp. 2d 451, 468-69 (S.D.N.Y. 2004) (denying motion to
exclude expert testimony concerning lost earnings because the
expert did not use appropriate comparables).
46
C. Legal or Factual Conclusions
Finally, the Defendants object to “six narrative opinions”
which
they
believe
are
factually
or
legally
conclusory.
For
example, the Defendants take issue with Phillips’s statement that
“Defendants Wesselman and Anderson, during the term of their
assignment at the Medical Center, failed at the most fundamental
level to provide appropriate and effective executive management and
leadership to the Hospital consistent with ordinary professional
standards and [Quorum’s] management agreement with NRMC.” Phillips
Report at 5. The Defendants characterize this and other such
statements as “analytically-naked,” “broadly-brushed,” “haphazard,”
“legally conclusory,” “post-hoc” conclusions. If the Defendants
disagree with Phillips’s conclusions, the proper way for the
Defendants to expose his “analytically-naked” methodology is by
challenging it with testimony from their own expert witnesses. See
Daubert, 509 U.S. at 596 (“Vigorous cross-examination, presentation
of contrary evidence, and careful instruction on the burden of
proof are the traditional and appropriate means of attacking shaky
but admissible evidence.”). Phillips possesses sufficient knowledge
and experience to render such conclusions and supports his opinions
with factual data. Having been recognized as an expert by this
Court, he may render his expert opinions, which by their very
nature are “post-hoc” conclusions based on prior facts. See Fed. R.
Civ. P. 702.
47
2. Motion to Exclude the Testimony of J.W. Tillet
NRMC moves to exclude Defendants’ Expert J.W. Tillet on the
grounds that (1) he challenges Scott Phillips’s qualifications and
(2) impermissibly offered testimony regarding a balance sheet entry
without admissible evidence to support his testimony. Regarding
NRMC’s first contention, the Court, having found Scott Phillips
qualified to testify as an expert, concludes that Tillet may not
testify that Phillips is unqualified to give his opinion. In other
words, he cannot state that Phillips’s conclusions are flawed
because he lacks an active CPA licence, but he can of course
explain
why
he
believes
Phillips’s
interpretations
of
NRMC’s
finances are flawed, including Phillips’s purported failure to
apply the standards or guidelines of the AICPA, as long as those
references attack the substance of Phillips’s testimony.
As to the second issue, at the hearing, the Court briefly
addressed Tillet’s opinion that Anderson’s allegedly fictitious
July 2007 $50,000 accounting entry was actually based on a letter
from the State of Mississippi regarding the possibility of future
payments
victims–a
for
the
letter
hospital’s
that
was
treatment
not
produced
of
or
Hurricane
Katrina
authenticated
in
discovery. The Court informed the Defendants that Tillet will only
be allowed to testify about the letter being the basis for the
entry if they are able to produce and authenticate the letter. The
Defendants responded that they are working on authenticating the
48
letter. Accordingly, the Court will wait until trial to rule on
this issue. Tillet will not be allowed to testify that this letter
could have been the basis for Anderson’s accounting entry unless
the letter can be produced and properly authenticated at trial.
3. Motion to Exclude the Testimony of John Czarnetsky
NRMC’s Motion in Limine to Exclude the Testimony of John
Czarnetzky can be quickly addressed. Czarnetsky, a professor of
bankruptcy at the University of Mississippi School of Law, is
prepared to testify about the advantages and disadvantages of filing
bankruptcy and whether filing bankruptcy was a viable option for
NRMC in 2006. NRMC moves to exclude based on the irrelevancy of
Czarnetzky’s testimony. See Fed. R. Civ. P. 403. There is some
testimony in the record indicating that NRMC’s decision not to file
bankruptcy in 2006 and the advantages gained by declaring bankruptcy
in 2009 will be presented at trial. See Defs.’ Memo. in Resp. to
Mot. to Exclude at 6-9. The Court anticipates the pros and cons of
filing bankruptcy will become less relevant as the Parties begin to
present their cases at trial. However, in the event that bankruptcy
does
become
relevant
to
the
presentation
of
NRMC’s
or
the
Defendants’ case, it would be error not to allow Czarnetzky to
testify on the Defendants’ behalf as
Czarnetzky is qualified to
assist the fact-finder in understanding the evidence. Fed. R. Civ.
P. 702(a). Accordingly, this Motion will be deferred until such time
as the Court can fully weigh the relevancy of bankruptcy to the
49
claims or defenses presented at trial.
IV. Conclusion
Accordingly, IT IS HEREBY ORDERED that Defendants’ Motion for
Summary Judgment [docket entry no. 90] is GRANTED IN PART AND DENIED
IN PART. Plaintiff’s Fraudulent Transfer Act claim (Count Eight) and
Corporate Waste claim (Count Nine) are DISMISSED WITH PREJUDICE. IT
IS FURTHER ORDERED that Defendants’ Motion to Exclude [docket entry
no. 93] is DENIED. IT IS FURTHER ORDERED that Plaintiff’s Motion to
Exclude Portions of J.W. Tillett’s Expert Report [docket entry no.
97] is GRANTED IN PART AND DENIED IN PART. J.W. Tillett will be
allowed to testify in accordance with the Court’s instruction above.
IT IS FURTHER ORDERED that Plaintiff’s Motion in Limine to Exclude
Testimony of Expert Witness John Czarnetzky [docket entry no. 94]
is HELD IN ABEYANCE. The Court will reconsider this Motion at trial.
So ORDERED, this the 18th day of July, 2012.
/s/ David Bramlette
UNITED STATES DISTRICT JUDGE
50
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