In Re the Medical Center of Southeast Texas, LP D/B/A the Medical Center of Southeast Texas, Steward Health Care System LLC, and Steward Health Care Holdings LLC v. the State of Texas

• Court: Court of Appeals of Texas
• Decided: April 4, 2024
• Docket: 09-24-00034-CV
• Status: Published

Opinion

In The

Court of Appeals

Ninth District of Texas at Beaumont

__________________

NO. 09-24-00034-CV __________________

IN RE THE MEDICAL CENTER OF SOUTHEAST TEXAS, LP D/B/A THE MEDICAL CENTER OF SOUTHEAST TEXAS, STEWARD HEALTH CARE SYSTEM LLC, AND STEWARD HEALTH CARE HOLDINGS LLC

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Original Proceeding 58th District Court of Jefferson County, Texas Trial Cause No. 23DCCV1824 __________________________________________________________________

MEMORANDUM OPINION

The underlying matter involves a dispute over unpaid invoices. The invoices

pertain to services allegedly provided by HNI Physician Services of Texas, Inc., a

provider of healthcare professionals, and HNI MSO, Inc. (hereinafter collectively

HNI). HNI contends they provided healthcare professionals to The Medical Center

of Southeast Texas, LP d/b/a The Medical Center of Southeast Texas (hereinafter

The Medical Center), a hospital located in Port Arthur, Texas, and that they were not

paid. HNI contends that Steward Health Care System LLC and Steward Health Care

1 Holdings LLC (hereinafter collectively Steward), are “the parent companies” of The

Medical Center, and that Steward promised it would pay the outstanding invoices

owed by The Medical Center after Steward completed the sale of certain out-of-state

hospitals. In the trial court, the trial court ordered Relators, The Medical Center and

Steward, to produce documents relating to Steward’s sale of the out-of-state

hospitals to unrelated third parties. We stayed the contested portion of the trial

court’s order and obtained a response from the Real Parties in Interest, HNI.

Background

When the dispute arose, HNI MSO, Inc. was the exclusive provider of hospital

management services pursuant to a Management Agreement with The Medical

Center of Southeast Texas, LP, and HNI Physician Services of Texas, Inc. was the

hospital’s exclusive provider of hospitalist services pursuant to a Professional

Services Agreement with The Medical Center of Southeast Texas, LP. On October

9, 2023, The Medical Center gave notice of termination of the Professional Services

Agreement effective January 8, 2024. Eight days later, HNI gave notice of breach of

both the Professional Services Agreement and the Management Agreement and

demanded immediate payment of $484,297.17.

HNI filed the underlying lawsuit in December 2023, asserting claims against

The Medical Center and Steward for breach of the Professional Services Agreement

and the Management Agreement, unjust enrichment, fraud, and negligent

2 misrepresentation. HNI alleged that The Medical Center failed to provide 120 days’

notice of termination as required by the Professional Services Agreement. HNI

alleged that The Medical Center failed to pay invoices for services that were properly

provided and invoiced, and HNI estimated the total amount that would be owed

when the contracts terminated the following month would be $2,334,808.93. HNI

alleged that negotiations between HNI and Steward’s corporate representatives

began in January 2023 and continued until October 20, 2023. HNI alleged that

Steward’s representative promised a weekly payment plan and informed HNI that it

would fully catch up on The Medical Center’s payment obligations upon the pending

sale of several Steward-owned hospitals in Utah. HNI alleged that under the

arranged payment plan HNI received the initial payment of $800,000 and the first

two weekly installments of $500,000 and $400,000, but Steward underpaid

subsequent installments and then ceased making payments altogether until HNI sent

Steward a Notice of Delinquent Accounts on May 9, 2023. HNI alleged that in

August 2023 Steward’s corporate representatives participated in multiple telephone

calls regarding Steward’s progress on making two $550,000 payments, but HNI

received only $484,000 on September 18, 2023. HNI alleged that the following day,

Steward’s Regional President for Texas and Louisiana committed Steward to a

payment plan to include three weekly payments of $500,000 and a $4,000,000 lump

sum payment, which would be issued shortly after Steward closed on a new credit

3 facility on October 9, 2023. According to HNI, the Regional President “again

reiterated Steward’s promise to catch up on payments as soon as Steward closed on

pending asset sales[,]” but Steward made only two payments of $400,000 in

September 2023. According to HNI, “Steward went silent after receiving a Notice

of Breach on October 17, 2023.”

In its original petition, HNI requested a writ of attachment of unspecified

assets arguing that the defendants owe the plaintiffs for property obtained under false

pretenses. See Tex. Civ. Prac. & Rem. Code Ann. § 61.002(9). HNI asked the trial

court to order Steward to deposit funds into the registry of the court for two reasons:

(1) because ownership of funds received from third-party payors for services

provided by HNI is disputed; and (2) because Steward is overwhelmingly likely to

become insolvent due to numerous pending lawsuits filed by HNI and others against

Steward and its affiliates. HNI asked the trial court to issue an injunction under the

Texas Uniform Fraudulent Transfer Act because HNI has a claim against Steward,

Steward committed fraud by inducing HNI to continue providing services with no

intent to pay for those services, and Steward received substantial payments in

exchange for those services and subsequently Steward refused to pay HNI for those

same services while falsely claiming that HNI would be paid from proceeds of the

sale of Steward’s Utah hospitals.

4 Discovery Dispute

HNI requested expedited discovery to prepare for a temporary injunction

hearing. Relators objected to HNI’s request for expedited discovery because HNI

was merely speculating that Steward might be unable to pay a judgment which had

not even been issued. Relators argued HNI was not entitled to a temporary injunction

of expedited discovery for the following four reasons: (1) the harm is capable of

monetary valuation and may be remedied through money damages; (2) a writ of

attachment would be inappropriate because HNI provided only services and Relators

obtained no property from HNI; (3) ordering a deposit of funds into the registry of

the court is unwarranted because Steward owns the funds from the sale of the out-

of-state hospitals outright; and (4) HNI failed to allege that Relators committed a

transfer, fraudulent or not.

Relators also complained that HNI’s discovery requests are overly broad,

require production of documents and corporate-representative depositions of parties

with whom HNI has no relationship, and seek privileged and confidential investment

and financial documents. Relators also complained the financial records exchanged

between their subsidiaries are protected as trade secrets.

The trial court ordered Relators to produce: (1) “Contracts for the sale of

hospitals owned by Steward Health Care System, LLC, and/or Steward Health Care

Holdings, LLC, in the State of Utah, for the period January 1, 2023, through the

5 present[;]” (2) “Closing documents for the sale of hospitals owned by Steward

Health Care System, LLC, and/or Steward Health Care Holdings, LLC, in the State

of Utah, for the period January 1, 2023, through the present[;]” and (3) “Documents

reflecting the funds generated by the sale of hospitals owned by Steward Health Care

System, LLC, and/or Steward Health Care Holdings, LLC, in the State of Utah, for

the period January 1, 2023, through the present, including documents reflecting the

amount of funds obtained in connection with the sale and the disposition of those

funds (e.g., how those funds were allocated or otherwise used after closing).”1

Relators asked the trial court to reconsider its discovery order. In the motion

to reconsider, Relators asserted that the sales contracts, closing documents, and

documents reflecting the funds generated by the sales of the Utah hospitals are

confidential and sensitive documents regarding transactions between the alleged

debtor’s parent companies and wholly unrelated third parties and are irrelevant

because they have no bearing on the injunctive relief requested and no tendency to

make any fact related to HNI’s underlying claims more or less probable. Relators

noted that HNI had not alleged that a transfer occurred between The Medical Center

and the parent companies. Relators asserted that a confidentiality clause in the

purchase agreement required the terms and status of the purchase agreement and

1 Two additional production categories and an expedited discovery schedule were contained in the order but are not challenged in the mandamus petition. 6 other transaction documents, the contemplated transactions, and the identity of the

parties and guarantors remain confidential and not subject to disclosure except in an

action or proceeding brought by a party or guarantor in pursuit of its rights or in

exercise of its remedies under the purchase agreement. Relators argued Steward

could not disclose any of the confidential or sensitive information in the HNI lawsuit,

which does not assert rights or remedies under the Utah transactions. According to

Steward, these confidential and sensitive documents provide no information

regarding the merits of whether a writ of attachment should attach to any of

Steward’s assets or whether Steward should be ordered to place money into the

registry of the Court and would not provide evidence regarding an alleged fraudulent

transfer from The Medical Center to either parent company. The trial court denied

the motion to reconsider, and Relators sought mandamus relief in this Court.

Mandamus Standard

Generally, the trial court has discretion regarding the scope of discovery. In

re Colonial Pipeline Co., 968 S.W.2d 938, 941 (Tex. 1998) (orig. proceeding). If the

trial court commits a clear abuse of discretion and the relator lacks an adequate

remedy at law, however, the appellate court may grant mandamus relief to correct a

discovery order. Id. A trial court abuses its discretion when its ruling is so arbitrary

and unreasonable that it constitutes a clear and prejudicial error of law. In re CSX

Corp., 124 S.W.3d 149, 151 (Tex. 2003) (orig. proceeding). A trial court has no

7 discretion in determining what the law is or applying the law to the facts. Walker v.

Packer, 827 S.W.2d 833, 840 (Tex. 1992) (orig. proceeding). “Mandamus relief is

available when the trial court compels production beyond the permissible bounds of

discovery.” In re Weekley Homes, L.P., 295 S.W.3d 309, 322 (Tex. 2009) (orig.

proceeding). “If an appellate court cannot remedy a trial court’s discovery error, then

an adequate appellate remedy does not exist.” In re Dana Corp., 138 S.W.3d 298,

301 (Tex. 2004) (orig. proceeding). For instance, appeal is not an adequate remedy

when a discovery order compels a party to reveal privileged information or trade

secrets or when a discovery order compels the production of patently irrelevant

documents imposes a disproportionate burden on the producing party. In re Colonial

Pipeline Co., 968 S.W.2d at 941.

Abuse of Discretion

In the mandamus petition, Relators argue the trial court abused its discretion

by signing an order that requires them to produce “sensitive and confidential

information about transactions between wholly unrelated third parties and the

alleged debtor’s parent companies[.]” In response to the mandamus petition, HNI

argues the documents are relevant because in February 2023, Steward’s corporate

representatives agreed to a payment plan to keep HNI from pulling its providers out

of Steward’s hospitals in Texas and Louisiana, states in which HNI is the exclusive

provider of a variety of healthcare providers and administrators, then the parent

8 companies reneged on its promise to make payments to HNI after Steward closed

the sale of five hospitals it owned in Utah in May 2023.

Relators argue the documents related to the transaction in Utah are not

discoverable because they are not relevant to a claim that The Medical Center made

a fraudulent transfer to its parent companies, would not demonstrate that The

Medical Center is insolvent and unable to pay HNI’s invoices, do not establish HNI’s

entitlement to any proceeds from the Utah transactions, and do not prove the merits

of a right to a writ of attachment or a deposit into the registry of the court. HNI

alleges it is entitled to be paid by the parent companies because the parent companies

failed to pay HNI as promised. HNI contends the documents associated with the

transaction in Utah are therefore relevant to its request for injunctive relief to

preserve the specific assets that were generated in Steward’s transaction that

involved the five hospitals in Utah. That said, HNI has not alleged that the Utah

assets belong to HNI or that HNI has a valid lien or other perfected security interest

in the Utah hospitals or the proceeds from their sale. Accordingly, we conclude the

trial court abused its discretion by ordering production of documents that are not

relevant to the subject matter of the pending action. See In re Nat’l Lloyds Ins. Co.,

507 S.W.3d 219, 223-24 (Tex. 2016) (orig. proceeding); see also Tex. R. Civ. P.

192.3(a).

9 Lack of Adequate Remedy by Appeal

To be entitled to mandamus relief, Relators must also show that they lack an

adequate remedy by appeal. “A discovery order that compels production beyond the

rules of procedure is an abuse of discretion for which mandamus is the proper

remedy.” In re Nat’l Lloyds Ins. Co., 449 S.W.3d 486, 488 (Tex. 2014). We conclude

Relators lack an adequate remedy at law because complying with the discovery order

would require Steward to produce documents that are subject to a non-disclosure

agreement with a third party. See In re Weekley Homes, L.P., 295 S.W.3d at 322

(intrusive discovery measures require that the benefits of the discovery outweigh the

burden imposed on the discovered party); In re Ford Motor Co., 211 S.W.3d 295,

298 (Tex. 2006) (orig. proceeding) (appeal is inadequate when a trial court

erroneously orders the production of confidential information).

We lift our stay order of January 25, 2024, and we conditionally grant the

petition for a writ of mandamus. We are confident that the trial court will vacate the

part of its order of January 16, 2024, that required Relators to produce contracts for

the sale of hospitals in Utah, closing documents for the sale of hospitals in Utah, and

documents reflecting the funds generated by the sale of those hospitals. The writ

shall issue only if the trial court fails to comply.

10 PETITION CONDITIONALLY GRANTED.

PER CURIAM

Submitted on February 5, 2024 Opinion Delivered April 4, 2024

Before Golemon, C.J., Horton and Johnson, JJ.