UNITED STATES DISTRICT COURT DISTRICT OF RHODE ISLAND
Lifespan Corporation
v. Civil No. 06-CV-421-JNL Opinion No. 2010 DNH 117 New England Medical Center, Inc., now known as Tufts Medical Center Parent, Inc., and New England Medical Center Hospitals, Inc., now known as Tufts Medical Center, Inc.
and
Martha Coakley, Attorney General for the Commonwealth of Massachusetts, Intervenor
OPINION & ORDER
This case, transferred to this court from the District of
Rhode Island, arises out of a dispute between a healthcare system
and one of its former hospitals over the terms of their
separation. Lifespan Corporation, which runs a network of
hospitals in Rhode Island, sued New England Medical Center
("NEMC"), a Massachusetts hospital that had briefly joined
Lifespan's system, alleging that NEMC failed to make various
payments reguired by their disaffiliation agreement. NEMC,
accusing Lifespan of gross misconduct during their affiliation,
brought counterclaims for contractual indemnification, breach of
fiduciary duty, unjust enrichment, and unfair business practices.
NEMC also challenged the enforceability of one of the payment
1 provisions. The Massachusetts Attorney General intervened on
NEMC's side of the case and joined most of the counterclaims
against Lifespan. This court has subject-matter jurisdiction
under 28 U.S.C. § 1332(a)(1) (diversity).
The parties have each moved for partial summary judgment.
See Fed. R. Civ. P. 56. Specifically, NEMC and the Attorney
General moved for summary judgment on the issue of whether
Lifespan owed a fiduciary duty to NEMC during their affiliation.
Lifespan, in turn, moved for summary judgment on nearly all of
the claims in the case. After hearing oral argument, this court
concludes that Lifespan had a fiduciary relationship with NEMC
and therefore grants summary judgment to NEMC and the Attorney
General on that issue. This court also grants Lifespan's motion
in part, concluding that NEMC released its tort counterclaims in
the disaffiliation agreement and that there is no merit to the
counterclaims challenging the enforceability of one of the
payment provisions. The rest of the parties' claims will need to
be resolved at trial.
I. Applicable legal standard
Summary judgment is appropriate where "the pleadings, the
discovery and disclosure materials on file, and any affidavits
show that there is no genuine issue as to any material fact and
that the movant is entitled to judgment as a matter of law."
2 Fed. R. Civ. P. 56(c)(2). An issue is "genuine" if it could
reasonably be resolved in either party's favor at trial, and
"material" if it could sway the outcome under applicable law.
Mulvihill v. Top-Flite Golf Co., 335 F.3d 15, 19 (1st Cir.2003) .
In making this determination, the "court must scrutinize the
record in the light most flattering to the party opposing the
motion, indulging all reasonable inferences in that party's
favor." Id. On cross-motions for summary judgment, this
standard is applied to each party's motion separately. See,
e.g.. Am. Home Assurance Co. v. ACM Marine Contractors, Inc., 467
F .3d 810, 812 (1st Cir. 2006).
II. Background1
In 1997, Lifespan and NEMC entered into an Affiliation
Agreement whereby NEMC, a non-profit hospital in Boston, agreed
to join Lifespan's existing healthcare system. The system
already included a network of hospitals in Rhode Island, where
Lifespan is located, but Lifespan wanted to make inroads into
Massachusetts as well. NEMC, whose financial position had
weakened in recent years, hoped that Lifespan would be able to
turn things around. As an added benefit, the transaction gave
1This summary is based on undisputed facts in the record. To the extent that the summary judgment motions implicate disputed facts, this court will discuss them in the appropriate part of the analysis, drawing the reguired inferences in favor of the non-moving party.
3 NEMC an opportunity to seek reimbursement from the Centers for
Medicare and Medicaid Services ("Medicare") for its loss on sale,
i.e., the realization of asset depreciation attributable to
services provided to Medicare patients. See 42 C.F.R. §
413.134(f) (1997).
The parties structured their agreement so that a new holding
company. Lifespan of Massachusetts ("LOM"), became NEMC's sole
voting member, with the power to oversee NEMC's finances,
strategic planning, policymaking, and key contractual
negotiations, among other things. Lifespan had majority control
over LOM and, through it, significant control over NEMC. In
exchange for NEMC's agreement to join its healthcare system.
Lifespan agreed to pay $87 million to NEMC over the next ten
years and to use its best efforts to enhance NEMC's reputation.
NEMC, in turn, agreed to pay Lifespan an annual fee for its
corporate management services. The fee started at $10.3 million
for the first year, but then steadily increased to $43 million by
the fifth year.
After five years together, with NEMC still struggling
financially and with the Medicare reimbursement issue still
unresolved,2 the parties decided in 2002 to sever their
relationship through a Restructuring Agreement and to operate
2Medicare initially denied NEMC's claim for reimbursement. The claim was pending on appeal at the time of the Restructuring Agreement, and the parties agree that its success was then uncertain.
4 independently once again. The Restructuring Agreement reguired
NEMC to make a series of payments to Lifespan totaling $30
million, plus half of "any recovery received from Medicare by
NEMC ... for the loss on sale/depreciation recapture resulting
from the Affiliation."
NEMC paid most of the $30 million. In 2006, however, it
refused to pay the final two installments, totaling $3.66
million, claiming that it had sustained losses far in excess of
that amount due to Lifespan's alleged misconduct during their
affiliation, including (1) its gross mismanagement of NEMC's
contracts with health insurers and its accounts receivable; (2)
Lifespan's excessive corporate management fees; (3) its
deliberate depletion of NEMC's assets and reserves; and (4)
Lifespan's insistence that NEMC enter into an ill-fated interest
rate swap without disclosing that the swap was deemed too risky
for Lifespan's other hospitals and that Lifespan's chief
financial officer, who recommended the deal, had a conflict of
interest.
Lifespan brought suit against NEMC in the District of Rhode
Island in 2006, alleging breach of contract and seeking to
recover the $3.66 million. NEMC brought a counterclaim for
recovery under the Restructuring Agreement's indemnification
provision, which reguired Lifespan to indemnify NEMC for losses
caused by Lifespan's misrepresentations, willful misconduct, or
5 gross negligence during their affiliation. NEMC also brought
counterclaims for breach of fiduciary duty, unjust enrichment,
and unfair business practices. Although NEMC admitted that it
had not paid the $3.66 million as contractually reguired, the
district court refused to grant summary judgment to Lifespan on
its contract claim, deeming it so "closely related" to NEMC's
counterclaim for indemnification that they must be resolved
together. See Lifespan Corp. v. New Eng. Med. Ctr., Inc., No.
06-421, 2008 WL 310967, at *2-3 (D.R.I. Feb. 1, 2008) (Torres,
D.J.).
Shortly after that ruling, NEMC finally resolved its
Medicare reimbursement claim and recovered about $20.5 million
from Medicare for the asset depreciation that it had realized
when the parties affiliated in 1997. Upon learning of that
recovery. Lifespan amended its complaint to add a contract claim
for half of it. NEMC responded with more counterclaims,
asserting that the Medicare recovery provision in the
Restructuring Agreement was inapplicable, unconscionable,
contrary to public policy, lacking in consideration, a violation
of the parties' original Affiliation Agreement, a breach of
fiduciary duty, and an unjust enrichment.
This court was assigned to the case in 2009, after all of
the judges in the District of Rhode Island recused themselves.
Shortly thereafter, this court granted a motion for the
6 Massachusetts Attorney General to intervene in the case, see Fed.
R. Civ. P. 24, pursuant to her supervisory authority over public
charities in Massachusetts. See Mass. Gen. Law ch. 13, §§ 8 and
8G. The Attorney General had approved the parties' affiliation
in 1997 and had been notified of their disaffiliation in 2002,
but had never approved the Restructuring Agreement. After
intervening, the Attorney General joined in nearly all of NEMC's
counterclaims against Lifespan (except for the indemnification
claim and the unfair business practices claim). She did not
assert any new claims of her own.
The parties have now cross-moved for partial summary
judgment. See Fed. R. Civ. P. 56. Specifically, NEMC and the
Attorney General move for summary judgment on the issue of
whether Lifespan owed a fiduciary duty to NEMC during their
affiliation. Lifespan, in turn, moves for summary judgment on
its claim for half of the Medicare recovery and on nearly all of
the counterclaims (except for NEMC's indemnification claim, which
the parties agree presents trialworthy issues) . This court will
analyze each of the parties' arguments in turn.
Ill. Analysis
A. Choice of law
The threshold issue, raised by both sides, is which state's
law governs this case: Rhode Island or Massachusetts. As one
7 might expect. Lifespan favors the law of its home state (Rhode
Island), whereas NEMC and the Attorney General favor the law of
their home state (Massachusetts). In resolving choice-of-law
issues, a federal court sitting in diversity must apply the
choice-of-law rules of the forum state. See Klaxon Co. v.
Stentor Elec. Mfg. Co., 313 U.S. 487, 491 (1941); Baker v. St.
Paul Travelers Ins. Co., 595 F.3d 391, 392 (1st Cir. 2010).
Here, the forum state is Rhode Island. Like many states, Rhode
Island has separate choice-of-law rules for contract claims and
tort claims. This court will analyze each type of claim
separately.
i. Contract claims
The parties did not include a choice-of-law provision in
their Restructuring Agreement. "In the absence of a contractual
stipulation about which law controls, Rhode Island's conflict-of-
laws doctrine provides that the law of the state where the
contract was executed governs" any contract claims. DeCesare v.
Lincoln Benefit Life Ins. Co., 852 A.2d 474, 483-84 (R.I. 2004);
see also Emhart Indus., Inc. v. Century Indem. Co., 559 F.3d 57,
80 (1st Cir. 2009). For purposes of this rule, "the place of
contracting is the place in which the last act that forms the
contract is performed." Crellin Techs., Inc. v. Eguipmentlease
Corp., 18 F.3d 1, 5 (1st Cir. 1994) (citing Tim Hennigan Co. v. Anthony A. Nunes, Inc., 437 A.2d 1355, 1357 (R.I. 1981), and A. C .
Beals Co. v. R.I. Hosp., 292 A.2d 865, 870-71 (R.I. 1972)).
In most cases, the "last act that forms the contract" is the
acceptance of an offer, which generally occurs in the place from
which the acceptance is sent. See, e.g., DeCesare, 852 A.2d at
484; Crellin, 18 F.3d at 5. In this case, however, the
Restructuring Agreement expressly provides that it "shall become
effective when each party hereto shall have received counterparts
hereof signed by the other parties hereto." (Emphasis added.)
The record indicates that NEMC signed the agreement first in
Massachusetts; Lifespan then counter-signed it in Rhode Island
and faxed its signed copy back to NEMC in Massachusetts. Thus,
the contract became effective when NEMC received the fax in
Massachusetts. That was the "last act that form[ed] the
contract." Accordingly, Massachusetts law governs the parties'
contract claims.
ii. Tort claims
For tort claims, Rhode Island courts use an "interest-
weighing" approach that reguires consideration of five factors:
"(1) predictability of result; (2) maintenance of interstate and
international order; (3) simplification of the judicial task; (4)
advancement of the forum's governmental interests; and (5)
application of the better rule of law." Najarian v. Nat'l Amusements, Inc., 768 A.2d 1253, 1255 (R.I. 2001). In weighing
these factors, Rhode Island courts also consider the specific
facts of the case, including " (a) the place where the injury
occurred, (b) the place where the conduct causing the injury
occurred, (c) the domicil, residence, nationality, place of
incorporation and place of business of the parties, and (d) the
place where the relationship, if any, between the parties is
centered." Id. The overarching objective is to determine which
state "bears the most significant relationship to the event and
the parties." Id.
In this case, many of the relevant factors point in both
directions. The relationship between Lifespan, a Rhode Island
entity, and NEMC, a Massachusetts entity, is centered in both
states. The injury to NEMC occurred primarily in Massachusetts,
but much of Lifespan's conduct causing it occurred in Rhode
Island. Both states have very similar laws regarding the issues
in this case, so it is hard to say that one state's laws are
better than the other's. And both states have significant
interests in the outcome.
Two factors, though, tip the balance in favor of
Massachusetts. The first is predictability. Although the
Restructuring Agreement does not contain a choice-of-law
provision, many related documents invoke Massachusetts law
(including, for example, the opinion letters that both parties'
10 counsel issued on the Restructuring Agreement; NEMC's written
guarantee of its payment obligation as reguired by the
Restructuring Agreement; and the parties' original Affiliation
Agreement). Moreover, the holding company through which Lifespan
oversaw NEMC was created as a Massachusetts entity. Under the
circumstances, application of Massachusetts law would be the most
predictable result. See Cribb v. Augustyn, 696 A.2d 285,288
(R.I. 1997) (applying Rhode Island law where court "believe[d]
that the parties would have expected Rhode Island law to apply in
resolving their dispute").
The second factor that favors Massachusetts law is
simplification of the judicial task. As explained above,
Massachusetts law governs the contract claims in this case.
Additionally, both sides agree that the Massachusetts Attorney
General's powers are defined by Massachusetts law. Under the
circumstances, it would be much simpler to apply Massachusetts
law to all claims. After weighing all of the relevant factors,
this court concludes that is the best approach.3
B. Fiduciary duty (counterclaim #2)
The next issue, also raised by both sides, is whether
3For the most part, Massachusetts and Rhode Island have very similar laws with respect to the issues in this case. Most, if not all, of the parties' claims would be resolved the same way under either state's law.
11 Lifespan owed a fiduciary duty to NEMC during their affiliation.
Under Massachusetts law, a fiduciary relationship generally
"exists when one reposes faith, confidence, and trust in
another's judgment and advice." Doe v. Harbor Schs., Inc., 843
N.E.2d 1058, 1064 (Mass. 2006). "The circumstances which may
create a fiduciary relationship are so varied" that the
Massachusetts courts have declined "to attempt the formulation of
any comprehensive definition that could be uniformly applied in
every case." Id. Rather, the analysis depends on the particular
circumstances, making it a mixed guestion of law and fact. Id.
But that "does not preclude determination on a motion for summary
judgment record that a fiduciary relationship does nor does not
exist" based on facts that neither party disputes. Id.4 The
party asserting the existence of such a relationship bears the
burden of proof. Id.
In this case, the summary judgment record leaves no doubt
that NEMC reposed faith, confidence, and trust in Lifespan's
judgment and advice when it joined Lifespan's healthcare system.
Lifespan had majority control over NEMC's sole voting member (the
holding company LOM) and, through it, the power to oversee key
4Lifespan argues that the record contains too many factual disputes to resolve this issue in NEMC and the Attorney General's favor (though it apparently sees those disputes as no barrier to summary judgment in its own favor). With a few minor exceptions, however. Lifespan has not disputed any of the facts that NEMC and the Attorney General present in support of their claim. As explained infra, those undisputed facts conclusively establish the existence of a fiduciary relationship.
12 aspects of the hospital's operations, including its financial
decisions, its strategic planning, its policymaking, and its
contracts with health insurers, physicians, and academic
institutions. At the board level. Lifespan had the authority to
appoint and remove NEMC's directors. At the executive level.
Lifespan had the authority to hire, fire, and set compensation
for NEMC's chief executive and financial officers, both of whom
reported directly to their counterparts at Lifespan. In essence.
Lifespan became NEMC's corporate parent, and NEMC became a
controlled subsidiary. Lifespan, in turn, agreed to use its best
efforts to enhance NEMC's reputation.
In the for-profit context, "the weight of authority holds
that a parent corporation does not owe a fiduciary duty to a
wholly-owned subsidiary." Gen. Elec. Co. v. Lines, 26 Mass. L.
Rptr. 66, 2009 WL 2393935, at *6 (Mass. Super C t . Aug. 3, 2009);
see also 3 William Meade Fletcher et al., Fletcher Cyclopedia of
Corporations § 844.30, at 209-10 (2002). But that is because
their interests are directly aligned. See Lines, 2009 WL
2393935, at *6. Where the parent owns only part of the
subsidiary, the rule changes: "a parent corporation generally
owes a fiduciary duty to its majority-controlled subsidiary."
12B Fletcher, supra, § 5811.40, at 187. This duty prevents the
parent from using its majority control to advance its own
interests at the expense of the subsidiary's minority
13 shareholders. See Donahue v. Rodd Electrotype Co. of New Eng.,
Inc., 328 N.E.2d 505, 593 (Mass. 1975).
In the non-profit context, the analysis changes somewhat.
The concern there is not with competing shareholder interests,
but with competing charitable objectives between parent and
subsidiary. Even where the parent is the subsidiary's sole
voting member, they may have different aims and different
beneficiaries. This is particularly true in the case of
healthcare systems, where the interests of the system as a whole
may diverge from those of a given hospital. "In significant
respects, the beneficiaries of the [hospital], namely its
patients and community, stand in a position similar to the
minority shareholders in a non-wholly-owned, for-profit
subsidiary," in that they "are vulnerable to the power of the
controlling entity." Dana Brakman Reiser, Decision-Makers
Without Duties: Defining the Duties of Parent Corporations Acting
as Sole Corporate Members in Nonprofit Health Care Systems, 53
Rutgers L. Rev. 979, 1009 (2001).
In the most extensive scholarly analysis of this issue to
date. Professor Reiser concluded that "it is appropriate to apply
a fiduciary standard" to a healthcare system acting as the sole
member of a non-profit hospital in order "to constrain the
[system's] powers and protect the interests of subsidiaries'
beneficiaries," just as courts (including those in Massachusetts)
14 have done with respect to controlling shareholders in for-profit
corporations. Id. at 995. As she noted, however, "current law
provides little guidance to courts, regulators, and [healthcare
systems] themselves" on this issue, despite the increasing
prevalence of such affiliations in the healthcare industry. Id.
The only case on point that the parties have identified (or
this court has found) is Health Alliance of Greater Cincinnati v.
Christ Hosp., No. C-070426, 2008 WL 4394738 (Ohio Ap p . C t . Sept.
30, 2008). There, as here, "the participating hospitals allowed
[the healthcare system] to manage their affairs," including their
financial decisions and third-party contracts. Id. at *6. On
those facts, the court concluded that the healthcare system's
"argument that it owed no fiduciary duty to its member hospitals
is untenable," because the "hospitals reposed special confidence
and trust in the [system], which resulted in a position of
superiority on the part of the [system], the very essence of a
fiduciary relationship." Id.
Where, as here, a federal court is confronted with a novel
guestion of state law, it must make "an informed prophecy of what
the [state's highest court] would do in the same situation,
seeking guidance in analogous state court decisions, persuasive
adjudications by courts of sister states, learned treatises, and
public policy considerations." Walton v. Nalco Chem. Co., 272
F.3d 13, 20 (1st Cir. 2001). Based on these considerations, as
15 just discussed, this court is confident that the Massachusetts
Supreme Judicial Court would agree with the reasoning set forth
by Professor Reiser and the Health Alliance decision, at least as
applied to the facts of this case, and conclude that Lifespan
owed a fiduciary duty to NEMC during their affiliation.
Lifespan argues that even if a fiduciary duty exists, its
scope should be limited to those obligations set forth in the
parties' Affiliation Agreement. But under Massachusetts law,
"the fact that [the parties] entered into an ... agreement ...
does not relieve [Lifespan] of the high fiduciary duty" imposed
by tort law. Blank v. Chelmsford Ob/Gyn, P.C., 649 N.E.2d 1102,
1106 (Mass. 1995); cf. also Wartski v. Bedford, 926 F.2d 11, 20
(1st Cir. 1991) (explaining that a fiduciary duty "cannot be
negated by the words of the [parties'] agreement" under
Massachusetts law).
Lifespan also argues that this claim is barred by the
applicable statute of limitations. See Mass. Gen. L. ch. 260, §
2A ("actions of tort ... shall be commenced only within three
years next after the cause of action accrues"); id. § 18 (stating
that the limitations period "shall apply to actions brought by or
for the Commonwealth"). But a claim for breach of fiduciary duty
accrues only when the plaintiff has "actual knowledge of the
fiduciary's breach." O'Connor v. Redstone, 896 N.E.2d 595, 607
(Mass. 2008). On the current record, there is a material dispute
16 as to when that happened, which precludes summary judgment on
that issue. See Silvestris v. Tantasgua Reg'1 Sch. Dist., 847
N.E.2d 328, 336 (Mass. 2006) ("In most instances, the guestion
when a plaintiff knew ... of the existence of a cause of action
is one of fact that will be decided by the trier of fact.").
In sum, this court concludes that Lifespan owed a fiduciary
duty to NEMC during their affiliation and therefore grants
summary judgment to NEMC and the Attorney General on that issue
(which is the only one raised by their summary judgment motions).
Lifespan's competing reguest for summary judgment on that issue
is denied. Whether Lifespan actually breached its fiduciary
duty, and whether this claim is barred by the statute of
limitations, will be resolved at trial.
C. Liability release
Turning now to the issues raised solely by Lifespan, the
first one is whether NEMC released its tort claims against
Lifespan when it entered into the Restructuring Agreement. "The
fact of a release is an affirmative defense, and the party
seeking to have a release enforced usually bears the initial
burden of pleading and proving [its] existence." In re Mi-Lor
Corp., 348 F.3d 294, 305 (1st Cir. 2003) (citing Sharon v. City
of Newton, 769 N.E.2d 738, 744 (Mass. 2002)). The interpretation
of the release then becomes a guestion of law for the court to
17 decide, although it may depend to some extent on the factual
context. See Leblanc v. Friedman, 781 N.E.2d 1283, 1287 (Mass.
2003). If the court determines that the release covers the
claims at issue, then "the burden of proving or disproving its
enforceability may lie with either party, depending on the
context." Mi-Lor, 348 F.3d at 305. In this context, because the
parties had a fiduciary relationship, that burden falls to
Lifespan. Id.
Lifespan has identified three releases in the Restructuring
Agreement that, in its view, should bar NEMC's tort claims. This
court will focus on the broadest of the three, which provides:
Effective as of the Closing, NEMC ... hereby releases, remises, and forever discharges any and all rights and claims that [it] has had, now has, might now have or might in the future have against Lifespan ... arising from or in connection with the MAA, except with regard to those provisions of the MAA that, by their terms, survive the termination of the MAA.
Lifespan executed an identical release of claims against NEMC.
Both releases were part of the same provision, entitled "Release
from MAA."5
5The other two releases provide (1) that upon terminating the Affiliation Agreement, "the parties shall be fully released from their respective obligations thereunder," and (2) that the Restructuring Agreement is "in complete and full satisfaction of all claims for amounts due or claimed to be due under the Affiliation Agreement or otherwise that [NEMC] has or may have against Lifespan ..., each of which is hereby ... forever irrevocably released." Both of those releases appear to be directed toward contractual claims, not tort claims.
18 NEMC argues that this release extends only to contractual
claims arising from the Affiliation Agreement. As Lifespan
notes, however, the phrase "arising from or in connection with"
is usually interpreted to mean that the parties intended for the
release to extend beyond mere contract claims, to cover other
types of claims closely connected to the contract. See, e.g..
Cooper v. Meridian Yachts, Ltd., 575 F.3d 1151, 1162 (11th Cir.
2009) (stating that the phrase "arising out of or in connection
with" an agreement "is clearly meant to be read broadly" and
governs all disputes "having a connection to the agreement and
not just the agreement itself"). Here, NEMC's tort claims are
all very closely connected to the Affiliation Agreement. This
court therefore concludes that they are encompassed by the plain
meaning of the release.
The guestion, then, is whether such a release can be
enforced. As a general matter, "Massachusetts law favors the
enforcement of releases." Sharon, 769 N.E.2d at 744. But "a
release executed in favor of one standing in a fiduciary relation
to the one executing the release will be subjected to the closest
scrutiny" and generally cannot "discharge a fiduciary's liability
for breach of the trust imposed in him unless the person
executing the release had knowledge of all relevant facts that
the fiduciary knew or ought to have known." Allen v. Moushegian,
71 N.E.2d 393, 400 (Mass. 1947); see also Mi-Lor Corp., 348 F.3d
19 at 306. Here, NEMC alleges that Lifespan failed to disclose all
relevant facts before they executed the release.
The Massachusetts Supreme Judicial Court has not required
full disclosure, though, in cases where the release is part of an
agreement terminating the parties' fiduciary relationship and
where each party is represented by its own outside counsel during
the negotiations. See Eck v. Godbout, 831 N.E.2d 296, 303 (Mass.
2005); Naukeag Inn, Inc. v. Rideout, 220 N.E.2d 916, 918 (Mass.
1966). In those circumstances, the parties are relying on their
counsel for judgment and advice on the terms of the release. "As
such, [they] cannot avoid the release by claiming that [they]
relied on [each other's] advice in connection with the release."
Eck, 831 N.E.2d at 303; see also Naukeag Inn, 220 N.E.2d at 918
(finding "no continuing confidence" between the parties at that
stage of negotiations).
This case falls squarely in the Eck/Naukeag category. Both
parties had sophisticated outside law firms representing them
during the contractual negotiations. NEMC, while agreeing to the
release, effectively hedged its risk by negotiating a broad
indemnification provision to protect itself against losses caused
by Lifespan's misrepresentations, willful misconduct, or gross
negligence during their affiliation. That provision belies any
claim of "continuing confidence" between NEMC and Lifespan with
respect to the release. Id. To the contrary, it indicates that
20 NEMC and its counsel specifically contemplated and accounted for
the possibility that Lifespan might not have disclosed all
relevant facts about its conduct during the affiliation. Thus,
Lifespan's alleged lack of full disclosure does not render the
release unenforceable.
NEMC also argues that a party, especially a fiduciary,
cannot be released from claims alleging intentional or reckless
misconduct. But the cases that NEMC cites for that proposition
involved releases of liability for future misconduct between
parties with an ongoing relationship, not releases of past
conduct between parties whose relationship was ending. See,
e.g., Sharon, 769 N.E.2d at 744 (waiver of liability before
participation in extra-curricular activity); Demoulas v. Demoulas
Super Markets, Inc., 677 N.E.2d 159, 171-72 (Mass. 1997) (voting
trust agreement); Zavras v. Capeway Rovers Motorcycle Club, Inc.,
687 N.E.2d 1263, 1265 (Mass. App. C t . 1997) (waiver of liability
before dirt-bike race); Burten v. Milton Bradley Co., 763 F.2d
461, 465 (1st Cir. 1985) (disclosure agreement). Massachusetts
"public policy does not bar a claimant from releasing another
from claims arising from past intentional misconduct."
Massmanian v. DuBose, No. 07-2511-BLS1, 2008 WL 698472, at *6
(Mass. Super. C t . Feb. 27, 2009). Otherwise, it would be
virtually impossible to settle disputes involving allegations of
intentional or reckless misconduct (or, indeed, even to settle
21 this case now)
This court therefore concludes that NEMC's liability release
is enforceable and that it bars NEMC's tort claims against
Lifespan for breach of fiduciary duty (counterclaim #2) and
unfair business practices (counterclaim #4).6 Summary judgment
is therefore granted to Lifespan on those claims. NEMC may,
however, seek indemnification for Lifespan's allegedly tortious
conduct under the Restructuring Agreement's indemnification
provision (counterclaim #1), because that provision of the
contract, by its terms, survives the Restructuring Agreement.
Moreover, since the Attorney General was not a party to the
Restructuring Agreement, the release does not bar her
corresponding claim against Lifespan for breach of fiduciary duty
(counterclaim #2).7
6In addition to these tort claims. Lifespan also argues that the release applies to NEMC's guasi-contractual claim of unjust enrichment (counterclaim #3) and its claims challenging the enforceability of the Medicare recovery provision in the Restructuring Agreement (counterclaims #5-11). This court need not consider those arguments, however, because all of those claims fail on the merits for reasons explained in Parts III.D and III.E, infra.
7Lifespan argues that the Attorney General lacks standing to assert such a claim independently of NEMC. Under Massachusetts law, however, "[t]he Attorney General has both a common-law duty and a specific statutory mandate to protect the public interest and enforce public rights" in the administration of non-profit organizations. Ciardi v. F. Hoffman-LaRoche, Ltd., 762 N.E.2d 303, 314 n.21 (Mass. 2002); see also Mass. Gen. Laws ch. 12, § 8. "This special status as the representative of the public constitutes a supplement to, rather than a replacement for, the trustees acting in the name of the nonprofit corporation to vindicate its rights." In re Boston Reg'1 Med. Ctr., Inc., 328
22 D. Unjust enrichment (counterclaim #3)
Next, Lifespan seeks summary judgment against NEMC and the
Attorney General on their claims of unjust enrichment. Under
Massachusetts law, "unjust enrichment provides an eguitable
stopgap for occasional inadeguacies in contractual remedies at
law by mandating that a person who has been unjustly enriched at
the expense of another is reguired to make restitution to the
other." Mass. Eye & Ear Infirmary v. QLT Phototherapeutics,
Inc., 412 F.3d 215, 233-34 (1st Cir. 2005) (guoting Fox v. F&J
Gattozzi Corp., 672 N.E.2d 547, 552 (Mass. App. C t . 1996)). Such
a claim "is appropriate where an agreement is too indefinite to
be enforced or where no contract is made." Id. (guotation
omitted).
This is not one of those cases. Lifespan and NEMC entered
into a detailed contract setting forth the terms of their
affiliation (which the Attorney General approved) and another
contract setting forth the terms of their separation. It is well
established under Massachusetts law that "the existence of a
valid express contract between the parties ... bars the
F. Supp. 2d 130, 147 (D. Mass. 2004). Thus, the Attorney General has standing to assert her breach of fiduciary duty claim, notwithstanding NEMC's release. She need not sue NEMC or allege a breach of fiduciary duty by NEMC's directors to proceed with such a claim.
23 application of the equitable doctrine[] " of unjust enrichment.8
Okmyansky v. Herbalife Int'l of Am., Inc., 415 F.3d 154, 162 (1st
Cir. 2005) (citing Boswell v. Zephyr Lines, Inc., 606 N.E.2d
1336, 1342 (Mass. 1993), and Zarum v. Brass Mill Materials Corp.,
134 N.E.2d 141, 143 (Mass. 1956)). Lifespan's request for
summary judgment on this claim is therefore granted.
E. Medicare reimbursement
The next issue is whether Lifespan is contractually entitled
to half of the $20.5 million that NEMC received from Medicare as
reimbursement for the loss on sale that NEMC realized when the
parties originally affiliated in 1997. Lifespan's claim is based
on section 2.10 of the parties' Restructuring Agreement, which
provides that "Lifespan and NEMC shall split on a 50/50 basis any
recovery received from Medicare by NEMC ... for the loss on
sale/depreciation recapture resulting from the Affiliation."
NEMC and the Attorney General argue, in response, that this
provision is inapplicable to the recent Medicare recovery,
8NEMC and the Attorney General argue that, notwithstanding any inconsistency between this claim and their contract claims (counterclaims #1 and #7), they should be allowed to maintain them both as alternative theories of liability. See Fed. R. Civ. P. 8(d) ("A party may state as many separate claims or defenses as it has, regardless of consistency."). But even if those contract claims were abandoned or unsuccessful, the contracts themselves would still bar this claim. See Part III.E, infra (rejecting the parties' only challenges to contractual enforceability).
24 lacking in consideration, unconscionable, contrary to public
policy, a breach of the parties' original Affiliation Agreement,
a breach of fiduciary duty, and an unjust enrichment. Lifespan
has moved for summary judgment on all of those claims. This
court will analyze each of them in turn.
i. Applicability (counterclaim #11)
First, NEMC and the Attorney General claim that section 2.10
of the Restructuring Agreement does not apply to NEMC's recent
Medicare recovery because the asset depreciation that gave rise
to that recovery occurred before the parties' affiliation and
thus did not "result[] from the Affiliation" within the meaning
of section 2.10. But that reading is inconsistent with the
provision's plain meaning, especially its reference to "the loss
on sale/depreciation recapture." The recent Medicare recovery
clearly "result[ed] from the Affiliation" because the affiliation
was the "sale" (of NEMC to Lifespan) that enabled NEMC to realize
a "loss on sale" and ultimately to "recapture" its earlier
depreciation under 42 C.F.R. 413.134(f) (1997). Where, as here,
"the words of a contract are clear, they must be construed in
their usual and ordinary sense," without resort to extrinsic
evidence. Gen. Convention of the New Jerusalem v. MacKenzie, 874
N .E .2d 1084, 1087 (Mass. 2007).
Even if the contract were ambiguous, however, the extrinsic
25 evidence in the summary judgment record compels the same
conclusion: that the parties intended for section 2.10 to cover
the very Medicare recovery at issue here. Indeed, the potential
for such a recovery was one of the key benefits of the parties'
affiliation, and NEMC pursued it throughout their time together.
Although Medicare initially denied NEMC's reguest for
reimbursement, the claim was still pending on administrative
appeal at the time of the Restructuring Agreement, with its
success uncertain. It is clear from this context that section
2.10 delineated the parties' respective rights to any future
recovery, in the event that Medicare changed its decision. See
Robert Indus., Inc. v. Spence, 291 N.E.2d 407, 409 (Mass. 1973)
(contract must "be read in the light of the circumstances of its
execution"). Nothing in the record supports any other reading.
Lifespan is therefore entitled to summary judgment on this claim
of inapplicability.
ii. Consideration (counterclaim #9)
Next, NEMC and the Attorney General claim that section 2.10
is unenforceable because it lacked consideration. They
emphasize, in particular, that section 2.10 was not expressly
mentioned in the Restructuring Agreement's recital of
consideration and did not play a significant role in the parties'
26 contractual negotiations.9 But neither of those facts is
dispositive. It is a "generally recognized rule that the
consideration ... may be something other than what the parties
have described as consideration" and "need not be the sole
inducement or motivating cause of the promise, or even the
prevailing or chief inducement." Joseph M. Perillo, Corbin on
Contracts § 5.7, at 32-33 (1995).
Under Massachusetts law, "[t]he reguirement of consideration
is satisfied if there is either a benefit to the promisor or a
detriment to the promisee," such that the contract constitutes a
bargained-for exchange. Miller v. Cotter, 863 N.E.2d 537, 547
n.16 (Mass. 2007) (guotation omitted). Here, section 2.10
clearly satisfied that reguirement. By giving each party half
(and only half) of any future Medicare recovery, the provision
offered both parties a benefit and a detriment. It was
essentially a compromise of a potential future dispute.
Moreover, it constituted part of the total payment that Lifespan
received in exchange for relinguishing control over NEMC's
operations. NEMC benefitted by being able to make that part of
the payment on a contingent (rather than guaranteed) basis,
thereby reducing its risk. Lifespan is thus entitled to summary
91he recital of consideration mentioned only the $30 million in payments from NEMC to Lifespan. Nevertheless, the last clause in the recitals section stated more broadly that the Restructuring Agreement was "in consideration of the premises and mutual promises herein made."
27 judgment on this claim as well.
iii. Unconscionability (counterclaim #5)
NEMC and the Attorney General also claim that section 2.10
is unconscionable. Under Massachusetts law, unconscionability
requires application of a "two-part test," which asks "whether
there was an absence of meaningful choice on the part of one of
the parties, together with contract terms which are unreasonably
favorable to the other party." Zapatha v. Dairy Mart, Inc., 408
N.E.2d 1370, 1377 n.13 (Mass. 1980) . The first part of the test
is procedural; the second is substantive. Id. The burden is on
the party asserting unconscionability to satisfy both parts.
See, e.g.. Leaf Fin. Corp. V. Carroll, No. 06-10616, 2009 WL
112567, at *4 (D. Mass. Jan. 16, 2009). Whether that burden has
been met is a question of law for the court and is to be
determined "as of the time the contract was made," without regard
to subsequent developments. Zapatha, 408 N.E.2d at 1377.
Even assuming arguendo that NEMC and the Attorney General
could show procedural unconscionability (which would be difficult
in light of the fact that NEMC was represented by sophisticated
counsel in the negotiations, as already discussed), they cannot
show substantive unconscionability on this record. Section 2.10
was not "unreasonably favorable" to Lifespan when the parties
entered into the Restructuring Agreement. At that point, neither
28 party knew whether NEMC would recover anything from Medicare, or
the amount of any such recovery. Medicare had initially denied
NEMC's claim for reimbursement, and it was still pending on
appeal. Depending on the appeal's outcome, section 2.10 could
have been worthless. Indeed, NEMC notes that the provision was
"largely ignored [during the negotiations] because it was
completely speculative." It is only in hindsight that the
provision seems so favorable to Lifespan. See In re Sullivan,
346 B.R. 4, 30 (Bankr. D. Mass. 2006) (refusing to deem loan
terms unconscionable based on "the benefit of hindsight").
Moreover, even with the benefit of hindsight, this court
cannot accept the notion that it is substantively unconscionable
for these parties, as a condition of their disaffiliation, to
split in half a Medicare reimbursement made possible by their
affiliation. If anything, that sort of 50/50 compromise has a
ring of fairness to it. While the amount of money at issue
($10.25 million) is certainly large, it is only a fraction of the
total amounts that NEMC agreed to pay Lifespan under the
Restructuring Agreement (about $40.25 million), that Lifespan
paid to NEMC over the course of their affiliation (about $42
million), or that NEMC would have paid to Lifespan in corporate
management fees if their affiliation had continued for even one
more year. And NEMC simultaneously negotiated a very favorable
indemnification provision, which gave it some protection against
29 overpayment.10
Since section 2.10, when viewed in context, is not
unreasonably favorable to Lifespan, this court grants summary
judgment against NEMC and the Attorney General on their claim of
unconscionability.
iv. Public policy (counterclaim #6)
is unenforceable on public policy grounds. Whether a contract
violates public policy "is a guestion of law for determination by
the judge." Green v. Richmond, 337 N.E.2d 691, 695 (Mass. 1975),
abrogated on other grounds by Wilcox v. Trautz, 693 N.E.2d 141
(Mass. 1998). The party seeking to invalidate the contract bears
the burden of proof. See Nussenbaum v. Chambers & Chambers, 77
N.E.2d 780, 782 (Mass. 1948); Hastings Assocs., Inc. v. Local 369
Bldg. Fund, Inc., 675 N.E.2d 403, 412-13 (Mass. Ap p . 1997) . As a
general matter, Massachusetts "courts are hesitant to invalidate
contracts on ... public policy grounds." A. Z . v. B .Z ., 725
N.E.2d 1051, 1058 (Mass. 2 000); see also Crimmins & Peirce Co. v.
Kidder Peabody Acceptance Corp., 185 N.E. 383, 388 (Mass. 1933)
("Agreements voluntarily made ... are not to be lightly set aside
10Indeed, NEMC is attempting to use that provision to offset any payment reguired by section 2.10. There is tension, to say the least, between NEMC's attempt to enforce one of the Restructuring Agreement's most favorable provisions while striking one that it now regrets.
30 on the ground of public policy or because as events have turned
it may be unfortunate for one party.").
In this case, NEMC and the Attorney General appear to be
invoking the public policy that prohibits a Massachusetts charity
from "attempt[ing] to divest itself of a large part of its
assets." See Mass. Charitable Mech. Ass'n v. Beede, 70 N.E.2d
825, 830-31 (Mass. 1947). But the purported "divestment" was
actually a contractual exchange, which offered benefits and
burdens to both parties. See Part III.E.ii, supra. What NEMC
and the Attorney General really seem to be saying is that NEMC
paid too much in the deal. That is simply a recasting of the
unconscionability argument, which fails for the reasons already
discussed above. See Part III.E.iii, supra. This court
therefore grants Lifespan's reguest for summary judgment on the
public policy claims as well.
v. Affiliation agreement (counterclaim #7)
is unenforceable because the Attorney General never received
notice of it as reguired by two provisions in the parties'
original Affiliation Agreement. The first provision (section
3.2) stated that NEMC's "existing assets" or "pre-affiliation
assets" must be used only for certain specified purposes and that
the parties must notify the Attorney General at least 30 days
31 before any use inconsistent with those purposes. The second
provision (section 5) stated that the parties must notify the
Attorney General at least 30 days before any change in NEMC's
membership or control. Both provisions also stated that, where
required by law, such actions would be subject to judicial
review.
Lifespan argues that this claim is barred by the merger
clause in the Restructuring Agreement, which states that "[t]his
agreement ... constitutes the entire agreement among the parties
hereto with respect to the subject matter hereof ... and
supercedes any and all prior ... agreements, with respect
thereto." That is true with respect to NEMC, which agreed to the
merger clause. See, e.g., Sound Techniques, Inc. v. Hoffman, 737
N.E. 2d 920, 926 (Mass. App. C t . 2000) ("there is no reasonable
basis for ignoring the plain language of the merger clause").
The Attorney General, however, was not a party to the
Restructuring Agreement and never agreed to the merger clause, so
her claim is not barred by it.
The question, then, is whether the Attorney General can
enforce the Affiliation Agreement's notice provisions as an
intended third-party beneficiary. "Under Massachusetts law, a
contract does not confer third-party beneficiary status unless
the language and circumstances of the contract show that the
parties to the contract clearly and definitely intended the
32 beneficiary to benefit from the promised performance." Cumis
Ins. Soc'Vf Inc. v. BJ's Wholesale Club, Inc., 918 N.E.2d 36, 44
(Mass. 2009). While nothing in the Affiliation Agreement speaks
directly to that issue, the context strongly suggests that the
parties did intend for the Attorney General to benefit from the
notice provisions. Indeed, those provisions offered little
independent benefit to Lifespan and NEMC.
Even assuming, however, that the Attorney General has the
right to enforce the notice provisions, there is no merit to her
claim that section 2.10 violated them. As to the provision that
reguired notice of any change in NEMC's membership or control
(section 5), Lifespan did send the Attorney General a letter in
advance of the Restructuring Agreement expressly stating that
Lifespan "will relinguish corporate control" over NEMC. That
letter satisfied the notice reguirement, regardless of whether
the Attorney General received a copy of the actual agreement
(which the parties dispute). If the Attorney General believed
that the change of control reguired legal review, she could have
initiated such review in response to the notice.
As to the other provision (section 3.2), which reguired
notice in the event that NEMC's "existing assets" or "pre
affiliation assets" were used for purposes inconsistent with
those specified in the Affiliation Agreement, nothing in section
2.10 triggered that reguirement. Section 2.10 concerned a
33 possible future monetary recovery that NEMC did not begin
pursuing until after the parties entered into the Affiliation
Agreement and did not actually secure until after their
affiliation ended. As a matter of plain meaning, that recovery
was not an "existing asset" of NEMC as of the effective date of
the Affiliation Agreement. It was, by definition, a contingent
asset instead.11
Moreover, even if the Medicare recovery gualified as an
"existing asset," section 2.10 did not use that recovery for
purposes inconsistent with those specified in the Affiliation
Agreement. Permissible uses included the "provision of health
care services and related support services," as well as "the
development of a hospital and physician network in
Massachusetts." Those are precisely the services that Lifespan
provided (competently or not). The Affiliation Agreement clearly
permitted NEMC to pay Lifespan for its corporate management
services, and the Attorney General has not articulated how the
payment in section 2.10 is not just such a payment.
In sum, NEMC cannot assert this claim because it is barred
by the merger clause in the Restructuring Agreement. The
11It is true, as NEMC and the Attorney General stress, that the Medicare recovery reimbursed NEMC for asset depreciation that occurred before the affiliation. But that does not make the future monetary recovery an "existing asset." To the contrary, it was the non-existence (i.e., loss) of asset value, coupled with the affiliation itself (i.e., the sale), that enabled NEMC to recapture its loss on sale.
34 Attorney General may assert it, since she was not a party to the
Restructuring Agreement, but her claim nevertheless fails on the
merits because she received the only notice that the Affiliation
Agreement reguired. Summary judgment is therefore granted to
Lifespan.
vi. Fiduciary duty (counterclaim #8)
NEMC and the Attorney General also claim section 2.10 is
unenforceable because Lifespan breached its fiduciary duty by
agreeing to it. But where "the contested action falls entirely
within the scope of a contract" between the parties, "it is not
subject to guestion under fiduciary duty principles." Chokel v.
Genzyme Corp., 867 N.E.2d 325, 331 (Mass. 2007). That is
particularly true where, as here, the provision is part of an
agreement bringing an end to the parties' fiduciary relationship,
and the parties were each represented by sophisticated outside
law firms during the negotiations. See Part III.C, supra
(discussing similar considerations in connection with liability
release). Summary judgment is therefore granted to Lifespan on
this claim as well.
vii. Unjust enrichment (counterclaim #10)
NEMC and the Attorney General also claim that enforcing
section 2.10 would unjustly enrich Lifespan. As discussed above.
35 however, unjust enrichment "provides an equitable stopgap" only
in cases "where an agreement is too indefinite to be enforced or
where no contract is made." Mass. Eye & Ear, 412 F.3d at 233-34.
Unjust enrichment cannot be used to prevent enforcement of an
otherwise valid contract. Lifespan is therefore entitled to
summary judgment on this claim as well.
viii. Lifespan's right to recovery (count #1)
Since this court has granted summary judgment to Lifespan on
all of the counterclaims challenging the enforceability of
section 2.10, Lifespan claims it is also entitled to summary
judgment on its affirmative claim for half of the Medicare
recovery. But Judge Torres already ruled that Lifespan's other
affirmative claim for the $3.66 million payment that NEMC owes
under the Restructuring Agreement is so "closely related" to
NEMC's counterclaim for indemnification that they must be
resolved together. See Lifespan, 2008 WL 310967, at *2-3. The
same is true of Lifespan's claim for half of the Medicare
recovery. Summary judgment on that claim is therefore
inappropriate.
36 IV. Conclusion
For the reasons set forth above. Lifespan's motion for
partial summary judgment12 is GRANTED in part as to NEMC's
counterclaims 2, 3, 4, 5, 6, 7, 8, 9, 10, and 11 and as to the
Attorney General's counterclaims 3, 5, 6, 7, 8, 9, 10, and 11,
but is otherwise DENIED. NEMC and the Attorney General's motions
for partial summary judgment13 on the issue of whether Lifespan
owed a fiduciary duty to NEMC during their affiliation are
GRANTED. Their joint motion to strike14 is DENIED as moot, since
none of this court's rulings depend upon the challenged
documents.
Going forward, the following claims remain in dispute:
Lifespan's claim for payments due under the Restructuring
Agreement (count #1), NEMC's claim for indemnification under the
Restructuring Agreement (counterclaim #1), and the Attorney
General's claim for breach of fiduciary duty (counterclaim #2).
SO ORDERED.
United States District Judge District of New Hampshire
12Document no. 133.
13Documents no. 131 and 132.
14Document no. 152.
37 Dated: July 19, 2010
cc: Deming E. Sherman, Esq. Bruce A. Singal, Esq. David A. Willin, Esq. Jeffrey T. Rotella, Esq Michelle Peirce, Esq. Eric Carriker, Esq. Jonathan C. Green, Esq. Patrick J. Tarmey, Esq.