Lifespan v. NEMC, et al.

2011 DNH 083

• Court: District Court, D. New Hampshire
• Decided: May 24, 2011
• Docket: CV-06-241-JL
• Status: Published

Opinion

Lifespan v . NEMC, et a l . CV-06-241-JL 5/24/11 UNITED STATES DISTRICT COURT DISTRICT OF RHODE ISLAND

Lifespan Corporation

v. Civil N o . 06-cv-421-JNL Opinion N o . 2011 DNH 083 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

FINDINGS OF FACT & RULINGS OF LAW AFTER BENCH TRIAL

This case arises from a dispute between a non-profit

healthcare system and a non-profit hospital over their brief and

unsuccessful affiliation. Lifespan Corporation, which runs a

network of hospitals in Rhode Island, sued New England Medical

Center (“NEMC”), a Massachusetts hospital that had joined

Lifespan’s system from 1997 to 2002, alleging that NEMC failed to

make certain payments required by their disaffiliation agreement.

NEMC, admitting non-payment but accusing Lifespan of misconduct

during the affiliation, brought a counterclaim for

indemnification under that same agreement (along with several

other counterclaims on which this court granted summary judgment

to Lifespan, see Lifespan Corp. v . New Eng. Med. Ctr., Inc., 731

F. Supp. 2d 232 (D.R.I. 2010)). The Massachusetts Attorney

General, invoking NEMC’s status as a public charity, intervened in the case on behalf of the public interest, see Fed. R. Civ. P.

2 4 , and brought a counterclaim against Lifespan for breach of

fiduciary duty to NEMC, based on the same alleged misconduct.

This court, which is sitting by designation in the District

of Rhode Island and has subject-matter jurisdiction under 28

U.S.C. § 1332(a)(1) (diversity), held a three-week bench trial in

February and March 2011, hearing testimony from nearly 20

witnesses, most of them current or former executives at Lifespan

and NEMC. The parties each submitted proposed findings of fact

and rulings of law, both before and after trial, along with

supporting memoranda. They also submitted, pursuant to this

court’s customary practice for bench trials, a joint statement of

agreed-upon facts and a joint timeline. With the assistance of

those materials, this court makes the following findings of fact

and rulings of law, see Fed. R. Civ. P. 52(a)(1), which result in

a net award of $272,756 to NEMC, after deducting the payments

that NEMC owes Lifespan under the disaffiliation agreement

($13,903,948) from the amount of Lifespan’s liability to NEMC and

the Attorney General ($14,176,704) for its misconduct during the

affiliation.

2 I. Background1

A. The parties

1. Lifespan is a non-profit healthcare system with its

headquarters in Providence, Rhode Island. It is an umbrella

organization that provides managerial, administrative, and other

support services to its hospital subsidiaries, which include

Rhode Island Hospital (the main teaching hospital for Brown

University’s medical school), Miriam Hospital, Newport Hospital,

and Bradley Hospital, all located in Rhode Island. It is the

largest healthcare system in the Ocean State.

2. NEMC, now known as Tufts Medical Center, is a non-profit

hospital located in the Chinatown neighborhood of Boston,

Massachusetts, with about 415 beds, 500 faculty physicians, 400

other physicians (including residents, interns, and fellows), and

a large nursing staff. It is the teaching hospital for Tufts

University’s medical school and focuses on providing complex

tertiary and quaternary care. It is one of the oldest permanent

medical facilities in the United States.

3. The Massachusetts Attorney General is the chief law

enforcement officer in Massachusetts and has supervisory

authority over the Commonwealth’s public charities, including

NEMC. See Mass. Gen. L . ch. 1 2 , § 8 (“The attorney general shall

1 This section consists of factual findings pursuant to Fed. R. Civ. P. 52(a)(1).

3 enforce the due application of funds given or appropriated to

public charities within the commonwealth and prevent breaches of

trust in the administration thereof.”).

B. The affiliation

4. In 1996 and 1997, NEMC engaged in a search for a

potential merger partner. Many of NEMC’s competitors had merged

or otherwise affiliated in prior years, leaving NEMC as one of

the smallest teaching hospitals in the Boston area. For that and

other reasons, NEMC had been in a downward spiral, losing money,

patient volume, and its ability to participate in one of the

area’s major insurance networks (Harvard Pilgrim Health Care).

There was a significant risk that NEMC would not be able to

survive on its own.

5. NEMC approached a number of potential merger partners,

including a for-profit healthcare system (Columbia/HCA) and a

religious healthcare system (Caritas Christi), but those talks

broke down over philosophical differences. NEMC ultimately

decided to affiliate with Lifespan, a non-profit healthcare

system with a compatible mission. They executed a memorandum of

understanding in January 1997, proposing an affiliation in which

Lifespan would become NEMC’s corporate parent, and NEMC would in

turn become one of the hospital subsidiaries in Lifespan’s

system.

4 6. Lifespan saw the proposed affiliation as an opportunity

to expand its healthcare system beyond Rhode Island into

Massachusetts, in preparation for what it anticipated (wrongly,

as it turned out) would be a movement toward “regionalization” of

the healthcare industry across state lines.

7. NEMC saw the proposed affiliation as a way to improve

its financial condition, reduce its corporate overhead, gain

leverage in its negotiations with health insurers, and obtain

more referrals of complex cases. In addition, the affiliation

would give NEMC an opportunity to claim a “loss on sale” (i.e.,

an accounting write-down for asset depreciation), for which it

could seek partial reimbursement from the Centers for Medicare

and Medicaid Services under then-applicable regulations. See 42

C.F.R. § 413.134(f) (1997).

8. After signing the memorandum of understanding, Lifespan

and NEMC each conducted “due diligence” on the proposed

affiliation. They also submitted the proposal to various

regulatory bodies, including the Massachusetts and Rhode Island

Attorneys General, for review and approval. Once the due

diligence had been completed and the regulatory approvals

received, Lifespan and NEMC entered into a final Amended and

Restated Master Affiliation Agreement in October 1997.

9. The Affiliation Agreement provided that Lifespan would

establish Lifespan of Massachusetts, Inc. (“LOM”), a non-profit

5 entity. LOM, in turn, became the sole voting member of NEMC,

with the power to oversee and control its operations, including

major financial decisions, budgeting, strategic planning,

policymaking, and contractual negotiations with health insurers.

Lifespan had majority control of LOM and, through i t , the ability

to control NEMC.

10. In exchange for NEMC’s agreement to join Lifespan’s

system and submit to its control, Lifespan agreed to transfer

$8.7 million per year to NEMC, which resulted in a total transfer

of about $42 million over the course of the affiliation. NEMC,

in turn, agreed to pay its share of Lifespan’s corporate overhead

expenses, which totaled about $172 million over the course of the

affiliation. See Part III.D, infra (discussing the corporate

overhead charges in greater detail).

11. During the affiliation, Lifespan and NEMC each had its

own board of directors or trustees, and each board had its own

finance committee. Lifespan had the power to appoint and remove

the members of NEMC’s board. NEMC, in turn, had minority

representation (not to exceed 20 percent) on Lifespan and LOM’s

boards. Given this structure, NEMC’s board felt powerless and

uncertain of its role, to the point where one member (a law

school dean) resigned in frustration.

12. Lifespan and NEMC also each had its own chief executive

officer (“CEO”), chief financial officer (“CFO”), and various

6 other executive officers. NEMC’s CEO and CFO reported directly

and regularly to their counterparts at Lifespan, whom they

regarded as their superiors. Lifespan had the power to hire and

fire them and, through its compensation committee, set their

compensation.

13. During the first three years of the affiliation, NEMC’s

financial situation improved somewhat, largely because of its

return to the Harvard Pilgrim network.2 But, setting aside the

depreciation write-down and other non-operational accounting

adjustments, NEMC continued to lose money. See Part III.E, infra

(discussing NEMC’s financial performance in greater detail). And

despite considerable effort, the parties were unable to grow a

network in Massachusetts.

14. During the last two years of the affiliation, NEMC’s

financial situation deteriorated further. NEMC became

increasingly upset with Lifespan over the performance of its

health insurer contracts, see Part III.B, infra, the unfavorable

outcome of a complex financial transaction, known as an interest

rate swap, recommended by Lifespan’s CFO, see Part III.C, infra,

and the amount of Lifespan’s corporate overhead charges, see Part

III.D, infra.

2 That return resulted primarily from political pressure that NEMC and its allies applied to Harvard Pilgrim in Massachusetts (not from the affiliation itself).

7 C. The disaffiliation

15. Recognizing that the affiliation was not working, NEMC

proposed, and Lifespan agreed, to disaffiliate through a

Restructuring Agreement signed in September 2002 and then closed

in November 2002. The Restructuring Agreement required NEMC to

make a series of payments to Lifespan totaling $30 million and

also to “split on a 50/50 basis . . . any recovery received from

Medicare by NEMC . . . for the loss on sale/depreciation

recapture resulting from the Affiliation.”3

16. NEMC paid most of that $30 million to Lifespan. But,

at the direction of its new CEO Ellen Zane, NEMC refused to pay

the final two installments due in 2006 and 2007, totaling $3.66

million. As grounds for non-payment, NEMC claimed that it had

sustained losses far in excess of that amount because of

Lifespan’s misconduct during the affiliation, including with

regard to (1) the health insurer contracts, (2) the interest rate

swap, (3) the corporate overhead charges, and (4) NEMC’s overall

financial performance.

3 At that point, it was uncertain whether NEMC would recover anything from Medicare, which had initially denied NEMC’s reimbursement claim; NEMC was pursuing an administrative appeal of that decision.

8 D. The litigation

17. 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 that NEMC refused to pay. NEMC brought

a counterclaim against Lifespan under the Restructuring

Agreement’s indemnification provision, see Part II.C, infra

(discussing that provision in greater detail), seeking to recover

the losses allegedly caused by Lifespan’s misconduct. NEMC also

brought counterclaims for breach of fiduciary duty, unjust

enrichment, and unfair business practices.

18. Lifespan moved for summary judgment on its breach of

contract claim. See Fed. R. Civ. P. 5 6 . Although NEMC admitted

non-payment of the $3.66 million, putting it in clear breach of

the Restructuring Agreement, the court (Torres, J.) declined to

enter judgment for Lifespan, ruling that “NEMC’s promise to pay

Lifespan and Lifespan’s promise to indemnify” were so “closely

related” that they needed to be resolved through a single

judgment. See Lifespan Corp. v . New Eng. Med. Ctr., Inc., N o .

06-421, 2008 WL 310967, at * 2 - 3 , 2008 U.S. Dist. LEXIS 7776, at

*7-8 (D.R.I. Feb. 1 , 2008).

19. After that ruling, NEMC finally resolved its Medicare

reimbursement claim, recovering $20,487,895 from Medicare for the

“loss on sale” resulting from the affiliation. Upon learning of

that recovery, Lifespan amended its complaint to add a contract

9 claim for half of i t . NEMC responded by adding more

counterclaims, asserting that the Restructuring Agreement’s

Medicare recovery provision was inapplicable, unconscionable,

contrary to public policy, lacking in consideration, a violation

of the Affiliation Agreement, a breach of fiduciary duty, and an

unjust enrichment.

20. The District of Rhode Island transferred the case to

this court in 2009, after all of the available judges there

recused themselves. The case has at all times remained on the

District of Rhode Island docket.

21. Shortly after that transfer, this court granted a

motion by the Massachusetts Attorney General to intervene in the

case on behalf of the public interest, see Fed. R. Civ. P. 2 4 ,

pursuant to her supervisory authority over NEMC as a public

charity, see Mass. Gen. L . ch. 1 2 , §§ 8 et seq. After

intervening, the Attorney General joined in nearly all of NEMC’s

counterclaims against Lifespan (except for the indemnification

and unfair business practices claims). She did not assert any

new claims of her own.

22. The parties then cross-moved for partial summary

judgment. See Fed. R. Civ. P. 5 6 . Specifically, NEMC and the

Attorney General moved for summary judgment on the issue of

whether Lifespan owed a fiduciary duty to NEMC during the

affiliation. After concluding that Massachusetts law governed

10 all of the parties’ claims, this court ruled that Lifespan did

owe a fiduciary duty to NEMC, by virtue of its control over a

non-profit hospital and the “faith, confidence, and trust” that

NEMC placed in its judgment and advice. Lifespan, 731 F. Supp.

2d at 238-41 (quoting Doe v . Harbor Schs., Inc., 843 N.E.2d 1058,

1064 (Mass. 2006)).

23. Lifespan moved for summary judgment on its claim for

half of NEMC’s recent Medicare recovery, and on nearly all of the

counterclaims (except for NEMC’s indemnification claim, which the

parties agreed was trialworthy). This court ruled that Lifespan

was entitled to half of the Medicare recovery, rejecting the slew

of counterclaims challenging the Restructuring Agreement’s

Medicare recovery provision. Id. at 244-49. Following Judge

Torres’s approach, however, this court declined to enter judgment

for Lifespan, because NEMC’s “closely related” indemnification

claim was still unresolved. Id. at 249 (quoting Lifespan, 2008

WL 310967, at * 2 - 3 ) .

24. This court further ruled that NEMC had released its

tort counterclaims against Lifespan through the Restructuring

Agreement, including its claims for breach of fiduciary duty and

unfair business practices, leaving itself only a contractual

remedy under the agreement’s indemnification provision. Id. at

241-43 (citing Eck v . Godbout, 831 N.E.2d 296, 303 (Mass. 2005)).

This court also rejected NEMC’s other counterclaim, for unjust

11 enrichment, as unavailable in light of NEMC’s contractual remedy.

Id. at 244 (citing Okmyansky v . Herbalife Int’l of Am., Inc., 415

F.3d 1 5 4 , 162 (1st Cir. 2005)).

25. This court ruled, however, that the Attorney General

was not bound by NEMC’s release and could therefore proceed to

trial on her claim for breach of fiduciary duty. Id. at 243.

Lifespan argued that the Attorney General’s claim was barred by

the statute of limitations, but this court ruled that no

limitations period applies to such a claim when brought by the

Attorney General. See Lifespan Corp. v . New Eng. Med. Ctr.,

Inc., N o . 06-421, 2010 WL 3718952, at *1-2 (D.R.I. Sept. 2 0 ,

2010) (document n o . 166) (citing Davenport v . Atty. Gen., 280

N.E.2d 193, 197 (Mass. 1972)). 4

E. The trial

26. This court held a three-week bench trial in New

Hampshire in February and March 2011. Because only the Attorney

General’s breach of fiduciary duty claim and NEMC’s

4 Lifespan now argues, in a similar vein, that the Attorney General’s claim is barred by laches. But “Massachusetts law is clear that ‘[t]he defense of laches is not available to the defendants where the proceeding is brought by an authorized public agency to enforce the law of the Commonwealth.’” FDIC v . Gladstone, 44 F. Supp. 2d 8 1 , 90 (D. Mass. 1999) (quoting Bd. of Health of Holbrook v . Nelson, 217 N.E.2d 777 (Mass. 1966)). Moreover, Lifespan has not shown either unreasonable delay by the Attorney General or prejudice, as would be required to establish that defense. See, e.g., A.W. Chesterton C o . v . Mass. Insurers Insolvency Fund, 838 N.E.2d 1237, 1249 (Mass. 2005).

12 indemnification claim were still in genuine dispute (Lifespan’s

breach of contract claim having essentially been resolved by the

prior rulings, albeit without an entry of judgment, see Lifespan,

731 F. Supp. 2d at 249; Lifespan, 2008 WL 310967, at * 2 - 3 ) , this

court treated the Attorney General and NEMC as plaintiffs during

the trial, and Lifespan as the defendant.

27. The parties presented testimony from nearly 20

witnesses, most of them appearing live and a few by deposition.

They included high-level NEMC executives (its former chairman of

the board, its current and former CEOs, its former CFOs, and its

former budget director), high-level Lifespan executives (its

chairman, former vice chairman, current and former CEOs, current

and former CFOs, corporate compliance director, and payor

contracting director), a representative from the financial

services firm with which NEMC executed the interest rate swap,

and the parties’ expert witnesses.

II. Applicable legal standards5

A. Lifespan’s breach of contract claim

28. To recover on a claim for breach of contract under

Massachusetts law, Lifespan must prove each of the following

three elements by a preponderance of the evidence: “(1) that the

5 This section consists of legal rulings pursuant to Fed. R. Civ. P. 52(a)(1).

13 parties reached a valid and binding agreement”; “(2) that [NEMC]

breached the terms . . . of the agreement”; and “(3) that [NEMC]

suffered damages from the breach.” Michelson v . Digital Fin.

Servs., 167 F.3d 715, 720 (1st Cir. 1999) (applying Massachusetts

l a w ) ; see also, e.g., Singarella v . City of Boston, 173 N.E.2d

290, 291 (Mass. 1961).

B. Attorney General’s breach of fiduciary duty claim

29. To recover on a claim for breach of fiduciary duty

under Massachusetts law, the Attorney General must prove each of

the following four elements by a preponderance of the evidence:

(1) the existence of a fiduciary duty from Lifespan to NEMC; (2)

breach of that fiduciary duty by Lifespan; (3) damages to NEMC;

and (4) a causal connection between the breach of fiduciary duty

and the damages. See, e.g., Hanover Ins. C o . v . Sutton, 705

N.E.2d 279, 288-89 & n.18 (Mass. App. C t . 1999).

30. “A fiduciary duty exists when one reposes faith,

confidence, and trust in another’s judgment and advice.” Harbor

Schools, 843 N.E.2d at 1064. Again, this court has already ruled

that Lifespan owed a fiduciary duty to NEMC during the

affiliation, by virtue of its control over a non-profit hospital

and the faith, confidence, and trust that NEMC placed in its

judgment. See Lifespan, 731 F. Supp. 2d at 238-41. That ruling

is incorporated by reference here.

14 31. The “central tenet” of a fiduciary duty “is the duty on

the part of the fiduciary to act for the benefit of the other

party to the relation as to matters within the scope of the

relation,” exercising “utmost good faith.” Harbor Schools, 843

N.E.2d at 1064-65. That duty includes both (1) a duty of loyalty

and (2) a duty of care. See, e.g., Blackstone v . Cashman, 860

N.E.2d 7 , 17 (Mass. 2007) (citing Spiegel v . Beacon

Participations, Inc., 8 N.E.2d 895, 904 (Mass. 1937)).

32. The duty of loyalty requires a fiduciary “to act with

absolute fidelity” to the other party and to place the other

party’s interests above its own. Demoulas v . Demoulas Super

Mkts., Inc., 677 N.E.2d 159, 179 (Mass. 1997) (quoting Spiegel, 8

N.E.2d at 9 0 4 ) . A fiduciary “may not act out of avarice,

expediency, or self-interest in derogation of [its] duty of

loyalty.” Donahue v . Rodd Electrotype C o . of New Eng., Inc., 328

N.E.2d 505, 515 (Mass. 1975).

33. The duty of care requires “complete good faith plus the

exercise of reasonable intelligence.” Boston Children’s Heart

Found., Inc. v . Nadal-Ginard, 73 F.3d 429, 433 (1st Cir. 1996)

(“BCHF”) (quoting Murphy v . Hanlon, 79 N.E.2d 2 9 2 , 293 (Mass.

1948)). “Under this standard,” a fiduciary is “not responsible

for mere errors of judgment or want of prudence.” Id. (citing

Sagalyn v . Meekins, Packard & Wheat, Inc., 195 N.E. 769, 771

(Mass. 1935)). Liability attaches only where the fiduciary acts

15 in bad faith, or with “clear and gross negligence.” Id. (citing

Spiegel, 8 N.E.2d at 904). 6

34. The measure of damages recoverable for a breach of

fiduciary duty is the amount necessary to put the other party “in

the position [it] would have been in if no breach of fiduciary

duty had been committed.” Berish v . Bornstein, 770 N.E.2d 9 6 1 ,

977 (Mass. 2002). “Under Massachusetts law, trial courts are

vested with the discretion to determine the amount of damages for

fiduciary breaches according to the peculiar factors of each

individual case.” BCHF, 73 F.3d at 435 (citing Chelsea Indus.,

Inc. v . Gaffney, 449 N.E.2d 3 2 0 , 327 (Mass. 1983)).

35. For damages to be recoverable, they must be causally

connected to the breach of fiduciary duty. See, e.g., Reinhardt

v . Gulf Ins. Co., 489 F.3d 405, 412 (1st Cir. 2007) (citing

Sutton, 705 N.E.2d at 2 8 0 ) . Causation has two components: the

plaintiff must prove that the breach was both (1) “a but-for

cause” of the damages, and (2) “a “substantial legal factor in

6 That standard incorporates the “business judgment” rule, which shields corporate officers and directors from liability for good-faith business judgments reasonably believed to be in the corporation’s best interests. See, e.g., Halebian v . Berv, 931 N.E.2d 986, 991 n.11 (Mass. 2010). The Attorney General argues that the business judgment rule should not apply in this charitable context. But Massachusetts law expressly extends that rule to officers and directors of charitable corporations. See Mass. Gen. L . ch. 1 8 0 , § 6 C . Moreover, BCHF involved the oversight of a charity providing medical care at a Boston teaching hospital, making it closely analogous. This court will apply the standard set forth in BCHF.

16 bringing about . . . the harm,” which is known as proximate

causation. Id. (citing Tritsch v . Boston Edison Co., 293 N.E.2d

264, 267 (Mass. 1973)).

C. NEMC’s indemnification claim

36. To recover on a claim for contractual indemnification

under Massachusetts law, NEMC must prove by a preponderance of

the evidence that it has suffered losses covered by the

indemnification provision in the Restructuring Agreement. See,

e.g., Spellman v . Shawmut Woodworking & Supply, Inc., 840 N.E.2d

4 7 , 49 (Mass. 2006).

37. Under Massachusetts law, “an indemnity provision . . .

is to be interpreted like any ordinary contract, with attention

to language, background, and purpose.” Caldwell Tanks, Inc. v .

Haley & Ward, Inc., 471 F.3d 2 1 0 , 216 (1st Cir. 2006) (quoting

Speers v . H.P. Hood, Inc., 495 N.E.2d 880-881 (Mass. App. C t .

1986)). As a “basic rule of construction,” the court “must give

effect to the parties’ intentions and construe the language to

give it reasonable meaning wherever possible.” Shea v . Bay State

Gas Co., 418 N.E.2d 5 9 7 , 601 (Mass. 1981).

38. NEMC claims that it has suffered losses covered by two

parts of the Restructuring Agreement’s indemnification provision:

one relating to “willful misconduct and gross negligence,” and

17 the other relating to “misrepresentation[s].” This court will

discuss each provision in turn.

i. Willful misconduct and gross negligence

39. The Restructuring Agreement provides that “Lifespan

will indemnify NEMC for any losses it incurs that result directly

and solely . . . from Lifespan’s willful misconduct or gross

negligence in the provision of services to NEMC by Lifespan

employees working under the supervision and direction of Lifespan

employees during the Affiliation Period.”

40. The term “willful misconduct” means misconduct that is

either intentional or involves “such recklessness as is the

equivalent of intent,” and carries a “great chance” of causing

harm to another. Dillon’s Case, 85 N.E.2d 6 9 , 74 (Mass. 1949).

It “is much more than mere negligence, or even than gross or

culpable negligence.” Drumm’s Case, 903 N.E.2d 1127, 1129 (Mass.

App. C t . 2009) (quoting O’Leary’s Case, 324 N.E.2d 3 8 0 , 384

(Mass. 1975)).

41. The term “gross negligence” means “very great

negligence, or the absence of slight diligence, or the want of

even scant care.” Altman v . Aronson, 121 N.E. 505, 506 (Mass.

1919). It is “substantially and appreciably higher in magnitude

than ordinary negligence” and “a manifestly smaller amount of

watchfulness and circumspection than the circumstances require of

18 a person of ordinary prudence.” Id.; accord Matsuyama v .

Birnbaum, 890 N.E.2d 819, 847 (Mass. 2008).

ii. Misrepresentations

42. The Restructuring Agreement also provides that Lifespan

“shall indemnify and hold harmless NEMC . . . from, against, and

in respect of any and all Losses, incurred or suffered by [NEMC]

as a result o f , arising out of or directly or indirectly relating

to,” among other things, “[a]ny misrepresentation by Lifespan, or

any breach or failure of any covenant, or any breach or

inaccuracy in any representation or warranty made by or on behalf

of Lifespan in this Agreement, including in any Schedule or

Exhibit (as each such representation or warranty would read if

all qualifications as to knowledge and materiality were deleted

therefrom).”

43. Lifespan argues that the phrase “in this Agreement”

modifies not only the “representation or warranty” clause, but

also the “misrepresentation” and “covenant” clauses, meaning that

only a misrepresentation in the Restructuring Agreement itself

would be covered. But that argument “is inconsistent with the

general rule of grammatical construction that a modifying clause

is confined to the last antecedent unless there is something in

the subject matter or dominant purpose which requires a different

19 interpretation.” Deerskin Trading Post, Inc. v . Spencer Press,

Inc., 495 N.E.2d 303, 307 (Mass. 1986) (quotation omitted).

44. Deerskin involved a contract provision stating that “in

the event of 1 ) breach of any warranty or 2 ) delays in delivery,

caused in part by circumstances over which [the supplier] has no

direct control (such as availability of paper and other raw

materials) the liability of [the supplier] shall be limited to a

refund.” Id. The Massachusetts Supreme Judicial Court rejected

the argument that the “no direct control” clause modified the

“breach of any warranty” clause, finding “no language in the

limitation of damages provision and nothing in the subject matter

or dominant purpose of [that] provision that requires [that]

conclusion.” Id. The court noted that “the parenthetical phrase

‘such as availability of paper and other raw materials’ included

in the no direct control clause clearly indicates that the clause

was meant to apply only to delays in delivery.” Id.

45. The analysis here is similar. The phrase “in this

Agreement” is followed by a parenthetical that refers back to the

“representation or warranty” clause (specifically, it states “as

each such representation or warranty would read if all

qualifications as to knowledge and materiality were deleted

therefrom”). That parenthetical strongly suggests that the

intervening phrase “in this Agreement” also refers back to the

“representation or warranty” clause, not the preceding clauses.

20 Nothing in the provision’s language, subject matter, or purpose compels a contrary interpretation.7

46. This court accordingly interprets the indemnification

provision as covering “[a]ny misrepresentation by Lifespan” to

NEMC, not just any misrepresentation in the Restructuring

Agreement.8 It is worth noting, however, that the only

misrepresentations that NEMC has proven in this case also

constituted intentional misconduct by Lifespan, see Part

III.C.ii.b, and thus would be covered by the other part of the

indemnification provision, regardless of the scope of the

misrepresentation clause.

47. A misrepresentation can be either intentional or

negligent under Massachusetts law. Intentional misrepresentation

occurs where a party makes “a false representation of material

fact, with knowledge of its falsity, for the purpose of inducing

[another party] to act on this representation,” and the other

7 It is true that, as Lifespan notes, the “covenant” clause also appears to refer to covenants in the Restructuring Agreement. But the word “covenant” already implies as much, making that a less compelling point. See, e.g., Munro v . Jordan, 2010 Mass. App. Div. 1 , 1 (Mass. Dist. C t . 2010) (“Of course, a covenant is a contract, or at least part of one.”) (citing Black’s Law Dictionary 391 (8th ed. 2004), which defines “covenant” to mean a “formal agreement or promise, usu. in a contract”). 8 As the parties know, this court had been leaning toward the opposite reading based on the pre-trial briefing and oral argument, but that was before reading Deerskin, which neither party had previously brought to this court’s attention.

21 party “reasonably relie[s] on the representation as true,”

resulting in damages. Cumis Ins. Soc’y, Inc. v . BJ’s Wholesale

Club, Inc., 918 N.E.2d 3 6 , 47 (Mass. 2009).

48. Negligent misrepresentation occurs where a party “in

the course of [its] business . . . supplie[s] false information

for the guidance of others in their business transactions,

without exercising reasonable care or competence in obtaining or

communicating the information,” and “those others justifiably

rel[y] on the information,” resulting in pecuniary loss. Id. at

47-48 (citing Nycal Corp. v . KPMG Peat Marwick LLP, 688 N.E.2d

1368 (Mass. 1998)) (formatting altered).

III. Analysis

This court will now analyze each of the parties’ specific

claims, beginning with (A) Lifespan’s claim for breach of

contract and then turning to the Attorney General and NEMC’s

counterclaims for breach of fiduciary duty and indemnification,

respectively, based on Lifespan’s alleged misconduct with respect

to (B) NEMC’s health insurer contracts, (C) the interest rate

swap, (D) Lifespan’s corporate overhead charges, and (E) NEMC’s

financial performance during the affiliation.

22 A. Lifespan’s breach of contract claim

Lifespan claims that NEMC committed breach of contract by

failing to make several payments required by the Restructuring

Agreement. This court makes the following findings of fact and

rulings of law on that claim, which result in an award of

$13,903,948 in damages to Lifespan.

i. Findings of fact

49. NEMC agreed in the Restructuring Agreement to pay

Lifespan $1.83 million on or before January 2 , 2006 and another

$1.83 million on or before January 2 , 2007. To date, NEMC has

not paid Lifespan either of those sums.

50. NEMC also agreed in the Restructuring Agreement to

“split on a 50/50 basis” with Lifespan “any recovery received

from Medicare by NEMC . . . for the loss on sale/depreciation

recapture resulting from the Affiliation.”

51. On or about March 2 5 , 2008, NEMC received a $20,487,895

million recovery from Medicare for the loss on sale/depreciation

recapture resulting from the affiliation. To date, NEMC has not

paid Lifespan any part of that recovery.

ii. Rulings of law

52. The Restructuring Agreement, including each of the

payment provisions just mentioned in ¶¶ 49-50, supra, is a valid

23 and binding agreement between Lifespan and NEMC. This court

previously rejected NEMC’s only challenges to the enforceability

of those provisions (specifically, the Medicare recovery

provision). See Lifespan, 731 F. Supp. 2d at 244-49. That

ruling is incorporated by reference here.

53. NEMC breached the terms of the Restructuring Agreement

by failing to make the January 2006 and January 2007 payments

described in ¶ 4 9 , supra. Those breaches caused Lifespan to

suffer $3.66 million in actual damages, which is the sum of those

two payments.

54. NEMC also breached the terms of the Restructuring

Agreement by failing to pay Lifespan half of the Medicare

recovery described in ¶¶ 50-51, supra. That breach caused

Lifespan to suffer $10,243,948 in actual damages, which is half

of the amount that NEMC recovered from Medicare.9

55. Combining those amounts, Lifespan is entitled to a

total of $13,903,948 for NEMC’s breach of the Restructuring

Agreement’s payment provisions.

9 One of NEMC’s counterclaims, for unjust enrichment, argued that Lifespan’s recovery should be reduced by the amount that NEMC spent pursuing the Medicare reimbursement. See documents n o . 1 0 2 , at ¶ 9 4 , and n o . 1 4 2 , at 7-8. This court rejected that counterclaim as unavailable in light of the express contract. Lifespan, 731 F. Supp. 2d at 244 (citing Okmyansky, 415 F.3d at 1 6 2 ) . NEMC has not argued that it is entitled to such a reduction under the contract itself, or on any other basis.

24 B. Counterclaims relating to health insurer contracts

NEMC and the Attorney General each seek to hold Lifespan

liable for allegedly failing to meet the standard of care in

negotiating NEMC’s contracts with health insurance providers

(also called “payors”) during the affiliation. This court makes

the following findings of fact and rulings of law on those

claims, which result in an award of $5,857,913 in damages to NEMC

and the Attorney General.

56. Lifespan had authority under the Affiliation Agreement

to negotiate NEMC’s payor contracts, which it delegated to the

Lifespan Physicians Professional Services Organization (“PSO”), a

joint venture between Lifespan and certain Rhode Island-based

physician groups. The PSO also handled payor contracting for

Lifespan’s Rhode Island hospitals and their physicians. Lifespan

had control over the PSO and, through i t , control over NEMC’s

payor contracting throughout the affiliation.

57. D r . Joel Kaufman served as the PSO’s executive director

and CEO throughout the affiliation. William Beyer served under

him as chief operating officer (“COO”). They were both based in

Rhode Island. Beyer supervised two PSO teams: one based in

Rhode Island, working on payor contracting for Lifespan’s Rhode

Island hospitals; and the other based in Massachusetts, working

25 on payor contracting for NEMC. Robin Junkins, a former NEMC

employee who joined the PSO during the affiliation, led the

Massachusetts team.10

58. At the outset of the affiliation, the PSO (including

Kaufman, Beyer, and Junkins) worked with NEMC officials

(including CFO Mitchell Creem) to assess the past performance and

current status of NEMC’s existing payor contracts. The contracts

were generally found to be outdated, difficult to administer, and

to have unfavorable reimbursement rates. Also, as mentioned

supra, NEMC had recently lost its contract with one of its major

payors, Harvard Pilgrim, resulting in heavy losses of patient

volume and revenue.

59. NEMC’s expert Kim Damokosh, an outside consultant who

has helped NEMC with payor contracting since 2004, testified that

the standard industry practice under such circumstances is to

prepare a comprehensive written analysis of each payor contract

and then a written “blueprint” to guide future negotiations,

neither of which the PSO did. This court is not persuaded,

however, that such an approach actually constitutes the standard

10 Lifespan paid the salaries of those employees and passed them down to NEMC and the system’s other hospitals through the corporate overhead charges. See Part III.D, infra.

26 industry practice. Damokosh’s testimony establishes only that it is her own practice.11

60. NEMC generally collected about half of its revenue from

commercial payors, and the other half from governmental payors,

such as Medicare and Medicaid. Because the government

reimbursement rates were non-negotiable and generally

insufficient to cover NEMC’s costs of providing care, NEMC needed

sufficient reimbursement rates and margins on its commercial

business to make up the difference, in order to achieve a

positive operating margin overall.12

61. About 40 percent of NEMC’s revenue came from the three

major non-profit payors in Massachusetts: Harvard Pilgrim, Blue

Cross/Blue Shield of Massachusetts, and Tufts Health Plan

(collectively, the “regional payors”). About 5 to 10 percent

came from three for-profit payors with a national presence:

11 Before trial, Lifespan moved in limine to exclude Damokosh’s expert testimony as insufficiently reliable to satisfy Federal Rule of Evidence 702. See Daubert v . Merrell Dow Pharms., Inc., 509 U.S. 579, 597 (1993); L.R. 16.2(b)(3). This court held a hearing on that and other limine motions, see documents n o . 205 and 206, and then denied it orally, allowing Damokosh to testify. Nevertheless, in evaluating Damokosh’s testimony, this court has kept in mind the arguments made in Lifespan’s motion and has rejected any of Damokosh’s opinions that it regards as unreliable, including those based on mere ipse dixit or speculation. 12 That need became particularly acute when, just before the affiliation, Congress passed the Balanced Budget Act of 1997, Pub. L . 105-33, 111 Stat. 2 5 1 , which significantly reduced Medicare payments to hospitals.

27 Cigna, United Healthcare, and Aetna (collectively, the “national

payors”). Those six payors accounted for the vast majority of

NEMC’s commercial business.

a. Regional payors

62. During the affiliation, the PSO focused its work for

NEMC almost exclusively on renegotiating its contracts with the

regional payors. As an initial priority, the PSO negotiated a

new contract between NEMC and Harvard Pilgrim in 1998, restoring

that relationship. The PSO also renegotiated NEMC’s contracts

with Blue Cross and Tufts that same year. Further contracts or

amendments were negotiated with each of those payors every one or

two years thereafter.

63. To prepare for negotiations with the regional payors,

the PSO (specifically, Beyer and Junkins) met regularly with

representatives from various NEMC departments to discuss their

contracting goals and priorities, including with respect to

reimbursement rates. The PSO then approached the payors and

attempted to negotiate contracts that accomplished NEMC’s

objectives. Where necessary, Beyer and Junkins went back to

NEMC’s representatives to seek more input.

64. During the first half of the affiliation, Creem (NEMC’s

CFO) also played an active role in the regional payor

negotiations. He attended some of the negotiating sessions and,

28 when he could not attend, received follow-up reports from Beyer

and Junkins. He regularly discussed negotiating strategy with

them and made recommendations, which they followed. Overall, he

was satisfied with the progress that the PSO made, including on

reimbursement rates, which steadily improved.

65. Creem left NEMC in 2000. A new CFO, Mark Scott, joined

NEMC in 2001. Unlike Creem, Scott did not play an active role in

payor contracting. He complained to Lifespan that the PSO was

doing a poor job and that he wanted to take control of the

negotiations. During 2002, the last year of the affiliation,

Lifespan allowed Scott to become more involved, formally adding

him to the negotiating team. But he and the PSO were unable to

integrate their efforts before the affiliation ended.

66. Notwithstanding the steady improvement in NEMC’s

reimbursement rates, Damokosh testified that NEMC’s rates and

margins on its regional payor business were below industry

standards. Specifically, she testified that other Boston

teaching hospitals generally achieved margins of 3 to 10 percent

on care reimbursed by those payors, whereas NEMC’s aggregate

margin on such care in fiscal year 2003 (the year after the

affiliation, and the earliest year for which data is still

available) was negative 2.3 percent.13

13 The evidence relating to NEMC’s payor contracts is incomplete, as not all of the contracts, financial data, and other documents were retained, and neither Beyer nor Junkins (the

29 67. This court is not persuaded, however, that any such

deficiencies in rates or margins resulted from poor negotiating

or lack of effort by the PSO. Reimbursement rates in payor

contracts are driven largely by the provider’s position in the

marketplace, including its market share and reputation (and,

likewise, by the payor’s position). A provider with a bigger

market share or a stronger reputation has more bargaining power

with payors--and thus can usually obtain higher rates--than less

prominent providers.

68. At the time of the affiliation, NEMC was one of the

smallest teaching hospitals in the Boston area. And while NEMC

(by Lifespan’s own account) had a strong reputation, most of the

other Boston teaching hospitals, including Massachusetts General

Hospital, Brigham & Women’s Hospital, and Beth Israel Deaconess

Medical Center, had even stronger reputations. As a result, NEMC

had significantly less bargaining power with the regional payors

(as starkly illustrated by Harvard Pilgrim’s decision to drop

NEMC from its network).

69. There was little, if anything, that Lifespan could do

to increase NEMC’s bargaining power during the affiliation. None

two people most likely to have personal knowledge of contract details) testified at trial. Both sides argue that this court should draw an adverse inference against the other side with regard to missing evidence. But this court finds no basis for doing s o . There is no indication of culpable document destruction, and either side could have called one of those witnesses to fill in any gaps.

30 of the regional payors maintained a significant presence in Rhode

Island throughout that period, so Lifespan could not use its

market share in Rhode Island to significantly increase NEMC’s

leverage with those payors in Massachusetts.14 And while

Lifespan and NEMC were both working hard to grow a network in

Massachusetts and to enhance NEMC’s reputation, those were

challenging, long-term objectives.

70. Even in 2010, after more than five years of

renegotiating its regional payor contracts with Damokosh’s help,

NEMC’s reimbursement rates from those payors remained about 20

percent lower than those of most other Boston teaching hospitals.

Damokosh testified that NEMC is still digging itself out of the

“very deep hole” in which Lifespan left i t . But to the extent

that such a hole exists, it is the result of NEMC’s market

position, not the PSO’s performance, and existed even before the

affiliation.15

14 Blue Cross/Blue Shield of Rhode Island is a separate entity from Blue Cross/Blue Shield of Massachusetts. Harvard Pilgrim and Tufts, while both offering coverage in Rhode Island at the outset of the affiliation, had pulled out of that state by 1999/2000. Harvard Pilgrim paid similar rates to the Rhode Island hospitals as it paid to NEMC. 15 Damokosh also testified that, with her help, NEMC obtained significantly higher rates from the regional payors from 2004 onward. But this court is not persuaded that NEMC’s post- affiliation rates constitute a reliable benchmark for evaluating the PSO’s 1997-2002 performance, in light of changing conditions and the fact that Damokosh, by her own account, elevated NEMC’s payor contracting efforts above the standard of care.

31 71. Although unable to command the same rates as other

Boston teaching hospitals, NEMC’s costs of providing care were

generally comparable t o , or greater than, theirs. Lifespan

repeatedly urged NEMC to cut its costs, particularly during the

last two years of the affiliation, but NEMC struggled to do s o .

Had NEMC cut its costs to a level commensurate with its market

position, its margins on the regional payor business would have

been significantly better.16

b. National payors

72. The PSO did not renegotiate NEMC’s contracts with the

national payors at all during the affiliation (except in a few

discrete areas, including most notably a contract with Cigna

relating specifically to transplant services). Kaufman, the

PSO’s executive director and CEO, deemed those contracts to be

less of a priority than the regional payor contracts, because the

national payors accounted for a relatively small percentage of

NEMC’s revenue. See ¶ 6 1 , supra.

16 Because NEMC’s costs varied considerably from year to year, not always moving in lockstep with its revenue, this court also is not persuaded that NEMC’s aggregate margin on the regional payor contracts in fiscal year 2003 is a reliable proxy for determining its margins on each of those contracts, individually, from 1997 to 2002. Even in 2003, Damokosh acknowledged that one of NEMC’s contracts, with Tufts, resulted in a positive margin of 6.1 percent.

32 73. Only one of NEMC’s national payor contracts, with

Aetna, had inflationary increases built into its reimbursement

rates for all hospital services. NEMC’s contract with Cigna did

not include any inflationary increases, and its United contract

generally included them only for outpatient services, not for

inpatient services. Both contracts had been negotiated in 1997,

before the affiliation. The PSO allowed the contracts to

“evergreen,” i.e., roll over automatically at the old rates and

terms, without inflationary increases.

74. This court finds, consistent with Damokosh’s testimony,

that it is standard industry practice for reimbursement rates in

payor contracts to keep pace with inflation, and for providers

not to allow contracts to “evergreen” at old rates without

inflationary increases. The standard inflationary increase is a

blend between the medical consumer price index (“CPI”) for the

provider’s region (here, Boston) and the lower all-item CPI.

NEMC’s rates under the Aetna contract, for example, increased

each year by the Boston all-item CPI plus 1 percent.

75. With minimal effort, the PSO likely could have

negotiated inflationary increases for NEMC on its Cigna and

United reimbursement rates, at the same level as NEMC’s Aetna

increases, by the end of the affiliation’s second year.17 Payors

17 While it usually takes less than a year to negotiate payor contracts, Damokosh acknowledged that, after the affiliation, it took NEMC (with her help) two years to complete renegotiations

33 generally do not object to inflation-only increases. Negotiating

such increases from Cigna and United would not have interfered

with the PSO’s efforts with the regional payors or required any

shift in contracting priorities, and would have increased NEMC’s

revenue by millions of dollars.

76. No one at NEMC ever instructed the PSO to forego

seeking inflationary increases on the Cigna and United contracts,

or suggested that the PSO should pursue other priorities to the

exclusion of such increases. Even Lifespan’s CFO acknowledged at

trial that “I have difficulty saying that” it was reasonable and

appropriate for the PSO not to renegotiate those contracts, and

that “I have a difficult time” explaining how inflationary

increases could not be deemed a priority.

77. Damokosh testified that, in addition to failing to keep

pace with inflation, NEMC’s national payor contracts resulted in

reimbursement rates and margins that were below industry

teaching hospitals generally achieved margins of 25 to 50 percent

from those payors, whereas NEMC’s aggregate margin from those

payors in fiscal year 2003 (again, the earliest year for which

data is available) was 21 percent.

with all three national payors. This court sees no reason to hold the PSO to a faster timetable.

34 78. But the only national payor contract that individually

failed to achieve a 25 percent margin that year was the Cigna

contract, which had a negative margin of 10.5 percent. Aetna’s

contract (which, again, had built-in inflationary increases)

resulted in a margin of 63 percent, well above Damokosh’s

standard range. United’s contract (which, again, had partial

inflationary increases) resulted in a margin of about 39 percent,

in the middle of the range.

79. Even the national payor contracts that NEMC negotiated

with Damokosh’s help after the affiliation failed to achieve an

aggregate margin of 25 percent (as of 2007). NEMC’s margins on

Aetna and United business were actually lower in 2007 than in

2003. This court is not persuaded that the PSO could have

significantly improved the Aetna and United rates and margins

during the affiliation, aside from negotiating inflationary

increases from United.18

80. Cigna, however, is a different matter. In addition to

resulting in negative margins, NEMC’s reimbursement rates from

Cigna were 50 to 75 percent lower than the rates that Cigna paid

to Lifespan’s Rhode Island hospitals during the affiliation, even

though Cigna had a relatively small market share in both states.

18 Damokosh testified that NEMC obtained significantly higher rates from the national payors from 2004 onward. But this court is not persuaded that NEMC’s post-affiliation rates constitute a reliable benchmark for evaluating the PSO’s performance. See note 1 5 , supra.

35 The PSO likely could have jointly renegotiated with Cigna on

behalf of NEMC and the Rhode Island hospitals, and thereby

obtained significantly higher rates for NEMC. But the PSO never

attempted to do so.19

81. Damokosh testified, and this court finds, that it is

standard industry practice for healthcare systems to jointly

negotiate payor contracts on behalf of their hospitals wherever

practicable, so as to maximize their leverage with payors and

obtain the highest possible reimbursement rates. As discussed in

Part I , supra, that was also one of the primary goals of the

affiliation. No one at NEMC ever suggested that the PSO should

forego joint negotiations.

82. Even without pursuing joint negotiations, the PSO

likely could have obtained significantly higher rates for NEMC

simply by sharing Cigna’s Rhode Island rate information with NEMC

and the Massachusetts team handling NEMC’s payor contracts, for

use in independent negotiations with Cigna (had they happened,

see ¶ 7 2 , supra). That, too, is standard industry practice

within healthcare systems. The PSO failed, however, to share

rate information across the system.20

19 In contrast, the PSO generally negotiated jointly for all of Lifespan’s Rhode Island hospitals. 20 Lifespan notes that Beyer, as supervisor of both the Massachusetts and Rhode Island teams, had access to all the Rhode Island rate information. But there is no evidence that he actually accessed i t , used i t , or communicated it for the purpose of helping with NEMC’s payor contracts.

36 83. This court is not persuaded, however, that joint

negotiations or information sharing would have resulted in higher

rates for NEMC on its United and Aetna business. Both of those

payors conducted significant business in Rhode Island, but United

had a much larger market share in that state (about 20 percent)

and consequently paid lower rates to Lifespan’s Rhode Island

hospitals than to NEMC, resulting in lower margins. As to Aetna,

the evidence provides no reliable basis for determining whose

rates were higher.

c. Physician groups

84. The PSO did not negotiate payor contracts for NEMC’s

physician groups either. While it is common in the healthcare

industry for hospitals and physicians to negotiate jointly with

payors (as the PSO did for Lifespan’s Rhode Island hospitals and

their physicians), NEMC’s physician groups had traditionally

negotiated their contracts separately from the hospital, and

continued doing so throughout the affiliation, using their own

contracting specialist.

85. The physician groups preferred separate negotiations

because they were independent-minded and wanted to retain control

over their revenue streams. They also lacked confidence in

NEMC’s or the PSO’s ability to achieve better results than their

own specialist. According to D r . Thomas O’Donnell, who was

37 NEMC’s CEO and also a member of one of its physician groups,

“there was a significant amount of antipathy towards Lifespan

among the physician population.”

86. NEMC’s physicians groups generally achieved poor

results on their payor contracts throughout the affiliation.

Their reimbursement rates from the national and regional payors

were at or near the bottom of the market in the Boston area. As

a result, NEMC had to pay or loan more than $15 million to the

physician groups each year to prevent a mass exodus of physicians

from the hospital.

87. Lifespan likely could have forced NEMC’s physician

groups to negotiate jointly with the hospital through the PSO,

because NEMC controlled two-thirds of the seats on the board of

the New England Health Care Foundation, Inc. (“Foundation”),

which was then the sole controlling member of the physician

groups. Lifespan, in turn, exercised control over NEMC, as

discussed in Part I.A, supra.21

88. The Affiliation Agreement, however, provided as follows

with respect to Lifespan’s relationship with NEMC’s physician

groups:

Lifespan shall continue the successful and productive relationship that currently exists among [NEMC], the

21 After the affiliation, NEMC persuaded the Foundation to make NEMC its sole member, in exchange for forgiving about $11 million in loans owed by the physician groups to NEMC. NEMC and the physician groups have since negotiated payor contracts jointly.

38 [Foundation], and the NEMC physician practice groups to enhance the ability of all of these organizations to achieve their mission and promote their economic viability. Lifespan acknowledges that there are significant financial and operational arrangements currently in place among [those entities] and shall move forward with these arrangements with due recognition of the importance they play in supporting the academic, teaching and other missions of all the entities. Consistent with this understanding and with current practice, adjustments in such arrangements shall be made only after significant consultation and meaningful input from the physician groups affected and Tufts.

(Emphases added.) 22

89. Lifespan never approached the physician groups to

request or recommend any adjustments in the traditional

operational arrangement for separate payor contracting by NEMC

and its physician groups. Nor did the physician groups ever

approach Lifespan to request any adjustments in that arrangement,

or express to Lifespan or NEMC any interest in jointly

negotiating contracts with the hospital.

i. Rulings of law

a. Attorney General’s breach of fiduciary duty claim

90. This court has already ruled that Lifespan owed a

fiduciary duty to NEMC during the affiliation. See Lifespan, 731

F. Supp. 2d at 238-41. Lifespan specifically owed a fiduciary

22 Neither the Foundation nor the practice groups were parties to the Affiliation Agreement, the Restructuring Agreement, or this litigation.

39 duty to NEMC with regard to payor contracting, by virtue of the

control that Lifespan (through the PSO) exercised over NEMC in

that area and the “faith, confidence, and trust” that NEMC placed

in Lifespan’s judgment and advice. Id. (quoting Harbor Schools,

843 N.E.2d at 1064).

91. The Attorney General argues, first, that Lifespan

breached its fiduciary duty of care to NEMC by failing to

comprehensively assess NEMC’s existing payor contracts at the

outset of the affiliation. But the PSO conducted a reasonable,

good-faith assessment of that sort, with NEMC’s assistance. See

¶¶ 58-59, supra. The Attorney General has not met her burden of

proving that Lifespan departed from the standard of care in that

regard.

92. The Attorney General argues, next, that Lifespan

negotiate sufficient rates and margins from the regional payors.

But the PSO made a reasonable, good-faith effort throughout the

affiliation to negotiate better rates from those payors, with

some success. See ¶¶ 62-71, supra. While the PSO may not have

been the strongest negotiator, the Attorney General has not met

her burden of proving that Lifespan departed from the standard of

care in that regard either.

93. This court agrees with the Attorney General, however,

that Lifespan breached its fiduciary duty of care to NEMC by

40 failing to renegotiate NEMC’s Cigna and United contracts to

obtain inflationary increases in their reimbursement rates by the

end of the affiliation’s second year and annually thereafter.

See ¶¶ 72-76, supra. Those failures constituted “clear and

gross” departures from the standard of care that any reasonable

party in Lifespan’s position would have exercised. BCHF, 73 F.3d

at 433 (citing Spiegel, 8 N.E.2d at 9 0 4 ) .

94. This court also agrees with the Attorney General that

Lifespan breached its fiduciary duty of care to NEMC by failing

to negotiate jointly with Cigna on behalf of NEMC and the Rhode

Island hospitals, and failing to share Cigna’s Rhode Island rate

information with NEMC and the PSO’s Massachusetts team. See ¶¶

80-82, supra. Those, too, were “clear and gross” departures from

the standard of care that any reasonable party in Lifespan’s

position would have exercised. BCHF, 73 F.3d at 433 (citing

Spiegel, 8 N.E.2d at 9 0 4 ) .

95. The Attorney General argues that Lifespan also breached

its fiduciary duty of care by failing to jointly negotiate with

Aetna, United, and the regional payors. But joint negotiations

with those payors likely would not have been helpful to NEMC or

resulted in higher reimbursement rates. See ¶¶ 6 9 , 8 3 , supra.

The Attorney General has not met her burden of proving that

Lifespan departed from the standard of care in that regard, o r ,

even if it did, that it caused any damages to NEMC.

41 96. The Attorney General also argues that Lifespan breached

its fiduciary duty of care to NEMC by failing to negotiate

sufficient rates and margins from the national payors. This

court agrees as to Cigna, which paid unreasonably low rates that

resulted in negative margins. See ¶¶ 93-94, supra. As to Aetna

and United, however, NEMC’s rates and margins were within a

reasonable range. See ¶¶ 78-79, 8 3 , supra. Lifespan did not

depart from the standard of care in that regard (except in

failing to negotiate inflationary increases from United, see ¶

9 3 , supra). 23

97. Finally, the Attorney General argues that Lifespan

breached its fiduciary duty of care by failing to negotiate on

behalf of NEMC’s physician groups. This court rules, however,

that Lifespan made a reasonable, good-faith decision to maintain

the traditional arrangement of separate payor contracting by NEMC

and its physician groups, which reflected their reasonable

preference. See ¶¶ 84-85, 88-89, supra. The Attorney General

has not met her burden of proving that Lifespan departed from the

standard of care in that regard.

23 The fact that United’s rates were otherwise reasonable does not prevent Lifespan from being held liable for failing to negotiate inflationary increases, because those increases were easily attainable, and Lifespan violated the standard of care in failing to obtain them. Simply put, Lifespan left millions of dollars on the table in inflationary adjustments because of its gross negligence.

42 98. Lifespan’s breaches of fiduciary duty, see ¶¶ 93-94,

9 6 , supra, were the “but-for” and proximate cause of damages to

NEMC. They foreseeably prevented NEMC from obtaining higher

reimbursement rates from Cigna and United, and thereby resulted

in NEMC’s receiving significantly less revenue from those payors

during the affiliation.

99. As to United, Lifespan’s breach of fiduciary duty

caused NEMC to suffer actual damages in the amount of $2,699,109,

which is the amount of additional revenue that NEMC likely would

have collected from United during the affiliation if Lifespan had

negotiated inflationary increases in United’s reimbursement rates

by the end of the affiliation’s second year, and annually

thereafter, based on the Boston all-item CPI plus 1 percent

(NEMC’s Aetna inflation rate). See Appendix.

100. As to Cigna, Lifespan’s breach of fiduciary duty

included not only a failure to negotiate inflationary increases,

but also a failure to negotiate jointly with the Rhode Island

hospitals and to share Cigna’s Rhode Island rate information,

either of which likely would have resulted in further rate

increases for NEMC. See ¶¶ 8 0 , 8 2 , supra. This court therefore

concludes that it is appropriate to use the full Boston medical

CPI to calculate the Cigna damages, rather than the lower CPI

blend used to calculate the United damages.24

24 It is possible that joint negotiations or information- sharing would have resulted in Cigna rate increases even beyond

43 101. As to Cigna, then, Lifespan’s breaches of fiduciary

duty caused NEMC to suffer actual damages in the amount of

$3,158,804, which is the amount of additional revenue that NEMC

likely would have collected from Cigna during the affiliation if

Lifespan had negotiated inflationary increases in Cigna’s

reimbursement rates by the end of the affiliation’s second year,

and annually thereafter, based on the Boston medical CPI. See

Appendix.

102. Combining the Cigna and United damages, the Attorney

General is entitled to recover a total of $5,857,913 for

Lifespan’s breaches of fiduciary duty in the area of payor

contracting, which is the amount necessary to put NEMC “in the

position [it] would have been in if no breach of fiduciary duty

had been committed.” Berish, 770 N.E.2d at 977.

b. NEMC’s indemnification claim

103. As discussed in Part II.C.i, supra, Lifespan agreed in

the Restructuring Agreement to “indemnify NEMC for any losses it

incurs that result directly and solely . . . from Lifespan’s

willful misconduct or gross negligence in the provision of

services to NEMC by Lifespan employees working under the

the Boston medical C P I , but this court is not prepared to deem such increases likely based on the evidence at trial. In any event, the Attorney General and NEMC have not provided a reliable basis for measuring damages beyond that level. The medical C P I , while possibly on the conservative end, is a reliable and reasonable measure.

44 supervision and direction of Lifespan employees during the

Affiliation Period.”

104. The individuals responsible for overseeing NEMC’s

payor contracting during the affiliation (including Kaufman,

Beyer, and Junkins) were Lifespan employees working under the

supervision and direction of Lifespan employees, and were

providing services to NEMC. See ¶¶ 57-58 & n.10, supra.

Lifespan has not argued otherwise.

105. Lifespan was grossly negligent in failing to

renegotiate the Cigna and United contracts to obtain inflationary

increases in their reimbursement rates, in failing to jointly

negotiate with Cigna on behalf of NEMC and the Rhode Island

hospitals or to share Cigna’s Rhode Island rate information

across the system, and in failing to obtain sufficient rates and

margins from Cigna. See ¶¶ 93-94, 9 6 , supra.

106. NEMC argues that Lifespan was also grossly negligent

in all of the other respects that the Attorney General argued in

connection with her breach of fiduciary claim. But, for the

reasons already discussed, this court rules that NEMC has not

proven gross negligence in any of those other respects. See ¶¶

91-92, 95-97, supra.

107. Lifespan’s gross negligence directly and solely caused

NEMC to incur $5,857,913 in losses. See ¶¶ 1 0 2 , supra. Lifespan

argues that those losses were not “solely” caused by its gross

45 negligence because NEMC, too, was involved in payor contracting.

But NEMC played no role in Lifespan’s failures to negotiate with

Cigna and United or to use the system’s leverage in negotiating

with Cigna. See ¶¶ 7 6 , 8 1 , supra. Those failures were

Lifespan’s alone.

C. Counterclaims relating to interest rate swap

liable for alleged misconduct in connection with a complex

financial transaction, known as an interest rate swap, that NEMC

executed during the last year of the affiliation. This court

makes the following findings of fact and rulings of law on those

claims, which result in an award of $8,318,791 in damages to NEMC

108. In 1992, NEMC issued more than $100 million in revenue

bonds to finance a major building project. The bonds were

callable in July 2002. In the years leading up to that date,

interest rates dropped significantly from the rate at which the

bonds had been issued, creating a potential opportunity for NEMC

to refinance the bonds at a lower rate. Lifespan and NEMC both

recognized that opportunity.

46 109. About a year before the call date, Lifespan’s CFO

David Lantto arranged for representatives of Morgan Stanley, a

financial services firm, to present a bond refinancing proposal

to NEMC. Morgan Stanley proposed that NEMC refinance the bonds

in July 2002, using Morgan Stanley as underwriter. In the

meantime, Morgan Stanley proposed that NEMC enter into an

interest rate swap, which it claimed would enable NEMC to “lock

in” the current low interest rate and “protect” against any rate

increases before the refinancing date.

110. The proposed swap worked as follows: NEMC would agree

to pay Morgan Stanley a fixed interest rate, and Morgan Stanley

would agree to pay NEMC a variable interest rate (based on a swap

rate index), on a notional amount roughly equal to the amount of

NEMC’s bonds. Upon termination of the swap, whichever party had

the higher balance would pay the difference. Thus, if the

variable rate went u p , Morgan Stanley would make a payment to

NEMC. Conversely, if the variable rate went down, NEMC would

make a payment to Morgan Stanley.

111. Under ordinary conditions, where the swap rate index

moved roughly in tandem with the refinancing rate available to

NEMC, the swap would offset any movements in the refinancing rate

and effectively enable NEMC to “lock in” the current rate (minus

Morgan Stanley’s $1.6 million transaction fee, which was built

into the swap). But if the swap rate index “decoupled” from that

47 refinancing rate, NEMC would not actually “lock in” the current

rate; it would be at risk of paying more, or receiving less, in

the swap than the amount necessary to offset changes in the

refinancing rate.

112. Morgan Stanley mentioned that risk of decoupling

(known as “basis risk” or “swap spread risk”) to NEMC, but only

in passing, and not in a way that enabled NEMC to fully

understand the nature and scope of the risk. After the

affiliation, NEMC asserted a claim against Morgan Stanley for

failing to fully disclose the swap’s risks. They settled the

claim in June 2005 for $2.25 million. The settlement agreement

stated that Morgan Stanley was not admitting liability and was

settling “solely for reasons of economy.”

113. Before Morgan Stanley’s proposal, NEMC had never

entered into an interest rate swap or seriously considered one,

either in conjunction with a bond refinancing or otherwise. As

with many non-profit organizations, NEMC’s board and management

were conservative and ordinarily not inclined to enter into

complex financial transactions of that sort. The idea for the

swap came from Morgan Stanley broker Jeff Seubel, who suggested

it to Lantto, who in turn suggested it to NEMC.

114. Unbeknownst to NEMC, Lantto had a close, longstanding

personal friendship with Seubel. Lantto had worked with Seubel

in the past, and Seubel had recommended Lantto for the CFO

48 position that Lantto held before coming to Lifespan. Their

business relationship had developed into a friendship because of

their mutual affinity for wine. They had gone to wine tastings

together, bought dinner and wine for each other on numerous

occasions, and stayed overnight at each other’s homes. Seubel

was also part of a wine-related business partnership that Lantto

wanted, but had never been invited, to join.

115. Lifespan’s own corporate policies, including its

conflict of interest policy and its meals/gifts policy, required

Lantto to fully disclose his personal relationship with Seubel

and offer to recuse himself from the proposed transaction with

Morgan Stanley. Lantto knew of those policies and requirements,

on which he had received training, but nevertheless failed to

disclose the personal relationship to NEMC, recuse himself, or

offer to do s o .

116. In a report prepared after the affiliation, Lifespan’s

compliance officer and internal audit director Thomas Igoe found,

based on an internal investigation, that Lantto “should have

recused himself from the process [of considering the swap] or

more fully disclosed his friendship” with Seubel and that his

failure to do so put his “independence” in question and gave “the

appearance of conflict via preferential access.” Igoe found that

Lantto and Seubel “needed to maintain a relationship beyond

reproach; they have not.”

49 117. This court agrees with those findings and further

finds that Lantto not only appeared to have, but actually had, a

conflict of interest in the swap transaction, which resulted in

preferential access for Morgan Stanley. Lantto introduced Morgan

Stanley to NEMC, and then pressured NEMC to enter into the swap,

taking the steps described in ¶¶ 118-123, infra, all for the

purpose of pleasing his friend Seubel, strengthening their

personal relationship, returning past favors, and likely also in

hopes of being invited to join Seubel’s wine partnership. He did

so in knowing disregard of NEMC’s interests.

118. NEMC’s CFO, Mark Scott, strongly opposed the swap, in

part because it was a complex transaction and difficult to

understand or assess. In an attempt to better understand i t , he

requested Lantto’s permission to engage an independent financial

advisor, Chris Payne of the firm Ponder & Co., for a second

opinion on Morgan Stanley’s proposal, explaining that he had

worked with Payne in the past and had confidence in his judgment.

Lantto denied that request.25

119. Lantto thereafter insisted that NEMC engage a less

expensive financial advisor of his choosing, Public Financial

Management (“PFM”), to prepare a fairness opinion on the swap.

PFM did not provide its fairness opinion until February 2002,

25 This is one of many examples of Lifespan’s control over NEMC during the affiliation, including with respect to the interest rate swap. See Lifespan, 731 F. Supp. 2d at 238-41; ¶ , supra, and ¶ 135, infra.

50 after NEMC had already entered into the swap. The opinion was

too late to be of any use to NEMC. Before providing that

opinion, PFM participated in some conference calls regarding the

swap, but did not give NEMC any significant advice regarding its

risks.

120. Scott also requested that Lantto arrange for

competitive bidding against Morgan Stanley by other financial

firms. Lantto denied that request as well, explaining that he

had worked with Morgan Stanley in the past and could vouch for

their competence (but, again, not disclosing his personal

relationship with Seubel). As a result of Lantto’s decision,

NEMC received no competing proposals before entering into the

swap with Morgan Stanley.

121. Scott informed Lantto and various NEMC officials,

early in the process of considering the swap, that he strongly

opposed doing i t . Lantto pressured him not to continue raising

strong objections. Lantto also expressed disapproval when Scott

renewed his request for a second opinion from Ponder & C o .

Because Lantto was his superior, see ¶ 1 2 , supra, and because

Scott had just joined NEMC that year, he acquiesced to that

pressure, toning down his opposition to the swap.

122. NEMC officials relied heavily on Lantto’s advice in

deciding whether to enter into the swap, perceiving him as a

financial expert. Lantto understood the potential risks of the

51 swap, including basis risk (albeit not by that name), but never

discussed those risks with NEMC officials or expressed any

concerns about the swap. He spoke only of the swap’s potential

benefits, reiterating Morgan Stanley’s claim that it would “lock

in” the current interest rate.26

123. At Lantto’s urging, NEMC approved the swap in late

2001. Lantto personally attended the relevant finance committee

and board meetings at NEMC. His presence at those meetings was

unusual and reasonably understood by NEMC officials as an

implicit endorsement of the swap. Lantto then personally

presented the swap to Lifespan’s finance committee and board,

which also approved i t , clearing the way for NEMC to enter into

the swap. NEMC executed the swap contract with Morgan Stanley in

January 2002.

124. Less than a month later, a group of Lifespan’s Rhode

Island hospitals rejected a very similar swap proposal presented

by Morgan Stanley. Those hospitals were contemplating a new bond

issuance, rather than a refinancing. They decided that, in light

of their poor credit rating and resulting uncertainty about

whether they would be able to arrange acceptable bond financing

26 Lantto, who testified by deposition, denied using the phrase “lock in,” acknowledging that it was inaccurate. But NEMC officials recalled his saying i t , and contemporaneous NEMC board meeting minutes expressly state that “Lantto . . . asked the board to ratify . . . the locking in of December interest rates through a hedging mechanism.” This court finds that Lantto likely did use that phrase.

52 that year, the swap was “too risky.” Lantto, having already

pressured NEMC into its swap, did not apply the same pressure to

the Rhode Island group.

125. Under the contract with Morgan Stanley, NEMC’s swap

was scheduled to terminate in July 2002, simultaneously with

NEMC’s anticipated bond refinancing. Morgan Stanley projected

that, if interest rates moved as expected over the next six

months, the swap would result in savings to NEMC of $10,604,144

on the bond refinancing, relative to NEMC’s existing payment

obligations on the original bonds.

126. After NEMC signed the contract, however, interest

rates unexpectedly moved in a direction adverse to NEMC’s swap

position. That movement included a decoupling of the swap rate

index from NEMC’s available refinancing rate. See ¶ 1 1 1 , supra.

By July 2002, as a result of that adverse rate movement, NEMC’s

projected savings on the bond refinancing had dropped by nearly

half, to $5.73 million.

127. If NEMC had terminated the swap at that point, it

would have been required to make a large payment to Morgan

Stanley. See ¶ 1 1 0 , supra. That payment, if not folded into a

simultaneous bond refinancing, would have been classified as an

operating loss for accounting purposes and consequently would

have put NEMC at risk of defaulting on its bond covenants, which

would have caused a host of other problems.

53 128. NEMC expressed to Morgan Stanley its unhappiness with

the swap’s performance and the now-apparent basis risk. Morgan

Stanley, still seeking to serve as NEMC’s underwriter in the bond

refinancing, advised NEMC that it expected interest rates to move

in NEMC’s favor soon. Based on that advice, NEMC decided, with

approval from Lifespan and Lantto (who still had not disclosed

his conflict of interest), to extend the swap beyond July 2002,

and delay the refinancing.

129. After the extension, however, interest rates moved in

a direction even further adverse to NEMC’s swap position. In

August 2002, as Lifespan and NEMC moved closer to disaffiliation,

Lantto distanced himself from the transaction, telling Scott to

take the lead. NEMC then engaged Ponder & Co., the consultant

that Scott had wanted to engage earlier, to present options with

regard to the swap and refinancing.

130. Based on Ponder’s advice, NEMC decided to refinance

the bonds with Merrill Lynch as underwriter, rather than Morgan

Stanley, which it fired. NEMC terminated the swap with Morgan

Stanley in November 2002 and refinanced the bonds through Merrill

Lynch. In the end, NEMC saved only $681,209 on the refinancing,

relative to its existing bond payment obligations. NEMC made a

payment of $8.954 million to Morgan Stanley under the swap, which

was folded into the refinancing.

54 131. If not for his friendship with Seubel, Lantto never

would have arranged for Morgan Stanley (or any other firm) to

present a swap proposal to NEMC, or pressured NEMC to enter into

a swap. NEMC, in turn, never would have entered into a swap.

Instead, NEMC likely would have refinanced its bonds in July 2002

at then-prevailing interest rates. That would have resulted in

present value savings to NEMC of $11.25 million.27

132. If Lantto had arranged for Morgan Stanley to present

the swap proposal, but then disclosed his conflict of interest to

NEMC and recused himself from the transaction, Scott would have

opposed the swap more openly and forcefully, likely with the

backing of his chosen consultant. Without Lantto there to

counter Scott’s view and push the transaction through, NEMC

likely never would have entered into a swap, and instead would

have refinanced the bonds in July 2002.

133. Regardless of whether Lantto disclosed his conflict of

interest or recused himself, NEMC would not have entered into the

swap, and likely would have refinanced the bonds in July 2002, if

Lantto had discussed with NEMC the potential risks of the swap,

including its basis risk, rather than speaking only of its

27 There is also a possibility, though not a likelihood, that NEMC would have conducted an “advance refunding” of the bonds, refinancing them in advance of July 2002 to truly lock in the current interest rate. That can only be done once during the life of the bonds. An advance refunding would have resulted in present value savings to NEMC of $8.538 million, after accounting for negative arbitrage.

55 benefits and falsely stating to NEMC that the swap would “lock

in” current interest rates. See ¶ 1 2 2 , supra.

134. Foregoing the swap would have left NEMC at risk of

potential interest rate increases after January 2002, but also

would have left open the possibility of beneficial rate

reductions (which actually happened), would not have required

NEMC to pay a $1.6 million transaction fee to Morgan Stanley, see

¶ 1 1 1 , supra, and would not have created the risk of a large swap

payment that, if not folded into a simultaneous bond refinancing,

could cause NEMC to default on its bond covenants, see ¶¶ 1 1 0 ,

127, supra. On balance, foregoing the swap would have been the

better course for NEMC.

135. This court has already ruled that Lifespan owed a

fiduciary duty to NEMC during the affiliation. See Lifespan, 731

F. Supp. 2d at 238-41. Lifespan specifically owed a fiduciary

duty to NEMC with regard to the interest rate swap and bond

refinancing, by virtue of the control that Lifespan exercised

over those matters and the “faith, confidence, and trust” that

NEMC placed in Lifespan’s judgment and advice. Id. (quoting

Harbor Schools, 843 N.E.2d at 1064).

56 136. Lifespan breached its fiduciary duty to NEMC when

Lantto, its CFO,28 knowingly gave Morgan Stanley preferential

access to NEMC, concealed from NEMC his personal relationship

with Seubel, failed to recuse himself from the proposed swap

transaction, pressured NEMC to enter into the swap, prohibited

competitive bidding, prohibited NEMC from obtaining a timely

second opinion from its chosen consultant, suppressed opposition

from NEMC’s CFO, advocated the swap to NEMC without discussing

its risks, and falsely stated to NEMC that the swap would “lock

in” current interest rates.

137. Each of those acts and omissions was done knowingly by

Lantto for the purpose of advancing his self-interest, and in

knowing disregard of NEMC’s interests. See ¶ 1 1 7 , supra. Lantto

failed, in each instance, to exercise “utmost good faith” toward

NEMC. Harbor Schools, 843 N.E.2d at 1064-65. Each of those acts

and omissions therefore constituted a breach of his--and

Lifespan’s--duty of loyalty to NEMC. See, e.g., Demoulas, 677

N.E.2d at 179 (duty of loyalty requires fiduciary “to act with

28 “Under ordinary principles of agency,” a corporation “is vicariously liable for the tortious conduct of its employee committed within the scope of his employment.” Kourouvacilis v . Am. Fed’n of State, County & Mun. Emps., 841 N.E.2d 1273, 1283 (Mass. App. C t . 2006) (citing Worcester Ins. C o . v . Fells Acres Day Sch., Inc., 558 N.E.2d 9 5 8 , 967 (Mass. 1990)).

57 absolute fidelity”); Donahue, 328 N.E.2d at 515 (fiduciary “may not act out of . . . self-interest”).29

138. Lifespan argues that a fiduciary has no duty to

disclose a conflict of interest unless non-disclosure would

unjustly enrich the fiduciary. But “the circumstances creating

such fiduciary obligations as a duty to disclose are varied,” and

not subject to any “universally-applicable rule.” Geo. Knight &

C o . v . Watson Wyatt & Co., 170 F.3d 2 1 0 , 216 (1st Cir. 1999)

(citing Massachusetts cases). The touchstone is whether the

fiduciary’s “failure to make disclosure would be inequitable.”

Id. Here, Lantto’s knowing concealment of his conflict of

interest was inequitable and disloyal to NEMC, regardless of

whether it unjustly enriched him.

139. Moreover, even if unjust enrichment were required,

that requirement would be satisfied here. Lantto had not only a

personal interest in the swap, but also a financial interest, in

that he wanted to join Seubel’s wine partnership and likely hoped

the swap would help make that happen. See ¶ 1 1 7 , supra. That

made his conduct a form of unjust enrichment and self-dealing.

Under such circumstances, “to satisfy the duty of loyalty, a

fiduciary . . . must disclose details of the transaction and the

29 During closing argument, Lifespan argued that Lantto’s conduct was “not unusual” and is the sort of thing that “happens all of the time” in the business community. But that assertion is not supported by the evidence and, in any event, would not excuse knowingly disloyal behavior by a fiduciary.

58 conflict of interest to the corporate decisionmakers” so that

they can make an informed and independent judgment. Demoulas,

677 N.E.2d at 181; BCHF, 73 F.3d at 433-34.

140. Lifespan’s breaches of fiduciary duty, see ¶¶ 136-137,

supra, were the “but-for” and proximate cause of damages to NEMC,

in that they foreseeably caused NEMC to enter into the swap and

suffer damages, which it otherwise would not have done, see ¶¶

131-133, supra, and they were a substantial factor at every stage

of the decision-making process.

141. Lifespan’s breach of fiduciary duty caused actual

damages to NEMC in the amount of $10,568,791, which is the

difference between what NEMC likely would have saved on a July

2002 bond refinancing had it not entered the swap ($11.25

million), and the amount that it actually saved as a result of

the swap ($681,209). See ¶¶ 130-131, supra. That is the amount

necessary to put NEMC “in the position [it] would have been in if

no breach of fiduciary duty had been committed.” Berish, 770

N.E.2d at 977.

142. Lifespan argues that NEMC’s damages should be measured

relative to what it would have saved had it terminated the swap

as scheduled in July 2002 ($5.73 million), rather than extending

it through November 2002, which would reduce NEMC’s damages by

nearly half, to $5.52 million. See ¶ 126, supra. But NEMC

extended the swap based on Morgan Stanley’s advice and with

59 Lantto’s approval, at a time when Lantto’s conflict of interest

remained undisclosed, and Morgan Stanley was still seeking, with

Lantto’s support, to serve as NEMC’s bond underwriter. See ¶

128, supra.

143. NEMC’s decision to extend the swap was a reasonable

and foreseeable response to the dilemma in which it found itself

as a result of Lifespan’s breach of fiduciary duty, and which it

otherwise would not have faced. Cutting off NEMC’s damages as of

July 2002 would not result in full and fair compensation. Cf.,

e.g., Rattigan v . Wile, 841 N.E.2d 6 8 0 , 690 (Mass. 2006)

(explaining that “the appropriate inquiry” in assessing damages

incurred in an attempt to mitigate “is whether, in the

circumstances, the cost incurred . . . was a reasonable response

to the defendant’s behavior,” not whether the response “actually

succeeded in its purpose”).

144. Finally, the Attorney General and NEMC concede,

without objection from Lifespan, that the swap damages should be

reduced by the $2.25 million payment that NEMC already received

under its settlement agreement with Morgan Stanley. See document

n o . 2 1 0 , at 25. 30 After making that adjustment, the amount of

30 This concession appears to be based on Massachusetts’s Uniform Contribution Among Tortfeasors Act, which provides that “[w]hen a release . . . is given in good faith to one of two or more persons liable in tort for the same injury, . . . it shall reduce the claim against the others . . . in the amount of the consideration paid for it.” Mass. Gen. L . ch. 231B, § 4 ; DeLuca v Jordan, 781 N.E.2d 849, 858 (Mass. App. C t . 2003) (explaining that breach of fiduciary duty is a tort covered by that statute). 60 damages to which the Attorney General is entitled for Lifespan’s

breach of fiduciary duty is $8,318,791.

145. As discussed in Part II.C.i, supra, Lifespan agreed in

the Restructuring Agreement to “indemnify NEMC for any losses it

supervision and direction of Lifespan employees during the

146. Lantto was a Lifespan employee working under the

affiliation when he provided services to NEMC relating to the

refinancing and swap.

147. Lantto’s conduct relating to the swap which

constituted a breach of fiduciary duty, see ¶¶ 136-137, supra,

also constituted willful misconduct, in that Lantto’s acts and

omissions were intentional and carried a “great chance” of harm

to NEMC. Dillon’s Case, 85 N.E.2d at 7 4 .

148. Lantto’s willful misconduct resulted directly and

solely in NEMC’s suffering an actual loss of $8,318,791, after

accounting for the settlement with Morgan Stanley, which reduced

NEMC’s actual loss. See ¶¶ 1 4 1 , 1 4 4 , supra.

61 149. Lifespan argues that Lantto’s misconduct cannot be

deemed the sole cause of NEMC’s loss, because Morgan Stanley also

contributed to that loss, as evidenced by its settlement with

NEMC. But NEMC never would have even considered the swap if not

for Lantto’s misconduct, see ¶ 1 3 1 , supra, and, even having

considered i t , never would have approved i t , regardless of what

Morgan Stanley did. See ¶¶ 132-133, supra. So Lantto’s

misconduct solely and independently caused the loss.

150. Lifespan argues that the word “solely” requires NEMC

to exclude any and all other causes. But, as Justice Holmes

wrote while sitting on the Massachusetts Supreme Judicial Court,

if a defendant were “exonerated because other causes co-operate”

with its own misconduct, then “it never would be liable.” Hayes

v . Town of Hyde Park, 27 N.E. 5 2 2 , 523 (Mass. 1891). This court

rejects Lifespan’s reading as an unreasonable attempt to render

the indemnification provision meaningless.

151. Moreover, even if this court accepted Lifespan’s

reading, NEMC would still be entitled to indemnification under

the other part of the indemnification provision, in which

Lifespan agreed to indemnify NEMC from any losses “incurred or

suffered by [NEMC] as a result o f , arising out of or directly or

indirectly relating to . . . [a]ny misrepresentation by

Lifespan.” See Part II.C.ii, supra.

62 152. Lantto misrepresented to NEMC officials that the

interest rate swap would enable NEMC to “lock in” the then-

current interest rate, which he knew was false. See ¶ 1 2 2 ,

supra. He made that misrepresentation for the purpose of

inducing NEMC’s reliance (i.e., to induce NEMC to enter into the

swap based on that purported “lock in” feature), and NEMC

reasonably did so rely, resulting in damages to NEMC. See ¶ 133,

supra.

153. A knowing concealment of material information by one

who has a duty to disclose that information also constitutes a

misrepresentation under Massachusetts law. See, e.g., First

Marblehead Corp. v . House, 473 F.3d 1 , 9-10 (1st Cir. 2006)

(citing Fox v . F & J Gattozzi Corp., 672 N.E.2d 5 4 7 , 550-51

(Mass. App. C t . 1996), Swinton v . Whitinsville Sav. Bank, 42

N.E.2d 808 (Mass. 1942), and Restatement (Second) of Torts §

551(1) (1977)).

154. Lantto knowingly concealed from NEMC officials his

conflict of interest in the swap transaction and bond

refinancing, which was a material fact that he had a duty to

disclose, by virtue of Lifespan’s fiduciary relationship with

NEMC. See ¶¶ 136-139, supra. He concealed that fact for the

purpose of inducing NEMC’s reliance on his presumed lack of

conflict, and NEMC reasonably did so rely, resulting in damages.

See ¶¶ 131-133, supra.

63 155. As a direct result of each of Lantto’s

misrepresentations, NEMC suffered an actual loss of $8,318,791,

after accounting for the settlement with Morgan Stanley. See ¶¶

141, 1 4 4 , supra. There is no requirement, under the

misrepresentation clause of the indemnification provision, that

NEMC’s loss be caused “solely” by Lifespan’s misrepresentation;

in fact, the loss need only “directly or indirectly relat[e] to”

the misrepresentations. That standard is easily satisfied here.

D. Counterclaims relating to corporate overhead charges

liable for alleged misconduct relating to the corporate overhead

expenses that Lifespan charged to NEMC on an annual basis

throughout the affiliation. This court makes the following

findings of fact and rulings of law on those claims, which result

in no liability for Lifespan.

156. NEMC agreed in the Affiliation Agreement to pay its

share of Lifespan’s corporate overhead expenses, on a “budget

neutral basis.” Lifespan’s other hospitals were also responsible

for paying their respective shares. Corporate overhead expenses

included, for example, executive compensation (for Lifespan and

hospital officials), information technology, payor contracting,

64 financial services, purchasing, legal services, risk management,

public relations, and marketing.

157. During the affiliation, Lifespan charged, and NEMC

paid, corporate overhead fees in the following amounts:

• $10,301,000 for fiscal year 1998 (pro-rated because NEMC joined the system toward the end of that year);

• $35,875,000 for fiscal year 1999;

• $36,416,000 for fiscal year 2000;

• $40,201,000 for fiscal year 2001;

• $43,075,000 for fiscal year 2002; and

• $6,612,000 for fiscal year 2003 (pro-rated because NEMC left the system early that year).

158. Lifespan’s corporate overhead charges were generally

based on its budget projections for each fiscal year. Lifespan

attempted to make budget projections that would equal its actual

expenses. In most years of the affiliation, Lifespan’s actual

expenses turned out to be lower than the budget projections. In

fiscal year 1999, however, the expenses were higher. Overall,

during the affiliation Lifespan spent about $10 million less than

it budgeted systemwide.

159. There was generally no reconciliation, or “true-up,”

at the end of the year between Lifespan’s budget-based corporate

overhead charges and its actual expenses.31 Lifespan used budget

31 On one occasion, however, at NEMC’s request, Lifespan deferred a $500,000 budgeted expense from 2001 to 2002, when it was actually incurred.

65 projections as the basis of its overhead charges to avoid having

to devote time and resources to reconciliation. That began to

change during the last year of the affiliation (2002), when

Lifespan began using actual expenses for certain costs directly

associated with particular hospitals. See ¶ 163, infra

(discussing allocation among hospitals).

160. Lifespan took its actual expenses into account,

however, when making budget projections for the following fiscal

year. Thus, when the actual expenses were lower than the budget

projections, it generally had the effect of reducing the next

year’s budget and, in turn, reducing the next year’s corporate

overhead charges. That happened, for example, in fiscal year

2000, after Lifespan used much less of its medical malpractice

reserves than projected in fiscal year 1999.

161. Despite spending less than budgeted, Lifespan’s

corporate services had an operating loss nearly every year of the

affiliation, and an overall operating loss of about $11 million

during that period. Even after accounting for non-operating

income, Lifespan had a net loss in half of the fiscal years

during the affiliation and essentially broke even overall (except

for a $5.7 million net gain in fiscal year 1999, which resulted

largely from the malpractice savings).

162. This court is not persuaded that Lifespan’s use of

budget projections, rather than actual expenses, to determine

66 corporate overhead charges prevented those charges from being

“budget neutral.” Lifespan saved money in some years, but lost

money in other years. There is no reliable basis for concluding

that the savings and losses would not have balanced out over the

long run. Nor is there any reliable evidence that Lifespan’s

budget-based approach departed from standard industry practice

among healthcare systems.32

163. Lifespan used several different methods to determine

each hospital’s share of the corporate overhead. Certain costs

directly associated with a particular hospital (e.g., salaries

for each hospital’s on-site corporate staff) were charged to that

hospital only. Most costs, however, were allocated among the

hospitals based on their relative revenue. NEMC accounted for

roughly one-third of the system’s revenue and consequently paid

about one-third of the overhead each year.

164. During the first half of the affiliation, NEMC and the

Rhode Island hospitals regularly discussed those allocation

methods with Lifespan and raised objections to allocations that

they considered unfair.33 Lifespan carefully considered their

32 Indeed, that approach likely reduced NEMC’s charges overall, by putting the risk of cost overruns on Lifespan and thereby encouraging it to meet or beat the budget. 33 NEMC still objects, for example, to a $5 million charge in fiscal year 1998 for expenses relating to the COMPASS project, which Lifespan had initiated to address financial problems that pre-dated the affiliation. Notwithstanding its origins, however, that project was designed to benefit the entire system, including NEMC, and was allocated accordingly.

67 respective views and, in some instances, adjusted its methods so

that the allocation would better reflect each hospital’s actual

use of corporate services. Disagreements about the allocation

methods became infrequent during the second half of the

165. This court is not persuaded that Lifespan’s methods

for allocating the corporate charges among its hospitals were any

less favorable to NEMC, on the whole, than to any of the system’s

Rhode Island hospitals, or that a more direct allocation method

would have been any more favorable to NEMC than the mix of

methods that Lifespan used. Nor, again, is there any reliable

evidence that Lifespan’s allocation methods departed from

standard industry practice.

166. At various points during the affiliation, NEMC

requested information from Lifespan regarding the corporate

overhead charges. As NEMC’s budget director John Greenwood

acknowledged, Lifespan officials “tried to provide [NEMC] with as

much details as they ha[d],” including a breakdown of the charges

by department or other cost area. This court is not persuaded

that Lifespan ever refused to provide information that NEMC

requested on that topic.

167. During the second half of the affiliation, NEMC

complained frequently to Lifespan about the amount of corporate

overhead charges. Lifespan maintained that the charges were fair

68 and reasonable. At the end of fiscal year 2001, without

Lifespan’s knowledge, NEMC engaged an outside consultant, Applied

Management Systems (“AMS”), to analyze the charges. AMS reported

that Lifespan’s annual overhead expenses exceeded industry

benchmarks by about $7 million.

168. In 2002, as part of preparing to disaffiliate from

Lifespan, NEMC engaged another outside consultant, Cap Gemini

Ernst & Young, to analyze Lifespan’s corporate overhead charges.

Like AMS, Cap Gemini reported that Lifespan’s annual overhead

exceeded industry benchmarks by about $7 million. The report

pointed to specific areas where, in Cap Gemini’s view, NEMC

received no value from Lifespan’s services, or where NEMC and

Lifespan were duplicating efforts.

169. Cap Gemini acknowledged, however, that “[f]or many

critical areas . . . data availability was severely limited, as

the majority of information was at the corporate offices of

Lifespan.”34 Both its report and AMS’s report were based on a

simple comparison of NEMC’s corporate overhead charges (by

department) to the overhead reported by other healthcare systems.

Moreover, both reports were commissioned by NEMC for the purpose

34 NEMC blames Lifespan for that lack of information, but Lifespan was not involved in the studies or given an opportunity to assist Cap Gemini or AMS. It is worth noting, moreover, that NEMC is seeking to have it both ways: accusing Lifespan of providing insufficient information for NEMC to evaluate the corporate charges, but then asking this court to deem those charges excessive based largely on benchmark analyses of the information that Lifespan provided.

69 of bolstering its complaints. This court is not persuaded that

either report provides a reliable, unbiased analysis of

Lifespan’s corporate overhead charges.

170. There were some areas where Lifespan and NEMC

duplicated efforts, particularly with respect to financial

services. But much of that duplication was the inevitable, and

expected, result of an affiliation between two large entities.

To the extent that the duplication exceeded expectations, it was

because of NEMC’s reluctance to fully integrate itself into

Lifespan’s system, not from any over-reaching on Lifespan’s part.

NEMC still received the benefit of Lifespan’s services in any areas of duplication.35

171. This court has already ruled that Lifespan owed a

fiduciary duty to NEMC during the affiliation. See Lifespan, 731

F. Supp. 2d at 238-41. Lifespan specifically owed a fiduciary

duty to NEMC with regard to the corporate overhead charges, by

virtue of the control that Lifespan exercised over the amount of

those charges and the “faith, confidence, and trust” that NEMC

35 NEMC also received the benefit of Lifespan’s services in the areas where Cap Gemini purportedly found no value to NEMC, which included services for system integration and shared services coordination, and the facilities costs for Lifespan’s corporate headquarters.

70 placed in Lifespan’s judgment. Id. (quoting Harbor Schools, 843

N.E.2d at 1064).

172. The Attorney General argues, first, that Lifespan

breached its fiduciary duty to NEMC by basing its corporate

overhead charges on budget projections, rather than actual

expenses. But Lifespan’s budget projections were designed, in

good faith, to equal actual expenses, and it was fair and

reasonable for Lifespan to use a budget-based approach. See ¶¶

158-162, supra. The Attorney General has not proven that

Lifespan acted disloyally to NEMC or departed from the standard

of care in that regard.

173. The Attorney General argues, next, that Lifespan

breached its fiduciary duty to NEMC by using unfair methods to

allocate corporate overhead charges among the system’s hospitals.

But Lifespan made a reasonable, good-faith effort to allocate the

charges fairly, with input from NEMC and the Rhode Island

hospitals. See ¶¶ 163-165, supra. The Attorney General has not

proven that Lifespan acted disloyally to NEMC or departed from

the standard of care in that regard either.

174. The Attorney General also argues that Lifespan

breached its fiduciary duty to NEMC by failing to disclose

sufficient information regarding the corporate overhead charges.

But Lifespan made reasonable, good-faith disclosures to NEMC

throughout the affiliation, showing how the charges were

71 allocated and for what services. See ¶¶ 1 6 4 , 166, supra. The

Attorney General has not proven that Lifespan acted disloyally to

NEMC or departed from the standard of care in that regard.

175. The Attorney General also argues that Lifespan

breached its fiduciary duty by charging NEMC for duplicative

corporate services. But NEMC, not Lifespan, was responsible for

any such duplication, beyond that which was inevitable and

expected as a result of the affiliation. See ¶ 1 7 0 , supra. The

Attorney General has not shown that Lifespan acted disloyally or

departed from the standard of care in charging NEMC for

duplicative services.

176. It is important, in considering the duplication and

allocation issues, see ¶¶ 173 and 175, supra, to keep in mind

that Lifespan had a fiduciary duty not only to NEMC, but also to

the system’s other hospitals. It would have been unfair to those

hospitals for Lifespan to exempt NEMC from paying its share of

corporate services designed to benefit the entire system, merely

because NEMC had duplicated them, or to use an allocation method

designed to favor NEMC over the other hospitals. Lifespan had to

strike a fair balance between competing hospital interests.36

36 See, e.g., 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) (noting that hospital subsidiaries in a non-profit healthcare system have “potentially compet[ing]” interests and that, given “the realities of that

72 177. Finally, the Attorney General argues that Lifespan

breached its fiduciary duty by charging NEMC excessive amounts

for corporate overhead. As just discussed, however, the charges

resulted from reasonable, good-faith processes. See ¶¶ 172-176,

supra. While they may have been on the high end compared to some

other healthcare systems, this court is not prepared to rule that

they were unreasonably high or that Lifespan acted disloyally in

setting them at the level it did.37

178. NEMC makes essentially the same arguments in support

of its indemnification claim as the Attorney General made on her

breach of fiduciary duty claim. For the reasons just discussed,

NEMC has not proven that Lifespan committed intentional

misconduct or gross negligence, or made any misrepresentations,

with regard to the corporate overhead charges. See ¶¶ 172-177,

supra. So NEMC is not entitled to indemnification on that basis.

context,” the “fairness” of actions affecting multiple hospitals “should be defined with reference to the system” as a whole, not “as if the subsidiary was still freestanding”). 37 The Attorney General argues that the corporate overhead charges constituted a form of self-dealing and that Lifespan therefore bears the burden of proving that the charges were fair to NEMC. See, e.g., Demoulas, 677 N.E.2d at 181. This court need not resolve that issue because, even assuming arguendo that the Attorney General’s argument is correct, Lifespan has satisfied its burden of proof.

73 E. Counterclaims relating to NEMC’s financial performance

Finally, NEMC and the Attorney General each seek to hold

Lifespan liable for NEMC’s poor financial performance during the

affiliation. This court makes the following findings of fact and

rulings of law on those claims, which result in no liability for

Lifespan, beyond that already assessed with regard to payor

contracting and the interest rate swap.

179. As discussed in Part I , supra, Lifespan and NEMC

conducted “due diligence” before entering into the affiliation.

As part of that process, NEMC engaged an outside consultant,

Mitchell Creem of the accounting firm Tofias Fleishman Shapiro &

C o . (who later became NEMC’s C F O ) , to analyze how the affiliation

would affect NEMC’s financial performance in future years. Creem

prepared detailed financial projections, which were shared with

both NEMC and Lifespan.

180. Lifespan and NEMC also jointly engaged an outside

consultant, the accounting firm Ernst & Young LLP, to quantify

and document the potential efficiency gains that could be

achieved through the affiliation. Using Creem’s financial

projections as a baseline, Ernst & Young estimated that the

affiliation would result in annual net savings to NEMC in the

range of $13.45 to $14.6 million.

74 181. Based on those projections, Lifespan and NEMC

officials mutually believed that the affiliation would enable

NEMC to return a positive operating margin. Lifespan’s CFO John

Schibler conveyed that belief and provided those projections to

the Rhode Island Attorney General, describing the projections as

“conservative” and “attainable,” and indicating that Lifespan

would take “aggressive” measures, if necessary, in an effort to

achieve them.

182. Lifespan never promised or guaranteed to NEMC,

however, that it would, in fact, return NEMC to a positive

operating margin or achieve the efficiency gains projected by

Ernst & Young.38 Nor were any of Lifespan’s statements

understood by NEMC officials as a promise or guarantee to that

effect. Lifespan and NEMC officials mutually understood that,

despite their best efforts, the projected improvements might not

be achieved.

183. NEMC never achieved a positive operating margin during

the affiliation. NEMC’s expert Rajan Patel testified, and this

court finds, that NEMC had operating losses of about $25 million

38 NEMC points to a memorandum, written in September 1998, in which Lifespan’s senior vice president of institutional advancement, David Slone, stated to Lifespan’s CEO that the depreciation write-down would “return NEMC to a positive operating margin--as we promised when we took control of that organization.” This court is not persuaded, however, that Slone’s isolated use of the word “promise,” in reference to events occurring a year earlier, was an accurate description of what happened or reflected personal knowledge.

75 in fiscal year 1998, $16.2 million in fiscal year 1999, $15.8

million in fiscal year 2000, $32.3 million in fiscal year 2001,

and $29 million in fiscal year 2002 (after setting aside the

depreciation write-down and certain other accounting adjustments

not reflective of NEMC’s actual performance).

184. Even after accounting for non-operational income, NEMC

never achieved a positive total margin during the affiliation.

Patel testified, and this court finds, that NEMC had total losses

of about $9.2 million in fiscal year 1998, $5.8 million in fiscal

year 1999, $1.1 million in fiscal year 2000, $25.6 million in

fiscal year 2001, and $28.9 million in fiscal year 2002 (again,

after setting aside those accounting adjustments not reflective

of NEMC’s actual performance).

185. NEMC’s total losses would have been even larger in

fiscal years 2000 to 2002 if not for NEMC’s decision, on the

advice of its CFO and with Lifespan’s approval, to draw down its

general reserves in each of those three years. General reserves

are an accounting mechanism used to set aside money for unknown

events. NEMC reduced its general reserves by $5.3 million in

fiscal year 2000, $8.7 million in fiscal year 2001, and $14.1

million in fiscal year 2002, which had the effect of reducing its

total losses by those amounts.

186. As the annual margins indicate, NEMC’s financial

performance improved somewhat from the beginning of the

76 affiliation through fiscal year 2000, but then deteriorated again

in fiscal years 2001 and 2002, leaving NEMC with fewer net assets

at the end of the affiliation (about $219 million) than it had at

the beginning (about $289 million), less cash on hand (about $44

million, compared with about $47 million at the beginning), and

in worse financial condition overall.

187. Patel testified that NEMC’s margin and various other

financial metrics fell below industry benchmarks throughout the

affiliation. Specifically, he testified that other teaching

hospitals nationwide generally achieved positive operating

margins in each of those years, and total margins in the range of

2 to 5 percent, whereas NEMC had negative operating margins each

year, and total margins as low as negative 5 to 6 percent in

2001-2002.

188. This court is not persuaded, however, that the

performance of teaching hospitals nationally is a reliable

benchmark for evaluating NEMC’s performance during the

affiliation. Boston teaching hospitals faced a different set of

circumstances over that period than hospitals in other states,

and their financial results (including margins) generally were

not as strong. Moreover, NEMC’s circumstances were unique even

among Boston teaching hospitals. See ¶¶ 67-71, supra.

189. NEMC’s financial performance followed a different

trajectory from that of most other teaching hospitals. Whereas

77 NEMC’s performance improved somewhat during the first three years

of the affiliation, other teaching hospitals generally saw their

margins fall by nearly half, in large part because of the

Balanced Budget Act of 1997, which reduced Medicare payments.

See note 1 2 , supra. Then, just as other hospitals generally

stabilized their financial performance, NEMC’s performance

deteriorated again.

190. Patel offered little to no testimony on why NEMC’s

financial performance differed from that of other teaching

hospitals, or what Lifespan could have done to improve i t . One

thing that Lifespan repeatedly urged NEMC to d o , especially

during 2001-2002, was to reduce its costs, including its number

of full-time employees and its average length of stay. But NEMC

struggled to do s o , and to some extent resisted Lifespan’s

advice, leading Lifespan to reject--for the first and only time--

NEMC’s budget for fiscal year 2003.

191. Lifespan had financial problems of its own at the

beginning of the affiliation, reporting a large loss for fiscal

year 1998 (shortly after the affiliation started), which resulted

in an investigation by the Rhode Island Attorney General and a

change of command at Lifespan (then-CEO William Kreykes was

replaced by current CEO George Vecchione). Unlike with NEMC,

however, Lifespan’s financial performance improved steadily

throughout the affiliation.

78 ii. Rulings of law

192. This court has already ruled that Lifespan owed a

fiduciary duty to NEMC during the affiliation. See Lifespan, 731

F. Supp. 2d at 238-41. Lifespan specifically owed a fiduciary

duty to NEMC with regard to its oversight of NEMC’s financial

performance, by virtue of the control that Lifespan exercised

over NEMC and the “faith, confidence, and trust” that NEMC placed

in Lifespan’s judgment and advice. Id. (quoting Harbor Schools,

193. The Attorney General argues that Lifespan breached its

fiduciary duty to NEMC by failing to return NEMC to a positive

operating margin and failing to achieve the efficiency gains

projected by Ernst & Young. But, outside of payor contracting,

see Part III.B, supra, and the interest rate swap, see Part

III.C, supra, the Attorney General has not proven any specific

departure(s) from the standard of care by Lifespan, or any

disloyal acts, that caused or contributed to NEMC’s poor

194. This court cannot accept the conclusory proposition,

put forth by NEMC’s expert Patel, that because Lifespan exercised

control over NEMC, and because NEMC’s financial performance

failed to improve as projected, Lifespan must have departed from

79 the standard of care (violating what the Attorney General and

NEMC call the “duty to improve NEMC’s performance”). Countless

factors affect the financial performance of a hospital of NEMC’s

size and scope, and many of them cannot be predicted or

controlled by the hospital’s corporate parent. This is no place

for “res ipsa loquitur”-style reasoning.

195. It is important to note, moreover, that NEMC’s

financial performance improved somewhat during the first three

years of the affiliation, at a time when other teaching

hospitals’ margins were generally moving in the opposite

direction. See ¶ 189, supra. NEMC’s own CFO (Creem) considered

NEMC’s financial performance over that period “very successful.”

That demonstrates the flaw in Patel’s logic and suggests that

Lifespan may even have out-performed industry standards in some

respects.

196. The Attorney General also argues that Lifespan

breached its fiduciary duty by misrepresenting that it would

return NEMC to a positive operating margin and achieve the

projected efficiency gains, without exercising reasonable care in

determining if it actually could do s o , and without delivering on

that commitment. But Lifespan never made any promises or

guarantees that it would actually achieve those financial

projections, nor did NEMC officials understand it to have done

so. See ¶ 1 8 2 , supra.

80 197. Moreover, “false statements of conditions to exist in

the future, and promises to perform an act” do not constitute

misrepresentations “unless the promisor had no intention to

perform the promise at the time it was made.” Cumis, 918 N.E.2d

at 4 9 . At the time of the alleged misrepresentations, Lifespan

reasonably believed that it would be able to achieve the

projected improvements and intended, in good faith, to achieve

them. S o , even if it had promised to achieve those results, the

promises would not be misrepresentations.

198. Finally, in a combination of the two arguments already

discussed, the Attorney General argues that Lifespan “created its

own yardstick” by endorsing Ernst & Young’s projections and

representing that it could achieve them. But the fact that a

fiduciary may have held itself to a higher standard, or expressed

a good-faith belief that it could achieve a higher standard, does

not change the standard for proving a breach of fiduciary duty.

The Attorney General has not met that standard.

199. NEMC makes essentially the same arguments in support

of its indemnification claim as the Attorney General made on her

breach of fiduciary duty claim. For the reasons just discussed,

misconduct or gross negligence, or made any misrepresentations,

81 with regard to NEMC’s financial performance, except to the extent

already addressed in connection with payor contracting and the

interest rate swap. See ¶¶ 193-198, supra.

IX. Conclusion

Based on the findings and rulings set forth above, this

court awards Lifespan $13,903,948 on its claim against NEMC for

breach of contract, and awards $14,176,704 to NEMC and the

Attorney General on their counterclaims against Lifespan for

indemnification and breach of fiduciary duty, resulting in a net

award of $272,756 to NEMC. The clerk shall enter judgment

accordingly and close the case.

SO ORDERED.

Joseph N. Laplante United States District Judge District of New Hampshire

Dated: May 2 4 , 2011

cc: Deming E . Sherman, Esq. Patricia A . Sullivan, Esq. Rachel K. Caldwell, Esq. Bruce A . Singal, Esq. David A . Wollin, Esq. Jeffrey T . Rotella, Esq. Michelle Peirce, Esq. Adam M . Ramos, Esq. Eric Carriker, Esq. Jonathan C . Green, Esq. Patrick J. Tarmey, Esq.

82 APPENDIX: PAYOR CONTRACTING DAMAGES

UNITED

Year Actual Inflation (Boston Adjusted Lost revenue* all-item CPI plus revenue revenue 1%)** 2000 $7,103,411 6.9% $7,593,546 $490,135 2001 $7,103,411 5.3% $7,996,004 $892,593 2002 $7,103,411 5.3% $8,419,792 $1,316,381 Total $21,310,233 $24,009,342 $2,699,109

CIGNA

Year Actual Inflation (Boston Adjusted Lost revenue* medical CPI)** revenue revenue 2000 $5,504,385 12.7% $6,203,442 $699,057 2001 $5,504,385 5.6% $6,550,835 $1,046,450 2002 $5,504,385 5.6% $6,917,682 $1,413,297 Total $16,513,155 $19,671,959 $3,158,804

* These numbers reflect the amount that NEMC collected from United and Cigna during fiscal year 2003, the earliest year for which data is still available. This court finds that the 2003 collections data is a reasonable approximation for the revenue collected from United and Cigna during each year of the affiliation (and, as Lifespan’s expert John Lavan acknowledged, “as good as anything we have”). If anything, it is conservative, because NEMC’s revenue from those payors had generally been in decline. This court has excluded United collections for inpatient services, because they were subject to built-in inflationary increases, see ¶ 7 3 , supra, and Cigna collections for transplant services, because they were covered by a contract separately negotiated during the affiliation, see ¶ 7 2 , supra.

** These percentages reflect the CPI increases for the year preceding the one listed in the first column. For the year 2000, because the United and Cigna contracts had not been negotiated since 1997, see ¶ 7 3 , supra, the percentages reflect the total, compounded inflation for 1998 and 1999.