Opinion
Civil Action Number 03-2354 Section "L" (2).
August 7, 2004
FINDINGS OF FACT AND CONCLUSIONS OF LAW
This case arises from a lease agreement that was executed by the parties on July 2, 2003. The commencement of the obligations created by the agreement was subject to certain conditions. The Plaintiff maintains that the conditions were not fulfilled due to the fault of the Defendant. Thus, the Plaintiff filed suit claiming that the Defendant is in breach and liable for damages. The Defendant denies fault and claims that they did everything reasonable and proper to fulfill the conditions. Defendant maintains that despite its good faith efforts, the conditions could not be fulfilled and, thus, the contract became void.
This matter came before the Court for a two-day bench trial beginning on July 26, 2004. At the conclusion of the trial, the Court took the matter under submission. After considering the testimony of witnesses, the argument of counsel, and all of the evidence, the Court hereby renders judgment in favor of the Defendant.
I. FINDINGS OF FACT
1.
Plaintiff Lake Forest Management ("Lake Forest") owns and operates an ambulatory surgical center known as the Lake Forest Surgery Center, located at 10545 Lake Forest Boulevard in New Orleans, Louisiana. Dr. Edward M. Campbell ("Campbell") is the sole member and stakeholder in Lake Forest.2.
Defendant HealthMark Partners ("HealthMark") owns, manages, and develops surgery centers, including ambulatory surgery centers, throughout the country. Jerry Brown ("Brown") is HealthMark's Senior Vice-President of Development, and was HealthMark's primary contact with Lake Forest and Campbell at all times relevant to the case at bar.
An ambulatory surgery center is a designation achieved via licensure.
3.
Ben Ferguson ("Ferguson") is a business broker with over seven years of experience in the health-care industry. Ferguson assisted Campbell in selling or leasing the Lake Forest facility.
4.
Prior to October 2002, several other surgery-center developers contacted Campbell to discuss proposals to invest in an ASC at the Lake Forest facility. None of these potential ventures ever came to fruition.
5.
In October 2002, HealthMark contacted Campbell through Ferguson to propose an asset purchase of the Lake Forest facility to develop an ambulatory surgery center ("ASC"). The standard model of an ASC developed by HealthMark is to recruit surgeons with a practice in the geographical region near the facility to become investors. The physician-investors form a syndicate, thereby pooling their resources to purchase a surgical facility to house the surgical operations of the syndicate. The asset-purchase proposed by HealthMark included a syndication of physicians to invest in the venture.6.
HealthMark was having difficulties attracting physician-investors to the venture. Rather than abandon the venture altogether, the parties agreed to restructure the venture to a lease with an option to purchase. A principal purpose of the change to a lease agreement instead of a sale was to make the proposal more attractive to physician-investors.
7.
As part of the lease agreement, HealthMark agreed to form a Limited Liability Company for the purposes of leasing, owning, and/or operating an ASC at the Lake Forest site. Physicians' Surgery Center of New Orleans ("PSCNO") was the Limited Liability Company formed for this purpose. HealthMark would be an investor in PSCNO and the manager of the facility.
8.
Under the agreement, PSCNO would lease the Lake Forest facility from the Plaintiff for a term of five (5) years and for an annual rental of $250,000. HealthMark was not a party to the lease, but executed a guaranty of the first year's lease payments, plus an additional period of rentals for 180 days if PSCNO exercised its termination option under the lease. The agreement also included an option to purchase the facility at any time while the lease was in effect.
9.
Both parties participated in drafting the lease agreement and were represented by counsel throughout the negotiation process. The parties executed the agreement on July 2, 2003. However, the term did not commence on that date. Rather, the parties contemplated that the lease term would commence on the later to occur of June 1, 2003, or upon the happening of three specific conditions. Namely, the relevant provision of the agreement provides:
The term of his Agreement shall be for a period of five (5) years, beginning on the later to occur of June 1, 2003, or the date by which all of the following are achieved: (1) Tenant shall have completed the addition of all of its physician members; (2) Tenant shall have obtained all approvals and certifications from the appropriate state and federal authorities necessary to operate the Surgery Center and be reimbursed for services rendered to Medicaid and Medicare patients, and (3) all service, if any, required to ensure that the Surgery Center's heating and ventilation system complies with minimum AIA standards for ambulatory surgery centers is completed. . . .
Neither party alleges that the lease term began on June 1, 2003. Furthermore, there is no dispute regarding the third condition above.
10.
The parties executed the lease agreement even though at that particular point in time, all of the factors to complete the agreement were not yet in place. Brown testified that developing an ASC requires coordinating many different, interrelated elements simultaneously. In this case, the elements at issue involve HealthMark's attempts to recruit physician-investors and arrange for anesthesiology coverage at the facility, as discussed fully below. However, HealthMark signed the lease in July because it needed to have a facility secured in order to move forward with other elements. Additionally, Campbell was preparing to leave the country, and the parties wished to have the lease arrangement confected prior to his depature.
11.
The agreement also provided that Campbell would receive a fifteen (15) percent interest in PSCNO. Moreover, HealthMark would receive no less than thirty-six (36) percent and no more than fifty-one (51) percent. HealthMark was also given the right to vote Campbell's fifteen (15) percent interest in PSCNO.
12.
HealthMark attempted to attract physician members by having some physicians participate as "founders." The involvement of founders was intended to generate interest in the venture from other physicians who would perceive the involvement as a good sign of the potential success of the venture. However, the founders were under no obligation to become physician investors. Founders executed a letter of intent and tendered a $750 deposit. Six (6) doctors enrolled as founders.
The following physicians enrolled as founders: Kevin Stephens, Chris Marrero, David Jarrott, Denardo Dunham, Calvin Williams, and Washington Bryan.
13.
To enroll as a physician-investor, a physician was required to execute a Subscription Agreement and tender $5000 per each one (1) percent interest in the ASC. Several physicians executed Subscription Agreements in varying percentages. However, only two physicians executed Subscription Agreements and tendered the appropriate funds. The other potential physician investors either refused to tender the funds or were unable to obtain financing. Moreover, even if all of the potential investors tendered funds thereby completing the subscription process, the overall subscription rate would not have exceeded seventy (70) percent. This number includes Campbell's and HealthMark's respective percentages of interest.14.
The inability to achieve the necessary commitments from physician investors was complicated by the problems in contracting with one or more licensed anesthesiologists to provide anesthesiology services to the ASC. In addition to recruiting physician investors, HealthMark also had to obtain all state and federal approvals and certifications necessary to operate the ASC and to be reimbursed for services rendered to Medicaid and Medicare patients. Among other things, in order for this condition to be fulfilled, HealthMark had to arrange for anesthesiology coverage.
The partes agree that there are no other issues regarding licensure.
15.
The Code of Federal Regulations regarding Medicare and Medicaid mandates that anesthesiology must be administered in one of two ways in order for surgical procedures performed in an ambulatory surgery center to be covered. 42 C.F.R. § 416.42 (2004). Pursuant to the federal provision, anesthetics must be administered by only:(1) A qualified anesthesiologist; or
(2) A physician qualified to administer anesthesia, a certified registered nurse anesthetist (CRNA) or an anesthesiologist's assistant . . ., or a supervised trainee in an approved education program. In those cases in which a non-physician administers the anesthesia, unless exempted in accordance with paragraph (d) of this section, the anesthetist must be under the supervision of the operating physician, and in the case of an anesthesiologists's assistant, under the supervision of an anesthesiologist.42 C.F.R. § 416.42(b). Paragraph (d) referenced in subsection (2) above, allows individual states to opt out of the requirements set forth in the provision. Louisiana has not opted out. Thus, if anesthesia is not administered by an anesthesiologist or a physician qualified to administer anesthesia, the physician who performed the operation must supervise the CRNA and remain at the surgical facility until the patient is released.
16.
HealthMark's standard practice is to contract with physician anesthesiologists to provide services on a fee-for-service basis. HealthMark uses physician anesthesiologists as opposed to CRNA's in order to comply with federal and state law and in order to promote efficiency. In HealthMark's experience, physician-investors require, or at least prefer, that anesthesiology coverage be provided by a physician anesthesiologist. Physicians prefer anesthesiologists because different levels of cases require different levels of anesthesia. In some cases, a general surgeon is not qualified to administer anesthesia. In other cases, physicians do not want to assume the risk associated with administering anesthesia.
Moreover, as cited above, a CRNA must be supervised by the doctor who performed the surgery. Thus, the operating doctor must remain at the facility until all of the patients upon whom he or she operated are released. In HealthMark's experience, such an arrangement is not efficient, cost effective, or economically attractive to physicians. Physicians who perform surgeries at an ASC typically come to the facility to perform the surgery and then leave once the surgery has been completed.
17.
In his surgical practice, Campbell uses a CRNA under his supervision to administer anesthesia. Such an arrangement is feasible for Campbell because he maintains an office at the Lake Forest facility. Campbell knew that HealthMark required a physician anesthesiologist for the proposed ASC because he negotiated a term in the agreement that would allow him to be exempted from this requirement. Campbell desired such an arrangement so that he could continue to perform plastic surgical procedures at a fixed rate, which included the services of a CRNA. HealthMark agreed to this arrangement.
18.
Because the costs of anesthesiology is not included as part of the ASC's overhead, anesthesiology costs are not typically included in a proposed ASC's financial projections. HealthMark did not include anesthesiology in its financial projections for the proposed ASC because, based on its experience, it would be able to contract with anesthesiologists on a fee-for-service basis. Campbell was aware that these costs were not contemplated by HealthMark.
19.
To that end, sometime after May 2003, HealthMark attempted to contract with anesthesiologists on a fee-for-service basis. HealthMark contacted numerous anesthesiologists to solicit their interest in providing services to the proposed ASC. HealthMark also sought assistance from Campbell and the other physician-investors to identify anesthesiologists whom HealthMark could contact. HealthMark contacted every anesthesiologist identified in this way. None of them were willing to provide services on a fee-for-service basis.20.
During this time, HealthMark was in contact with Campbell on a regular basis. Campbell allowed Brown and other HealthMark staff to use space at the Lake Forest facility from which to operate when in New Orleans. As July approached, Brown or other HealthMark staff were in daily contact with either Campbell or his assistant, Wendy Keller. Campbell was aware of the difficulties HealthMark was having arranging anesthesia coverage as reflected in email correspondence. For example, in an email from Brown dated July 8, 2003 sent to, among others, Campbell, Wendy Keller, and Campbell's attorney, Brown indicates that they had been unsuccessful in reaching a specific anesthesiologist and that anesthesia coverage remains an "open item." Plain. Ex. No. 51. Brown closed that email by indicating that the anesthesia issue was one of the most pressing matters in establishing a commencement date.
21.
By late July 2003, efforts to obtain anesthesiology coverage were unsuccessful. On July 30, 2003, Brown held a conference call with the two physician-investors who had completed the subscription process by signing the Subscription Agreement and tendering the appropriate funds. The consensus among these physicians was that the venture was unlikely to proceed due to the inability to arrange for anesthesiology coverage. However, it was agreed that Brown would contact Campbell to determine if there were other options that might allow the venture to move forward.
22.
Immediately following this conference call, Brown contacted Campbell by telephone to discuss the issues raised in the conference call. Brown sent Campbell an email the following day memorializing their conversation. Pl. Ex. No. 55. In the email, Brown stated that they had been unable "to contract on satisfactory terms for MD anesthesia coverage at the center." Brown further stated that the venture could not move forward without such coverage and that "per the terms of the lease unless this issue can be resolved satisfactorily we will not be in a position to proceed."
Brown also stated in the email that HealthMark was not willing to accept the risk of employing an anesthesiologist. As an alternative, HealthMark suggested that Campbell assume the risk of such employment by reducing the amount of the rental payments. Healthmark made this suggestion based on Campbell's belief that the proposed ASC would generate sufficient fees to cover compensation for an anesthesiologist. Campbell did not agree to this arrangement.
23.
On July 31, 2003, Ferguson sent Brown an email referring Brown to a recruitment firm. In the event that the firm was successful in locating an anesthesiologist to provide services on a fee-for-service basis, HealthMark would owe a fee of $20,000. Pl. Ex. No. 54. HealthMark opted not to use a recruitment firm, however, because of the delay such an approach would cause. Pl. Ex. No. 59.
24.
Campbell did provide the phone number of another potential anesthesiologist. Pl. Ex. No. 58. HealthMark attempted to contact the anesthesiologist, but its phone calls were not returned.
25.
Ultimately, every anesthesiologist contacted by HealthMark was either not interested in the venture or would not agree to its terms. The anesthesiologists who were interested wanted to be hired as full-time employees of the ASC and remunerated on par with the compensation they were receiving at a hospital. That is, they wanted a fixed salary, full benefits, and vacation and sick leave. As stated above, it was HealthMark's standard practice to contract with anesthesiologists on a fee-for-service basis, and the parties contemplated that anesthesia would be provided for in this manner.
26.
On August 14, 2003, HealthMark gave formal notice to Campbell and Lake Forest that the proposed venture had failed due to (1) PSCNO's failure to complete the syndication of physician-investors; and (2) the inability to obtain regulatory approvals and certifications resulting from the unavailability of anesthesiology coverage on an acceptable basis. Pl. Ex. No. 68.
27.
Lake Forest filed the instant law suit on August 20, 2003.II. CONCLUSIONS OF LAW
1.
Under the Louisiana Civil Code, a conditional obligation is one dependent on an uncertain event. La. Civ. Code art. 1767. If the obligation may not be enforced until the uncertain event occurs the condition is suspensive. La. Civ. Code art. 1767. Courts do not construe provisions in a contract as suspensive conditions unless the express contract language compels such construction. Hampton v. Hampton, 713 So.2d 1185, 1190 (La.App. 1st Cir. 1998).2.
In this case, the agreement stipulated that it would begin "the later to occur of June 1, 2003, or the date by which all of the following [conditions] are achieved." (Emphasis added). The express language of the agreement unambiguously indicates that the parties contemplated that the obligations created by the agreement would not arise until the enumerated conditions were fulfilled. Thus, the Court finds that the conditions enumerated in the agreement were suspensive conditions.
3.
Pursuant to an obligation subject to a suspensive condition, the obligor does not have to perform and the obligee does not have the right to demand performance until the happening of the uncertain event. Nevertheless, "the obligation exists, and therefore, though it may not yet be enforced, it already binds the parties in a way that allows the obligee to take measures in preservation of his right and places both parties under a duty of good faith that bars any action of theirs that would prevent the happening of the uncertain event." Saul Litvinoff, The Law of Obligations, 5 Louisiana Civil Law Treatise § 5.1 (2001); see Dufrene v. Browning-Ferris, Inc., 1997 WL 587765 (EDLA Vance, 1997). However, the mere failure to fulfill a contractual obligation, without showing of intent or ill will, does not constitute a breach of good faith under Louisiana law. Brill v. Catfish Shaks of America, Inc., 727 F. Supp. 1035, 1041 (EDLA Mentz 1989). An obligor will not be liable if the obligor acted reasonably and in good faith to attempt to fulfill the condition. See Garsee v. Bowie, 852 So.2d 1156 (La.App. 2d Cir. 2003).
4.
The parties agree that the obligations did not arise on June 1, 2003. In the complaint, the Plaintiff stated that, in fact, the conditions had been fulfilled, such that the contract obligations were enforceable. However, the direct evidence belies this contention. The question is whether the Defendant prevented fulfillment of the conditions. In such a case, Louisiana Civil Code article 1772 provides that a "condition is regarded as fulfilled when it is not fulfilled because of the fault of a party with an interest contrary to the fulfillment."
5.
"Fault" is not defined in the Civil Code. Langlois v. Allied Chemical Corp., 258 So.2d 133, 137 (La. 1971) (reversed on other grounds). Though Langlois dealt with fault in the tort context, the court discussed "fault" in the Civil Code in general and stated thus:
Definitions of fault are actually indefinite generalities and usually not illuminating when applying the concept. Colin and Capitant have said that fault signifies that conduct which a man should not have engaged in-that is, that he has acted as he should not have acted. Defining fault is logomachy. . . . Fault is not limited to moral wrongs but encompasses many acts which are merely forbidden by law. The fault of the employer which makes him liable for the negligence of his employees is founded upon socio-economic needs and not upon moral considerations. Our Code has defined man's responsibility in numerous relationships with others, such as lessor, as lessee, as carrier, as an adjoining landowner, as a neighbor, to illustrate only a few.Id. (Internal citations omitted). Thus, the Court explained that fault can arise from an act or failure to act of a party, or it can arise by operation of law based on legally defined relationships.
6.
In contract, the law imposes a duty of good faith and fair dealing upon the relationship between obligor/obligee. La. Civil Code art. 1983. This duty governs and is at the center of every contractual relationship. Applied to article 1772, the duty of good faith requires that the parties allow the conditions to happen or not happen in the manner intended at the creation of the obligation. See Saul Litvinoff 5 Louisiana Civil Law Treatise, The Law of Obligations § 5.9 (2nd Ed. 2001). Should the condition not be fulfilled due to circumstances outside of the control of either party, then the condition is deemed unfulfilled and the obligations are extinguished.
However, a party who undertakes to prevent the happening of a condition is actually exercising control over the event, thereby destroying its uncertainty. To protect the interests and intent of the non-offending party, however, article 1772 provides that the condition is deemed fulfilled.
7.
Most of the jurisprudence interpreting article 1772 involves obligations to buy property subject to the condition of the buyer's obtaining financing. The uncertain event in such a case is that a third-party, a financial institution, will grant the loan. The duty of good faith requires the buyer to apply for the loan and take all steps necessary to secure financing. See Williams v. Enmon, 380 So.2d 144 (La.App. 1st Cir. 1979); Liuzza v. Panzer, 333 So.2d 689 (La.App. 4th Cir. 1976); Freedman v. Faia, 176 So.2d 213 (La.App. 4th Cir. 1965). Professor Litvinoff explains that failure to do so constitutes "fault," "which in such a case consists in a violation of the overriding duty of good faith that bound the buyer to allow the condition to happen or not happen in the manner that the parties intended at the inception of the obligation" ( citing 3 Toullier, Le droit civil francais 548 (1833)).8.
Similarly, the contract at issue required the Defendant to attempt to recruit the needed number of physician members and secure anesthesiology coverage. The uncertain events in this case were that the third-party physicians would execute Subscription Agreements and that HealthMark would be able to arrange physician anesthesiology coverage on a fee-for-service basis. The duty of good faith required the Defendants to allow these event to happen in the manner contemplated by the parties at the inception of the contract. The Court finds that the parties contemplated that Subscription Agreements would not be confected until the individual physician members tendered funds in the appropriate amount and that anesthesiology coverage would be provided by physician anesthesiologists on a fee-for-service basis.
9.
Regarding the recruitment efforts of the Defendant, the Court finds that the Defendant made a good faith and reasonable effort to attract physician-investors to the venture. In addition to Campbell and HealthMark, eight (8) additional prospective physician-investors executed Subscription Agreements. However, of this eight (8), only two (2) actually tendered their investments. The investments of these two physicians accounted for only a two (2) percent interest in PSCNO. As of July 31, 2003, the remaining six (6) potential investors had not funded their investments, despite the efforts of the Defendant to secure the funding. Furthermore, the Defendant's efforts to recruit physician-investors was complicated by its ability to arrange anesthesia coverage by a physician anesthesiologist.The Court concludes that the efforts by the Defendant to close the syndicate were reasonable and made in good faith. The Defendant had an interest in seeing this venture succeed, and there is no evidence that the Defendants undertook any action to prevent the syndication from closing.
10.
Similarly, as to the anesthesia coverage, the Court finds that the Defendant made a good faith and reasonable effort to obtain anesthesia coverage for the proposed ASC. Based on HealthMark's experience, such coverage is supplied to ASC's on a fee-for-service basis. HealthMark had not had difficulties arranging such coverage in other locales and was reasonable in concluding that it would be able to arrange for such coverage at the Lake Forest site. To that end, HealthMark contacted numerous individual anesthesiologists and anesthesiology groups in the market area. None of the anesthesiologists contacted were willing to provide services on a fee-for-service basis. There is no evidence that HealthMark acted in less than good faith in its attempts to secure anesthesia coverage. After spending substantial sums of money and dedicating a significant portion of its staff to this venture, it is illogical that HealthMark would foil its own attempts. As such, the Court concludes that the non-fulfillment of the second suspensive condition for lack of anesthesia coverage was not due to the "fault" of the Defendant.
III. CONCLUSION
In sum, the Court finds that, notwithstanding the good faith efforts on the part of the Defendant, both suspensive conditions at issue were not fulfilled. As such, the obligations under the contract are not enforceable, and the agreement is void ab initio.
Accordingly, and for the reasons given above, the Court hereby renders judgment in favor of the Defendant. The Plaintiff's claims should be and hereby are DISMISSED with prejudice.