Opinion
16-P-162
05-01-2017
ADVANCED HEALTHCARE MANAGEMENT SERVICES, LLC, & others v. VHS ACQUISITION SUBSIDIARY NUMBER 9, INC.,& another.
MEMORANDUM AND ORDER PURSUANT TO RULE 1:28
After a jury-waived trial, a judge in the Superior Court awarded the plaintiffs, Dr. Sagun Tuli and two corporations created by her, $3,652,000 in damages on their breach of contract claims and $965,859 in attorney's fees and costs. The claims result from a failed business venture between Dr. Tuli and the defendants, Vanguard Health Systems, Inc. (Vanguard) and VHS Acquisition Subsidiary No. 9, Inc., d/b/a MetroWest Medical Center (MetroWest), to establish a specialized medical institute in Natick to perform brain and spinal surgery. The defendants appeal arguing, among other things, that the judge erred in using extrinsic evidence to interpret what they claim is unambiguous contract language; miscalculated the amount of damages; and misinterpreted the indemnity provisions in the contracts which, in turn, resulted in an erroneous award of attorney's fees and costs. We affirm in part, and reverse in part.
Background. We summarize the relevant facts as found by the judge in her comprehensive written decision.
The venture. In 2008, Dr. Tuli, an experienced neurosurgeon, began developing a business plan to create a "stand-alone" hospital facility to provide cost-effective, evidence-based brain and spine care. For logistical reasons, she sought to first establish a facility through a joint venture with an area hospital. In August, 2010, after having already met with several area hospitals, Dr. Tuli met with representatives of Vanguard, whose subsidiary, MetroWest, owns and operates two acute care hospitals, one in Framingham and one in Natick. Vanguard responded positively to Dr. Tuli's proposal, and the parties soon began negotiating the details of a joint venture to create a premier brain and spine institute (institute).
The parties contemplated an arrangement whereby MetroWest would host the institute at its Natick hospital; Dr. Tuli's company, Center for Advanced Brain and Spine Surgery, LLC (practice) would provide the specialized physicians and services; and, her other company, Advanced Healthcare Management Services, LLC (manager) would assist in managing the institute. Once the institute was sufficiently established, Vanguard and MetroWest would commit to filing a so-called "DON application" with the appropriate regulatory authorities, which would allow the institute to become a free-standing medical establishment that could be directly owned by Dr. Tuli and her nonphysician partners.
For regulatory reasons, the plan was for Dr. Tuli to stop practicing medicine at that time so that she could take an ownership interest in the institute.
The contracts. On May 2, 2011, after substantial negotiations, the parties executed two contracts: a professional services agreement (PSA), between MetroWest and the practice; and an institute management agreement (IMA), between MetroWest and the manager. The venture was an ambitious one and not without significant risks. For example, the plan called for an initial investment from Vanguard and MetroWest of nearly $14 million in medical equipment alone. Consequently, the contracts included provisions designed to minimize the financial losses should the venture fail.
The contract provided, among other provisions designed to manage risk, that MetroWest's equipment purchase obligations would be phased in as the venture proceeded. The IMA grouped equipment into three categories: (1) about $5 million worth of equipment "required on the first day of the Institute's operations" (first-day equipment); (2) other equipment assumed to be currently available (existing equipment); and, (3) an estimated $9 million of equipment "that will be available following approval of the Institute's DON" (stand-alone institute equipment). Thus, only upon approval of the DON—a milestone of success and the moment whereupon the Institute could become a stand-alone facility—would MetroWest be obligated to buy the most expensive equipment. Moreover, Vanguard and MetroWest would not be obligated to file any DON application until Dr. Tuli successfully recruited four surgeons (herself included) to work at the institute.
The contracts also contained provisions designed to promote the chances the venture would succeed. In relevant part, these included obligations on the part of MetroWest to (1) purchase first-day equipment and provide existing equipment; (2) arrange for use of an MRI machine, to be available twenty-four hours a day, seven days a week; (3) ensure that an on-site anesthesiologist was available twenty-four hours a day, seven days a week; (4) provide all necessary nursing staff, including persons with appropriate training on brain and spine care; (5) take primary charge of marketing the institute; and, (6) seek to establish an academic affiliation with the Tufts University School of Medicine.
The performance. Various problems arose soon after the signing of the contracts. As the judge explained, there were two principal reasons for the ensuing conflicts. First, there was a schism between MetroWest and Vanguard. Ordinarily, MetroWest, with its local agents, would take charge of the day-to-day implementation of projects like the one at issue. However, given the magnitude (and expense) of the project, Vanguard, whose corporate offices were located in Nashville, Tennessee, assigned its own officers to the project. Not only was communication between the two entities poor, but issues also arose between them as to whether Dr. Tuli's principal contact should be a local MetroWest agent or a Nashville-based Vanguard agent. Second, problems in the execution of certain contract obligations arose due to MetroWest's poor internal communication. MetroWest not only alienated its local nurses, clinicians, and doctors by failing to inform them of the project (they discovered the venture's existence randomly, by word of mouth), but it also failed to attend to its equipment, staff, and outreach-related obligations under the contract. Ultimately, as detailed below, the judge found that MetroWest breached its contractual obligations.
1. Equipment. When Dr. Tuli first arrived, in July, 2011, the Natick hospital had no equipment for complex neurological cases, causing her to have to begin work in Framingham rather than Natick, as contemplated by the agreements. By the time she finally moved to Natick, in March, 2012, equipment purchases had only barely begun. Though Vanguard had budgeted somewhere between $4.7 and $5.25 million for purchasing first-day equipment, by March, 2012—about eight months after Dr. Tuli arrived—it had expended less than $1 million on equipment purchases. Even the so-called existing equipment was, in large part, missing. In addition, MetroWest failed to provide an MRI machine on a twenty-four hours per day, seven days per week basis.
2. Staffing. MetroWest also breached its staffing obligations, both as to nursing and anesthesiology services—failures that led to serious concerns about patient safety. In July, 2011, Dr. Tuli found that the nurses had received virtually no training. MetroWest anticipated that it would finish training nurses in its Natick hospital before the end of October, 2011, but this did not happen. By November, nurses and their supporting staff were voicing concerns, saying they were anxious to receive training. By February, 2012, Natick nurses had still received virtually no training, and the operating room nurses were not even scheduled to begin their training until March, 2012.
MetroWest further failed to arrange for anesthesiology services, as required under the contract (twenty-four hours per day, seven days per week.) In January, 2012, MetroWest told Dr. Tuli that it had arranged for anesthesiologists in the Natick hospital to provide services, but in truth those doctors never agreed to do so, and indeed, were quite reluctant.
3. Outreach. Last, MetroWest failed to fulfill its obligations relating to marketing and the establishment of an academic affiliation. Despite signing the contracts in May, 2011, by the end of October it had not developed any marketing strategy whatsoever. Vanguard agents in Nashville, critical of local agents' efforts, eventually stepped in, but there was little improvement. As of March 1, 2012, MetroWest's online "find a physician" index still did not include Dr. Tuli and another doctor she had recruited. Only near the end of March, 2012, did MetroWest create a Web site—a "temporary" one—to market the institute. Brochures were not sent out until April, 2012, and they included a nonworking telephone number. By the end of the fiscal year, only about one-third of the marketing budget had been expended.
Outreach efforts relating to an academic affiliation were similarly poor. MetroWest had been required to pursue an affiliation with Tufts University School of Medicine, which it and Vanguard knew was a necessary prerequisite for the institute to retain physicians who had been trained overseas and were therefore not board-eligible. MetroWest approached Tufts only on two or three occasions and, apparently, only quite briefly; an agent claimed to have spoken with a Tufts representative in the fall or winter of 2011, but when another approach was made in March, 2012, Tufts's representative looked into whether any prior discussion had taken place and concluded that none had. Ultimately, the judge concluded, MetroWest's efforts were simply insufficient; it failed to exercise good faith best efforts to establish the academic affiliation.
4. Neurosurgeon recruitment. At the same time, as the judge found, Dr. Tuli failed to achieve one of her goals under the contracts: to retain the requisite number of neurosurgeons to work at the institute. Although Dr. Tuli had recruited two other doctors, she was never able to recruit the final, fourth doctor. The judge found, however, that the contracts did not set a deadline by which Dr. Tuli would have to retain the requisite number of surgeons. Additionally, the judge found, MetroWest's own failures created significant practical obstacles to recruitment. Its failure to establish an academic affiliation impeded recruitment of overseas-trained surgeons. And, its failure to provide the first-day equipment and existing equipment made recruitment inherently difficult. As the trial judge explained, "a neurosurgeon considering joining the Institute would want to see that complex brain and spine surgeries could actually be performed at MetroWest."
The termination. Starting at least as of the beginning of 2012, concerns over the venture had become a regular topic of discussion in Nashville, including at monthly "performance review meetings." The executives reviewed financial information and discussed Dr. Tuli's contractual obligations, including, specifically, her failure to recruit additional physicians. Ultimately, on or about May 3, 2012, Vanguard decided to terminate the contracts and abandon the venture.
The contracts had provisions governing termination in the event of a material breach. The party seeking to terminate the contracts was required to give thirty days' notice of its intent to terminate, and would not be permitted to terminate if the breaching party commenced a cure within that thirty-day period and, thereafter, "diligently and in good faith" continued its cure efforts, and ultimately fully cured within 120 days of the notice. Vanguard and MetroWest, however, failed to follow this process; neither entity sent Dr. Tuli a written termination notice or afforded her a right to cure any alleged breach.
The judge's conclusions. The trial judge concluded that Dr. Tuli proved many of her theories of breach of contract by the defendants, but had not proved much of the damages she claimed. The judge found that breaches of the contracts by the defendants were "legion," and included the failure to provide general equipment specified as being currently available and the failure to purchase new equipment. The judge further concluded that the failure to provide the equipment specified in the contract by January, 2012, was a material breach that proximately contributed to the failure of the venture. Similarly, the failure to meet the contract's requirements that the defendants provide the plaintiffs with on-site anesthesia services, provide nursing support training and coverage, market the venture, and use good faith best efforts in seeking an academic affiliation for the venture, were all material breaches of the agreement, leading to the failure of the venture. In addition, the judge concluded the method used by the defendants to terminate the agreement breached the termination provision of the agreement.
Specifically, the judge ruled in favor of the plaintiffs on claims of breach of contract and breach of the implied covenant of good faith and fair dealing. In addition, the practice prevailed against MetroWest and Vanguard for tortious interference with contractual relations, but without further damages; and Dr. Tuli prevailed against Vanguard for breach of contract and breach of the implied covenant of good faith and fair dealing, though again, without further damages. MetroWest and Vanguard prevailed on only one claim, which was against the practice for unpaid rent.
In reaching her conclusions, the judge rejected the defendants' argument that Dr. Tuli breached her obligation to provide four neurosurgeons to the venture, thus excusing them from their obligations, noting that Dr. Tuli had three of the four neurosurgeons required by November, 2011, that there was no deadline for Dr. Tuli to obtain commitments from the neurosurgeons, and that the defendants understood that the equipment was necessary to recruit additional surgeons. She concluded that "it defies common sense, medical sense, and business sense to suggest these sophisticated parties would structure an agreement whereby the Defendants would have no obligation whatsoever to provide any specialized equipment for neurosurgeons one, two and three to operate and to serve patients, unless and until neurosurgeon number four signed on." Accordingly, she found that Dr. Tuli did not breach the agreement by failing to secure the fourth neurosurgeon before Vanguard "pulled the plug" on the venture.
The judge further concluded that the plaintiffs had suffered damages of $3 million in lost profits over the remaining years of the agreement as a result of the defendants' breach. She also found that the defendants breached the IMA, providing for a maximum payment to Tuli of $500,000 for the first year, and found additional damages of $152,000 for the remaining three years of that agreement. She entered judgment for the plaintiffs in the amount of $3,652,000, offset by a $29,697.51 judgment for the defendants on their counterclaim for rent owed by the plaintiffs. She subsequently allowed, substantially, the plaintiffs' motion for attorney's fees and costs and denied the defendants' motion to alter and amend.
Discussion. On appeal, the defendants make the following related arguments: (1) the judge incorrectly relied on extrinsic evidence to interpret the contracts; (2) certain breaches were either not proven or not shown to have caused damages; (3) their nonperformance was excused by the plaintiffs' alleged breach; (4) damages were improperly calculated; and (5) the plaintiffs should not have been awarded attorney's fees. We address each of these claims in turn.
The defendants' primary argument, which the judge rejected, is that they were under no obligation to perform until all four neurosurgeons were working for the institute and that Dr. Tuli breached the contract by failing to hire all four doctors within six months of signing the contract. Essentially, they contend that Dr. Tuli's successful recruitment of all of the four surgeons was a condition precedent to their obligation to provide any equipment, nursing services, or anesthesiology services whatsoever. They posit that their obligations were owed to the institute, which, they claim, could not be deemed to exist or be "open" until Dr. Tuli provided the requisite number of physicians.
In support of this theory, the defendants cite the following provisions from the PSA and IMA:
"The Hospital shall provide all of the equipment and furniture necessary for the Institute to provide Specialty Services (the "Equipment"), as set forth in Exhibit B.
"...
"In order for the Hospital to establish and operate the Institute, Practice has agreed to supply to the Hospital a sufficient number of Physicians to provide the Specialty Services as set forth in this Agreement ....
"The Hospital ... shall provide or arrange for ... nursing ... staff necessary for the Institute's timely and efficient operation.... Such personnel, who shall be highly qualified and trained, shall be available ... [on a] twenty-four (24) hour, seven (7) day a week [basis and] ... shall include the ... appropriately qualified and competent Anesthesiologist on site during all such time." (Emphases added.)
The judge thoroughly considered this argument and properly rejected it. She found that, contrary to the defendants' assertions, the contract did not specify any deadline for Dr. Tuli's recruitment of neurosurgeons. Indeed, as the judge noted, the contract, as signed, states: "On or before _____, 20__, Practice minimally will arrange for the services of at least four (4) brain and spine surgeons and one pain physician whose training and education levels would be comparable to those of Dr. Sagun Tuli." In addition, the contract did not expressly state the order in which the parties' duties were to be performed. Relying on extrinsic evidence, the judge then found that the defendants' performance of their obligations was critical to Dr. Tuli's ability to recruit surgeons. The thrust of the defendants' challenge is to the judge's reliance on extrinsic evidence.
The interpretation of an unambiguous contract term is a question of law, as is the question whether an ambiguity exists. Quinn v. Mar-Lees Seafood, LLC, 69 Mass. App. Ct. 688, 695 (2007). The existence of an ambiguity creates a factual question whose resolution may be aided by certain forms of extrinsic evidence. Massachusetts Mun. Wholesale Elec. Co. v. Danvers, 411 Mass. 39, 48 (1991) (Wholesale Elec.); Commercial Union Ins. Co. v. Boston Edison Co., 412 Mass. 545, 557 (1992). Though the trial judge did not explicitly rule that an ambiguity existed, her decision clearly reflects her implicit ruling that the contracts' language was ambiguous as a matter of law.
There was no error in finding the contractual terms ambiguous so as to permit reliance on extrinsic evidence. See Wholesale Elec., 411 Mass. at 45 (intent is relevant to whether parties have created a condition precedent). Not only was the date by which Dr. Tuli's recruitment of additional neurosurgeons would be completed left blank, but, more fundamentally, it makes little sense to suggest that Dr. Tuli would be able to retain several qualified, highly specialized neurosurgeons to work at an institute that had no equipment, nursing staff, or other professional support.
We are not persuaded by the defendants' argument that other terms in the contracts reflect a six-month deadline for recruitment of all four neurosurgeons. Specifically, the defendants rely on a billing provision in the IMA as indicating that the institute was to be operational, with all of its physicians, within that time period:
"The Hospital shall have the sole right and responsibility to bill and collect from all applicable parties for all Institute Specialty Services provided by the Hospital; however, it is expected that within six (6) months of the Effective Date the Hospital shall engage Manager to assist it with billing for Specialty Services provided in the Institute."
This argument fails because it depends on the faulty assumption that the institute would not be "open" or operational, and thus performing billable work, until Dr. Tuli recruited all of the physicians. However, as the judge found, the institute opened within the six-month period and was actually treating patients (albeit with limitations and difficulties caused by the defendants' failure to provide equipment and professional support). This factual determination was supported by the evidence. Moreover, the defendants' interpretation would require us to disregard the absence of a deadline where one would expect it, and to do so in favor of the vague implication of this billing provision.
Next, the defendants challenge the judge's conclusion that they breached the contract by failing to market the institute and pursue an academic affiliation. As to marketing, they claim that because the institute was never established, there was nothing to market. This argument fails if only because, as we have noted, the judge found that the institute was operational six months after the contracts were signed. As to the conclusion that the defendants breached the contract by failing to market the institute, the challenge centers on the claim that the judge relied exclusively on an electronic-mail communication from Tufts that constituted inadmissible hearsay. We agree with the plaintiffs that there was ample other evidence, not objected-to, that supports the judge's finding. That evidence includes testimony from witnesses repeating the communication received from Tufts.
The defendants advance a related argument that there was no evidence that the lack of an academic affiliation caused any damage to the plaintiffs. That assertion is belied by the evidence which established that available neurosurgical candidates were lost due to the failure to secure academic affiliation.
Damages. The judge awarded damages for the plaintiffs' loss of profits that would have been earned by the venture, as well as their loss of management fees that they would have received under the IMA contract. The lost profits damages were based, among other things, on the proposition that, but for the defendants' breach, a fourth surgeon would have joined the practice by December, 2012, and thereafter all four surgeons would "ramp up" their practices and increase earnings steadily over the remaining several years of the contracts' five-year term. The defendants challenge this calculation, arguing that the evidence did not sufficiently establish that a fourth surgeon would have joined the practice by that date. We disagree.
The plaintiffs requested, but the trial judge declined to award, damages for the value of their equity interest in the venture.
The evidence showed that Dr. Tuli began her work in July, 2011, two months after the parties signed the contracts, and by November, two more surgeons had been recruited. There was evidence supporting the inference that Dr. Tuli could have recruited one more surgeon over the thirteen months between November, 2011, and December, 2012. Dr. Tuli also testified that she interviewed approximately seventy neurosurgeon candidates between May, 2011, when the contracts were signed, and May, 2012, when the defendants unilaterally terminated the contracts. Given this evidence, the judge could reasonably conclude that a fourth surgeon would have joined the practice.
The defendants next argue that Dr. Tuli had an obligation to mitigate her damages but failed to adequately do so. This shortcoming, the defendants allege, should have been considered by the judge. We disagree. First, Dr. Tuli testified, credibly as far as the judge was concerned, about her efforts to remain employed. The defendants did not provide evidence to contradict Dr. Tuli's testimony. Our review of the record leads us to conclude that the judge accounted for and accepted Dr. Tuli's testimony to mitigate damages.
Finally, the defendants contend that the trial judge failed to adequately explain her decision to award $3 million to the practice. We conclude otherwise. The judge's written decision contains no fewer than seventeen paragraphs detailing her analysis of damages. The plaintiffs proffered a comprehensive expert witness report proposing a model for damages calculations. The judge carefully parsed the report making a number of alterations. Among other things, in view of "available market statistics for eastern to central Massachusetts," she reduced the model's estimate as to how many surgeries would be performed; she incorporated other critiques to reduce the model's estimate of surgeon productivity; and, she considered how, if at all, to incorporate information about outpatient cases and less complex surgeries. The judge's obligation was not to produce detailed arithmetic, but to "articulate the essential grounds" for her decision. Willis v. Selectmen of Easton, 405 Mass. 159, 161 (1989). In the context of this dispute, the nature and exactness of the judge's reasoning was more than sufficient.
Attorney's fees. The interpretation of an indemnity clause is a question of law for the court. See Post v. Belmont Country Club, Inc., 60 Mass. App. Ct. 645, 647 (2004). The defendants argue that the trial judge erred in awarding the plaintiffs attorney's fees and costs on the basis of the indemnity clauses in both contracts. They claim that the indemnity clauses apply only to defending actions from third parties, not prosecuting one against a party to the contracts. We agree.
The defendants also claim that costs should not have been awarded on this basis. We need not address this issue because, subject to exceptions that are not applicable to this case, costs "shall be allowed as of course to the prevailing party." Mass.R.Civ.P. 54(d), as appearing in 382 Mass. 821 (1980).
We are not persuaded by the plaintiffs' argument that the defendants are "estopped" from claiming that the indemnity clauses do not provide for the recovery of attorney's fees by the prevailing party on the ground that the defendants themselves requested an award of attorney's fees under the same provisions in their counterclaims. The question whether the provisions at issue provide for an award of attorney's fees was a matter for the judge to resolve.
The indemnity provision of the IMA provides:
"16. Indemnity.... The Hospital shall indemnify, defend and hold harmless Manager and all of its Agents from and against any and all claims, ... fees, costs and expenses (including attorneys' fees and costs of defense), incurred by any of them as a result of or arising out of the acts or omissions of the Hospital, or any of its Agents (other than Manager) ... in connection with or pursuant to this Agreement and the Hospital's duties and responsibilities hereunder."
The PSA contained an essentially identical provision:
"16. Indemnity.... The Hospital shall indemnify, defend and hold harmless Practice and its Agents ... from and against any and all claims, ... fees, costs and expenses (including attorneys' fees and costs of defense), incurred by any of them as a result of or arising out of the acts or omissions of the Hospital, any of its Agents ... in connection with or pursuant to this Agreement and the Hospital's duties and responsibilities hereunder."
While in Massachusetts indemnity clauses are not necessarily limited to third-party claims, they are generally understood to define the reimbursement, defense, and related obligations between contracting parties in the event either party becomes involved in a related action by or against a third party. See generally Caldwell Tanks, Inc. v. Haley & Ward, Inc., 471 F.3d 210, 216 (1st Cir. 2006). Here, the language of the indemnity provisions is unambiguous and cannot be "fairly and reasonably construed" to include indemnification for attorney's fees in an action between the parties. Whittle v. Pagani Bros. Constr. Co., 383 Mass. 796, 798 (1981). To the contrary, the provisions specifically permit recovery of "attorney's fees and costs of defense." The only sensible interpretation of the phrase "of defense" is that it refers to the defense of a third-party claim. See Astrolabe, Inc. v. Esoteric Technologies PTY, Ltd., 2002 U.S. Dist. LEXIS 5764 at *15-16 (D. Mass. 2002). Our conclusion is further buttressed by the fact that had the parties intended to provide for fee-shifting in the event of a breach of contract action, the subject of fee-shifting would most appropriately be included in the contracts' sections governing breach and termination, not indemnification. Additionally, had the parties intended to effect fee-shifting within the indemnity provisions, we would expect to see language reflecting such an intent, such as inclusion of the phrase "prevailing party," or something similar. The award of attorney's fees was therefore erroneous.
Given our conclusion, we deny the plaintiffs' request for attorney's fees incurred in connection with this appeal.
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Conclusion. We reverse that portion of the judgment awarding attorney's fees and affirm the judgment in all remaining respects.
So ordered.
Reversed in part; affirmed in part.