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Acute Care Holdings, LLC v. Houston County

Court of Appeals of Tennessee, Nashville

June 3, 2019


          Session March 7, 2019

          Appeal from the Chancery Court for Houston County No. 2014-CV-434 David D. Wolfe, Chancellor

         This appeal arises from an action filed by a healthcare management company against a county for breach of contract and unjust enrichment. The dispute centered on a financially distressed hospital, which the county wanted to purchase and lease to the healthcare company to manage. Thus, the county, the hospital, and the healthcare management company entered into a Letter of Intent to accomplish this goal. The Letter of Intent provided that the healthcare management company would loan funds to the owner of the hospital to keep the hospital operating while the county negotiated the asset purchase agreement. If the purchase of the hospital closed by the agreed-upon deadline, the county agreed to repay the healthcare management company for the amount loaned; however, if the purchase of the hospital did not close by the deadline, the county was not obligated to repay the loans to the hospital. After the asset purchase agreement did not close by the deadline set in the Letter of Intent, the county purchased the hospital and awarded the contract to manage the hospital to a company owned by the county's attorneys and refused to pay the healthcare management company the more than $1.2 million it loaned the hospital. Thereafter, the healthcare management company filed this action against the county for breach of contract and unjust enrichment. In its answer, the county denied breaching the contract because of the failure of the condition precedent, that the purchase of the hospital close by the agreed-upon deadline. Thereafter, the county filed a motion for summary judgment on the same ground and also moved to summarily dismiss the unjust enrichment claim because the Letter of Intent, which was an enforceable contract, precluded the claim. The healthcare management company responded by presenting evidence indicating that the county failed to act in good faith to close on the purchase of the hospital by the deadline in order to avoid its obligations to the healthcare management company. It also contended that its claim of unjust enrichment should not be dismissed unless the court determined that the Letter of Intent was an enforceable contract. The trial court summarily dismissed both claims on the finding the evidence was not sufficient to create a genuine dispute of material fact as to either claim. Having determined that the evidence was sufficient, we reverse and remand this case to the trial court for further proceedings.

         Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Reversed and Remanded

          Robert E. Boston, Tera Rica Murdock, and Taylor J. Askew, Nashville, Tennessee, for the appellant, Acute Care Holdings, LLC.

          Samuel P. Funk and Michael R. O'Neill, Nashville, Tennessee, for the appellee, Houston County, Tennessee.

          Frank G. Clement Jr., P.J., M.S., delivered the opinion of the Court, in which Andy D. Bennett and Richard H. Dinkins, JJ., joined.


          FRANK G. CLEMENT JR., P.J., M.S.

         By the fall of 2001, the only hospital in Houston County, Patient's Choice Medical Center ("PCMC"), was in financial distress and in danger of closing its doors. Although the hospital had just recently obtained certification as a "Critical Access Medical Center, "[1] which would likely provide for a better financial future, but not in the immediate future, PCMC lacked the capital or revenue to continue operating long enough to benefit from the new certification. Because PCMC was Houston County's third largest employer and a critical provider of medical services to the community, in order to prevent the closure of the hospital, Houston County sought to purchase the hospital from PCMC and then lease it to a hospital management company.

         Around the same time, Acute Care Holdings, LLC ("Acute Care"), which operated a nursing facility in Houston County, also considered buying PCMC but determined that it was not feasible to do so. Nevertheless, its inquiry into the matter ultimately resulted in the execution of a Letter of Intent among Houston County, Acute Care, and PCMC pursuant to which Houston County would endeavor to negotiate an asset purchase agreement with PCMC to purchase the hospital and its assets and then lease the hospital to Acute Care, which would manage the hospital.

         The Letter of Intent, which was executed on February 29, 2012, established the conditions by which Acute Care agreed to loan funds to PCMC to sustain the hospital's operations while Houston County and PCMC negotiated an asset purchase agreement. In pertinent part, the Letter of Intent provided:

As of March 1, 2012, [Acute Care] . . . and [PCMC] shall enter into an interim management agreement for the [PCMC] facility . . . wherein [Acute Care] agrees to assume operational authority and control of the Facility under [PCMC's] provider number and license, to the extent permitted by law, and to provide funding for certain improvements and operational expenses, to be reimbursed at a later date by [Houston County] to [Acute Care] if and when the Closing occurs. [PCMC] shall execute one or more promissory notes . . . for all expenses paid by [Acute Care] for operation of the Facility in excess of the Facility's revenue during the interim management period, evidencing [PCMC's] obligation to repay such expenses in the event the closing does not occur.

         (Emphasis added).

         The Letter of Intent further provided that once Houston County purchased the hospital, Houston County would lease the assets to Acute Care to operate and manage, stating:

Lease. As of the Closing, [Houston County] and [Acute Care] shall enter into a lease of the Assets ("Lease") containing the following terms:
a. Term: 5 years, with six, five year renewal options, with lessee right to terminate early with notice in the event of a regulatory change materially and adversely affecting the operations of the facility.
b. Rent: building rental shall be based on fair market value.
c. Purchase option: [Acute Care] shall have the option to purchase the leased property at the end of the initial lease term and each renewal term thereafter for fair market value.
d. Capital Expenditures: [Houston County] shall be responsible for payment of the expenses set forth on Exhibit "C" attached hereto.
e. Charitable care: [Houston County] acknowledges and agrees that the provision of charitable care to the Erin community is a desired and valuable service, and therefore agrees to reimburse [Acute Care] on a monthly basis for such charitable care and bad debt.

         The Letter of Intent also provided a due diligence period whereby Acute Care would inspect PCMC's assets. The Letter of Intent also clarified the parties' obligations to one another when the Letter of Intent was canceled or expired:

[Acute Care] shall have 30 days from the date of this Letter of Intent ("Due Diligence Period") to fully inspect the Assets and, at its discretion, proceed with, or cancel the transaction. If canceled, no party shall have any further obligations to the others, except for the repayment of any promissory note(s) signed by [PCMC] in favor of [Acute Care] for funds expended by [Acute Care] for payment of improvements and operating expenses during the interim management period. Unless [Acute Care], in its sole discretion, gives [PCMC] notice that it waives its rights to cancel the transaction, the transaction shall be deemed canceled at the end of the Inspection Period.

         Based on the agreement, if Houston County closed on the purchase of the hospital within the agreed-upon deadline, Houston County would assume PCMC's obligations to Acute Care on the loans that kept the hospital in business. If, however, the purchase did not close in accordance with the Letter of Intent, Houston County would have no financial obligations to Acute Care.

         Acting pursuant to the Letter of Intent, Acute Care periodically loaned PCMC the funds it needed to operate the hospital while Houston County and PCMC negotiated the asset purchase agreement. When Houston County and PCMC were unable to reach an agreement by the initial deadline, Acute Care, Houston County, and PCMC executed amendments to the Letter of Intent that extended the deadline to December 31, 2012, all the while Acute Care continued to financially support PCMC. As each loan was made, PCMC's president, Ray Shoemaker, executed promissory notes to memorialize its debt to Acute Care.

         By November 25, 2012, Houston County still had not closed on the purchase of the hospital. Thus, Acute Care sent Houston County a new proposed Letter of Intent which provided that Acute Care would "continue to manage the Hospital pursuant to the existing interim management agreement . . . until the County acquires the Hospital, but in no event beyond January 10, 2013." It further provided that Houston County would execute a promissory note in Acute Care's favor to cover the cost of PCMC's November payroll. Houston County rejected the proposal.

         Houston County did not close on the purchase of the hospital by the December 31 deadline; however, Houston County and PCMC executed a purchase agreement in March 2013, by which Houston County would not assume any of PCMC's liabilities. Additionally, instead of awarding the management contract to Acute Care, Houston County awarded the hospital management contract to an entity owned by the County's attorneys. Thereafter, Houston County refused to reimburse Acute Care for the money it expended to keep the hospital in business during negotiations.

         On November 10, 2014, Acute Care filed a complaint for breach of contract and unjust enrichment in Houston County Chancery Court, alleging Houston County was liable to Acute Care for the more than $1.2 million Acute Care expended during the interim management period.[2] In its answer, Houston County denied the allegations and asserted a number of affirmative defenses, including the failure of a condition precedent.

         Houston County filed a motion for summary judgment on November 16, 2017, wherein it contended that the County was not obligated to reimburse Acute Care because it was undisputed the closing did not occur pursuant to the Letter of Intent; thus, Acute Care's only recourse was to seek reimbursement from PCMC or its president Ray Shoemaker.[3] Houston County also sought dismissal of the claim for unjust enrichment because that claim only applied ...

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