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UHS-QUALICARE, INC., UHS OF THE GULF COAST, INC., AND QUALICARE SUB., INC., ET AL. v. GULF COAST COMMUNITY HOSPITAL

AUGUST 19, 1987

UHS-QUALICARE, INC., UHS OF THE GULF COAST, INC., AND QUALICARE SUB., INC., ET AL.
v.
GULF COAST COMMUNITY HOSPITAL, INC., SAFECARE COMPANY, INC., S. C. LONGVIEW, INC., STEPHEN R. JEPSON, J. STEPHEN WRIGHT, AND LARRY W. WELLS



BEFORE WALKER, C.J.; ROBERTSON AND ANDERSON, JJ.

ROBERTSON, JUSTICE, FOR THE COURT:

I.

This declaratory judgment action arises out of a hospital

 management contract. The hospital drew first blood as it secured a trial court declaration that it had lawfully terminated the contract by reason of the manager's material breaches. We reverse and render, holding the breaches not sufficient to support the radical remedy of termination, for the reason that the contract vested in the hospital authority to cure immediately.

 II.

 A.

 Gulf Coast Community Hospital was built in 1976 in Biloxi, Mississippi. The hospital was financed and built by Safecare Company, Inc. ("Safecare") for a group of local physicians. After completion the hospital was leased to Charter Medical, a hospital management company. By 1979 Gulf Coast was in serious financial difficulty. In March of 1980 a joint venture was formed between Safecare and Qualicare of Louisiana, Inc. ("Qualicare") which promptly acquired the hospital in March of 1980. Pursuant to the joint venture agreement, Safecare and Qualicare each acquired a fifty percent stock interest in Gulf Coast Community Hospital, Inc. ("Gulf Coast") which in turn owned the hospital.

 On March 1, 1980, Gulf Coast entered into a twenty year management contract with Qualicare. The contract provided that Qualicare would manage the hospital. For its services Qualicare would be paid a monthly fee based on gross revenues.

 The management contract delineates the duties and prerogatives of both Qualicare, as the manager/co-owner, and Gulf Coast, referred to in the contract as the "corporation." Article III of the Management Agreement is entitled "RIGHTS AND DUTIES OF MANAGER" and provides in part:

 (D) Manager shall prepare an annual budget for the Facility. . . and shall cause the budget to be presented to the Corporation prior to the commencement of each fiscal year for its acceptance, rejection, or modification. Upon adoption of such budget, or any modification thereof, by the Corporation, such budgets shall serve as a guide for the operation of the facility during the ensuing year.

 In Article IV, which is entitled "RIGHTS AND DUTIES OF THE CORPORATION DURING THE TERM OF THIS AGREEMENT," the contract states:

 The Corporation has reserved the right to make all management and policy decisions specifically including the right to set the Corporation's admission policies and fee structures.

 In Article VIII, there appears a termination clause which reads as follows:

 (C) If Manager shall fail to keep, observe or perform any material covenant, agreement, term or provision of this Agreement to be kept, observed or performed by Manager, and such default shall continue for a period of thirty (30) days after written notice thereof by Corporation to Manager, then in case of any such event and upon the expiration of the aforesaid thirty (30) day period, this Agreement shall terminate at any time thereafter upon notice to Manager by the Corporation in writing.

 The hospital operated under joint Qualicare/Safecare ownership and Qualicare management until 1983. In January of 1983, Qualicare reached an agreement with United Health Services, Inc. ("UHS") for the sale to UHS of Qualicare's interest in Gulf Coast. UHS formed a subsidiary corporation, UHS-Qualicare, Inc. ("UHS-Qualicare"), to serve as a vehicle through which acquisition could take place. Effective May 29, 1983, UHS-Qualicare succeeded to all of the rights, assets and liabilities of Qualicare and became owner of fifty percent of the stock of Gulf Coast. UHS-Qualicare also succeeded to Qualicare's position as manager of Gulf Coast Community Hospital.

 Gulf Coast's budget for fiscal year 1983 was already in effect at the time of this acquisition. That budget assumed an average daily census (average number of patients per day) of 103. With this census, the hospital had a projected "bottom line" profit of $2,200,000.00. The budget also contained a "variable budget," outlining the hospital's financial prospects if the census was not 103, but rather was 95. Under a 95 census, the budget projected a profit of $1,426,000.00 for the year. By the end of May, 1983, the average daily census was running around 93, and the accrued profit for the first five months was approximately $667,000.00. Under the variable budget portion of the Board-approved budget, outlining the course the hospital would

 take under a 95 census, the profit for five months (5/12 of total income) had been projected to be $600,000.00.

 Here the recitation of the facts in the briefs of the parties degenerates into a series of charges and counter charges. A few basics, however, appear beyond dispute. In June of 1983, UHS-Qualicare, as manager, increased the rates charged patients from $654.00 per patient day to $738.00 per patient day. This rate increase was designed to achieve a 38 percent gross profit margin, substantially higher than the 26 percent contained in the Board-approved budget. UHS argues that this was necessary to maintain the bottom line of the $2.2 million dollar profit projected in the Board-approved budget. The scheduled June 1 increases were put off until a new budget could be developed. That was done and was completed on June 16, 1983. All increases were imposed between June 19 and June 29, 1983. The Board of Directors was not informed of the changes nor was its approval sought.

 On June 16, 1983, Safecare - as distinguished from Gulf Coast - wrote to UHS insisting that it be consulted with respect to all rate changes. It is highly significant, as will appear later, that this is a letter from one 50 percent owner, Safecare Company, Inc., to the other 50 percent owner, United Health Services, Inc. *fn1

 June and July, 1983, were months of increasing disenchantment among the new joint venturers. A series of moves and counter moves took place, each party jockeying to improve its strategic position. Quite apparently, little thought was being given to patient care at the hospital. Be that as it may, the critical event was the July 12, 1983, resignation of A. Russell Chandler from the Board of Directors. Prior to that time, the Board had consisted of six members, three "controlled" by Safecare and three "controlled" by UHS-Qualicare. Chandler had been president of the original Qualicare, the party which sold its interest to UHS. Reading between the lines, one may assume that, his company out of the picture, Chandler simply wanted no part of the imminent warfare. In any event, on July 12, 1983, Chandler resigned from Gulf Coast's Board.

 In rapid fire succession, the three Safecare directors elected one of their own, Thomas L. Haywood, to succeed Chandler. Thereafter, the two remaining UHS-Qualicare directors were removed so that, following the massacre, Gulf Coast's Board of Directors consisted of four persons, all loyal to Safecare. *fn2 Gulf Coast, a/k/a Safecare, concedes in its brief that these changes were made to preserve its "power to make management and policy decisions reserved to it by the

 Management Contract," a preservation which will acquire considerable significance as we proceed.

 On the same day, July 12, 1983, Gulf Coast, acting through its newly elected president, J. Stephen Wright, declared the Management Agreement terminated in a letter addressed in triplicate to Qualicare of Louisiana, Inc., the original manager, to UHS-Qualicare, Inc., the successor manager, and to United Health Services, Inc., the parent company of UHS-Qualicare. *fn3 The termination letter is vague and general. Gulf Coast complains that UHS-Qualicare "has made changes in the operation of the Hospital which are materially detrimental." Noted generally are "certain changes in the fee structure of the Hospital." Gulf Coast declares these "as material breaches to the Management Contract" and then declares the contract terminated. No reference is made to UHS-Qualicare being given any opportunity to cure the alleged breaches. No reference is made to the thirty day notice provision of Section VIII(c) of the Management Contract.

 Most significant of all is that the sun set on July 12, 1983, without the Safecare-controlled Gulf Coast Board of Directors having taken any action to reestablish the $654.00 per patient day rate or to reverse or alter any other action taken by UHS-Qualicare.

 After these moments of certainty, matters again degenerated. During the remainder of July and early August, the record reflects various communications, written and verbal, telephonic and in person, between Safecare and UHS-Qualicare representatives. Each claims that it was being reasonable and the other unreasonable and evasive. Importantly, UHS-Qualicare insists that it offered to roll back the rates. Objectively viewed, the roll back discussions amounted to a cat and mouse game, each party changing its role at whim.

 During this period of time, it should be noted, the principal officers of Safecare, J. Stephen Wright and Stephen R. Jepson, were wearing two hats. Wright was senior vice president of Safecare Company, Inc. and was chairman of the board and president of Gulf Coast Community Hospital, Inc. Jepson was vice president of Safecare Company, Inc. and vice president of Gulf Coast Community Hospital, Inc. Although the July 12 letter was written by Wright in his capacity as chairman of the board and president of Gulf Coast, it appears for all practical purposes that throughout he was acting primarily in the interest of his principal employer, Safecare.

 In any event, by the middle of August, 1983, one thing was clear: the rates had not been rolled back. Safecare had not insisted that the rates be rolled back. The Gulf Coast Board of Directors, which were all Safecare-loyal individuals, had not ordered the rates rolled back. Nor had UHS-Qualicare taken any action to reduce the ...


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