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S.A.H.H. Hospital Management, LLC v. San Antonio Hospital Management, Inc.

United States District Court, Fifth Circuit

October 22, 2013




On this day the Court considered Defendants' motion to dismiss. Doc. No. 9. The motion is GRANTED in part and DENIED in part. The motion to dismiss the fraudulent inducement claim is GRANTED. With respect to the claims for breach of contract and breach of fiduciary duty, the motion to dismiss is DENIED.

I. Background

A. Factual & Procedural Background[1]

Plaintiffs S.A.H.H. Hospital Management, LLC, S.A.H.H. Investment Group, Ltd., and S.A.H.H. Management, Inc. were formed by a group of cardiologists to build a heart hospital in San Antonio ("the hospital"). In 2001, Plaintiffs formed a limited partnership with Defendants San Antonio Hospital Management, Inc. ("SAHMI") and San Antonio Holdings, Inc. ("SAH") to build and operate the hospital. SAHMI and SAH are both wholly-owned subsidiaries of Defendant Medcath, Inc. ("MedCath").

The hospital partnership did not fare as well financially as expected, and by 2010 Defendants were looking to sell. In August 2010, the parties entered into a Put/Call Agreement. The agreement provided Defendants with the right to purchase Plaintiffs' partnership interests at any time in order to facilitate the sale of the hospital. Defendants exercised their purchase right in December 2010, and the hospital was sold to a third party later that month. Around that time, Defendants informed Plaintiffs that they were under investigation by the federal government for billing practices related to Implantable Cardiac Defibrillators (the "ICD Investigation"). Accordingly, Defendants unilaterally increased the amount of cash held in reserve to pay for future liabilities from $2.5 million to $11 million. Although a reserve fund ("The Reserve") was provided for in the Put/Call Agreement, Plaintiffs allege that Defendants breached the contract by funding the Reserve in a certain way. In addition, Plaintiffs bring claims for fraudulent inducement based upon alleged misconduct surrounding the negotiation of the Put/Call Agreement, as well as for breach of fiduciary duty.

Plaintiffs filed their Original Petition in state court on September 18, 2012. The Original Petition sought $3.3 million in actual damages and $6.6 million in exemplary damages. In addition, Plaintiffs seek an accounting of all proceeds from the sale of the hospital, pre- and postjudgment interest, costs, and attorneys' fees. Defendants timely removed the action to this Court on November 9, 2012, based on diversity jurisdiction. Plaintiffs filed a motion to remand contending that Defendants' notice of removal failed to establish the citizenship of the parties. The Court permitted the parties to conduct discovery related to jurisdictional issues and after further briefing the Court found that it had subject matter jurisdiction over this case. Doc. No. 29. On July 31, 2013, Defendants' filed this motion to dismiss. Doc. No. 33.

B. The Put/Call Agreement

Article II of the Put/Call Agreement defines Defendant SAHMI's call right and is largely the focus of this dispute. The contract permits the General Partner to purchase the interests held by the physician partners. Section 2.1(b) provides the method for calculating the purchase price ("Call Purchase Price"). The price was set at the greater of either: (1) the Plaintiffs' proportionate share of the "Net Proceeds" less certain costs, or (2) $4.48 million less certain costs (the "Call Floor Price"). Section 2.1(c) defines "Net Proceeds" to include both: (1) all cash proceeds from the sale, and (2) "Accounts Receivable" during the year following the sale closing date.

Section 2.1(d) outlines procedures for payment of the Call Purchase Price, and by its terms applies regardless of how the Call Purchase Price is determined under § 2.1(b). Specifically, § 2.1(d) provides that the physicians were entitled to a First Payment on the date of the Asset Sale equal to their share of the net cash proceeds, less their proportionate share of: (1) all known liabilities, and (2) the Reserve fund. This Reserve was initially set at $2.5 million, but could be increased or decreased by Defendants "upon the Asset Sale Closing only if the General Partner has a good faith basis to do so." Put/Call Agreement § 2(d)(i)(y). Finally, §2.1(d) provides that "in no event shall the First Payment be less than the Call Floor Amount, " and that the physicians would be entitled to additional payments if the final Call Purchase Price exceeded the First Payment. In that case, the Put/Call Agreement stipulates that the physicians were to be paid out of the Accounts Receivable, unless that asset had been sold to the potential buyer. Put/Call Agreement §2.1(d)(ii-iv).

II. Legal Standard

"To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. While detailed factual allegations are not necessary, a plaintiff must provide "more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555. However, a complaint can survive a motion to dismiss even if actual proof of the facts alleged is "improbable." Twombly, 550 U.S. at 556. Although the court must take all of the factual allegations in the complaint as true, the court is "not bound to accept as true a legal conclusion couched as a factual allegation." Iqbal, 556 U.S. at 678 (internal quotation marks omitted).

In deciding a motion to dismiss, a court may consider documents incorporated into the complaint by reference. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007). "The court's review is limited to the complaint, any documents attached to the complaint, and any documents attached to the motion to dismiss that are central to the claim and referenced by the complaint." Lone Star Fund V (U.S.), L.P. v. Barclays Bank PLC, 594 F.3d 383, 388 (5th Cir. 2010). In this breach of contract case, the contract itself is incorporated into the ...

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