Alpha Real Estate Co. v. DELTA DENTAL, C7-01-2259.

• Decision Date: 18 November 2003
• Docket Number: No. C7-01-2259.,C7-01-2259.
• Citation: 671 N.W.2d 213
• Parties: ALPHA REAL ESTATE COMPANY OF ROCHESTER, Appellant, v. DELTA DENTAL PLAN OF MINNESOTA, et al., Respondents.
• Court: Minnesota Court of Appeals

671 N.W.2d 213

ALPHA REAL ESTATE COMPANY OF ROCHESTER, Appellant, v. DELTA DENTAL PLAN OF MINNESOTA, et al., Respondents.

No. C7-01-2259.

Court of Appeals of Minnesota.

November 18, 2003.

Review Denied January 20, 2004.

Timothy J. Hassett, Janet A. Newberg, Felhaber, Larson, Fenlon & Vogt, P.A., St. Paul, MN, for appellant.

David B. Morse, Eagan, MN, for respondents.

Considered and decided by KALITOWSKI, Presiding Judge, LANSING, Judge, and G. BARRY ANDERSON, Judge.

OPINION

G. BARRY ANDERSON, Judge.

Appellant Alpha Real Estate Company ("Alpha") sued respondents Delta Dental Plan of Minnesota ("Delta") and Sui Generis Development Company ("Sui Generis"), a wholly owned subsidiary of Delta, to enforce the exercise of Alpha's option to purchase a dental clinic pursuant to Alpha's lease with Sui Generis; Sui Generis and Delta counterclaimed for breach of contract. After a trial, the district court concluded that Alpha had breached the parties' contract by failing to pay a five-percent rental surcharge and that the disputed provision was not illegal under federal or state law. Alpha appealed, and this court affirmed. Alpha Real Estate of Rochester v. Delta Dental Plan of Minn., C7-01-2259, 2002 WL 1840897 (Minn.App. Aug. 13, 2002), aff'd in part, rev'd in part, and remanded, 664 N.W.2d 303 (Minn. 2003). The supreme court affirmed in part and reversed in part and remanded to this court to conduct a de novo review as to whether the five-percent rental surcharge violated state and federal law. Alpha Real Estate of Rochester v. Delta Dental Plan of Minn., 664 N.W.2d 303 (Minn.2003). We affirm in part, reverse in part, and remand for determination of attorney fees.

FACTS

This case arises from the establishment of a dental clinic in Rochester, Minnesota. Delta Dental Plan of Minnesota is a nonprofit health-service-plan corporation that sells and administers dental benefits to group plans, governmental units, and labor unions on a contract basis. In 1995, Delta was experiencing difficulties finding service providers in the Rochester area. Delta contacted Dr. Ted Erickson, a Faribault dentist, and negotiated a contract under which Delta would purchase and construct a dental clinic in Rochester and Erickson would provide the services under a provider agreement. Both parties sought to keep the arrangement confidential.

To implement this plan, Delta formed a wholly owned subsidiary, Sui Generis Development Company, to purchase, construct, and equip the property and to act as landlord. Erickson formed two companies, Alpha Real Estate of Rochester ("Alpha"), which leased the property from Sui Generis, and Apollo Dental Center, PLC ("Apollo"), which leased the property from Alpha. Apollo also entered into a provider agreement with Delta and operated the dental clinic. Apollo is not a party to this appeal.

In 1995, the parties entered into lengthy negotiations concerning the dental clinic. A document known as the 1995 agreement contained the following provision, "If in any one calendar year during the first ten years of the Lease (1996-2005) the adjusted cash receipts exceed $1 million, [Alpha] shall pay to Sui Generis additional rent for that particular year a sum equal to five percent of adjusted cash receipts." The 1995 agreement also provides that Erickson may purchase the clinic, but, in that event, "the additional five percent rental formula based upon adjusted cash receipts shall continue for the remainder of the ten year period." The 1995 lease, a separate document, also contains the five-percent rental surcharge clause, but it does not provide that it continues after the sale of the clinic. The 1995 lease was replaced by the 1997 lease, which was drafted to reflect the fact that construction of the building had been completed; it contains the five-percent rental surcharge clause that was in the 1995 lease.

The benchmark amount of $1 million was attained in 1998 and in 1999, but Alpha did not pay the additional sums due under the five-percent clause in 1998 or 1999. Delta served notices of default but took no steps to evict Alpha, which otherwise continued to pay its rent.

In 1999, Alpha attempted to exercise its option to purchase the property, but Delta refused to convey the property unless Alpha agreed to pay the five-percent charge on a continuing basis after the sale pursuant to the 1995 agreement. Alpha sued for specific performance. Delta counterclaimed for breach of contract based on Alpha's failure to make payments in 1998 and 1999 under the five-percent clause, and a court trial was held.

The district court, finding the lease ambiguous and considering extrinsic evidence, held that the five-percent clause survived Apollo's exercise of the option to purchase the clinic and this court affirmed. Alpha Real Estate of Rochester v. Delta Dental Plan of Minn., C7-01-2259, 2002 WL 1840897 (Minn.App. Aug. 13, 2002), aff'd in part, rev'd in part, and remanded, 664 N.W.2d 303 (Minn.2003). The supreme court affirmed in part and reversed in part, holding in relevant part that the 1997 lease was a "complete integration" and "that under the 1997 lease Alpha's five percent additional rent obligation terminates upon the closing of the option to purchase." Alpha Real Estate Co. of Rochester v. Delta Dental Plan of Minn., 664 N.W.2d 303, 314 (Minn.2003). Under the supreme court's decision, however, because the $1 million benchmark was achieved in 1998 while the 1997 lease was in effect and "because the district court ordered Alpha to pay Delta $165,500.81 in additional rent for 1998 and 1999," the challenge to the legality of the five-percent clause remained. Id. Because this court applied an incorrect standard of review in considering the issue, the supreme court remanded to this court for de novo review the issue of "whether the five percent additional rent clause violates federal and state law." Id. at 314-315. This court then reinstated the appeal.

ISSUES

I. Does the five-percent clause violate the federal anti-kickback statute, 42 U.S.C. § 1320a-7b(b) (Supp. V 1999), or the state law prohibiting conflicts of interest by health-care providers, Minn.Stat. § 62J.23 (2002)?

II. Does the five-percent clause violate the state prohibition against fee splitting by dentists under Minn.Stat. § 150A.11, subd. 4 (2002)?

III. If the five-percent clause is illegal, is it severable from the remainder of the 1997 contract?

ANALYSIS

Alpha took this appeal from the district courts decision, after a court trial, without making a motion for a new trial. As enunciated by the supreme court, "while permissive, motions for a new trial pursuant to Minn. R. Civ. P. 59.01 are not a prerequisite for appellate review of substantive questions of law when a genuine issue of law is properly raised and considered at the district court level." Alpha Real Estate Co. of Rochester v. Delta Dental Plan of Minn., 664 N.W.2d 303, 311 (Minn.2003). An appellate court does "not give deference to the district court's conclusions of law and we review questions of law de novo." Id.

I.

The supreme court remanded to this court the issue of "whether the five percent additional rent clause violates federal and state law." Id. at 315. Alpha contends that the five-percent clause is illegal because it violates the federal anti-kickback statute, 42 U.S.C. § 1320(a)-7b(b) (Supp. V 1999), and the state law prohibiting conflicts of interest by health-care providers, Minn.Stat. § 62J.23 (2002). As an initial matter, we note that under Minn. Stat. § 62J.23, subd. 2, the federal anti-kickback statutes and related federal regulations apply to the state statute until the Commissioner of Health adopts rules concerning the section. Because such state rules have not yet been adopted, we apply federal law, and a separate analysis of state law is unnecessary.

"A contract violating law or public policy is void." Barna, Guzy & Steffen, Ltd. v. Beens, 541 N.W.2d 354, 356 (Minn. App.1995), review denied (Minn. Feb. 27, 1996). A contract may be deemed illegal if it violates the federal anti-kickback statute. See Feldstein v. Nash Cmty. Health Servs., Inc., 51 F.Supp.2d 673, 680 (E.D.N.C.1999)

(addressing this issue). Under the federal anti-kickback statute, it is a felony to "knowingly and willfully solicit[ ] or receive[ ] any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind" in return for referrals or purchases, leases, or orders of any goods or services under federal health-care programs. 42 U.S.C. § 1320a-7b(b)(1) (emphasis added).

We focus here on the intent requirement. "Because the anti-kickback statute is a criminal statute with a scienter requirement," there must be a finding that the requisite intent is present before it can be determined that the contract violates the federal anti-kickback law. Feldstein, 51 F.Supp.2d at 684. Courts have construed the intent requirement somewhat differently. The eighth circuit court of appeals explained it as follows: "Both the plain language of [the anti-kickback] statute, and respect for the traditional principle that ignorance of the law is no defense, suggests that a heightened mens rea standard should only require proof that [the defendant] knew that his conduct was wrongful, rather than proof that he knew it violated `a known legal duty.'" United States v. Jain, 93 F.3d 436, 441 (8th Cir. 1996); see United States v. Starks, 157 F.3d 833, 838 (11th Cir.1998)

(applying similar standard). Starks noted that the anti-kickback statute was not highly technical and did not pose a danger "of ensnaring persons engaged in apparently innocent conduct. Indeed, the giving or taking of kickbacks for medical referrals is hardly the sort of activity a person might expect to be legal." 157 F.3d at 838. In contrast, the ninth circuit required that the defendant have knowledge of the anti-kickback statute and engage in prohibited conduct with specific intent to...