AVES BY AND THROUGH AVES v. Shah

• Decision Date: 18 January 1996
• Docket Number: No. 88-1669-PFK.,88-1669-PFK.
• Citation: 914 F. Supp. 443
• Parties: Darcy M. AVES, a Minor, By and Through Dan J. AVES and Faye E. Aves, Her Mother and Father, Natural Guardians and Next Friends; Darcy M. Aves, Individually; and Dan J. Aves and Faye E. Aves, Individually, Plaintiffs, v. Nasreen B. SHAH, M.D., Defendant, v. Ron TODD, Commissioner of Insurance of the State of Kansas, as Administrator of the Health Care Stabilization Fund, Garnishee.
• Court: U.S. District Court — District of Kansas

914 F. Supp. 443

Darcy M. AVES, a Minor, By and Through Dan J. AVES and Faye E. Aves, Her Mother and Father, Natural Guardians and Next Friends; Darcy M. Aves, Individually; and Dan J. Aves and Faye E. Aves, Individually, Plaintiffs, v. Nasreen B. SHAH, M.D., Defendant, v. Ron TODD, Commissioner of Insurance of the State of Kansas, as Administrator of the Health Care Stabilization Fund, Garnishee.

No. 88-1669-PFK.

United States District Court, D. Kansas.

January 18, 1996.

COPYRIGHT MATERIAL OMITTED

Mark B. Hutton, Derek S. Casey and Channel P. Townsley, of Hutton & Hutton, Wichita, KS, Randall E. Fisher, Law Offices of Randall E. Fisher, Wichita, KS, Arden J. Bradshaw and Troy H. Gott, of Bradshaw, Johnson & Hund, Wichita, KS, for plaintiffs.

William Tinker, Jr., of McDonald, Tinker, Skaer, Quinn & Herrington, Wichita, KS for Shah and insurance carrier.

Richard I. Stephenson, of Fleeson, Gooing, Coulson & Kitch, Wichita, KS for Shah.

Steven C. Day, of Woodard, Blaylock, Hernandez, Roth & Day, Wichita, KS, for Kansas Health Care Stabilization Fund.

MEMORANDUM AND ORDER

PATRICK F. KELLY, Senior District Judge.

The action currently before the court is a garnishment action against the Commissioner of Insurance of the State of Kansas, in his role as Administrator of the Kansas Health Care Stabilization Fund. Underlying the garnishment action is the judgment returned in a medical malpractice action brought against Dr. Nasreen B. Shah and the Central Kansas Medical Center. In 1990, the jury in the malpractice action returned a verdict for the plaintiffs, Darcy Aves and her parents, in excess of $23 million, finding Dr. Shah 90% at fault and the medical center 10% at fault. Dr. Shah's share of the damages exceeds $21 million. The jury's verdict was affirmed on appeal. Aves v. Shah, 997 F.2d 762 (10th Cir.1993).

The plaintiffs commenced the present garnishment action alleging that the Fund acted in bad faith or with negligence in its actions preceding the trial of the malpractice action. Specifically, the plaintiffs contend that the Fund rejected settlement offers of $1.5 to 2 million, despite warnings from Dr. Shah's attorney and an independent advisory counsel appointed by the Fund that any verdict would likely exceed the $3.2 million policy limits. The Fund specifically rejected offers by the Aves family to settle the case for $3.1 or 3.2 million.

The plaintiffs contend that the Fund acted negligently or in bad faith by refusing to settle the case within the policy limits established for the Fund under state law. The Fund was created as a result of the Health Care Provider Insurance Availability Act, K.S.A. 40-3401 et seq. One portion of the Act, K.S.A. 40-3403(e), provides:

(e) In no event shall the fund be liable to pay in excess of $3,000,000 pursuant to any one judgment or settlement against any one health care provider relating to any injury or death arising out of the rendering of or the failure to render professional services on and after July 1, 1984, and before July 1, 1989, subject to an aggregate limitation for all judgments or settlements arising from all claims made in any one fiscal year in the amount of $6,000,000 for each health care provider.

The Act also provides pursuant to K.S.A. 40-3412(c) (1994 Supp.) that:

Nothing herein shall be construed to impose any liability in the fund in excess of that specifically provided for herein for negligent failure to settle a claim or for failure to settle a claim in good faith.

The Fund has moved to dismiss the plaintiffs' claims on a variety of grounds. The Fund argues that it is an agency of the State of Kansas and therefore immune from the plaintiffs' claims under the Eleventh Amendment; that there is incomplete diversity of citizenship among the parties and thus no subject matter jurisdiction in the garnishment proceedings; and that K.S.A. 40-3403 and 40-3412 bar any action against the Fund for bad faith or negligent failure to settle a claim.

In order to obtain a clearer statement of Kansas law on the viability of the plaintiffs' claims of negligence and bad faith, this court, on December 12, 1994, addressed certified questions to the Kansas Supreme Court. The court asked:

1. Whether, in light of the provisions of the Health Care Provider Insurance Availability Act, Kansas law recognizes a claim of bad faith against the Health Care Stabilization Fund when a judgment is returned in excess of the Fund's statutory limits of liability.

2. May the plaintiffs holding the excess judgment prosecute such a bad faith action against the Fund by way of garnishment in light of K.S.A. 60-723(d)?

On November 3, 1995, the Kansas Supreme Court responded to the first question by holding that K.S.A. 40-3403(e) and 40-3412(c) bar any action against the Fund for bad faith or for negligent failure to settle a claim. Aves v. Shah, 258 Kan. 506, 906 P.2d 642 (1995). The court declined to answer the second question, finding the matter moot in light of its conclusion regarding the first certified question.

In reaching its conclusion, the court agreed with the argument that K.S.A. 40-3412(c) "was originally intended to prevent common-law bad faith claims" against the Fund. 906 P.2d at 651. The court also rejected the argument of the plaintiffs that K.S.A. 40-3412(c) is an unconscionable term of the insurance contract, that the Fund was estopped to assert the defenses created by the statutes, or that 40-3412(c) violated the due process and equal protection guarantees of the Kansas Constitution Bill of Rights.

This response to the certified questions puts in issue the Fund's motion to dismiss, as well as the competing motion to determine a question of law filed by the plaintiffs, in which the plaintiffs seek a determination that K.S.A. 40-3412(c) and 40-3403 violate the federal constitution.¹ Because the briefs addressing the issues presented by these motions were originally presented prior to the submission of the certified questions, on November 14, 1995, the court explicitly invited both the Fund and the plaintiffs to present supplemental briefs on the remaining constitutional issues.

Both parties have complied, and the court has carefully reviewed these briefs, as well as all other pleadings in the present action. The court finds that oral argument would not materially assist in the resolution of the issues presented by the various motions, and accordingly will proceed directly to the merits of the plaintiffs' constitutional arguments.

The plaintiffs attack the provisions of the Act which bar a bad faith claim on three grounds. They contend that the Act's prohibition of an action for bad faith impairs the contractual obligations between Dr. Shah and her insurer, in violation of the Contract Clause of the United States Constitution. They also contend that the Act violates due process and equal protection.

The contract clause provides: "No State shall ... pass any ... Law impairing the Obligation of Contracts." U.S. Const. art I, § 10. Although the text of the clause itself would appear to bar any state legislation affecting contracts, the courts have never applied the bar so broadly. The clause should not be understood to be "the Draconian provision that its words might seem to imply." Allied Structural Steel v. Spannaus, 438 U.S. 234, 240, 98 S.Ct. 2716, 2720, 57 L.Ed.2d 727 (1978). "Literalism in the construction of the contract clause," the Supreme Court has stated, "would make it destructive of the public interest by depriving the State of its prerogative of self-protection." W.B. Worthen Co. v. Thomas, 292 U.S. 426, 433, 54 S.Ct. 816, 818, 78 L.Ed. 1344 (1934). See also National R.R. Passenger Corp. v. Atchison, T. & S.F. Ry. Co., 470 U.S. 451, 472, 105 S.Ct. 1441, 1455, 84 L.Ed.2d 432 (1985).

Instead, the courts have focused upon the magnitude of the alleged infringement. The inquiry into the validity of state legislation under the contract clause "has three components: whether there is a contractual relationship, whether a change in law impairs that contractual relationship, and whether the impairment is substantial." General Motors Corp. v. Romein, 503 U.S. 181, 112 S.Ct. 1105, 117 L.Ed.2d 328 (1992).

The importance of the contract clause as a vehicle for striking down state laws reached its high water mark in the nineteenth century. In this century the importance of the clause has ebbed significantly. Nonetheless, the Supreme Court has recently indicated that the clause "remains a part of our written Constitution." United States Trust Co. v. New Jersey, 431 U.S. 1, 16, 97 S.Ct. 1505, 1514, 52 L.Ed.2d 92 (1977). In Allied Structural Steel, 438 U.S. at 241, 242, 98 S.Ct. at 2721, the Court stated that the contract clause is "not a dead letter," and "must be understood to impose some limits upon the power of a State to abridge existing contractual relationships."

The underlying purpose of the contract clause is to protect the expectations of persons who enter into contracts from the danger of subsequent legislation.

Contracts enable individuals to order their personal and business affairs according to their particular needs and interests. Once arranged, those rights and obligations are binding under the law, and the parties are entitled to rely on them.

Allied Structural, 438 U.S. at 245, 98 S.Ct. at 2723.

It is for this reason that the plaintiffs' contract clause attack on K.S.A. 40-3403 and 40-3412 must fail. Even assuming the existence of a contract relationship which was significantly impaired by these statutes, it is apparent here that the statutes did not affect any pre-existing contract. The challenged provisions of the Health Care Provider Insurance Availability Act were adopted in 1976, long before the effective date of any contractual relationship between Dr. Shah and her insurer. Accordingly, the application of the provisions of the Act cannot do damage to any reasonable reliance expectations of the parties to the contract.

The...