Cambio Health Solutions, LLC v. Reardon

• Decision Date: 14 December 2006
• Citation: 213 S.W.3d 785
• Parties: CAMBIO HEALTH SOLUTIONS, LLC et al. v. Thomas M. REARDON.
• Court: Tennessee Supreme Court

213 S.W.3d 785

CAMBIO HEALTH SOLUTIONS, LLC et al. v. Thomas M. REARDON.

Supreme Court of Tennessee, at Knoxville.

October 4, 2006 Session.

December 14, 2006.

Thomas O. Helton, Chattanooga, Tennessee, Lawrence S. Eastwood, Jr., and Preston A. Hawkins, Nashville, Tennessee, for the petitioners, Cambio Health Solutions, LLC, Triad Hospitals, Inc., Quorum Health Resources, LLC, and Intensive Resource Group, LLC.

James F. Sanders and W. David Bridgers, Nashville, Tennessee, for the respondent, Thomas R. Reardon.

OPINION

WILLIAM M. BARKER, C.J., delivered the opinion of the court, in which JANICE M. HOLDER, CORNELIA A. CLARK, and GARY R. WADE, JJ., and ADOLPHO A. BIRCH, JR., Sp. J., joined.

In federal district court, a jury awarded an employee compensatory damages against his employer for breach of contract and punitive damages against his employer's parent corporations for intentional interference with contract. The employer and parent corporations appealed to the United States Court of Appeals for the Sixth Circuit, which certified a question of law to this Court: Whether a parent company's qualified privilege to cause a wholly-owned subsidiary to breach a contract without incurring tort liability applies when the parent company only has a majority interest in the subsidiary. We hold that it does not.

Facts and Procedural History

Because this case comes to us as a certified question of law,¹ we summarize the relevant facts based on the certification order of the United States Court of Appeals for the Sixth Circuit. On September 1, 1999, Cambio Health Solutions, LLC (Cambio) hired Thomas M. Reardon (Reardon) as its CEO. Reardon and Cambio entered into an executive consulting agreement (the "Agreement") to govern the terms of Reardon's employment. The Agreement provided that upon a "change in control" at Cambio or Intensive Resource Group, LLC (IRG), which at the time of the Agreement owned a majority of Cambio's stock, Reardon would have the option to terminate his employment for "good reason" and receive severance pay. The Agreement defined "good reason" to include a failure to pay compensation and benefits. Under the Agreement, Reardon received a 10% ownership stake in Cambio.

At the time Cambio and Reardon entered into the Agreement, IRG owned 80% of Cambio's stock. The remaining shares were owned by Reardon (10%) and private investors (10%). At that time, IRG was a wholly-owned subsidiary of Quorum Health Resources, LLC (QHR), which was a wholly-owned subsidiary of Quorum Health Group (QHG). On April 27, 2001, Triad Hospitals, Inc. (Triad) acquired QHG, and QHG merged into Triad.

The Triad merger and various actions taken by IRG, QHR, and Triad after the merger marginalized Reardon's role at Cambio. On March 14, 2002, Reardon resigned from his employment with Cambio and requested severance pay under the Agreement. Reardon asserted that Triad's acquisition of QHG constituted a "change of control" under the Agreement and that his resignation was for "good reason." In response, IRG, QHR, and Triad directed Cambio to file suit in federal district court seeking a declaratory judgment that Reardon was not owed severance pay. Reardon then brought a counterclaim against Cambio for breach of contract and against IRG, QHR, and Triad (together with Cambio, referred to collectively as "the Companies") for tortious interference with contract under the common law and inducement of a breach of contract under Tennessee Code Annotated section 47-50-109 (2001).

At the time of the alleged interference, Triad owned 100% of QHR, which owned 100% of IRG, which owned between 80% and 90% of Cambio. Reardon still owned 10% of Cambio.

At trial, the jury found that Cambio breached the Agreement by not paying severance to Reardon. The jury awarded Reardon $815,000 in compensatory damages for breach of contract. The jury also found that Triad, QHR, and IRG tortiously interfered with the contract and induced a breach of the contract in violation of Tennessee Code Annotated section 47-50-109. The jury awarded Reardon $1,800,000 in punitive damages against Triad, $3,000,000 against QHR, and $200,000 against IRG.

The Companies appealed the award of punitive damages to the United States Court of Appeals for the Sixth Circuit, arguing that the district court erred by refusing to hold as a matter of law that Triad, QHR, and IRG were privileged to interfere with Cambio's contract with Reardon.

Analysis

Pursuant to Rule 23 of the Rules of the Supreme Court of Tennessee, this Court accepted certification of the following question from the United States Court of Appeals for the Sixth Circuit:

Does a parent company's qualified privilege to interfere in the contractual relations of a wholly owned subsidiary apply when the parent company has a majority interest in the subsidiary?

Based on our decision in Waste Conversion Systems, Inc. v. Greenstone Industries, Inc., 33 S.W.3d 779 (Tenn.2000), and the discussion below, we hold that the qualified privilege of a parent company to interfere in the contractual relations of a subsidiary company does not apply when the parent owns less than 100% of its subsidiary.

In Waste Conversion, we held that a "parent corporation has a privilege pursuant to which it can cause a wholly-owned subsidiary to breach a contract without becoming liable for tortiously interfering with a contractual relationship." Id. at 780. We held that this privilege—to interfere with a contract—is a limited privilege that can be lost if the parent acts contrary to the subsidiary's economic interests or employs wrongful means. Id.

In acknowledging the qualified privilege, we were explicit in our reasoning: "The reason for acknowledging the privilege of a parent corporation to interfere in its wholly-owned subsidiary's contractual relations is the usual identity of interest between the subsidiary and its parent." Id. at 781. We explained that in such a situation, the parent and subsidiary are so closely aligned as to render them the "same entity." Id. at 781-82 (quoting Am. Med. Int'l, Inc. v. Giurintano, 821 S.W.2d 331, 336 (Tex.Ct.App.1991)).

We also cited with approval the reasoning of the United States Supreme Court in Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 104 S.Ct. 2731, 81 L.Ed.2d 628 (1984), which involved a federal antitrust claim. Waste Conversion, 33 S.W.3d at 782. In Copperweld, the Court reasoned that a parent and wholly-owned subsidiary were not capable of conspiring with each other because they share a "complete unity of interest," guided and determined by one consciousness. 467 U.S. at 771, 104 S.Ct. 2731.

In Waste Conversion, we emphasized that our holding was "limited to the relationship between a parent corporation and a wholly-owned subsidiary." 33 S.W.3d at 781 (emphasis added). We left open the extent to which the privilege "would apply [if at all] to situations in which a parent corporation owns less than 100 percent of the stock in a subsidiary." Id.

The question we left open in Waste Conversion is the question certified to us in this case. We conclude that the privilege does not extend when a parent owns less than 100% of a subsidiary. The foundation of Waste Conversion and the reasoning upon which it rests is that the qualified privilege should be extended when there is a full and complete identity of interest between a parent corporation and its subsidiary. When there exists such an identity of interest, courts are justified in treating two legally separate entities as one and in extending the immunity from tortious interference that is normally enjoyed only by the parties to a contract. However, courts are not justified in extending the privilege when the interests of the parent and the subsidiary are not identical.

In a tortious interference claim, a parent corporation and its subsidiary will usually not share an identity of interests when the subsidiary is not wholly-owned because the interests of the majority shareholder are often different from and antagonistic to the interests of the minority shareholders. Because of the competing nature of their interests, Tennessee law protects minority shareholders from majority shareholders. Under Tennessee law, a majority shareholder owes a fiduciary duty to minority shareholders. See Nelms v. Weaver, 681 S.W.2d 547, 549 (Tenn.1984) (citing Johns v. Caldwell, 601 S.W.2d 37, 41 (Tenn.Ct.App.1980)). A majority shareholder is obligated to deal fairly with minority shareholders and not to act out of avarice, malice, or self-interest. See Nelson v. Martin, 958 S.W.2d 643, 649 (Tenn.1997), overruled on other grounds by Trau-Med of Am., Inc. v. Allstate Ins. Co., 71 S.W.3d 691, 701 (Tenn.2002).

Although the majority shareholder and minority shareholders do indeed share similar interests in many areas of a corporation's operations, including a financial interest in a share of the dividends, their interests in other respects, such as to the direction and control of the company, may be quite different. See Holloway v. Skinner, 898 S.W.2d 793, 797 (Tex.1995) (concluding that the controlling shareholder did not share a "complete identity of interest" with the corporation despite the "substantial alignment of his interests with those of the Corporation," because the interests of the controlling shareholder and the corporation "are not of necessity identical"). All shareholders, whether they own 100% or .001% of a company, benefit when a company is profitable. But for there to be a complete identity of interest, all of their interests must be aligned so as to render the parent and the subsidiary the "same entity." Waste Conversion, 33 S.W.3d at 782.

This case demonstrates how easily the interests of a majority shareholder and minority shareholder can diverge, disrupting the identity of interests. Cambio, a subsidiary of IRG, entered into the Agreement with Reardon for his personal services. As part of the Agreement, Reardon received...