Cinicola v. Scharffenberger

• Citation: 248 F.3d 110
• Decision Date: 13 September 2000
• Docket Number: No. 00-3318,MATHEWS-MLAKAR,00-3318
• Parties: (3rd Cir. 2001) JOHN CINICOLA; BONNIE K. CASE; PHILIP F. RABINOWITZ; MICHAEL FARRELL; MICHELE R.; MARSHA FINO; ELLIOT SMITH; HUBERT SHICK T/D/B/A NORTH ALLEGHENY INTERNAL MEDICINE, APPELLANTS v. WILLIAM J. SCHARFFENBERGER, CHAPTER 11 TRUSTEE, ET AL.; ALLEGHENY GENERAL HOSPITAL; WESTERN PENNSYLVANIA HEALTHCARE SYSTEM, INC
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Page 110

248 F.3d 110 (3rd Cir. 2001)

JOHN CINICOLA; BONNIE K. CASE; PHILIP F. RABINOWITZ; MICHAEL FARRELL; MICHELE R. MATHEWS-MLAKAR; MARSHA FINO; ELLIOT SMITH; HUBERT SHICK T/D/B/A NORTH ALLEGHENY INTERNAL MEDICINE, APPELLANTS v. WILLIAM J. SCHARFFENBERGER, CHAPTER 11 TRUSTEE, ET AL.; ALLEGHENY GENERAL HOSPITAL; WESTERN PENNSYLVANIA HEALTHCARE SYSTEM, INC.

No. 00-3318

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

Argued September 13, 2000

Filed: April 25, 2001

On Appeal from the United States District Court for the Western District of Pennsylvania D.C. Civil Action No. 99-cv-01327 (Honorable Gary L. Lancaster) [Copyrighted Material Omitted]

[Copyrighted Material Omitted]

[Copyrighted Material Omitted]

[Copyrighted Material Omitted]

William H. Schorling, Esquire (argued) Klett, Rooney, Lieber & Schorling Two Logan Square, 12th Floor 18th and Arch Streets Philadelphia, Pennsylvania 19103 Edwin L. Klett, Esquire Klett, Rooney, Lieber & Schorling One Oxford Centre, 40th Floor Pittsburgh, Pennsylvania 15219 Attorneys for Appellants

David I. Swan, Esquire (argued) Mark E. Freedlander, Esquire McGuire Woods Frick Building, 7th Floor 437 Grant Street Pittsburgh, Pennsylvania 15219-6002 Attorneys for Appellee, William J. Scharffenberger, Chapter 11 Trustee, et al.

John P. Edgar, Esquire (argued) Gary P. Nelson, Esquire Sherrard, German & Kelly FreeMarkets Center, 35th Floor 210 Sixth Avenue Pittsburgh, Pennsylvania 15222-2602 Attorneys for Appellees, Allegheny General Hospital; Western Pennsylvania Healthcare System, Inc.

Before: Sloviter, Scirica and Alito, Circuit Judges

OPINION FOR THE COURT

Scirica, Circuit Judge.

In this bankruptcy appeal, the issue is whether plaintiffs should have obtained a stay under S 363(m) of the Bankruptcy Code before appealing an assumption and an assignment under S 365. See 11 U.S.C.S 363(m) (1994).

This appeal arises from the District Court's affirmance of the Bankruptcy Court's order approving the assumption of eight physician employment contracts by the Chapter 11 Trustee of a bankrupt health care system and their assignment to another hospital.¹ Contending their employment contracts were not assignable, the physicians appealed.

I. FACTUAL AND PROCEDURAL HISTORY

The Allegheny Health, Education and Research Foundation ("AHERF"), the parent corporation, managed a multi-entity healthcare network in Pittsburgh and Philadelphia. After a decade of acquisitions, the health system grew to more than fifty not-for -profit corporations that operated health care, educational and research institutions. The enterprises included Allegheny University Medical Practices Allegheny University of the Health Sciences, Allegheny General Hospital, Allegheny University Hospital-East, Centennial Hospital, Allegheny Singer Research Institute, Allegheny University Medical Center, and The Medical College of Pennsylvania-Hahnemann University. Especially relevant here were AHERF physician practice plans located in the Pittsburgh area.

Plaintiffs-appellants, Dr. John Cinicola and seven primary care physicians, operate the North Allegheny Internal Medicine medical practice in several locations around Pittsburgh.² Between 1995 and 1997, the physicians signed contracts with Allegheny Integrated Health Group (now Allegheny University Medical Practices), and The Medical College of Pennsylvania-Hahnemann University (now Allegheny University of the Health Sciences) --both AHERF affiliates.

After AHERF incurred significant losses, many of its affiliates and hospitals in Philadelphia and Pittsburgh filed for bankruptcy on July 21, 1998.³ Some months after his confirmation, William Scharffenberger, AHERF's Chapter 11 trustee, together with some non-debtor AHERF affiliates, filed an emergency application with the Bankruptcy Court to approve a settlement agreement. For our purposes, the germane provisions of the settlement agreement involved the sale of assets and the assignment of executory contracts, for over $25,000,000, to the Western Pennsylvania Healthcare Alliance. To assume control of several of AHERF's not-for-profit institutions that did not file for bankruptcy, in particular Allegheny General Hospital, the settlement agreement substituted the Western Pennsylvania Healthcare Alliance for AHERF as the institutions' sole voting member.⁴ The settlement agreement also provided for the assignment of the physicians' employment contracts from Allegheny University Medical Practices and Allegheny University of the Health Sciences to the Western Pennsylvania Healthcare Alliance, which at the time had no affiliation with AHERF.

In response, the physicians filed omnibus objections with the Bankruptcy Court alleging the proposed assumption and assignment of their contracts to the Western Pennsylvania Healthcare Alliance--without their consent--violated their employment agreements prohibiting assignment to a non-affiliate of AHERF.⁵ Moreover, contesting Western Pennsylvania Healthcare Alliance's financial viability, the physicians asserted adequate assurance of Western Pennsylvania Healthcare Alliance's future performance of their contracts had not been provided as required by S 365(f)(2) of the Bankruptcy Code. See 11 U.S.C. S 365(f)(2)(B) (trustee may assign executory contracts only if "adequate assurance of future performance by the assignee of such contract or lease is provided, whether or not there has been default in such contract or lease"). After holding a non-evidentiary hearing on July 22, 1999, the Bankruptcy Court issued an order the following day, July 23, approving the settlement agreement ("the First Order"), but deferred deciding the assumption and assignment of the physicians' contracts in order to address their objections.

At a non-evidentiary hearing on July 29, 1999 to consider the physicians' objections, the Bankruptcy Court allowed the trustee to orally amend the settlement agreement to permit the physicians' contracts to be assigned to Allegheny General Hospital, at the time an AHERF affiliate.⁶ This substitution was critical because the contracts explicitly prohibited assignment to an entity, like the Western Pennsylvania Healthcare Alliance, not affiliated with AHERF. After the hearing, the Bankruptcy Court authorized the assumption of the physicians' contracts and their assignment to Allegheny General Hospital ("the Second Order"). Later that same day, the trustee assigned the contracts to Allegheny General Hospital. The Western Pennsylvania Healthcare Alliance then closed on the settlement agreement on August 3, 1999, substituting the Western Pennsylvania Healthcare Alliance for AHERF as the sole and controlling member of Allegheny General Hospital.

Without seeking a stay, the physicians appealed the Bankruptcy Court's Second Order to the District Court on August 5, 1999. As noted, the trustee and the Western Pennsylvania Healthcare Alliance closed on the settlement agreement two days earlier. Before the District Court ruled on their appeal, however, the physicians terminated their employment with Allegheny General Hospital effective October 28, 1999. On February 29, 2000, the District Court affirmed the Bankruptcy Court's Second Order which assigned the employment agreements to Allegheny General Hospital. The physicians then appealed the assumption and assignment to this Court.

Because the sale cannot be reversed, the physicians seek vacation of the Bankruptcy Court's order approving the assumption and assignment of their employment contracts. Appellees contend the physicians' claims are constitutionally moot because the sale has been consummated and statutorily moot under S 363(m) because the physicians failed to obtain a stay pending appeal.

As noted, the physicians unilaterally terminated their contracts with Allegheny General Hospital, now a Western Pennsylvania Healthcare Alliance affiliate. It became clear at oral argument that the physicians seek to invalidate the assignment of their employment contracts to avoid the non-competition clauses in their contracts that Allegheny General Hospital would now assert.⁷ The non-competition clauses prohibit the physicians from working anywhere "within a five (5) mile radius of any medical practice location at which . . . [they] provided primary care services" for AHERF or its affiliates. The covenants arguably bar the physicians from joining Allegheny General Hospital's main competitor in Pittsburgh and terminate on October 28, 2001, "two (2) years after the last date" of their employment. Id. When the non-competition clauses expire, the physicians concede their appeal becomes constitutionally moot.

II. CONSTITUTIONAL MOOTNESS

Because the physicians unilaterally terminated their employment, the Western Pennsylvania Healthcare Alliance and the trustee contend the physicians' appeal is constitutionally moot. In the absence of current employment contracts, appellees assert there remains neither a claim to adjudicate nor relief to grant.

Under Article III of the United States Constitution, the exercise of judicial power depends upon the existence of a case or controversy. DeFunis v. Odegaard, 416 U.S. 312, 316 (1974); Abdul-Akbar v. Watson, 4 F.3d 195, 206 (3d Cir. 1993). Mootness derives from Article III's prohibition against federal courts issuing advisory opinions. North Carolina v. Rice, 404 U.S. 244, 246 (1971); Presbytery of N.J. of the Orthodox Presbyterian Church v. Florio, 40 F.3d 1454, 1463 (3d Cir. 1994). While the Supreme Court has spoken of the "flexible character of the Article III mootness doctrine," United States Parole Comm. v. Geraghty, 445 U.S. 388, 400 (1980), it applies where interim events remove the effects of the violation that prevent the appellate court from granting any relief. In re Cantwell, 639 F.2d 1050, 1053 (3d Cir. 1981).

To avoid mootness, a claim must (1) present a real legal controversy, (2) genuinely affect an individual, and (3) have sufficiently adverse parties. Nat'l Iranian Oil Co....