Gladwin v. Medfield Corp.

• Decision Date: 22 October 1976
• Docket Number: No. 75-2138,75-2138
• Citation: 540 F.2d 1266
• Parties: Fed. Sec. L. Rep. P 95,787 Harold C. GLADWIN et al., Plaintiffs-Appellees, v. MEDFIELD CORPORATION et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1266

540 F.2d 1266

Fed. Sec. L. Rep. P 95,787

Harold C. GLADWIN et al., Plaintiffs-Appellees, v. MEDFIELD CORPORATION et al., Defendants-Appellants.

No. 75-2138.

United States Court of Appeals Fifth Circuit.

Oct. 22, 1976.

George P. Michaely, Jr., Washington, D. C., William J. Schifino, Tampa, Fla., Jon D. Epstein, Houston, Tex., for defendants-appellants.

Allen P. Allweiss, St. Petersburg, Fla., Leonard Barrack, David Berger, Philadelphia, Pa., for plaintiffs-appellees.

Appeal from the United States District Court for the Middle District of Florida.

Before BROWN, Chief Judge, and GODBOLD and SIMPSON, Circuit Judges.

GODBOLD, Circuit Judge:

This case concerns use of proxy material that is false or misleading with respect to the presentation or omission of material facts.

The Gladwins own voting stock in Medfield, a publicly-held corporation engaged in operating hospitals and other health facilities. On February 6, 1974, in preparation for its March 1 annual shareholder meeting at which directors would be elected, Medfield sent to shareholders a 1973 annual report, a notice of annual meeting, and a proxy statement. Medfield sent additional proxy solicitation material on February 20 and 23. A group known as the Medfield Shareholders Committee nominated a rival slate of candidates and also solicited proxies.

At the annual meeting the slate nominated by the existing directors received 56% of the votes cast, against 44% for the candidates nominated by the rival group.

The Gladwins sued, alleging multiple instances of misstatements or material omissions in Medfield's proxy material in violation of § 14(a) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78n, and the applicable proxy rules adopted pursuant to the Act. ¹ The district court, sitting without a jury, found six violations of § 14(a) in that Medfield's proxy materials:

1) failed to disclose the nature and extent of Medfield's Medicare liabilities;

2) failed to disclose and misrepresented a significant turnover in Medfield management and other related personnel problems;

3) failed to disclose substantial purchases of Medfield stock by directors;

4) failed to adequately disclose the true nature and extent of self-dealing by one of the directors with Medfield;

5) failed to disclose that attempts were being made to sell two major assets of Medfield; and

6) unlawfully impugned the character, integrity and personal reputation of one of the candidates opposed to management.

The court ordered a new election. It directed that proxy solicitation material for such election must include corrections of all illegal misstatements and omissions, a statement that the prior solicitations were in violation of the 1934 Act and the proxy rules, and an explanation that the resolicitation was the result of this suit. By a stipulation, approved by the trial court, the order was stayed pending appeal. We affirm the decision of the district court except to the extent hereinafter indicated.

I. Disclosure of Medicare liabilities

Medfield and its wholly-owned subsidiary, Palms of Pasadena Hospital, are participants in the Medicare program of the U.S. Department of Health, Education and Welfare. HEW pays for services and products provided to Medicare beneficiaries. Funding is done through "fiscal intermediaries." Reimbursement to a provider of services is made through interim payments based upon estimated costs of the services and products furnished, as defined in Medicare regulations. The fiscal intermediary audits the provider's costs on an annual basis, and adjustments are made depending upon whether the audit indicates that interim payments to the provider have resulted in excessive or insufficient reimbursement. In June 1973 Blue Cross of Florida, Medfield's "fiscal intermediary," notified Medfield that Blue Cross had reached a "tentative final settlement" for fiscal 1969 of $253,553 in overpayments and requested payment within 30 days. In July 1973 Medfield requested a 24-month repayment plan and was advised by the fiscal intermediary that a request for a repayment plan exceeding 12 months must be forwarded to the Regional Office of the Bureau of Health Insurance, a branch of HEW, and must include the first payment under the proposed payout period. During December 1973 Blue Cross informed Medfield of its determinations that it had been overpaid for the years 1970, 1971 and 1972 in the amounts of $367,243, $327,609, and $419,097, respectively .

On January 15, 1974, the fiscal intermediary told Medfield that the total amount "due and owing" from it was $1,836,272, consisting of the above amounts for 1969 through 1972, plus $163,783 for 1973 and current amounts of $304,987. Blue Cross also told Medfield that current Medicare funds were being withheld because of Medfield's non-payment.

Later in January negotiations ensued pursuant to which Medfield and Blue Cross agreed that Medfield would appeal with respect to amounts said to be owing for 1970, 1971 and 1972, and that the suspended HEW payments would be resumed upon receipt from Medfield of cash flow data and interim financial statements, following which regular payments, less $51,000 per month, would be resumed. While disputing the Blue Cross figures, Medfield asked for a ten-year repayment plan.

In the proxy solicitation the only information provided by Medfield to its stockholders concerning this controversy was in the form of a footnote to the consolidated financial statement in the 1973 annual report, as follows:

(3) ESTIMATED MEDICARE CONTRACTUAL ALLOWANCES:

Palms of Pasadena Hospital, Inc., as a provider under the Medicare Program, has been reimbursed for costs relating to Medicare patients. These reimbursements are subject to adjustment by subsequent examination of the Hospital's accounting records in accordance with existing Medicare regulations.

During the fiscal year ended June 30, 1973, the fiscal intermediary for the Department of Health, Education and Welfare examined the cost of reimbursement reports of the Hospital for the fiscal years ended June 30, 1970, 1971 and 1972. As a result of these examinations, certain adjustments have been proposed which would reduce the amount of the Company's reimbursable cost, and result in refunds to Medicare.

The cumulative liability from the proposed adjustments as calculated by the fiscal intermediary totaled $1,031,555 (before giving effect to Federal income taxes) for the three years ending June 30, 1972.

The primary adjustment proposed relates to the provision of the Medicare reimbursement regulations which provides that costs applicable to services, etc., furnished to a provider by a related organization can be included in allowable costs of the provider only to the extent of the cost to the related organization. The fiscal intermediary has challenged the opinion of the management and counsel of the Company that Pharmacare, Inc. (which operates the pharmacy within the Hospital and provides all pharmaceutical supplies of the Hospital, and which is 23% owned by Medfield Corporation) is not a related organization as defined in the Medicare regulations. The liability arising from this particular issue represents approximately $513,000 of the total proposed liability.

The remainder of the liability is attributable to proposed adjustments relating to methods of allocation and disputed statistics utilized.

As the Company has disputed all of the above proposed adjustments, and the amount of any ultimate liability is indeterminable at this time, no provisions for such proposed adjustments have been provided.

We agree with the district court that this footnote did not sufficiently describe the overpayment controversy as it then existed. It did not reveal the amount of the claim as asserted on January 15, the cessation of HEW payments, or the subsequent arrangements agreed to between Blue Cross and Medfield. ² An omitted fact is material under Rule 14a-9 "if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." TSC Industries, Inc. v. Northway, Inc., --- U.S. ----, 96 S.Ct. 2126, 2133, 48 L.Ed.2d 757, 766 (1976). ³ No rational argument can be mounted that the omissions which we have described were not material.

Medfield's major point on this appeal is that the district court erred in describing the amount of $1,836,272 as "due and owing" and "due within thirty days." It urges that under the Medicare Act and the regulations no amount of overpayments was ascertained with finality nor were the overpayments, whatever the amount, due and payable within 30 days. Medfield views the asserted amount as a tentative figure, subject to administrative review and appeals in which final, liquidated liability would be determined. It asserts that there is no provision in the statute or the regulations making a fiscal intermediary's determination of proposed final liability payable in 30 days. In support of its position Medfield represents to us that through administrative review and appeals, and after the judgment of the district court in this case, overpayments for the periods in question were found to be only $203,000.

It is not necessary...