Health Care Found. of Greater Kan. City v. HM Acquisition, LLC, WD 79340

Decision Date17 January 2017
Docket NumberWD 79340
CourtMissouri Court of Appeals

Paul D. Seyferth, Michael L. Blumenthal, Kevin J. Karpin, and Deena B. Jenab, Kansas City, MO, Edward D. Robertson, Jr., Jefferson City, MO, Attorneys for Respondent,

Thomas G. Kokoruda, William E. Quirk, and Lauren E. Tucker McCubbin, Kansas City, MO, Mark P. Goodman, Maura Kathleen Monaghan, and Jacob W. Stahl (all admitted pro hac vice), New York, NY, Attorneys for Appellants.

Before Division IV: Mark D. Pfeiffer, Chief Judge, and Thomas H. Newton and Cynthia L. Martin, Judges

Mark D. Pfeiffer, Chief Judge

HM Acquisition, LLC ("HM Acquisition") and HCA, Inc. ("HCA") appeal from the judgment entered by the Circuit Court of Jackson County, Missouri ("trial court"), after a bench trial, in favor of Health Care Foundation of Greater Kansas City ("Foundation") on the Foundation's petition for declaratory judgment, accounting, and specific performance. The trial court's judgment is affirmed in part, reversed in part, and modified.

Factual and Procedural Background

Health Midwest, a Missouri nonprofit public benefit corporation, owned a number of hospitals in the greater Kansas City metropolitan area. In 2002, because of Health Midwest's lack of access to capital necessary to maintain, expand, and renovate the facilities it owned, its board decided to explore the sale of its hospitals and other assets.

Health Midwest contacted HCA, a publicly-traded corporation with headquarters in Nashville, Tennessee, and the largest for-profit health care provider hospital chain in the nation, and solicited it to buy the assets of Health Midwest. This led to negotiations between the parties that were ultimately successful. Later that year, HCA formed HM Acquisition, a Missouri limited liability company, for the purpose of acquiring certain assets and liabilities of Health Midwest.

Health Midwest and HM Acquisition executed an Asset Purchase Agreement ("APA") on November 22, 2002. Under the terms of the APA, HCA agreed to serve as guarantor of HM Acquisition's performance and obligations. Under Section 2.1 of the APA, Health Midwest agreed to sell to HM Acquisition substantially all of its tangible and intangible assets, principally nine hospitals in the Kansas City metropolitan area, for the purchase price of $1.125 billion dollars. Under Article 5 of the APA, HM Acquisition agreed to certain post-closing operating covenants. Section 5.1 states:

5.1 Capital Improvements.[1 ] Within two (2) years following the Closing Date, [HM Acquisition] will either spend or commit to spend at least Three Hundred Million Dollars ($300,000,000) in capital expenditures. In each of the three (3) years subsequent to the two-year period following the Closing Date, [HM Acquisition] will either spend or commit to spend at least Fifty Million Dollars ($50,000,000) in capital expenditures. Any amounts spent in any period that are in excess of the required amount for such period will be credited against amounts required to be spent or committed to be spent in subsequent periods. Moreover, any Permitted Capital Expenditures and any capital expenditures made by Seller or System Entities which are approved by [HM Acquisition] shall be credited against [HM Acquisition's] obligations under this Section 5.1. The amount of capitalized expenditures made under this Section 5.1 will be determined in accordance with [HM Acquisition's] then applicable accounting policies and procedures. The construction of new facilities by [HM Acquisition] will not materially detract from the required maintenance and necessary improvement of existing Facilities.

HM Acquisition also agreed in Section 5.14 to provide Health Midwest an annual report "setting forth in reasonable detail how it complied with the operating covenants, including a specific accounting of capital expenditures [HM Acquisition] agree[d] to make in accordance with Section 5.1."

Section 5.15 spelled out Health Midwest's remedies should HM Acquisition breach or not perform any of the Article 5 operating covenants:

Breach or nonperformance of any operating covenant set forth in this Article 5 will entitle [Health Midwest] to the indemnification rights set forth in Article 13 and/or any and all other remedies at law or equity (including monetary damages suffered by the community as a result of such breach or nonperformance, specific performance, and restraining order, injunction or other equitable relief). In addition, if the annual report shows that, for any applicable period, [HM Acquisition] has not spent or committed to spend dollars on capital expenditures during such period at least equal to the amount [HM Acquisition] agreed to provide in Section 5.1, then [HM Acquisition] will immediately pay such shortfall to [Health Midwest]. Moreover, if [HM Acquisition] has not spent $450,000,000 on capital expenditures (and amounts paid to [Health Midwest] pursuant to this Section 5.15) within a reasonable period of time after the fifth anniversary of the Closing ..., then [HM Acquisition] will immediately pay such shortfall to [Health Midwest].

Pursuant to Section 14.18 of the APA, HCA, as guarantor, "unconditionally and absolutely guarantee[d] the prompt performance and observation of [HM Acquisition] for each and every obligation, covenant[,] and agreement of [HM Acquisition] arising out of, connected with, or related to this [APA] or any ancillary documents hereto[.]"

Four days after the execution of the APA, Health Midwest filed lawsuits against the Attorneys General of Missouri and Kansas, challenging their attempts to exercise authority over the disposition of the proceeds of the sale of Health Midwest's public benefit assets. Section 8.5 of the APA provided that Health Midwest and HM Acquisition would cooperate to secure all necessary government approvals to consummate the transaction anticipated by the APA, including from the Missouri and Kansas Attorneys General. Though the APA obligated Health Midwest to "take the lead" in any such efforts, Health Midwest was obligated to "include [HM Acquisition] in any such discussions." In the same section of the APA, the parties agreed to "prepare any document or other material which may be required by [the Missouri and Kansas Attorneys General] as a predicate to or result of the transactions contemplated" by the APA. Accordingly, Health Midwest2 entered into a Settlement Agreement on July 23, 2003, with the Missouri Attorney General, wherein Health Midwest agreed to create the Foundation,3 a Missouri nonprofit public benefit corporation, to receive eighty percent of the net proceeds of the sale and eighty percent of the net assets retained by Health Midwest upon its future dissolution. The Settlement Agreement provided that the Missouri Attorney General "specifically reserve[d] his right ... to monitor HCA's[4 ] compliance with its obligations under the APA and to seek to enforce those obligations." The Settlement Agreement attached as an exhibit an agreement to be later executed ("Joinder Agreement") wherein foundations created in Missouri and Kansas5 to receive shares of the proceeds paid to Health Midwest would become parties to the APA with HM Acquisition's consent. By virtue of the Settlement Agreement, the transactions contemplated in the APA were authorized to proceed.6

On February 19, 2004, the Joinder Agreement anticipated by the Settlement Agreement was executed by representatives of Reach Healthcare, the Foundation, Health Midwest, and HM Acquisition. The Joinder Agreement identified Reach Healthcare and the Foundation as Health Midwest's "Transferees" as contemplated by the APA. In the Joinder Agreement, the "Transferees" agreed "to be bound by the provisions in the [APA] to the same extent as [Health Midwest]." Numbered paragraph 1 of the Joinder Agreement provided that Reach Healthcare and the Foundation each:

(i) agrees to be made a party to the [APA] solely for purposes of assuming the obligations of [Health Midwest] thereunder and (ii) assumes and consents to be bound by all post-closing terms and conditions of the [APA] as [Health Midwest] ... to the same extent as, and jointly and severally obligated with, [Health Midwest] ...; provided that the foregoing agreement, assumption and consent by [the Foundation] is not intended to, and does not, constitute an assignment of rights of [Health Midwest] under the [APA] pursuant to Section 14.3 of the [APA] and [HM Acquisition] does not hereby consent to any such assignment.

The parties further agreed that under no circumstances would Health Midwest be liquidated or dissolved until five years after the closing date of the APA. Numbered paragraph 4 of the Joinder Agreement stated:

Each party shall be entitled to specific performance of any of the provisions of this Joinder or the [APA] in addition to any other equitable remedies to which such party may otherwise be entitled as a result of a failure by the other party to comply with its obligations hereunder or thereunder.

On October 2, 2009, the Foundation filed a four-count petition against HM Acquisition and HCA.7 In Counts II, III, and IV, the Foundation sought to enforce certain covenants in Article 5 of the APA: for an accounting related to HCA's required reporting and compliance with the APA (Count II); for a declaration regarding HM Acquisition and HCA's compliance with Section 5.1 and 5.14 of the APA (Count III); and to order specific performance of the covenants in the APA (Count IV). The primary dispute related to the interpretation of Section 5.1 of the APA, and whether HCA was entitled to take credit for the construction of new facilities in Independence and Lee's Summit in order to satisfy the $450 million capital expenditure requirements of Section 5.1.

On January 24, 2013, after two-plus weeks of evidentiary hearings, the trial court issued a ruling...

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