iHealthcare, Inc. v. Greene
| Decision Date | 05 June 2012 |
| Docket Number | CIVIL NO. 2:11 cv 396 |
| Parties | iHEALTHCARE, INC., Plaintiff v. BARBARA GREENE; HILTON HUDSON, MD; PAUL JONES, MD, Defendants |
| Court | U.S. District Court — Northern District of Indiana |
This matter is before the court on the Motion to Disqualify Counsel [DE 23] filed by the defendant, Paul Jones, on January 9, 2012, and the Motion to Disqualify Counsel [DE 36] filed by the defendant, Barbara Greene, on January 29, 2012. For the reasons set forth below, both motions are GRANTED.
Heartland Memorial Hospital was an Indiana limited liability company that operated a number of for-profit physician practices and owned other healthcare businesses and medical practices in Indiana and Illinois. The plaintiff, iHealthcare, owned 100% of the equity membership interests of Heartland Hospital and controlled its business affairs. iHealthcare is an Indiana Corporation owned in part by Harold Collins, iHealthcare's attorney in the present matter. Collins also was a member of iHealthcare's Board of Directors from 1994 until March 20, 2006, and served asGeneral Counsel and Chief Financial Officer of iHealthcare and Heartland Hospital from 1994 until October 2005.
From 2002 until November 2004, iHealthcare, on behalf of Heartland Hospital, undertook the development of an acute care hospital facility. iHealthcare arranged and guaranteed Heartland Hospital's major financing and capital requirements, including, but not limited to, approximately $3.5 million of iHealthcare convertible debentures, the proceeds of which were loaned to Heartland Hospital and used as money to construct the new facility.
On August 30, 2004, Heartland Hospital entered into a refinancing agreement, commonly referred to as a "sale/leaseback". Under the agreement, Heartland Hospital agreed to sell its Munster Hospital Facility to Munster Holdings, an Indiana limited liability company, for the sum of $30 million dollars. At the time the facility was valued at $40,000,000. Heartland Hospital agreed to lease the facility back from Munster Holdings pursuant to a long-term lease with a repurchase option for $30,000,000.
In June 2005, iHealthcare was approached by Wright Captial Partners, LLC, as prospective buyers for the Heartland Hospital assets and iHealthcare's equity interest in Heartland Hospital. Wright subsequently created a new business entity to effect the iHealthcare stock purchase that was ultimately named HM Holdings.On October 10, 2005, iHealtcare executed a merger agreement whereby Wright Capital committed to lend iHealtcare $2.5 million dollars on behalf of Heartland Hospital provided that LeRoy Wright be named as Chairman of the Board, Alfred Sharp as Chief Financial Officer, and Jeffrey Yessenow as Chief Executive Officer. The loan amount was later increased to $4.8 million.
iHealthcare alleges that the financial condition of iHealth-care and Heartland began to deteriorate after the merger under the new management. iHealthcare was forced to file Chapter 11 bankruptcy on March 16, 2007, in the United States Bankruptcy Court for the Northern District of Indiana. iHealthcare alleges that the new management breached its fiduciary duties by a number of acts including: transferring the facility and its equipment for $20,000,000 less than fair market value to Sisters of St. Francis Health Services; failing to get an appraisal of the facility; failing to supervise the hospital to prevent looting; bankrupting the companies by entering detrimental transactions; and various other activities. iHealthcare further complains that the defendants made false and deceitful representations to induce all parties to enter into the St. Francis sale/leaseback agreement. One of the agreements St. Francis made was that it would settle the contractual claims of Vijay Gupta M.D. and Collins, the target of both motions.
Collins previously had negotiated an employment contract for himself and Gupta with iHealthcare. In a separate action in the Circuit Court of Cook County, Illinois, iHealthcare is suing Collins for malpractice, alleging that the contracts were bogus, never approved by the iHealthcare board, and were unfair and unreasonable. iHealthcare has taken the position that the contracts were procured by fraud and that Collins knowingly made fraudulent representations to iHealtchare's corporate parent to induce the contracts. iHealthcare's wholly owned subsidiary, Heartland Hospital, also has litigation pending against Collins for malpractice and breach of fiduciary duties with respect to the 2004 and 2006 employment agreements. Collins filed a lawsuit against iHealthcare for fraudulent conspiracy and breach of two separate employment agreements iHealthcare allegedly entered with Collins in 2004 and 2006 respectively.
The defendants now move to disqualify Collins as iHealth-care's attorney in the present matter, arguing that the pending litigation in the Circuit Court of Cook County conflicts with his duty to exercise professional judgment on behalf of his client. In this matter, Collins' and Gupta's contracts are entangled in iHealtchcare's fraud claims against Jones, Greene, and Hudson. Specifically, Collins argues here, on behalf of iHealthcare, that the contracts were valid and that the sale/leaseback was approvedin part because St. Francis agreed to settle the contract claims. In the state court malpractice case, iHealthcare has taken the opposite position, arguing that Collins procured the contracts by fraud. In light of the conflicting positions, the defendants argue that Collins cannot represent iHealthcare because his personal and financial interest in the pending state court litigation may interfere with his ability to exercise professional judgment in this matter. Moreover, the defendants argue that Collins' role in procuring the contracts, which are entangled in iHealthcare's claim against the defendants, renders him a necessary witness and provides further reason why he cannot continue representing iHealthcare.
The defendants move to disqualify Collins as iHealthcare's attorney, arguing that his representation violates Indiana Rules of Professional Conduct 1.7 and 3.7 because iHealthcare and Collins have ongoing litigation arising from the same events in state court and Collins will be a necessary fact witness to the present litigation. A motion to disqualify should be viewed with caution and considered a drastic remedy. Owen v. Wangerin, 985 F.2d 312, 317 (7th Cir. 1993). The local rules of this court state that "Indiana's Rules of Professional Conduct and the Seventh Circuit Standards of Professional Conduct (an appendix tothese rules) govern the conduct of those practicing in the court." Local Rule 83.5(e)
Rule 1.7 of the Indiana Rules of Professional Conduct reads:
Here, the defendants urge that Collins has a personal interest in the litigation because he has a financial stake in the outcome of the litigation and he is setting forth an argument contrary to the position iHealthcare is taking against him in the separate state court litigation.
An attorney cannot advance his own interests at the expense of his client. Matter of Strutz, 652 N.E.2d 41, 47 (Ind. 1995). "A lawyer commits a breach of trust going to the very essence of the attorney-client relationship when he takes a position adverse to that of his client, or former client, in a business transaction." Bell v. Clark, 653 N.E.2d 483, 490 (Ind. App. 1995). This includes accepting employment "if the exercise of his professional judgment on behalf of his client will be or reasonably may be affected by his own financial or business interests unless the client consents after full disclosure." Strutz, 652 N.E.2d at 47. If the lawyer's conduct in a transaction raises a serious question, it is unlikely that the lawyer can fulfill his duty and give a client independent advice. Rule 1.7, Cmt. 10. Moreover, the comments to Rule 1.7 explain that a lawyer is prohibited from acting as an advocate "in one matter against a person the lawyer represents in some other matter, even when the matters are wholly unrelated."
Collins, on behalf of iHealthcare, advances several arguments in opposition to the defendants' motions. First, Collins argues that the bankruptcy court addressed whether Collins had a conflict of interest when the defendants opposed his appointment as special counsel. Collins argues that further consideration is barred by stare decisis or collateral estoppel. Collins further contends that the defendants lack standing to raise the conflicts because they are not and never have been represented by Collins. Should the court consider the defendants' motions on the merits, Collins maintains that iHealthcare consented to the conflicts and the underlying malpractice claims were voluntarily dismissed and no longer pose a conflict.
Before the court may hear the merits of the case, it first...
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