In re Doctors Health, Inc.
| Decision Date | 15 April 2005 |
| Docket Number | Bankruptcy No. 98-6-6211-JS.,Adversary No. 99-5563-JS. |
| Citation | 335 B.R. 95 |
| Parties | In re DOCTORS HEALTH, INC., Debtor in Possession, Doctors Health, Inc., Plaintiff, v. Nylcare Health Plans of the Mid-Atlantic, Inc., Defendant. |
| Court | U.S. Bankruptcy Court — District of Maryland |
Mark J. Friedman, Susan S. Maher, John D. Corse, John Wellschlager, Piper Rudnick LLP, John A. Roberts, Venable, Baetjer and Howard, Baltimore, MD, for Doctors Health, Inc.
Henry F. Siedzikowski, Mark J. Schwemler, Mark A. Keatney, John P. Elliott, Eric L. Young, Elliott Reihner Siedzikowski & Egan, P.C., Blue Bell, PA, Melvyn J. Weinstock, Weinstock, Friedman, Baltimore, MD, Steven F. Benz, Kellogg, Huber, Washington, D.C., for NYLCare Health Plans of the Mid-Atlantic.
Doctors Health, Inc. ("Doctors Health"), a health care provider and debtor in possession filed the instant adversary proceeding against NYLCare Health Plans of the Mid-Atlantic, Inc. ("NYLCare"), a health maintenance organization ("HMO")1 for damages for breach of contract and the disallowance/equitable subordination of the defendant's proof of claim in the amount of $19,607,967, which has since been increased by amendment to $29,796,049.37.2
This complaint is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B), (C), (F) and (O)3, because it is essentially an objection and a counterclaim filed by the debtor to the claim filed by NYLCare, arising from the same transaction, which the complaint seeks to avoid, disallow or equitably subordinate, based upon the defendant's misconduct alleged to have tortiously injured and destroyed the debtor's business and caused it to file bankruptcy. Kline v. Ed. Zueblin, AG (In re American Export Group Intern. Svs., Inc.), 167 B.R. 311, 315 (Bankr.D.D.C.1994); Cf. Katchen v. Landy, 382 U.S. 323, 337, 86 S.Ct. 467, 477, 15 L.Ed.2d 391 (1966). NYLCare subjected itself to the core jurisdiction of this Court, by reason of having filed a claim against the debtor in the instant bankruptcy case. 176-60 Union Turnpike v. Howard Beach Fitness Ctr., Inc., 209 B.R. 307, 311 (S.D.N.Y.1997). For the reasons stated, the objection will be sustained, the defendant's claim will be disallowed in its entirety and damages will be awarded to the plaintiff for breach of contract in the amount of $21,300,000.
Medicare is a federal health insurance program enacted to provide medical care to eligible elderly and disabled patients. See 42 U.S.C. § 1395(c) and (d). The program is administered by the Health Care Finance Administration ("HCFA"). See Keith J. Shapiro et al., Health Care Bankruptcy Cases, Norton, Annual Survey of Bankruptcy Law 1999-2000. As HMO, NYLCare had a contract with HCFA to provide health services to Medicare enrollees in the form of a health maintenance plan known as the "NYLCare 65 plan," in return for a per member per month premium from HCFA. Jeff Douglas Emerson ("Emerson") was the chief operating officer of NYLCare. Susan Lefkowitz ("Lefkowitz") was its executive vice president. NYLCare was an indirect subsidiary of New York Life Insurance Co. ("New York Life") and part of New York Life's health care business ("NYLCare Corporate"). NYLCare Corporate was divided into operating subsidiaries defined by different geographic markets.
Doctors Health was a publicly-traded Delaware corporation with its principal place of business in Maryland, in the business of managed health care as a physician practice management company ("PPM") and as an Administrative Service Provider ("ASP")4, that provided health services through a network of primary care physicians ("PCPs"), specialists, hospitals and others. Between 1995 and 1998, Doctors Health established a provider network of thousands of physicians and specialists in Maryland, Virginia and the District of Columbia, and had contracted with HMOs and insurance companies for its physicians to provide medical services to their enrollees. By June 30, 1998, Doctors Health had a network of 10,970 physicians in the three jurisdictions, that included 2,570 PCPs and 8,400 specialists. Debtor's Amended Disclosure Statement [P. 383], with annual revenues of at least $100 million and responsibility for approximately 25,000-30,000 patients. The debtor's management included its founders, Drs. Scott Rifkin and Alan Kimmel, as well as Stewart Gold ("Gold"), John Dwyer ("Dwyer") and Theresa Spoletti
In 1995, Doctors Health received $3.5 million from St. Joseph's Medical Center and $4 million from Med-Lantic Management Services, a subsidiary of Medical Mutual Liability Insurance Company of Maryland. In September 1996 and January 1997, it received equity investments totaling $10 million from Genesis Health Ventures ("Genesis"). In addition, Doctors Health had a $5 million credit facility from an affiliate of Genesis. On July 7, 1997, the Beacon Group III-Focus Value Fund, L.P. ("Beacon"), invested $20 million in Doctors Health and agreed to invest an additional $10 million before June 30, 1998, under certain conditions. Plaintiff's Exhibit No. 8.
The parties entered into an Administrative Service Provider Contract for Medicare Global Risk Services5 dated September 30, 1997, (the "Administrative Contract"), Plaintiff's Exhibit No. 18, and a Medicare Network Management Agreement dated October 1, 1997 (the "Network Contract"), Plaintiff's Exhibit No. 20 (collectively the "Contract"), whereby Doctors Health agreed to serve as the exclusive manager to provide medical services to certain of the enrollees in the NYLCare 65 plan and acted as the Medicare network manager for the NYLCare 65 plan for an initial term of three years, commencing October 1, 1997, "unless terminated in accordance with the provisions thereof." Section 7.6 of the Network Contract incorporated the terms of the Administrative Contract and provided that in the event of a conflict the Network Contract shall control. Section 7.7 provided that Maryland law should govern "the validity, interpretation and performance of this Agreement." Id.6
The parties specifically agreed to a multi-year term because they did not expect the Contract to be profitable in its first year due to the time required to invest in Doctors Health's infrastructure and because Doctors Health did not expect its medical loss ratio ("MLR")7 to reach a favorable level in the first year. The parties understood that the Contract required Doctors Health to invest an enormous amount of time and resources that might adversely compromise Doctors Health's pre-existing relationships with other payors.8 Memorandum of Understanding (Letter of Intent), dated September 10, 1997. Plaintiff's Exhibit No. 13.
The Network Contract permitted the termination of the Contract by either party "for cause" in Section 7.2,9 "by agreement" in Section 7.4, and/or because of "prospective regulatory changes" in Section 7.5.
NYLCare — The Administrative Contract provided that NYLCare "shall throughout the term of the Agreement maintain all licenses and accreditations." Section 2.16. The Network Contract required NYLCare to use its best efforts to expand membership in the NYLCare 65 plan during the initial three-year term. NYLCare specifically agreed to "aggressively and in good faith use its best efforts" to engage in a variety of marketing activities designed to expand the number of enrollees in the NYLCare 65 HMO, including television, radio and direct mail advertisements. Section 3.8.
NYLCare was required to collect monthly payments from HCFA and to remit a "Capitation Payment" to Doctors Health on a monthly basis equal to 88.5% of the sum of HCFA's adjusted average per capita cost (the "AAPCC")10, plus any subscriber or employer premiums (the "Premium"), minus any claims approved for payment by Doctors Health and actually paid by NYLCare for approved medical services for its members.. NYLCare was required to provide a "Monthly Capitation Report" to Doctors Health at the beginning of each month that reflected the Premium for the month and the amount of any paid medical claims for the prior month. If the Premium exceeded the medical claims properly paid, the report would indicate that Doctors Health was entitled to be paid the excess (the "Capitation Payment") and NYLCare would wire transfer funds to Doctors Health in the amount of the excess. In the event that properly-paid medical claims exceeded the Premium, the Monthly Capitation Report would indicate the deficit and NYLCare would invoice Doctors Health for the amount of the deficit.11
Section 9.1 of the Medicare Network Management Agreement provided that the parties did not intend ... to create any relationship between Doctors Health and NYLCare Mid-Atlantic other than that of independent parties contracting for the purpose of effecting provisions of the Agreement. Neither party nor any of their representatives shall be construed to be the agent, employer, employee or representative of the other.
Id. Nevertheless, under both the Contract and by statute, Doctors Health was an "administrative service provider," that NYLCare as HMO was required to pay in consideration for its providing health care services to members of the NYLCare 65 Plan, the payments for which NYLCare was liable.
NYLCare was required to pay claims at the lesser of the NYLCare Mid-Atlantic rate, the Medicare rate or the Doctors Health rate in the event that Doctors Health advised it had a lower rate after previewing the claims. Section 3.4.2(2)(e). NYLCare was entitled to draw on a letter of credit to be provided by Doctors Health "onl...
To continue reading
Request your trial
-
Ash v. N. Am. Title Co.
...provider, it can expect dire financial consequences will arise for the latter. (See In re Doctors Health, Inc. v. Nylcare Health Plans of the Mid–Atlantic, Inc. (Bankr.D.Md.2005) 335 B.R. 95, 121.) If the breaching party breaches a contract to purchase stock when he knows of the other party......
-
In re Clinic, Bankruptcy Nos. 06-31766
...there was a confirmed liquidation plan that provided for distribution of at least $4.7 million to creditors. In re Doctors Health, Inc., 335 B.R. 95, 101 (Bankr.D.Md.2005). That plan disclosed to creditors that disallowance of the NYLCare claim would have resulted in a larger distribution; ......