In re Pomona Valley Medical Group, Inc.

• Decision Date: 17 January 2007
• Docket Number: No. 04-56334.,04-56334.
• Citation: 476 F.3d 665
• Parties: In re POMONA VALLEY MEDICAL GROUP, INC., Debtor, Chandrahas Agarwal, M.D., Appellant, v. Pomona Valley Medical Group, Inc., a California professional corporation, d/b/a Promed Health Network, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

476 F.3d 665

In re POMONA VALLEY MEDICAL GROUP, INC., Debtor,

Chandrahas Agarwal, M.D., Appellant, v. Pomona Valley Medical Group, Inc., a California professional corporation, d/b/a Promed Health Network, Appellee.

No. 04-56334.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted June 8, 2006.

Filed January 17, 2007.

Henry R. Fenton, Dennis E. Lee, Law Offices of Henry R. Fenton, Los Angeles, CA, briefed and argued for the appellant.

Randall J. Sherman, Stradling Yocca Carlson & Rauth, Newport Beach, CA; and Garrick A. Hollander, Winthrop Couchot, Newport Beach, CA, briefed for the appellee.

Marc J. Winthrop, Winthrop Couchot, Newport Beach, California, briefed and argued for the appellee.

Paul L. Gale, Stradling Yocca Carlson & Rauth, Newport Beach, CA, argued for the appellee.

Appeal from the United States District Court for the Central District of California; Consuelo B. Marshall, Chief Judge, Presiding. D.C. No. CV-01-10027-CBM.

Before: D.W. NELSON, RAWLINSON, and BEA, Circuit Judges.

D.W. NELSON, Senior Circuit Judge:

Chandrahas Agarwal ("Agarwal") appeals the district court's decision affirming (1) the bankruptcy court's order rejecting his contract with Pomona Valley Medical Group, Inc., dba ProMed Health Network ("ProMed") and (2) the bankruptcy court's subsequent order dismissing Agarwal's complaint in an adversary proceeding against ProMed. We have jurisdiction pursuant to 28 U.S.C. § 1291, and we affirm, in part, and reverse, in part.

BACKGROUND¹

On May 14, 1999, Chandrahas Agarwal, a primary care physician and certified cardiologist, entered into a provider agreement (the "Agreement") with ProMed, an "independent practice association"² in Southern California. Pursuant to the Agreement, Agarwal provided primary or basic medical services to patients in ProMed's network. When a patient required specialty medical services, such as cardiology tests, Agarwal was required to seek authorization from ProMed's medical director.

Under the Agreement, the twelve-month contract was extended automatically for an unlimited number of additional twelve-month periods, unless ProMed provided written notice of non-renewal.³ At the end of its first term, the Agreement was extended to June 1, 2000, by the automatic renewal provision. Shortly after, on June 29, 2000, ProMed voluntarily filed for bankruptcy under Chapter 11.

Approximately six months later, ProMed began routinely denying initial authorization for cardiology tests Agarwal requested for his patients. After Agarwal protested, ProMed eventually authorized most of the procedures he requested. In April 2001, ProMed warned Agarwal that if he disagreed with or continued to protest ProMed's authorization policies he would be terminated. A month later, the company sent Agarwal written notice that it would not be retaining his services after the expiration of the second year of the Agreement. Although the Agreement's non-renewal provision did not require justification, the notice stated that Agarwal's frequent ordering of "unnecessary tests for patients simply to increase [his] compensation at ProMed's expense" justified termination with cause.

Following the expiration of the Agreement, Agarwal commenced adversary proceedings in bankruptcy court, alleging various California statutory and common law causes of action. Thereafter, ProMed moved to "reject" its executory contract with Agarwal and to dismiss his complaint for failure to state a claim. The bankruptcy court granted both motions but permitted Agarwal to file an amended complaint.⁴ Agarwal, instead, appealed to the district court, which affirmed the bankruptcy court's decisions. This timely appeal followed.

DISCUSSION

We review de novo the district court's decision in a bankruptcy appeal. In re Onecast Media, Inc., 439 F.3d 558, 561 (9th Cir.2006). Therefore, we must consider independently the bankruptcy court's underlying ruling, applying the same standard of review as the district court. Id.

I. Rejection of the Executory Contract and the Business Judgment Rule

As a preliminary matter, we hold that the bankruptcy court did not err in approving ProMed's rejection of its executory contract with Agarwal.⁵ Under 11 U.S.C. § 365(a), a Chapter 11 debtor-in-possession, "subject to the court's approval, may ... reject any executory contract." See also In re Robert L. Helms Constr. &amp Dev. Co., Inc., 139 F.3d 702 (9th Cir.1998) (en banc). In making its determination, a bankruptcy court need engage in "only a cursory review of a [debtor-in-possession]'s decision to reject the contract. Specifically, a bankruptcy court applies the business judgment rule to evaluate a [debtor-in-possession]'s rejection decision ...." Durkin v. Benedor Corp. (In re G.I. Indust., Inc.), 204 F.3d 1276, 1282 (9th Cir.2000) (citing NLRB v. Bildisco & Bildisco, 465 U.S. 513, 523, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984)); see also In re Chi-Feng Huang, 23 B.R. 798, 800 (9th Cir. BAP1982) (citing cases).

We have never had the occasion to define the contours of the business judgment rule in the bankruptcy context. However, courts are no more equipped to make subjective business decisions for insolvent business than they are for solvent businesses, so we have no difficulty concluding that its formulation in corporate litigation is also appropriate here. See Lubrizol Enter. v. Richmond Metal Finishers, 756 F.2d 1043, 1047 (4th Cir.1985) (adopting the corporate business judgment rule for bankruptcy proceedings).

Thus, in evaluating the rejection decision, the bankruptcy court should presume that the debtor-in-possession acted prudently, on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the bankruptcy estate. See Navellier v. Sletten, 262 F.3d 923, 946 n. 12 (9th Cir. 2001); FDIC v. Castetter, 184 F.3d 1040, 1043 (9th Cir.1999); see also In re Chi-Feng Huang, 23 B.R. at 801 ("The primary issue is whether rejection would benefit the general unsecured creditors."). It should approve the rejection of an executory contract under § 365(a) unless it finds that the debtor-in-possession's conclusion that rejection would be "advantageous is so manifestly unreasonable that it could not be based on sound business judgment, but only on bad faith, or whim or caprice." Lubrizol, 756 F.2d at 1047. Such determinations, clearly, involve questions of fact, see Richmond Leasing Co. v. Capital Bank, 762 F.2d 1303, 1307-08 (5th Cir. 1985); Lubrizol, 756 F.2d at 1047, which we review for clear error. In re Rains, 428 F.3d 893, 900 (9th Cir.2005).

Turning to the instant case, ProMed justified its business decision, explaining, inter alia, that its Chapter 11 reorganization strategy included efforts to reduce costs by limiting the number of physicians in its network and severing relationships with physicians, like Agarwal, who created financial burdens by ordering treatment and tests ProMed considered unnecessary.

We can discern no reason that ProMed's stated reorganization strategy was so unreasonable as to indicate it acted in bad faith or on whim or caprice in rejecting the Agreement. Nor has Agarwal offered any. He merely countered that, in making its determination to reject an executory contract, a debtor-in-possession must abide by state law health and safety regulations. We do not quarrel with this position. See, e.g., Hillis Motors, Inc. v. Hawaii Auto. Dealers' Ass'n, 997 F.2d 581, 592 (9th Cir.1993) (citation omitted) (holding that a bankruptcy trustee must "manage a business in accordance with state law, as any other person must"). However, Agarwal has failed to explain how ProMed's rejection of the Agreement violates California health and safety laws.

Agarwal also argued that in approving the decision to reject an executory contract the bankruptcy court must weigh equitable concerns. He urges us that "it is proper for the court to refuse to authorize rejection of a lease or executory contract where the party whose contract is to be rejected would be damaged disproportionately to any benefit to be derived by the general creditors of the estate...." In re Chi-Feng Huang, 23 B.R. at 801. Again, we do not disagree. There may be cases where the disproportionate damage to the party whose contract is to be rejected demonstrates that the debtor-in-possession's decision could not be based on sound business judgment. Here, however, there is no such demonstration.

We find it somewhat suspect that ProMed did not seek to reject the Agreement until Agarwal filed an adversary claim in the bankruptcy court, more than a year after ProMed filed its bankruptcy petition. However, after a hearing in which both Agarwal and ProMed presented their arguments and representations, the bankruptcy court found that the rejection of the Agreement was in the best interests of the bankruptcy estate and its creditors. That finding of fact necessarily indicates that the bankruptcy court believed ProMed's justifications for its actions. The bankruptcy court approval of ProMed's decision, which stated the decision was "within the sound `business judgment' of the [d]ebtor," also constitutes an implicit finding that ProMed did not act in bad faith or on whim or caprice. On appeal, Agarwal does not challenge these findings.⁶

On the record before us, we do not have "the definite and firm conviction that a mistake has been committed by the bankruptcy judge." In re Rains, 428 F.3d at 900 (requiring the reviewing court to accept findings of fact unless it is definitely and firmly convinced that the finding was erroneous). Therefore, rejection of the Agreement was proper.

II. Dismissal of Agarwal's Complaint

Our conclusion that rejection was proper does not end our inquiry. ProMed's rejection of the Agreement constituted a breach of that contract effective immediately before ProMed filed for bankruptcy on June 29, 2000. 11 U.S.C. § 365(g). As of that date, ProMed was relieved of its performance...