Interim Healthcare, Inc. v. Spherion Corp.

• Citation: 884 A.2d 513
• Decision Date: 04 February 2005
• Docket Number: C.A. No. 00C-09-180-JRS.
• Parties: INTERIM HEALTHCARE, INC, Catamaran Acquisition Corp. and Cornerstone Equity Investors, IV, L.P., Plaintiffs, v. SPHERION CORPORATION, Defendant.
• Court: Delaware Superior Court

884 A.2d 513

INTERIM HEALTHCARE, INC, Catamaran Acquisition Corp. and Cornerstone Equity Investors, IV, L.P., Plaintiffs, v. SPHERION CORPORATION, Defendant.

C.A. No. 00C-09-180-JRS.

Superior Court of Delaware, New Castle County.

Submitted: July 20, 2004.

Decided: February 4, 2005.

Sean J. Bellew, Cozen O'Connor, Wilmington, DE; Robert W. Hayes, Sarah E Davies and Mary Craine Lombardo, Cozen O'Connor, Philadelphia, PA, for Plaintiffs.

Allen M. Terrell, Jr. and Alyssa M. Schwartz, Richards, Layton & Finger, Wilmington, DE, for Defendant. SLIGHTS, Judge.

TABLE OF CONTENTS¹

I. ............................................................................ 518 A. The Parties ............................................................. 518 B. The Medicare Cost Reimbursement Program ................................. 519 C. Cost Reports ............................................................ 520 1. The Regulation of Cost Reports ....................................... 521 2. Interim's Cost Reports ............................................... 522 a. The Three Component A & G Methodology ............................. 523 b. The Allocation of Capital Costs ................................... 525 c. Regional Vice President and Branch Manager Salaries ............... 526 D. Interim's Pre-Sale Discussions With Its Fiscal Intermediaries ........... 526 E. Catamaran Acquires Interim at Auction ................................... 529 1. The Timing of the Sale ............................................... 529 2. The Financial Statements ............................................. 529 a. The Audited Historical Financial Statements ....................... 529 b. The Pro Forma Financial Statements ....................... 530 c. The Medicare Reserves ............................................. 531 d. The Descriptive Memorandum ........................................ 532 3. Cornerstone's Due Diligence .......................................... 532 4. Cornerstone's Final Bid .............................................. 534 5. The Restated Stock Purchase Agreement ................................ 534 a. The Medicare Provisions ........................................... 536 b. The Financial Statements Provision ................................ 537 c. The Pending or Threatened Litigation or Liabilities Provisions .... 537 d. The Indemnification Provisions .................................... 538 F. Interim's Pre-Sale Liabilities .......................................... 539 1. The Medicare Adjustments ............................................. 539 2. The Black and Burns Franchise Loans .................................. 541 3. The Huff Litigation .................................................. 542 4. The Williams Litigation .............................................. 544 5. The Therapy Student Claims ........................................... 544 II. ............................................................................ 545 A. Preliminary Findings of Fact and Conclusions of Law ..................... 545 1. The Burden of Proof .................................................. 545 2. The Parol Evidence Rule .............................................. 546 3. There is No Evidence of Fraud or Intentional Misrepresentation ....... 547 4. The Elements of a Breach of Contract Claim ........................... 548 5. Catamaran Has Standing to Allege a Breach of the Agreement ........... 548 6. The Contractual Allocation of Risk and Expectancy Damages ............ 549 B. The Medicare Adjustments ................................................ 552 1. The Parties' Contentions ............................................. 552 2. The Interpretation of the Applicable Provisions of the Agreement ..... 554 a. Section 3.16 ...................................................... 554 b. Section 3.17 ...................................................... 557 3. The Medicare Experts ................................................. 558 4. The Audit Conclusions of HCFA and the FI are Not Dispositive ......... 560 5. Cross-Subsidization .................................................. 560 6. The Three Component A & G Methodology ................................ 561 7. The Allocation of Capital Costs ...................................... 565 8. The Allowance of Regional Vice-President and Branch Manager Cost ..... 567 9. The Failure to Adjust Visits to the Provider's Statistical and Reimbursement Report ................................................. 569 10. The Miscellaneous Violations of Law ................................. 570 11. Causation and Damages ............................................... 570 C. The Interim Financial Statements ....................................... 571 1. The Parties' Contentions ............................................ 571 2. The Adequacy of Interim's Reserves .................................. 572 D. The Remaining Section 10.1 Indemnification Claims ...................... 576 1. The Burns and Black Franchise Loans ................................. 576 2. The Huff Litigation ................................................. 578 3. The Williams Litigation ............................................. 579 4. Plaintiffs Are Not Entitled To Indemnification For Any Damages Indemnifiable Under Section 10.1 .................................... 580 E. The Therapy Student Claims .............................................. 580 1. The Definition of Therapy Student In the Agreement ................... 581 2. The Therapy Student Reserve .......................................... 582 3. Notice of Therapy Student Claims ..................................... 583 4. Indemnification for the Therapy Student Claims ....................... 584 F. Plaintiffs Are Not Entitled to Expectancy Damages ....................... 585 III. .......................................................................... 585

This lawsuit involves claims arising from alleged breaches of an intensely negotiated stock purchase agreement for the sale of Interim Healthcare, Inc. ("Interim") by defendant, Spherion Corporation ("Spherion"), to plaintiffs, Catamaran Acquisition Corp. ("Catamaran") and Cornerstone Equity Investors, IV L.P. ("Cornerstone") (the transaction will be referred to hereinafter as "the Sale"). The plaintiffs, Interim (as acquired),² Catamaran and Cornerstone, allege that Spherion breached several representations and warranties in the Agreement by failing adequately to disclose numerous pre-Sale liabilities of Interim and by misrepresenting the financial condition of Interim in the financial statements supplied to the plaintiffs during due diligence. Plaintiffs seek damages under the indemnification provisions of the Agreement and also seek expectancy/benefit-of-the-bargain damages for the difference between what they paid for Interim and the actual value of Interim at the time of the Sale.

After a three week bench trial and post-trial submissions by the parties, this is the Court's findings of fact and conclusion of law. In short, the Court has found in favor of the plaintiffs on Counts I and II of their Amended Complaint and awards damages to plaintiffs in the amount of $1,070,719.47. The Court has found in favor of Spherion on Counts III of the Amended Complaint, Count I of the Court of Chancery Complaint (previously transferred to this Court), and on plaintiffs' claim for expectancy damages.

This Opinion, necessarily lengthy given the size of the trial record and the complexity of the claims, is organized as follows: Part One describes the parties, the background facts and the Court's findings of fact where the parties disagree. Part Two summarizes the claims and defenses and sets forth the Court's analyses and conclusions of law. Finally, Part Three summarizes the Court's conclusions and directions for the entry of the appropriate verdict and judgment on the docket.

I.

A. The Parties

Prior to September 26, 1997, Spherion (formerly known as Interim Services, Inc.), a Delaware corporation, operated two principal divisions, a commercial staffing division and a healthcare division. The healthcare division initially focused on providing temporary nurses to hospitals.³ Eventually, the healthcare segment of Spherion's business grew with its entry into the home healthcare, physical therapy, and other health-related markets.⁴ By the time Spherion sold its healthcare business in 1997, Interim had become the second largest independent home healthcare company in the United States.⁵ As of December 27, 1996, Interim "operated a network of 391 home care offices in 45 states and 4 Canadian provinces."⁶

Of Interim's 391 home care offices, 285 of them were operated by Interim franchisees.⁷ The remaining home care offices were owned by Spherion and operated by Interim directly. The majority of Interim's revenues (approximately 75%) were derived from reimbursements for services from private payers (individual patients and private health insurers). The remaining approximately 25% of Interim's revenues were derived from Medicare program reimbursements.⁸

Cornerstone is a private equity firm based in New York.⁹ Over its twenty year history, Cornerstone has focused its investment activities in four basic areas: technology, retail, consumer business services and healthcare.¹⁰ Cornerstone's investors (approximately 30 in number) are primarily state pension funds and large corporate pension funds.¹¹ Cornerstone formed Catamaran in 1997 as the vehicle through which it would acquire Interim.¹²

B. The Medicare Cost Reimbursement Program

As indicated, a significant percentage of Interim's revenues were derived from Medicare reimbursements. It is not surprising, then, that this segment of Interim's operation was a focal point of the parties' discussion prior to the Sale. Given the intense regulatory environment in which the Medicare...