Lifespan Corp. v. Nat'l Union Fire Ins. Co. of Pittsburgh

• Decision Date: 17 November 2014
• Docket Number: No. C.A. 12–300–M.,C.A. 12–300–M.
• Citation: 59 F.Supp.3d 427
• Court: U.S. District Court — District of Rhode Island
• Parties: LIFESPAN CORPORATION, Plaintiff, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. and RLI Insurance Company, Defendants.

59 F.Supp.3d 427

LIFESPAN CORPORATION, Plaintiff

v.NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA. and RLI Insurance Company, Defendants.

No. C.A. 12–300–M.

United States District Court, D. Rhode Island.

Signed Nov. 17, 2014.

Joseph V. Cavanagh, Jr., Stephen J. Reid, Jr., Joseph V. Cavanagh, III, Blish & Cavanagh LLP, Providence, RI, for Plaintiff.

Michael P. DuffyChristopher R. Conroy, Scarlett Rajbanshi, Peabody & Arnold LLP, Jesse Siegel, Mark D. Cahill, Choate, Hall & Stewart, LLP, Boston, MA, Stephen J. Reid, Jr., Blish & Cavanagh, LLP, Mark C. Hadden, Law Office of Mark C. Hadden, Providence, RI, for Defendants.

MEMORANDUM AND ORDER

JOHN J. McCONNELL, JR., District Judge.

Lifespan filed this lawsuit to obtain a declaratory judgment and monetary damages from the two defendant insurance companies, National Union Fire Insurance Company of Pittsburgh, Pennsylvania and RLI Insurance Company. Lifespan seeks coverage under its policies with National Union and RLI in connection with a $29,605,282.93 amended judgment issued against it at the conclusion of litigation between Lifespan, New England Medical Center, Inc. (“NEMC”), and the Massachusetts Attorney General (the “Attorney General”) regarding a five-year affiliation between Lifespan and NEMC (the “Underlying Suit”). The question is whether Lifespan, through its insurance policies, has coverage for its monetary losses stemming from breaches of fiduciary duties and gross negligence in connection with the negotiation of NEMC's health insurer contracts and an interest rate swap transaction.

Three motions for summary judgment bring the matter before this Court. (ECF Nos. 20, 22, 24). They raise the issue of whether the defendant insurance companies have proven that various exclusions to established insurance coverage apply. After a thorough review of the facts and the law, and after extensive briefing and lengthy arguments, this Court finds that the exclusions to coverage asserted by the insurance companies do not apply.

I. BACKGROUND¹

A. Before The Underlying Suit

In January of 1997, Lifespan and NEMC executed a memorandum of understanding “proposing an affiliation in which Lifespan would become NEMC's corporate parent, and NEMC would in turn become one of the hospital subsidiaries in Lifespan's system.” Findings of Fact at ¶ 5. NEMC, a non-profit hospital in Boston, was one of the smallest teaching hospitals in the area and it “had been in a downward spiral, losing money, patient volume, and its ability to participate in one of the area's major insurance networks.”Id. at ¶¶ 2, 4. Lifespan, “an umbrella organization that provides managerial, administrative, and other support services to its hospital subsidiaries,” “saw the proposed affiliation as an opportunity to expand its healthcare system beyond Rhode Island into Massachusetts.” Id. at ¶¶ 1, 6.

After conducting due diligence and obtaining regulatory approvals, “Lifespan and NEMC entered into a final Amended and Restated Master Affiliation Agreement [the “Affiliation Agreement”] in October 1997.” Id. at ¶ 8. Per the Affiliation Agreement, Lifespan established Lifespan of Massachusetts, Inc. (“LOM”) and maintained majority control of LOM. Id. at ¶ 9. “LOM, in turn, became the sole voting member of NEMC, with the power to oversee and control its operations, including major financial decisions, budgeting, strategic planning, policymaking, and contractual negotiations with health insurers.” Id. Through its majority control of LOM, Lifespan had “the ability to control NEMC.” Id. “In exchange for NEMC's agreement to join Lifespan's system and submit to its control, Lifespan agreed to transfer $8.7 million per year to NEMC, which resulted in a total transfer of about $42 million over the course of the affiliation.” Id. at ¶ 10. NEMC paid its “share of Lifespan's corporate overhead expenses, which totaled about $172 million over the course of the affiliation.” Id.

“During the first three years of the affiliation, NEMC's financial situation improved somewhat, largely because of its return to the Harvard Pilgrim network,” but it “continued to lose money.” Id. at ¶ 13. “During the last two years of the affiliation, NEMC's financial situation deteriorated further.” Id. at ¶ 14. “NEMC became increasingly upset with Lifespan over the performance of its health insurer contracts, the unfavorable outcome of a complex financial transaction, known as an interest rate swap, recommended by Lifespan's CFO, and the amount of Lifespan's corporate overhead charges.” Id. (internal citations omitted).

“Recognizing that the affiliation was not working, NEMC proposed, and Lifespan agreed, to disaffiliate through a Restructuring Agreement signed in September 2002 and then closed in November 2002.” Id. at ¶ 15. Under the Restructuring Agreement, NEMC was required “to make a series of payments to Lifespan totaling $30 million and also to split on a 50/50 basis ... any recovery received from Medicare by NEMC ... for the loss on sale/depreciation recapture resulting from the Affiliation.” Id. (internal quotation marks omitted). While NEMC paid most of the $30 million to Lifespan required by the Restructuring Agreement, it refused to pay the final two installments totaling $3.66 million because “NEMC claimed that it had sustained losses far in excess of that amount because of Lifespan's misconduct during the affiliation, including with regard to (1) the health insurer contracts, (2) the interest rate swap, (3) the corporate overhead charges, and (4) NEMC's overall financial performance.” Id. at ¶ 16.

In addition, “[t]he Restructuring Agreement provides that ‘Lifespan will indemnify NEMC for any losses it incurs that result directly and solely ... from Lifespan's willful misconduct or gross negligence in the provision of services to NEMC by Lifespan employees working under the supervision and direction of Lifespan employees during the Affiliation Period.’ ” Id. at ¶ 39. The Restructuring Agreement also contains releases of liability, including a release providing that NEMC “hereby releases, remises and forever discharges any and all rights and claims that [it] has had, now has, might now have or might in the future have against Lifespan ... or their officers, directors, employees and agents arising from or in connection with the [Affiliation Agreement].” (ECF No. 21–9 at 29–30).

B. The Underlying Suit

In 2006, Lifespan filed the Underlying Suit in this district, “alleging breach of contract and seeking to recover the $3.66 million that NEMC refused to pay.” Findings of Fact at ¶ 17. “NEMC brought a counterclaim against Lifespan under the Restructuring Agreement's indemnification provision, seeking to recover the losses allegedly caused by Lifespan's misconduct” as well as “counterclaims for breach of fiduciary duty, unjust enrichment, and unfair business practices.” Id. (internal citation omitted). Lifespan later amended its complaint to add a contract claim for half of the Medicare reimbursement NEMC received. Id. at ¶ 19. Then NEMC added “more counterclaims, asserting that the Restructuring Agreement's Medicare recovery provision was inapplicable, unconscionable, contrary to public policy, lacking in consideration, a violation of the Affiliation Agreement, a breach of fiduciary duty, and an unjust enrichment.” Id.

Following recusal by all of the judges in this district at that time, the case was assigned to Judge Joseph N. Laplante of the United States District Court for the District of New Hampshire. Id. at ¶ 20.² Then the court “granted a motion by the Massachusetts Attorney General to intervene in the case on behalf of the public interest pursuant to her supervisory authority over NEMC as a public charity.” Id. at ¶ 21 (internal citation omitted). “[T]he Attorney General joined in nearly all of NEMC's counterclaims against Lifespan (except for the indemnification and unfair business practices claims)” and “did not assert any new claims of her own.” Id.

All three parties moved for partial summary judgment. Id. at ¶ 22. “NEMC and the Attorney General moved for summary judgment on the issue of whether Lifespan owed a fiduciary duty to NEMC during the affiliation.” Id. Applying Massachusetts law, the court concluded that “Lifespan did owe a fiduciary duty to NEMC, by virtue of its control over a non-profit hospital and the faith, confidence, and trust that NEMC placed in its judgment and advice.” Id. (internal quotation marks and citation omitted). Lifespan sought “summary judgment on its claim for half of NEMC's recent Medicare recovery, and on nearly all of the counterclaims (except for NEMC's indemnification claim, which the parties agreed was trialworthy).” Id. at ¶ 23.

The “court ruled that Lifespan was entitled to half of the Medicare recovery,³ rejecting the slew of counterclaims challenging the Restructuring Agreement's Medicare recovery provision.” Id. (citation omitted). The court also “ruled that NEMC had released its tort counterclaims against Lifespan through the Restructuring Agreement, including its claims for breach of fiduciary duty and unfair business practices, leaving itself only a contractual remedy under the agreement's indemnification provision.” Id. at ¶ 24 (citations omitted). NEMC's unjust enrichment counterclaim also was rejected, as it was “unavailable in light of NEMC's contractual remedy.” Id. (citations omitted). However, the court found “that the Attorney General was not bound by NEMC's release and could therefore proceed to trial on her claim for breach of fiduciary duty.” Id. at ¶ 25 (citation omitted).

The court held a three-week bench trial in New Hampshire in February and March of 2011, hearing from almost twenty witnesses. Id. at ¶ 26–27. “Because only the Attorney General's breach of fiduciary duty claim and NEMC's indemnification claim were still in genuine dispute,” the “court treated the Attorney General and NEMC as plaintiffs during the trial, and Lifespan as the defendant.” Id. at ¶ 26.

After the trial, the...