McCall et al v. Scott et al
| Decision Date | 07 December 2000 |
| Docket Number | 99-6387,Nos. 99-6370,s. 99-6370 |
| Citation | 239 F.3d 808 |
| Parties | (6th Cir. 2001) H. Carl McCall, as Comptroller of the State of New York and Trustee of the New York State Common Retirement Fund, derivatively on behalf of Columbia/HCA Healthcare Corporation; California Public Employees' Retirement System; New York State Teachers' Retirement System; New York City Fire Department Pension Fund; New York City Police Department Pension Fund; New York City Teachers' Retirement System; New York City Board of Education Retirement System; New York City Employees' Retirement System; Los Angeles County Employees' Retirement Association; Teachers' Retirement System of Louisiana; City of Philadelphia, acting through its Board of Pensions and Retirement; Concord Investment Company Employees' 401(K) Profit and Sharing Plan and Trust; Irrevocable Trust for the Benefit of Robert Moorman, by its Trustee, Sidney J. Silver; Norman Chock, M.D.; Norman Chock, M.D., Inc. Pension and Profit Sharing Plan; Norman Chock, M.D., Inc. Integrated Profit Sharing Plan, by Norman Chock, their Trustee/Owner; Barbara E. Shuster; The May Family Partnership; Samuel Weiss; Moise Katz; Grace M. Gisselquist, Plaintiffs-Appellants, National Industry Pension Fund, Plaintiff, v. Richard L. Scott; Thomas F. Frist, Jr., M.D.; R. Clayton McWhorter; T. Michael Long; William T. Young; Frank S. Royal, M.D.; Donald S. MacNaughton; Magdalena Averhoff, M.D.; David T. Vandewater; Columbia/HCA Healthcare Corporation, a nominal deft, Defendants-Appellees. Louisiana State Employees Retirement System, Plaintiff-Appellant, v. Magdalena Averhoff; Jay A. Jarrell; Michael T. Neeb; Robert Whiteside; Thomas F. Frist; T. Michael Long, Jr.; Donald S. MacNaughton; R. Clayton McWhorter; Carl E. Reichardt; Frank Royal; Richard L. Scott; David Vandewater; William T. Young; John Doe, and Richard Doe, being fictitious, the parties intended being those officers, directors, agents and/or employees of the nominal defendant who participated in the wrongful acts involved herein; Columbia/HCA Healthcare Cor |
| Court | U.S. Court of Appeals — Sixth Circuit |
Appeal from the United States District Court for the Middle District of Tennessee at Nashville. Nos. 97-00838; 98-00846, Thomas A. Higgins, District Judge. [Copyrighted Material Omitted]
[Copyrighted Material Omitted]
[Copyrighted Material Omitted] Stanley M. Chernau, Chernau, Chaffin & Burnsed, PLLC, Nashville, TN, Daniel L. Berger, Max W. Berger, Jeffrey N. Leibell, BERNSTEIN, LITOWITZ, BERGER & GROSSMANN, New York, New York, for H. Carl McCall, California Public Employees' Retirement System, New York State Teachers' Retirement System, New York City Fire Department Pension Fund, New York City Police Department Pension Fund, New York City Teachers' Retirement System, New York City Board of Education Retirement System, Los Angeles County Employees' Retirement Ass'n, Teachers Retirement System of LA, City of Philadelphia Bd. Of Pensions and Retirement, Concord Investment Co. Employees' 401(K) Profit and Sharing Plan and Trust, Irrevocable Trust for the Benefit of Robert Moorman, by its trustee, Sidney J. Silver, Norman Chick, M.D., Norman Chock, M.D., Inc., Pension and Profit Sharing Plan, by Norman Chock, thier Trustee/Owner, Barbara E. Shuster, The May Family Partnership, Samuel Weiss, Grace M. Giselquist in Docket No. 99-6370.
Jeffrey N. Leibell, BERNSTEIN, LITOWITZ, BERGER & GROSSMANN, New York, New York,
For National Industry Pension Fund and Mosie Katz in Docket No. 99-6370.
I. Walton Bader, BADER & BADER, White Plains, New York, for Appellants. Paul H. Dawes, LATHAM & WATKINS, Menlo Park, California, for Appellees.
David D. Aufhauser, Enu A. Mainigi, Dennis M. Black, WILLIAMS & CONNOLLY, Washington, D.C., John D. Kitch, Kitch & Garman, Nashville, TN, for Richard L. Scott.
Curtis P. Lu, Latham & Watkins, Washington, D.C., Steven A. Riley, Brown, Riley, Warnock & Jacobson, Nashville, TN, William J. Meeske, Latham & Watkins, Los Angeles,California, Paul H. Dawes, Latham & Watkins, Menlo Park, CA , for Thomas F. Frist, Jr., M.D. R. Clayton, McWhorter, T. Michael Long, William T. Young, Frank S. Royal, M.D. Donald S. MacNaughton, Magdalena Averhoff, M.D..
James G. Thomas, Neal & Harwellm William R. Willis, Jr., WILLIS & KNIGHT, Nashville, Tennessee, for Carl E. Richardt, Judith Ann Karam, David T. Vanderwater.
I. Walton Bader, BADER & BADER, White Plains, New York, for Appellants.
Steven A. Riley, BOWEN, RILEY, WARNOCK & JACOBSON, Nashville, Tennessee, Paul H. Dawes, Latham & Watkins, Menlo Park, CA, for Magdalena Averhoff.
Cutis P. Lu, Latham & Watkins, Washington, D.C., Steven A. Riley, Bowen, Riley, Warnock & Jacobson, Nashville TN, William J. Meeskse, Latham & Watkins, Los Angeles, CA, Paul H. Dawes, Latham & Watkins, Menlo Park, CA, for Jay A. Jarrell, Michael T. Neeb, Robert Whiteside in Docket No. 99-6387.
Before: MARTIN, Chief Judge; GUY and COLE, Circuit Judges.
These appeals involve a consolidated stockholder derivative action brought on behalf of the nominal defendant, Columbia/HCA Healthcare Corporation (Columbia), against certain of its current and former directors and/or officers. The claims arise out of investigations into allegedly wide-spread and systematic health care fraud by Columbia's hospitals, home health agencies, and other facilities. Plaintiffs are investors, institutional and otherwise, that own shares of Columbia/HCA and owned such shares during the time of the alleged wrongdoing. Plaintiffs' three-count amended and consolidated complaint alleged intentional and negligent breach of the fiduciary duty of care, and intentional breach of the fiduciary duty of loyalty by illegal insider trading. 1 The district court, adopting the findings and conclusions of the magistrate judge, dismissed the consolidated action under Fed. R. Civ. P. 12(b)(6), finding that plaintiffs had failed to sufficiently allege demand futility under Delaware law to excuse the failure to make a pre-suit demand on the Board of Directors. Plaintiffs argue that the district court failed to properly view the allegations in the light most favorable to them and made errors in the interpretation and application of the law. 2
The director defendants, Thomas F. Frist, Jr., M.D.; R. Clayton McWhorter; Donald S. MacNaughton; Magdalena Averhoff, M.D.; Frank Royal, M.D.; T. Michael Long, Jr.; and William T. Young; filed a joint brief on appeal arguing that the dismissal was proper both for failure to allege demand futility and for failure to state a claim against them as directors. Defendants Richard Scott, who was Chairman of the Board and CEO of Columbia, and David Vandewater, who was the Chief Operating Officer (but not a director), each adopted the joint brief of the other individual defendants. Columbia likewise adopted the defendants' brief, but only as to the issue of demand futility. After careful review of the record and the applicable law, we reverse in part and find that the plaintiffs sufficiently alleged demand futility with respect to their claim for intentional or reckless breach of the duty of care. Despite the urging of the individual defendants, we do not address the motions to dismiss the claims on the merits because they were not considered by the district court.
Columbia/HCA is a Delaware corporation with its headquarters and principal place of business in Nashville, Tennessee. Founded in 1987 by Richard L. Scott, Columbia grew so aggressively that, by 1995, it owned and operated 45% of all for-profit hospitals in the United States. It was three times as large as the next largest for-profit health care management company and was the nation's ninth largest employer. Its strategy for growth was to acquire mid- to large-size general, acute-care hospitals. Plaintiffs alleged that Columbia operated 314 hospitals, 143 outpatient surgery centers, and over 500 home health care centers located in 35 states and 3 foreign countries. Columbia was Medicare's single largest provider and, between 1994 and 1996, received over 40% of its revenues from Medicare and Medicaid. Columbia participated in the Medicare, Medicaid, and CHAMPUS programs, with nearly all of its hospitals certified as providers of benefits under these programs4.
Plaintiffs alleged that Columbia's senior management, with Board knowledge, devised schemes to improperly increase revenue and profits, and perpetuated a management philosophy that provided strong incentives for employees to commit fraud. Plaintiffs averred that management set growth targets at 15 to 20%, or three to four times the industry average, which could not reasonably be attained without violating Medicare and Medicaid laws and regulations. Results were monitored using a "score card," and good results were rewarded with cash bonuses. Fraudulent practices allegedly included: (1) "upcoding" by providers, which refers to billing for services under DRG (diagnosis related group) codes for illnesses with a higher degree of complexity and severity than a patient's condition actually warranted; (2)aimproper cost reporting, such as seeking reimbursement for advertising and marketing costs, "grossing up" outpatient revenues, allocating costs from one division to another, and structuring transactions to disguise acquisition costs as reimbursable management fees; (3) offering financial incentives to physicians to increase referrals of Medicare patients to Columbia's facilities (i.e., equity interests, fees, rents, or other perquisites); and (4) acquisition practices that offered inducements to executives of target companies and interfered with existing physician relationships. Plaintiffs also asserted that some of the defendants engaged in illegal insider trading since they traded while knowing of Columbia's fraudulent activities. Da...
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