OVRS Acquisition Corp. v. Community Health Services, Inc., 82A05-9410-CV-425

• Decision Date: 26 October 1995
• Docket Number: No. 82A05-9410-CV-425,82A05-9410-CV-425
• Parties: OVRS ACQUISITION CORP., Appellant-Defendant Third Party Plaintiff, v. COMMUNITY HEALTH SERVICES, INC., Appellee-Plaintiff. OVRS ACQUISITION CORP., Appellant-Defendant Third Party Plaintiff, v. James A. SCHELLER.
• Court: Indiana Appellate Court

Page 117

657 N.E.2d 117

OVRS ACQUISITION CORP., Appellant-Defendant Third Party Plaintiff, v. COMMUNITY HEALTH SERVICES, INC., Appellee-Plaintiff.

OVRS ACQUISITION CORP., Appellant-Defendant Third Party Plaintiff, v. James A. SCHELLER.

No. 82A05-9410-CV-425.

Court of Appeals of Indiana.

Oct. 26, 1995.

Rehearing Denied Jan. 4, 1996.

Paul J. Wallace, Greg A. Granger, David E. Gray, Bowers Harrison Kent & Miller, Evansville, for Appellant.

James D. Johnson, Mattingly Rudolph Fine & Porter, Evansville, for Community Health Services, Inc.

Wayne S. Trockman, Newman Trockman Lloyd Flynn & Rheinlander, Evansville, for James A. Scheller.

OPINION

SHARPNACK, Chief Judge.

Ohio Valley Respiratory Medical Services Acquisition Corp. ("OVRS") appeals the judgment in favor of Community Health Services, Inc. ("CHS") for damages resulting from a breach of a covenant not to compete ("covenant"). OVRS also appeals the negative judgment on its claim against third-party defendant, James Scheller. CHS cross-appeals on the amount of damages. We affirm.

OVRS raises six issues for review which we restate as whether the trial court erred by:

(1) not specifying whether it applied the law of Kentucky or Indiana in rendering the judgment;

(2) finding the covenant to be supported by consideration;

(3) enforcing the covenant;

(4) finding that the contract provided for mutuality of obligations;

(5) finding that CHS did not terminate the Management Agreement; and

(6) finding that neither CHS nor Scheller breached a fiduciary duty owed to OVRS.

On cross-appeal, CHS appeals the amount of damages awarded to it by the trial court.

The facts most favorable to the judgment follow. In 1993, CHS filed suit against OVRS for damages totalling $130,000.00. The complaint alleged that OVRS breached a contract between OVRS and CHS which prohibited OVRS from competing against CHS in servicing two Kentucky nursing facilities. OVRS raised affirmative defenses which included failure and want of consideration, failure to name the real party in interest, estoppel, fraud, misrepresentation, and bad faith. Later, OVRS filed a third-party complaint against Scheller, its former employee, for executing a contract (entitled the "management agreement") without authority. The management agreement included a covenant not to compete. OVRS filed a motion for summary judgment, which was denied by the court. On February 16 and 17, 1994, the case was tried to the court. On July 22, 1994, the trial court entered judgment in favor of CHS and issued findings of fact and conclusions thereon. The relevant findings include:

"FINDINGS OF FACT

1. Plaintiff, Community Health Services, Inc. (hereinafter "CHS"), is a corporation organized under the laws of the State of Kentucky, with its principal place of business in Owensboro, Kentucky. CHS' business primarily consists of providing health care therapies.

2. Mike Reiherzer ("Reiherzer") is the sole shareholder, President and Chief Executive Officer of CHS.

3. Defendant/third party plaintiff, OVRS Acquisition Corp. ("OVRS") is a corporation organized under the laws of the State of Indiana, with its principal places of business being Evansville, Indiana, and Henderson, Kentucky.

4. Robert Jobes ("Jobes") and Michael Weber ("Weber") are the principal shareholders of OVRS, Jobes is the President, and Weber is the Treasurer of OVRS.

5. The third-party defendant, James A. Scheller ("Scheller"), during all times relevant to this case, was the Vice President, shareholder, and Chief Operating Officer of OVRS in charge of the day-to-day operations of OVRS and with marketing and attempting to increase the business of OVRS.

6. Unicare Homes, Inc. ("Unicare") is a corporation with its principal place of business in Milwaukee, Wisconsin. Unicare owns and operates numerous nursing and extended care homes, one (1) of which being the Medco Center of Henderson ("Henderson Medco"), and another being the Medco Center of Owensboro ("Owensboro Medco") (referred to collectively as "the Medcos").

7. CHS and Unicare entered into two (2) Therapy Service Agreements. One (1) was for CHS to provide respiratory therapy services ("R/T") for the Owensboro Medco, and the other was for CHS to provide R/T for the Henderson Medco (collectively referred to as "Medco Contracts"). The Medco Contracts became effective January 1, 1992.

8. On the same date, OVRS and CHS entered into an agreement entitled the "Management Agreement" whereby OVRS and CHS would jointly service the Medco Contracts. The Management Agreement contains a list of the services to be provided by OVRS, the method of compensation to OVRS, and a non-compete provision between CHS and OVRS.

9. The non-compete provision provides:

Non-compete: OHIO VALLEY RESPIRATORY AND MEDICAL SERVICES (OVRS) agrees not to contract services with the Medco Centers of Henderson and Owensboro directly for a minimum period of one (1) year following the termination of the existing agreement unless expressly approved by COMMUNITY HEALTH SERVICES (CHS).

10. The Management Agreement is executed by Reiherzer for CHS and Scheller as Vice President for OVRS. Although the Management Agreement was not signed on December 31, 1991, it was dated on that date so it would be in effect contemporaneously with the Medco Contracts.

11. Prior to the execution of the Medco Contracts, Scheller, and Vice President for OVRS, sent a letter to Steve Marshall ("Marshall"), then Vice-President of Ancillary Services for Unicare, describing OVRS and CHS, and outlining what both companies' involvement would be in the providing of R/T for the Medcos.

12. CHS had a Certificate of Need ("CON") with the State of Kentucky. Marshall required that whomever was awarded the Medco Contracts have a CON. Although on the date of execution of the Medco Contracts Marshall believed a CON was no longer necessary, Marshall contracted with CHS because the decision to award the Medco Contracts to CHS was made prior to Marshall's believed knowledge of the lack of a necessity for a CON.

13. Prior to the execution of the Medco contracts, Reiherzer had communicated to Scheller and Jobes that he sought protection against OVRS taking the Medco Contracts from CHS.

14. Reiherzer's desire for protection against OVRS arose from a joint venture/partnership that Reiherzer was involved in with Jobes, Weber and Scheller. The joint venture was called Infusion Kare and Reiherzer owned fifty percent (50%) interest in Infusion Kare. Infusion Kare was negotiating with St. Mary's Hospital in Evansville, Indiana, to provide outpatient treatments for patients of St. Mary's. As Infusion Kare and St. Mary's were negotiating, it became apparent to the parties that it could be a lucrative agreement. Jobes, Weber and Scheller decided that Reiherzer should not receive fifty percent (50%) of the profits from the potential St. Mary's contract and discussed this with Reiherzer. Reiherzer rejected an offer that he would receive less than fifty percent (50%) of the profits. In response to Reiherzer's failure to lessen his percentage of ownership in Infusion Kare, Jobes, Weber and Scheller, under the name of OVRS, had their attorney, Paul Wallace, send a letter to Reiherzer stating that Infusion Kare joint venture (partnership) would be terminated effective September 30, 1991, due to the fact that Reiherzer would not lower his interest in the joint venture. Scheller, Weber and Jones nominated Scheller to wind up the joint venture. Scheller delivered the letter to Reiherzer.

15. The Management Agreement was drafted by Scheller as Vice President for OVRS. Scheller presented a draft of the Management Agreement to both Reiherzer and Jobes. The draft did not contain a non-compete provision, and Reiherzer stated to Scheller that OVRS would not receive any money from the Medco Contracts unless there was in place an agreement including a non-compete provision between CHS and OVRS as to the Medco Contracts. Jobes stated to Scheller that the compensation provisions of the draft should be changed to define net revenues.

16. Scheller communicated to Jobes that Reiherzer insisted on the non-compete provision. OVRS had lost money since Jobes and Weber had become the principal shareholders, and OVRS was in financial need of a portion of the revenues from the Medco Contracts. OVRS would not have received any money from the Medco Contracts unless it executed a contract with CHS containing a non-compete provision. Jobes understood why CHS required a non-compete provision and agreed that Scheller could execute the Management Agreement containing the non-compete provision. Scheller, acting as Vice President for OVRS with express authority from Jobes, prepared and executed on behalf of OVRS the Management Agreement.

* * * * * *

18. CHS and OVRS performed pursuant to the Management Agreement from January 1, 1992, until March 4, 1993. OVRS' contractual requirements were performed by Jim Scheller.

19. On March 4, 1993, Scheller was terminated as Vice President of OVRS. OVRS did not provide anyone else to assist CHS in performing OVRS' requirements pursuant to the Management Agreement in servicing the Medco Contracts, nor did OVRS further assist CHS in servicing the Medco Contracts.

20. In March of 1993, Jobes, Weber and Keith Thomas traveled to Milwaukee to meet with the principals of Unicare in an attempt to have the Unicare contracts between CHS and Unicare terminated and have Unicare execute new contracts with OVRS to provide R/T for the Medco.

21. Jobes' and Weber's actions were successful, and on March 30, 1993, CHS received a letter from Bruce Paller, the Vice President of Ancillary Operations for Unicare, stating CHS had provided "quality" R/T, but terminating the Medco Contracts effective May 1, 1993.

22. On the same date, May 1, 1993, Unicare and OVRS entered into two (2) contracts, one (1) for the Owensboro Medco, and the other for the Henderson Medco, whereby OVRS would begin providing...