Schell v. Lifemark Hospitals of Missouri

• Decision Date: 31 October 2002
• Docket Number: No. WD 59826.,WD 59826.
• Citation: 92 S.W.3d 222
• Parties: James A. SCHELL, II, M.D., F.A.C.P., Appellant, v. LIFEMARK HOSPITALS OF MISSOURI, Respondent.
• Court: Missouri Court of Appeals

92 S.W.3d 222

James A. SCHELL, II, M.D., F.A.C.P., Appellant, v. LIFEMARK HOSPITALS OF MISSOURI, Respondent.

No. WD 59826.

Missouri Court of Appeals, Western District.

October 31, 2002.

Motion for Rehearing and/or Transfer to Supreme Court December 24, 2002.

Application for Transfer Denied January 28, 2003.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Danieal H. Miller, Columbia, MO, for Appellant.

Terrance J. Good, St. Louis, MO, for Respondent.

Before LOWENSTEIN, P.J., NEWTON and HOLLIGER, JJ.

HAROLD L. LOWENSTEIN, Judge.

Dr. James A. Schell appeals the trial court's judgment, in a bench-tried case, in favor of respondent Life Mark. Schell had filed a breach of contract suit against Life-Mark for not paying him severance pay he claimed was owed him under a four-year employment contract between the two. Because LifeMark terminated Schell without cause and because LifeMark had a contractual obligation to pay severance pay if it terminated Schell without cause, this court reverses the trial court's judgment.

Factual & Procedural History

On July 1, 1993, Dr. Schell and Life-Mark entered into an employment contract according to which Schell would provide medical services to patients provided by LifeMark, and LifeMark would take over Schell's practice. As compensation, Schell would receive a base salary of $93,750 per year and incentive compensation equal to fifty percent of receipts from medical services when those services exceeded $75,000 per year. Because Schell's pay was dependent on the payer mix — that is, the relative percentage of fee-for-service providers versus providers who solely pay a flat fee for patient care the two parties agreed that "in the event of a change in payor [sic] mix" they would "renegotiate" the incentive pay provision. "Failure to renegotiate same within 30 days of the annual anniversary of th[e] [a]greement [e.g., July 1, 1996] shall constitute a termination without cause."

Section G of the contract, titled "Termination Without Cause," allowed LifeMark to terminate the agreement without cause so long as it provided Schell 30 days written notice. It also stated: "In that event, [LifeMark] agrees to make severance payments to [Schell] in the amount of 6 months compensation plus one additional month for every three months of full-time employment starting from July 1, 1993; however, total severance shall not exceed 18 months compensation." In addition, § G required LifeMark to notify Schell in writing if it did not intend to renew the employment agreement; failing to notify would be a termination without cause.

The contract commenced on July 1, 1993, and was slated to continue for four years thereafter, "unless sooner terminated in accordance" with the employment contract.

During the last six months of 1995, Life-Mark proposed increasing the number of managed care plan in which it participated, starting January 1, 1996. In December, 1995, Schell took a two week vacation in addition to taking off the regular holidays, thus resulting in a $16,550 drop in his income for that month. On May 1, 1996, Life Mark¹ notified Schell that it did not intend to renew his employment contract at the end of its term, July 30, 1997, referring to § G. LifeMark expressed a willingness to enter into a new contract with Schell.

On July 1, 1996, an anniversary date, Schell notified LifeMark that he felt he had experienced a substantial and continuing change in payer mix since June 30, 1993, necessitating renegotiation of his incentive pay compensation. In a table, Schell juxtaposed the payer mix for the January 1, 1996 — June 30 period with that for the July 1, 1992 — June 30, 1996 period. It purported to show a drop in fee-for-service ("commercial") providers, from 27.2 to 15.2 percent of total receipts, with an increase from zero to 9.1 percent of HMO providers. Schell proposed a new compensation package, to wit: base pay of $93, 750; supplemental pay of $85,000 for services as a Medical Director/Technical Supervisor to compensate for "negative effects of administrative policies"; and incentive pay in the amount of 30 percent of booked charges in excess of $76,500 per year. Schell also floated the idea of relative value units (RVUs) as a better basis for incentive pay.

In response, on July 16, 1996, LifeMark expressed willingness to review the relevant data and to enter into a new employment contract. LifeMark proposed that any new compensation provision would start on June 1, 1997 — one month before the natural termination of the original agreement. It rejected basing incentive pay on booked charges because they would conflict with a contract it had with a third party, Telnet; stated that it did not believe supplemental pay of $85,000 for a medical directorship was acceptable because incentive pay must directly represent performance; and denied that any change in payer mix of less than twelve percent was significant, since seventy percent of Schell's business, represented by Medicare and Medicaid payers, remained unchanged.

Schell responded on July 19, 1996, stating that he did not understand why any new incentive pay provision would not apply to the new contract period. Schell stated that he did not see why the acceptability of booked charges should turn on whether Telnet gave a thumbs up, since his contract was with LifeMark. Nonetheless, Schell proposed basing incentive pay on RVUs. Schell pointed out that another doctor who provided services similar to those he (Schell) provided had received $90,000 per year from LifeMark as a medical director.

On August 5, 1996, LifeMark and Schell met to discuss their correspondence. During the meeting, the parties discussed payer mix, incentive compensation, using RVUs as basis for compensation, and a medical directorship. According to Life-Mark's testimony, Schell said that, unless he received a medical directorship and $220,000 a year, he would not renew the agreement. LifeMark informed Schell that there was no medical directorship available and proposed dividing incentive pay into a managed-care portion and a fee-for-service portion.

Six days later, Schell sent LifeMark a draft of incentive pay based on RVUs. He told LifeMark that the divided incentive pay was a nonstarter. On September 1, 1996, Schell notified LifeMark that he was terminating their contract because Life-Mark had not renegotiated the incentive pay compensation provision by July 31, 1996. Accordingly, Schell said that Life-Mark owed him $199,284.28 in severance pay. Because LifeMark had rejected the two proposals Schell submitted for consideration, Schell said he thought any further discussion would be unproductive.

Schell filed a petition for breach-of-contract damages, specifically seeking severance pay of $199,248.02. After a bench trial, the trial court found that: (1) both parties violated the covenant of good faith and fair dealing in their renegotiation of the incentive pay provision; (2) Schell's contract had not been terminated without cause; and (3) Schell was not entitled to severance pay. The trial court traced Schell's bad faith to the fact that his proposed modifications would have boosted his income to level higher than what it was before there was a change in the payer mix. LifeMark acted in bad faith, according to the trial court, because LifeMark did not do any research or computations regarding the effect the change in payer mix had on Schell's income before concluding the change was insignificant.

Standard of Review

Appellate review of a bench is governed by Murphy v. Carron, 536 S.W.2d 30, 32 (Mo. banc 1976). Reversal is warranted only where the judgment is against the weight of the evidence or is unsupported by substantial evidence, or where the trial court misstates or misapplies the law. Id.

Analysis

A. Renegotiation Term

The first issue is whether Life-Mark agreed to pay Schell severance pay if the negotiations between the two over Schell's incentive pay floundered. Life-Mark and Schell agreed to renegotiate the incentive pay provision within 30 days of the anniversary date if the payer mix changed. While they agree that the payer mix changed, LifeMark first contended the change was insubstantial — though its CEO later testified that an eleven percent shift was substantial. Because their agreement did not require a substantial change only some, non-de minimis change² — the point is moot, making resolution of the meaning of "renegotiate" mandatory.

The trial court found the contract unambiguous — interpreting the renegotiation clause as requiring the parties to agree to a new incentive pay term that would stabilize Schell's incentive compensation — but this finding was erroneous because there were two levels of ambiguity in the renegotiation clause. The goal of contract interpretation is to ascertain and give effect to the intent of the contracting parties. Butler v. Mitchell-Hugeback, Inc., 895 S.W.2d 15, 21 (Mo. banc 1995). The first level of ambiguity has to deal with the word "renegotiate," which is unclear because it has two reasonable meanings.³ See Eisenberg v. Redd, 38 S.W.3d 409, 411 (Mo.2001) (term in contract ambiguous where it has two or more reasonable meanings). It can mean either (1) to negotiate anew, with no guarantee of success, or (2) to revise the terms of a contract through negotiation. See The American Heritage Dictionary of the English Language (4th ed.2000).⁴

Here, the context clarifies which meaning the parties intended. See Sonoma Mgmt. Co. v. Boessen, 70 S.W.3d 475, 480 (Mo.App.2002) (where term susceptible to multiple interpretations, term should be construed in light of context). First, it must be noted that this contract was the product of the sale of Schell's practice to LifeMark in exchange for employment — apparently a means to reduce the risk to Schell of a possible downturn in his practice. Hence, the base pay was an income floor for Schell. The incentive pay was a way to ensure productivity on the part...