Tenet Healthsystem v. Jefferson Parish Hosp.

• Court: U.S. Court of Appeals — Fifth Circuit
• Writing for the Court: W. Eugene Davis
• Citation: Tenet Healthsystem v. Jefferson Parish Hosp., 426 F.3d 738 (5th Cir. 2005)
• Decision Date: 21 September 2005
• Docket Number: No. 04-31055.,04-31055.
• Parties: TENET HEALTHSYSTEM SURGICAL, L.L.C., Plaintiff-Counter Defendant-Appellant, v. JEFFERSON PARISH HOSPITAL SERVICE DISTRICT NO. 1, doing business as West Jefferson Medical Center, Defendant-Counter Claimant-Appellee.

426 F.3d 738

TENET HEALTHSYSTEM SURGICAL, L.L.C., Plaintiff-Counter Defendant-Appellant, v. JEFFERSON PARISH HOSPITAL SERVICE DISTRICT NO. 1, doing business as West Jefferson Medical Center, Defendant-Counter Claimant-Appellee.

No. 04-31055.

United States Court of Appeals, Fifth Circuit.

September 21, 2005.

Daniel A. Ranson (argued), Gaudry, Ranson, Higgins & Gremillion, Gretna, LA, for Plaintiff-Counter Defendant-Appellant.

Peter J. Butler, Jr., Peter J. Butler (argued), Richard G. Passler, Breazeale, Sachse & Wilson, New Orleans, LA, for Defendant-Counter Claimant-Appellee.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before KING, Chief Judge, DAVIS, Circuit Judge, and FITZWATER, District Judge.¹

W. EUGENE DAVIS, Circuit Judge:

Tenet HealthSystem Surgical, L.L.C. appeals the judgment of the district court dismissing its claims for breach of lease and other claims against the defendant Jefferson Parish Hospital Service District No. 1, operator of West Jefferson Medical Center. Based on our conclusion that West Jefferson's denial of consent to Tenet's proposed assignment of the lease was unreasonable, we reverse.

I.

In April 2001, Tenet HealthSystem Surgical, L.L.C. ("Tenet") contracted to lease space in a building owned by Marrero Shopping Center, Inc. ("MSC") in Marrero, Louisiana. The lease provided for an initial term of five years and granted Tenet the right to renew for additional five-year terms through April 2021. Under terms of the agreement, Tenet was permitted to use the premises "for out patient surgical procedures and general medical and physicians offices, including related uses and for other purposes reasonably acceptable to Landlord." The lease allowed the lessee to assign the lease with the consent of the lessor and provided that such consent "shall not be unreasonably withheld." Tenet occupied the premises and began operating an outpatient surgical center.

In June 2003, West Jefferson Medical Center ("West Jefferson") purchased the property from MSC subject to the Tenet lease and other leases affecting the shopping center. The leased premises are located adjacent to the West Jefferson hospital campus and were a strategic purchase by West Jefferson to allow for future expansion of its facilities.

Tenet ceased doing business as a surgery center in August 2003. It sought to assign the lease to Pelican Medical-West, L.L.C. ("Pelican"). Pelican intended to use the premises for an occupational medicine clinic. Occupational medicine clinics primarily provide medical services to industry, treating mainly workmen's compensation cases, although walk-in business from the general public is also accepted. The services offered include urgent care, primary care, physical examinations, x-rays, phlebotomy, drug and alcohol testing, laboratory services, and minor surgical procedures.

On August 29, 2003, Tenet dispatched a letter to West Jefferson requesting consent to assign the lease to Pelican for use permitted under the lease and to alter the leased premises according to a plan that had been attached. West Jefferson responded that it would not approve the assignment, and, after a request by Tenet, explained that one of the reasons it had denied the requested assignment was that Pelican intended to use the premises in a manner that competed with West Jefferson. The other stated reasons were later mooted by settlement or withdrawn.

Tenet filed suit in the 24th Judicial District Court in Jefferson Parish in September 2003, asserting claims for breach of the lease, violation of the Louisiana Unfair Trade Practices Act and Consumer Protection Laws, and unconstitutional deprivation of Tenet's property rights. The suit was subsequently removed to federal court on federal question grounds. West Jefferson asserted a counterclaim seeking a declaratory judgment that its refusal to consent to the sublease was reasonable and that its refusal did not constitute an unconstitutional deprivation of Tenet's property rights. In its argument in favor of summary judgment on the reasonableness of its consent, West Jefferson added the argument that it was reasonable in refusing consent to the assignment because the proposed use of the facility was not a permitted use under the terms of the lease.

On June 18, 2004, the district court granted summary judgment in favor of West Jefferson on its counterclaim. The district court held that the reasonableness of West Jefferson's actions must be considered from the perspective of West Jefferson. It also held that "West Jefferson did not unreasonably withhold consent to the proposed assignment to a third party who intended to open an urgent care, occupational medicine, and primary care facility whose operations were outside the scope of the activities of the assignor lessee, and intended to broaden the operations on the leased premises to include new areas of competition with the lessor." Because it found that West Jefferson's actions did not breach the lease, Tenet's other claims failed as well.

After the court granted summary judgment, the parties agreed to settle their claims related to proposed alterations to the premises; however, they expressly preserved Tenet's right to appeal the district court's holding that West Jefferson acted reasonably in denying the sublease because Pelican would provide more competition with West Jefferson. Tenet now appeals.

II.

Under Louisiana law, "[t]he lease contract is the law between the parties in defining their respective rights and obligations." Fleniken v. Entergy Corp., 790 So.2d 64, 73 (La.App. 1st Cir.), writ denied, 793 So.2d 1250 (La.2001). In interpreting a lease, like other contracts, courts are bound to give legal effect to written contracts in accordance with the true intent of the parties. This intent is to be determined by the words of the contract when they are clear, explicit and do not lead to absurd consequences. IP Timberlands Operating Co. v. Denmiss Corp., 657 So.2d 282, 294 (La.App. 1st Cir.), writ denied, 661 So.2d 1348 (La.1995).

Article 2725 of the Louisiana Civil Code governs a lessee's right to sublease or assign the lease.

The lessee has a right to underlease, or even to cede his lease to another person, unless this power has been expressly interdicted.

The interdiction may be for the whole, or for a part; and this clause is always strictly construed.

La. Civ.Code Art. 2725. When a lease contains the requirement that lessor's consent is required to sublease with no limitation, the lessor's right to refuse will be protected unless the lessor has abused that right. Truschinger v. Pak, 513 So.2d 1151, 1154 (La.1987). When a lease provides that the lessor's consent to assign the lease may not be unreasonably withheld, as is the case in the MSC/Tenet Lease, "the lessor's right to refuse will be judicially protected unless the lessor's refusal was unreasonable." Id. "[W]ithholding consent is `unreasonable' where there are no `sufficient grounds for a reasonably prudent business person to deny consent.'" La. Casino Cruises, Inc. v. Capitol Lake Props., Inc., 845 So.2d 447, 450 (La.App. 1st Cir.2003)(quoting Caplan v. Latter & Blum, Inc., 468 So.2d 1188, 1191 (La.1985)).

These rules have been applied in few Louisiana cases, but the following applications emerge. A lessor may reasonably refuse his consent to a proposed sublease or assignment if the proposed sublessee or assignee is financially inferior to the present lessee, La. Casino Cruises; if the sublessee's activities don't fall within the permitted uses in the lease or if the sublessee's use would inhibit the lessor's ability to lease other spaces in the leased property, Van Geffen v. Herbert, 439 So.2d 1257 (La.App. 5th Cir.1983); if the sublessee won't delineate his proposed activities or if the sublease causes the lessor to lose a tenant on the same property, Fourchon Docks, Inc. v. Milchem Inc., 849 F.2d 1561 (5th Cir.1988). A lessor's refusal to consent to a sublease or assignment will be found to be unreasonable if the reasons given for the refusal are pretextual Caplan, or if the proposed sublessee is identical to the lessee in financial status and proposed use of the property, Maurin-Ogden-1978 Pinhook Plaza v. Wiener Corp., 430 So.2d 747 (La.App. 5th Cir.1983).

West Jefferson argues that its refusal to consent to Tenet's proposed assignment to Pelican was reasonable on two grounds. First, West Jefferson asserts that Pelican's contemplated uses of the facility exceed those permitted under the lease. Second, West Jefferson asserts that its refusal was reasonable because the proposed use of the facility poses more competition to its adjacent hospital. We will address each in turn.

A.

The use provision of the lease states:

Tenant shall use and occupy the Leased Premises for out patient surgical procedures and general medical and physician's offices, including related uses and for other purposes reasonably acceptable to Landlord.

Tenet used the facility for an outpatient surgery center. Pelican planned to use the facility for an occupational medical clinic. As described by Dr. Kotler, the owner of Pelican, occupational medicine describes the type of customer the clinic solicits, primarily members of the workforce. The services offered by an occupational medicine practice are quite comprehensive, from physical examinations and drug screening to low acuity emergencies, depending on the demands of the employer and the walk-in patient. The clinic can treat patients presenting with depression, lacerations, broken bones, abdominal pain, or pneumonia, and provides related lab and x-ray services. In our view, nothing in this description takes the proposed practice outside the limits of a "general medical and physician's offices, including related uses," a permitted use under the lease.

This case is very different from the permitted use case West Jefferson relies on, Van Geffen v. Herbert, 439 So.2d 1257 (...