Twin Falls NSC v. S. Idaho Ambulatory Surgery Ctr.

• Decision Date: 23 September 2019
• Docket Number: Case No: 1:19-cv-00009-DCN
• Parties: TWIN FALLS NSC, LLC, a Tennessee limited liability company, Plaintiff/Counter-defendant, v. SOUTHERN IDAHO AMBULATORY SURGERY CENTER, LLC, an Idaho limited liability company, Defendant/Counter-claimant.
• Court: U.S. District Court — District of Idaho

TWIN FALLS NSC, LLC,a Tennessee limited liability company, Plaintiff/Counter-defendant, v. SOUTHERN IDAHO AMBULATORY SURGERY CENTER, LLC,an Idaho limited liability company, Defendant/Counter-claimant.

Case No: 1:19-cv-00009-DCN

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF IDAHO

September 23, 2019

MEMORANDUM DECISION AND ORDER

I. INTRODUCTION

Plaintiff/Counter-defendant Twin Falls NSC, LLC ("Twin Falls") filed a Complaint and Application to confirm a final arbitration award (Dkt. 1) issued in an arbitration with Defendant Southern Idaho Ambulatory Surgery Center, LLC ("Sawtooth"). The arbitration award became final on January 7, 2019. Sawtooth filed a Counter-Petition to vacate the arbitration award (Dkt. 8), alleging the arbitrator refused to provide Sawtooth with access to critical evidence, refused to consider dispositive evidence submitted by Sawtooth during the arbitration proceedings, and committed manifest disregard of the law. In the alternative, Sawtooth suggests the Court must remand to the arbitrator for clarification and modification because the arbitration award is incomplete, ambiguous and contradictory. Twin Falls thereafter filed a Motion to Confirm the arbitration award (Dkt. 12) and a Motion to Dismiss Sawtooth's Counter-Petition (Dkt. 13). Sawtooth responded with its own Motion to Vacate/Modify the arbitration award (Dkt. 22). The Court held oral argument on the motions on July 18, 2019.

Because Sawtooth fails to satisfy the extremely narrow circumstances under which a final arbitration award can be vacated or remanded under the Federal Arbitration Act, 9 U.S.C. §§ 10 and 11 ("FAA"), the Court GRANTS Twin Falls' Motion to Confirm Arbitration Award (Dkt. 12), DENIES Sawtooth's Motion to Vacate and/or Modify Arbitration Award (Dkt. 22), and MOOTS Twin Falls' Motion to Dismiss. (Dkt. 13).

II. FACTS

On June 27, 2018, Sawtooth initiated an arbitration proceeding with the American Arbitration Association ("AAA") against Twin Falls by filing an arbitration demand. Sawtooth asserted claims for breach of contract, breach of fiduciary duty, declaratory judgment, intentional interference with prospective economic advantage, negligent interference with prospective economic advantage, negligent misrepresentation, unjust enrichment, fraud, failure to turn over corporate records, and an accounting. The parties were required to arbitrate their disputes pursuant to the "Second Amended and Restated Operating Agreement of Southern Idaho Ambulatory Surgery Center" (hereinafter "Operating Agreement"). Dkt. 1, Ex. 4. On July 3, 2018, Twin Falls filed its Answer, along with a counterclaim for breach of contract against Sawtooth.

On July 17, 2018, the AAA appointed former Arizona Superior Court Judge Rebecca A. Albrecht as arbitrator in the matter (hereinafter the "Arbitrator"). Pursuant to the expedited schedule provided in the Operating Agreement, and after a prehearing conference with the Arbitrator on June 20, 2018, the parties agreed to submit dispositivemotions by August 15, 2018. Dkt. 1, Ex. 7. On August 28, 2018, the Arbitrator granted summary judgment in favor of Twin Falls on Sawtooth's claims for declaratory judgment, intentional interference with prospective economic advantage, negligent interference with prospective economic advantage, negligent misrepresentation, unjust enrichment and fraud.

An arbitration hearing was held on September 7-8, 2018, in Twin Falls, Idaho. On September 7, 2018, after the close of Sawtooth's proof at the hearing, the Arbitrator granted a directed verdict in favor of Twin Falls on Sawtooth's claims for breach of fiduciary duty, the demand for turnover of corporate records, and the demand for an accounting. Following the hearing, both parties submitted post-hearing briefs on October 17, 2018. On November 9, 2018, the Arbitrator entered an Interim Award, finding in favor of Twin Falls on its counterclaim for breach of contract. The Arbitrator held that Sawtooth was liable to Twin Falls in the amount of $236,830 for breach of contract and awarded judgment in favor of Twin Falls on Sawtooth's remaining claims. Pursuant to the Operating Agreement, the Arbitrator also awarded Twin Falls its attorneys' fees and costs. Dkt. 1, Ex. 4, at § 21.11.

Following submission of Twin Falls' fees and costs and Sawtooth's objection thereto, the Arbitrator confirmed the Interim Award and entered a Final Award and Award of Attorneys' Fees and Costs on January 7, 2019 ("Final Award"). In addition to $236,830 in damages for Sawtooth's breach of contract, the Final Award granted Twin Falls their total requested attorneys' fees and costs in the amount of $976,207.74, as well as $17,008.49 for Twin Falls' share of the AAA expenses. The Interim Award and Final Award are referred to collectively hereinafter as the "Arbitration Award." Pursuant to 9U.S.C. § 9 and Idaho Code section 7-911, Twin Falls filed the instant action to confirm the Arbitration Award on January 9, 2019.

Although the aforementioned facts are those relevant to the instant suit, a brief summary of the underlying dispute provides necessary context for Sawtooth's attempt to vacate the Arbitration Award. Sawtooth is an ambulatory surgery center founded in 1998 by a small group of surgeons in Twin Falls, Idaho. As Sawtooth grew, the prospect of large-scale funding and national resources motivated a partnership with a company called National Surgical Corporation ("NSC"). NSC acquired a fifty-one percent (51%) ownership interest in Sawtooth, assumed the position of Managing Member of Sawtooth, and held its interest through special purpose entity Twin Falls. The Operating Agreement set out the rights and duties of the Managing Member and the non-Managing Members of Sawtooth.

Between 2007 and 2011, Sawtooth flourished under the management of NSC. However, in late 2011, NSC sold its interest in Twin Falls to AmSurg Holdings ("AmSurg"). Twin Falls, under its new ownership, served as the Managing Member of Sawtooth between September 1, 2011, and December 26, 2017. Twin Falls succeeded to broad managerial powers and control of Sawtooth under the Operating Agreement, which remained unaltered during the AmSurg acquisition. In exchange, Twin Falls received a monthly "Management Fee" equal to seven-percent (7%) of Sawtooth's net receipts.¹

Sawtooth became dissatisfied with Twin Falls' management almost immediately.Over the next six years, the relationship between the parties continued to deteriorate. Although it recounts a number of Twin Falls' purported failures, Sawtooth was particularly frustrated by Twin Falls' management of Sawtooth's ophthalmology practice group ("Ophthalmology Group"), concerned about Twin Falls' lack of strategic planning and recruitment, and disenfranchised by Twin Falls' purported acts of interference with Sawtooth's physicians and revenue-generating activities by competitor St. Luke's Medical Group, Ltd. ("St. Luke's"). Dkt. 8, ¶ 22.

Beginning in 2012, Sawtooth's Ophthalmology Group began criticizing the compensation paid to Twin Falls as disproportionate to the value Twin Falls contributed to Sawtooth's business. In 2013, the Ophthalmology Group expressed a desire to potentially withdraw from Sawtooth's membership and move their surgical caseload to another surgical center. Twin Falls negotiated with the Ophthalmology Group for more than a year. The Ophthalmology Group's main concerns were its percentage of ownership, the management fee paid to Twin Falls, and the long-term viability of Sawtooth given competition from St. Luke's. Despite lengthy discussions, the Ophthalmology Group ultimately decided to leave Sawtooth, and subsequently sold their membership units to remaining non-Managing members of Sawtooth.

Over the following two years, the Ophthalmology Group reduced its caseload but continued to perform procedures at Sawtooth until it had satisfied its noncompetition obligations. Once such obligations were satisfied, the Ophthalmology Group cut all ties with Sawtooth. Sawtooth suggests Twin Falls made no efforts to recruit surgeons to replace the income it knew would be lost at the end of the noncompetition period and instead choseto "reap the Ophthalmology Group's revenue during the period they were bound by the non-competition obligation." Dkt. 8, ¶ 29. As a result, Sawtooth suggests Twin Falls "forfeited rights against physicians whose membership obligations would have yielded approximately $15,000,000 in projected gross earnings." Id. at 30.

Sawtooth also claims Twin Falls did nothing to prevent or remedy interference with its operations by St. Luke's, including the health system's purported coercion of Sawtooth's non-Managing Members and non-Member physicians. In particular, Sawtooth claims one of Sawtooth's founding Members, Dr. Blake Johnson, moved his entire surgical practice to St. Luke's new surgery center in late 2016. Sawtooth alleges Twin Falls failed to take legally required action to divest Dr. Johnson of his membership interest in Sawtooth, failed to enforce Dr. Johnson's noncompetition obligations, and failed to take action to stop member compensation from being paid to Dr. Johnson.

After "intense discussions" between Sawtooth's non-Managing Members and Twin Falls regarding the future of the surgery center, Twin Falls ultimately withdrew as Managing Member on December 26, 2017. Dkt. 8, ¶ 41. The Operating Agreement required that if "the Non-Managing Members elect timely to reconstitute and continue the Company" following the withdrawal of the Managing Member, "the Company shall purchase the Units of the Managing Member for cash[.]" Dkt. 1, Ex. 4, at § 16.2. After Twin Falls withdrew, Sawtooth continued the company and elected member Dr. Peter Doble ("Dr. Doble") as its Managing Member. Twin Falls' breach of contract counterclaim was for Sawtooth's failure to buy Twin Falls' units following Twin Falls' withdrawal. The parties stipulated at the arbitration hearing that damages related to...