Friday, October 11, 2013
C.A. Awards Fees for Defense of Conflict-of-Interest Charges
Panel Says Action to Invalidate Hospital District’s Agreements Were ‘on the Contract’ Under Sec. 1717
By KENNETH OFGANG, Staff Writer
A nonprofit hospital operator that fought off a healthcare district’s effort to invalidate several contracts on the ground of alleged conflicts of interest on the part of the district’s own board members is entitled to an award of attorney fees under Civil Code Sec. 1717, the First District Court of Appeal has ruled.
Div. One reversed an Alameda Superior Court judge’s order denying fees to Eden Medical Center for its successful defense of a cross-complaint brought by the Eden Township Healthcare District in a suit brought by Sutter Health over the breach of a contract for the sale of San Leandro Hospital.
As explained by the Court of Appeal in a prior opinion, the healthcare district is a public entity, located in Alameda County and governed by an elected board of five members. Sutter Health is a nonprofit hospital operating company, and Eden Medical Center, or EMC, is a nonprofit public benefit corporation formed by Sutter and the district, initially to operate Eden Hospital in Castro Valley.
EMC was initially governed by an 11-member board, including the five district board members.
Eden Hospital was a district facility that ran into financial and other difficulties in the 1990s. Sutter agreed to form EMC, which acquired all of the hospital’s assets, as well as to infuse cash into the district, and assume about $40 million of its debts, and spend about $65 million to acquire adjoining land and improve the building.
Because of seismic problems, however, it became clear a decade ago that the hospital had to be replaced. After several years of negotiations and threats of litigation, agreements were finally reached in 2008 by which Sutter agreed to spend $300 million to replace the building and received an option to purchase San Leandro Hospital.
It was also agreed that the district directors would resign from the EMC board six months after a notice of commencement of construction of the new hospital was delivered.
In 2009, Sutter exercised its option to buy San Leandro Hospital, and said it planned to lease the hospital to another party to convert it from an acute care emergency services hospital to an acute rehabilitation hospital. The district’s newly elected board, however, objected to the loss of emergency care services and refused to convey the hospital, saying Sutter breached an agreement to convert an entire floor of the hospital to acute rehabilitation.
The refusal was followed by arbitration and litigation proceedings, resulting in an arbitrator’s ruling that Sutter was entitled to specific performance of its right to a conveyance of the hospital, subject to the outcome of litigation on the district’s cross-complaint. The district claimed in that pleading that the contracts between the district and EMC violated Government Code Sec. 1090, which prohibits public officials and employees from having personal financial interests in contracts they approve or negotiate on behalf of public entities.
The district’s claims were rejected, and summary judgment in favor of EMC and Sutter was entered in 2010 and affirmed by the Court of Appeal the following year. According to press releases by Sutter, it has since opened the replacement for Eden Hospital and transferred San Leandro Hospital to another public entity, Alameda Health Systems.
EMC then moved for an award of attorney fees under Sec. 1717, which provides that where a contract provides for a fee award to any party in an action “on the contract,” any other party that prevails in such litigation has the reciprocal right to such an award.
Superior Court Judge Marshall Whitley agreed with the district that an action to invalidate a contract is different than an action to enforce one, and that Sec. 1717 only applies to the latter. But Justice Robert Dondero, writing for the Court of Appeal, disagreed.
“Candidly, it is difficult to think of an action that is more likely to be characterized as an ‘action on a contract’ than one in which the party bringing the action explicitly seeks to have the subject contract declared void and invalid in its entirety,” the justice wrote.
The case is Eden Township Healthcare District v. Eden Medical Center, 13 S.O.S. 5240.
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