Same Day Surgery v. Montana Regional ( 2005 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 04-3908
No. 04-3909
___________
Same Day Surgery Centers, L.L.C., *
*
Plaintiff - Appellant/ *
Cross Appellee, *
* Appeals from the United States
v. * District Court for the
* District of Minnesota.
Montana Regional Orthopedics, L.L.C., *
*
Defendant - Appellee/ *
Cross Appellant. *
___________
Submitted: September 12, 2005
Filed: December 30, 2005
___________
Before LOKEN, Chief Judge, WOLLMAN and BYE, Circuit Judges.
___________
LOKEN, Chief Judge.
Montana Regional Orthopedics (MRO), an orthopedic physician group
practicing in Missoula, Montana, hired Minnesota-based Same Day Surgery (SDS)
to construct, equip, and manage an ambulatory surgical center in Missoula. After
SDS substantially completed the facility in June 2001, MRO denied demands for final
payments. SDS commenced this diversity action for breach of two contracts, and
MRO asserted breach of contract counterclaims. After a bench trial, applying
Minnesota law, the district court1 rejected SDS’s primary claim for reimbursement of
expenses invoiced by third party vendors, finding that SDS failed to prove that the
amounts it paid vendors exceeded MRO’s contract payments to SDS for this purpose.
The court upheld two of SDS’s lesser contract claims, rejected MRO’s counterclaims,
and entered judgment for SDS in the amount of $23,840.44, plus statutory
prejudgment interest and contract-based attorneys fees. SDS appeals the rejection of
its main claim. MRO cross-appeals the rejection of one counterclaim. We affirm.
I.
The parties’ relationship was reflected in a Development Agreement signed
June 1, 2000, and a Management Agreement signed July 1, 2000. Only the
Development Agreement is at issue on appeal. Under that Agreement, SDS agreed
to purchase real estate, design and construct the surgical center, purchase and install
necessary equipment, supervise selection of the nursing staff, and obtain certifications
and licenses. MRO agreed to reimburse SDS for costs and expenses incurred and to
pay SDS a “Development Fee” of $457,500. The Agreement provided that the total
Project costs including the Development Fee “will not exceed $2,042,603.”
Construction of the surgical center began in late October 2000. MRO
physicians saw their first patient at the facility in early March 2001. The surgical
center received provisional accreditation as an approved Medicare facility effective
June 18, 2001, which the parties agree was the Substantial Completion date under the
Agreement. During these phases of the Project, MRO made four progress payments
of $430,000 each, not always in response to SDS invoices. MRO paid SDS a total of
$1,857,006 under the Development Agreement. On January 30, 2002, SDS sent
1
The HONORABLE FRANKLIN L. NOEL, United States Magistrate Judge
for the District of Minnesota, presiding with the consent of the parties pursuant to 28
U.S.C. § 636(c).
-2-
MRO a final invoice of $246,007.62, an amount that exceeded the contract cap by
some $60,411. MRO refused to pay any part of that invoice. This lawsuit followed.
At trial, SDS conceded that MRO had paid the entire $457,500 Development
Fee but claimed that invoices received from third party vendors put the total Project
costs in excess of the $2,042,603 cap. Therefore, SDS argued, MRO owed an
additional $185,597 for unreimbursed vendor expenses. SDS calculated its claim by
subtracting the $1,857,006 paid by MRO from the contract cap. In support of the
claim, SDS introduced vendor invoices (which it did not include in the record on
appeal); Exhibit 4, a summary exhibit showing $1,561,820.59 in vendor invoices
received by SDS; Exhibit 6, a summary exhibit showing a total of $1,185,904.94 paid
by SDS to vendors; and testimony by Margaret Olin, a partner in SDS, explaining
which entries on Exhibit 4 and Exhibit 6 were included in the $185,597 claim.
There was also trial testimony that SDS experienced financial difficulty during
and after completion of the surgical center Project. Olin testified that she negotiated
invoice reductions with some vendors and paid some vendor obligations with
personal checks, and that one or two vendors had sued SDS and obtained money
judgments. MRO’s chief executive, Ronald Peterson, testified that MRO paid some
vendors directly to maintain needed relationships. Despite this episodic testimony,
neither party introduced probative evidence as to the status of vendor claims, nor did
SDS represent that monies it collected on its claim would be paid to vendors.
II.
On appeal, SDS argues that MRO received the full benefit of its bargain, SDS
presented evidence that it has incurred liabilities which exceed the contract cap, and
therefore SDS was entitled to payment of the full $2,042,603 cap. In response, MRO
argues that the trial evidence proved that SDS’s payments to vendors plus its
Development Fee were substantially less than the $1,857,006 paid by MRO under the
-3-
Agreement. Therefore, MRO does not owe SDS the claimed $185,597. Rather, SDS
owes MRO for its “overpayment” of reimbursable vendor expenses. These
competing contentions require a closer look at the payment provisions in the
Development Agreement. The interpretation of these provisions is a question of law
we review de novo. See Alpha Real Estate Co. of Rochester v. Delta Dental Plan of
Minn., 664 N.W.2d 303, 311 (Minn. 2003).
Section 2 of the Development Agreement is entitled “Development services to
be provided by [SDS].” It contains two relevant provisions:
2.2.3 Construction. . . . [SDS] will enter into appropriate
agreements with the general contractor and/or other parties for
construction of the Project. . . . [MRO] shall pay when due or promptly
reimburse [SDS] for all amounts payable under such construction
contracts.
2.2.4 Equipment Selection and Purchasing. . . . [SDS] will
coordinate the purchase and arrange for delivery and installation of all
capital equipment, instruments and supplies necessary for operation of
the Project through national vendors selected by [SDS] . . . . [SDS] shall
enter into appropriate agreements . . . for the purchase of such
equipment, instruments and supplies. [MRO] shall pay when due or
promptly reimburse [SDS] for all amounts payable under such
agreements.
Section 4 of the Agreement is entitled “[SDS’s] Fees and Expenses” and
contains what the parties consider the most relevant provision:
4.3 Direct Expenses. In addition to fees payable to [SDS],
[MRO] shall reimburse [SDS] for certain direct expenses advanced by
[SDS] . . . except where such expenses are expressly stated to be the
responsibility of [SDS]. . . . Direct expenses shall include out-of-pocket
disbursements, including but not limited to . . . fees or charges advanced
-4-
to other parties. . . . [SDS] shall send invoices . . . for its direct expenses
on a monthly basis during the development of the Project and [MRO]
shall pay such invoices within ten (10) days of receipt. Any amounts
remaining unpaid . . . shall be due and payable in full at Substantial
Completion.
Finally, Section 5 of the Agreement is entitled “[MRO] Responsibilities” and
contains the following provision:
5.4 Equity/Loan Funds; Payment Obligations. . . . [MRO] shall
pay when due all amounts to be paid to any third party in connection
with the development of the Project, regardless of whether [SDS] or
[MRO] entered into the contract with such third party, unless the
obligation to pay such amounts is expressly stated herein to be that of
[SDS].
The critical issue, as framed by the parties, is whether these provisions, and
particularly § 4.3 with its use of the word “advanced,” limit MRO’s reimbursement
obligations to amounts SDS has in fact paid to the third party vendors in question.
At trial, SDS’s Olin conceded that this was the course of dealing contemplated by the
parties at the outset of the Project. But SDS nonetheless argues that, as a matter of
contract interpretation, it incurred “direct expenses” triggering MRO’s obligation to
reimburse whenever a third party vendor invoiced SDS for goods or services the
vendor in fact provided to the Project, regardless of whether SDS paid the vendor.
The term “advanced” in § 4.3, SDS explains, is not a requirement that SDS advance
payment to the vendor before seeking reimbursement from MRO. Rather, it simply
refers to the fact that SDS “advanced” the vendor’s goods and services to the Project
before SDS sought reimbursement by MRO. SDS suggests the provision in § 4.3 that
direct expenses “include out-of-pocket disbursements” confirms that the parties
intended that the term “direct expenses” be broadly construed to reflect the principle
“that MRO should pay for the benefits it indisputably received.” The district court’s
-5-
contrary interpretation of § 4.3, SDS complains, is inconsistent with MRO’s clear
obligation to pay amounts due third party vendors under §§ 2.2.3, 2.2.4, and 5.4.
MRO argues that the plain and unambiguous meaning of § 4.3 is that SDS must
“advance” money to the vendor to trigger MRO’s obligation to reimburse SDS for a
“direct expense.” But § 4.3 must be read in conjunction with §§ 2.2.3, 2.2.4, and 5.4,
which provide that either SDS or MRO may contract with third party vendors and
obligate MRO to pay or reimburse SDS for amounts owed to vendors “when due.”
Taken together, these provisions made the contract ambiguous in the sense that they
left the parties flexibility in dealing with third party contractors and suppliers. Thus,
as the district court recognized, extrinsic evidence was needed to determine whether
SDS was entitled to be reimbursed for a particular vendor invoice. See Noreen v.
Park Constr. Co., 96 N.W.2d 33, 36 (Minn. 1959).
SDS’s Olin testified that the parties expected SDS to pay vendors before being
reimbursed by MRO, even though MRO made four substantial progress payments
during the construction phase without requiring detailed invoices from SDS.2 This
was a logical course of dealing. Because SDS chose the vendors, contracted with the
2
At trial, MRO’s Peterson testified that MRO sent SDS regular progress
payments without requiring SDS to prove vendors had been paid. The court noted
that this practice undermined MRO’s argument that SDS payment to the vendor was
a condition precedent to reimbursement:
THE COURT: Let me interrupt for a second. I’m confused. You
say you didn’t get monthly invoices from Same Day for direct
reimbursement pursuant to Section 2.3?
THE WITNESS: I got some, but I did not get all of them.
THE COURT: Well, how did it come that you paid them money?
* * * * *
THE WITNESS: I was paying in good-faith, assuming that the expenses
existed–
-6-
vendors, and was in charge of constructing and equipping the facility, a vendor
payment by SDS confirmed to MRO that the vendor had delivered proper goods or
services at the proper price and that the vendor’s invoice was “due” to be paid or
reimbursed. But we reject MRO’s contention that this sensible expectation was an
inflexible contract requirement. For example, if cash flow difficulties prevented SDS
from paying a vendor for goods or services already provided to the Project, the
contract would not bar MRO from paying the vendor directly, or from advancing
funds to SDS to pay the vendor, to compensate the vendor for benefits it provided to
MRO as facility owner. Cf. Mrozik Constr. Inc. v. Lovering Assoc., Inc., 461
N.W.2d 49 (Minn. App. 1990); Restatement (Second) of Contracts § 227(1) (1981).
At trial, rather than present detailed, vendor-by-vendor proof of its right to
additional expense reimbursement, SDS introduced only summary exhibits and vague
testimony describing what might be called the big picture. The evidence established
that MRO paid SDS a total of $1,857,006, $185,597 less than the $2,042,603 contract
cap. SDS paid third party vendors $1,185,904.94 and kept the $457,500
Development Fee. What SDS did with the remaining MRO proceeds was not
explained. To put this evidence in perspective, we will assume that the total Project
costs including the Development Fee exceeded the contract cap, as SDS alleged but
arguably did not prove. Under the parties’ course of dealing as described by Olin,
SDS should have used the payments received from MRO to pay vendors what they
were owed, applying any balance to the unpaid Development Fee. Then, when the
Project was substantially completed, SDS would demand that MRO pay the balance
of the Development Fee up to the contract cap. But SDS did not do that. Instead, it
pocketed the entire Development Fee from MRO’s progress payments, paid vendors
less than they were owed, and then demanded after substantial completion that MRO
pay additional reimbursement up to the contract cap.
In these circumstances, if MRO is held liable to SDS for the claimed additional
reimbursement, the remedy would not benefit vendors, who on this record are the
-7-
truly aggrieved parties. Rather, the recovery by SDS would have the practical effect
of increasing its Development Fee well beyond the agreed amount, $457,500. In our
view, by no stretch of the imagination would this result be consistent with the
Development Agreement. Therefore, the district court properly denied SDS’s claim
for $185,597 because SDS failed to prove that claim.
III.
At trial, MRO alleged that SDS breached the Development Agreement by not
timely completing the Project and breached the Management Agreement by failing
to provide competent services. The district court rejected those counterclaims on the
merits, rulings that MRO does not appeal. Based upon the trial evidence that SDS
paid vendors less than the total amount MRO paid SDS, minus the Development Fee,
MRO expanded its counterclaim to include a demand for a “refund” of its
overpayments. MRO cross-appeals the district court’s denial of that claim.
SDS presented evidence that MRO got the full benefit of its bargain. MRO did
not refute that evidence. We agree with the district court that “the Parties’ conflicting
exhibits . . . are too confusing, and the testimony regarding them, too inconclusive to
allow the Court to provide a precise accounting.” In these circumstances, MRO may
not rely on the inadequate proof that was insufficient to prove SDS’s claim to justify
a belated refund claim that MRO did not itself affirmatively establish.
The judgment of the district court is affirmed.
______________________________
-8-