Cleveland Surgery Center v. Bradley Co. Hospital ( 1999 )

FILED
IN THE COURT OF APPEALS OF TENNESSEE
AT KNOXVILLE March 24, 1999
Cecil Crowson, Jr.
Appellate C ourt
Clerk
CLEVELAND SURGERY CENTER )
L.P., and OCOEE PHYSICAL ) BRADLEY CHANCERY
THERAPY, INC., )
)
Plaintiffs/Appellees, ) NO. 03A01-9804-CH-00120
)
v. ) HON. EARL HENLEY,
) CHANCELLOR
BRADLEY COUNTY MEMORIAL )
HOSPITAL, BRADLEY BUILDING )
LLC, and OCOEE HEALTH )
ALLIANCE, ) AFFIRMED,
) as MODIFIED,
Defendants/Appellants ) and REMANDED.
Michael E. Callaway, Cleveland, for Appellant Bradley County Memorial
Hospital.
Donald J. Cocke, Memphis, for Appellant Ocoee Health Alliance.
William H. West, Nashville, and Buddy B. Presley, Jr., Chattanooga, for
Appellees Cleveland Surgery Center and Ocoee Physical Therapy, Inc.
William B. Hubbard and Jerry W. Taylor, Nashville, for Amici Curiae,
Tennessee Hospital Association and Health Systems and Hospital Alliance of
Tennessee, Inc.
OPINION
INMAN, Senior Judge
Two private health care providers sought a declaratory judgment that a
county-owned hospital and its business partners had entered into business
ventures which were ultra vires and in violation of the Tennessee Constitution.
The trial court held that the county hospital had exceeded its authority by entering
into unconstitutional business dealings with private entities, and issued an
injunction permanently restraining the hospital from participating in these or any
similar ventures. We affirm the judgment of the trial court as to the specific
1
business ventures involving these defendants. We modify the judgment by
narrowing the permanent injunction consistent with this opinion.
Plaintiffs Cleveland Surgery Center, hereinafter "Surgery Center," and
Ocoee Physical Therapy, Inc., hereinafter "Physical Therapy," two businesses
owned and operated by private physicians and physical therapists respectively,
learned of plans by Bradley County Memorial Hospital, hereinafter "County
Hospital," to acquire land and build a medical office building adjoining County
Hospital. The plan provided that Ocoee Health Alliance, hereinafter the
“Alliance,” a partnership owned by County Hospital (50% interest) and local
physicians (50% interest), would secure financing for the $8,500,000.00 building
project, with no investment or personal liability for the loan on the part of the
physicians, who would, however, have an ownership interest in the office
building, with each physician owning an equal share of the Alliance’s 50%
interest. That building project is not the subject of appeal, since SunTrust bank
threatened to default the Hospital’s loan after adverse publicity and the filing of
this lawsuit, resulting in sale of the project to other parties. The appeal concerns
whether the Hospital can lawfully engage in similar projects with Alliance.
Desiring to provide services for the patients of County Hospital, Physical
Therapy sought membership in the Alliance which was denied on grounds that the
Alliance already offered physical therapy services. Surgery Center, which
operates a stand-alone surgical clinic, feared that the Alliance planned to establish
a competing surgical clinic in the new building and joined with Physical Therapy
in this suit against County Hospital, the Alliance, Bradley County Hospital
Foundation and Bradley Builders, LLC, alleging unfair competition by the
Alliance, ultra vires acts by County Hospital under its Private Acts and
2
unconstitutional business ventures between partners County Hospital and the Alliance.
The trial court held that County Hospital, through its actions as an agent
and arm of Bradley County, had exceeded its authority by lending the credit of the
county and joining in ultra vires business ventures with private industry in
violation of Article II, § 29 of the Tennessee Constitution.
Defendants County Hospital and the Alliance appeal and raise the
following issues, verbatim:
1. The Chancellor erred when he determined Bradley
County Memorial Hospital is ". . . an agent and arm of
Bradley County"; that is, is not an independent
governmental entity or quasi-municipal corporation.
2. The Chancellor erred when he found the Hospital's participation in
the Ocoee Health Alliance, which is authorized by the Private Acts
creating and governing the Hospital, as well as by T.C.A. sect. 7-57-
601 et seq. [The Private Act Hospital Authority Act], was ultra vires
and violated Article II, Section 29 of the Constitution of Tennessee.
3. The terms of the Order of Final Judgment and Permanent Injunction
entered by the Chancellor are too broad and imprecise and unduly
restrict and interfere with the Hospital's operation.
4. The Chancellor erred in finding the Plaintiffs had standing to bring
this action.
I
Surgery Center and Physical Therapy have standing to bring this action by
virtue of the special injuries which they allege are occasioned by unfair and illegal
competition by the Alliance. Morristown Rescue Squad v. Volunteer
Development, 793 S.W.2d 262 (Tenn. App. 1990); Parks v. Alexander, 608
S.W.2d 881, 890 (Tenn. App. 1980), cert. denied, 451 U.S. 939 (1981).
II
Appellants argue that the Chancellor erred:
when he determined Bradley County Memorial Hospital
3
“ . . . is an agent and arm of Bradley County”; that is, is not an
independent governmental entity or quasi-municipal corporation.
Appellant’s brief, page 1.
The Chancellor made no finding that County Hospital "is not an
independent governmental entity or a quasi-municipal corporation." Rather, the
court's opinion describes County Hospital as “an agent and arm of Bradley
County” under the facts and circumstances of this particular case. Tennessee
Private Act County Hospitals have, in some instances, properly been referred to
as “governmental entities,” “independent governmental entities,” “public non-
profit corporations,” “political subdivisions of Tennessee,” “subdivisions of the
state and county,” or “public instrumentalities acting on behalf of the county,”
Ketron v. Chattanooga-Hamilton County Hospital Authority, 919 F. Supp. 280,
282 (E.D. Tenn., 1996), (for the purpose of determining whether former
employees were entitled to bring suit under 42 U.S.C. § 1983 for alleged
retaliatory discharge). Other appropriate descriptive terms have included
“municipal corporation,” Finister v. Humboldt General Hospital, Inc., No. 02S01-
9704-CH-00038 (Tenn. May 26, 1998), (for the purpose of determining whether
a Private Act Hospital is exempt from the Tennessee Workers’ Compensation
Law), “quasi-municipal corporation,” Professional Home Health & Hospice, Inc.
v. Jackson-Madison County General Hospital District, 759 S.W.2d 416 (Tenn.
App. 1988), (for the purpose of determining whether a Hospital Authority could
purchase and operate a home health care business outside the territorial
jurisdiction specifically established by its Private Act), and “governmental
hospital authority,” Moses v. Erlanger Medical Center, 1995 WL 610243 (Tenn.
App. Oct. 18, 1995), (for the purpose of determining whether plaintiff could
maintain a tort action against a Private Act Hospital for mental anguish). No
doubt other similar terms may be appropriate in other instances; the trial court did
4
not exclude them. It merely considered (1) the provisions of Bradley County’s
Private Act, (2) the relevant statutes, (3) Article II, § 29 of the Tennessee
Constitution, (3) the kinds of Hospital/Alliance and private/public ventures at
issue in this case, and (4) the potential obligation of Bradley County funds. Based
on that analysis, the trial court held that in this instance, County Hospital operates
as an agent or arm of Bradley County and, as such, is subject to certain restrictions
under both its Private Acts and Article II, § 29.
Appellants argue that County Hospital is “not an agency of the county. . .
but rather an independent governmental entity,” because the Attorney General
defined Erlanger Hospital as such in Tenn. Att’y. Gen. Op. No. U-95-040,1 April
13, 1995:
“Thus, we think the prohibitions in Article 2, Section 29 would not
apply to this authority or to any other private act hospital authority
which is an independent governmental entity. The prohibitions
would apply to a private act hospital authority which is a
department of a municipality or county. [Emphasis added].2
1
Indeed, the Attorney General has been asked on several occasions to advise legislators as to the
constitutional implications of physician-hospital-organizations (PHO’s). Tenn. Att’y. Gen. Op. 95-056, May 23,
1995, involved an opinion as to “whether the General Assembly may constitutionally enact proposed legislation that
would authorize a county-owned hospital to hold an ‘ownership interest’ in an organization owned in part by
medical practitioners licensed in the State of Tennessee, without requiring approval by a local referendum.” The
Attorne y Gene ral advised that the pro posed law “is uncon stitutional to the extent it auth orizes a co unty to len d its
credit in aid of a private individual or entity or to act as a shareholder, with others, in any company, association or
corpora tion witho ut appro val by ref erendu m requ ired by A rticle 2, Sectio n 29 of th e Tenn essee Co nstitution.
Wheth er any p articular tran saction w ould co nstitute an u nconstitu tional lend ing of cre dit or ow nership in terest could
only be determined after an analysis of all the facts and circumstances of the transaction, especially the form of the
owne rship and whethe r the coun ty wou ld be incu rring an a dditional liab ility, direct or co ntingen t, by particip ating in
such organization.” By way of example, the Attorney General opined that “a loan guarantee or other pledge of
assets by the county on beh alf of a ph ysicians ho spital organ ization w ould also constitute su ch a lend ing of cre dit.”
See also, Tenn. Att’y. Gen. Op. No. U97-037, July 28, 1997: “The extent to which the Board of Trustees [of
Cookeville General Hospital] may exercise any of the powers accorded to the hospital under the Private Act
Hospital A uthority A ct of 199 6 depen ds upon its authority u nder the C ity Charter . The ho spital is not a sep arate
legal entity; rather it is a facility owned by city government. . . it should be noted, further, that Article II, Section 29
of the Tennessee Constitution prohibits a city, county or town from owning stock with others. It is not clear whether
a court w ould co nclude th at acting as a mem ber in a no t-for-prof it corpora tion, whic h issues no stock, wo uld violate
the provision.”
See also, Tenn. Att’y. Gen. Op. No. 98-119, July 2, 1998: McNairy County Hospital Board of Trustees has no
authority to sell the hospital without permission of the County Commission. Under the Private Acts governing the
hospital, such authority rests with the McNairy County Commission, which can, however, sell the hospital without
the permission of, or participation by, the hospital’s Board of Trustees. (Hospital Trustees, without the involvement
of the County Commission, had given a “Right of First Refusal” on the sale of the McNairy County Hospital to the
Jackson -Mad ison Cou nty Gen eral Hosp ital District.)
2
The Priv ate Act w hich crea ted Chatta nooga -Ham ilton Cou nty Ho spital Auth ority, [Erlan ger Ho spital] is
quite different from the Bradley County Private Act, as will be shown. The Chattanooga Act provides that: “Neither
the county nor the city shall in any event be liable for the payment of the principal of or interest on any bonds or
notes of th e [hospital] authority . . . or any ple dge, m ortgage , obligation or agreem ent of any kind w hatsoev er . . .
none of the . . . obligations shall be construed to constitute an indebtedness of either the county or city within the
5
The Attorney General recommended the following determinative analysis:
. . . an analysis of all the facts and circumstances of the transaction,
especially the form of the ownership and whether the county would
be incurring an additional liability, direct or contingent, by
participating in such an organization.
The record demonstrates that the trial court in this case performed the
recommended analysis, described in detail in its Memorandum Opinion. We find
no fault with the conclusion drawn by the trial court that the County Hospital
functions, in this instance, as an agent and arm of Bradley County.3 The trial
court’s judgment on this issue is accordingly affirmed.
III
Appellants next complain of the trial court’s finding that County Hospital’s
participation in the Ocoee Health Alliance was ultra vires and violated Article II,
§ 29 of the Tennessee Constitution. Appellants contend that the partnership is
authorized by the Private Acts creating and governing County Hospital and by
T.C.A. § 7-57-601 et seq. (1996).
In 1996 the Legislature passed The Private Act Hospital Authorities Act,
T.C.A. § 7-57-601 et seq., which extends to all Tennessee Private Act hospitals
the powers previously granted to Private Act Metropolitan Hospitals under T.C.A.
§ 7-57-501 et seq. (1995). These Acts provide, as pertinent:
(b) In addition to powers otherwise granted by this part or any
other public or private act of this state, or by any state regulation or
federal law or regulation, and to the extent at the time not
prohibited by the Constitution of Tennessee [emphasis added], a
private act metropolitan hospital authority has, together with all
powers incidental thereto or necessary to discharge the powers
granted specifically herein, the following powers:
mean ing of an y constitutio nal or statuto ry prov ision wh atsoever.”
3
Finister v.H umbo ldt Gene ral Hop ital, Inc., No. 02 S01-97 04-CH -0003 8 (Tenn . May 2 6, 1998 ), squarely
holds that a Private Act hospital is an agency of the County which owns it. While this case arose in the context of
the Workers’ Compensation Law, T.C.A. § 50-6-106(5), we do not believe that a workers’ compensation setting
involves a definition of “State of Tennessee”,” counties thereof” and” municipal corporations” that is different from
the usual definition of these terms. The “City of Jackson” can only be defined in one manner, whether the
underly ing case in volves w orkers’ co mpen sation, tort, co ntract, mu nicipal cor poration law, or w hatever. F or this
reason, we are of the opinion that the holding of the Supreme Court in Finister is conclusiv e of the issue that a
Private Act hospital is an agency of the County, unless it is designated and created as an independent entity.
6
(1) To participate as a shareholder in a corporation, as
a joint venturer in a joint venture, as a general partner in a general
partnership, as a limited partner in a limited partnership or a general
partnership, as a member in a nonprofit corporation or as a member
of any other lawful form of business organization, which provides
hospital, medical or health care or is engaged in any activity
supporting or related to the exercise of any power granted to a
private act metropolitan hospital authority;
T.C.A. § 7-57-603 (incorporating T.C.A. § 7-57-502(b)(1)). Such hospitals may:
(10)(c) . . . acquire, manage, lease, purchase, sell, contract for
or otherwise participate solely or with others in the ownership or
operation of hospital, medical or health program properties and
facilities, and properties, facilities, and programs supporting or
relating thereto of any kind and nature whatsoever and in any form
of ownership whenever the board of trustees in its discretion shall
determine it is consistent with the purposes and policies of this part
or any private act applicable to it, and may exercise such powers
regardless of the competitive consequences thereof.
T.C.A. § 7-57-603 (incorporating T.C.A. § 7-57-502(c)).
By specific directive of the Legislature, both the 1995 and 1996 Private Act
Hospital Authority Acts contain special rights which are to be provided to Private
Act Hospitals to the extent at the time not prohibited by the Constitution of
Tennessee. The trial court held that the ventures engaged in by County Hospital
and the Alliance, which at first blush appear lawful, considering only sections
(b)(1) and (10)(c) of the 1996 Private Act Hospital Act, are in fact
unconstitutional, considering the constitutional limitation as recognized by the
Legislature in section (b) of the Act.
The court opined that County Hospital/Alliance ventures violated Article
II, § 29 of the Constitution, which provides:
The General Assembly shall have power to authorize the several
counties and incorporated towns in this State, to impose taxes for
County and Corporation purposes respectively, in such manner as
shall be prescribed by law; and all property shall be taxed according
to its value, upon the principles established in regard to State
taxation. But the credit of no County, City or Town shall be given
or loaned to or in aid of any person, company, association or
corporation, except upon an election to be first held by the
7
qualified voters of such county, city or town, and the assent of
three-fourths of the votes cast at said election. Nor shall any
county, city or town become a stockholder with others in any
company, association or corporation except upon a like election,
and the assent of the majority. [Emphasis added.]
Appellants contend that Article II, § 29 of the Constitution applies only to
“counties, cities or towns” and therefore does not require an election and the
assent of three-fourths or a majority of the voters before Private Act Hospitals
engage in business involving credit or loans with private individuals, corporations
or associations.
This issue was addressed recently by this court in a case to be published,
Eye Clinic, P.C. v. Jackson-Madison County General Hospital, No. 02A01-9707-
CH-00143 (Tenn. App. July 24, 1998, perm. app. denied January 11, 1999). Judge
Holly Kirby Lillard, writing for the court, applied the analysis recommended by
the Tennessee Attorney General. After describing the particular facts surrounding
the challenged businesses of West Tennessee Alliance,4 Judge Lillard considered
those ventures in light of the Private Act Hospital Authority Acts of 1995 and
1996, the Private Act which enabled Jackson-Madison County General Hospital,
and Article II, § 29.
Judge Lillard held that in the West Tennessee Alliance ventures, Article II,
§ 29 was not infringed because Jackson-Madison County General Hospital was
not vested by its enabling Private Act with the “power to levy taxes;” “power to
compel [the city of Jackson] to invoke its taxing power to make payments;” or
power to “obligate Madison County” to appropriate funds “to commence
[hospital] operations and pay operating deficits.” The Private Act which enabled
the hospital in that case merely provided that Madison County was “authorized to
appropriate funds” for the hospital; the county was not obligated to do so.
4
A partn ership sim ilar or identic al to the defe ndant A lliance in this ca se.
8
(Emphasis in original.) Therefore, private ventures between that hospital and
West Tennessee Alliance could obligate only hospital-generated or physician-
generated funds; no county taxes could be obligated by the private/public ventures
in contravention of Article II, section 29.
Applying the analysis in Eye Clinic v. Jackson-Madison County, we
compare the Private Acts authorizing Bradley County Memorial Hospital to
Madison County’s Private Acts as interpreted by Judge Lillard. Bradley County
Hospital was established under Chapter 846 of the Private Acts of 1947:
SECTION 1. BE IT ENACTED BY THE GENERAL ASSEMBLY
OF THE STATE OF TENNESSEE, that the County of Bradley . . .
upon the approval of a majority of the qualified voters of said County
. . . is hereby authorized to issue not to exceed $400,000.00 dollars
coupon bonds . . . for the purpose of acquiring a necessary site or
location for a hospital, and . . . necessary equipment . . . .
SECTION 2. BE IT FURTHER ENACTED, . . . Said bonds, when
issued in conformity with this Act, shall be direct general obligations
of Bradley County, for the payment of which, with interest, well and
truly to be made the full faith and credit and all the taxing power
of the County shall be irrevocably pledged . . . . (Emphasis
added.)
* * *
SECTION 8. BE IT FURTHER ENACTED, That it shall be the duty
of the Quarterly County Court of Bradley County annually to levy
and provide for the collection of a sufficient tax on all the taxable
property in the County, over and above all other taxes authorized and
limited by law, for the purpose of creating a sinking fund to pay the
interest on said bonds as the same falls due and to retire said bonds
as they mature.
Chapter 197 of Private Acts of 1953 provided for the operation of the hospital
under the Board of Directors and gave to that Board:
. . . full, absolute and complete authority and responsibility for the
operation, management, conduct and control of the business and
affairs of said hospital. Said authority and responsibility shall
include, but shall not be limited to, the establishment, promulgation
and enforcement of rules, regulations, and policies, the upkeep and
maintenance of all property, the administration of all financial
affairs, the maintenance of separate banking arrangements, the
execution of all contracts, the purchase of supplies and equipment,
9
and the employment, supervision, compensation and discharge of all
personnel including a Hospital Administrator.
1953 Tenn. Priv. Acts 197, § 1. These Acts were amended in 1992:
WHEREAS, the complexities of providing health care services in the
current environment necessitate a clarification and restatement of the
power and authority of the board of directors;
BE IT ENACTED . . .
SECTION 1. Section 13 of Chapter 846 of the Private Acts of 1947,
is amended by adding the following additional language:
The Board of Directors shall have the authority to acquire or lease
real property, equipment and other personal property related to the
business and affairs of the hospital, including medical office
buildings, parking structures, real property, buildings and other
facilities determined by the board to be appropriate for the operation
of the hospital and the provision of health care services. All
property acquired by the board shall be acquired subject to the
approval of the county legislative body and shall be held and
owned in the same manner as the original property conveyed for
establishment of the Bradley County Memorial Hospital under
Chapter 846 of the Private Acts of 1947, as subsequently
amended. (Emphasis added.)
* * *
SECTION 2. Section 14 of Chapter 846 of the Private Acts of 1947,
is amended by adding the following additional language:
Any revenues derived from operation of the hospital in excess of (1)
operating expenses and (2) amounts required for the retirement of
any bonds issued by Bradley County for the benefit of the hospital
shall be used for future hospital capital projects and the
provision of health care services to indigent persons. (Emphasis
added.)5
* * *
SECTION 4. This act shall have no effect unless it is approved by
a two-thirds (2/3) vote of the county legislative body of Bradley
County . . . .
1992 Tenn. Priv. Acts 206 § 1, 4.
5
To emphasize the distinction between the respective Private Acts: In Eye Clin ic, the Private Act me rely
authorized Madiso n Coun ty to appr opriate fu nds to co mme nce ope rations and pay op erating de ficits; it was not
obligated to do so. This factual and legal conclusion essentially controlled the disposition of the case. But in the
case at Bar, the Private Act, unlike the Madison County Private Act, clearly onerates and obligates Bradley County,
which pledges its full faith and credit and its taxing power to the payment of the bonds. No discretion is allowed.
10
IV
Because plaintiffs argue that County Hospital could not enter into a
partnership venture with the Alliance without the approval of Bradley County,
whereas defendants assert the independence of County Hospital from County
intervention, much evidence was introduced at trial with regard to the degree of
financial independence from Bradley County the County Hospital actually
maintained prior to and during the initiation of the soon-to-be-contested Alliance
projects. Numerous course-of-business documents in evidence effectively
describe the relationship:
Excerpt from Comprehensive Annual Financial Report, Bradley County,
Tennessee, For The Year Ended June 30, 1996.
Individual Component Unit Disclosures . . . Bradley County's Board
of Commissioners must approve all long-term debt issues of the
hospital. Bradley County would be responsible for this debt in
case of default by the hospital.
Excerpt from Pershing & Yoakley Independent Auditors' Financial Statement for
Bradley County Memorial Hospital, June 30, 1996.
Bradley County Memorial Hospital is a not-for-profit general short-
term health care provider which serves Cleveland, Tennessee and
surrounding areas. The Hospital is a component unit of Bradley
County, Tennessee, which is considered the primary government unit
. . . . The Hospital has a 51% membership in Ocoee Health Alliance
(the Alliance), a Tennessee mutual benefit corporation formed for the
purpose of providing a comprehensive provider network and
managed care system to businesses and others in the Hospital's
service area. The remaining 49% membership interest is comprised
of eligible physicians licensed to practice in the state of Tennessee
and with active staff membership on the medical staff of the
Hospital.6 During 1996 and 1995, the Hospital paid membership
dues of $51,946 and $54,392, respectively to the Alliance. In
addition, during 1996 the Hospital paid for certain expenses related
to the Alliance. Other current assets at June 30, 1996 include
$156,296 from the Alliance for payment of such expenses.
Letter from Mike Callaway, Attorney for County Hospital, to Bradley County
Executive, in response to her inquiry as to the Hospital obligating County funds,
July 18, 1996.
6
The Charter for the Alliance provides, in part: “Upon the dissolution of the Corporation, the Board of
Directors, after making provision for the payment of all of the liabilities of the Corporation, shall distribute all of the
assets of the C orporatio n to its mem bers . . . .”
11
. . . you will recall in 1995, in response to a request to the Attorney
General for an opinion regarding the authority of the Hospital's
Board of Directors to borrow funds from private sources, General
Burson opined " . . . Bradley County [is not] liable for a debt
incurred by the Bradley County Memorial Hospital Board of
Directors without the consent of the County Commission or the
County Executive." In any case, the Board and administration are
convinced Bradley Memorial has the financial capacity and resources
to perform its obligations under the Ground Lease Agreement, else
the Hospital would not have executed it.
Minutes of Bradley County Hospital Board of Directors, Oct. 28, 1996.
Jim Whitlock, Hospital Administrator, announced that his term as
President of the Tennessee Hospital Association would end at its
next meeting. He also reported that “originally Bradley Memorial
Hospital was a 51% owner in the joint venture with Ocoee Health
Alliance [April 1995]. Since the Private Act has been revised and no
longer requires the hospital to be 51% owner in joint ventures, Mr.
Whitlock requested that the Board authorize the Ocoee Health
Alliance bylaws to be changed to allow a 50-50 joint venture
ownership. Motion passed unanimously.”
SunTrust Bank - In-House Loan Offering Memorandum from Recommending
Loan Officer, for Loan of $8,500.00 to Bradley Building LLC, December 10,
1996.
The lease is structured so Bradley agrees to assume the debt or pay
it off in case of default . . . The strength of this deal is, obviously, the
Bradley lease. Bradley’s financial condition is very strong . . .
Among the strengths of the deal are: (1) Bradley’s overall financial
condition, Bradley County's A1 bond rating. . .
Letter from Jeffrey Ivey, Regional President, SunTrust Bank, to Michael
Callaway, Attorney for County Hospital, January 31, 1997:
I have enclosed for your review the documents that we will be asking
Bradley Memorial Hospital to execute in conjunction with the $8.5
million construction/permanent loan to Bradley Building, LLC . . .
The Credit Support Agreement was created because of the overall
reliance on the Hospital for the debt repayment. Our
underwriting of the loan request was based on the Hospital's
ability to make the required lease payments.
Letter from Michael Callaway, Attorney for County Hospital, February 24, 1997,
to David R. Evans, Attorney for SunTrust Bank: (in a different forum, taking a
position opposite from that which he takes as counsel for the Hospital in this
action)
. . . I have consulted with the Hospital and must advise [you that]
Bradley Memorial cannot approve that portion of Section 3 of the
document wherein it is required to accept possession of the building
prior to completion, and further is constitutionally prohibited
from executing and agreement that, in effect, guarantees
repayment of credit extended to a private party as is required of
12
the Hospital in Section 18 of the Agreement in the event of a default.
(Emphasis added.)
Excerpt from Letter of Cameron Sorenson, Southeast Venture Corporation
(purchaser of the project lease when SunTrust threatened to hold Hospital in
default), to Craig Taylor, Assistant Administrator, Bradley County Memorial
Hospital, March 6, 1997.
. . . after reviewing the potential reduction in rent if Galen (a private
physician practice) were to elect not to accept an ownership interest
in Bradley Building, LLC . . . as you and I discussed, it could create
some issues with respect to Fraud and Abuse statutes if the Hospital
were to redistribute Galen's forgone ownership to other physicians.
Affidavit of Jim Whitlock, August 27, 1997.
The plaintiffs have alleged “. . . Bradley County Memorial Hospital
has also unconstitutionally extended credit to Bradley Building,
LLC, in violation of Section 29 of Article II of the Tennessee
Constitution by guaranteeing the financing of Bradley Building's
medical office building through entering into a Master Lease . . .”
As a result of that allegation, the lender for the medical office
building, SunTrust Bank, has questioned the validity of the lease and,
therefore, its prospects of being repaid on its loan with the result it
has declined to fund the developer's most recent draw requests . . .
the Bank requested that the Hospital, in effect, "guarantee" the loan.
That request was rejected by the Hospital. Affiant is informed and
believes the same documents were also submitted to the County
Executive for execution on behalf of Bradley County, but were
likewise rejected.
Court-Ordered Trial Brief of Amicus Curiae James Webb, Attorney for Bradley
County, filed October 27, 1997.
The Court is no doubt aware that considerable controversy regarding
Bradley County Memorial Hospital and certain of its recent actions,
as well as to what its future status should be, exists among Bradley
County's officials and citizenry . . . . Bradley County Memorial
Hospital, unlike similar institutions which are owned by
"Authorities" or other independent corporate entities, has no
separate existence from Bradley County itself. This is quite
evident from the manner in which the Hospital's site was acquired in
1949 and the form in which its Board of Directors was established in
1947 . . . . “Bradley County Memorial Hospital” is without
independent existence and is but an alter ego of “Bradley County”
itself - - a fortunate circumstance, for otherwise the validity of some
22.5 million dollars of bonds issued by the County for the benefit of
the Hospital, along with another 2.5 million dollar bond issue now
in process, might well be called into question . . . . The “Master
Office Lease Agreement” which was assigned by Bradley Building,
LLC, to SunTrust Bank to secure the $8,000,000.00 loan for the
office building to be leased entirely by Bradley County Memorial
Hospital - - in truth, as previously noted, Bradley County itself - - is
a "hell or high water lease" as described by the attorneys who
prepared it for the lender . . . it amounts to no more than a barely
13
disguised absolute guaranty of repayment of SunTrust Bank's loan
to Bradley Building, LLC. This conclusion is made inevitable by the
content of certain documents indicating that the bank looked solely
to the credit-worthiness of Bradley County in evaluating the
prospects of repayment of the loan . . . Before the credit of Bradley
County (through its alter ego, “Bradley County Memorial Hospital”)
was loaned in aid of Bradley Building, LLC, the assent of three-
fourths of the qualified voters of Bradley County should have been
first secured through an election. Even Bradley County
Commission, itself, which is directly elected by the voters of the
County and directly answerable to all of its citizens, could not
have entered into the arrangement concerned in this case without
a referendum. (Emphasis added.)
Affidavit of Donna Hubbard, County Executive for Bradley County, October 29,
1997. The Documents attached hereto as Exhibit A to this
affidavit are true and exact copies of excerpts from the
official offering documents for the 1990 bond issue of
Bradley County, Tennessee in which Bradley County
issued $6,840,000.00 million in hospital revenue and
tax improvements bonds, Series 1990. These bonds
were bonds of Bradley County to which, insofar as they
pertain to Bradley County Memorial Hospital, pledged
the ad valorem taxing power of Bradley County to
the repayment of said bonds should the revenues of
Bradley County Memorial Hospital be insufficient to
make the payments required by the bonds . . . I have
reviewed and directed the review of Bradley County's
payment history of its bonds issued on behalf of
Bradley County Memorial Hospital. My review of
Bradley County's payments on those bonds establishes
that, prior to 1993, Bradley County itself made the
principal and interest payments on its bonds issued
on behalf of Bradley County Memorial Hospital.
Excerpt from Bradley County, Tennessee Series 1990 Bond.
SECURITY: The Bonds, as to both principal and interest, shall be
payable primarily from and secured by a pledge of the net revenues
to be derived from the operation of the Hospital subject to any prior
pledges of such revenues . . . . The Bonds will also be payable from
unlimited ad valorem taxes to be levied in all taxable property
within the corporate limits of the County. For the prompt
payment of principal of, premium, if any, and interest on the
Bonds, the full faith and credit of the County are irrevocably
pledged. The Bonds will not be obligations of the State of
Tennessee.
Considering the funding relationship between the county and the hospital
as shown by the Bradley County Private Acts, along with the overwhelming
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evidence that the County has been fully obligated for the hospital’s debts, we find
that the partnership ventures engaged in by County Hospital and the private
Alliance in this case amount to ultra vires acts under the Bradley County Private
Acts and an unconstitutional application of the Private Act Hospital Act of 1996,
under Art. II, § 29 of the Constitution of Tennessee. It is our duty to adopt a
construction which will sustain a statute and avoid constitutional conflict if any
reasonable construction exists that satisfies the requirements of the Constitution.
Davis-Kidd Booksellers, Inc. v. McWherter, 866 S.W.2d 520 (Tenn. 1993), citing
State v. Sliger, 846 S.W.2d 262, 263 (Tenn. 1993); State v. Lyons, 802 S.W.2d
590, 592 (Tenn. 1990); Shelby County Election Comm’n v. Turner, 755 S.W.2d
774, 777 (Tenn. 1988); Kirk v. State, 126 Tenn. 7, 10, 150 S.W.2d 83, 84 (Tenn.
1911). See also, Smith v. Schneider, No. 02A01-9608-CH-00193 (Tenn. App.
December 11, 1996); Barry v. Wilson County, 610 S.W.2d 441 (Tenn. App. 1980).
As stated, we find that the trial court correctly analyzed the facts and
circumstances and correctly determined that under those facts and circumstances,
County Hospital functions as an agent and arm of Bradley County. Further,
applying the constitutional limitations set out in Art. II, § 29, the court properly
enjoined County Hospital from participating in those or any other partnership
ventures with the private Alliance which obligate County funds without first
conducting a County referendum as constitutionally required.7 We find that
under these facts and circumstances, the constitutional requirement for prior
approval of the county by vote of its citizens exists irrespective of any rights
7
In so holding, we acknowledge the argument presented in the amicus brief of the Tennessee Hospital
Associatio n and H ospital Allian ce of Ten nessee, Inc .:
The key then is not whether the taxing power can be used a t all in suppo rt of the entity - as in the Eye
clinic case [in which] the Western Section found that the possibility that the county or city could tax
was insufficient - but whether taxing power has been use d in support of a particular project at issue.
While we a re not convinc ed of the soun dness of this argum ent, we need n ot decide, since the pro of is
abundant that in this case, Bradley County Hospital and the private physicians’ Alliance ignored the constitutional
restrictions and obligated County fun ds in mixed p rivate-public projects w ithout vote of Brad ley County c itizens.
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granted to Private Act Hospitals in general under T.C.A. § 7-57-601, et seq. That
part of the trial court’s judgment so ordering is affirmed.
V
Finally, the appellants argue that the terms of the Order of Final Judgment
and Permanent Injunction entered by the Chancellor are too broad and imprecise
and unduly restrict and interfere with County Hospital’s operation. Appellants
point out that the injunction “prohibits the hospital from being a member of
organizations such as the Tennessee Hospital Association, or the American
Hospital Association, or even the local Chamber of Commerce, since all of them,
though non-profit in nature, have members - probably even a majority of members
- who are “non-governmental entities.”
We must agree. We therefore narrow the injunction to provide that
Bradley County Memorial Hospital is hereby enjoined from entering into any
business transactions with private businesses or individuals which obligate County
Funds unless authority is granted by vote of the citizens of Bradley County in a
referendum, as required by law.
The judgment of the trial court is affirmed as modified. Costs are assessed
to the parties evenly.
_______________________________
William H. Inman, Senior Judge
CONCUR:
_______________________________
Houston M. Goddard, Presiding Judge
_______________________________
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Charles D. Susano, Jr., Judge
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