Direct Supply, Inc. v. Speciality Hospitals of America, LLC

UNITED STATES DISTRICT COURT
DISTRICT OF COLUMBIA
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:
DIRECT SUPPLY, INC., : CASE NO. 1:11-CV-00683
:
Plaintiff, :
:
vs. : OPINION & ORDER
: [Resolving Docs. Nos 15, 41, 42 & 47]
SPECIALITY HOSPITALS OF :
AMERICA, LLC, et al., :
:
Defendants. :
:
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JAMES S. GWIN, UNITED STATES DISTRICT JUDGE:
In this contract dispute, all parties agree that Plaintiff Direct Supply is owed money, but
disagree as to who should pay. In 2007, Direct Supply entered into an agreement with Defendant
Speciality Hospitals of America (Specialty Hospital) to supply products and services to Specialty
Hospital’s United Medical Center (UMC) in the District of Columbia (the District). Two years later,
the District evicted Specialty Hospital and transferred ownership of UMC to a newly-created
governmental corporation, Defendant Not-For-Profit Hospital Corporation (NFP). Throughout this
ownership shuffle, Direct Supply remained unpaid. It now asks this Court to make Specialty
Hospital pay up, or in the alternative, to find against NFP on equitable grounds. For the following
reasons, this Court GRANTS Direct Supply’s motion for summary judgment on its breach of
contract claim against Specialty Hospital, and DENIES AS MOOT all of Direct Supply’s alternative
claims. Further, NFP’s motions to dismiss, for summary judgment, and to strike the affidavit of Jim
Rappaport are DENIED AS MOOT.
I. BACKGROUND
In November 2007, faced with a need to increase medical services east of Anacostia River,
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the District approved a public-private partnership with Specialty Hospital.1/ The District wanted
Specialty Hospital to run the Greater Southeast Community Hospital (GSCH), which primarily
served an underserved population.2/
The partnership agreement recognized that Specialty Hospital would purchase GSCH
pursuant to a previously approved asset purchase agreement.3/ Under the terms of the agreement,
Specialty Hospital was a general partner with 1% of the partnership interests, while the District was
a limited partner with 99% of the partnership interests.4/ The District agreed to contribute seventy-
nine million dollars in capital.5/ Importantly for our purposes, Specialty Hospital lacked the authority
to unilaterally “obligate, bind or commit [the District] in any way for any obligation.”6/ The
agreement made clear that the District would not be liable for “the debts, liabilities, contracts, or any
other obligations of the Partnership.”7/
Specialty Hospital maintained and operated GSCH under its wholly owned subsidiary,
Capitol Medical Center, LLC (CMC).8/ It began operation of GSCH under a new name, United
Medical Center. In August 2008 and February 2009, Specialty Hospital entered into two “Product
and Services Agreements” with Plaintiff Direct Supply. The total value of the goods and services
rendered was over six hundred thousand dollars.9/ The contract provided that Direct Supply could
1/
Doc. 24-1, at 2.
2/
Doc. 40-1, at 2.
3/
Id. at 36.
4/
Id. at 38.
5/
Id. at 37.
6/
Id. at 40, § 4.2(a)..
7/
Id. at 43, § 5.1.
8/
Doc. 24-1, at 2.
9/
See doc. 40-1, at 3; doc 15-3, at 38.
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charge Specialty Hospital “a one percent late charge per month for payments that are 30 or more days
past due,” and that Specialty Hospital agrees “to pay all costs of collection including all reasonable
attorney’s fees should [it] fail to pay any amounts due” Direct Supply.10/ The parties do not dispute
that Direct Supply performed its end of the agreement and delivered the good and services under the
contract. It is unclear from the record before this Court when Direct Supply performed the
services and delivered the goods under the contract. Specialty Hospital did, however, agree to pay
Direct Supply. On August 21, 2009, Specialty Hospital’s Regional Controller wrote Direct Supply:
This letter is to confirm our verbal agreement as discussed . . . concerning [Specialty
Hospital’s] outstanding accounts receivable balance with Direct Supply, Inc.
[Specialty Hospital] is agreeing to pay Direct Supply $25,000 bi-weekly beginning
Friday, August 21, 2009, and will continue to pay this amount until the company has
closed on its line of credit from [its] lending institution in September.11/
On June 4, 2010, that same controller forwarded a draft settlement agreement and release to
Specialty Hospital. The draft agreement provided that Specialty Hospital would pay Direct Supply
a total of $507,431.96.12/ On July 30, 2010, Specialty Hospital wired $50,190.84 to Direct Supply.13/
Enter, stage-right, the District. According to Specialty Hospital’s head, DC approached
Specialty Hospital to place geriatric mental health patients at UMC’s skilled nursing facility.14/
Specialty Hospital refused. Specialty Hospital now says the District’s subsequent acts were to solve
the geriatric mental health overpopulation problem at another hospital, St. Elizabeth’s.15/
On July 7, 2010, the District Council passed D.C. Act 18-476, titled the “Not-for-Profit
10/
See doc. 40-1, at 21; doc. 15-3, at 40.
11/
Doc. 15-3, at 44.
12/
Id. at 46-47.
13/
Id. at 52.
14/
Doc. 40-1, at 29.
15/
Id.
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Hospital Corporation Establishment Emergency Amendment Act of 2010.”16/ The act established
NFP “as an instrumentality of the District government . . . to provide community-centered health
care east of the Anacostia River . . . .”17/ NFP’s property would be established via a mayoral decree
that would “transfer all of the assets, including cash, accounts receivable, and real and personal
property, of United Medical Center to” NFP.18/ Seeking to stop this transfer, Specialty Hospital gave
the District notice that it planned to pursue legal remedies. Specialty Hospital filed suit against the
District, and in late 2011, the partes settled the case.19/ Throughout this period, Direct Supply
remained unpaid.
In April 2011, Direct Supply filed the instant complaint against both Specialty Hospital and
NFP, seeking $462,055.17, and fees, costs, and interest.20/ Direct Supply sought relief on its breach
of contract claim against Specialty Hospital, or in the alternative, relief on its quantum meruit claim
against Specialty Hospital. Were this Court to find against it on its claims against Specialty Hospital,
Direct Supply also asked for similar relief against NFP. This Court, in an earlier order, dismissed
Direct Supply’s contract claim against NFP, but allowed all other claims to proceed.21/ Direct Supply
and NFP now move for summary judgment on all claims, and NFP also moves to dismiss for lack
of subject-matter jurisdiction.22/
16/
Doc. 41-2, at 5.
17/
Id.
18/
Id. at 11.
19/
CMC Realty v. Fenty, Civ. Action 10-004571-B (D.C. Sup. Ct. 2011).
20/
Doc. 1.
21/
Doc. 27.
22/
The parties engaged in mediation in late 2012, to no avail. The motions in this case became ripe for
adjudication in January 2013.
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II. LAW & ANALYSIS
For the reasons stated below, this Court finds that there exists a valid contract between
Specialty Hospital and Direct Supply, and that Specialty Hospital’s defenses to its obligation to pay
for the goods and services that it has received. Therefore, this Court need not reach the sovereign
immunity issues raised in NFP’s motion to dismiss.
A. Direct Supply’s Motion for Summary Judgment Against Specialty Hospital
Plaintiff Direct Supply’s motion for summary judgment first asks that judgment be entered
against Defendant Specialty Hospital on the breach of contract claims. In the alternative, it asks for
judgment against Defendant Specialty Hospital on the claim for unjust enrichment.
1. Breach of contract claim against Specialty Hospital
Specialty Hospital agrees that Direct Supply provided the good and services to UMC as
required by the underlying contract and invoices.23/ Rather, Specialty Hospital says that it does not
have to pay for the goods and services it received because of the affirmative defenses of frustration
of purpose and impossibility to excuse its performance.
“Under the frustration of purpose defense, the promissor’s performance is excused because
changed conditions have rendered the performance bargained from the promisee worthless, not
because the promissor’s performance has become different or impracticable.”24/ “In the typical
scenario, the party is perfectly capable of performing, but the party’s reason for doing so no longer
exists.”25/
23/
Doc. 40, at 9.
24/
St. Paul Mercury Ins. Co. v. Capitol Sprinkler Inspection, Inc., 573 F. Supp. 2d 152, 172 (D.D.C. 2008)
(quoting Island Devel. Corp. v. Dist. of Columbia, 933 A.2d 340, 349 (D.C. 2007)).
25/
Island Devel. Corp., 933 A.2d at 349 (quoting 14 James P. Nehf, Corbin on Contracts: Impossibility § 77.1,
at 243 (Joseph M. Perillo ed., 2001) (alterations omitted).
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No such situation exists here. Frustration of purpose traditionally occurs before the
promisee’s performance.26/ The affirmative defense envisions an event occurring after the contract’s
offer and acceptance, but before the parties have done what they contracted to do. Had the District
seized UMC prior to Direct Supply’s delivery of the contract goods, this defense might hold water.
But Direct Supply provided the products and services in March 2009—over a year before the District
passed D.C. Act 18-476 and created NFP.27/ Specialty Hospital enjoyed the benefit of the contract
for a significant period of time, affirmatively told Direct Supply that it was liable on the contract,
and now seeks to escape its corresponding duty. To adopt Specialty Hospital’s understanding of the
doctrine of frustration would incent promissors to withhold payment indefinitely. Why was the one
year that Specialty Hospital had the goods not enough time for it to perform? What if it had not paid
for five years? Ten? Although thoroughly briefed by Plaintiff Direct Supply, Defendant Specialty
Hospital never produces a compelling response.
Indeed, a close reading of Specialty Hospital’s briefing reveals that it never actually makes
a frustration argument. To be sure, Specialty Hospital lists the elements of a frustration defense by
citing the Restatement (Second) of Contracts § 265. But when it applies this case to the elements
of the defense, it does so under an impossibility framework.28/ But even if Specialty Hospital had
undertaken a frustration analysis, the result would be the same. As stated in Island, “[t]he object [of
the contract] must be so completely the basis of the contract that, as both parties understand, without
26/
See Restatement (Second) of Contracts § 265, illustration 1 (“A and B make a contract under which B is to
pay A $1,000 and is to have the use of A's window on January 10 to view a parade that has been scheduled for that day.
Because of the illness of an important official, the parade is cancelled. B refuses to use the window or pay the $1,000.
B's duty to pay $1,000 is discharged, and B is not liable to A for breach of contract.”).
27/
Doc. 15-2, at 4.
28/
Doc. 40, at 13.
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it the transaction would make little sense.”29/ But in the instant case, the transaction did make sense,
at least for a year. Further, Specialty Hospital does not provide a single case—from this jurisdiction
or elsewhere—to lend support to its theory that a frustration of purpose defense can be asserted after
a party’s performance.
Finally, Specialty Hospital cannot assert the doctrine of impossibility. Under impossibility,
a promissor is excused from performance “because a supervening event changes the nature of the
promissor’s performance so that it has become commercially impracticable.”30/ On page 13 of its
opposition to Direct Supply’s motion for summary judgment, Specialty Hospital admits that its
performance has not become impracticable. Specifically, in explaining why it undertakes a
frustration analysis (that is actually an impossibility analysis), Specialty Hospital writes that:
[Specialty Hospital’s] performance is excused because changed conditions
(DC/NFP’s seizure of the UMC [facility]) have rendered the performance bargained
from the promisee (Direct Supply’s goods) worthless, not because the promissor’s
performance has become different or impracticable (Specialty Hospital’s payment
is still possible).31/
(emphasis added). But then, on page 14, Specialty Hospital says that its performance is
commercially impracticable.32/
Regardless, even if Specialty Hospital had not waived the argument, it would still fail. The
doctrine of impossibility relieves a promissor of its obligation to perform in only the most extreme
circumstances. “The party asserting the defense of impossibility bears the burden of proving a real
29/
Island Devel. Corp., 933 A.2d at 350.
30/
Id. at 349.
31/
Doc. 40, at 13.
32/
Id. at 14.
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impossibility and not a mere inconvenience or unexpected difficulty.”33/ Generally, the defense is
successful only “where performance is objectively impossible—that is, the contract is incapable of
performance by anyone—rather than instances where the party subjectively claims the inability to
perform.”34/ Specialty Hospital has made no such showing here.
2. Direct Supply’s quantum meruit claim against Specialty Hospital
This Court need not reach Direct Supply’s alternative quantum meruit claim against Specialty
Hospital, as Specialty Hospital’s contractual obligation to pay for the goods and services it has
received has not been excused. Regardless, the existence of an express contract between the parties
generally precludes the assertion of a quantum meruit claim.35/
B. Direct Supply’s Motion for Summary Judgment Against NFP
Were this Court to find against Direct Supply on its claims against Specialty Hospital, Direct
Supply asks for judgment against NFP or the quantum meruit claim. Because all parties agree that
Direct Supply and Specialty Hospital executed a valid contract, and because Direct Supply’s
affirmative defenses are unavailing, this Court need not reach this issue.
III. CONCLUSION
For the foregoing reasons, this Court GRANTS Direct Supply’s motion for summary
judgment on its breach of contract claim against Specialty Hospital, and DENIES AS MOOT all of
Direct Supply’s alternative claims. Further, NFP’s motions to dismiss, for summary judgment, and
to strike the affidavit of Jim Rappaport are DENIED AS MOOT. Specialty Hospital is hereby
33/
East Capitol View Comm. Devel. Corp. v. Robinson, 941 A.2d 1036, 1040 (D.C. 2008) (quotation omitted).
34/
Id.35/
See Plesha v. Ferguson, 725 F. Supp. 2d 106, 112 (D.D.C. 2010) (“Because both promissory estoppel and
unjust enrichment presuppose that an express, enforceable contract is absent, District of Columbia courts generally
prohibit litigants from asserting these claims when there is an express contract that governs the parties' conduct.”).
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ordered to pay $462,055.17 to Direct Supply, along with interest, late charges, costs, and attorney’s
fees.
IT IS SO ORDERED.
Dated: March 27, 2013 s/ James S. Gwin
JAMES S. GWIN
UNITED STATES DISTRICT JUDGE
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