Encore Preakness, Inc. v. Chestnut Health and Rehabilitation Group, Inc.

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
ENCORE PREAKNESS, INC, f/k/a
SELECT MEDICAL REHABILITATION
SERVICES, INC.
Plaintiff,
V.
REHABILITATION GROUP, INC;
CH-BLUE HILLS, LLC;
CH-BRIGHAM, LLC; CH-COUNTRY
GARDENS, LLC; CH-CRAWFORD, LLC;
CH-CROSSINGS EAST, LLC;
CH-CROSSINGS WEST, LLC;
CH-DEN-MAR, LLC; CH-FRANKLIN,
LLC; CH-HANOVER, LLC; CH-OAK
HILL, LLC; CH-PARKWAY PAVILION, )
LLC; CH-QUINCY, LLC; CH-WALDEN, )
LLC; CH-WYOMISSING, LLC; KANE )
FINANCIAL SERVICES, LLC; AIRAMID )
HEALTH SERVICES, LLC f/k/a )
AIRAMID HEALTH MANAGEMENT, )
LLC; AIRAMID HEALTH CONSULTING,)
LLC; and DEBRA HOWE, )
)
)
)
)
)
)
)
)
§
CHESTNUT HEALTH AND )
)
)
)
)
)
)
)
)
Defendants.
C.A. N0. N17C-O3-1677 AML
Submitted: Septernber 25, 2017
Decided: November 1, 2017
MEMORANDUM OPINION
Upon Defendants’ Motion to Dismiss, Granted in part, Denied in part
Christopher J. Day, Esq. of DAY LAW GROUP, LLC, Wilmington, Delaware;
Attorneys for Encore Preakness, Inc.
Nancy S. Rappaport, Esq. and Brian A. Biggs, Esq. of DLA PIPER LLP,
Wilmington, Delaware, and Brooke Madonna, Esq. of SPECTOR GADON &
ROSEN, Philadelphia, Pennsylvania; Attorneys for Defendants KANE
FINANCIAL SERVICES, LLC; AIRAMID HEALTH SERVICES, LLC f/k/a
AIRAMID HEALTH MANAGEMENT, LLC AIRAMID HEALTH
CONSULTING, LLC; and DEBRA HOWE.
J. LeGROW
This action involves a dispute over unpaid invoices for therapy services the
plaintiff performed at various nursing facilities under a series of contracts with
those facilities. The plaintiff contends those invoices should have been paid by the
facilities or their unaffiliated management companies, which separately contracted
with facilities to perform financial and operational services. In other words, two
sets of contracts define the parties’ rights and obligations: (l) therapy service
contracts between the plaintiff and the facilities; and (2) financial services
contracts between the facilities and the defendant management companies. No
direct contractual relationship existed between the plaintiff and the defendant
management companies.
Shortly after being sold to a third party, the facilities defaulted on payments
owed to the plaintiff Although they allegedly collected insurance payments for
the plaintiffs services to facilities, the defendant management companies also have
not remitted that payment to the plaintiff The plaintiff therefore has sued not just
the facilities, but also the defendant management companies for breach of contract,
unjust enrichment, and tortious interference with contract. The management
companies contend those claims should be dismissed
This case explores fundamental contractual principles, particularly privity,
and the circumstances, if any, under which a person not a party to a contract may
pursue a claim arising from that contract. ln this case, the plaintiff"s claims against
the defendant management companies for unjust enrichment and breach of contract
are barred by settled principles of Delaware contract law. The plaintiff has, though
barely, alleged a reasonably conceivable claim that the management companies
tortiously interfered with the plaintiffs contract with the facilities. My reasoning
follows.
I. FACTUAL BACKGROUND
The following facts are drawn from the complaint and the documents it
incorporates, drawing all reasonable references in favor of the plaintiff Before
March 2016, Chestnut Group (“the Facilities”) operated long-term nursing care
facilities in Massachusetts, Connecticut, New Hampshire, Rhode Island, and
Pennsylvania through various Delaware limited liability companies. Kane
Financial Services, LLC, Airamid Health Services, LLC, and Airamid Health
Consulting, LLC (collectively, the “Moving Defendants”) provided management
and financial services to Facilities under several Financial Consulting Agreements
(“FCAs”) that predated plaintiff s contracts with the Facilities.1
Early in 2016, Facilities solicited Encore Preakness (“Plaintiff’) to provide
staffing services at Facilities’ care centers. On February l, 2016, Plaintiff and
Facilities entered into Therapy Services Agreements (“TSAs”) for fourteen of
Facilities’ care centers. Under the TSAs, Plaintiff supplied Facilities’ care centers
1 Compi. 1[ 39.
with speech, occupational, and physical therapy services. At the end of February,
Plaintiff billed Facilities $670,156.32. In March 2016, Facilities sold the fourteen
care centers to Northern Hills Senior Living Centers and Wachusett Health
Management.
After the sale, Facilities failed to pay Plaintiff for the February invoices.``
Plaintiff alleges Moving Defendants billed the applicable third party payors,
including Medicare and Medicaid, for the February invoices and received payment
from those payors. Plaintiff further alleges Facilities and Moving Defendants
wrongfully have Withheld payment to Plaintiff for the February invoices, despite
informal and formal demands for payment.
On March 3l, 2017, Plaintiff filed this action. In the complaint, Plaintiff
asserted claims against Facilities for breach of contract, unjust enrichment, and
conversion. Plaintiff also asserted claims against Moving Defendants for unjust
enrichment, breach of contract, tortious interference, conversion, and piercing the
corporate veil. Facilities made no response to the complaint and Plaintiff has
moved for default judgment against them.2 Moving Defendants moved to dismiss
the claims against them for failure to state a claim. In its opposition to the motion
to dismiss, Plaintiff withdrew its claims for conversion and veil piercing.
2 D.l. 60-75.
II. THE PARTIES’ CONTENTIONS
Plaintiff alleges Moving Defendants unjustly were enriched by withholding
Plaintiff s payment for the February invoices. Plaintiff argues it is not a party to
the FCAs and therefore is not barred from seeking relief through unjust enrichment
based on Moving Defendant’s performance under the FCAs. Moving Defendants
argue Plaintiff is barred from seeking relief through unjust enrichment because the
FCAs and TSAs govern the parties’ relationships and, although Plaintiff is not a
party to the FCAs, it cannot maintain an unjust enrichment claim regarding
services Moving Defendants allegedly were required by contract to perform.
Plaintiff also claims it is a third party beneficiary to the FCAS because the
FCAS provided that Moving Defendants would forward payment to Facilities’
vendors from third party payors, like Medicaid and Medicare. Plaintiff thus argues
it was an intended beneficiary of the FCAs and is entitled to seek relief for breach
of those contracts. Moving Defendants counter that Plaintiff is, at most, an
incidental beneficiary and therefore may not maintain an action for breach of
contract,
Finally, Plaintiff claims Moving Defendants tortiously interfered with
Plaintiffs contract with Facilities by withholding payment for the February
invoices without justification Moving Defendants counter that they were justified
in performing their contracts with Facilities. Moving Defendants deny paying
themselves at the expense of Facilities’ vendors, like Plaintiff
III. ANALYSIS
On a motion to dismiss, the Court must determine whether the “plaintiff may
recover under any reasonably conceivable set of circumstances susceptible of
proof.”3 “If [the plaintiff] may recover, the motion must be denied.”4 A court may
grant the motion if “it appears to a reasonable certainty that under no state of facts
which could be proved to support the claim asserted would plaintiff be entitled to
relief”5 When applying this standard, the Court will accept as true all non-
conclusory, well-pleaded allegations6 In addition, “a trial court must draw all
reasonable factual inferences in favor of the party opposing the motion.”7
A. Unjust enrichment is not available because the TSAS and FCAs
govern the parties’ relationships.
Moving Defendants argue Plaintiff cannot bring an unjust enrichment claim
when a contract governs the parties’ relationship. To plead a claim for unjust
3 Holmes v. D’Elia, 129 A.3d 881 (Del. 2015) (citing Spence v. Funk, 396 A.2d 967, 968 (Del.
1978)).
4 Deuley v. DynCorp Im"l, lnc., 2010 WL 704895, at *3 (Del. Super. Feb. 26, 2010) (citing
Parlin v. DynCorp Inl’l, lnc., 2009 WL 3636756, at *l (Del. Super. Sept. 30, 2009) (quoting
Spence, 396 A.2d at 968)), a]j"a’, 8 A.3d 1156 (Del. 2010).
5 Fish Eng’g Corp. v. Hutchinson, 162 A.2d 722, 724 (Del. 1960) (citing Danby v. Osteopathic
Hosp. Ass’n ofDel., 101 A.2d 308, 315 (Del. Ch. 1953), a]j"d, 104 A.2d 903 (Del. 1954)); Nero
v. Littleton, 1998 WL 229526, at *3 (Del. Ch. Apr. 30, 1998).
6 Pfejj‘er v. Redstone, 965 A.2d 676, 683 (Del. 2009).
7 Doe v. Cahl``ll, 884 A.2d 451, 458 (Del. 2005) (citing Ramunno v. Cawley, 705 A.2d 1029, 1034
(Del. 1998) (citing Solomon v. Pathe Commc’ns Corp., 672 A.2d 35, 38 (Del. 1996)) (other citations
omitted)).
enrichment, Plaintiff must allege: “(l) an enrichment, (2) an impoverishment, (3) a
relationship between the enrichment and impoverishment, (4) the absence of
justification, and (5) the absence of a remedy provided by law.”8 The Court of
Chancery has held “[a] claim for unjust enrichment is not available if there is a
contract that governs the relationship between the parties that gives rise to the
”9 Although there are three parties here, instead of two, a
unjust enrichment claim.
contract governs each relationship between the parties and the allegedly enriched
Facilities.
Plaintiff concedes it has a contractual relationship with Facilities through the
TSAs, but argues no contract governs its relationship with Moving Defendants.
This lack of privity between Plaintiff and Moving Defendants, however, does not
mean Plaintiff is free to pursue its unjust enrichment claim. Plaintiff s complaint
alleges the TSAs govern their relationship and incorporates the TSAS by
reference.10 In addition, the relationship between Facilities and Moving
Defendants is governed by the FCAs.ll The Court of Chancery has held:
It is a well-settled principle of Delaware law that a party
cannot recover under a theory of unjust enrichment if a
contract governs the relationship between the contesting
parties that gives rise to the unjust enrichment claim. As
an extension of that principle, . . . unjust enrichment
8 Nemec v. Shraa'er, 991 A.2d 1120, 1130 (Del. 2010).
9 Kuroda v. SP.]S Holdings, LLC, 971 A.2d 872, 891 (Del. Ch. 2009).
10 Compl. jj 34-37.
11 The existence of the FCAs, though not their express terms, is incorporated in the complaint.
6
cannot be used to circumvent basic contract principles
[recognizing] that a person not a party to [a] contract
cannot be held liable to it. Delaware courts consistently
have held that where a contract exists no person can be
sued for breach of contract who has not contracted either
in person or by an agent, and . . . that the doctrine of
unjust enrichment cannot be used to circumvent this
principle merely by substituting one person or debtor for
another.12
Under basic contractual principles, the Moving Defendants are not
susceptible to a breach of contract claim except one brought by Facilities or third
party beneficiaries to the contract, In addition, having entered into a binding
contract with Facilities, Plaintiff cannot also pursue a claim for unjust enrichment
relating to the subject matter of the contract. Plaintiff cannot, then, use clever
labeling in pleadings to subvert these principles by asserting an unjust enrichment
claim against the Moving Defendants. lt is Facilities, and not the Moving
Defendants, with whom Plaintiff contracted, and it therefore is Facilities to whom
Plaintiff must look for payment. “[T]he inability of a party to a contract to fulfill
an obligation thereunder cannot serve as a basis to conclude that other entities, who
are not party to the contract, are liable for that obligation.’713
12 Vichi v. Koninklijke Philips Electronics N.V., 62 A.3d 26, 58-59 (Del. Ch. 2012) (internal
q)uotation marks omitted).
1 m m 59.
Secondly, unjust enrichment only is available to the impoverished party if
the enriched party is the defendant. As the Court of Chancery held in United
Health Alliance,
[T]o recover under a theory of quasi contract, a plaintiff
must demonstrate that services were performed for the
defendant resulting in its unjust enrichment. It is not
enough that the defendant received a benefit from the
activities of the plaintiff; if the services were performed
at the behest of someone other than the defendants, the
plaintiff must look to that person for recovery.14
In United Health Alliance, United Medical contracted to provide software
for United Health Alliance (“UHA”).15 UHA used the software to provide
administrative and billing services for Bayhealth Hospitalists, LLC (“BHH”) and
Christiana Medical Group (“CMG”).16 During a negotiation dispute, United
Medical blocked UHA’s access to the software.17 As a result, BHH and CMG
suffered damages due to UHA’s inability to provide administrative and billing
services.18 BHH and CMG sought to recover damages resulting from the blockage
by United Medical through a theory of unjust enrichment.19 The Court of
Chancery found United Medical unjustly was enriched, but at the expense of the
14 United Health Alliance, LLC v. United Medical, LLC, 2014 WL 6488659, *8 (Del. Ch. Nov.
20, 2014) (quoting MetCap Sec. LLC v. Pearl Sem'or Care, Inc., 2007 WL 1498989, at *6 (Del.
Ch. May 16, 2007) (emphasis added).
15 Id. at *2.
16 Id_
17 Id_
18 Id
19 Id. at *8.
UHA, not BHH and CMG, because BHH and CMG made no direct payments to
United l\/ledical.20 Rather, BHH and CMG had to seek recovery from UHA, not
United Medical.21 Here, as in United Health Alliance, Plaintiff performed no
services for Moving Defendants. If Moving Defendants were enriched, it was at
the expense of Facilities, not Plaintiff Plaintiff therefore must look to Facilities
for recovery.
Plaintiff nonetheless argues it may plead unjust enrichment as an alternative
theory of recovery, notwithstanding the fact of the contracts. Although a party
may at times plead both breach of contract and unjust enrichment claims, those
instances are limited to cases where there is some question about the effectiveness
or application of the contract at issue.22 Plaintiff, however, has not alleged the
TSAS or FCAs are ineffective or non-operative. Because Plaintiff concedes the
contracts are operative and applicable to the parties’ obligations here, Plaintiff is
barred from raising an unjust enrichment claim, even as an alternative theory of
recovery. Accordingly, Moving Defendants’ motion to dismiss Count III is
granted.
20 Id
21 Id
22 see Rossdeurscher v. Viacom, lnc., 768 A.2d 8, 23 (Dei. 2001).
9
B. Plaintiff is not a third party beneficiary of the FCAs because no pre-
existing duty predated the contracts and benefitting Plaintiff Was not
a material purpose of the FCAs.
Moving Defendants argue Plaintiff cannot sue under breach of contract
because Plaintiff is neither a signatory to, nor a third party beneficiary of, the
FCAs. Under Delaware law, a non-party to a contract cannot sue for breach of
contract unless they are a third party beneficiary.23
1 To qualify as a third party beneficiary, (i) the contracting
parties must have intended that the third party beneficiary
benefit from the contract, (ii) the benefit must have been
intended as a gift or in satisfaction of a pre-existing
obligation to that person, and (iii) the intent to benefit the
third party must be a material part of the parties’ purpose
in entering into the contract,24
The Plaintiffs claim to third party beneficiary status fails because it does not
sufficiently plead facts satisfying the second and third elements. Rather, the
pleadings demonstrate Plaintiff cannot satisfy those elements.
As to the second element, Facilities and Moving Defendants did not intend
the FCAs to satisfy a pre-existing duty owed to Plaintiff The FCAs took effect on
March 19, 2014.25 The TSAs were executed early in 2016, nearly two years after
the FCAs took effect.26 Because Facilities entered into the TSAs after they
contracted with Moving Defendants, there is no reasonably conceivable set of facts
:: Madison legally Parmers 7, LLC v. Ag ISA, LLC, 2001 wL 406268 (Del. Ch. April 17, 2001).
Id.
25 Financial Consulting Agreement (Ex. l to Def.’s Mot. Dismiss).
26 Pls.’ Resp. Br. to Defs.’ Mot. Dismiss 2.
10
under which the fact finder could conclude that a pre-existing duty to Plaintiff
existed at the time the FCAs took effect. Furthermore, Plaintiff did not plead that
the FCAs were intended to satisfy a pre-existing duty to Plaintiff
In its opposition to the motion to dismiss, Plaintiff relies heavily on United
Health Alliance to support its claim of third party beneficiary status. In United
Health Alliance, UHA provided administrative billing services to plaintiffs.27
UHA later contracted with United Medical to obtain access to United Medical’s
software.28 The Court of Chancery reasoned that UHA’s subsequent contract with
United Medical would have provided the benefit of billing services to plaintiffs,
thereby satisfying UHA’s pre-existing obligation to plaintiffs29
Here, Plaintiffs reliance on United Health Alliance is inapposite because its
contract with Facilities did not pre-date Facilities’ contract with Moving
Defendants. In United Health Alliance, plaintiffs were the first party to contract
with the promisor (UHA). Here, Plaintiff was not the first party to contract with
the promisor (Facilities), therefore its contract could not have been a pre-existing
obligation.
As to the third element, no reasonable inference can be drawn from the
complaint that any benefits Plaintiff received from the FCAs were material to the
27 United Health Alliance, 2014 WL 6488659, *6.
28 Id
29 ld
ll
parties’ purpose in entering into the FCAs. Plaintiff does not allege that it was a
material part of the FCAs’ purpose, but instead claims it was a beneficiary because
Moving Defendants were responsible for paying Facilities’ vendors. Plaintiff thus
argues it was intended to benefit from the FCAs in the same way every other
vendor benefitted
The type of beneficiary Plaintiff describes, however, is not an intended
beneficiary, but rather an incidental one. Illustration 19 to Comment e to § 302 of
the Restatement (Second) of Contracts demonstrates the difference between an
incidental and intended beneficiary in a factually similar context.
A contracts to erect a building for C. B then contracts
with A to supply lumber needed for the building. C is an
incidental beneficiary of B’s promise, and B is an
incidental beneficiary of C’s promise to pay A for the
building.20
In the same way that B is an incidental beneficiary of C’s promise to pay A
for the building, Plaintiff is an incidental beneficiary of Moving Defendants’
promise to Facilities to forward payment from third party payors. As an incidental,
subsequent beneficiary, any benefit conferred on Plaintiff was not a material
purpose of the FCAs. For the foregoing reasons, I find Plaintiff fails to qualify as a
third party beneficiary. Accordingly, Defendant’s motion to dismiss Count IV is
granted.
30 REsTATEMENT (SECoND) oF CoNTRACTs § 302 (AM. LAW INsT. 2017).
12
C. Fairly read, the complaint alleges Moving Defendants tortiously
interfered With the TSAs.
The elements of tortious interference are “(1) a contract (2) about which the
defendant knew and (3) an intentional act that is a significant factor in causing the
breach of such contract (4) without justification (5) which causes injury.”3l
Moving Defendants argue performance of their contracts with Facilities is a
complete justification for any alleged tortious interference with Plaintiffs
contracts.32 That argument, however, assumes Moving Defendants performed
consistently with the terms of the FCAs. In other words, Moving Defendants
cannot rely on the contracts as justification if they acted inconsistently with those
contracts.33
Plaintiffs complaint alleges that Moving Defendants were required to remit
to Plaintiff payments received from third party vendors, but failed to do so.34
Accepting those allegations as true, the complaint, fairly read, alleges that Moving
Defendants interfered with Plaintiff s contracts with Facilities and did so in
violation of the Moving Defendants’ contracts with Facilities.35
31 Lipson v. Anesthesl``a Services, P.A., 790 A.2d 1261, 1284 (2001).
32 Def.’s Mot. Dismiss 27.
23 Nix v. Sawyer, 466 A.2d 407 (Del. super. 1983).
24 Compr 11 39.
3 3 The complaint alleges Airamid Health Services and Airamid Health Consulting were involved
in Facilities’ financial operations and also withheld monies Facilities owed to Plaintiff Compl. jj
46. The Moving Defendants argue only Kane provided financial management and, in Plaintiffs
answering brief, Plaintiff alleges the Airamid Defendants only managed the facilities’ operations,
while Kane was responsible for Facilities’ financial services. Pls.’ Answering Br. 3. If the facts
13
Moving Defendants rely on Kuroda v. SPJS Holdings, LLC36 to argue that
Plaintiff may not pursue a tortious interference claim. The decision in Kuroda,
however, is distinguishable from this case because the individual defendants
seeking dismissal in Kuroda were managing members and therefore agents of the
LLC defendants.37 The Court in Kuroda concluded a party to a contract could not
be sued for both breach of contract and tort, and the LLC’s agents also could not be
sued in tort absent allegations that they exceeded the scope of their authority. On
the other hand, Moving Defendants in this case were neither affiliated with, nor
agents of, the Facilities and, as a result, are susceptible to a claim for tortious
interference with the TSAs.
For the foregoing reasons, l conclude Plaintiff could recover under a
reasonably conceivable set of circumstances susceptible to proof Accordingly,
Moving Defendants’ motion to dismiss Count V is denied.
IV. CONCLUSION
For the foregoing reasons, Moving Defendants’ Motion to Dismiss is
GRANTED as to Counts III and IV and is DENIED as to Count V.
or contracts in issue later do not support the conclusion that the Airamid Defendants provided
financial services to Facilities, the Airamid Defendants may file for summary judgment. The
Court, however, cannot reconcile this factual dispute without looking outside the complaint,
which it may not do in the current procedural posture.
:: Kumda v. SPJS Holdings, LLC, 971 A.2d 872 (Dei. Ch. 2009).
Id.
14