Citrus County Hospital Board, etc. v. Citrus Memorial Health Foundation, Inc., etc.

Supreme Court of Florida
____________
No. SC13-411
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CITRUS COUNTY HOSPITAL BOARD, etc., et al.,
Appellants,
vs.
CITRUS MEMORIAL HEALTH FOUNDATION, INC., etc.,
Appellee.
[November 13, 2014]
POLSTON, J.
This case is before the Court on appeal from the First District Court of
Appeal’s decision in Citrus Memorial Health Foundation, Inc. v. Citrus County
Hospital Board, 108 So. 3d 675 (Fla. 1st DCA 2013), which held that the special
law enacted at chapter 2011-256, Laws of Florida, impairs the Foundation’s
contracts in violation of article I, section 10 of the Florida Constitution.1 For the
reasons below, we affirm the First District’s decision.
1. We have jurisdiction. See art. V, § 3(b)(1), Fla. Const.
I. BACKGROUND
In 1949, the Florida Legislature created the Citrus County Hospital Board,
an independent special district charged with operating a public hospital in Citrus
County, Florida. In 1990, the Hospital Board utilized section 155.40, Florida
Statutes, which was enacted in 1982 and authorizes county hospital districts to
lease their hospitals to specified Florida business entities so that public hospitals
may more effectively compete with private hospitals.
Specifically, through two contracts—a lease and an agreement for hospital
care—the Hospital Board turned the hospital’s operation and management over to
the Citrus Memorial Health Foundation, Inc., a Florida not-for-profit corporation
incorporated in 1987 under chapter 617, Florida Statutes. Transferring control of
the hospital to the Foundation through these agreements, which are effective until
2033, allows the hospital to avoid participating in the State retirement program and
to engage in joint ventures previously not available to it because of the Hospital
Board’s public status. The Foundation has likewise benefited from its relationship
with the Hospital Board, by for example, using its status as the operator of a public
hospital and its accountability to the Hospital Board to obtain sovereign immunity
and recalculate its Medicaid rates.
Though the Hospital Board and Foundation are legally separate entities, the
Hospital Board has been involved in various ways with the Foundation’s activities.
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For example, the Hospital Board facilitated the Foundation’s incorporation, and the
Foundation’s original articles of incorporation listed among its purposes “[t]o
operate exclusively for the benefit of and to carry out the purposes of but not in
any way as an agency of the Citrus County Hospital Board.” Further, for many
years after the Foundation’s incorporation, including in 1990 when the lease and
agreement for hospital care were executed, the Hospital Board, through its five
trustees, held the majority position on the Foundation’s governing board.
Significantly, however, the Foundation later amended its articles of incorporation
to eliminate the Hospital Board’s majority position.
Thereafter, disputes arose between the parties. In 2011, the Legislature
became involved and enacted chapter 2011-256, Laws of Florida, based on its
determinations that “meaningful oversight by the hospital board is necessitated in
light of the [Foundation’s] status as an instrumentality of the hospital district,” that
“restoration of meaningful hospital board representation on the board of the
[Foundation] and implementation of appropriate accountability and oversight by
the hospital board are necessitated in order to ensure the sovereign immunity status
of the [Foundation] as an instrumentality of the hospital district,” and that “the
ability of the hospital board to continue to act in the public interest on behalf of the
taxpayers of Citrus County requires mechanisms to ensure adherence to the
hospital board’s public responsibilities.” Ch. 2011-256, Laws of Fla.
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In pertinent part, section 3 of the special law reenacts the Hospital Board’s
charter. Section 16 of the charter includes fifteen subsections that, for the first
time, specifically address the Hospital Board’s relationship with the Foundation (or
any future lessee) and that are “in addition to the requirements for any [] lease set
forth in section 155.40.” Ch. 2011-256, § 3(16), at 59-60, Laws of Fla. For
example, these provisions (i) require the Hospital Board to approve the
Foundation’s articles of incorporation and bylaws (including those currently in
effect)—section 16(2); (ii) require the Foundation to amend its articles of
incorporation so that the Hospital Board’s trustees constitute a majority of its
voting directors—section 16(5); (iii) require the Hospital Board to approve all
Foundation directors, including current directors—section 16(6); (iv) require the
Hospital Board to approve certain borrowing, indebtedness, policies, budgets,
capital projects, and expenditures—sections 16(8) and (10); (v) require the
Hospital Board to approve the Foundation’s annual and operating capital budget—
section 16(9); (vi) allow the Hospital Board to order, at the Foundation’s expense,
an independent audit of the Foundation’s fiscal management of the hospital—
section 16(11); and (vii) require that any dispute between the Foundation and the
Hospital Board be subject to the statutory procedures applicable to governmental
disputes—section 16(15).
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The Foundation filed suit against the Hospital Board and the State in circuit
court challenging the special law and seeking, among other things, a declaratory
judgment that section 16 of the Hospital Board’s charter as enacted in section 3 of
the special law applies to impair its articles of incorporation, lease, and agreement
for hospital care in violation of article I, section 10 of the Florida Constitution.
After dismissing the State as a party, the circuit court granted summary judgment
for the Hospital Board based on its conclusions that the Foundation is prohibited
from challenging the constitutionality of the special law because it is a public or
quasi-public corporation and that the special law does not impair the Foundation’s
contracts.
On appeal, the First District reversed, holding that, as applied to the
Foundation, the special law “significantly alters the parties’ contractual rights and
is an unconstitutional impairment of their contracts so as to be prohibited by
[a]rticle I, [s]ection 10.” Citrus Mem’l, 108 So. 3d at 676.
II. ANALYSIS
The dispositive issues before this Court are whether the contract clause of
the Florida Constitution applies to the Foundation’s contracts and, if so, whether,
as applied, the special law unconstitutionally impairs the Foundation’s contracts.
As explained below, we resolve both of these issues in the Foundation’s favor.
A. The Contract Clause Applies to the Foundation’s Contracts
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As a threshold matter, both the Hospital Board and the State argue that the
Foundation should not be heard to complain about the special law’s alleged
impairment of its contracts because it is a public or quasi-public corporation and
therefore not entitled to protection under the contract clause. We disagree.2
Article I, section 10 of the Florida Constitution provides that “[n]o . . . law
impairing the obligation of contracts shall be passed.” As part of the Florida
Constitution’s Declaration of Rights, this right belongs to the people, including
corporations, as against the government. See Traylor v. State, 596 So. 2d 957, 963
(Fla. 1992) (explaining that “[e]ach right” in the Declaration of Rights is “a distinct
freedom guaranteed to each Floridian against government intrusion” and “operates
in favor of the individual, against [the] government”); see also State Farm Mut.
Auto. Ins. Co. v. Gant, 478 So. 2d 25, 26 (Fla. 1985) (applying the contract clause
to a corporation).
Although Florida law is clear that corporations, like individuals, are entitled
to protection under the contract clause, this Court has not addressed whether the
contract clause protects a corporation that has contracted with a hospital district
under section 155.40, Florida Statutes, to operate and manage a public hospital. In
other contexts not involving the contract clause, Florida courts have precluded
2. We review whether the contract clause applies to the Foundation’s
contracts de novo. See Dep’t of Educ. v. Lewis, 416 So. 2d 455, 458 (Fla. 1982).
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State agencies and local governments from challenging the constitutionality of
certain legislation. For example, in Department of Education v. Lewis, this Court
held that “State officers and agencies must presume legislation affecting their
duties to be valid, and do not have standing to initiate litigation for the purpose of
determining otherwise.” 416 So. 2d 455, 458 (Fla. 1982) (addressing a challenge
to an appropriations law under article III, section 12 of the Florida Constitution);
see also Fla. Dep’t of Agric. & Consumer Servs. v. Miami-Dade Cnty., 790 So. 2d
555, 558 (Fla. 3d DCA 2001) (relying on Lewis to hold that county and city lacked
standing under article I, section 12 of the Florida Constitution to challenge the
constitutionality of the statutory citrus eradication program).
Further, in O’Malley v. Florida Insurance Guaranty Ass’n, 257 So. 2d 9, 11
(Fla. 1971), this Court examined whether a legislatively-created corporation was
public or private for purposes of an alleged violation of article III, section
11(a)(12), which prohibits a special law or general law of local application
pertaining to or granting any privilege to a private corporation. In so doing, we
distinguished private and public corporations as follows:
Private corporations are those which have no official duties or
concern with the affairs of government, are voluntarily organized and
are not bound to perform any act solely for government benefit, but
the primary object of which is the personal emolument of its
stockholders.
Examples of public corporations in Florida are: the rural
electrical cooperatives, city housing authorities, The Inter-American
Cultural and Trade Center Authority, the Soil and Water Conservation
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Districts, and the Jacksonville Expressway Authority. Their business
ordinarily is stipulated by the Legislature to fill a public need without
private profit to any organizers or stockholders. Their function is to
promote the public welfare and often they implement governmental
regulations within the state’s police power. In a word, they are
organized for the benefit of the public.
O’Malley, 257 So. 2d at 11 (citations omitted); see also Forbes Pioneer Boat Line
v. Bd. of Com’rs of Everglades Drainage Dist., 82 So. 346 (Fla. 1919) (discussing
public, quasi-public, and private corporations in determining that the legislatively-
created board of commissioners of the drainage district was a “public quasi
corporation” that had only the authority delegated to it by law).
However, our decision in O’Malley did not address a corporation’s standing
to allege a contract clause violation. Further, unlike the legislatively-created
corporation at issue in O’Malley, the Legislature did not create the Foundation, and
the Foundation is not a State agency or local government. Instead, the Foundation
was incorporated as a not-for-profit corporation under chapter 617, Florida
Statutes, just as any other Florida not-for-profit corporation would be, for the
specific purpose of taking control of the public hospital—by contract—as
authorized by section 155.40. Moreover, while there is no indication that the
corporation in O’Malley was created to avoid obligations applicable to public
entities, even though the Foundation operates a hospital for the public’s benefit,
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spends public money,3 and uses public property in the process, it “was used by the
[Hospital] Board for the express purpose of avoiding statutory and constitutional
limitations which would pertain to the [Hospital] Board as a public entity.” Citrus
Mem’l, 108 So. 3d at 677. Given that the very purpose of section 155.40 is to
contractually transfer control of public hospitals to entities like the Foundation, we
refuse to apply O’Malley in a way that would effectively render the contracts used
to accomplish this purpose meaningless. See Pan-Am Tobacco Corp. v. Dep’t of
Corr., 471 So. 2d 4, 5 (Fla. 1984) (recognizing that “[w]here the [L]egislature has,
by general law, authorized entities of the state to enter into contract or to undertake
those activities which, as a matter of practicality, require entering into contract, the
[L]egislature has clearly intended that such contracts be valid and binding on both
parties”).
We also refuse to rely on representations about the Foundation’s status that
the parties have made in different contexts over the years to impute the Hospital
Board’s status onto the Foundation. The parties’ representations simply do not
alter the fact that the Foundation is not a creature of the Legislature and is a
3. Under the agreement for hospital care, the Foundation must submit its
annual operating and capital budgets to the Hospital Board so that the Hospital
Board may determine, “in its discretion,” the amount of tax funds necessary for the
Foundation to meet its obligation to provide hospital services for Citrus County
residents and appropriate that amount to the Foundation. From 2006-2010, on
average, tax funds received from the Hospital Board comprised less than 5% per
year of the Foundation’s total revenues and did not exceed 6.3% in any year.
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distinct legal entity from the Hospital Board. Nor do the facts that the Hospital
Board was involved with the Foundation’s incorporation, previously controlled its
board, and is its sole member somehow remove the Foundation’s contracts from
the protection afforded by the contract clause.
Accordingly, we hold that the contract clause applies to the Foundation’s
contracts.
B. The Special Law Unconstitutionally Impairs the Foundation’s Contracts
The Hospital Board and the State next argue that, even if the contract clause
applies, the First District erred by concluding that the special law
unconstitutionally impairs the Foundation’s articles of incorporation, lease, and
agreement for hospital care. We disagree and hold that, as applied to these
contracts, section 16 of the Hospital Board’s charter as enacted in section 3 of the
special law is unconstitutional.4
The contract clause prohibits any “law impairing the obligation of
contracts.” Art. I, § 10, Fla. Const. We have defined impairment
as meaning to make worse; to diminish in quantity, value, excellency,
or strength; to lessen in power; to weaken. Whatever legislation
lessens the efficacy of the means of enforcement of the obligation is
an impairment. Also if it tends to postpone or retard the enforcement
of the contract, it is an impairment.
4. We apply a de novo standard of review. See Scott v. Williams, 107 So.
3d 379, 384 (Fla. 2013).
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State ex rel. Woman’s Benefit Ass’n v. Port of Palm Beach Dist., 164 So. 851, 856
(Fla. 1935) (emphasis omitted). And we have “generally prohibited all forms of
contract impairment.” State, Dep’t of Transp. v. Edward M. Chadbourne, Inc., 382
So. 2d 293, 297 (Fla. 1980); see also Dewberry v. Auto-Owners Ins. Co., 363 So.
2d 1077, 1080 (Fla. 1978) (“Any conduct on the part of the [L]egislature that
detracts in any way from the value of the contract is inhibited by the Constitution.”
(quoting Pinellas Cnty. v. Banks, 19 So. 2d 1, 3 (Fla. 1944))).
Section 16 of the Hospital Board’s charter as enacted in section 3 of the
special law meets our definition of impairment. It eliminates the Foundation’s
ability to operate and manage the hospital as it has contracted to do by turning the
Foundation’s governance over to the Hospital Board in disregard of the
Foundation’s status as a separate legal entity.5 See generally Marion Mortg. Co. v.
State, 145 So. 222, 223 (Fla. 1932) (agreeing that a corporate charter “is a contract
between the state and [the corporation], which contract cannot be impaired by the
Legislature”). And it also obligates the Foundation to comply with public
5. For example, the special law requires the Hospital Board to approve the
Foundation’s articles of incorporation and bylaws (including those currently in
effect); requires the Foundation to amend its articles of incorporation so that the
Hospital Board’s trustees constitute a majority of the Foundation’s voting
directors; and requires the Hospital Board to approve all Foundation directors,
including current directors. See ch. 2011-256, §§ 3(16)(2), (5), (6), at 59, Laws of
Fla.
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accountability and financial responsibility measures that are mentioned nowhere in
the parties’ agreements and that are “in addition to the requirements for any []
lease set forth in section 155.40.”6 Ch. 2011-256, § 3(16), at 59, Laws of Fla. In
other words, as the First District cogently stated, the special law “is a rewrite of the
parties’ contractual agreements and the imposition of further obligations on the
Foundation, while permitting the [Hospital] Board’s privatization of hospital
management functions as [authorized by section 155.40].” Citrus Mem’l, 108 So.
3d at 678.
In light of this impairment, we hold that section 16 of the Hospital Board’s
charter as enacted in section 3 of the special law is unconstitutional as applied to
the Foundation’s contracts. See Cohn v. Grand Condo. Ass’n, Inc., 62 So. 3d
1120, 1122 (Fla. 2011) (affirming the district court’s decision that a state statute
was unconstitutional “because [it] impairs the obligation of contract as applied to
[the plaintiff]”); see also Dewberry, 363 So. 2d at 1080 (“It is axiomatic that
6. The special law requires the Hospital Board to approve the Foundation’s
annual and operating capital budget as well as certain borrowing, indebtedness,
policies, budgets, capital projects, and expenditures of the Foundation; allows the
Hospital Board to order, at the Foundation’s expense, an independent audit of the
Foundation’s fiscal management of the hospital; and requires that any dispute
between the Foundation and the Hospital Board be subject to the statutory
procedures applicable to governmental disputes. Id. §§ 3(16)(8)-(11), (15), at 59-
60.
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subsequent legislation which diminishes the value of a contract is repugnant to our
Constitution.”).
III. CONCLUSION
For the foregoing reasons, we affirm the First District’s decision.
It is so ordered.
LABARGA, C.J., and PARIENTE, LEWIS, QUINCE, and PERRY, JJ., concur.
CANADY, J., dissents with an opinion.
NOT FINAL UNTIL TIME EXPIRES TO FILE REHEARING MOTION, AND
IF FILED, DETERMINED.
CANADY, J., dissenting.
Because I conclude that Citrus Memorial Health Foundation, Inc., is a public
corporation that is subject to legislative control, I dissent. I would quash the
decision of the First District and adopt the analysis contained in Judge Ray’s well-
reasoned dissent.
The Citrus County Hospital Board has aptly described “[t]he overarching
question in this case” as “whether an entity created by a public body for the sole
purpose of conducting a public function involving public property and funded by
public money can unilaterally remove itself from legislative oversight of the use of
public money and the operation of the public function.” Citrus Cnty. Hosp. Bd.,
Inc. v. Citrus Mem’l Health Found., Inc., No. SC13-411, Initial Brief of Appellant
at 1 (Fla. Apr. 29, 2013). That question should be answered in the negative. The
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majority’s decision to the contrary departs from the understanding of the
constitutional prohibition on laws impairing the obligation of contracts that has
been established for nearly two centuries. The result is that the Legislature is
ousted from its proper role of ensuring that the governmental activities of the
Hospital Board and the Foundation are conducted in accord with the public
interest.
In Trustees of Dartmouth College v. Woodward, 17 U.S. 518 (1819), the
Supreme Court recognized that the prohibition on state legislation impairing the
obligation of contracts does not proscribe legislative interference with contractual
rights of public corporations. In deciding that Dartmouth College was a private
charity whose corporate charter was subject to the protection of the Contract
Clause, the court relied on a distinction between public and private corporations.
In his opinion for the court, Chief Justice Marshall acknowledged that “the framers
of the [C]onstitution did not intend to restrain the States in the regulation of their
civil institutions, adopted for internal government.” Id. at 629. Accordingly, Chief
Justice Marshall reasoned that
[i]f the act of incorporation [of Dartmouth College] be a grant of
political power, if it create a civil institution, to be employed in the
administration of the government, or if the funds of the college be
public property, . . . the subject is one in which the legislature of the
state may act according to its own judgment, unrestrained by any
limitation of its power imposed by the [C]onstitution of the United
States.
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Id. at 629-30.
Chief Justice Marshall went on, however, to conclude that Dartmouth was
not such a “civil institution” but was instead “a private eleemosynary institution,”
the funds of which “consisted entirely of private donations.” Id. at 632-41. Chief
Justice Marshall explained that the grant by government of a “charter of
incorporation” did not determine the “character of the institution.” Id. at 638. It
thus could not be concluded that Dartmouth had the character of a civil institution
simply on the ground that it had been granted a royal corporate charter. “The
incorporating act” did not “change the character of a private eleemosynary
institution” into a civil institution. Id. at 638-39. In elucidating this conclusion,
Chief Justice Marshall observed:
The character of civil institutions does not grow out of their
incorporation, but out of the manner in which they are formed, and the
objects for which they are created. The right to change them is not
founded on their being incorporated, but on their being the
instruments of government, created for its purposes. The same
institutions, created for the same objects, though not incorporated,
would be public institutions, and, of course, be controllable by the
legislature.
Id. at 638 (emphasis added).
Chief Justice Marshall thus accepted the view that “laws concerning civil
institutions . . . must change with circumstances, and be modified by ordinary
legislation” and that such laws “deeply concern the public.” Id. at 627. “[T]o
preserve good government, the public judgment must control” with respect to such
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laws. Id. If the Contract Clause were allowed to encroach into the realm of a
state’s regulation of its civil institutions, “the clause would be an unprofitable and
vexatious interference with the internal concerns of a State.” Id. at 628. No
conceivable reason supports interpreting Florida’s Contract Clause differently.
And the logic of Chief Justice Marshall’s reasoning regarding the Contract Clause
defeats any due process claim against a state by a public corporation of the state.
Here, the Foundation is a civil institution—that is, a public corporation—and
therefore is “controllable by the legislature.” Its status as a public corporation, an
“instrument[] of government,” is made manifest by “the manner in which [it was]
formed, and the objects for which [it was] created.” Woodward, 17 U.S. at 638.
Judge Ray described the undeniable realities of the Foundation’s existence:
[The Foundation] was not voluntarily created by private citizens for
their own benefit or for the benefit of any private interests whatsoever.
As the Foundation has admitted, the Hospital Board created the
Foundation for the purpose of fulfilling the Hospital Board’s public
function of providing hospital services in Citrus County, and it still
exists for that sole purpose. The Foundation has no shareholders, and
the Hospital Board is its only member. As the Hospital Board has
aptly described the relationship, the Hospital Board essentially
restructured itself when it executed the Lease Agreement and
Agreement for Hospital Care. This situation was not one where a
special taxing district competitively bid the outsourcing of a public
function and entered into [an] “arm’s length” bilateral contract with a
private company.
Citrus Mem’l Health Found., Inc., 108 So. 3d at 680.
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It is of no significance that the Foundation was organized by the Hospital
Board as a not-for-profit corporation under chapter 617, Florida Statutes, and not
established directly by an act of the Legislature. There is simply no authority to
support the conclusion that a not-for-profit corporation formed under chapter 617
will—simply because of that formality—be legally deemed not to be a public
corporation. As Judge Ray further explained: “[W]hether a corporation is created
directly by the State, or by an arm of the State, seems to be a distinction without a
difference when, as here, the sole and exclusive purpose of the corporation is to
carry out a public function for the benefit of the public.” Id. The Foundation may
have been structured to avoid certain requirements that might otherwise have fallen
on the Hospital Board as a governmental entity, and the Foundation may have
received some charitable contributions. But those circumstances do not alter the
essential character of the Foundation. The creation of the Foundation by the
Hospital Board for a governmental purpose points to the inescapable conclusion
that—for purposes of the Contract Clause—the Foundation is a public corporation.
The opposite conclusion reached by the First District and the majority exalts
incidental circumstances over the essential character of the Foundation.
At bottom, as Judge Ray recognized, there is no private property interest or
right that is impaired by the legislation affecting the Foundation that the majority
declares unconstitutional. As Chief Justice Marshall stated, the Contract Clause
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was designed “to restrain the legislature in [the] future from violating the right to
property” and therefore concerns “contracts respecting property, under which some
individual could claim a right to something beneficial to himself.” Woodward, 17
U.S. at 628. No one can make such a claim here. Any person involved with the
Foundation was chargeable with knowledge that the Foundation was established as
a public corporation to carry out a governmental purpose, as distinct from a private
not-for-profit corporation established to carry out private charitable activities.
Whatever private interest any person—including those who made charitable
contributions—might assert regarding the relationship between the Hospital Board
and the Foundation is negated by the public character of the Foundation.
In this context, the majority’s application of the Contract Clause does not
protect any private contract right. Instead, it results in “an unprofitable and
vexatious interference with the internal concerns of a State.” Id. at 628.
An Appeal from the District Court of Appeal – Statutory or Constitutional
Invalidity
First District - Case No. 1D12-858
(Leon County)
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Barry Scott Richard of Greenberg Traurig, P.A., Tallahassee, Florida, and William
John Grant of the Law Office of Grant & Dozier, Inverness, Florida, on behalf of
the Citrus County Hospital Board; and Pamela Jo Bondi, Attorney General, Enoch
Jonathan Whitney, Assistant Attorney General, Diane G. DeWolf, Deputy Solicitor
General, and Rachel Erin Nordby, Deputy Solicitor General, Tallahassee, Florida,
on behalf of the State of Florida,
for Appellants
Peter D. Webster and Christine Davis Graves of Carlton Fields, P.A., Tallahassee,
Florida, and Sylvia H. Walbolt and Gary L. Sasso of Carlton Fields, Tampa,
Florida,
for Appellee
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