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Health Care Foundation of Greater Kansas City v. HM Acquisition, LLC

Court of Appeals of Missouri, Western District, Fourth Division

January 17, 2017

HEALTH CARE FOUNDATION OF GREATER KANSAS CITY, Respondent,
v.
HM ACQUISITION, LLC and HCA, INC., Appellants.

         Appeal from the Circuit Court of Jackson County, Missouri The Honorable John M. Torrence, Judge

          Before: Mark D. Pfeiffer, Chief Judge, and Thomas H. Newton and Cynthia L. Martin, Judges

          Mark D Pfeiffer, Chief Judge

         HM Acquisition, LLC ("HM Acquisition") and HCA, Inc. ("HCA") appeal from the judgment entered by the Circuit Court of Jackson County, Missouri ("trial court"), after a bench trial, in favor of Health Care Foundation of Greater Kansas City ("Foundation") on the Foundation's petition for declaratory judgment, accounting, and specific performance. The trial court's judgment is affirmed in part, reversed in part, and modified.

         Factual and Procedural Background

         Health Midwest, a Missouri nonprofit public benefit corporation, owned a number of hospitals in the greater Kansas City metropolitan area. In 2002, because of Health Midwest's lack of access to capital necessary to maintain, expand, and renovate the facilities it owned, its board decided to explore the sale of its hospitals and other assets.

         Health Midwest contacted HCA, a publicly-traded corporation with headquarters in Nashville, Tennessee, and the largest for-profit health care provider hospital chain in the nation, and solicited it to buy the assets of Health Midwest. This led to negotiations between the parties that were ultimately successful. Later that year, HCA formed HM Acquisition, a Missouri limited liability company, for the purpose of acquiring certain assets and liabilities of Health Midwest.

         Health Midwest and HM Acquisition executed an Asset Purchase Agreement ("APA") on November 22, 2002. Under the terms of the APA, HCA agreed to serve as guarantor of HM Acquisition's performance and obligations. Under Section 2.1 of the APA, Health Midwest agreed to sell to HM Acquisition substantially all of its tangible and intangible assets, principally nine hospitals in the Kansas City metropolitan area, for the purchase price of $1.125 billion dollars. Under Article 5 of the APA, HM Acquisition agreed to certain post-closing operating covenants. Section 5.1 states:

5.1 Capital Improvements.[1] Within two (2) years following the Closing Date, [HM Acquisition] will either spend or commit to spend at least Three Hundred Million Dollars ($300, 000, 000) in capital expenditures. In each of the three (3) years subsequent to the two-year period following the Closing Date, [HM Acquisition] will either spend or commit to spend at least Fifty Million Dollars ($50, 000, 000) in capital expenditures. Any amounts spent in any period that are in excess of the required amount for such period will be credited against amounts required to be spent or committed to be spent in subsequent periods. Moreover, any Permitted Capital Expenditures and any capital expenditures made by Seller or System Entities which are approved by [HM Acquisition] shall be credited against [HM Acquisition's] obligations under this Section 5.1. The amount of capitalized expenditures made under this Section 5.1 will be determined in accordance with [HM Acquisition's] then applicable accounting policies and procedures. The construction of new facilities by [HM Acquisition] will not materially detract from the required maintenance and necessary improvement of existing Facilities.

         HM Acquisition also agreed in Section 5.14 to provide Health Midwest an annual report "setting forth in reasonable detail how it complied with the operating covenants, including a specific accounting of capital expenditures [HM Acquisition] agree[d] to make in accordance with Section 5.1."

         Section 5.15 spelled out Health Midwest's remedies should HM Acquisition breach or not perform any of the Article 5 operating covenants:

Breach or nonperformance of any operating covenant set forth in this Article 5 will entitle [Health Midwest] to the indemnification rights set forth in Article 13 and/or any and all other remedies at law or equity (including monetary damages suffered by the community as a result of such breach or nonperformance, specific performance, and restraining order, injunction or other equitable relief). In addition, if the annual report shows that, for any applicable period, [HM Acquisition] has not spent or committed to spend dollars on capital expenditures during such period at least equal to the amount [HM Acquisition] agreed to provide in Section 5.1, then [HM Acquisition] will immediately pay such shortfall to [Health Midwest]. Moreover, if [HM Acquisition] has not spent $450, 000, 000 on capital expenditures (and amounts paid to [Health Midwest] pursuant to this Section 5.15) within a reasonable period of time after the fifth anniversary of the Closing . . ., then [HM Acquisition] will immediately pay such shortfall to [Health Midwest].

         Pursuant to Section 14.18 of the APA, HCA, as guarantor, "unconditionally and absolutely guarantee[d] the prompt performance and observation of [HM Acquisition] for each and every obligation, covenant[, ] and agreement of [HM Acquisition] arising out of, connected with, or related to this [APA] or any ancillary documents hereto[.]"

         Four days after the execution of the APA, Health Midwest filed lawsuits against the Attorneys General of Missouri and Kansas, challenging their attempts to exercise authority over the disposition of the proceeds of the sale of Health Midwest's public benefit assets. Section 8.5 of the APA provided that Health Midwest and HM Acquisition would cooperate to secure all necessary government approvals to consummate the transaction anticipated by the APA, including from the Missouri and Kansas Attorneys General. Though the APA obligated Health Midwest to "take the lead" in any such efforts, Health Midwest was obligated to "include [HM Acquisition] in any such discussions." In the same section of the APA, the parties agreed to "prepare any document or other material which may be required by [the Missouri and Kansas Attorneys General] as a predicate to or result of the transactions contemplated" by the APA. Accordingly, Health Midwest[2] entered into a Settlement Agreement on July 23, 2003, with the Missouri Attorney General, wherein Health Midwest agreed to create the Foundation, [3] a Missouri nonprofit public benefit corporation, to receive eighty percent of the net proceeds of the sale and eighty percent of the net assets retained by Health Midwest upon its future dissolution. The Settlement Agreement provided that the Missouri Attorney General "specifically reserve[d] his right . . . to monitor HCA's[4] compliance with its obligations under the APA and to seek to enforce those obligations." The Settlement Agreement attached as an exhibit an agreement to be later executed ("Joinder Agreement") wherein foundations created in Missouri and Kansas[5] to receive shares of the proceeds paid to Health Midwest would become parties to the APA with HM Acquisition's consent. By virtue of the Settlement Agreement, the transactions contemplated in the APA were authorized to proceed.[6]

         On February 19, 2004, the Joinder Agreement anticipated by the Settlement Agreement was executed by representatives of Reach Healthcare, the Foundation, Health Midwest, and HM Acquisition. The Joinder Agreement identified Reach Healthcare and the Foundation as Health Midwest's "Transferees" as contemplated by the APA. In the Joinder Agreement, the "Transferees" agreed "to be bound by the provisions in the [APA] to the same extent as [Health Midwest]." Numbered paragraph 1 of the Joinder Agreement provided that Reach Healthcare and the Foundation each:

(i) agrees to be made a party to the [APA] solely for purposes of assuming the obligations of [Health Midwest] thereunder and (ii) assumes and consents to be bound by all post-closing terms and conditions of the [APA] as [Health Midwest] . . . to the same extent as, and jointly and severally obligated with, [Health Midwest] . . .; provided that the foregoing agreement, assumption and consent by [the Foundation] is not intended to, and does not, constitute an assignment of rights of [Health Midwest] under the [APA] pursuant to Section 14.3 of the [APA] and [HM Acquisition] does not hereby consent to any such assignment.

         The parties further agreed that under no circumstances would Health Midwest be liquidated or dissolved until five years after the closing date of the APA. Numbered paragraph 4 of the Joinder Agreement stated:

Each party shall be entitled to specific performance of any of the provisions of this Joinder or the [APA] in addition to any other equitable remedies to which such party may otherwise be entitled as a result of a failure by the other party to comply with its obligations hereunder or thereunder.

         On October 2, 2009, the Foundation filed a four-count petition against HM Acquisition and HCA.[7] In Counts II, III, and IV, the Foundation sought to enforce certain covenants in Article 5 of the APA: for an accounting related to HCA's required reporting and compliance with the APA (Count II); for a declaration regarding HM Acquisition and HCA's compliance with Section 5.1 and 5.14 of the APA (Count III); and to order specific performance of the covenants in the APA (Count IV). The primary dispute related to the interpretation of Section 5.1 of the APA, and whether HCA was entitled to take credit for the construction of new facilities in Independence and Lee's Summit in order to satisfy the $450 million capital expenditure requirements of Section 5.1.

         On January 24, 2013, after two-plus weeks of evidentiary hearings, the trial court issued a ruling denominating 571 paragraphs (and 140 pages) of findings of fact and conclusions of law ("FOF"), in which the trial court concluded that HM Acquisition (as the purchaser under the APA) and HCA (as the guarantor under the APA) (collectively referred to hereafter as "HCA") had breached the APA in that: (i) HCA was not entitled to take credit for the construction of new facilities in order to satisfy the APA's Section 5.1 requirements, which related only to capital expenditures for "existing Facilities" purchased by HCA; and (ii) HCA improperly attempted to take credit for "commitments" to spend claimed to have been made by HCA in alleged compliance with Section 5.1 of the APA. The trial court preliminarily awarded the Foundation a total of $161, 908, 504, representing the trial court's calculation of the lowest shortfall sum due and owing under the APA; awarded the Foundation attorney's fees and costs; and ordered the parties to participate in a court-supervised accounting with a special master to determine whether the Foundation was owed additional shortfall amounts under Section 5.1 of the APA.

         During the accounting phase with the special master, additional shortfalls totaling $77, 536, 321 were stipulated to exist.[8] On December 9, 2015, the trial court issued its Judgment, awarding the Foundation $239, 444, 825 (total shortfall amount), plus $167, 105, 206 (prejudgment interest), plus $27, 175, 562 in attorney's fees, costs, and prejudgment interest on the fees and costs, for a total judgment of $433, 725, 593, with interest continuing to accrue thereon at nine percent per annum, compounded annually, from and after November 19, 2015.

         HCA timely appealed.

         Standard of Review

         In a bench-tried case, the judgment of the trial court will be sustained by the appellate court "unless there is no substantial evidence to support it, unless it is against the weight of the evidence, unless it erroneously declares the law, or unless it erroneously applies the law." Murphy v. Carron, 536 S.W.2d 30, 32 (Mo. banc 1976). We defer to the trial court's determination of the weight to be given the evidence and the credibility of the witnesses. Brasher v. Craig, 483 S.W.3d 446, 450 (Mo. App. W.D. 2016). The trial court is free to believe some, all, or none of the testimony of any witness. Id. We review the evidence in a bench-tried case "in a light most favorable to the judgment, accept it as true, and disregard any contradictory evidence." Id. (internal quotation omitted). In reviewing a court-tried case, "[t]he appellate court is primarily concerned with the correctness of the trial court's result, not the route taken by the trial court to reach that result." Business Men's Assurance Co. of Am. v. Graham, 984 S.W.2d 501, 506 (Mo. banc 1999). "Thus, the judgment will be affirmed if cognizable under any theory, regardless of whether the reasons advanced by the trial court are wrong or not sufficient." Id.

         Analysis Point I - Standing

         In HCA's first point, it asserts that the Foundation lacked standing to bring this suit. Standing is a question of law that we review de novo. Schweich v. Nixon, 408 S.W.3d 769, 773 (Mo. banc 2013). To have standing, a plaintiff must have a legally protectable interest at stake arising from threatened or actual injury. Id. "A plaintiff has a legally protectable interest if the plaintiff is directly and adversely affected by the action in question . . . ." Byrne & Jones Enters., Inc. v. Monroe City R-1 Sch. Dist., 493 S.W.3d 847, 851 (Mo. banc 2016).

         The gist of HCA's argument is that the Foundation, via the Joinder Agreement, acquired Health Midwest's "obligations" under the APA but not its "rights, " and thus had no standing to utilize remedial measures to compel HCA's compliance with Section 5.1 of the APA.

         To address HCA's standing argument, we must necessarily interpret the terms of the Joinder Agreement and APA. Interpretation of a contract is a question of law, which we review de novo. Newco Atlas, Inc. v. Park Range Constr., Inc., 272 S.W.3d 886, 891 (Mo. App. W.D. 2008). "The cardinal principle of contract interpretation is to ascertain the intention of the parties and to give effect to that intent." Dunn Indus. Grp., Inc. v. City of Sugar Creek, 112 S.W.3d 421, 428 (Mo. banc 2003). We read the terms of a contract as a whole to determine the intention of the parties, and we give the terms their plain, ordinary, and usual meaning. Id. "Additionally, each term of a contract is construed to avoid rendering other terms meaningless." Id. "A construction that attributes a reasonable meaning to all the provisions of the agreement is preferred to one that leaves some of the provisions without function or sense." Id.

         The APA was the definitive acquisition agreement between the seller, Health Midwest, and the buyer, HCA. Section 14.3 of the APA provides that, subject to any contrary provisions, the APA "inure[s] to the benefit of and [is] binding upon the parties hereto and their respective legal representatives, successors and assigns." Section 14.3 of the APA further provides that "any transferee of funds of [Health Midwest] . . . shall become obligated hereunder in the same manner as [Health Midwest] and shall execute any agreements or other documentation to effect such obligation as [HCA] may reasonably request."

         The APA anticipated the need to secure various governmental approvals as a condition to closing, and particularly the approvals of the Missouri and Kansas Attorneys General. Section 8.5 obligated the parties to the APA to cooperate to secure any required approvals, and in executing documents required to do so. The Settlement Agreement between Health Midwest and the Missouri Attorney General constituted just such a document, and though not itself signed by HCA, was nonetheless negotiated with HCA's involvement, as found by the Judgment. In keeping with this fact, the Settlement Agreement attached an agreed form of the Joinder Agreement-a document which required HM Acquisition's signature-to evidence the Foundation's right to receive funds otherwise payable to Health Midwest pursuant to the APA and HCA's consent to same, as required by Section 14.3 of the APA.

         In numbered paragraph 1 of the Joinder Agreement, the Foundation:

hereby (i) agrees to be made a party to the [APA] solely for the purposes of assuming the obligations of [Health Midwest] thereunder and (ii) assumes and consents to be bound by all the post-closing terms and conditions of the [APA] . . . to the same extent as, and jointly and severally obligated with, [Health Midwest] (including without limitation the obligations set forth in Section 12.6 and Article 13); provided that the foregoing agreement, assumption and consent by [the Foundation] is not intended to, and does not, constitute an assignment of rights of [Health Midwest] under the [APA] . . . and [HCA] does not hereby consent to any such assignment. . . . Without limiting the generality of the foregoing, [the Foundation] agrees to comply with the provisions of Section 14.3 of the Asset Purchase Agreement . . . .

HCA argues that, pursuant to this provision of the Joinder Agreement, none of Health Midwest's "rights" under the APA were assigned to the Foundation by the Joinder Agreement, leaving the Foundation with no remedy for HCA's argued failure to pay Section 5.1 shortfalls. Though the Joinder Agreement does state that none of Health Midwest's "rights" under the APA have been assigned, at the same time, the Joinder Agreement incongruently recognizes that the Foundation had acquired the right to receive funds payable to Health Midwest pursuant to the APA. And the Joinder Agreement incongruently affords "each party" (including the Foundation) the right to enforce by specific performance violated provisions of either the Joinder Agreement or the APA.[9] To conclude, HCA's argument-that the Foundation assumed no enforceable rights by virtue of the Joinder Agreement-would render meaningless HCA's consent to the Foundation's status as the lawful transferee of Health Midwest's right to receive APA proceeds, and would render meaningless the Foundation's expressed right to resort to the Joinder Agreement's "remedies" provision.

         This seeming conflict can be reconciled without rendering any provision of the Joinder Agreement meaningless. See Dunn Indus. Grp., Inc., 112 S.W.3d at 428. HCA consented to the Foundation's lawful status as a "transferee" of funds otherwise payable to Health Midwest. HCA consented to the Foundation's "assum[ption] . . . [of] all post-closing terms and conditions of the [APA]" as if the Foundation were Health Midwest. And HCA agreed that the Foundation could specifically perform any violated provision of the APA impacting its rights as a transferee. The post-closing terms and conditions set forth in Section 5.1 of the APA, and the right described in Section 5.15 to insist on payment of a Section 5.1 shortfall, plainly inured to the benefit of the Foundation as HCA's transferee, and plainly fall within the scope of the Joinder Agreement's remedy provision. Though the Foundation did not "assume, " per se, HCA's rights under the APA, it did not need to, as the Joinder Agreement afforded the Foundation the right to protect its lawful status as the transferee of funds otherwise payable to Health Midwest pursuant to the APA.

         In summary, by executing the Joinder Agreement (which was agreed to and signed by HCA), the Foundation necessarily acquired a consented-to right to receive Health Midwest's proceeds from the APA, necessarily assumed Health Midwest's obligations under the APA, and necessarily acquired the remedial authority to enforce either the Joinder Agreement or the APA to the extent appropriate to preserve its rights. Pursuant to the contractually created remedial authority, the Foundation was entitled to sue HCA to enforce the terms of the APA, including the Post-Closing Operating Covenants, relating to its rights as a transferee of funds otherwise payable to Health Midwest pursuant to the APA-which included the right to enforce the shortfall provisions expressed in Section 5.15 of the APA. The Foundation established its standing by showing that it has a "legally protectable interest at stake in the outcome of the litigation" so as to be "directly and adversely affected" by its outcome. Byrne & Jones Enters., Inc. v. Monroe City R-1 Sch. Dist., 493 S.W.3d 847, 851 (Mo. banc 2016) (internal quotation omitted). "In contract actions, a party has a legally protectable interest at stake if it has a right to enforce the contract as a party thereto . . . ." Gen. Motors Acceptance Corp. v. Windsor Grp., Inc., 2 S.W.3d 836, 839 (Mo. App. E.D. 1999).

         Point I is denied.[10]

         Point II - Necessary Party

         In HCA's second point, it asserts that the trial court erred in denying its motion to join Health Midwest as a necessary party under Rule 52.04(a). HCA contends that Health Midwest is a necessary party because: (i) it was a signatory to the APA; and (ii) if the Foundation has standing, Health Midwest is a co-obligee with a shared right to enforce HCA's Section 5.1 performance.

         "We review the trial court's denial of relief under this Rule [52.04(a)] only to determine if it is supported by substantial evidence, is against the weight of the evidence, or it erroneously declares or misapplies the law." Williams Pipeline Co. v. Allison & Alexander, Inc., 80 S.W.3d 829, 837 (Mo. App. W.D. 2002). HCA asserted as a defense in its answer that the Foundation's petition must be dismissed in whole or in part because the Foundation did not join Health Midwest as a party under Rule 52.04. In its motion to dismiss filed along with its answer, HCA raised the Foundation's failure to join Health Midwest as a necessary party and moved that Health Midwest be joined as a cross-claim defendant. There are two problems with HCA's procedure. First, "[t]he remedy for failure to join a necessary party is by motion to add a necessary party rather than by a motion to dismiss." Edmunds v. Sigma Chapter of Alpha Kappa, 87 S.W.3d 21, 27 (Mo. App. W.D. 2002). Second, Rule 55.32(g) provides that "[p]arties other than those made parties to the original action may be made parties to a counterclaim or cross-claim in accordance with the provisions of Rules 52.04 and 52.05." "This language assumes 'a counterclaim or cross-claim' exists separate from the addition of the new party-it does not provide that non-parties may be added to assert a new cross-claim." State ex rel. Cohen McNeile & Pappas, P.C. v. Blankenship, 375 S.W.3d 233, 236 (Mo. App. S.D. 2012). Here, HCA claimed Health Midwest was a necessary party but did not file a Rule 52.04 motion. Even if we concluded that HCA's motion to dismiss constituted a motion to add a necessary party, HCA's argument still fails.

         Rule 52.04(a) requires the joinder of a person if:

(1) in the person's absence complete relief cannot be accorded among those already parties, or (2) the person claims an interest relating to the subject of the action and is so situated that the disposition of the action in the person's absence may: (i) as a practical matter impair or impede the person's ability to protect that interest or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of the claimed interest. If the person has not been joined, the court shall order that the person be made a party. If the person should join as a plaintiff but refuses to do so, the person may be made a defendant.

         "A necessary person is one who is so vitally interested in the subject matter that a valid judgment cannot be effectively rendered without their presence." Williams Pipeline Co., 80 S.W.3d at 837. "An 'interest' exists within the meaning of the Rule where there is a direct claim upon the subject matter of the action that the person will either gain or lose by direct operation of the judgment." Id. (internal quotation omitted).

         Health Midwest created the Foundation to receive a percentage of the net proceeds of the sale of Health Midwest's assets to HCA pursuant to the terms of the APA. The parties to the transaction anticipated that Health Midwest would be liquidated or dissolved approximately five to six years after the closing date of the APA. In the Joinder Agreement, the Foundation agreed "to be bound by the provisions in the [APA] to the same extent as [Health Midwest]." In numbered paragraph 1 of the Joinder Agreement, the Foundation agreed to be made a "transferee" party to the APA for the purpose of assuming Health Midwest's obligations thereunder and assumed and consented to be bound by all post-closing terms and conditions of the APA jointly and severally with Health Midwest. Numbered paragraph 4 of the Joinder Agreement entitled each party "to specific performance of any of the provisions of this Joinder or the [APA] in addition to any other equitable remedies to which such party may otherwise be entitled as a result of a failure by the other party to comply with its obligations hereunder or thereunder, " including the obligations assumed by HCA under the Post-Closing Operating Covenants.

         "In determining which parties are required to be before the court, consideration is given . . . to the nature of relief requested and the interests to be adjudicated." Dolphin Capital Corp. v. Schroeder, 247 S.W.3d 93, 97 (Mo. App. W.D. 2008) (internal quotation omitted). In Counts II, III, and IV of the Foundation's petition against HCA, the Foundation sought to enforce certain covenants in Article 5 of the APA and requested an accounting related to HCA's required reporting and compliance with the APA (Count II), a declaration regarding HCA's compliance with Section 5.1 and 5.14 of the APA (Count III), and specific performance of HCA's covenants in the APA (Count IV).

         HCA contends that Health Midwest must be joined as a necessary party because it is a signatory to and co-obligee under the APA. We disagree. The Foundation petitioned for equitable relief. The rule that an action upon a joint contract cannot be maintained by one joint obligee without the joinder of co-obligees has long been recognized in Missouri as applicable only in actions at law. Priest v. Oehler, 41 S.W.2d 783, 788 (Mo. 1931). See also State ex rel. Massman Constr. Co. v. Shain, 130 S.W.2d 491, 497 (Mo. 1939); Skidmore v. Back, 512 S.W.2d 223, 235 (Mo. App. 1974) ("[O]ur Supreme Court has held [in Priest] that the proposition ...


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