Iron Mound, LLC v. Nueterra Healthcare Management, LLC

Citations: 234 P.3d 39; 44 Kan. App. 2d 104; 2010 Kan. App. LEXIS 73Docket: 101,647

Court: Court of Appeals of Kansas; June 25, 2010; Kansas; State Appellate Court

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Iron Mound, LLC appeals a trial court ruling that granted summary judgment to Nueterra Healthcare Management, LLC, denying Iron Mound's summary judgment request concerning breach of contract claims. Iron Mound contends that the trial court misinterpreted the agreement related to management fee payments. The appellate court agrees, noting that there is a genuine issue of material fact regarding the parties' intentions about management fee payments under their Operating Agreement. This indicates that the entitlement to continued management fee payments is a factual issue, incorrectly resolved as a matter of law at the summary judgment stage. Consequently, the appellate court reverses the trial court's decision and remands for further proceedings.

The Operating Agreement, established on March 26, 1999, between Iron Mound and ASC Group, allocated a 40% interest to Iron Mound and a 60% interest to ASC Group in ASC Midwest, which was created to develop and operate healthcare facilities. Prior to the agreement, key figures from both companies had engaged in business dealings related to surgical centers and had made significant contacts for various projects. Testimony indicated that Iron Mound was entitled to a higher share of management fees from certain projects due to their prior contributions. Article X, Section 10.2 of the Operating Agreement details the revenue split from management services and development fees, specifying that Iron Mound and ASC Group would receive certain percentages of revenues generated from respective services performed by ASC or its affiliates.

In the case of a Management Agreement obtained by ASC or its Affiliates for the Topeka, Salina, or Manhattan Centers, revenue percentages for the Company will differ from previously stated amounts. Specifically, for Topeka, the Company receives 0% of gross fees while Iron Mound receives 15%. For Salina and/or Manhattan, the Company also receives 0%, and Iron Mound receives 20%. On April 24, 1999, ASC Management, LLC entered into Management Agreement I with Manhattan Surgical Center, wherein Manhattan Surgical Center would pay ASC Management a $100,000 business development fee and a 7% management fee on collected net revenues. This agreement was set for five years with automatic renewals unless notice of nonrenewal was given 90 days prior to expiration.

On May 25, 2001, Schwartz notified Tasset of Iron Mound's decision to dissolve ASC Midwest, which was permissible under the Operating Agreement. A Certificate of Cancellation was filed on May 30, 2001, with ASC Midwest having no liabilities but holding the management fee interest from Manhattan Surgical Center. The dissolution released Iron Mound from certain covenants. Despite the dissolution, payments were made to Iron Mound by ASC Management, later known as Nueterra, until February 2006. On February 7, 2006, Nueterra executed Management Agreement II with Manhattan Surgical Center, establishing lower management fees and revised payment terms based on net revenues over a seven-year period. The terms of Management Agreement II reflected a shift in responsibilities, with Manhattan Surgical Center taking over billing functions, although the overall responsibilities of Nueterra remained largely unchanged according to testimony from involved parties.

Schwartz testified in August 2005 that he informed the Board of Manhattan Surgical Center, in the presence of CEO David Ayres, about Iron Mound's involvement in sharing fees from Management Agreement II, which Ayres did not dispute. Ayres previously stated that sharing fees with Iron Mound was simply a business cost. Schraeder, a Board member, recused himself from discussions regarding Management Agreement II due to a potential conflict of interest related to Iron Mound's payments. McAtee noted Schraeder's conflict during discussions, and it was indicated that Nueterra's vice president, Scott Christ, was likely present during these discussions. After Management Agreement II was executed, Ayres informed Christ that Iron Mound would not receive future payments. When Iron Mound stopped receiving payments, Schwartz inquired about the nonpayment and was told the management agreement under the Operating Agreement had expired, and a new agreement was in place.

In October 2006, Iron Mound sued Nueterra for breach of contract over alleged nonpayment of gross management fees as stipulated in Section 10.2(c) of the Operating Agreement. Nueterra sought summary judgment in June 2007, asserting the old management agreement had expired and the new agreement was distinct. The trial court decided to allow discovery to proceed before addressing the summary judgment motion. In August 2008, Nueterra renewed its motion for summary judgment, arguing the Operating Agreement lacked a survival clause and no fee-sharing rights had vested before the dissolution of ASC Midwest. Iron Mound also moved for summary judgment, claiming Nueterra breached its obligation to pay 20% of the gross management fees. 

In November 2008, the trial court ruled that Iron Mound had no contractual right to share in the management fees under Management Agreement II, noting no rights were reserved upon the termination of the operating agreement. The court concluded that while Iron Mound had vested rights under the 1999 Management Agreement, those rights expired with Management Agreement I in 2006. Consequently, the court granted Nueterra's summary judgment motion and denied Iron Mound's. On appeal, Iron Mound contends that the trial court erred in both its rulings.

Summary judgment is deemed appropriate when there is no genuine issue of material fact, and the moving party is entitled to judgment as a matter of law. The trial court must view all facts and reasonable inferences in favor of the opposing party. To counter a summary judgment motion, the adverse party must present evidence demonstrating a factual dispute that is material to the case. On appeal, if reasonable minds could differ based on the evidence, summary judgment must be denied, as established in Miller v. Westport Ins. Corp.

Interpretation of contracts primarily seeks to ascertain the parties' intent. Clear contract terms should be interpreted from the language itself without additional construction rules. Contract provisions should be understood in the context of the entire document, avoiding absurd interpretations that undermine the agreement's purpose, as noted in Anderson v. Dillard's Inc. and other cases.

In the appeal regarding Section 10.2 of the Operating Agreement, Nueterra argues that Iron Mound is not entitled to gross management fees from Management Agreement II, claiming it was not contemplated at the contract's execution. Conversely, Iron Mound asserts that "contemplated" refers to a management agreement related to specific centers, thus entitling it to fees if a management contract exists with Manhattan Surgical Center. Section 10.2(c) specifies revenue distribution from management agreements for Topeka, Salina, and Manhattan Centers. Iron Mound's interpretation is supported by the phrase structure in the agreement, indicating intent to include management fees for the Manhattan Surgical Center.

Omitting the phrase "for the Topeka, Salina or Manhattan Centers" from the dependent clause would not change the meaning related to the Management Agreement. If restructured, the clause would still imply that Iron Mound was intended to receive a portion of the gross management fees for the Manhattan Surgical Center. The phrase acts as a limiting descriptor, clarifying which centers are involved. While Iron Mound's interpretation of Section 10.2 of the Operating Agreement appears logical, Nueterra argues this interpretation allows Iron Mound to receive fees indefinitely as long as a management agreement exists with Manhattan Surgical Center. Citing Augusta Medical Complex, Inc. v. Blue Cross, Nueterra highlights a traditional aversion to contracts lacking time limitations. Courts are bound to enforce contracts as written, without altering clear language. Initially, Iron Mound claimed that "contemplated" pertained only to the Management Agreement, not the centers. The ambiguity in the contract arises from the absence of time limits regarding fee payments, suggesting either a perpetual fee arrangement for Iron Mound based on its contributions to the Manhattan Surgical Center or a recognition of its significant role justifying a higher fee percentage. Specifically, Iron Mound was entitled to 20% of gross fees from Manhattan, while receiving lower percentages from other centers, indicating its unique value in this context.

Nueterra asserts that the trial court correctly ruled that the dissolution of ASC Midwest led to the termination of the Operating Agreement. Following Iron Mound's decision to dissolve ASC Midwest, Nueterra claimed it was no longer obligated to pay a percentage of management fees to the company for distribution to Iron Mound. Iron Mound's dissolution was executed under Section 15.1(b) of the Operating Agreement, and a Certificate of Cancellation was filed with the Kansas Secretary of State. Schwartz informed Nueterra of the dissolution and indicated he was winding up ASC Midwest's affairs. Despite Nueterra's position that the Operating Agreement was effectively terminated by the dissolution, it failed to provide any legal precedent or statutory authority to support this claim. Kansas statutes detail the creation and dissolution of limited liability companies but do not specify that all provisions of an operating agreement terminate upon dissolution. K.S.A. 17-7673 outlines the formation of limited liability companies and acknowledges operating agreements without including an automatic termination clause in K.S.A. 17-7675. As operating agreements are contractual in nature, the intent of the parties must be determined from the agreement's language. The Operating Agreement does not clarify whether Section 10.2(c), which addresses payment of gross management fees, survives the dissolution, leading Nueterra to argue that the absence of express survival language means that provision ended with the Operating Agreement.

Accepting Nueterra's argument would imply that all provisions in the Operating Agreement terminate automatically upon ASC Midwest's dissolution, negating the need for explicit termination language. However, Section 4.7(d) of the Operating Agreement explicitly nullifies specific obligations related to restrictive covenants upon dissolution, indicating that not all provisions terminate in the same manner. The absence of similar termination language for gross management fees under Section 10.2(c) creates ambiguity regarding the parties' intent for these fees to survive dissolution.

Nueterra points to testimony from Iron Mound's representatives, Schraeder and Schwartz, asserting they believed the Operating Agreement terminated with ASC Midwest's dissolution. However, this view is contradicted by Schwartz's deposition, where he stated that Nueterra retained an obligation to pay Iron Mound 20% of the gross management fees for services provided to Manhattan Surgical Center. Furthermore, Iron Mound provided evidence that Schraeder recused himself from discussions about Management Agreement II due to Iron Mound's rights to payment, reinforcing that the parties intended for the management fee agreement to persist post-dissolution.

Nueterra references the case Saylor v. Brooks to argue that the Operating Agreement ceased to exist because its subject matter was dissolved. However, Saylor does not directly apply here, as the management agreement for Manhattan Surgical Center—part of Section 10.2—remains intact. Notably, evidence indicates that the parties' conduct demonstrated an intention for the payment obligations to continue despite ASC Midwest's dissolution, highlighting the importance of their actions and ongoing business dealings in interpreting the agreement's terms.

Under Kansas law, courts can determine the existence and terms of an agreement by analyzing both written documents and the actions of the parties involved. Established case law supports that agreements can be interpreted through a combination of written communications and party conduct. The Restatement (Second) of Contracts emphasizes that a party's consistent course of performance is significant in interpreting agreements, particularly when one party continues to perform without objection from the other, indicating acceptance of the terms.

In the context of the Operating Agreement between Nueterra and Iron Mound, the parties' behavior suggests an intent to maintain payment of gross management fees even after the dissolution of ASC Midwest. Despite Iron Mound's dissolution of ASC Midwest and filing a Certificate of Cancellation in May 2001, Nueterra continued to pay Iron Mound management fees for almost five years. This raises questions about Nueterra's claim that the Operating Agreement automatically terminated upon dissolution, as continued payments imply otherwise.

Nueterra's counsel argued that the obligation to pay management fees remained under Management Agreement I, asserting that payments were vested and ongoing. However, during oral arguments, Nueterra contradicted its earlier position, claiming Iron Mound lacked a vested share in the fees despite previously suggesting otherwise. Iron Mound contends that even if the Operating Agreement terminated, its right to a portion of the management fees should survive because it was a member of ASC Midwest, which is now defunct. Nueterra countered that once ASC Midwest was dissolved, its obligations ceased, indicating that neither party was bound by the management fee agreement post-dissolution.

Nueterra presents conflicting positions regarding the Operating Agreement's termination following ASC Midwest's dissolution. Initially, Nueterra contends that the Agreement ceased to exist and that it had no further obligations. However, this stance contradicts its actions, as Nueterra continued payments to Iron Mound for nearly five years post-dissolution. Consequently, Nueterra shifts its argument to assert that obligations under the Agreement persisted, creating a dilemma where it cannot simultaneously claim both termination and ongoing obligations. The case involves factual questions regarding the implications of these continued payments, indicating that the trial court's summary judgment favoring Nueterra was premature. According to established legal principles, when a contract is ambiguous and extrinsic evidence is necessary to determine the parties' intentions, summary judgment should be avoided amidst conflicting evidence. The conflicting evidence at the summary judgment stage regarding intent about management fees indicates that whether Iron Mound was entitled to fees under Management Agreement II is a factual issue unsuitable for resolution as a matter of law. Therefore, the appellate court reverses the summary judgment in favor of Nueterra, denies Iron Mound's request for summary judgment, and remands the case for further proceedings.