United Tort v. Quorum Health Resources, LLC (In re Otero County Hospital Ass'n)
Docket: Case No. 11-11-13686 JL; Master Docket, Misc. Proceeding No. 13-00007; Adversary Nos: 12-1204J through 12-1207j, 12-1209j, 12-1210, 12-1212 through 12-1215j, 12-1221j, 12-1235j, 12-1238j through 12-1241j, 12-1243j, 12-1244j, 12-1246j, 12-1248j, 12-1249j,
Court: United States Bankruptcy Court, D. New Mexico; May 15, 2017; Us Bankruptcy; United States Bankruptcy Court
United States Bankruptcy Judge Robert H. Jacobvitz issued a memorandum opinion concerning a request by United Tort Claimants (UTC) and Quorum Health Resources, LLC (QHR) to determine QHR's entitlement to an offset for amounts paid in partial settlement of negligence claims against it. After oral arguments on March 1, 2017, the Court concluded that QHR is entitled to a credit only for amounts that satisfy a self-insured retention directly compensating UTC for damages related to its negligence claims.
Otero County Hospital Association, Inc. (the Debtor) filed for Chapter 11 bankruptcy on August 16, 2011. Subsequently, UTC initiated adversary proceedings, removing forty-seven state court actions to bankruptcy court. A partial settlement was reached involving Debtor, UTC, QHR, and Nautilus Insurance Company, among others, which included mediation sessions and resulted in a Term Sheet detailing a $21 million payment to UTC—$8.45 million from Nautilus, $7.5 million from the Debtor, and $5.05 million from QHR. The Debtor's payment may occur over three years, and bankruptcy attorneys must finalize the payment distribution language.
The Term Sheet defined "Personal Injury Claims" to encompass UTC's bodily injury claims linked to surgeries and related mismanagement claims. UTC agreed to pursue any judgment against QHR solely through available insurance, releasing QHR from excess liability beyond its insurance coverage. The parties also committed to drafting a more comprehensive settlement agreement. The Debtor confirmed its Third Amended Chapter 11 Plan of Reorganization on August 7, 2012, which approved the Settlement Agreement, affirming the provisions in the Term Sheet and superseding prior negotiations, except for the Term Sheet and Waiver of Defense Conditions.
The Settlement Agreement outlines several key elements regarding the resolution of claims by the United Tort Claimants (UTC) against various parties, including QHR. It defines "Personal Injury Claims" as all claims, demands, and actions related to UTC's allegations against the Debtor and others, encompassing known and unknown liabilities. The UTC and QHR aim to resolve all claims against QHR, specifically those exceeding the limits of applicable insurance policies, which include policies from Lexington Insurance Company and Ironshore Insurance Company.
The "Unreleased Claims Against QHR" include claims against QHR and its affiliates that fall within the coverage of their insurance policies. The Settlement Agreement specifies that Nautilus will pay $8.45 million into a designated account for the benefit of the UTC, with $6 million allocated to settle claims against QHR, intended to cover any self-insured retention (SIR) amounts. Additionally, QHR will contribute $5.05 million to the UTC Account. In return, UTC releases QHR from all claims related to the Personal Injury Claims that exceed its insurance coverage, agreeing to pursue any judgments on Unreleased Claims solely against QHR's available insurance, not its assets.
QHR holds insurance policies from three insurers—Nautilus, Lexington Insurance Company, and Ironshore Insurance Company—that may cover claims from UTC in ongoing adversary proceedings and related state court litigation. Nautilus provides the first tier, Lexington the second, and Ironshore the third of insurance coverage. Lexington and Ironshore did not participate in mediation, though Ironshore later settled with UTC. Disputes regarding Lexington’s insurance coverage are still pending in Tennessee state court. Following a partial settlement, UTC amended its complaints to focus solely on negligence claims against QHR.
The Court has addressed UTC's negligence claims in phases, assigning a master docket number to facilitate proceedings. In phase 1, the Court found that QHR owed and breached a duty to UTC. In phase 2, it determined that one of QHR's breaches caused UTC harm, attributing 16.5% fault to QHR. Four adversary proceedings are set for damages trials starting July 21, 2017, after which UTC and QHR will engage in further mediation.
QHR claims it is entitled to an offset for amounts already paid under the Settlement Agreement, asserting that allowing UTC to recover these amounts would result in double recovery, which is prohibited under New Mexico law. UTC argues the Settlement Agreement and Term Sheet prevent QHR from receiving such a credit. The Court will review these documents to ascertain QHR’s entitlement to a credit, applying state contract law principles to interpret the Settlement Agreement. The Court aims to honor the parties' intent, considering both explicit terms and contextual factors to resolve potential ambiguities.
The Court may examine factors beyond the settlement agreement's explicit terms to evaluate the release of claims, focusing on the transaction's nature and the parties' intent. The Settlement Agreement and Term Sheet specify that QHR must pay UTC $5.05 million directly, while Nautilus is responsible for $8.45 million, with $6 million allocated for QHR. In return, UTC agrees to enforce any judgment against QHR solely against available insurance, not QHR’s assets. UTC will also release all claims exceeding QHR’s insurance related to Personal Injury Claims. Released claims are defined as those exceeding available insurance, whereas unreleased claims are those within QHR’s insurance coverage. The settlement aimed to maximize UTC's recovery under insurance policies while eliminating other liabilities of QHR. The distinction between released and unreleased claims hinges on whether damages fall within available insurance coverage. The Court cites Rummel v. Lexington Ins. Co. to illustrate the relevance of policy language in determining damage allocation strategies to optimize insurance recovery, emphasizing that nothing prevents parties from structuring settlements to enhance coverage.
The Court does not have access to the insurance policies and will not adjudicate insurance coverage issues, which fall under Coverage Litigation. UTC alleges that Lexington acted in bad faith by not participating in settlement negotiations, similar to the situation in Rummel. UTC views Lexington as the 'real party in interest' since it may be liable for any judgment against QHR, although Lexington is not a party to these proceedings. The Court can utilize principles from Rummel and Fulkerson to allow parties to allocate settlement payments to optimize recovery from insurance, as long as this allocation is aligned with the insurance policy terms and does not result in double compensation for UTC’s negligence claims against QHR.
The Settlement Agreement includes two payment components that may affect any judgment against QHR: 1) QHR's $5.05 million direct payment to UTC, and 2) Nautilus’s $6 million payment made on behalf of QHR. QHR's payment of $5.05 million is meant to settle claims not covered by its insurance policies, as the Settlement Agreement releases QHR from claims exceeding its insurance coverage. UTC retains all claims within QHR's available insurance policies. The allocation of QHR’s payment to non-covered claims is designed to maximize UTC's recovery from insurance. QHR will not receive an offset for this payment, as it is allocated to damages outside policy coverage unless needed for a Self-Insured Retention (SIR) trigger.
In exchange for the payment, UTC agrees not to pursue QHR’s assets for any judgment but will seek recovery solely from available insurance. This Settlement Agreement is distinguished from the case of Summit Properties v. Public Service Co. of New Mexico, where the court invalidated an attempt to allocate a settlement to attorney’s fees not recoverable by law, viewing it as an effort to bypass rules on crediting obligations among joint obligors.
QHR's payment under the Settlement Agreement addressed claims not covered by its insurance, specifically including claims for fraud and willful or reckless hiring, training, supervision, and credentialing. The payment does not result in an impermissible duplication of damages. Nautilus is obligated to pay $6 million toward settling with UTC on behalf of QHR, intended to satisfy any Self-Insured Retention (SIR) applicable to QHR’s excess coverages. The Settlement Agreement's clear language indicates that the payments aim to satisfy the SIR required to activate the Lexington insurance policies.
An SIR is the portion of a covered loss that must be paid out-of-pocket before insurance benefits are triggered. Typically, only payments related to covered claims should apply to the SIR. Thus, Nautilus’ $6 million payment may need to be allocated toward compensating UTC for damages awarded by the Court, potentially allowing QHR a credit or offset for the amount paid to satisfy the SIR. However, entitlement to such a credit depends on the language of the insurance policies; if they do not explicitly restrict the types of payments required to satisfy the SIR, QHR may not qualify for a credit.
The precedent case, Sunnyland, is distinguished, as it involved a settlement where the defendant acquired subrogation rights and was denied an offset due to public policy concerns. Here, Nautilus is QHR’s insurer, and its payment is not considered a collateral source. The Court cannot determine the credit for amounts paid by Ironshore in settlement with UTC, as those terms are not presented. The Settlement Agreement aims to maximize UTC’s recovery from available insurance while reserving claims within QHR’s insurance and releasing those exceeding it.
The Court has interpreted the Settlement Agreement to assess QHR's potential credit or offset against any future judgments, though quantification of such credits requires interpretation of the Lexington insurance policies, which is not currently before the Court. No formal motion for offset has been filed, but offset issues were raised during a status conference on January 10, 2017.
The Court established a briefing schedule for 'offset issues' related to various claims against Dr. Christian Schlicht, QHR, and others in an original medical malpractice complaint. The claims included negligence, fraud, and violations of the New Mexico Unfair Trade Practices Act, with a request for both compensatory and punitive damages. An amended complaint following a Settlement Agreement named only QHR and focused solely on negligence, seeking compensatory damages and interest. The Court found that QHR had breached its duty by not requesting an investigation into Dr. Schlicht after allegations of experimental surgeries. It ruled that comparative fault applies, determining QHR's liability for 16.5% of damages awarded to UTC for injuries suffered by members related to procedures performed by Dr. Schlicht after September 21, 2007. The collateral source rule, which typically allows plaintiffs to recover full losses even if compensated by insurance, was deemed inapplicable as the payments were made directly by QHR or its insurers. The Settlement Agreement, governed by New Mexico law with specific bankruptcy considerations, defines 'Unreleased Claims Against QHR' and indicates that Nautilus paid $8.45 million for UTC's benefit.
