In Re Pomona Valley Medical Group, Inc., Debtor,[476 F.3d 666]chandrahas Agarwal, M.d., Appellant, v. Pomona Valley Medical Group, Inc., a California Professional Corporation, D/b/a Promed Health Network, Appellee, 476 F.3d 665 (9th Cir. 2007)

Chandrahas Agarwal ("Agarwal") appeals the district court's decision affirming (1) the bankruptcy court's order rejecting his contract with Pomona Valley Medical Group, Inc., dba ProMed Health Network ("ProMed") and (2) the bankruptcy court's subsequent order dismissing Agarwal's complaint in an adversary proceeding against ProMed. We have jurisdiction pursuant to 28 U.S.C. § 1291, and we affirm, in part, and reverse, in part.

On May 14, 1999, Chandrahas Agarwal, a primary care physician and certified cardiologist, entered into a provider agreement (the "Agreement") with ProMed, an "independent practice association"²  in Southern California. Pursuant to the Agreement, Agarwal provided primary or basic medical services to patients in ProMed's network. When a patient required specialty medical services, such as cardiology tests, Agarwal was required to seek authorization from ProMed's medical director.

Under the Agreement, the twelve-month contract was extended automatically for an unlimited number of additional twelve-month periods, unless ProMed provided written notice of non-renewal.³  At the end of its first term, the Agreement was extended [476 F.3d 669] 669 to June 1, 2000, by the automatic renewal provision. Shortly after, on June 29, 2000, ProMed voluntarily filed for bankruptcy under Chapter 11.

Approximately six months later, ProMed began routinely denying initial authorization for cardiology tests Agarwal requested for his patients. After Agarwal protested, ProMed eventually authorized most of the procedures he requested. In April 2001, ProMed warned Agarwal that if he disagreed with or continued to protest ProMed's authorization policies he would be terminated. A month later, the company sent Agarwal written notice that it would not be retaining his services after the expiration of the second year of the Agreement. Although the Agreement's non-renewal provision did not require justification, the notice stated that Agarwal's frequent ordering of "unnecessary tests for patients simply to increase [his] compensation at ProMed's expense" justified termination with cause.

Following the expiration of the Agreement, Agarwal commenced adversary proceedings in bankruptcy court, alleging various California statutory and common law causes of action. Thereafter, ProMed moved to "reject" its executory contract with Agarwal and to dismiss his complaint for failure to state a claim. The bankruptcy court granted both motions but permitted Agarwal to file an amended complaint.⁴  Agarwal, instead, appealed to the district court, which affirmed the bankruptcy court's decisions. This timely appeal followed.

DISCUSSION

We review de novo the district court's decision in a bankruptcy appeal. In re Onecast Media, Inc., 439 F.3d 558, 561 (9th Cir. 2006). Therefore, we must consider independently the bankruptcy court's underlying ruling, applying the same standard of review as the district court. Id.

I. Rejection of the Executory Contract and the Business Judgment Rule

As a preliminary matter, we hold that the bankruptcy court did not err in approving ProMed's rejection of its executory contract with Agarwal.⁵  Under 11 U.S.C. § 365(a), a Chapter 11 debtor-in-possession, "subject to the court's approval, may ... reject any executory contract." See also In re Robert L. Helms Constr. & [476 F.3d 670] 670 Dev. Co., Inc., 139 F.3d 702 (9th Cir. 1998) (en banc). In making its determination, a bankruptcy court need engage in "only a cursory review of a [debtor-in-possession]'s decision to reject the contract. Specifically, a bankruptcy court applies the business judgment rule to evaluate a [debtor-in-possession]'s rejection decision ...." Durkin v. Benedor Corp. (In re G.I. Indust., Inc.), 204 F.3d 1276, 1282 (9th Cir. 2000) (citing NLRB v. Bildisco & Bildisco, 465 U.S. 513, 523, 104 S. Ct. 1188, 79 L. Ed. 2d 482 (1984)); see also In re Chi-Feng Huang, 23 B.R. 798, 800 (9th Cir. BAP1982) (citing cases).

We have never had the occasion to define the contours of the business judgment rule in the bankruptcy context. However, courts are no more equipped to make subjective business decisions for insolvent business than they are for solvent businesses, so we have no difficulty concluding that its formulation in corporate litigation is also appropriate here. See Lubrizol Enter. v. Richmond Metal Finishers, 756 F.2d 1043, 1047 (4th Cir. 1985) (adopting the corporate business judgment rule for bankruptcy proceedings).

Thus, in evaluating the rejection decision, the bankruptcy court should presume that the debtor-in-possession acted prudently, on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the bankruptcy estate. See Navellier v. Sletten, 262 F.3d 923, 946 n. 12 (9th Cir. 2001); FDIC v. Castetter, 184 F.3d 1040, 1043 (9th Cir. 1999); see also In re Chi-Feng Huang, 23 B.R. at 801 ("The primary issue is whether rejection would benefit the general unsecured creditors."). It should approve the rejection of an executory contract under § 365(a) unless it finds that the debtor-in-possession's conclusion that rejection would be "advantageous is so manifestly unreasonable that it could not be based on sound business judgment, but only on bad faith, or whim or caprice." Lubrizol, 756 F.2d at 1047. Such determinations, clearly, involve questions of fact, see Richmond Leasing Co. v. Capital Bank, 762 F.2d 1303, 1307-08 (5th Cir. 1985); Lubrizol, 756 F.2d at 1047, which we review for clear error. In re Rains, 428 F.3d 893, 900 (9th Cir. 2005).

Turning to the instant case, ProMed justified its business decision, explaining, inter alia, that its Chapter 11 reorganization strategy included efforts to reduce costs by limiting the number of physicians in its network and severing relationships with physicians, like Agarwal, who created financial burdens by ordering treatment and tests ProMed considered unnecessary.

We can discern no reason that ProMed's stated reorganization strategy was so unreasonable as to indicate it acted in bad faith or on whim or caprice in rejecting the Agreement. Nor has Agarwal offered any. He merely countered that, in making its determination to reject an executory contract, a debtor-in-possession must abide by state law health and safety regulations. We do not quarrel with this position. See, e.g., Hillis Motors, Inc. v. Hawaii Auto. Dealers' Ass'n, 997 F.2d 581, 592 (9th Cir. 1993) (citation omitted) (holding that a bankruptcy trustee must "manage a business in accordance with state law, as any other person must"). However, Agarwal has failed to explain how ProMed's rejection of the Agreement violates California health and safety laws.

Agarwal also argued that in approving the decision to reject an executory contract the bankruptcy court must weigh equitable concerns. He urges us that "it is proper for the court to refuse to authorize rejection of a lease or executory contract where the party whose contract is to be rejected would be damaged disproportionately to any benefit to be derived by the general [476 F.3d 671] 671 creditors of the estate...." In re Chi-Feng Huang, 23 B.R. at 801. Again, we do not disagree. There may be cases where the disproportionate damage to the party whose contract is to be rejected demonstrates that the debtor-in-possession's decision could not be based on sound business judgment. Here, however, there is no such demonstration.

We find it somewhat suspect that ProMed did not seek to reject the Agreement until Agarwal filed an adversary claim in the bankruptcy court, more than a year after ProMed filed its bankruptcy petition. However, after a hearing in which both Agarwal and ProMed presented their arguments and representations, the bankruptcy court found that the rejection of the Agreement was in the best interests of the bankruptcy estate and its creditors. That finding of fact necessarily indicates that the bankruptcy court believed ProMed's justifications for its actions. The bankruptcy court approval of ProMed's decision, which stated the decision was "within the sound `business judgment' of the [d]ebtor," also constitutes an implicit finding that ProMed did not act in bad faith or on whim or caprice. On appeal, Agarwal does not challenge these findings.⁶ 

On the record before us, we do not have "the definite and firm conviction that a mistake has been committed by the bankruptcy judge." In re Rains, 428 F.3d at 900 (requiring the reviewing court to accept findings of fact unless it is definitely and firmly convinced that the finding was erroneous). Therefore, rejection of the Agreement was proper.

Our conclusion that rejection was proper does not end our inquiry. ProMed's rejection of the Agreement constituted a breach of that contract effective immediately before ProMed filed for bankruptcy on June 29, 2000. 11 U.S.C. § 365(g). As of that date, ProMed was relieved of its performance obligations under the Agreement, and Agarwal was permitted to file an unsecured claim for breach of contract. In re Onecast Media, Inc., 439 F.3d at 563 (citing cases); In re Pacific Express, Inc., 780 F.2d 1482, 1486 & n. 3 (9th Cir. 1986).⁷  Thus, accepting Agarwal's allegations as true, we must consider whether it appears [476 F.3d 672] 672 beyond doubt that he can prove no set of facts in support of his claims that would entitle him to relief. Zimmer v. PSB Lending Corp., 313 F.3d 1220, 1222 (9th Cir. 2002); see also Fed. R. Bankr.P. 7012(b) (incorporating Fed. R. Civ. P. 12(b) (6)).⁸ 

In his complaint, Agarwal asserts that ProMed's termination of the Agreement supported six causes of action:

(1) Retaliatory termination in violation of Cal. Bus. & Prof.Code § 2056;

(2) Violation of the notice and hearing requirements of Cal. Bus. & Prof.Code § 809, et seq.

(3) Violation of California's common law right to fair procedure;

(4) Breach of the notice requirements of the Agreement;

(5) Unfair competition in violation of Cal. Bus. & Prof.Code § 17200, et seq.; and

(6) Interference with prospective business advantage.⁹ 

It immediately should be obvious that Agarwal's fourth cause of action, challenging as insufficient the notice provided in ProMed's letter, cannot survive a motion to dismiss for failure to state a claim. Because of its valid rejection of the contract, ProMed was relieved of its obligations under the notice provisions of the agreement. In re Pacific Express, Inc., 780 F.2d at 1486 n. 3 (noting that rejection allows the bankrupt's estate to avoid the requirements of the contract).

We are convinced that ProMed's valid rejection of the Agreement also is fatal to Agarwal's second cause of action, alleging a violation of Cal. Bus. & Prof.Code § 809, and his third cause of action, which alleges a violation of California's common law right to fair procedure. Like the notice provisions of Agarwal's contract, these causes of action concern primarily the process by which a company decides to discharge a physician, not whether a physician may be discharged. See Potvin v. Metropolitan Life Ins. Co., 22 Cal. 4th 1060, 95 Cal. Rptr. 2d 496, 997 P.2d 1153, 1158 (2000) (when it applies, the right to fair procedure ensures that a decision is "both substantively rational and procedurally fair") (quoting Pinsker v. Pac. Coast Soc'y of Ortho., 12 Cal. 3d 541, 116 Cal. Rptr. 245, 526 P.2d 253, 260 (1974)); Cal. Bus. & Prof.Code § 809.1(a) & (c) (entitling certain physicians to written notice and a hearing before they are terminated).

Section 365(a) gives debtors wide latitude in deciding whether to assume or reject a contract, which is inconsonant with the supplementary procedures imposed under California law. Moreover, it would be anomalous for § 365(a)—a provision aimed at relieving the debtor of burdensome performance obligations while it is trying to recover financially, In re Onecast Media, Inc., 439 F.3d at 563—to force ProMed to provide sham notices and hearings [476 F.3d 673] 673 from which Agarwal could expect no relief. Accordingly, we need not determine whether Agarwal's second, third, and fourth causes of action pass muster under the Federal Rule of Bankruptcy Procedure. Even assuming Agarwal's allegations were sufficient, he can prove no set of facts entitling him to the damages he seeks, so dismissal of these causes of action was proper.

The rejection of an executory contract does not, however, otherwise affect the parties' substantive rights under the contract or state law. See In re Onecast Media, Inc., 439 F.3d at 563 (citing 3 COLLIER ON BANKRUPTCY § 365.09 [1] (Alan N. Resnick & Henry J. Sommer eds., 15th rev. ed.2005)). Accordingly, ProMed's rejection of the Agreement did not automatically extinguish Agarwal's other causes of action, and it is possible that he has stated a claim that survives under the Federal Rules of Bankruptcy Procedure. We examine each in turn.

Agarwal's first cause of action alleges retaliatory termination in violation of Cal. Bus. & Prof.Code § 2056, which provides that physicians cannot suffer "retaliation ... [for] advocat [ing] for medically appropriate health care for their patients...." Cal. Bus. & Prof.Code § 2056(a) & (c).

In order to state a claim under § 2056, Agarwal must first allege that ProMed's "decision to terminate [his] employment or other contractual relationship ... or otherwise penalize [him was] principally for advocating for medically appropriate health care...." Cal. Bus. & Prof.Code § 2056(c).¹⁰  Agarwal's complaint states, "The real reason for PROMED's termination of Dr. Agarwal is that PROMED ... wish [es] to maximize their profits at the patient's expense.... PROMED ... perceive [s] Dr. Agarwal as `too expensive' because Dr. Agarwal does not hesitate to order necessary and entirely proper medical tests for his patients, in the best interests of his patients." If proven, these allegations match precisely the first element of a retaliatory termination claim: Agarwal was terminated because his ordering medically appropriate health care made him "too expensive." Albeit unartful, these allegations are sufficient under liberal notice pleading standards.

Under § 2056, Agarwal must also allege either that he appealed ProMed's decision to deny payment for a service or that he protested a decision, policy, or practice that he "reasonably believe [d] impair [ed his] ability to provide medically appropriate health care to his ... patients." Cal. Bus. & Prof.Code § 2056(b).¹¹  Again, Agarwal's allegations are sufficient.

The complaint stated that Agarwal "advocat [ed] for patients and protest [ed] the denials and delays in authorization." Although Agarwal conceded that payment was ultimately authorized " [i]n most instances," nothing in § 2056 requires that a physician be prevented from providing medically appropriate health care. Rather, Agarwal must reasonably believe that ProMed's initial denials impaired—i.e., damaged, injured, lessened, see OXFORD ENGLISH DICTIONARY (2d ed.1989)— his ability to treat his patients. We must broadly construe his statements that he was required to provide "extensive oral and written justification" for "entirely necessary medical tests and procedures" and that authorization was delayed and "nearly always initially denied" as alleging just that. See Khajavi v. Feather River Anesthesia Med. Group, 84 Cal. App. 4th 32, 100 Cal. Rptr. 2d 627, 638 (2000) (finding an "unambiguous legislative intent to apply the statute broadly to protect physicians' exercise of their professional judgment in advocating for medically appropriate health care"); id. at 640 (deciding that there should be a "broad interpretation of the statute").

For these reasons, the bankruptcy court erred in dismissing Agarwal's retaliation claim under Federal Rule of Bankruptcy Procedure 7012.

The bankruptcy court also erred in dismissing Agarwal's fifth cause of action, alleging unfair competition. California's unfair competition statute prohibits any unfair competition, which means "any unlawful, unfair or fraudulent business act or practice." Cal. Bus. & Prof.Code §§ 17200, et seq.

Thus, in order to state a claim for unfair competition, Agarwal must first allege that ProMed's termination of the Agreement was unlawful, unfair or fraudulent. An unlawful act is one "forbidden by law, be it civil or criminal, federal, state, or municipal, statutory, regulatory, or court-made." Saunders v. Superior Court, 27 Cal. App. 4th 832, 33 Cal. Rptr. 2d 438, 441 (1994). Thus, stating a claim for retaliatory termination—an act forbidden by Cal. Bus. & Prof.Code § 2056—satisfies the requirement that Agarwal alleged an unlawful business act or practice.

Agarwal also advances an alternate theory of unfair competition. He alleges that ProMed's pretextual reason for terminating the Agreement was "misleading to the public in general" because, as a result, approximately fifty people believe he is a bad doctor, which is "entirely false." Although such allegations do not state a claim in tort, as used in § 17200, "fraudulent" does not refer to the common law tort of fraud. Bank of the W. v. Superior Court, 2 Cal. 4th 1254, 10 Cal. Rptr. 2d 538, 833 P.2d 545, 553 (1992). Rather, Agarwal need allege only that "members of the public are likely to be deceived" by ProMed's business act or practice. Id. (quoting Chern v. Bank of Am., 15 Cal. 3d 866, 876, 127 Cal. Rptr. 110, 544 P.2d 1310 (Cal.1976) (quotation marks omitted)). Clearly, the public is likely to be deceived by statements that are "entirely false."

On its face, the unfair competition statute also appears to require that Agarwal allege that he was in competition with [476 F.3d 675] 675 ProMed. Agarwal does allege he was in competition with ProMed, but as a matter of law, we are not convinced that a member of an independent practice association may be considered to be in competition with that independent practice association. We need not resolve our concern here because, under the unfair competition statute, "competition between the parties is not a prerequisite to relief.... Emphasis is ... placed upon the word `unfair' rather than on `competition.'" Ball v. Am. Trial Lawyers Ass'n, 14 Cal. App. 3d 289, 92 Cal. Rptr. 228, 237 (1971) (internal citations omitted) (interpreting virtually identical definition of "unfair competition" in Cal. Civ.Code § 3369).

As the California courts have explained, the unfair competition statute is not limited to "conduct that is unfair to competitors." People ex rel. Renne v. Servantes, 86 Cal. App. 4th 1081, 103 Cal. Rptr. 2d 870, 881 (2001) (citing Barquis v. Merch. Collection Ass'n, 7 Cal. 3d 94, 101 Cal. Rptr. 745, 496 P.2d 817 (1972)). Indeed, in defining unfair competition, § 17200 refers to only business acts and practices, not competitive business acts or practices, and the term "embrac [es] anything that can properly be called a business practice." Cel-Tech Comm., Inc. v. L.A. Cellular Tel. Co., 20 Cal. 4th 163, 83 Cal. Rptr. 2d 548, 973 P.2d 527, 539 (1999) (emphasis added) (quoting Rubin v. Green, 4 Cal. 4th 1187, 17 Cal. Rptr. 2d 828, 847 P.2d 1044, 1052 (1993); cf. Khoury v. Maly's of Calif., 14 Cal. App. 4th 612, 17 Cal. Rptr. 2d 708, 712 (1993)) (sustaining the trial court's demurrer under Cal. Bus. & Prof.Code § 17001 because " [t]he facts [did] not involve [any] ... anticompetitive practice ... because appellant is not in competition with respondent").

Moreover, at the time Agarwal initiated his adversary proceeding, the statute gave the right to challenge the unfair business practices to any citizen, even if he suffered no individualized injury. See Cal. Bus. & Prof.Code § 17204 (2003) (authorizing civil action to enforce § 17200 by "any person acting for the interests of itself, its members, or the general public"); see also Californians for Disability Rights v. Mervyn's, LLC, 39 Cal. 4th 223, 227, 46 Cal. Rptr. 3d 57, 138 P.3d 207 (2006).¹² 

In light of these policies, we are convinced that competition—as that term is generally understood—is not an element of a claim under the unfair competition statute. We can, thus, discern no deficiency in Agarwal's pleading,¹³  and we reverse the bankruptcy court's dismissal of Agarwal's unfair competition claim.

CONCLUSION

For the foregoing reasons, the district court's decision is

AFFIRMED, in part, REVERSED, in part, and REMANDED.

The parties shall bear their own costs.

RAWLINSON, Circuit Judge, dissenting in part:

I respectfully dissent from that portion of the majority opinion holding that ProMed's valid rejection of the Agreement between ProMed and Chandrahas Agarwal constituted a breach of that contract.

The contract between Agarwal and ProMed provided for non-renewal of the contract if written notice of non-renewal was given. ProMed complied with the non-renewal provision of the contract, resulting in non-renewal of the contract. ProMed only sought rejection of the contract as a cautionary measure in response to the filing of an adversary proceeding by Agarwal. The fact that ProMed filed a superfluous motion to reject a contract that had not been renewed does not support a finding of breach.