IMX Information Management Solutions, Inc. v. MultiPlan, Inc., et al.
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
I/MX INFORMATION MANAGEMENT )
SOLUTIONS, INC., a Delaware
)
corporation,
)
)
Plaintiff,
)
)
v.
)
)
MULTIPLAN, INC., a New York
)
corporation, and HMA ACQUISITION
)
CORPORATION, a Delaware
)
corporation,
)
)
Defendants.
C.A. No. 7786-VCP
MEMORANDUM OPINION
Date Submitted: March 20, 2013
Date Decided: June 28, 2013
Cathy L. Reese, Esq., Joseph B. Warden, Esq., FISH & RICHARDSON P.C.,
Wilmington, Delaware; Attorneys for Plaintiff.
Srinivas M. Raju, Esq., Robert L. Burns, Esq., RICHARDS, LAYTON & FINGER, P.A.,
Wilmington, Delaware; Allen M. Gardner, Esq., Christopher J. Fawal, Esq., LATHAM &
WATKINS LLP, Washington, D.C.; Attorneys for Defendants.
PARSONS, Vice Chancellor.
This action is before me on a motion to dismiss the plaintiff‘s declaratory
judgment claims related to the release of funds in an escrow account. In 2011, the
defendants acquired several of the plaintiff‘s now-former subsidiaries. As part of that
transaction, the plaintiff made a number of representations and warranties, including that
no material contracts were in material breach or default. The parties also executed an
escrow agreement under which claims for indemnification could be pursued.
Less than a month before the escrowed funds were scheduled to be released, the
defendants notified the plaintiff and the escrow agent that they had a pending claim
resulting from the purported material breach of a material contract by one of the acquired
companies.
The plaintiff disagreed with that characterization and filed this action
seeking, among other things, a declaration that the defendants were not entitled to
indemnification and an injunction requiring the defendants to participate in giving joint
instructions for release of the escrowed funds.
That complaint was based on the
plaintiff‘s allegations that: (1) the defendants‘ claim is not indemnifiable; (2) the
defendants failed properly to assert their claim; and (3) the defendants‘ claim is now
moot. The defendants dispute those allegations and filed a motion to dismiss the entirety
of the plaintiff‘s action for failure to state a claim.
Having considered the parties‘ briefs and heard oral argument on the defendants‘
motion to dismiss, I conclude that as to at least some parts of the complaint, the plaintiff
has stated a claim upon which relief can be granted. Accordingly, I deny the defendants‘
motion to dismiss.
1
I.
BACKGROUND
A.
The Parties
Plaintiff, i/mx Information Management Solutions, Inc. (―IMX‖ or ―Plaintiff‖), is a
Delaware corporation that provides development, management, and advisory services for
employee health plans.
Defendant MultiPlan, Inc. (―MultiPlan‖) is a New York corporation that develops
and operates healthcare provider networks and offers related cost management services to
insurance companies and other health benefit payors.
Defendant HMA Acquisition
Corporation (―HMA Acquisition‖ and, together with MultiPlan, the ―Defendants‖) is a
Delaware corporation that was formed to acquire several IMX subsidiaries.
Facts1
B.
In April 2011, HMA Acquisition acquired two former subsidiaries of IMX,
namely HMA, Inc. and HMN, Inc.
HMN, Inc. negotiates with hospitals and other
healthcare providers to get preferred rates, which can be accessed through HMN, Inc.‘s
member plans.
The acquisition of those companies was memorialized in a Stock Purchase
Agreement (the ―SPA‖) dated April 29, 2011 between HMA Acquisition and IMX.2 As
part of that agreement, IMX agreed to indemnify the ―Purchaser Indemnified Parties‖—
1
The facts recited herein are drawn from the well-pled allegations of IMX‘s
Amended and Supplemental Verified Complaint (the ―Complaint‖), together with
the attached exhibits, and are presumed true for purposes of Defendants‘ motion to
dismiss.
2
Compl. Ex. A, SPA.
2
which include both HMA Acquisition and MultiPlan—for any and all damages that are
based upon, arise out of, or are related to, among other things, ―any [a]ction or claim
asserted, commenced, filed, or threatened with respect to the operations of [IMX] or any
of its Subsidiaries (excluding the Acquired Companies and their Subsidiaries . . . ).‖3
HMA, Inc. is defined in the SPA as one of three ―Acquired Companies.‖4 Pursuant to the
SPA, IMX also agreed to indemnify the Purchaser Indemnified Parties from any breaches
of any representation or warranty made by IMX in the SPA.5
In section 4.12(b) of the SPA, IMX represented and warranted that:
Except as set forth on Schedule 4.12(b), all of the Material
Contracts (i) are in full force and effect, (ii) represent the
legal, valid and binding obligations of a Target Company or a
Subsidiary of a Target Company, and (iii) to the knowledge
of Seller, are enforceable by a Target Company or a
Subsidiary of a Target Company in accordance with their
terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and
similar Laws affecting creditors‘ rights generally and subject
to general principles of equity. Except as set forth on
Schedule 4.12(b), (A) neither the Target Companies nor any
of their Subsidiaries nor, to the knowledge of Seller, any other
party thereto is in material breach of or default under any
provision of any Material Contract, (B) neither the Target
Companies nor any of their Subsidiaries have received any
written claim or notice of material breach of or default under
any Material Contract, (C) to the knowledge of Seller, no
event has occurred which individually or together with other
events, would reasonably be expected to result in a material
3
Id. § 8.2.
4
Id. at 1, art. I.
5
Id. § 8.2(a).
3
breach of or a default under any Material Contract (in each
case, with or without notice or lapse of time or both).6
The parties also executed an escrow agreement (the ―Escrow Agreement‖) that
provided that $1,800,000 of the purchase price (the ―Escrowed Funds‖) was to be
withheld and deposited with an escrow agent (the ―Escrow Agent‖).7 In the event that a
party was entitled to indemnification under the SPA, those claims could be pursued
against the Escrowed Funds.8 The Escrow Agreement also provides that the funds were
to be held until fifteen months after the date of the agreement (the ―Survival Expiration
Date‖), at which time the Escrow Agent was to release the Escrowed Funds minus the
―Disputed Amount‖ as of the Survival Expiration Date.9 ―Disputed Amount‖ is defined
as ―the aggregate amount of all Damages alleged to be incurred by any Purchaser
Indemnified Party pursuant to any Pending Claim that remains unpaid as of such date.‖10
On June 25, 2012, within the fifteen-month indemnification window, MultiPlan
submitted a notice of claim (the ―Notice of Claim‖) informing IMX that Queens Medical
Center (―QMC‖) had asserted that HMN, Inc. may have permitted payor entities,
6
Id. § 4.12(b) (emphasis added).
7
Compl. Ex. B, Escrow Agreement, at 1, § 1.
8
Id. § 3(a).
9
Id. § 3(a)(iv).
10
Id. Pending Claim is defined as ―any claim pursuant to Section 8.2 of the [SPA
that] shall have been properly asserted by Purchaser on or prior to the Survival
Expiration Date and shall remain pending on the Survival Expiration Date.‖ Id.
4
including the Veteran‘s Administration (the ―VA‖), inappropriate access to preferred
rates.11
Traditionally, the VA had a policy of reimbursing health care providers at the
Medicare allowed amounts. The VA had contracted with Electronic Technology Services
(―ETS‖) and other ―claims re-pricing providers,‖ however, to obtain better rates, with the
claims re-pricing providers retaining a portion of the cost savings. The claims re-pricing
providers, in turn, subcontracted with organizations, such as HMN, Inc., to negotiate for
better rates. According to the Complaint, Defendants have asserted that QMC has a
claim against HMN, Inc. based on HMN, Inc. having provided the VA access to HMN,
Inc.‘s preferred rates despite the fact that the VA‘s contract with HMN, Inc. did not give
the VA access to those rates.
On July 19, 2012, IMX submitted a letter enclosing proposed joint instructions to
the Escrow Agent to disburse $1,683,491 of the Escrowed Funds to IMX and $116,509 to
HMA Acquisition, the latter amount reflecting a net working capital adjustment.12 On
July 26, 2012, HMA Acquisition responded, proposing that the Escrow Agent withhold
all the Escrowed Funds, except the $116,509 net working capital adjustment.13 HMA
Acquisition based that proposal on its position that it had a ―Pending Claim‖ with respect
to QMC. Specifically, HMA Acquisition‘s letter stated that:
11
Compl. Ex. C, Notice of Claim.
12
Id. Ex. D.
13
Id. Ex. E.
5
[QMC] is claiming that it received incorrect reimbursement
amounts in breach of their contract, which is a Material
Contract pursuant to Section 4.12 of the [SPA]. [QMC]
contends that the breach is material and that it occurred prior
to the execution of the [SPA]. [QMC]‘s claims may well
implicate other provisions of the [SPA] and HMA will notify
you of any other potential breaches as it learns more.14
On July 29, 2012, i.e., the Survival Expiration Date, the Escrow Agent did not
make a disbursement of the Escrowed Funds to either party and instead directed that a
disbursement would be made only after receipt of joint written instructions or a final
order of a court. The parties engaged in further correspondence concerning the Escrow,
with IMX noting deficiencies in HMA Acquisition‘s claims and HMA Acquisition
defending their sufficiency.
On August 20, 2012, the VA‘s Office of Inspector General issued a report (the
―Inspector General‘s Report‖) recommending, among other things, that the VA: (1)
terminate its contracts with ETS and other claims re-pricing providers; (2) determine
whether claims re-pricing provides access to prices lower than Medicare prices; and (3)
evaluate whether claims re-pricing contracts are necessary.15
C.
Procedural History
On August 15, 2012, IMX commenced this action. The initial complaint sought,
among other things, a declaration that Defendants were not entitled to indemnification
under the SPA and an injunction requiring Defendants to give joint instructions to the
14
Id.
15
Id. Ex. K, the Inspector General‘s Report.
6
Escrow Agent to disburse the $1,683,491 of Escrowed Funds to IMX. On September 25,
2012, Defendants moved to dismiss that complaint. On November 6, IMX filed an
amended complaint, i.e., the Complaint, seeking fundamentally the same relief.
Thereafter, Defendants again moved to dismiss the Complaint in its entirety. After full
briefing on that motion, I heard argument on March 20, 2013.
On April 26, 2013, Defendants moved to stay discovery pending resolution of
their motion to dismiss. I granted Defendants‘ motion to stay discovery subject to a
limited carve-out requiring Defendants to disclose certain facts that they had represented
they would produce at the March 20, 2013 argument.
This Memorandum Opinion
constitutes my ruling on Defendants‘ motion to dismiss.
D.
Parties’ Contentions
IMX seeks a declaratory judgment on essentially four grounds. First, IMX asserts
that it lacked the requisite ―knowledge‖ to have breached Section 4.12(b) of the SPA.
Second, IMX argues that Defendants have not alleged a ―material‖ breach or default of a
Material Contract. Third, IMX contends that Defendants did not establish a Disputed
Amount to be held in escrow. Finally, IMX argues that the Inspector General‘s Report
has mooted Defendants‘ claim.16
16
In its Complaint, IMX also asserted that it was entitled to declaratory relief
because HMA, Inc. was an Acquired Company, and as such was excluded from
IMX‘s indemnification obligations under Section 8.3(c) of the SPA. In IMX‘s
Answering Brief, however, IMX acknowledged that ―Defendants seek
indemnification solely under Section 8.2(a)‖ and, accordingly, IMX has restricted
its arguments to Section 8.2(a). Pl.‘s Answering Br. 16 n.3.
7
Defendants disagree with IMX‘s contentions that it failed to assert an
indemnifiable claim and that its claim is moot. Specifically, Defendants assert that there
is no ―knowledge‖ requirement in the relevant part of Section 4.12(b) of the SPA. In
addition, Defendants argue that QMC‘s claims for breach of contract are material, as
defined by the SPA. Defendants also maintain that they complied with the requirements
of Section 3(a)(iv) of the Escrow Agreement, thereby establishing a Disputed Amount.
Finally, Defendants aver that the Inspector General‘s Report has not mooted their claim
because the report‘s recommendations have not been implemented and the report does
not apply to claims for past damages.
At oral argument, Defendants changed the relief requested through their motion
from a dismissal with prejudice to a dismissal without prejudice.17 That modification
apparently sought to take into account the possibility that QMC‘s claims might disappear
through, for example, the passing of a statute of limitations or QMC voluntarily releasing
its claims.18
17
Tr. 9–10.
18
Id. (Defendants‘ Counsel) (―What we believe the Court ought to do with this case
– I know we ask in our papers for the matter to be dismissed with prejudice. I
actually don‘t think that made sense. I know that‘s what we asked. Because I can
imagine situations if there are factual developments that in the future make the
threat no longer a threat – passing of the statute of limitations, [QMC] releasing
the claims they‘ve threatened, a change in the law or the facts that would make the
claims not compensable, not likely to be brought, not indemnifiable in some way.
There are several situations that I could imagine that would make their demand for
the indemnification – for the release of the escrow, despite the presence of this
threatened claim, go away. So I don‘t believe the Court ought to dismiss the
claims with prejudice.‖).
8
II.
A.
ANALYSIS
Standard
This is a motion to dismiss under Court of Chancery Rule 12(b)(6). Therefore, I
assume the truthfulness of the well-pled allegations in the Complaint and afford IMX
―the benefit of all reasonable inferences.‖19 If the well-pled allegations in the Complaint
would entitle IMX to relief under any ―reasonably conceivable‖ set of circumstances, the
Court must deny the motion to dismiss.20 But, the Court need not accept inferences or
factual conclusions unsupported by specific allegations of fact.21
Furthermore, ―a
complaint may, despite allegations to the contrary, be dismissed where the unambiguous
language of documents upon which the claims are based contradict the complaint‘s
allegations.‖22
In deciding this motion, I also apply familiar principles of contract interpretation.
Under Delaware law, the proper interpretation of language in a contract is a question of
law. ―Accordingly, a motion to dismiss is a proper framework for determining the
19
Superwire.com, Inc. v. Hampton, 805 A.2d 904, 908 (Del. Ch. 2002) (citing
Solomon v. Pathe Commc’ns Corp., 672 A.2d 35, 38 (Del. 1996)).
20
Central Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531,
536 (Del. 2011).
21
Norton v. K-Sea Transp. P’rs L.P., – A.3d –, –, 2013 WL 2316550, at *3 (Del.
May 28, 2013).
22
H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129, 139 (Del. Ch. 2003).
9
meaning of contract language.‖23
When the language of a contract is plain and
unambiguous, binding effect should be given to its evident meaning.24 Only where there
are ambiguities may a court look to collateral circumstances; otherwise, only the
language of the contract itself is considered in determining the intentions of the parties.25
B.
Knowledge of Sellers
In its Complaint, IMX asserts that its representation and warranty regarding the
absence of any material breach or default of any Material Contract contains the
qualification that such representation and warranty was made ―to the knowledge of the
Seller.‖26 In that regard, IMX argues that if, as it claims, it did not have knowledge of the
alleged breach, it cannot be responsible for indemnifying Defendants. Defendants, on the
other hand, contend that the knowledge requirement only qualifies IMX‘s representations
with respect to whether ―any other party‖ is in material breach or default and does not
limit IMX‘s representations regarding the companies it owned.
23
Majkowski v. Am. Imaging Mgmt. Servs., LLC, 913 A.2d 572, 581 (Del. Ch. 2006)
(citing OSI Sys., Inc. v. Instrumentarium Corp., 892 A.2d 1086, 1090 (Del. Ch.
2006)).
24
Id. (citing Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d
1192, 1195 (Del. 1992)).
25
See Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del.
1997); Citadel Hldg. Corp., v. Roven, 603 A.2d 818, 822 (Del. 1992).
26
See Compl. ¶ 23 (―Th[e] claim [relied upon by Defendants] also does not implicate
a breach of IMX‘s representation that, to IMX’s knowledge, neither the Acquired
Companies or any other party was in material breach or default of any material
contract, and, as a result, is not indemnifiable under Section 8.2(a)‖ (emphasis
added)).
10
The relevant part of Section 4.12(b) of the SPA is as follows:
Except as set forth on Schedule 4.12(b), all of the Material
Contracts (i) are in full force and effect, (ii) represent the
legal, valid and binding obligations of a Target Company or a
Subsidiary of a Target Company, and (iii) to the knowledge of
Seller, are enforceable by a Target Company or a Subsidiary
of a Target Company in accordance with their terms, subject
to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar Laws affecting
creditors‘ rights generally and subject to general principles of
equity. Except as set forth on Schedule 4.12(b), (A) neither
the Target Companies nor any of their Subsidiaries nor, to the
knowledge of Seller, any other party thereto is in material
breach of or default under any provision of any Material
Contract, (B) neither the Target Companies nor any of their
Subsidiaries have received any written claim or notice of
material breach of or default under any Material Contract, (C)
to the knowledge of Seller, no event has occurred which
individually or together with other events, would reasonably
be expected to result in a material breach of or a default under
any Material Contract (in each case, with or without notice or
lapse of time or both).27
While the language of Section 4.12(b) could have been drafted more clearly, I hold that it
unambiguously conveys to the reader that the phrase ―to the knowledge of Seller‖ does
not modify IMX‘s representation that none of the Target Companies or their Subsidiaries
are in material breach of or default under a provision of a Material Contract.
IMX argues that the ―to the knowledge of Seller‖ limitation qualifies all
representations and warranties contained in Section 4.12(b)(iii), including what it calls
subpart 4.12(b)(iii)(A). IMX‘s interpretation, however, would render superfluous the
second use of the phrase ―to the knowledge of Seller,‖ which appears in the middle of
27
SPA § 4.12(b) (emphasis added).
11
clause A in the second sentence of Section 4.12(b). ―In interpreting contractual language,
there is a presumption that the parties intended every part of the agreement to mean
something and that ‗an interpretation that gives effect to every part of the agreement is
favored over one that makes some part of it mere surplusage.‘‖28 Here, there is an
alternative interpretation that avoids the anomaly in IMX‘s interpretation. That is, the
subparts denominated 4.12(b)(iii)(A)–(C) reasonably can be read as not imputing into
each subpart the knowledge requirement of 4.12(b)(iii).
This interpretation gives
independent meaning to the later qualifications and circumvents the surplusage issue
altogether.
With that in mind, I conclude that the proper interpretation of subpart (A) of the
second sentence of Section 4.12(b)(iii) is that the phrase ―to the knowledge of Seller‖
modifies only IMX‘s representation that ―any other party thereto‖ is not in material
breach of or default under any provision of any Material Contract.
Any other
interpretation would ignore the placement and order of words. As the Supreme Court of
the United States observed long ago, ―[t]o get at the thought or meaning expressed in a
statute, a contract, or a constitution, the first resort, in all cases, is to the natural
significa[nce] of the words, in the order of grammatical arrangement in which the
framers of the instrument have placed them.‖29
28
Ross Hldg. & Mgmt. Co. v. Advance Realty Gp., LLC, 2010 WL 1838608, at *6
(Del. Ch. Apr. 28, 2010) (quoting E. Allen Farnsworth, Contracts § 7.11 (4th ed.
2004)).
29
Lake Cty. v. Rollins, 130 U.S. 662, 670 (1889) (emphasis added).
12
In sum, IMX‘s interpretation of the SPA as attaching a ―to the knowledge of
Seller‖ qualifier to IMX‘s representation regarding whether any Target Company or its
Subsidiary materially breached or defaulted under a Material Contract is unreasonable
and contrary to the plain language of the SPA. Accordingly, IMX has not stated a claim
for its requested declaratory and injunctive relief based on its construction of the
purported knowledge qualifier.
C.
Material Breach
IMX also seeks a declaratory judgment that Defendants‘ claim is not
indemnifiable because none of the Target Companies are in ―material breach or default of
any [M]aterial [C]ontract.‖30 In response, Defendants contend that it is undisputed that
the QMC contract is a Material Contract and that QMC‘s threatened claim would far
exceed the materiality threshold of $100,000 purportedly expressed in Section 8.4(b) of
the SPA.31
―Material breach‖ is not defined in the SPA. To give that term meaning, IMX
relies on Delaware cases that define ―materiality‖ for purposes of repudiating a contract.
Under those cases, ―a ‗material breach‘ is a failure to do something that is so fundamental
to a contract that the failure to perform that obligation defeats the essential purpose of the
30
See Compl. ¶ 23. Although Paragraph 23 of the Complaint refers to Acquired
Companies, it is clear from the Complaint as a whole and the documents integral
to the Complaint that this reference applies to the Target Companies.
31
IMX concedes that the QMC contract is a Material Contract. See Pl.‘s Answering
Br. 14.
13
contract and makes it impossible for the other party to perform under the contract.‖32
IMX alleges that QMC‘s allegations regarding the VA do not meet that standard,
characterizing them as ―a small fraction of the total services performed by QMC for
which HMN, Inc.‘s thousands of plan members accessed HMN, Inc.‘s negotiated rates.‖33
Defendants argue that IMX need not rely on Delaware cases because the parties to
the SPA defined materiality in terms of ―baskets.‖ ―Baskets‖ are often used in stock
purchase agreements to recognize that all ―representations concerning an ongoing
business are unlikely to be perfectly accurate and to avoid disputes over smaller
amounts.‖34 ―Baskets‖ refers to either a ―threshold‖ that, once crossed, entitles the
indemnified party to recover all damages or a ―deductible‖ that entitles the indemnified
party to the excess damages over the stated amount.35 As described below, baskets also
can be used to resolve the question of ―materiality.‖
Even worse, the parties may not attempt to define the slippery
and subjective concept of materiality. As a result, the term
―materiality‖ may become an issue after the closing of the
acquisition and the acquirer may demand indemnification for
an allegedly ―material‖ breach of warranty, omission, or
32
Shore Invs., Inc. v. Bhole, Inc., 2011 WL 5967253, at *5 (Del. Super. Nov. 28,
2011); see also BioLife Solutions, Inc. v. Endocare, Inc., 838 A.2d 268, 278 (Del.
Ch. 2003) (noting that one of several factors to consider when determining
whether a failure to render performance is material is whether a party was
―deprived of the benefit which [it] reasonably expected‖).
33
Compl. ¶ 12.
34
American Bar Ass‘n, Model Stock Purchase Agreement with Commentary 329
(2d ed. 2010).
35
Id.
14
misrepresentation. The target will, of course, insist that the
term is not ―material‖ and the issue will need to be decided by
a court.
The usefulness of the materiality concept can be salvaged,
however, by means of defining materiality in terms of a
―basket‖ or ―cushion‖ provision. Such a provision would
state that a breach of warranty, an omission, or a
misrepresentation is material (either individually or in the
aggregate) only if it causes a specified amount of damage to
the acquiring corporation. This will prevent the acquirer from
using a minor breach of warranty, an omission, or a
misrepresentation as a pretext for refusing to close. It will
also protect the acquirer from being forced to accept
numerous
warranty
breaches,
omissions,
or
misrepresentations that, in the aggregate, are clearly material
if none, by themselves, reaches the specified amount of
materiality.36
Here, the parties included a ―claims basket‖ in the SPA. Specifically, Section
8.4(b) of the SPA provides:
Claims Basket. Notwithstanding any provision hereof to the
contrary, an Indemnified Party shall only be entitled to
indemnification pursuant to Section 8.2(a) or Section 8.3(a)
for breach of representation or warranty to the extent the
aggregate amount of all Damages incurred by such
Indemnified Party for which such Indemnified Party is
entitled to indemnification pursuant to such section exceeds
$100,000 (the ―Basket Amount‖), at which point an
Indemnified Party shall be entitled to indemnification for all
Damages (including all Damages incurred prior to exceeding
the Basket Amount); provided that no such limitation shall
apply in respect of Damages as a result of, arising out of or
relating to breaches or misrepresentations of the Fundamental
Representation or Damages for which indemnification is
provided in Section 7.1.
36
Aaron Rachelson, Corporate Acquisitions, Mergers and Divestitures § 4.41
(2013).
15
The ―Claims Basket‖ in Section 8.4(b) arguably defines ―materiality‖ for purposes of the
SPA, but does not define what a ―material breach‖ of a Material Contract would be. In
that regard, it would seem reasonable to consider the materiality concept of Section
8.4(b) in interpreting Section 4.12.
One conceivable interpretation, for example, is that the parties intended any
breach of a Material Contract that involved a loss of $100,000 or more to a party to that
contract to constitute a ―material breach.‖ Such an interpretation would recognize that
the parties to the SPA probably intended some relationship to exist between ―material
breach‖ as it relates to Section 4.12(b)(iii)(A) of the SPA and the Claims Basket in
Section 8.4(b).
Even assuming the Claims Basket effectively established that any breach of
$100,000 or more was ―material,‖ it is conceivable that QMC‘s claim does not involve
damages greater than that amount. In its Complaint, IMX alleges that the ―services
performed for VA members constituted only a small fraction of the total services
performed by QMC for which HMN, Inc.‘s thousands of plan members accessed HMN,
Inc.‘s negotiated rates.‖37 IMX also avers that QMC did not seek a monetary remedy.38
37
Compl. ¶ 12.
38
Id. ¶ 15 (―The parties engaged in additional correspondence, leading up to an
August 6, 2012 letter from MultiPlan, in which IMX discovered that QMC sought
only to have HMN, Inc., ‗stop providing network access to third parties who are
not covered under the Agreement,‘ and did not seek any monetary remedy.‖ (bold
omitted)).
16
Based on those allegations, it is reasonably conceivable that IMX could prove that
QMC‘s threatened claim is for an amount less than $100,000. In that event, even under
the arguably lower standard for ―material breach‖ derived from the basket provisions,
IMX conceivably could succeed in showing that HMN, Inc. was not in material breach of
a Material Contract and that Defendants do not have an indemnifiable claim.
Accordingly, I conclude that IMX has stated a claim for the declaratory and injunctive
relief it seeks, and that Defendants‘ motion to dismiss should be denied.
D.
Disputed Amount
IMX next argues that it is entitled to release of the Escrowed Funds, because
Defendants have not adequately established a Disputed Amount as required by Section
3(a)(iv) of the Escrow Agreement.
Defendants, on the other hand, assert that they
provided a Disputed Amount in their July 26, 2012 letter, which contained proposed joint
written instructions for the Escrow Agent to retain the remaining Escrowed Funds.39
Section 3(a)(iv) does not contain a notice provision. Instead it directs that, on the
Survival Expiration Date, the Escrow Agent should release the Escrowed Funds minus
the Disputed Amount. The section then goes on to define Disputed Amount as the
39
Defendants also posit that they satisfied the minimal notice requirements of
Section 8.6 of the SPA. In that regard, IMX stated that it ―takes no position on
whether Defendants properly complied with the notice provision of the SPA
because . . . Defendants do not have an indemnifiable claim for which notice could
be given.‖ Pl.‘s Answering Br. 19. Accordingly, I assume, without deciding, that
Defendants satisfied the notice requirements of Section 8.6 of the SPA.
17
―aggregate amount of all Damages alleged to be incurred by any Purchaser Indemnified
Party pursuant to any Pending Claim that remains unpaid as of such date.‖40
Where the Disputed Amount is less than the Escrowed Funds, a party would need
to specify that amount so as to enable the Escrow Agent to release the difference between
the Escrowed Funds and the Disputed Amount. But, where the Disputed Amount is
greater than or equal to the Escrowed Funds, a party could so state that without assigning
an exact number to the Disputed Amount. And, where a party proposes that the Escrow
Agent withhold all of the Escrowed Funds, one reasonably would infer that the Disputed
Amount was greater than the Escrowed Funds.
Here, Defendants proposed in their July 26 letter, that the Escrow Agent should
―hold the remaining Escrow[ed] Funds in the Escrow Account pursuant to Section
3(a)(iv) of the Escrow Agreement until a Pending Claim relating to [QMC] is resolved.‖41
In doing so, Defendants communicated their view that the Disputed Amount exceeded
the Escrowed Funds. Accordingly, I conclude that Defendants satisfied their obligations
under the Escrow Agreement to provide a Disputed Amount and find unpersuasive
IMX‘s general allegation that ―MultiPlan alleged no damages arising from the QMC‘s
allegations prior to July 29, 2012 and, as a result, as of that date, there was no Disputed
Amount.‖42 Thus, IMX has failed to state a claim for either declaratory or injunctive
40
Escrow Agreement § 3(a)(iv).
41
Compl. Ex. E.
42
See Compl. ¶ 24.
18
relief based on its allegation that Defendants failed to comply with a contractual
requirement to state a Disputed Amount.
E.
The Inspector General’s Report
Finally, IMX‘s Complaint seeks a declaratory judgment that ―any claim arising
from QMC‘s allegations is now moot.‖43 One basis for that conclusion is that the
Inspector General‘s Report eliminates any threatened claim by QMC, thereby mooting
Defendants‘ claim for indemnification. Defendants counter that the Inspector General‘s
Report is irrelevant because: (1) it merely provided a set of recommendations; (2) it did
not apply retroactively; and (3) QMC‘s purported claims are based on ―third parties‖
other than the VA.
IMX asks the Court to ignore Defendants‘ arguments and, instead, accept its
allegation on information and belief in the Amended Complaint that ―this change [in
policy] has resulted in QMC no longer pursuing any claims against Defendants related to
the VA, including any claim for retroactive relief.‖44 But, ―[i]t is well established that ―a
claim may be dismissed if allegations in the complaint or in the exhibits incorporated into
the complaint effectively negate the claim as a matter of law.‖ 45 Here, the Inspector
43
Id. ¶ 29.
44
Pl.‘s Answering Br. 21 (citing Compl. ¶ 20).
45
In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 169 (Del. 2006); see
also H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129, 139 (Del. Ch. 2003)
(―Under Rule 12(b)(6), a complaint may, despite allegations to the contrary, be
dismissed where the unambiguous language of documents upon which the claims
are based contradict the complaint‘s allegations.‖).
19
General‘s Report upon which IMX relies undermines its suggestion that the report itself
is conclusive evidence of mootness.46
As an initial matter, the Inspector General‘s Report merely provides a set of
recommendations to the Chief Procurement and Logistics Officer and the Under
Secretary for Health.47 Until those officials and the VA actually adopt and implement
these recommendations, the report does not moot Defendants‘ claims.
Indeed, the
evidence before me, including an ―Action Plan‖ at the end of the Inspector General‘s
Report, indicates that the recommendations have not been implemented. The Action Plan
states that the VA will work with the Chief Procurement and Logistics Officer to
―determine the availability of re-pricing contract opportunities that would be beneficial to
the [VA]‖ and ―will perform a cost benefit ratio in order to determine if continued use of
re-pricing continues to be beneficial with the use of Medicare rates.‖48
That forward-looking language also indicates that the report‘s recommendations
will not apply retroactively. Importantly, however, QMC‘s threatened claims appear to
include matters that arose before the Inspector General‘s Report.49 Thus, even if the VA
were to implement the policies stated in the Inspector General‘s Report, the
implementation would not necessarily affect QMC‘s past claims and Defendants‘
46
The Inspector General‘s Report is Exhibit K to the Complaint.
47
Inspector General‘s Report 15.
48
Id. at 22, 23 (emphasis added).
49
Compl. Ex. H (―[Y]our assertion that the Agreement limits retrospective review of
claims to two years is misplaced.‖).
20
indemnification claims would not be mooted. For these reasons, I conclude that IMX‘s
position that the Inspector General‘s Report moots Defendants‘ claims is without merit.
Nevertheless, Defendants‘ claim conceivably could be mooted for reasons alluded
to in the Inspector General‘s Report or otherwise. For example, the statute of limitations
may run on QMC‘s purported claim. Or, the existence of the Inspector General‘s Report
may cause QMC to reconsider its purported claim. Having concluded that Defendants
are not entitled to dismissal of IMX‘s Complaint, and based on IMX‘s allegation that
―any claim arising from QMC‘s allegations is now moot,‖ I find it appropriate to deny
this aspect of Defendants‘ motion to dismiss and allow discovery to go forward.
III.
CONCLUSION
For the reasons stated in this Memorandum Opinion, I deny Defendants‘ motion to
dismiss the Complaint. I also hereby vacate the stay entered on May 23, 2013.
IT IS SO ORDERED.
21
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