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St. Elizabeth Medical Center v. UC Health

United States District Court, E.D. Kentucky, Northern Division, Covington

July 30, 2014

ST. ELIZABETH MEDICAL CENTER, Plaintiff/Counter-Defendant,
UC HEALTH, Defendant/Counter-Claimant.



This action was filed in federal court invoking diversity jurisdiction. St. Elizabeth is a Kentucky citizen while UC Health is an Ohio citizen and the amount in controversy exceeds $75, 000.

This matter is before the Court on St. Elizabeth's motions for summary judgment on its Medicaid claim, bond prepaid interest claim, and a request under FRCP 56(f) for its indemnification claim. (Doc. 68, Plaintiff's motion for summary judgment on its Medicaid claim; Doc. 54, Plaintiff's motion for summary judgment on its bond interest claim; and Doc. 95, Plaintiff's Request for FRCP 56(f) consideration on its indemnification claim.) In addition, the matter is before the Court on UC Health's motions for summary judgment on its Medicaid claim, and St. Elizabeth's indemnification claim. (Doc. 66, Defendant's motion for summary judgment on its breach of contract, conversion, and unjust enrichment claims relating to the Medicaid funds; Doc. 64, Defendant's motion for summary judgment on Plaintiff's indemnification claim.) In addition, each party has filed a Daubert motion to strike the other party's expert witness. (Doc. 49, Plaintiff's motion to strike Defendant's rebuttal expert witness, Robert Russ; Doc. 80, Defendant's motion to disqualify Plaintiff's expert witness, Troy Dahlberg, and to strike Troy Dahlberg's deposition at Doc. 51).


Separation of St. Luke Hospitals (East and West) from UC Health and its transition to St. Elizabeth.

The Health Alliance (now known as "UC Health") was a consortium of hospitals, including St. Luke Hospitals ("SLH"), and was responsible for the overall management of its member hospitals. (Doc. 30-3. p. 16.) The purpose of these hospitals' coming under the umbrella of one management company was to reduce the cost of providing healthcare. ( Id. ) This new hospital consortium would reduce cost by creating more efficient systems and taking advantage of its new economy of scale. ( Id. ) SLH was a member of the Health Alliance of Greater Cincinnati from 1995 until August 31, 2008. (Doc. 52-1, Financial Settlement Agreement ("FSA"); Doc. 30-3 p. 2, Third Amended and Restated Joint Operating Agreement ("JOA"); Doc. 33-4 p. 1, First Amendment to the Third Amended and Restated Joint Operating Agreement).

On June 6, 2006, SLH intervened in a lawsuit between The Christ Hospital and the Health Alliance in Ohio state court, and the Court permitted SLH to withdraw from the Health Alliance as of the date of intervention. (Doc. 33-3, Ohio State Court Final Judgment). However, this separation was a complex transaction that culminated in a financial settlement agreement on October 27, 2008, which was effective as of August 31, 2008. (Doc. 52-1, FSA).

The parties seem to agree on the general structure of the deal between SLH and the Health Alliance. SLH had a 12.08% interest in the Health Alliance's retained net earnings. (Doc. 30-3 p. 25). St. Elizabeth asserts SLH agreed to give up its 12.08% interest to be a primarily debt-free hospital, where it would be relieved of its obligation as an "Obligated Party" under the Master Trust Indenture to the debt of the Health Alliance. (Doc. 50-3, Agreement Regarding Prepayment of Certain Bond Obligations). The parties agreed that SLH would have a "net book value of the sum of the Assets... equal" to $98 million (the "Guaranteed Amount"). (Doc. 52-1 p. 3, Section 1.5(a) of the Financial Settlement Agreement).

The Health Alliance agreed to "transfer, convey, assign, and deliver to SLH, and/or release from the provisions of the JOA" the assets as described in Section 1.1 of the FSA. (Doc. 52-1 p. 2, Section 1.1 of the FSA). The Health Alliance was a management company not a holding company; it did not own the assets of SLH but instead maintained consolidated financial statements of SLH and the other Participating Entities in the Health Alliance. (30-3 Sec. 4.4, 4.5, JOA).

To avoid a lengthy auditing process, the parties agreed to transfer the net book value of the assets back to SLH. That is, instead of inspecting each item and determining a fair market value for each asset, the parties chose to accept the value of each asset on the Health Alliance's financial statements. (Doc. 52-1 p. 8, Section 3.5 of the FSA). Section 3.5 guaranteed the net book values were accurate.[1] Combined with Section 1.5, SLH was guaranteed assets that had a net book value of $98 million. (Doc. 52-1 p. 3-4).


1. Are the expert reports admissible? Yes, the experts satisfy Daubert and were timely filed.

2. Is St. Elizabeth entitled to reimbursement for its payment of the interim bond interest? Yes, once SLH left the Obligated Group, it no longer had any obligation to pay bond interest.

3. Is St. Elizabeth entitled to indemnification under the FSA? No, the claim for which St. Elizabeth seeks indemnification was not an indeminifiable claim under Section 10.2(v) of the FSA because it was an assumed liability under Section 1.3 of the FSA.

4. Is St. Elizabeth entitled to keep the Medicaid settlement funds? Yes, because the Medicaid Settlement was not an asset subject to the $98 million Guaranteed Amount under Section 1.5 of the FSA.

1. Daubert Analysis

"Absent any need to clarify or define terms of art, science, or trade, expert opinion testimony to interpret contract language is inadmissible." N. Am. Specialty Ins. Co. v. Myers, 111 F.3d 1273, 1281 (6th Cir. 1997). However, where there is a need to define terms of art, expert opinion testimony is admissible. Fed.R.Civ.P. 702. However, an expert goes too far when interpreting contract language. Transpro, Inc. v. Leggett & Platt, Inc., 297 F.Appx. 434, 441-42 (6th Cir. 2008) (holding that an accounting expert's testimony that "as of" is a term of art under GAAP and defining it to give clarity to the court's contract interpretation was admissible).

Here, Dahlberg provides the Court with an opinion that blends contract interpretation with definitions and explanations of accounting terms of art. Where Dahlberg's expert report strays into the inadmissible realm of contract interpretation, it is inadmissible. However, his expert testimony defining accounting terms of art is admissible. This analysis applies equally to Dr. Robert Russ's expert report.

St. Elizabeth also argues that Russ's report should be barred because he was not properly identified as an expert prior to the Court's deadlines. However, as UC Health points out, Russ's report is a rebuttal report and it met the Court's deadline in that capacity. As such, Russ's report will not be stricken for failing to meet the expert report deadline.

2. Bond Interest Claim


When SLH left the Health Alliance, it had no infrastructure in place to pay expenses, collect its accounts receivable, or maintain proper financial statements because the Health Alliance had been responsible for these tasks for the prior fifteen years. Thus, SLH and UC Health entered into a Transition Services Agreement ("TSA") in which UC Health would continue to maintain these administrative functions. (Doc. 33-1 p. 8, TSA).

While UC Health was operating under the Transition Services Agreement to provide these office services, UC Health charged SLH interest as a member of the "Obligated Group" under the Master Trust Indenture ("MTI"). (Doc. 53, MTI). This interest totaled $901, 961 from September through December 2008. (Doc. 34-1 ¶ 37 & fn. 49, Dahlberg Expert Report).

UC Health and SLH entered into the "Agreement Regarding Prepayment of Certain Bond Obligations" ("Bond Prepayment Agreement") to facilitate SLH's exit from the Health Alliance. (Doc. 50-3). Under Section 5.3 of the Joint Operating Agreement, the Joint Operating Company ("JOC" or "the Health Alliance") was the only entity that could incur debt on behalf of the Participating Entities, of which SLH was one. (Doc. 30-3, § 5.3). The parties agree that each Participating Entity was also a member of the Obligated Group which was jointly and severally liable for the debts of the Joint Operating Company. (Doc. 72 p. 3, UC Health's Memorandum in Opposition to Plaintiff's Motion for Summary Judgment; Doc. 54-1, p. 3, Plaintiff's Motion for Summary Judgment on the Bond Interest Misallocation Claim).

The parties also agree that the total bond obligation attributable to capital improvements specifically for SLH was $81, 220, 000. (Doc. 72 p. 3; Doc 54-1 p. 3). This included three bonds: Series 1997C, 1997D, and 2001E. (Doc. 72 p. 3; Doc. 50-3 p. 4). To leave the Health Alliance, SLH either had to assume the liability for the above-mentioned bonds or prepay them. UC Health admits SLH chose to prepay the bonds. (Doc. 72 p. 3).

SLH agreed to give up its 12.08% interest in the retained earnings of the Health Alliance if the Health Alliance prepaid its bond obligations.[2] To accomplish this, the Health Alliance placed the funds to pay off all of the bonds, interest, and trust fees in trust with Deutsche Bank on August 21, 2008. (Doc. 42-1, Deutsche Bank escrow records). The trust then paid interest on these bonds and redeemed them on November 21, 2008 (2001E bond) and December 3, 2008 (1997C and D bonds). ( Id. ) The trust was required, under the Master Trust Indenture, to wait ninety (90) days to redeem the bonds to protect the bondholders against a bankruptcy preference should the Health Alliance file for bankruptcy within those 90 days. The trustee paid the bond interest during the interim period and redeemed the bonds after the preference period ended. (Doc. 42-1).

St. Elizabeth retained Troy A. Dahlberg as a forensic accounting expert to testify to the accounting terms and accounting requirements relevant to the bond prepayment interest claim (as well as the other claims). He testified that GAAP does not require interest expense to be an operating expense. (Doc. 34-1 p. 22, Expert Report of Troy A. Dahlberg). Further, he notes that the accounting processes that were in place before August 21, 2008 remained in place through December, which would cause SLH to be charged the interest ...

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