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Alfred Jennings, Dale Hayford v. Rapid City Regional Hospital

August 24, 2011

ALFRED JENNINGS, DALE HAYFORD, ROMAN ROBERTS, RICK FARLEY, TODD CARLSON, CLAY ROSE, LEONARD FEIST, KASEY COFFIELD, STANLEY FEDERKIEWICZ, WILLIAM MAY, DICKIE KAISER, DEAN SORENSON, ROBERT KOSKI, MARY GEERSMA, CHARLES EDWARDS, DONALD BERTALOT, LYNN SHUCK, SUSAN BURNISON, KELVIN KIEL, CHARLES SWANSON, CHARLOTTE WARD AND KENNETH MERNAUGH,
PLAINTIFFS AND APPELLANTS,
v.
RAPID CITY REGIONAL HOSPITAL, INC., REGIONAL HEALTH NETWORK, INC., AND REGIONAL HEALTH PHYSICIANS, INC.,
DEFENDANTS AND APPELLEES.



APPEAL FROM THE CIRCUIT COURT OF THE FOURTH JUDICIAL CIRCUIT LAWRENCE COUNTY, SOUTH DAKOTA HONORABLE RANDALL L. MACY Judge

The opinion of the court was delivered by: Meierhenry, Retired Justice.

ARGUED FEBRUARY 16, 2011

[¶1.] Plaintiffs (Employees) were all formerly employed by Pope & Talbot, a lumber business located in Spearfish, South Dakota. Pope & Talbot self-insured a health benefits plan for Employees, their spouses, and dependents. This plan was partially paid for by deductions from Employees' paychecks. In January 2000, Pope & Talbot entered into a contract (Payer Agreement) with First Choice of the Midwest (FCM), a managed care organization, to administer a self-insured health plan. FCM managed healthcare services by establishing a Preferred Provider Organization Network (PPO Network). In March 1998, FCM contracted with Rapid City Regional Hospital System (Regional) to participate in the PPO Network (Hospital Agreement).*fn1 Under the Agreements, Regional would submit claims to FCM for healthcare services provided to Pope & Talbot Employees. FCM then would process the claims to determine coverage and provider rates and forward the processed claims to Pope & Talbot for payment. Payer Agreement § 2.08; Hospital Agreement § 5.03. Both Agreements provided that "members" (in this case Pope & Talbot Employees) were "[e]xcept as otherwise permitted under applicable law . . . not liable for any charges for Healthcare Services that are Covered Services." Payer Agreement § 2.11; Hospital Agreement § 5.05.

[¶2.] In November 2007, Pope & Talbot filed for Chapter 11 reorganization bankruptcy. Pope & Talbot continued to take payroll deductions from Employees for medical coverage after filing bankruptcy, but stopped paying Regional for some of the covered charges. In May 2008, Pope & Talbot sold the lumber company and stopped making any payments owed under the health plan. Regional's collection agencies then directly billed Employees for services that should have been paid by Pope & Talbot under the Agreements.

[¶3.] Employees filed suit to stop Regional's attempts to collect payment from them for services that were covered by Pope & Talbot's benefit plan. Employees sought relief under the following theories: declaratory judgment, injunction, breach of contract, negligent infliction of emotional distress, and bad faith breach of contract. Regional counterclaimed for a declaratory judgment that "[Employees] are obligated to pay for the care rendered by [Regional]."

[¶4.] Employees moved for partial summary judgment on their breach of contract claim. Employees argued that the Hospital and Payer Agreements prohibited Regional from collecting covered medical care charges directly from the Employees because those charges were Pope & Talbot's obligation. Payer Agreement § 2.11; Hospital Agreement § 5.05. Regional moved for summary judgment on all of Employees' claims because "there [were] no disputed issues of material fact regarding [Employees'] obligation to pay [Regional] for the healthcare services provided." At the summary judgment hearing, Regional argued to the circuit court that Employees were not third-party beneficiaries under either the Payer Agreement or Hospital Agreement and were therefore unable to assert any protection under the Agreements.*fn2

[¶5.] The circuit court granted summary judgment in favor of Regional on all of Employees' claims and denied Employees' motion for partial summary judgment. The court found that "nothing in these contracts relieves [Employees] from paying for medical services if the self-insured employer fails to pay the provider." We reverse and remand.

Analysis

Employees are third-party beneficiaries of both Agreements.

[¶6.] The first issue is whether Employees have standing as third-party beneficiaries to enforce the provisions of the two contracts: (1) the Payer Agreement between Pope & Talbot and FCM, and (2) the Hospital Agreement between FCM and Regional. If Employees are third-party beneficiaries of the Agreements, they have standing to use the Agreements to challenge Regional's attempt to collect for covered medical services left unpaid by Pope & Talbot. Resolution of the issue is a matter of law, which we review de novo. Masad v. Weber, 2009 S.D. 80, ¶ 10, 772 N.W.2d 144, 149.

[¶7.] The circuit court found that Employees were not third-party beneficiaries of the Hospital Agreement and the Payer Agreement. The circuit court explained that the Agreements must be read as a whole and that "[Employees] may have had the benefit of third-party status if [Regional] would have received payment from Pope [and Talbot] and [Regional] then tried to balance bill the [Employees]." The circuit court viewed payment by Pope & Talbot as a condition precedent of the Hospital Agreement, which, if paid, would have required Regional to accept the discounted payment in exchange for the services provided. Under the circuit court's reasoning, Pope & Talbot's failure to pay entitled Regional to bill Employees for the full cost of services provided.

[¶8.] The circuit court's characterization of Pope and Talbot's payment as a condition precedent is misplaced. We have said:

A condition precedent is a contract term distinguishable from a normal contractual promise in that it does not create a right or duty, but instead is a limitation on the contractual obligations of the parties.

A condition precedent is a fact or event which the parties intend must exist or take place before there is a right to performance. . . . A condition is distinguished from a promise in that it creates no right or duty in and of itself but is merely a limiting or modifying factor. . . . If the condition is not fulfilled, the right to enforce the contract does not come into existence.

Johnson v. Coss, 2003 S.D. 86, ¶ 13, 667 N.W.2d 701, 705-06 (citing 13 Richard A. Lord, Williston on Contracts, § 38:1 (4th ed. 2000)).

[¶9.] Additionally, we have noted that "courts generally will interpret conditions as stipulations rather than conditions precedent that could trigger forfeiture." Weitzel v. Sioux Valley Heart Partners, 2006 S.D. 45, ¶ 38, 714 N.W.2d 884, 895. The Agreements in this case do not reflect the intent to create a condition precedent. Pope & Talbot's agreement to pay can only be viewed as a promise. Failure to pay may constitute a breach of the contract but does not render the contract unenforceable or automatically discharge benefits to third parties. Id.

[¶10.] Under South Dakota law, "[a] contract made expressly for the benefit of a third person may be enforced by him at any time before the parties thereto rescind it." SDCL 53-2-6. We have stated that a purported third-party beneficiary "must clearly show that [the contract] was entered into with the intent on the part of the parties thereto that such third party should be benefited thereby."

Sisney v. Reisch, 2008 S.D. 72, ¶ 9, 754 N.W.2d 813, 817-18. See also Sisney v. State, 2008 S.D. 71, ¶ 10, 754 N.W.2d 639, 643. To determine the parties' intent, we first look at the language of the contract.*fn3 Reisch , 2008 S.D. 72, ¶ 9, 754 N.W.2d at 818. "The terms of the contract must clearly express intent to benefit that party or an identifiable class of which the party is a member. . . . This intent might in a given case, sufficiently appear from the contract itself." Id.

[¶11.] In this case, the contract language clearly expresses intent to benefit the employees of Pope & Talbot. The Agreements are part of the managed care arrangement and contain similar and, in some instances, identical language when referring to "members" covered under the Agreements. By the terms of the Agreements, the parties acknowledge they are part of a "contractual relationship" to "provide" medical services for eligible employees or "obtain access" to the services for eligible employees. The terms of the Payer Agreement between Pope & Talbot and FCM explicitly state the purpose of the contract is to provide healthcare services for its employees through the PPO Network. It recites as follows:

Whereas, Payer exercises discretionary authority to control respecting management and administration of one or more Employer's Health Benefits Plan(s) which are offered to eligible employees, their ...


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