IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 00-30645
In The Matter of: LILJEBERG ENTERPRISES, INC.,
Debtor,
--------------------
LIFEMARK HOSPITALS, INC.,
Appellant - Cross-Appellee,
versus
LILJEBERG ENTERPRISES, INC.,
Appellee - Cross-Appellant,
_________________________________________________________________
LILJEBERG ENTERPRISES, INC.,
Appellee - Cross-Appellant,
versus
LIFEMARK HOSPITALS, INC.,
Appellant - Cross-Appellee,
_________________________________________________________________
LIFEMARK HOSPITALS, INC.,
Appellant - Cross-Appellee
versus
ST. JUDE HOSPITAL OF KENNER, LOUISIANA, L.L.C.,
Appellee - Cross-Appellant,
_________________________________________________________________
LILJEBERG ENTERPRISES, INC.,
Appellee - Cross-Appellant,
versus
LIFEMARK HOSPITALS OF LOUISIANA, INC.;
LIFEMARK HOSPITALS, INC.;
AMERICAN MEDICAL INTERNATIONAL;
TENENT HEALTHCARE CORPORATION,
Appellants - Cross-Appellees.
Appeals from the United States District Court
For the Eastern District of Louisiana
August 28, 2002
Before HIGGINBOTHAM, DeMOSS, and BENAVIDES, Circuit Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:
This appeal brings to us three of four consolidated actions
arising from a failed relationship formed to build and manage a
hospital and medical office building in Kenner, Louisiana, the
latest round in the parties’ protracted litigation.
Following a bench trial of the consolidated cases, the
district court overturned a judicial sale of the hospital,
reinstated various contracts which defined the financing and lease
of the hospital, and denied the holder of the hospital mortgage a
claim for a deficiency judgment. The court also ruled that, under
a Clinical Pharmacy Management Agreement governing the operation of
the hospital pharmacy and the flow of drugs to the hospital,
Liljeberg Enterprises, Inc., the hospital pharmacy operator and
principal supplier of drugs to the hospital, was due almost $12.5
million and the hospital operators and principal purchasers of the
drugs for the hospital were owed $741,879.
In Chapter 11 proceedings, the district court conditionally
granted the debtor Liljeberg Enterprises, Inc.’s request to assume
2
the Clinical Pharmacy Management Agreement as an executory contract
pursuant to 11 U.S.C. § 365.1
We reverse the district court’s judgment setting aside the
judicial foreclosure of the hospital and declining to award the
deficiency due on the mortgage debt, we reverse the district
court’s order allowing the debtor in the Chapter 11 proceedings to
assume the pharmacy agreement, and finally we affirm in part and
reverse in part the various awards made under the pharmacy
agreement.
I.
First, the dramatis personae. The four consolidated actions
involve Lifemark Hospitals of Louisiana, Inc., Lifemark Hospitals,
Inc., American Medical International, and Tenet Healthcare
Corporation on one side,2 and Liljeberg Enterprises, Inc.
(“Liljeberg Enterprises”) and St. Jude Hospital of Kenner, La.,
L.L.C. (“St. Jude”) (collectively the “Liljebergs”) on the other.
Liljeberg Enterprises is a corporation whose sole shareholders
are John Liljeberg and his brother Robert Liljeberg, both licensed
pharmacists. The Liljebergs, through Liljeberg Enterprises, formed
1
Neither party appeals from the district court’s judgment in Cause No.
95-2922, denying Liljeberg Enterprises, Inc.’s request for injunctive relief.
The district court consolidated Cause No. 93-1794 early on with Cause Nos. 93-
4249, 94-3993, and 95-2922 for all purposes, but, for ease of reference, we
follow the district court and the parties in referring to the various parts of
the district court’s judgment in the case by the original causes of action
numbers.
2
We refer to these parties collectively or individually as “Lifemark”
except where further distinction is relevant.
3
a series of corporations and a partnership to own or operate a
medical complex consisting of a hospital, a hospital pharmacy, and
a medical office building. St. Jude, a wholly-owned subsidiary of
Liljeberg Enterprises, owned the St. Jude Hospital (“hospital”),
which is now known as Kenner Regional Medical Center. St. Jude
Medical Office Building, Ltd. Partnership (“St. Jude Limited
Partnership”), of which St. Jude was the general partner, owned the
adjacent medical office building. Funding for that building came
from Travelers Insurance Company, a loan of $25 million on October
10, 1985, secured by a mortgage on the medical office building and
an assignment to Travelers of rents to be paid on leased spaces in
the building.
Lifemark Hospitals, Inc. was a national hospital management
company that provided financing to St. Jude to build the hospital.
Lifemark Hospitals of Louisiana, Inc., a wholly owned subsidiary of
Lifemark Hospitals, Inc., entered into an agreement with St. Jude
to lease and operate the hospital. American Medical acquired
Lifemark Hospitals, Inc. in 1984, and Tenet became the successor to
American Medical in 1995.
II.
On August 26, 1981, the Liljebergs obtained a “certificate of
need” under Section 1122 of the Social Security Act to build and
operate a 300-bed acute care facility in the New Orleans area.3
3
The 1122 certificate allowed certain capital costs to be passed through
to the government.
4
This Section 1122 certificate was the only one available in the New
Orleans area and the last one to be granted in Louisiana. Lacking
the money to build a hospital, the Liljebergs immediately solicited
participation by many companies, including Health Services
Acquisition Corporation. The Liljebergs’ negotiations with Health
Services extended over several months before disintegrating into
heated litigation.4 The Liljebergs began their discussions with
Lifemark in the latter part of 1981, under the shadow of the
approaching deadline under the Section 1122 certificate of need.
In their negotiations with Lifemark, John Liljeberg was
assisted by a team of two attorneys, one of whom was a CPA, an
economist, and two pharmacy consultants. John Liljeberg insisted
from the outset that, as part of any deal, the Liljebergs had to be
given a contract to provide pharmaceutical services to the
hospital. On December 21, 1982, the parties signed a letter of
intent setting forth the principal terms of their agreement.
The final documents were executed in early 1983, including:
(1) a loan agreement, wherein Lifemark Hospitals, Inc. agreed to
provide financing of over $44 million to St. Jude for construction
of the hospital; (2) a promissory note signed by St. Jude and made
payable to Lifemark Hospitals, Inc.; (3) a collateral mortgage, a
collateral mortgage note, and a pledge of the collateral mortgage
note, all signed by St. Jude to secure the note to Lifemark
4
See, e.g., Liljeberg v. Health Servs. Acquisition Corp., 486 U.S. 847
(1988).
5
Hospitals, Inc.; (4) a lease agreement wherein Lifemark Hospitals
of Louisiana, Inc. agreed to lease and operate the hospital from
St. Jude; and (5) the Clinical Pharmacy Management Agreement
(“pharmacy agreement”), signed by Liljeberg Enterprises and
Lifemark Hospitals of Louisiana, Inc., wherein Liljeberg
Enterprises agreed to provide pharmaceutical services to the
hospital. Additionally, the Liljebergs received a cash payment of
$2.5 million as called for by the letter of intent.
These agreements were intertwined in at least two ways: (1)
St. Jude’s note payments and Lifemark’s lease payments were
offsetting transactions so that their monthly payment was only a
bookkeeping entry;5 and (2) the pharmacy agreement contained a
cross-default provision.
A dispute arose between Lifemark and St. Jude over the
financing and project management involved in the construction of
the hospital. That dispute was settled by written agreement in
1991 after arbitration. As part of the settlement, St. Jude
executed a renewal note, renewing and extending the original note.
Like the original note, the renewal note was secured by the
original collateral mortgage, collateral mortgage note, and pledge
of collateral mortgage note. To further secure the renewal note,
St. Jude executed a “Collateral Assignment of Basic Rent”
5
Under both its original note and a later renewal note, St. Jude had the
right to offset its right to receive basic rent against St. Jude’s note
obligations. St. Jude exercised this option at all relevant times through
October 1, 1994.
6
(“collateral assignment of rents”), which was recorded, providing
Lifemark Hospitals, Inc. a secured interest in rents in the event
of a future default by St. Jude.
The hospital, hospital pharmacy, and medical office building
became operational in 1985. By March of 1990, St. Jude Limited
Partnership had defaulted on its Travelers loan and, in June 1990,
Travelers sued St. Jude Limited Partnership and other defendants.
The suit, seeking seizure and sale by judicial process of the
medical office building, was successful, and the building was sold
at public auction on October 18, 1991 to Travelers, the sole
bidder.
More protracted litigation ensued, in the course of which a
panel of this court commented that the conduct of the Liljebergs
constituted “as egregious and unconscionable of bad faith
contractual dealings as the members of this panel can recall having
encountered.”6 Travelers obtained an amended judgment in December
1992 awarding Travelers both unpaid rents and damages from St. Jude
Limited Partnership based on, inter alia, a jury verdict finding
waste committed by the Liljebergs with respect to the collateral in
the medical office building securing the repayment of Travelers’s
loan to St. Jude Limited Partnership for the construction of the
building. When efforts to collect the amended judgment against the
partnership failed, Travelers filed a separate action against St.
6
Travelers Ins. Co. v. St. Jude Hosp., No. 92-9579, 21 F.3d 1107, at 2
(5th Cir. Apr. 20, 1994) (unpublished per curiam).
7
Jude, the general partner of St. Jude Limited Partnership, in which
Travelers obtained a summary judgment on July 30, 1993, which this
Court affirmed.7
On August 12, 1993, Travelers secured a lien on the hospital
by filing its $7.8 million judgment against St. Jude. The
Travelers lien primed Lifemark’s collateral mortgage because
Lifemark had not at that time reinscribed its lien.8 Lifemark
reinscribed its collateral mortgage on June 29, 1994.
Within the same time frame, on January 27, 1993, within one
month after Travelers obtained its $7.8 million judgment, Liljeberg
Enterprises filed for bankruptcy protection. In the course of
these bankruptcy proceedings, Liljeberg Enterprises as the debtor
in possession, sought the federal district court’s permission to
assume, that is, continue to operate under, the pharmacy agreement,
pursuant to 11 U.S.C. §§ 365 and 1107. Shortly thereafter, on
August 11, 1993, within one month after Travelers sought to collect
its judgment against St. Jude, St. Jude filed for Chapter 11
bankruptcy protection. The bankruptcy court dismissed that action
one year later, finding that St. Jude had filed in bad faith.
7
Travelers Ins. Co. v. St. Jude Hosp. of Kenner, La., Inc., 37 F.3d 193
(5th Cir. 1994).
8
Lifemark’s collateral mortgage is dated March 15, 1983. In order to
preserve the rank of the collateral mortgage, it had to be reinscribed by March
15, 1993. See LA. CIVIL CODE art. 3328; accord id. art. 3369 (repealed by 1992 La.
Acts 1132). Nearly five months later Travelers filed its judgment lien. One
effect of Lifemark’s failure to reinscribe was that it was not able to foreclose
on the hospital following the filing of the Travelers lien without paying the
Travelers debt. Lifemark, in fact, ultimately sued its former attorneys for
legal malpractice on the basis of this failure to reinscribe.
8
On August 30, 1994, Travelers began the process of foreclosing
on the hospital. Once again, St. Jude asked the district court to
vacate Travelers’s writ of execution and to find Travelers’s lien
inferior to Lifemark’s lien. At St. Jude’s request, Lifemark filed
a memorandum setting forth the facts concerning the ranking of the
liens. The court denied St. Jude’s motions and allowed the
foreclosure sale to proceed.
Prior to the sale, Lifemark Hospitals, Inc. filed a motion in
the federal district court before Judge Henry A. Mentz, Jr. seeking
permission to bid credits against the value of its collateral
mortgage instead of cash at the judicial sale, subject to any
obligation to pay the amount of cash necessary to satisfy the
superior judicial mortgage of Travelers. The court granted
Lifemark Hospitals, Inc.’s motion.
The United States Marshal’s seizure and judicial sale of the
hospital occurred on October 28, 1994. Lifemark Hospitals of
Louisiana, Inc. was the sole bidder and purchased the hospital for
$26 million, or two-thirds of the $37.5 million appraised value as
the minimum price prescribed by Louisiana statute. The purchase
price was distributed as follows: (1) $7,786,083.33 went to
Travelers to satisfy its lien; (2) $18,165,483.74 went to Lifemark
Hospitals, Inc. to reduce the deficiency owed on St. Jude’s note to
Lifemark Hospitals, Inc.; and (3) the balance was applied to costs
of the sale. The district court subsequently confirmed the sale.
St. Jude appealed the orders of the district court, and this court
9
affirmed, dismissing as moot St. Jude’s challenge to the confirmed
judicial sale.9
As a result, Lifemark became the owner of the hospital, and
Lifemark’s lease with St. Jude was extinguished as a matter of law
under the doctrine of confusion. At the same time, Lifemark
accelerated the debt owed by St. Jude under the renewal note, and
Lifemark sought to terminate the pharmacy agreement based upon the
cross-default provision in that agreement.
III.
Ultimately four lawsuits were consolidated and tried to the
bench in the United States District Court for the Eastern District
of Louisiana in June and July 1997. The district court entered
findings of fact and conclusions of law and a partial judgment on
April 26, 2000, later amending the judgment by adding a
certification under Federal Rule of Civil Procedure 54(b) on August
1, 2000, three years after the case was tried. The amended
judgment included a Rule 54(b) certification for immediate appeal
of “all claims other than Liljeberg Enterprises, Inc.’s claim in
Cause No. 93-4249 for damages accruing from the commencement date
of the trial and continuing through the date of” the amended
judgment.
9
See Travelers Ins. Co. v. St. Jude Hosp. of Kenner, La., Inc., Nos. 94-
30636, 94-30639 & 94-30665, 56 F.3d 1386 (5th Cir. May 24, 1995) (unpublished per
curiam).
10
In the first lawsuit, Cause No. 94-3993, Lifemark sued St.
Jude to collect the unpaid balance of a promissory note evidencing
the debt incurred in building the hospital. St. Jude
counterclaimed for damages asserting a variety of lender liability
claims. The district court awarded no damages to Lifemark or St.
Jude. Rather it set out to undo the transaction and overturned the
1994 confirmed judicial sale of the hospital. This upset was made
contingent upon either St. Jude or its parent company Liljeberg
Enterprises reimbursing Lifemark the amount that Lifemark had paid
to Travelers, the holder of the superior lien and judicial
mortgage. The district court also reinstated all of the related
commercial instruments as if the judicial sale had never taken
place and denied Lifemark’s deficiency claim.
In the second suit, Cause No. 93-1794, Liljeberg Enterprises,
as the Chapter 11 debtor in possession, sought permission from the
bankruptcy court to assume the pharmacy agreement between Lifemark
and Liljeberg Enterprises as an executory contract pursuant to
Bankruptcy Code section 365. On October 19, 1993, the district
court withdrew the reference to bankruptcy court of LEI’s motion to
assume. The district court, over Lifemark’s objection, granted the
motion to assume the pharmacy contract.
The third suit, Cause No. 93-4249, was filed in Louisiana
state court but removed to the federal district court. Here
Liljeberg Enterprises claims that Lifemark, acting in bad faith,
breached and wrongfully “circumvented” the pharmacy agreement.
11
Lifemark denied the allegations and counterclaimed for overcharges
and breaches of the pharmacy agreement.10 The district court found
that Lifemark owed Liljeberg Enterprises $12,432,905.92 for breach
of payment due under the pharmacy agreement and that Liljeberg
Enterprises owed Lifemark $741,879 in overcharges.
Finally, in the fourth suit, Cause No. 95-2922, Liljeberg
Enterprises sought an injunction to prohibit Lifemark from
unlawfully dispensing legend drugs at the hospital.11 The district
court denied Liljeberg Enterprises’s request.
IV.
Lifemark here attacks judgments in Cause Nos. 94-3993, 93-
1794, and 93-4249 on many grounds. In Cause No. 94-3993, Lifemark
argues that the district court erred by rescinding the judicial
sale of the hospital when this court of appeals decided in prior
10
Lifemark filed many of its breach of contract claims as part of its
counterclaim in the bankruptcy cause of action, Cause No. 93-1794. The district
court consolidated Cause No. 93-1794 with Cause No. 93-4249 early in the course
of this litigation, and, as a result, like the district court’s opinion and
judgment, this court’s opinion treats Lifemark’s claims related to LEI’s breach
of the pharmacy agreement as though they were filed in Cause No. 93-4249.
11
Legend drugs are prescription drugs that bear a legend on the label
warning that the drug may not be dispensed without a prescription from a duly-
authorized practitioner. See LA. REV. STAT. § 37:1164(45) (“‘Prescription drug’
or ‘legend drug’ means a drug that is required by any applicable federal or state
law or regulation to be dispensed or delivered pursuant only to a prescription
drug order, or is restricted to use by practitioners only.”); id. § 40:1237(3)
(“‘Legend drug’ means any drug or drug product bearing on the label of the
manufacturer or distributor, as required by the Federal Food and Drug
Administration, the statement ‘Caution: Federal law prohibits dispensing without
prescription.’”); LA. ADMIN. CODE tit. 46, pt. LIII, § 3501(A) (“Legend Drugs. A
legend drug is a medication which must only be dispensed by a pharmacist on the
order of a licensed practitioner and shall bear the following notation on the
label of a commercial container: ‘caution: federal law prohibits dispensing
without a prescription’ (Ref. R.S. 40:1237, et seq. [1982] and U.S.C. 21:353(b)
[1987]).”)
12
litigation that St. Jude’s challenge to the judicially confirmed
sale was moot; that the judgments are flawed by the following
erroneous rulings: that Lifemark Hospitals, Inc. had a duty to St.
Jude to reinscribe the collateral mortgage, and that Lifemark
Hospitals, Inc. had a duty to terminate the Travelers foreclosure;
that Lifemark Hospitals, Inc. had a duty to prevent Lifemark
Hospitals of Louisiana, Inc. from purchasing the hospital at the
foreclosure sale; that Lifemark acted in bad faith or colluded to
chill the bidding at the foreclosure sale which proximately caused
St. Jude’s loss; and that Lifemark Hospitals of Louisiana, Inc. did
not properly purchase the hospital at two-thirds of its appraised
value. Lifemark also argues that the district court erred in
concluding that Lifemark is not entitled to recover on its
deficiency claim under the renewal promissory note.
In Cause No. 93-1794, Lifemark argues that the district court
erred in allowing Liljeberg Enterprises to assume the pharmacy
agreement on several grounds. First, it erred in its ruling that
the pharmacy agreement did not terminate by its own terms prior to
the district court’s order allowing assumption. Second, by failing
to properly interpret sections 5.1(e) and 5.1(b) of the pharmacy
agreement and section 11.1 of the lease and the fourth and fifth
covenants of the mortgage.
In Cause No. 93-4249, Lifemark argues that the district court
erred in its interpretation of sections 2.4, 2.6, 4.1, and Exhibit
B of the pharmacy agreement and in denying Lifemark’s motion to
13
reopen the evidence. Further, Lifemark argues that the district
court erred: in awarding damages based upon a procedurally flawed
audit; in awarding duplicative damages; in allowing Liljeberg
Enterprises to recover costs greater than those allowed by the
hospital’s prime vendor contract under section 2.4 of the pharmacy
agreement; in allowing Liljeberg Enterprises to recover based on
unexplained bills; in failing to award damages to Lifemark for
Liljeberg Enterprises’s overbilling; and in its interpretation of
the parties’ stipulation as to actual acquisition costs payable
under an earlier state court judgment.
Finally, Lifemark argues that the district court erred in
awarding any relief against Tenet, a non-party.
On its cross-appeal, in Cause No. 94-3993, Liljeberg
Enterprises argues that the district court erred in requiring St.
Jude and Liljeberg Enterprises to reimburse Lifemark the
$7,834,516.26 it paid to Travelers for the allegedly collusive
purchase of the hospital. The Liljebergs also contend on their
cross-appeal in Cause Nos. 94-3993, 93-1794, and 93-4249 that
Liljeberg Enterprises and St. Jude are entitled to attorneys’ fees
by the parties’ lease agreement and under Louisiana Civil Code
articles 1997 and 1958.
V. Cause No. 94-3993
The district court in Cause No. 94-3993 overturned the
confirmed 1994 judicial sale of the hospital contingent upon either
St. Jude or Liljeberg Enterprises reimbursing Lifemark the
14
approximately $7.8 million that Lifemark paid to Travelers to
purchase the hospital at foreclosure. The district court also
reinstated the renewal promissory note, collateral mortgage note,
pledge of collateral mortgage note, collateral mortgage, hospital
lease, and collateral assignment of rents which existed before the
judicial sale and held that all rental payments that were due by
Lifemark to St. Jude under the lease shall be deemed paid by St.
Jude to Lifemark and the renewal promissory note, collateral
mortgage note, pledge of collateral mortgage note, and collateral
mortgage are deemed current and not in default as of the date of
judgment. Finally, the district court denied Lifemark’s claim for
a deficiency pursuant to the renewal promissory note.
We review de novo the district court’s legal conclusions, but
review its findings of fact for clear error.12 We have explained
that “‘a finding is clearly erroneous when although there is
evidence to support it, the reviewing court on the entire evidence
is left with the definite and firm conviction that a mistake has
been committed,’” and that, “despite an appellate court’s
conviction that it would have weighed the evidence differently had
it been sitting as the trier of fact, it may not reverse a district
court’s findings when they are based on a plausible account of the
12
Kona Tech. Corp. v. S. Pac. Transp. Co., 225 F.3d 595, 601 (5th Cir.
2000).
15
evidence considered against the entirety of the record.”13
Accordingly, “when ‘two permissible views of the evidence exist,
the fact finder’s choice between them cannot be clearly
erroneous.’”14 Further, “as to mixed questions of law and fact, we
review the district court’s fact findings for clear error, and its
legal conclusions and application of law to fact de novo.”15
A.
The district court premised its decision setting aside the
judicial sale of the hospital on a finding that Lifemark breached
fiduciary duties and an obligation of good faith owed to St. Jude.
It found these obligations in the Louisiana law of pledge. The
district court found that Lifemark Hospitals, Inc. became the
pledgee of St. Jude by holding the collateral mortgage note and the
right to basic rent under the collateral assignment of rents. As
pledgee, Lifemark owed fiduciary duties to St. Jude, its pledgor,
to protect that collateral, the collateral mortgage note and the
right to basic rent under the collateral assignment of rents.
The found breach came when Lifemark failed to timely
reinscribe the collateral mortgage and “allowed” Travelers’
judgment mortgage to prime the collateral mortgage. The district
court also found a breach of a duty to preserve the lease covering
13
NAACP v. Fordice, 252 F.3d 361, 365 (5th Cir. 2001) (quoting Anderson
v. City of Bessemer, 470 U.S. 564, 573 (1985)).
14
Id. (quoting Anderson, 470 U.S. at 573).
15
Payne v. United States, 289 F.3d 377, 381 (5th Cir. 2002).
16
the assigned rents as pledgee of the right to basic rent under the
collateral assignment of rents. This breach came, it found, when
Lifemark Hospitals, Inc. allowed Lifemark Hospitals of Louisiana,
Inc. to acquire the hospital. That acquisition extinguished the
lease under the doctrine of confusion pursuant to Louisiana Civil
Code article 1903 as well as the rental stream assigned to Lifemark
Hospitals, Inc.
As the district court explained it, when St. Jude became
liable to Travelers for over $7.8 million, specifically
$7,834,516.26, and the hospital became subject to Travelers’s
approximately $7.8 million lien, Lifemark Hospitals, Inc. was
obligated to buy out the Travelers lien, to add the Travelers debt
to the debt owed by St. Jude to Lifemark Hospitals, Inc.
Relatedly, it found an obligation to refrain from having Lifemark
Hospitals of Louisiana, Inc. purchase the hospital at the
foreclosure sale. All these were found to be duties, all of which
Lifemark breached.
In this diversity case, we are controlled by the substantive
law of Louisiana. We are to determine and apply its law as we
believe the Supreme Court of Louisiana would, looking to the
decisions of intermediate Louisiana appellate courts for guidance
where the Supreme Court of Louisiana has not spoken clearly to the
issue.16
16
See Verdine v. Ensco Offshore Co., 255 F.3d 246, 252 (5th Cir. 2001);
Hulin v. Fibreboard Corp., 178 F.3d 316, 328 (5th Cir. 1999).
17
We conclude that the foundational principles of the entire set
of the district court’s rulings are deeply flawed. Such duties are
not to be found in Louisiana law.
There is no question but that, under Louisiana law, “‘a trust
relationship between the pledgor and pledgee’” carries with it
“‘attendant duties to protect the debt or the obligation and the
collateral.’”17 But holding the collateral mortgage note and the
right to basic rent under the collateral assignment of rents did
not create a pledgor-pledgee relationship giving rise to the duties
discovered by the district court.
To understand why this is so it is helpful to review the
Louisiana law of pledge and collateral mortgages. “The pledge is
a contract by which one debtor gives something to his creditor as
a security for his debt.”18 The Supreme Court of Louisiana has very
recently repeated the Louisiana law of pledge:
Pledge is an accessory contract by which one debtor
gives something to a creditor as security for the debt.
Invariably, the thing given as security for the debt is
a movable, in which case the contract is more accurately
called pawn. A person may give a pledge not only for his
own debt, but also for that of another. The pledge
secures only that debt or debts contemplated in the
contract between the pledgor and pledgee.19
17
Trans-Global Alloy Ltd. v. First Nat’l Bank of Jefferson Parish, 583
So.2d 443, 453 (La. 1991) (quoting In re Pan American Life Ins. Co., 88 So.2d
410, 415 (La. App. 2 Cir. 1956)).
18
LA. CIV. CODE art. 3133.
19
Diamond Servs. Corp. v. Benoit, 780 So.2d 367, 371 (La. 2001)
(citations and footnote omitted).
18
A “collateral mortgage” is statutorily defined as “a mortgage
that is given to secure a written obligation, such as a collateral
mortgage note, negotiable or nonnegotiable instrument, or other
written evidence of debt, that is issued, pledged, or otherwise
used as security for another obligation.”20 We recently summarized
the basic operation of a typical collateral mortgage transaction
under Louisiana law:
In a typical Louisiana collateral mortgage transaction,
the borrower contemporaneously executes a promissory note
(known as a collateral mortgage note) and an act of
mortgage (known as a collateral mortgage). In this
latter instrument, the mortgagor acknowledges his
indebtedness and states his intent to pledge the
collateral mortgage note, which is secured by the
collateral mortgage, as security for the advancement of
funds. The collateral mortgage note is customly made
payable on demand, to “Bearer” or “Myself” or “Any Future
Holder,” and is “paraphed” for identification with the
mortgage. This collateral mortgage package is then
delivered by the borrower in pledge to the lender to
secure an indebtedness which is usually represented by a
separate “hand note.”
The pledge of a collateral mortgage note and
collateral mortgage to secure a debt is a contract. The
pledge secures only the debt or debts contemplated in the
act of pledge between the pledgor and the pledgee. A
collateral mortgage package may be pledged to secure
particular debts, either previously existing or
contracted contemporaneously with the pledge, or future
loans by the pledgee to the pledgor—or both—up to the
limits of the pledge.21
20
LA. REV. STAT. § 9:5550(1).
21
Charrier v. Sec. Nat’l of Or. (In re Charrier), 167 F.3d 229, 232-33
(5th Cir. 1999) (footnotes omitted). We have also discussed the usual purpose
to which collateral mortgages are put: “The collateral mortgage is commonly used
with financing in which the maker draws the loan proceeds in stages. The
collateral note and mortgage are made for the full amount of the line of credit
extended by the lender. This is then pledged as security for a debt, usually
represented by a separate hand note. This seemingly fictitious transaction is
a Louisiana credit device that lenders use to obtain a lien on property effective
19
The Supreme Court of Louisiana has made clear that “[t]he
collateral mortgage, though now recognized by statute, is a form of
conventional mortgage that was developed by Louisiana’s practicing
lawyers and has long been recognized by Louisiana courts.”22 It
“arose out of the need for a special form of mortgage to secure
revolving lines of credit and multiple present and future cross-
collateralized debts for which there was no provision in the Civil
Code.”23
More specifically, the Supreme Court of Louisiana explained:
“A mortgage is an accessory right which is granted
to the creditor over the property of another as security
for the debt. La. Civ. Code arts. 3278, 3284. Mortgages
are of three types: conventional, legal and judicial. La.
Civ. Code art. 3286. Within the area of conventional
mortgages, three different forms of mortgages are
recognized by the Louisiana statutes and jurisprudence:
an “ordinary mortgage” (La. Civ. Code arts. 3278, 3290);
a mortgage to secure future advances (La. Civ. Code arts.
3292, 3293); and a collateral mortgage. See Thrift Funds
Canal, Inc. v. Foy, 261 La. 573, 260 So.2d 628 (1972).
Unlike the other two forms of conventional mortgages, a
collateral mortgage is not a ‘pure’ mortgage; rather, it
is the result of judicial recognition that one can pledge
a note secured by a mortgage and use this pledge to
secure yet another debt.
“A collateral mortgage indirectly secures a debt via
a pledge. A collateral mortgage consists of at least
three documents, and takes several steps to complete.
First, there is a promissory note, usually called a
collateral mortgage note or a ‘ne varietur’ note. The
collateral mortgage note is secured by a mortgage, the
on the date the mortgage is executed for advances not yet made, but which the
lender may make in the future.” Fed. Sav. & Loan Ins. Corp. v. Murray, 853 F.2d
1251, 1255 n.1 (5th Cir. 1988).
22
Diamond Servs., 780 So.2d at 370 (footnote omitted).
23
Id. at 371.
20
so-called collateral mortgage. The mortgage provides the
creditor with security in the enforcement of the
collateral mortgage note.
“Up to this point, a collateral mortgage appears to
be identical to both a mortgage to secure future advances
and an ordinary mortgage. But a distinction arises in
the collateral mortgage situation because money is not
directly advanced on the note that is paraphed for
identification with the act of mortgage. Rather, the
collateral mortgage note and the mortgage which secures
it are pledged to secure a debt.”24
As such, “[b]ecause the mortgagor, after executing the collateral
mortgage and the collateral mortgage note, then pledges the
collateral mortgage note as security for a debt, usually
represented by a separate hand note, the collateral mortgage
package combines the security devices of pledge and mortgage.”25
Synthesizing the law of pledge and on collateral mortgages,
the Supreme Court of Louisiana has observed that a “[p]ledge is an
accessory contract which secures the performance of an existing
principal obligation,” and “[t]he principal obligation in the
collateral mortgage scheme is the actual indebtedness, usually
represented by a hand note, and the collateral mortgage note is
pledged to secure payment of the principal obligation.”26 The
district court and Liljeberg Enterprises make much of the fact that
the collateral mortgage “package” involves a “pledge,” but, under
the facts of this case, this is word play.
24
Id. at 371 (quoting First Guar. Bank v. Alford, 366 So.2d 1299, 1302
(La. 1978)).
25
Id. at 372 (footnote omitted).
26
Tex. Bank of Beaumont v. Bozorg, 457 So.2d 667, 671 n.4 (La. 1984).
21
A collateral mortgage often involves a hand note that is a
third party’s note made payable to the mortgagor, which note is
pledged by the mortgagor to the mortgagee.27 In such an instance,
a pledgor-pledgee relationship with attendant duties—including a
statutory duty of reasonable care and fiduciary duties—to protect
the rights of the mortgagor in the third party’s note against other
creditors of the third party may well arise under statute by the
virtue of the nature of the pledgor-pledgee relationship.28
Here, however, St. Jude executed a collateral mortgage on the
hospital site and pledged a collateral mortgage note to Lifemark
Hospitals, Inc. to secure the collateral mortgage, which was itself
created to secure the promissory note evidencing Lifemark
Hospitals, Inc.’s loan to St. Jude for construction of the
27
See, e.g., Diamond Servs., 780 So.2d at 372 (“The dispute in this case
centers around the obligation that arises from the making of the collateral
mortgage note when that note is pledged to secure the debt of a third party
represented by a hand note executed by that third party.”).
28
See, e.g., LA. REV. STAT. § 10:9-207(a) (“Duty of care when secured party
in possession. Except as otherwise provided in subsection (d), a secured party
shall use reasonable care in the custody and preservation of collateral in the
secured party’s possession. In the case of chattel paper or an instrument,
reasonable care includes taking necessary steps to preserve rights against prior
parties unless otherwise agreed.”); LA. CIV. CODE art. 3167 (“The creditor is
answerable agreeably to the rules which have been established under the title:
Of Conventional Obligations, for the loss or decay of the pledge which may happen
through his fault.”); accord LA. REV. STAT. § 10:9-207(1) (“A secured party must
use reasonable care in the custody and preservation of collateral in his
possession. In the case of an instrument or chattel paper reasonable care
includes taking necessary steps to preserve rights against prior parties unless
otherwise agreed.”) (superseded by 2001 La. Acts 128); cf. Trans-Global, 583
So.2d at 453 (holding that, in a case not involving a collateral mortgage, the
duty of care imposed on a creditor, as the pledgee of a debtor’s letter of credit
from a third party, was that of prudent administrator such that the creditor
could be held liable for the loss or decay of the pledge occurring through its
fault).
22
hospital. There was no third-party obligation involved.29 In such
a case, where the mortgagor has “pledged” to the mortgagee the
mortgagor’s own hand note on which the mortgagor is directly
obligated to the mortgagee, the mortgagee has a duty to keep the
note so that it may be returned to the mortgagor upon payment of
29
Liljeberg Enterprises argues for first time in its reply brief that
Lifemark did not raise in the district court its argument distinguishing between
collateral mortgages involving third party notes and those involving hand notes
on which the collateral mortgagor is the obligor. Ordinarily, we do not consider
arguments raised for the first time in a reply brief. See Price v. Roark, 256
F.3d 364, 368 n.2 (5th Cir. 2001). However, St. Jude’s argument here seeks
simply to invoke a rule which we at times invoke sua sponte: that arguments not
raised in the district court cannot be asserted for the first time on appeal.
See Stokes v. Emerson Elec. Co., 217 F.3d 353, 358 n.19 (5th Cir. 2000); Brown
v. Ames, 201 F.3d 654, 663 (5th Cir.), cert. denied, 531 U.S. 925 (2000).
However, an argument is not waived on appeal if the argument on the issue before
the district court was sufficient to permit the district court to rule on it.
Brown, 201 F.3d at 663; Rogers v. Hartford Life & Accident Ins. Co., 167 F.3d
933, 943 n.8 (5th Cir. 1999); N.Y. Life Ins. Co. v. Brown, 84 F.3d 137, 141 n.4
(5th Cir. 1996). That is the case here, based on our review of the record. On
appeal, Lifemark has certainly refined its argument to distinguish the duties
owed by a collateral mortgagee/pledgee in third-party note situations as
developed in the case law cited by St. Jude from Lifemark’s situation, but
Lifemark did sufficiently put before the district court its argument that no duty
to reinscribe the collateral mortgage or to prevent the loss of the hospital
flowed from its pledgor-pledgee relationship with St. Jude. See R. 9076, 9151-
57. This was sufficient to permit the district court to rule on the essential
argument Lifemark advances on appeal.
23
the underlying debt to the mortgagee.30 It is true that the Supreme
Court of Louisiana has cited Professor Slovenko’s observation that:
... [I]n the case of promissory notes, bills of exchange,
and other evidences of indebtedness pledged as security,
a duty exists on the part of the pledgee to preserve the
rights of the pledgor against the obligors in the
deposited documents. The pledgee is held responsible if
he neglects to have a promissory note, the subject of the
pledge, protested for non-payment, and the endorser is
discharged in consequence; or, if he neglects to have a
mortgage which is pledged to him reinscribed or
reregistered in proper time, and it loses its rank and
effect.31
It is also the case that Professor Slovenko’s discussion assumes
that a third-party obligation is involved with the pledge, where
here it is not. To the contrary, the obligor of the underlying
document and the pledgor (and the collateral mortgagor) were one
and the same—St. Jude.
Lifemark Hospitals, Inc. loaned money to St. Jude to build a
hospital, a loan evidenced by a loan agreement and a promissory
30
Cf. Max Nathan, Jr. & Anthony P. Dunbar, The Collateral Mortgage: Logic
and Experience, 49 LA. L. REV. 39, 49 (1988) (“Since a collateral mortgage may be
used to secure a specific debt, a debtor who wishes to limit the mortgage to that
debt can lawfully do so and the pledge agreement is clearly the proper document
in which to manifest such an intent. The risk, of course, is that the ne
varietur note, which is negotiable, may fall into the hands of bona fide third
parties who are unaware of the pledge agreement and are not bound by it. That
risk is probably the major drawback to use of the collateral mortgage. The
problem is mitigated by the fact that a pledgee, who accepts a fiduciary duty as
such, surely would be liable to a borrower injured in such a situation. The risk
can be further minimized by use of a third-party custodian to hold the ne
varietur note, or by use of a safety deposit box with appropriate restrictions.”
(emphasis added; footnotes omitted)); cf. also People’s Bank v. Cookston, 142 So.
285, 286 (La. App. 2 Cir. 1932) (holding that the plaintiff, as pledgee of the
chattel mortgage note, was “under obligation to keep the pledged property intact,
in order that it might be returned when the principal obligation is paid, when
it does not proceed on the pledged property”).
31
Ralph Slovenko, Of Pledge, 33 TUL. L. REV. 59, 121 (1958) (cited in
Trans-Global, 583 So.2d at 453).
24
note, or hand note, in turn collateralized by the pledge of a
collateral mortgage note, itself secured by a collateral mortgage
on the hospital site.32 The extraordinary duty the district court
imposed upon Lifemark, who loaned the money to build the hospital
and held the mortgage on it to secure its payment, is inexplicable.
Whatever duty Lifemark may have owed as the pledgee of the
collateral mortgage note, they do not include a requirement that
Lifemark reinscribe the mortgage executed in Lifemark’s favor to
secure a debt owed by St. Jude to Lifemark, in order that the
mortgage may retain priority for Lifemark’s benefit as pledgee and
mortgagee. As Lifemark aptly points out, ordinarily a debtor such
as St. Jude is happy to have its creditor fail to record its lien.
We reject the assertion that Lifemark as the mortgagee here owed a
duty to its mortgagor to reinscribe the mortgage, as illustrated in
part, indeed, by the very difficulty of describing exactly how not
protecting a mortgage’s first position, in and of itself, could
possibly harm the mortgagor.
Nor can this theory explain how it can lie beside the
undisputed right of Lifemark Hospitals, Inc. to, “at any time,
without notice to anyone, release any part of the Property from the
effect of the Mortgage.” This right of release is explicitly
32
Under a later settlement in 1991, St. Jude executed a renewal note,
renewing and extending the original note, and, like the original note, the
renewal note was secured by the original collateral mortgage, collateral mortgage
note, and pledge of the collateral mortgage note. Along with the execution of
the renewal note, St. Jude provided Lifemark Hospitals, Inc. with additional
security in the form of a collateral assignment of rents, which assignment was
recorded.
25
recited in the collateral mortgage itself. In addition, the
renewal note provides that St. Jude “agree[s] to any ... release of
any [of the security herefor].” The right of Lifemark to
unilaterally release any part of the property from the mortgage is
wholly at odds with the district court’s discovery of a “duty” to
reinscribe the collateral mortgage. It was Lifemark’s contracted-
for right to retain the collateral mortgage’s priority against
other creditors, under both the renewal note and the collateral
mortgage itself.33 The grant of a security interest to secure St.
Jude’s debt was to protect the lender, Lifemark Hospitals, Inc.,
not the borrower.
Nor did Lifemark as mortgagee have a duty to protect the
hospital owner from other creditors asserting their rights against
the hospital, as the district court held Lifemark did. It is self-
evident that there is a vast difference between a statutory duty to
prevent loss or decay of a third party’s note evidencing a debt
owed to the collateral mortgagor/pledgor in order to preserve
against other third parties the collateral mortgagor’s rights in
the third party’s note pledged by it to the collateral mortgagee,
and a supposed fiduciary duty on the part of the collateral
mortgagee to protect the collateral mortgagor against a third
33
Cf. Commercial Nat’l Bank in Shreveport v. Audubon Meadow P’ship, 566
So.2d 1136, 1140-41 (La. App. 2 Cir. 1990) (holding that, in light of the
guaranty agreement’s permitting the lending bank to surrender any securities
without notice or consent from the guarantor, the bank’s alleged negligence in
allowing a letter of credit to lapse provided the guarantor with no basis for
recovery against the bank).
26
party’s exercise of its rights in an entirely different instrument
or judgment. This is a mere chimera, existing nowhere in Louisiana
law. It was apparently constructed out of whole cloth.
In sum, Lifemark had no duty to timely reinscribe the
collateral mortgage, and the district court erred as a matter of
law in concluding that Lifemark had a consequential duty to
“mitigate” any harm allegedly caused by Lifemark’s failure to
reinscribe by buying out the Travelers lien and adding the
Travelers debt to the debt owed by St. Jude to Lifemark.
As for any duties arising out of Lifemark’s holding the right
to basic rent under the collateral assignment of rents, Lifemark
argues in part that the statutory duty of reasonable care under
Louisiana Civil Code article 3167 does not apply to an assignment
of rents because such an assignment is not a pledge where Lifemark
did not take possession of a corporeal movable or evidence of a
credit, such as a note, as required by Louisiana Civil Code article
3152.34 Lifemark argues that article 3167 imposes only custodial
duties on pledgees and that no such duties attend its collateral
assignment of rents from St. Jude.
This argument, however, does not account for Louisiana Civil
Code article 3153, which provides: “But this delivery is only
necessary with respect to corporeal things; as to incorporeal
34
See LA. CIV. CODE art. 3152 (“It is essential to the contract of pledge
that the creditor be put in possession of the thing given to him in pledge, and
consequently that actual delivery of it be made to him, unless he has possession
of it already by some other right.”).
27
rights, such as credits, which are given in pledge, the delivery is
merely fictitious and symbolical.”35 An assignment of rents may be
a pledge, because “[o]ne may, in fine, pawn incorporeal movables,
such as credits and other claims of that nature.”36 Indeed,
Louisiana statutes provide that “[c]laims, credits, obligations,
and incorporeal rights in general not evidenced by written
instrument or muniment of title, shall be subject to pledge, and
may be pledged in the same manner as other property” and that
“[t]he pledge shall be valid as to all persons without delivery of
the claim, credit, obligation, or incorporeal right to the
pledgee.”37
But again, that is beside the point, the duty attributed by
the district court to Lifemark as pledgee of the right to basic
rent under the collateral assignment of rents did not exist. The
recorded collateral assignment of rents simply gave Lifemark a
secured right to rents upon default by St. Jude under the renewal
35
Id. art. 3153.
36
Id. art. 3155; see also LA. REV. STAT. § 9:4401(A) (“Any obligation may
be secured by an assignment by a lessor or sublessor of leases or rents, or both
leases and rents, pertaining to immovable property. Such assignment may be
expressed as a conditional or collateral assignment, and may be effected in an
act of mortgage, by a separate written instrument of assignment, or by a separate
written instrument of pledge, and may be referred to, denominated, or described
as a pledge or an assignment, or both.”).
37
LA. REV. STAT. §§ 9:4321, 9:4322 (repealed by 2001 La. Acts. 128).
Although these provisions were repealed in 2001, see 2001 La. Acts 128, this
repeal cannot be applied retroactively to the facts of this case because these
provisions were substantive laws and the legislature did not express its intent
to give the repeal of the substantive law retroactive effect, see Billingsley v.
Mitchell, 676 So.2d 208, 212-13 (La. App. 1 Cir.), writ denied, 681 So.2d 1265
(La. 1996).
28
note. The collateral assignment of rents specifically provides
that Lifemark Hospitals, Inc. “shall not be obligated to perform or
discharge nor does [Lifemark Hospitals, Inc.] hereby undertake to
perform or discharge any obligation, duty or liability under said
Lease.” As we observed, the renewal note itself gave Lifemark the
right to release any security, including the collateral assignment
of rents, under the renewal note. In the face of these contractual
provisions, holding the right to basic rent under the collateral
assignment of rents imposed no duty upon Lifemark to preserve the
lease covering the assigned rents.
We are persuaded that the district court erred as a matter of
law in concluding that Lifemark breached any duties by failing to
timely reinscribe the collateral mortgage, buy out the Travelers
lien, add the Travelers debt to the debt owed by St. Jude to
Lifemark Hospitals, Inc., and refrain from having Lifemark
Hospitals of Louisiana, Inc. purchase the hospital at the
foreclosure sale. In sum, Lifemark did not owe the duties to St.
Jude upon which the district court premised its order reversing the
judicial sale of the hospital. The district court erred in
upsetting the confirmed judicial sale on these grounds.
B.
The district court pointed to its findings of Lifemark’s bad
faith, collusion, and self-dealing in forcing the judicial sale of
the hospital, chilling the bidding at the sale, and purchasing the
hospital as an alternative ground for its upset of the judicial
29
sale. The district court relied upon two unpublished district
court decisions setting aside a judicial sale. Both were in
admiralty and prior to sale confirmation.
That slender reed aside, the district court’s findings of a
“conspiracy” to wrest control of the hospital and medical office
building from St. Jude and Liljeberg Enterprises border on the
absurd. We are left with the definite and firm conviction that a
mistake has been committed, that the findings are not supported by
the evidence and are clearly erroneous.
The district court’s “conspiracy theory” conclusion is based,
in part, on the view that Liljeberg Enterprises’s or St. Jude’s
losses were caused by Lifemark. Specifically, not reinscribing the
collateral mortgage and not buying out the Travelers lien and
adding the Travelers debt to the debt owed by St. Jude to Lifemark.
These findings turn on the remarkable but largely implicit
conclusion, asserted directly by the Liljebergs’ counsel at oral
argument, that, under Louisiana law, a second mortgagee, which
Travelers would have been had the collateral mortgage been timely
reinscribed, cannot initiate foreclosure proceedings. The district
court and Liljeberg Enterprises offer no statutory or case law
support for this proposition, for the simple reason that this is
not the law.38
38
See, e.g., First Nat’l Bank of Gonzales v. Morton, 544 So.2d 5 (La.
App. 1 Cir.) (involving a prior successful foreclosure suit brought by a second
mortgagee), writ denied, 550 So.2d 654 (La. 1989); Keys v. Box, 476 So.2d 1141
(La. App. 3 Cir. 1985) (involving a foreclosure suit brought by a bank to protect
30
The theory that Lifemark proximately caused any loss to
Liljeberg Enterprises or St. Jude from the Travelers foreclosure on
its judicial mortgage cannot accommodate the undisputed fact that,
under Louisiana law, St. Jude could have reinscribed the collateral
mortgage itself.39 A subordinate position for the Travelers
judgment is now said to have been critical for St. Jude and its
loss the centerpiece of a conspiracy to take the hospital. Yet,
St. Jude could have checked the records and protected its own
interest. That it could have and did not do so is telling. It
rends a large hole in the conspiracy claim and leaves St. Jude’s
inaction unexplained. This, with the reality we have explained
that Lifemark Hospitals, Inc. had no duty to buy out the Travelers
lien, no duty to add the Travelers debt to the debt owed by St.
Jude to Lifemark Hospitals, Inc., and no duty to prevent the
purchase of the hospital at the foreclosure sale by Lifemark
Hospitals of Louisiana, Inc.
Even if we were to somehow “explain” all of this by the theory
that this foreclosure was part of Lifemark’s plan from the
its interest as a second mortgagee); Guinn v. Houston Fire & Cas. Ins. Co., 32
So.2d 613 (La. App. 1 Cir. 1947) (involving a foreclosure suit instituted by a
second mortgagee).
39
See LA. CIV. CODE art. 3333 (“A person may reinscribe a recorded document
creating a mortgage or evidencing a privilege by filing with a recorder a signed,
written notice of reinscription.”); accord id. art. 3369(E) (“The effect of the
registry ceases in all cases, even against the contracting parties, unless the
inscriptions have been renewed within the periods of time above provided in the
manner in which they were first made, or by filing a notice of reinscription of
mortgage or a written request for reinscription by the mortgagee or any
interested person, together with a copy of the original act of mortgage.”
(emphasis added)) (repealed by 1992 La. Acts 1132).
31
beginning, the theory cannot be squared with one large undisputed
fact: Liljeberg Enterprises and St. Jude faced the Travelers lien
because of Liljeberg Enterprises’s and St. Jude’s own failed
litigation against Travelers, arising out of an independent dispute
with Travelers. Any suggestion that Lifemark somehow worked that
result is defied by the record. Indeed, a panel of this court
described the Liljebergs’ conduct involved that litigation as “as
egregious and unconscionable of bad faith contractual dealings as
the members of this panel can recall having encountered.”40 The
cases before us only reinforce that panel’s observation. The
record is clear that any losses by St. Jude and Liljeberg
Enterprises were proximately caused by the Liljebergs, who
defaulted to Travelers and whose post-default conduct, in part, led
to the Travelers judgment and its resulting judicial mortgage and
lien on the hospital. The foreclosure of this lien led to the
foreclosure of the hospital that the district court order would set
aside.
Indeed, despite Liljeberg Enterprises’s contention on appeal
that Lifemark’s efforts to “circumvent” the pharmacy agreement and
refusal to renew the medical office building lease caused St. Jude
and Liljeberg Enterprises to experience significant shortfalls
40
Travelers Ins. Co. v. St. Jude Hosp., No. 92-9579, 21 F.3d 1107, at 2
(5th Cir. Apr. 20, 1994) (unpublished per curiam). The panel further noted that
“[t]he Liljeberg conduct to which we refer is the antithesis of that mandated in
La. Civil Code Ann. art. 1983 (‘Contracts must be performed in good faith.’), and
has contributed to the legal effects described in La. Civil Code Ann. art. 1997
(‘An obligor in bad faith is liable for all damages, foreseeable or nor, that are
a direct consequence of his failure to perform.’).” Id. at 2 n.3.
32
which foreclosed any possibility of paying the note on the medical
office building to Travelers, the district court made no findings
of fact that Lifemark’s conduct was the cause of the debt to
Travelers or St. Jude’s inability to pay that debt, which resulted
in the judicial mortgage Travelers filed encumbering the hospital
property.41
With or without such findings, however, the idea that Lifemark
deliberately subordinated its mortgage interest to Travelers,
knowing it would result in a required payment, to wit,
approximately $7.8 million, to Travelers at any judicial sale,
comes close to being nonsensical. It rests upon the assertion that
Louisiana law somehow obligated Lifemark to lend the money to bail
the Liljebergs out of their litigation fiasco with Travelers. That
is so because, as we will explain, Travelers would most certainly
have foreclosed its second mortgage. Although the district court
made no such explicit finding, Liljeberg Enterprises argues on
appeal that Lifemark deliberately failed to reinscribe its
collateral mortgage in order to facilitate the Travelers
foreclosure and the judicial sale of the medical office building
and the hospital to Lifemark Hospitals of Louisiana, Inc.,
whereafter Lifemark conspired to manipulate the judicial sale,
41
Nor, for that matter, did the district court make findings supporting
two other premises of the Liljebergs’ arguments on appeal: that Lifemark
intentionally or deliberately failed to reinscribe the collateral mortgage or
that Lifemark engaged in any fraud on the court or fraud with regard to the
judicial sale.
33
colluded to minimize the price offered at the judicial sale, and
schemed to terminate the lease and St. Jude’s right to collect
rents from Lifemark.
In answer to the palpable flaws in their theories, the
Liljebergs would simply expand the conspiracy. They argue that
this court should consider documents from Lifemark’s legal
malpractice suit against their former attorneys for their
attorneys’ failure to reinscribe the collateral mortgage and, more
specifically, in a footnote in their original brief, the Liljebergs
state for the first time that they “challenge the court’s denial of
their motion to supplement the record with documents from the trial
between Lifemark and [its former attorneys],” which “documents
clearly show that Defendants and their attorneys conspired to
defraud St. Jude/Liljeberg Enterprises out the hospital, the lease,
and the pharmacy.” It tells that this argument was not raised or
briefed as a separate issue until the Liljebergs’ final reply
brief. It is therefore waived.42 Moreover, the district court
ruled in an order dated April 25, 2000 that the Liljebergs’ motion
to supplement was rendered moot by the court’s order and final
judgment issuing its findings of fact and conclusions of law, which
42
See Price, 256 F.3d at 368 n.2 (court of appeals does not consider
issues raised for the first time in a reply brief); Peavy v. WFAA-TV, Inc., 221
F.3d 158, 179 (5th Cir. 2000) (refusing to consider issue that were not raised
or adequately briefed in the parties’ opening briefs), cert. denied, 532 U.S.
1051 (2001); Atwood v. Union Carbide Corp., 847 F.2d 278, 280 (5th Cir.) (“As we
have already noted, issues not briefed, or set forth in the list of issues
presented, are waived.”), amended on reh’g on other grounds, 850 F.2d 1093 (5th
Cir. 1988).
34
therefore quite obviously did not rely on the supplemental
materials proffered with the motion. Under these circumstances,
even if we were to consider this issue, the Liljebergs could not
show an abuse of discretion on appeal.43
In sum, we conclude that the district court’s findings that
Lifemark engaged in bad faith, collusion, and self-dealing to force
the judicial sale of the hospital, chill the bidding at the sale,
and purchase the hospital are clearly erroneous. In the absence of
any breach of duty to St. Jude or Liljeberg Enterprises on the part
of Lifemark or a Lifemark breach having proximately caused any loss
to the Liljebergs resulting from the Travelers lien, there is no
bad faith or collusion in Lifemark’s decision to bid at the
judicial sale or Lifemark’s purchase of the hospital at the
legally-permitted two-thirds of its appraised value.
The other side of the no-duty coin is that Lifemark was free
to act in its own self-interest, including allowing Lifemark, which
had the license, to own and operate the hospital, and to escape the
burden of the pharmacy agreement, which functioned much like an
overriding royalty payment. As Lifemark persuasively argues on
appeal, and the record is clear: the various lending and lease
43
See Fields v. Pool Offshore, Inc., 182 F.3d 353, 360 n.7 (5th Cir.
1999) (standard of review for denial of motion to supplement the record is for
abuse of discretion only); Morales v. Turman, 562 F.2d 993, 996 (5th Cir. 1977)
(same).
Even assuming arguendo that the Liljebergs did not waive this issue on
appeal and that we were to conclude that the district court abused its discretion
in denying their motion to supplement, the supplemental material would not alter
our conclusions on appeal.
35
transactions and instruments, as agreed to by the Liljebergs and
Lifemark, permitted the outcomes which Lifemark sought in Lifemark
Hospitals of Louisiana, Inc.’s bidding at the judicial sale as well
as Lifemark’s decision not to renew the lease on the medical office
building.44 Lifemark Hospitals, Inc. was legally entitled to obtain
permission to bid credits, and received a court order granting such
permission, to give it the option to bid at the sale should the
circumstances warrant. The district court’s findings and the
Liljebergs’ arguments on appeal offer no logical connection between
a decision to seek authority to bid credits and the absence, let
alone the chilling, of other bids on the hospital property at the
judicial sale—the credits represent a debt Lifemark Hospitals, Inc.
was owed, so a payment in cash and credits or simply in cash would
make no difference for the bottom line in Lifemark’s accounting.
Moreover, although the Liljebergs argue that Lifemark’s knowledge
that the priority of the lease on the hospital and collateral
assignment of rents would deter other bidders at the judicial sale
somehow supports their conspiracy theory, it demonstrates quite the
opposite. As counsel for Lifemark aptly noted at oral argument,
the judicial sale could almost be considered “chill-proof,” in that
it is hard to imagine anyone bidding $26 million on a property that
44
Cf. Clark v. America’s Favorite Chicken Co., 110 F.3d 295, 297-98 (5th
Cir. 1997) (under Louisiana law, it is not a breach of the implied covenant of
good faith and fair dealing to engage in conduct which is expressly allowed under
a contract).
36
would, by virtue of the lease and collateral assignment of rents,
provide no cash-flow until at least sixteen years later, in 2010.
On the basis of its clearly erroneous “conspiracy theory”
findings, the district court erred as a matter of law in
disregarding long-standing Louisiana jurisprudence that a judicial
sale, once completed, cannot generally be undone.45 Freed from the
district court’s clearly erroneous “conspiracy theory” findings,
the evidence concerning Lifemark’s actions following Travelers’s
filing its judicial mortgage does not support findings of bad
faith, collusion, and self-dealing on the part of Lifemark that
would permit the district court to overturn the confirmed judicial
sale.46 Rather, the evidence considered against the entirety of the
record shows that Lifemark’s actions consisted of commercially
45
See generally Boyd v. Farmers-Merchants Bank & Trust Co., 433 So.2d
339, 342 (La. App. 3 Cir.) (“As a general rule, a judicial sale cannot be
attacked once the sale is consummated in the absence of fraud or ill
practices.”), writ denied, 440 So.2d 732 (La. 1983).
46
Compare Acadian Prod. Corp. of La. v. Savanna Corp., 63 So.2d 141, 142
(La. 1953) (“Among the requirements for the legal seizure and sale of property
in satisfaction of a judgment are to be found ... those prohibiting any
combination or conspiracy to stifle competition and chill the bidding at a
judicial sale.”); Pease v. Gatti, 12 So.2d 684, 690 (La. 1942) (“This court has
repeatedly held that, where there is an agreement to stifle competition at
judicial sales and where one of the parties to the agreement is a party to the
proceeding, the sale may be annulled by the injured party.”); Konen v. Konen, 115
So. 490, 491 (La. 1928) (“Hence the concealment or misrepresentation of facts,
amounting to fraud, is not the only cause for annulling a judicial sale, but
anything said or done by one who becomes an adjudicatee, for the purpose of
preventing competition at the sale, or, in other words, for the purpose of
chilling it, which is reasonably capable of doing so, and has that effect, will
be sufficient to annul the sale.”); First Nat’l Bank of Abbeville v. Hebert, 111
So. 66, 69 (La. 1926) (“An agreement whereby parties engage not to bid against
each other at a public auction, especially where the auction is required or
directed by law, as in sales of property under execution, and where one of the
parties to the agreement is a party to the proceeding, is a sufficient cause for
annulling the sale.”).
37
reasonable, albeit aggressive, steps in reaction to the Travelers
judgment, all of which were within their contractual rights and
applicable law.
We have detected several warring premises internal to the
Liljebergs’ theories. In concluding this section, we mention one
more: the Liljebergs attempt to maintain both that Lifemark never
intended to perform under the various commercial instruments
between the parties and that Lifemark drafted these instruments to
allow Lifemark to engage in conduct it challenges—declining to
renew the lease on the medical office building, purchasing the
hospital at a judicial sale, and terminating the pharmacy agreement
based on a cross-default provision.
C.
Lifemark argues that the district court erred in denying its
claim for a deficiency judgment, a sum of $20,600,060.91 that St.
Jude owed Lifemark Hospitals, Inc. under the renewal promissory
note after Lifemark Hospitals of Louisiana, Inc.’s purchase of the
hospital at the judicial sale.
The Liljebergs respond that the same bad faith and collusive
conduct that tainted the judicial sale also bars any claim for
deficiency and that the alleged defaults and acceleration were
caused by the bad faith and collusive wrongdoing of Lifemark, which
alone is legally responsible. The district court denied Lifemark’s
deficiency judgment claim based on its decision to overturn the
38
judicial sale, such that “[a]ll rents which would have been paid
absent the judicial sale will be deemed paid on the mortgage in
favor of [Lifemark Hospitals, Inc.] and the mortgage note shall be
deemed current at the time of transfer,” and, “[i]nasmuch as this
Court has restored the status quo prior to sale and reinstated the
collateral mortgage, collateral mortgage note, and note, the claim
of [Lifemark Hospitals, Inc.] on the note is disallowed.” Having
found the district court’s findings and conclusions in favor of
this order to be in error, and rejected the Liljebergs’ arguments
on appeal, we must in turn reverse the district court’s order
denying this claim. As discussed infra in connection with the
motion to assume the pharmacy agreement, the judicial mortgage and
lien on the hospital won in court by Travelers and the judicial
sale that followed were defaults under the fourth covenant of the
collateral mortgage. These events of default gave Lifemark the
contractually-secured right to accelerate the renewal promissory
note and immediately recover all amounts and interest due
thereunder.47 We remand to the district court for calculation of
47
The fourth covenant of the collateral mortgage provides:
The Property is to remain mortgaged and hypothecated until the full
and final payment of the aforesaid indebtedness in principal and
interest, attorney’s fees, insurance premiums, costs and expenses,
the Mortgagor hereby binding itself, its heirs, successors and
assigns not to make a conveyance, mortgage, transfer or sale of the
Property until full and final payment of the aforesaid indebtedness
including principal and interest, attorney’s fees, insurance
premiums, costs and expenses, unless the Mortgagee expressly
consents to such conveyance or mortgage in writing. The Mortgagor
hereby agrees that should the Property be mortgaged, sold or
transferred, either with or without the assumption of the aforesaid
indebtedness, such sale, transfer or mortgage shall constitute a
39
the amount of deficiency owed to Lifemark Hospitals, Inc. and for
entry of judgment in that amount.
D.
On its cross-appeal, Liljeberg Enterprises argues that the
district court erred in requiring St. Jude and Liljeberg
Enterprises to reimburse Lifemark the approximately $7.8 million it
paid to Travelers. Having reversed the district court’s order
overturning the judicial sale, we must reverse the order of
reimbursement, part of the district court’s set-aside of the
judicial sale. Because Lifemark will maintain ownership of the
hospital pursuant to the confirmed judicial sale, the Liljebergs
need not reimburse Lifemark’s payment of the Travelers debt made at
foreclosure. Liljeberg Enterprises’s cross-appeal on this issue is
now moot.48
VI. Cause No. 93-1794
The district court concluded in Cause No. 93-1794 that
Liljeberg Enterprises, as the debtor in possession in its Chapter
11 bankruptcy proceeding, should be allowed to assume the pharmacy
breach of this contract and the obligations herein set forth, and
the Note shall, at the option of the Mortgagee, immediately mature
and become due and payable, anything contained herein to the
contrary notwithstanding, and it shall be lawful for the Mortgagee
to proceed with enforcement of its mortgag as hereinabove set forth.
48
We therefore assume, without deciding, that the Liljebergs did not
waive this point of error by failing to raise it before the district court,
notwithstanding that the relief they sought in seeking to alter or amend the
district court’s findings and judgment specifically requested only that the
district court “defer the due date for reimbursing Lifemark with the amount of
the Travelers judicial mortgage until after the single business enterprise has
paid all the money judgments awarded in favor of Liljeberg Enterprises and St.
Jude.”
40
agreement pursuant to 11 U.S.C. § 365. The district court rejected
Lifemark’s arguments that the pharmacy agreement terminated under
its own terms and was therefore not available to be assumed and
that Liljeberg Enterprises committed incurable defaults under the
pharmacy agreement which, pursuant to 11 U.S.C. § 365(b)(1),
precluded an order granting Liljeberg Enterprises’s motion to
assume.
11 U.S.C. § 365(a) provides that “the trustee, subject to the
court’s approval, may assume or reject any executory contract or
unexpired lease of the debtor,” but 11 U.S.C. § 1107(a) provides
that, “[s]ubject to any limitations on a trustee serving in a case
under this chapter, and to such limitations or conditions as the
court prescribes, a debtor in possession shall have all the rights,
other than the right to compensation under section 330 of this
title, ... of a trustee serving in a case under this chapter.”
Thus, as a debtor in possession, Liljeberg Enterprises was required
to satisfy all the requirements of 11 U.S.C. § 365(b)(1) in order
to assume the pharmacy agreement as an executory contract under
section 365:
If there has been a default in an executory contract or
unexpired lease of the debtor, the trustee may not assume
such contract or lease unless, at the time of assumption
of such contract or lease, the trustee—
(A) cures, or provides adequate assurance that the
trustee will promptly cure, such default;
(B) compensates, or provides adequate assurance that the
trustee will promptly compensate, a party other than the
debtor to such contract or lease, for any actual
pecuniary loss to such party resulting from such default;
and
41
(C) provides adequate assurance of future performance
under such contract or lease.49
A.
As an initial matter, Lifemark argues that the pharmacy
agreement was no longer an executory contract subject to
assumption. To determine if a contract is executory for purposes
of this provision, “the relevant inquiry is whether performance
remains due to some extent on both sides,” such “that an agreement
is executory if at the time of the bankruptcy filing, the failure
of either party to complete performance would constitute a material
breach of the contract, thereby excusing the performance of the
other party.”50
Lifemark argues that the district court erred in treating the
pharmacy agreement as an executory contract subject to assumption
by Liljeberg Enterprises. They contend that, when Lifemark ceased
to lease the hospital on October 28, 1994, the pharmacy agreement
terminated by its own terms pursuant to section 5.1(e). It
provides: “This Agreement shall be effective as set forth above and
shall continue in full force and effect, unless sooner terminated
49
11 U.S.C. § 365(b)(1).
50
Phoenix Exploration, Inc. v. Yaquinto (In re Murexco Petroleum, Inc.),
15 F.3d 60, 62-63 (5th Cir. 1994) (emphasis added); accord Stewart Title Guar.
Co. v. Old Republic Nat’l Title Ins. Co., 83 F.3d 735, 741 (5th Cir. 1996); cf.
Phillips v. First City, Texas–Tyler, N.A. (In re Phillips), 966 F.2d 926, 935
(5th Cir. 1992) (holding that a partnership agreement does not “remain[] an
executory contract after the Final Judgment decreed that [one partner] breached
the partnership agreement, awarded [another partner] damages, and ordered [the
partnership] dissolved, and after passage of the Final Judgment’s 90-day
prescription for winding up [the partnership]”).
42
with the first to occur of the following: ... (e) LIFEMARK ceases
to lease or operate Hospital.”
Liljeberg Enterprises filed for Chapter 11 relief on January
27, 1993. Lifemark’s lease of the hospital did not end until
almost twenty months later–when Travelers foreclosed and Lifemark
bought the hospital at the judicial sale. There is no dispute but
that throughout this period the pharmacy agreement was in full
force and effect and a failure of either party to complete
performance would have been a material breach.
Lifemark argues, however, that a line of authority out of the
Tenth Circuit provides that “[a] contract that provides for
termination on the default of one party may terminate under
ordinary principles of contract law even if the defaulting party
has filed a petition under the Bankruptcy Act.”51 Although this
holding arose under the old Bankruptcy Act,52 Lifemark argues that
it remains valid under the Bankruptcy Code, pointing to a
bankruptcy court’s conclusion to that effect.53 That Michigan
bankruptcy court reviewed several decisions involving the issue of
51
Trigg v. U.S. Dep’t of Interior (In re Trigg), 630 F.2d 1370, 1374
(10th Cir. 1980); accord Gloria Mfg. Corp. v. Int’l Ladies’ Garment Workers’
Union, 734 F.2d 1020, 1022 (4th Cir. 1984).
52
“The Bankruptcy Reform Act of 1978, Pub. L. 95-598, November 6, 1978,
92 Stat. 2549, repealed the former Bankruptcy Act of 1898 and replaced that Act
with the Bankruptcy Code, Title 11 of the United States Code, effective October
1, 1979.” Mitsubishi Int’l Corp. v. Clark Pipe & Supply Co., Inc., 735 F.2d 160,
162 n.2 (5th Cir. 1984).
53
Hertzberg v. Loyal Am. Life Ins. Co. (In re B&K Hydraulic Co.), 106
B.R. 131, 134 (Bankr. E.D. Mich. 1989).
43
whether a contract terminated by its own terms or time limits post-
petition and concluded that “the issue must be whether termination
requires the non-debtor party to undertake some post-petition
affirmative act,” such that, “[w]hen termination of the contract
requires an affirmative act of the non-debtor party, the contract
remains executory because such an act is stayed under 11 U.S.C. §
362(a),” but, “[w]hen termination occurs without any action by the
non-debtor party, the contract is no longer executory and no longer
subject to assumption or rejection.”54
The parties have pointed to no Fifth Circuit decisions
treating this issue, and we have located none. The Liljebergs
argue that even under this authority the pharmacy agreement did not
terminate post-petition where Lifemark not only participated in the
alleged defaults, they intentionally precipitated them; that,
under the pharmacy agreement and Louisiana law, the pharmacy
agreement could not terminate automatically but required Lifemark
to place Liljeberg Enterprises in default and obtain judicial
dissolution.
We agree and conclude that the district court did not err in
concluding that the pharmacy agreement was an executory agreement
subject to assumption by Liljeberg Enterprises. Lifemark’s
affirmative acts—its purchase of the hospital—caused the lease to
be extinguished under the doctrine of confusion, which in turn
54
Id. at 135-36 (emphasis added).
44
caused any alleged default under section 5.1(e) of the pharmacy
agreement. Moreover, Louisiana law provides that, except in
limited circumstances which the district court correctly concluded
do not apply here, a contract will not terminate unless the non-
breaching party seeks judicial dissolution of the contract or at
least provides notice of the intent to exercise the right to
terminate the contract for default, even if the contract explicitly
provides for automatic termination.55 And section 5.1(e) does not
do so. Lifemark was required to give Liljeberg Enterprises written
notice of termination under section 15 of the pharmacy agreement.
In short, terminating the pharmacy agreement for default under
section 5.1(e) required an affirmative act of Lifemark. Lifemark
gave no notice and did not seek judicial dissolution. The pharmacy
agreement remained executory.
B.
Turning then to whether the district court erred in allowing
Liljeberg Enterprises to assume the executory pharmacy agreement,
under section 365, “[a]n assumed lease or contract will remain in
effect through and then after the completion of the
reorganization,” and “[t]he non-debtor party to the agreement is
not released from its duties and must continue to perform;
likewise, the debtor must continue to perform or pay for the
55
See LA. CIV. CODE art. 2013 & cmts. (b)-(c); id. 2015, cmt. (c); id. 2017
& cmt. (b); id. 2024; Mennella v. Kurt E. Schon E.A.I., Ltd., 979 F.2d 357, 361
& n.16 (5th Cir. 1992); Pembroke v. Gulf Oil Corp., 454 F.2d 606, 611 (5th Cir.
1971).
45
services or other costs that are not discharged.”56 We have further
explained that “‘[t]he act of assumption must be grounded, at least
in part, in the conclusion that maintenance of the contract is more
beneficial to the estate than doing without the other party’s
services,’”57 a determination that assumption of the pharmacy
agreement by Liljeberg Enterprises “represented a proper exercise
of business judgment.”58
Section 365(b)(1) essentially “‘allows a debtor to ‘continue
in a beneficial contract provided, however, that the other party is
made whole at the time of the debtor’s assumption of said
contract.’’”59 That is, “[s]ection 365 is intended to provide a
means whereby a debtor can force another party to an executory
contract to continue to perform under the contract if (1) the
debtor can provide adequate assurance that it, too, will continue
to perform, and if (2) the debtor can cure any defaults in its past
performance.”60 As such, “the debtor party must take full account
of the cost to cure all existing defaults owed to the non-debtor
56
Century Indem. Co. v. Nat’l Gypsum Co. Settlement Trust (In re Nat’l
Gypsum Co.), 208 F.3d 498, 505 (5th Cir.), cert. denied, 531 U.S. 871 (2000).
57
Id. (quoting MMR Holding Corp. v. C & C Consultants, Inc. (In re MMR
Holding Corp.), 203 B.R. 605, 612 (Bankr. M.D. La. 1996)).
58
Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1309 (5th
Cir. 1985).
59
Nat’l Gypsum, 208 F.3d at 505 (quoting In re Eagle Bus Mfg., Inc., 148
B.R. 481, 483 (Bankr. S.D. Tex. 1992) (quoting 255 Turnpike Assocs. v. J.W. Mays,
Inc. (In re J.W. Mays, Inc.), 30 B.R. 769, 772 (Bankr. S.D.N.Y. 1983))).
60
Richmond, 762 F.2d at 1310.
46
party when assessing whether the contract is beneficial to the
estate.”61 Further, to determine if the debtor in possession has
provided “adequate assurance” of future performance, we have held
that courts must look to “‘factual conditions,’” including
“consider[ation of] whether the debtor’s financial data indicated
its ability to generate an income stream sufficient to meet its
obligations, the general economic outlook in the debtor’s industry,
and the presence of a guarantee.”62
To the extent that such determinations turn on contested
factual disputes, and not errors of law, we review only for clear
error and not under de novo review.63 Lifemark argues that,
pursuant to 11 U.S.C. § 365(b)(1), the district court should have
denied Liljeberg Enterprises’s motion to assume because Liljeberg
Enterprises’s transactional and operational defaults under the
pharmacy agreement are incurable and because Liljeberg Enterprises
cannot provide adequate assurance of future performance.
Lifemark’s arguments regarding transactional defaults require
interpretation of several contractual documents. “The district
court’s interpretation of a contract is reviewed de novo,” and
“[t]he contract and record are reviewed independently and under the
61
Nat’l Gypsum, 208 F.3d at 505.
62
Richmond, 762 F.2d at 1310 (quoting In re Sapolin Paints, Inc., 5 B.R.
412, 421 (Bankr. E.D.N.Y. 1980)).
63
See id. at 1307-09 & n.4.
47
same standards that guided the district court.”64 At the same time,
“if the interpretation of the contract turns on the consideration
of extrinsic evidence, such as evidence of the intent of the
parties, the standard of review is clearly erroneous,” but, if
“intent is determined solely from the language of the contract,
then contractual interpretation is purely a question of law,” and
“[t]he threshold question whether extrinsic evidence should be
considered in determining the intent of the parties is itself a
question of law and thus reviewable de novo.”65
In this diversity case, we look to Louisiana law for the
applicable standard of contract interpretation.66 “Under Louisiana
law, a contract is the law between the parties, and is read for its
plain meaning.”67 Thus, “[u]nder Louisiana law, where the words of
a contract are clear and explicit and lead to no absurd
64
St. Martin v. Mobil Exploration & Producing U.S. Inc., 224 F.3d 402,
409 (5th Cir. 2000).
65
Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Circle, Inc., 915 F.2d
986, 989 (5th Cir. 1990) (per curiam); see also Gebreyesus v. F.C. Schaffer &
Assocs., Inc., 204 F.3d 639, 642 (5th Cir. 2000) (“Under Louisiana law, the
interpretation of a contract and the determination of ambiguities are questions
of law. Where a court determines that ambiguity exists and makes factual
determinations of intent, we review those factual findings for clear error.”
(citations omitted)). As the district court correctly noted, the Louisiana Civil
Code’s contract interpretation provisions were substantially amended by Act 331
of 1984, which was enacted after the pharmacy agreement was entered into on
February 10, 1983. However, the cited provisions of the Civil Code and other
principles of contract interpretation under Louisiana law cited and applied
herein did not substantively change the law and so there are no retroactivity
concerns presented by citing these post-Act 331 cases and Code provisions. Cf.
Morris v. Friedman, 663 So.2d 19, 23-24 (La. 1995).
66
See Exxon Corp. v. Crosby-Mississippi Res., Ltd., 154 F.3d 202, 205
(5th Cir. 1998).
67
Nat’l Union, 915 F.2d at 989 (citation omitted).
48
consequences, the contract’s meaning and the intent of its parties
must be sought within the four corners of the document and cannot
be explained or contradicted by extrinsic evidence,” such that,
“[i]f a court finds the contract to be unambiguous, it may construe
the intent from the face of the document—without considering
extrinsic evidence—and enter judgment as a matter of law.”68
Further, “‘[u]nder Louisiana law, a contract is ambiguous when it
is uncertain as to the parties’ intentions and susceptible to more
than one reasonable meaning under the circumstances and after
applying established rules of construction.’”69 Put another way,
“under Louisiana law, ‘when the words of the contract are clear and
explicit and lead to no absurd consequences, no further
interpretation may be made in search of the parties’ intent,’” and
“[t]his established rule of strict construction does not allow the
parties to create an ambiguity where none exists and does not
authorize courts to create new contractual obligations where the
language of the written document clearly expresses the intent of
the parties.”70
The Liljebergs and the district court also rely on the rule
that “under Louisiana law doubts or ambiguities as to the meaning
68
Am. Totalisator Co., Inc. v. Fair Grounds Corp., 3 F.3d 810, 813 (5th
Cir. 1993).
69
Davis Oil Co. v. TS, Inc., 145 F.3d 305, 308 (5th Cir. 1998) (quoting
Lloyds of London v. Transcon. Gas Pipe Line Corp., 101 F.3d 425, 429 (5th Cir.
1996)).
70
Omnitech Int’l, Inc. v. Clorox Co., 11 F.3d 1316, 1326 (5th Cir. 1994)
(quoting LA. CIV. CODE art. 2046).
49
of a contract must, if not otherwise resolvable, be eliminated by
interpreting the contract against the party who prepared it.”71 The
Supreme Court of Louisiana has applied this rule in the context of
“an adhesionary contract,” noting that “any contradiction or
ambiguity should be construed against Titan, the party who drafted
the policy,” but that “[t]his general rule of construction ... only
applies when there are two equally reasonable interpretations of
the contractual provision in question.”72
The statutory provision, Louisiana Civil Code article 2056,
captioned “Standard-form contracts,” provides both that, “[i]n case
of doubt that cannot be otherwise resolved, a provision in a
contract must be interpreted against the party who furnished its
text” and that “[a] contract executed in a standard form of one
party must be interpreted, in case of doubt, in favor of the other
party.” This language suggests it will primarily be applied to
standard-form or adhesionary contracts or, as the Supreme Court of
Louisiana has most often recently applied article 2056, to
71
Amoco Prod. Co. v. Forest Oil Corp., 844 F.2d 251, 255 n.7 (5th Cir.
1988); accord Liljeberg Enters. Inc. v. Lifemark Hosps. of La., Inc., 620 So.2d
1331, 1334-35 (La. App. 4 Cir.) (“Interpretation of a contract is the
determination of the common intent of the parties. LSA-C.C. 2045. When the
words of a contract are clear and explicit and lead to no absurd consequences,
no further interpretation may be made in search of the parties’ intent. LSA-C.C.
2046. The words of a contract must be given their generally prevailing meaning.
LSA-C.C. 2047. Each provision in a contract must be interpreted in light of the
other provisions so that each is given the meaning suggested by the contract as
a whole. LSA-C.C. 2050. In case of doubt that cannot be otherwise resolved, a
provision in a contract must be interpreted against the party who furnished its
text. LSA-C.C. 2056.”), writs denied, 621 So.2d 818 (La. 1993). On appeal,
Lifemark does not deny that it drafted the pharmacy agreement. See id. at 1338
(identifying “the attorney who drafted the agreement for Lifemark”).
72
Lewis v. Hamilton, 652 So.2d 1327, 1330 (La. 1995).
50
insurance contracts.73 Neither this court nor the Supreme Court of
Louisiana has, however, confined the provision to these types of
contracts.74
At the same time, we have held that, “while the jurisprudence
of Louisiana has established a rule of contractual interpretation
which construes ambiguity against the party drafting the document
in question, neither party is deemed to be the scrivener when, as
here, the initial draft is modified and remodified in a series of
exchanges between the parties to produce an execution draft
reflecting give and take between obligor and obligee.”75
We first must answer whether the judicial lien and foreclosure
of the hospital were defaults under the collateral mortgage and
lease and, if so, whether they were transactional defaults under
the pharmacy agreement’s cross-default provision. Section 5.1(b)
of the pharmacy agreement provides:
73
E.g., Succession of Fannaly v. Lafayette Ins. Co., 805 So.2d 1134, 1138
(La. 2002); La. Ins. Guar. Ass’n v. Interstate Fire & Cas. Co., 630 So.2d 759,
764 (La. 1994).
74
See, e.g., United States Abatement Corp. v. Mobil Exploration &
Producing U.S., Inc. (In re United States Abatement Corp.), 79 F.3d 393, 400 (5th
Cir. 1996) (case involving oil platform maintenance contract); Huggs, Inc. v. LPC
Energy, Inc., 889 F.2d 649, 653 (5th Cir. 1989) (case involving mineral lease);
Brown v. Drillers, Inc., 630 So.2d 741, 754 n.20 (La. 1994) (“Applying this rule
[Louisiana Civil Code article 2056] in contexts like this one is appropriate in
that it recognizes the reality that the releasee is responsible for the broad
release language and that any ambiguity should thus be construed against the
releasee.”); cf. Mott v. ODECO, 577 F.2d 273, 278 (5th Cir. 1978) (case involving
master service contract relating to offshore oil-drilling platform) (applying
pre-article 2056 rule in Louisiana Civil Code articles 1957 and 1958, which
embodied the same general rule of Louisiana jurisprudence).
75
Shell Offshore, Inc. v. Marr, 916 F.2d 1040, 1046 (5th Cir. 1990).
51
This Agreement shall be effective as set forth above and
shall continue in full force and effect, unless sooner
terminated with the first to occur of the following: ...
(b) Either party shall remain in breach of this Agreement
for a continuous, unabated 30-day period after receipt of
written notice of such breach from the other party.
Should OPERATOR [Liljeberg Enterprises, Inc.]; or any of
LIFEMARK’s corporate affiliates, be in default of any
other contractual agreement with LIFEMARK or any of
LIFEMARK’s corporate affiliates, including, but not
limited to, the lease relating to the Hospital, then
OPERATOR [Liljeberg Enterprises, Inc.] shall be in breach
of this Agreement.
Section 5.1(b) placed the Liljebergs in breach of the pharmacy
agreement by virtue of the default under the fourth covenant of the
collateral mortgage through the sale of the hospital. That
covenant provides that “[t]he Mortgagor [St. Jude] hereby agrees
that should the [hospital] be mortgaged, sold or transferred,
either with or without the assumption of the aforesaid
indebtedness, such sale, transfer or mortgage shall constitute a
breach of this contract and the obligations herein set forth.”
Lifemark argues that the judicial mortgage and lien placed on
the hospital was also a transactional default under the fourth and
fifth covenants of the collateral mortgage. The fourth covenant
provides in relevant part, in addition to the previously-quoted
language, that “[t]he [hospital] is to remain mortgaged and
hypothecated until the full and final payment of the aforesaid
indebtedness ... the Mortgagor [St. Jude] hereby binding itself ...
not to make a conveyance, mortgage, transfer or sale of the
[hospital] until full and final payment of the aforesaid
indebtedness ..., unless the Mortgagee [Lifemark Hospitals, Inc.]
52
expressly consents to such conveyance or mortgage in writing.” The
fifth covenant provides, in pertinent part, that “should there be
created or suffered to be created any other lien or charges
superior in rank to the lien and mortgage herein granted, ... then
and in any of such events, the Note in principal and interest and
all other indebtedness secured hereby shall, at the option of the
Mortgagee [Lifemark Hospitals, Inc.] shall, at the option of the
Mortgagee [Lifemark Hospitals, Inc.], immediately become due and
payable ....” Finally, Lifemark argues that the Travelers lien
created a default of the lease between St. Jude and Lifemark, which
provides in Article 11.1, entitled “Warranty of Peaceable
Possession and Title,” that “[d]uring the Lease Term, LESSOR [St.
Jude] represents and covenants that it will not create nor allow to
exist any liens, encumbrances or charges relating to obligations of
the LESSOR [St. Jude] affecting the Leased Premises except liens,
such as paving, water and sewerage liens, resulting from a special
assessment by a Governmental Authority and the Act of Collateral
Mortgage ... and any other mortgage instruments now or hereafter
executed to secure the [Lifemark Hospitals, Inc.] loan ... or
otherwise agreed to in writing by [Lifemark Hospitals, Inc.].”
It is important to note that the collateral mortgage was
signed by St. Jude and Lifemark Hospitals, Inc., not Liljeberg
Enterprises and Lifemark Hospitals of Louisiana, Inc., while the
lease of the hospital was signed by St. Jude and Lifemark Hospitals
of Louisiana, Inc., not Liljeberg Enterprises and Lifemark
53
Hospitals of Louisiana, Inc. As a result, Lifemark argues on
appeal that the first reference to Lifemark in section 5.1(b) of
the CPA is a typographical error, and that the provision should
read “or any of OPERATOR’s corporate affiliates,” such that any
default of St. Jude, which is an affiliate of the “Operator,”
Liljeberg Enterprises, is a default under the pharmacy agreement.
The difficulty for Lifemark is that it is required to seek
reformation or, to avoid absurdity, reading of the word
“OPERATOR’S” into section 5.1(b) for “LIFEMARK’S.” Lifemark has
never whole-heartedly sought reformation and with good reason.
Under Louisiana law, “[r]eformation is an equitable remedy that may
be used when a contract between the parties fails to express their
true intent, either because of mutual mistake or fraud.”76 Indeed,
“[t]o establish the appropriateness of reformation, [Lifemark] had
to prove by clear and convincing evidence that the [pharmacy
agreement], as written, contained a mutual mistake and did not
comport with the parties original intent.”77
On this appeal, Lifemark stresses that the district court
erred in rejecting its interpretation of section 5.1(b). The
district court concluded that the language in section 5.1(b) could
have been prepared for Liljeberg Enterprises’s benefit so that a
default by Lifemark or a Lifemark affiliate would have allowed
76
Edwards v. Your Credit Inc., 148 F.3d 427, 436 (5th Cir. 1998).
77
Duhon v. Mobil Oil Corp., 12 F.3d 55, 58 (5th Cir. 1994).
54
Liljeberg Enterprises to terminate the pharmacy agreement or seek
damages. Lifemark replies that this suggested rational basis for
the provision’s otherwise embarrassing phrasing is not so simple.
Rather, this rescue requires a finding that the scriveners made
four errors in the provision, instead of the one error that would
exist under Lifemark’s interpretation. Lifemark’s argument, while
strong, is not clear and convincing evidence of mutual mistake or
fraud in the formation of the pharmacy agreement.
Lifemark also says that John Liljeberg testified that the
Travelers lien could cause a default under the pharmacy agreement’s
cross-default provision. As we read the testimony, Liljeberg did
not admit any mutual mistake in the drafting of section 5.1(b) of
the pharmacy agreement. Rather he indicated only that his attorney
was concerned that the Travelers lien and foreclosure might sever
the pharmacy agreement.
At the same time, “Louisiana courts will not interpret a
contract in a way that leads to unreasonable consequences or
inequitable or absurd results even when the words used in the
contract are fairly explicit.”78 Lifemark argues that the assertion
that there was no typographical error in section 5.1(b) of the
pharmacy agreement is untenable because it leads to the nonsensical
result that, when read literally, section 5.1(b) provides that
Liljeberg Enterprises would be in breach if a Lifemark affiliate
78
Tex. E. Transmission Corp. v. Amerada Hess Corp., 145 F.3d 737, 742
(5th Cir. 1998).
55
defaulted under an agreement with another Lifemark affiliate.
Lifemark points out that this reading of section 5.1(b) is contrary
to its plain language. That provision sets forth a default on “the
lease relating to the Hospital” as an example of the type of breach
that will trigger the cross-default provision. They note that,
under Liljeberg Enterprises’s reading, such a breach of the lease
could not trigger the cross-default provision because it is not an
agreement between Liljeberg Enterprises and a Lifemark affiliate or
an agreement between two Lifemark entities.
This is a stronger argument for Lifemark’s interpretation of
section 5.1(b). Particularly so in light of several controlling
standards for contract interpretation under Louisiana law: (1)
Every provision of the contract must be interpreted in light of the
contract’s other provisions in order to give each provision the
meaning suggested by the contract as a whole; (2) Contract
provisions susceptible to different meanings should be interpreted
so as not to neutralize or ignore any provision or treat any
provision as mere surplusage and so as to preserve the validity of
the contract; and (3) “‘A doubtful provision must be interpreted in
light of the nature of the contract, equity, usages, the conduct of
the parties before and after the formation of the contract, and of
other contracts of a like nature between the same parties.’”79 Only
if these rules do not resolve the issue of how to interpret the
79
Id. (quoting LA. CIV. CODE art. 2053).
56
contractual provision at issue should the provision be interpreted
against the party that drafted it, which default rule applies, in
any event, “only ... when there are two equally reasonable
interpretations of the contractual provision in question.”80
We conclude that Lifemark’s interpretation of section 5.1(b),
providing that “LIFEMARK’S” should be read as “OPERATOR’S” in the
first reference in the provision, is the only construction of the
provision which gives it the meaning suggested by the pharmacy
agreement as a whole and which does not neutralize or ignore any
provision or treat any provision as mere surplusage. In
particular, this reading of section 5.1(b) makes sense of the
example of the lease of the hospital between St. Jude and Lifemark
Hospitals, Inc., which was signed only a month after Liljeberg
Enterprises and Lifemark Hospitals of Louisiana, Inc. entered into
the pharmacy agreement. In short, reading section 5.1(b) literally
leads to absurd results, inter alia, that Liljeberg Enterprises
would be required to answer for a default by one of Lifemark’s
corporate affiliates, whereas the interpretation advanced by
Lifemark represents the most reasonable interpretation of the
provision in question following the established rules of contract
interpretation under Louisiana law.
We conclude that the district court erred in finding section
5.1(b) to be unenforceable and therefore severable from the
80
Lewis, 652 So.2d at 1330.
57
pharmacy agreement pursuant to section 10 and in finding that
“[t]he obligations contained in the [pharmacy agreement] are
severable from St. Jude’s obligations to [Lifemark Hospitals, Inc.]
under the mortgage and [Lifemark Hospitals of Louisiana, Inc.]
under the lease.”
We further hold that the district court clearly erred in
finding, largely implicitly, that the Travelers judicial mortgage
and the judicial sale of the hospital were not defaults under the
fourth covenant of the collateral mortgage. The district court
also clearly erred in finding that “[t]he mortgage when viewed in
tandem with the lease was incapable of default since the
obligations owed by [Lifemark] under the lease would satisfy all of
the obligations due by St. Jude to [Lifemark Hospitals, Inc.] under
the terms of the financing.” Under the express terms of the
collateral mortgage, the hospital was not be mortgaged or sold.
These events were breaches of the non-financial covenants of the
collateral mortgage and the undisputed fact is that the hospital
was both mortgaged and sold. It is no answer that the mortgage and
sale resulted from Lifemark’s actions and not Liljeberg
Enterprises’s or St. Jude’s. The express language of the fourth
covenant does not confine its prohibition of sales or mortgages of
the hospital to events caused by St. Jude. We have already
concluded that the district court clearly erred in finding the
superior rank of the Travelers judicial mortgage and the resulting
judicial sale of the hospital to have been the result of a breach
58
of fiduciary duties, bad faith, or collusion on the part of
Lifemark. Moreover, the district court made no findings that
Liljeberg Enterprises had cured or provided adequate assurance that
it will promptly cure such a default, nor could the district court
have done so on this record.
The Liljebergs, however, attempt to escape the effect of the
default under the collateral mortgage by attacking the validity of
the cross-default provision of the pharmacy agreement. These
efforts are unavailing. The Travelers judgment which gave rise to
the judicial mortgage and lien and subsequent judicial sale of the
hospital did not occur solely because of Liljeberg Enterprises’s
financial condition upon the filing of its Chapter 11 bankruptcy
petition. To assert that it did ignores the Liljebergs’ bad faith
conduct, as found by this court, in their dealings with Travelers.
Contrary to the Liljebergs’ assertion, relegated to a footnote,
that the pharmacy agreement’s cross-default provision is legally
invalid because it impermissibly hinges on Liljeberg Enterprises’s
financial condition and ability to pay under the other contracts,
the cross-default provision does not run afoul of the exceptions to
11 U.S.C. § 365(b)(1)’s requirements provided under sections
365(b)(2)(A) or 365(e)(1)(A).81
81
See 11 U.S.C. § 365(b)(2)(A) (“Paragraph (1) of this subsection does
not apply to a default that is a breach of a provision relating to—(A) the ...
financial condition of the debtor at any time before the closing of the case
....”); id. § 365(e)(1)(A) (“Notwithstanding a provision in an executory contract
..., an executory contract ... of the debtor may not be terminated ..., at any
time after the commencement of the case solely because of a provision in such
contract or lease that is conditioned on—(A) the ... financial condition of the
59
There is non-binding authority from bankruptcy and district
courts outside of this circuit, cited by the Liljebergs, for the
propositions that cross-default provisions do not integrate
otherwise separate transactions or leases and that section 365
prohibits the enforcement of cross-default provisions where
enforcement would restrict the debtor’s ability to assume an
executory contract.82 We agree with another bankruptcy court which
recently synthesized these authorities and concluded that, while
“cross-default provisions are inherently suspect,” they are not per
se invalid in the bankruptcy context, and “a court should carefully
scrutinize the facts and circumstances surrounding the particular
transaction to determine whether enforcement of the provision would
contravene an overriding federal bankruptcy policy and thus
impermissibly hamper the debtor's reorganization.”83 Before finding
that a cross-default provision involving a lease and non-lease
agreements, including a note, similar to that here, was
enforceable, the bankruptcy court concluded that “[f]ederal
bankruptcy policy is offended where the non-debtor party seeks
debtor at any time before the closing of the case ....”). Compare In re Plitt
Amusement Co. of Wash., Inc., 233 B.R. 837, 847 (Bankr. C.D. Cal. 1999); In re
Sambo’s Rests., Inc., 24 B.R. 755, 757 (Bankr. C.D. Cal. 1982).
82
See EBG Midtown S. Corp. v. McLaren/Hart Envtl. Eng’g Corp. (In re
Sanshoe Worldwide Corp.), 139 B.R. 585, 597 (S.D.N.Y. 1992); Braniff, Inc. v. GPA
Group PLC (In re Braniff, Inc.), 118 B.R. 819, 845 (Bankr. M.D. Fla. 1990); see
also Plitt, 233 B.R. at 847.
83
Kopel v. Campanile (In re Kopel), 232 B.R. 57, 64 (Bankr. E.D.N.Y.
1999).
60
enforcement of a cross-default provision in an effort to extract
priority payments under an unrelated agreement,” such that “[a]
creditor cannot use the protections afforded it by section 365(b)
(which requires curing of defaults and adequate assurances of
future payments as a precondition to assumption of an executory
contract or unexpired lease) in order to maximize its returns by
treating unrelated unsecured debt as a de facto priority
obligation.”84 As such, “where the non-debtor party would have been
willing, absent the existence of the cross-defaulted agreement, to
enter into a contract that the debtor wishes to assume, the cross-
default provision should not be enforced,” but “enforcement of a
cross-default provision should not be refused where to do so would
thwart the non-debtor party's bargain.”85 The court also noted that
“[t]he fact that legally separate entities are parties to the
various contracts does not of itself preclude enforcement of the
cross-default provision” and that, “[w]here documents are
contemporaneously executed as necessary elements of the same
transaction, such that there would have been no transaction without
each of the other agreements, the fact that nominally distinct
parties executed the agreements will not preclude enforcement of a
cross-default provision in favor of a party whose economic
84
Id. at 65-66.
85
Id. at 66.
61
interests are identical to those of the entity that is party to the
document containing the cross-default provision.”86
Here, there is ample support for the conclusion that the lease
and collateral mortgage of the hospital are interrelated with the
pharmacy agreement and that there would have been no pharmacy
agreement without the lease of the hospital or the loan secured by
the collateral mortgage. Indeed, the parties agreed in the pre-
trial order that St. Jude would not have entered into the lease of
the hospital to Lifemark if Lifemark had refused to enter into the
pharmacy agreement with Liljeberg Enterprises.87 It is true that
the lease was signed a month after the pharmacy agreement was
executed, but section 5.1(b) expressly contemplates “the lease
relating to the Hospital” as an instrument covered by the cross-
default provision. The parties also agreed that John Liljeberg
signed a letter of intent dated December 20, 1982, with Lifemark
concerning a proposal to develop St. Jude Hospital.88 The district
court, in considering the effectiveness of an alleged default under
pharmacy agreement section 5.1(e), found that “although it is
evident that the [pharmacy agreement] was a part of the overall
transaction, it is not evident from the documents executed one
month after the [pharmacy agreement] that the [pharmacy agreement]
86
Id. at 67.
87
Pre-Trial Order at 34 ¶ 23 (R. 9212).
88
Id. at 32 ¶ 4 (R. 9210).
62
was not severable from the remainder of the transaction,” such that
“a default under the [pharmacy agreement] would not collapse the
loan or the Lease.” That observation adds nothing. Non-
enforcement of the cross-default provision, providing that a
default under the collateral mortgage or lease would collapse the
pharmacy agreement, would thwart Lifemark’s bargain in agreeing to
enter into the pharmacy agreement, all a part of the overall
transaction to finance the building of the hospital through a loan
secured by a collateral mortgage. Any finding, express or implied,
to the contrary by the district court is clearly erroneous on the
record before us.89
C.
In sum, the district court erred in allowing Liljeberg
Enterprises to assume the pharmacy agreement pursuant to 11 U.S.C.
§ 365. Liljeberg Enterprises’s assumption of the pharmacy
agreement is barred pursuant to 11 U.S.C. § 365(b)(1)(A) by
defaults under the fourth covenant of the collateral mortgage in
the form of the judicial mortgage placed on and judicial sale of
the hospital, which in turn resulted in an incurable default under
89
Likewise, the Liljebergs’ unsupported contention in a footnote that
principles of estoppel and waiver bar Lifemark’s challenge to Liljeberg
Enterprises’s assumption because Liljeberg Enterprises would not be in bankruptcy
were it not for Lifemark’s actions is undermined by our conclusion that the
district court clearly erred in its findings of bad faith and collusion and by
the absence of any findings by the district court (or record evidence) that
Lifemark’s conduct was the cause of the debt to Travelers or St. Jude’s inability
to pay that debt, let alone Liljeberg Enterprises’s Chapter 11 bankruptcy.
63
section 5.1(b) of the pharmacy agreement.90 We therefore reverse
the district court’s judgment in Cause No. 93-1794 granting
Liljeberg Enterprises’s motion to assume the pharmacy agreement.
VII. Cause No. 93-4249
The district court in Cause No. 93-4249 ruled that Lifemark
Hospitals of Louisiana, Inc., American Medical, and Tenet are
liable to Liljeberg Enterprises for damages in the total amount of
$12,432,905.92 for breach of payment due under the pharmacy
agreement, specifically for the following: (1) $4,062,396 for
Lifemark’s failure to reimburse Liljeberg Enterprises its actual
acquisition costs for the period August 31, 1989 through June 1,
1993; (2) $700,000 as lost profits for Lifemark’s failure to
purchase contrast media through the date of trial from Liljeberg
Enterprises as required under the pharmacy agreement;91 (3)
$2,023,571 for Lifemark’s wrongful disallowance of requested
payment to Liljeberg Enterprises due to pricing differences and
other items not specifically addressed in the district court’s
judgment through the date of trial; (4) $103,617 for Lifemark’s
wrongfully deducting bad debt allowances from its payments on the
cost reimbursement portion of Liljeberg Enterprises’s billing
90
In light of this conclusion, we need not address Lifemark’s additional
arguments regarding Liljeberg Enterprises’s transaction defaults under the
collateral mortgage and lease, operational defaults under the pharmacy agreement,
or failure to provide adequate assurance of future performance under the pharmacy
agreement.
91
Contrast media is a diagnostic drug for use in, inter alia, radiology
procedures, which is generally swallowed or injected and which the district court
found may come in a kit or may be purchased separately.
64
through the date of trial; (5) $150,275.60 for Lifemark’s failure
to implement minimum fee increases due to Liljeberg Enterprises
under the pharmacy agreement through the date of trial; (6) $54,055
for Lifemark’s failure to properly pay Liljeberg Enterprises under
the pharmacy agreement for TPN fees and to reimburse Liljeberg
Enterprises for chemotherapy kits provided to the nursing staff at
the hospital;92 (7) $281,906.32 for pricing and quantity
differences; (8) $57,085 for Lifemark’s failure to properly pay
Liljeberg Enterprises for nitroglycerin and insulin supplied under
the pharmacy agreement; and (9) an additional $5 million as damages
through the date of trial. The district court also ruled that
Liljeberg Enterprises is liable to Lifemark Hospitals of Louisiana,
Inc., American Medical, and Tenet for $741,879, specifically
$616,400 for Liljeberg Enterprises’s overcharges on piggyback fees
under the pharmacy agreement93 and $125,479 for Liljeberg
Enterprises’s failure to pay Medicare reimbursement due to Lifemark
Hospitals of Louisiana, Inc., American Medical, and Tenet under the
pharmacy agreement through the date of trial. The district court
denied all other claims by the parties for damages under the
pharmacy agreement.
92
The district court found that “Total Patenterals Nutrition (‘TPN’) is
a combination of a highly caloric dextrose or sugar solution with protein
additives prepared using the aseptic technique.”
93
The district court found that “[a]n ‘IV piggyback’ is a small volume
of fluid that is used to administer mostly antibiotic ... medications to patients
through an intravenous solution,” and “[a]n additive is added to IV piggybacks
in 90% of the IV piggybacks dispensed by [Liljeberg Enterprises].”
65
In the absence of an error of law, this court reviews the
district court’s award of damages for clear error only.94 “If the
award of damages is plausible in light of the record, a reviewing
court should not reverse the award even if it might have come to a
different conclusion.”95
We have generally held that, “[w]hile the district court may
not determine damages by speculation or guess, it will be enough if
the evidence show[s] the extent of the damages as a matter of just
and reasonable inference, although the result be only
approximate.”96 Moreover, under Louisiana law, it is well-settled
that “[a]ctual damages must be proven; they cannot be speculative
or conjectural.”97 Thus, “[w]hile the breaching party should not
escape liability because of difficulty in finding a perfect measure
of damages, the evidence must furnish data for a reasonably
accurate estimate of the amount of damages” such that it “appear[s]
reasonably evident that the amount allowed rests upon a certain
94
E. & J. Gallo Winery v. Spider Webs Ltd., 286 F.3d 270, 277 (5th Cir.
2002); Harken Exploration Co. v. Sphere Drake Ins. PLC, 261 F.3d 466, 477 (5th
Cir. 2001).
95
St. Martin, 224 F.3d at 410.
96
Sulzer Carbomedics, Inc. v. Or. Cardio-Devices, Inc., 257 F.3d 449,
459-60 (5th Cir. 2001) (internal quotation marks omitted) (quoting DSC
Communications Corp. v. Next Level Communications, 107 F.3d 322, 330 (5th Cir.
1997) (quoting Terrell v. Household Goods Carriers’ Bureau, 494 F.2d 16, 24 (5th
Cir. 1974))).
97
Nat Harrison Assocs., Inc. v. Gulf States Utils. Co., 491 F.2d 578, 587
(5th Cir. 1974).
66
basis.”98 More specifically, “Louisiana law is well-settled that
lost profits ‘must be proven with reasonable certainty and cannot
be based on conjecture and speculation.’”99
The district court’s findings of breaches of the pharmacy
agreement meriting damage awards against Lifemark and many of
Lifemark’s arguments on appeal turn largely on interpretations of
various provisions of the pharmacy agreement, which are generally
governed by the standards we have described. On appeal, the
Liljebergs seek to go beyond the plain language of the pharmacy
agreement on the basis of Lifemark’s alleged drafting of the
pharmacy agreement in bad faith. The argument is that the contract
was made deliberately ambiguous in order to injure Liljeberg
Enterprises. Likewise, the district court found ambiguity in
almost every relevant provision of the pharmacy agreement which was
not preclusively interpreted by the Louisiana state court in a
prior case involving these parties.100 The district court further
concluded that, based on testimony that Lifemark entered into the
pharmacy agreement with the ultimate motive of terminating rather
than abiding by the contract, the pharmacy agreement should be
98
Id.; accord Mobil Exploration & Producing U.S., Inc. v. Cajun Constr.
Servs., Inc., 45 F.3d 96, 101-02 & nn.18-19 (5th Cir. 1995).
99
MAC Sales, Inc. v. E.I. du Pont de Nemours & Co., 24 F.3d 747, 753 (5th
Cir. 1994) (quoting Guy T. Williams Realty, Inc. v. Shamrock Constr. Co., 564
So.2d 689, 695 (La. App. 5 Cir.), writ denied, 569 So.2d 982 (La. 1990)).
100
See Liljeberg Enters. Inc. v. Lifemark Hosps. of La., Inc., 620 So.2d
1331 (La. App. 4 Cir.), writs denied, 621 So.2d 818 (La. 1993). Neither party
challenges on appeal the district court’s determination of issue preclusion.
67
interpreted against Lifemark where the pharmacy agreement is
susceptible to more than one interpretation. However, as Lifemark
aptly points out on appeal, Liljeberg Enterprises never argued that
the contract was fraudulently induced and the record shows that
John Liljeberg was fully apprised of the pharmacy agreement’s terms
and was represented by counsel and pharmacy consultants when he
negotiated the agreement and understood the agreement that he
signed on behalf of Liljeberg Enterprises. Under these
circumstances, in the absence of ambiguity, we look to the clear
and explicit language within the four corners of the pharmacy
agreement to determine the pharmacy agreement’s meaning and the
intent of its parties.
On appeal, Lifemark challenges several of the district court’s
damage awards to Liljeberg Enterprises.101 We will address each
challenge in turn.
A.
Lifemark argues that the district court erred in awarding $5
million for Liljeberg Enterprises’s “circumvention claim” based
upon Liljeberg Enterprises’s theory that Lifemark “circumvented”
the pharmacy agreement, and thereby avoided paying Liljeberg
Enterprises, by not paying Liljeberg Enterprises for each
101
Lifemark does not appeal the district court’s awards of $103,617 for
bad debt deductions and $54,055 for chemotherapy kits and TPN fees, nor the
district court’s failure to award $753,952 for Liljeberg Enterprises’s denial of
Medicaid reimbursements. Likewise, the Liljebergs do not appeal the order to
repay $616,400 for I.V. piggyback fee overcharges and $125,479 for Medicare
reimbursement denials.
68
administered dose of drugs provided by Liljeberg Enterprises and
obtaining drugs from other sources. Lifemark contends that these
claims fail because they are based upon erroneous interpretations
of sections 2.6 and 4.1 of the pharmacy agreement and because, in
any event, by relying solely on a procedurally flawed audit of
patient charts, Liljeberg Enterprises failed to adequately prove
damages. Lifemark also contends that the $5 million award for
“circumvention” overlaps impermissibly with the $700,000 award for
lost profits on contrast media (based upon Liljeberg Enterprises’s
argument under section 2.6(a)) and the $57,085 award for insulin
and nitroglycerin underpayments (based upon Liljeberg Enterprises’s
argument under section 4.1).102
The provisions of the pharmacy agreement at issue here are
sections 2.6 and 4.1 and Exhibit B. Section 2.6(a) provides:
OPERATOR [Liljeberg Enterprises, Inc.] shall not provide,
nor be entitled to any compensation, for the following:
(a) all drugs and supplies utilized by the ancillary
departments of the Hospital in preparation for, during,
or immediately following departmental patient related
procedures, except those patient identifiable charges in
which the cost of the drug is not included in a fee or
charge for that procedure. Ancillary departments shall
include, but not be limited to, radiology,
anesthesiology, and clinical labs ....
Section 4.1 provides in pertinent part:
(a) As compensation for those pharmaceutical services
provided by OPERATOR [Liljeberg Enterprises, Inc.] as
specified above, and for pharmaceuticals and intravenous
102
See Nat’l Tea Co. v. Plymouth Rubber Co., Inc., 663 So.2d 801, 811 (La.
App. 5 Cir. 1995) (holding that “the allowance of a double recovery in a
contractual situation, in which the damages are fixed, is inappropriate”).
69
solutions furnished hereunder to inpatients or emergency
room patients, LIFEMARK shall pay to OPERATOR [Liljeberg
Enterprises, Inc.] the fee per procedure as shown on
Exhibit B, which is attached hereto and incorporated
herein for all purposes less 5% of such total of the fees
per procedure as allowance, for bad debt. The allowance
for bad debt shall be reviewed after each fiscal year of
the Hospital and changed to reflect the actual percentage
of uncollectable accounts for the preceding fiscal year
of the Hospital.
Exhibit B, in turn, provides:
LIFEMARK shall reimburse the OPERATOR [Liljeberg
Enterprises, Inc.] the greater of (i) the minimum fee set
forth below or (ii) a fee equal to 1.35 times cost as
identified by invoice.
Drug Category Minimum Fee
Orals
Solid $ .53
Liquid .63
CII Controlled Drug .56
Suppositories .53
Parenterals
Per Dose 2.80
CII Controlled Drug 3.00
Partial Fill I.V.'s (Piggybacks) 5.25 (includes cost
of solution)
Miscellaneous
Opthalmics, Externals, Otics, etc. 1.40
Fees for items or categories not identified above shall
be established in a manner consistent with the
development schedule.
LIFEMARK shall reimburse the OPERATOR [Liljeberg
Enterprises, Inc.] a flat fee for handling the following
items:
I.V. Handling fee for Non-Additive,
large volume parenterals $ 1.00
I.V. Additive Fee 1.70
i.
70
Lifemark argues that the district court erroneously
interpreted section 4.1(a)’s provision for “the fee per procedure
as shown on Exhibit B” to mean that Liljeberg Enterprises was
entitled to a new fee each time a dose of the same drug or drug
combination was administered by a nurse or physician, even if
Liljeberg Enterprises performed no new pharmaceutical service.
Lifemark contends that section 4.1(a)’s “fee per procedure”
provision is unambiguous and simply means that Liljeberg
Enterprises is entitled to a single fee for each drug dispensed by
Liljeberg Enterprises’s pharmacy, irrespective of whether a nurse
or doctor later administers a dose or doses of the drug in a multi-
step process.
The state court’s preclusive holding establishes that, under
section 4.1(a), Liljeberg Enterprises is entitled to receive
reimbursement for actual acquisition costs in addition to the “fee
per procedure” set forth in Exhibit B.103 The question left
unanswered by the state court decision, however, and squarely
presented in this case is whether “fee per procedure” should be
understood to authorize Liljeberg Enterprises to receive a fee per
drug dispensed or pharmaceutical service provided by Liljeberg
Enterprises’s pharmacy or a fee per administered dose, as the
district court found. The district court concluded that the phrase
103
Liljeberg Enters., 620 So.2d at 1335-36.
71
“per procedure” is ambiguous and therefore turned to extrinsic
evidence.
This conclusion is correct if the parties’ intent as to the
meaning of this provision of section 4.1(a) is uncertain and this
provision is susceptible to more than one reasonable meaning under
the circumstances and after applying established rules of
construction.104 The term “procedure” is nowhere defined in the
pharmacy agreement and is, in fact, used in several different
contexts within this contract, including “departmental patient
related procedures” and “the Hospital's policies and procedures.”
Lifemark argues that the per-administered-dose meaning is not
reasonable because it would compensate Liljeberg Enterprises for
services performed by other hospital employees or departments, such
as nurses administering medication, and not simply for services
Liljeberg Enterprises actually performed. As support for this
argument, Lifemark notes that section 4.1(a) provides that the “fee
for procedure” shall be paid “[a]s compensation for those
pharmaceutical services provided by [Liljeberg Enterprises] as
specified above, and for pharmaceuticals and intravenous solutions
furnished hereunder to inpatients or emergency room patients.”
Section 2.4 provides that “pharmaceutical services” includes
“without limitation, drugs, medicines, and intravenous solutions.”
Even the most expansive, reasonable meaning attributable to
104
See Davis Oil, 145 F.3d at 308.
72
“pharmaceutical services” under the pharmacy agreement would not
include services performed by other hospital employees or
departments within the scope of “pharmaceutical services provided
by [Liljeberg Enterprises].”
However, section 4.1(a) also provides that the “fee per
procedure” shall be paid “for pharmaceuticals and intravenous
solutions furnished hereunder to inpatients or emergency room
patients.” In light of this language, the ordinary meaning of
“procedure” could reasonably encompass either meaning attributed by
the parties to “fee per procedure.” Moreover, the district court’s
interpretation of “fee per procedure” does not neutralize or ignore
or treat as mere surplusage any other provision of the pharmacy
agreement. Under these circumstances, we conclude that the
district court did not err in concluding that the phrase “fee per
procedure” in section 4.1(a) is ambiguous and looking to extrinsic
evidence.
Having found ambiguity exists in section 4.1(a), we review the
district court’s factual determinations of intent for clear error
only.105 Lifemark argues that compensation per dose administered
results in grossly excessive charges. Additionally, Lifemark notes
that the district court interpreted the “fee per procedure” phrase
to apply differently to heparin flush kits and contends that there
is no reasoned basis for interpreting “per procedure” differently
105
See Gebreyesus, 204 F.3d at 642.
73
according to the type of drug dispensed when the pharmacy’s
involvement is the same.106 However, Lifemark offers no persuasive
argument on appeal that there is clear error in the district
court’s finding, based on witness testimony, that the parties
intended for Liljeberg Enterprises to be compensated for each unit
administered with respect to the administration of multiple units
of medication or multiple administrations of medication from single
vials of medicine. We therefore conclude that the district court’s
interpretation of section 4.1(a)is correct.107 The district court’s
additional finding that heparin flush kits are distinguishable
because allowing Liljeberg Enterprises compensation for each step
in the process and each legend drug item contained in a kit would
involve multiple reimbursement for a single, one-time process of
administering the kit is consistent with the district court’s
general finding and is also not clearly erroneous.
ii.
Turning to section 2.6(a) of the pharmacy agreement, Lifemark
argues that the district court erred in ruling that Lifemark was
106
The district court’s unchallenged factual finding was that “[a]
‘heparin flush kit’ consists of three separate items that are administered at one
time and are in essence a single procedure or dose.”
107
Lifemark also argues that the district court erred in failing to award
Lifemark $51,771 as reimbursement for overpayments for multiple doses of
nitroglycerin and insulin, where Liljeberg Enterprises charged multiple fees for
the pharmacy’s single act of dispensing these medications, and, based on the same
reasoning, Lifemark contends that the district court erred in awarding $57,085
for Lifemark’s alleged underpayments to Liljeberg Enterprises for nitroglycerin
and insulin supplied under the pharmacy agreement. On the basis of our
conclusion that the district court’s interpretation of “fee for procedure” in
section 4.1(a) is not in error, we reject these points of error as well.
74
required to compensate Liljeberg Enterprises for certain bulk
drugs, such as contrast media and surgery kits, which Lifemark
purchased directly from drug wholesalers and which were sent to
ancillary departments of the hospital for administration by doctors
or nurses.108 According to Lifemark, the district court held that
compensation was due Liljeberg Enterprises because section 2.6(a)’s
excluding compensation to Liljeberg Enterprises for these drugs was
illegal and was superceded by the Tenet policy manual. The
argument is that the district court included this unspecified
compensation in its $5 million award to Liljeberg Enterprises.
The district court’s actual findings and conclusions on this
matter are somewhat different, however, and hinge on the following
propositions. Liljeberg Enterprises was the exclusive, licensed
hospital pharmacy for the hospital, and the parties intended that
Liljeberg Enterprises would have the exclusive right to furnish all
drugs to all departments at the hospital except for specific
exclusions set forth in section 2.6. Louisiana and federal law do
not require that kits which include legend drugs be purchased from
Liljeberg Enterprises, but the law does require that Liljeberg
Enterprises oversee the storage and dispensing of these items.
However, Tenet policy requires that the hospital pharmacy procure,
store, distribute, and control all pharmaceuticals used within the
108
Surgery kits contain a combination of legend drugs such as Lidocaine
and non-legend supplies used during surgical procedures.
75
hospital,109 and the pharmacy agreement requires that all drugs to
be administered to patients at the hospital be purchased from
Liljeberg Enterprises, other than those drugs for which a specific
exclusion exists under the pharmacy agreement, e.g., pursuant to
section 2.6. Thus, Lifemark should have involved Liljeberg
Enterprises in procuring, storing, and dispensing any drugs or kits
which required the intervention of a licensed pharmacist under
applicable law. Lifemark failed to do so in ordering legend drugs
or kits containing legend drugs from sources other than Liljeberg
Enterprises, including by use of Liljeberg Enterprises’s pharmacy
permit without Liljeberg Enterprises’s permission,110 and by storing
and dispensing legend drugs through the hospital’s Materials
Management Department, bypassing the hospital pharmacy, in
contravention of the pharmacy agreement.
Thus, the district court did not conclude that section 2.6(a)
is illegal per se. Nor did it conclude that Liljeberg Enterprises
was required by state or federal law to purchase all drugs or kits
containing legend drugs for use in the ancillary departments of the
hospital in preparation for, during, or immediately following
departmental patient related procedures. Rather, it decided that,
109
The district court found that Tenet’s Pharmacy Policy & Procedure
Manual gave Liljeberg Enterprises, as the hospital’s pharmacy department, the
responsibility to store, control, and distribute all drugs, including non-legend
drugs, for use in ancillary departments, resting on the manual’s general
statement that the general purpose of the pharmacy department is the procurement,
distribution, and control of all pharmaceuticals used within the hospital.
110
There is no dispute that only Liljeberg Enterprises possessed the
relevant hospital pharmacy permit for the hospital required under Louisiana law.
76
where state and federal law requires Liljeberg Enterprises’s
involvement with legend drugs used by the ancillary departments of
the hospital, section 2.6(a) must not be read to bar Liljeberg
Enterprises from entitlement to compensation under the pharmacy
agreement.
Lifemark argues, however, that where section 2.6(a) states
that Liljeberg Enterprises will neither “provide” nor be
compensated for drugs used in ancillary departments, including
legend drugs, but does not prohibit Liljeberg Enterprises from
providing oversight or other services which the court has found to
be necessary, section 2.6(a) is entirely consistent with the
district court’s finding that Lifemark could lawfully purchase
legend drugs. Lifemark also argues that there is no evidence of
illegality; that a Louisiana Board of Pharmacy inspector found no
violations where the drugs were distributed on doctors’ orders and
the administration of the drugs was ultimately reviewed by the
hospital pharmacy.111 Lifemark contends that the district court
erred in discounting this evidence (along with testimony that, even
if it is against the letter of the law, many hospitals store and
dispense pharmaceuticals out of ancillary departments), because, in
the view of the district court, the Board’s non-action against
111
Lifemark concedes that an inspector for the Louisiana Department of
Health and Hospitals testified that he concluded that legend drugs were being
stored and dispensed from the Materials Management Department without the
supervision of a pharmacist, but notes that he also admitted that his normal job
responsibility was to inspect hospitals for federal reimbursements and that he
would defer to Louisiana Board of Pharmacy on the interpretation and enforcement
of Louisiana pharmacy laws.
77
Lifemark appeared to be the result of the Board’s desire to stay
out of a contract dispute between two private entities and “because
the exercise of discretion by the Board of Pharmacy cannot abrogate
black letter law.”
Finally, Lifemark argues that the district court erred in
refusing to reopen the record to allow evidence from a trial in
another lawsuit filed by Liljeberg Enterprises’s former pharmacy
director James Witchen against Lifemark Hospitals of Louisiana,
Inc., a Lifemark employee, Tenet, and Liljeberg Enterprises.112
This evidence showed that the Louisiana Board of Pharmacy found
that Lifemark’s handling of legend drugs was not a violation of
pharmacy laws. Lifemark argues that this refusal works an
injustice to it and constitutes an abuse of discretion.113
We conclude that the district court erred in concluding that
section 2.6(a) denies Liljeberg Enterprises compensation for its
112
Witchen’s suit stemmed from Lifemark’s request, pursuant to its rights
under the pharmacy agreement, that Liljeberg Enterprises remove Witchen as
pharmacy director.
113
The standard for deciding whether the district court erred in denying
a motion to reopen is well-settled:
We review for abuse of discretion a district court’s ruling on
a party’s motion to reopen its case for the presentation of
additional evidence. The court’s decision “will not be disturbed in
the absence of a showing that it has worked an injustice in the
cause.” Among the factors the trial court should examine in
deciding whether to allow a reopening are the importance and
probative value of the evidence, the reason for the moving party’s
failure to introduce the evidence earlier, and the possibility of
prejudice to the non-moving party.
Garcia v. Woman’s Hosp. of Tex., 97 F.3d 810, 814 (5th Cir. 1996) (citations
omitted; quoting Gas Ridge, Inc. v. Suburban Agric. Props., Inc., 150 F.2d 363,
366 (5th Cir. 1945)).
78
required involvement in the procuring or purchasing and
distribution, as opposed to the dispensing, of the legend drugs or
kits. However, the district court did not err insofar as it
concluded that Liljeberg Enterprises should have been involved with
the storage of the legend drugs or kits at issue and compensated
accordingly under the pharmacy agreement.
The district court’s conclusion turns on whether applicable
state or federal law required Liljeberg Enterprises to purchase,
procure, store, distribute, or dispense legend drugs or kits
containing legend drugs, which would prohibit a reading of section
2.6(a) to exclude compensation to Liljeberg Enterprises for
rendering these services to “provide” such drugs for use by the
ancillary departments of the hospital.114
Turning first to federal law, neither the district court nor
the Liljebergs point to any relevant statutes, and we have found
none, which prohibit the hospital’s practice of the Materials
Management Department’s ordering, storing, and distributing legend
drugs, which are not “controlled substances,” to doctors or nurses
in the ancillary departments of the hospital to administer to
114
Section 2.6(a) provides that Liljeberg Enterprises “shall not provide,
nor be entitled to any compensation, for ... (a) all drugs and supplies utilized
by the ancillary departments of the Hospital in preparation for, during, or
immediately following departmental patient related procedures, except those
patient identifiable charges in which the cost of the drug is not included in a
fee or charge for that procedure.” (emphasis added).
79
patients on doctors’ orders.115 Furthermore, although the district
court found that American Medical and Tenet used Liljeberg
Enterprises’s pharmacy permit without Liljeberg Enterprises’s
permission to order drugs, the court made no further findings that
these drugs were controlled substances for which 21 U.S.C. § 822
requires registration with the United States Attorney General, and
the record does not support a finding that Liljeberg Enterprises’s
“circumvention claim” involves any legend drugs which are
controlled substances.
This issue presents a classic Erie question as to what state
law requires, which we review de novo.116 The competing views of
officials from the Louisiana Board of Pharmacy and the Louisiana
Department of Health and Hospitals on the question of what
Louisiana law required as to the procurement or purchasing,
storage, and dispensing or distributing of legend drugs at the
hospital are of no moment in this analysis and entitled to no
deference. Although the regulations upon which the district court
relied were promulgated by the Board of Pharmacy of the Louisiana
Department of Health and Hospitals, the views upon which the
parties rely are not the sort of final decision of a state agency
115
See 21 U.S.C. § 353(b)(1)(ii) (requiring that certain drugs be
dispensed only “upon a written prescription of a practitioner licensed by law to
administer such drug”); id. § 822 (governing persons required to register with
the United States Attorney General in order to dispense any “controlled
substance”).
116
See Salve Regina Coll. v. Russell, 499 U.S. 225, 231 (1991).
80
embodying the agency’s interpretation of its own regulations to
which Louisiana courts will give deference.117 For this reason, the
district court was entirely within its discretion in denying
Lifemark’s motion to supplement the record with evidence that the
Louisiana Board of Pharmacy rejected Liljeberg Enterprises’s
complaints to the Board that Lifemark’s hospital departments were
dispensing drugs in violation of state pharmacy laws and that the
Board rejected the complaints because it failed to find any
violation of the pharmacy laws.
In concluding that “[t]he law only requires that [Liljeberg
Enterprises] oversee the storage and dispensing of [items
containing legend drugs],” the district court discussed only
regulations promulgated by the Board of Pharmacy of the Louisiana
Department of Health and Hospitals which govern “hospital
pharmacies.”118 These regulations, however, do not specifically
require the hospital pharmacy or pharmacist-in-charge to be
involved in the purchasing, procurement, or distribution of legend
drugs to doctors or nurses in the ancillary departments of the
117
Cf. Matter of Recovery I, Inc., 635 So.2d 690, 697 (La. App. 1 Cir.),
writ denied, 639 So.2d 1169 (La. 1994); cf. also Laidlaw Envtl. Servs., Inc. v.
La. Pub. Serv. Comm’n, 752 So.2d 748, 751 (La. 1999) (noting that the Louisiana
Public Service Commission is entitled to deference in its interpretations of its
own rules and regulations but not in its interpretation of statutes and judicial
decisions).
118
See LA. ADMIN. CODE tit. 46, pt. LIII, § 2501; id. § 2503; id. § 2507(B);
id. § 2513; id. § 2519(A); id. § 2523(A).
81
hospital to administer to patients on doctors’ orders.119 Our
review of Louisiana law convinces us that the Materials Management
Department’s “distributing” legend drugs to doctors or nurses in
the ancillary departments of the hospital to “administer” to
patients on doctors’ orders constituted “distribution” and was not
“dispensing,” as the district court described it. Louisiana law in
effect at the relevant time did not require that this work be
supervised or done by a pharmacist.120 Neither the district court
119
See id. § 2501 (“A hospital pharmacy is a pharmacy department located
in a hospital facility licensed under R.S. 40:2000 et seq., [1986] by the
Louisiana Department of Health and Hospitals. Hospital pharmacy represents an
inpatient primary care treatment modality pharmacy.”); id. § 2503(A) (“A hospital
pharmacy permit shall be required to operate a pharmacy for possession,
dispensing, and delivering legend prescription orders to patients in a
hospital.”); id. § 2511(A) (“Hospital dispensing is the issuance of one or more
unit doses of medication in a suitable container, by a pharmacist, properly
labeled for subsequent administration ....”); id. § 2513 (“Prescription legend
drugs may be dispensed from the hospital pharmacy only upon orders of a licensed
medical practitioner.”); id. § 2517(A) (“All drugs dispensed by a hospital
pharmacy, intended for use within the facility, shall be dispensed in appropriate
containers and adequately labeled as to identify patient name, room number, trade
mark, chemical or generic name, and strength of the medication.”); id. § 2519(A)
(“Drugs may be dispensed and administered only upon the prescription orders of
licensed authorized prescribers.”); id. § 2523(A) (“The hospital pharmacy shall
be under the direct control and supervision of a pharmacy director who is a
Louisiana licensed pharmacist, serves as pharmacist-in-charge and is competent
in the specialized functions of a hospital pharmacy located in a primary care
treatment modality.”); id. § 2529(A)(1) (“The annual hospital pharmacy inspection
review shall verify the following. 1. Dispensed Drugs. Prescription orders are
dispensed exclusively by licensed pharmacists to inpatients.”); accord id. §
3501(A) (“Legend Drugs. A legend drug is a medication which must only be
dispensed by a pharmacist on the order of a licensed practitioner and shall bear
the following notation on the label of a commercial container: ‘caution: federal
law prohibits dispensing without a prescription’ (Ref. R.S. 40:1237, et seq.
[1982] and U.S.C. 21:353(b) [1987]).”); id. § 3501(A)(1) (“Dispensing. Legend
drugs shall be dispensed only by a licensed Louisiana pharmacist.”); id. §
3501(A)(3) (“Possession. Legend drugs shall be procured and possessed by a
pharmacy permittee for legitimate dispensing by a pharmacist in the course of the
practice of pharmacy, unless otherwise provided by law.”).
120
It is important to distinguish between “dispensing,” “administering,”
“delivering,” and “distributing” drugs. Under Louisiana law, “‘[a]dminister’ or
‘administration’ means the direct application of a drug to the body of a patient
or research subject by injection, inhalation, ingestion, or any other means.”
82
nor Liljeberg Enterprises point us to any other controlling
Louisiana law then in force that would prohibit the role of the
Materials Management Department in ordering and distributing the
drugs and kits at issue, and we have located no Louisiana case law
or statute in effect at the relevant time which would do so.
The Louisiana legislature later changed the law to require
just what the district court found to be the law at the time of
Lifemark’s alleged “circumvention” pursuant to the various hospital
pharmacy regulations. The Louisiana legislature in 1999, after the
events which allegedly gave rise to Liljeberg Enterprises’s
“circumvention claim,” enacted Louisiana Revised Statutes §
37:1224(F). This section provided that “[a]ll procurement,
delivery, dispensing, and distribution of federal legend and
controlled drugs that are purchased for and administered to
patients inside a hospital licensed under R.S. 40:2100, et seq.
shall be procured, delivered, dispensed, and distributed under the
direction of the pharmacist-in-charge of that hospital.”121 The
LA. REV. STAT. § 37:1164(1); accord id. § 40:961(2). “‘Deliver’ or ‘delivery’
means the actual, constructive, or attempted transfer of a drug or device from
one person to another, whether or not for a consideration.” Id. § 37:1164(8);
accord id. § 40:961(10). On the other hand, “‘[d]ispense’ or ‘dispensing’ means
the interpretation, evaluation, and implementation of a prescription drug order,
including the preparation and delivery of a drug or device to a patient or
patient's agent in a suitable container appropriately labeled for subsequent
administration to, or use by, a patient,” such that “‘[d]ispense’ necessarily
includes a transfer of possession of a drug or device to the patient or the
patient's agent.” Id. § 37:1164(10); accord id. § 40:961(13). Finally,
“‘[d]istribute’ or ‘distribution’ means the delivery of a drug or device other
than by administering or dispensing.” Id. § 37:1164(11); accord id. §
40:961(14).
121
LA. REV. STAT. § 37:1224(F) (repealed by 2000 La. Acts 83). Section
37:1224(F) was repealed the year after its enactment. See 2000 La. Acts 83.
83
legislature explicitly noted in Act 767, in which it enacted
section 37:1224(F), that section “37:1224(F) is all new law.”122
Yet, because the Legislature did not expressly provide for this new
substantive law to apply retroactively, section 37:1224(F) is not
applicable to this case.123
Regulations from the Board of Pharmacy Louisiana Department of
Health in force at the relevant time, however, provided that
“[l]egend drugs shall be stored in a licensed pharmacy under the
immediate control and responsibility of a pharmacist.”124 On
appeal, Lifemark does not challenge the district court’s finding
that “Materials Management is merely a department of the hospital,
is not a pharmacy and is not under the control or direction of a
licensed pharmacist.”125 Lifemark instead points us to the
testimony of the Louisiana Board of Pharmacy inspector that a
sanitary permit issued by the Louisiana Department of Health and
Hospitals to Lifemark gave the hospital the authority to hold and
store prescription drugs outside of the hospital pharmacy. But
Lifemark points us to no controlling Louisiana law which codifies
or confirms this authority, and our own research has located none.
122
See 1999 La. Acts 767.
123
See id.; see generally Jacobs v. City of Bunkie, 737 So.2d 14, 20 (La.
1999).
124
LA. ADMIN. CODE tit. 46, pt. LIII, § 3501(A)(4).
125
The district court also found that Liljeberg Enterprises “and its
pharmacy director have recently been given the ability to supervise and oversee
the storage of the kits containing legend drugs.”
84
On the basis of our review of Louisiana law in force at the
time of the events giving rise to the Liljebergs’ “circumvention
claim,” we believe the Supreme Court of Louisiana would conclude
that Lifemark’s contested practice of ordering and distributing
certain legend drugs and kits containing legend drugs did not
violate the Louisiana pharmacy laws. This conclusion is bolstered
by the legislature’s later enactment of section 37:1224(F) as “new
law.” At the same tine, we are persuaded that the Supreme Court of
Louisiana would conclude that governing state regulations required
the involvement of the hospital pharmacy in the storage of legend
drugs and kits containing legend drugs.
Accordingly, without any basis in state or federal
requirements, the district court erred as a matter of law in
expanding the scope of the pharmacy agreement through Tenet’s
policy manual to provide for a requirement that Liljeberg
Enterprises be involved in the purchasing, procurement, or
distribution of the legend drugs or kits containing legend drugs at
issue.126 Indeed, the law between the parties–section 2.6(a) of the
pharmacy agreement–provides to the contrary.
The district court thus erred in awarding $5 million in
damages on the basis, in part, that Lifemark “circumvented”
Liljeberg Enterprises’s hospital pharmacy and thereby denied
126
See Nat’l Union, 915 F.2d at 989 (“Under Louisiana law, a contract is
the law between the parties, and is read for its plain meaning.” (citation
omitted)).
85
compensation to Liljeberg Enterprises. Lifemark did not violate
federal or Louisiana law by purchasing certain bulk drugs, such as
contrast media and surgery kits, directly from drug wholesalers and
distributing them to ancillary departments of the hospital for
administration by doctors and nurses, but the hospital’s storage of
these drugs and kits outside of the hospital pharmacy contravened
governing state regulations.
iii.
Lifemark argues that, notwithstanding its challenges to the
district court’s interpretations of sections 4.1(a) and 2.6(a) of
the pharmacy agreement in favor of Liljeberg Enterprises’s
“circumvention claim,” the $5 million award cannot stand because
Liljeberg Enterprises failed to adequately prove damages awarded in
reliance on a procedurally flawed audit of patient charts.
Moreover, Lifemark argues that the $5 million award for Liljeberg
Enterprises’s “circumvention claim” is duplicative, in part, of the
$700,000 award for lost profits on contrast media, which we address
below, and the $57,085 award for insulin and nitroglycerin
underpayments, which we affirm.
a.
Lifemark argues that, rather than even attempting to prove
actual, itemized damages, Liljeberg Enterprises performed an audit
of a small percentage of patient charts from which it asked a
mathematics professor to extrapolate a damage figure. The district
court rejected the professor’s figure, finding “that the [Liljeberg
86
Enterprises] methodology to price the calculation of damages
pursuant to its chart audit to be inflated.” However, despite
Lifemark’s assertion that the district court found the chart audit
to be unreliable, the only flaw the district court found in the
audit was its “charging the full price of the drug plus the fee for
each administration of a drug when, in fact, a multiple
administration of a drug would have carried no separate acquisition
cost,” while the district court also found that Lifemark’s claim
“that 40% of all of the patients receive no drugs is also ...
without foundation.” On the basis of these findings, the district
court found that “the correct figure is somewhere between [Lifemark
expert] Dr. Haworth’s $3,000,000 and a significant discount off the
[Liljeberg Enterprises] expert’s figure,” which was at least $12.8
million, and accordingly found “that $5,000,000 is the proper
figure.”
The district court was presented with conflicting testimony
and evidence as to the validity of the chart audit and the accuracy
of its methodology. On appeal, Lifemark argues that the district
court should have credited the testimony of its experts over the
testimony and evidence offered by Liljeberg Enterprises in support
of the audit. On the record before us, the district court was
entitled to weigh the conflicting testimony and credit Liljeberg
Enterprises’s chart audit as the basis for a reasonably accurate
estimate of the amount of damages, with modifications, and, in so
doing, the district court did not base its award on mere
87
speculation or conjecture.127 It is well-settled that the district
court is only required to determine the extent of the damages as a
matter of just and reasonable inference and that the result need
only be approximate. The basis for the district court’s award,
while it is decidedly not “a perfect measure of damages,”
nevertheless meets these criteria on the record before us.
b.
Additionally, according to Lifemark, the $5 million award
overlaps with two more specific damage awards for non-payments for
contrast media and underpayments for insulin and nitroglycerin.
This is because Liljeberg Enterprises’s pharmacy director admitted
that both these claims were a part of Liljeberg Enterprises’s
“circumvention claim.” Additionally, the district court’s $5
million award was based on the chart audit; that Liljeberg
Enterprises’s expert accepted the chart in calculating damages for
claimed underpayments or non-payments for contrast media, insulin,
and nitroglycerin. That is, Liljeberg Enterprises did not back the
overlapping charges out of the audit.
It is unclear whether the district court’s $5 million figure
took account of non-payments for contrast media or underpayments
for insulin and nitroglycerin. However, because the district court
127
See Theriot v. United States, 245 F.3d 388, 395 (5th Cir. 1998) (noting
that, when the district court's finding is based on its decision to credit the
testimony of one witness over that of another, that finding, if not internally
inconsistent, can virtually never be clear error); accord Justiss Oil Co., Inc.
v. Kerr-McGee Ref. Corp., 75 F.3d 1057, 1067 (5th Cir. 1996).
88
made specific awards with separate stated reasons as to each of
these claimed underpayments, we must conclude that they were not
included in the $5 million award, in the absence of more compelling
evidence from Lifemark of duplicative awards.
iv.
We conclude that the district court erred, in part, in
awarding $5 million on Liljeberg Enterprises’s “circumvention
claim” on the basis of its interpretation of section 2.6(a) of the
pharmacy agreement. We cannot on the record before us quantify how
much of the $5 million award was for Liljeberg Enterprises’s
“circumvention claim” under section 2.6(a), which we reverse in
part, as distinguished from its claim under section 4.1(a), which
we affirm. We therefore vacate the district court’s $5 million
award to Liljeberg Enterprises and remand to the district court for
a redetermination of damages for Liljeberg Enterprises’s
“circumvention claim.”
B.
Lifemark also argues that, because contrast media was not
separately identifiable on patients’ bills, Liljeberg Enterprises
is not entitled to the $700,000 award for lost profits on contrast
media under section 2.6(a) of the pharmacy agreement. Lifemark
argues that the district court erred in relying upon an exception
in section 2.6(a), which excludes “patient identifiable charges in
which the cost of the drug is ... included in a fee or a charge for
that procedure,” to justify a $700,000 award.
89
The district court found that Liljeberg Enterprises originally
supplied contrast media to the hospital, which was included as a
separate item on the bill of a patient, but that American Medical
later decided to include contrast media in what it urges are
unidentifiable costs in a single procedure. The district court
found that American Medical began including the contrast media cost
within a single procedure in order to avoid having to purchase this
item from Liljeberg Enterprises. The contention is that the
pharmacy agreement allowed American Medical to purchase items and
legend drugs from other sources “where the cost for the drug is not
identifiable from the cost of the procedure.” However, the
district court concluded that, from American Medical’s master price
list or “charge master,” it can identify the cost of contrast media
by comparing the listed costs for procedures with and without
contrast media and so, “for purposes of the [pharmacy agreement],
it is an identifiable cost.”
Lifemark argues that American Medical stopped billing contrast
media as a separate item to each patient and began including them
in bills for radiology procedures. Lifemark argues that it
negotiated a favorable contract with a new vendor, which allowed it
to bill for contrast media in this fashion, a practice that saved
patients up to $400 per procedure. The argument continues that,
pursuant to section 2.6(a) of the pharmacy agreement, American
Medical stopped paying Liljeberg Enterprises for contrast media
because, under its new practice, these drugs were “patient
90
identifiable charges in which the cost of the drug is ... included
in a fee or charge for that procedure.”
Section 2.6(a) provides that Liljeberg Enterprises “shall not
provide, nor be entitled to any compensation, for ... (a) all drugs
and supplies utilized by the ancillary departments of the Hospital
[including, but not limited to, radiology] in preparation for,
during, or immediately following departmental patient related
procedures,” including “those patient identifiable charges in which
the cost of the drug is ... included in a fee or charge for that
procedure.”
The operation of this provision does not turn, as the district
court concluded, on whether the charge for the drug can be
identified, i.e., is “identifiable,” for each patient, but rather
on whether such an “identifiable” charge is included in the fee or
charge for the departmental patient related procedure in which the
drug is used. The district court made no finding that the charges
for the cost of contract media were not included in the charges for
radiation procedures, but simply concluded that American Medical
contravened the terms and spirit of the pharmacy agreement.
Section 2.6(a) is clear, and American Medical operated well
within its terms. The district court erred in its implicit
conclusion that American Medical breached the pharmacy agreement in
bad faith. We reverse the district court’s award of $700,000 to
Liljeberg Enterprises as lost profits for Lifemark’s failure to
91
purchase contrast media through the date of trial from Liljeberg
Enterprises as required under the pharmacy agreement.
C.
Lifemark argues that the district court erred in awarding
Liljeberg Enterprises $2,023,571, which represents costs incurred
in excess of limits set by their contract. The argument is that
the award is based on an erroneous conclusion that Lifemark
improperly limited reimbursement for acquired drugs to prices set
forth in Lifemark’s prime vendor contracts; that this finding is
erroneous because the limit is found in section 2.4 of the pharmacy
agreement. Section 2.4 provides:
OPERATOR [Liljeberg Enterprises, Inc.] agrees to obtain
from LIFEMARK Pharmacy all of Hospital's inpatient
(including emergency room patients) requirements for
pharmaceutical services, including, without limitation,
drugs, medicines, and intravenous solutions, to the
extent LIFEMARK Pharmacy can provide same. LIFEMARK
Pharmacy shall supply these items at cost. Nothing in
this Agreement shall prevent OPERATOR [Liljeberg
Enterprises, Inc.] from acquiring those items from
another supplier if i) the cost for those items is less
than what LIFEMARK Pharmacy would charge and ii) the
quality of those items is equal to or superior to those
supplied by LIFEMARK Pharmacy.
The district court concluded that, under section 2.4,
Liljeberg Enterprises agreed to obtain all hospital inpatient
requirements from Lifemark Pharmacy, which was obligated to supply
the items at cost; that, Liljeberg Enterprises could purchase such
required items from a vendor other than Lifemark Pharmacy only if
Lifemark Pharmacy could not supply an item or if the item was less
expensive elsewhere and the quality was equal or superior to that
92
supplied by Lifemark Pharmacy. The district court also found,
however, that “Lifemark Pharmacy” did not exist at any time after
the hospital opened and that Liljeberg Enterprises never purchased
any drugs from “Lifemark Pharmacy” but instead purchased drugs
under buying contracts from Bergan Brunswig and from Spark Drug.
Finally, the district court found that Liljeberg Enterprises was
paying six percent less for drugs than if it would have under
purchasing contracts between drug manufacturers and wholesalers and
American Medical and later Tenet.
The district court found that, where Liljeberg Enterprises’s
actual acquisition costs for drugs which it did not obtain through
Lifemark’s prime vendor contracts was greater than the amount shown
for those drugs on the prime vendor contracts, Lifemark had
deducted the difference between the amounts from its payments to
Liljeberg Enterprises under the pharmacy agreement. At trial,
Lifemark’s expert witness Dr. Albert Richard applied the same
approach to argue that Liljeberg Enterprises had wrongfully billed
in excess of $600,000 based on the difference between Liljeberg
Enterprises’s actual acquisition costs and the amounts shown on
Lifemark’s prime vendor contracts. The district court rejected Dr.
Richards’s argument and found that Lifemark’s contract
administrator had wrongfully deducted amounts from Liljeberg
Enterprises’s bills on the basis of this approach. The district
court found that Lifemark’s approach failed to compare the National
93
Drug Code (“NDC”) number128 in Lifemark’s prime vendor contract to
the NDC number of the drugs actually supplied by Liljeberg
Enterprises. Instead, payments were based on the lowest price
possible for the type of drug supplied without regard to
differences in generic versus name-brand drugs and in strength,
quantity, bioequivalency, and bioavailability.
Lifemark first argues that American Medical and later Tenet
are the successors to “Lifemark Pharmacy” for purposes of the
pharmacy agreement. According to Lifemark, because American
Medical purchased Lifemark in 1984, before the pharmacy opened,
pricing was established by a prime vendor contract negotiated by
American Medical on behalf of all American Medical-owned hospitals.
This provided sources in bulk with favorable pricing, and Tenet
later followed the same protocol.
Lifemark also argues that it was entitled under section 2.4 to
pay Liljeberg Enterprises only the price for generic drugs,
otherwise equivalent with regard to strength, bioequivalency, and
bioavailability. It points out that Liljeberg Enterprises could
have purchased its drugs at the lower prices under the prime vendor
contracts by becoming a member of Tenet’s group purchasing
organization or by purchasing generic or other drugs from outside
vendors at the lower prices; that Liljeberg Enterprises instead
128
The district court found that “[a] coding system, implemented by NDC
whereby each drug is given a code number, allows the identification of the drug
manufacturer, its strengths and its quantity and, thus, is a means of identifying
the cost of the drug pursuant to purchasing contracts.”
94
chose to purchase and bill Lifemark for the more expensive name-
brand drugs, thereby expanding its profits under the cost-plus
contract. Liljeberg Enterprises responds that nothing in the
pharmacy agreement authorized American Medical or Tenet to pay
Liljeberg Enterprises for generic drugs when Liljeberg Enterprises
was dispensing physician-requested name-brand drugs and that
Lifemark never told Liljeberg Enterprises to dispense only
generics.
We conclude that the district court did not err in its
interpretation of section 2.4. Like the parties, whose past
practice under the pharmacy agreement includes Liljeberg
Enterprises’s purchasing drugs under Lifemark’s prime vendor
contracts negotiated by American Medical, we substitute American
Medical/Tenet for “LIFEMARK Pharmacy,” so that the comparison for
purposes of the phrase “less than what LIFEMARK Pharmacy would
charge” looks to Lifemark’s prime vendor contracts. However, the
provision that Liljeberg Enterprises could obtain drugs from other
suppliers so long as “the cost for those items is less than what
LIFEMARK Pharmacy would charge” does not in itself contemplate
that, while American Medical/Tenet would charge one price for
requested name-brand drugs under the prime vendor contracts,
Lifemark can pay Liljeberg Enterprises only the cost of generic
equivalents under the prime vendor contracts.
On appeal, Lifemark does not challenge the finding that
Liljeberg Enterprises paid the same or less for name-brand drugs
95
than if it would have paid for the same name-brand drugs under
Lifemark’s prime vendor contracts, which Lifemark simply describes
as providing “favorable bulk prices.”129 Instead, Lifemark
complains that Liljeberg Enterprises should have been purchasing
only generic drugs or purchasing in bulk under its prime vendor
contracts. Nothing in section 2.4 entitles Lifemark to insist on
such purchases by Liljeberg Enterprises in the absence of the
availability from the prime vendor contracts of lower prices for
the same drugs. It is no answer that the pharmacy agreement
requires the purchase of the lowest priced drugs and makes no
exceptions for name-brand drugs where the term “items” in section
2.4 reasonably encompasses, in the context of the pharmacy
agreement, both name-brand and generic drugs, depending on the
order which Liljeberg Enterprises was called upon to fill.
We find no error in the district court’s interpretation of
section 2.4 or its findings supporting its award of $2,023,571 for
Lifemark’s wrongful disallowance of requested payment due to
pricing differences.
D.
129
Lifemark does challenge the specific finding that Liljeberg Enterprises
is paying six percent less than Tenet’s bulk prices on the basis that the
supporting testimony for this finding referred only to the price Liljeberg
Enterprises was paying at the time of trial. However, Lifemark points to no
evidence that would show clear error in the district court’s broader finding that
the prices for name-brand drugs under Lifemark’s prime vendor contracts are not
lower than the prices Liljeberg Enterprises was paying for the same name-brand
drugs.
96
Lifemark argues that the district court misread the minimum
fee increase provision of the pharmacy agreement, section 4.1(c).
This led to its finding that Lifemark should have increased the
minimum fee in 1995 and its award of $150,275.60. Section 4.1(c)
of the pharmacy agreement provides:
LIFEMARK agrees that OPERATOR's [Liljeberg Enterprises,
Inc.’s] minimum fee expressed in Exhibit B shall be
increased annually by the lesser of (i) the percentage
increase in the Department's revenue per patient day and
(ii) the percentage increase in the Hospital Market
Basket Index, as published by the American Hospital
Association, or appropriate successor index (the
"Index"); provided however, that in any year in which
there is either no change or a percentage decrease
pursuant to subsection (i) or (ii) above, the minimum fee
shall not be changed and provided, further, that the
calculations in any year pursuant to subsection (i) and
(ii) above shall be adjusted for any decrease, if any, in
the immediately preceding years. The percentage
calculated pursuant to subsection (i) above shall be a
fraction, the numerator of which is the revenue per
patient day for the year just ended and the denominator
of which is the revenue per patient day for the prior
year. The percentage calculated pursuant to subsection
(ii) above shall be a fraction, the numerator of which is
the most recently published Index and the denominator of
which is the last published Index immediately prior to
the beginning of the most recently concluded 12-month
period of this subsection Agreement. The first
adjustment shall be made as of the first day of the
thirteenth (13th) month of the term of this Agreement and
shall be based solely upon subsection (ii) above, and
subsequent adjustments shall be made on each annual
anniversary date thereafter.
The district court found that Liljeberg Enterprises receives
33% of its revenue from minimum fee items under the pharmacy
agreement and that, for the period September 1, 1995 through May
31, 1997, Liljeberg Enterprises received $2,447,485.35 from minimum
fee revenue; that this amount was paid by Lifemark based upon
97
Lifemark’s mistaken belief that no increase in the minimum fee was
due under the terms of the pharmacy agreement. The district court
concluded that under the pharmacy agreement a 6.14% increase in the
minimum fee should have been paid to Liljeberg Enterprises, an
additional $150,275.60 for the period September 1, 1995 through May
31, 1997. These findings are based on the district court’s
conclusion that, under section 4.1(c), the term “immediately
preceding years” requires, as Liljeberg Enterprises claims, that
the minimum fee for any year is to be calculated based upon the
immediate preceding year and not, as Lifemark claims, upon the
highest percentage for any prior year.
Lifemark’s only argument here is that reading the word “years”
as singular and not plural led the district court to erroneously
conclude that a minimum fee increase should be allowed when there
is a net increase based upon a single year’s growth on the heels of
several years of losses. Lifemark contends that this
interpretation flies in the face of common sense as well as the
language of the pharmacy agreement, which calls for the netting of
decreases in previous years against any increases in the current
year’s revenue. Lifemark asserts that it is undisputed that
pharmacy revenue per patient day declined during the years 1992-
1994 and that, although Liljeberg Enterprises increased its per-
patient revenue in 1995, a cumulative decrease remained, such that
the minimum fee increase provision was not triggered.
98
We conclude that the district court erred in its
interpretation of section 4.1(c).130 The pharmacy agreement nowhere
explicitly mentions “netting” or aggregating prior years’
percentage decreases or changes. Yet every provision of the
pharmacy agreement must be interpreted in light of the contract’s
other provisions, to give each provision the meaning suggested by
the contract as a whole and to avoid neutralizing, ignoring, or
treating as mere surplusage any provision.
Section 4.1(c) calls for an increase in the minimum fee based
on the lesser of the percentage increase in the pharmacy’s revenue
per patient day and the percentage increase in the Hospital Market
Basket Index so long as (1) there was a percentage increase in both
the pharmacy’s revenue per patient day and the Hospital Market
Basket Index, i.e., neither of these indices experienced either “no
change or a percentage decrease,” (2) “provided, further, that the
calculations in any year pursuant to subsection (i) and (ii) above
shall be adjusted for any decrease, if any, in the immediately
preceding years.” The district court apparently read this
provision to provide for an increase in minimum fees by the lesser
of the percentage increase in the pharmacy’s revenue per patient
130
We are not persuaded by the Liljebergs’ argument that this issue is
controlled by the Louisiana state court decision’s preclusive holdings. See
Liljeberg Enters., 620 So.2d at 1340 (holding only that the trial court erred in
determining that the starting date for the escalation of the minimum fees was
March 1, 1984, whereas “any adjustments in the minimum fees should have begun
thirteen months from August 25, 1985, the date St. Jude's Hospital began
operations”).
99
day and the percentage increase in the Hospital Market Basket Index
that year, so long as there was no percentage decrease in the
“immediately preceding year.” Lifemark would read the provision to
prohibit a minimum fee increase until there is no net percentage
decrease when the current year’s percentage increase is added to
the percentage decreases in some unspecified number of preceding
years.
The district court’s interpretation gives no effect to the
phrase “the calculations in any year pursuant to subsection (i) and
(ii) above shall be adjusted for” and, without any explanation or
apparent finding of ambiguity, reads “immediately preceding years”
as singular and not plural. Looking to the meaning of this phrase
in section 4.1(c) suggested by the contract as a whole, we note
that the “calculations” at issue are important for determining
whether there is an increase, a decrease, or no change as a matter
of percentages. The most reasonable understanding of “adjusting”
the calculations “for any decrease, if any, in the immediately
preceding years” is to offset any percentage increase in the
current year by the net “decrease, if any, in the immediately
preceding years.” The natural sense of “immediately preceding
years” conveys the last two or three years, in order to give effect
to both the phrases “immediately preceding” and “years.”
Accordingly, we conclude that the district court erred in its
interpretation of section 4.1(c). As such, we reverse the district
100
court’s award of $150,275.60 to Liljeberg Enterprises for
Lifemark’s failure to implement minimum fee increases due to
Liljeberg Enterprises under the pharmacy agreement through the date
of trial.
E.
Lifemark argues that the district court erred in awarding
Liljeberg Enterprises $281,906.32 based upon its finding that the
HPI reports131 failed to reflect drug prices and frequencies
submitted in reports generated by Liljeberg Enterprises. Lifemark
asserts that this finding is clearly erroneous because it is
predicated on a fundamental misunderstanding of the parties’
record-keeping and billing procedures and because it overlooks
Liljeberg Enterprises’s failure to provide documentation to support
the accuracy of the prices and quantities it submitted.
The district court found that Lifemark improperly entered cost
data into its computer, “deleted administered doses dispensed by
Liljeberg Enterprises without any known reason from [Liljeberg
Enterprises’s] daily and monthly disks,” and generated inaccurate
HPI reports which incorrectly reflected the drug prices and
frequencies dispensed by Liljeberg Enterprises, and that the HPI
reports also failed to take into account floor stock. The district
court further found that there was no evidence that the drugs at
131
HPI rates represented the prices at which Liljeberg Enterprises billed
Lifemark for pharmaceuticals, and HPI rates were located on the monthly “hospital
pharmacy billing” report, or “HPI report.”
101
issue in Liljeberg Enterprises’s claim for underpayments due to
Lifemark’s incorrect pricing and quantity differences between
January 1989 and May 31, 1997 were not provided by Liljeberg
Enterprises and that the evidence in the record revealed that floor
stock items were not accounted for by Lifemark.
Reviewing these factual findings for clear error only, we find
that this damage award is based on a plausible account of the
evidence considered against the entirety of the record. Lifemark
points out that Liljeberg Enterprises’s own pharmacy director
clearly testified that the daily disks provided by the Liljeberg
Enterprises pharmacy to Lifemark contained only the quantity that
the pharmacy dispensed, not the doses administered by the
hospital’s doctors and nurses, such that it was not possible that
Lifemark’s computers deleted administered doses dispensed by
Liljeberg Enterprises from Liljeberg Enterprises’s daily disks. At
the same time, Lifemark does not deny that the HPI reports often
indicated that the actual cost of acquisition of a drug to be zero
and did not always account for so-called floor stock. The district
court heard conflicting testimony as to whether Lifemark adequately
paid Liljeberg Enterprises for this floor stock and the zero
entries on the HPI reports, and it was entitled to credit Liljeberg
Enterprises’s account of the evidence. Lifemark’s citation to
isolated testimony favorable to its position on each of these fact
findings does not show clear error.
102
We affirm the district court’s award of $281,906.32 to
Liljeberg Enterprises for pricing and quantity differences.
F.
Lifemark argues that district court miscalculated the actual
acquisition costs payable under the judgment of the Louisiana state
court of appeal in a prior case between Liljeberg Enterprises and
Lifemark involving the pharmacy agreement. According to Lifemark,
Liljeberg Enterprises and Lifemark stipulated that they would
“split the difference” between their experts’ numbers, which was
$3,575,748 by Lifemark’s expert and $4,062,396 by Liljeberg
Enterprises’s expert. Accordingly, Lifemark contends that the
district court should have awarded $3,819,072, not $4,062,396,
which was the number given by Liljeberg Enterprises’s expert.
Lifemark acknowledges that it owes Liljeberg Enterprises for
actual acquisition cost for drugs for the period August 1989
through June 1993 pursuant to the preclusive state court
judgment,132 but argues that the district court erred in finding
that “[t]he parties have stipulated that the actual acquisition
cost billed by [Liljeberg Enterprises] for the period is
$4,062,396.00.” Liljeberg Enterprises suggests that the record
indicates that Lifemark’s and Liljeberg Enterprises’s experts
originally did split at $4,062,396, but that Lifemark’s expert
later tried to lower that figure.
132
See Liljeberg Enters. Inc. v. Lifemark Hosps. of La., Inc., 620 So.2d
1331 (La. App. 4 Cir.), writs denied, 621 So.2d 818 (La. 1993).
103
The record reflects that the parties stipulated at trial that
the amount of this award should be fixed at the mid-point between
the sum determined by Liljeberg Enterprises’s expert and the sum
determined by Lifemark’s expert. Liljeberg Enterprises’s expert’s
number was undisputedly $4,062,396. The number provided by Dr.
Richard, Lifemark’s damages expert, began at $3,990,953, and at
trial he testified that the average of these figures would be
$4,026,675. However, he then discussed several adjustments off
this number and presented a figure of $3,575,748, which Lifemark
now urges on appeal to provide an average of $3,819,072.
Based on the parties’ stipulation, we conclude that the
district court clearly erred in not splitting the difference
between Dr. Richard’s original figure of $3,990,953 and Liljeberg
Enterprises’s figure of $4,062,396. We must reduce this award to
$4,026,675.
G.
Lifemark argues that the district court erred by not awarding
Lifemark $2,585,138 in reimbursement of Liljeberg Enterprises’s
overcharges based on Liljeberg Enterprises’s submission each month
of a lump sum bill that was inexplicably higher than and
inconsistent with the daily record of patient billing that
Liljeberg Enterprises provided to Lifemark. According to Lifemark,
the evidence at trial showed that this claim included (1) $184,000
overbilled to Lifemark based upon claimed frequencies of drugs
dispensed; (2) $1,497,078 for thousands of unexplained $3.05
104
“admixture fees,” overcharges relating to I.V.s, for which Lifemark
should have been awarded $880,678, after a credit of $616,400 for
the amount awarded to Lifemark for overcharges relating to I.V.
handling fees for piggybacks;133 (3) $885,644 which Liljeberg
Enterprises overcharged Lifemark for heparin flush kits, which the
district court found but refused to award on the basis that
Lifemark passed the overcharges onto patients and suffered no loss;
and (4) $634,816 in overcharges resulting from Liljeberg
Enterprises’s submission of incorrect pricing information from
September 1, 1989 through April 30, 1993 on Liljeberg Enterprises’s
bills based upon HPI reports using pricing information from
Liljeberg Enterprises’s add/change/delete forms.
i.
First, Lifemark argues that it presented uncontroverted
evidence that Liljeberg Enterprises, in adjusting the bills to
Lifemark to reflect the frequencies of drugs dispensed, only
adjusted the bills when the numbers favored Liljeberg Enterprises
and failed to adjust the bills when the numbers favored Lifemark,
which resulted in an overbilling which Dr. Richard estimated as at
least $184,000. Liljeberg Enterprises points to no evidence to the
contrary, but argues that the $184,000 Lifemark claims is based on
133
The district court found that “[a] ‘handling fee’ is a charge imposed
on a large volume patental (‘LVP’) that is handled by a pharmacist” and that
“[a]n ‘admixture’ is the result of additives being placed in an intravenous
solution,” where “[e]ach additive to a solution is performed as a separate
procedure.”
105
frequencies of drugs which the hospital alone handled and was
responsible for and which, assuming Lifemark dispensed these drugs
in violation of the pharmacy agreement, more likely than not would
increase, not decrease, Liljeberg Enterprises’s damages if an
accounting were made of the compensation owed for these drugs under
the pharmacy agreement.
The district court made no relevant findings as to this claim
and did not explicitly deny it, and, as Lifemark aptly observes,
Liljeberg Enterprises’s response is a non-answer. We conclude that
the failure to award this sum is clearly erroneous. The record
evidence submitted by Lifemark leaves us with the firm and definite
conviction that the only plausible account of the evidence
considered against the entirety of the record is that Liljeberg
Enterprises systematically overcharged Lifemark by failing to
correct drug frequency reports when the preliminary frequency shown
on Lifemark’s HPI report exceeded the frequency shown on Liljeberg
Enterprises’s pharmacy charge report.134
The evidence is that Dr. Richard testified that $184,000 is a
reasonable estimate of the amount of the aggregate overcharges. We
are given no conflicting evidence and modify the judgment to award
Lifemark $184,000 in damages on this claim.
ii.
134
Liljeberg Enterprises also implies that the denial of these damages was
appropriate because Lifemark readily billed its patients on the basis of the
numbers in the HPI reports. This pass-through argument, addressed more fully
below, is wholly unpersuasive.
106
Second, Lifemark contends that, when Liljeberg Enterprises’s
bills were scrutinized at trial, Liljeberg Enterprises was unable
to explain thousands of $3.05 “admixture fees” relating to I.V.s
and argues that the district court clearly erred in failing to
award damages based on Dr. Richard’s calculation of reimbursement
of the total overcharge for these unexplained fees, $1,497,078.
Lifemark contends that, notwithstanding the unexplained “admixture”
charges and the discrepancies in the pharmacy’s reporting of the
charges, Lifemark was billed these charges thousands of times each
month for several years and paid them. The district court made no
relevant findings as to this claim and did not explicitly deny it.
On the record before us, we cannot conclude that the district
court clearly erred in failing to award damages to Lifemark for
these overcharges. The district court awarded Lifemark $616,400
for Liljeberg Enterprises’s overcharges on I.V. piggyback fees
under the pharmacy agreement, which Liljeberg Enterprises has not
appealed, and the number offered by Dr. Richard was $1,497,078 in
gross overcharges for I.V. handling and admixture fees. Lifemark
seeks an award of $880,678 after applying a credit of $616,400 for
the amount awarded for overcharges relating to I.V. handling fees
for piggybacks.
The record before us, however, does not allow us to arrive at
a reasonably accurate estimate of the amount of damages for any
overcharges for the I.V. “admixture” fees disaggregated from Dr.
Richard’s estimate of the gross overcharges for I.V. handling and
107
admixture fees. Accordingly, we affirm the district court’s
decision to deny Lifemark an award on this claim.
iii.
Third, Lifemark argues that the district court erred by
finding that “[Liljeberg Enterprises] has in fact overcharged
[Lifemark] for [Heparin flush kits]” but then refusing to reimburse
Lifemark for the $885,644 overcharge due to its conclusion that
Lifemark passed the overcharge onto patients and suffered no loss.
Lifemark contends that this latter finding was based upon a
misreading of the testimony of Steven Faucheaux, Lifemark’s
administrative pharmacist. According to Lifemark, the district
court found that Faucheaux testified that Lifemark billed its
patients based upon Liljeberg Enterprises’s “overcharge price and
multiplied that cost times three,” when, in fact, Faucheaux
explicitly denied basing patient charges on Liljeberg Enterprises’s
“overcharge prices” and instead explained that “patient rates are
from a totally separate mechanism” and that Lifemark “uses the
actual wholesale price of the drug” to bill patients. Moreover,
Lifemark argues that, even if the overcharges were passed on,
Lifemark was entitled to realize the benefit of its bargain by
paying the lower costs to Liljeberg Enterprises, citing Louisiana
Civil Code article 1995.135
135
LA. CIV. CODE art. 1995 (“Damages are measured by the loss sustained by
the obligee and the profit of which he has been deprived.”).
108
The district court found that Lifemark, American Medical, and
Tenet bill the hospital’s patients a set markup from the price
charged by Liljeberg Enterprises for each drug, including a triple
markup for heparin flush kits. The court then concluded that,
although Liljeberg Enterprises in fact overcharged Lifemark for
heparin flush kits, Liljeberg Enterprises is not liable for damages
because Lifemark suffered no loss when it charged its patients
three times the overcharge price for the loss and so actually
profited from the overcharge by passing it on to patients.
Regardless of whether Lifemark tripled the charges from
Liljeberg Enterprises in billing its patients, we concluded that
the district court’s “pass-through” reasoning is without merit.
Even if Lifemark recouped the overcharge payments many times over,
Liljeberg Enterprises remains liable for the amount it overcharged
Lifemark in the first instance in breach of the pharmacy
agreement.136 Neither the district court nor Liljeberg Enterprises
has presented any authority to the contrary. Under Louisiana law,
Lifemark suffered a loss as a matter of law by overpaying Liljeberg
Enterprises based on Liljeberg Enterprises’s systematic overcharges
for heparin flush kits.
Based on the evidence presented by Lifemark, including the
expert report of Dr. Richard, the district court clearly erred as
136
Cf. S. Pac. Co. v. Darnell-Taenzer Lumber Co., 245 U.S. 531, 534-35
(1918); Hughes Communications Galaxy, Inc. v. United States, 38 Fed. Cl. 578,
580-82 (1997).
109
a matter of law in failing to award Lifemark $885,644 for the
heparin flush kit overcharges. We modify the judgment to provide
the award to Lifemark of $885,644 in damages on this claim.
iv.
Fourth and finally, Lifemark argues that the district court
erred by failing to award Lifemark $634,816 based on overcharges
resulting from Liljeberg Enterprises’s submission of incorrect
pricing information from September 1, 1989 through April 30, 1993.
Lifemark contends that, although during that time period, Liljeberg
Enterprises’s bills were based solely upon HPI reports, which were
generated by the hospital’s computers, the pricing information, the
“HPI rate,” came directly from Liljeberg Enterprises’s
add/change/delete forms, on which, in several instances, Liljeberg
Enterprises submitted the wrong HPI rate.
We cannot find clear error in the rejection of this claim.
The evidence presented by Lifemark does not leave us with a
definite and firm conviction that the district court was mistaken
in denying the claim. The claim was based on Dr. Richard’s
extrapolation of a 60-item sample that Lifemark wrongfully paid
$634,816 as a result of Liljeberg Enterprises’s errors in using the
HPI rate. Unlike the evidence regarding the systematic frequency
billing discrepancies which overwhelmingly ran in Liljeberg
Enterprises’s favor, the evidence here simply shows that some HPI
rates drawn from Liljeberg Enterprises’s add/change/delete forms
were incorrect and Lifemark failed to notice and correct the error
110
based on the information provided by Liljeberg Enterprises in the
first instance.
We therefore affirm the district court’s denial of an award to
Lifemark on this claim.
VIII. Judgment against Tenet
Lifemark argues that, because Tenet was not sued by Liljeberg
Enterprises or St. Jude, it was error for the district court to
enter judgment against it. The district court made no finding of
jurisdiction over Tenet nor any ruling formally adding Tenet as a
party to this consolidated case, and a review of the district
court’s docket sheet confirms that, to this day, Tenet is not a
party in this case and has never been joined as a defendant or
served with process.
“It is elementary that one is not bound by a judgment in
personam resulting from litigation in which he is not designated as
a party or to which he has not been made a party by service of
process.”137 The Liljebergs’ reliance on case law regarding
successor liability and collateral estoppel is misplaced. The
issue is jurisdiction over a non-party to the actions, not
liability for a party already properly joined and served. We
conclude that the district court erred in entering judgment against
137
Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 110
(1969); accord Waffenschmidt v. MacKay, 763 F.2d 711, 718 (5th Cir. 1985); E.B.
Elliott Adver. Co. v. Metro. Dade County, 425 F.2d 1141, 1148 (5th Cir. 1970).
111
Tenet, a non-party in this case, and we must vacate the judgment in
its entirety as against Tenet.
IX. Attorneys’ Fees
On their cross-appeal, the Liljebergs argue that Liljeberg
Enterprises and St. Jude are entitled to attorneys’ fees under the
parties’ lease agreement and under Civil Code articles 1997 and
1958. On the record before us and based on our rulings on this
appeal, Liljeberg Enterprises and St. Jude have no basis for a
claim for attorneys’ fees.
First, we have reversed the district court’s judgment
overturning the judicial sale and reinstating, inter alia, the
lease between St. Jude and Lifemark. Accordingly, even assuming
the claim has not been waived, as Lifemark claims, there is no
basis to award St. Jude fees under section 17.1 of the lease.
Second, Louisiana Civil Code article 1958 provides that “[t]he
party against whom rescission is granted because of fraud is liable
for damages and attorney fees.” Again, however, even assuming this
provision would apply to this case based on the district court’s
findings of fact and conclusions of law and that this claim has not
been waived, we have reversed the district court’s judgment which
overturned the judicial sale and ordered rescission of the
hospital.
Finally, Louisiana Civil Code article 1997 provides that “[a]n
obligor in bad faith is liable for all the damages, foreseeable or
112
not, that are a direct consequence of his failure to perform.”
There is conflicting authority as to whether this provision
authorizes the award of attorneys’ fees for a bad faith breach of
contract.138 However, we need not decide this unsettled issue
because the Liljebergs failed to raise article 1997 as a basis for
attorneys’ fees in the district court and have therefore waived any
claim to attorneys’ fees.139 We are not persuaded that our refusal
to consider this claim for the first time on appeal would work a
miscarriage of justice.
X.
To summarize our holdings,(i) we reverse the district court’s
judgment in Cause No. 94-3993 overturning the judicial sale of the
hospital and reinstating various commercial instruments relating to
the financing and lease of the hospital and remand for calculation
of the amount of, and entry of judgment on, the past due deficiency
owed to Lifemark Hospitals, Inc. on the renewal promissory note and
interest due thereunder; (ii) we reverse the judgment in Cause No.
93-1794 granting Liljeberg Enterprises’s motion to assume the
pharmacy contract; (iii) in Cause No. 93-4249, we affirm the
district court’s damage awards to Liljeberg Enterprises of
138
See Newport Ltd. v. Sears, Roebuck & Co., No. Civ. A. 86-2319, 1995 WL
688799, at *4-*8 (E.D. La. Nov. 21, 1995).
139
See N. Alamo Water Supply Corp. v. City of San Juan, 90 F.3d 910, 916
(5th Cir. 1996) (holding that the Court of Appeals will not consider an issue
that a party fails to raise in the district court absent extraordinary
circumstances, which exist only when the issue is a pure question of law and a
miscarriage of justice would result from the failure to consider it).
113
$2,023,571 for Lifemark’s wrongful disallowance of requested
payment due to pricing differences and $281,906.32 for pricing and
quantity differences; (iv) we reverse the district court’s award to
Liljeberg Enterprises of $700,000 as lost profits for Lifemark’s
failure to purchase contrast media from Liljeberg Enterprises and
$150,275.60 for Lifemark’s failure to implement minimum fee
increases due to Liljeberg Enterprises under the pharmacy agreement
through the date of trial; (v) we modify the district court’s award
of $4,062,396 for Lifemark’s failure to reimburse Liljeberg
Enterprises its actual acquisition costs for the period August 31,
1989 through June 1, 1993 to $4,026,675; (vi) we vacate the
district court’s $5 million award to Liljeberg Enterprises and
remand to the district court for a redetermination of damages for
Liljeberg Enterprises’s “circumvention claim”; (vii) we conclude
that the district court clearly erred in failing to award Lifemark
$184,000 in overbillings by Liljeberg Enterprises based upon
claimed frequencies of drugs dispensed and $885,644 for the heparin
flush kit overcharges, and we award Lifemark damages in these
amounts; (viii) we reverse the district court’s judgment against
Tenet, a non-party to this case; and (ix) we conclude that
Lifemark’s other points of error on appeal and the Liljebergs’
points of error on their cross-appeal are without merit.140
140
As a final housekeeping matter, the Liljebergs’ motion to strike
Lifemark’s reply brief’s cross-index, which has been carried with the case, is
meritless and is denied. The inclusion of the index is not prohibited by any
rule, and it did not cause the reply brief to exceed the word count mandated by
114
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED IN PART.
Federal Rule of Appellate Procedure 32.
115