In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 06-1157
OMEGA HEALTHCARE INVESTORS, INC.,
Plaintiff-Appellant,
v.
RES-CARE, INC.,
Defendant-Appellee.
____________
Appeal from the United States District Court
for the Southern District of Indiana, Indianapolis Division.
No. 99 C 862—Richard L. Young, Judge.
____________
ARGUED SEPTEMBER 7, 2006—DECIDED JANUARY 22, 2007
____________
Before RIPPLE, KANNE, and WOOD, Circuit Judges.
KANNE, Circuit Judge. This diversity case concerns
the lease and administration of a residential healthcare
facility in Lexington, Kentucky.1 The appellant, Omega
Healthcare Investors, brought suit against Res-Care
alleging, among other things, breach of contract. The
parties filed cross-motions for summary judgment, and the
1
Because seven of the eight facilities that were the subject of
the original complaint were located in Indiana, venue in the
Southern District of Indiana was proper. By the time it reached
this court, the only remaining issue of contention concerned a
single facility in Lexington.
2 No. 06-1157
district court granted summary judgment in favor of Res-
Care. Omega appeals. For the reasons set forth below, we
reverse the judgment of the district court and remand
for further proceedings.
I. HISTORY
In 1989, Omega’s predecessor in interest entered into a
ten-year lease with Robert E. Petrie for certain property,
referred to in the lease as the “Lexington Campus” but
referred to by the parties during this litigation as the
Excepticon Facility (Excepticon).2 The property was a
healthcare facility designed to house and care for pa-
tients with developmental disabilities. In the accepted
language of the time, this was referred to as an Intermedi-
ate Care Facility for the Mentally Retarded (ICF/MR).
Because Omega, a real estate investment trust, could
not operate a medical facility, the lease envisioned that
Omega would rent the facility to Petrie and that Petrie
would acquire the necessary licenses to run the facility.
However the actual day-to-day management of Ex-
cepticon was to be performed by a third party—Res-Care.
To that end, Petrie and Res-Care simultaneously entered
a second contract, referred to as the Management Agree-
ment. The Lease (between Omega and Petrie) and the
2
The parties to the original lease were Angell Real Estate
Company and Robert Petrie. The parties to the accompanying
Management Agreement were Petrie and Res-Care Health
Services, Inc. Omega is Angell’s successor in interest, and Res-
Care is Res-Care Health Services’ successor in interest. For
clarity, except where necessary, we will refer to “Omega” and
“Res-Care” uniformly even where actions were actually taken by
Omega’s predecessor in interest or Res-Care’s predecessor in
interest.
No. 06-1157 3
Management Agreement (between Petrie and Res-Care)
each make reference to the other document.
For about eight years, the three parties happily coex-
isted, Omega as the lessor of the property, Petrie as the
lessee of the property, and Res-Care managing the prop-
erty. But in 1998 the environment began to change when
Res-Care purchased all of the Petrie rights and obliga-
tions under the Management Agreement and the Lease
from the Petrie estate. At this point there were only two
parties—Omega owned the property and leased it to Res-
Care, who became both the lessee and also the day-to-day
manager of operations in the facility.
Over the course of 1998 and 1999, Res-Care began a
process of working with the Commonwealth of Kentucky
to move the patients out of the Excepticon Facility and
into non-institutional community-based care. However,
Kentucky would not be able to pay Res-Care to manage
the community-based treatment for the former residents
of Excepticon as long as Excepticon was still open and
certified to provide care for the developmentally disabled
patients. By shutting the doors to Excepticon, Kentucky
would be able to apply for federal funding for the residents
to move into community care under a program called a
conversion waiver, a waiver that would not be available
if Excepticon was still operating.
Res-Care then did the following three things: it sought
and received an order from the district court to prevent
Omega from reclaiming possession of the property at the
natural termination of the Petrie lease; it helped the
residents of Excepticon move into community-based care
arranged by Res-Care; and (once the patients were re-
moved) it closed the ICF/MR. With those preconditions
met, Kentucky was able to rescind its certificate of need
for an ICF/MR, and federal funding for community-based
care was approved. When Omega regained possession of
4 No. 06-1157
Excepticon from Res-Care, it had no patients, no employ-
ees, and was no longer certified for use as an ICF/MR
in Kentucky.
Omega brought suit. Over Res-Care’s objection, the
district court gave Omega leave to file a Third Amended
Complaint on July 31, 2002. This complaint contained five
counts. During the Spring and Summer of 2003, the
parties filed cross-motions for summary judgment. Omega
moved for summary judgment on Counts I and V. Res-Care
moved for summary judgment on Counts I, II, IV, and V.
On December 4, 2003, the district court entered judgment
granting Res-Care’s motion for summary judgment on
Count V and denying Omega’s motion for the same.3
For two more years, the parties argued about the
remaining four counts. By December 27, 2005, the parties
had reached a settlement agreement on those four counts,
and the district court entered an order dismissing all
remaining claims and making the 2003 judgment on Count
V a final and appealable order. Omega appeals the order
granting summary judgment to Res-Care on Count V.
3
The appellant argues that the district court’s order should, in
fact, be read as a dismissal for failure to state a claim under FED.
R. CIV. P. 12(b)(6). To that end, Omega has filed a new lawsuit
in the district court with an eye toward more specifically
pleading breach of contract. It is true that the court did use the
term “dismissed” in resolving the claim and relied almost
exclusively on the content of the plaintiff ’s complaint. But the
court also looked to one affidavit and to the briefs of the parties.
Because the parties and the court made reference to materials
outside the pleadings, Rule 12 would have required that the
motion be considered under Rule 56 anyway, which we will do.
FED. R. CIV. P. 12(c) (“If, on a motion for judgment on the
pleadings, matters outside the pleadings are presented to and not
excluded by the court, the motion shall be treated as one
for summary judgment and disposed of as provided in Rule
56 . . . .”).
No. 06-1157 5
There is no disagreement that Excepticon was very
nearly fully-staffed and fully-occupied when Res-Care
assumed the obligations of the lessee in 1998. By the time
Res-Care returned the premises to Omega at the end of
1999, the facility was empty. At the heart of this dispute
is a disagreement about whether Res-Care owed any
duty to run Excepticon in a particular manner during
the years 1998 and 1999, and if so whether it breached
those obligations. Because the complaint and Omega’s
motion for summary judgment alleged that Res-Care’s
behavior violated both the Lease agreement and the
Management Agreement, we will consider them separately.
At some points the consideration of one necessarily implies
consideration of the other.
II. ANALYSIS
We review an appeal of summary judgment de novo. Lee
v. Keith, 463 F.3d 763, 767 (7th Cir. 2006). On summary
judgment, a party is entitled to judgment if the plead-
ings, depositions, answers to interrogatories, and admis-
sions on file, together with the affidavits, if any, show that
there is no genuine issue as to any material fact and
that the moving party is entitled to judgment as a matter
of law. FED. R. CIV. P. 56(c). We view all facts and draw all
inferences in the light most favorable to the non-moving
party. Tanner v. Jupiter Realty Corp., 433 F.3d 913, 915
(7th Cir. 2006).
In its motion for summary judgment, Omega clarified
exactly how it believes that Res-Care breached its two
contracts. It alleged that many of the acts that Res-Care
took in conjunction with the Commonwealth of Kentucky
in 1998 and 1999 constituted breaches of the Management
Agreement that was originally signed by Res-Care and
Petrie. Omega also alleged that those same actions vio-
lated paragraph 23 of the Lease. It further alleged
6 No. 06-1157
that Res-Care had breached paragraphs 9 and 36 of the
Lease, independent of any breach of the Management
Agreement. Finally, Omega noted that under the Lease, if
the court believed that the Management Agreement had
been terminated that such termination was a further
violation of Lease paragraph 25.
For reasons that are unclear, Res-Care has contended
for several years now that the Third Amended Complaint
only alleged a breach of the Management Agreement, and
said nothing about the Lease. There is simply no way that
this argument can be squared with the plain language of
the complaint. For example, paragraph 105 of the com-
plaint reads, in its entirety: “Res-Care refused to surrender
control and operation of the Lexington facility at the
termination of the Lease, and continued to operate the
facility in violation of the lease surrender provisions from
the termination of the Lease through December 31, 1999.”
Likewise, paragraph 106 reads: “Defendant’s conduct in
refusing to surrender the leased facility at the termina-
tion of the Petrie Lease Agreement constituted a breach of
that written contract.” Paragraph 107 reads: “Defendant’s
conduct . . . constituted multiple breaches of the Petrie
Lease and the Defendant’s Guaranteed Management
Agreement.” How it could be possible to read these three
paragraphs as dealing exclusively with the Management
Agreement defies explanation.
A federal complaint requires only a short and plain
statement of the claim. FED. R. CIV. P. 8(a). A plaintiff
in federal court “need do no more than narrate a grievance
simply and directly, so that the defendant knows what
he has been accused of.” Doe v. Smith, 429 F.3d 706, 708
(7th Cir. 2005). This defendant was on notice that Count
V pleaded not only a breach of the Management Agree-
ment but also of the Lease agreement. Repeatedly deny-
ing this fact does not change reality. Res-Care is entitled
to take issue with questions of fact and law as presented
No. 06-1157 7
by Omega in its motion, but Res-Care is not entitled to
pretend, ipse dixit, that entire portions of the complaint
and entire pages of the plaintiff ’s memorandum support-
ing its motion for summary judgment simply do not exist.
We will consider each alleged breach of the two contracts
in turn.
A. Breach of the Management Agreement Itself
The terms of the Management Agreement that Omega
believes were breached can be summarized as follows: the
contract required that the manager of the property
would “maintain and operate the facility in compliance
with the standards for state licensure . . . sufficient to
maintain a license as an ICF/MR facility” and “not do or
permit to be done any act or thing which . . . is incompati-
ble with its operation as an ICF/MR facility.” Management
Agreement § II(d), § II(h). Additionally, it was a “goal” that
the manager “seek to maintain appropriate and adequate
relationships with referral sources sufficient to main-
tain 99% occupancy.” Before considering the evidence to
support these allegations, we must (as did the district
court) consider Res-Care’s legal argument that the Man-
agement Agreement had ceased to exist when Res-Care
bought out Petrie and became both the lessee and the
manager. We agree that the Management Agreement
ceased to exist on January 1, 1998.
The Management Agreement on its face is a contract
between Petrie and Res-Care. The first question faced by
the district court and by this court is whether Res-Care’s
acquisition of Petrie’s rights and obligations under the
Management Agreement made that agreement void. We
conclude that it did.
The principle involved here was summarized in the
Restatement of Contracts § 451: “Where a person subject
8 No. 06-1157
to a contractual duty, or to a duty to make compensation,
acquires the correlative right in the same capacity in
which he owes the duty, the duty is discharged.” The
comments and examples clarify. “A legal duty cannot be
owed by a person to himself acting in the same capacity.”
RESTATEMENT (FIRST) OF CONTRACTS § 451 cmt. a (1932).
“A owes B $100. A is B’s next of kin, and B dying without
a will A inherits all of B’s property. A’s duty to B is dis-
charged.” RESTATEMENT (FIRST) OF CONTRACTS § 451 ill. 1
(1932).
Although the Kentucky case law on the topic is scant, it
supports the view that Kentucky follows the Restatement.
Res-Care cites to Allin v. Shadburne, 31 Ky. (1 Dana) 68
(Ky. 1833), for the long-standing proposition4 that a party
cannot contract with itself. Although that case had not
been mentioned in the courts of Kentucky since 1904, see
United Loan & Deposit Bank v. Bitzer, 78 S.W. 183, 184
(Ky. 1904), we can find no authority to suggest that this
does not remain the law of contract in the Commonwealth
of Kentucky. We agree that under Kentucky contract law
the Management Agreement was nullified when Res-Care
bought Petrie’s interest in 1998 and therefore could not
have been breached.
Omega makes two counter-arguments on appeal. Omega
claims that it was an intended third-party beneficiary
to that contract and that the two contracts were actually
a single three-party contract and therefore Res-Care is not
the only party on both sides of the Management Agree-
ment. Because Omega did not raise either of these argu-
ments in the district court they have been forfeited for
4
We recognize that “long-standing proposition” is a party’s
shorthand for being unable to find an authority more recent
than the 19th century. Nevertheless, it appears to remain good
law.
No. 06-1157 9
the purposes of this appeal. Coker v. Trans World Air-
lines, Inc., 165 F.3d 579, 586 (7th Cir. 1999).
B. Breach of Paragraph 23 of the Lease
Omega argued in the district court and properly pre-
served for appeal its contention that the terms of the
Management Agreement were also incorporated into the
Lease. See Pl. Mem. Supp. Summ. J. 2 (“However, the
Lease Agreement made clear that the terms and provi-
sions of the Management Agreement were a part of the
Lease with Omega, and the breach of any of those terms
and provisions would constitute a breach of the Lease.”).
We agree with Omega.
Under Kentucky law, a contract can incorporate terms
by reference to outside sources. Bartelt Aviation, Inc. v.
Dry Lake Coal Co., 682 S.W.2d 796, 797 (Ky. Ct. App.
1985) (“[W]hen a signature is placed after clear language
has expressed the incorporation of other terms and condi-
tions by reference, it is a logical inference that the
signer agrees to be bound by everything incorporated.”).
Paragraph 23 of the Lease reads, “Lessor approves the
entry by Lessee simultaneously with the execution of this
Lease, into a Management Agreement (herein the “Man-
agement Agreement”) of even date . . . a true and correct
copy of which is attached hereto as Exhibit C_ and made
a part hereof. Lessee agrees that it will not consent to
any modification or amendment of the management
agreement without the prior written approval of the
Lessor.” Lease ¶ 23 (emphasis added). Omega argues that
this paragraph was sufficient to incorporate the Manage-
ment Agreement into the Lease.
Paragraph 23 of the Lease is unambiguous, and the
interpretation of unambiguous contract provisions is a
question of law. First Bank & Trust v. Firstar Info. Servs.
10 No. 06-1157
Corp., 276 F.3d 317, 322 (7th Cir. 2001). The only sensible
way to interpret paragraph 23 is that the parties to the
Lease (Omega and Petrie) intended that the specific
provisions of the Management Agreement were a part of
the basis of their bargain—that operation of the facility
in a particular manner was necessary to protect the
interests of the parties to the Lease. This view is sup-
ported by reading Lease paragraph 23 in conjunction with
Lease paragraph 25. See Cantrell Supply, Inc. v. Liberty
Mut. Ins. Co., 94 S.W.3d 381, 384-85 (Ky. Ct. App. 2002)
(“Any contract or agreement must be construed as a
whole, giving effect to all parts and every word in it if
possible.”) (internal citation and quotations omitted). Not
only was any change to the facility’s management sub-
ject to Omega’s approval, any lapse of the Management
Agreement constituted breach of the Lease by Petrie. We
are convinced that the terms of the Lease are clear and
that the contract incorporates the provisions of the Man-
agement Agreement into the Lease.
Of course Res-Care, in its role as manager of Excepticon,
could not be bound by a contract between Omega and
Petrie. But on January 1, 1998, Res-Care also became the
lessee of the facility, and was bound by the obligations
that Petrie had agreed to in the Lease, just as (Res-Care
agrees) it assumed Petrie’s obligation to pay rent to
Omega. As Res-Care acknowledges in its brief, by January
1, 1998, there was no longer a manager of Excepticon:
there was only a lessor and lessee. Res-Care, as the lessee,
accepted the terms of the Lease.
However, Res-Care submits that Omega consented to
the sale of the Petrie assets to Res-Care. Omega’s admis-
sions in a separate pleading before a Kentucky admin-
istrative agency support the view that Omega consented
to the substitution of parties to the two contracts, but Res-
Care provides nothing to suggest that Omega consented to
any alteration of the terms under which the facility
No. 06-1157 11
would be managed. The lessee of the facility, first Petrie
and then Res-Care, agreed to manage the facility in
accordance with certain standards. Those were memorial-
ized in the Management Agreement between Petrie and
Res-Care, but we conclude that as incorporated terms
they were also binding on Petrie as lessee and later Res-
Care as lessee under the separate Lease. Whatever effect
substituting the parties had on the Management Agree-
ment, there is no indication that the incorporated terms of
the Lease were changed thereby.
The only remaining question for this court is whether the
legal demise of the Management Agreement prevents the
incorporated terms from being effective as part of the
separate Lease Agreement. We are forced to look as far
back as 1922 in Kentucky to find an answer to that
question. In Torian v. Hibbs, 245 S.W. 502 (Ky. 1922), the
court held that parties to a contract could properly in-
corporate the terms of a previous expired and unenforce-
able contract into a different contract. Finding nothing to
suggest that this is not the case today, we believe that
under Kentucky law the terms of the Management Agree-
ment, not having been modified by the parties to the
lease, remained binding on the lessor and lessee despite
the legal lapse of the separate Management Agreement.
The facts, even when viewed in the light most favorable
to Res-Care, are sufficient to establish that Res-Care
breached the terms incorporated into paragraph 23 of the
lease.5 The affidavits and depositions that accompanied
Omega’s motion for summary judgment established the
5
Res-Care’s brief in this court does not address any of the facts
that Omega presented as not being in dispute, relying instead
on two purely legal arguments: that there was no contractual
duty, or alternatively that even if there were any duties owed
to Omega that public policy prevented following through on
them.
12 No. 06-1157
facts that follow. Sometime after Res-Care assumed
Petrie’s obligations under the lease in 1998, Res-Care
approached Kentucky about moving patients from the
Excepticon facility into the community. This is corrobo-
rated not only by depositions of Kentucky officials but also
by admissions of Res-Care’s officers. See Morse Dep. at 7:1-
7:5; Geary Dep. at 73:7-73:25. In fact, Res-Care had
drawn up a plan for how it would close Excepticon and
convert the certified need for the ICF/MR beds into
community-based care for those patients. See Kelley Dep.
at 80:6-82:19. Kentucky officials informed Res-Care that
any funding for community-based care would be condi-
tioned on closing Excepticon. See Morse Dep. at 7:13-8:7.
Res-Care informed Kentucky that it was in a position to
permanently close Excepticon. See Boyd Dep. at 9:21-10:19.
Although the parties have now quibbled for years over
whether “eviction” is the proper description, officials from
Kentucky confirm that the residents of Excepticon were
not given the choice to remain in Excepticon (even though
they eventually left of their own free will, having been
informed that the facility was closing). See Boyd Dep. at
18:6-18:8, 33:25-34:7. Kentucky informed Res-Care that
the process of shifting the patients from Excepticon to the
community would result in the revocation of Excepticon’s
license to continue operating as an ICF/MR. See Morse
Dep. at 7:13-8:7. Res-Care’s general counsel admitted that
closing the facility was incompatible with its continued
operation as an ICF/MR. See Waskey Dep. at 72:8-72:11.
At the time that the patients were being moved from
Excepticon, there was a waiting list for Medicaid-funded
beds in ICF/MRs in Kentucky. See Boyd Dep. at 20:6-20:10.
There are no material facts in dispute. Over the course
of two years, Res-Care initiated a plan to move the pa-
tients from Excepticon into the community. Res-Care
approached Kentucky and offered to close Excepticon. As
patients were placed into the community, Res-Care did
No. 06-1157 13
nothing to bring new patients into the facility off the
waiting list. Res-Care knew that its actions were incom-
patible with Excepticon’s continued operation as an
ICF/MR and incompatible with Excepticon’s continued
licensure as an ICF/MR. Res-Care’s actions as lessee
were in violation of the terms incorporated into the Lease
by paragraph 23. Barring success on Res-Care’s affirma-
tive defense of a public policy exception (see Part II.F
below), Omega is entitled to judgment as a matter of law
for breach of the incorporated terms of paragraph 23 of the
Lease.
C. Breach of Paragraph 9 of the Lease
Omega argued in its motion for summary judgment that
Res-Care breached Paragraph 9 of the Petrie lease,
entitled “Alterations.” It reads, in relevant part, that the
“[l]essee shall not make any alterations or additions to the
Demised Premises without Lessor’s prior approval.” The
definition of the Demised Premises is provided in para-
graph 1 as:
assets, rights, interests and other properties owned by
the lessor and relating to the Facility . . .
[including] . . . (c) Appurtenances: all tenements,
hereditaments, rights, privileges, interests, easements
and appurtenances belonging or in any wise pertain-
ing to the Parcel and/or the Improvements . . . .
Omega argues that Res-Care impaired Omega’s rights,
privileges, and interests during the term of the lease by
destroying or impairing the Medicaid certificate of need
(CON) for the slots at the Excepticon ICF/MR. Omega
argues that those impairments constitute an alteration of
the demised premises in violation of paragraph 9.
Because Omega is a real estate investment trust, and not
a medical service provider, Res-Care argues that the CON
14 No. 06-1157
could not possibly have been among the rights, privileges,
or interests that ran as part of the demised property. Res-
Care’s argument is supported by the fact that the lessees
and managers of Excepticon have been the ones who
applied for and received the various licenses and CONs
throughout the term of this Lease. In fact, it was the
operators and managers exclusively who had ever acquired
any “right” or “privilege” to operate the facility under a
CON. Since this was not part of the premises that Omega’s
predecessor had demised to Petrie, its absence upon lease
termination could not be an alteration of the premises. The
CONs and any other right to operate the facility were
simply never leased from Omega to Petrie and their
absence does not violate paragraph 9 of the Lease.
D. Breach of Paragraph 36 of the Lease
Paragraph 36 of the Lease is extensive, occupying more
than two single-spaced pages of the original contract. It is
entitled “Surrender; Obligations Upon Expiration or
Termination.” While much of the boilerplate in the para-
graph is inconsequential to this case, Omega alleged in
its motion for summary judgment that there are four
specific clauses in paragraph 36 that Res-Care had
breached. Paragraph 36(a) required that the lessee “shall
[upon the termination date] well and truly surrender and
deliver the Demised Premises into the possession and use
of the Lessor without fraud or delay.” Paragraph 36(c)(2)
required that upon surrendering the premises the lessee
must warrant that “[t]here is no outstanding written
notice of default, cancellation or termination in connection
with any instrument or document which could be con-
strued, directly or indirectly, to bind or in any way affect
Lessor or Lessor’s assigns after the termination hereof.”
Paragraph 36(d) required that the lessee shall “use its
best efforts to persuade such personnel of the Facilities
No. 06-1157 15
as Lessor may designate to become employees of Lessor or
Lessor’s assigns after the expiration or termination of the
term hereof.” Finally, paragraph 36(f ) required that the
lessee must allow the lessor to use the lessee’s Medicaid
provider number for a short period after surrendering the
premises until the lessor acquired its own provider num-
bers so that it could continue to bill Medicaid during the
transition period.
There is no doubt that Res-Care did not initially surren-
der the demised premises as required by paragraph 36(a).
The parties agreed to an order, entered by the district
court on October 26, 1999, that allowed Res-Care to remain
in possession of the premises until December 31, 1999.
Because Omega agreed to allow Res-Care to remain in
possession, such possession cannot of itself be grounds for
a claim for breach of paragraph 36. KY. REV. STAT. ANN.
§ 383.160 (West 2006) (permitting the parties to ex-
pressly contract for holdover beyond the day that a lease
terminates). But the district court’s order also put a limit
on what Res-Care could do during this holdover period.
By agreement of both parties, paragraph 6 of the October
26 order required that “Res-Care shall not use its hold-
over position to impair Omega’s ability to continue to
operate Excepticon as a Medicaid funded ICF/MR facility.”
Reading paragraph 6 of the agreed order in conjunc-
tion with the provisions of paragraph 36 of the Lease,
which clearly required Res-Care to deliver the premises
in such a condition as to be ready to continue operation as
an ICF/MR, we conclude that the actions taken between
September 1 and December 31, 1999 constituted a breach
of paragraph 36 of the Lease. Res-Care was under an
obligation to turn over the premises at the end of August.
If it had done so, it would have given Omega a partially
occupied and staffed ICF/MR that was still licensed.
Admittedly, as we held above, Res-Care was already in
breach by August 31. But had Res-Care surrendered the
16 No. 06-1157
premises Omega would have been allowed to look for a
new operator to take over the management of the facility.
Omega and Res-Care negotiated an extension to that lease
turnover date on the explicit conditions—which were
consistent with the parties’ intentions expressed in
paragraph 36 of the Lease—that the facility would still
be capable of being operated as a Medicaid-funded ICF/MR
facility when the eventual turn-over occurred.
The facility that Res-Care surrendered was anything
but capable of being used as such. We note that the
undisputed facts above that put Res-Care in breach of
the incorporated management terms apply equally here.
The occupants were gone, the staff was gone, and the
Commonwealth was pulling the plug on its certification.
Although the parties differ in their characterization of
how the residents were moved—Res-Care says they all
left of their own will, Omega says they were evicted—the
parties agree that Res-Care took affirmative steps to
place the residents elsewhere and made no efforts to
replace them. The parties also agree that Res-Care had
been negotiating with Kentucky before the hold-over
period to arrange for community-based care, and that
the funding of community-based care (and Res-Care’s
eventual profits therefrom) would depend on the perma-
nent closure of the Excepticon Facility. It is also clear that
both parties are in agreement that it was during this
holdover period that the coup de grâce was delivered to
Excepticon when its last patient left (or was evicted) and
the Commonwealth was free to decertify the facility. On
the basis of these actions alone, Omega is entitled to
summary judgment on the issue of liability for breach of
paragraph 36 of the Lease.
E. Breach of Paragraph 25 of the Lease
Finally, Omega alleged in its motion for summary
judgment that any lapse of the Management Agreement
No. 06-1157 17
would constitute a separate breach of paragraph 25 of the
Lease. Pl. Mot. Supp. Summ. J. 3-4 (“The lease also makes
the termination of the Management Agreement a breach
of the Lease, for which Res-Care would be liable pursuant
to its obligations under the Lease terms.”). Omega specifi-
cally pointed the court to Lease paragraph 25, entitled
“Default, Termination” which reads in relevant part, “The
parties hereto agree that notwithstanding any other
provision of this Lease, the term ‘default’ as used in the
Lease will also include (i) the termination, either voluntary
or involuntary, of the Management Agreement; or (ii) the
occurrence of an event of default by either party to
the Management Agreement.”
Res-Care has based much of its appeal on the (correct)
theory that its purchase of the Petrie interests on January
1, 1998, resulted in the termination of the Management
Agreement as a standalone contract. But Res-Care did
not respond in the district court to Omega’s argument
that the termination of the Management Agreement
would also put it in breach of the Lease. Res-Care’s
defense to the argument on appeal is to assert (once again)
that Omega never made that argument below. Appellee’s
Br. 32-34. They are incorrect.6 Having failed to identify
any law or facts that would preclude this interpretation of
paragraph 25, we find that the lessee (Petrie and Res-Care
as his successor) was in default under the terms of the
Lease effective January 1, 1998, when the Management
Agreement was terminated. The practical effect of this
6
Omega incorporated by reference certain arguments from its
brief in support of its own motion for summary judgment into its
brief in opposition to Res-Care’s motion. See Pl. Mot. Opp. Summ.
J. 20 (“For a detailed description of the Lease terms and provi-
sions and the applicable law, Omega incorporates by reference
its Brief in Support of Cross Motion for Summary Judgment,
on Count V.”).
18 No. 06-1157
remains to be seen, as there has been no offering of proof
of any damages suffered as a result of that default. Those
damages, if there are any, will be among the issues
addressed on remand.
F. Res-Care’s Public Policy Defense
Res-Care has placed much reliance on its argument that
public policy prevents the enforcement of the terms of the
Lease. In Kentucky, it is “a question of law . . . whether [a]
contract, if made, can be enforced, or whether it is void as
against public policy.” Hickey v. Glass, 149 S.W.2d 535,
536 (Ky. 1941). We consider questions of law de novo. This
argument fails because it misinterprets the state of the
law with respect to integration of the developmentally
disabled and it misrepresents the facts of the current case.
Res-Care’s argument is that enforcing the terms of the
contract “would effectively prevent people with disabil-
ities from leaving large institutional facilities like
Excepticon, contrary to clearly stated federal and state
public policies.” Appellee’s Br. 44-45. This argument relies
on Olmstead v. L.C. ex rel Zimring, 527 U.S. 581 (1999).
Olmstead stands for the proposition that in order to avoid
violating the Americans with Disabilities Act (ADA), the
placement of individuals in community-based settings
is appropriate “when the state’s treatment professionals
have determined that community placement is appropri-
ate, the transfer from institutional care to a less restric-
tive setting is not opposed by the affected individual, and
the placement can be reasonably accommodated, taking
into account the resources available to the State and the
needs of others with mental disabilities.” Id. at 587.
Res-Care’s reliance on the integration mandate, as
expressed by Olmstead, is misplaced. Res-Care overlooks
the fact that Olmstead requires only that particular
No. 06-1157 19
individuals be given the choice of community placement
or institutional care. Olmstead specifically does not stand
for the proposition that ICF/MRs must be closed. The
Supreme Court explicitly rejected the argument that Res-
Care is now making, that the ADA somehow requires
that institutional care be discontinued. “We emphasize
that nothing in the ADA or its implementing regulations
condones termination of institutional settings for persons
unable to handle or benefit from community settings.” Id.
at 601-02. Kentucky continued to operate ICF/MRs after
Olmstead. The depositions that accompanied Omega’s
motion for summary judgment included assurances from
Kentucky officials that there were waiting lists for facili-
ties such as Excepticon and that Kentucky was not in
the process of closing other ICF/MRs. See Boyd Dep. at
19:16-21:1. Res-Care’s CEO admitted during his deposi-
tion that the company continued to operate ICF/MRs
elsewhere. See Geary Dep. at 46:4-47:13. To the extent
that there is a public policy on community-based care, it
is a mandate that individuals be given choices, not a
mandate to force the lessees of institutional facilities to
shut the doors of their facilities in violation of lease terms.
To suggest that continued operation of Excepticon would
be “illegal” was disingenuous at best.
In summary, Robert Petrie, and later Res-Care as his
successor, agreed to rent a fully-functional, fully-occupied,
and fully-staffed medical facility from Omega. Recognizing
that much of the residual value of the facility would
depend on its return in substantially the same condition,
Omega included certain protections in the lease. Omega
required that the facility would be managed in a particular
way, specifically requiring that the people who were
entrusted with the facility not do anything that would
result in its de-certification. The terms of the separate
Management Agreement were properly incorporated
into the Lease. Any deviation from them, or any termina-
20 No. 06-1157
tion of the agreement, constituted a breach of the lease.
Any failure to surrender the premises at the end of the
lease period constituted a separate breach of the lease.
Res-Care, as Petrie’s successor in the lease, inherited
those obligations. Even viewing the facts in the light most
favorable to Res-Care, it is clear that Res-Care breached
paragraphs 23, 25, and 36 of the lease. Omega is entitled
to judgment as a matter of law, however the question of
adequate damages is not properly before this court.
III. CONCLUSION
Accordingly, for the reasons set forth above, the judg-
ment of the district court is REVERSED and the case is
REMANDED with instructions to enter summary judg-
ment in favor of the plaintiff on Count V of the Third
Amended Complaint, and for further proceedings consis-
tent with this opinion.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—1-22-07