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HomeMy WebLinkAbout02-3252 CivilSELECT MEDICAL CORPORATION AND REHABCLINICS, INC., PLAINTIFFS IN THE COURT OF COMMON PLEAS OF CUMBERLAND COUNTY, P E N N SYLVAN IA HEALTHCARE INNOVATIONS, INC., HCI MANAGEMENT SERVICES, INC., BURKE OCCUPATIONAL HEALTH, INC., BURKE REHABILITATION CENTER, INC., HCI OF ILLINOIS, INC., HCI OF NORTH CAROLINA, INC., HCI OF TENNESSEE, INC.,: KENTUCKY PHYSICAL THERAPY, INC., LEXINGTON PHYSICAL THERAPY, INC., MOUNTAIN PHYSICAL THERAPY, INC., OCCUPATIONAL MEDICINE CONSULTANTS,: INC., PATIENT FOCUS PHYSICAL THERAPY: & REHAB, INC., PINEHURST REHABILITATION CENTER, INC., SPORTS &: 02-3252 CIVIL TERM ORTHOPEDIC REHAB CENTER, INC., HEALTHCARE PROFESSIONALS, INC., WORK SOLUTIONS, INC., AUSTIN VENTURES IV-A, L.P., AUSTIN VENTURES IV-B, L.P., SSM VENTURE PARTNERS, L.P., SPROUT CAPITAL VII, L.P., SPROUT CEO FUND, L.P., DLJ CAPITAL CORPORATION, DLJ FIRST ESC L.L.C., HEALTHCARE INVESTORS, LLC, LOUIS D. HAMRIC AND PAUL J. FITZPATRICK, DEFENDANTS IN RE: PRELIMINARY OBJECTIONS OF DEFENDANTS AUSTIN VENTURES IV-A, L.P., AUSTIN VENTURES IV-B, L.P., SSM VENTURE PARTNERS, L.P., SPROUT CAPITAL Vii, L.P., SPROUT CEO FUND, L.P., DLJ CAPITAL CORPORATION AND DLJ FIRST ESC L.L.C. TO PLAINTIFFS' COMPLAINT BEFORE BAYLEY, J. AND HESS, J. OPINION AND ORDER OF COURT Bayley, J., February 11, 2003:-- 02-3252 CIVIL TERM Plaintiffs, Select Medical Corporation and Rehabclinics, Inc., purchased the assets of Healthcare Innovations, Inc., and its corporate affiliates, under the terms in a written Asset Purchase Agreement dated November 14, 2001.4 On July 9, 2002, plaintiffs filed this complaint against (1) Healthcare Innovations, Inc., and its corporate affiliates, (2) Louis D. Hamric and Paul J. Fitzpatrick, the officers of Healthcare Innovations, Inc., 2 and (3) various entities that are the shareholders of the corporate defendants.3 Plaintiffs allege causes of action for (1) breach of contract against the corporate defendants, (2) conversion against the corporate defendants and corporate officers, (3) fraud against the corporate defendants, corporate officers and shareholder defendants, and (4) unjust enrichment against the corporate defendants and shareholder defendants. Plaintiffs aver that as a result of fraud by the corporate defendants, the corporate officers, and the shareholder defendants for whom the corporate officers Hamric and Fitzpatrick were acting as agents, they overpaid almost ten million dollars on the ~ The corporate affiliates are HCI Management Services, Inc., Burke Occupational Health, Inc., Burke Rehabilitation Center, Inc., HCI of Illinois, Inc., HCI of North Carolina, Inc., HCI of Tennessee, Inc., Kentucky Physical Therapy, Inc., Lexington Physical Therapy, Inc., Mountain Physical Therapy, Inc., Occupational Medicine Consultants, Inc., Patient Focus Physical Therapy & Rehab, Inc., Pinehurst Rehabilitation Center, Inc., Sports & Orthopedic Rehab Center, Inc., Healthcare Professional, Inc., Work Solutions, Inc. : Hamric was CEO and President. Fitzpatrick was Executive Vice President, COO and Secretary. Austin Ventures IV-A, L.P., Austin Ventures IV-B, L.P., SSM Venture Partners, L.P., Sprout Capital VII, L.P., Sprout CEO Fund, L.P., DLJ Capital Corporation, DLJ First ESC L.L.C., Healthcare Investors, LLC. -2- 02-3252 CIVIL TERM nineteen million dollar transaction.4 The fraud is premised on alleged misrepresentations in a Letter of Intent dated April 14, 2001, of financial data used to determine the purchase price of the transaction based on the multiple of the earnings of the corporate defendants before interest, taxes, depreciation and amortization from operations calculated in accordance with generally accepted accounting principles (EBITDA). Plaintiffs seek (1) a rescission of the Asset Purchase Agreement, that they be excused from paying the Note and Guaranty, and related damages, and (2) a return of the amount of the overpayment with related damages. The shareholder defendants filed preliminary objections to the complaint in the form of a demurrer. The issues have been briefed and argued. A demurrer is to be sustained only where the complaint is insufficient to establish the pleader's right to relief. County of Alleghany v. Commonwealth, 507 Pa. 360 (1985). A demurrer admits as true all well pleaded, material, relevant facts and every inference fairly deducible from those facts. Id. The shareholder defendants, who are not parties to the Asset Purchase Agreement, maintain that under Pennsylvania's Association Code, they cannot be held liable to plaintiffs. The Code at 15 Pa.C.S. Section 1526(a), provides: General rule--A shareholder of a business corporation shall not be liable, solely by reason of being a shareholder, under an order of a court or in any other manner for a debt, obligation or liability of the corporation of any kind or for the acts of any shareholder or representative of the corporation. The Letter of Intent was signed by the corporate defendants and the corporate officers, Hamric and Fitzpatrick. It was signed by the shareholder defendants only with 4 Plaintiffs paid seventeen million dollars plus signed a Note and Guaranty, the total of which has a value of nineteen million dollars. -3- 02-3252 CIVIL TERM respect to four limited matters set forth in paragraphs 9 through 12. They did not sign the document as to the representations of financial data set forth in other paragraphs. The plaintiffs' fraud claim against the corporate officers Hamric and Fitzpatrick is brought on averments that they directly participated in the fraud by making the misrepresentations in the Letter of Intent that they signed. See Wicks v. Milzoco Builders, Inc., 503 Pa. 614 (1983). The averments as to the liability against the shareholder defendants is that Hamric and Fitzpatrick, in perpetrating the fraud in the inducement, were acting as agents for the shareholders. In the context of plaintiffs' allegations of fraud, the rule set forth by the Supreme Court of Pennsylvania in Line Lexington Lumber & Millwork Co, Inc. v. Pennsylvania Publishing Corp., 451 Pa. 154 (1973), is applicable: "An averment of agency is a fact that is admitted for purposes of a demurrer rather than a conclusion of law." Accordingly, based on the averments of agency, plaintiffs have pleaded a cause of action for fraud against the shareholder defendants. The shareholder defendants maintain that the allegations of fraud in plaintiffs' complaint lack sufficient specificity. In Gibbs v. Ernst, 538 Pa. 193 (1994), the Supreme Court of Pennsylvania set forth the requirements for pleading a fraud claim based on intentional misrepresentation: (1) a representation; (2) which is material to the transaction at hand; (3) made falsely, with knowledge of its falsity or recklessness as to whether it is true or false; (4) with the intent of misleading another into relying on it; (5) justifiable reliance on the misrepresentation; and (6) the resulting injury was proximately caused by the reliance. Fraud based on intentional non-disclosure has the same elements except that the party intentionally conceals a material fact rather than making -4- 02-3252 CIVIL TERM an affirmative misrepresentation. Id. Plaintiffs have pled that the shareholder defendants participated in the fraud through the misrepresentations in the Letter of Intent of their agents, the corporate officers, Hamric and Fitzpatrick, by (1) misrepresenting the net revenues including Cash Adjustment figures in order to increase EBITDA and thereby the purchase price, (2) misrepresenting the existence, value and status of contracts for physical therapy services so as to artificially inflate projected net revenue, EBITDA and the purchase price, and (3) concealing financial information and information about the Cash Adjustment figures and contracts. These allegations are sufficiently specific to support plaintiffs' allegation of fraud by inducement to enter into the Asset Purchase Agreement for the inflated price of nineteen million dollars. Citing HOB Contractors v. Liberty Place Hotel Associates, 652 A.2d 1278 (Pa. 1995), the shareholder defendants maintain that plaintiffs' claim of fraudulent inducement based upon the alleged misrepresentations in the Letter of Intent is defeated by the integration clause in the Asset Purchase Agreement. The integration clause at paragraph 7.4 provides: Entire A,qreement. The agreement of the parties, which is comprised of this Agreement and the schedules hereto and the documents referred to herein, sets forth the entire agreement and understanding between the parties and supersedes any prior agreement or understanding, written or oral, relating to the subject matter of this Agreement. (Emphasis added.) The Asset Purchase Agreement at Section 2.34, provides: Disclosure. No representation or warranty by any Seller in this Agreement, and no exhibit, certificate or schedule furnished or to be furnished to Buyer pursuant hereto, or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact, or omits or will omit to state a -5- 02-3252 CIVIL TERM material fact necessary to make the statements or facts contained herein or therein not misleading or necessary to provide Buyer with proper information as to Sellers, the Subsidiaries, the Business and the Purchased Assets. There is no fact or condition known to Sellers, which has not been disclosed to Buyer in the Schedules to this Agreement or otherwise in writing, that was or is, or so far as Seller can reasonably foresee, will have a Material Adverse Effect on the Business or the ability of Sellers to perform its obligations under Agreement. (Emphasis added.) In HOB Contractors, the Supreme Court of Pennsylvania held that in a claim alleging fraudulent inducement to enter into a contract, "[w]here prior fraudulent oral representations are alleged regarding a subject that was specifically dealt with in the written contract, the party alleging such representations must, pursuant to the parol evidence rule, also aver that the oral representations were fraudulently or by accident or mistake omitted from the integrated contract.''5 Plaintiffs herein, who are not alleging fraudulent oral statements, have not made such a pleading. The Letter of Intent was furnished to the buyers by the corporate defendants and the corporate officers in connection with the transaction that became the Asset Purchase Agreement. The words "otherwise in writing" in the disclosure provision in the Agreement that provides, "There is no fact or condition known to Sellers, which has not 5 The Court noted an exception to the strict application of the parol evidence rule in sales and leases of real estate where oral representations regarding a lack of physical defects in the property are made and the purchaser or lessee was not able to discover, through visual inspection, that the representations were false. Id. See Berger v. Pittsburgh Auto Equipment Co., 387 Pa. 61 (1956); 1726 Cherry Street Partnership v. Bell Atlantic Properties, Inc., 653 A.2d 663 (Pa. Super. 1995); Blumenstock v. Gibson, 811 A.2d 1029 (Pa. Super. 2002). -6- 02-3252 CIVIL TERM been disclosed to Buyer in the Schedules to this Agreement or otherwise in writing, that was or is, or so far as Seller can reasonably foresee, will have a Material Adverse Effect on the Business," includes the financial data of the corporate defendants supporting the EBITDA set forth in the written Letter of Intent. It is that financial data that plaintiffs' claim was fraudulently misrepresented and has a material adverse effect on the value of the businesses they were induced to purchase for the inflated price of nineteen million dollars. The Letter of Intent is a "document referred to herein" as these words are used in paragraph 7.4 of the integration clause in the contract. Thus, by the specific terms of that paragraph the document is part of the Asset Purchase Agreement. Therefore, the parol evidence rule as it applies to oral representations as set forth in HCB Contractors, is not applicable. The fraud in the inducement alleged by plaintiffs in the written Letter of Intent is not defeated by the integration clause in the Asset Purchase Agreement. The shareholder defendants maintain that plaintiffs have not stated a valid cause of action for unjust enrichment. They cite Commonwealth of Pennsylvania, Department of Public Welfare, Central Region v. Dauphin County Social Services for Children and Youth, 90 Commw. Ct. 295 (1985), for the proposition that a claim of unjust enrichment is not applicable when a written agreement governs the relationship of the parties. In the present case, the shareholder defendants are not parties to the Asset Purchase Agreement. Plaintiffs' claim that the shareholder defendants participated through their agents, the corporate officers, in perpetrating fraud in the inducement that led them to -7- 02-3252 CIVIL TERM pay almost ten million dollars more than the true financial data showed was the value of the assets of the corporate defendants. As a result, as stockholders of the corporate defendants, they were unjustly enriched by that overpayment. Plaintiffs have pleaded a valid cause of action for unjust enrichment. For the foregoing reasons, the following order is entered. ORDER OF COURT AND NOW, this day of February, 2003, the preliminary objections of defendants to plaintiffs' complaint, ARE DISMISSED. By the Court, Edgar B. Bayley, J. Jack M. Hartman, Esquire For Plaintiffs Jayson R. Wolfgang, Esquire C.W. Flynn, Esquire For the Shareholder Defendants Taylor P. Andrews, Esquire Steven A. Arbittier, Esquire For the Corporate Defendants and Corporate Officers :sal -8-