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Pedro Q. Dayrit, M.D. and Shaukat M. Qureshi, M.D v. the Memorial Hospital of Salem

June 5, 2012

PEDRO Q. DAYRIT, M.D. AND SHAUKAT M. QURESHI, M.D., PLAINTIFFS-APPELLANTS,
v.
THE MEMORIAL HOSPITAL OF SALEM, COMMUNITY HEALTH SYSTEMS, INC., GARY D. NEWSOME, AND ANGELA M. MARCHI, DEFENDANTS-RESPONDENTS.



On appeal from the Superior Court of New Jersey, Law Division, Salem County, Docket No. L-79-07.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued: February 16, 2012

Before Judges Axelrad, Sapp-Peterson and Ostrer.

Plaintiffs Drs. Pedro Dayrit and Shaukat Qureshi, former shareholders of the Surgery Center of Salem County, LLC (the Surgery Center), appeal from summary judgment dismissal of their claims against the Memorial Hospital of Salem (the Hospital), a majority shareholder of the Surgery Center, for fraud, negligent misrepresentation, tortious interference with contract and with economic advantage, and breach of the implied covenant of good faith and fair dealing. They challenge the grant of summary judgment and argue the trial court failed to provide a sufficient statement of reasons for its decision as required by Rule 1:7-4. We affirm.

On March 2, 2007, plaintiffs filed suit against the Hospital, Community Health Systems, Inc. (CHS), Gary Newsome, CHS' vice president, and Angela Marchi, the Hospital's CEO, among other parties not pertinent to this appeal. Plaintiffs set forth ten claims relating to the creation and operation of the Surgery Center: injunctive relief (count one), fraud (count two), negligent misrepresentation (count three), conversion (count four), tortious interference with contract (count five), tortious interference with economic advantage (count six), breach of fiduciary duty (count seven), breach of the implied covenant of good faith and fair dealing (count eight), unjust enrichment (count nine), and unfair business practices (count ten). With leave of court, plaintiffs filed an amended verified complaint in May 2008, adding a claim for punitive damages (count eleven).

On or about June 18, 2009, defendants Hospital, Newsome and Marchi moved for summary judgment on all eleven counts. On the same day, defendant CHS filed a separate motion for summary judgment on the additional basis that it was not subject to personal jurisdiction in the State of New Jersey. Oral argument was conducted before Judge David W. Morgan in November 2009. The judge issued an oral opinion on the record on July 29, 2010, granting defendants' motions for summary judgment and dismissing all counts of plaintiffs' complaint with prejudice, memorialized in orders of the same date.

Plaintiffs filed a notice of appeal and case information statement, referencing only the order pertaining to the Hospital, Newsome and Marchi.*fn1 Plaintiffs seek reversal of the order granting summary judgment as to count two (fraud), count three (negligent misrepresentation), count five (tortious interference with contract), count six (tortious interference with economic advantage), count eight (breach of the implied covenant of good faith and fair dealing), and count eleven (punitive damages).

I.

Dr. Dayrit is a gastroenterologist and Dr. Qureshi is a urologist; both are Board Certified. On March 4, 1997, plaintiffs, defendant Hospital, and other individuals executed an Operating Agreement, creating the Surgery Center and setting forth the rights and responsibilities of the owners, as well as the rules governing the Surgery Center's management. The Surgery Center was a joint venture between the Hospital, owning fifty percent, and five physicians, including plaintiffs, each owning ten percent for a combined physical ownership share of fifty percent. Pursuant to Section 5.1.5. of the Operating Agreement, the Surgery Center directors, including plaintiffs, voted to hire Dr. Thomas Mitros as its administrator in 2002. Dr. Mitros resigned on or about July 31, 2005.

On October 29, 2003, the Hospital proposed an amendment to the Operating Agreement that would reduce each physician's ownership from ten percent to four percent, and increase the Hospital's ownership to eighty percent. Dr. Dayrit testified in his deposition that the reason the physicians wanted to give the Hospital the majority ownership was because the Surgery Center's $2 million loan was appearing on the individual physician members' credit reports and made it difficult for one doctor to obtain a loan. The record also demonstrates from a 2002 board meeting that the Hospital had been interested in increasing its share of equity in the Surgery Center because "equity redistribution [would] enable the facility to more effectively access CHS resources and contracts" and "adding the facility's volume into the Hospital utilization reports will minimize financial considerations and facilitate choice of location for procedures based solely on appropriate patient care."

Dr. Dayrit and Dr. Qureshi testified that the Hospital paid them $60,000 each for sixty percent of their shares. Plaintiffs had originally invested $29,000, so at that point they had a net positive cash flow of $31,000. In November 2003, the Hospital and the physician members of the board entered into the Amended Operating Agreement. The amendment, in compliance with federal regulations, also required the individual physician members to certify annually that they derive one-third of their income from performing outpatient surgical procedures and perform one-third of their outpatient surgical procedures at the Surgery Center.

Dr. Qureshi testified at his deposition that until 2002, he performed approximately 100 surgeries per year at the Surgery Center. In 2003, the number of cases he performed at the Surgery center was cut by more than half. According to a valuation report, Dr. Qureshi performed ninety surgeries in 2002, forty-one surgeries in 2003, and none in 2004 and 2005. The reason for his reduction is disputed. According to Dr. Qureshi, his surgeries were decreased because Dr. Mitros "started canceling [his] cases." Dr. Qureshi believed "it was an organized attempt to try to run down the Surgery Center to devalue it and then eventually buy it." Dr. Qureshi, however, did not keep a written record of the cancellations. Also in 2003, Dr. Qureshi was ill as he began to suffer the effects of renal failure, and in October 2007 he had a kidney transplant. He testified in depositions that due to his tiredness and fatigue, he reduced the number of hours he worked, stopped taking emergency calls, and stopped doing major surgeries. On April 25, 2005, the Hospital, as majority shareholder of the Surgery Center, notified Dr. Qureshi that he failed to maintain his Class A member status, because he had not performed the requisite number of surgeries as required by the Amended Operating Agreement. Accordingly, Dr. Qureshi's Class A member status was terminated in December 2006.

From 1999 to 2003, Dr. Dayrit performed the highest number of surgical procedures at the Surgery Center. In 2004, he performed the second highest number of surgeries, next to Dr. Mitros. In 2005, the number of surgeries Dr. Dayrit performed dropped from 957 to 459. Dr. Dayrit stated in depositions he believed the drop in volume of his surgeries was because of a "hostile atmosphere" when he stopped using Dr. Mitros as his anesthesiologist and began sedating his own patients. According to Dr. Dayrit, the nurses sympathized with Dr. Mitros, threatened to boycott working with Dr. Dayrit, and one nurse told him he was not her boss. Dr. Dayrit also testified it was difficult to increase the volume of his surgeries because there were "no nurses" at the Surgery Center and on one occasion, he had to perform a surgery in the Hospital on short notice.

In April 2005, pursuant to allegations received by the Surgery Center, an internal audit was performed there. The auditor found no major problems except for unexplained expenditures for food, limousine rides for patients, some payments that did not appear to be in compliance with the contract, and some payments to other physicians that were not well documented.

In September 2005, at the request of Dr. Dayrit, the Surgery Center's procedure for handling narcotics and medications was audited for compliance purposes. The internal audit found there were no serious or reportable problems regarding the Surgery Center's handling of drugs and medications, although it did find some practices that needed improvement. A memorandum by Marchi informed the physician owners that the controlled substances audit had been performed and "[a]ppropriate modifications were immediately put in place and ongoing audits will be in place to assure compliance." Dr. Dayrit testified in depositions he was satisfied the end result of the medical audit was that the "laxities" which concerned him were "fixed."

At an undisclosed time the Surgery Center was closed. Newsome testified in depositions that he made the final determination to close it as "volumes had deteriorated, and it was not a viable center from a quality patient satisfaction or financial respect."

In their lawsuit, plaintiffs alleged that from June through August 2005, they began to question the financial record-keeping of defendants as well as the existence of any audits performed since the inception of the Amended Operating Agreement but were "rebuffed and ignored" until they received Marchi's brief response on September 13, 2005. They further alleged they also questioned the existence and validity of subsequent audits but their requests were also "rebuffed and ignored"; they received only another brief response from Marchi dated September 15, 2005. On October 24, 2005, Dr. Dayrit wrote to Marchi as a "formal request" for copies of the financial and drug audits. Marchi scheduled a meeting for November 7, 2005 with plaintiffs and interested parties to review the audits. However, the meeting was cancelled when Dr. Dayrit did not arrive on time.

According to plaintiffs' complaint, defendants "conspired to illegally and improperly block [them] from receiving access to the information requested in order to unfairly keep plaintiffs from realizing that defendants were devaluing [t]he Surgery Center through intentional acts in an attempt to unjustly enrich themselves." As to count two, fraud, and count three, negligent misrepresentation, they alleged defendants represented to them that they would be given updated financial statements, copies of audits and other documents related to and required by the Operating Agreement and that the managers and operators of the Surgery Center, including Dr. Mitros, would perform in a proper manner. Plaintiffs ...


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