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KTM Health Care Inc. v. SG Nursing Home LLC

Court of Appeals of Utah

August 16, 2018

KTM Health Care Inc., Appellee and Cross-appellant,
v.
SG Nursing Home LLC dba Kolob Care & Rehabilitation of St. George, and Apex Healthcare Solutions LLC, Appellants and Cross-appellees.

          Fifth District Court, St. George Department The Honorable Jeffrey C. Wilcox No. 100503405

          Gary R. Guelker and Janet I. Jenson, Attorneys for Appellants and Cross-appellees

          Justin D. Heideman and Justin R. Elswick, Attorneys for Appellee and Cross-appellant

          Judge Ryan M. Harris authored this Opinion, in which Judges Gregory K. Orme and David N. Mortensen concurred.

          OPINION

          HARRIS, JUDGE.

         ¶1 KTM Health Care, Inc. (Pharmacy) and SG Nursing Home LLC dba Kolob Care & Rehabilitation of St. George (Nursing Home) entered into a written agreement for Pharmacy to become Nursing Home's exclusive provider of all pharmacy-related products and services. Soon after signing the contract, however, Nursing Home attempted to cancel its agreement with Pharmacy, apparently realizing that it was still contractually committed to a different provider. Pharmacy then sued Nursing Home, asserting claims for breach of contract as well as various fraud-related causes of action. Nursing Home defended the case, in part, by arguing that the parties had been mutually mistaken about Nursing Home's ability to terminate its contract with its existing provider, and asserting that the parties had therefore never actually entered into an enforceable contract. Prior to trial, on Nursing Home's motion, the court determined that Pharmacy chose to "elect" its breach of contract remedies and that it would not be permitted to further pursue its fraud-based remedies.

         ¶2 The case proceeded to trial, and a jury determined that Nursing Home breached the contract and that Pharmacy was entitled to over $143, 000 in damages, plus attorney fees, even though the jury instructions made no mention of attorney fees. However, the jury also determined that the parties had, in fact, been mutually mistaken about the terms of Nursing Home's contract with its previous provider. Believing that the jury's answers to the questions on the special verdict form were inconsistent, the trial court resubmitted the case to the jury. After briefly re-deliberating, the jury affirmed its breach finding, but changed its mutual mistake finding. It also amended its damages award by increasing the amount of consequential damages while eliminating any mention of attorney fees. Following trial, the court refused to award Pharmacy any prejudgment interest.

         ¶3 Both parties appeal. Nursing Home asserts that the trial court erred in resubmitting the case to the jury. Pharmacy asserts that the trial court erred by excluding one of its expert witnesses, by dismissing its fraud-based claims prior to trial, and by failing to award prejudgment interest. We affirm in part, reverse in part, vacate the trial court's judgment, and remand the case for the limited purpose of entering judgment in favor of Pharmacy on its breach of contract claim in an amount consistent with the jury's original damages award (less attorney fees).

         BACKGROUND

         ¶4 In August 2009, Adam Katschke and a business partner formed Pharmacy. Pharmacy began as an "open-door" pharmacy, which is a "typical retail community pharmacy" that is open to the public. After operating as an open-door pharmacy for several months, Katschke and his business partner decided that they wanted to grow their business, and in 2010 started contacting various entities in southern Utah with the goal of becoming a "closed-door" pharmacy. A "closed-door" pharmacy typically is not open to the public but, instead, serves as a dedicated pharmacy for one or more entities such as long-term care facilities, nursing homes, or assisted living centers.

         ¶5 One of the entities that Pharmacy contacted was Nursing Home, a facility that billed itself as "the largest skilled nursing facility in Southern Utah." When Pharmacy initially contacted Nursing Home about becoming its pharmacy, Nursing Home already had an existing agreement with a different provider, but was considering a change due to "service issues" it was experiencing with that provider.

         ¶6 In March 2010, Katschke met with a representative (Manager) of Apex Healthcare Solutions, LLC, the company that owned Nursing Home and had supervisory authority over its employees. During the meeting, Manager indicated to Katschke that Nursing Home was interested in utilizing Pharmacy's services, but that Katschke had to be the specific pharmacist assigned to the account; no one else would do. Katschke indicated that he would be willing to make arrangements to serve as the face of Pharmacy in its relationship with Nursing Home, and to personally work with Nursing Home during the contemplated closed-door contract. Although they had apparently come close to agreement on material terms, Nursing Home and Pharmacy did not sign a contract at that meeting. According to Katschke, Nursing Home wanted Pharmacy "to go write it up and give [Nursing Home] some proofs" of a proposed contract.

         ¶7 After meeting with Katschke, Manager contacted Nursing Home's existing provider to determine whether it could terminate its contract. After that conversation, Manager "was under the impression that [Nursing Home was] on a month-to-month contract" with its existing provider, and that Nursing Home would be able to terminate its contract and transition to a different provider as early as June 28, 2010. However, Nursing Home did not terminate its contract at that time. And Katschke, for his part, was unaware of the terms of Nursing Home's contract with its other provider.

         ¶8 Katschke also owned and operated another pharmacy in Nevada (Nevada Pharmacy), and Katschke was the sole pharmacist staffing that pharmacy. To honor Nursing Home's request that he be the face of Pharmacy for any relationship with Nursing Home, Katschke determined that Nevada Pharmacy would need to hire another pharmacist to operate it. Soon after the March 2010 meeting, believing that a contractual relationship with Nursing Home was imminent, Nevada Pharmacy made that hire, and agreed to retain a second pharmacist for a 36-month term beginning on May 1, 2010, at a rate of $45 per hour for a 40-hour week plus various benefits.

         ¶9 Meanwhile, Katschke began to renovate Pharmacy in order to come into compliance with regulations governing closed-door pharmacies. This involved adding shelving, countertops, pharmacy software, an alarm system, and a refrigerator. Pharmacy completed these improvements in April 2010, and incurred over $33, 000 in expenses in doing so.

         ¶10 On May 25, 2010, after some additional negotiations, Katschke and Manager-on behalf of their respective entities- signed a contract where under Pharmacy would become Nursing Home's exclusive closed-door pharmacy beginning on June 28, 2010 and continuing for an initial one-year term. The agreement contained a provision allowing for automatic renewal of the agreement for additional one-year periods unless, at least ninety days prior to the expiration of the current contractual term, either party provided the other with written notice of its intent not to renew.

         ¶11 That same day, after the contract had been signed, Nursing Home's administrator (Administrator) contacted the existing provider to let it know that Nursing Home was "going in a different direction." The provider responded by expressing its view that Nursing Home did not have the right to cancel the contract. Administrator informed Katschke of the issue in an email, but initially downplayed it, stating that he thought he could "get this resolved within a day or two."

         ¶12 Several days later, on June 7, however, Administrator sent another email to Katschke informing him that "apparently we are not going to be able to get out of" the contract with the other provider "until the end of October [2010]," despite just having signed a contract with Pharmacy. Administrator further explained that "[w]e . . . would like to do business with you but right now it looks like we don't have a choice other than to take a step back, at least for a while."

         ¶13 Later that month, after apparently making the determination that it was bound by its contract with the other provider, Nursing Home made the decision to renew its contract with that provider. The renewed contract was set to commence on July 1, 2010, just three days after its contract with Pharmacy was set to commence, and was renewable in one-year terms thereafter. Administrator gave Katschke the bad news on July 11, 2010, via email: "[W]e have decided to stick with [the other provider] for at least another year." Administrator's email did not mention Nursing Home's contract with Pharmacy.

         ¶14 Later that year, in October 2010, Pharmacy sued Nursing Home for (among other claims) breach of contract, fraud in the inducement, constructive fraud, intentional misrepresentation, and negligent misrepresentation.

         ¶15 As the case proceeded to trial, Pharmacy informed the court and Nursing Home of its intention to call a pharmacist (Pharmacy Expert) as an expert witness. Pharmacy Expert had experience dealing with closed-door pharmacies, and Pharmacy wanted him to testify about "the number of years for which [Pharmacy] can recover damages" for lost profits. Pharmacy Expert's proposed testimony included the opinion that the parties likely would have renewed the contract for at least six years. Nursing Home moved to exclude that testimony, arguing that Pharmacy Expert's analysis was unhelpful and unreliable. The trial court granted Nursing Home's motion, reasoning that "there are not sufficient facts in this case to support the proposed testimony" that Nursing Home "would have renewed its pharmacy provider agreement with [Pharmacy] for at least six years had [Nursing Home] begun using [Pharmacy] for its pharmaceutical needs in 2010." Therefore, the trial court determined that Pharmacy Expert's proposed testimony should be excluded because it would not be helpful to the jury.

         ¶16 Also prior to trial, Nursing Home asked the trial court to force Pharmacy to "elect its remedy," arguing that Pharmacy "is seeking to recover two categories of damages that are wholly contradictory to one another." Nursing Home argued that "there must be an election of remedies in cases involving contracts and deceitful inducement because the recovery of both lost profits and reliance damages constitutes a double recovery." The trial court agreed with Nursing Home, determining that Pharmacy "has chosen to affirm its contract with [Nursing Home] and has elected money damages as the remedy for [Nursing Home's] alleged breach of that contract." From that premise, the court concluded that "the doctrine of election of remedies and the economic loss rule preclude [Pharmacy] from pursuing its tort claims against [Nursing Home] for fraud in the inducement, constructive fraud, intentional misrepresentation[, ] and negligent misrepresentation."

         ¶17 The case then proceeded to jury trial on Pharmacy's claim for breach of contract. Pharmacy did not call a damages expert, choosing instead to rely on Katschke's testimony regarding damages. Katschke initially testified that Pharmacy would have realized $401, 280 in profit during the first year of its contractual relationship with Nursing Home. Katschke arrived at that figure by starting with the pricing terms of the contract, making certain assumptions about the number of patients and other variables, and computing a one-year profit estimate. On cross-examination, Katschke acknowledged that his figure did not include certain additional overhead costs, which he estimated to be approximately $43, 000. In the end, then, Katschke testified that Pharmacy sustained approximately $358, 000 in lost profits during the relevant one-year period.

         ¶18 Nursing Home countered that testimony with a damages expert (Damages Expert), who was employed as a financial analyst for Nursing Home's existing provider's parent company, which Damages Expert characterized as the "largest long-term care or closed-door pharmacy operator in the country." Damages expert offered his opinion that, not only did Pharmacy not sustain any lost profits, Pharmacy would have lost over $127, 000 had it been Nursing Home's exclusive provider of pharmacy services for the one-year term of the contract. Damages Expert based his calculation on an analysis of the revenues received and expenses incurred during the year in question by Nursing Home's existing provider, and then adjusting that analysis based on various perceived differences between Pharmacy and the existing provider. On cross-examination, Pharmacy's counsel called into question several of the assumptions that Damages Expert made during his analysis.

         ¶19 At the conclusion of the trial, Pharmacy argued to the jury that Nursing Home breached the contract by deciding "to stick with [the other provider] for at least another year." Nursing Home, in contrast, argued that it was mistaken about its ability to terminate its contract with its other provider, and therefore the affirmative defense of mutual mistake applied.

         ¶20 Upon completion of closing arguments, the trial court submitted a special verdict form to the jury that contained a series of questions. The verdict form was nine pages long and quite complex, and after some of the questions it instructed the jury to proceed in one fashion if its answer was "yes," but to proceed in a different fashion if its answer was "no." In particular, after the question about mutual mistake, the verdict form stated as follows: "If you answered 'yes' [that mutual mistake existed], please proceed to the next question." After the next question, the jury was instructed, regardless of the answer, to "[p]roceed to" the question "on the following page" and to complete the remainder of the verdict form. The instructions did not inform the jury that, if it found the existence of a mutual mistake, the parties' contract may be considered unenforceable.[1]

         ¶21 After deliberation, the jury found that Nursing Home entered into and breached a contract with Pharmacy. However, the jury also found that Nursing Home's "ability to terminate its contract with [the other provider] was a basic assumption or an important fact, upon which both" parties based their contract, and that, at the time the contract was formed, both Pharmacy and Nursing Home "were mistaken regarding [Nursing Home's] ability to terminate its contract" with the other provider. In addition, the jury found that Pharmacy sustained $143, 989[2] in "Lost Profits," but that Pharmacy did not sustain any amount of "Consequential Damages." After a line entitled, "Total Damage Award," the jury wrote the phrase "$143, 989 plus attorney fees."

         ¶22 After reviewing the special verdict form in open court, the trial court determined that "there are inconsistencies here." The court explained to the jury:

An affirmative defense to the breach of contract is mutual mistake, and you found that there was [a] mutual mistake. If there was a mutual mistake made, then there was no contract. It never formed, and so you couldn't award damages. And rather than have this go up on appeal with that instruction, I would like you to go back and consider if, in fact, you found by clear and convincing evidence that there was [a] mutual mistake . . ., then you can't find a contract and find damages.

         ¶23 The court then referenced the jury's hand-written award of "attorney fees," and made the following statement to the still-empaneled jury:

As a matter of fact, the only time attorney[] fees can be awarded is if it's in the contract or if there's a statute. There was no statute that would be involved, and if you read-and I'm sure that you did-the contract did not have an attorney[] fees clause. If there had been one, we would have been arguing about it and about the amount. And since it's not, your suggestion here plus attorney[] fees is also [-] I guess as a matter of law I can't do that.

         ¶24 The court then resubmitted the case to the jury. The court did not restrict the number of questions the jury could reconsider; rather, the court simply gave the jury another complete copy of the special verdict form, along with the "old one to review," and sent the jury back into the jury room. After re-deliberation, the jury reaffirmed its finding that Pharmacy and Nursing Home entered into a contract and that Nursing Home had breached that contract. However, the jury changed its prior finding of mutual mistake, this time answering "no" to the question of whether Nursing Home's "ability to terminate its contract with [the other provider] was a basic assumption, or an important fact, upon which both" parties based their contract. The jury also amended its damages award. The jury again found that Pharmacy suffered "Lost Profits" of $143, 989, but this time-after the court informed it that attorney fees were not recoverable-found that Pharmacy had also suffered "Consequential Damages" of $120, 000. The second damages verdict contained no mention of attorney fees. After it returned the second verdict form, the jury was discharged.

         ¶25 After trial, Pharmacy submitted a proposed judgment calculating its total damages as $603, 980.60, apparently arriving at that figure after taking the jury's award and adding interest at a rate of 1.5% per month, pursuant to a term of the contract. Nursing Home objected to the proposed judgment, arguing that Pharmacy's proposed judgment was "based on an improper prejudgment interest rate." Specifically, Nursing Home asserted that the contract's rate of 1.5% per month applied only to penalties on "unpaid balances" and "invoices" and did not apply to the jury's damages award because Pharmacy "never actually provided any drugs or medical supplies to [Nursing Home's] patients." Nursing Home also argued that if prejudgment interest were appropriate, it should be calculated at 10% per annum. The trial court, however, determined that an award of prejudgment interest was inappropriate, no matter the rate, because the jury could not have reached its judgment amount using "fixed standards of valuation," and must instead have reached its verdict based on "its best judgment."

         ISSUES AND STANDARDS OF REVIEW

         ¶26 Both parties appeal, and together raise four issues for our review. Nursing Home raises one issue in its appeal, and Pharmacy raises three issues in its cross-appeal.

         ¶27 Nursing Home argues that the trial court should not have resubmitted the case to the jury after reviewing the jury's first special verdict form. As we explain below, infra ¶ 46, we review this issue for abuse of discretion.[3]

         ¶28 In its cross-appeal, Pharmacy first argues that the trial court should have allowed Pharmacy Expert to testify. "We review a district court's decision to admit or exclude expert witness testimony for an abuse of discretion and will not reverse that decision unless it exceeds the limits of reasonability." Conocophillips Co. v. Utah Dep't of Transp., 2017 UT App 68, ¶ 12, 397 P.3d 772.

         ¶29 Pharmacy next argues that "[t]he trial court erred in determining that the economic loss rule and doctrine of election of remedies required dismissal of [Pharmacy's] fraud-based claims." "The availability of a remedy is a legal conclusion that we review for correctness." Ockey v. Lehmer, 2008 UT 37, ¶ 42, 189 P.3d 51.

         ¶30 Finally, Pharmacy argues that the trial court erred by determining that Pharmacy was not entitled to prejudgment interest. A trial court's decision regarding prejudgment interest is a question of law that we review for correctness. ...


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