Health Law Daily Relator overcomes challenge to dispute over breach of settlement agreement
Monday, March 4, 2019

Relator overcomes challenge to dispute over breach of settlement agreement

By Sheryl Allenson, J.D.

The relator in a previously settled False Claims Act case successfully alleged that the owners of the settling medical practice never intended to follow through on payment after they dissolved the practice and established new corporate entities.

A doctor overcame a motion to dismiss on her claims that the owners of the former Family Medicine Centers of South Carolina (FMC) fraudulently induced her to enter a settlement agreement that they had no intention of executing, tortiously interfered with the settlement agreement, and engaged in a civil conspiracy to avoid payment (Schaefer v. Family Medicine Centers of South Carolina, February 27, 2019, Seymour, M).

False claims suit. In 2014, the doctor filed a qui tam action under the False Claims Act (FCA) (31 U.S.C. §3729 et seq.) alleging that she personally witnessed FMC’s scheme to defraud the government by submitting false claims to Medicare, that physician compensation at FMC was directly attributable to the volume and value of referrals in violation of the Stark Law (42 U.S.C. §1395nn), and that she was wrongfully terminated once she objected to these practices. The U.S. intervened, and the parties eventually settled. Pursuant to the settlement agreement, FMC would pay more than $1.5 million to the government over a five-year term, and the physician would receive a portion of these payments due to her whistleblower status.

Insolvency. Notwithstanding its representations that it was solvent and would remain solvent during the term of the settlement payments, after about 10 months FMC claimed it was no longer solvent and could no longer make the settlement payments. The doctor alleged that soon after the settlement was reached, the owners wound up the practice. One of the FMC doctors created a new LLC under which the medical practice operated, FMC was closed, and patients were directed to see their former FMC doctors at their new practices. After the execution of the settlement agreement, two of FMC’s owners created a number of LLCs which owned the real estate from which their practices operated. The doctor asserted claims for fraud in the inducement relating to FMC and two of the owner physicians, tortious interference with the settlement agreement contract, and civil conspiracy. The other physicians moved to dismiss.

Adequacy of pleadings. After analyzing the elements necessary to sustain a fraud in the inducement claim, the court found that the doctor adequately pleaded allegations necessary to sustain the claim. The court rejected the defendants’ position that dismissal was warranted because FMC’s representations constituted "mere promises" and that fraudulent representation is not actionable unless it relates to "existing or past facts." The doctor disputed that position, citing caselaw highlighting the position that where a defendant has no intention of keeping the agreement, a claim for fraudulent inducement can stand. The court found that the doctor properly alleged that a general plan existed at the time the agreement was executed, and that FMC’s representation of timely payments and solvency were made to further the plan.

With respect to the doctor’s tortious interference claim, the court rejected one physician’s claim that he was not liable in light of his retirement from the practice of medicine. The court noted that the doctor’s allegations support an inference that closing FMC "directly resulted in FMC defaulting under the Settlement Agreement." In relation to the other physician owner, the court found that another settlement agreement only covered certain covered conduct, which did not include the claims advanced in the lawsuit. Accordingly, the court found that the doctor properly alleged a cause of action for fraud in the inducement.

Finally, the court found that the doctor properly pleaded special damages, rejecting all of the owner physicians’ claims that her civil conspiracy count should be dismissed. In its analysis, the court found that although the conspiracy allegations are "factually thin," and independently probably insufficient to satisfy notice pleading standards, the remainder of the complaint’s allegations that are incorporated by reference into the claim describe in "sufficient detail" allegations to support the civil conspiracy claim against all of the owner physicians. As such, the court denied the motion to dismiss.

The case is C/A No. 3:18-cv-02775-MBS.

Attorneys: Christopher P. Kenney (Richard A. Harpootlian PA) for Catherine A. Schaefer. Mark Brandon Goddard, Jr. (Turner Padget Graham & Laney, PA) for Family Medicine Centers of South Carolina LLC, Springwood Lake Primary Care LLC, Springwood Lake Building LLC and Southeast Professional Plaza LLC.

Companies: Family Medicine Centers of South Carolina LLC; Springwood Lake Primary Care LLC; Springwood Lake Building LLC; Southeast Professional Plaza LLC.

MainStory: TopStory CMSNews FCANews FraudNews ProgramIntegrityNews QuiTamNews StarkNews

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