Northstar Healthcare, Inc. (TSX: NHC) Subsidiary Sued for $2.4 Million in Breach of Contract Claim

Monday, March 15, 2010 General News
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HOUSTON, March 15 Lake Breeze Surgical Affiliates, P.A., one of approximately 100 physician owned entities that are contracted to provide surgical services at Northstar Healthcare Inc.'s (TSX: NHC) subsidiary, Palladium for Surgery - Houston, Ltd. ("Palladium"), has sued Palladium stating that Palladium's management, Northstar, has failed to comply with the terms of its contract with Lake Breeze Surgical Affiliates, P.A.

PLAINTIFF'S ORIGINAL PETITION

TO THE HONORABLE JUDGE OF SAID COURT:

Lake Breeze Surgical Affiliates, P.A., plaintiff in the abovestyled and numbered cause, files this complaint about Defendant, The Palladium for Surgery - Houston, Ltd., a Texas limited partnership.

I. DISCOVERY LEVEL

1. Plaintiff intends to conduct discovery under Rule 190.4 (Level 3) of the Texas Rules of Civil Procedure.

II. PARTIES

2. Plaintiff is a professional association organized and existing under the laws of Texas.

3. Defendant The Palladium for Surgery - Houston, Ltd., a Texas limited partnership and may be served with process and this petition through its registered agent, Kenneth Klein, at its registered office located at 4120 Southwest Freeway, Suite 200, Houston, Harris County, Texas, 77027.

III. REQUESTS FOR DISCLOSURE

4. Pursuant to Rule 194, you are requested to disclose, within 50 days of service of this request, the information or material described in Rule 194.2.

IV. VENUE AND JURISDICTION

5. This matter is within the jurisdictional limits of this Court.

6. Venue is proper in Harris County, Texas because all or a substantial part of the events or omissions giving rise to the claim occurred in Harris County, and the Defendant maintains its principal office within Harris County. Tex. Civ. Prac. & Rem. Code 15.001, 15.002.

V. FACTUAL BACKGROUND

7. Plaintiff's principal, Dr. Roy Lewis, is an otolaryngology ("ENT") surgeon who maintains his practice in the Houston area. During his career, Dr. Lewis has practiced at a number of clinics, including The Palladium for Surgery--Houston ("Palladium"), an ambulatory surgery center ("ASC") in Houston owned and managed by Defendant.

8. ASCs have become popular in recent years, as they provide patients with an alternative to traditional inpatient facilities, such as large hospitals. Indeed, there are approximately 400 ASCs currently operating in Texas alone. Like traditional hospitals, ASCs are licensed and regulated by the state, and provide facilities for a wide variety of surgical procedures. Physicians at Palladium, for example, perform surgeries in fields such as orthopedics, pain management, and ENT. There are approximately 100 such physicians on staff. However, ASCs perform outpatient procedures exclusively, and do not provide overnight care. As a result of Palladium's focus on outpatient treatment, its patients are typically discharged within hours of their surgeries.

9. Dr. Lewis, as principal of Plaintiff, began practicing at Palladium in approximately 2007. Because Plaintiff's practice did not employ staff to handle billing and collection matters, it entered into a contract with Defendant.

10. Under the terms of the Billing Services Agreement, Plaintiff appointed Defendant as its agent and attorney-in-fact to bill for Plaintiff's services and to collect debts owed to it from insurers and/or patients. As part of the Billing Services Agreement, Defendant agreed that it would use its best efforts to collect all surgery fees charged by Plaintiff for Dr. Lewis' work at Defendant's surgical facility.

11. Defendant, however, failed to employ its best efforts to collect on debts owed to Plaintiff. To the contrary, shortly after May 2007, Defendant began engaging in a practice of quickly writing-off debts owed to Plaintiff.

12. Specifically, after Defendant's initial efforts to collect money owed to Plaintiff failed, Defendant refused to escalate its efforts. Often within weeks or even days of Plaintiff's initial invoices being sent, Defendant ceased its collection efforts and instead declared Plaintiff's debts to be uncollectible, thus removing them from the company's balance sheet. These write-offs were made in spite of the fact that in numerous cases, Defendant had received next to no reimbursement from health insurers and/or patients.

13. For example, in 2008, Defendant wrote-off nearly $94,000 of an approximately $97,000 invoice that was barely three months old. Again in 2008, Defendant wrote-off a $73,000 debt that was six weeks old after receiving less than $500. Finally, in 2007, Defendant wrote-off a nearly $70,000 invoice immediately after receiving less than $300 in payment.

14. The aforementioned examples merely reflect a small portion of Plaintiff's invoices that were written-off by Defendant. In the period from June 2007-June 2009, Defendant wrote-off nearly $2.4 million that was owed to Dr. Lewis.

15. Writing-off these debts was to the obvious detriment of Plaintiff, as it was unable to be properly reimbursed for surgeries that Dr. Lewis performed. However, writing-off Plaintiff's debt was highly beneficial to Defendant as the write-offs spared Defendant from certain taxes and made its business appear healthier than it actually was.

VI. CAUSES OF ACTION

First Cause of Action - Breach of Contract

16. Plaintiff repeats and realleges each allegation set forth herein.

17. Plaintiff and Defendant are parties to a Billing Services Agreement.

18. Under the terms of the Billing Services Agreement, Defendant was obligated to use its best efforts to bill and collect debts on Plaintiff's behalf for surgical procedures performed by Dr. Lewis.

19. Plaintiff has performed as required under the terms of the Billing Services Agreement.

20. Defendant, however, failed to use its best efforts to collect debts owed to Plaintiff. Instead, often within days or weeks of sending an initial invoice, Defendant wrote-off Plaintiff's invoices without collecting more than pennies on the dollar.

21. In material breach of the Billing Services Agreement, Defendant wrote-off nearly $2.4 million of Plaintiff's invoices, to the detriment of Plaintiff.

22. As a result of Defendant's breach of contract, the Plaintiff has been damaged in an amount within the jurisdictional limits of this Court for which amount the Plaintiff sues.

Second Cause of Action - Breach of Fiduciary Duty

23. Plaintiff repeats and realleges each allegation set forth herein.

24. Plaintiff and Defendant are parties to the Billing Services Agreement.

25. The Billing Services Agreement establishes Defendant as Plaintiff's agent and attorney-in-fact with respect to billing and collecting for surgical services provided by Plaintiff at Palladium. Defendant is therefore a fiduciary to Plaintiff.

26. On information and belief, in order to make its business appear healthier than it actually was, Defendant deliberately engaged in a practice of writing-off debts that were not repaid immediately.

27. As a result of Defendant's blatant self-dealing, Plaintiff failed to recover nearly $2.4 million that he had invoiced insurers and/or patients for surgical procedures he had performed.

28. On account of the aforementioned actions, Defendant has breached its duties of loyalty, good faith, and care owed to Plaintiff.

29. As a result of Defendant's breach of its fiduciary duties, the Plaintiff has been damaged in an amount within the jurisdictional limits of this Court for which amount the Plaintiff sues.

30. Accordingly, and in addition to his actual damages, the Plaintiff is also entitled to exemplary damages for such breach for which amount the Plaintiff hereby sues.

VII. PRAYER

WHEREFORE, Plaintiff requests that Defendant be cited to appear and answer, and that on final trial, Plaintiff have the following:

(1) All actual and exemplary damages for breach of contract and breach of fiduciary duty.

(2) Cost of suit and attorneys' fees.

(3) Such other and further relief as may be appropriate in the circumstances.

CAUSE NO. 2010-16562 LAKE BREEZE SURGICAL AFFILIATES, P.A., IN THE DISTRICT COURT OF Plaintiff, HARRIS COUNTY, TEXAS v. THE PALLADIUM FOR SURGERY - HOUSTON, LTD., Defendant. 129th JUDICIAL DISTRICT

SOURCE Michael P. Fleming


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