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Smith v. Selma Community Hospital

September 1, 2010


APPEAL from a judgment of the Superior Court of Fresno County. Mark Wood Snauffer, Judge. (Super. Ct. No. 05CECG02293).

The opinion of the court was delivered by: Dawson, J.



The governing board of Selma Community Hospital (also SCH) terminated the hospital privileges of Brenton R. Smith, M.D., and Smith filed a petition for writ of mandamus seeking to have his hospital privileges reinstated. Smith prevailed in the writ proceeding and also won when the hospital appealed. (Smith v. Selma Community Hospital (2008) 164 Cal.App.4th 1478 [superior court's issuance of writ affirmed].) After the appeal, Smith filed a motion for attorney fees pursuant to Business and Professions Code section 809.9.*fn1 The trial court denied the motion, and Smith appealed.

Section 809.9 provides that the court shall award attorney fees "to a substantially prevailing party" in a peer review lawsuit "if the other party's conduct in bringing, defending, or litigating the suit was frivolous, unreasonable, without foundation, or in bad faith." The parties disagree on (1) the interpretation of section 809.9, (2) the proper application of the opinion in Mir v. Charter Suburban Hospital (1994) 27 Cal.App.4th 1471 (Mir), (3) the evidence that is relevant to the determination of bad faith, and (4) whether this court can determine as a matter of law that the hospital's conduct meets one of the four grounds stated in section 809.9.

We conclude that (1) when the conditions contained in section 809.9 are shown, the prevailing party is entitled to attorney fees--that is, the award of fees is not discretionary; (2) the statutory phrase "frivolous, unreasonable, without foundation, or in bad faith" sets forth separate grounds for an award of attorney fees; (3) the terms "frivolous," "unreasonable," and "without foundation" are objective standards that might overlap; (4) the term "bad faith" is a subjective standard concerned with a defendant's motives for defending or litigating a lawsuit; (5) because a defendant's subjective state of mind is usually proven by circumstantial evidence, a defendant's prelitigation conduct and postlitigation conduct are relevant evidence from which inferences can be drawn regarding its motives in defending or litigating a lawsuit; and (6) this matter will be remanded so the legal standard for bad faith adopted in this opinion can be applied to the evidence relevant to that determination.


A fundamental issue in this appeal is the motivation for the conduct of SCH and its affiliates toward Smith. Because motive, which is one aspect of state of mind, usually is shown by circumstantial evidence, we will describe in detail the circumstances of Smith's relationship with SCH and its affiliates.*fn2

Smith is a licensed physician with certified specialties in family practice and emergency room medicine. He moved to Fresno County in 1983 and grew his practice until his corporation owned 12 clinics in the Central Valley. Smith's clinics compete with clinics owned by Adventist Health System/West in the same area.

In the 1980's, Smith became a member of the medical staffs of three hospitals, which are now named Selma Community Hospital, Hanford Community Medical Center, and Central Valley General Hospital.

Smith's conflicts with the parent and affiliates of SCH*fn3 appear to have begun in October 1999 when Smith planned to open a birthing center in Hanford, California that would have competed directly with the Hanford hospitals. Around that time, Darwin Remboldt (who Smith believed was the chief executive officer of Central Valley General Hospital and an attorney) summoned Smith to a meeting at Remboldt's offices. At that meeting, according to Smith, Remboldt was blunt:

"Mr. Remboldt informed me that he was not going to allow me to build the birthing center. Mr. Remboldt said to me: 'Either you become a physician in Kings Health [a Medical Group run by one of (the Hanford) hospitals] or we are going to run you out of town.'"*fn4

Then, in mid-2000, a representative of the Hanford hospitals approached Smith with an offer to purchase his practice, which Smith declined. After Smith declined the offer, SCH instituted proceedings to terminate his hospital privileges, claiming Smith had an altercation with a nurse in front of a patient and the patient's family in April 2000. Smith's attorney sent a private investigator to interview the patient and her family, interviews which had not been conducted by SCH. Smith and his attorney submitted the witness statements to SCH and the hospital withdrew the claim and agreed to purge Smith's credential/privilege file of all documents related to the matter.

In late 2001, Remboldt approached Smith again about purchasing his practice. By March 2002, Smith and Central Valley General Hospital had entered into a letter of intent for the hospital's purchase of Smith's practice and clinics for $8 million. Among other things, the letter of intent provided that Smith would be paid for managing the clinics and consulting with the Hanford hospitals after the purchase and that he could not compete with them.

During the due diligence period specified in the letter of intent, Central Valley General Hospital became concerned with alleged billing irregularities at Smith's clinics. About this time (late March 2002), a subcommittee of the medical executive committee of the Hanford hospitals convened and was charged with investigating a series of complaints against Smith. The complaints included allegations of unprofessional conduct, disruptive behavior, abuse of staff, falsification of medical records, and substandard patient care. Smith contends these charges were pursued to gain leverage in the purchase of his clinics and thereby eliminate him as a competitor.*fn5

On May 31, 2002, Smith met with representatives of Adventist Health about the sale. They demanded changes in the terms of purchase to make them significantly more favorable to Central Valley General Hospital, including the elimination of payments to Smith for management and consulting services and prohibiting Smith from practicing medicine in Fresno and Kings Counties. Smith rejected the offer.

Immediately after the meeting, Adventist Health terminated contracts with Smith for the provision of emergency room and clinic services, which represented over $1 million in revenue to his practice, and a management agreement. Adventist Health also accused Smith of systematic billing fraud.

Also near the time of the meeting, Adventist Health sent Smith a letter accusing him of using foul language in speaking to a nurse in front of a patient. As he did in response to SCH's accusation in mid-2000, Smith hired an investigator who interviewed the patient who stated the alleged incident never happened. Like the mid-2000 accusation, the hospital had not interviewed the patient about the alleged incident.

On June 26, 2002, Smith attended a meeting with representatives of Adventist Health and its lawyers. They offered to purchase Smith's practice on the same terms presented to Smith about a month earlier and told him the terms were not negotiable. Again, Smith rejected the offer.

On July 2, 2002, before the discussions concerning the sale of Smith's clinics were terminated,*fn6 the Hanford hospitals orally informed Smith that his privileges had been suspended and he had been granted temporary privileges until July 9, 2002.

On Friday, July 5, 2002, Smith met with Remboldt about the sale of Smith's clinics. Remboldt mentioned Smith's retirement, his financial security, recognition of Smith's contributions to the community, the placement of a plaque to Smith in the nursery of a planned new birthing hospital, job security for Smith's employees, and the continued operation of the clinics he started. Remboldt also told Smith that Adventist Health had set aside $5 to 7 million to complete the acquisition of his practice. Remboldt told Smith they needed to wrap up the sale and emphasized the need for Smith to call Adventist Health's representative before the close of business on July 8, 2002, which was the day before the decision was to be made about extending Smith's privileges. Remboldt told Smith the offer to acquire his practice essentially was a take it or leave it, nonnegotiable offer that would expire on Monday, July 8, 2002.

Smith left the meeting with the belief that the purpose of the meeting had been to force him to sell his practice on the terms offered or face the loss of his privileges. Smith did not intend to sell on those terms and, fearing the loss of his privileges and practice, he instructed his attorney to seek a temporary restraining order.

On July 8, 2002, Smith filed in Kings County a verified complaint for preliminary and permanent injunctive relief that requested the Hanford hospitals be enjoined from terminating or suspending his privileges unless they first afforded him fair procedure rights in accordance with section 809 et seq.

On July 9, 2002, the parties stipulated in open court that, in lieu of obtaining a ruling from the superior court on the merits of the temporary restraining order requested by Smith, the superior court would enter the following order: "The [Hanford] hospital[s] will do nothing to revoke, suspend or modify Dr. Smith's staff privileges prior to September 30, 2002, unless such modification, revocation or suspension is in full compliance with ... Section 809, et seq."

After the court hearing, Smith received a letter from the Hanford hospitals questioning the medical care he provided to a patient who had been discharged in January 2000, approximately two and a half years earlier.

Two days after the stipulation was entered, Central Valley General Hospital sued Smith over the sale of the clinics and sought the return of $250,000 delivered to Smith when the letter of intent was executed.*fn7 (See Central Valley General Hospital v. Smith, supra, 162 Cal.App.4th at p. 510.)

Later in July 2002, Smith attempted to learn the reasons for the allegations regarding his care of the patient discharged in January 2000. His efforts led to a July 30, 2002, telephone conversation between his lawyer and a lawyer representing the medical staff. The declaration of Smith's attorney described the telephone conversation as including a threat:

"Ms. van Hall said to me: 'Dr. Smith should be careful what he asks for in requesting to know the basis of the charges against him.' She said when the [medical executive] committee makes charges those charges will be reportable to the National Practitioner Data Bank even if Dr. Smith thereafter sells his practice and later withdraws his application for reappointment. Ms. van Hall told me that if Dr. Smith sells his practice before the [medical executive] committee provides Dr. Smith with the charges that the charges will not be reportable. It was my impression that the phone call from Ms. van Hall was for the purpose of threatening Dr. Smith that if he did not sell his practice to [Adventist Health], they were going to ruin him by taking away his hospital privileges."

The next day, Smith's attorney had a telephone conference with attorneys and consultants representing Adventist Health. Again, Smith's attorney was informed about the timing of the notice of charges and the related reporting obligation. In addition, Ms. van Hall stated: "If [Smith] waits to sell his practice until after the Ad Hoc committee provides [him] with notice of the charges against him, by law, the hospitals would be obligated to report the proposed disciplinary action to the Medical Board of California."

The referenced ad hoc committee was appointed by the medical executive committee of the consolidated medical staffs of the Hanford hospitals for the purpose of continuing the investigation of Smith.*fn8 A letter dated August 19, 2002, advised Smith that the ad hoc committee had identified a number of concerns, that he could submit a written response and appear for a personal interview, and that he should submit a written plan of correction to address the problems and deficiencies noted in an enclosure.

Smith sought a temporary restraining order to prevent the Hanford hospitals from limiting or restricting his privileges based on the grounds identified in the August 19, 2002, letter. On September 10, 2002, the superior court filed an order denying Smith's application for temporary restraining order. The superior court stated it would not enjoin the peer review process and that there were other remedies for the concerns raised by Smith about the process. Despite its denial of Smith's application, the superior court characterized as "troubling" Central Valley General Hospital's "using the possibility of loss of hospital privileges as a bargaining chip in its efforts to secure favorable terms for the purchase of the licentiate's practice ...."

Also on September 10, 2002, the medical executive committee of the Hanford hospitals voted to summarily suspend Smith's privileges. The incidents relied upon for the summary suspension occurred in August 2002 and involved six patient charts.

Smith notified SCH once he learned of his summary suspension at the Hanford hospitals. On September 12, 2002, Stanley Louie, D.O., the chief of staff of SCH, wrote to both Smith and the chief of staff at the Hanford hospitals to request written information explaining the reasons for the suspension.

Smith responded by letter and included the written opinions of two doctors who had reviewed the six patient charts. The Hanford hospitals did not respond to SCH's request. Based on the information provided and Smith's practice at SCH, Dr. Louie did not believe that Smith posed an imminent danger to patients at SCH and did not feel the need to investigate or take other action at that point. As a result, SCH took no action to limit Smith's privileges at SCH, and Smith moved all of his hospital cases to SCH, delivering about 40 babies a month.

In October 2002, the medical executive committee of the Hanford hospitals reviewed the report of the investigation of Smith and voted to continue his summary suspension and to deny his reappointment. The matter then went before the judicial review committee of the Hanford hospitals. Its formal hearing took place over 10 sessions beginning on April 30, 2003, and ending September 28, 2003.

In May 2003, while the judicial review committee proceeding was pending at the Hanford hospitals, Smith applied for reappointment to the medical staff at SCH because his two-year appointment was scheduled to expire.

Dr. Louie testified that, in accordance with its bylaws, SCH conducted a review when it evaluated Smith's application.*fn9 The June 12, 2003, minutes of SCH's medical executive committee included its recommendation that the credentials committee evaluate Smith's application without information from the Hanford hospitals. As a result, the credentials committee recommended the reappointment of Smith based only on his activity and outcomes at SCH and left open a review of his privileges upon receipt of additional information.

In July 2003, notwithstanding his summary suspension by the Hanford hospitals, SCH notified Smith that the governing board of SCH "ratified the approval of your re-appointment to the Active Medical Staff for the next two year period, ending June 25, 2005."

Meanwhile, the judicial review committee of the Hanford hospitals completed its proceedings. In November 2003, it issued its decision and report on the charges of Smith's substandard patient care, abusive behavior towards patients and staff, and falsification of records, from January 1, 2000, to August 19, 2002.

The decision and report listed 23 of the 34 instances of alleged substandard care as "proven," eight as "proven in part," two as "not proven" and one as "proven, but of minimal importance." Seven out of 26 charges of abusive behavior were listed as not proven. Five charges of falsification of records were listed as proven, two were listed as not proven, two were listed as proven with extenuating circumstances, and one was listed as proven but not serious.*fn10

Based on these findings, the judicial review committee of the Hanford hospitals found that the summary suspension of Smith and the recommendation that he not be reappointed were reasonable and warranted.

In November 2003, Smith provided SCH with a copy of the decision of the judicial review committee of the Hanford hospitals.

In December 2003, Smith notified SCH that he was going to take a 90-day leave of absence from the medical staff of SCH, starting January 1, 2004. Smith took the leave of absence to help with the lawsuit concerning Central Valley General Hospital's failed attempt to purchase his practice.*fn11

Also in December 2003, Smith appealed the decision of the judicial review committee to the appeal board of the Hanford hospitals. Smith's ground for appeal was substantial noncompliance with the procedures required by statute and by the bylaws of the medical staff of the Hanford hospitals. Among other things, Smith asserted that an unbiased panel had not presided over the hearing and that he had not been given an opportunity to present all relevant evidence of the matters charged.

On January 27, 2004, the governing board of Hanford Community Medical Center affirmed the decision of the consolidated judicial review committee of the Hanford hospitals. On February 6, 2004, the governing board of Central Valley General Hospital affirmed the same decision. The written decisions of the governing boards were the final peer review decisions of the Hanford hospitals and both stated they became effective January 28, 2004.

In February 2004, Smith requested reinstatement to SCH's medical staff with his prior privileges. SCH requested and received from Smith a copy of the governing boards' final decisions in the Hanford peer review proceeding. Smith also provided SCH with a copy of a letter from his attorney stating that, within the next month, she anticipated filing a petition for writ of mandamus challenging the final administrative decision of the Hanford hospitals' peer review proceeding.*fn12

On March 15, 2004, Smith met with Darrick Wells, M.D., who had replaced Dr. Louie as chief of staff at SCH. Dr. Wells told Smith that his privileges would be summarily suspended if he did not resign his membership or request an additional leave of nine months. After that meeting, Smith sent Dr. Wells a confirming letter, which stated: "You noted that both you and the MEC [medical executive committee] had received legal advice from both MEC attorney(s) and Hospital attorney(s); that the MEC 'had to' act on the 'final' decision from Hanford and take action."

The letter is consistent with Dr. Winkelman's testimony before SCH's judicial review committee regarding his conversation with Dr. Wells concerning Smith's privileges:

"I was told, very clearly, that hospital counsel or MEC counsel or both, that is the counsel that they--that the MEC was getting advice from, had advised the MEC and Dr. Wells that they were obligated to either suspend Dr. Smith's privileges or in some other manner prevent him from practicing here, because of the liability associated with having him continue to practice, due to the action taken at Central Valley General Hospital. And this followed the discussion of the fact that Dr. Wells was not aware of any adverse events at Selma District Hospital that was calling his privileges into question."

Smith did not resign or request another leave of absence. Consequently, on March 23, 2004, SCH's medical executive committee notified Smith that it had voted to summarily suspend his privileges effective March 27, 2004. Smith sued, challenging the suspension. On April 29, 2004, he obtained a temporary restraining order enjoining SCH from taking any action to suspend, restrict or otherwise impede Smith's staff membership or privileges at SCH.

On May 5, 2004, SCH's medical executive committee met with a representative of SCH's governing board, SCH's director of administration, and Richard Rawson, the president of SCH, who also was president of the Hanford hospitals. The medical executive committee discussed (1) the temporary restraining order, (2) the trial court's view that the information presented was insufficient to demonstrate Smith was a potential threat to patient and staff, and (3) the summons regarding Smith's suit against the hospital for interference with his right to pursue a lawful occupation, intentional interference with prospective business advantage, and unfair competition. SCH's medical executive committee approved making an offer, contingent upon Smith dismissing with prejudice his lawsuit against SCH in its entirety, to (1) rescind Smith's summary suspension; (2) rescind the recommendation to terminate his medical staff membership and clinical privileges; (3) not use the findings in the Hanford hospitals proceedings as the basis for either future corrective action or denial of reappointment to SCH; (4) base future corrective action against Smith on events occurring after May 5, 2004; and (5) submit corrected reports to the California Medical Board and the National Practitioner Data Bank. Smith did not accept the offer, which he characterizes as a blatant attempt to trade hospital privileges for dismissal of his lawsuit--that is, the use of peer review proceedings as a cudgel to force him to dismiss the suit.

On June 4, 2004, SCH's medical executive committee voted to rescind the summary suspension, which was no longer in operation because of the temporary restraining order, and continue with the recommendation to terminate Smith's medical staff membership and clinical privileges. The written notice of charges that SCH's medical executive committee provided to Smith stated that "the MEC determined that your conduct, as finally determined after extensive hearings at the Hanford hospitals, was reasonably likely to be (1) detrimental to patient safety and to the delivering of quality patient care within the hospital, (2) unethical, (3) contrary to the Medical Staff Bylaws and rules and regulations, and (4) below applicable professional standards."*fn13

The written notice also advised Smith of SCH's selection of individuals to serve as SCH's judicial review committee. Smith objected to the four individuals on the ground they had significant economic ties to SCH. The hearing officer, retired Judge Frederic A. Jacobus, subsequently sustained the objections and struck the entire panel. A new judicial review committee was formed with physicians who were associated with the Fresno-Madera Medical Society and were not members of SCH's medical staff.

The judicial review committee held hearings in February and March 2005 in which each side called witnesses. For example, Dr. Wells testified at the hearing that over the prior year or 11 months he had been reviewing every one of Smith's charts and admissions to SCH and "[t]here has been no fallout of medical care of those charts to this point." Dr. Wells also testified that he relied on the final decision of the Hanford hospitals, that he would not dispute the findings, and that he was not concerned about the fairness of the proceeding at the Hanford hospitals.

On March 31, 2005, the judicial review committee issued a written decision in Smith's favor. It specifically found that the medical executive committee had not proven by a preponderance of the evidence that its recommendation was reasonable and warranted. Consequently, the judicial review committee rejected the action proposed by SCH's medical executive committee.

The written decision of the judicial review committee discussed the relationship between SCH and the Hanford hospitals, the close relationship between the two Hanford hospitals that terminated Smith's privileges, the failure of the proposed transaction between Smith and one of the Hanford hospitals for the sale of his practice and 12 clinics, the charges and results of the peer review proceedings at the Hanford hospitals, and SCH's medical executive committee's offer to compromise SCH's peer review proceeding against Smith.

The judicial review committee observed that Smith was reappointed to SCH's medical staff in June 2003 (after his suspension by the Hanford hospitals) and that the retrospective peer review of his work at SCH "apparently did not identify his clinical practices as an 'outlier.'" The judicial review committee noted that the interval examined by SCH before reappointing Smith was the interval when the events occurred that were the basis for the findings of the Hanford hospitals. As to matters occurring after Smith was reappointed to SCH's medical staff in 2003, no outlying outcomes from Smith's practice at SCH were identified in the testimony presented to the judicial review committee.

The judicial review committee's decision included an explanation of its conclusion to reject the recommendation of the medical executive committee:

"We do not believe SCH Medial [sic] Staff through its MEC and attorney has produced evidence to convince us that the action of Selma Adventist Hospital MEC is reasonable or warranted. We believe that SCH must do their own investigation of Dr. Smith, and follow accepted guidelines such as those outlined in the model Medical Staff By-Laws as presented by ... Jack Rötenberg, MD, and California Medical Association. The information from the Hanford hospitals may be used as a part of a reason to monitor Dr. Smith by accepted peer review mechanisms such as case monitoring, proctoring at surgery and a more intensive review of patients admitted to SCH. After doing their own investigation of Dr. Smith's performance at SCH, then the experiences at the Hanford hospitals may be used as additional evidence of his need to be dismissed."

In April 2005, SCH's medical executive committee appealed the decision of the judicial review committee to the governing board of SCH. The governing board exercised its authority under its bylaws to appoint a committee composed of three members of the governing board to sit as the appeal board.

The appeal committee of the governing board issued a written document that included its conclusions that (1) the judicial review committee's noncompliance with the procedures required by the bylaws was prejudicial and (2) the judicial review committee's decision was not supported by substantial evidence. Based on these conclusions, the appeal board ultimately recommended "that the Governing Board of Selma Community Hospital reverse the [judicial review committee] and affirm the MEC's recommendation to terminate Dr. Smith's Medical Staff membership and clinical privileges ...."

SCH's governing board agreed with the recommendation and adopted a resolution, effective July 7, 2005, implementing the medical executive committee's recommendation to terminate the membership and privileges of Smith. On July 25, 2005, Smith filed the petition for writ of mandamus that started the lawsuit involved in this appeal.

In June 2006, the superior court filed a judgment granting a peremptory writ of mandamus. The writ directed SCH to set aside the decision of the appeal board of July 7, 2005, and reinstate the decision of the judicial review committee. (Smith v. Selma Community Hospital, supra, 164 Cal.App.4th at p. 1499.)

On July 12, 2006, SCH filed an appeal. Five days later, it filed a return in the superior court stating it could not comply with the writ because there was no SCH medical staff to which Smith could return. This statement was based on Adventist Health's reorganization of its hospital subsidiaries and their medical staffs, which had occurred the preceding fall. (Smith v. Adventist Health System/West, supra, 182 Cal.App.4th at p. 732.) After that reorganization, the medical staff of the Hanford hospitals and SCH was a single entity.*fn14 (Ibid.)

Within a day or two of filing its return, SCH filed a petition for a writ of supersedeas and a request for an immediate stay with this court. The petition misinterpreted the trial court's decision by asserting it held "that California hospitals may never base termination decisions solely on a physician's substandard medical care and/or inappropriate behavior at another facility, no matter how egregious."*fn15 In August 2006, this court denied the petition for a writ, stating that (1) a party seeking a writ must convincingly show that substantial questions will be raised on appeal and must demonstrate it would suffer irreparable harm outweighing the harm that would be suffered by the other party and (2) SCH had failed to carry its burden.

In mid-August 2006, frustrated by SCH's failure to comply with the writ of mandate issued by the trial court, Smith sought to regain his privileges at SCH by filing a motion for issuance of an order to show cause regarding contempt. The trial court held two hearings on the motion.

The controversies raised in the hearings included a dispute over the inferences that should be drawn from this court's denial of SCH's petition for a writ of supersedeas. SCH argued that the fact Smith was not exercising privileges was the basis for this court's finding of no imminent harm to it and, therefore, the trial court should not reinstate Smith because that would upset the balance struck by this court. The trial court correctly rejected SCH's characterization of this court's order denying the writ.

Besides matters raised at the two hearings, other controversies arose. A week after the second hearing, SCH filed a declaration to support its position that Smith should not be reinstated pursuant to the writ of mandate. The declaration referenced an accusation filed against Smith by the California Medical Board in August 2005 and a criminal investigation conducted by the Attorney General's Office. SCH asked the court to delay ruling until after the Attorney General's Office had decided whether to file criminal charges, which SCH represented would occur in late November or the first week of December 2006.*fn16

On December 5, 2006, the trial court issued an order that (1) found no contempt, (2) ordered the reinstatement of the judicial review committee's decision as required by the court's June 15, 2006, writ, (3) directed that Smith submit an application for consolidated medical staff privileges, and (4) ordered that Smith "shall be permitted to practice on the Consolidated Medical Staff at ... Selma Community Hospital for a period of one (1) year following the submission of his application, and then must reapply for privileges, as would any other physician practicing there."

SCH reacted to this order by filing a second petition for writ of supersedeas and a request for an immediate stay. Four days later, on December 19, 2006, this court denied the petition. As a result, Smith resumed practicing at SCH on December 21, 2006. He points out that his reinstatement had been delayed for almost six months.

In July 2008, this court affirmed the trial court's decision to issue the writ of mandamus, stating:

"The governing board's decision includes several errors of law. It misinterpreted the decision of the judicial review committee, misapplied the collateral estoppel or the exhaustion of remedies doctrine, erroneously decided certain evidence was irrelevant, and misapplied the substantial evidence ...

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