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Eden Township Healthcare District v. Eden Medical Center

California Court of Appeals, First District, First Division

October 9, 2013

EDEN TOWNSHIP HEALTHCARE DISTRICT, Cross-complainant and Respondent,
v.
EDEN MEDICAL CENTER, Cross-defendant and Appellant.

Alameda County Superior Court No. RG09-481573, Hon. Marshall Ivan Whitley, Trial Judge:

DLA Piper LLP, Stephen L. Goff, Marcia L. Augsburger, and Ashley H. Joyce for Cross-defendant and Appellant Eden Medical Center.

Pillsbury Winthrop Shaw Pittman LLP, Christopher R. Rodriguez, Darcy L. Muilenburg, and Kevin M. Fong for Cross-complainant and Respondent Eden Township Healthcare District.

Dondero, J.

Cross-defendant Eden Medical Center (EMC) appeals the trial court’s order denying its motion for attorney fees under Civil Code section 1717 (section 1717). The motion was denied after cross-complainant Eden Township Healthcare District (District) unsuccessfully sought declaratory relief to have certain agreements declared illegal and void under Government Code section 1090.[1] EMC claims the court erred in finding that the action on which EMC prevailed was not “on a contract” within the meaning of section 1717. We agree and reverse, and remand to the lower court to award EMC its attorney fees.

FACTUAL BACKGROUND AND PROCEDURAL HISTORY

This is the second time we have considered an appeal in this case. (See Eden Township Healthcare Dist. v. Sutter Health (2011) 202 Cal.App.4th 208 (Eden I).)

I. The Parties and the History of Their Written Agreements

We quote at length from our discussion of the facts in our prior opinion:[2]

“The District is a public agency established in 1948 pursuant to California’s Local Health Care District Law (Health & Saf. Code, § 32000 et seq.). The mission of the District is to ‘fulfill the function of protecting the public health and welfare by furnishing hospital services [and] provid[ing] for the public health and welfare....’ (Talley v. Northern San Diego Hosp. Dist. (1953) 41 Cal.2d 33, 40, overruled on other grounds in Muskopf v. Corning Hospital Dist. (1961) 55 Cal.2d 211, 213.) The District’s operations are overseen by a board comprised of five publicly elected members.... Prior to 1998, the District owned and operated multiple hospitals in Alameda County, including [Eden Hospital (Eden)] in Castro Valley.

“[Sutter Health (Sutter)] is a California nonprofit public benefit corporation. Sutter does not own any hospitals. The 24 hospitals with which Sutter is affiliated are owned by other nonprofit public benefit corporations. Sutter is a ‘member’ of each of these nonprofit public benefit corporations, including EMC.

“EMC is a California nonprofit corporation that was formed to operate Eden for the District. EMC also operates [San Leandro Hospital (SLH)], which is a general acute care hospital with an emergency services department. EMC currently leases SLH from the District. EMC is owned not by shareholders, but by its two members. The District is the ‘Community Member’ of EMC, and Sutter is its ‘General Member.’ During the time period relevant to this lawsuit, EMC had 11 voting directors, five of whom were the members of the District’s board.

“[¶]... [¶]

“In 1997, Sutter purchased Eden from the District for $30 million, plus an assumption of approximately $40 million of District debt. Sutter also invested approximately $65 million in improvements to the hospital campus, including the purchase of adjoining property to expand. Pursuant to a 1997 memorandum of understanding between the District and Sutter (the 1997 MOU), Eden’s assets were transferred to EMC, then known as ‘NewCo.’...

“By the early 2000’s, Eden, which was built in the 1950’s, faced the prospect of closure because the facility did not meet current seismic code requirements. To address this problem, the District entered into an agreement in 2004 (the 2004 Agreement) by which EMC agreed to spend at least $262 million to construct a new hospital to replace Eden. Around this time, the District purchased SLH from a third party and leased it to EMC, on the condition that EMC maintain general acute care services at SLH for three years. Sutter guaranteed EMC’s obligations under the 2004 Agreement. The 2004 Agreement further provided that if the replacement hospital was not operational by December 2011, EMC would purchase SLH at a price equal to $35 million, minus straight line depreciation.

“In 2006, Sutter notified EMC’s board, including the five District board members, that it would not build the contemplated replacement hospital. In November 2006, the District notified respondents that they were in breach of their contractual obligation to the District to construct the replacement hospital. The District claimed Sutter’s notification amounted to an anticipatory breach and threatened to sue Sutter for $262 ...


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