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i/mx Information Management Solutions, Inc. v. Multiplan, Inc.

Court of Chancery of Delaware

March 27, 2014

I/MX INFORMATION MANAGEMENT SOLUTIONS, INC., a Delaware corporation, Plaintiff,
MULTIPLAN, INC., a New York corporation, and HMA ACQUISITION CORPORATION, a Delaware corporation, Defendants.

Submitted: December 11, 2013

Jeremy D. Anderson, Esq., Joseph B. Warden, Esq., FISH & RICHARDSON P.C., Wilmington, Delaware; Attorneys for Plaintiff.

Srinivas M. Raju, Esq., Robert L. Burns, Esq., RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Allen M. Gardner, Esq., Christopher J. Fawal, Esq., LATHAM & WATKINS LLP, Washington, D.C.; Attorneys for Defendants.


PARSONS, Vice Chancellor.

This action arises from a dispute over funds that were placed in escrow pursuant to the sale of certain of plaintiff's subsidiaries to the defendants. According to the documents that governed the sale of the subsidiaries and the escrow funds agreed to by the plaintiff and the defendants, the money being held in escrow was to be released to the plaintiff on July 29, 2012, unless the defendants, at that time, had a pending claim for indemnification. On July 29, 2012, the defendants refused to release the escrow funds on the basis that they had a pending claim for indemnification because a hospital that worked with one of the subsidiaries it bought was alleging that the subsidiary breached its contract with the hospital by granting a third party unauthorized access to preferential treatment rates. The plaintiff disagreed that the hospital's allegations entitled the defendants to withhold the escrow funds. Consequently, it filed suit to secure the release of those funds. Several months after the plaintiff initiated this lawsuit, the defendants, for the first time, informed the plaintiff that they also had a pending claim for indemnification as of July 29, 2012, based on the same hospital's objection to the same subsidiary's interactions with a different third party.

The plaintiff has moved for partial summary judgment on the issue of whether the later asserted "pending claim" provides a valid basis for defendants to withhold the escrowed funds based on the language of agreements governing the sale of the subsidiary and the escrow. The plaintiff argues that the second pending claim does not meet the definitional criteria enumerated in the parties' agreements as of July 29, 2012, and even if it did, the defendants had not given the plaintiff adequate notice of that fact in accordance with the relevant terms of their agreements. The defendants counter that the second pending claim satisfied the requisite contractual standards and ripened before the July 29, 2012 deadline, and that the notice they provided to the plaintiff regarding the first pending claim also sufficed to give the plaintiff adequate notice of the second pending claim.

Having considered the parties' briefs and heard argument on the motion, I conclude that the second pending claim was not a "Pending Claim" within the meaning of the parties' agreements as of July 29, 2012, and that, in any event, the defendants failed to give the plaintiff the contractually mandated notice which it was entitled to of their purported second "Pending Claim." Therefore, I grant the plaintiff's motion for partial summary judgment.


A. The Parties

Plaintiff, i/mx Information Management Solutions, Inc. ("IMX" or "Plaintiff"), is a Delaware corporation that provides development, management, and advisory services for employee health plans.

Defendant MultiPlan, Inc. ("Multiplan") is a New York corporation that develops and operates healthcare provider networks and offers related cost management services to insurance companies and other health benefit payors. Defendant HMA Acquisition Corporation ("HMA" and, together with Multiplan, "Defendants") is a Delaware corporation that was formed to acquire several IMX subsidiaries.

B. Facts [1]

In July 2005, Queens Medical Center ("QMC") and Health Management Network, Inc. ("HMN"), a subsidiary of IMX, entered into a Participating Hospital Agreement. This agreement allowed HMN to offer discounted rates to clients that it directed to QMC for medical services.

On April 29, 2011, IMX entered into a Stock Purchase Agreement (the "SPA" or "Agreement") with HMA to facilitate the sale of several IMX subsidiaries, including HMN, to HMA. Under the SPA, IMX made several representations and warranties regarding material contracts involving the entities, such as HMN, it was selling. This included HMN's Participating Hospital Agreement with QMC.

In addition, IMX agreed to indemnify HMA for any material breaches of its representations and warranties. Section 8.2 of the SPA states, in relevant part, "[Defendants] shall be entitled to indemnification for any and all Damages incurred by [Defendants] to the extent based upon, arising out of or related to (a) any breach of any representation or warranty [IMX] has made in this Agreement or any inaccuracy in such representation or warranty."[2]

Section 8.6 of the SPA outlines the procedures the parties must follow to make an indemnification claim pursuant to the Agreement. This provision reads, "[i]f any Action is commenced or threatened that may give rise to a claim for indemnification by any Indemnified Party, then such Indemnified Party will promptly give notice to the Indemnifying Party."[3] The SPA defines an "Action" as "any claim, action, or suit, or any proceeding or investigation, by or before any Governmental Authority or any arbitration or mediation before any third party."[4] Section 8.6 goes on to state that "failure to notify the Indemnifying Party will not relieve the Indemnifying Party of any liability that it may have to the Indemnified Party, except to the extent the defense of such Action is materially and irrevocably prejudiced by the Indemnified Party's failure to give such notice."

Finally, the parties agreed in Section 8.1 of the SPA that "[n]o claim for breach of any representation or warranty contained in this Agreement may be asserted pursuant to this Agreement unless such claim is asserted in writing on or before the Survival Expiration Date."[5] The Survival Expiration Date was July 29, 2012.

Contemporaneous with the SPA, the parties also entered into an Escrow Agreement to hold money for making certain potential payments, including payments of indemnification claims. Section 3(a)(iv) of the Escrow Agreement requires the release of all funds in escrow to IMX on the Survival Expiration Date, except "if any claim pursuant to Section 8.2 of the [SPA] shall have been properly asserted by the [Defendants] on or prior to the Survival Expiration Date and shall remain pending on the Survival Expiration Date."[6] In that case, "the portion of the Escrow Funds to be released to [IMX] as contemplated by this sentence shall be the amount of the Escrow Funds, minus the Disputed Amount . . . as of the Survival Expiration Date." Thus, a claim for indemnification based on a breach of the representations and warranties in the SPA is valid and may serve as a basis for withholding escrow amounts only if it is asserted on or before July 29, 2012, the Survival Expiration Date.

By May 2012, QMC had advised Defendants that QMC believed the Veterans Administration ("VA") had accessed improperly discounted rates under HMN's Participating Hospital Agreement. QMC and Multiplan attempted, unsuccessfully, to negotiate a resolution of this issue.

On May 31, 2012, QMC sent Multiplan a letter revealing that it had become aware that Kaiser Foundation Hospitals in Hawaii ("Kaiser") had been accessing impermissibly HMN's Participating Hospital Agreement rates. The purpose of QMC's letter was to "provid[e] HMN, Inc. written notification of our position in accordance with Section VII.3 [of the Participating Hospital Agreement]."[7] The letter did not make any demands on Defendants, but stated "[y]our prompt attention to this matter will be appreciated." Multiplan received the letter on June 4, 2012. While there were discussions within Multiplan about this letter's significance, there does not appear to be any evidence that Multiplan discussed the letter with QMC before the Survival Expiration Date.

On June 21, 2012, Keith Vangeison of Multiplan sent a letter to QMC to address the ongoing issue between the two entities regarding the VA. The letter, which was a follow up to unsuccessful negotiations between QMC and Multiplan, focused solely on the VA and did not mention Kaiser. Approximately two weeks later on July 5, 2012, QMC responded to Vangeison's letter. QMC's response also focused entirely on the VA and did not mention Kaiser. The last paragraph of the response stated, "[QMC] demands that HMN, Inc. stop providing network access to third parties who are not covered under the Agreement. [QMC] reserves the right to pursue all legal remedies if this matter is not resolved by July 17, 2012."[8]

Nearly three months later, and approximately two months after the Survival Expiration Date, on September 26, 2012, counsel for QMC sent its second letter to Multiplan's general counsel regarding Kaiser. This letter, unlike QMC's July 5 letter as to the VA, did not suggest that a lawsuit was probable or imminent. Instead, the letter, like the May 31 letter, referred to Section VII.3 of the Participating Hospital Agreement, and called for Multiplan and QMC to work in cooperation to investigate and resolve the underlying issue. QMC's counsel requested a response by October 8, 2012.

Amidst the ongoing letter exchange between Multiplan and QMC, Defendants also began corresponding with IMX regarding indemnification under the SPA. On June 25, 2012, Defendants informed IMX that they were demanding indemnification in accordance with Section 8.6 of the SPA. IMX responded on July 3 that Defendants had failed to specify sufficiently the basis for their indemnification demand, to which Defendants replied on July 26 with more information regarding their claim. Thereafter, IMX demanded the release of the Escrow Funds on July 30. Defendants refused to comply, stating that there was a pending indemnification claim. After an exchange of letters regarding whether Defendants had "manufactured" their indemnification claim, IMX commenced this action on August 15, 2012.

C. Procedural History

After IMX filed its initial complaint, on September 25, 2012, Defendants moved to dismiss that complaint. On November 6, 2012, IMX filed an amended complaint (the "Complaint"), seeking fundamentally the same relief. Thereafter, Defendants again moved to dismiss the Complaint in its entirety. After full briefing on that motion, I heard argument on March 20, 2013.

On April 26, 2013, Defendants moved to stay discovery pending resolution of their motion to dismiss. I granted Defendants' motion to stay subject to a limited carve-out requiring Defendants to disclose certain facts that they had represented they would produce at the March 20, 2013 argument. On June 28, 2013, I issued a Memorandum Opinion ...

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