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Encore Preakness, Inc. v. Chestnut Health and Rehabilitation Group, Inc.

Superior Court of Delaware

November 1, 2017


          Submitted: September 25, 2017

         Upon Defendants' Motion to Dismiss, Granted in part, Denied in part

          Christopher J. Day, Esq. of DAY LAW GROUP, LLC, Wilmington, Delaware; Attorneys for Encore Preakness, Inc.

          Nancy S. Rappaport, Esq. and Brian A. Biggs, Esq. of DLA PIPER LLP, Wilmington, Delaware, and Brooke Madonna, Esq. of SPECTOR GADON & ROSEN, Philadelphia, Pennsylvania; Attorneys for Defendants KANE FINANCIAL SERVICES, LLC; AIRAMID HEALTH SERVICES, LLC f/k/a AIRAMID HEALTH MANAGEMENT, LLC AIRAMID HEALTH CONSULTING, LLC; and DEBRA HOWE.


          LeGROW, J.

         This action involves a dispute over unpaid invoices for therapy services the plaintiff performed at various nursing facilities under a series of contracts with those facilities. The plaintiff contends those invoices should have been paid by the facilities or their unaffiliated management companies, which separately contracted with facilities to perform financial and operational services. In other words, two sets of contracts define the parties' rights and obligations: (1) therapy service contracts between the plaintiff and the facilities; and (2) financial services contracts between the facilities and the defendant management companies. No direct contractual relationship existed between the plaintiff and the defendant management companies.

         Shortly after being sold to a third party, the facilities defaulted on payments owed to the plaintiff. Although they allegedly collected insurance payments for the plaintiffs services to facilities, the defendant management companies also have not remitted that payment to the plaintiff. The plaintiff therefore has sued not just the facilities, but also the defendant management companies for breach of contract, unjust enrichment, and tortious interference with contract. The management companies contend those claims should be dismissed.

         This case explores fundamental contractual principles, particularly privity, and the circumstances, if any, under which a person not a party to a contract may pursue a claim arising from that contract. In this case, the plaintiffs claims against the defendant management companies for unjust enrichment and breach of contract are barred by settled principles of Delaware contract law. The plaintiff has, though barely, alleged a reasonably conceivable claim that the management companies tortiously interfered with the plaintiffs contract with the facilities. My reasoning follows.


         The following facts are drawn from the complaint and the documents it incorporates, drawing all reasonable references in favor of the plaintiff. Before March 2016, Chestnut Group ("the Facilities") operated long-term nursing care facilities in Massachusetts, Connecticut, New Hampshire, Rhode Island, and Pennsylvania through various Delaware limited liability companies. Kane Financial Services, LLC, Airamid Health Services, LLC, and Airamid Health Consulting, LLC (collectively, the "Moving Defendants") provided management and financial services to Facilities under several Financial Consulting Agreements ("FCAs") that predated plaintiffs contracts with the Facilities.[1]

         Early in 2016, Facilities solicited Encore Preakness ("Plaintiff) to provide staffing services at Facilities' care centers. On February 1, 2016, Plaintiff and Facilities entered into Therapy Services Agreements ("TSAs") for fourteen of Facilities' care centers. Under the TSAs, Plaintiff supplied Facilities' care centers with speech, occupational, and physical therapy services. At the end of February, Plaintiff billed Facilities $670, 156.32. In March 2016, Facilities sold the fourteen care centers to Northern Hills Senior Living Centers and Wachusett Health Management.

         After the sale, Facilities failed to pay Plaintiff for the February invoices. Plaintiff alleges Moving Defendants billed the applicable third party payors, including Medicare and Medicaid, for the February invoices and received payment from those payors. Plaintiff further alleges Facilities and Moving Defendants wrongfully have withheld payment to Plaintiff for the February invoices, despite informal and formal demands for payment.

         On March 31, 2017, Plaintiff filed this action. In the complaint, Plaintiff asserted claims against Facilities for breach of contract, unjust enrichment, and conversion. Plaintiff also asserted claims against Moving Defendants for unjust enrichment, breach of contract, tortious interference, conversion, and piercing the corporate veil. Facilities made no response to the complaint and Plaintiff has moved for default judgment against them.[2] Moving Defendants moved to dismiss the claims against them for failure to state a claim. In its opposition to the motion to dismiss, Plaintiff withdrew its claims for conversion and veil piercing.


         Plaintiff alleges Moving Defendants unjustly were enriched by withholding Plaintiffs payment for the February invoices. Plaintiff argues it is not a party to the FCAs and therefore is not barred from seeking relief through unjust enrichment based on Moving Defendant's performance under the FCAs. Moving Defendants argue Plaintiff is barred from seeking relief through unjust enrichment because the FCAs and TSAs govern the parties' relationships and, although Plaintiff is not a party to the FCAs, it cannot maintain an unjust enrichment claim regarding services Moving Defendants allegedly were required by contract to perform.

         Plaintiff also claims it is a third party beneficiary to the FCAs because the FCAs provided that Moving Defendants would forward payment to Facilities' vendors from third party payors, like Medicaid and Medicare. Plaintiff thus argues it was an intended beneficiary of the FCAs and is entitled to seek relief for breach of those contracts. Moving Defendants counter that Plaintiff is, at most, an incidental beneficiary and therefore may not maintain an action for breach of contract.

         Finally, Plaintiff claims Moving Defendants tortiously interfered with Plaintiffs contract with Facilities by withholding payment for the February invoices without justification. Moving Defendants counter that they were justified in performing their contracts with Facilities. Moving Defendants deny paying themselves at the expense of Facilities' vendors, like Plaintiff.

         III. ANALYSIS

         On a motion to dismiss, the Court must determine whether the "plaintiff may recover under any reasonably conceivable set of circumstances susceptible of proof."[3] "If [the plaintiff] may recover, the motion must be denied."[4] A court may grant the motion if "it appears to a reasonable certainty that under no state of facts which could be proved to support the claim asserted would plaintiff be entitled to relief."[5] When applying this standard, the Court will accept as true all non- conclusory, well-pleaded allegations.[6] In addition, "a trial court must draw all reasonable factual inferences in favor of the party opposing the motion."[7]

         A. Unjust enrichment is not available because the TSAs and FCAs govern the parties' relationships.

         Moving Defendants argue Plaintiff cannot bring an unjust enrichment claim when a contract governs the parties' relationship. To plead a claim for unjust enrichment, Plaintiff must allege: "(1) an enrichment, (2) an impoverishment, (3) a relationship between the enrichment and impoverishment, (4) the absence of justification, and (5) the absence of a remedy provided by law."[8] The Court of Chancery has held "[a] claim for unjust enrichment is not available if there is a contract that governs the relationship between the parties that gives rise to the unjust enrichment claim."[9] Although there are three parties here, instead of two, a contract governs each relationship between the parties and the allegedly enriched Facilities.

         Plaintiff concedes it has a contractual relationship with Facilities through the TSAs, but argues no contract governs its relationship with Moving Defendants. This lack of privity between Plaintiff and Moving Defendants, however, does not mean Plaintiff is free to pursue its unjust enrichment claim. Plaintiffs complaint alleges the TSAs govern their relationship and incorporates the TSAs by reference.[10] In addition, the relationship between Facilities and Moving Defendants is governed by the FCAs.[11] The Court of Chancery has held:

It is a well-settled principle of Delaware law that a party cannot recover under a theory of unjust enrichment if a contract governs the relationship between the contesting parties that gives rise to the unjust enrichment claim. As an extension of that principle, . . . unjust enrichment cannot be used to circumvent basic contract principles [recognizing] that a person not a party to [a] contract cannot be held liable to it. Delaware courts consistently have held that where a contract exists no person can be sued for breach of contract who has not contracted either in person or by an agent, and . . . that the doctrine of unjust enrichment cannot be used to circumvent this principle merely by substituting one person or debtor for another.[12]

         Under basic contractual principles, the Moving Defendants are not susceptible to a breach of contract claim except one brought by Facilities or third party beneficiaries to the contract. In addition, having entered into a binding contract with Facilities, Plaintiff cannot also pursue a claim for unjust enrichment relating to the subject matter of the contract. Plaintiff cannot, then, use clever labeling in pleadings to subvert these principles by asserting an unjust enrichment claim against the Moving Defendants. It is Facilities, and not the Moving Defendants, with whom Plaintiff contracted, and it therefore is Facilities to whom Plaintiff must look for payment. "[T]he inability of a party to a contract to fulfill an obligation thereunder cannot serve as a basis to conclude that other entities, who are not party to the contract, are liable for that obligation."[13]

         Secondly, unjust enrichment only is available to the impoverished party if the enriched party is the defendant. As the Court of ...

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