Riverboat Group, LLC v. Ivy Creek of Tallapoosa, LLC (CONSENT)

IN THE UNITED STATES DISTRICT COURT

FOR THE MIDDLE DISTRICT OF ALABAMA

EASTERN DIVISION

RIVERBOAT GROUP, LLC, )

)

Plaintiff, )

)

vs. ) Case No. 3:18-CV-00147-WC

)

IVY CREEK OF TALLAPOOSA, )

LLC, )

)

Defendant. )

MEMORANDUM OPINION AND ORDER

Plaintiff Riverboat Group, LLC, filed this case against Defendant Ivy Creek of

Tallapoosa, LLC, alleging claims of breach of contract, open account, and unjust

enrichment arising out of a contract between the parties. Before trial, Plaintiff agreed to

dismiss the claims of open account and unjust enrichment, and its remaining breach of

contract claim was tried before the undersigned on November 4, 2019. In this post-trial

opinion, I conclude that Plaintiff cannot recover from Defendant for breach of contract

damages because it is guilty of the first material breach of the contract and cannot

demonstrate its own substantial compliance with the contract.

I. FINDINGS OF FACT

Below are the facts as I find them based on evidence presented at a trial, which

consisted of three fact witnesses and documentary exhibits1 submitted by both parties.

1 Defendant’s Exhibit 15 is a disk containing 823 pages of Bates-stamped documents, only some of which

were admitted into evidence at trial. Although Defendant submitted hard copies of Exhibits 1–14, the Court

allowed the disk to be admitted separately as an exhibit with the understanding that only properly admitted

evidence from the disk would be considered by the Court.

Plaintiff is Riverboat Group, LLC, which does business as Vanguard Labs, LLC.

Clayton White (“White”), who testified at trial, was in-house counsel and business manager

for Riverboat Group, LLC. Because the parties referred to the Plaintiff as “Vanguard”

throughout the trial, the Court will do so here. Vanguard is located in New Orleans,

Louisiana, and has no locations in Alabama. Although Vanguard has no employees, it pays

another company, Poydras Healthcare Advisors (“Poydras”), to provide its staffing needs.

White testified that Poydras provided the people and managed the business operations for

Vanguard, including billing and accounting employees, a lab director, and the employees

who operate the lab.

Defendant is Ivy Creek of Tallapoosa, LLC, which does business as Lake Martin

Community Hospital. As with Plaintiff, the Court will refer to Defendant by the name

most often used by witnesses at trial, which in this case is “Lake Martin.” Michael Bruce

(“Bruce”) is the CEO of operations and administration at Lake Martin. Augustine LeTorre

(“LeTorre”) works for Ivy Creek Health Care, the parent company of Ivy Creek of

Tallapoosa LLC, and manages Lake Martin’s largest clinic. Bruce and LeTorre both

testified at trial.

The contract between the parties arose out of discussions that began in Fall 2015

when Michael Bruce was contacted by an individual named Kevin Robson (“Robson”)

about a possible business opportunity for Lake Martin and Vanguard. Bruce understood

from Robson that Vanguard had previously been submitting claims to Blue Cross Blue

Shield Insurance Company (“Blue Cross”), but it could no longer do so because they had

been “kicked out” of the state by Blue Cross. As a result, Vanguard needed Lake Martin

to receive orders for lab tests from physicians, refer the orders to Vanguard, and then

submit billing claims to Blue Cross.2

Bruce testified that a major selling point by Robson was that he had a network of

doctors already in place who would be using a software program called Engage DX that

was developed for pain management physicians. Engage DX was designed to ensure that

lab tests ordered by the doctors satisfied Blue Cross’s requirements for medical necessity.

White stated that he was familiar with the sales presentation on Engage DX that Robson

made to Bruce, and the presentation documents White reviewed while on the witness stand

confirm that the sales presentation was done on behalf of Poydras.

2 At the summary judgment stage, Defendant filed an affidavit signed by Michael Bruce indicating that the

parties had entered into a contract to circumvent Blue Cross regulations prohibiting out-of-state providers

from submitting claims for drug screens. Specifically, the affidavit stated that Vanguard, which had no

locations in Alabama, had previously submitted claims to Blue Cross but, due to the new regulations,

Vanguard needed an Alabama provider to submit the claims. These assertions were troubling to the Court,

as they begged the question of whether false representations were made to Blue Cross that the lab tests were

performed in Alabama. Under Delaware law, no party “may exercise his broad power to enter into contract

relations with another so as to offend against what the law deems to be sound public policy.” Maddock v.

Greenville Ret. Cmty., L.P., No. CIV.A. 12564, 1997 WL 89094, at *5 (Del. Ch. Feb. 26, 1997) (citations

omitted). Further, courts do not aid one party against another when permitting recovery enforces an illegal

contract. Eisenman v. Seitz, 26 Del. Ch. 185, 25 A.2d 496, 498 (1942) (citations and quotations omitted).

At trial, Defendant’s counsel made similar allegations during his opening statement, calling it “borderline

healthcare fraud,” and the issue was alluded to a couple of times, including Bruce’s statement that Vanguard

had been “kicked out” of the state. However, the issue was not factually developed at trial, as there was no

evidence presented on Blue Cross’s regulations regarding out-of-state providers, how they had changed,

and exactly what was prohibited. “Once the case proceeds to trial, the full record developed in court

supersedes the record existing at the time of the summary-judgment motion.” Wilkerson v. Seymour, 626

F. App’x 816, 818 (11th Cir. 2015) (quoting Ortiz v. Jordan, 562 U.S. 180, 184 (2011)). Due to a lack of

evidence presented at trial, the Court cannot determine whether Blue Cross prohibited performance of

laboratory services by an out-of-state provider, such that obtaining payment from Blue Cross based on a

representation that the lab tests were performed in Alabama would be fraudulent, or if Blue Cross allowed

this type of referral relationship and simply prohibited billing by an out-of-state provider. Consequently,

being unable to determine whether the referral arrangement was permitted or whether the parties’ whole

purpose in forming the contract was illegal and against public policy, the Court cannot reach the issue of

whether the contract void. Sternberg v. Nanticoke Mem’l Hosp., Inc., No. CIV.A. 07C-10-011, 2012 WL

5830150, at *6 (Del. Super. Ct. Feb. 13, 2012), aff’d, 62 A.3d 1212 (Del. 2013) (stating that a court’s power

to declare a contract void as against public policy under Delaware law “must be exercised with caution and

only in cases that are free from doubt”) (citations and quotations omitted).

Bruce testified that he knew Robson worked in sales but that Robson held himself

out as someone who worked for Vanguard. In fact, Bruce had never heard of White, and

Robson was his only contact at Vanguard, from the initial discussions about contract

formation through the end of the parties’ contractual relationship. LeTorre also testified

that Robson was his only contact at Vanguard. According to LeTorre, Robson identified

himself as the person running the project for Poydras, Riverboat, and Vanguard, that he

was in charge, and that LeTorre should go through him only. The instruction from Robson

coincided with what LeTorre observed when he visited Vanguard’s lab in New Orleans,

where Robson was the person who showed LeTorre around the lab and explained how the

lab samples would be handled.

Vanguard and Lake Martin’s contract became effective May 11, 2016. Pursuant to

the contract, Vanguard agreed to perform clinical laboratory tests on samples received from

Lake Martin, and Lake Martin agreed to pay Vanguard $400.00 for each test. The contract

also contained the following provisions, in which Lake Martin is the “Facility” and

Vanguard is the “Laboratory”:

Section 1, Paragraph 2: Service Orders. Facility shall arrange for every

specimen to be sent to the Laboratory with an appropriate laboratory test

requisition form signed by a physician or practitioner licensed by state law

and authorized to order such testing, test(s) requested, diagnosis codes, other

information required by payors to establish medical necessity, and billing

contact information.

…

Section 1, Paragraph 5: Facility’s Responsibilities.… If any payor requires

that Facility provide the ordering physician/practitioner’s medical records for

a pre-payment or post-payment review or audit being conducted by payor,

Facility will notify Laboratory in writing (via email is permissible), and

Laboratory shall assist in obtain [sic] the pertinent medical records and

provide them to Facility within the timeline designated by Facility such that

Facility can meet the timeline required by payor.

In July 2016, only two months after the contract became effective, Bruce learned

that Blue Cross was rejecting claims pending further investigation. Auggie LeTorre

notified Robson of the denied claims in writing on July 27, 2016. Def. Ex. 4. After that,

there were multiple email exchanges among Robson, Bruce, LeTorre, and others about the

rejected claims.

Bruce was the only witness who testified with knowledge of billing and coding

requirements of Blue Cross. He testified that the claims submitted by Lake Martin to Blue

Cross were covered claims but that Blue Cross denied them because Lake Martin could not

produce the physicians’ medical records that were required to establish medical necessity.

According to Bruce, the pain management labs in this case were ordered so doctors could

make sure patients were taking their medications. The type of testing got out of hand, as

Bruce described it, so Blue Cross established regulations in March 2015 that limited

qualitative testing to once every three months. Blue Cross also required that a doctor get a

positive result on a quick “dipstick” quantitative test, which is cheaper and does not require

a high-complexity lab to perform, before ordering a qualitative test. Additionally, doctors

had to complete an extensive pain matrix to verify that a patient was eligible for a

qualitative test. Other requirements included performing an adequate assessment of patient

history and risk of substance abuse, as well as checking to see if the patient was seeking

drugs from another provider.

Bruce testified that Robson knew about the above requirements when he approached

Bruce and that the purpose of Engage DX was to ensure all the requirements were met

before a lab test was ordered. Engage DX required the doctors to answer a series of

questions related to the patient and the need for lab testing. At the end of the questioning,

Engage DX would either confirm that all requirements for medical necessity were met or

the lab test would be flagged in the system. All of the information entered by the doctors

became part of the patients’ medical records, and it was required to be submitted to Blue

Cross, upon request, in order for a claim to be covered.

In response to Bruce’s testimony that the claims were denied based on medical

necessity, Vanguard’s counsel suggested to Bruce that the codes used by Lake Martin to

bill for Vanguard’s lab work were simply codes for non-covered services, such that no

amount of documentation produced to Blue Cross would have mattered. However, Bruce

disputed this contention, pointing out that Blue Cross does not have codes for services that

are never covered. As Bruce explained it, the codes used by Lake Martin were for covered

services as long as the tests were performed to confirm that the patient was taking

prescribed medication, as opposed to another drug such as cocaine or marijuana. Lake

Martin could bill under those codes but only to test for pain management drugs when all

of the other medical necessity requirements – as documented in the physician’s records

showing the prescribed medication, the drug to be tested, and the reasons for ordering the

test – were met.

Vanguard’s counsel also made a distinction between comprehensive and

confirmatory panels and another distinction between composite and confirmatory panels,

suggesting that composite or more comprehensive claims were simply not covered and,

again, that no amount of supporting medical records would have changed this. However,

Bruce testified that all labs sent to Vanguard in this case were confirmatory panels. White

admitted at trial that he had no contact with Blue Cross about the rejected claims and did

not get involved in trying to understand why they were rejected and what was required to

get the claims paid. Bruce was the only witness with knowledge of Blue Cross’s billing

requirements and the only witness in a position to understand why the claims were rejected.

Additionally, his testimony about the medical necessity requirements and billing codes was

undisputed, and the Court found him to be a credible witness. Accordingly, the Court

accepts Bruce’s testimony that Blue Cross’s rejection of the Vanguard claims was not

based on billing codes or the type of panel tested and that the claims would have been

covered if the patient medical records establishing medical necessity had been produced.

The parties’ contract required Lake Martin to notify Vanguard in writing if a payor

requested medical records as part of an audit. As mentioned above, when Blue Cross

requested medical necessity information, LeTorre notified Robson in writing by email. He

also notified an individual named Tim Repole (“Repole”), who, based on email

correspondence admitted at trial, worked for a company called Matryx Life.3 Because

3 There was no explanation at trial about Tim Repole’s role in this matter except that he was somehow

involved in compliance and that he brought a few doctors into the billing arrangement. The email

correspondence admitted into evidence demonstrates that Repole was actively working with Robson to

obtain the documents requested by Blue Cross.

Lake Martin did not have access to the medical records for the doctors within Robson’s

network, they looked to Robson to gather the requested documents. After being notified,

Robson went to work trying to obtain the information requested by Blue Cross. LeTorre

testified that he had numerous telephone conversations, emails, and texts with Robson

about the requested documents and that Robson guaranteed he would get the documents.

Robson participated in email exchanges about what was needed, at one point he hired a

team of experts to assist, and he kept LeTorre and Bruce informed on his progress.

Notably, none of the emails in evidence suggest that Lake Martin was expected to play any

role in obtaining the medical records, and it is clear from documentary evidence and

testimony by Bruce and LeTorre that Robson and Repole assumed that responsibility.

With respect to Lake Martin’s obligation to provide written notice of the need for

medical records, White testified that notice to Robson did not satisfy that obligation

because Robson was not an agent or employee of Vanguard. According to White, Robson

owned and worked in the sales group for a company called TAQ,4 and he described Robson

as a third party who simply carried information back and forth between Vanguard and Lake

4 Other than its name and the fact that it was a “sales group,” the parties offered no information about TAQ;

however, the fact that Robson worked for a separate company is not dispositive of whether he was an agent

of Vanguard. Robson seems to have been associated to some extent with several different companies

identified in this lawsuit. Vanguard’s building had three labs: Vanguard, Lazarus Services, and UTC Labs.

At one point there was a fourth lab in the building as well. White testified that the labs were separate

entities but that Vanguard/Riverboat had contracts with all of them to perform lab work if needed. Bruce

and LeTorre testified that they believed all of these companies were the same and that Robson either worked

for or was somehow in charge of them. Any confusion seems warranted, as emails regarding the rejected

Blue Cross claims referred to the claims as “Lazarus” or “Lazarus/Vanguard” claims. Def. Exs. 4, 5, 7, and

13. Additionally, Bruce testified that there was confusion in the beginning as to whether the party entering

into the contract with Lake Martin would be Lazarus, Riverboat, or Vanguard. Unfortunately, the evidence

presented at trial did not adequately clarify the relationships among White, Robson, and the other labs or

business entities.

Martin. Vanguard paid Robson a commission based on the number of laboratory samples

he brought in, but he was paid only when Vanguard was paid, much like a car dealership

pays a salesman. White said Robson made introductions between Vanguard and Lake

Martin and that he gathered information, but he did not negotiate the contract and was not

authorized on behalf of Vanguard to put the project in place. However, Bruce testified that

Robson did all of the negotiating, and White admits that he never met or spoke to Bruce

during negotiations, after the contract was formed, or at any time before this lawsuit was

filed. When asked how Robson even found out there was a problem with the claims, when

he was supposedly just a courier of information, White said Robson was the one in contact

with Lake Martin while White was in New Orleans running the business.

White even testified that Robson was not an employee or representative of Poydras.

Not only is Poydras the company listed on the sales materials Robson presented to Lake

Martin, which would indicate that Robson was authorized to make a presentation on behalf

of Poydras, but the emails admitted at trial reflect that Robson had a Poydras email address

and that he used the Poydras Healthcare Advisors logo as part of his email signature. Def.

Exs. 7, 9, 10, 12–14. Interestingly, White had a Poydras email address as well. Def. Ex.

14. White was specifically asked where Robson worked, and he testified only that Robson

worked for TAQ. His failure to be forthcoming about the above information concerning

Poydras, which suggests that Robson had some affiliation with the company providing

management employees to Vangard and that White did as well, is viewed by the Court as

an effort to hide facts related to the issue of agency, and it diminished White’s credibility

as a witness.

On the issue of credibility, there were other occasions where White appeared to

testify in an evasive manner.5 Bruce testified that he was approached by Robson after

Vanguard was “kicked out” of the state and could no longer submit claims to Blue Cross.

White never disputed that Vanguard had been billing Blue Cross before the parties entered

into a contract. However, White testified that he had no knowledge of the Blue Cross

regulation prohibiting Vanguard from submitting claims, and he said the reason Vanguard

did not submit claims was because he lacked the staff to manage the Blue Cross contracts

in different states. Regardless of why Vanguard was prohibited from billing Blue Cross,

White did not dispute Bruce’s testimony that Vanguard had been billing Blue Cross

previously. As the person running the business in New Orleans, White certainly would be

expected to know that he could bill Blue Cross one day but not the next and the reasons for

that change. For this reason, the Court found White’s testimony to be evasive on this issue.

In another example, when asked if he ever talked to Robson about getting medical

charts, White testified that he would ask how things were coming along but that the

technical details were outside his expertise or role, as he was more worried about

relationships. Again, it seems unlikely, given his position, that White would not be

concerned with the reason Blue Cross rejected $250,000.00 of claims performed by his lab

or what was needed to get the claims paid. Frankly, the Court views this testimony as an

attempt to distance Vanguard from those who were working to correct the situation in order

to demonstrate that doing so was outside the scope of Vanguard’s duties.

5 In one instance while White was testifying, the Court specifically instructed him to be straightforward

with his answers.

With regard to obtaining the medical records requested by Blue Cross, White placed

the blame for missing documentation on Megan Jackson, a data processor employed by

Lake Martin that Vanguard required to be stationed at its New Orleans office to receive lab

samples. White said Ms. Jackson was responsible for entering “initial information” into

Engage DX when she received lab samples. He then stated that, if the medical necessity

documentation was not to be found, Ms. Jackson must have shredded it or did not know

where to find it, and there would be nothing to get out of the system if she never entered it.

T. 35. However, White also stated more than once that he had no knowledge of the

technical side of how things worked.

According to LeTorre and Bruce and in contrast to White’s testimony, Ms. Jackson

entered information into CPSI, Lake Martin’s billing system, not into Engage DX. In fact,

the lab orders and specimens were sent directly to Vanguard’s lab from the physicians’

offices without going through Lake Martin, and the results were sent from Vanguard to the

ordering physicians, again without going through Lake Martin. When Ms. Jackson

received the specimens at Vanguard’s lab in New Orleans, she entered information such as

name, billing and insurance information, addresses, and billing codes into CPSI. This

testimony is supported by an email dated August 12, 2016, from Robson stating that he had

hired a team to manually pull files and enter information into Engage DX and, once that

was complete, Ms. Jackson would be able to “go into each one and manually put them into

CPSI.” Def. Ex. 12.

The information entered by Ms. Jackson into CPSI would go to Lake Martin, where

the billing company was located, and would then be sent to Blue Cross. The actual medical

charts –whether entered into Engage DX or not – were retained by the physicians and were

never sent to Ms. Jackson. In order for Lake Martin to have obtained all of the

documentation required to establish medical necessity before Vanguard performed a lab

test, it would have to obtain a patient’s medical file from the doctor and review the file

before sending the test to Vanguard. Bruce testified that, in his twenty years of healthcare

experience, he has never obtained more than a physician’s order for a lab test before it was

performed (unless precertification was required, as in the case of surgery), and medical

charts are needed only if an insurance company requests additional documentation to

support a claim.

Furthermore, despite its touted capabilities, it appears that Engage DX was not even

capable of capturing the information being requested by Blue Cross. In an email dated

August 10, 2016, from Tim Repole in response to LeTorre’s request about the status of the

medical records requested by Blue Cross, Repole stated:

It is my understanding that the initial screen information is being sent from

UTC to Megan [Jackson] for loading into the system, the medical list is

already there and the medical necessity letter is being drafted for review and

distribution later today.” Moving forward, we will utilize UTC req forms …

until such time Engage DX has the capability to record the necessary

information.6

Def. Ex. 11 (emphasis added). In the August 12th email from Robson mentioned above,

he states that Repole had gone to the various clinics to review medical records but that the

required documentation was not there. Thus, not only is White’s testimony about Ms.

6 This email, proposing use of a UTC Labs form, is another example of how the various entities involved

in this lawsuit are intertwined.

Jackson’s role of entering information into Engage DX contradicted, but it is clear that the

records sought should have been generated by a physician and contained within his files,

that the records did not exist, and, even if they had, Engage DX could not have recorded

them.

Bruce testified that Vanguard provided absolutely nothing in response to his request

to produce the documents Blue Cross required in order to pay the claims. When asked

about Vanguard’s obligations to produce documents, White said that Vanguard was

required only to assist in obtaining them. When asked what Vanguard did to assist, he

could only describe Robson’s efforts, including his work with various people at Poydras to

retrieve information out of the software system. This is another example of White’s

inconsistent testimony. He admits that Vanguard at least had a duty to assist in obtaining

the documents requested by Blue Cross. However, if the Court were to accept White’s

testimony that Robson was not Vanguard’s agent, it would mean that Vanguard took no

action whatsoever to fulfill that obligation. Vanguard cannot deny that Robson is its agent

yet claim his actions fulfilled its obligation to “assist” under the contract.

During the course of the contract, Vanguard sent the following invoices to Lake

Martin for laboratory services:

Date Amount Approximate Number of Tests

Performed at $400 each

07/05/16 $22,533.91 56

07/22/16 101,640.00 254

08/01/16 146,300.00 365

09/07/16 33,600.00 84

09/07/16 730.01 2

09/16/16 13,133.88 32

09/23/16 23,153.19 57

09/30/16 11,521.07 28

10/25/16 54,601.64 136

$407,213.70 1,014

The total amount billed by Vanguard to Lake Martin through the invoices listed above is

$407,213.70. Those invoices reflect a credit of $8,085.00 on September 7, 2015, and, with

that credit, the total amount of laboratory services performed was $399,128.70 (Pl. Ex. 2).

According to Bruce, Lake Martin paid Vanguard for all lab tests that were reimbursed by

Blue Cross, but it did not pay Vanguard for the claims rejected by Blue Cross. Vanguard

claims Lake Martin owes $250,024.81 in unpaid invoices plus $33,637.14 in interest, for a

total of $283,661.95. Lake Martin did not dispute that amount.7

II. DISCUSSION

The parties agree that the contract between them is governed by and should be

construed in accordance with the laws of Delaware. Under Delaware law, to sustain a

breach of contract claim, the plaintiff must establish (1) the existence of an express or

implied contract; (2) the breach of an obligation imposed by that contract; and (3) resulting

damages to the plaintiff. Edelstein v. Goldstein, No. CIV.A.09C-05-034DCS, 2011 WL

721490, at *5 (Del. Super. Ct. Mar. 1, 2011) (citing VLIW Tech., LLC v. Hewlett–Packard

Co., 840 A.2d 606, 612 (Del. 2003)). “As a general rule, the party first guilty of a material

breach of contract cannot complain if the other party subsequently refuses to perform.” Id.

(quoting Hudson v. D & v. Mason Contractors, Inc., 252 A.2d 166 (Del. Super. Ct. 1969)).

7 Defendant’s Exhibit 1 shows that Blue Cross sought a refund from Lake Martin Hospital in the amount

of $1,573.373.60; however, Bruce testified that the overpayment sought by Blue Cross involved lab testing

samples sent to Vanguard in addition to samples sent to another laboratory before Lake Martin entered into

a contract with Vanguard. That amount was reduced to $1,442,832.94 and then lowered to $1,009,983.00

when Blue Cross agreed to a 30% reduction (Def. Ex. 2).

Additionally, a plaintiff alleging breach of contract must demonstrate substantial

compliance with all the provisions of his contract in order to recover damages for any

breach. Id. (citations omitted).

In this case, Lake Martin does not dispute the existence of an express contract or

that it failed to pay Vanguard $250,024.81 for lab tests. However, Lake Martin asserts that

it gave notice to Vanguard, through Robson, of Blue Cross’s audit and request for medical

records and that Vanguard failed to provide those records, thereby breaching the contract

and preventing Vanguard from demonstrating its own substantial performance under the

contract. Thus, the questions before the Court are whether Robson was an agent of

Vanguard such that written notice to Robson constituted notice to Vanguard; whether

Vanguard was required to provide the medical records requested by Blue Cross; and, if

these two questions are answered in the affirmative, whether Vanguard’s failure to provide

the medical records constitutes a material breach and prevents Vanguard from establishing

its own substantial compliance under the contract.

(A) Kevin Robson was Vanguard’s agent.

As explained above, Lake Martin was required to give written notice to Vanguard

if a payor requested pertinent medical records during an audit. It is undisputed that Robson

had written notice of the audit and the records being requested. White, however, claims

that Robson was not an agent of Vanguard, and, as a result, Lake Martin failed to comply

with the provision requiring written notice.

Under the common law of agency, there are two main forms of authority: actual and

apparent. An agent has actual authority when he reasonably believes, based on the

principal’s manifestations to the agent, that the principal wishes the agent to act

accordingly. Parke Bancorp Inc. v. 659 Chestnut LLC, 217 A.3d 701, 712 (Del. 2019)

(quotations and citations omitted). Apparent authority, on the other hand, “is the power

held by an agent or other actor to affect a principal’s legal relations with third parties when

a third party reasonably believes the actor has authority to act on behalf of the principal

and that belief is traceable to the principal’s manifestations.” Id. (quoting Vichi v.

Koninklijke Philips Elecs., N.V., 85 A.3d 725, 799 (Del. Ch. 2014) (quoting Restatement

(Third) of Agency § 2.03))). It is authority that the principal knowingly or negligently

permits the agent to exercise or holds him out as possessing. Tibco Software, Inc., v.

nThrive Revenue Systems, LLC, No. N18C-08-072 MAA, 2019 WL 6216229, at *8 (Del.

Super. Ct. Nov. 21, 2019) (quotations and citations omitted). In this case, it is not necessary

to discuss actual authority because the Court concludes that Robson at least acted with

apparent authority.

In Sarissa Capital Domestic Fund LP v. Innoviva, Inc., the court recognized that a

non-agent director has apparent authority to bind a corporation when a third party

reasonably believes the director has such authority and that belief is traceable to the

corporation’s manifestations. No. CV 2017-0309-JRS, 2017 WL 6209597, at *19 (Del. Ch.

Dec. 8, 2017), judgment entered, (Del. Ch. 2017) (citations omitted). Such a manifestation

may occur when a corporation places someone in charge of a transaction or situation and,

in particular, when a corporation designates the person as its exclusive channel of

communication with a third party. Id. (quotations and citations omitted). The plaintiffs in

Sarissa believed that a particular individual spoke on behalf of the defendant, and the court

held it to be reasonable because (1) that person was the company’s lead negotiator in

settlement discussions; (2) he was the only board member with whom plaintiff spoke

during a critical time period; (3) defendant never indicated that the agent was not authorized

to act on its behalf; and (4) plaintiffs’ reasonable belief was traceable to the company’s

own actions of allowing him to be the lead negotiator and exclusive channel of

communications. Thus, the court held that an apparent agency relationship had been

created and that the agent had the authority to bind the principal.

As in Sarissa, Robson was Lake Martin’s only contact with Vanguard during

discussions leading up to contract formation. White denied that Robson negotiated the

parties’ contract, and he went so far as to deny that Robson even had authority to put the

project together for Vanguard. He testified that Robson could not have signed the contract

and could not have changed the price of the lab work. However, Bruce testified that

Robson was the only person with whom he negotiated, which is certainly believable

considering that Robson was Bruce’s only contact before the contract was signed.

Regardless of whether Robson’s authority was broad enough to execute a contract or set

prices, he was, in fact, the one and only person who negotiated the contract and put the deal

together for Vanguard.

He was also Lake Martin’s only contact after the contract was formed and during

the critical time of the Blue Cross audit. White admitted that he never engaged with Bruce

when claims started getting rejected and that he left everything to Robson. Thus, he was

aware that Robson was the one making efforts to satisfy Blue Cross so Vanguard could get

paid. White also admitted that he never even met anyone at Lake Martin until after this

lawsuit was filed. There can be no question that White knowingly allowed Robson to be

Vanguard’s exclusive channel of communication from the time of initial contract

discussions through the critical time of the audit and the filing of this lawsuit. Accordingly,

Bruce and LeTorre’s belief that Robson was Vanguard’s agent is traceable to White’s own

actions.

The Court further finds that the belief as to Robson’s agency was reasonable. When

LeTorre went to Vanguard’s office in New Orleans, Robson is the one who met him and

showed him around the lab. White was aware that Robson sent emails among Bruce,

LeTorre, and White using Robson’s and White’s Poydras email addresses. These emails

would suggest that Robson and White worked for the same company – the company that

provided Engage DX to physicians and provided management and operations employees

to Vanguard. Further, the email exchanges also refer to the rejected Blue Cross claims as

“Lazarus/Vanguard” claims, and at one point the use of documents from UTC Labs was

proposed as part of the solution. Robson, White, and the companies involved in this case

are so intertwined that, even after a full trial, the Court cannot make reasonable distinctions

among them. Therefore, the Court concludes that Bruce and LeTorre’s belief that Robson

was Vanguard’s agent was reasonable. Of course, as well-settled law instructs, notice to an

agent acquired while acting within the scope of his authority is imputable to the principal.

Hecksher v. Fairwinds Baptist Church, Inc., 115 A.3d 1187, 1201 n.50 (Del. 2015)

(citation omitted). Thus, Lake Martin’s notice to Robson satisfied its obligation to provide

written notice to Vanguard.

(B) Vanguard was required to assist in obtaining and to provide physicians’

medical records in the event of an audit.

The contract has two provisions pertinent to the parties’ responsibilities concerning

documentation, medical necessity, and billing. The first requires Lake Martin to arrange

for specimens to be sent to Vanguard with “other information required by payors to

establish medical necessity” (Section 1, Paragraph 2). The second states that Vanguard, in

the event of an audit, would “assist in obtain [sic] the pertinent medical records and provide

them to [Lake Martin] within the timeline designated by [Lake Martin] such that [Lake

Martin] can meet the timeline required by [Blue Cross]” (Section 1, Paragraph 4).

Plaintiff’s interpretation of the contract is that Lake Martin was required to obtain

medical necessity documents and that Vanguard was required only to assist Lake Martin

with obtaining any documents requested in an audit. Defendant’s interpretation is that

Vanguard was required to assist but that it was ultimately responsible for providing any

documents requested by Blue Cross during an audit so that Lake Martin could comply with

Blue Cross’s deadline. However, “[a] contract is not rendered ambiguous simply because

the parties do not agree upon its proper construction. Rather, a contract is ambiguous only

when the provisions in controversy are reasonably or fairly susceptible of different

interpretations or may have two or more different meanings.” Sunline Commercial

Carriers, Inc. v. CITGO Petroleum Corp., 206 A.3d 836, 840 (Del. 2019) (quoting Rhone-

Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del. 1992)).

Long-settled principles require courts to read a contract as a whole, giving effect to each

term and provision in a way that does not render any provision illusory, meaningless, or

mere surplusage. MicroStrategy Inc. v. Acacia Research Corp., No. CIV.A. 5735-VCP,

2010 WL 5550455, at *5–6 (Del. Ch. Dec. 30, 2010) (citations and quotations omitted).

In looking at the contract language, the Court can fairly say that the provisions

regarding billing and medical documentation are susceptible to both parties’

interpretations, as the first provision requires Lake Martin to send medical necessity

documents to Vanguard with lab specimens but the second provision contemplates

Vanguard providing requested medical records in the event of an audit. Further, it is clear

that the phrase “assist in obtain the pertinent medical records” should have been written as

“assist in obtaining the pertinent medical records.” Otherwise, the sentence is

grammatically incorrect. If this error is corrected, the contract requires Vanguard to “assist

in obtaining the pertinent medical records and provide them to [Lake Martin] within the

timeline designated by [Lake Martin],” with the word “assist” applying only to the act of

obtaining records and Vanguard having a separate responsibility to provide the records.

Of course, with respect to such errors:

[G]rammar and punctuation are of secondary importance to a court in

interpreting a contract where such grammar and punctuation reasonably

would frustrate the parties’ clear intent as evinced from the language used in

the contract. Indeed, a court should not allow the imprecise placement of

adverbs and commas to alter the otherwise plain meaning of a contractual

provision or to frustrate the overall plan or scheme memorialized in the

parties’ contract.

Id. at *7 (citations and quotations omitted). However, under Vanguard’s interpretation,

there would be no need for the next provision in the paragraph, which requires Lake Martin

to notify Vanguard of the need for the documents in writing so Vanguard could comply

within Lake Martin’s designated timeline and Lake Martin could, in turn, comply with the

insurer’s timeline. There is no purpose in designating a timeline for Vanguard’s

compliance if Vanguard’s obligation was limited to “assisting,” with no real responsibility

to do anything, and Vanguard’s interpretation would certainly render the provision

concerning written notice and a designated timeline illusory, meaningless, and surplusage.

For these reasons, the Court finds that the contract is ambiguous.

When contractual provisions are ambiguous, a court’s task is to determine the intent

of the parties. Delaware law requires a contract to be “read in the light of the intent of the

parties as determined by the facts and circumstances surrounding the transaction,” meaning

the Court will infer the parties’ intent. In re BankUnited Fin. Corp., 727 F.3d 1100, 1107

(11th Cir. 2013) (quoting Rohner v. Niemann, 380 A.2d 549, 552 (Del. 1977) (citation

omitted)).

The facts in this case indicate that the parties never intended for Lake Martin to be

responsible for gathering or obtaining the requested medical records from Robson’s

network of physicians. Credible testimony establishes that all of a patient’s medical

information was entered into Engage DX by the physician and maintained in the patient’s

medical record at the physician’s office. Reviewing individual patient files obtained from

doctors’ and confirming that a physician has done everything required to establish medical

necessity before ordering lab work is not an industry practice. Witnesses from both sides

testified that ensuring medical necessity was one of the purposes of Engage DX. However,

when Repole visited the physicians’ offices to review the medical records and gather

information needed to establish medical necessity, the information did not exist, but

Engage DX had failed to flag the test. Additionally, the physicians sent lab orders directly

to Vanguard and received results directly from Vanguard, bypassing Lake Martin

altogether. The specimens and any accompanying information were received by Ms.

Jackson, a data processor, who certainly was not qualified to make a determination reserved

for the treating physician. Finally, when Blue Cross began its audit, Robson immediately

began trying to track down the requested documents, even hiring a team of experts to help,

so Ms. Jackson could access the records and enter information in to the hospital’s billing

system.8 While Robson and Repole provided Lake Martin with updates on their progress

and what needed to be done, there was no suggestion by anyone that Lake Martin was

responsible for getting the medical records. Based on these facts, the Court cannot infer

that the parties intended for Lake Martin to be responsible for obtaining the medical records

requested by Blue Cross during its audit, even if those documents related to medical

necessity. The Court finds that the intended meaning of the contract was that Vanguard

would assisting in obtaining and ultimately provide the pertinent medical records requested

during an audit and that Vanguard would provide them within a deadline set by Lake

Martin so Lake Martin could comply with the deadline set by Blue Cross.

8 Regarding Engage DX, Lake Martin entered into a contract with Vanguard based on representations that

it would weed out the bad claims and, further, that Lake Martin would have access to medical

documentation through Engage DX. Engage DX was provided to physicians by Poydras, with which

Robson and White have some unexplained affiliation. None of the required information was entered into

Engage DX by the physicians, and Lake Martin had no access to patients’ medical records located at the

physicians’ offices. Vanguard argues that Lake Martin bore the responsibility of obtaining medical records

and places blame on Lake Martin for being unable to do so, but its inability was due to the inadequacy of

and failure to implement the Poydras software. These facts raise the possibility of a defense based on

fraudulent inducement, but that defense was not factually developed or otherwise pursued by Lake Martin

at summary judgment or trial.

(C) Vanguard cannot recover damages from Lake Martin due to its material

breach and lack of substantial compliance.

Finally, the Court finds that Vanguard’s failure to provide the pertinent medical

records was a material breach of the contract and prevents Vanguard from establishing its

own substantial compliance with the contract. A material breach is a failure to do

something so fundamental to a contract that it defeats the essential purpose of the contract

or makes it impossible for the other party to perform. Tektree, LLC v. Borla Performance

Indus., Inc., No. CIV.A. CPU4-12-00291, 2013 WL 5230705, at *4 (Del. Com. Pl. Sept.

16, 2013) (citations omitted). White pointed out that the contract between the parties did

not make Lake Martin’s payment to Vanguard contingent on Blue Cross’s payment to Lake

Martin; however, there can be no question that an essential purpose of the contract was to

perform and bill for lab tests reimbursable by Blue Cross. Indeed, it was the one and only

purpose. It is the reason Engage DX was created, and the contract was formed so Lake

Martin could submit claims to Blue Cross on behalf of Vanguard. Having found that the

contract required Vanguard to provide the pertinent medical records requested by Blue

Cross, the Court further finds that Vanguard’s failure to do so defeated the essential

purpose of the contract. Further, the breach prevented Lake Martin from performing its

obligations under the contract. Section II, Paragraph 3, of the contract placed the duty of

“compliance with all applicable insurance billing regulations” on Lake Martin. Vanguard’s

actions prevented Lake Martin from complying with Blue Cross’s requirements to submit

supporting medical records that were required for payment of a claim. For these reasons,

the Court finds that Vanguard’s failure constitutes a material breach of the contract, which

discharged Lake Martin of its duty to perform. Tektree, 2013 WL 5230705, at *4 (citing

Brasby v. Morris, 2007 WL 949485, at *4 (Del. Super. Ct. Mar. 29, 2007), in turn quoting

BioLife Solutions, Inc. v. Endocare, Inc., 838 A.2d 268, 278 (Del. Ch. 2003)).

Likewise, the doctrine of substantial compliance prevents recovery by Vanguard.

Before it can recover on its breach of contract claim, Vanguard must demonstrate its own

substantial compliance with all the provisions of the contract. E. Elec. & Heating, Inc. v.

Pike Creek Prof’l Ctr., No. 85C-MR-79, 1987 WL 9610 (Del. Super. Ct. Apr. 7, 1987),

aff’d, 540 A.2d 1088 (Del. 1988) (emphasis added) (citing Emmet S. Hickman Co. v. Emilio

Capaldi Developer, Inc., 251 A.2d 571 (Del. Super. 1969)). Substantial compliance is

permitted when literal compliance is impossible and substantial compliance “provides the

important and essential benefits of the contract.” See Halpin v. Riverstone Nat’l, Inc., No.

CV 9796-VCG, 2015 WL 854724, at *7 (Del. Ch. Feb. 26, 2015) (quoting Gildor v. Optical

Solutions, Inc., 2006 WL 4782348, at *7 (Del. Ch. June 5, 2006)). Although Vanguard

performed lab work as required under the contract, it is undisputed that Vanguard failed to

produce even one document that Blue Cross requested during its audit. Although Vanguard

did not argue that literal compliance was impossible, it is clear that Vanguard cannot show

any compliance with the provision requiring it to produce the requested medical records,

thereby preventing it from establishing its own substantial compliance with all of the

provisions of the contract.

III. CONCLUSION

For the above reasons, although Lake Martin does not dispute that it failed to pay

Vanguard for the lab tests at issue in this case, as was required under the contract, Vanguard

was first guilty of a material breach and cannot establish its own substantial performance

under the contract. Accordingly, Vanguard is not entitled to recover damages from Lake

Martin. The Court will enter a separate final judgment in favor of the Defendant.

DONE this 19th day of February, 2020.

/s/ Wallace Capel, Jr.

WALLACE CAPEL, JR.

CHIEF UNITED STATES MAGISTRATE JUDGE