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Weirton Medical Center, Inc. v. R&V Associates, Ltd.

United States District Court, N.D. West Virginia, Wheeling

December 23, 2019



          John Preston Bailey Bailey Judge

         Pending before this Court is Defendant R&V Associates' Motions to Dismiss Amended Complaint [Doc. 26]. The motion has been fully briefed and is ripe for decision. For the reasons hereinafter stated, the motion will be granted in part and denied in part.

         Legal Standard

         A motion to dismiss filed under Fed.R.Civ.P. 12(b)(6) tests the legal sufficiency of a complaint or pleading. Giarratano v. Johnson, 521 F.3d 298, 302 (4th Cir, 2008).

         A complaint must be dismissed if it does not allege "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). In assessing a motion to dismiss, a court may consider public records, "documents incorporated into the complaint by reference, and matters of which the court may take judicial notice," or sources "whose accuracy cannot reasonably be questioned." Katyle v. Penn National Gaming, Inc., 637 F.3d 462 (4th Cir. 2011). This includes documents filed in prior court proceedings. See Walker v. Kelly, 589 F.3dl27 (4th Cir. 2009).


         The facts of this case, viewed in the light most favorable to Weirton Medical Center ("WMC") as the non-moving party, Nemet Chevrolet, Ltd. v., Inc., 591 F.3d 250, 255 (4th Cir. 2009), include the following:

         WMC is a nonprofit community hospital in Weirton, West Virginia. Beginning in 2012, WMC's Board of Trustees engaged R&V to provide management and consulting services to WMC pursuant to a written contract. WMC had fallen upon difficult financial times, and R&V billed itself as a sort of "turnaround" specialist for struggling hospitals. After all, R&V managed an apparent "turnaround" at Wheeling Hospital. WMC hoped that R&V could similarly provide such a "turnaround" in Weirton and relied on R&V's purported skills to achieve that.

         The Contract was to be performed by R&V's principal, Vincent C. Deluzio ("Deluzio"). Deluzio is an attorney and further held himself out as an expert for financial, legal, regulatory, staffing, and other issues that WMC faced. WMC relied on R&V's and Deluzio's representations to that effect. Pursuant to the terms of the Contract, R&V and Deluzio were to provide "coordination of operations, marketing, legal and compliance matters, with a goal of improving the financial condition and results of the operations" of WMC.

         Though the Contract itself used the terms "management consulting services," R&V's and Deluzio's control was all encompassing. Every WMC officer and employee-including even WMC's CEO-ultimately answered to R&V and Deluzio. In turn, R&V and Deluzio reported only to the Board of Trustees, whose oversight and authority they worked to thwart by, among other things, dramatically reducing the number of Board and finance committee meetings. Indeed, WMC's organizational charts specifically showed every officer, employee, and department of the hospital answering ultimately to R&V and Deluzio-only the Board of Trustees stood above it. R&V and Deluzio ran WMC.

         As part of R&V's and Deluzio's control over WMC, they were responsible for, among other things, physician compensation as well as the hiring, recruiting, and acquisition of physicians and physician practices. Such expansions and acquisitions are not inherently bad-so long as they comply with the various federal laws and regulations that govern physician compensation. For example, the Stark Law (42 U.S.C. § I395nn or "Stark Law") and the Anti-Kickback Statute (42 U.S.C. § 1320a-7b(b) or “AKS”) constrain the compensation that hospitals like WMC can pay physicians. The key import of the Stark Law and AKS is that hospitals cannot pay physicians more based upon the volume of referrals from the physician to the hospital itself. Violation of the Stark Law or AKS can subject a hospital to significant liability, including through qui tarn actions under the False Claims Act. WMC relied on R&V and Deluzio to navigate these legal requirements. Indeed, the Contract itself stated that R&V (and by extension, Deluzio) would "coordinate] . . . legal and compliance matters." WMC relied upon R&V's and Deluzio's supposed expertise in these matters, until the Wheeling Hospital Litigation.

         In December2OI 8, this Court unsealed a qui tarn lawsuit against Wheeling Hospital, styled United States ex rel. Longo v. Wheeling Hosp., Inc., 5:19-cv-00192 (hereinafter, "Wheeling Hospital Litigation"). Also named as defendants were R&V and its other principal, Rona!d L. Violi ("Violi"). R&V served in a key management role at Wheeling Hospital, just as it did at WMC.

         WMC became more concerned about the Wheeling Hospital Litigation when the United States Department of Justice joined in the case and filed its own Complaint in Intervention on March 25, 2019. There, the DOJ described the means by which Wheeling Hospital, pursuant to R&V's control, "systematically entered into financial relationships with referring physicians" that violated the Stark Law and/or AKS, thereby "knowingly submit[ing] . . . thousands of false claims" and causing millions of dollars of damages. More particularly, the DOJ Complaint explains that, prior to R&V's hiring, Wheeling Hospital had "experienced financial difficulties." But under R&V's management, "Wheeling Hospital went from losing money from its operations to generating substantial profits." One of the "principal means" by which "R&V engineered Wheeling Hospital's financial turnaround was the hiring of a large number of physicians, primarily as employees" in order to "capture" those employed "physicians' referrals and the resulting revenues" in a way that violated the Stark Law and AKS.

         The apparent parallels between R&V's conduct at Wheeling Hospital and R&V's conduct at WMC were shocking. Just as Wheeling Hospital "experienced financial difficulties," WMC was also struggling financially before R&V came in. And just as R&V "engineered Wheeling Hospital's financial turnaround" through physician employment, so did R&V at WMC. Indeed, WMC's Contract with R&V provided the latter with control over "recruitment" and "business combination[s]." Just as R&V's aggressive physician employment, acquisition, and compensation strategies lead to Wheeling Hospital's turnaround, WMC began to wonder whether its change in financial prospects was similarly due to R&V's potential misconduct. These concerns are further bolstered by the fact that WMC itself was mentioned in the DOJ Complaint, as was Deluzio's personal interaction at Wheeling Hospital.

         Following the DOJ Complaint, WMC alleges that it became aware that R&V and Deluzio were directing WMC's "legal and compliance matters" not for the benefit of WMC-as required by the Contract-but rather to serve R&V's and its principals' own personal interests in the Wheeling Hospital Litigation. For example, at R&V's and Deluzio's direction, they caused WMC to engage Wheeling Hospital's counsel for the Wheeling Hospital Litigation, David Paragas, to conduct an "independent" investigation at WMC. This was billed as "independent"-and indeed needed to be in order to accurately examine R&V's own conduct. Despite that, R&V and Deluzio nonetheless directed and controlled the investigation. R&V and Deluzio began directing the "independent" audit, not to discover potential non-compliance issues to correct and self-report as required by law, but rather to protect their own interests, both in the Wheeling Hospital Litigation and any potential litigation arising from their work at WMC. This strategy inherently conflicted with the Board's preference-and WMC's own best interests-which was to investigate any potential issues, correct and self-report them, and cooperate fully with any government investigation. That was, and still remains, WMC's approach. That was, and still remains, in WMC's best interests.

         Because of this inherent tension and conflict between WMC's interests on the one hand and the interests of R&V, Deluzio, Violi, and Wheeling Hospital on the other hand, the Board of Trustees terminated the supposedly "independent" investigation by R&V's hand-selected counsel and commissioned its own truly independent audit to be conducted by Bowles Rice LLP. R&V and Deluzio would be witnesses in and subjects of that audit, but they would no longer control it. Because the Board's decision went against R&V's and Deluzio's personal interests, they objected to, refused to cooperate with, and attempted to obstruct that second investigation. Some means by which R&V and Deluzio did this are spelled out in WMC's Amended Complaint, but include the following as examples:

1. Threatening to sue WMC for commissioning its own audit and defense strategy (a threat R&V and Deluzio followed through with in this litigation);
2. Threatening to quit and nonetheless fully charge WMC for the remaining balance of payments on the Contract (again, a remedy that R&V and Deluzio seek in this litigation);
3. Attemptg to coerce or intimidate Board members from cooperating or permitting the new audit; and
4. Tampering with witnesses for the new audit, including instructing them how to answer and questioning them after interviews.

         Most concerning and obvious, though, was R&V's and Deluzio's alteration of WMC documents in order to falsely lessen liability for R&V and Deluzio. Prior to the Wheeling Hospital Litigation, WMC's organizational charts accurately depicted the fact that all WMC officers, employees, and departments answered ultimately to R&V and Deluzio. But in April 2019-less than one month after the unveiling of the DOJ Complaint-R&V and Deluzio directed a change in the organizational chart to show themselves on equal footing as WMC's CEO. This new representation on the organizational chart is false and was done to deflect blame and culpability away from R&V and Deluzio and onto WMC. This change concocts a theory of lessened liability for R&V and conveys the false impression that Deluzio was a mere consultant, not the de facto CEO.

         Amended Complaint

         The Amended Complaint filed by WMC [Doc. 25] contains the following eight causes of action:

Count 1 alleges breach of the contract between WMC and R&V;
Count 2 seeks a declaratory judgment that WMC was within its rights in terminating the contract between WMC and R&V and that no further payment is due to R&V;
Count 3 alleges a breach of fiduciary duty by R&V by coordinating WMC's legal and compliance matters for its own benefit;
Count 4 alleges that R&V tortiously interfered with WMC's contract with the Bowles
Rice law firm, under which Bowles Rice was to conduct an independent audit;
Count 5 alleges unjust enrichment on the part of R&V in retaining an advance payment of $335, 000 which has not been returned;
Count 6 alleges the malicious use of process in R&V knowingly and ...

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