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D.C. Healthcare Systems, Inc. v. District of Columbia

United States District Court, District of Columbia

September 7, 2017

D.C. HEALTHCARE SYSTEMS, INC., et al., Plaintiffs,
v.
DISTRICT OF COLUMBIA, et al, Defendants.

          MEMORANDUM OPINION [DKTS. ##53, 54, 55, 56, 57]

          RICHARD J. LEON UNITED STATES DISTRICT JUDGE

         For over a decade, D.C. Chartered Health Plan, Inc. ("Chartered"), contracted with the District of Columbia to provide healthcare services to low-income residents of the District. Then, in 2012, the District became concerned about the financial health of Chartered and obtained a court order from the Superior Court of the District of Columbia placing the company into rehabilitation. During the rehabilitation proceedings that followed, the Superior Court entered orders approving an asset purchase agreement and reorganization plan for Chartered, and approving a settlement agreement between Chartered and the District of Columbia resolving claims that the District underpaid Chartered for certain services. Now, D.C. Healthcare Systems, Inc. ("DCHSI"), the sole shareholder in Chartered and an active participant in the Superior Court proceedings, brings this suit to recover compensatory and punitive damages resulting from the reorganization of Chartered and the settlement of its claims against the District. Before the Court are five motions to dismiss. Upon consideration of the pleadings, relevant law, and the entire record herein, the Court concludes that it is barred from reviewing the claims asserted by DCHSI. See generally Rooker v. Fidelity Trust Co., 263 U.S. 413 (1923); D.C. Court of Appeals v. Feldman, 460 U.S. 462 (1983). Accordingly, the Court will GRANT the motions and DISMISS this action for lack of subject-matter jurisdiction.

         BACKGROUND[1]

         The District of Columbia provides healthcare coverage for low-income adults, uninsured children, and disabled residents through privately-owned managed care organizations ("MCOs") operating under government contracts. Am. Compl. ¶ 1 [Dkt. #41]. Chartered, a District of Columbia corporation, is one such MCO. From 1987 to 2013, Chartered contracted with the D.C. Department of Health Care Finance ("DHCF") to provide services to approximately 110, 000 District residents enrolled in Medicaid or the D.C. Healthcare Alliance Program, a locally-funded program covering certain individuals who are not eligible for Medicaid. Am. Compl. ¶¶ 13, 32-33. Pursuant to this arrangement, DHCF set the reimbursement rates at which it would pay Chartered. These rates, known as "capitation rates, " are per-member per-month rates which, by law, must be set at "actuarially sound" levels designed to cover the cost of contracted services and permit the MCO to generate a profit. Am. Compl. ¶¶ 2, 29-35.

         In 2010, Congress enacted the Patient Protection and Affordable Care Act, Pub. Law No. 111-148, 124 Stat. 119. Among other things, the Act changed the federal eligibility standards for Medicaid in a manner that enticed the District to transfer approximately 23, 000 residents from the locally-funded Alliance program to the federally-subsidized Medicaid program. Am. Compl. ¶ 36. This transfer caused Chartered's costs to skyrocket because individuals enrolled in Medicaid are entitled to certain prescription drug and other benefits that were not covered by the Alliance program. Am. Compl. ¶¶ 36, 42. On more than one occasion, Chartered notified DHCF and the District's actuary, Mercer Government Human Services Consulting ("Mercer"), [2] that the transfer would have a severe adverse financial impact on Chartered if the capitation rates were not adjusted to accommodate the company's increased costs. Am. Compl. ¶¶ 37- 40. These pleas, apparently, fell on deaf ears. DHCF did not raise the rates, and, by February 2011, Chartered was "experiencing heavy losses." Am. Compl. ¶38. Although Chartered continued to seek a rate increase from DHCF, none was granted, and "Chartered's financial condition predictably and precipitously deteriorated." Am. Compl. ¶ 44.

         In April 2012, then-Commissioner of the D.C. Department of Insurance, Securities and Banking ("DISB"), William White, wrote to Chartered's president to inform him that Chartered's financial statement for the previous year had shown a level of "risk-based capital" that was "significantly below" the threshold required by D.C. law. Am. Compl. ¶47. Shortly thereafter, Commissioner White retained consultant Daniel Watkins to conduct a financial review of Chartered. Am. Compl. ¶¶ 15> 50> 55- In October 2012, White and Watkins began working with Wayne Turnage, Director of DHCF, to obtain consent from Chartered's board of directors to place Chartered into rehabilitation. Am. Compl. ¶¶ 16, 62. As part of that negotiation process, Watkins represented to Jeffrey Thompson, DCHSI's owner, that if Watkins were appointed rehabilitator, he would consult with DCHSI in the reorganization of Chartered, cause Chartered to bid on new Medicaid and Alliance contracts, refrain from suing DCHSI and Thompson, and seek approval of the extension of Chartered's Medicaid contract. Am. Compl. ¶¶ 62-63. Following these representations, Thompson gave his consent to rehabilitation. Am. Compl. ¶¶ 64-65.

         On October 19, 2012, Commissioner White filed an emergency consent petition in the Superior Court of the District of Columbia, seeking to place Chartered into rehabilitation pursuant to D.C. Code §§31-1303, 31-1310, 31-1311, 31-1312, and 31-3420. A Superior Court judge issued an Emergency Consent Order of Rehabilitation later that same day. See Defs.' Mot. Dismiss First Am. Compl. ("Defs.' Mot.") [Dkt. #54], Ex. F ("Rehabilitation Order") [Dkt. #54-8]. The Rehabilitation Order appointed Commissioner White as Rehabilitator, authorized White to appoint deputies, and vested him "with all appropriate and necessary powers" under D.C. law, including "[a]ll powers of the directors, officers and managers of Chartered, " "[a]uthority to take possession and control of Chartered's assets and administer them under the general supervision of the Court, " and "[a]uthority to take such action as deemed necessary or appropriate to reform and revitalize Chartered." Rehabilitation Order 1-2. The Order directed the Rehabilitator to "seek Court approval of any compromise or settlement of Chartered's claim . . . regarding capitation rates" and to "submit a plan of rehabilitation of Chartered for Court approval, if one is feasible." Rehabilitation Order 2-3. The Order also specified that the Superior Court retained jurisdiction during Chartered's rehabilitation. Rehabilitation Order 3.

         Following entry of the Rehabilitation Order, Commissioner White appointed Watkins as Special Deputy to the Rehabilitator ("SDR"). On February 22, 2013, SDR Watkins submitted for Superior Court approval a proposed rehabilitation plan and a proposed asset purchase agreement between Chartered and another D.C.-based MCO, AmeriHealth Caritas District of Columbia, Inc.[3] Defs.' Mot., Ex. H (SDR's Second Status R. and Pet.) [Dkt. #54-10]. DCHSI appeared as a "party in interest" to oppose the plan and agreement. Defs.' Mot., Ex. I (DCHSI's Mot. Opp'n) [Dkt. #54-11]; Am. Compl. ¶ 82. DCHSI argued that the plan and agreement would cause it to "suffer irreparable harm because the proposed transaction effectively liquidates Chartered, which is DCHSI's sole source of revenue." Defs.' Mot., Ex. H, at 1. Nevertheless, on March 1, 2013, following a hearing, Superior Court Judge Melvin R. Wright issued an Order Approving the Asset Purchase Agreement, Plan of Reorganization and Related Matters. Defs.' Mot., Ex. K ("Reorganization Order") [Dkt. #54-13]. The court found that "the Agreement and Plan of Reorganization are necessary and appropriate and fair and equitable to all parties concerned." Reorganization Order 2. It rejected due process and statutory authority objections raised by DCHSI, stating that the Rehabilitation Order "gave the rehabilitator the right, based upon the statute, to marshal the assets and to seek rehabilitation." Defs.' Mot., Ex. J (Tr. of Hr'g before J. Wright (Mar. 1, 2013), at 35:24-36:06) [Dkt. #54-12]. In addition, Judge Wright informed DCHSI that it "certainly ha[s] the right to note an appeal now . . . because this would be a final order." Id. at 36:20-22.

         Five days after the Superior Court entered the Reorganization Order, DCHSI filed a motion for reconsideration or stay pending appeal. Defs.' Mot., Ex. L (Party-in-Interest DCHSI Mot. Stay Pending Appeal & Injunctive Relief) [Dkt. #54-14]. The company argued, among other things, that ii was likely to succeed on the merits of its appeal because the Rehabilitator had "exceeded the limits of his authority" by "effecting] a 'transformation' of Chartered" outside the scope envisioned by the D.C. Code and the Rehabilitation Order. Id. at 23. The Superior Court denied the motion. It concluded that DCHSI was unlikely to succeed on the merits because the Rehabilitator had complied with the requirements of the D.C. Code and the Rehabilitation Order. See Defs.' Mot., Ex. O (Order), at 2-4 [Dkt. #54-17]. The court also found that DCHSI had not shown irreparable harm stemming from the Reorganization Order because "Chartered was set to lose its [existing] Medicaid contract" and "was unqualified to receive a new contract under the term[s] of the Medicaid RFP issued in late 2012." Id. at 4.

         Meanwhile, the District and Chartered entered into a settlement agreement in which the District agreed to pay Chartered $48 million to settle $62.5 million in claims brought by the Rehabilitator on behalf of Chartered for the payment of unsound capitation rates. Am. Compl. ¶¶ 86-87, 91. As required by the Rehabilitation Order, the Rehabilitator sought Superior Court approval of the proposed settlement. The Rehabilitator and SDR described the proposed settlement as the product of arms-length negotiations by experienced counsel, arguing that the settlement would benefit Chartered by resulting in payment to the company without further litigation or uncertainty. Defs.' Mot., Ex. Q (Rehabilitators' Mem. P. & A. Supp. Mot. for Order Approving Settlement Agreement) [Dkt. #54-19]. DCHSI opposed the settlement on the ground that it was "unreasonable and contrary to Chartered's best interests" because it undervalued Chartered's claims and because litigation of those claims was likely to be successful. Defs.' Mot., Ex. B (DCHSI's Mem. Opp'n to Mot. Approve Settlement Agreement), at 2, 15 [Dkt. #54-4]; see also Defs.' Mot., Ex. T (Suppl. to DCHSI's Mem. Opp'n to Mot. Approve Settlement Agreement) [Dkt. #54-22].

         On August 21, 2013, Judge Wright held a hearing on the proposed settlement agreement. In regard to DCHSI's objections, Judge Wright stated:

The objections by [DCHSI] who is not a party ha[ve] been considered by the court and the court will rule that they are not a party to this case and really didn't have the right to be permitted to do what they have done. The court has permitted them to do that. Because had they filed a motion to intervene, the court probably would have grant[ed] it, but it did serve a purpose to have the court examine the record. I just do not agree with [DCHSI's] calculations [regarding the value of Chartered's claims].

Defs.' Mot., Ex. U (Tr. of Hr'g before J. Wright (Aug. 21, 2013), at 10:20-11:3) [Dkt. #54-23]. Judge Wright went on to acknowledge that DCHSI had a right to appeal, but stated that any appeal "may be moot" because "had you been a party, I would have overruled your objection anyway. . . . I've considered all the things that you would have raised had you been granted standing." Id. at 21:9-17; see also Id. at 22:5-8 ("[H]ad standing been granted, the court would have approved the settlement anyway over your objection.").[4] The next day, Judge Wright issued an Order Approving Settlement Between Chartered and the District of Columbia. Defs.' Mot., Ex. V ("Settlement Order") [Dkt. #54-24]. The Settlement Order "resolve[d] all of Chartered's claims" stemming from the allegedly ' unsound capitation rates "and all potential related claims." Settlement Order 1.

         DCHSI appealed from the Reorganization Order and the Settlement Order. The company argued that Lhe Reorganization Order was invalid because the Rehabilitator had exceeded the limits of his statutory authority and denied due process to DCHSI. Defs.' Mot., Ex. W (DCHSI's Appellant's Op'g Br.) [Dkt. #54-25]. In regard to the Settlement Order, it argued that the settlement was "manifestly unfair." Def. Mercer LLC's Mot. to Dismiss the First Am. Compl. ("Mercer Mot.") [Dkt. #57], Ex. 15 (Br. of Appellant DCHSI), at 29 [Dkt. #57-16]. DCHSI also argued that it had "standing" because it had been "treated as a party" throughout the rehabilitation proceeding. Id. at 28-29. The D.C. Court of Appeals set oral argument for October 15, 2014. ...


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