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Healthnow New York Inc. v. APS Healthcare Bethesda

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF NEW YORK


March 10, 2006

HEALTHNOW NEW YORK INC. D/B/A/ BLUECROSS AND BLUESHIELD OF WESTERN NEW YORK AND BLUESHIELD OF NORTHEASTERN NEW YORK, PLAINTIFF,
v.
APS HEALTHCARE BETHESDA, INC. AND METROPOLITAN IPA, INC., DEFENDANTS.

The opinion of the court was delivered by: Scullin, Chief Judge

MEMORANDUM-DECISION AND ORDER

I. INTRODUCTION*fn1

Plaintiff HealthNow, New York, Inc. ("HealthNow"), commenced this action against Defendants APS Healthcare Besthesda, Inc. and Metropolitan IPA, Inc. (collectively "APS") asserting (1) a breach of contract claim and (2) a claim for a declaratory judgment and specific performance. Defendant APS asserts counterclaims against Plaintiff HealthNow for (1) negligent misrepresentation, (2) fraud, and (3) promissory estoppel.*fn2

Currently before the Court is HealthNow's motion to dismiss APS's counterclaims for (1) negligent misrepresentation, (2) fraud, and (3) promissory estoppel, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure.

II. BACKGROUND*fn3

HealthNow is a New York corporation that is licensed in New York as a not-for-profit health insurer and a health maintenance organization. Defendant APS Healthcare Bethesda, Inc. is an Iowa corporation with its principal place of business in Silver Spring, Maryland. APS is registered in New York to perform utilization review on behalf of HMOs and insurers. Defendant Metropolitan IPA, Inc. ("IPA"), a corporate affiliate of APS, is a Maryland corporation with its principal place of business in Silver Spring, Maryland. IPA arranges for mental health and chemical dependency services to persons with third-party health care coverage plans through service providers.

Toward the end of summer 2001, HealthNow needed to replace its third-party mental health and chemical dependency service provider, Integra. On August 24, 2001, HealthNow provided APS with data so that APS could formulate its price proposals as a possible replacement for Integra. HealthNow then provided APS with additional information, specifically, its former pricing fee schedule with its previous mental health service provider, Integra.

On May 31, 2002, HealthNow and APS entered into an IPA Agreement ("the Agreement") that set forth the terms under which APS was to arrange for the provision of mental health and chemical dependency services to HealthNow's members and the manner in which HealthNow was to pay for those services.

Sometime after the Agreement was executed, APS noticed that HealthNow's data and representations were inaccurate.*fn4 HealthNow acknowledged that some of the information that it had provided was inaccurate or misclassifed. Sometime thereafter, HealthNow drafted a Revised and Restated IPA Agreement ("Revised Agreement") to reflect changes made to the original Agreement.*fn5

APS's President of Behavioral Health Services, Roderick Hafer, signed the Revised Agreement on June 16, 2004, but stated, under separate cover, that he was only doing so based on his understanding that an amendment would be prepared memorializing the Revised Agreement's terms as currently negotiated. On July 9, 2004, however, after HealthNow and APS were still unable to resolve certain issues that were integral to the parties' Revised Agreement, APS sent HealthNow a letter containing its final proposal to resolve damages that APS incurred as a result of HealthNow's inaccurate information. The letter informed HealthNow that, if it did not respond by July 14, 2004, APS would terminate their contractual relationship. HealthNow never responded. APS terminated the relationship on October 15, 2004. As a result, HealthNow brought this action against APS for (1) breach of contract and (2) declaratory judgment and specificperformance. In a separate answer and counterclaim, APS asserted claims against HealthNow for (1) negligent misrepresentation, (2) fraud, and (3) promissory estoppel.

III. DISCUSSION

A. Standard of Review

As a threshold matter, Rule 12(b)(6) applies to both claims and counterclaims with equal force; therefore, courts review counterclaims under the same standard as claims in a plaintiff's complaint. See Pyke v. Laughing, No. 92-CV-555, 1996 WL 252660, *2 (N.D.N.Y May 9, 1996) (citing Cohen v. Stephen Wise Free Synagogue, 95 Civ. 1659, 1996 WL 159096, at *1 (S.D.N.Y. April 4, 1996)). Under Rule 12(b)(6), "a court must accept the material facts alleged in the complaint as true" and consider those facts in the light most favorable to the plaintiff. Solutia Inc. v. FMC Corp., 385 F. Supp. 2d 324, 330 (S.D.N.Y. 2005) (citing Grandon v. Merrill Lynch & Co., 147 F.3d 184, 188 (2d Cir. 1998)) (other citation omitted). "[U]nless 'it appears beyond doubt that the plaintiff can prove no set of facts in support of [its] claim which would entitle [it] to relief,'" a court should not dismiss a complaint for failure to state a claim. Id. (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed. 2d 80 (1957)).

Applying this standard, the Court will address each of APS's counterclaims in turn.

B. Negligent Misrepresentation

Under New York law, to state a claim for negligent misrepresentation, a plaintiff must prove that: (1) defendant, as a result of a special relationship, failed to give correct information; (2) defendant should have known that the false representation was incorrect; (3) defendant knew the information was to be used by plaintiff for a serious purpose; (4) plaintiff intended to rely and act upon it; and (5) plaintiff reasonably relied on the information to his or her detriment.

Calcutti v. SBU., Inc., 223 F. Supp. 2d 517, 522 (S.D.N.Y. 2002) (citing Hydro Investors, Inc. v. Trafalgar Power, Inc., 227 F.3d 8, 20 (2d Cir. 2000)).

In determining whether a special relationship exists in the commercial context, the New York Court of Appeals has instructed that a fact finder should consider whether the person making the representation held or appeared to hold unique or special expertise; whether a special relationship of trust or confidence existed between the parties; and whether the speaker was aware of the use to which the information would be put and supplied it for that purpose.*fn6

Kimmell v. Schaefer, 89 N.Y.2d 257, 264 (1996).

HealthNow argues that the Court should dismiss APS's negligent misrepresentation claim because APS fails to allege that it had a special relationship with HealthNow other than an arm's length business transaction. As a result, HealthNow contends that APS cannot state a claim for negligent misrepresentation.

APS, conversely, contends that it did, in fact, have a special relationship with HealthNow based on HealthNow's unique expertise and proprietary grip on information that it provided to APS. APS, therefore, contends that HealthNow "knew or should have known that APS would rely upon [the data's] accuracy and comprehensiveness in formulating its pricing proposals and ultimately agreeing on pricing amounts for the HealthNow business." See APS's Counterclaim at ¶ 53.*fn7

APS alleges that HealthNow had a "unique or special expertise" regarding the information that it provided to APS and upon which APS relied because that information was only available from HealthNow.*fn8 Kimmell, 89 N.Y. 2d at 264. Moreover, APS alleges that had it

"known that the data and representations it was relying upon from HealthNow had glaring material omissions and was [sic] inaccurate, it would not have entered into the Agreements with HealthNow at the rates it did." See APS's Counterclaim at ¶ 56. APS further alleges that, since HealthNow made these representations in the course of the parties' contractual negotiations and APS entered the contract based on that information, HealthNow was likely "aware of the use to which the information would be put and supplied it for that purpose."*fn9 Kimmell, 89 N.Y. 2d at 264. APS's counterclaim, therefore, alleges sufficient facts which, if true, would support a claim for negligent misrepresentation generally and whether a special relationship existed between the parties specifically.*fn10

Accordingly, the Court denies HeathNow's motion to dismiss APS's negligent misrepresentation counterclaim.

C. Fraud

1. Fraud's Elements and the Revised Agreement's Integration Clause

To state a claim for common law fraud in New York, "a plaintiff must allege: (1) a material false representation made by the defendant; (2) with the intent to defraud; (3) upon which the plaintiff reasonably relied; (4) causing the plaintiff damage as a result of his reliance." Doehla v. Wathne Ltd., Inc., No. 98 Civ. 6087, 1999 WL 566311, *9 (S.D.N.Y. Aug. 3, 1999) (citing Swersky v. Dreyer and Traub, 643 N.Y.S.2d 33, 36 (1st Dep't 1996)). However, for a fraud claim to survive alongside a breach of contract claim the plaintiff must either: "(i) demonstrate a legal duty separate from the duty to perform under the contract, or (ii) demonstrate a fraudulent misrepresentation collateral or extraneous to the contract, or (iii) seek special damages that are caused by the misrepresentation and unrecoverable as contract damages."

Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. of N.Y., No. 02 Civ. 1312, 2002 WL 31426310, *5 (S.D.N.Y. Oct. 29, 2002) (emphasis added) (quoting [Bridgestone/Firestone, 98 F.3d] at 20) (other citation omitted).*fn11

HealthNow argues that APS cannot maintain its fraud counterclaim because it cannot show that it justifiably relied on HealthNow's representations, that HealthNow had a legal duty separate from the contract, or that HealthNow had the requisite fraudulent intent. Moreover, HealthNow contends that the Agreement contradicts the allegations that support APS's fraud claim.

To the contrary, APS asserts that it has sufficiently pled justifiable reliance and that HealthNow's argument only indicates that there are factual issues to be addressed in this regard. The gravamen of APS's fraud claim is that HealthNow knowingly or with reckless disregard provided false, inaccurate, and incomplete data to APS in order to induce APS to enter into a contractual relationship with HealthNow. As a result, APS argues that it reasonably relied to its detriment on HealthNow's representations and would not have done so had it known the truth.

As a threshold matter, HealthNow relies on New York common law that holds that, when a fraud claim and breach of contract claim coexist in the same action, a plaintiff must either demonstrate "'(1) a legal duty separate and apart from the contractual duty to perform; (2) a fraudulent representation collateral or extraneous to the contract; or (3) special damages proximately caused by the fraudulent representation that are not recoverable under the contract measure of damages.'" See HealthNow's Memorandum of Law at 16-17 (quoting Bridgestone/Firestone, Inc. v. Recovery Credit Services, Inc., 98 F.3d 13, 20 (2d Cir. 1996)) (other citation omitted). In this case, however, APS has not alleged a breach of contract claim; therefore, it does not have to establish the additional elements required when a fraud claim is coexistent with a breach-of-contract claim. See Eternity Global Master Fund, 2002 WL 31426310, at *5. Thus, APS need only allege facts sufficient to satisfy the elements of common law fraud.*fn12

Applying the elements of common law fraud to APS's allegations, the Court concludes that APS satisfies the false material representation element by alleging that HeathNow provided false "standard" provider fee schedules and falsely represented that the FHP program was "commercial" in nature. Regarding HealthNow's intent to defraud, APS alleges that HealthNow "needed to quickly replace its third party mental health and chemical dependency service provider, Integra, due to financial difficulties Integra was facing." See APS's Counterclaim at ¶ 7. HealthNow, therefore, provided this false information, APS alleges, to induce APS to enter into the contract. As to reliance, APS asserts that it relied on HealthNow's inaccurate information and provided "services at rates far below what it would have agreed to if HealthNow had presented it with accurate and reliable information."*fn13 See id. at ¶ 1. Finally, as a result of this reliance, APS alleges that it suffered damages in excess of millions of dollars.*fn14 See id. at ¶ 66. Accordingly, the Court finds that APS has stated sufficient facts to support its fraud counterclaim.

With respect to the Agreement's integration clause, HealthNow asserts that "all prior written or oral agreements are merged into the written agreement" which therefore "preclude[s]

APS from relying on any alleged representations that were made at the time the parties negotiated the original IPA Agreement . . . ." See HealthNow's Memorandum of Law at 18 (citing Revised and Restated IPA Agreement §§ 12.8.1-8.2). APS, conversely, claims that the integration clause is ineffective against allegations of fraud.

New York courts prohibit the introduction of extrinsic evidence where a contract is fully integrated by a merger clause. See Solutia, 385 F. Supp. 2d at 340 (citing Mfrs. Hanover Trust Co. v. Yanakas, 7 F.3d 310, 315 (2d Cir. 1993)). "However, where the alleged misrepresentations supporting a claim of fraud arise from facts within the 'peculiar knowledge' of a party, even a specific disclaimer as to reliance on those representations does not bar a fraud claim." Id. (citing Warner Theatre Assocs. Ltd. P'ship v. Metro. Life Ins. Co., 149 F.3d 134, 136 (2d Cir. 1998)) (other citations omitted); see also Yurish v. Sportini, 123 A.D.2d 760, 761-62 (2d Dep't 1986) ("[T]his court has repeatedly noted that allegedly fraudulent [parties] may not invoke even specific disclaimer clauses in order to preclude evidence of oral misrepresentations if the facts allegedly misrepresented are peculiarly within [that party's] knowledge." (internal quotation omitted)).

As previously noted, APS alleges that HealthNow had a proprietary interest in the information that it provided to APS; therefore, APS had to rely on that data because it had no other means of obtaining the same. Since APS alleges that it relied on HealthNow's representations concerning facts within HealthNow's peculiar knowledge, the Revised Agreement's integration clause does not preclude APS's fraud counterclaim based on representations extraneous to the contract.*fn15 Cf., e.g., Solutia, 385 F. Supp. 2d at 340 (holding that the plaintiff can introduce extrinsic evidence notwithstanding a merger clause where the "alleged misrepresentations in this action concern the capability of proprietary technology, which is necessarily in the peculiar knowledge of its owner" (citation omitted)).

Accordingly, the Court denies HealthNow's motion to dismiss APS's fraud counterclaim to the extent that HealthNow bases its motion upon its argument that APS failed to allege the elements of fraud.

2. Particularity Requirements of Rule 9(b)

Under Rule 9(b) of the Federal Rules of Civil Procedure, a plaintiff must plead fraud with particularity, which requires it to "'(1) detail the statements (or omissions) that the plaintiff contends are fraudulent, (2) identify the speaker, (3) state where and when the statements (or omissions) were made, and (4) explain why the statements (or omissions) are fraudulent.'" Eternity Global Master Fund Ltd. , 375 F.3d at 187 (quoting Harsco, 91 F.3d at 347). Moreover, the complaint must be particular enough to satisfy Rule 9(b)'s three objectives: "(1) to provide a defendant with fair notice of the claims against it; (2) to protect a defendant from harm to its reputation or goodwill by unfounded allegations of fraud; and (3) to reduce the number of strike suits." Doehla, 1999 WL 566311 at *17 (citing DiVittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir. 1987)). Finally, although the rule does not require a plaintiff to allege scienter specifically, "it does require plaintiff to plead a factual basis which gives rise to a strong inference of fraudulent intent." Id. (citing Wexner v. First Manhattan Co., 902 F.2d 169, 172 (2d Cir. 1990)).

HealthNow argues that APS has no factual basis to support the conclusion that it justifiably relied on HealthNow's alleged misrepresentations. Moreover, HealthNow asserts that this is particularly true considering that APS entered into the Revised and Restated Agreement in June 2004, "long after the alleged misrepresentations were purportedly made." See HealthNow's Memorandum of Law at 20. APS, however, contends that it pled its fraud claim with the particularity that Rule 9(b) requires. Specifically, APS alleges that Nora McGuire, Senior Vice President of Marketing & Business Development for HealthNow, Christian Miller, Corporate Director of Contractual Benefits for HealthNow, and HealthNow provided "APS in the course of the parties' negotiations" with "false and incomplete" information. See APS's Counterclaim at ¶ 60. In particular, this false information included the standard nature of the provider fee schedules, the commercial nature of the FHP program, and false representations about transferring the Indemnity/PPO members to APS.*fn16 APS also alleges that Ms. McGuire, Mr. Miller, and HealthNow knew that the data and representations that they supplied to APS were false; and that, because that information was proprietary to HealthNow, "McGuire knew or should have known that APS was going to rely on the accuracy and comprehensiveness of the data . . . ."*fn17 See APS's Counterclaim at ¶¶ 8, 66.

As previously stated, Rule 9(b) requires the plaintiff to (1) detail the fraudulent representations, (2) identify the speaker, (3) identify when the representations were made, and (4) explain why the representations are fraudulent. See Eternity Global Master Fund Ltd., 375 F.3d at 187 (quotation omitted). APS's counterclaim details the representations that HealthNow made with respect to the information upon which APS relied, such as the standard Integra fee schedules and the representation that it would steer business towards APS if it would lower its administrative services fees. APS identifies the speakers, Ms. McGuire and Mr. Miller, "who were [both] in a position to know, and did know the contents and nature of information being tendered to APS." See APS's Counterclaim at ¶ 10. APS specifies when these representations were made, on August 24, 2001, when APS received a diskette of data, which APS used to form the basis for its price proposal to HealthNow, and in subsequent negotiations in late summer 2001. APS explains that these representations were fraudulent because, among other things, HealthNow provided APS with "standard" providers' fees which were actually the exception rather than the norm. These factual allegations are sufficient to pass muster under Rule 9(b) if they give "'rise to a strong inference of fraudulent intent.'" Aetna Cas. & Surety Co. v. Aneiro Concrete Co., Inc., 404 F.3d 566, 579 (2d Cir. 2005) (quotation omitted). "This may be accomplished 'through allegations of a motive to deceive and access to accurate information.'" Id. (quotation omitted).

As to access to accurate information, HealthNow has a proprietary interest in the information and, as APS alleges, Ms. McGuire and Mr. Miller were in a position to know the content and nature of the information that they provided. As to a motive to deceive, APS alleges that HealthNow provided false information to induce APS to enter into a contract with it because it "found itself in a position where it needed to quickly replace its third party mental health and chemical dependency service provider, Integra, due to financial difficulties Integra was facing." See APS's Counterclaim at ¶ 7. Accepting these allegations as true, a reasonable inference can be drawn that HealthNow's need to replace its departing mental health provider quickly contributed to its need to induce APS to enter into a contract with it. If APS is able to prove these allegations, they would establish HealthNow's motive to provide false information, a motive Ms. McGuire and Mr. Miller would share as HealthNow employees. This information could, therefore, permit an inference that HealthNow, Ms. McGuire, and Mr. Miller acted with intent to defraud.

Accordingly, the Court finds that APS has sufficiently pled the circumstances of the fraud with the specificity that Rule 9(b) requires. Moreover, the facts as alleged in the counterclaim certainly "provide [HealthNow] with fair notice of the claims against it." Doehla, 1999 WL 566311, at *9 (citations omitted).

D. Promissory Estoppel

To establish a promissory estoppel claim under New York law, a plaintiff must allege "(1) a clear and unambiguous promise, (2) reasonable and foreseeable reliance by the promisee, and (3) unconscionable injury to the relying party as a result of the reliance." Readco, Inc. v. Marine Midland Bank, 81 F.3d 295, 301 (2d Cir. 1996) (citations omitted).*fn18

HealthNow argues that, because it had a valid enforceable contract with APS, the Court should dismiss APS's promissory estoppel counterclaim. Alternatively, HealthNow claims that APS cannot allege reasonable reliance. HealthNow also argues that the Revised Agreement's integration clause precludes APS's reliance on any promises made prior to its execution.

APS, conversely, claims that it has alleged a valid claim for promissory estoppel and that HealthNow's first contention is wrong because it incorrectly assumes that the backdated Revised Agreement was intended to be a final accord. Moreover, APS argues that HealthNow promised to transfer business its way in exchange for reduced administrative fees and that this promise was not in writing and was, therefore, outside the written agreement's scope.

As to the first element of promissory estoppel, APS's counterclaim alleges that

"HealthNow unambiguously promised APS that it would enroll 288,000 PPO/Indemnity members with APS by September 2002 if APS charged only $.61/pmpm rather than $.71/pmpm . . . ." See APS's Counterclaim at ¶¶ 68-69. Regarding reasonable reliance, APS alleges that it agreed to the $.61/pmpm price for administrative services because "those additional members would provide significant economies of scale for APS." See id. HealthNow, however, never transferred those additional members to APS by September 2002. Finally, as to unconscionable injury, APS alleges that it "has been damaged in an amount to be determined at trial as a result of HealthNow's breach of promise." See id. at ¶ 71.

Although at first glance these allegations might not seem to rise to the level of "unconscionable injury," the District Court for the Western District of New York has noted that, when determining the unconscionability of injury, "[w]hile one may question whether the sort of injury [asserted here] can be considered unconscionable" such an inquiry "'call[s] for a qualitative and quantitative examination of facts that cannot be well-addressed in the pleading stage of a lawsuit.'" Clarence Beverage, Inc. v. BRL Hardy (USA) Inc., No. 99-CV-0256E, 2000 WL 210205, *3 (W.D.N.Y. Feb. 8, 2000) (quotation omitted). In essence, therefore, APS has sufficiently pled all three elements of its promissory estoppel counterclaim; and, therefore, the Court denies HealthNow's motion to dismiss on this basis.

As to the integration clause in the parties' Agreement (§ 12.8), at least one New York court has held that where a "merger clause is of a very general nature and does not contradict the allegations herein," a party is not precluded from raising a promissory estoppel claim. Urban Holding Corp. v. Haberman, 162 A.D.2d 230, 231 (1st Dep't 1990) (citation omitted). Other authority, however, holds that, where a merger clause is plainly intended to apply to the whole agreement and its language is comprehensive, there can be no reasonable reliance on representations made outside the contract. See Kleinberg v. Radian Group, Inc., No. 01 Civ. 9295, 2002 WL 31422884, *10 (S.D.N.Y. Oct. 29, 2002) (distinguishing Haberman and citing D'Accord Fin. Servs., Inc. v. Metsa-Serla Oy, No. 98 Civ. 5847, 1999 WL 58916, *4 n.5 (S.D.N.Y. Feb. 8, 1999)).

HealthNow asserts that the integration clause bars APS's promissory estoppel counterclaim. APS argues that, because HealthNow made its representations regarding transferring additional members for the purpose of fraudulently inducing APS to enter the Agreement at a lower administrative fee, as well as the integration clause's silence on this issue, the clause is too general to bar APS's promissory estoppel claim.

APS is correct that its allegations do not contradict the Agreement because it is silent on HealthNow's alleged agreement to transfer additional members to APS; thus, the Court denies HealthNow's motion to dismiss APS's promissory estoppel counterclaim.

IV. CONCLUSION

After carefully considering the record in this matter, the parties' submissions, and the applicable law, and for the reasons stated herein, the Court hereby

ORDERS that HealthNow's motion to dismiss APS's counterclaims for (1) negligent misrepresentation, (2) fraud, and (3) promissory estoppel, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, is DENIED.

IT IS SO ORDERED.


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