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Commissioner of Department of Social Services of City of New York v. New York-Presbyterian Hospital

Supreme Court of New York, First Department

July 26, 2018

Commissioner of the Department of Social Services of the City of New York, Plaintiff-Appellant,
v.
New York-Presbyterian Hospital, Defendant-Respondent, C.Y.L., et al., Defendants.

         Plaintiff appeals from an order of the Supreme Court, New York County (Charles E. Ramos, J.), entered September 8, 2016, which granted defendant New York-Presbyterian Hospital's (NYPH) motion to dismiss the complaint, and denied plaintiff's cross motion for summary judgment on its causes of action for breach of contact and unjust enrichment.

          Zachary W. Carter, Corporation Counsel, New York (Eric Lee and Scott Shorr of counsel), for appellant.

          Stuart Perry, PC, New York (Stuart S. Perry of counsel) and Solomon Law Firm, Cherry Hill, N.J. (Franklin P. Solomon of the bar of the State of New Jersey and the State of Pennsylvania, admitted pro hac vice, of counsel), for respondent.

          David Friedman, J.P., Rosalyn H. Richter, Richard T. Andrias, Judith J. Gische, Peter H. Moulton, JJ.

          FRIEDMAN, J.P.

         At issue on this appeal is an agreement settling a prior medical malpractice action against a hospital, in which the hospital agreed to "assume full responsibility for any monies which are ultimately found to be due to Medicaid in connection with" the injured patient's lengthy hospitalization. We hold, as a matter of law, that this provision may be enforced against the hospital in this action by plaintiff Commissioner of the New York City Department of Social Services (DSS), the relevant Medicaid administrator, as an intended third-party beneficiary of this aspect of the settlement agreement. We also hold that DSS's claim against the hospital is not barred by the doctrine of res judicata.

         Defendant C.Y.L.'s then-18-month-old son, M.L., was being treated for a congenital condition at defendant New York-Presbyterian Hospital (NYPH) in November 2003 when he was injured, allegedly by malpractice attributable to NYPH. As a result of this incident, M.L. remained an inpatient at NYPH until his death in 2010. C.Y.L., as M.L.'s guardian and on his own behalf, commenced a malpractice action against NYPH in 2004. While M.L. was still alive, the malpractice action was settled, with court approval, pursuant to a settlement agreement, dated April 28, 2008, which provides, in pertinent part:

"NYPH agrees and stipulates that, if and when Medicaid asserts a lien or claim for return of any monies paid by Medicaid for care and treatment rendered to [M.L.] during his hospitalization that commenced on or about November 8, 2003, NYPH will assume full responsibility for any monies which are ultimately found to be due to Medicaid in connection with the aforementioned hospitalization."

         The settlement documentation also includes a "hold harmless" agreement, dated April 25, 2008, containing a provision substantially identical to the above-quoted provision of the settlement agreement, and further providing that C.Y.L. would "hold [NYPH] harmless from any and all claims or liens of any nature whatsoever," except for "the potential Medicaid lien or claim referenced above."

         Pursuant to the settlement agreement and the infant's compromise order entered by the court, NYPH's $6 million settlement payment was used to fund a supplemental needs trust for M.L.'s future care after his then-anticipated discharge from NYPH [1]. After M.L. died in March 2010, having never been discharged from NYPH, DSS (as the agency responsible for recoupment of Medicaid expenditures in New York City) received notice of the winding up of the trust, but, other than submitting a claim for reimbursement of $7, 133 in payments made to providers other than NYPH, it did not participate in the winding-up proceedings [2]. By order entered July 14, 2010, the court approved the final accounting for the trust, the plan for payment of the trust's outstanding expenses (including DSS's claim for $7, 133) and for the distribution of its residual assets, and the discharge of the trustees upon filing of proof of compliance with the order.

         On or about November 17, 2010, about four months after entry of the order approving the plan for the winding up of the trust, NYPH billed the New York State Department of Health (DOH) - the agency responsible for the processing and payment of claims against Medicaid for compensation for services covered by the program - for the costs it had incurred in caring for M.L. from November 2003 until his death in March 2010. After substantial downward adjustment of the invoiced sums, DOH paid NYPH an amount in excess of $4.8 million in 2012. When the payment was brought to the attention of DSS - which, again, is the agency responsible for the recoupment of Medicaid expenditures - DSS sought reimbursement of this amount from defendant C.Y.L., and defendant BNY Mellon, N.A., the co-trustees of the supplemental needs trust and co-administrators of M.L.'s estate [3]. Ultimately, DSS commenced this action to recoup the funds against C.Y.L., BNY and NYPH. Against NYPH, DSS asserted causes of action for unjust enrichment and breach of contract, the latter based on the theory that DSS was an intended third-party beneficiary of the settlement agreement's provision that NYPH would "assume full responsibility for any monies which are ultimately found to be due to Medicaid[.]"

         By orders entered in November 2014 and March 2015, Supreme Court dismissed the complaint in this action as against C.Y.L., and BNY based on res judicata, a determination from which DSS did not appeal [4]. Subsequently, by order entered in September 2016, Supreme Court granted the motion by NYPH, the sole remaining defendant, to dismiss the complaint as against it, and denied DSS's cross motion for summary judgment on its causes of action against NYPH. Supreme Court, taking the view that DSS should have raised its claims against NYPH in the proceedings to wind up the trust, granted NYPH's motion to dismiss on the ground of res judicata.

         Now before us is DSS's appeal from the order granting NYPH's motion to dismiss the complaint and denying DSS's cross motion for summary judgment. Initially, we hold that Supreme Court erred in dismissing the complaint on the ground of res judicata. At the time of the winding up of the trust in 2010, Medicaid had not been billed for, and had not paid, any of NYPH's charges for the hospitalization of M.L. that DSS now seeks to recoup in this action [5]. Thus, the claims that DSS asserts in this action did not exist when the trust was wound up. Logically, the order approving the final accounting of the trust - the basis for NYPH's assertion of the defense of res judicata - could not preclude DSS from asserting a claim that had not yet come into being at the time the order was entered (see X-Act Contr. Corp. v Flanders, 148 A.D.3d 518, 518 [1st Dept 2017] [a prior action did not constitute res judicata barring suit on a claim based on wrongdoing that allegedly occurred after the prior action had been settled]).

         Turning to the merits of the cause of action for breach of contract (which Supreme Court did not address), the question presented is whether DSS was an intended third-party beneficiary of the settlement agreement's provision that NYPH "will assume full responsibility for any monies... ultimately found to be due to Medicaid." We find that this question can be answered as a matter of law. This is also the view of both parties to this appeal, each of which urges that the terms of the settlement agreement unambiguously support the party's own position on the issue of DSS's status as a third-party beneficiary. Further, neither party, in arguing for its position, places significant reliance on parol evidence. NYPH, in particular, in its appellate argument on the third-party beneficiary issue, makes no reference at all to anything in the record other than the settlement agreement, the hold harmless agreement, and the infant's compromise order. [6]

         As most recently articulated by the Court of Appeals, an intention of the parties to a contract to benefit a third party, thereby conferring on the third party the right to enforce the contract, will be found (apart from situations where the third party is the only party that could recover for the breach) only "when it is... clear from the language of the contract that there was an intent to permit enforcement by the third party'" (Dormitory Auth. of the State of N.Y. v Samson Constr. Co., 30 N.Y.3d 704, 710 [2018], quoting Fourth Ocean Putnam Corp. v Interstate Wrecking Co., 66 N.Y.2d 28, 45 [1985]). Thus, it is well established that a third party cannot be deemed an intended beneficiary of a contract unless "the parties' intent to benefit the third party... [is] apparent from the face of the contract" (LaSalle Natl. Bank v Ernst & Young, 285 A.D.2d 101, 108 [1st Dept 2001]; accord Perfetto v CEA Engrs., P.C., 114 A.D.3d 835, 836 [2d Dept 2014]; U.S. Bank N.A. v GreenPoint Mtge. Funding, Inc., 105 A.D.3d 639, 640 [1st Dept 2013], lv denied 22 N.Y.3d 863');">22 N.Y.3d 863 [2014]; East Coast Athletic Club, Inc. v Chicago Tit. Ins. Co., 39 A.D.3d 461, 463 [2d Dept 2007]; Zelber v Lewoc, 6 A.D.3d 1043, 1045 [3d Dept 2004]).

         The provision of the settlement agreement under which NYPH agreed to "assume full responsibility" for any Medicaid claim in the settlement agreement makes it "apparent from the face of the contract" (LaSalle, 285 A.D.2d at 108) that the parties intended to confer a direct benefit on DSS. NYPH's "assum[ption] [of] full responsibility" for any Medicaid claim is more than a promise merely to indemnify C.Y.L. against such a claim, which would not, by itself, confer third-party beneficiary status on DSS (see e.g. Siegel Consultants, Ltd. v Nokia, Inc., 85 A.D.3d 654, 657 [1st Dept 2011], lv denied 18 N.Y.3d 809');">18 N.Y.3d 809 [2012]; Joseph P. Day Realty Corp. v Chera, 308 A.D.2d 148, 152-153 [1st Dept 2003]). Rather, the settlement agreement, by requiring NYPH to "assume full responsibility for any monies which are ultimately found to be due to Medicaid," plainly contemplates that "performance is to be rendered directly to [the] third party," a reliable indication that "the third party is deemed an intended beneficiary of the covenant and is entitled to sue for its breach" (Goodman-Marks Assoc., Inc. v Westbury Post Assoc., 70 A.D.2d 145');">70 A.D.2d 145, 148 [2d Dept 1979]; accord Tarrant Apparel Group v Camuto Consulting Group, Inc., 40 A.D.3d 556');">40 A.D.3d 556, 557 [1st Dept 2007]; Internationale Nederlanden [U.S.] Capital Corp. v Bankers Trust Co., 261 A.D.2d 117');">261 A.D.2d 117, 123 [1st Dept 1999]). [7]

         The dissent's attempt to distinguish Goodman-Marks, Tarrant Apparel and International Nederlanden is not persuasive. The observation that the particular facts of those cases are dissimilar from the facts presented here does not undercut the purposes for which we cite those cases, namely, that an agreement under which a benefit is to be provided directly to a third party generally establishes an intended third-party beneficiary status [8]. Indeed, what essentially occurred in this case, as evidenced by the plain terms of the settlement agreement, is that NYPH agreed to act as a surety for any liability that C.Y.L. might conceivably have to reimburse Medicaid. Thus, this case presents one of the paradigmatic situations in which the intention of the parties to the contract to confer a benefit on the third party, thereby allowing a direct action by the third party against the promisor, is generally recognized (see Restatement [Second] of Contracts § 302[1][a] [a beneficiary is intended "if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and... the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary"]; id., Comment b [in a surety situation, "a direct action by beneficiary against promisor is normally appropriate to carry out the intention of promisor and promisee"]; see also Daniel-Morris Co. v Glens Falls Indem. Co., 308 NY 464, 468-469 [1955]). [9]

         NYPH argues that any direct obligation to DSS imposed on it by the settlement agreement is triggered only when "monies... are ultimately found to be due to Medicaid," a condition that has not occurred, and (according to NYPH) now can never occur, since DSS's claims against C.Y.L. and BNY have been dismissed on res judicata grounds. We see no merit in this argument, as a matter of law. Under the relevant paragraph of the settlement agreement, the trigger for NYPH's obligation to "assume full responsibility for any monies... ultimately found to be due to Medicaid" is not the ultimate liability finding (which would render the provision a mere indemnity clause). Rather, the settlement agreement provides that NYPH's obligation to "assume full responsibility" for any liability to DSS arises" if and when Medicaid asserts a lien or claim for return of any monies paid by Medicaid for care and treatment rendered to [M.L.] during his hospitalization that commenced on or about November 8, 2003" (emphasis added). Stated otherwise, the obligation to assume liability on the claim is triggered upon DSS's assertion of the claim; it does not await the ultimate liquidation of the claim. As events transpired, DSS asserted the claim "for return of [the] monies paid by Medicaid" against C.Y.L. and BNY when it commenced this action against them (as representatives of M.L.'s estate and the trust), as well as against NYPH, in 2014. Therefore, it was the commencement of this action that triggered NYPH's obligation under the settlement agreement to assume the liability to reimburse DSS for its expenditures on the subject hospitalization, with the amount of the liability to be determined in the course of ...


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