Chattanooga-Hamilton County Hospital Authority d/b/a Erlanger Health System – Trial Court Awards $36 Million to Client

Challenge

Chattanooga-Hamilton County Hospital Authority, d/b/a Erlanger Health System (“Erlanger”), has five hospitals in Tennessee and is the seventh largest public hospital in the United States. Erlanger made a $20 million loan to the Hospital Authority of Walker, Dade and Catoosa Counties (the “Authority”) in connection with the execution of a management agreement, pursuant to which Erlanger agreed to take on defined management responsibilities at Hutcheson Medical Center, Inc. (“HMC”) in Fort Oglethorpe, Georgia. The loan was secured by certain real estate owned by HMC and guaranties from two of the affected counties. After the Authority terminated the management agreement without paying Erlanger, the client hired Arnall Golden Gregory to sue for recovery of the loan. The primary challenge was that the operative documents required Erlanger to first foreclose on its collateral prior to seeking recovery from the county guarantors. This requirement was complicated by defendants’ requests for injunctive relief to stop foreclosure based on certain Georgia statutes, by a previous bank lender to the Authority that claimed Erlanger’s security interests were subordinate to those of the bank, and by co-defendant HMC’s filling of a Chapter 11 petition.

Approach

Initially, the defendants attempted to delay the litigation, forestall foreclosure on Erlanger’s collateral and avoid the entry of judgment against them by contending that the Georgia Hospital Acquisition and Hospital Authorities Acts applied to the deed to secure debt and should preclude foreclosure on Erlanger’s collateral for the loan. They also contended that Erlanger’s breaches of the management agreement caused alleged monetary injuries in excess of the amount due under the note. The case was heard in federal court, where Arnall Golden Gregory attorneys showed that the Hospital Acquisition and Hospital Authorities Acts were not applicable to the deed to secure debt. Thus, the court denied defendant’s requests for injunctive relief. Erlanger also prevailed on its assertions that the Hospital Authority could not recover lost products and that Erlanger’s claims were not barred by fraudulent inducement. Finally, Erlanger prevailed on its motion for summary judgment, likewise defeating—on a motion to dismiss—a separate lawsuit initiated by the bank lender to the Authority seeking a finding that Erlanger’s interests were subordinate to those of the bank.

Result

The trial court awarded $36 million to the client, comprising the $20 million loan, $4 million in interest and $12.4 million in late fees and legal fees. Agreeing with arguments made by Arnall Golden Gregory attorneys, the court also ruled the Authority could not receive lost profits and thus could not make any monetary recovery on its purported mismanagement claims.