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Legal Opinions - U.S. District Court, Maryland: May 5, 2008

Daily Record, The (Baltimore), May 5, 2008

Civil Procedure

Personal jurisdiction

BOTTOM LINE: Defendants did not purposefully avail themselves of the privilege of doing business in Maryland and therefore lacked the requisite minimum contacts with Maryland to justify personal jurisdiction.

CASE: ASCO Healthcare v. Heart of Texas Health Care, and Rehabilitation, Inc., et. al., USDMD Civ. No. L-04-1419 (filed Mar. 27, 2008) (Judge LEGG)

FACTS: This case involved a contract dispute between ASCO Healthcare, Inc. ("ASCO"), a Maryland corporation with its principle place of business in Baltimore, and two successive owners of certain Texas health care and rehabilitation facilities (the "Facilities").

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Heart of Texas Care and Rehabilitation, Inc. ("Heart of Texas") was created when a company established in connection with a bond offering to finance the operation of health care facilities in Texas, filed for Chapter 11 bankruptcy in October 2001. As part of the reorganization effort to repay obligations under the bond offering, Heart of Texas took ownership of the Facilities and assumed responsibility for their operation.

In the fall of 2002, ASCO and Heart of Texas entered into pharmaceutical contracts for each of Heart of Texas' six health care facilities for a term of two years. These contracts made ASCO the sole and exclusive provider of pharmaceutical services and supplies for the contract's two year term. According to the contracts, any sale of the facilities would not constitute grounds for the termination or modification of the agreement.

The Facilities continued to struggle financially. In September 2003, prior to the expiration of the pharmaceutical contracts' two year term, Heath of Texas signed an agreement ("the Purchase Agreement") to sell the Facilities to Defendant Sam Jewell in an arms-length transaction.

Under the terms of the Purchase Agreement, Heart of Texas did not purport to assign ASCO's pharmaceutical contracts to Jewell. The Legacy Defendants consisted of six Texas corporations created by defendant Sam Jewell in connection with his purchase of the Facilities from Heart of Texas in September.

The Purchase Agreement contemplated an interim period before the deal closed and other companies created in conjunction with the transaction the Legacy Defendants took ownership of the Facilities.

Initially, the parties intended that the management company owned by Jewell called Shady Grove, Inc., would manage the Facilities until the sale closed. Under the management agreement, Drushel Management Company, the original manager of day to day operations, would be replaced by Shady Grove, assuming responsibility for depositing the Facilities' revenues into the disbursement account.

In addition, the Management Agreement appointed Shady Grove to manage the day-to-day business activities and management. Although the Management Agreement was executed, it was never fully implemented.

By late December 2003, the Facilities had all received the licenses required for the Legacy Defendants to take ownership of the Facilities. In anticipation of the scheduled closing date, Jewell and the Facilities Administrators informed ASCO of the imminent change in ownership, and informed ASCO that the Legacy Defendants would not be continuing with the pharmaceutical contracts once the sale closed.

In response, ASCO sued Heart of Texas for terminating the contracts prior to the expiration of their two year terms and for unpaid invoices. ASCO also sued Jewell and the Legacy Defendants for breach of contract.

The Legacy Defendants filed a motion to dismiss for lack of personal jurisdiction. At the conclusion of full discovery both parties moved for summary judgment. The court granted Heart of Texas's motion to dismiss.

LAW: The parties did not dispute that ASCO continued to fill pharmaceutical orders from the Facilities during the interim period between the execution of the Purchase Agreement and the termination of ASCO's contracts. ASCO contended that this fact demonstrates that the Legacy Defendants impliedly assumed the pharmaceutical contracts, making them liable for terminating those contracts before the execution of their two year term.

In order for a federal court to exercise personal jurisdiction over a nonresident defendant, two requirements must be met. First, the execution of jurisdiction must be authorized under the state's long-arm statute, and the exercise of the jurisdiction must comport with the due process requirement of the Fourteenth Amendment. Christian Science Bd. of Dirs. of the First Church of Christ v. Nolan, 259 F.3d 209-215 (4th Cir. 2001).

Maryland courts have consistently held that the state's long-arm statute is coextensive with the limits of personal jurisdiction set by the due clause of the Constitution. See, e.g., Mohamed v. Michael, 370 A.2d 551, 553 (Md. 1997).

A court's exercise of jurisdiction over a nonresident defendant comports with due process if the defendant has "minimum contacts" with the forum, such that to require the defendant to defend its interests in that state "does not offend traditional notions of fair play and substantial justice." Int'l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945).

Legal Opinions - U.S. District Court, Maryland: May 5, 2008

Daily Record, The (Baltimore), May 5, 2008

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