Central Valley Orthopedic and Spine Inst. v. Sanders Enterprises







Filed 9/7/11 Central Valley Orthopedic and Spine Inst. v. Sanders Enterprises CA5









NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.



IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIFTH APPELLATE DISTRICT

CENTRAL VALLEY ORTHOPEDIC AND SPINE INSTITUTE, Plaintiff, Cross-defendant and Appellant, v. SANDERS ENTERPRISES, Defendant, Cross-complainant and Appellant.

F059554 (Super. Ct. No. 04CECG01740) OPINION

APPEAL from a judgment of the Superior Court of Fresno County. Donald R. Franson, Jr., Judge.
Katten Muchin Rosenman, Daniel A. Platt and Gloria C. Franke for Plaintiff, Cross-defendant and Appellant.
Gilmore, Wood, Vinnard & Magness and David M. Gilmore for Defendant, Cross-complainant and Appellant.
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After plaintiff, Central Valley Orthopedic and Spine Institute, L.P. (Central Valley), leased a hospital facility from defendant, Sanders Enterprises, L.P. (Sanders), Central Valley assumed the license and Medicare provider number that had belonged to the previous tenant, Sanger General Hospital. Consequently, Central Valley was potentially liable for amounts that might be due to Medicare for overpayments made by Medicare to Sanger General Hospital. The lease therefore provided that Central Valley could offset any amounts paid to Medicare on behalf of Sanger General Hospital against the rent due to Sanders.
Central Valley took possession of the hospital facility in October 2002 but quit paying rent in May 2004. Central Valley ceased operations in June 2004 and filed the underlying action against Sanders alleging fraud and seeking rescission of the lease and damages. Central Valley claimed that there were significant amounts owed to Medicare for periods of time before it took possession of the premises. Sanders filed a cross-complaint seeking rent owed under the lease.
By the time of trial in March 2009, Central Valley had neither bills nor demands for payment from Medicare for the obligations owed before the lease date. Nevertheless, Central Valley had paid $360,000 to Medicare based on its expert’s review of the available cost reports.
Following a bench trial, the court ruled that Sanders was entitled to full credit for the remaining rent due but offset that amount by the $360,000 Central Valley had paid to Medicare. Shortly after the court issued its tentative decision, Central Valley moved to reopen the evidence claiming that additional sums were due to Medicare that it had not presented at trial. The court denied Central Valley’s motion finding that Central Valley had failed to act diligently and that the evidence that Central Valley sought to introduce was inadmissible hearsay.
On appeal, Central Valley contends that the trial court abused its discretion when it denied the motion to reopen the evidence. Central Valley further argues that the trial court erred in not accepting its expert witness’s testimony that Sanders could have mitigated its damages by leasing the hospital facility to another party before the end of Central Valley’s lease term. In a cross-appeal, Sanders asserts that the trial court erred in not taking steps to provide that, if Central Valley receives any refunds for Medicare overpayments, the refunds be paid to Sanders.
As discussed below, the trial court did not abuse its discretion in refusing to reopen the evidence. Further, the trial court was not required to accept the expert’s opinion on the marketability of the hospital facility. Finally, the court did not abuse its discretion in failing to provide a mechanism to disperse speculative Medicare refunds. Accordingly, the judgment will be affirmed.
BACKGROUND
Sanders owns a hospital facility that was leased to, and operated by, Sanger General Hospital. After Sanger General Hospital ceased operations, Central Valley entered into a lease of the premises in October 2002. The lease term was for three years.
Rather than obtaining its own license and Medicare provider number, Central Valley elected to assume the license and Medicare provider number that had belonged to Sanger General Hospital. Accordingly, Central Valley assumed the liabilities of Sanger General Hospital. To compensate for these potential liabilities, the lease provided that Central Valley was “entitled to offset any withholds from its Medicare or Medi-Cal reimbursement due to the assumption of such Prior Operator Liabilities from current rent payments.”
In April 2003, Central Valley learned that Sanger General Hospital apparently owed approximately $480,000 to Medicare for overpayments and that Medicare would be withholding those amounts from any future amounts due Central Valley for services it rendered after October 2002. Nevertheless, Central Valley paid rent to Sanders without a Medicare offset until May 31, 2004. At that point, Central Valley stopped paying rent and ceased operations. However, Central Valley did not vacate the premises until May 2005.
Central Valley filed suit against Sanders in June 2004 but never served that complaint. The operative pleading is the second amended complaint filed in August 2005. The essence of this complaint is that Central Valley was misled both during and after lease negotiations regarding the conditions of the hospital facility and the pre-lease Medicare obligations. Based on this alleged fraud and misrepresentation, Central Valley sought to rescind the lease and be relieved from its lease obligations. Central Valley also requested compensatory and punitive damages. Sanders filed a cross-complaint to collect the past due rent.
From March 17 through 19, 2009, the case was tried by the court. Central Valley presented testimony from its Medicare expert, Paul Fayollat. Fayollat had been hired by Central Valley at least eight months before trial. However, Fayollat took no steps to investigate what Central Valley might owe to Medicare until approximately three weeks before trial.
Fayollat testified that he examined the final audited cost reports issued by Medicare for Sanger General Hospital and that none of these cost reports were still open. Such cost reports reflect the Medicare overpayments or underpayments that are owed by or to a hospital. Based on the Sanger General Hospital final cost reports, Fayollat calculated that approximately $360,000 plus interest was owed to Medicare. There were no more adjustments to the cost reports after May 2007 except for interest being charged. According to Fayollat, at anytime, Central Valley could have gotten a running balance of what was owed for the years Sanger General Hospital was in operation from the Medicare fiscal intermediary. A fiscal intermediary is the contracted, non-governmental agency that acts as “the bookkeeper for Medicare.” At the time of trial, the fiscal intermediary was Palmetto, a private South Carolina company.
On March 13, 2009, four days before trial was to begin, Central Valley made a $360,000 payment to Medicare, through Palmetto, for services provided before Central Valley entered into the lease. Central Valley did not have a bill or demand from Medicare and did not attempt to contact Palmetto to obtain a balance due. Rather, this amount was based on Fayollat’s calculation. George William Hammer, Central Valley’s chief financial officer, testified that he decided to make this payment to avoid losing the ability to offset the Medicare obligation against the rent.
Central Valley also presented testimony from Michael Schuh, a commercial real estate leasing and sales expert, on the issue of mitigation of damages. According to Schuh, Sanders could have reasonably marketed the premises and found another tenant within an approximate time frame of 10 to 12 months.
The court issued a tentative decision finding in favor of Sanders on the fraud and breach of lease claims. The court also gave Sanders full credit for the rent due. The court found that Central Valley did not meet its burden on its mitigation defense to the claim for back rent “based on the lack of persuasiveness” of Central Valley’s expert witness. However, based on Hammer’s testimony, the court found that the March 13, 2009, payment to Medicare qualified as a payment for pre-lease Medicare obligations and thus credited that amount against the past due rent. After this offset, the court found the past due rent totaled approximately $99,500, plus interest. Finally, the court denied the claims for indemnification on the ground that any future obligations were purely speculative.
Thereafter, Central Valley filed a motion to reopen the case for the introduction of new evidence of additional sums due to Medicare. According to Central Valley, after the trial concluded, Central Valley was contacted by Palmetto and informed that an additional approximately $87,000 was owed to Medicare and that Central Valley had paid that amount. In support of this motion, Central Valley submitted the declaration of Randy Taylor, Central Valley’s risk manager, stating that he was contacted by Palmetto and informed of the additional amount due and that Central Valley had issued a check in that amount. Attached to his declaration was a copy of the face of that check.
The trial court denied Central Valley’s motion to reopen the case. The court concluded that Central Valley had not met its burden of showing due diligence and, in any event, the proffered evidence was “simply based on hearsay, with no showing that admissible evidentiary documents or testimony could or would be produced should the trial be reopened.”
After the judgment was signed but before it was entered, Central Valley again presented a motion to reopen the evidence. The court refused to file the motion and instead suggested that, after judgment was entered, Central Valley file the motion as a motion for a new trial. Judgment was thereafter entered in favor of Sanders.
DISCUSSION
1. Central Valley’s appeal.
Central Valley raises two issues on appeal. Central Valley contends that the trial court erred in (1) denying its motion to reopen the evidence; and (2) disregarding its expert witness’s testimony regarding Sanders’s alleged failure to mitigate damages on the ground that the testimony was unpersuasive.
a. The trial court did not abuse its discretion in refusing to reopen the case.
Trial courts have broad discretion in deciding whether to reopen a case for further evidence. (Horning v. Shilberg (2005) 130 Cal.App.4th 197, 208.) Accordingly, a court’s denial of a motion to reopen evidence is reviewed for an abuse of discretion. (Ibid.) Thus, the trial court’s decision will be affirmed unless it exceeds the bounds of reason. (Id. at pp. 208-209.) The denial of a motion to reopen will be upheld where the moving party fails to show diligence. (Guardianship of Phillip B. (1983) 139 Cal.App.3d 407, 428.)
As discussed above, the trial court denied Central Valley’s motion to reopen based on Central Valley’s failure to meet its burden of showing due diligence in attempting to obtain the “new evidence.” The court noted that Central Valley waited until approximately 30 days before trial, over four and one-half years after Central Valley filed its complaint, to ask its expert to calculate its potential remaining liability to Medicare. The court concluded that the “floating” nature of Medicare liabilities did not excuse Central Valley’s failure to undertake the analysis or investigation well before they did. The court pointed out that Central Valley raised the affirmative defense of offset to the cross-complaint for unpaid rent in February 2006 and retained their expert eight to twelve months before trial. Further, Central Valley offered no excuse as to why it had failed to attempt to contact the fiscal intermediaries from 2004 to the time of trial in March 2009.
Central Valley contends that it was “reasonably diligent in procuring and producing the new evidence.” Central Valley first notes that, according to its risk manager Taylor, it takes anywhere from three to ten years for Medicare liabilities to be finalized. However, Central Valley’s Medicare expert, Fayollat, testified that, with the exception of interest, the Sanger General Hospital liabilities were final as of May 2007.
Central Valley then attempts to excuse its failure to produce the proffered evidence during trial on the ground that the original fiscal intermediary went out of business and the new fiscal intermediary, Palmetto, took over only a few months before trial. While this may be true, it does not explain why Central Valley waited until the eve of trial to determine what its Medicare liabilities might be. Central Valley learned as early as April 2003 that Sanger General Hospital owed as much as $480,000 to Medicare and it raised the issue of offset in February 2006. Moreover, according to Fayollat, Central Valley could have obtained a running balance of what was owed by Sanger General Hospital to Medicare at any time.
Finally, Central Valley claims it was diligent because a fiscal intermediary is protected by sovereign immunity and therefore the information could not be subpoenaed. However, a fiscal intermediary’s sovereign immunity comes into play when the fiscal intermediary is sued as an agent of the United States government. (Kaiser v. Blue Cross of California (9th Cir. 2003) 347 F.3d 1107, 1116-1117.) That is not the case here. Moreover, Central Valley did not make this claim at trial. Rather, when the trial court noted that the out-of-state fiscal intermediary could not be compelled to testify in California, counsel for Central Valley stated that he would take the fiscal intermediary’s deposition in another state if he had to.
In sum, the trial court’s finding that Central Valley failed to meet its burden of showing due diligence does not exceed the bounds of reason. Accordingly, there was no abuse of discretion in denying Central Valley’s motion to reopen.
In making its decision, the court mentioned in passing that the proffered evidence was based simply on hearsay. As noted above, this evidence consisted of Taylor’s declaration stating that he was contacted by Palmetto and informed that an additional approximately $87,000 was owed. A copy of the face of Central Valley’s check representing payment of this amount is attached as an exhibit to the declaration.
In response to the court’s characterizing this evidence as hearsay, Central Valley claims that it falls under a number of exceptions to the hearsay rule. According to Central Valley, Taylor’s declaration is admissible as evidence of the reasonableness of Central Valley’s decision to issue the approximately $87,000 check; for the purpose of providing context as to the basis for issuing the check; and because there is a substantial need for the evidence citing In re Cindy L. (1997) 17 Cal.4th 15, 27-28. Central Valley also argues the copy of the check is admissible as a business record.
It should first be noted that the trial court’s conclusion that Central Valley failed to demonstrate diligence is sufficient to uphold the decision. In any event, the trial court correctly found that the proffered evidence was inadmissible hearsay. At issue, i.e., the matter asserted, was the amount owed. The unknown Palmetto representative’s out-of-court statements as to this amount is hearsay. (Cf. Pajaro Valley Water Management Agency v. McGrath (2005) 128 Cal.App.4th 1093, 1107-1108.)
Moreover, no hearsay exceptions apply. The reasonableness of the decision to issue the check and the context of issuing the check are irrelevant to the proof of the amount owed. Further, the copy of the check does not demonstrate that the amount was in fact owed. Finally, the exception set forth in In re Cindy L., supra, 17 Cal.4th 15, is inapplicable. In In re Cindy L., the court created a hearsay exception in the context of a child dependency action where an abused minor who was found incompetent to testify at trial had provided statements to a social worker that possessed intrinsic reliability. (Id. at p. 28.) In this case, Central Valley created the “substantial need” by its lack of diligence. Further, this evidence is not intrinsically reliable.
b. The expert testimony did not compel the trial court to find that Sanders failed to mitigate its damages.
As outlined above, Central Valley’s real estate sales and leasing expert, Michael Schuh, testified that a reasonable time to market the hospital facility for either lease or sale would have been approximately 10 to 12 months. Based on this testimony, Central Valley contends that it should not be liable for 17 months of back rent, i.e., from May 2004 until the end of the lease term in September 2005, because Sanders failed to mitigate its damages. According to Central Valley, the trial court erred in disregarding this uncontradicted and unimpeached testimony.
While evidence that is not inherently improbable and is not impeached or contradicted by other evidence should be accepted as true by the trial court (Estate of Sargavak (1950) 35 Cal.2d 93, 107), it is the trial court that is the arbiter of the credibility of the witness (La Jolla Casa deManana v. Hopkins (1950) 98 Cal.App.2d 339, 346). The trial court is entitled to accept or reject all or any part of a witness’s testimony. The appellate court will neither reweigh the evidence nor pass on the witness’s credibility. (Mosesian v. Bagdasarian (1968) 260 Cal.App.2d 361, 368.)
Here, contrary to Central Valley’s position, the trial court was not required to accept Schuh’s opinion that this single purpose facility could have been leased or sold within 10 to 12 months. Moreover, Central Valley did not vacate the premises until May 2005 leaving less than 10 months before the end of the lease term.
2. Sanders’s cross-appeal.
Sanders contends the trial court erred when it refused to include a mechanism in the judgment to ensure that, if Central Valley were to receive a refund of any portion of the $360,000 credited against the rent, that amount would be returned to Sanders. The trial court concluded that any such refund was speculative.
The trial court did not abuse its discretion. Based on Fayollat’s testimony, the court found that the $360,000 was owed to Medicare and was paid by Central Valley. Moreover, the cost reports that reflect this amount as owed are final. Under these circumstances, the possibility of a future refund is highly speculative. Accordingly, the trial court’s decision to close the case did not exceed the bounds of reason.
DISPOSITION
The judgment is affirmed. Costs on appeal are awarded to Sanders.


_____________________
LEVY, J.
WE CONCUR:


_____________________
WISEMAN, Acting P. J.


_____________________
KANE, J.



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