Correctional Medical Services, Inc. v. State of Illinois

ORDER

EPSTEIN, J. This is an indemnification claim on four medical service contracts with the respondent’s Department of Corrections (“IDOC”), and is now before us on the respondent motion to dismiss, which attacks the four contractual indemnifications, three counts sounding in “estoppel” and some of the relief requested in the complaint.

The core issue is the validity of the State’s contractual indemnifications, which the respondent attacks as void ab initio as in conflict with the State Employee Indemnification Act (5 ILCS 350) (“SEIA” or the “Indemnification Act”). Since 1998, the Attorney General has taken the position, advanced herein the motion to dismiss, that the State’s indemnity obligations apply only to “individuals or organizations” (SEIA §2) that directly contract with the State and do not extend to physicians who are employed or subcontracted by “organizations” that contract the IDOC. Claimant contends that both the contract and the statute apply to its doctors as well as to itself.

Nature of the Claims Correctional Medical Services, Inc. (“claimant” or “CMS”) brought this case to enforce the identical indemnification clauses of four now-expired contracts with IDOC under which CMS provided medical services at various IDOC facilities (the “IDOC Contracts”).1 Claimant alleges that the Attorney General has refused to defend or indemnify CMS physicians in violation of the IDOC Contracts. CMS seeks a declaration as to the interpretation of the contract indemnification clause and SEIA, an order directing the Attorney General and IDOC to defend and indemnify CMS physicians, damages, and attorney’s fees.

The Motion to Dismiss IDOC Contracts No. 970185 (“Big Muddy” Agreement), No. 985246 (“Joliet” Agreement), No. 950311 (“Menard” Agreement), and No. 910443 (“Taylorville” Agreement). These contracts were allegedly in effect for various periods from 1990-2000. (Compl., P11-15.) This case is one of three claims by CMS arising out of medical service contracts with IDOC (See, No. 00CC2314, No. 00CC0051).

[*192] Respondent’s motion advances three grounds: (1) the indemnification clauses are void ab initio as violative of the SEIA; (2) the requested order against the Attorney General and IDOC (Compl., Ct. I, Prayer, ¶B) is an injunction and beyond the jurisdiction of this court; and (3) Counts III, V, VII and IX of the complaint (captioned “Estoppel/Waiver”_ are each “a claim … based upon estoppel, which is an equitable theory over which this Court does not have jurisdiction and which does not apply to Respondent in this case.” (Motion to Dismiss, ¶3.) For purposes of the motion to dismiss, the court is required to take as true all well pleaded facts in the complaint.

Indemnification: The Voidness Issue

The central issue presented by this motion is whether the IDOC Contracts obligate the State (here IDOC and the Attorney General) to defend and indemnify CMS employees and subcontractors against liability claims arising out of their medical services rendered under those contracts.

The respondent contends that the IDOC indemnifications, which on their face apply to “any physician or employee contracted through [CMS],” as well as to CMS itself, “are void because the indemnification clause … directly violates the State Employee Indemnification Act which does not include employees or subcontractor of contracting individuals or organizations within the definition of ‘employee’ …” (Motion to Dismiss, ¶9.)

Respondent relies on the following language in the SEIA “employee” definition (§1(b); 5 ILCS 350/1(b)) (emph. added):

(b) The term “employee” means any present or former … officer, trustee or employee of the State, … individuals or organizations who contract with the Department of Corrections, the Comprehensive Health Insurance Board, or the Department of Veteran’s Affairs to provide services … but does not mean independent contractor except as provided in this Section.

Claimant does not dispute that the IDOC Contracts apply to CMS’ physicians. The contract indemnification provisions (Compl, ¶15; see, e.g., Exh. A. ¶6.1), read as follows:

In the event that any civil proceeding is commenced against the contractor or any physician or employee contracts through the contractor to provide services under this Agreement, alleging death or bodily injury or other injury to the person of the complainant, resulting from or arising out of any act or [*193] omission in connection with services provided under this Agreement, said defendants may seek representation and indemnification from the Attorney General’s office under the provision of the Indemnification Act of the State of Illinois.

The operative provision of the Indemnification Act (SEIA §2(a); 5 ILCS 350/2(a)), insofar as material here, provides as follows (emph. added):

(a) In the event that any civil proceeding is commenced against any State employee arising out of any act or omission occurring within the scope of the employee’s State employment, the Attorney General shall … appear on behalf of such employee and defend the action. In the event that any civil proceeding is commenced against any physician who is an employee of the Department of Corrections … alleging … injury … resulting from and arising out of any act or omission … within the scope of the employee’s State employment … the Attorney General shall … appear on behalf of such employee and defend the action … In any such proceeding, the State shall pay the court costs and litigation expenses of defending such action, to the extend approved by the Attorney General as reasonable … In its complaint, CMS also alleges: From 1979-1997, CMS and IDOC entered into numerous medical service contracts that all contained the same indemnification clause (Compl., ¶17). During those 18 years, IDOC and the Attorney General honored those indemnifications, including defense of CMS “contract physicians and employees” by the Attorney General’s office (id., ¶18). The indemnification was a material economic term of the IDOC Contracts, which allowed CMS to obtain “professional liability insurance at a substantially reduced rate” (id., ¶19) that was “passed on to the State …[as] lower contract prices….” (id., ¶20).

The Attorney General first took the position that the indemnifications did not apply to CMS contractors in 1996, when he filed a motion in the circuit court seeking to withdraw as defense counsel for a CMS contract physician in a wrongful death case; however, after a meeting on the issue, he withdrew his motion, and defended that doctor for the next two years (Compl., ¶23-25).

IDOC then continued to bid and award medical contracts for at least seven IDOC facilities that contained the same indemnification clause (id., ¶25). Then, in October, 1998, the Attorney General again moved to withdraw from representation of the doctor (id., ¶26), which was allowed by [*194] the circuit court without opining on the SEIA issues (id., ¶27; see also, Exh. E).

CMS then provided defense counsel to the physician at its own expense (ibid.).

IDOC advised CMS “on numerous occasions” that the Attorney General’s position in Dr. Ngo’s case was “unique, and that IDOC anticipated that the State … would continue its longstanding practice of defending and indemnifying CMS contractors and employees” (id., ¶26). Subsequently, the “State … [has] denied representation and indemnification” of CMS contactors and employees “in almost each instance” of a liability claim against them (id., ¶29).

Contract Indemnification Voidness: Discussion

The language of the IDOC Contracts’ indemnification clause - “contractor or any physician or employee contracted through the contractor” (emph. added) - is plainly broad enough to cover CMS’ contract and employee doctors. The respondent concedes this broad reach of the contract as the premise of its argument that the contract is at odds with the statute and is therefore void ab initio.

The court must reject the respondent’s voidness argument as now advanced in the motion to dismiss. We find no basis in SEIA for voiding the contractual indemnification clause.

First, and foremost, there is no “conflict” between the contract indemnification and the indemnification statute. SEIA contains no prohibition or limitation on State contractual indemnifications, nor does the statute manifest a policy against State indemnification of contractors. To the contrary, the SEIA evinces a strong policy of defending and indemnifying State employees and some State contractors, including medical service providers.

Respondent has not identified any basis in SEIA, nor any judicial authority, for invalidating the IDOC Contracts’ indemnifications.

Second, despite its rhetoric, respondent does not really contend that the contract “conflicts” with the statute. The thrust of respondent’s argument is that the contract extends beyond the scope of the statute. Respondent maintains that the IDOC Contracts do, but the statute does not, cover CMS’ individual physicians, i.e., that the contract is broader than the statute (which presumes a narrow construction of SEIA, which we discuss below).

The respondent takes this argument way too far. Even if the court were to find that the contract provides a broader indemnification coverage than SEIA requires, the additional indemnification would not by itself render the contract provision void, ab initio or otherwise.

This is because SEIA is a mandate to provide defense and indemnification (to State officers, employees and some contractors) and is not an authorization nor a regulation of contractual indemnifications by State agencies. We agree with the claimant that this Act is not the source of IDOC’s authority to indemnify its medical providers by contract (which the respondent does not contend). Thus any broader scope of the contract than of [*195] the statute does not “void” the broader indemnification, which does not rest on authorization by SEIA. This analysis, however, does not totally dispose of the respondent’s argument.

Finally, it is not obvious on the face of the statute - SEIA §2 read together with its §1(b) definition of “employee” - that SEIA fails to extend indemnification to organizations’ subcontractor-and employee-physicians, as the respondent presumes. The parties debate this issue vigorously.

The respondent advances a narrow and literal reading of SEIA’s “employee” definition. Reasoning that because the §1(a) definition expressly includes only “individuals or organizations who contract with [IDOC]” and not individuals who are employees or contractors of such contracting organizations, respondent concludes that those individual physicians are not “employees” under SEIA. That is a straightforward and plausible reading.

The claimant, on the other hand, urges a broader reading of the statutory definition. CMS advances a more inclusive interpretation of the terms “[to] contract” and “organization in §1(a), each of which would have the effect of including doctorsubcontractors and doctor-employees of medical service contractors within the “employee” definition. These, too, are plausible readings of the statute.

Neither party has cited judicial construction of this Act or of any analogous statute, nor any other precedent, in support of its view. The parties have cited no legislative history supporting their competing views of this statute.2 The respondent also has not replied to the claimant’s statutory construction arguments, nor to CMS’ course-of-conduct allegation that IDOC and the Attorney General formerly applied a broad view of the State’s indemnification obligations, but recently reversed position(s)). We have a substantial but seriously incomplete debate over SEIA’s coverage.3 Neither party has analyzed the legislative debates (if any) on the original enactment of the highly specific §2(a) language “any physician who is an employee of the Department of Correction” and the §1(a) definition’s specific inclusion of “individuals or organizations who contract with the Department of Corrections … to provide services,” which were both added to SEIA by a single amendment (P.A. 81-1068). Nor have the parties reviewed the numerous other amendments to SEIA’s indemnification coverage, which reflect an ongoing legislative expansion of SEIA’s indemnifications. (See, Smith-Hurd

Ill.Stat.Annot., 5 ILCS 350/1, 350/2.)

CMS also argues that the Attorney General’s formalistic and literal distinction between “organizations” that contract with IDOC “to provide services” and their employed or contracted doctors who actually provide the contracted services is “absurd” and so pointless that it could not have been intended by the legislature (which presumably never enacts absurd legislation). CMS points out that SEIA obligates the State to indemnify the “organization” in any event for its doctors’ defenses and liabilities arising out of the contract services, and that by declining to defend the doctors in the underlying liability lawsuits, the State loses control over the liability litigation (and, implicitly, over the cost of providing that defense by private legal counsel) but still ultimately pays the bill. The respondent has not replied to this argument, but has stated that the IDOC [*196] We need not decide this statutory construction issue in order to resolve the present motion. Claimant’s action is predicated on the contract rather than the statute, and we have rejected the respondent’s argument that IDOC’s contract indemnification is voided by the statute. Even though the claimant argues that the indemnification Act also covers its doctors, the complaint here sounds solely in contract and does not assert a statutory right that we must now consider.

This would ordinarily end the analysis of this contract claim on the motion before us. However, it seems certain that the SEIA interpretation issue will be back, and may be dispositive. We therefore turn briefly to some of the points that should be addressed in the future proceedings.

The Contract Indemnification Clause and SEIA Although neither party points it out, the strange indemnification language in the IDOC Contracts leads the contract analysis, one way or the other, right back to the statute. The operative language of the IDOC Contracts’ indemnification clause is as follows (emph. added):

…said defendants may seek representation and indemnification from the Attorney General’s office under the provisions of the Indemnification Act of the State of Illinois.

The curious point about this contract language is the absence of any words of right or entitlement or duty or obligation, as one would expect in a contract. The language, read literally, grants a “right” only to request the Attorney General’s office for representation and indemnification “under the … Indemnification Act.” This formulation is classically ambiguous, particularly in the context of a contract. This contract language can be read in at least two obvious ways:

(1) Literally: A contractually-covered defendant may request the Attorney General to defend and indemnify him under SEIA. In turn, the Attorney General must do so “under” SEIA if SEIA applies to that defendant, but is not required Contracts also require the contracting “organization” to carry its own malpractice insurance. Claimant contends that that insurance is less expensive due to the (expected) State indemnification and defense, and that those savings are passed on to the State. Neither party has fleshed out or supported its cost and insurance claims, and neither party has explained the role (or the presence or absence) of malpractice insurance coverage of the individual physicians. On this grossly inadequate record, which leaves one guessing as to who pays what costs, the court could not possibly evaluate the merits of either party’s arguments on this point.

[*197] to do so if the defendant is not covered by SEIA’s indemnification. This is a “piggyback” view of the contract, in which it rests on the statutory rights, but adds no additional indemnification rights itself.

(2) Contextually: A contractually-covered defendant is granted the contractual right to defense and indemnification by the Attorney General under SEIA’s procedures. This is the “entitlement” view, supported by the contractual context of the indemnification language. On this view, the contract adopts the SEIA mechanics and procedures by reference, and contractually applies them to all par ties specified in the contract.4 Each of these alternatives has problems. On the first (“piggyback”) view, the contract grants no right to defense or indemnification beyond what is granted by the statute (i.e., it is inapplicable and inoperative, but not “void,” outside the scope of the Indemnification Act). On this view of the IDOC Contracts, CMS’ contract claim turns on the scope of SEIA’s indemnification.

On the second (“entitlement”) view, the contract grants a right to indemnification to the parties that it covers, even if the statute does not. On this view, the IDOC Contracts obligate the Attorney General to provide defense and indemnification to CMS’ doctors “under the provisions of the Indemnification Act.” That is unremarkable if the statute also mandates the indemnification. But if the contract is broader than SEIA (as the respondent has claimed), and if SEIA does not itself indemnify the particular doctors, then we are confronted with the issues of (i) whether IDOC can impose duties on the Attorney General, an elected State officer, by contract with a third party, Both parties, without discussion, now assume the entitlement view. That is a reasonable reading of a clause embedded in a contract ( which is ordinarily written for the purpose of establishing right and duties between the parties). But is not compelled by the plain meaning of the language.

Although the current motion to dismiss says only that the contract indemnification is “void ab initio,” the respondent may also be contending that the contract, insofar as it may provide indemnification beyond the statutory mandate, is invalid generally or is unenforceable as to the Attorney General’s office. That argument has not been clearly advanced in the respondent’s papers, but as we suggested above, the parties will have the opportunity to argue these issues later.

[*198] and (ii) if not, whether the State is nevertheless liable to provide financial indemnity under the IDOC Contracts but without the Attorney General’s participation (as SEIA contemplates). These issues have not been briefed by these parties and, indeed, have not previously been raised.5 Both views of the language of the contract indemnification clause thus take the analysis back to the interpretation of SEIA’s coverage. Clearly, if SEIA is construed to provide indemnification to IDOC contractor’s employee-and subcontractor-physicians - as claimant vigorously argues - then the contract and the statute are coextensive and claimant can maintain his contract indemnification claim (and could maintain a statutory claim as well).

If this court is forced to decide this issue, we should do so on a much more extensive record as to the State’s historical application of the statute and the contract clause, and the interplay of the State’s indemnification with the malpractice insurance coverage of the contracting “organization” (here CMS) and that of the individual doctors, if any. If this issue returns, the court expects a much more extensive briefing on the legislative history of SEIA and, hopefully, some pertinent judicial precedent as guidance.

The Injunction Issue

Respondent has also moved to dismiss the requested order against the Attorney General and IDOC, which requests the following relief (Compl., Ct. I, Prayer, ¶B):

“that … the IDOC, through the … Attorney General, … take over defense of all pending suits against CMS contractors and employees arising from the Agreements, … assume responsibility for indemnification of CMS contractors and employees … and defend and indemnify [them] … in all such suits … in the future … in connection with services provided under the Agreements” We agree that this requests a mandatory injunctive-type order, i.e. an order affirmatively directing actions by a State officer or agency (here both), which this court lacks the authority to grant. This statutory court lacks the delegated statutory authority to issue or enforce such orders. Garimella v. Board of Trustees of the University of Illinois, 50 Ill.Ct.Cl. 350 (1997). We will therefore strike this prayer for relief.

The Estoppel/Waiver Issue

Respondent has moved to dismiss Counts III, V, VII and IX of the complaint (captioned “Estoppel/Waiver”) as being “… based upon estoppel [*199] … over which this Court does not have jurisdiction and which does not apply to Respondent in this case.” (Motion to Dismiss, at 3.)

Respondent advances two distinct arguments. First is the jurisdictional point, with which we agree as a matter of statutory law: a claim in this court cannot be predicated on a pure estoppel (promissory or equitable estoppel) theory as the basis for relief. This, however, is not because the doctrine emanates from the equity side of our historical jurisprudence. This is because a claim founded solely upon an estoppel does not fall within any of the grants of our jurisdictional statute. §8 of the Court of Claims Act (705 ILCS 505/8). Our core jurisdiction consists of claims (against the State) founded upon (§8(d)) a tort, (§8(b)) a contract, or (§8(a)) a “law of … Illinois.” A purely equitable estoppel claim simply is not within our §8 jurisdiction. (Our remaining jurisdiction to adjudicate claims against the State, under §8(c) and §8(f)-(i), cover only specific statutory actions.)

However, a close reading of the complaint discloses that the challenged counts do not sound purely in estoppel, despite their caption, but are brought expressly as contract claims (with jurisdiction predicated on §8(c) of the Court of Claims Act). See Complaint, ¶1, incorporated into all counts.

In the challenged counts, the doctrines of estoppel and waiver are asserted not as a substitute for a non-existent contract, which is alleged, but to preclude the respondent from asserting various defenses. This is a fine distinction, but we believe a genuine distinction at least on the fact of this complaint. Thus respondent’s jurisdictional point, valid in the abstract, is not well taken as applied to this complaint.

This is a close call on some of the proposed estoppels, but we cannot say at this point that these proposed applications of estoppel (and waiver) are so devoid of colorable merit on the facts alleged as to require dismissal as a pleading matter. On this objection, we will deny the motion to dismiss, without prejudice to renew the objection on a fuller factual basis later.

Respondent’s alternative point, that the estoppel doctrines do not apply to the State “in this case” is also a close issue. The court agrees with the respondent that Illinois law disfavors estoppels against the State, as it does against all governmental bodies, but it cannot be said that under Illinois law estoppel never lies against the State or any other governmental body. See, e.g., Hickey v. Illinois Central Railroad Co., 35 Ill. 2d 470, 220 N.E.2d 415 (1966); Location & Places, JMS., Inc. v. State of Illinois, 50 Ill.Ct.Cl. 251 (1998)(Sommer, C.J.).

The cases cited by the respondent do not hold that estoppel never lies against the State. Respondent has cited numerous precedents of this court, in which we have applied equitable or promissory estoppel to bar an otherwise applicable defense by the State. But the application of this doctrine is very fact sensitive; the caselaw teaches that each case must be judged on its own peculiar facts. Accordingly, we will allow the contract/estoppel claims to stand, as a pleading matter, and will reconsider the sufficiency of these defense-preclusion estoppels on a more developed factual record on summary judgment or after trial if the respondent renews its objections later.

[*200] However, we must observe that both promissory and equitable estoppel require a greater showing against a governmental defendant in Illinois than is required against a private party, including an additional element: that the alleged detrimental reliance must be based on a positive action taken (equitable estoppel) or an affirmative promise (promissory estoppel) made by some official or agency with actual authority to take the action or make the commitment on which the claimant “reasonably” relied to its detriment; an estoppel cannot be based on an act, promise or representation of a ministerial employee or minor official who ordinarily lacks the requisite authority. See, e.g., Schumann v. Kumarich, 102 Ill.App. 3d 454, 430 N.E.2d 99 (1981).

Conclusion

For the foregoing reasons, it is hereby ORDERED:

1. Respondent’s motion to dismiss is granted in part and denied in part, as follows:

A. The motion to dismiss for failure to state a cause of action based on the indemnification clause of the IDOC Contracts being void as against the State Employees Indemnification Act is denied, without prejudice; B. The motion to dismiss Counts III, V, VII and IX for lack of jurisdiction over a cause of action in estoppel, and for failure to state an estoppel claim, is denied, without prejudice; the court finds that these counts sound in contract; C. The motion to dismiss the prayers for mandatory orders against the Attorney General and the Department of Corrections of the complaint is granted, and those prayers for relief are stricken; 2. On the court’s motion, the request for a trial by jury in the complaint is stricken; and 3. This claim is remanded to the assigned Commissioner for further proceedings.

ORDER

SPRAGUE, C.J. Claimant filed its Motion for Partial Summary Judgment alleging that its physicians and employees are entitled to be defended and indemnified under the Indemnification Clause of the contract which reads as follows:

[*201] “In the event that any civil proceeding is commenced against the contractor or any physician or employee contracted through the contractor to provide services under this Agreement, alleging death or bodily injury or other injury to the person of the complaint, resulting from an arising out of any act or omission in connection with services provided under this Agreement, said defendants may seek representation and indemnification from the Attorney General’s office under the provision of the Indemnification Act of the State of

Illinois.”

Respondent has filed a Motion for Summary Judgment claiming the physicians are not state employees and the practice of medicine is beyond the scope of the contract.

The Indemnification Act of the State of Illinois states that a physician who is an employee of the Department of Corrections shall be defended by the Attorney General (5 ILCS 350/2(a)). It further provides upon judgment or settlement the judgment or amount shall be paid by the state treasury if certified by the Attorney General that doing so is not inconsistent with the provisions of Section 2 (5 ILCS 350/2(e)(ii). Section 1 of the Indemnification Act includes in the definition of employee individuals or organizations who contract with the Department of Corrections but does not mean an independent contractor.

In this case the contract expressly states Claimant is not an agent or employee of IDOC. Section 4.1 of the contract reads as follows: “Contractor shall act as an independent contractor insofar as the performance of services hereunder is concerned. In no way shall Contractor be considered or deemed to be engaging in the practice of medicine. To that end, Contractor shall employ, direct and/or contract with such personnel as it requires to perform said services; shall secure any and all permits that may be required in order to perform the services herein contemplated; shall exercise full and complete authority over its employees; shall comply with the Workmen’s Compensation, employer’s liability and other Federal, State, County, and Municipal laws, ordinances, rules and regulations required of an employer performing services as herein contemplated; and shall make all reports and remit all withholding or other deductions from the compensation paid its personnel as may be required by any Federal, State, County or Municipal law, ordinance, Rule or Regulation.

Neither Contractor nor any person employed by the Contractor to perform services under this agreement shall be deemed to be an agent or employee of the IDOC. Further, neither Contractor nor any employees of the Contractor shall be entitled to participate in any retirement or pension plan, group insurance program, or other programs designed to benefit employees of the State of Illinois, Department of Corrections.”

Therefore the physician Claimant contracted for are not state employees and are not covered by the State Employee’s Indemnification Act.

Respondent’s Motion for Summary Judgment is granted and Claimant’s Motion for Partial Summary Judgment is denied.