#25710-rev & rem-JKM

2011 S.D. 50

                          IN THE SUPREME COURT
                                  OF THE
                         STATE OF SOUTH DAKOTA

                                * * * *

ALFRED JENNINGS, DALE HAYFORD,
ROMAN ROBERTS, RICK FARLEY,
TODD CARLSON, CLAY ROSE, LEONARD
FEIST, KASEY COFFIELD, STANLEY
FEDERKIEWICZ, WILLIAM MAY, DICKIE
KAISER, DEAN SORENSON, ROBERT
KOSKI, MARY GEERSMA, CHARLES
EDWARDS, DONALD BERTALOT, LYNN
SHUCK, SUSAN BURNISON, KELVIN
KIEL, CHARLES SWANSON, CHARLOTTE
WARD and KENNETH MERNAUGH,                Plaintiffs and Appellants,

v.

RAPID CITY REGIONAL HOSPITAL, INC.,
REGIONAL HEALTH NETWORK, INC., and
REGIONAL HEALTH PHYSICIANS, INC.,         Defendants and Appellees.

                                * * * *

                APPEAL FROM THE CIRCUIT COURT OF
                  THE FOURTH JUDICIAL CIRCUIT
                LAWRENCE COUNTY, SOUTH DAKOTA

                                * * * *

                       HONORABLE RANDALL L. MACY
                                 Judge

                                * * * *
                                          ARGUED FEBRUARY 16, 2011

                                          OPINION FILED 08/24/11
REED C. RICHARDS of
Richards and Richards
Spearfish, South Dakota

and

STEVEN M. CHRISTENSEN
Deadwood, South Dakota     Attorneys for plaintiffs
                           and appellants.

DANIEL G. DUFFY
JEFFREY G. HURD of
Bangs, McCullen, Butler,
Foye & Simmons, LLP
Rapid City, South Dakota   Attorneys for defendants
                           and appellees.
#25710

MEIERHENRY, Retired Justice.

[¶1.]         Plaintiffs (Employees) were all formerly employed by Pope & Talbot, a

lumber business located in Spearfish, South Dakota. Pope & Talbot self-insured a

health benefits plan for Employees, their spouses, and dependents. This plan was

partially paid for by deductions from Employees’ paychecks. In January 2000, Pope

& Talbot entered into a contract (Payer Agreement) with First Choice of the

Midwest (FCM), a managed care organization, to administer a self-insured health

plan. FCM managed healthcare services by establishing a Preferred Provider

Organization Network (PPO Network). In March 1998, FCM contracted with Rapid

City Regional Hospital System (Regional) to participate in the PPO Network

(Hospital Agreement). 1 Under the Agreements, Regional would submit claims to

FCM for healthcare services provided to Pope & Talbot Employees. FCM then

would process the claims to determine coverage and provider rates and forward the

processed claims to Pope & Talbot for payment. Payer Agreement § 2.08; Hospital

Agreement § 5.03. Both Agreements provided that “members” (in this case Pope &

Talbot Employees) were “[e]xcept as otherwise permitted under applicable law . . .

not liable for any charges for Healthcare Services that are Covered Services.” Payer

Agreement § 2.11; Hospital Agreement § 5.05.

[¶2.]         In November 2007, Pope & Talbot filed for Chapter 11 reorganization

bankruptcy. Pope & Talbot continued to take payroll deductions from Employees



1.      The Hospital Agreement and Payer Agreement will collectively be referred to
        as the “Agreements.”


                                         -1-
#25710

for medical coverage after filing bankruptcy, but stopped paying Regional for some

of the covered charges. In May 2008, Pope & Talbot sold the lumber company and

stopped making any payments owed under the health plan. Regional’s collection

agencies then directly billed Employees for services that should have been paid by

Pope & Talbot under the Agreements.

[¶3.]        Employees filed suit to stop Regional’s attempts to collect payment

from them for services that were covered by Pope & Talbot’s benefit plan.

Employees sought relief under the following theories: declaratory judgment,

injunction, breach of contract, negligent infliction of emotional distress, and bad

faith breach of contract. Regional counterclaimed for a declaratory judgment that

“[Employees] are obligated to pay for the care rendered by [Regional].”

[¶4.]        Employees moved for partial summary judgment on their breach of

contract claim. Employees argued that the Hospital and Payer Agreements

prohibited Regional from collecting covered medical care charges directly from the

Employees because those charges were Pope & Talbot’s obligation. Payer

Agreement § 2.11; Hospital Agreement § 5.05. Regional moved for summary

judgment on all of Employees’ claims because “there [were] no disputed issues of

material fact regarding [Employees’] obligation to pay [Regional] for the healthcare

services provided.” At the summary judgment hearing, Regional argued to the

circuit court that Employees were not third-party beneficiaries under either the




                                          -2-
#25710

Payer Agreement or Hospital Agreement and were therefore unable to assert any

protection under the Agreements. 2

[¶5.]         The circuit court granted summary judgment in favor of Regional on

all of Employees’ claims and denied Employees’ motion for partial summary

judgment. The court found that “nothing in these contracts relieves [Employees]

from paying for medical services if the self-insured employer fails to pay the

provider.” We reverse and remand.

                                      Analysis

Employees are third-party beneficiaries of both Agreements.

[¶6.]         The first issue is whether Employees have standing as third-party

beneficiaries to enforce the provisions of the two contracts: (1) the Payer Agreement

between Pope & Talbot and FCM, and (2) the Hospital Agreement between FCM

and Regional. If Employees are third-party beneficiaries of the Agreements, they

have standing to use the Agreements to challenge Regional’s attempt to collect for

covered medical services left unpaid by Pope & Talbot. Resolution of the issue is a

matter of law, which we review de novo. Masad v. Weber, 2009 S.D. 80, ¶ 10, 772

N.W.2d 144, 149.




2.      In its “Statements of Material Fact in Support of Motion for Summary
        Judgment,” Regional stated for the first time that Employees have
        independent contracts with Employees that purportedly allow Regional to bill
        Employees directly. These “independent contracts” are Consent to Treatment
        and Conditions of Admission forms signed by Employees when they received
        healthcare services from Regional. At oral argument, Regional stated that it
        was seeking payment from Employees under these consent forms, but not as
        a part of this proceeding.


                                          -3-
#25710

[¶7.]        The circuit court found that Employees were not third-party

beneficiaries of the Hospital Agreement and the Payer Agreement. The circuit court

explained that the Agreements must be read as a whole and that “[Employees] may

have had the benefit of third-party status if [Regional] would have received

payment from Pope [and Talbot] and [Regional] then tried to balance bill the

[Employees].” The circuit court viewed payment by Pope & Talbot as a condition

precedent of the Hospital Agreement, which, if paid, would have required Regional

to accept the discounted payment in exchange for the services provided. Under the

circuit court’s reasoning, Pope & Talbot’s failure to pay entitled Regional to bill

Employees for the full cost of services provided.

[¶8.]        The circuit court’s characterization of Pope and Talbot’s payment as a

condition precedent is misplaced. We have said:

             A condition precedent is a contract term distinguishable from a
             normal contractual promise in that it does not create a right or
             duty, but instead is a limitation on the contractual obligations of
             the parties.

             A condition precedent is a fact or event which the parties intend
             must exist or take place before there is a right to performance. . .
             . A condition is distinguished from a promise in that it creates
             no right or duty in and of itself but is merely a limiting or
             modifying factor. . . . If the condition is not fulfilled, the right to
             enforce the contract does not come into existence.

Johnson v. Coss, 2003 S.D. 86, ¶ 13, 667 N.W.2d 701, 705-06 (citing 13 Richard A.

Lord, Williston on Contracts, § 38:1 (4th ed. 2000)).

[¶9.]        Additionally, we have noted that “courts generally will interpret

conditions as stipulations rather than conditions precedent that could trigger

forfeiture.” Weitzel v. Sioux Valley Heart Partners, 2006 S.D. 45, ¶ 38, 714 N.W.2d


                                           -4-
#25710

884, 895. The Agreements in this case do not reflect the intent to create a condition

precedent. Pope & Talbot’s agreement to pay can only be viewed as a promise.

Failure to pay may constitute a breach of the contract but does not render the

contract unenforceable or automatically discharge benefits to third parties. Id.

[¶10.]         Under South Dakota law, “[a] contract made expressly for the benefit

of a third person may be enforced by him at any time before the parties thereto

rescind it.” SDCL 53-2-6. We have stated that a purported third-party beneficiary

“must clearly show that [the contract] was entered into with the intent on the part

of the parties thereto that such third party should be benefited thereby.” Sisney v.

Reisch, 2008 S.D. 72, ¶ 9, 754 N.W.2d 813, 817-18. See also Sisney v. State, 2008

S.D. 71, ¶ 10, 754 N.W.2d 639, 643. To determine the parties’ intent, we first look

at the language of the contract. 3 Reisch, 2008 S.D. 72, ¶ 9, 754 N.W.2d at 818.

“The terms of the contract must clearly express intent to benefit that party or an

identifiable class of which the party is a member. . . . This intent might in a given

case, sufficiently appear from the contract itself.” Id.

[¶11.]         In this case, the contract language clearly expresses intent to benefit

the employees of Pope & Talbot. The Agreements are part of the managed care

arrangement and contain similar and, in some instances, identical language when

referring to “members” covered under the Agreements. By the terms of the


3.       Regional provided affidavits by employees of FCM & Regional as support that
         Employees were not intended to be third-party beneficiaries. These affidavits
         are not persuasive because they do not indicate the affiants’ intent at the
         time the contract was made, but rather their intent after litigation had
         commenced. Furthermore, the determination of third-party beneficiary
         status is a question of law.


                                           -5-
#25710

Agreements, the parties acknowledge they are part of a “contractual relationship” to

“provide” medical services for eligible employees or “obtain access” to the services

for eligible employees. The terms of the Payer Agreement between Pope & Talbot

and FCM explicitly state the purpose of the contract is to provide healthcare

services for its employees through the PPO Network. It recites as follows:

             Whereas, Payer exercises discretionary authority to control
             respecting management and administration of one or more
             Employer’s Health Benefits Plan(s) which are offered to eligible
             employees, their dependents, and other eligible beneficiaries
             (“Members”);

             Whereas FCM is organized for the purpose of coordinating
             Healthcare Services through the establishment of a Preferred
             Provider Organization (“PPO”) Network comprised of
             Physicians, Hospitals and other Healthcare Providers, whose
             services may be accessed by Payers on behalf of their Members
             after entering into an Agreement to obtain such access;

             Whereas, FCM and Payer intend to enter into a contractual
             relationship whereby Payer obtains for its Members access to
             FCM’s PPO Network.

The Hospital Agreement between FCM and Regional also expresses the parties’

intent to provide healthcare services to employees through contracts with

employers. The recitals in the agreement provide:

             Whereas, FCM is organized for the purpose of coordinating
             healthcare services through the establishment of a Preferred
             Provider Organization (“PPO”) Network and through its current
             and anticipated contracts with employer groups, insurance
             carriers, and third party administrators who may obtain access
             to the PPO Network for their Members;
             ...
             Whereas, FCM and Hospital intend to enter into a contractual
             relationship whereby Hospital will provide Healthcare Services
             to Members who are entitled to utilize the medical resources of
             the PPO Network.



                                          -6-
#25710

Both Agreements define “Members” as “any current or former employee and/or

dependent who meets the eligibility requirements under an applicable plan.”

Hospital Agreement § 1.12; Payer Agreement § 1.12. There is no dispute that

Employees were “Members” under the Agreements. The recitals in the Agreements

clearly express an intent to benefit Employees.

[¶12.]       Regional asserts, however, that although Employees benefit, that was

not the primary purpose of the Agreements. Specifically, Regional argues that “the

primary purpose of the Hospital Agreement was to benefit FCM by making its PPO

Network more attractive to health plans, to benefit Pope & Talbot with reduced

healthcare costs, and to provide Regional with a larger patient pool.” Employees

respond that the primary purpose of the Agreements is to benefit them by providing

health services. We have said that a third-party beneficiary must show “that the

contract was entered into by the parties directly and primarily for his benefit.”

Masad, 2009 S.D. 80, ¶ 18, 772 N.W.2d at 154. It is not necessary for Employees to

show that no other party has benefited from the contract. It may be true that

Regional, FCM, and Pope & Talbot did benefit from the Agreements. But for the

Employees, however, they would not have entered into the Agreements. We look

only at who was directly and primarily benefited. See id. In this case, it is

Employees.

[¶13.]       Regional argues that Employees are only incidental beneficiaries

similar to the situation in Masad, 2009 S.D. 80, ¶ 18, 772 N.W.2d at 154. But

Masad is distinguishable. In Masad, an employee of a catering company was

attacked by an inmate while working in the prison kitchen. The catering company


                                          -7-
#25710

had a contract with the penitentiary to provide food services for the inmates. The

contract also included security provisions. Masad argued that he was a third-party

beneficiary to the contract. This Court held that any benefit to Masad was only

indirect. Id. ¶ 24. “The primary purpose of the contract was to provide food

services for the prisoners in the custody of the State.” Id.

[¶14.]         Employees in this case are not in Masad’s position but more in the

position of the third-party beneficiary in Reisch, 2008 S.D. 72, 754 N.W.2d 813. In

Reisch, we held that an inmate was a third-party beneficiary of an agreement

between the Department of Corrections and a former inmate to provide kosher food

for Jewish inmates. Id. ¶ 10. The agreement in that case was to provide a kosher

diet “to all Jewish inmates who request it.” 4 Since the intent of the contract was to

provide kosher food to Jewish inmates, Sisney, as a Jewish inmate, was a third-

party beneficiary to the agreement. Like Sisney, Employees are part of an

identifiable group, i.e., “Members” under the plan. The intent of the Agreements

was to provide medical services to Members. Accordingly, Employees are third-

party beneficiaries. Consequently, Employees have standing to enforce the

Agreements.

[¶15.]         The circuit court also determined that Employees’ eligibility as

“Members” ceased in November 2007 when Pope & Talbot filed for bankruptcy. The

record does not indicate that FCM, Regional, or Pope & Talbot terminated either

Agreement at that time or that the bankruptcy proceedings dealt with this issue. In


4.       Reisch is distinguishable from Sisney because the contract in Sisney was a
         public contract that did not expressly indicate it was made for the benefit of
         Sisney. Sisney, 2008 S.D. 71, ¶¶ 11-13, 754 N.W.2d 639, 644.

                                            -8-
#25710

fact, Pope & Talbot continued to take deductions out of Employees’ paychecks for

the self-insured plan after filing for bankruptcy.

[¶16.]       Furthermore, the Agreements both contain “Continuation of

Obligations” clauses addressing reimbursement in the event of termination of the

Agreement. Hospital Agreement § 6.04; Payer Agreement § 6.04. Although the

language is slightly different, both clauses indicate that the Payer (Pope & Talbot)

or “Plans or Administrators” shall reimburse any participating provider for covered

services received before termination of the plan. Id. Therefore, the bankruptcy

filing did not terminate the contract arrangement established by the Agreements.

Actually, counsel indicated in their briefs and at oral argument that Employees

received services before and after the bankruptcy filing. But no services were

provided after Pope & Talbot sold the business in May 2008. Thus, all the services

at issue were provided before the arrangement was terminated by the sale. The

circuit court ruling that Employees are responsible for any covered services

provided after the bankruptcy filing is not supported by the record.

Employees are not obligated to pay for covered medical services under the
Agreements.

[¶17.]       The next question is whether the terms of the Agreements allow

Regional to charge Employees for the cost of covered services that Pope & Talbot

should have paid. Neither Agreement addresses what happens if the “payer,” Pope

& Talbot, fails to pay. Additionally, nothing in either Agreement gives Regional the

right to bill Employees directly for covered services. But identical provisions in the

Hospital Agreement and the Payer Agreement provide:



                                          -9-
#25710

            Except as otherwise permitted under applicable law, Members
            shall not be liable for any charges for Healthcare Services that
            are Covered Services. This provision shall not prohibit collection
            of supplemental charges or copayments by Provider. To the
            extent permissible under applicable law, Provider may bill
            Member directly for non-covered services, Deductibles and
            Copayments, and for services rendered after a Member’s
            eligibility has ceased. In no event shall FCM be responsible for
            any amount of money owed by the member to Provider in the
            event that Providers are unable to collect such amount of money
            from the Member.

Hospital Agreement § 5.05; Payer Agreement § 2.11 (emphasis added). 5 The plain

meaning of this provision is that the Employees cannot be charged for covered




5.    While the dissent is correct that generally the “failure of the promisee to
      perform a return promise ordinarily discharges the promisor’s duty to a
      beneficiary to the same extent that it discharges his duty to the promisee,” it
      is not applicable here. See dissent ¶ 33. While the promisor’s duty to the
      beneficiary may be discharged, that discharge cannot create an obligation for
      the beneficiary. In other words, the inability of a third party beneficiary to
      receive a benefit because the promisee breached the contract with promisor
      does not mean that the beneficiary incurs the promisee’s liability under the
      contract. As Prof. E. Allan Farnsworth explained, “the beneficiary is subject
      to recoupment of any claims of the promisor for damages for breach of
      contract by the promise. The claim is only good against the beneficiary to the
      extent that it extinguishes the beneficiary’s claim; it cannot be used to impose
      liability on the beneficiary.” E. Allan Farnsworth, Contracts § 10.9,
      Vulnerability of Beneficiary to Defenses and Claims 676 (4th ed. 2004)
      (emphasis added). By the nature of being a beneficiary, it is only possible to
      benefit from the contract, not be harmed by it. While factually
      distinguishable, this Court upheld this principle in First Dakota National
      Bank v. Performance Engineering & Manufacturing, Inc., 2004 S.D. 26, 676
      N.W.2d 395. In that case, we stated:

            A third-party beneficiary is one who is given rights under a
            contract to which that person is not a party. Obligations under
            such a contract, including any obligations to third parties, are
            created by agreement between the signatories . . . If the
            signatories so intend, a third party can enforce the contract
            against the signatory so obligated. But the third-party
            beneficiary, who did not sign the contract, is not liable for either
                                                           (continued . . .)
                                         -10-
#25710

services. The only way they could be charged for covered services would be if some

“applicable law” permitted it. Regional did not provide the circuit court or this

Court with a law that would apply to these circumstances.

[¶18.]         The Agreements make Pope & Talbot, as a self-insured employer,

solely liable for covered services. Section 1.15 of both the Payer Agreement and

Hospital Agreement state: “Payer shall refer to an organization which purchases

Healthcare Services on behalf of individual members pursuant to a health benefits

plan and which is, therefore, responsible for the payment of Covered Healthcare

Services to Members.” (Emphasis added.) The Agreements allowed Pope & Talbot

to pay a discounted rate for covered services after receiving a bill from Regional via

FCM. Regional understood from the Hospital Agreement that they would be getting

paid by Pope & Talbot, not Employees, for “covered services.” Because Regional

knew the payments would be coming from Pope & Talbot, Regional bore the risk of

Pope & Talbot’s failure to pay. Furthermore, Employees had deductions from their

paychecks to contribute to Pope & Talbot’s self-insured plan. Under the

arrangement established by the Agreements, if Regional was allowed to bill

Employees for their services, Employees would effectively be paying for their health

services twice.


________________________________
(. . . continued)
               signatory’s performance and has no contractual obligations to
               either.

         Id. ¶ 8, 676 N.W.2d at 399 (quoting Motorsport Eng’g, Inc. v. Maserati SPA,
         316 F.3d 26, 29 (1st Cir. 2002)).



                                          -11-
#25710

[¶19.]       In conclusion, Employees are intended third-party beneficiaries of the

Agreements and therefore have standing to enforce the Agreements. The plain

language of the Agreements specifically states that Members are not liable for

covered services. Regional has not provided any argument that overcomes this

plain language. Pope & Talbot’s failure to pay for Employees’ covered services does

not pass the obligation to the Employees, who have already contributed to their

health plan. Regional’s recourse under the Agreements is against Pope & Talbot,

not the Employees.

Whether the “Consent to Treatment and Conditions of Admission” Forms
are contracts of adhesion is not properly before this Court.

[¶20.]       The parties attempt to interject the issue of whether Regional’s

“Consent to Treatment and Conditions of Admission” forms were contracts of

adhesion. This issue, however, was not actually raised or addressed below. The

circuit court merely noted in its memorandum decision that Regional has “separate

contracts with [Employees] for payment of [m]edical [s]ervices. These separate

contracts ‘Consent to Treatment and Conditions of Admission’ make [Employees]

responsible for non-covered charges.” Non-covered charges, however, were not an

issue. The circuit court pointed out that Employees could raise adhesion as an

affirmative defense, but that Regional was not seeking to enforce the Consent

Forms or “collect for unpaid medical bills in this lawsuit.” Regional admitted at the

summary judgment hearing that it was not attempting to collect in this case, that

was “a separate issue.” See supra note 2. Because Regional was not seeking

payment under the Consent Forms in this action and because the parties did not

raise issues of adhesion or enforceability of the Consent Forms in the pleadings or

                                        -12-
#25710

otherwise, the circuit court was correct in declining to rule on the Consent Forms.

The issues were not properly before the circuit court nor ripe for review. Thus, we

decline to address any issues related to the Consent Forms. And, contrary to the

dissent’s statement that today’s decision “enjoins Regional from pursuing payment

of its bills,” we express no opinion on the effect this case may have after remand on

an effort by Regional to seek payment under the Consent Forms. See dissent n.8.

                                     Conclusion

[¶21.]       Employees are third-party beneficiaries of the Agreements and have

standing to enforce the Agreements. Under the language and arrangement of the

Agreements, Employees are not responsible for the cost of covered services. We

reverse and remand for the circuit court to address Employees’ other causes of

action.

[¶22.]       GILBERTSON, Chief Justice, and SEVERSON, Justice, concur.

[¶23.]       ZINTER, Justice, concurs with a writing.

[¶24.]       KONENKAMP, Justice, dissents.



ZINTER, Justice (concurring).

[¶25.]       I join the opinion of Justice Meierhenry. Although I agree with many

of the legal principles discussed in the dissent, I join the majority writing because it

appears that the Agreements the employees sought to enforce as third-party

beneficiaries were not terminated before Regional provided the medical services at

issue.




                                          -13-
#25710

[¶26.]       The dissent agrees that Regional “was limited to accepting ‘payment as

provided in this Agreement as payment in full’ for covered services.” See infra ¶ 32

(quoting agreement). Indeed, both Agreements explicitly provided that the

employee members were “[e]xcept as otherwise permitted under applicable law . . .

not liable for any charges for Healthcare Services that are Covered Services.” See

supra ¶ 17 (quoting § 2.11 of the Payer Agreement and § 5.05 of the Hospital

Agreement) (emphasis added). The dissent, however, concludes that because Pope

& Talbot “defaulted” on its payments, Regional’s limitation on billing employees

was discharged by Pope & Talbot’s “breach.” See infra ¶¶ 32, 33-35, 37. Similarly,

the circuit court ruled that Regional was not prohibited from billing employees after

their “eligibility for services ceased,” which the circuit court determined occurred

when Pope & Talbot filed for bankruptcy in November 2007. Thus, the dissent and

the circuit court reason that upon breach (the dissent) or bankruptcy (the circuit

court), the agreements automatically terminated thereby eliminating employees’

ability to enforce the contracts. Both opinions further assume that the medical

services at issue were provided after termination of the Agreements. In my view,

the record does not support either assumption.

[¶27.]       With respect to termination, Justice Meierhenry points out that there

is no evidence that FMC or Regional terminated either Agreement in the

bankruptcy or otherwise. Supra ¶ 15. This observation is well supported because

the Agreements did not automatically terminate upon breach or bankruptcy. § 6.03

of Regional’s contract only gave Regional the conditional right to terminate for a

material breach if not corrected within thirty days of written notice of such breach.


                                         -14-
#25710

The record does not, however, reflect that Regional ever terminated the contract in

accordance with the written notice and grace period requirements. Moreover, the

record does not indicate that the contracts were terminated in the November 2007

bankruptcy because some medical services were paid for under the plan through

April 2008. Thus, the record does not support the assumption that the Agreements

were terminated before Pope & Talbot was sold in May of 2008.

[¶28.]       This is significant because even though Regional knew Pope & Talbot

was not paying, and even though Regional knew it could terminate the Agreements

thirty days after a breach, Regional continued to provide medical services without

terminating the Agreements. Thus, a substantial number of the medical services

were provided before the November 2007 bankruptcy (some as early as September

7, 2006) and some were provided as late as May 2008. And although there is no

dispute that Pope & Talbot was sold in May 2008, the record does not reflect that

any services were provided after May 30, 2008. Finally, even if there had been a

termination of the Agreements, § 6.04 required Regional to provide services for the

period necessary to conclude any hospitalizations existing on the date of

termination or until the patient could be safely and reasonably referred.

[¶29.]       Because the contracts did not automatically terminate, and because

Regional continued to provide the medical services at issue without terminating the

contracts, the contracts restricting Regional’s right to seek payment from the

employees remained in effect for the medical services involved in this case. And

until the Agreements were terminated, the employees were entitled the benefit of




                                        -15-
#25710

the Agreements as third-party beneficiaries. I therefore join the opinion of the

Court.



KONENKAMP, Justice (dissenting).

[¶30.]       Plaintiffs, the employees of Pope & Talbot, are suing Rapid City

Regional Hospital seeking, first, an injunction precluding the hospital from

collecting for the medical services it provided to the employees and, second,

compensatory and punitive damages against the hospital in attempting to collect its

unpaid bills. The employees do not deny they received these medical services, but

contend that because Pope & Talbot entered into a self-insured medical care plan,

making the employees not liable for covered services under the plan, that as third

party beneficiaries, they cannot be held financially responsible for their medical

bills. The problem is that after Pope & Talbot went bankrupt and was sold, it

ceased paying for its employees’ medical bills. With Pope & Talbot having defaulted

on its obligation to pay under its self-insured plan, can the employees be held

financially responsible?

[¶31.]       Two contracts bear on this question: Pope & Talbot’s Payer Agreement

with FCM and FCM’s Participating Hospital Agreement with Regional. With

respect to employee liability, the Payer Agreement states: “Except as otherwise

permitted under applicable law, [the employees] shall not be liable for any charges

for [covered healthcare services].” In the same vein, the Participating Hospital

Agreement provides: “Hospital agrees to accept payment as provided in this

Agreement as payment in full for [covered healthcare services] rendered to each


                                         -16-
#25710

[employee] and shall not bill [an employee] for any balance between Hospital’s

billed charges and the applicable reimbursement rate to which Hospital is entitled

under this Agreement.” (Emphasis added.) These agreements form Pope & Talbot’s

self-insured health care plan.

[¶32.]         Typically, managed care agreements contain a hold harmless provision

preventing hospitals from seeking payment from the enrollees for covered medical

services, when the payer organization fails to pay for these services or goes

bankrupt. 6 But no such provision can be found in the two agreements here, and the

employees have never contended that South Dakota law prohibits collection directly

from them. 7 The employees rely solely on the two contracts to define their rights.

Under these contracts, Regional was limited to accepting “payment as provided in

this Agreement as payment in full” for covered services. The difficulty being, of

course, that Regional did not receive payment “as provided in this Agreement.” The

payer, Pope & Talbot, defaulted.



6.       Collette B. Resnik, Maxicare as a Guide for Health Maintenance
         Organizations (HMOs) in Bankruptcy, 8 Bankr. Dev. J. 271, 281 (1991). Most
         states require “hold harmless” provisions in managed health care plans
         similar if not identical to the one adopted in the Health Maintenance
         Organization Model Act, promulgated by the National Association of
         Insurance Commissioners (NAIC). See Samsel v. Allstate Ins. Co., 59 P.3d
         281, 288-89 (Ariz. 2002).
7.       South Dakota prohibits a managed care provider from collecting or
         attempting to collect from a covered person any money owed to the provider
         by a health carrier. SDCL 58-17C-14(2) (repealed and transferred to SDCL
         ch. 15-17). In oral argument, counsel for Regional said that this prohibition
         does not apply in this case, and the employees have not raised this issue
         before the circuit court or argued it before us. “Generally, failure to raise an
         issue below will preclude appellate review.” In re B.Y. Dev., Inc., 2000 S.D.
         102, ¶ 17, 615 N.W.2d 604, 611 (citations omitted).

                                            -17-
#25710

[¶33.]       Accordingly, even if we assume that Pope & Talbot’s employees are

third party beneficiaries, the employees cannot enforce Regional’s performance as if

Pope & Talbot had continued to honor its contractual obligations. As third party

beneficiaries under Pope & Talbot’s self-insured plan, the employees stand in the

shoes of Pope & Talbot, and “failure of the promisee to perform a return promise

ordinarily discharges the promisor’s duty to a beneficiary to the same extent that it

discharges his duty to the promisee.” Restatement (Second) of Contracts § 309 cmt.

b; see also Souza v. Westlands Water Dist., 38 Cal. Rptr. 3d 78, 91 (Cal. Ct. App.

2006).

[¶34.]       As counsel for the employees explained, the employees “are asking this

Court to enforce . . . the Regional contract by prohibiting it from attempting to

collect from [the employees] those payments owed by Pope & Talbot to Regional for

medical services rendered under contracts herein.” Thus, they seek enforcement of

the “shall not be liable for any charges” provision. But only if Pope & Talbot had

the right to enforce performance from Regional, would the employees have the right

to require Regional to refrain from collecting its bills directly from the employees.

See Votaw Precision Tool Co. v. Air Canada, 131 Cal. Rptr. 335, 337 (Cal. Ct. App.

1976) (promisee breached contract, alleged beneficiary cannot enforce contract

against promisor); see also BAII Banking Corp. v. UPG, Inc., 985 F.2d 685, 697 (2d

Cir. 1993); Kinne v. Lampson, 364 P.2d 510, 512 (Wash. 1961).

[¶35.]       The crux of this case is Pope & Talbot’s failure to pay. In addressing

this issue, the Court writes: “Failure to pay may constitute a breach of the contract

but does not render the contract unenforceable or automatically discharge benefits


                                          -18-
#25710

to third parties.” To support this holding, the Court cites Weitzel v. Sioux Valley

Heart Partners, 2006 S.D. 45, 714 N.W.2d 884. Weitzel is inapplicable. First, it was

not a third party beneficiary case. Second, the suggestion that failure to pay may

not excuse performance was made in connection with applying the prevention

doctrine. This case has nothing to do with that doctrine. Here, Pope & Talbot

breached the contract when it failed to pay. And Regional would be entitled to raise

any claims or defenses against the employees that it could have raised against Pope

& Talbot. See Oman v. Yates, 422 P.2d 489, 495 (Wash. 1967) (promisee’s breach of

the contract was a defense available to promisor on action by third party

beneficiary); see also Restatement (Second) Contracts, § 309; Souza, 38 Cal. Rptr. 3d

at 91; State v. Osborne, 607 P.2d 369, 371 (Alaska 1980). As Professor Farnsworth

explains:

             Since an intended beneficiary’s right is based on the contract
             between the promisor and the promisee, it is measured by the
             terms of that contract and is generally subject to any defenses
             and claims of the promisor against the promisee arising out of
             the contract.

E. Allan Farnsworth, Contracts § 10.9, Vulnerability of Beneficiary to Defenses and

Claims, 772 (2d ed. 1990).

[¶36.]       To stress the point, had Pope & Talbot brought an action to enforce the

contracts seeking to require Regional to provide its contractually agreed medical

services to Pope & Talbot’s employees, it is obvious the action would have no merit:

Pope & Talbot’s failure to pay would excuse Regional’s duty to perform. See

Osborne, 607 P.2d at 371; see also Rae v. Air-Speed, Inc., 435 N.E.2d 628, 633 (Mass.

1982) (beneficiary’s recovery is limited to amount beneficiary could have recovered


                                         -19-
#25710

had promisee performed under the contract). But Regional did perform. Thus,

contrary to the Court’s conclusion that “the employees cannot be charged for

covered services,” Regional may still seek payment for those services from the

employees, under the individual agreements each signed upon hospital admission,

subject to the employees’ defenses that these are contracts of adhesion. 8 Being

third party beneficiaries does not elevate the employees to a protected status,

immunizing them from liability. On what conditions and in what amounts Regional

may obtain payment remains to be decided in a separate lawsuit.

[¶37.]         The Court incorrectly contends that this dissent would create an

obligation for the employees under these health care contracts. It claims that Pope

& Talbot’s self-insured medical plan cannot harm the employees, and that “the

inability of a third party beneficiary to receive a benefit because the promisee

breached the contract with the promisor does not mean that the beneficiary incurs

the promisee’s liability under the contract.” In no way is it being suggested here

that the two health care contracts themselves create liability for the employees.

Nor is Regional making such a claim. Rather, because Pope & Talbot breached its

duty to pay under its self-insured agreement, Regional is not precluded from

seeking payment under the individual contracts the employees signed.


8.       The Court claims that it is not reaching the question of enforceability of these
         Conditions of Admission agreements, but its decision today effectively enjoins
         Regional from pursuing payment of its bills under these agreements.
         Regional’s Consent to Treatment and Conditions of Admission form provides:
         “The undersigned agrees, whether as agent or as patient, that in
         consideration of the services to be rendered to the patient, he/she individually
         obligates himself/herself to pay the account of the Hospital in accordance
         with the rates and policies of the Hospital.”

                                           -20-
#25710

[¶38.]         Regional provided Pope & Talbot’s employees and their dependents

with medical services for which Regional has not been paid. In accord with the

contract terms, Regional agreed to “accept payment as provided in this Agreement

as payment in full” for covered healthcare services. Since Regional was not paid by

Pope & Talbot, Regional cannot be held to the terms of the agreement. 9 Summary

judgment should be affirmed.




9.       Justice Zinter’s writing assumes that Regional would have no recourse
         against the employees upon Pope & Talbot’s failure to pay until after notice
         of termination of the medical care contracts. Cf. SDCL 58-17C-14(2). But
         these contracts only bound Regional to accept the “applicable reimbursement
         rate” as payment in full, not to waive all payments in the event Pope &
         Talbot paid nothing.

                                          -21-
