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Center for Wound Healing & Hyperbaric Medicine, LLC v. Kit Carson County Health Service District.

2024 COA 24. No. 23CA0522. Taxation—TABOR—Special Districts—Constitutional Debt—Contracts—Appropriation Contingency Clauses.

February 29, 2024

The Center for Wound Healing & Hyperbaric Medicine, LLC (center) and the Kit Carson County Health Service District (district) entered into an Administrative Services Agreement (the ASA) in 2018, in which the parties agreed that the center would establish and manage a hyperbaric oxygen therapy and wound care facility at Kit Carson County Memorial Hospital, which the district operates. Per the ASA, the district agreed to pay the center 80% of the district’s net collections for hyperbaric treatment and, for wound care, $75 per procedure performed at the facility, with annual upward adjustments of 3%. The district’s payments were due on the 15th day of each month, with no exceptions. The ASA’s initial term was for seven years, and it specified that early termination was permissible only in certain circumstances. In the event of a material breach, the nonbreaching party was required to give the breaching party notice of the breach and allow for a 45-day cure period. In recognition of the potential impact of the Taxpayer’s Bill of Rights (TABOR) on the ASA, subsection 7.4 included a provision acknowledging that the parties agreed that the district believed itself to be subject to the Colorado Constitution, article 10, § 20.

In 2020, based on a letter from a Medicare compliance contractor, the district became concerned that there were billing compliance concerns, and it stopped submitting claims from the center to Medicare for reimbursement. On June 25, 2021, the center notified the district that the district had materially breached the ASA by failing to pay for the center’s services. Three days later, the district informed the center that it was terminating the ASA, effective immediately, and ceased compliance with the ASA. The center sent the district a demand letter alleging breach of contract. The district then paid the June 2021 invoice plus contractual interest, but it made no further payments to the center. The center then filed suit, seeking to recover $404,583.68 for its July 2021 invoice and $7,679,447.19 (plus contractual interest) under the acceleration clause. The district pleaded affirmative defenses and counterclaims. The center moved for summary judgment, which the court denied, and the district filed its own motion for summary judgment. While the district’s summary judgment motion was pending, it filed a “Motion in Limine with Grounds for Dismissal of Plaintiff’s Claims” arguing that, based on TABOR and subsection 7.4 of the ASA, the center could not claim any damages resulting from the district’s termination of the ASA. The trial court granted the district’s motion in limine and dismissed the center’s claims for relief.

On appeal, the center argued that TABOR does not regulate damages, so the trial court erroneously concluded that the center could not recover breach of contract damages from the district without appropriations by the district for that specific purpose. TABOR bars the creation of multiple-fiscal year direct or indirect district debt or other financial obligations absent voter preapproval. Colorado courts have declined to interpret TABOR in a way that prevents effective day-to-day governance, and multiyear contracts that lack either voter approval or pre-pledged funds are void under TABOR only if they create “constitutional debt.” A multiyear contract avoids constitutional debt by making the government’s obligations contingent on sufficient annual appropriation, and in the event of non-appropriation, termination of the contract without the payment of damages. Here, ASA subsection 7.4 made any payment to the center in the fiscal years after 2018 contingent on specific appropriations for that purpose, so it ensured that the district would not be financially bound in later fiscal years. This discretion over whether to appropriate funds to continue services under the ASA renders the ASA valid under TABOR. But the amounts owed under the ASA subsection 6.1 acceleration clause and required by subsection 7.2(D) are “payments” within the meaning of subsection 7.4, so that provision also renders the district’s obligations under the acceleration clause contingent upon sufficient annual appropriation by the district for future fiscal years. However, this conclusion is dispositive only of those obligations for which the district has not and will not make appropriations. For fiscal years after 2021, it is undisputed that no such appropriations will occur. But because the agreement was terminated midway through fiscal year 2021, the status of any obligations arising during that year is less certain, and this uncertainty should have precluded entry of judgment as a matter of law with respect to any payments for fiscal year 2021 that the district never made.

The entry of judgment was affirmed to the extent that it precludes the center from recovering payments due under the acceleration clause corresponding to years following fiscal year 2021. The entry of judgment was reversed to the extent that it precludes the center from recovering unpaid sums that the center claims correspond to fiscal year 2021, and the case was remanded for further proceedings.

Official Colorado Court of Appeals proceedings can be found at the Colorado Court of Appeals website.

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