Xenon Health, L.L.C. v. Mirza Baig , 662 F. App'x 270 ( 2016 )

Case: 15-20627 Document: 00513733333 Page: 1 Date Filed: 10/25/2016
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
FILED
No. 15-20627 October 25, 2016
Lyle W. Cayce
Clerk
XENON HEALTH, L.L.C.; HAROON W. CHAUDHRY, M.D.,
Plaintiffs - Appellants
v.
MIRZA BAIG,
Defendant - Appellee
Appeal from the United States District Court
for the Southern District of Texas
Before DAVIS, ELROD, and HIGGINSON, Circuit Judges.
PER CURIAM:*
Plaintiffs-Appellants appeal the district court’s grant of summary
judgment dismissing their tortious interference with a contract claim on the
grounds that the underlying agreements were illegal and void under the Texas
Medical Practice Act because they provided for the practice of medicine in
Texas without a license. We AFFIRM.
* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.
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I.
Plaintiff Xenon Health, L.L.C. (“Xenon”) is a California company that
provides anesthesia services to medical facilities and management services to
anesthesia providers. Plaintiff Haroon W. Chaudhry, M.D. (“Dr. Chaudhry”),
a resident of California, is the president and chief executive officer of Xenon.
Xenon sought to expand its services to Texas in early 2011, but Dr. Chaudhry
was not licensed to practice medicine in Texas and could not provide medical
services without a Texas license. Xenon’s chief operating officer, Fahim
Hashim (“Hashim”), contacted his friend and business associate, Defendant
Mirza Baig. Baig introduced Plaintiff Dr. Chaudhry to Dr. Mutjaba Ali Khan
(“Dr. Khan”), a physician licensed to practice medicine in Texas.
Dr. Chaudhry was in the process of seeking a Texas medical license and
agreed with Dr. Khan to establish a Texas entity, Xenon Anesthesia of Texas
PLCC (“Xenon Texas”), to provide anesthesia services in Texas. Dr. Chaudhry
and Dr. Khan entered into three agreements in July 2011: (1) a Purchase and
Sale Agreement (“PSA”), (2) an Equity Interest Assignment Agreement
(“Equity Agreement”), and (3) an Exclusive Management Services Agreement.
Under the Exclusive Management Services Agreement, Dr. Khan acted
as managing member of Xenon Texas, but the services were provided by Dr.
Chaudhry through Xenon in California. Additionally, under the PSA and the
Equity Agreement, within seven business days of Dr. Chaudhry obtaining his
Texas medical license, Dr. Khan agreed to sell his interest in Xenon Texas to
Dr. Chaudhry. Until that sale, Xenon would perform services for Xenon Texas
for a monthly fee of $750,000. These agreements were all signed
contemporaneously in July 2011 and became effective on that date.
Xenon’s chief operating officer, Hashim, left the business in December
2011, believing that he would be terminated. At that point, Plaintiffs Xenon
and Dr. Chaudhry filed this suit, alleging that Baig, Hashim, Dr. Khan, and
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Dr. Khan’s attorney all conspired to take control of Xenon Texas. Plaintiffs
alleged that Baig, as the “leader” of the effort, caused the termination of all
three agreements before Dr. Chaudhry obtained his Texas medical license on
October 1, 2012.
Plaintiffs’ suit alleged that Baig tortuously interfered with the
agreements between Xenon/Dr. Chaudhry and Xenon Texas/Dr. Khan. Baig
moved for summary judgment. Finding that the three agreements were illegal
and void, the district court granted Baig’s motion for summary judgment and
dismissed the suit. The district court held that the three interrelated contracts
were void under the Texas Medical Practice Act, which prohibits any person
from practicing medicine in Texas without a Texas license to do so. 1 It followed
that no suit could lie for interference with a void contract. 2
II.
We review the district court’s grant of summary judgment de novo. 3
Summary judgment is appropriate “if the movant shows that there is no
genuine dispute as to any material fact and the movant is entitled to judgment
as a matter of law.” 4 The Court views all evidence in the light most favorable
to the nonmoving party, drawing all reasonable inferences in that party’s
favor. 5
III.
Plaintiffs-Appellants Xenon and Dr. Chaudhry raise several inter-
related issues on appeal, arguing that the district court erred in granting
Baig’s motion for summary judgment. The district court wrote a
1 Xenon Health LLC v. Baig, No. H-13-1828, 2015 WL 3823623, at *6 (S.D. Tex. June
19, 2015).
2 Id. at *7.
3 Johnston & Johnston v. Conseco Life Ins. Co., 732 F.3d 555, 561 (5th Cir. 2013).
4 Fed. R. Civ. P. 56(a).
5 Crawford v. Formosa Plastics Corp., 234 F.3d 899, 902 (5th Cir. 2000).
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comprehensive opinion addressing these arguments. We consider below the
issues Plaintiffs raise on appeal.
Plaintiffs argue on appeal that the district court erred in finding that the
three agreements were illegal and void under the Texas Medical Practice Act. 6
The district court correctly concluded that Dr. Khan’s corporation, Xenon
Texas, was organized to furnish anesthesia services in Texas, this corporation
was a sham, and these services were being provided by Dr. Chaudhry. The
Exclusive Management Services Agreement with Dr. Chaudhry’s corporation,
Xenon, makes it clear that Dr. Chaudhry and Xenon had total control of Xenon
Texas. This agreement provided that Xenon would have the exclusive right to
furnish the following services for Xenon Texas:
(i) recruiting, credentialing and scheduling (including ensuring
vacation coverage) of anesthesia providers (the “Anesthesia
Providers”), (ii) ordering and maintaining supplies and equipment,
(iii) management of billing and collection services, (iv) monitoring
and overseeing regulatory compliance, (v) providing financial
reports, (vi) implementing quality assurance programs, (vii)
management of all funds of Xenon (including with respect to
receipt of accounts receivables and payment of expenses incurred
by Xenon), and (viii) providing logistics (including, if necessary,
assisting in structuring employment relationships with
Anesthesia Providers). 7
Dr. Chaudhry explained in his deposition that Dr. Khan was the paper owner
of Xenon Texas. In addition, Dr. Khan even granted signature authority to Dr.
Chaudhry. The agreement also provided that Xenon controlled all funds
received for services provided by Xenon Texas. As the district court concluded,
6 Dr. Chaudhry and Xenon also argue that a Texas state court judgment ordering Dr.
Khan to transfer his ownership interest in Xenon Texas to Plaintiff binds this Court under
principles of res judicata. The district court fully explained in footnote 31 of its opinion why
the Texas state court’s decision is not binding in this suit for tortious interference with the
contract. Xenon, 2015 WL 3823623, at *6 n.31.
7 Id. at *4 (quoting the Exclusive Management Services Agreement).
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Dr. Chaudhry alone had authority to enter into agreements to provide
anesthesia services and services related to that effort on behalf of Xenon Texas.
The one argument Plaintiffs urge on appeal that requires analysis is that
the PSA and the Equity Agreement did not relate to the practice of medicine
in Texas and that the district court erred in finding that it was void. As stated
above, the PSA required Dr. Khan to transfer Xenon Texas to Xenon within
seven days of the date Dr. Chaudhry received his Texas medical license.
We agree with the district court that the PSA and the Equity Agreement
were an integral part of the overall scheme for Xenon to control Xenon Texas
and were inextricably intertwined with the Exclusive Management Services
Agreement. It is significant that the PSA required action by Dr. Khan during
the time Xenon was actively operating Xenon Texas in the provision of
anesthesia services. More specifically, Dr. Khan agreed to (1) “disclose . . . each
and every action he takes with respect to [Xenon Texas] and each and every
decision he makes on behalf of [Xenon Texas]”; (2) give Dr. Chaudhry and his
agents access to all of Xenon’s “personnel, properties, books, contracts,
commitments, tax returns and records,” as well as any other information Dr.
Chaudhry might request; and (3) refrain from paying any dividends or
distributions, incurring any debt, or selling company assets. 8 These provisions
in the PSA strengthened Dr. Chaudhry’s control over Xenon Texas’s medical
practice before Dr. Chaudhry obtained his medical license and were designed
to protect the value of his investment in Xenon Texas.
The PSA and the Equity Agreement were designed to avoid the
possibility for Dr. Khan to dispose of Xenon Texas or deplete assets in Xenon
Texas until Dr. Chaudhry obtained his medical license. In other words,
through the PSA, Dr. Chaudhry tried to preserve the asset he developed in
8 Purchase and Sale Agreement, July 2011, at 5-7.
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Xenon Texas while he was directing the practice of medicine in Texas in
violation of the Texas Medical Practice Act. The PSA and Equity Agreement
were executed contemporaneously with the other contracts and played a
central role in allowing Dr. Chaudhry to indirectly practice medicine in Texas
and reap the benefit of that illegal practice once he obtained his license.
IV.
In sum, the district court correctly analyzed these three interrelated
contracts that were designed by Dr. Chaudhry to give him almost total control
over the medical practice of Xenon Texas. This was done to permit Dr.
Chaudhry to illegally practice medicine in Texas and reap the benefit of
receiving the asset he developed through this illegal activity. For these reasons
and the reasons assigned by the district court in its careful opinion, the
judgment of the district court is AFFIRMED.
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HIGGINSON, Circuit Judge, concurring in part and dissenting in part:
I agree with the majority opinion that the Exclusive Management
Services Agreement violated the Texas Medical Practice Act and accordingly
agree that Plaintiffs’ tortious interference claim predicated on the Exclusive
Management Services Agreement cannot survive summary judgment.
However, I respectfully disagree with the majority opinion’s conclusions
concerning the Purchase Sale Agreement (“PSA”) and the Equity Interest
Assignment Agreement (“Equity Agreement”). Instead, I would hold that
Plaintiffs have put forward sufficient evidence—at least at this stage—to
create a genuine issue of material fact concerning whether the PSA and Equity
Agreement are separate from the unlawful Exclusive Management Services
Agreement and therefore, are enforceable.
As an initial uncontested matter, neither the PSA nor the Equity
Agreement, standing alone, violates the Texas Medical Practice Act. The PSA
expressly conditions its effect on Chaudhry, or his designee, receiving a Texas
medical license. And, the Equity Agreement, as an exhibit to the PSA, is
subject to the same condition. Thus, the majority opinion’s illegality holding
must depend on the assertion that the PSA and the Equity Agreement “were
an integral part of the overall scheme for Xenon to control Xenon Texas and
were inextricably intertwined with the Exclusive Management Services
Agreement.”
Even granting the argument that all three agreements were
“inextricably intertwined,” the legal conclusion that the PSA and the Equity
Agreement are therefore necessarily illegal and void does not follow, as Texas
courts implicitly have held assessing these same agreements.
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Under Texas law, which all parties agree applies here, where an
“incidental” clause of a contract is unlawful but the “original consideration of
the contract is legal,” the “invalid provisions may be severed and the valid
portion of the agreement upheld.” Rogers v. Wolfson, 763 S.W.2d 922, 925 (Tex.
App. 1989), writ denied (June 7, 1989). “An illegal or unconscionable provision
of a contract may generally be severed so long as it does not constitute the
essential purpose of the agreement.” In re Poly-Am., L.P., 262 S.W.3d 337, 360
(Tex. 2008). “The relevant inquiry is whether or not parties would have
entered into the agreement absent the unenforceable provisions.” Id. If the
parties would have still entered into the agreement absent the unenforceable
clauses, the illegal terms may be severed and the agreement may still be
enforced. See Whiteside v. Griffis & Griffis, P.C., 902 S.W.2d 739, 744 (Tex.
App. 1995), writ denied (Nov. 16, 1995). Courts determine whether an illegal
clause is severable from the agreement as a whole by looking to the parties’
intent as evidenced by the terms of the agreement. Montgomery v. Browder,
930 S.W.2d 772, 778–79 (Tex. App. 1996), writ denied (Apr. 18, 1997)
(“Severability of the contract is determined by the intent of the parties as
evidenced by the language of the contract.”).
Although asserting that all three agreements essentially functioned as
one, the district court did not consider whether the PSA or the Equity
Agreement are severable from the Exclusive Management Services
Agreement. There is at least enough evidence to find a genuine issue of
material fact that they are.
First, and most importantly, the PSA contains a severability clause.
Section 15.13 of the PSA provides, “In case any one or more of the provisions
contained in this Agreement is for any reason held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality, or unenforceability
will not affect any other provisions of this Agreement . . . .” “[T]he purpose of
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a severability clause is to allow a contract to stand when a portion has been
held to be invalid.” John R. Ray & Sons, Inc. v. Stroman, 923 S.W.2d 80, 87
(Tex. App. 1996), writ denied (Feb. 21, 1997). Although a severability clause
alone will not save an unlawful contract, see Stroman, 923 S.W.2d at 87, “[t]he
presence of a severability clause sheds light on the agreement’s ‘essential
purpose.’ ” Coronado v. D. N.W. Houston, Inc., No. 13-CV-2179, 2015 WL
5781375, at *10 (S.D. Tex. Sept. 30, 2015). Accordingly, Texas courts have
relied on the presence of severability clauses to determine that an unlawful
clause was not essential to a contract. See, e.g., Poly-Am., 262 S.W.3d at 360
(“We agree with Poly–America that the intent of the parties, as expressed by
the severability clause, is that unconscionable provisions be excised where
possible.”).
Second, the recitals to the PSA indicate that the purpose of the
agreement was to transfer all of Khan’s interest in Xenon Texas to Chaudhry.
That purpose can function entirely independently from the pre-transfer
management rights given to Chaudhry by the Exclusive Management Services
Agreement. That is, Chaudhry could have purchased Xenon Texas without
managing the company prior to the purchase.
Third, the PSA contains terms that make little sense against the
backdrop of an enforceable Exclusive Management Services Agreement. For
example, why would the PSA require Khan to give Chaudhry access to Xenon
Texas’s books and records when the Exclusive Management Services
Agreement gave Chaudhry control over Xenon Texas’s financial reports?
These overlapping terms equally suggest that the PSA was intended to operate
independently from, not “inextricably intertwined” with, the Exclusive
Management Services Agreement.
Fourth, the fact that the parties chose to structure the Exclusive
Management Services Agreement, the PSA, and the Equity Agreement as
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separate agreements suggests that each was meant to function independently.
Put another way, there was nothing to stop the parties from drafting a
commercially reasonable agreement that combined all three agreements into
one.
Significantly to me, finding that the PSA and the Equity Agreement
could be enforceable would square our judgment with the rulings of the Texas
courts. As the majority opinion acknowledges, Texas courts previously have
found the PSA enforceable. Those rulings are in serious tension with the
majority opinion’s holding that the PSA is illegal and void under Texas law.
The majority opinion’s explanation for this divergence adopts footnote thirty-
one of the district court’s opinion. Id. Footnote thirty-one distinguished the
Texas cases by arguing that the those cases only concerned the PSA’s legality
after Chaudhry received his Texas medical license. The district court
reasoned:
Plaintiffs’ allegations of tortious interference in this case, however,
allegedly accrued in late 2011 and the early months of 2012, when
Plaintiff Chaudhry had neither a Texas administrative medicine
license nor a Texas clinical medical license. . . . Whatever the post-
medical licensure effect was, if any, that the Texas state courts
may have found inured to the benefit of Chaudhry when he
received a Texas administrative medicine license, he had no
administrative medical license or clinical medical license in Texas
in late 2011 and during the first nine months of 2012 when the
alleged tortious interference occurred, and the contracts then were
void as against public policy.
But, the district court’s conclusion is not supported by the record;
Plaintiffs have put forward evidence of tortious interference after Chaudhry
received his Texas medical license. At his deposition, Chaudhry stated that on
October 9, 2012, Xenon wrote to Khan to inform him that Chaudhry had
obtained his medical license. Chaudhry contends that Khan did not respond
to that letter because of Baig’s influence; specifically, he claims that Khan
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wanted to settle the dispute following Xenon’s letter but did not do so because
of Baig. In support, Chaudhry cites Fahim Hashim’s testimony. Hashim
testified that Khan did not want to be involved in the ongoing conflict but Baig
convinced him otherwise. Accordingly, I am apprehensive that the majority
opinion adopts a footnote proposition contradicted both by the record and also
by Texas state courts.
That being said, I recognize that there is record evidence to support the
argument that the Exclusive Management Services Agreement’s unlawful
terms might not be severable from the PSA and the Equity Agreement. For
example, the PSA became effective in July 2011—before Dr. Chaudhry
received his medical license. And, although the contemplated purchase was
not to occur until after Chaudhry got his license, the preceding time period was
still relevant because the PSA set the purchase price as the sum of (1) Xenon
Texas’s startup expenses and (2) five percent of collections from anesthesia
procedures performed between the effective date and either (a) the closing date
or (b) 180 days later. Thus, the purchase price in the PSA depended on revenue
generated during the period of unlawful management. This structure allowed
Chaudhry to exploit the benefits of business that he generated during the
pendency of the Exclusive Management Services Agreement.
To be clear, I would not find—at least at this stage of the litigation—that
the PSA and Equity Agreement are lawful. Instead, I would reverse the
district court’s holding with respect to the PSA, Equity Agreement, and
conspiracy claims, and thereby allow the district court to consider, on a full
trial record, whether the PSA and Equity Agreement are so “inextricably
intertwined” that they cannot be severed from the unlawful Exclusive
Management Services Agreement.
Because I see a material issue of fact as to the separateness of these
agreements, and especially because the district court did not engage in any
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severability analysis that might harmonize our holding with the rulings of the
Texas courts, I respectfully dissent.
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