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U.S. Neurosurgical, Inc. v. City of Chicago

August 24, 2007


The opinion of the court was delivered by: Judge Joan H. Lefkow


This action arises from a contract between Global Health Systems, Inc. ("Global") and defendant City of Chicago ("the City") for the installation of a computer information system for the Chicago Department of Health ("CDOH"). Plaintiff, U.S. Neurosurgical, Inc. ("USN"), as the purported successor in interest to Global, has alleged, inter alia, that the City breached its contract with Global and seeks recovery of unpaid invoices in the total amount of $532,033.32, plus interest and costs.*fn1 The case was tried to the bench. Thereafter, counsel for each party submitted closing memoranda of fact and law. Based on the exhibits and testimony received in evidence and having considered the weight of the evidence and credibility of the witnesses and the post-trial submissions of counsel, the court hereby enters the following findings of fact and conclusions of law.*fn2


A. Background

1. USN is a Delaware corporation with its office and principal place of business in Rockville, Maryland.

2. The City is an Illinois municipal corporation.

3. At all relevant times, Global was a Delaware corporation with its principal place of business in Rockville, Maryland, and a wholly-owned subsidiary of GHS, Inc., a Delaware corporation.

4. On June 30, 1995, Global entered into a written contract with the City in which Global agreed to design, install, implement, and manage a computer information system for the Chicago Department of Health ("CDOH") ("the contract").

5. This computer system was known as the Global Health Information System, or "GHiS."

6. The contract included a choice-of-law provision, which specified that the contract was governed as to performance and interpretation by the laws of Illinois.

7. At all relevant times, Patrick Lenihan was a Deputy Commissioner for CDOH and was the executive project manager and key representative for the City for purposes of the contract.

8. At the time the contract documents were executed, Alan Gold was the president and chief executive officer of Global and the president and chief executive officer of GHS, Inc. As of the time of trial, he was the president, chairman, and chief executive officer of USN.

B. Asset Purchase Agreement between Global and Health Management Systems, Inc.

9. Global began its work under the contract in 1995, which it continued until July 15, 1997.

10. On July 15, 1997, Global assigned its rights under the contract to Health Management Systems, Inc. ("HMS"), through an Asset Purchase Agreement dated March 10, 1997. In the Asset Purchase Agreement, Global sold substantially all of the assets and properties of its business to HMS.

11. In paragraph 1.01(c)(vii) of the Asset Purchase Agreement, Global and HMS agreed that those items listed on Schedule 1.01(c)(vii) to the agreement were specifically excluded from the Global assets transferred to HMS and were to be retained by Global. Among the items listed on this schedule were the unbilled accounts receivable relating to work performed by Global on or before July 14, 1997 for the CDOH project.

12. Paragraph 1.01(c)(ii) of the Asset Purchase Agreement provides that all accounts receivable of Global attributable to the business through the closing date were specifically excluded from the assets to be transferred and were retained by Global and Management. (The billed and unbilled accounts receivable are referred to hereafter collectively as "the Chicago receivables.")

13. Global notified the City of the asset purchase transaction between Global and HMS on March 11, 1997. Global requested the City's consent to the assignment and transfer of the contract to HMS, which the City gave on June 25, 1997 by executing an assignment form.

14. The transfer of assets and the contract from Global to HMS under the March 10, 1997 Asset Purchase Agreement became effective July 15, 1997 through a Bill of Sale, Assignment and Assumption Agreement.

15. As of July 15, 1997, the contract was assigned to HMS, and HMS assumed and agreed to perform and keep all covenants and agreements of Global. The City agreed to pay HMS for work performed after the effective date of the assignment.

16. After the assets of Global were sold to HMS, Global ceased doing business as a corporate entity and its operations continued under HMS with the same name, "Global Health Systems." Global continued to hold the Chicago receivables and certain other assets not relevant here.

17. Prior to the July 15, 1997 transaction, Global submitted invoices to the City, which the City has not paid. These invoices, which the court will refer to as "the billed receivables," were numbered 7339, 7503, 7621, 7631, 7733, 7781, 7813, 7815, 7857, 7863, 8131, and 8132. The total amount of these invoices is $32,033.35.

18. On September 11, 1997, Global submitted invoice number 8170 to the City. This invoice specified that $250,000 was due for "special programming" work, noting it was "reduced 50% for prompt payment." (This invoice represents the retained unbilled receivable of Finding of Fact No. 11 above.)

19. The City did not reject the invoice promptly after receiving it and did not pay the invoice.

C. Assignment and Assumption Agreement between GHS, Inc. and USN

20. GHS, Inc. ("GHS") during the relevant period was the holding company for both USN and Global. (At one time, both USN and Global were wholly-owned subsidiaries of GHS.) Alan Gold was the president and CEO of GHS.

21. Within days after the closing of the Asset Purchase Agreement of July 15, 1997, Global's three directors, Alan Gold, Susan Greenwald Gold, and Howard Grunfeld,*fn3 met to discuss what to do with what remained of Global (hereafter "Old Global").

22. During that meeting, the directors orally transferred 100 per cent of Old Global's assets, including the Chicago receivables, to GHS. There is no document or other testimony in evidence that reflects a transfer of assets from Old Global to GHS.

23. On May 27, 1999, GHS and USN entered into an Assignment and Assumption Agreement, which included a New York choice of law provision. As part of this agreement, GHS assigned to USN "all accounts receivable of [GHS] and each of its subsidiaries arising through [May 27, 1999]."

24. This Assignment and Assumption Agreement did not include a schedule or description of the accounts receivable. Nevertheless, the parties to the agreement understood that the only receivables GHS had to assign were the Chicago receivables.

25. None of USN's annual reports or SEC filings from that time forward list the Chicago receivables as an asset.

D. Global's Contract with the City

26. Global's GHiS system used existing software that Global expected to modify to meet the specifications of its clients.

27. Generally, Global's service was to build an interface to render its GHiS system's database capable of receiving data exported from another system, such as CDOH's system. On top of the GHiS system's database is a layer of software that is built as an interface to bring the exported data into the database. To bring that data into the database, a programmer writes code to "massage" the data into a format to meet the specifications of the interface of the GHiS system.

28. The GHiS system then processed the data to perform the applications contained in its software modules.

29. In entering into the contract with Global, the City recognized that it needed a computerized system that integrated information ...

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