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Citadel Group Limited, A Delaware Corporation v. Washington Regional Medical Center

March 22, 2011


The opinion of the court was delivered by: Honorable Marvin E. Aspen U.S. District Court Judge


This dispute between Washington Regional Medical Center ("WRMC") and Citadel Group Limited ("Citadel") pertains to the development of a medical office building ("MOB") in Springdale, Arkansas. WRMC moves for partial summary judgment on Count II of Citadel's amended complaint. (Dkt. No. 124.) In Count II, Citadel seeks lost profits arising from WRMC's alleged breach of an agreement between them. (Dkt. No. 63.) We grant WRMC's motion.


WRMC is an Arkansas not-for-profit corporation that operates medical facilities in that state. (Def.'s 56.1 Facts ¶ 1.) Citadel is a Delaware corporation headquartered in Chicago, Illinois and engaged in real estate development with a focus on the healthcare industry.*fn1 (Id. ¶ 2.) On September 15, 2005, WRMC signed an agreement with Citadel relating to the development of the MOB. (Id. ¶ 16.) The scope of the agreement between WRMC and Citadel is at issue here. We begin by laying out the facts.*fn2

A. WRMC's Request for Proposal and Citadel's Proposal

In early 2005, WRMC was considering developing a MOB in Springdale, Arkansas on property owned by its affiliate, the Washington Regional Foundation.*fn3 (Def.'s 56.1 Facts ¶ 4; Hutchison Dep. at 36; Bradley Dep. at 21--23.) WRMC initially sought to develop the MOB through a lease-back arrangement with an outside developer. (Pl.'s 56.1 Facts ¶ 1.) Through this arrangement, WRMC would execute a long-term ground lease on the property with the developer, who would then build the MOB, retain ownership of it, and lease back space in the MOB to WRMC. (Id.) WRMC sought this type of arrangement in order to develop the MOB without adding substantial debt to its balance sheet. (Id.) At the time, WRMC's Chief Executive Officer ("CEO"), William Bradley, was concerned that WRMC's "debt load was high." (Id.)

Seeking this type of arrangement, WRMC's Senior Vice President, Tami Hutchison, who Bradley had placed in charge of the project, issued a "Request for Proposal" ("RFP") on April 26, 2005 to eight developers, including Citadel. (Id. ¶ 2.) The RFP indicated that WRMC was interested in executing a "long-term ground lease" with a developer for the purpose of developing a 30,000 square foot medical facility in which WRMC would then lease a portion of the space for a primary care practice. (Id. ¶ 3.) Some of the remaining space would be pre-leased for use as an ambulatory surgery center and an orthopedic clinic. (Dkt. No. 137--9 at 4--5.) Under a heading titled "[e]stimated ground lease rate and terms," the RFP stated that WRMC was "propos[ing] a 30-year lease" at $1,812 per month for the first ten years, $1,993 per month for the next ten years, and $2,192 per month for the last ten years. (Id. at 5.) The RFP also identified certain "Requested Terms" to be included in the proposals, specifically the "[p]roposed lease rate and [o]ther [l]ease [t]erms." (Id.)

On May 13, 2005, Citadel submitted a proposal in response to the RFP. (Def.'s 56.1 Facts ¶ 5.) The first section of the proposal was a proposal letter with an appended "Authorization to Proceed" identical in all but one line to the "Authorization to Proceed" WRMC would later sign. (Dkt. No. 137--9 at 11--12; Def.'s 56.1 Facts ¶ 12.) The second section of the proposal was a three-page "Preliminary Leasing Terms Sheet" ("Terms Sheet"). (Def.'s 56.1 Facts ¶ 6.) The Terms Sheet began by stating: The following terms reflect interest rates as of May 9, 2005. This terms sheet is subject to credit review, commitments committee approval and changing market conditions among other considerations. The project costs as well as structural terms are subject to change following review of the final project design along with architect's and construction manager's final cost estimate. (Dkt. No. 137-9 at 13.) The Terms Sheet then provided an estimated project cost of $5,000,000, with the caveat that the final budget would be "determined by [WRMC]'s facility design specifications." (Id.) The Terms Sheet also proposed two pairs of variable and fixed rate lease options for the space leases in the MOB. (Id. at 13--14.) The monthly cost per square foot of the different space lease options varied depending on whether the leased space would be used for primary care practice, an ambulatory surgery center, or other medical offices. (Id.) The Terms Sheet also proposed a sixty-year "fair market value" lease for the ground lease on the property. (Id. at 15.)

Although Citadel's proposal sought a response by May 27, 2005, WRMC requested more information about the proposal on June 7, 2005. (Id. at 12; Pl.'s 56.1 Facts ¶ 9.) Citadel provided a detailed development budget of $6,200,000 in response to this request on June 15, 2005. (Pl.'s 56.1 Facts ¶ 11.) On July 19, 2005, William Bradley presented Citadel's proposal and another developer's proposal to Washington Regional Medical System's Board of Directors ("the Board"), which governs WRMC. (Id. ¶ 13.) Bradley recommended Citadel's proposal over the other developer's and sought authority to make a $60,000 deposit payment to Citadel, which the Board granted him. (Id. ¶ 15.)

B. Authorization to Proceed

After WRMC's auditors certified that the proposal would qualify for off-balance sheet treatment, Citadel submitted another proposal letter to WRMC on August 24, 2005. (Id. ¶ 16; Def.'s 56.1 Facts ¶ 10.) Although the letter began by stating "Citadel Group Limited is pleased to present [WRMC] with [Citadel's] comprehensive development proposal," the letter does not expressly incorporate any other documents. (Def.'s 56.1 Facts ¶¶ 10--11.) Nevertheless, the August 24 letter was nearly identical to the May 13 letter. Besides certain dates, the only substantive difference in the August 24 letter was the addition of a sentence in the appended "Authorization to Proceed." (Id. ¶ 12.) The text of the Authorization to Proceed was as follows, with emphasis added to the sentence not previously included:

Washington Regional Medical Center authorizes Citadel Group Limited to proceed with Project development at a fee of four percent (4%) of project costs according to the following schedule: (I) a 1% good faith deposit upon execution of this proposal, and (ii) the balance from Project funding. Washington Regional Medical Center is responsible for all legal expenses and other costs associated with Project development, except architectural and engineering fees, whether or not the project is ultimately developed. Project costs and expenses may be included in the Project's budget and hence, refunded to Washington Regional Medical Center at Project funding. Washington Regional Medical Center will only be responsible for architectural and engineering fees in the event Washington Regional Medical Center does not execute its space leases and ground lease. (Def.'s 56.1 Facts ¶ 18.) Bradley signed the Authorization to Proceed on behalf of WRMC on September 15, 2005, despite the fact that Citadel had sought a response by August 31, 2005. (Dkt. No. 137--9 at 12.)

Although they concede they had an agreement as of September 15, 2005, the parties dispute the scope of that agreement. (Def.'s 56.1 Facts ¶ 16.) Citadel contends that WRMC was accepting Citadel's "comprehensive development proposal" by signing the Authorization to Proceed. (Pl.'s 56.1 Facts ¶ 18.) In particular, Citadel claims that WRMC knew it was accepting the Terms Sheet from the May 13 proposal, because WRMC relied upon Citadel's proposed lease terms in comparing Citadel's proposal to the competing developer's. (Id. ¶¶ 13, 17--18.) As such, Citadel believes it is entitled to damages for the profits it would have received had it implemented all the elements of the comprehensive development proposal. (Id. ¶ 39.)

According to Citadel, these lost profits include the rental income from the space leases discussed in the Terms Sheet, the residual value of the MOB, and other fees that would have been incurred upon the deal's closing. (Def.'s 56.1 Facts ¶ 73.)

On the other hand, WRMC alleges that "[n]either ground nor space leases had been drafted, much less executed, at the time WRMC signed the Authorization." (Id. ¶ 26.) In support of this contention, WRMC points to the fact that the language of the Authorization to Proceed anticipates that the execution of the ground and space leases might never occur. (Id.

¶ 15.) Indeed, WRMC argues that ground and space leases were never executed, and thus Citadel cannot seek lost profits based on them. (Mem. at 12--15.)

C. Lease Negotiations

Whatever the scope of their agreement on September 15, 2005, the parties continued working with one another to develop plans for the MOB in the months after executing the Authorization to Proceed. During this time, Citadel hired attorneys, architects, engineers, and worked to arrange financing. (Id. ¶ 39.) The parties also continued to negotiate regarding the lease terms. (Id. ¶ 41; Pl.'s 56.1 Facts ¶ 25.)

On March 21, 2006, Citadel's Adam Lynch sent WRMC's Tami Hutchison an email attaching "a preliminary calculation for [the MOB's] lease rates." (Def.'s 56.1 Facts ΒΆ 41.) The attached document compares what it describes as the "Original Terms Sheet" from May 9, 2005, with "Preliminary Lease Rates" dated March 21, 2006. (Lynch Dep., Ex. 36 at 2.) The new "Preliminary Lease Rates" are different and higher. (Id.) There is also a formula explaining how the new lease ...

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