Quantum Management Group, Ltd. v. The University of Chicago Hospitals

In the
United States Court of Appeals
For the Seventh Circuit
No. 00-3765
Quantum Management Group, Ltd.,
Plaintiff-Appellant,
v.
The University of Chicago Hospitals,
Defendant-Appellee.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 99 C 2248--Ronald A. Guzman, Judge.
Argued March 1, 2002--Decided March 25, 2002
Before Flaum, Chief Judge, and Bauer and
Harlington Wood, Jr., Circuit Judges.
Flaum, Chief Judge. Magistrate Judge
Ashman granted The University of Chicago
Hospitals’ ("UCH") motion for summary
judgment, holding that Quantum Management
Group, Ltd. ("Quantum") was not entitled
to additional payments under the contract
between the parties because Quantum
failed to present a genuine issue of
material fact on an essential element of
its case. The court held that at least
two of the three conditions precedent
were not met. The court also found that
UCH was entitled to damages from Quantum
for breaching the contract. Quantum
appeals. We affirm the decision of the
district court.
I. Background
In 1995, in an attempt to reap the
savings that the private sector had
achieved through managed health care
programs and to improve beneficiaries’
access to care, the State of Illinois
announced an intended program that would
require Medicaid recipients to be
enrolled in managed health care plans.
Because the state’s announced program had
the potential of threatening its patient
base, UCH decided to create its own
managed care plan for its Medicaid
patients.

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A. Facts Relating to Quantum’s Claim
In order to create this type of plan,
Illinois law required UCH to enter into a
contract with the state ("the State
Contract") that authorized the proposed
plan to provide assistance to Medicaid
beneficiaries, and provided that the
state would pay the plan a monthly fee
for each enrollee.
In July 1996, UCH entered into a
contract ("the Agreement") with Quantum,
a consultancy with experience in
establishing and operating managed care
programs. Frederick Fey, as trustee of
the Frederick Fey Family Trust, was the
president, sole limited partner, and
controlling shareholder of Quantum
Management Group, Inc., Quantum’s
corporate general partner. The Agreement
provided that Quantum would design,
establish, and operate a managed health
care plan ("the Plan"), eventually known
as Family First, in which UCH’s Medicaid
patients could enroll. Upon execution of
the Agreement, Quantum hired George
Morrow to be CEO, as well as a number of
consultants and other employees--150, at
the peak--for the plan. The Plan became
operational in January 1997; the first
members enrolled in March of that year.
The Plan’s highest enrollment level in
any given month was 17,618. Morrow
resigned as CEO in July 1997.
The Agreement included a two-and-a-half
page section ("Section IV") entitled
"Payments to Quantum." The language of
Section IV, and the facts surrounding the
provision’s conditions, give rise to
Quantum’s allegations. The provision
states first that UCH will pay Quantum
monthly consulting fees and expenses.
(Section IV (A)). UCH did so--to the tune
of 2 million dollars. Section IV also
provides for additional payments to
Quantum if certain conditions are met.
In addition to the other payments
described herein . . . UCH[ ] shall pay
Quantum compensation for its services in
an amount based on the number of
enrollees in the Plan on the first day of
the previous month (hereinafter referred
to as the "Monthly Fee" payable with
respect to such previous month) provided,
however, that no Monthly Fee shall be
payable with respect to any month in

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which the Plan experienced an operating
loss. For such purpose an operating loss
shall mean an excess of total expenses
over total revenues (in each case not
including investment income and expenses)
computed on an accrual basis as specified
by generally accepted accounting
principles.
Notwithstanding anything to the contrary
above, a Monthly Fee with respect to a
given month shall not be due if the total
enrollment in the Plan on the first day
of the previous month was less than 120%
of the breakeven level of enrollment. The
breakeven level of enrollment for such
purpose shall mean the number of
enrollees in the Plan on the first day of
the first month in which the Plan did not
experience an operating loss, as defined
above.
Section IV(B). Under the terms of this
Section, Quantum is not entitled to a
Monthly Fee for any given month unless at
least two profitable months exist. First,
the Plan must have achieved a breakeven
level of enrollees (or, in other words,
achieved the number of enrollees
necessary to create an operating gain)
during any month before the one for which
a fee may be due. Second, the month for
which a fee is due must have surpassed
that breakeven level by at least twenty
percent. UCH never paid Quantum Monthly
Fees.
The only financial data produced at
trial showed that the Plan suffered an
operating loss each month it was in oper
ation. Quantum contends that the plan
broke even in either March or May of
1998, as evidenced by Fey’s testimony
that two officers of UCH told him that
the plan was "cash positive" and making
money. Quantum points to no evidence
suggesting that a month existed where the
Plan’s enrollment level reached 120% of
the supposed breakeven point. Quantum
admits that no hard data exist as to
whether the Plan ever reached a breakeven
point, but contends that it was UCH’s
duty to keep such records.
Section IV(D) of the Agreement provides
that UCH shall continue to pay any
Monthly Fees payable under Section IV(B)
if it terminates the Agreement without
cause. Section IV(E) states that if the
Agreement is terminated for cause,

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payments due under IV(B) shall cease.
Section IV(F), which applies when the
Plan undergoes a significant structural
change, provides that development fees,
which Fey concedes include IV(B)
payments, shall be equitably adjusted.
In the fall of 1997, the State announced
that, contrary to its 1995 announcement,
it would not implement a mandatory
managed care program for Medicaid
beneficiaries. In May 1998, UCH told
Quantum that it intended to sell the Plan
and terminated the Agreement. Quantum
considered buying the Plan, but was
outbid. On July 31, 1998, the sale of the
Plan closed. The State Contract was,
therefore, terminated as well.
B. Facts Relating to UCH’s Counterclaim
UCH paid Quantum under Section IV(A),
which states that UCH shall reimburse
Quantum for all expenses, to the extent
that such expenses were "within the scope
of the Budget included within the
Business Plan or within the scope of a
later Budget . . . in effect at the time
the expense was incurred by Quantum." The
Business Plan allowed for $25,000 per
month for Fey’s services from April
through December 1997. A December 17,
1996 modification to the budget allowed
for an increase in consulting fees as
well as an additional $26,000 per month
for Morrow’s services. Morrow resigned in
July 1997. Quantum continued to charge
and accept the $26,000 per month for five
months thereafter. That is, it received a
total of $130,000 for services it did not
provide. Also, as consideration for the
December 17 modification, Quantum agreed
to split equally the increase in fees;
UCH would initially pay Quantum’s share,
as a draw against future payments.
Quantum’s share of the increase equaled
$148,690. It has not repaid UCH.
Section III(E) of the Agreement provides
that Quantum shall recommend and "assist
in the selection, development, and/or
integration of information and internal
communication systems, which shall
include a management information system
("MIS") for the gathering, synthesis,
storage and retrieval of data required
for the plan. . . . [T]he MIS shall be
designed for the purpose[ ] of . . .
making required reporting to regulatory
agencies." Quantum selected an MIS that

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failed to make the required reporting to
the Illinois Department of Public Aid.
Due to this failure, the Plan did not
comply with the State Contract. UCH
retained another consultant to achieve
compliance with the reporting
requirements at a cost of $166,945.
Finally, when Fey moved to Chicago to
begin working for the Plan, UCH paid a
$2,026 security deposit required by the
landlord of his apartment. When Fey moved
out, he instructed the landlord to refund
the deposit to him. He never reimbursed
UCH.
Pursuant to U.S.C. sec.636(c) and Fed.
R. Civ. P. 73, the parties consented to
the exercise of jurisdiction by
Magistrate Judge Ashman for the limited
purpose of ruling on UCH’s summary
judgment motion. Judge Ashman granted the
motion, holding that Quantum failed to
raise a genuine issue of material fact as
to whether the Plan achieved an operating
gain during any given month, or as to
whether the Plan ever reached 120% of the
enrollment level of any supposed
breakeven month. The court also awarded
UCH $447,661.37, holding that Quantum
breached the Agreement by collecting fees
earmarked for Morrow’s services after his
resignation, by failing to return its
half of the additional consulting fees
advanced by UCH, by failing to return the
security deposit on Fey’s apartment, and
by failing to select an appropriate MIS.
II. Discussion
We review a grant of summary judgment de
novo, viewing all of the facts, and
drawing all reasonable inferences
therefrom, in favor of the nonmoving
party. See, e.g., Lewis v. Holsum of Fort
Wayne, Inc., 278 F.3d 706 (7th Cir.
2002). Summary judgment is proper when
the "pleadings, depositions, answers to
interrogatories, and admissions on file,
together with the affidavits, if any,
show that there is no genuine issue as to
any material fact and that the moving
party is entitled to judgment as a matter
of law." Id.; Fed. R. Civ. P. 56(c). If
the nonmoving party fails to make a
sufficient showing on an essential
element of her case, the moving party is
entitled to judgment as a matter of law
because "a complete failure of proof
concerning an essential element of the

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[nonmovant’s] case necessarily renders
all other facts immaterial." Celotex
Corp. v. Catrett, 477 U.S. 317, 323
(1986).
A. Quantum’s Claim
No breach on UCH’s part occurred unless
it terminated the Agreement without
cause, and two requisite profitable
months occurred--one that first achieved
an operating gain (the breakeven month),
and a second that surpassed the breakeven
month by 20%. The district court assumed
without deciding that UCH’s termination
of the contract was without cause. We do
the same. At issue, then, are the two
Section IV(B) profitable-month
conditions. The only financial data
presented--UCH’s Spreadsheet of Plan
Financial Information for Fiscal Year
1998--itemized revenues and expenses for
the year and showed an operating loss for
each month. According to this evidence,
neither a breakeven month nor a month
that achieved at least 120% of the
enrollment level of a breakeven month
occurred. These two profitable months are
conditions precedent to UCH’s contractual
obligation. Hardin, Rodriguez & Boivin
Anesthesiologists, Ltd. v. Paradigm Ins.
Co., 962 F.2d 628, 633 (7th Cir. 1992)
("Under Illinois law, a condition
precedent is some act that must be
performed or event that must occur before
a contract becomes effective or before
one party to an existing contract is
obligated to perform."). Where a
condition precedent is not satisfied, no
breach of contract occurs for failure to
perform. Id.
1. Agreement Section IV(B): Breakeven
Month
Quantum contends that Fey’s deposition
testimony that two UCH representatives
told him that the Plan was "cash
positive" in March 1998 constitutes
sufficient evidence to raise a genuine
issue of material fact. We disagree.
First, the district court held that such
testimony was inadmissible hearsay (as
Fey did not establish that the statements
were made in a representative capacity)
and violated myriad other federal rules
of evidence. Moreover, even if we accept
the statements as true, they do little to
prove that a breakeven month occurred as
defined by the Agreement: "an excess of

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total expenses over total revenues . . .
computed on an accrual basis as specified
by generally accepted accounting
principles."
Quantum argues that the testimony is
enough because the Agreement placed the
burden of keeping the monthly breakdown
of accrued monthly medical expenses was
on UCH. Because UCH breached the contract
by failing to do so, it contends, it
cannot be expected to provide specific
financial data to the court. However,
Quantum can point to no actual clause in
the Agreement that places such a duty on
UCH. Quantum attempts to rely on the
Illinois Wrongful Prevention Doctrine
which provides that a party that prevents
the occurrence of a condition precedent
may not ruly on such nonoccurrence to
refuse to perform. Swaback v. American
Information Technologies Corp., 103 F.3d
535 (7th Cir. 1996). The doctrine is
simply inapplicable in this case because
nothing suggests that UCH wrongfully pre
vented the Plan from achieving an
operating gain. Even if Quantum could
show that UCH had the duty to produce
better records and did not do so, which
it cannot, the doctrine would not be of
any help.
2. Agreement Section IV(B): 120% of the
Breakeven Level
Even assuming that the evidence to which
Quantum points regarding the breakeven
month creates a genuine issue of material
fact, Quantum presented absolutely no
evidence to the district court that a
month existed where the Plan achieved
120% of the breakeven level of
enrollment. The lowest enrollment for a
month that Quantum argues was a breakeven
month was 15,825 in March 1998; one
hundred twenty percent of 15,825 is
18,990. Quantum does not contest that the
Plan’s highest enrollment level was
17,618. In fact, it fails to address the
issue altogether in its brief on appeal.
Quantum admits that the 120% month is an
essential element that it must prove, but
makes no attempt to do so.
3. Other Agreement Sections
If the Agreement was terminated for
cause, Section IV(E) provides that no
payments beyond those paid by UCH are
due. If the Agreement was terminated

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without cause, Section IV(D) states that
any payments called for under IV(B) shall
continue. If the sale of the plan
constituted a structural change, then
Section IV(F) states that any IV(B)
payments due shall be equitably adjusted.
Because Quantum fails to show that it was
entitled to payment under Section IV(B),
Sections IV(D) and (F) are not
implicated. Therefore, whether the
Agreement was terminated for or without
cause, Quantum creates no issue of fact.
We agree with the district court that
summary judgment was appropriate.
B. UCH’s Counterclaim
First, UCH argues, and the district
court agreed, that Quantum breached
Section IV(A) of the Agreement by
continuing to charge and accept $26,000
per month, earmarked in the modified
budget for Morrow’s services, for five
months after Morrow’s resignation.
Because IV(A) allows for only those
expenses within the scope of the budget,
and Quantum makes no argument in its
brief on appeal contesting that these
payments were outside the scope of that
budget, we agree with the district court
that UCH is entitled to the $130,000 that
it paid for services never rendered.
Second, the district court held that
Quantum was liable to UCH for $148,690.37
that was advanced by UCH. As
consideration for the December 1996
modification to the Plan’s budget,
allowing for an increase in consulting
fees to Quantum, Quantum agreed to share
equally the increase. It never repaid UCH
its share, and presents no argument on
appeal as to how the district court erred
in finding it liable. UCH is entitled to
payment.
Third, we agree that Quantum is liable
to UCH for the $2,026 security deposit.
It makes no argument as to why it is not,
and creates no genuine issue of material
fact.
Finally, the district court held that
Quantum is liable for the $166,945 that
UCH expended to retain a consultant to
bring the Plan into compliance with the
reporting requirements of the Illinois
Department of Public Health. Section
III(E) of the Agreement provides that
Quantum shall "make recommendations and

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assist in the selection . . . of . . . a
management information system ("MIS") . .
. . Among other things, the MIS shall be
designed for the purpose of . . . making
required reporting to regulatory
agencies." Quantum has admitted that it
was responsible for the selection of MIS
software and that the system it chose was
unable to meet the state reporting
requirements. It did not present evidence
to the district court that created an
issue of fact and it similarly fails to
develop an argument on appeal.
III. Conclusion
For the reasons stated herein, we AFFIRM
the decision of the district court.

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