IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF VIRGINIA

Richmond Division

CORRECTIONAL MEDICAL SERVICES, INC.,

Plaintiff,

V. Civil Action No. 3:00cv498

CORRECTIONS CORPORATION OF AMERICA, and

PRISON REALTY TRUST, INC., Defendants.

COMPLAINT

Correctional Medical Services, Inc. ("CMS"), by counsel, for its Complaint against Corrections Corporation of America and Prison Realty Trust, Inc. (collectively defendant "CCA"), avers as follows:

Parties

1. Plaintiff Correctional Medical Services, Inc. is a corporation organized under the laws of Missouri, having its principal place of business at 12647 Olive Boulevard, St. Louis, Missouri 63141. It is qualified and registered to do business in Virginia.

2. Defendant Corrections Corporation of American is a corporation organized under the laws of Delaware, having its principal place of business at 10 Burton Hills Boulevard, Nashville, Tennessee 37215. Defendant Prison Realty Trust, Inc. is a Real Estate Investment Trust organized under the laws of Maryland and having its principal place of business at 10 Burton Hills Boulevard, Nashville, Tennessee 37215. Upon information and belief, Corrections Corporation of America was wholly acquired by and merged into Prison Realty Trust, Inc. in January, 1999. Corrections Corporation of America is currently qualified and registered to do business in Virginia; Prison Realty Trust, Inc. is not.

Jurisdiction and Venue

3. Defendant CCA is subject to personal jurisdiction in Virginia by virtue of its conducting significant business in the state, particularly the performance of contracts to construct and operate a correctional center at Lawrenceville, Virginia. Va. Code § 8.01-328.1. Prison Realty Trust, Inc. is subject to personal jurisdiction in Virginia as it has continued to conduct business in Virginia as Corrections Corporation of America after its acquisition of Corrections Corporation of America. All allegations of this complaint are directed against both defendants, jointly and severally. Lawrenceville, where the defendants have conducted much of their business in Virginia and the locus of the contract performance at issue in this action, lies within the Eastern District of Virginia and within the Richmond Division.

4. The amount in controversy in this dispute exceeds $75,000, exclusive of interests and costs.

5. Jurisdiction is therefore appropriate in this Court pursuant to 28 U.S.C. Section 1332. Venue is proper in this district and division pursuant to 28 U.S.C. Section 1391, as the judicial district in which a substantial part of the events or omissions giving rise to the claim occurred, as further set forth below.

General Allegations

6. On July 11, 1996, defendant CCA entered into a contract with the Commonwealth of Virginia Department of Corrections, attached as Exhibit A (the "VDOC Contract") pursuant to which defendant CCA was to provide correctional services in the form of managing and operating a medium security, celled prison facility known as the Lawrenceville Correctional Center. The Virginia Department of Corrections (the "VDOC") was statutorily authorized to enter into this contract by Virginia Code §§ 53.1-261-62. The term of the VDOC Contract was for a period of five years from the commencement of service. Pursuant to separate contract, CCA designed and constructed the Lawrenceville Correctional Center. CCA retains ownership of the facility and leases it to the Commonwealth. Pursuant to the VDOC Contract, CCA was required to provide a range of medical services, including dental programs, counseling, and mental health services as set forth in Section 4.6 of the VDOC Contract.

7. Effective March 23, 1998, defendant CCA entered into a contract with plaintiff CMS, attached as Exhibit B (the "CCA Agreement"), pursuant to which CMS agreed to provide certain health care services at the Lawrenceville Correctional Center. The term of the CCA Agreement was three years, expiring on March 22, 2001.

8. Appendix E to the VDOC Contract set forth certain specified minimum types and numbers of staff to be employed by CCA, including minimum contract medical staff to be "utilized" by CCA during the administration of the VDOC Contract. This same staffing pattern document, which apparently had been part of CCA’s proposal to the state, was set forth as Attachment B to the CCA Agreement, and CMS was obliged to provide medical personnel staffing in accordance with it.

9. Section 8.3 of the VDOC Contract provided for liquidated damages in the event of CCA’s breach "of a type described in Appendix F" to the VDOC Contract. Appendix F to that contract set out a formula for the calculation of liquidated damages for breach that was based on a multiplier for the "relative value of service area" times a multiplier for the "relative value of the breach" times $25.00 per day of breach. (This Appendix is part of Exhibit A hereto, and is also separately attached as Exhibit C for convenience.) Section 8.3 of the VDOC Contract made certain recitations about the appropriateness and reasonableness of the liquidated damages calculation set forth in the Appendix to the VDOC Contract.1 Neither these recitations and stipulations nor any other such agreements were incorporated into the CCA Agreement.

1The provision, Section 8.3(d), refers to the liquidated damages "contained in Appendix E," but the liquidated damages are actually set forth in Appendix F of that agreement.

10. The CCA Agreement, Section 12.2E states:

Liquidated damages as specified in Attachment F shall be the responsibility

of the Facility [Lawrenceville (CCA)], but in the event such damages are

assessed by the Virginia Department of Corrections, Contractor shall pay to

CCA 125% of any damages assessed against CCA for health care services

or staffing deficiencies.

The "Attachment F" referred to in Section 12.2E was a copy of Attachment F to the VDOC Contract (Exhibit C hereto).

11. Under the calculation formula set forth in Appendix F to both the VDOC Contract and the CCA Agreement, failure to provide sufficient staff in the medical /dental area was assigned a multiplier of 5 for breach, and the area was given a service area multiplier of 5, resulting in a multiplier of 25 times $25.00 per day of liquidated damages for failure to provide adequate staffing in medical/dental. The multipliers for the counseling/mental health service area and for breach by failure to staff were each 4. Thus the CCA Agreement language provides that CMS would be subject to a potential maximum liquidated damages assessment of $625.00 per day (5 x 5 x $25), plus the 25% surcharge by CCA, for failure to provide the full staffing required in the medical/dental area, and $400 per day (4 x 4 x $25), plus the 25% surcharge, for failure to fully staff the counseling/mental health area.

12. CMS performed pursuant to the CCA Agreement through November 30, 1999, having given notice on November 16, 1999 terminating the contract effective at the end of the month. The CCA Agreement terminated because of CCA’s nonpayment of significant amounts earned by CMS under said agreement. As of the termination of the CCA Agreement, CCA owed CMS $887,204.39.

13. CCA deducted large portions of the payments owed to CMS for services rendered in February, 1999, and similar deductions continued each month through December, 1999, with the exception of the months of June and October. For example, on billings of $180,433.96 in February, more than half of the payment owed, $100,937.50, was deducted. Similarly in April of 1999, more was deducted than was paid, resulting in CMS being paid less than half of its almost $200,000 in billings for that month. In July, 1999, on billings of $200,038.97, CCA paid CMS only $12,195.22.

14. These deductions resulted in compensation to CMS of less than 66% of amounts due to CMS under the CCA Agreement; in one instance (July) CMS was paid just slightly over 6% of the money it was due for services rendered. CCA has taken the position that most of these enormous deductions are the results of passing through liquidated damages assessed against CCA by the Commonwealth. CCA has also not paid CMS at all for services rendered in the last month of the CCA Agreement, November, 1999, nor has CCA paid for certain inventory transferred to CCA by CMS.

15. CMS did not provide some of the staffing set forth in Appendix B to the CCA Agreement during the term thereof. However, some of these positions, which were based on the estimates contained in CCA’s proposal to the Commonwealth, were not appropriate over the course of the CCA Agreement, and they were not necessary to provide the inmates with adequate medical care. This fact is clearly illustrated by the facility having passed, with highest marks on the medical portions, both the independent American Correctional Association audit and the Virginia Board of Corrections audit. Neither CCA nor the Commonwealth sustained any injury from any staffing variances. Assessment of liquidated damages by CCA did not reasonably approximate any actual injury suffered by either CCA or the Commonwealth, and calculation of those damages was not in accordance with a reasonable interpretation of the liquidated damages provision in the CCA Agreement in any event.

16. According to CCA, the Commonwealth calculated the damages not as set forth in paragraph 11 above, but at $625.00 per day per position for the medical/dental area and $400.00 per day per position for the counseling/mental health area, thus assessing the daily liquidated damages amount for each position listed in Appendix B that was not filled during the billing period. Assessment of damages in this fashion resulted in CCA making huge deductions from the payments due CMS, deductions that were confiscatory and deprived CMS substantially of the benefits of its labors in providing satisfactory health care services at the Lawrenceville Correctional Facility. These deductions also bore no relation to any actual injury caused by any short staffing.

17. CMS began objecting to these assessments and deductions in May, 1999, and CCA assured CMS it would endeavor to correct the damages calculation assessment. Through repeated representations of wanting and intending to "work the problem out," CCA induced CMS to remain at the facility and provide health care services through the period when CCA was undergoing an accreditation audit. CCA reaped a substantial benefit from CMS’s work during this period, as it passed the audit with highest marks for health care. Through its promises and assurances, however, CCA caused CMS to continue to incur unacceptable losses due to the erroneous assessment of liquidated damages and withheld amounts. CCA has refused to pay CMS the amounts owed under the CCA Agreement.

Count I: Breach of Contract

18. CMS incorporates the allegations of paragraphs 1- 17 as if set forth fully here.

19. The Agreement between CMS and CCA required CCA to pay CMS monthly for the health care services rendered by CMS and invoiced for that month.

21. CMS rendered services substantially in accordance with the Agreement and invoiced CCA for those services.

22. CCA breached the Agreement by failing and refusing to pay CMS for its services. In the months of February, March, April, May, July, August and September, 1999, CCA deducted substantial sums from the payments due and made only fractional payments. CCA made no payments for any services rendered during the month of November, 1999 and also failed to pay for inventory sold and transferred to CCA..

23. CCA’s assessment of liquidated damages constitutes imposition of an unlawful penalty and breach of contract as these damages were miscalculated and not related to any actual injury sustained by CCA and therefore grossly in excess of actual damages. Moreover, the damages from failure to staff were susceptible of definite measurement at the time the CMS-CCA Agreement was made. Further, assessment of the liquidated damages in the amounts withheld by CCA constitutes breach by CCA of the CCA Agreement because the method of calculation is inconsistent with the plain and reasonable meaning of the terms of that Agreement.

24. CCA’s imposition on CMS of an arbitrary surcharge of 25% of the liquidated damages incorrectly assessed against CCA by the Commonwealth constitutes imposition of an unlawful and unenforceable penalty.

25. As a result of CCA’s breaches as described above, CMS has suffered loss of payments totaling $887,204.39, the sum of the liquidated damages and surcharges assessed, $680,218.75, and the November billings and inventory costs that remain unpaid, $206,985.64.

26. CMS therefore requests judgment against CCA in the amount of $887,204.39 plus interest and costs of suit.

Count II: Mutual Mistake and Quantum Meruit

27. CMS incorporates the allegations of paragraphs 1- 17 as if set forth fully here.

28. The calculation of liquidated damages per position per day, resulting in overall nonpayment of over one-third of the amounts due CMS for the months involved — and of 94% of the amount due in one month — is an unreasonable and unconscionable interpretation of the contractual language, which deprived CMS substantially of the benefit of its bargain.

29. CMS, upon entering into the CCA Agreement, never entertained or contemplated such an interpretation and would certainly never have entered into a contract had it understood that such an onerous and punitive interpretation would be applied. CCA, likewise, had no expectation that it would be assessed liquidated damages, or assess them against CMS, based on such a calculation.

30. Accordingly, neither of the parties contemplated calculation of liquidated damages in the fashion imposed by the Commonwealth. If the Commonwealth’s method of calculation is the proper interpretation of Appendix F, then the CCA-CMS Agreement was founded upon a fundamental mutual mistake and is unenforceable, except to the extent performed. CMS is entitled under implied contract principles to the fair value of the services it has rendered, which amounts to $887,204.39, the difference between CMS total billings of $2,167,285.32 and the payments of $1,280,080.93 that CCA made.

31. As an alternative to recovery under Count I, therefore, CMS requests judgment against CCA in the amount of $887,204.39 plus interest and costs of suit.

Count III: Fraudulent Inducement in Performance

32. CMS incorporates the allegations of paragraphs 1-17 as if set forth fully here.

33. By repeatedly assuring CMS that it would rectify the liquidated damages calculation and by promising that it would work out the problem of assessment of damages for short staffing, CCA induced CMS to continue to perform its services, so that CCA was able to pass its crucial facility accreditation audit. CCA, however, did not attempt to resolve the problem of the assessed damages and did not intend to do so when it induced CMS to remain on the job to CCA’s benefit but to CMS’s detriment. Indeed, as soon as the audit was successfully completed, CCA broke off all communication with CMS and prepared to take over CMS’s undertakings. On November 17, 1999, the day after CMS notified CCA of its termination of the CCA Agreement, CCA approached CMS’s employees at the facility with previously prepared employee packages, enrollment documents and incentives.

34. CCA’s false promises and assurances that it would correct the damages assessment, made to induce CMS to continue its performance, constitute fraud in the inducement of performance the CCA Agreement.

35. As a direct and proximate result of the fraudulent inducement alleged above, CMS continued to perform services for which it was not paid and accordingly suffered damages in an amount to be proven at trial, but in excess of $200,000, and demands judgment therefore, plus interest and costs of suit.

CORRECTIONAL MEDICAL SERVICES, INC.

By ___________________________________

Counsel

David E. Boelzner VSB # 26092

WRIGHT, ROBINSON, OSTHIMER & TATUM

411 East Franklin Street

Richmond Virginia 23219

804-783-1100