1 

### FILED March 24, 1999 Cecil Crowson, Jr. Appellate C ourt Clerk IN THE COURT OF APPEALS OF TENNESSEE AT KNOXVILLE

CLEVELAND SURGERY CENTER ) L.P., and OCOEE PHYSICAL ) BRADLEY CHANCERY THERAPY, INC., ) ) Plaintiffs/Appell

ees, ) NO. 03A01-9804-C H-00120 ) v. ) HON. EARL HENLEY, ) CHANCELLOR BRADLEY COUNTY MEMORIAL ) HOSPITAL, BRADLEY BUILDING ) LLC, and OCOEE HEALTH ) ALLIANCE, ) AFFIRMED, ) as MODIFIED, Defendants/Appel

lants ) and REMANDED. Michael E. Callaway, Cleveland, for Appellant Bradley County Memorial Hospital. Donald J. Cocke, Memphis, for Appellant Ocoee Health Alliance. William H. Wes

t, Nashville, an

d Buddy B. Presley,

Jr., Chattanooga

, for Appellees Cleveland Surgery Center and Ocoee Physical Therapy, Inc. William B. Hubbard and Jerry W. Taylor, Nashville, for Amici Curiae, Tennessee Hospita

l Association and He

alth Systems and Hos

pital Alliance of Tennessee, Inc. 

## OPINION INMAN, Seni

or Judge Two private health car

e providers sought

a declaratory judgme

nt that a county-owned hospital a nd its business partners had entered into business ventures which were ultra vires and i n v iolation of the Tennessee Constitution. The trial court held tha

t the county

hospital had exceede

d its authority

by entering into uncon stitutio nal business dealings with private entities, and issued an injunction

permanently restr

aining the hospital fr

om participating in these or any sim ila r ventures. We af

firm the judgment of

the trial court as t

o the specific2

business ventures involving these defendants. We modify t

he judgm ent by narrowing the perm

anent injunction consis

tent with this opinion. Plaint iffs C leveland Surgery C enter, hereinaf

ter "Surgery Cent

er," and Ocoee Physical The

rapy, Inc., hereinafter "Physical Therapy," two businesses owned and operated by priva te physicians and physical therapists respe ctively, learned of plans by Bradley County Memorial Hospital, hereinaft er "County Hospital," to acqu ire l and and build a medica l office building adjo

ining County Hospital. The plan provided that Ocoee Health Alliance, herei nafter th e “Alliance,” a partnership owne d by Coun t y Hospital (50% interest) and local physicians (50% interest), would secure financing for the $8, 500,000.00 building project, with no investment or personal liabilit

y for the loan on the pa

rt of the physicians, who would, howeve r, have an owner

ship inte rest in the office building, with each physician owning an e qual share of the Allia nce’s 50% interest. That building projec t is not the subject of a ppeal, since SunT rust bank threatened to defa

ult the Hospital’s lo an after adverse publicity and the filin

g of this lawsuit, resultin

g in saleof the project to other parties. The appeal concerns whether the Hospital can lawfully engage in similar projects with Alliance. Desiringto provide services f or the patients

of County Hospital, Physical Therapy sought membership in th

e Alliance which

was denied on grounds

that the Al liance a lready offered physical therapy services. Surgery Center, which operates a stand-alone surgical clinic, fear ed that the Allianc

e planned to establish

a competing surgical clinic in the new building and joined withPhysical Therapy in this suit against County Hospital, the Allianc e, Bradley County Hospital Foundation

and Bradley Builder s, L LC, alleging unfa ir competition by the Alliance, ultra vires acts by County Hospital under its Private A cts and3

unconstitutional business ventures betwe en partners County Hospital and the Alliance

. The trial court held tha

t County Hospital, th

rough its actions

as an agent and arm of Bradley County, hadexceeded its authority by lending the credit of the county and joining in ultra vires busines s ventures with priva te industry in violation of Articl

e II, § 29 of the T

ennessee Constitution

. De fendants County Hospital and the Alliance appeal and raise th e following issues, verbatim: 1. The Chancellor erred when he determined Bradley County Memorial Hospital is ". . . an agent and arm of Bradley County"; that is, is not an independent governmental entity o

r quasi-municipal c

orporation. 2. The Chancellor erredwhen he found the Hospital 's participation in the Ocoee Health

Alliance, whic

h is authorized by the

Private Acts creatingand governing the Hospital, as well as by T.C.A. sect. 7-57- 601 et seq. [The Private Act Hospital Authority Act], was ultra vires and violated Article I

I, Section 29 of the Constitution of Tennessee. 3. The terms of the Order of F inal Judgment and Per

manent Injunction entered by the Chancellor ar e too broad and impre

cise and un d uly restrict and inter

fere with the Hos

pital's operation. 4. The Chancellor erre d in finding the Plaintiffs had standing to bring this action. I Surgery Center and Physical Therapy have stand ing to bring this action by virtue of the special injuries which they allege are occasioned by unfair and illegal compe tition by the Alliance. Morristown Rescue Squad v. Volunteer De velopment, 793 S.W.2d 262 (T enn. App. 1990); Parks v. Alexan der, 60 8 S.W.2d 881, 890 (Tenn. App. 1980), cert. denied, 451 U.S. 939 (1981).

II Appellants argue th

at the Chancellor e

rred: when he determine

d Bradley County Mem

orial Hospital4 “ . . . is an agent and arm of Bradley County”; that is , is not an independent

governmental e

ntit y or quasi-municipal corporation. Appellant’s brief, pag e 1. The Chan cellor ma de no finding that County Hospital "is not an independent

governmental entity or a quasi-municipal corporation." Rather, the

co urt's op inion describes County Hospital as “an agent and arm of Bradley County” under the fact

s and circumstan

ces of this particular case. Tennessee Private Act Count

y Hospitals have, in some instances, p roperly been refe

rred to

as “governmental enti

ties,” “independe

ntgove rnmental entities, ” “public nonprofit corporations,” “political subdivisions o f Tennessee,” “subdivisions of the

state and county,” or “public instrume nt alities acting on b ehalf of the county,” Ketron v. Chattanooga-Ham ilton Count

y Hos pital Authority, 919 F. Supp. 280, 282 (E.D. Tenn., 1996), (for the p u rpose of determining whether former employees were entitled to bring sui t under 42 U.S.C. § 1983 for alleged retaliator y discharge). Other appropriate descriptive terms have included “municipal corpora tion,” Finister v. Humboldt General Hosp ital, Inc., No. 02S01- 9704-CH-00038 (Tenn. May 26, 19 98), (for the purpose of determining whether

a Privat e Act Ho spital is exempt fro m the Tennessee W

orkers’ Compensati

on Law), “quasi-municipal corporation,” Professional Home Health & Hospice, Inc.

v. Jackson-Madison

County General Hospital Dis trict, 759 S.W.2d 416 (T enn. App. 1988), (for

the purpose of deter

mining whether a H

ospital Authority coul

d purchase and operate a home health care business outside the territorial jurisdiction

specifically esta

blished by i ts Private Act), and “governmental hospital authority,” Moses v. Erlanger Medical Cen ter, 1995 WL 610243 (Tenn. App. Oct. 18, 1995), (for the purpose of d etermi ning whether plainti ff could maintain a tort action aga

inst a Private Act Hospital fo r mental anguish). No doubt other similar term

s may beappropriate in otherinstances; the tria l court did1 Indeed, the Attorney Genera

l has been as

ked on several

occasions

to advise

legisl ators as to the constit utional i mplicati ons of physic

ian-hospi

tal-or ganizati ons (PHO’s). Te

nn. Att’y.Gen. Op. 95-056, May 23, 1995, involved an opinion as to “whether t he General Assembly may constitutional ly enact proposed legis lation that would authoriz

e a county-owned hospi tal to hold an ‘ownershi p interes t’ in an or

ganizati on owned in part by medical pract

itioner s licens ed in the St

ate of Tennes see, wit

hout requir

ing approval by a local r eferendum.” The Attorne y Gene ral advised that the pro posed law “is uncon stitutional to the extent it auth orizes a co unty to len d its credit i n aid of a pri

vate indi vidual or ent

ity or t o act as a s

hareholder,

with other

s, in any c ompany, associ ation or corpora tion witho ut appro val by ref erendu m requ ired by A rticle 2, Sectio n 29 of th e Tenn essee Co nstitution. Wheth er any p articular tran saction w ould co nstitute an u nconstitu tional lend ing of cre dit or ow nership in terest could only be deter

mined after an analysi s of all the fact s and circ

umstances of t

he transac

tion, es peciall y the form of t

he owne rship and whethe r the coun ty wou ld be incu rring an a dditional liab ility, direct or co ntingen t, by particip ating in such organiza

tion.” By way of

example, the

Attorney Genera

l opined t

hat “a loa

n guarantee or

other pledge

of assets by the county on beh alf of a ph ysicians ho spital organ ization w ould also constitute su ch a lend ing of cre dit.” See also, Tenn. Att’y.

Gen. Op. No. U97-037, J uly 28, 1997: “

The extent t

o which the Board of

Trustees

[of Cookeville General Hospital ] may exercise any of the powers accorded t o the hospital under t

he Private Act Hospital A uthority A ct of 199 6 depen ds upon its authority u nder the C ity Charter . The ho spital is not a sep arate legal ent ity; r ather it is a fac ilit y owned by city government . . . i t should be not

ed, furt her, that Article II, Sect ion 29 of the Tennessee Constit ution prohibits a city, county or t own from owning stock with others. It i s not clear whether a court w ould co nclude th at acting as a mem ber in a no t-for-prof it corpora tion, whic h issues no stock, wo uld violate the provision.” See also, Tenn. Att’y.

Gen. Op. No. 98-119, July 2, 1998: McNairy County Hospit al Board of Trus

tees has no authorit y to sell the hospit

al without

permission of the County Commiss ion. Under t he Private

Acts governi

ng the hospital , such aut

hority re sts wit

h the McNairy County Commissi on, which can,however, sel l the hospi

tal wit hout the permiss

ion of, or pa

rtici pation by, t

he hospital ’s Board of Trus tees. ( Hospital Trustees,

without t

he involvement of the County Commissi on, had given a “

Right of Fi

rst Refus al” on the s ale of the McNairy County Hospit al to t he Jackson -Mad ison Cou nty Gen eral Hosp ital District.)

2 The Priv ate Act w hich crea ted Chatta nooga -Ham ilton Cou nty Ho spital Auth ority, [Erlan ger Ho spital] is quite different

from the Bradley County Private Act, as will be shown. The Chattanooga Act provides that: “Neither the county nor the cit

y shall i n any event be l

iable for the payment of t

he principa

l of or i nterest on any bonds or notes of th e [hospital] authority . . . or any ple dge, m ortgage , obligation or agreem ent of any kind w hatsoev er . . . none of the . . . obli

gations s hall be cons

trued to cons

titut e an indebte

dness of ei

ther the county or cit

y within t

he 5 not exclud e them. It merely considered (1) the provisions of Bradley County’s Private Act, (2) the re

levant statutes, ( 3) Article II, § 29 of the

Tennesse e Constitution, (3) the kinds of Hospi tal/Alliance and

pr ivate/public ventures at issue in this case, and (4

) the potential obligation

of Bradley County funds. Based

on that analysis, the trial court held that in this instance, County Hospital operates

as an agent

or arm of Bradle

y County and, as such,

is subject to certai

n restrictions under both its Private

Acts and Article

II, § 29. Appellants argue th

at County Hospital is “

not an agency of

the county. . . but rather an independent governmental entity,” because the Attorn ey General defined Erlanger Hospita l as such in Tenn. Att’y. Gen. O p. No. U-95-040, 1 April 13, 1995: “Thus, we think the prohibiti ons in Article 2, S ection 29 wouldnot apply to this authority or to any other private acthospital authority which is an independent governmental en

tity. The prohibitions wouldapply t o a private act hospit al authority which is

a department of a municipality or county

. [Emphasis added]. 2mean ing of an y constitutio nal or statuto ry prov ision wh atsoever.”

3 Finister v.H umbo ldt Gene ral Hop ital, Inc., No. 02 S01-97 04-CH -0003 8 (Tenn . May 2 6, 1998 ), squarely holds that

a Privat e Act hospit

al is a n agency of the Count

y which owns it.

While this

case aros e in the cont

ext of the Workers’ Compensa tion Law, T.C. A. § 50-6-106(5), we do not belie

ve that a worke

rs’ compensat

ion sett ing involves a definit

ion of “Sta

te of Tennessee”,” count ies ther eof” and” munici

pal corporat

ions” that

is dif ferent f rom the usual definit

ion of thes e terms. The “ City of Ja

ckson” can only be

defined in one manner, whether the underly ing case in volves w orkers’ co mpen sation, tort, co ntract, mu nicipal cor poration law, or w hatever. F or this reason, we ar

e of the opi

nion that the holding of the Supreme Court in Finister

is conclusiv e of the issue that a Private Act

hospital is an agency of

the County, unl

ess it is desi gnated and crea

ted as an i

ndependent enti

ty. 6 The Attorney Genera

l recommend

ed the following determin ative analysis:

. . . an analysis of

all the facts and c

ircumstances of the

transaction, especially

the formof the ownership and whet her the county would be incurring an additiona l liability, direct

or contingent, by participating in such

an organization. The record demonstrates that the trial court in this case p erfo rmed the recommended analysis, describe d in detail in

its Memorandum Opinion. We find

no fau lt with the conclusion drawn by the trial court that the County Hospital functions, in this instance, as an agent and arm of

Bradley County. 3 The tr ial court’s judgment o n this issue is acco rdingly affirmed. III Appellants next complain of the t rial court’s findin

g that County Hospital’s participation

in the Ocoee Health Alliance was ultra vires and violated Article II, § 29 of the Tennessee

Constitution. Appel

lants contend that the

partnership is authorized by the Pr

ivate Acts creat

ing and governing County Hospital and by T.C.A. § 7-57-601 et seq. (1996). In 1996 the Legislature passed The Private Act Hospital Authorities Act, T.C.A. § 7-57-601 et seq., which exten ds to all T ennessee Private Act hospitals the powers prev iously granted to Private Act Metropoli tan Hospitals und er T.C.A. § 7-57-501 et seq. (1 995). These Act s provide, as pertin

ent: (b) In addition

to powers otherwi se granted by this part or any otherpublic or private act of t his state, or by

any state regulation

or federal law or regu

lat ion, and to the exten t at the time n

ot prohibited by the Constitution of Tennessee [emphasis added], a private act metropolitan hos

pital authorit

y has, together wit

h all powers incidental thereto or necessary to discharge the powers granted specifica

lly herein, the fol

lowing powers:7 (1) To participate as a sha reholder in a corporation, as a joint venturer in a j oint venture, a s a general partner in a general partnership, as a limited partne r in a limited partnership or a general partnership, as a member in a non profit corporation or

as a member of an y othe r lawful form of business organization, which provides hospital , medical or health care or is engaged in any acti vity supporting or related to the e xercis e of any power granted to a private act metro

politan hospital author

ity; T.C.A. § 7-57-603 (incorporating T.C.A. § 7-57-502(b)(1)). Such hospitals may: (10)(c) . . . acquire,

manage, lease,

purchase, sell,

contract for or otherwise partic

ipate solely or with

others i n the o wnership or operation of hospital, medica l or he alth program proper ties and facilities, and properties, facilities, and programs supporting or relating thereto of any kind and nature whatsoever and in a ny form of ownership wheneve

r the board of truste

es in its discretion

sha ll determine

it is consistent

with the purposes and

policies of

this part or any private act appl

icable to it, and ma

y exercise such po

wer s regardless of the competitive consequences thereof. T.C.A. § 7-57-603 (incorporating T.C.A. § 7-57-502(c)). By specificdirective of the L egislature, both the

1995 and 1996 Private Act Hospital Authority Acts

contain special righ

ts which are to

be provided to Privat

e Act Hospit als to the extent at the time not p

rohibited by th

e Constitution of Tennessee. The trial court held thatthe ventures engaged in by County Hospital and the Alliance , which at first blush appear lawful,

considering only secti

ons (b)(1) and (10)(c) of the 1996 Private Act Hospital Act, are in fact unconstitutional,considering the consti tutional limitation as

recognized by the Legislature in secti on (b) of the Act. The court opined that County Hospital/Alliance ventures violated A

rticle II, § 29 of the Const

itution, which provid

es: The General Assembly shall hav e po wer to authorize the several counties and incorporated tow ns in this State, to imp ose taxes for County and Corporation purpo ses respe c tively, in such manner as shall be prescribed by law ; and all property sha ll be taxed according to its value, upon the pr inciples established in r egar d to State taxation. But the credi

tof no County, C

ity or Town shall be given or loaned to or in aid

of any person , compa ny, association or corporation , exce pt upon an election to be first held by the4 A partn ership sim ilar or identic al to the defe ndant A lliance in this ca se. 8 qualified voters of such cou nty, city or tow

n, and the assen

t of three-fourths of the v o tes cast at said election. Nor shall any county, city or town become a stockholder wi th others in any company,

association or corporation except upon a like election, and the assent of

the majority.

[Emphasis added.] Appellants contend that Artic le II, § 29 of the Const

itution applies only to “counties, cities or towns” an d therefore does not

require an electi

on and the

assent of three-fourths or a majori ty of the voters before Pri vate Act Hospital s engagein business involving credit or loans with private i

ndividuals, corpora

tions or associations. This issue was addr

essed rec ently by this court in a case to be published, Eye Clinic, P.C. v. Jackson-Madis on County General

Hospital, No. 02A01-9707- CH-00143 (Tenn. App. Jul y 24, 1998, perm. app. denied January 11, 19 99). Judge Holly Kirby Lilla

rd, writing for the cou

rt, applied the

analysis recommen

ded by the Tennessee Attorney Genera l. After descr

ibing theparticular facts

surrounding the challenged businesses of West Tennessee Alliance, 4 Judge Lillard considered those ventures in light

of t he Private Act H

ospital Authority Ac

ts of 1995 and 1996, the Private Act w

hich enabled Jackson-

Madison County Gener

al Hospital, and Article II,

§ 29. Judge Lillard held that i

n the West Tennessee Alliance ventures, Article II, § 29 was not

infringed because J

ackson-Madison County

General Hospital was

not vested by its enabling P

rivate Act with

the “power to levy taxe s;” “power to compe l [the city of Jackson] to invoke it s taxing power to mak

e payments;” or power to “obligate Madison C ounty” to appropriate

funds “to com

menc e [hospital] operations and

pay operating deficits.” The Private Act which enabled the hospital in that case merely provided that Madison County was “authorized to appropriate

funds” for the hospita

l; the county was not ob ligate d to do so.9

(Emphasis in origi nal.) Therefor e, private ventures between that hospit al and West Tennessee Allian ce could obligate only h ospital-generated

or physiciangenerated funds; no county taxes could

be obligated by the private/public ventures in contravention of Article II, section 29

. Applying the analysis in Eye Clinic v. J ackson-Madison County , we compare the Private Acts autho riz ing Bradley County Me morial Hospital to Madison County’s Private A

cts as interpreted

by Judge Lillard. Bradley County Hospital was esta

blished under Chapter

846 of the Private A

cts of 1947: SECTION 1. BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF TENN ESSEE, that

the County of

Bradley . . . upon the approval of a major ity of the qualified v

oters of said County

. . . is hereby authorized to issue not to exceed $400,000.00 dollars coupon bonds . . . for the purpose of acquiring a necessary s ite o r location for a hosp ital, and . . . necessary equ ipment . . . . SECTION 2. BE IT FURTHER ENACTED, . .

. Said bonds, when issued in conformity with t his Act, shall

be direct general obl

igations of Bradley County, fo

r the payment of whi

ch, with interest

, well and trulyto be made the full faith and credit and all the taxing power o f the County shall be irrevoca bly pledged . . .

. (Emphasis added.) * * * SECTION 8. BE IT FURTHER ENACTED, That it shall be the duty of the Quarterly Cou

nty Court of Bradley County annua lly to levy and provide for the collection of a suf ficient tax

on all the taxable propertyin the County, over and above all other taxes authorized and limited by law, for the

purpose of creating

asinking fund to pay the interest on said bonds a

s the same falls due

and to retire said bonds as they mature. Chapter 197 of Private Acts of 1953 provided for the operation of the h ospit al under the Board of D

irectors and gave to

that Board:

. . . full, absolute and complete authority and res pons ibility for the operation, management, condu ct and co ntrol of the business a nd affairs of said hospital. Sa id authority and respons ib ility shall include, but

shall not be limited to , the establishment , promulgation and enforcement of r

ules, regulations, and pol icies, the upkeep a

nd maintenance of all property, the administration of all fi nan cial affairs, the mainte n ance of separate banking arrangemen

ts, the execution of all contracts,

the purchase of suppl

ies and equipment,5 To emphasize the di stinct ion between t

he respect

ive Privat

e Acts: I n Eye Clin ic, the Private Act me rely authorized

Madiso n Coun ty to appr opriate fu nds to co mme nce ope rations and pay op erating de ficits; it was not obligated t

o do so. This fact

ual and lega

l conclusi

on essenti

ally cont rolled t he disposi

tion of t he case. But

in the case at Bar

, the Pri vate Act, unlike the

Madison County Pri

vate Act, clearl

y onerates and obligat

es Bradley Count

y, which pledges i

ts full faith and credit a

nd its t axing power to t

he payment of the bonds . No discre tion is allowed. 10 and the employment, supe rvision, compensation and disc harge of all personnel including a Hospital Administrator. 1953 Tenn. Priv. A

cts 197, § 1. These

Acts were ame

nded in 1992: WHEREAS, the complexities of providing health care servi ces inthe current environment

necessitate

a clarification a

nd restatement of t

he power and authority of the board of dire ctors; BE IT ENACTED . . . SECTION 1. Section 13 of Cha pter 846 of the Priva

te Acts of 1947, is amended by adding the following additional language: The Board of Directo

rs shall have the authority to acquire or lease real property, equipmen

t and other personal p

roperty related to t he business and affairs of the hospital, includin

g medic al office buildings, parking structures, real property, buildings and other facilities determined by the boa rd to be appropriate

for the operation of the hospital and the provision of h ealth care services. All property acquired by the board shall be acquired subject to the approvalof the county le gislative body and sh

all b e he ld and owned in the same manner as the original prop

erty conveyed for establishment

of the Bradley County Memorial Hospital under Chapter846 of the Private Acts of 1947, as subseque ntl y amended. (Emphasis added.) * * * SECTION 2. Section 14 of Cha pter 846 of the Priva

te Acts of 1947, is amended by adding the following additional language: Any revenues derived f

rom operation

of the hospital in excess of (1) op erating expenses and (2) amounts required for the retiremen t o f any bonds issued by Bradley Count y for the benefit of the hospital shall be used fo r futur e hospital capital projects and the provision

of health care services to indigent per so ns. (Emphasis added.) 5 * * * SECTION 4. Th is act s hall have no effec t unless it is approved b

y a two-thirds (2/3) vot

e of the coun

ty legis lative body of Bradley County . . . . 1992 Tenn. Priv. A

cts 206 § 1, 4.6 The Charter f or the All

iance provi

des, in pa

rt: “Upon t

he dissol ution of t

he Corporati

on, the Board of Directors , after

making provisi

on for the payment

of all of the li abilit

ies of t he Corporati

on, shall distri bute all of the assets of the C orporatio n to its mem bers . . . .” 11 IV Bec ause plaintiffs argue tha t County Hospital could not enter into a partnership

venture with the

All iance without the ap

proval of Bradley C

ounty, whereas defendants assert t he independence of C

ounty Hospital from C

ounty intervention, much evidence was introduced at trial with regard to the

degree of f inancial independence from Bradley County the C ounty Hospital actual

ly maintained prior to and during the initiation of the soon-to-be-contested Alliance projects. Numerous course-of-business documents in evidence ef fecti vely describe the rela

tionship: Excerpt from Comprehensive

Ann ual Fi nancial Report, B radley County, Tennessee, For The Year Ended June 30, 1996. Individual Component

Unit Disclosures . . . Bradley County's Board of Commissioners must a

pprove all l ong-ter m debt issues of the hospital. Bradley County would be re sponsible for thi s debt in case of default by the hosp ital. Excerpt from Pershing

& Yoakley Independe

nt Auditors' Financ

ial Statement for Bradley County Memo

rial Hospital, June

30, 1996. Bradley County Memorial Hos pital is a not-for-

profit general shor

ttermhealth care p rov ider which serves Cleveland, Tenne ssee and surrounding areas. The Ho s pital is a component unit of Bradley County, Tennessee, which is considered t he primary governme nt unit

. . . . The Hospi

tal has a 51% membership in Ocoee Health Alliance (the Alliance), a Te nnessee mut ual benefit corpora

tion formed for the purpose of providing a co mpreh ensive provider netw ork and managed care system to businesses and other s in the Hospital's service area. The remaining 49% membership interest is comprised of e l igible physicians licensed to practice in the state of Tennessee and with active staff

membership on the me dical sta ff of the Hospital. 6 During 19 96 an d 1995, the Hospital pa id membership dues of $51,946 and $54,392, re s pectively to the Alliance. In addition, during 1996 the Hospita l paid for certain expenses related to the Alliance. Othe

r current assets a

t June 30, 1996 inc lud e $156,296 from the Al

liance for payment

of such expenses. Letter from Mike Callaw

ay, Attorney for

County Hospital, to B radley C o unty Executive, in response to her inquiry as to the Hospital obligati ng County funds, July 18, 1996.12 . . . youwill recall in 1995, in response to

a request to the Attorney General for an opinion regarding the authority of the Hospital's Board of Directors to borr ow funds from private sources, General Burso n opined " . . . Bradley County [is not] liable for a debt incurred by th e Brad ley County Memo rial Hospital Board

of Directors without the consent of the County Commission or the County Executive." In any case, the Board and

administration are convinced Bradley Memoria l has the financial capacity and resourc e s to perform its obliga

tions under the Ground Le ase Agreement,

else the Hospital would not

have executed it. Minutes of Bradley C

ounty Hospital Board o

f Directors, O

ct. 28, 1996. JimWhitlock, Hospital Administrator, announce d that his term as President of the Tennessee H

ospi tal A ssociation would end a t its next meeting. He also

reported that “ori

gina l ly Bradley Memorial Hospital was a 51% owner in the joint ven ture wit h Ocoee Health Alliance [April 1995]. Since the Private Act has been revised and no l onger requires the hospi tal to be 51% owner in j oint ventures, M r . Whitlockrequested that th e B oard authorize the O coee Health Alliance bylaws to be changed to allow a 50- 50 joint venture ownership. Motion p assed unanimousl y.” SunTrust Bank - In-House Loan Off e ring Memorandum fr

om Recommending Loan Officer, for

Loan of $8,500.00 t

o Bradley Building L

L C, December 10, 1996. The lease is struc

tured so Bradley agrees to assume the

debt or pay itoff in case of def

ault . . . The st

rength of this deal is , obviously, the Bradley lease. Bradley’s financial co ndition is very s trong . . . Among the strengths of the deal are: (1) Bradle y’s overall

financial condition, Bradley County's A1 bond r ating. . . Letter from Jeffrey Ive

y, Regional Presid

ent, Sun Trust B ank, to Michael Callaway, Atto

rney for County Hospi

tal, January 31, 19 97: I have enclosed for your rev iew the documents th at we will be asking Bradley Memorial

Hospital to execute

in conjunction with the $8.5 millionconstruction/perma nent lo an to Bradley Buildi ng, LLC . . . The Credit Support Agr

e ement was created because of the overall reli ance on the Hospital for the debt re payment. O u r underwriti ng of t he loan request was based on the Hospital's ability to make th

e required lease

payments. Letter from Michael Cal

laway, Attorney for County Hospital, February 24, 1997, to David R. Evans,

Attorney for SunTrust Bank: (in a different f orum, taking a position opp osite from that whi ch he takes as counse

l for the Hospital in

this action)

. . . I have consulte

d with the Hospit

al and must

advise [you that] Bradley Memorial cannot approve that portion of S ec tion 3 of the document wherein it is required to accep

t possession of the buildi

ng prio r to completion, and further is constitutionally prohibited fromexecuting and agreement that, in effect, guarantees repayment of credit extended to a private party as is required of13

the Hospital in Section 18 of the Agreemen t in the event of

a default. (Emphasis added.) Excerpt from Letter of Cameron Sorenson, Southeast Venture

Corporation (purchaser

of the project lease when SunTrust threaten ed to hol d Hospital in default), to Craig Taylor, Assistant Administr

ator, Bradley Cou

nt y Mem orial Hospital, March 6 , 1997.

. . . after reviewing the potential reduction in rent if Galen (a private physician practice) wereto elect not to acce ptan ownership interest in Bradley Building, LLC . . . as you and I disc ussed, it could create some issues with respec

t to Fraud and Abuse s

tatutes if the Hospital were to redistribute

Galen's forgone o

wnership to other phys

icians. Affidavit of Jim W

hitlock, August 27, 1997. The plaintiffs have alleged “. . . Bradley County Memorial Hospital has also unconstitutionally extended cre d it to Bradley Building , LLC, in violation of Section 29 of Article II of t he Tennessee Constitution

by guaranteeing the fi

nancing of Bradley Building's medi cal office building through entering into a Master Lease

. . . ” As a result of that allegation, the lender for the medical office building, SunTrust Bank, ha s questioned the validit

y of the lease and, therefore, its prospects of being repaid on its loan wi

th the result it has declined to fund the de veloper's most rec

ent draw requ

ests

. . . the Bank requested that the Hospital, in effect, "guar

antee" the loan. That request was rejected by the Hospital. Affiant is inform ed and believes the same documents were al so submi tted to the County Executive

for execution on behalf of Bradley Co unty, bu t were likewise rejecte

d. Court-Ordered Trial Brief of Amicus Curiae JamesWebb, Attorney for Bradley County, filed Octo

ber 27, 1997. The Court is no doubt

aware that consid

erable controvers

y regarding Bradley County Memorial Hospital and certa in of its recent

actions, as well as to what

its future status shoul

d be, exists among Bradley County's officials and citi zenry . . . . Bradley County M emorial Hospital, unli ke similar institutions which are owned by "Authorities" or other independent corporate ent ities, has no separa te existence from Bradley County itself. This is quite evident from the manner

in which the Hospital's site was acquired in 1949 and the form in whic h its Board of

Directors was establishedin 1947 . . . . “Bradl

ey County Memorial H osp ital ” is without independent

existence a nd is but an alter ego of “Bradley County” itself - - a fortunate ci

rcumstance, for

otherwise the vali

dity of some 22.5 million dollars of bond s issued by the County for the benefit of the Hospital, along wi

th another 2.5 millio

n dol lar bon d issue now in process, might well be called into questi on . . . . The “Master Office Lease Agreeme

nt” which was assi

gned by Bradley Building, LLC, to SunTrust Bank to secure the $8,000, 000.00 loa n for the office building to be leased e ntirely by Bradley C

o unty Memorial Hospital - - intruth, as previously noted, Bradley County itself - - is a "hell or high wa ter l ease" as describe d by the attorneys who prep ared i t for the lender . . . it amounts to no m ore than a barely14 disguised abso lu te guaranty of repayment of SunTrust Bank's loan to Bradley Building,

LLC. This conc

lusion is made inevitable by th e content of certain documents indicating that the bank looked solely to the credit-worth

iness of Bradley Cou

nty in evalua

t ing the prospects of

repayment

of the loan . . . Before the credit of Bradley County (through its alter

ego, “Bradley County Memorial Hospital”) was loaned in aid of Bradley Building, LLC, the as se nt of threefourths of the qualif

ied voters of Bradl

ey County should

have been first secured through an e le ct ion. Even Bradley County Commission, itself, which is directly elected by the voters of the County and di r ectly answerable to all of its citize

ns, could not have entered into th e arran gement concerned in this case without a referendum. (Emphasis added.) Affidavit of Donna Hubbard, C

ounty Executive for

Bradley County, O

ctober 29, 1997. The Documents attac hed hereto as Ex hibit A to thi s

affidavit are true and exac

t copies of excerpts

from the official offerin

g documents for the 1990 bond issueof Bradley County, Tennessee in w hich Bradley County issued $6,840,000.00 millio n in hospital r evenue and tax improvements bonds, Series 1990. The se bonds were bonds of Bradley County to which, insofar as they pertain to Bradley County Memorial Hos pital, pledged the ad valorem taxing powerof Bradley County to t he repayment of said bonds should the reven ues o f Bradley County Memor

i al Hospital be insuff

icient to make the payments requi red by the bonds . . . I hav e reviewed and directed the review of Bradley County's payment history of its bonds issue d on behalf of B rad ley County Memorial Hos pital. My review

of Bradley County's payments on those bonds establishes that , prior to 1993, Bradley County itself made the principal and interest payments on its bonds issued on behalf of Brad

ley County Memo

rial Hospital. Excerpt from Br

adley County, Tennessee Series 1990 Bon d. SECURITY: The Bonds, as to bot h pr incipa l and interest, sha ll be payableprimarily from and securedby a pledge of the net revenues to be derived from the operation of the Hospital subje ct to any prior pledges of such revenues . . .

. The Bonds will also be payable fro

m unlimi ted ad valorem taxes to be levied in all taxable proper t y within the c orpora te limits of the County. For the prompt payment of principal of, premium, if any, and interest on the Bonds,the full faith an d credit of the County are irre

vocably pledg ed. The Bonds will not be obligations of the Sta te o f Tennessee. Considering the

funding relationship between the county and the hospital

as shown by the B radley Co unty Private Acts, along with the overw

helming7 In so holding, we acknowledge the argument presented i n the amicus brief of t

he Tennessee Hospital Associatio n and H ospital Allian ce of Ten nessee, Inc .:

The key then is not whether the taxing power can be used a t all in suppo rt of the entity - as in the Eye clinic case [in which] the Western Section f ound that t

he possibili

ty that the county or city could tax was insufficient - but whether taxing power has been use d in support of a partic ular project at

issue. While we a re not convinc ed of the soun dness of this argum ent, we need n ot decide, since the pro of is abundant that in thi s case, Bradley County Hospit al and the private physicians’ Alli ance ignored the constit utional restrictions and obligated County fun ds in mixed p rivate-public projects w ithout vote of Brad ley County c itizens. 15 evidence thatthe County has been fully ob ligated for the hospit

al’s debts, we fi

nd that the partnership vent ures engaged in by County Hospital and the private Alliance in this case amount to ult ra vires acts under

the Bradley County P

rivate Acts and an unconstitutional application

of the Private Act Hospital Act of 1996, under Art. II, § 29 of the Constitution of T ennessee. It is our

duty to adopt a construction

which will sustain a

statut e and avoid constitutional conflict if any reasonable

construction exists th

at satisfies the re

quirements of the Co

nstitution. Davis-Kidd

Booksellers, Inc. v. McWhert er, 866 S.W.2d 520 (T enn. 1993), citing State v. Sliger, 8 46 S.W.2d 262, 263 (Tenn. 1993) ; State v. Lyons, 802 S.W.2d 590, 592 (Tenn. 1990); Shelby County Elec tion Comm’n v. T

urn er, 75 5 S.W.2d 774, 777 (Tenn. 1988); Kirk v. State, 126 Tenn. 7, 10, 150 S.W.2d 83, 84

(Tenn. 1911). See also, Smith v. Schn eider, No. 02A01-9608-CH-00 193 (Te nn. Ap p. December

11, 1996); Barry v. Wilson Count y, 610 S.W.2d 441 (T enn. App. 1980). As stated, we f

ind that the trial cou

rt correctly anal

yzed the facts and circumstances and correctly determined that under those facts and circums

tances, County Hospital functions as an agent and arm of Bradley County. Further, applying the constitutional lim itations set out in

Art. II, § 29, the court prope rly enjoined County Hospital from participating

in those or any other par tnership

ventures w ith the private Alliance which obligate County

funds without first conducting a County referendu m as constitutionally

requi red. 7 We find that under these facts and cir cumstances, the c

onstitutional require

ment for prior approval of the county by vote of its citizens exists ir

respective of any r

igh t s16

granted to Private Act H

ospitals in general un

der T.C.A. § 7-57-601, et seq. That part of the trial c

ourt’s judgment so orde

ring is affirmed. V Finally, the appellants argue that the terms of the

Order of Final Jud

gment and Permanent Injunct

ion entered by

the Chancellor ar

e too broad and

imprecise and unduly restrict an d interfere with Count y Hospital’s operat ion. Ap pellants point out that the injunction “ prohibits the hospital f

rom being a member of organizationssuc h a s the Tennessee Hospital Association, or the American Hospital Association, or e ven the local Chamber of Commerce, since all of them, though non-profit in nature , have members - probably even a majo

rity of members - who are “non-governmental entities.” We must agree. We therefore narrow the injunction to provide that Bradley County Memorial Hos pital is hereby enjoi

ned from entering in

to any business trans actions with private businesses or indiv

iduals which obligate Count y Funds unless authority is gra nted by vote of

the citizens of Bradle

y County in a referendum, as required by law. The judgment of the

trial court is

affirmed as

modified. Cos

ts are assessed to the p arties evenly.

_________________ _ ____________

_ William H.

Inman, Senio

r Judge CONCUR:

_______________________________ Houston M. Goddard, Presiding Judge

_______________________________17

Charles D. Susa

no, Jr., Judge