PHOENIX (Legal Newsline) – The Arizona Supreme Court has ruled that a hospital may not litigate against its former CEO claims that were permissive counterclaims in a previous arbitration.

On July 21, the court ruled against Winslow Memorial Hospital Inc., doing business as Little Colorado Medical Center, which had filed an unjust enrichment claim against former CEO Jeffrey Hamblen. 

Winslow Memorial Hospital hired Hamblen as its president and CEO in 2003. The hospital alleged that Hamblen said he would not receive any severance payments from his prior employer. 

Hamblen allegedly also didn’t disclose that there was an amendment to the management services agreement requiring the hospital to reimburse the prior employer for the severance payments received by Hamblen. 

Hamblen was put on administrative leave in 2014 after LCMC found out that Hamblen was getting severance payments that it was required to pay back. Hamblen notified LCMC saying he was ending his contract. 

LCMC then notified Hamblen it would be terminating his employment for cause. Hamblen next filed a demand for arbitration with the American Arbitration Association, claiming that he was owed severance payment by LCMC. 

Shortly after that, LCMC filed the lawsuit claiming unjust enrichment. The hospital claimed that Hamblen had proffered fraudulent misrepresentations and omissions. Counterclaims were asserted.

The Superior Court stayed the case until arbitration could be completed. LCMC was victorious in the arbitration proceeding.

The arbitrator entered his award in October 2015 “(a) denying Hamblen’s claim for severance pay because he terminated the agreement without 'good reason'; and (b) ruling that 'LCMC had grounds to rescind, and did rescind,' the employment contract based on Hamblen’s misrepresentations and omissions, which 'abrogates the agreement and undoes it from the beginning,'" according to the order issued by the Arizona Supreme Court.

The hospital asked the Superior Court to let it seek damages from Hamblen. The court granted LCMC leave to amend its complaint, and Hamblen asked the court to not award money to any party.

Hamblen’s motions were denied, and in April 2016 the court granted LCMC’s motion to amend the complaint. Also, both parties asked that the court confirm the arbitration award. It was ruled that because the hospital rescinded Hamblen’s employment contract, LCMC was entitled to a jury trial.

The Supreme Court accepted an appeal, noting in its opinion that it accepted it because “the case presents an issue of statewide importance and first impression before this court—whether the separability doctrine applies to post-arbitration confirmation proceedings and precludes court litigation of arbitrable claims when the agreement’s arbitration provision was not specifically challenged, even though the arbitrator finds grounds for rescinding the entire agreement.” 

It also noted they have jurisdiction under article 6, section 5(3) of the Arizona Constitution and A.R.S. § 12-120.24.

The Supreme Court ruled that the hospital was barred from litigating its claims against Hamblen in Superior Court. It remanded the case but directed that the amended complaint (by the hospital against Hamblen) be dismissed. It denied Hamblen’s request for attorney’s fees.

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