Minnesota Supreme Court Upholds Right of Unincorporated Medical Staff to Sue Nonprofit Hospital

In 2012 the nonprofit Avera Marshall Regional Medical Center‘s board of directors unilaterally decided to repeal and replace the hospital’s medical staff bylaws.  Two individual physicians and the Medical Staff as a whole objected, eventually filing a lawsuit against the hospital that reached the Minnesota Supreme Court on two important governance issues for nonprofit hospitals.  First, did the Medical Staff, as an unincorporated association, have the legal capacity to sue?  Second, did the medical staff bylaws constitute an enforceable contract between the hospital and the Medical Staff?  In a December 31, 2014 opinion, the Minnesota Supreme Court answered both questions in the affirmative.

With respect to the first question, the court acknowledged that the common law rule in Minnesota is that unincorporated associations are not legally distinct from their members and so do not have legal capacity to sue or be sued in their own right.  The court found, however, that the Minnesota legislature had overridden this rule when it enacted Minnesota Statute section 540.151, reading that statute as granting an unincorporated association that met the criteria described in the statute the capacity to sue and to be sued.  Those criteria are having two or more persons associate and act under a common name, criteria that the court found the hospital’s “Medical Staff” satisfied.

With respect to the second question, the Minnesota Supreme Court concluded that even though the hospital had a legal obligation under Minnesota administrative rules and the hospital’s corporate bylaws to adopt medical staff bylaws, both sides still provided consideration.  More specifically, the hospital granted privileges at the hospital in exchange for the prospective Medical Staff member agreeing to abide by the bylaws.  The court therefore concluded that there was a bargained-for exchange of promises and mutual consent to the exchange, creating an enforceable contract.  The court therefore remanded the case for consideration of the plaintiffs’ claims that the repeal and and replacement of the medical staff bylaws violated the terms of that contract.

The result in this case, which may be significant to many hospitals, for-profit and nonprofit, was not a foregone conclusion as both the state trial court and the state appellate court had reached the opposite result on both questions.  Indeed, two members of the Minnesota Supreme Court dissented from the five justice majority’s opinion.

Lloyd Mayer