384 F.3d 338 (7th Cir. 2004), 03-1086, DFS Secured Healthcare Receivables Trust v. Caregivers Great Lakes, Inc.

Docket Nº:03-1086, 03-3664.
Citation:384 F.3d 338
Party Name:DFS SECURED HEALTHCARE RECEIVABLES TRUST, Plaintiff-Appellee, v. CAREGIVERS GREAT LAKES, INC. and Marc Leestma Defendants-Appellants.
Case Date:September 13, 2004
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

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384 F.3d 338 (7th Cir. 2004)



CAREGIVERS GREAT LAKES, INC. and Marc Leestma Defendants-Appellants.

Nos. 03-1086, 03-3664.

United States Court of Appeals, Seventh Circuit

September 13, 2004

Argued June 10, 2004.

Rehearing Denied Oct. 18, 2004.

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[Copyrighted Material Omitted]

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Christopher A. Nichols, Husch & Eppenberger, Peoria, IL, for Plaintiff-Appellee.

D. Andrew Portinga, Miller, Johnson, Snell & Cummiskey, Grand Rapids, MI, Lucian J. Bernard, Pearson & Bernard, Covington, KY, for Defendants-Appellants.

Before CUDAHY, RIPPLE, and ROVNER, Circuit Judges.

CUDAHY, Circuit Judge.

This appeal involves a state law claim under Indiana's Uniform Fraudulent Transfer Act (IUFTA), Ind.Code §§ 32-18-2-1 et seq. It has long been argued by some that diversity jurisdiction should be limited or even abolished. The proponents of this view argue that the federal courts are overburdened, that they lack expertise in matters of state law and that in most cases, the concern of hometown bias originally driving the establishment of diversity jurisdiction represents no real threat to the parties. While we express no opinion as to whether diversity jurisdiction should be limited generally, we have little doubt that this case would have been better brought in an Indiana state court. This case raises numerous novel questions of Indiana state law, upon which federal courts can provide no more than conjecture as to how the Indiana Supreme Court would hold. The appellee, in oral argument, made it clear that it did not want us to certify any question to the Indiana Supreme Court because of the inevitable delay that would follow. However, it was the appellee that chose to file its complaint in federal court and it was that complaint which sought novel remedies, never previously awarded under Indiana law. R. at 36 (Cplt.¶ 51). Therefore, although we are not fans of delay, it is with limited sympathy that ultimately we must certify several of the questions raised in this appeal to the Indiana Supreme Court. See Stephan v. Rocky Mountain Chocolate Factory, Inc., 129 F.3d 414, 418 (7th Cir. 1997).


On May 15, 1996, Caregivers Plus, Inc. (CPI), a provider of home healthcare services

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to Medicare recipients and others, entered into a "factoring" agreement with DFS Secured Health Receivables Trust (DFS). App. at 63-115. Under this agreement, DFS purchased "the right to receive the proceeds of collections of Healthcare Receivables payable by Governmental Obligors when such collections [were] received by [CPI]" in exchange for immediate cash payments of 71.5% of the value of these receivables to CPI. Id. at 165. Additionally, under this agreement, CPI was obligated to pay DFS 2.5% interest for each month that receivables made payable to DFS went unpaid. Id. Therefore, in addition to its 28.5% discount on the value of the receivables DFS received, CPI owed DFS 30% annual interest on unpaid receivables. Id. at 165. A Monday night quarterback might think this a bad deal for CPI, but it was still Sunday morning, and it apparently looked serviceable to CPI at the time.

By February 1997, however, CPI owed DFS approximately $600,000 under this agreement. Id. at 48. On April 4, 1997, DFS filed suit against CPI and its principal, Claudette Harrison, in the Northern District of California to collect the debt. Id. at 49. Before the lawsuit began, Harrison admitted converting $250,000 in receivables that should have been paid to DFS. Id. at 48-49. The parties executed a settlement agreement and the suit was dismissed voluntarily without prejudice. Id. at 394. Following this settlement, DFS continued to purchase CPI's receivables despite the fact that CPI was constantly in default. Id. at 166. By the end of 1998, CPI's debt to DFS had grown to approximately $1.7 million. Id. at 53. On February 16, 1999, DFS again filed suit against Harrison, CPI and others in the United States District Court for the Eastern District of California and was granted a default judgment for approximately $1.7 million. Id. at 49-50, 346-47.

In the meantime, CPI had fallen into financial distress and its officers were concerned that it would go under by the end of 1998 due to its debts. Id. at 180. CPI's financial distress was due, in part, to changes in the Medicare program, including the Balanced Budget Act of 1997, which changed the Medicare reimbursement method and led to a 35% drop in spending on home health care agencies that year. Id. at 125. As a result, about one-third of Indiana's home health care agencies closed in 1998. Id. at 126.

Harrison decided to sell CPI. Id. at 368-69. On December 4, 1998, Marc Leestma, an entrepreneur in the home health care business, executed an asset purchase agreement ("APA") for the sale of essentially all of CPI's assets (Medicare provider number, files, furniture and computers) for $20,000. Id. at 349-54. The APA defined the "buyer" of CPI's assets as "Marc Leestma or, at his option, a corporation to be formed by him for purposes of this Agreement." Id. at 349. Under the terms of the APA, the buyer purchased CPI's assets and was also required to lease specific property, employ various former CPI employees (including Harrison, whose new salary with CGL was to be even higher than it was with CPI) and assume CPI's equipment leases. Id. at 349, 352. Following execution of the APA, on December 8, 1998, Leestma filed articles of incorporation for Caregivers Great Lakes, Inc. (CGL), to be the "buyer" of CPI's assets. Id. at 383. On January 8, 1999, CGL paid CPI $20,000 and the transaction was complete. App. at 388. Leestma claims that $20,000 represented the fair market value of CPI and was consistent with other offers Harrison had received during this time period. Id. at 194-95. A jury, however, ultimately found that the fair value for CPI's assets was actually $470,000. Id. at 301.

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Because CGL had purchased CPI's Medicare provider number, Medicare made payments totaling $439,388 to CGL for services provided by CPI prior to the asset purchase. Id. at 23. DFS claimed based on its May 15, 1996 agreement with CPI that it should have received these reimbursements. On October 1, 1999, DFS filed a complaint in the Northern District of Indiana claiming fraudulent transfer under the IUFTA, as well as, civil and criminal conversion. After a hearing at which the district court found that DFS was the lawful recipient of the Medicare receivables, CGL paid these funds to DFS. Id. at 53.

Nonetheless, DFS maintained its action, claiming that the sale of CPI was a fraudulent attempt to shield CPI's assets from its creditors (DFS). After the district court dismissed the conversion claims, trial began on May 14, 2001. At the close of trial, the jury found that the "reasonably equivalent value" of the assets transferred to CGL was $470,000 (rather than the $20,000 paid by CGL) and recommended punitive damages of $800,000 against Leestma and $100,000 against CGL. Id. at 301. Because the remedy sought was equitable in nature, the district court treated the jury's findings as advisory but ultimately adopted its recommendation. Id. at 303, 305-08, 314. On January 9, 2003, after the district court ruled on various post-judgment motions, CGL and Leestma filed a timely notice of appeal.

In this appeal, Leestma and CGL challenge four discrete issues. First, Leestma argues that the district court erred in finding that he could be personally liable under the IUFTA. Second, Leestma argues that DFS did not constitute a "creditor" under the IUFTA because (1) DFS did not obtain its judgment against CPI until after the asset transfer; and (2) its contract with CPI was void since the sale of Medicare receivables is illegal. Third, Leestma argues that a money judgment is not available under the IUFTA when the transferred assets are available for reconveyance. Finally, Leestma appeals the district court's award of punitive damages, arguing that such damages are not available under the IUFTA.


A. Leestma's personal liability

Leestma argues that the district court erred in holding him personally liable, because under the IUFTA, a judgment may be entered only against a "first transferee" of fraudulently transferred assets or "a person for whose benefit the transfer was made," and Leestma claims to be neither. See Ind.Code § 32-18-2-18(b) (1). According to Leestma, CGL--the corporation he created to purchase CPI's assets--was the "first transferee" of those assets, and Leestma acted as a mere agent of CGL. Therefore, he argues that because DFS did not attempt to pierce the corporate veil of CGL, he cannot be held personally liable.

We agree that a "transferee" is one with actual "dominion" or "control" over the assets in question. See Bonded Fin. Servs., Inc., 838 F.2d 890, 893-94 (7th Cir. 1988).1 " 'Control' does not mean the ability

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to steal the money, or use it for personal purposes in breach of duty." In re Schick, 234 B.R. 337, 343 (Bankr.S.D.N.Y.1999). A "transferee" must have "the right to put the money to one's own purposes," rather than merely being an "agent," "possessor" or someone "who touches the money." Bonded Fin. Servs., Inc., 838 F.2d at 893-99.

On December 4, 1998, the parties entered into an APA, under which the "buyer," defined as "Marc Leetsma [sic] or, at his option, a corporation to be formed by him for purposes of this Agreement," agreed to purchase CPI's assets for $20,000. See App. at 349. The district court concluded that because Leestma signed the APA in his own name, he was not an agent and that he personally became the "first transferee" of the assets. See Short App. at 15 ("Evidence supports a finding that Mr. Leestma is personally liable for buying fraudulently discounted assets--it was he who signed the asset purchase agreement--so Mr....

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