Alberts v. HCA, Inc.
| Citation | 496 B.R. 1 |
| Decision Date | 11 July 2013 |
| Docket Number | Civil No. 12–564 (RCL). |
| Parties | Sam J. ALBERTS, Trustee for The DCHC Liquidating Trust, Appellant, v. HCA, INC., Galen Hospital Illinois, Inc., and Western Plains Capital, Inc., formerly known as C/HCA Capital, LP, Appellees. |
| Court | U.S. District Court — District of Columbia |
OPINION TEXT STARTS HERE
Derek Sugimura, Stephen Adam Weisbrod, Weisbrod Matties & Copley PLLC, Washington, DC, for Appellant.
Jeffrey William Kilduff, Stephen Dudley Brody, William T. Buffaloe, O'Melveny & Myers, LLP, Washington, DC, for Appellees.
This case is before this Court on appeal from the United States Bankruptcy Court for the District of Columbia. Appellant Sam J. Alberts, the trustee for the Doctors Community Hospital Corporation Liquidating Trust, appeals from the final judgment of U.S. Bankruptcy Judge S. Martin Teel. In bankruptcy court, Alberts had initiated an adversary proceeding against, inter alia, appellees Hospital Corporation of America, Inc., and its wholly-owned subsidiaries Galen Hospital Illinois, Inc. and Western Plains Capital, Inc. In 1998, DCHC (through its wholly-owned subsidiary Reese Corporation) bought Michael Reese Hospital from HCA for approximately $66–68 million.1 In bankruptcy court, Alberts claimed that the sale of Reese Hospital was a “fraudulent transfer” because Reese Corp. did not receive reasonably equivalent value for the price it paid. Alberts sought to avoid and recover as a fraudulent transfer the allegedly excess purchase price.
After a series of dispositive motions and a five week bench trial, Judge Teel issued a 192–page statement of the bankruptcy court's findings of law and conclusions of fact. Judge Teel calculated the fair market value of Reese Hospital as $68.6 million, concluded that Reese Corp. received reasonably equivalent value, and entered judgment for the appellees. Alberts presents two questions on appeal (as thus characterized by Alberts) 2:
(1) Did the bankruptcy court err when, in the course of conducting a discounted cash flow analysis, the court treated the Hospital's working capital as a surplus asset and then calculated the Hospital's going concern value by adding the value of the working capital to the value of the income that the Hospital was projected to generate from its operations, assuming its operations were “fully capitalized”?
(2) Did the bankruptcy court err when, in the course of concluding that the Hospital's net working capital could be treated as a surplus asset and added to the Hospital's projected income from operations, the court employed an asset valuation method that was not supported by or consistent with any party's expert or any learned treatise and was not subject to evaluation under the Federal Rules of Evidence?
After reviewing the record on appeal, the underlying decisions of the bankruptcy court, and the parties' briefs, the court finds that Judge Teel correctly ascertained the controlling law and did not commit clear error in his factual findings. Furthermore, to the extent Judge Teel committed any reversible error regarding his treatment of the net working capital, such error is harmless. Therefore, this Court will affirm the judgment of the bankruptcy court.
I. BACKGROUNDA. Factual History
This case concerns the 1998 sale of Chicago-based Columbia Michael Reese Hospital and Medical Center (“the Hospital” or “Reese Hospital”). Hospital Corporation of America (“HCA”) is among the world's largest private healthcare providers. In 1997, HCA began a divestiture program to reduce the number of hospitals it owned. As part of this program, HCA put Reese Hospital up for sale. In late 1997 and early 1998, HCA received multiple offers for Reese Hospital. Doctors Community Hospital Corporation (“DCHC”) was interested in purchasing the Hospital. As the bankruptcy court stated, “DCHC executives were sophisticated and experienced professionals in the healthcare industry ... [who] had successfully turned around distressed hospitals and were confident they could do the same with Reese Hospital.” Am. Mem. Dec. Constituting the Ct.'s Findings of Fact & Conclusions of L. 187–88 (“Am.Mem. Dec.”), ADV 04–10366, May 19, 2008, ECF No. 596.
On February 18, 1998, DCHC entered into a letter of intent with HCA, indicating that DCHC would purchase Reese Hospital. DCHC subsequently conducted due diligence before completing its purchase of the Hospital. On July 8, 1998, Reese Corporation, a wholly-owned and specially-created subsidiary of DCHC, entered into an asset purchase agreement with Galen Hospital Illinois (“GHI”), a wholly-owned subsidiary of HCA, for the purchase of Reese Hospital. The transaction closed on November 12, 1998 (the “transfer date”). The bankruptcy court concluded as a factual matter that Reese Corp. paid $66,048,640 as consideration for Reese Hospital. See Am. Mem. Dec. 16. 3
DCHC and Reese Corp. were heavily reliant on financing from National Century Financial Enterprises, Inc. for satisfy ongoing expenses. In November 2002, National Century filed for bankruptcy, causing accounts from which DCHC and Reese Corp. drew operational funds to be frozen. Three days after National Century's bankruptcy filing—and a little over four years after completing the purchase of Reese Hospital–DCHC filed for Chapter 11 bankruptcyrelief. See, e.g., Appellant's Brief 8, Civil No. 12–564, June 4, 2012, ECF No. 9; Trial Tr. 447:5–448:11, Jan. 23, 2007, Ex. 691 to Record on Appeal (testimony of M. Redman) (Ex. I to Appellant's Brief); Trial Tr. 129:21–130:2, Jan. 19, 2007, Ex. 689 to Record on Appeal (testimony of P. Tuft) (Ex. K to Appellant's Brief).
B. Procedural History
DCHC's initial bankruptcy proceedings were protracted, lasting almost 18 months. On April 5, 2004, the debtors achieved confirmation of their second amended plan of reorganization. Section 6.6 of this reorganization plan created the DCHC Liquidating Trust (“Trust”) to liquidate certain assets of the debtors and distribute those funds to certain classes of creditors. Among the assets conveyed to the Trust were fraudulent conveyance and other actions authorized under Chapter 5 of the Bankruptcy Code. Sam J. Alberts was appointed trustee of the DCHC Trust. See Am. Mem. Dec. 4.
On November 18, 2004, in his capacity as trustee, Alberts instituted an adversary proceeding against HCA (and its affiliated companies and subsidiaries) in the U.S. Bankruptcy Court for the District of Columbia. This adversary proceeding is the subject of the instant appeal. Alberts instituted this action to recover, as a fraudulent conveyance under the Illinois Uniform Fraudulent Conveyance Act, the allegedly-excess purchase price Reese Corp. paid for Reese Hospital. Under the Illinois Act, a bankruptcy trustee can unwind a past transaction if the trustee proves: (1) the debtor transferred goods and received less than reasonably equivalent value in exchange for the transfer; and (2) the debtor was insolvent as of the date of the transaction. 740 Ill. Comp. Stat. § 160/5(a).
This adversary proceeding was also protracted. Over the course of several memorandum decisions, Judge Teel pared down the issues. See Alberts v. HCA Inc. ( In re Greater Se. Cmty. Hosp. Corp. I ), 365 B.R. 293 (Bankr.D.D.C.2006) (“HCA I ”); Alberts v. HCA Inc. ( In re Greater Se. Cmty. Hosp. Corp. I ), ADV 04–10366, 2007 WL 80812 (Bankr.D.D.C. Jan. 3, 2007) (“ HCA II ”); Alberts v. HCA Inc. ( In re Greater Se. Cmty. Hosp. Corp. I ), ADV 04–10366, 2007 WL 7230957 (Bankr.D.D.C. Jan. 3, 2007) (“ HCA III ”); Alberts v. HCA Inc. ( In re Greater Se. Cmty. Hosp. Corp. I ), 365 B.R. 322 (Bankr.D.D.C.2007) (“ HCA IV ”).
On January 19, 2007, Judge Teel commenced a five week 4 bench trial to determine whether the sale of Reese Hospital was a fraudulent conveyance. During this trial, according to appellees, Judge Teel heard testimony from 23 witnesses and received 772 exhibits into evidence. See Appellees' Brief 2, Civil No. 12–564, July 23, 2012, ECF No. 11. The primary purpose of this trial was to introduce evidence and advance legal arguments regarding the fair market value of the Reese Hospital, whether DCHC and Reese Corp. received “reasonably equivalent value” for its purchase price, and whether DCHC and Reese Corp. were insolvent at the time of the transfer. See Am. Mem. Dec 3–8.
Judge Teel afterwards issued a 192–page decision outlining the bankruptcy court's findings of fact and conclusions of law. In order to determine whether DCHC and Reese Corp. received “reasonably equivalent value,” Judge Teel needed to determine the fair market value of what Reese Corp. received (the Hospital), and compare it to what Reese Corp. transferred to HCA (the $66 million). See Barber v. Golden Seed Co., Inc., 129 F.3d 382, 388 (7th Cir.1997). Judge Teel dedicated the bulk of his opinion to this exercise. See Am. Mem. Dec. 23–180. At the outset, Judge Teel noted that there was no dispute that the sale of the Hospital was the result of arm's-length negotiations between the parties. Id. at 22. There are three primary methods for determining “fair market value”: (1) the “market” approach; (2) the “net asset” or “cost” approach; and (3) the “income” approach. Jay E. Fishman, et al., PPC's Guide to Business Valuations ¶ 203.2 (15th ed. 2005); Shannon P. Pratt, et al., Valuing a Business: The Analysis and Appraisal of Closely Held Companies 45 (4th ed. 2000).
The bankruptcy court first found that “there are no truly comparable transactions or public companies from which the court can derive an accurate and reliable fair market value for Reese Hospital using the market approach.” Am. Mem. Dec. 25. Alberts does not challenge this determination. Judge Teel then calculated the Hospital's value using the cost approach, which values a business based on the net aggregate value of its underlying assets, focusing on the...
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