Barrett L. Crawford, Tr. for the Bankr. Epch Operations, LLC v. Patrick Hosp. Investors, LLC (In re PCH Operations, LLC)
| Decision Date | 06 December 2016 |
| Docket Number | Adversary Proceeding No. 11-05023,Case No.: 09-50697,Adversary Proceeding No. 10-05067 |
| Court | U.S. Bankruptcy Court — Western District of North Carolina |
| Parties | In re: PCH OPERATIONS, LLC, Debtor. BARRETT L. CRAWFORD, Trustee for the Bankruptcy Estate of PCH Operations, LLC, Plaintiff, v. PATRICK HOSPITAL INVESTORS, LLC, PATRICK HOSPITAL, LLC, CHARLES E. TREFZGER, JR., DAVID S. JONES, REGINALD MOORE, JR., JOHN KESSEL, and GREG ROSENFELD, Defendants. BARRETT L. CRAWFORD, Trustee for the Bankruptcy Estate of PCH Operations, LLC, Plaintiff, v. PATRICK HOSPITAL INVESTORS, LLC, PATRICK HOSPITAL, LLC, CHARLES E. TREFZGER, JR., and DAVID S. JONES, Defendants. |
ORDER ON DEFENDANTS' MOTIONS FOR SUMMARY JUDGMENT IN ADVERSARY PROCEEDING NOS. 10-05067 AND 11-05023
THIS MATTER is before the court on the Defendants' Motion for Summary Judgment filed in adversary proceeding no. 10-05067 (the "2010 Motion") and the Defendants' Motion for Summary Judgment filed in adversary proceeding no. 11-05023 (the "2011 Motion") (collectively, the "Motions"). As will be discussed, summary judgment is granted as to the claims under 11 U.S.C. §§ 544, 548, and 549; the claim for obstruction of justice; the claims under the North Carolina Uniform Fraudulent Transfer Act ("NC UFTA") and N.C. GEN. STAT. § 75; and the claim for successor in interest. Summary judgment is denied as to the preference claim under § 547; the claims for negligence, conversion, bailment, and breach of fiduciary duty; the claims under §§ 506(c) and 510; and the claims for accounting and unjust enrichment. Partial summary judgment is granted as tothe claims under § 550 and the claim for suretyship contribution.
The Trustee filed his Complaint in case no. 10-05067 on September 2, 2010 and his Amended Complaint on October 1, 2010 (the "2010 Complaint") against Patrick Hospital Investors, LLC ("PHI"), a North Carolina limited liability corporation; Patrick Hospital, LLC ("PH LLC"), a North Carolina limited liability corporation;1 Charles E. Trefzger, Jr.; David S. Jones; Reginald Moore, Jr.; John Kessel; and Greg Rosenfeld (collectively, the "2010 Defendants"). The Trustee asserted the following claims in the 2010 Complaint: declaratory relief;2 contribution based on a theory of guaranty and/or suretyship against PHI, Trefzger, Jones, Moore, Kessel, and Rosenfeld (collectively, the "Suretyship Defendants"); accounting and conversion against PHI, PH LLC, Trefzger, and Jones; avoidance of transfer under § 548 against PH LLC, Trefzger, and Jones; avoidance of transfer under § 547;3 recovery under § 550 against PHI, PH LLC, Trefzger, andJones; and surcharge of collateral under § 506(c).
The Trustee filed his Complaint in case no. 11-05023 on May 19, 2011 ("2011 Complaint"). Like the 2010 Complaint, the 2011 Complaint asserts claims under §§ 547, 548, and 550 along with claims under state law for accounting and conversion against PHI, PH LLC, Trefzger, and Jones (collectively, the "2011 Defendants"). The 2011 Complaint also includes the following additional claims under Title 11: avoidance of rights and interests under § 544 against the 2011 Defendants; avoidance of post-petition transfers under § 549 against the 2011 Defendants; and a claim under § 510 for the subordination of PHI's claim. Further, the 2011 Complaint raises a number of additional state law claims. As to all the 2011 Defendants, the 2011 Complaint raises claims for: avoidance of transfer under the NC UFTA; negligence; breach of fiduciary duty; breach of bailment; obstruction of justice; unjust enrichment; and unfair and deceptive trade practices under N.C. GEN. STAT. § 75. In the claim titled "Successor in Interest," the Trustee alleges that PH LLC "was a mere continuation" of the Debtor, and the transfer of operations to PH LLC "amounts to a de facto merger." 2011 Complaint at 12.4
Case nos. 10-05067 and 11-05023 were consolidated on November 28, 2011 and November 23, 2011, respectively. The discovery deadline expired on March 31, 2012, and the dispositive motion deadline expired on August 10, 2012. The Defendants filed the Motions on August 8, 2012, and the Trustee filed his Response to Defendants' Motion for Summary Judgment ("Response"), no. 11-05023, Doc. No. 34, on August 24, 2012. The court conducted a hearing on the Motion on September 7, 2012 (the "Motion Hearing") and took the matters presented under advisement.
1. Uncontested Facts
The Debtor is a limited liability company incorporated under the laws of North Carolina, Exhibit B of 2011 Motion, Doc. No. 24-1 (B-1) ("Consulting Agreement") at 5, whose principals include M. Eugene Woodward, Jr. and Steven D. Womack, Declaration of M. Eugene Woodward, Jr., no. 11-05023, Doc. No. 29 at 1; Declaration of Steven D. Womack, no. 11-05023, Doc. No. 30 at 1 (combined as "Woodward/Womack Dec.").5 The Debtor was involved with the acquisition and operation of a hospital facility located in Patrick County, Virginia known as Patrick County Hospital and also known as R.J. Reynolds Hospital (the"Hospital"). 2011 Complaint at 2; Answer to Complaint, no. 11-05023, Doc. No. 6 ("2011 Answer") at 2. The Debtor's involvement with the Hospital would ultimately give rise to its bankruptcy case as well as these two adversary proceedings.
On or around January 10, 2005, PHI purchased the Hospital with a $2,000,000.00 loan from Marshall Investments Corporation ("Marshall") (this loan is hereafter referred to as the "PHI Loan" or the "PHI Loan Agreement"). Exhibit B of 2011 Motion, Doc. No. 24-1 (B-1) ("Promissory Note") at 16; Exhibit A of Motion for Relief from Stay, no. 09-50697, Doc. No. 107-1 ("Loan Agreement")6 (A-1) at 1. At the time of the PHI Loan, PHI was owned by Trefzger, Jones, Moore, Kessel, and Rosenfeld. Response at 1; Exhibit C of 2011 Motion, Doc. No. 24-3 (C-1) ("Jones Depo.") at 9-10.7 Although PHI and Marshall were respectively listed as the debtor and creditor in the PHI Loan Agreement, the Debtor's participation as a lessee of the Hospital was contemplated as part of the PHI Loan financing, Loan Agreement, Doc. No. 107-1 (A-1) at 12. Accordingly, contemporaneous with the PHI Loan, the Debtor agreed to lease the Hospital from PHI, and the rent under the Lease Agreement was the greater of$20,000.00 or PHI's monthly loan payment to Marshall. Exhibit B of 2011 Motion, Doc. No. 24-2 (B-2) (the "Lease Agreement") at 1-2.
In exchange for its financing, Marshall received a security interest in the Hospital's real and personal property, 2011 Complaint at 2; 2011 Answer at 2, and the following individuals signed a "Guaranty of Payment and Performance"8 (collectively, the "Guaranty Agreements") in favor of Marshall: Trefzger, Jones, Moore, Kessel, and Rosenfeld (collectively, the "Individual Guarantors"). All of the Individual Guarantors agreed to be liable to the full extent of PHI's obligations under the PHI Loan. Guarantee Agreement at 1-2. In addition, the Debtor pledged its assets as security for the PHI Loan with an Assignment and Security Agreement. Exhibit B of Motion to Dismiss, no. 10-05067, Doc. No. 21-2 ("Security Agreement") at 15-16. The Security Agreement made the Debtor liable to the full extent of PHI's obligations under the PHI Loan, and the Security Agreement further provides that a payment default under the Lease Agreement would also count as a default as to Marshall. Security Agreement at 16-17. The PHI Loan Agreement, Guaranty Agreements, Lease Agreement, and Security Agreement all provide that they would be governed by Virginia law. Promissory Note at21; Loan Agreement, Doc. No. 107-2 (A-2) at 17-18; Guaranty Agreement at 7; Lease Agreement at 13; Security Agreement at 20.
The parties contemplated that PHI would own the Hospital while the Debtor operated it, and this arrangement initially went smoothly. 2011 Motion at 3. However, the parties never reached an explicit agreement as to who should be primarily responsible for the PHI Loan payments, Response at 2, and there was ultimately a fallout at the Hospital. Although the parties disagree as to the allocation of blame for the fallout, there are some key events they agree upon.
In March of 2008, the Debtor and PHI entered into a Consulting Agreement. Exhibit B of 2011 Motion, Doc. No. 24-1 (B-1) ("Consulting Agreement") at 5. The Consulting Agreement provides that PHI would act as a consultant to the Debtor while the parties worked toward a transition agreement where the Debtor would relinquish control of the Hospital to PHI, thereby terminating the Lease Agreement. Consulting Agreement at 5-6. However, the contemplated transition agreement never came to fruition.
In October of 2008, Pharmacy Healthcare obtained a judgment against the Debtor and began garnishing the Debtor's bank accounts. 2010 Motion at 4; Exhibit B of 2010 Motion, Doc. No. 54-1 at 61-62. Subsequently, Jones and Trefzger formed PH LLC, and PH LLC began operating the Hospital, 2011 Motion at 4. TheDebtor, in turn, filed an action in Virginia state court against PHI and others in November of 2008 seeking the recovery of its books, records, accounts, and other property. Response at 4. Yet, the Debtor never again operated the Hospital, and it filed a voluntary petition under Chapter 7 of the Bankruptcy Code on May 20, 2009.
In September or October of 2009, without providing notice to the Trustee, PHI and Marshall agreed to the sale of the Hospital where Marshall would relinquish its security interest in the Hospital without receiving full payment of the underlying debt (this transaction is hereafter referred to as the "Hospital Sale"). 2011 Complaint at 4-5; 2011 Answer at 5. Eventually, the Trustee reached a settlement agreement with Presidium Asset Solutions ("PAS"), the successor in interest to Marshall, that satisfied the underlying debt associated with the PHI Loan. The Trustee obtained an...
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