Capital Fin., LLC v. Rosenberg

• Decision Date: 23 January 2019
• Docket Number: Civil No. RDB-17-2107
• Citation: 364 F.Supp.3d 529
• Parties: CAPITAL FINANCE, LLC, Plaintiff v. Oscar ROSENBERG, et al., Defendant.
• Court: U.S. District Court — District of Maryland

364 F.Supp.3d 529

CAPITAL FINANCE, LLC, Plaintiff

v.Oscar ROSENBERG, et al., Defendant.

Civil No. RDB-17-2107

United States District Court, D. Maryland.

Signed January 23, 2019

Joseph Francis Fiorill, Katten Muchin Rosenman LLP, Washington, DC, Paige B. Tinkham, Pro Hac Vice, William J. Dorsey, Pro Hac Vice, Katten Muchin Rosenman LLP, Chicago, IL, for Plaintiff.

C. Dunham Biles, Pro Hac Vice, Daniel W. Yager, Pro Hac Vice, David Grant Crooks, Pro Hac Vice, Fox Rothschild LLP, Dallas, TX, Jessica Haire, Nicholas T. Solosky, Rachel Marie Severance, Fox Rothschild LLP, Washington, DC, for Defendant.

MEMORANDUM OPINION

Richard D. Bennett, United States District Judge

On July 1, 2015PlaintiffCapital Finance, LLC("Capital Finance") and a group of eight skilled nursing facilities and long term acute care hospitals (collectively, the "Borrower"), controlled by DefendantsJosef Neuman("Neuman") and Oscar Rosenberg("Rosenberg")(collectively, "Defendants"), entered into a Credit and Security Agreement (the "Credit Agreement") and a Revolving Loan Note.Pursuant to these contracts, Capital Finance agreed to furnish capital financing to these long-term care facilities, thereby insuring that they could maintain a source of working capital while experiencing significant delays between rendering healthcare services and receiving payments for these services.Neuman and Rosenberg personally guaranteed this financing.

As a condition precedent for obtaining additional loan advances under these contracts, Neuman, as the Manager of Borrower, submitted one-page Borrowing Base Certificates which warranted that the facilities were in accordance with the terms of the loan documents and had paid all state and federal payroll taxes.Additionally, the Credit Agreement required Borrower to deposit the proceeds from its collateral into bank accounts at Banco Popular protected by a deposit account control agreement ("DACA").Included among these proceeds were Medicare funds and intergovernmental transfer payments ("IGT" payments).

To secure loans from Capital Financing, Rosenberg and Neuman executed so-called "bad boy" guaranties, which required them to satisfy all outstanding obligations under the Credit Agreement upon Borrower's commission of "fraud or illegal acts."These guaranties were triggered when Borrower failed to pay payroll taxes, a violation of federal law.Neuman doubled-down on this illegal activity by submitting, as manager of Borrower, Borrowing Base Certificates which falsely represented that Borrower had paid these taxes when in fact the payroll taxes had not been paid.

Between December 2016 and January 2017, Neuman further violated the terms of the loan agreement by diverting Medicare and IGT payments from DACA-controlled accounts to a Chase account over which Capital Finance had no control.Later, on June 20, 2017, Neuman made another attempt to divert funds by instructing a hospital to direct $ 160,179.80 in IGT payments to a non-DACA controlled account at Santander Bank.A Show Cause Order entered by the United States District Court for the Northern District of Texas with respect to the diversion attempt was resolved by Defendants paying money to Plaintiff.

After a two-day bench trial on January 9, 2019 and January 10, 2019, and for the reasons set forth below, this Court concludes as follows:

1.By submitting false Borrowing Base Certificates to obtain loan advances, Neuman committed fraud and caused Capital Finance to incur 575,705.65 in actual damages.¹Plaintiff is further awarded pre-judgment interest at the rate of six percent (6%) per annum and post-judgment interest at the rate of ten percent (10%) per annum.Punitive damages are warranted in the amount of $ 200,000.00.

2.Neuman diverted IGT payments and Medicare payments from the DACA-controlled accounts at Banco Popular, causing Borrower actual damages of $ 414,427.22 .²Plaintiff is awarded pre-judgment interest at the rate of six percent (6%) per annum and post-judgment interest at the rate of ten percent (10%) per annum.

3.Rosenberg and Neuman are obligated to pay Capital Finance the outstanding obligations under the Guaranty agreements.As of January 8, 2019 that amount is $ 1,304,731.37 , representing the sum of $ 575,705.65 in unpaid principle; $ 255,144.55 in default interest; $ 235,440.82 in legal fees (excluding fees associated with this litigation); $ 173,359.88 for field exam work; and $ 65,080.47 for lenders' monthly fees.Interest, at the default rate, continues to accrue on the unpaid balance at a per diem rate of $ 200.22.Plaintiff is further awarded post-judgment interest at the rate of ten percent (10%) per annum.

4.Judgment shall be ENTERED in favor of Capital Finance on Counts III and IV (Breach of Contract); Count V (Fraud); and Count VI (Conversion).

5.Rosenberg and Neuman SHALL PAY to Capital Finance a total of $ 1,304,731.37 .

6.Neuman SHALL PAY to Capital Finance $ 200,000.00 in punitive damages, over and above the total amount of $ 1,304,731.37.

Pursuant to Federal Rule of Civil Procedure 52(a), the following memorandum constitutes this Court's findings of fact and conclusions of law.

PROCEDURAL BACKGROUND

On July 26, 2017 Capital Finance initiated this lawsuit by filing a Complaint for Confession of Judgment against Rosenberg and Neuman pursuant to Local Rule 108(D. Md. 2018).(ECF No. 1.)On July 28, 2017, this matter was referred to Magistrate Judge A. David Copperthite for his review pursuant to 28 U.S.C. § 636 and Local Rules 301and302.(ECF No. 3.)On September 6, 2017, Judge Copperthite entered an Order directing Confession of Judgment in favor of Plaintiff against Defendants.(ECF No. 8.)In an accompanying Memorandum Opinion, the Magistrate Judge found that Borrower had breached its Credit Agreement with Capital Finance by "divert[ing] significant funds from being deposited into the AR Deposit Account and instead allocat[ing] said funds to an account not subject to its deposit account agreement with Capital [Finance]."(ECF No. 7, at 5.)As a result of this breach, Capital Finance was entitled to a confession of judgment against Rosenberg and Neuman pursuant to the guaranty agreements it had reached with Defendants.(Id. at 3-4, 5-6.)

On October 4, 2017, Rosenberg and Neuman filed a Motion to Open, Modify, or Vacate Judgment by Confession, arguing that liability had not attached to Rosenberg and Neuman because three necessary conditions enumerated in Section 1(d) of the guaranties had not occurred.(ECF No. 11.)Rosenberg and Neuman's primary argument had been, and remains, that they are not liable under the guaranties unless Borrower committed no less than three acts of egregious misconduct: collude to undergo an involuntary bankruptcy proceeding, improperly file a voluntary bankruptcy petition, and commit fraud.(Id. at 6.)

On November 1, 2017, Magistrate Judge Copperthite recommended that this Court deny Rosenberg and Neuman's Motions.(ECF No. 17.)He concluded that Defendants' interpretation of the contract, which they still maintain today, "makes no sense."(Id. at 6.)This Court adopted the Magistrate Judge's Report and Recommendation.(ECF No. 19.)On December 4, 2017, Defendants filed a Motion to Alter or Amendment Judgment, or, in the Alternative, for Relief from Judgment and Request for Stay of Execution.(ECF No. 20.)A notice of Appeal to the United States Fourth Circuit Court of Appeals followed.(ECF No. 23.)

On April 3, 2018, this Court conducted a telephone conference with all parties.Following the telephone conference, this Court issued a Letter Order GRANTING the Defendant's Motion to Alter or Amend Judgment(ECF No. 20), VACATING the Confession of Judgment, and permitting Defendants to file a Response to Plaintiff's Complaint.(ECF No. 27.)On the following day, Defendants withdrew their Notice of Appeal.(ECF Nos. 23, 29.)In September 2018, Defendants filed an Amended Complaint (ECF No. 42), adding breach of contract claims against Rosenberg and Neuman (Counts III and IV), a fraud claim against Neuman (Count V) and a claim of conversion against Neuman (Count VI).

This Court conducted a two-day bench trial on January 9, 2019 and January 10, 2019.After the conclusion of Plaintiff's case, Defendants moved for judgment on partial findings pursuant to Rule 52(c), which this Court GRANTED IN PART and DENIED IN PART.Specifically, this Court granted Defendants' motion to dismiss the Confession of Judgment claims against Rosenberg and Neuman (Counts I and II) because this Court had previously vacated the Confession of Judgment against Defendants and permitted them to respond to the Complaint.(ECF Nos. 8, 20.)The Motion was denied with respect to the remaining claims.

The following claims proceeded to trial:

(1) Capital Finance's breach of contract claim against Rosenberg (Count III);

(2) Capital Finance's breach of contract claim against Neuman (Count IV);

(3) Capital Finance's fraud claim against Neuman (Count V);

(4) Capital Finance's conversion claim against Neuman (Count VI).

FINDINGS OF FACT

I.The Borrower's Business.

In early August 2015, Rosenberg and Neuman acquired eight groups of skilled nursing facilities consisting of Plano Specialty Hospital Operator LLC, Plano Healthcare Residence Operator LLC, Mesa Hills Specialty Hospital Operator LLC, Mesa Hills Healthcare Residence Operator LLC, Plum Creek Specialty Hospital Operator LLC, Plum Creek Healthcare Residence Operator LLC, Midwest City Healthcare Residence Operator LLC, and Specialty Hospital of Midwest City Operator LLC(collectively, the "Borrower").(Stip. 1.)³

Rosenberg and Neuman had a 50/50 ownership interest in the Borrower.(Pl.'sEx. 1, at CAPFI 127.)While Rosenberg and other investors advanced funds to acquire these properties, Neuman did not contribute financially.(ECF No. 100, at 43:19-24.)⁴Instead, Neuman assumed the day-to-day operations of the company, drawing on his years of experience in the industry.(ECF No. 102, at 64:2-10; 97:21–2...