Gus A. Paloian, Chapter 11 Tr. of Doctors Hosp. of Hyde Park, Inc. v. Lasalle Bank Nat'Lass'N (In re Doctors Hosp. of Hyde Park, Inc.)

Citation507 B.R. 558
Decision Date04 October 2013
Docket NumberAdversary No. 02 A 00363.,Bankruptcy No. 00 B 11520.
PartiesIn re DOCTORS HOSPITAL OF HYDE PARK, INC., Debtor. Gus A. Paloian, Chapter 11 Trustee of Doctors Hospital of Hyde Park, Inc., Plaintiff, v. LaSalle Bank National Association, f/k/a LaSalle National Bank, as Trustee for Certificate Holders of Asset Securitization Corporation Commercial Pass–Through Certificates, Series 1997, D5, by and through its servicer, Orix Capital Markets, LLC, Defendant.
CourtUnited States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois

OPINION TEXT STARTS HERE

Recognized as Unconstitutional

11 U.S.C.A. § 157(b)(2)(C)

John Costello, Esq., Scott A. Semenek, Jeffrey L. Gansberg, Esq., Yeny Estrada, Edwards Wildman Palmer LLP, Chicago, IL, for Debtor/Plaintiff/Trustee.

Kathryn M. Gleason, Esq., Office of the U.S. Trustee, Chicago, IL.

Lewis T. Stevens, Esq., Michael Warner, Esq., Simon Warner & Doby LLP, Fort Worth, TX, Howard A. Adelman, Esq., Adam P. Silverman, Esq., Adelman, Gettleman, Merens, Berish & Carter, Ltd., Chicago, IL, for LaSalle Bank.

N. Neville Reid, Fox, Hefter, Swibel, Levin & Carroll LLP, Chicago, IL, for Unsecured Creditors Committee.

James M. Witz, Esq., Frances Gecker, Esq., Freeborn & Peters, Chicago, IL, for Stephen Weinstein.

David T.B. Audley, Esq., Michael T. Benz, Esq., Richard Wohlleber, Chapman and Cutler LLP, Chicago, IL, for LaSalle Bank N.A. as Trustee for Certificates–Holders of Asset Securitization Corp. Commercial Mortgage Pass–Through Certificates, Series 1997 D5, and through its servicer, ORIX Capital Markets, LLC.

Nancy A. Peterman, Esq., Jane B. McCullough, Esq., Kimberly M. DeShano, Esq., Greenburg Traurig, PC, Chicago, IL, for Asset Securitization Corp. and Nomura Asset Capital Corp.

Stacy J. Flanigan, Winston & Strawn LLP, Chicago, IL, for Dan K. Webb.

COUNTS VIII, IX AND X AMENDED FINDINGS OF FACT AND CONCLUSIONS OF LAW (MODIFYING PARTS I AND II)

JACK B. SCHMETTERER, Bankruptcy Judge.

This proceeding was tried on remand after appeals to the Seventh Circuit by both parties from a judgment entered following the first trial. The parties rested after further trial on issues remanded, and final arguments were filed in writing. Findings of Fact and Conclusions of Law are hereby made and entered in the following parts:

I.

Introduction and Summary of Findings and Conclusions

II.

Authority to Enter Final Judgment

585

III.

Findings of Fact as to Solvency Issues

592

IV.

Conclusions of Law as to Solvency Issues

625

V.

Findings of Fact as to Bankruptcy Remote Entity Issues

664

VI.

Conclusions of Law as to Bankruptcy Remote Entity Issues

694

Conclusions: Entry of Judgment on Each Count for Defendant
722

I.

INTRODUCTION AND SUMMARY OF FINDINGS AND CONCLUSIONS

Plaintiff seeks to recover allegedly fraudulent transfers made to Defendant during the period from October 1, 1997 through the date of the bankruptcy filing by the Debtor on April 17, 2000, Doctors Hospital of Hyde Park, Inc. The fraudulent transfers were said to have consisted of payments of rent, to the extent that they exceeded fair market value, during a period of time when Doctors Hospital was insolvent. It is claimed that the rent came from the Debtor, while the defense asserts that it mostly came from a separate entity (referred to below as the “bankruptcy remote entity”)

After a first trial, it was held that Plaintiff had proved insolvency during the entire period from August 1997 to April 2000, but judgment was entered only as to fraudulent transfers of rent that Doctors Hospital made directly to Defendant before July 1998. As to the transfers after that date, it was determined that the transfers were not made with assets of the Hospital, but were paid with assets of an entity named MMA Funding, LLC. MMA Funding, LLC was created in 1997 to act as a special purpose borrower on a loan from Daiwa–Healthco–2 LLC secured by Doctors Hospital's accounts receivable, an entity whose assets were asserted to be “bankruptcy remote,” i.e., intended not to be administered in a possible Doctors Hospital bankruptcy.

Doctors Hospital of Hyde Park, Inc. (the “Hospital”) filed its related chapter 11 Bankruptcy case on April 17, 2000. On March 28, 2001, LaSalle filed its proof of claim in the bankruptcy case in the amount of $60,139,317.04 based on asserted obligations of Doctors Hospital arising from its guarantee of a loan. Doctors Hospital filed this above titled adversary complaint pleading twenty-eight counts against a number of individuals and entities, Dr. James Desnick, and many others.1 However, Counts VIII, IX, and X of the adversary complaint asserted claims only against LaSalle Bank National Association, f/k/a LaSalle National Bank as trustee for certain asset certificate-holders of Asset Securitization Corporation Commercial Mortgage Pass–Through Certificates, Series 1997, D5 (LaSalle). Those counts serve as a counterclaim to the LaSalle claim. On April 22, 2004, Gus A. Paloian (the Trustee) was appointed as chapter 11 Trustee for Doctors Hospital, and he pursued those counts.

Counts VIII, IX, and X of this adversary complaint against LaSalle seek (1) to void as fraudulent transfers a guaranty and related security agreement that Doctors Hospital made in connection with a loan from LaSalle's predecessor, Nomura Asset Capital Corporation, to Doctors Hospital's landlord (Count VIII) and (2) to void a lease held by Defendant as Nomura's assignee or to recover as fraudulent transfers payments of rent that Doctors Hospital had made to LaSalle in excess of the property's fair market rental value (Counts IX and X). Count X was brought pursuant to 11 U.S.C. § 548(a)(1)(B). Counts VIII and IX were brought pursuant to the Illinois Uniform Fraudulent Transfer Act (“IUFTA”) and 11 U.S.C. § 544(b)(1), which is asserted to permit the trustee to avoid a transfer of the debtor's property under applicable non-bankruptcy law. Those three counts were consolidated for trial.

The first trial (“First Trial”) on the consolidated counts originally took place in 2006. Findings of Fact and Conclusions of Law were made and entered and a Final Judgment Order entered. Doctors Hosp. of Hyde Park Inc. v. Desnick, et al. (In re Doctors Hosp. of Hyde Park, Inc.), 360 B.R. 787 (Bankr.N.D.Ill.2007)(“Initial Opinion”). It was held therein that rental payments made after July 7, 1998 were not fraudulent transfers because they were not made with assets of Doctors Hospital. Id. at 853. LaSalle's request to void the lease pursuant to which rental payments were made was denied in the Judgment and that ruling was not appealed. For rental payments made prior to July 7, 1998, the Trustee was awarded damages to the extent that rental payments were found to have exceeded fair market value plus interest, resulting in judgment in favor of the Trustee allowing his counterclaim in the amount of $4,342,238.43. Both parties filed motions to alter or amend the judgment, which were denied in Additional Findings of Fact and Conclusions of Law dated July 25, 2007. In re Doctors Hosp. of Hyde Park, Inc., 373 B.R. 53 (Bankr.N.D.Ill.2007). Separate appeals were filed and were consolidated by a District Court Judge. That Judge affirmed all Findings and Conclusions. LaSalle N.A. Bank v. Paloian, 406 B.R. 299, 366 (N.D.Ill.2009). Appeal to the Seventh Circuit Court of Appeals followed.

Remanded Issues and Further Second Trial

The proceeding is now before this court on remand from the Court of Appeals for the Seventh Circuit. Paloian v. LaSalle Bank, N.A., 619 F.3d 688 (7th Cir.2010) (the “Remand Opinion”). Many adjudications in this Court's Initial Opinion made after the First Trial were accepted by the Remand Opinion and are deemed to continue and apply herein. As stated by the Remand Opinion, issues “pretermitted” by that Opinion have been decided, are law of the case, and are not within the scope of remand. Id. at 692.2 At issue following remand is the holding following the First Trial that post-July 1998 rental payments were not fraudulent transfers. The remand order sought further consideration of two issues: First, whether Doctors Hospital was insolvent at any time before filing for bankruptcy. Solvency is a significant issue because if the Hospital was not insolvent when the payments in issue took place, then Trustee Paloian may not recover as fraudulent transfers under 11 U.S.C. §§ 544(b)(1) and 548(a)(1)(B) the payments that were made to LaSalle even if those payments were found to have been made from property of the Debtor. Second, whether there was a true sale to MMA Funding, LLC of accounts receivable from the Hospital, and that issue further involves the question whether MMA Funding, LLC was in fact an actual business entity and not a part, department, or function of the Debtor. Paloian, 619 F.3d at 696. The status of MMA Funding, LLC is therefore relevant to Counts IX and X of the adversary complaint, because if it was not a true business entity dealing with its own funds, then payments made by it to LaSalle were from the Hospital's assets and might be recoverable by the Trustee.

All evidence introduced at the original trial was re-offered at the remand trial and admitted without objection. Additional evidence and stipulations were approved and admitted. Pursuant thereto, the following Findings of Fact and Conclusions of Law are made and entered.

Undisputed Background Facts
A. Parties and Related Entities

Doctors Hospital of Hyde Park, Inc. was an Illinois Subchapter–S corporation that had its principal place of business at 5800 South Stony Island Avenue, Chicago, Illinois. From approximately August 24, 1992 until April 17, 2000, it was owned and controlled by Dr. James Desnick. (Jt. Ex. 202 ¶ 1) 3

James Desnick was, at all relevant times, the sole shareholder and director of Doctors Hospital. (Jt. Ex. 202 ¶ 2)

Daiwa Healthco–2 LLC (“Daiwa”) is a Delaware limited liability company with its place of business in New York City, New York. (Jt. Ex. 202 ¶ 3)

HPCH LLC (“HPCH”) was a Delaware limited liability company...

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