Healthcare Real Estate Partners, LLC v. Summit Healthcare REIT, Inc. (In re Healthcare Real Estate Partners, LLC
| Decision Date | 12 May 2023 |
| Docket Number | 15-11931 (CTG),Adv. Pro. 16-50981 (CTG) |
| Parties | In re: HEALTHCARE REAL ESTATE PARTNERS, LLC, Debtor. v. SUMMIT HEALTHCARE REIT, INC., et al., Defendants. HEALTHCARE REAL ESTATE PARTNERS, LLC, Plaintiff, |
| Court | U.S. Bankruptcy Court — District of Delaware |
The petitioning creditors filed an involuntary chapter 7 bankruptcy petition against the debtor for reasons that had nothing to do with recovering on their prepetition claims against the debtor. Instead, the petition was filed in order to invoke an ipso facto clause that would entitle the petitioning creditors, upon the entry of an order for relief, to terminate the debtor's role as manager of two investment funds. The bankruptcy case was ultimately dismissed, though not before the petitioning creditors succeeded in removing the debtor as the manager of the funds.
The debtor now moves for damages under § 303(i) of the Bankruptcy Code. As a statutory matter, attorneys' fees and costs may be awarded whenever an involuntary case is dismissed. The Court is satisfied that an award of reasonable fees and costs is appropriate under the circumstances of this case.
But how much? Based on its review of the submitted invoices, the Court concludes that $172,107.37 in fees and costs were incurred in connection with seeking dismissal of the bankruptcy case and the motion to recover fees under § 303(i)(1). The only reason most of those fees were incurred however, was because the debtor's general counsel negligently failed to pay attention to the involuntary petition when it was validly served. Indeed, the general counsel testified that he thought the petition was just another unpaid bill in a stack of papers on his desk that could wait until he was able to focus on it.
Had the debtor promptly retained counsel and responded to the petition, there can be little dispute that the case would have been promptly dismissed. The debtor agrees that the fees and costs, in that event, would not have exceeded $50,000. The Court further concludes that a reasonable award for the fees and costs associated with bringing the motion under § 303(i) () would not exceed $25,000. The debtor is accordingly entitled to recover $75,000 in reasonable fees and costs. The incremental fees incurred in excess of $75,000 are more attributable to the debtor's failure to respond than to the filing of the petition and therefore cannot be recovered under § 303(i)(1).
The debtor also seeks to recover damages under § 303(i)(2) for the lost profits it claims it would have earned but for the filing of the involuntary petition. Damages under this section are available only in cases in which the filing was in bad faith.
While the cases on the bad faith use of an involuntary petition set out a multi-factor balancing test, the question of bad faith presented here is an easy one. An involuntary bankruptcy case that is filed for any reason other than the creditors' desire to maximize creditors' recovery against the debtor's estate cannot be in good faith. This case was filed for the purpose of permitting the petitioning creditors and Summit Healthcare to invoke an ipso facto clause and thereby terminate the debtor's right to manage the funds.[1] That is not an appropriate use of the bankruptcy process. The debtor is therefore entitled to recover any damages that were caused by the filing. The question under § 303(i)(2) is whether the debtor suffered compensable damages.
On that issue, the record makes clear that the debtor's business was moribund at the time of the petition. While the debtor served as the manager of investment funds, it lacked the personnel or the expertise to perform that function. To be sure, filing an involuntary bankruptcy petition was the wrong way to wind down this defunct business. But that does not change the fact that the debtor's business was defunct and ought to have been wound down. It therefore suffered no compensable damages, beyond the associated attorneys' fees and costs, as a result of the bad faith filing.
In addition, the debtor seeks to recover punitive damages under § 303(i)(2) for the bad faith filing. This presents a close question, because while it ought to have been self-evident that filing an involuntary bankruptcy petition for the purposes of invoking an ipso facto clause was improper, neither the debtor's nor this Court's own research have identified a case that says so directly. This is now such a case. In the face of the relatively sparse guidance from the caselaw and the quite limited actual damages suffered however, this Court does not believe it necessary or appropriate to award punitive damages here.
The debtor also contends that it is entitled to damages under § 362(k) of the Bankruptcy Code for violation of the automatic stay - specifically, the termination of the debtor's right to serve as manager of the funds based on the entry of the order for relief in the bankruptcy case. Section 362(k) by its terms is limited to claims by "an individual injured by [a] willful violation of [the] stay."[2] While the majority view is that the term "individual" is limited to flesh-and-blood human beings, the Third Circuit has found that the statute nevertheless applies to a corporate debtor.[3] Whether it might make sense to reconsider that precedent in light of subsequent decisions from other courts is a matter committed to the sole discretion of the Third Circuit. That court's existing precedent is controlling here and permits the debtor to assert a damages claim for alleged violations of the automatic stay.
As an initial matter, there can be no question that the debtor's right to serve as manager of the funds - a position from which the debtor could potentially have derived economic benefit - was "property of the estate" within the meaning of § 541 as of the filing of the petition. The petitioning creditors argue that they did not violate the automatic stay because the entry of the order for relief by itself (rather than any action on their part) operated to terminate the debtor's management rights. If that were correct, there would be an argument that the defendants' subsequent actions to replace the debtor as manager and dissolve the funds did not implicate estate property and thus did not violate the automatic stay.
That argument turns, however, on the proposition that the ipso facto clause that would operate to terminate the debtor's management rights was enforceable notwithstanding § 541(c). To that end, the petitioning creditors argue that § 541(c) only operates to protect a debtor's economic interest in a limited liability company, not its rights to participate in governance. The caselaw on which the petitioning creditors rely for this proposition, however, is limited to the executory contract context, and involves a construction of language in § 365(e) that is absent in § 541(c). Accordingly, the ipso facto clause that would terminate the debtor's right to manage the funds was not enforceable. The debtor's management rights thus remained property of the estate notwithstanding the terms of the ipso facto clause. The subsequent actions that the petitioning creditors and Summit Healthcare took to replace the debtor as the manager of, and to dissolve, the funds therefore did violate the automatic stay.
Under § 362(k), a debtor is entitled to recover its costs and reasonable attorneys' fees incurred in prosecuting a claim for violation of the automatic stay. Debtor has submitted invoices demonstrating those fees and costs. Based upon the Court's assessment of those invoices, the Court concludes that the debtor's compensable damages for attorneys' fees and costs arising out of the stay violation are $517,723.76.
The debtor also contends that, had the debtor's management rights not been terminated, it would have earned profits, and that the loss of those profits are recoverable damages for the violation of the stay. The evidence to which the debtor points, however, is simply too speculative to support a damages award. In view of the evidence showing that the debtor lacked the capability to perform the basic responsibilities of a fund manager, there is no reason to believe that the debtor would have, but for the stay violation, earned profits from managing the funds.[4] Debtor's recovery for the violation of the automatic stay is thus limited to its fees and costs.
Cornerstone Ventures hired Kent Eikanas in 2012 and charged him with turning around its struggling real estate investment trust Cornerstone Core Properties. While the common shares of Cornerstone Core Properties were publicly held, the company was closely linked to the Cornerstone family of companies. Those connections included an advisory agreement with Cornerstone Realty and a joint venture with another Cornerstone entity.[5] Soon after Eikanas was hired, Cornerstone Core Properties changed its name to Summit Healthcare. Eikanas' task was to reposition Summit Healthcare, which had been focused on industrial real estate, to a new focus on senior housing facilities.[6] In addition to serving as president of Summit Healthcare, Eikanas also served as an officer of Cornerstone Ventures, and the president and sole director of Cornerstone Realty, the entity that served as advisor to Summit Healthcare.[7]
Summit Healthcare was the majority holder of a holding company. A separate Cornerstone entity was Summit Healthcare's joint venture partner and held a minority stake in the holding company. The holding company owned several special purpose entities.[8] Each of those special purpose entities, in turn, owned the underlying senior housing...
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