In re Boston Regional Medical Center, Inc., Bankruptcy No. 99-10860-CJK.

• Decision Date: 14 August 2003
• Docket Number: Adversary No. 00-1390.,Bankruptcy No. 99-10860-CJK.
• Citation: 298 B.R. 1
• Parties: In re BOSTON REGIONAL MEDICAL CENTER, INC., Debtor. Boston Regional Medical Center, Inc., Plaintiff, v. Hanson S. Reynolds and Gary Douglas Rose, in their capacities as Co-Trustees of the Elizabeth Krauss Revocable Trust, the Elizabeth Krauss Charitable Remainder Annuity Trust, and the Elizabeth Krauss 1998 Charitable Remainder Annuity Trust, and The Attorney General of the Commonwealth of Massachusetts, Defendants, and First Lutheran Church and the First Church of Christ, Scientist, Interveners.
• Court: U.S. Bankruptcy Court — District of Massachusetts

Page 1

298 B.R. 1

In re BOSTON REGIONAL MEDICAL CENTER, INC., Debtor Boston Regional Medical Center, Inc., Plaintiff, v. Hanson S. Reynolds and Gary Douglas Rose, in their capacities as Co-Trustees of the Elizabeth Krauss Revocable Trust, the Elizabeth Krauss Charitable Remainder Annuity Trust, and the Elizabeth Krauss 1998 Charitable Remainder Annuity Trust, and The Attorney General of the Commonwealth of Massachusetts, Defendants, and First Lutheran Church and the First Church of Christ, Scientist, Interveners.

Bankruptcy No. 99-10860-CJK.

Adversary No. 00-1390.

United States Bankruptcy Court, D. Massachusetts.

August 14, 2003.

COPYRIGHT MATERIAL OMITTED

Charles R. Bennet, Jr., Kathleen R. Downing, Boston, MA, for Plaintiff.

Robert B. Foster, Boston, MA, for Reynolds.

Lawrence K. McCarthy, Roxbury, MA, for Rose.

Deirdre Rosenberg, Johanna Soris, Boston, MA, for Attorney General of Comm. of MA.

Michael G. Gilleran, Boston, MA, for Interpleader First Lutheran Church.

Theodore E. Dinsmoor, William V. Sopp, Boston, MA, for Interpleader The First Church of Christ, Scientist.

PROPOSED FINDINGS OF FACT AND CONCLUSIONS OF LAW

CAROL J. KENNER, Bankruptcy Judge.

The principal issue presented by this adversary proceeding is whether, under Massachusetts law, a debtor charitable corporation that has permanently discontinued its charitable operations (in this case, the provision of medical services) and entered liquidation proceedings nonetheless remains qualified to receive a bequest intended for charitable purposes, where the bequest would be used to pay debts incurred earlier, in furtherance of the corporation's charitable mission. The Court concludes that the debtor corporation remains qualified to receive the bequest.

Elizabeth Krauss died on March 1, 1998, leaving to the Debtor, Boston Regional Medical Center, Inc. ("BRMC" or "the Debtor") through three testamentary trusts, a one-third interest in the residue of each trust. BRMC filed its petition under Chapter 11 of the Bankruptcy Code on February 4, 1999, and discontinued hospital operations within a few days thereafter. By its amended complaint in this adversary proceeding, the Debtor, acting through its liquidating agent and pursuant to its confirmed Chapter 11 plan, seeks an order directing Hanson S. Reynolds and Gary Douglas Rose, as co-trustees of the three trusts ("the Co-Trustees") to turnover to BRMC the funds representing its one-third interest in the residue of each trust.¹ In their answers, the Co-Trustees state that they have no position on whether BRMC is entitled to a distribution from the trusts. The other two residuary legatees/beneficiaries, The First Lutheran Church of Boston ("First Lutheran") and The First Church of Christ, Scientist ("the Christian Science Church"), as Interveners herein, oppose the request for turnover, taking the position that BRMC, by virtue of its financial difficulties and ultimate discontinuance of hospital operations, has, before the date of distribution, become unable to use the funds for a charitable purpose. First Lutheran has also filed a counterclaim against BRMC and the Co-Trustees² of the three Trusts, asking that the testamentary provisions of the Trusts be reformed to require that the bequest to BRMC be used "to provide a bed for indigent patients" as was required by the will that the Trusts replaced and purportedly followed, and for a determination that BRMC cannot receive the bequest as so modified because it can no longer provide a bed for indigent patients. The Court, having determined that it has jurisdiction only to enter proposed findings of fact and conclusions of law, now enters and submits the following proposed findings and conclusions to the District Court in accordance with 28 U.S.C. § 157(c)(1) and F.R.BANKR.P. 9033. For the reasons set forth below. the Court concludes that judgment should enter for BRMC on both the complaint and the counterclaim.

PROCEDURAL HISTORY

BRMC is a Massachusetts charitable corporation that, at all relevant times through the date of its bankruptcy filing, operated as an acute care hospital in Stoneham, Massachusetts. BRMC filed a petition under Chapter 11 of the Bankruptcy Code on February 4, 1999. Within days thereafter, it ceased providing medical care. In its bankruptcy case, BRMC later proposed and this Court confirmed a Joint Liquidating Plan of Reorganization pursuant to which all property of the bankruptcy estate was revested in BRMC³ and is to be liquidated for the benefit of creditors.

Elizabeth Krauss died on March 1, 1998, eleven months before BRMC's bankruptcy filing. Before her death, her court-appointed guardians, acting pursuant to authority obtained from the Massachusetts Probate Court, had transferred her assets into three trusts: the Elizabeth Krauss Revocable Trust ("the Revocable Trust"), the Elizabeth Krauss Charitable Remainder Annuity Trust ("the 1997 Charitable Trust"), and the Elizabeth Krauss 1998 Charitable Remainder Annuity Trust ("the 1998 Charitable Trust"). Each trust contained testamentary provisions under which, upon the death of Ms. Krauss, the trustees were to distribute the residue of each trust in equal shares to three charitable organizations: BRMC, First Lutheran, and the Christian Science Church. When Ms. Krauss died, the value of the Trusts' residues totaled approximately $3.6 million. Even before February 4, 1999, the date of the Debtor's bankruptcy filing, the Co-Trustees of the three trusts made partial distributions to First Lutheran and the Christian Science Church; no distribution has yet been made to BRMC, but the Co-Trustees have set aside in escrow an equal share to that received by the others, pending final resolution of this adversary proceeding.

Disconcertingly and without explanation, BRMC was given no notice that it might be entitled to a distribution from the three trusts until over two years after Ms. Krauss's death and sixteen months after the commencement of this bankruptcy case. Approximately fifteen months after BRMC filed its bankruptcy petition, one or both Interveners filed suit in the Massachusetts Probate Court, challenging and seeking a determination of BRMC's rights under the Trusts, but the Interveners failed first to seek relief in this Court from the automatic stay, or from the equivalent injunction in the Debtor's confirmed liquidating plan and in the order confirming it.⁴ The Interveners have failed to offer any satisfactory explanation for this. On June 16, 2000, after commencing the action, First Lutheran moved belatedly in the bankruptcy court for relief from the automatic stay to prosecute the action and to join BRMC as a party therein, but BRMC objected. The Court denied the motion, in effect requiring that the matter be adjudicated in the Bankruptcy Court.

Then, on August 17, 2000, BRMC filed the complaint commencing this adversary proceeding. The complaint, as amended, names three defendants: Hanson S. Reynolds and Gary Douglas Rose, in their capacities as co-trustees of the Revocable Trust, the 1997 Charitable Trust, and the 1998 Charitable Trust, and the Attorney General of the Commonwealth of Massachusetts. As against the Co-Trustees, the complaint states two counts: one for turnover of BRMC's one-third interest in the residue of each trust, and one for an accounting of the receipts and disbursements of each trust from the date of Ms. Krauss's death. The complaint seeks no relief against the Attorney General; he was joined by order of the Court, the Court having determined that he was a necessary party because the complaint seeks a determination as to the disposition of a gift to a public charity, and because the Interveners argue (in part) that the gift is subject to the equitable doctrine of cy pres. In separate answers, the Co-Trustees have stated that they are stake-holders only and have no position on whether BRMC qualifies for a distribution under each of the trusts. The Attorney General filed an answer to the amended complaint but has taken no position on the issues and has not otherwise participated in this adversary proceeding.

First Lutheran and the Christian Science Church moved to intervene in the adversary proceeding, and their motion was allowed.⁵ As Interveners, they filed answers to the amended complaint, taking the position that BRMC is not entitled to distributions from the Trusts because it can no longer use the distributions for the charitable purposes for which they were intended and therefore no longer qualifies as a charitable beneficiary under the three Trusts.

Later, and with leave of Court, First Lutheran filed a counterclaim in which the Christian Science Church has since joined. The counterclaim is asserted against BRMC and against the Co-Trustees of the three Trusts. It asks that the bequest to BRMC in each of the three Trusts be declared a nullity because it fails to require that the bequest be used "to provide a bed for indigent patients," as was required by the will of Elizabeth Krauss that the Trusts replaced and purportedly followed; and, in the alternative, the counterclaim asks that the Court (1) reform the bequests in the Trusts to incorporate the omitted requirement and (2) determine that BRMC cannot receive the bequest as so reformed because it can no longer provide a bed for indigent patients. BRMC answered the counterclaim, stating that it should be denied on its merits and interposing the affirmative defense of res judicata. Hanson Reynolds, as Co-Trustee of the three Trusts, also answered the counterclaim, stating that it should be denied on its merits and interposing the affirmative defense of res judicata. The other Co-Trustee, Gary Douglas Rose, has filed no answer to the counterclaim.

Before moving for leave to file a counterclaim, First Lutheran moved to dismiss the amended complaint for lack of subject-matter jurisdiction, and the Christian Science Church moved that the Court abstain under 28 U.S.C. § 1334(c)(1)...