In re Cabrini Med. Ctr.
| Decision Date | 15 June 2012 |
| Docket Number | Case No. 09-14398 (ALG) |
| Parties | In re CABRINI MEDICAL CENTER, Debtor. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
Confirmed Case
MEMORANDUM OF DECISION DENYING RENEWEDMOTION FOR RELIEF FROM AUTOMATIC STAY
APPEARANCES:
TOGUT, SEGAL & SEGAL LLP
Attorneys for the Debtor
By: Frank A. Oswald, Esq.
Jonathan P. Ibsen, Esq.
PADUANO & WEINTRAUB LLP
By: Katherine B. Harrison, Esq.
KLESTADT & WINTERS
Attorneys for Missionary Sisters
of the Sacred Heart (New York)
By: Sean C. Southard, Esq.
Brendan M Scott, Esq.
In this matter, four of the Debtor's creditors request that the automatic stay be lifted in order to allow them to name the Debtor as a defendant in a state-court action seeking recovery from the Missionary Sisters of the Sacred Heart of Jesus (the "NY Missionary Sisters"), which allegedly controlled the Debtor. In that state-court action, the creditors allege that the Debtor wrongfully converted funds that were held for them and that the NY Missionary Sisters should be found liable for their damages on an alter ego theory. The creditors assert that they are not seeking any recovery from the Debtor but are required to name it as a defendant because the state court has ruled that the Debtor is a necessary party to that proceeding.
In prior proceedings involving these four creditors, this Court has determined that the creditors hold general unsecured claims for breach of contract as of the date of the bankruptcy petition. In light of the allegations of the state-court complaint, which specify no direct or particularized injury to the plaintiffs from the conduct of the NY Missionary Sisters, the alter ego causes of action at issue belong to the Debtor's estate and can only be pursued by the trustee or other entity authorized to assert estate-owned causes of action. Further, the causes of action at issue could not be abandoned to the creditors because they were settled in the context of an agreement that funded the debtor's plan of reorganization - a settlement agreement that was noticed to the creditors and to which the creditors did not object. The Court, therefore, must deny the motion to lift the stay as it seeks to pursue causes of action that have been settled and released.
The dispute underlying this renewed lift-stay motion concerns certain deferred compensation agreements (the "Deferred Compensation Plans") that were entered into by Cabrini Medical Center ("Cabrini" or the "Debtor") and four doctors it formerly employed, all of whom subsequently retired, two in 1980, one in 1995 and the other in 2000. Cabrini filed a chapter 11 petition under title 11 of the United States Code (the "Bankruptcy Code") on July 9, 2009 (the "Petition Date"), and on July 20, 2009 an Official Committee of Unsecured Creditors (the "Creditors' Committee") was formed. On the Petition Date, an action commenced by three of the retired doctors, as well as the widow of a fourth doctor (collectively, referred to as the "Mannucci Parties"), was pending in New York Supreme Court against Cabrini and other named defendants. In that action, the Mannucci Parties alleged that they were wrongfully deprived of certain compensation payments due under their Deferred Compensation Plans. The Mannucci Parties also filed proofs of claims in the Debtor's bankruptcy case on based upon the relief sought in that action.
The background facts are not substantially in dispute for purposes of this motion. Cabrini1 is a domestic not-for-profit corporation organized under the law of New York that was licensed to operate a hospital by the New York Department of Health but in March 2008 ceased hospital operations.2 As a not-for-profit hospital, Cabrini did not have any equity securityholders; however, it was sponsored by the Stella Maris Province of the Missionary Sisters of the Sacred Heart of Jesus, a religious institute of women of the Roman Catholic Church engaged in religious, charitable and educational activities. To further the purposes of this organization, corporations had been organized under the laws of several states, including one in Illinois (the "Illinois Missionary Sisters"), and one in New York (the NY Missionary Sisters, and together with the Illinois Missionary Sisters, the "Missionary Entities"). The state-court complaint filed by the Mannucci Parties, as amended (the "State Court Complaint"), asserts that the NY Missionary Sisters appointed and controlled the board of trustees of Cabrini, and that "the Missionary Sisters and Cabrini are inextricably intertwined." State Court Complaint at ¶ 25, Mannucci v. Missionary Sisters of the Sacred Heart of Jesus, No. 602284-08 (N.Y. Sup. Ct. Mar. 1, 2010), ECF No. 41.
At the time of its bankruptcy filing in 2009, the Debtor's most valuable assets were its real property holdings in the Gramercy section of Manhattan, which interests were sold during the course of the bankruptcy case to fund in part the Debtor's plan of reorganization. As of the Petition Date, after the claim of the first mortgage lien holder against the real property, the second and third largest secured claims were held by the Missionary Entities. The Illinois Missionary Sisters had secured claims against the Debtor of over $30 million, and the secured claims of the NY Missionary Sisters totaled $18.74 million; both claims were collateralized by mortgages on Cabrini's real and other property. In addition, the Missionary Entities held combined general unsecured claims against the Debtor of approximately $7.2 million. Moreover, the Illinois Missionary Sisters provided post-petition financing for the Debtor, and the Missionary Entities allowed the Debtor to use their cash collateral pursuant to §§ 363(c)(2) and363(e) of the Bankruptcy Code.3 In an Interim Order, dated July 30, 2009 (the "Financing Order"), which authorized, among other things, the post-petition financing and Debtor's use of cash collateral, the Debtor agreed, among other things, not to challenge the liens of the Missionary Entities, but it granted the Creditors' Committee and all other parties in interest standing and authority for 90 days to file, on behalf of the estate, a challenge to the liens or "otherwise [assert] any claims or causes of action" against the Missionary Entities.4
Thereafter, the Creditors' Committee filed a complaint in the Bankruptcy Court seeking, among other things, to recharacterize the Missionary Entities' secured and unsecured claims as contributions or grants, and to subordinate those claims to the claims of general unsecured creditors, as well as to set aside the related mortgages as fraudulent conveyances.5 The complaint filed by the Creditors' Committee contains many of the same allegations concerning the control exerted by the NY Missionary Sisters over Cabrini that the Mannucci Parties make in their state-court complaint.6 The Missionary Entities opposed the relief and, ultimately, after thesale of the Debtor's real property, a settlement was reached that provided for the Missionary Entities to transfer a portion of their secured claim for the benefit of unsecured creditors.
A motion (the "Settlement Motion"), dated September 22, 2010 [Docket Entry No. (hereinafter Doc. #) 423], was filed seeking approval of the settlement (the "Settlement Agreement") among the Creditors' Committee, the Missionary Entities and the Debtor. Paragraph 12 of the Settlement Agreement included a broad release in favor of the Missionary Entities that covered all potential claims that Cabrini, its estate or the Creditors' Committee, on behalf of the estate, might assert against the Missionary Entities.7 This broad release included any derivative actions that might be asserted in the interest of the unsecured creditors of Cabrini. In addition to this release, and as set forth in paragraph 9 of the Settlement Agreement, the parties contemplated that a plan of reorganization would be confirmed in the case, which would include an injunction (the "Plan Injunction") that would prevent any creditors who received a distribution under the plan "from pursuing claims against the [Missionary Entities] that arise out of the creditors' dealings with the Debtor." The releases given to the Missionary Entities were evidently the quid pro quo for their agreement to transfer a portion of their secured claim to fund a plan of reorganization for the benefit of all creditors.
The Settlement Motion, which was served on the Mannucci Parties, described the broad release contained in the Settlement Agreement [Settlement Motion, doc. # 423 at ¶ 17(i)]. A copy of that agreement was also attached to the Settlement Motion, and the Settlement Motion disclosed that a plan of reorganization was contemplated that would include the Plan Injunction. [Settlement Motion, doc. # 423 at ¶ 17(g)]. The Mannucci Parties did not object to the Settlement Agreement, and after certain modifications not relevant to this matter, the Settlement Agreement was approved on November 19, 2010 [doc. # 475]. Based upon the Settlement Agreement, Cabrini and the Creditors' Committee proposed a joint plan of reorganization and sought approval of a disclosure statement on December 21, 2010, which the Missionary Entities supported. As provided in the Settlement Agreement, the joint proposed plan of reorganization (the "Plan") included a Plan Injunction that precluded any creditor who received a distribution under the Plan from seeking further recovery from the Missionary Entities based upon any theory which stemmed from such holder's claim against the Debtor.
On December 22, 2010, the Debtor filed a motion seeking approval of the disclosure statement, to which the Mannucci Parties filed a timely objection, alleging that it inappropriately included as property of the estate, available to fund distributions, funds that rightfully belonged to them. In...
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