In re Chicago Lutheran Hosp. Ass'n
| Decision Date | 20 July 1988 |
| Docket Number | Bankruptcy No. 87 B 970. |
| Citation | 89 BR 719 |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
| Parties | In re CHICAGO LUTHERAN HOSPITAL ASSOCIATION, d/b/a Walther Memorial Hospital, Debtor. |
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Daniel M. Pelliccioni, Michael L. Molinaro, Katten, Muchin & Zavis, Chicago, Ill., for debtor.
Thomas E. Raleigh, Raleigh & Helms, Chicago, Ill., Trustee.
James H. Sprayregen, Lord, Bissell & Brook, Chicago, Ill., for Unsecured Creditors Committee.
James A. Chatz, Antonow & Fink, Chicago, Ill., amicus curiae.
John H. Mahoney, Associate Regional Counsel, Chicago, Ill., for HUD.
AMENDED MEMORANDUM, OPINION & ORDER
This matter is before the Court on the application of Katten, Muchin & Zavis, ("Katten") attorneys for the Chapter 11 debtor, Chicago Lutheran Hospital Association d/b/a Walther Memorial Hospital, ("debtor") for the allowance of interim compensation and reimbursement of expenses, on the application of Lord, Bissell & Brook for final compensation for services rendered as counsel to the official unsecured creditors' committee in this case, the claim of the United States of a prior lien in the proceeds of the medical malpractice fund paid to Katten as a retainer, and the motion of Katten for leave to supplement its fee application.1
The debtor operated a 212 bed not-for-profit hospital in an economically-disadvantaged area of Chicago's inner city. The debtor served primarily low income and elderly patients. On November 1, 1978, the debtor signed a note and mortgage in the amount of $9,013,700.00 in favor of BMFC, Inc. ("BMFC"). The mortgage was on the main hospital building and some, but not all of several other parcels of realty owned by the debtor. The debtor's obligation to BMFC was guaranteed by the United States Department of Housing and Urban Development ("HUD") and was further secured by a security agreement granting BMFC an interest in the debtor's personal property, including its accounts receivable, and the cash and non-cash proceeds of such collateral. Subsequently, BMFC assigned all of its rights to RIHT Mortgage Service Corporation ("RIHT"). On May 22, 1987, RIHT assigned its interest in the note, the mortgage, and the security agreement to HUD, which is now the debtor's major secured creditor. In fact, it appears at this point that all of the debtor's remaining assets are subject to HUD's lien or that of the Internal Revenue Service ("IRS") except, perhaps, the malpractice fund described below.2
Very few of the debtor's patients carried insurance coverage. Accordingly, the debtor received most of its patient reserve through the Medicare and Medicaid programs. The debtor began to experience financial losses in 1983, attributable in part to management's inability to adjust to reduced reimbursements under these and other insurance programs. Specifically, the debtor experienced losses of $390,499.00 in 1983; $2,315,286.00 in 1984; $1,920,914.00 in 1985; and $3,363,999.00 in 1986.
On January 14, 1987, the debtor withdrew money from its self-insured medical malpractice trust account maintained at Harris Trust & Savings Bank ("Harris Bank") in order to pay some of its debts and to retain professionals for its forthcoming Chapter 11 case. That account contained $673,238.18 before total funds of $475,238.18 were disbursed as follows:
$150,000.00 to the IRS pursuant to an installment
agreement dated January 7, 1987
$ 75,000.00 to debtor's operating account at the Harris
Bank
$ 842.75 to Harris Bank as a Trustee's fee
$249,395.43 transferred to debtor's new operating account
at American National Bank &
Trust Company of Chicago ("American
National")
At the close of business on January 14, 1987, the debtor's malpractice trust account had been reduced to some $198,000.00. That same day, the debtor paid $90,500.00 from its newly-created operating account at American National to the law firm of Katten as a retainer for Katten's services to be rendered as attorney for the debtor in a soon to be filed Chapter 11 case.
At that time, the debtor anticipated further negative cash flow of $329,006.00 in February, 1987 and $362,509.00 in March, 1987. In light of its gloomy prospects, the debtor filed a Chapter 11 petition on January 22, 1987, and continued to operate its business and manage its properties as a debtor-in-possession until March 20, 1987. On January 28, 1987, the debtor was authorized to retain Katten as its attorney in the Chapter 11 case on a general retainer with compensation to be paid pursuant to further orders of this Court.
Shortly after filing its Chapter 11 petition, the debtor requested the use of the funds in a sinking fund which had been established prepetition in connection with RIHT's mortgage. The debtor claimed that if it were allowed to use the money in the sinking fund to continue its operations it would have a positive cash flow by April 1987. The sinking fund was clearly part of HUD's collateral and thus was cash collateral. On February 16, 1987, this Court, over the objections of various creditors, authorized the debtor to use collections of accounts receivable and $300,000 of the sinking fund in order to keep the hospital in operation as an on-going entity in anticipation of a firm offer from a bona-fide purchaser for the hospital. In retrospect, that decision may not have been the wisest this Court has ever made. The debtor continued to lose copious amounts of money in its operations and none of the offers made for the hospital approached adequacy, i.e. no feasible offer was ever made for the hospital which came close to satisfying the HUD debt much less offering anything for unsecured creditors. No feasible plan was proposed by either the debtor or any plan proponent to assume the obligation to HUD, maintain the hospital operations and deal with the claims of the IRS and the debtor's other creditors. In short, the Chapter 11 case failed and failed miserably. By mid-March the debtor had lost some $700,000 of HUD's collateral in its postpetition operations during its futile reorganization efforts.3 On March 16, 1987, this Court denied the debtor's emergency motion to use further cash collateral. Shortly thereafter this Court ordered the United States Trustee to appoint a Chapter 11 trustee in order to take the debtor out of possession of the hospital. Thomas E. Raleigh was appointed trustee and was charged with the quick and orderly shutdown of the hospital, which was accomplished by March 27, 1987.
On July 5, 1987, after extensive advertising, the trustee conducted an auction sale of certain remaining assets of the debtor's estate. The main hospital building, its equipment and three parking lots were purchased by HUD by bidding in $2,063,000 of its mortgage. The trustee continues to negotiate the sale of the hospital on behalf of HUD.4
On March 19, 1987, the Official Committee of Unsecured Creditors ("Creditors' Committee") filed a motion to obtain compensation and expenses for its attorneys, Lord, Bissell & Brook, ("LB & B") pursuant to section 506(c) of the Bankruptcy Code. The Creditors' Committee claimed that the secured creditors, including HUD, benefitted from LB & B's services which resulted in the continued operation of the hospital, allowing the debtor to preserve its going concern value.
On August 14, 1987, Katten filed its initial application for allowance of interim compensation in the amount of $89,477.50 for services rendered from January 22, 1987 through June 30, 1987 and $9,688.34 for reimbursement of costs incurred during that period. Katten has since filed a supplemental application seeking $14,501.00 for services rendered from July 1, 1987 through December 31, 1987, and an additional $220.90 in reimbursement of costs incurred during the same period, bringing the total requested fees and expenses to $113,887.74. Katten supports its applications with a breakdown of all services rendered listing time for 15 attorneys, five paralegals and one law clerk, for a total of 836.90 hours. Katten requests that any compensation and reimbursement it might be allowed be paid from the $90,500 unused portion of the prepetition retainer it received from the debtor's medical malpractice fund.5 To the extent that the retainer proves inadequate to pay Katten in full for its services and expenses, Katten requests that it be paid out of the secured lenders' collateral under 11 U.S.C. ? 506(c), asserting that Katten's representation of the debtor benefitted HUD and IRS.
The secured creditors, HUD and IRS, and the trustee, have each filed their objections to the payment of compensation and expenses to Katten from the collateral of the secured creditors pursuant to 11 U.S.C. 506(c).6 HUD further objects to Katten's application of Katten's retainer to any fees and expenses allowed, claiming that it stems from a misappropriation of the medical malpractice trust account by the debtor. HUD contends that the malpractice fund was funded almost entirely with proceeds of the debtor's accounts receivable, all of which were subject to HUD's security interest. Thus, as HUD sees it, it had a lien in the malpractice fund under section 9-306 of the Illinois Uniform Commercial Code, Ill.Rev.Stat. ch. 26, ? 9-306 (1987). Accordingly, HUD contends that the prepetition retainer Katten received is subject to HUD's prior lien and cannot be used to pay attorneys' fees or other costs of administration in the Chapter 11 case without satisfaction of the requirements of 11 U.S.C. ? 506(c). Finally, HUD contends that even if Katten is entitled to compensation either under 11 U.S.C. ? 506 or from the retainer, the amounts requested by Katten are unreasonable and should be significantly reduced.7
The debtor is not the only inner-city not-for-profit hospital to file ...
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