In re Dequeen General Hosp., Bankruptcy No. 4:04-bk-75927M.
| Decision Date | 20 October 2009 |
| Docket Number | Bankruptcy No. 4:04-bk-75927M.,Adversary No. 4:07-ap-07284. |
| Citation | 418 B.R. 289 |
| Parties | In re DEQUEEN GENERAL HOSPITAL. Streetman & Meeks, PLLC, Distribution Agent on behalf of DeQueen General Hospital, Inc. d/b/a DeQueen Regional Medical Center, Plaintiff v. JCE Healthcare Group, LLC, and DeQueen Medical Center, Inc., Defendants. |
| Court | U.S. Bankruptcy Court — Western District of Arkansas |
Isaac A. Scott, Jr., Kimberly Wood Tucker, Wright, Lindsey & Jennings, Little Rock, AR, for Plaintiff.
Richard C. Downing, Attorney at Law, Little Rock, AR, for Defendants.
On September 3, 2004, DeQueen General Hospital d/b/a DeQueen Regional Medical Center (Debtor) filed a voluntary petition for relief under the provisions of Chapter 11. On July 10, 2007, Streetman & Meeks, PLLC (Plaintiff), as distribution agent on behalf of the Debtor filed this adversary proceeding against JCE Healthcare Group, LLC (JCE) and DeQueen Medical Center, Inc. (DMC) (collectively known as the Defendants), alleging numerous counts asking for a variety of relief arising out of the sale of assets from the Debtor to JCE.
The allegations in the complaint are lengthy and complex. Count I asks for a turnover of property of the estate pursuant to 11 U.S.C. § 542 and for an accounting and pre-judgment interest on all funds recovered.
Count II asks for damages, both compensatory and punitive, for breach of fiduciary duty owed by Defendants to Plaintiff.
Count III asks for judgment for conversion and punitive damages.
Count IV asks for judgment for fraudulent concealment, fraud, deceit, and punitive damages.
Count V asks for damages for breach of contract for delay in closing the sale.
Count VI asks for damages, attorney's fees, costs and expenses for breach of contract.
Finally, Count VII asks that any claim asserted in this case by the Defendants be equitably subordinated pursuant to 11 U.S.C. § 510.
The Defendants, both represented by the same counsel, filed a timely answer to the complaint denying the material allegations asking for relief and pleaded in the alternative, and by way of counterclaim, a contractual right of indemnity pursuant to the agreements involved in the controversy.
Trial on the merits was conducted on October sixth, seventh, and eighth of 2008, in Texarkana, Arkansas. By agreement of the parties the record was reopened and an additional hearing was held in Little Rock, Arkansas, on May 28, 2009.
The proceeding before the Court is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(E) & (O) and the Court has jurisdiction to enter a final judgment in this case. The following shall constitute the Court's findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.
The events with which this opinion is concerned will be discussed in considerable detail and are complicated. The following is a brief summary. The Debtor filed for relief under the provisions of Chapter 11 of the United States Bankruptcy Code. The Debtor was interested in selling its assets, which consisted of an operating, not-for-profit hospital located in DeQueen, Arkansas, to DMC. Also prior to the sale, the Debtor hired JCE to manage the hospital operations for a fee of $15,000.00 per month beginning in December 2004. DMC was formed by the owner of JCE.
Negotiations were conducted by the Debtor, JCE, and an active unsecured creditors committee represented by counsel. In early 2005, an agreement in general was reached for the sale of the Debtor's assets for $3,500,000.00 to the Defendants. A plan of liquidation was confirmed on June 9, 2005. Several attempts were made to close the sale, but the closing was postponed by agreement of the parties for reasons hereinafter discussed. The closing occurred in September of 2005, although the actual date of closing is in dispute.
When the sale was closed, the sale proceeds were distributed first by a title company and then by JCE, as manager of the Debtor. After deducting closing costs and other disbursements and after paying post-petition accounts payable, the balance of the sale proceeds were paid by JCE to the Plaintiff, for distribution to pre-petition unsecured creditors. (Pl. Ex. 18a.)
The amount paid by JCE to the Plaintiff was substantially less than was estimated by the plan and the disclosure statement. Efforts were made by the Plaintiff and JCE to account for the sale proceeds and the perceived shortfall but the issues were not resolved satisfactorily to the Plaintiff. This adversary proceeding was filed in July 2007. At the conclusion of the hearing in Texarkana, Arkansas, the Court ordered JCE to hire an independent CPA, to be agreed to by the parties, to prepare an accounting of the sale proceeds. Subsequently, a CPA was hired, and a copy of the his accounting was furnished to the parties and to the Court. Both parties have filed briefs supporting their respective positions.
The record contains voluminous documents, the most important of which are the confirmed plan of reorganization (Pl. Ex. 2), the asset purchase agreement (Pl. Ex. 8), the disclosure statement (Pl. Ex. 3), and the accounting prepared by the independent accountant (Pl. Ex. 70).
The Debtor was a Debtor-In-Possession operating the business of a hospital in DeQueen, Arkansas, from September 3, 2004, until the sale of all of the assets to DMC. JCE was, at all relevant times, the manager of the Debtor. The day-to-day operations were still handled by the employees of the Debtor but under the supervision of JCE. To make matters more complicated, John Matheson (Matheson) is the 70% owner of JCE and Vicky Kelly (Kelly) is JCE's President and CFO. (Tr. at 707 & 733.) Matheson and his wife own 80% of DMC and Matheson, Matheson's wife, and Kelly serve on DMC's board of directors. (Tr. at 733.)
The Debtor determined to sell its assets to DMC through the medium of a liquidating Chapter 11 plan. According to the petition, the Debtor owed pre-petition unsecured creditors the sum of $5,765,821.67. (Pl. Ex. 1.) There were no unsecured priority claims scheduled. (Pl. Ex. 1.) As of the date of the proposed sale, the unpaid claims included a pre-petition secured claim in favor of First National Bank of DeQueen in the sum of $998,954.35, administrative claims which included attorney's fees for counsel for the Debtor (Wetzel), counsel for the creditors committee (Wright, Lyndsey & Jennings LLP), unpaid management fees due Quorum Health and/or JCE, unpaid post-petition claims of employees, unpaid wage benefit claims of employees, and unpaid claims of vendors for services or supplies incurred during the Debtor's operation while operating in Chapter 11. (Pl. Ex. 18a & 70.)
In bankruptcy, different kinds of claims receive different treatment under a plan of reorganization and claims are paid in a priority set by bankruptcy law.1 For instance, the secured claim of First National Bank of DeQueen must be paid the present value of its secured claim in full. See 11 U.S.C. § 1129(b)(2)(A)(i) and 11 U.S.C. § 506(b). The unpaid claims for post-petition attorney's fees, management fees, post-petition wage and benefit claims, and unpaid unsecured post-petition vendor's claims are paid in full upon confirmation as administrative claims. 11 U.S.C. § 1129(a)(9)(A); 11 U.S.C. § 507(a)(1); 11 U.S.C. § 503(b)(1)(A). Pre-petition wage claims and benefit claims are entitled to a priority status and paid up to a maximum of $4,925.00 per claim after payment of secured claims and after payment of administrative claims if any distribution is available after payment of all senior claims. See 11 U.S.C. § 507(a)(3)(4) and 11 U.S.C. § 1129(a)(9)(B).
The Plaintiff, as stated previously, is the distribution agent created by the plan of reorganization. He is the agent of the Debtor and his duties are set forth in the plan and they are generally to distribute the remaining assets of the Debtor in the priorities set out in the Bankruptcy Code.
The asset purchase agreement was between the Debtor as Seller and DMC as Buyer and it provided that the closing shall take place in Little Rock, Arkansas, at 10:00 a.m. local time, ten days after the order approving the sale is approved by the Court. (Pl. Ex. 8, ¶ 2.1.) The agreement also provides that the closing date may occur at such other time and place as the parties might designate in writing. (Pl. Ex. 8, ¶ 2.1.) The order approving the sale was entered on March 21, 2005. (Pl. Ex. 9.)
John Matheson, the majority owner of the Defendants, testified that the delay was occasioned because his original loan was a bridge loan for just over a three-year period, and he found more desirable financing guaranteed by agencies of the United States. The new loan was a non-recourse loan and the payments were $30,000.00 a month as opposed to $108,000.00 per month for the bridge loan. (Tr. at 740-741.) This took time to get approved. Matheson said the Debtor agreed to extend the due date. (Tr. at 741-742.) The agreement to continue the date was also confirmed by the deposition testimony of Wetzel, counsel for the Debtor. (Tr. at 601-603.)
Jay Bunyard (Bunyard), who was chairman of the Debtor's board of directors, explained that the closing was first held up because of a lack of approval of funding for DMC. (Tr. at 440 & 442.) He said the closing was first set for March 31, 2005, then reset for June 30, 2005, but funding was still not approved. (Tr. at 448.) Once the funding was set, it was agreed to set the closing date at September 30, 2005. (Tr. at 442.) In fact, there is no evidence whatsoever in the record that indicates that DMC and the Debtor did not agree to extend the date of the closing.
Bunyard testified that September 30, 2005, fell on Saturday so the closing was to take place on...
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