In re Doctors Hosp. of Hyde Park, Inc.

• Decision Date: 02 March 2007
• Docket Number: Bankruptcy No. 00 B 11520.,Adversary No. 02 A 00363.
• Citation: 360 B.R. 787
• Parties: In re DOCTORS HOSPITAL OF HYDE PARK, INC., Debtor. Doctors Hospital of Hyde Park, Inc., Plaintiff, v. Dr. James H. Desnick, et al., Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

Page 787

360 B.R. 787

In re DOCTORS HOSPITAL OF HYDE PARK, INC., Debtor Doctors Hospital of Hyde Park, Inc., Plaintiff, v. Dr. James H. Desnick, et al., Defendants.

Bankruptcy No. 00 B 11520.

Adversary No. 02 A 00363.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

March 2, 2007.

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John E. Frey, Esq., John Costello, Esq., Scott A. Semenek, Esq., Jeffrey L. Gansberg, Esq., Wildman Harrold Allen & Dixon, Chicago, IL, Counsel for Debtor/Plaintiff/Trustee.

Kathryn. M. Gleason, Esq., Office of the U.S. Trustee, Chicago, IL.

Gus A. Paloian, Esq., Seyfarth, Shaw, Chicago, IL, for trustee.

Lewis T. Stevens, Esq., Michael Warner, Esq., Warner Stevens LLP, Fort Worth, TX, Howard L. Adelman, Esq., Adam P. Silverman, Esq., Adelman, Gettleman, Merens, Berish & Carter, Ltd., David T.B. Audley, Esq., Chapman and Cutler, Chicago, IL, Counsel for LaSalle Bank.

David J. Tecson, Esq., Michael N. Ripani, Esq., Chuhak & Tecson, P.C., Chicago, IL, Counsel for Michael Nelson.

James M. Witz, Esq., Frances Gecker, Esq., Freeborn & Peters, Chicago, IL, Counsel for Stephen Weinstein.

Jane B. McCullough, Esq., Greenburg Traurig PC, Chicago, IL, Counsel for Asset Securitization Corp. and Nomura Asset Capital Corp.

Robert D. Nachman, Esq., John L. Conlon, Esq., Schwartz, Cooper, Greenberger & Krauss, Chicago, IL, Counsel for James H. Desnick.

Margaret H. Weging, Esq., Oak Park, IL, Counsel for Richard Felbinger.

Neville N. Reid, Esq., Mayer Brown Rowe & Maw LLP, Chicago, IL, Counsel for Unsecured Creditors Committee.

Michael J. Kralovec, Esq., Joseph R. Lemersal, Esq., Sara J. Rowden, Esq., Nash, Lalich & Kralovec, Chicago, IL, Counsel for Robert Krasnow.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

JACK B. SCHMETTERER, Bankruptcy Judge.

This Adversary case relates to the Chapter 11 bankruptcy case filed by Chapter 11 Trustee for Debtor Doctors Hospital of Hyde Park, Inc. ("Doctors Hospital" or "Trustee"). The Adversary Complaint pleaded a total of twenty-eight Counts ("Complaint"). Three of the Counts pertain to Defendant LaSalle. Bank National Association, f/k/a LaSalle National Bank as Trustee for Certificate Holders of Asset Securitization Corporation Commercial Mortgage Pass-Through Certificates, Series 1997, D5, by and through its Servicer, Orix Capital Markets, LLC ("Trust" or the "LaSalle. Trust"), those Counts being VIII, IX, and X ("LaSalle Counts"). Separate trial of those Counts was ordered.

In Counts VIII, IX and X, Doctors Hospital asserted three claims against the Trust:

• Pursuant to Section 544 of the Bankruptcy Code and the Illinois Uniform Fraudulent Transfer Act, (a) to void the Guaranty, the Assignment, the Pledge and Security Agreement, and the Equity Pledge Agreement; (b) to recover all proceeds from the sale of hospital assets that formed the collateral associated with the Guaranty, Assignment, and pledges; and (c) pursuant to Section 550 of the Bankruptcy Code, to recover an amount equal to the aggregate payments on the Nomura Loan. (Count VIII)¹

• Pursuant to Section 544 and 550 of the Bankruptcy Code and the Illinois Uniform Fraudulent Transfer Act, (a) to void the Lease and (b) in any event, to recover payments made under the Lease to the extent that they exceed a fair market rental. (Count IX)

• Pursuant to Section 548 of the Bankruptcy Code, (a) to avoid transfers made pursuant to the Lease and (b) in any event, to recover those payments to the extent that they exceed a fair market rental. (Count X)

The Trust filed a Proof of Claim (the "Claim") in the related bankruptcy case in the amount of $60,139,317.04 based on obligations of Doctors Hospital arising from its guarantee of a loan. Count VIII of this Adversary proceeding and the Claim are factually related because resolution of issues in the Adversary proceeding impacts certain agreements between the LaSalle Trust and Doctors Hospital, agreements that are the underlying basis for the Claim. Therefore, Adversary allegations against the LaSalle Trust and objections to the Claim were consolidated for purposes of trial to the extent of some common issues, but the Claim itself is not to be fully resolved here.

Prior to trial, Doctors Hospital moved for "partial summary judgment" seeking a judgment limiting the Trust's Claim against the estate to the extent that it exceeds that value of its collateral. An Order and supporting Memorandum Opinion was entered on September 22, 2005, concluding that the Trust's Claim is limited to the value of its collateral.

Also prior to trial the Trust moved for summary judgment as to Counts VIII, IX, and X. An Order and supporting Memorandum Opinion was entered on October 17, 2005 denying the Trust's motion for summary judgment, but undisputed facts were set forth and deemed established for trial under Rule 56(d) Fed.R.Civ.P. [Rule 7056 Fed. R. Bankr.P.]

Following trial' and with agreement of the parties, final arguments were submitted in writing through filings of proposed Findings of Fact and Conclusions of Law. Supplemental briefs were filed as required. For reasons stated below and pursuant to separate judgment order to be entered, judgment will be entered in favor of Plaintiff in Counts IX and X based on payments of rent in excess of market value through July 7, 1998, and in favor of Defendant as to rent of payments after July 7, 1998; in favor of Plaintiff as to all remaining claims in Count VIII; and in favor of Defendant on the prayer in Count IX to void the Lease.

BACKGROUND

The Defendant Dr. Desnick purchased Doctors Hospital in 1992 for approximately $2.4 million. Ownership of the real estate and certain fixtures were titled in HPCH, a Delaware limited liability company. HPCH is owned 99% by HPCH Partners, L.P. and 1% by its managing member, HP Membership. Desnick owned 100% of HP Membership and a controlling interest in HPCH Partners, L.P. Doctors Hospital managed the hospital's business operations. Doctors Hospital entered into a lease to rent the hospital property located at 5800 South Stoney Island Avenue, Chicago, Illinois (the "Hospital Property") from HPCH for approximately $470,000 per month.

On August 28, 1997, Nomura Asset Capital Corporation ("Nomura") loaned $50 million to HPCH (the "Loan"). The Loan was secured by the hospital real estate, equipment, accounts receivable, and certain other intangibles relating to Doctors Hospital. As further security, HPCH assigned to Nomura all of its rights in the HPCH Lease with Doctors Hospital and the rental payments due thereunder. Doctors Hospital also executed a Guaranty and Suretyship Agreement (the "Guaranty") in favor of Nomura. Pursuant to the Guaranty, Doctors Hospital became surety to Nomura for the loan amount Nomura transferred all title, rights, and obligations relating to the Loan to Asset Securitization Corporation ("ASC"), which later assigned such rights and obligations to the LaSalle Trust.

The Loan was primarily intended for the benefit of Dr. Desnick.

PLEADINGS

Doctors Hospital filed its Chapter 11 bankruptcy petition on April 17, 2000. On March 28, 2001, the LaSalle Trust filed its Proof of Claim in the bankruptcy case in, the amount of $60,139,317.04 based on asserted obligations of Doctors Hospital arising from its guarantee of the Loan. Doctors Hospital filed this Adversary proceeding on April 15, 2002.

Counts VIII and IX assert that the Guaranty, an Operator Pledge and Security Agreement, the Equity Pledge Agreement ("Guaranty and Related Agreements"), and all rent payments made to HPCH pursuant to the HPCH Lease were fraudulent transfers under the Illinois Uniform Fraudulent Transfer Act, 740 ILLS 160/1 et seq., as made applicable under § 544 of the Bankruptcy Code. (Compl. 160-76.) Count X asserts that rental payments are also recoverable under § 548 of the Bankruptcy Code

The LaSalle Trust has six remaining affirmative defenses pursuant to an agreed order entered in this Court on October 3, 2005:(1) HPCH is the initial transferee of rent transfers, and the Trust is a good faith transferee for value without knowledge of the voidability of the rent transfers of HPCH, and as such, Plaintiff may not recover the transfers from the Trust (third affirmative defense); (2) the Complaint is barred because it fails to state a claim against the Trust upon which relief can be granted (fourth affirmative defense); (3) the Complaint is barred by failure of consideration and/or failure of conditions precedent (fifth affirmative defense); (4) the Complaint is barred by various principles and/or doctrines of estoppel including, but not limited to, the principals and/or doctrines of equitable estoppel (sixth affirmative defense); (5) the Complaint is barred by the principles or doctrines of in pari delicto or unclean hands (seventh affirmative defense); (6) and the Complaint is barred by virtue of the information, knowledge or belief, at all relevant times, held by the Debtor or the Estate (eighth affirmative defense). (Amend.Ans.1-10.)

The Debtor and the Trust filed an extensive stipulation of facts on August 18, 2005 and a joint supplemental stipulation of facts on March 13, 2006. The Memorandum Opinion entered on October 17, 2005 set forth undisputed facts that were deemed established for trial under Rule 56(d) Fed.R.Civ.P. [Rule 7056 Fed. R. Bankr.P.] In addition, both parties filed post-trial proposed findings of fact, to which each party responded. Those asserted facts not objected to are deemed undisputed. Undisputed facts from all of the foregoing sources are included in the Findings of Fact.

The following are major factual issues to be decided in reaching a decision:

1) Whether the Trust was the initial transferee of rents payments that Doctors Hospital made under the Lease.

2) Whether the $801,926 paid into the Cash Collateral Account on May 11, 1998 were made with funds owned by Doctors...