In re Eldercare Properties Ltd.
| Decision Date | 13 May 2009 |
| Docket Number | No. 08-40244.,No. 07-41057.,07-41057.,08-40244. |
| Citation | 568 F.3d 506 |
| Parties | In the Matter of: ELDERCARE PROPERTIES LTD., Debtor. Valley Educational Foundation, Inc., Appellant, v. Eldercare Properties Ltd., Appellee. In the Matter of: Eldercare Properties Ltd., Debtor. Eldercare Properties Ltd., Appellant, v. Valley Educational Foundation, Inc., Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Leslie Sara Hyman, Cox, Smith, Matthews, San Antonio, TX, Zachery Z. Annable, George H. Tarpley (argued), Cox, Smith, Matthews, Dallas, TX, for Valley Educational Found., Inc.
Shelby A. Jordan (argued), Jordan, Hyden, Womble, Culbreth & Holzer, Corpus Christiu, TX, Lance Alan Kirby, Jones, Galligan, Key & Lozano, Weslaco, TX, Elana Sari Einhorn, Deborah G. Hankinson, Hankinson, Levinger, LLP, Dallas, TX, Michael J. Urbis, Jordan, Hyden, Womble & Culbreth, Brownsville, TX, for Eldercare Properties, Ltd.
Appeals from the United States District Court for the Southern District of Texas.
Before O'CONNOR, Associate Justice (Ret.),* and WIENER and STEWART, Circuit Judges.
These consolidated appeals concern the vitality of the lease of a nursing home facility, Valley Grand Manor. The lessor, Valley Educational Foundation ("VEF"), argues that it validly terminated the lease in June 2005, before the lease's primary term expired. It also argues that if the lease survived the attempted termination, the lessee, ElderCare Properties Ltd. ("ElderCare"), failed effectively to exercise its option to renew the lease for an additional five-year term and that the lease consequently expired in December 2006. ElderCare argues that VEF never effectively terminated the lease. As to its failure strictly to comply with the lease's renewal terms, ElderCare contends that Texas common law principles of equitable intervention render its renewal effective.
The dispute has unfolded in the course of ElderCare's Chapter 11 bankruptcy. The issue whether the lease was validly terminated arose when ElderCare's bankruptcy estate moved to assume the lease in order to reorganize for the sole purpose of continuing to operate the nursing home. The United States Bankruptcy Court for the Southern District of Texas sided with ElderCare and allowed it to assume the lease, concluding that the lease had not been terminated. The court also ordered the parties to mediate certain ongoing lease terms. While the mediation process unfolded, ElderCare failed to provide timely notice of its intent to renew the lease, and VEF later sought to evict ElderCare, arguing that the lease had expired while the parties were pursuing mediation. Again the Bankruptcy Court sided with ElderCare, invoking Texas common law principles of equitable intervention to excuse ElderCare's technical omission. The United States District Court for the Southern District of Texas affirmed the former conclusion, but reversed the latter. It held: (I) the lease was not terminated in June 2005 and was thus properly assumed; and (ii) Texas principles of equity could not excuse ElderCare's failure to provide timely notice and as a result the lease expired in December 2006.
We agree with the Bankruptcy Court on both questions. We conclude that VEF failed to terminate the lease and that the lease was properly assumed by ElderCare's bankruptcy estate. We further conclude that principles of equitable intervention under Texas law are properly applied in the unique circumstances of this case in order to render effective ElderCare's five-year renewal.
VEF is a non-profit organization owned by the Seventh Day Adventist Church. When it ran into difficulty operating two nursing homes and a retirement facility that it owned, it asked Glen Hamel, a member of the Church and the owner of ElderCare, to join VEF's board and to offer help. With Hamel's assistance, VEF sold one of the nursing homes and the retirement facility. This dispute involves the remaining nursing home, Valley Grand Manor. Under a management contract, ElderCare took control of that facility's operations. In 1995, the parties went a step farther, consummating a lease of the facility to ElderCare. In light of the church's policy that its members should not litigate against one another, the lease agreement included several uncommon provisions requiring good faith negotiations and mediation in certain contexts.
In two provisions, the lease obliged ElderCare to maintain minimum insurance coverage. Section 6.07 set minimum coverage levels for "claims for personal injury or property damage under a policy of general public liability insurance." Section 6.08 did so for "claims arising out of malpractice." Section 6.16 of the lease also provided for renegotiation of the coverage minimums as follows:
In the event that either party shall at any time deem the limits of the personal injury or property damage public liability insurance then carried to be either excessive or insufficient, the parties shall endeavor to agree on the proper and reasonable limits for such insurance .... If the parties shall be unable to agree thereon, the proper and reasonable limits for such insurance to be carried shall be determined by a mediator jointly selected ..., provided however that the terms of the underlying Base Lease shall control the minimum insurance requirements which [Eldercare] is required to provide hereunder.
Because the nursing home derived a substantial portion of its revenue from Medicare/Medicaid reimbursements (more than 85% before 1995), the parties, in sections 2.07 and 14.09 of the lease, provided for the renegotiation of the rent terms in the event of substantial changes in those programs:
[VEF] recognizes that the primary source of revenue for the Facility is derived from residents from whom the payer source is either Medicaid or Medicare. Thus, should there be substantive changes and/or reductions in the way that Medicaid or Medicare and/or their successor programs reimburse the Facility for providing care, [VEF] at [Eldercare]'s request will enter into good faith negotiations with respect to the amount of Basic Rent and/or Additional Rent that is due and payable under the terms of this Lease Agreement.
....
[VEF and Eldercare] agree that should there be significant changes in the Medicare and/or Medicaid reimbursement methodology, [they] will proceed in good faith to amend the terms of this Agreement in a manner that represents a reasonable accommodation of the interests of each party.
Article 13 of the lease addressed default and termination. Section 13.01(b) provided that it would be "deemed [an] even[t] of default" by ElderCare if ElderCare "fail[ed] to comply with any term, provision, or covenant of th[e] Lease ... and d[id] not cure the failure within thirty (30) days after written notice." Section 13.02(a) gave VEF the option to terminate the lease upon the occurrence of any default.
Article 1 of the lease set December 31, 2006, as the lease's expiration date. It also granted ElderCare an option to extend the lease for an additional five-year term. In order to exercise that option, ElderCare was obliged to provide VEF written "notice of its intention to do so not later than 30 days prior to the expiration of the Lease term," on or before December 1, 2006.
In 1999, medical malpractice rates for Texas nursing homes started to climb dramatically. The business landscape was further complicated by a series of major changes to Texas's Medicare/Medicaid program that began in 2000. That year, ElderCare made several presentations to the VEF Board to explain these program changes and their purportedly adverse implications for ElderCare's business. The parties subsequently had several discussions on this issue. In August 2000, ElderCare sought to initiate a renegotiation of the rent terms pursuant to §§ 2.07 and 14.09 of the lease, first at a meeting and then in writing. VEF responded with a demand that ElderCare agree to a host of substantive changes to the lease (beyond the scope of rent terms) before VEF would commence renegotiations. VEF's preconditional amendments were memorialized in a VEF Board resolution and a letter to ElderCare. ElderCare refused to agree to the amendments, and a stalemate ensued.
Facing mounting rates, at the end of 2000 ElderCare reduced its insurance coverage below the lease minimums. VEF did not object to ElderCare's coverage levels for policy years 2001, 2002, or 2003. In 2003, ElderCare was unable to obtain malpractice insurance. To shield itself from liability, it subleased Valley Grand Manor to a newly-created corporation. The arrangement mirrored one VEF had used before leasing the facility to ElderCare. With this sublease in place, ElderCare terminated its general liability coverage, believing it no longer faced general liability. ElderCare never sought VEF's consent and VEF never objected to the sublease arrangement. From 2003 to 2005, while the sublease was in effect, more than 50% of nursing homes in Texas carried no malpractice coverage.
In the summer of 2004, ElderCare made a series of presentations to VEF's board and the parties held several other meetings. ElderCare endeavored to explain its difficulty securing insurance coverage and sought to renegotiate the lease minimums. VEF refused to negotiate to this end and notified ElderCare of its position that ElderCare was in default. Nevertheless, the parties continued to discuss the issue; VEF made no effort to terminate the lease and it extended the time for ElderCare to comply. At these meetings, ElderCare also raised again the challenges it faced in light of the changes being...
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