In re Florence Hosp. At Anthem, LLC
| Decision Date | 26 April 2018 |
| Docket Number | Case No. 4:13-bk-03201-BMW |
| Parties | In re: FLORENCE HOSPITAL AT ANTHEM, LLC, Debtor. |
| Court | U.S. Bankruptcy Court — District of Arizona |
Chapter 11 Proceedings
RULING AND ORDER REGARDING BLUE WOLF CAPITAL FUND III, L.P.'S ADMINISTRATIVE EXPENSE CLAIM
This matter came before the Court pursuant to Proof of Claim 76-1 filed by Blue Wolf Capital Fund III, L.P. ("Blue Wolf") on March 24, 2015, which was subsequently deemed an application for payment of an administrative expense claim;1 the Objection of Debtor to Claim No. 76 filed by Blue Wolf Capital Fund III, L.P.; and Notice of Bar Date for Claimant to Respond to Objection (14 Days After Service of This Notice) (the "Objection") (DE 1068) filed by Florence Hospital at Anthem, LLC ("the Debtor" and/or "FHA") on September 4, 2015; the Response of Blue Wolf Capital Fund, III, L.P. to Objection of Debtor to Claim No. 76 filed by Blue Wolf Capital Fund III, L.P. (the "Response") (DE 1105) on September 22, 2015; and all pleadings related thereto. An evidentiary hearing was conducted on September 27-28, 2017, at which time the parties presented evidence and oral argument. Testimony was provided by Dr. Timothy Johns ("Dr. Johns"), Philip R. Rudd ("Mr. Rudd"), Arthur M. Doloresco ("Mr. Doloresco") and Charles P. Miller ("Mr. Miller"). At the conclusion of the trial, the Courtallowed the parties to submit post-trial briefing, which was completed on October 27, 2017, and the Court took the matter under advisement. Based on the pleadings, the testimony offered, the exhibits entered into evidence, and the entire record before the Court, the Court now issues its ruling.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334(b) and 157(b)(2)(B). This decision constitutes the Court's findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52, as incorporated by Federal Rule of Bankruptcy Procedure 7052, and as made applicable to contested matters by Federal Rule of Bankruptcy Procedure 9014(c).
The only issue before the Court at this time is whether Blue Wolf is entitled to an administrative claim against the Debtor under the tort theories of fraudulent or negligent misrepresentation related to the Blue Wolf sale process. To the extent the Court determines that Blue Wolf is entitled to an administrative claim, the issue as to the amount of damages has been reserved for determination at a later date.
1. Dr. Johns is the founder of FHA and a related hospital, Gilbert Hospital, LLC ("GH").
2. On March 6, 2013, the Debtor filed its petition for relief under Chapter 11 of the Bankruptcy Code (the "Petition Date"). Dr. Johns signed the petition as manager of the Debtor.
3. From the Petition Date through the Effective Date of FHA's joint plan of reorganization in 2016, Dr. Johns was the sole manager and a member of FHA.
4. The Debtor remained in possession of its property and operated its business as a hospital in the ordinary course during the Chapter 11 case.
5. Dr. Johns was the interim Chief Executive Officer ("CEO") of FHA from April 26, 2013 until September 3, 2013. On September 16, 2013, the Debtor filed a notice stating that the Debtor had retained Arthur Doloresco as the new CEO. (DE 313). Court approval was not requested for Mr. Doloresco's retention. Mr. Doloresco did not have a signed employment contract with the Debtor. (9/28/17 Trial Tr., p. 9).2
6. Dr. Johns was involved in retaining Polsinelli PC ("Polsinelli") to replace the Debtor's original counsel, and in hiring CKS Advisors, LLC ("CKS") to serve as the Debtor's financial advisor and investment banker/sale agent. (9/27/17 Trial Tr., pp. 86, 116). Dr. Johns provided the retainers to Polsinelli ($75,000) and CKS ($24,000). (See DE 198, 202).
7. Dr. Johns received all Court filings in this case.
8. On February 5, 2014, GH filed its petition under Chapter 11 of the Bankruptcy Code. (Case No. 2:14-bk-01451-MCW). Bradley Newswander signed the GH petition as Board Chair. Dr. Johns was the majority member of GH, and sat on GH's management board.
9. The Debtor's Schedules indicate that GH was the Debtor's largest unsecured creditor.
10. The Debtor and GH asserted numerous cross-claims against each other during the course of the bankruptcy cases.
11. On April 2, 2014, the Debtor filed an Application to Employ CKS Securities, LLC as Investment Banker, to serve as the Debtor's investment banker and sale agent for the purpose of pursuing a sale of FHA. (DE 505). An order approving this application was entered on April 15, 2014, and amended on May 23, 2014. (DE 514, 538).
12. On June 11, 2014, the Debtor filed the Debtor's Motion for Orders: (1) Approving Sale of Debtor's Assets Free and Clear of Liens, Claims and Interests, (2) Approving Assumption and Assignment of Unexpired Leases and Executory Contracts, (3) Approving Certain Bid and Auction Procedures, (4) Setting Date and Time for Hearing on Proposed Sale, and (5) Approving Form and Notice of Auction and Sale Hearing (the "Sale Motion"), in which it proposed to sell substantially all of its assets to Terner Capital Group, LLC ("Terner") for $7,500,000. (DE 543, TE 6). The Sale Motion sought approval of a Letter of Intent submitted by Terner (the "Terner LOI") and requested that Terner be designated as the stalking horse bidder.
13. Five parties-in-interest filed objections to the Sale Motion, including Bank SNB National Association ("Bank SNB") (on the basis that the offer was not sufficient to pay its secured claim); FHA's landlord, MPT of Florence, LLC ("MPT") (on the basis that the sale could not affect its rights under its lease); GH; the Official Committee of Unsecured Creditors of FHA (the "FHA Committee") (as to the $350,000 cost reimbursement); and the United States Trustee for the District of Arizona (the "UST"). (DE 549-553, TE 225-229).
14. At a status hearing on August 18, 2014, the Debtor reported that Terner was not proceeding with its offer, but that a prior potential stalking horse bidder, which was later identified as Blue Wolf, was still interested in purchasing the Debtor's assets. (DE 583).
15. On September 25, 2014, the Debtor filed a Notice of Filing: (1) Letter of Intent from Blue Wolf Capital Fund III, L.P.; (2) Proposed Form Asset Purchase Agreement Regarding the Sale of the Debtor's Assets; and (3) Proposed Order Establishing Bid Procedures, Setting Date and Time of Sale Hearing, and Setting Related Deadlines (the "Blue Wolf Notice"). (DE 594, TE 8).
16. Pursuant to the Letter of Intent executed by Blue Wolf (together with any revisions or modifications, the "Blue Wolf LOI"), as attached to the Blue Wolf Notice, BlueWolf proposed to purchase substantially all of the Debtor's assets for cash consideration of $5,000,000 and the assumption of specified liabilities. The Debtor, through Mr. Doloresco, agreed to and accepted the terms of Blue Wolf's offer as an acceptable opening bid as the stalking horse bidder.
17. Blue Wolf is a sophisticated investor with experience bidding on assets in bankruptcy court sales under 11 U.S.C. § 363. (9/28/17 Trial Tr., p. 148).
18. The Blue Wolf LOI initially provided for a $300,000 "cost reimbursement" to Blue Wolf, payable in the event Blue Wolf was not the successful bidder, or if no auction or sale of the Debtor's assets occurred. The proposed order establishing bid procedures provided that Blue Wolf's cost reimbursement would be granted a super-priority administrative claim status, priming the security interests of Bank SNB and other creditors.
19. On September 30, 2014, MPT filed a Limited Objection and Statement of Position with Respect to Debtor's Proposed Sale Procedures Order and Related Matters. (DE 600). MPT objected to any condition that would require the Debtor's Lease with MPT to be renegotiated and amended, and to the terms of the proposed cost reimbursement.
20. On October 1, 2014, Bank SNB filed its Objection to Entry of Order Approving Certain Proposed Bid and Auction Procedures. (DE 601). The objections of Bank SNB to the proposed procedures included the failure of the Debtor to expressly recognize Bank SNB's right to credit bid. Bank SNB's objection also raised concerns about the "extremely low purchase price" proposed by Blue Wolf and that the sale constituted an improper sub rosa plan.
21. On October 1, 2014, GH filed its Objection and Joinder in MPT's and Bank SNB's Objections and Statements of Position Concerning Proposed Order Establishing Bid Procedures. (DE 603). GH joined in the objections of other parties and alleged that it held an administrative expense claim against FHA in the amount of $1,300,751.74. GH further noted that the Blue Wolf LOI provided that Bank SNB would be paid no more than $3.7 million on its claim of more than $9.8 million.
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/ / / 22. The Court conducted hearings on October 2, 2014 and October 6, 2014, regarding the proposed bid procedures and sale process. Dr. Johns appeared by telephone at the October 6, 2014 hearing.
23. On October 8, 2014, Bank SNB and GH filed a Notice of Commitment to File Creditor's Plan (the "Commitment Notice"). (DE 607). The Commitment Notice provided that Bank SNB and GH "hereby commit to filing, by no later than Friday, October 17, 2014, a Chapter 11 Plan proposed by Bank SNB and/or Gilbert Hospital." (DE 607). Neither GH nor Bank SNB filed a plan by October 17, 2014, but instead filed an Amended Notice of Commitment to File Creditor's Plan. (DE 611).
24. On October 10, 2014, FHA filed an Amended Notice of Filing: (1) Amended Letter of Intent from Blue Wolf Capital Fund III, L.P.; (2) Proposed Form Asset Purchase Agreement Regarding the Sale of the Debtor's Assets; and (3) Proposed Order Establishing Bid Procedures, Setting Date and Time of Sale Hearing, and Setting Related...
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