In re Jackson Brook Institute, Inc.

• Decision Date: 20 October 1998
• Docket Number: Bankruptcy No. 98-20439,Adversary No. 98-2060.
• Citation: In re Jackson Brook Institute, Inc., 226 B.R. 487 (Bankr. Me. 1998)
• Parties: In re JACKSON BROOK INSTITUTE, INC., Debtor. BANCBOSTON REAL ESTATE CAPITAL CORPORATION, Plaintiff and Defendant-in-Counterclaim v. JBI ASSOCIATES LIMITED PARTNERSHIP, Defendant and Plaintiff-in-Counterclaim and Jackson Brook Institute, Inc., Running Hill Associates, L.P., Design Acoustics, Inc. Behavioral Medical Care, Parties-in-Interest
• Court: U.S. Bankruptcy Court — District of Maine

226 B.R. 487 (1998)

In re JACKSON BROOK INSTITUTE, INC., Debtor BANCBOSTON REAL ESTATE CAPITAL CORPORATION, Plaintiff and Defendant-in-Counterclaim v. JBI ASSOCIATES LIMITED PARTNERSHIP, Defendant and Plaintiff-in-Counterclaim and Jackson Brook Institute, Inc., Running Hill Associates, L.P., Design Acoustics, Inc. Behavioral Medical Care, Parties-in-Interest

Bankruptcy No. 98-20439, Adversary No. 98-2060.

United States Bankruptcy Court, D. Maine.

October 20, 1998.

COPYRIGHT MATERIAL OMITTED

Robert J. Keach, Bernstein, Shur, Sawyer & Nelson, Portland, ME, for Plaintiff.

Daniel L. Cummings, Norman, Hanson & DeTroy, Portland, ME, John L. Whitlock, Palmer & Dodge, LLP, Boston, MA, for Defendant.

Roger A. Clement, Jr., Verrill & Dana, Portland, ME, for Jackson Brown Institute, Inc.

John C. Walker, Windham, ME, for Running Hill Associates, L.P.

MEMORANDUM AND DECISION

JAMES A. GOODMAN, Bankruptcy Judge.

This Court heard on September 15, 1998 the following contested matters in the above captioned adversary proceeding: (1) Bank Boston's Motion to Dismiss the Counterclaim and Strike the Affirmative Defenses of the Defendant, JBI Associates Limited Partnership; (2) Bank Boston's Motion for Summary Judgment; and (3) Bank Boston's Motion for Sanctions against JBI Associates Limited Partnership under Me. R. Civ. P. 11. For the reasons discussed below, the Court grants the Motion to Dismiss JBI Associates' Counterclaim, strikes JBI Associates' Affirmative Defenses, grants BancBoston's Motion for Summary Judgment, and the request for sanctions is denied without prejudice.

BACKGROUND

Understanding the identity and roles of the parties is essential to the issues at bench, so I begin with the roster of players:

Running Hill Associates Limited Partnership ("Running Hill") is a Massachusetts Limited Partnership which owns the fee interest in land on Running Hill Road in South Portland, Maine ("the Premises").

JBI Associates Limited Partnership ("Associates") is a Massachusetts Limited Partnership that leases the Premises owned by Running Hill under a ground lease. Associates developed the Premises into an acute care psychiatric hospital.

Jackson Brook Institute, Inc. ("Institute") is a Maine Corporation and the Debtor in these proceedings. Institute leases the Premises and buildings of the psychiatric hospital from Associates under a sublease and operates the hospital under the name Jackson Brook Institute. Institute also claims a 32% limited partnership interest in Associates. While it is not clear, Associates appears to be denying such an interest.¹

Community Care Systems, Inc. ("CCSI") is a Massachusetts Corporation which is the parent corporation of the Institute and owns 100% of the Institute stock. In 1982 when the premises was being developed, CCSI was a general partner of Associates.

Frederick Thacher is the president of CCSI and during some of the relevant times, the president of the Institute. He is also the sole general partner of Running Hill and the majority shareholder of CCSI.

Robert Cserr is a general partner of Associates and a shareholder in CCSI.

Elia Lipton alleges that he is a General Partner of Associates. Cserr disputes Lipton\'s status as a general partner and this matter is being litigated in Massachusetts. Lipton is also a shareholder in CCSI.

Casco Bank and Trust Company ("Casco") is the financial institution that provided the original financing to construct the psychiatric hospital.

Casco Northern Bank, N.A. ("Casco Northern") is the successor in interest to Casco.

BancBoston Real Estate Capital Corporation ("BancBoston") is the assignee of Casco Northern\'s interest in the Note, Mortgage, Collateral Assignment of Leases, and other documents relating to the original financing of the psychiatric hospital by Casco.

CCSI develops health care facilities and in 1979 it proposed to build the Jackson Brook Institute, a psychiatric hospital in South Portland, Maine. The plan was to create two new entities: Associates, which would obtain the financing to construct the facility; and Institute, an entity that would lease the facility from Associates and run the hospital.² Associates was formed as a limited partnership with CCSI as one of its general partners. Institute was created as the wholly owned corporate subsidiary of CCSI. Thacher controlled all three entities and was authorized to contract on their behalf.³

In 1982, Casco negotiated with CCSI, Associates, and Institute all through Thacher, to provide $5.6 million in construction financing to build the hospital. Thacher executed the Commitment Letter which stated inter alia that:

No funds from Jackson Brook Institute, Inc., or JBI Associates shall be withdrawn for the benefit of any affiliated business entities in any form without the prior written consent of Casco Bank and Trust Company. Withdrawals shall include but not limited to management fees, dividends, loans and rental payments.

December 20, 1982 Commitment Letter, p. 3, ¶ 6. On January 27, 1983, Thacher acting on behalf of the Institute, Associates and CCSI executed a clarification to the Commitment Letter with Casco stating that the prohibition against the up-streaming of funds quoted above is intended to control withdrawal of funds from Institute and Associates once the hospital is operational.

In May 1983, Associates entered into a "Lease and Sublease Agreement" for the land and yet-to-be built hospital with Institute. CCSI guaranteed Institute's obligations under the lease. In 1999, Institute is required under the terms of the lease to tender to Associates an offer to purchase the leased premises for $10 million or its fair market value, whichever is greater.⁴ On May 11, 1983, Casco funded the $5.6 million loan to Associates, who in turn with Running Hill granted a mortgage and security interest in the hospital to Casco. Associates also assigned the lease and CCSI's guaranty to Casco. All documents were executed by Thacher in his capacity as president of CCSI, which was at the time a general partner of Associates, and as a general partner of Running Hill. On May 12, 1983, Associates and Institute executed an amendment to the December Commitment Letter whereby Institute, Associates and CCSI expressly agreed to be bound by the terms of the Commitment Letter. On February 16, 1995, Casco Northern assigned all of its rights and interest in the Note, Mortgage and security agreements to BancBoston.

THE LITIGATION

(A) The 1993 Up-streaming Action:

Things proceeded smoothly until sometime in 1993 when Casco discovered that Institue was up-streaming funds to its parent CCSI, in violation of the December Commitment Letter. On November 24, 1993, Casco Northern filed suit in the Maine Superior Court against Associates, Institute, and CCSI seeking injunctive and declaratory relief including enforcement of the up-streaming prohibition contained in the Commitment Letter. Casco Northern alleged in the Complaint that sometime prior to June 1993, Institute up-streamed upwards of $3 million to CCSI without Casco's consent, and there remained due and owing to Institute in excess of $800,000. Institute answered the Complaint and denied that it was bound by the up-streaming prohibition contained in the December Commitment Letter. Associates filed a crossclaim against Institute and filed a motion requesting injunctive relief that mirrored Casco Northern's request.⁵

The First major incident in the litigation occurred on May 25, 1994, when Institute moved to disqualify Associates' legal counsel because that counsel had previously represented the Institute in various related matters. The litigation stalled pending a decision on the disqualification motion, which was granted on February 1, 1995. Associates appealed the disqualification order to the Maine Law Court and on February 14, 1995, it sought a stay of the Up-streaming Litigation pending the appeal. On February 17, 1995, the Superior Court granted Associates' request for a stay.

On November 30, 1995, the Law Court affirmed the disqualification order and, thereafter, Associates sought and obtained seven additional extensions of the stay of the litigation. See BancBoston's Memorandum in Support of Motion to Dismiss Counter Claims and Strike Affirmative Defenses, Exhibits 9-22. The litigation was effectively stayed for almost three years until December 8, 1997. In each request for a stay, Associates claimed that the stay was necessary to ongoing settlement discussions and should negotiations break down, it would need the additional time to prepare its new counsel for litigation. Remarkably, on October 14, 1997, prior to the expiration of the seventh and final stay granted by the Superior Court, Associates' new counsel withdrew from the case. See Defendant's Statement of Material Facts in Dispute, Exhibit 6, Docket Sheet.

(B) BancBoston's Foreclosure Action:

On October 29, 1997, BancBoston filed a Complaint for Foreclosure against Running Hill, Associates, Institute, and other interested parties in Maine Superior Court. The Complaint alleges that Associates defaulted on its obligations to the bank by: (1) failing to make the required monthly payment due and owing on August 1, 1997; (2) failing to make timely payments under the note including the months of June, July, and August 1997; (3) failing to timely pay interest and late charges under the note; (4) failing to pay real estate taxes due and payable before August 21, 1997; (5) failing to provide financial statements as required; and (6) failing to obtain BancBoston's written consent before transferring partnership interests or admitting additional partners into Associates.

Associates filed its Answer setting forth four affirmative defenses, along with a four count Counterclaim. All of the affirmative defenses and each count of the counterclaim, except one, depend upon the same factual basis. Associates alleges that Casco, and subsequently BancBoston did not aggressively pursue the...