In re Jerry M. Frankum And Amelia W. Frankum

• Decision Date: 18 July 2011
• Docket Number: Adversary No. 1:07–ap–01248.,Bankruptcy No. 1:05–bk–27198.
• Citation: 453 B.R. 352
• Parties: In re Jerry M. FRANKUM and Amelia W. Frankum, Debtors.James C. Luker, Trustee, Plaintiffv.Heartland Community Bank, Pulaski Community Bank and Trust Company f/k/a/ First Community Bank and Ruffin & Jarrett Funeral Home, Inc., Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of Arkansas

453 B.R. 352

In re Jerry M. FRANKUM and Amelia W. Frankum, Debtors.James C. Luker, Trustee, Plaintiff

v.Heartland Community Bank, Pulaski Community Bank and Trust Company f/k/a/ First Community Bank and Ruffin & Jarrett Funeral Home, Inc., Defendants.

Bankruptcy No. 1:05–bk–27198.

Adversary No. 1:07–ap–01248.

United States Bankruptcy Court, E.D. Arkansas,Batesville Division.

July 18, 2011.

Grant E. Fortson, Phyllis M. Jones, Lax, Vaughn, Fortson Jones & Rowe, Little Rock, AR, for Plaintiff.Rosalind M. Mouser, Ramsay Law Firm, Pine Bluff, AR, Lance Owens, Marshall & Owens, P.A., Jonesboro, AR, Guy Randolph Satterfield, Satterfield Law Firm, Little Rock, AR, for Defendants.

ORDER GRANTING MOTION FOR SUMMARY JUDGMENT

AUDREY R. EVANS, Bankruptcy Judge.

Now before the Court is the Second Motion for Summary Judgment or, in the alternative, for Partial Summary Judgment (docket # 35) (“Motion for Summary Judgment”), brief in support, and statement of undisputed facts, filed by the Plaintiff–Trustee, James C. Luker (“Trustee”). In the Motion for Summary Judgment, the Trustee alleges that a $500,000 payment made to Defendant, Heartland Community Bank (“Heartland”), out of funds in which the Debtors have an interest, constituted a preferential transfer subject to avoidance under 11 U.S.C. § 547.¹ The Motion for Summary Judgment does not make any specific request for relief regarding the other two Defendants in this case, Iberiabank f/k/a Pulaski Bank and Trust Company f/k/a First Community Bank (“Pulaski Bank”), or Ruffin and Jarrett Funeral Home, Inc. (“Ruffin”). Heartland and Ruffin each filed separate responses to the Motion for Summary Judgment, briefs in support, and statements of undisputed facts. The Court finds that summary judgment is appropriate in this matter, and grants the Motion for Summary Judgment.

OVERVIEW

The Debtors in this bankruptcy case are Jerry M. Frankum and Amelia Frankum. Jerry Frankum is a doctor, and the Debtors owned several medical facilities, including Rivercrest Nursing Home, Jefferson Nursing Home, and Newport Hospital and Clinic (“Newport Hospital”). The Rivercrest Nursing Home was financed by Heartland; the Jefferson Nursing Home was financed by Heartland and Ruffin; and the Newport Hospital was financed by Heritage Bank which later assigned its note and security interest to Pulaski Bank. From 2002 to 2004, the Debtors fell behind on their obligations to Heartland and Ruffin. These loans went into default, and Heartland and Ruffin filed several lawsuits to collect on the debts. These lawsuits resulted in a settlement agreement under which each creditor took a security interest in some of the Debtors' stock in Newport Hospital, and obtained a right to vote those stocks. The settlement agreement also gave the Debtors a deadline of December 1, 2004, to cure the deficiencies on the loans. If the Debtors did not cure those deficiencies by the stated date, the settlement agreements authorized Heartland and Ruffin to file pre-signed consent judgments in the lawsuits. The Debtors failed to cure the deficiencies within the time stated, and Heartland and Ruffin both entered the pre-signed consent judgments in the lawsuits. Based on its consent judgment, Heartland had a writ of execution issued to obtain additional Newport Hospital stock from the Debtors. Additionally, both Heartland and Ruffin filed their consent judgments in the real estate records of Green and Mississippi counties, but the liens created by those filings were subsequently found to be preferential transfers by the Court's Order Granting in Part, Denying in Part Motion for Summary Judgment (docket # 31) (“Order on First Motion for Summary Judgment”) entered on March 12, 2010.

In 2005, the Debtors attempted to sell substantially all of the assets of Newport Hospital to a company named Community Health Systems, Inc. (“CHS”). The Debtors needed the consent of Heartland, Ruffin, and Pulaski Bank (collectively the “Creditors”) to sell these assets. The Creditors entered into an agreement titled Consent to Sale, under which they agreed to allow the sale to take place provided they received a specified amount from the sale proceeds.

Soon after obtaining the Creditors' consent, Newport Hospital entered into an Asset Purchase Agreement, under which it sold substantially all of its assets to CHS. This agreement provided for a payment of $10,250,000 for the assets, and a separate payment of $250,000 each to Newport Hospital, Jerry Frankum, and Amelia Frankum, in exchange for their agreement not to compete with CHS for five years. The sale closed on September 30, 2005. At that time, CHS paid the agreed amount for both the purchase of the assets and the three covenant-not-to-compete payments. The closing agent, Land Services, Inc. (“Land Services”), distributed those funds according to the Master Wire/Payoff Instructions (the “Wiring Instructions”) provided by Eugene Zuber. The Wiring Instructions provided each creditor with the payment amount agreed to in the Consent to Sale. Specifically, Heartland received $613,500; Ruffin received $66,500; and Pulaski Bank received $720,000. The payment made to Heartland consisted of a combination of the $500,000 covenant-not-to-compete payments owed to Jerry and Amelia Frankum, and a secondary payment of $113,500 from the sale of the assets of Newport Hospital.

The Debtors filed bankruptcy on October 14, 2005, within 90 days of the sale's closing. The Trustee in the Debtors' bankruptcy case filed this adversary proceeding, pursuant to 11 U.S.C. § 547, to avoid the transfers caused by Ruffin and Heartland placing liens on the Debtors' property in Mississippi and Green counties, and to avoid the transfer of the $500,000 covenant-not-to-compete payments to Heartland. On March 12, 2010, the Court entered its Order on First Motion for Summary Judgment avoiding the liens as preferential transfers, and finding that a genuine issue of material fact existed as to whether the Debtors had a property interest in the transferred covenant-not-to-compete payments. On October 7, 2010, the Trustee filed this Motion for Summary Judgment, providing the Court with additional evidentiary support for the argument that the transfer of the covenant-not-to-compete payments to Heartland was a preferential transfer. Following a thorough review of the evidence submitted in support of, and in opposition to, this Motion for Summary Judgment, the Court finds that the Debtors did have a property interest in the covenant-not-to-compete payments and grants the Trustee's Motion for Summary Judgment.

EVIDENCE²

The following evidence was provided as support for, or in response to, the Motion for Summary Judgment and was relied on by the Court in making this determination:

1. The affidavit of James C. Luker, the Trustee in the Debtors' bankruptcy case (the “Luker Affidavit”).

2. The affidavit of Eugene Zuber, the Hospital Administrator for Newport Hospital and the Debtors' personal advisor (the “Zuber Affidavit”).

3. The affidavit of Robert Smith, the attorney for Newport Hospital with respect to the Asset Purchase Agreement (the “Smith Affidavit”).

4. The affidavit of Larry Lewallen, the accountant for both Newport Hospital and the Debtors (the “Lewallen Affidavit”).

5. The affidavit of Clyde H. Henderson, the Chairman and Chief Examining Officer of Heartland (the “Heartland Affidavit”).

6. The affidavit of Deborah Sheffield, the Secretary and Treasurer of Ruffin (the “Ruffin Affidavit”).

7. The affidavit of Bradley F. Snider, the Executive Vice President of Pulaski Bank (the “Pulaski Bank Affidavit”).

8. An agreement between the Debtors and Heartland Bank for the forbearance of collection activities (the “Heartland Settlement Agreement”).

9. An agreement between the Debtors and Ruffin for the forbearance of collection activities (the “Ruffin Settlement Agreement”).

10. A writ of execution by Heartland on the Debtors' stock in Newport Hospital (the “Writ of Execution”).

11. The agreement between Newport Hospital and CHS for the sale of substantially all of Newport Hospital's assets (the “Asset Purchase Agreement”).

12. The agreement entered into by Heartland, Ruffin, Pulaski Bank, and the Debtors, providing the creditors' consent to the Asset Purchase Agreement (the “Consent to Sale Agreement”).

13. The Wiring Instructions for disbursement of funds at closing on Asset Purchase Agreement (the “Wiring Instructions”).

14. The closing statement of Land Services, showing all payments and disbursements made at the closing of the Asset Purchase Agreement (the “Closing Statement”).

15. Email correspondence between Robert Smith and counsel for Heartland, Ruffin, and Pulaski Bank (the “Smith Emails”).

UNDISPUTED FACTS

Based on the evidence submitted, the parties' statements of undisputed facts, and the facts found to be undisputed in the Order on First Motion for Summary Judgment, the Court finds the following facts are not in dispute:

1. The Debtors borrowed a total of $3,277,944.88 from Heartland Community Bank (“Heartland”) between 1997 and 2002. This indebtedness consists of two separate loans incurred to purchase the Rivercrest Nursing Home and the Jefferson Nursing Home. The real and personal property of each nursing home secured the respective loans dealing with those properties. ( Heartland Settlement Agreement ).

2. The Debtors borrowed $1,600,000 from Heritage Bank secured by the Debtors' stock in Newport Hospital in 2000. Heritage Bank subsequently assigned this note and security interest to First Community Bank, which later became Pulaski Community Bank and Trust Company, and is now Iberiabank (“Pulaski Bank”). ( Pulaski Bank Note and Security Agreement; Pulaski Bank Affidavit ).

3. Jerry M. Frankum personally guaranteed a loan from Ruffin to Rivercrest Nursing Home in the amount of $995,000 in 1997. ( Ruffin Settlement Agreement ).

4. The Debtors defaulted on their obligations to Heartland and Ruffin. As a...