In re Kentuckiana Med. Ctr. Llc

• Decision Date: 06 May 2011
• Docket Number: Bankruptcy No. 10–93039–BHL–11.,Adversary No. 10–59080.
• Citation: 74 UCC Rep.Serv.2d 556,455 B.R. 694
• Parties: In re KENTUCKIANA MEDICAL CENTER LLC, Debtor.Kentuckiana Medical Center LLC, First Tennessee Bank, N.A., Plaintiffs,v.The Leasing Group Pool II, LLC, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of Indiana

455 B.R. 694

74 UCC Rep.Serv.2d 556

In re KENTUCKIANA MEDICAL CENTER LLC, Debtor.Kentuckiana Medical Center LLC, First Tennessee Bank, N.A., Plaintiffs,

v.The Leasing Group Pool II, LLC, Defendant.

Bankruptcy No. 10–93039–BHL–11.

Adversary No. 10–59080.

United States Bankruptcy Court, S.D. Indiana, New Albany Division.

May 6, 2011.

Charity B. Neukomm, David M. Cantor, Neil C. Bordy, Tyler R. Yeager, Seiller Waterman LLC, Louisville, KY, for Debtor and Plaintiffs.Elizabeth Alphin, Mapother & Mapother, Louisville, KY, for Defendant.

ORDER ON MOTION FOR SUMMARY JUDGMENT

BASIL H. LORCH III, Bankruptcy Judge.

This adversary proceeding was initiated by the filing of a Complaint for Declaratory Relief on April 1, 2011, wherein the Plaintiff, Kentuckiana Medical Center LLC [“KMC”] seeks to declare that three leases [“Leases”] that KMC executed and delivered to the Defendant, The Leasing Group Pool II, LLC [“Leasing Group”] are not true leases but rather are disguised security agreements. It now comes before the Court on the Motion for Summary Judgment by Defendant, The Leasing Group, LLC which was filed on April 1, 2011. The Plaintiff's Combined Response to Motion for Summary Judgment and Cross–Motion for Summary Judgment was filed on April 26, 2011. Finally, the Defendant's Combined Reply to Plaintiff's Response to Motion for Summary Judgment and Response to Cross–Motion for Summary Judgment was filed on May 2, 2011.

Statement of Undisputed Facts

1. KMC is an Indiana limited liability company with its principal place of business in Clarksville, Indiana. KMC operates a for-profit acute care medical facility that offers a range of care including cardiovascular, oncology, urology, internal medicine and plastics within its 36–bed facility.

2. The Leasing Group is a Kentucky limited liability company that facilitates business' acquisition of commercial equipment by partnering with banks to finance the transactions. See, Deposition of Dennis Turner, pp. 6–8 (Feb. 23, 2011).

3. KMC executed two (2) Commercial Lease Agreements on June 23, 2009, and another on September 3, 2009, whereby KMC leased medical equipment from Leasing Group. The Leases are identified as Lease No. 11681, 11661, and 11684.

4. Each of the Leases provide that “if the lease has been paid in a satisfactory manner, as provided in paragraph 20, upon termination, the lessee will have an end of the lease purchase option of fair market value plus applicable sales or use tax.” See Lease 11681, Lease 11684, and Lease 11661 at p. 1.

5. Each of the Leases have a sixty (60) month term.

6. Paragraph 20 of each of the Leases provides:

PURCHASE OPTION: If no Default or Event of Default has occurred, and if Lessee has satisfactorily performed its obligations under this Lease, then at the end of the Term, Lessee shall have an option to purchase all (but not less than all) of the Equipment on the Termination Date, subject to the following terms and conditions: (a) If Lessee desires to exercise its option to purchase, it shall give Lessor written notice of its exercise not less than sixty (60) days before such Termination Date. (b) On or before such Termination Date, Lessee shall pay to Lessor in cash or by certified or cashier's check, or by wire transfer of immediately available funds, the purchase price for the Equipment determined as provided in this Purchase Option provision. (C) The purchase price of the Equipment shall be the dollar amount or percentage of Lessor's Cost set out in Schedule B which is a part hereof (whichever blank is completed), which Lessor and Lessee agree is not less than the estimated Fair Market Sales Value of the Equipment at the end of the Term, reasonably estimated in good faith on the date of said Schedule. Upon satisfaction of all of those terms, Lessor shall transfer title to the Equipment to Lessee by bill of sale WITHOUT WARRANTY OF TITLE, AS IS, WHERE IS, WITHOUT ANY WARRANTY OF MERCHANTABILITY, ANY WARRANTY OF FITNESS FOR ANY PARTICULAR PURPOSE, OR ANY OTHER WARRANTY EXPRESS OR IMPLIED.

7. The Leases were amended to further define the parties' lease end agreement. The amendments state that “the Lessor and Lessee agree that the ‘Fair Market Value’ purchase option for the Equipment as set out in Paragraph 20 of the Lease, shall not be less than 10% of the Lessor's total acquisition cost of the Equipment” [the “Purchase Option”]. Such amendment was signed by both KMC and Leasing Group. See Lease 11681, 11684, and 11661 at First Amendment.

8. As an alternative, the amendments provide that KMC may “renew the lease for a Renewal Term of 1 months (sic) at a monthly rental payment of [varying amounts] (plus applicable sales and use taxes), after which title to the Equipment will transfer to the Lessee by Bill of Sale; the first renewal rental due and payable at the expiration of the original Lease Term” [the “Renewal Option”].

9. Finally, as a third option, paragraph 2 of the amendments provide that KMC may “return all Equipment to the Lessor as set out in Paragraph 8 of the Lease, pay any and all moving expenses, storage fees, sales commissions, and/or other selling expenses incurred by the Lessor in the sale of the Equipment, and guaranty to Lessor a minimum resale Equipment value equal to 10% of the Lessor's total acquisition cost.”

10. Citizen's Union Bank [“Citizens”] provided the financing for the equipment that was leased to KMC pursuant to lease No. 11681 and Lease No. 11684. As a result, the Leasing Group entered into a “Promissory Note and Security Agreement” with Citizens and assigned a portion of the lease payments that were due to it pursuant to the foregoing leases. See, Exh. D to Claim No. 3 and Exh. B to Claim No. 4.

11. The Peoples Bank provided the financing for the equipment that was leased to KMC pursuant to Lease No. 11661. As a result, Leasing Group entered into a “Promissory Note and Security Agreement” with The Peoples Bank and assigned a portion of the lease payments that were due to it pursuant to the foregoing lease. See Exh. F to Claim No. 5.

12. The Leasing Group's acquisition cost, for the equipment leased to KMC on all three leases was $2,386,126.16. This total acquisition cost of the Leasing Group does not include sales tax for the equipment which would be an additional $167,028.84. See Affidavit of Dennis Turner.

13. KMC's total rental obligations on the Leases is $2,906,355.

14. The Leases provide, at paragraph 22, that they shall be construed under the laws of Kentucky.

15. KMC filed for bankruptcy protection on September 19, 2010, at which time the Leases were in arrears.

16. KMC's CFO, Nick Clark, testified in his deposition and in the evidentiary hearing on the Motion to Appoint Trustee that KMC treats the Leases as operating leases; that the rent on the Leases is included as an expense on KMC's income statement; that the net income is reported on its tax return; and that it does not claim a depreciation deduction for the equipment that is subject to the Leases.

17. The Leasing Group submitted an appraisal report dated March 3, 2011, prepared by Christopher Kinzie of Present Value LLC, which found the present fair market value of the equipment to be $1,561,200. Exh. G to Motion; Affidavit of Christopher Kinzie.

18. Kinzie further found the forecasted fair market value of the equipment, as of lease end in 2014, to be $414,600 and a forecasted liquidation value at such time of $207,300.

Standard of Review

Summary judgment is mandated where there are no disputed issues of material fact and the movant must prevail as a matter of law. Dempsey v. Atchison, Topeka, & Santa Fe Ry. Co., 16 F.3d 832, 836 (7th Cir.1994). The moving party bears the initial burden of informing the court of the basis for its motion and identifying those portions of the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, which it believes demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Once the moving party presents a prima facie showing that he is entitled to judgment as a matter of law, the party opposing the motion may not rest upon the mere allegations or denials in its pleadings but must affirmatively show that there is a genuine issue of material fact for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Celotex, 477 U.S. at 323, 106 S.Ct. 2548; Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).

When reviewing facts in support of a motion for summary judgment, a court must construe all facts in the light most favorable to the non-moving party and draw all legitimate inferences and resolve all doubts in favor of that party. NLFC, Inc. v. Devcom Mid–America, Inc., 45 F.3d 231, 234 (7th Cir.1995). The court's role is not to evaluate the weight of the evidence, to judge the credibility of witnesses, or to determine the truth of the matter, but rather to determine whether there is a genuine issue of triable fact. Anderson, 477 U.S. at 249, 106 S.Ct. 2505.

Applicable Law

The Leases each contain a choice of law provision which dictates that the validity, construction and performance of the contract is to be governed by reference to the laws of Kentucky. Indiana courts acknowledge that contractual choice of law provisions govern the substantive disputes that arise out of the contract. Smither v. Asset Acceptance, LLC, 919 N.E.2d 1153, 1157 (Ind.Ct.App.2010); and see, Gibraltar Fin. Corp. v. Prestige Equip. Corp., 925 N.E.2d 751 (Ind.Ct.App.2010). Based upon the foregoing, the Court will interpret the contracts under Kentucky law.

Discussion

The issue before the Court is whether the Leases are true leases or are, in fact, disguised security agreements. Whether a lease constitutes a security interest is a matter of state law, Powers v. Royce, Inc. (In...