In re Morris Senior Living, LLC
| Decision Date | 22 October 2013 |
| Docket Number | Case No. 13 C 2457,Case No. 13 C 2064 |
| Parties | In re: MORRIS SENIOR LIVING, LLC and MORRIS REAL ESTATE HOLDINGS II, LLC, Debtors. MORRIS HEALTHCARE & REHABILITATION CENTER, LLC and MAURICE SALEM, Appellants. |
| Court | U.S. District Court — Northern District of Illinois |
This is an appeal from two orders entered in the bankruptcy of Morris Senior Living, LLC and Morris Real Estate Holdings II LLC. The first order, issued on March 5, 2013, found appellant Morris Healthcare & Rehabilitation Center, LLC (MHRC) in contempt of court for violating the automatic stay, required MHRC to pay the bankruptcy trustee's attorney's fees in an amount to be determined, and directed MHRC to promptly dismiss three lawsuits it had filed. The second order, issued on March 21, 2013, found MHRC and, it appears, its attorney Maurice Salem in contempt of court for failing to dismiss one of the three lawsuits. The court imposed an attorney's fee award upon MHRC arising from its failure to dismiss that suit. The court also imposed upon Salem a fee sanction concerning not just the failure to dismiss that suit but also based upon the earlier filing of two of the three suits.
MHRC and Salem have appealed. For the reasons set forth below, the Court:(a) affirms the bankruptcy court's March 5 order finding MHRC in contempt for violating the automatic stay; (b) affirms the fee award against MHRC to the extent it is premised on the automatic stay violations; (c) reverses the March 21 contempt findings against MHRC and Salem, as well as the fee award to the extent it arises from the contempt; and (d) reverses the remaining fee sanction against Salem and remands for further proceedings.
On February 14, 2012, Morris Senior Living and Morris Real Estate Holdings II filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Northern District of Illinois. Upon the filing of the petition, the automatic stay pursuant to 11 U.S.C. § 362(a) went into effect, prohibiting actions against the debtors or their property, as well as actions to exercise control over their property.
The event that immediately prompted the bankruptcy filing was the debtors' default under the terms of various secured lending agreements with Northbrook Bank & Trust Company. The day after the debtors filed for bankruptcy, Northbrook Bank foreclosed upon its liens on the membership interests of the owners of Morris Senior Living and in effect because the owner of that entity.
Before filing for bankruptcy, Morris Real Estate Holdings II owned a senior supportive living facility (SLF) located in Morris, Illinois, which is in Grundy County. Operating an SLF requires a license from the Illinois Department of Healthcare and Family Services (IDHFS). The license is called an SLF certificate. The owner of an SLF certificate may appoint a medical provider to operate the SLF. Appellant MHRCsays that in 2006, it became the owner of the SLF certificate and appointed Morris Senior Living as the medical provider. IDHFS and Morris Senior Living, however, maintain that Morris Senior Living has owned the SLF certificate since at least 2009.
On April 12, 2012, the bankruptcy court appointed Gregg Szilagyi as Chapter 11 trustee for the debtors. Shortly after his appointment, on May 15, 2012, the trustee prepared and submitted to IDHFS a change of ownership application regarding the SLF certificate. The next day, MHRC commenced an action against Northbrook Bank in Grundy County state court, seeking, among other things, a declaration that MHRC is the owner of the SLF certificate. On May 16, 2012, Northbrook Bank removed MHRC's action to the bankruptcy court as an adversary proceeding. On July 2, 2012, the trustee filed a motion to intervene in that proceeding as a defendant and to assert a counterclaim for a declaratory judgment that Morris Senior Living (not MHRC) owned the SLF certificate.
At a status hearing in the adversary proceeding held on August 7, 2012, the parties and the bankruptcy court agreed to a standstill. Specifically, they agreed to stay the adversary proceeding until IDHFS could conduct an administrative hearing to determine who properly owned the certificate. In short, as of that date, there was an adversary proceeding concerning ownership of the SLF certificate already pending in the bankruptcy case, and the parties - including MHRC - had agreed to hold that adversary proceeding in abeyance pending IDHFS's administrative determination of the certificate's ownership.
On January 14, 2013, however, MHRC filed suit against IDHFS in Grundy County state court (the Grundy County Action). In its complaint in that case, MHRC requested an injunction barring IDHFS from processing the trustee's change of ownership application regarding the SLF, on the ground that MHRC owned the certificate. MHRC also moved for a temporary restraining order.
On February 11, 2013, MHRC (together with other plaintiffs) filed another lawsuit, this one in U.S. District Court for the Northern District of Illinois, naming IDHFS and Northbrook Bank as defendants. See Prism Healthcare Mgmt. Grp., LLC, et al. v. Hamos, et al., Case No. 13 C 1136 (N.D. Ill.). In Count 1 of the complaint, brought under the federal Medicaid Act, MHRC sought, among other things, an order enjoining IDHFS from terminating the SLF certificate issued in MHRC's name. Morris Senior Living was named as a plaintiff in that suit. MHRC "withdrew" the complaint two days later - significantly (as will become apparent), not by simply voluntarily dismissing it but rather by filing a motion seeking dismissal before Judge James Zagel, to whom the case had been assigned. Judge Zagel entered an order granting the motion.
Two days after that, on February 15, 2013, MHRC, together with other plaintiffs (this time, not including Morris Senior Living), refiled essentially the same lawsuit in U.S. District Court in this district (the District Court Action). See Dixon Healthcare & Rehabilitation Ctr., LLC, et al. v. Hamos, Case No. 13 C 1233 (N.D. Ill.). This case was assigned to Judge Milton Shadur.
After the filing of each of these suits, the trustee sent written communications to MHRC's lawyer Maurice Salem, contending that the lawsuits violated the automatic stayin the debtors' bankruptcy case as well as the standstill agreement. MHRC did not withdraw either suit.
On February 27, 2013, MHRC filed a third lawsuit, this time an adversary proceeding in the pending bankruptcy case, against IDHFS and Northbrook Bank (the Bankruptcy Adversary Action). In its complaint in that case, MHRC sought an injunction barring Morris Senior Living from operating the SLF facility, directing IDHFS to allow MHRC to operate the facility, and barring IDHFS from issuing an SLF certificate for the facility to anyone other than MHRC. MHRC did not ask the bankruptcy court to lift the automatic stay before filing this suit, just as it had not done before filing the Grundy County and District Court Actions.
regarding violation of the automatic stay
The trustee then filed a motion before the bankruptcy court alleging that MHRC had violated the automatic stay. In that motion, the trustee sought a contempt finding against MHRC - not against Salem - for violating the automatic stay; damages resulting from the stay violations; and an order directing MHRC to promptly dismiss the three actions. The motion cited as authority 11 U.S.C. §§ 105 and 362 and Bankruptcy Rule 9020.
On March 5, 2013, after reviewing the trustee's motion and hearing oral arguments from both parties, the bankruptcy court entered an order finding that MHRC had violated the automatic stay and holding it in contempt. The bankruptcy court directed MHRC to pay the trustee his actual damages, consisting of his attorney's fees incurred in connection with: (a) the Grundy County Action, the District Court Action, the Bankruptcy Adversary Action, and the stay violations MHRC had committed inconnection with those matters; and (b) the trustee's stay violation motion. The bankruptcy court's March 5 order also directed MHRC to "promptly dismiss the Grundy County Action, the District Court Action, and the Bankruptcy Adversary Action on or before March 12, 2013." Appellee's Br., Ex. 2.
The next day, March 6, 2013, MHRC filed a notice of appeal from the bankruptcy court's March 5 order. For reasons that are not completely clear, the appeal did not get docketed in the district court until March 18, 2013.
MHRC dismissed the Grundy County Action and the Bankruptcy Adversary Action. With regard to the District Court Action, on March 12, MHRC filed in that case a motion asking the district court to stay the bankruptcy court's March 5 order directing it to dismiss the case. Salem, MHRC's attorney, noticed the motion for hearing before Judge Shadur on March 15, 2013, Judge Shadur's next-available motion call date. The trustee responded to MHRC's motion to stay on March 13. Among other things, the trustee stated that MHRC was in violation of the bankruptcy court's March 5 order because it had not "sought to dismiss" the District Court Action by March 12. Case No. 13 C 1233 (N.D. Ill.), dkt. no. 29 ¶ 20. In its reply, filed on March 14, MHRC said it had complied with the bankruptcy court's order, stating that pursuant to the motion it had filed on March 12, "[o]bviously, this Court either stays the bankruptcy court order, which directs the dismissal of this action, or it dismisses this action - there are no other options." Case No. 13 C 1233 (N.D. Ill.), dkt. no. 30 ¶ 6. MHRC also noted that its appeal from the bankruptcy court's order had not yet been assigned to a district judge, and...
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