In re Nat. Century Financial Enterprises, Inc.

• Citation: 341 B.R. 198
• Decision Date: 18 April 2006
• Docket Number: Bankruptcy No. 02-65235.,Adversary No. 04-2015.
• Parties: In re NATIONAL CENTURY FINANCIAL ENTERPRISES, INC., et al., Debtors. The Unencumbered Assets Trust, as successor in interest to National Century Financial Enterprises, Inc., et al., Plaintiff, v. Biomar Technologies, Inc., et al., Defendants.
• Court: United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Southern District of Ohio

341 B.R. 198

In re NATIONAL CENTURY FINANCIAL ENTERPRISES, INC., et al., Debtors The Unencumbered Assets Trust, as successor in interest to National Century Financial Enterprises, Inc., et al., Plaintiff, v. Biomar Technologies, Inc., et al., Defendants.

Bankruptcy No. 02-65235.

Adversary No. 04-2015.

United States Bankruptcy Court, S.D. Ohio, Eastern Division.

April 18, 2006.

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David A. Beck, Paul R. Brown, Sean P. Byrne, Drew H. Campbell, Kasey T. Ingram, Matthew A. Kairis, Charles M. Oellermann, Joseph M. Witalec, Joshua A.T. Fairfield, Columbus, OH, Robert R. Hall, Phoenix, AZ, Paul E. Harner, Chicago, IL, Robert J. Madden, Kathy D. Patrick, Brandon T. Allen, Sydney Ballesteros, Harold B. Murphy, Boston, MA, Ernest B. Williams, Nashville, TN, for Debtors.

MEMORANDUM OPINION FOLLOWING TRIAL ON PLAINTIFF'S COMPLAINT AND OBJECTION TO CLAIM

DONALD E. CALHOUN, JR. Bankruptcy Judge.

In this adversary proceeding, the Unencumbered Assets Trust (successor in interest to the Debtors — National Century Financial Enterprises, Inc. and its related entities) brought suit against Biomar Technologies, Inc. to avoid and recover alleged fraudulent transfers.¹ Following a trial on Plaintiff's fraudulent transfer claim, the Court finds that Biomar received a total of $608,000.00 from NCFE as payment for software licenses and services that Biomar provided to various third-party healthcare facilities. Because NCFE itself did not receive a concrete benefit as a result of these payments in a quantity reasonably equivalent to $608,000.00, the Court finds that Plaintiff can avoid these payments under section 548(a)(1)(B) of the Bankruptcy Code and is entitled to judgment against Biomar in the amount of $608,000.00 under section 550(a)(1) of the Bankruptcy Code.

Also within this suit, Plaintiff objected to Biomar's proof of claim on two grounds, both of which have merit. First, Plaintiff proved that NCFE never agreed to pay Biomar for the software services Biomar allegedly rendered at one third-party hospital, VillaView University Hospital ("Villa View"), and never agreed to pay Biomar the so-called "monthly maintenance" fees for a set of third-party clinics, Clinica Medica Familiar ("Clinics"). Biomar's claim consists of the monies due for services and maintenance allegedly performed at VillaView and the Clinics. Because NCFE never agreed to pay Biomar for the amounts that make up Biomar's claim, the claim should be disallowed under section 502(b)(1) of the Bankruptcy Code. Second, the claim should also be disallowed because NCFE did not receive reasonable equivalent value even close to the amount of the alleged obligation under section 548(a)(1)(B) of the Bankruptcy Code. Therefore, the Court sustains Plaintiff's objection to Biomar's claim.

I. Jurisdiction — Adversary Proceeding

The Court has jurisdiction over this adversary proceeding and objection to claim pursuant to 28 U.S.C. §§ 157 and 1334 and the General Order of Reference entered in this district. The adversary proceeding is a core proceeding under 28 U.S.C. § 157(b)(2)(H) and the objection to claim is a core proceeding under 28 U.S.C. § 157(b)(2)(B).

II. Factual and Procedural Background

A. Debtors' and Biomar's Backgrounds

The Debtors were one of the country's largest providers of healthcare accounts receivable financing. The Debtors financed and serviced more than $15 billion in healthcare accounts receivable. The Debtors also provided other financing and leasing services to healthcare companies.

The Debtors historically financed the purchase of eligible receivables primarily through private placement sales of bonds to institutional investors. The Debtors offered financing to healthcare providers by purchasing from them certain of their receivables — monies due to the providers from insurance companies and insurance-like programs — for services performed by the providers. All of the Debtors' outstanding bonds as of the NCFE petition date were issued by Debtors NPF VI and NPF XII.

NPF VI and NPF XII were special purpose entities that obtained money from investors in exchange for promissory notes. As of the Debtors' Chapter 11 filings on November 18, 2002 ("Petition Date"), it is reported that the aggregate outstanding principal amount of the bonds issued by NPF VI was $924,995,000.00, and the aggregate outstanding principal amount of the bonds issued by NPF XII was $2,047,500,000.00.²

Biomar, founded in 1992, offers several computer software products utilized in the healthcare industry. Biomar's hospital information system tracks patient charges generated from the point of admission through a patient's stay in the hospital. The system captures all charges including such services as laboratory tests and radiology work. Once the data is collected, the system "drops" the billing information into a billing module, which formats the data for the ultimate billing to the payor. The system further provides for compilation of the hospital's receivables. See Vol. I at 173; see also n. 3, infra.

B. Proof of Claim and Pleadings

Biomar filed a proof of claim on April 22, 2003 in NCFE's Chapter 11 case asserting that NCFE owed Biomar $790,000.00 for pre-petition "services performed" at Santa Marta Hospital ("Santa Marta"), VillaView, the Clinics and Lincoln Hospital Medical Center ("Lincoln Hospital"). See Proof of Claim No. 711, Case No. 02-65235.

In investigating this proof of claim, NCFE's post-petition management allegedly determined that NCFE had made $608,000.00 in payments to Biomar in the approximately one year prior to the Petition Date. See Plaintiff's Ex. 1; Vol. I at 52-63. Because the books and records of NCFE included no contract, lease, or loan documentation supporting either these payments or Biomar's claim, NCFE objected to Biomar's $790,000.00 proof of claim and sued Biomar to avoid and recover the $608,000.00 as fraudulent transfers. See Vol. I at 87; Vol. III at 40, 123.

In its complaint and objection to claim filed on January 13, 2004, NCFE asserted claims for avoidance of fraudulent transfers under sections 544(b) and 548(a) and recovery of those transfers under section 550(a) of the Bankruptcy Code. NCFE also asserted the theory of unjust enrichment and objected to Biomar's claim under sections 502(b)(1) and 548(a) of the Bankruptcy Code. See Doc. 1. Biomar's claim allegedly consisted of unpaid invoices relating to the licensing of computer software and provision of software and data conversion services to various healthcare providers. See id., ¶¶ 12-13. Similarly, NCFE alleged that the $608,000.00 payments made by NCFE to Biomar are avoidable fraudulent transfers that benefitted unrelated third-party healthcare providers not affiliated with NCFE. In its answer, Biomar asked that the Court enter judgment in its favor and allow its claim in full. See Doc. 5.

On October 4, 2004, Biomar moved to amend its proof of claim, see Doc. 27, in an attempt to fit its claim into the C-7 Convenience Class under the Debtors' Joint Plan of Liquidation. See Vol. II at 133-34. In its proposed amended claim, Biomar withdrew its claim for payment for services rendered to Santa Marta and its claim for a $150,000.00 "termination fee" relating to Lincoln Hospital. The amended proof of claim seeks payment of $495,000.00 only, relating to services Biomar says it provided at the Clinics and VillaView.

C. Trial

The Court conducted a trial on July 26 and 27, 2005, and heard remaining testimony on August 10, 2005.³ Witnesses for the Plaintiff included Charles Jennings, Jeffrey Benton, and Joyce Chester. Witnesses for Biomar included Allan Martia and Randolph Speer.

Mr. Jennings consults for the Plaintiff and formerly headed client services for NCFE, which would handle bankruptcy and litigation matters involving NCFE's client healthcare providers. See Vol. I at 36-38. Mr. Benton, a CPA, manages FTI Consulting and currently acts as financial advisor to Irwin Katz, the Trustee for the Plaintiff. See id. at 129-30. Ms. Chester was an account manager for NCFE for approximately 10 years until November 2004. See Vol. III at 200. Mr. Martia formed Biomar in 1992 with two other people and has been the President and CEO since its inception. See Vol. I at 171. Mr. Speer was the chief financial officer of NCFE from September 1999 to November 2002. See Vol. III at 10.

The parties submitted the following post-trial briefs to the Court: Defendant Biomar's Post Trial Brief: Proposed Findings of Fact and Conclusions of Law (Doc. 86); Plaintiff's Post-Trial Brief (Doc. 87); Plaintiff's Proposed Findings of Fact and Conclusions of Law (Doc. 88); Plaintiff's Objections to Exhibits of Defendant Biomar Technologies, Inc. (Doc. 89); Plaintiff's Post-Trial Reply Brief (Doc. 90); and Defendant Biomar's Reply Brief to Plaintiff's Post-Trial Brief, Proposed Findings of Fact and Conclusions of Law, and Objections to Exhibits of Defendant Biomar (Doc. 91).

The Court also considered the parties' pre-trial filings. See Order (Doc. 69) at 2 ("The briefs submitted in support of and in opposition to the summary judgment requests will be treated by the Court as trial briefs[.]"); see also Plaintiff's Motion in Limine to Preclude Hearsay Evidence (Doc. 72) and Defendant Biomar Technologies, Inc.'s Memorandum in Opposition to Plaintiff's Motion in Limine (Doc. 79).

1. Lincoln Hospital

At trial, Mr. Jennings testified that between October 2001 and October 2002, NCFE paid Biomar $358,000.00 for a software system at Lincoln Hospital. See Vol. I at 64; Plaintiff's Ex. 1. This amount included nine monthly payments of a purported maintenance fee. See Vol. I at 63-64. According to Mr. Speer, NCFE agreed to make these monthly payments "to ensure that [Allan Martia] had the cash flow to keep his business operating." Vol. III at 127 (quoting from Mr. Speer's deposition). Mr. Martia specifically insisted that NCFE pay Biomar...