In re Sacred Heart Hosp. of Norristown
| Decision Date | 02 December 1994 |
| Docket Number | Bankruptcy No. 94-13275DAS. Adv. No. 94-0490DAS. |
| Citation | 175 BR 543 |
| Parties | In re SACRED HEART HOSPITAL OF NORRISTOWN, d/b/a Sacred Heart Hospital and Rehabilitation Center, Debtor. SKILLED NURSING PROFESSIONAL SERVICES, A DIVISION OF SKILLED NURSING HOME CARE, INC., and Facilities Management, Inc., Plaintiffs, v. SACRED HEART HOSPITAL OF NORRISTOWN, d/b/a Sacred Heart Hospital and Rehabilitation Center, Defendant, and Midlantic Bank, N.A., successor to Continental Bank, and Allmed Financial Corporation, Intervening Defendants. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
COPYRIGHT MATERIAL OMITTED
Vincent J. Marriot, III, Ballard Spahr Andrews & Ingersoll, Philadelphia, PA, for debtor.
Mark S. Halpern, Furman & Halpern, P.C., Bala Cynwyd, PA, for Skilled Nursing
Professional Services, a Div. of Skilled Nursing Home Care, Inc., and Facilities Management, Inc.
John J. Koresko, V, Koresko & Noonan, Norristown, PA, for certain employee claimants.
Frederic Baker, Asst. U.S. Trustee, Philadelphia, PA.
J. Gregg Miller, Pepper, Hamilton & Scheetz, Philadelphia, PA, for Midlantic Bank, N.A., successor to Continental Bank.
Claudia Z. Springer, Duane Morris & Heckscher, Philadelphia, PA, for Municipal Bonds Investors Ins. Co.
W. Jeffrey Garson, Cohen, Shapiro, Polisher, Shiekman & Cohen, Philadelphia, PA, for Allmed Financial Corp.
Joel H. Levitin, Dechert Price & Rhoads, Philadelphia, PA, for Creditors' Committee.
The Plaintiffs in the instant proceeding have, in their post-trial briefing, narrowed the issue before us to whether this court should declare that accounts receivable generated by their home health care services performed on behalf of the Debtor hospital are not property of the Debtor's estate because they constitute the res of a constructive trust created by the Debtor in the Plaintiffs' favor. Since we find that the parties' relationship is that of debtor and creditor, and that neither the law, the parties' contract, nor the Debtor's conduct evinces wrongful acts or abuse of a confidential relationship necessary to create a constructive trust, we rule against the Plaintiffs.
The underlying Chapter 11 case of SACRED HEART HOSPITAL OF NORRISTOWN ("the Debtor") was filed on May 25, 1994, a week after the Debtor ceased its operations. This case has therefore been in a liquidation mode since its outset.
The Plaintiff has sought and been authorized to utilize cash collateral of its secured creditors, subject to their disputes regarding priority, in order to preserve its assets, including the hospital facility, for sale. We agree with the Plaintiffs that the cash collateral Orders entered on June 3, 1994, and thereafter have reserved whatever rights the Plaintiffs have in the Debtor's property. The main event in this case thus far has been the sale of the Debtor's hospital realty-asset to an unexpected bidder, Montgomery County, for a surprisingly high bid of $7.05 million. An attempt of the Borough of Norristown to thwart this sale by condemning the hospital was beaten back by an adversary proceeding (Adv. No. 94-0666DAS) in which the Borough's condemnation action was invalidated as violative of 11 U.S.C. § 362(a)(3).
After a status hearing of September 21, 1994, a deadline of November 22, 1994, was established for the Debtor to file a liquidating plan and a disclosure statement. A motion to extend this deadline to January 13, 1995, was recently allowed, due to the pendency of two adversary proceedings which will resolve the issues of the relative priorities of three creditor entities: (1) MIDLANTIC BANK, N.A., successor to Continental Bank ("the Bank"), the trustee of bonds issued on behalf of the Debtor, on which the balance due is approximately $25 million. The Debtor is seeking to avoid the Bank's liens as improperly perfected, and thus render the claims of the bondholders unsecured in a separate proceeding (Adv. No. 94-0561DAS) ("the Bank Proceeding"), tried on November 16, 1994, and on which briefing will be completed on December 16, 1994; (2) ALLMED FINANCIAL CORPORATION ("AllMed"), the purchaser of certain accounts receivable of the Debtor, which claims an apparently-undisputed replacement lien in certain property of the Debtor. AllMed will retain its complete secured status only if it can defeat alleged prior interests in the receivables in issue; and (3) SKILLED NURSING PROFESSIONAL SERVICES ("SNIPS"), a division of SKILLED NURSING HOME CARE, INC. ("SNHC"), and FACILITIES MANAGEMENT, INC. ("FMI," and with SNIPS, "the Plaintiffs"), which rendered home health care services on behalf of the Debtor prior to the closing of the hospital. The Plaintiffs, in the instant proceeding ("the Proceeding"), seek a declaration that accounts receivables ("the Receivables") generated by the Debtor's home health care department are not property of the Debtor's estate, but rather are property of the Plaintiffs. This claim is based upon the Plaintiffs' further request for a declaration that the Debtor holds the Receivables in constructive trust for Plaintiffs. The Bank and AllMed have both intervened in the Proceeding as parties defendant because they believe that the Plaintiffs' success in the Proceeding would siphon off to the Plaintiffs an amount of about $450,000 in estate funds. The Debtor's total assets will be clearly inadequate to pay all of the Bank's claims, let along those of all of the Debtor's creditors. Therefore, this Proceeding is, in essence, a battle for distribution priorities among the Plaintiffs and the Bank, and to a lesser degree, AllMed.
The testimony at the trial of September 29, 1994, of Harry (Tad) McKeon, the Plaintiff's former contractor; Joseph J. McCann, McKeon's successor; Anthony J. Gatt, the Debtor's former Director of Finance; and Gatt's successor, Terrence J. Cunningham, established several pertinent facts. In order to better serve its patients, and to stem the tide of defections to other medical facilities by its former patients who required home health care services, the Debtor, in the late 1980's, decided to open its own home health care services department. Rather than create its own staff and department, the Debtor enlisted the services of SNHC and SNIPS, who are in the business of providing home health care services, and FMI, an SNHC-related entity which is in the business of operating and managing hospital home health care departments. At some unspecified time in 1989, the Debtor, through a wholly owned subsidiary, Hyde Park Health Service, Inc., formed a joint venture with SNHC in order to provide home health care services to its patients. This joint venture was known as Sacred Heart Home Care Services, Inc.
The costs of home health care services, like ordinary inpatient hospital services, may be reimbursed by Medicare only if the provider has an agreement with Medicare and a valid provider number. The Debtor allied itself with the Plaintiffs because, inter alia, the Plaintiffs already held a valid provider number, which enabled them to seek reimbursement from Medicare for the provision of home health services to eligible patients. Unfortunately for the joint venture, Medicare ultimately informed the parties that the Plaintiffs' provider number could not be used by any entity other than themselves, including the joint venture.
Although certain options were available to the Debtor by which the Plaintiffs, in their own right, could have provided the home health care services on behalf of the Debtor and appropriately sought reimbursement from Medicare themselves through the joint venture structure, the Debtor declined to pursue those options and dissolved the joint venture. Instead, the Debtor decided to secure its own provider number and operate its own home health care department. Under this arrangement, the Medicare regulations permitted the Debtor to subcontract out much of these services to the Plaintiffs, as long as certain requirements were satisfied, including the installation of one of the Debtor's own employees as head of its home health care department. No party has argued that the Medicare requirements, in this regard, were not met. Thus, on October 1, 1991, the Debtor entered into a contract with SNIPS for professional home health care services ("the Service Agreement"), and a separate contract with FMI to manage its home health care department ("the Management Agreement").
Revenues collected for home health care services from patients, insurance companies, and third party payors such as Medicare, the latter of which constituted the majority of the revenues received by the Debtor from its home health care operations, were, at that time, placed in an account maintained at PNC Bank ("the PNC Account"). The Debtor had exclusive control over the PNC Account. Under this arrangement, SNIPS would bill the Debtor monthly for the services it rendered to home health care patients and the Debtor would pay SNIPS from its general revenues. FMI's payment arrangement was less clear. Although the Management Agreement suggests that, like SNIPS, FMI would submit monthly invoices to the Debtor and receive payment within 30 days (or thereafter with interest), the Agreement also details a reimbursement mechanism in which the PNC Account would be swept daily by the Debtor, a certain percentage of receipts would be paid to FMI, and a reconciliation between sums paid to FMI and the value of the services it rendered would be conducted by the parties at the end of the fiscal year. Apparently the sweep mechanism was never implemented, and FMI was paid in the same fashion as was SNIPS. In any event, the parties acknowledge that their arrangement obligated the Debtor to pay the Plaintiffs' invoices from whatever source of funds was available, not from just those generated by the home health service department. In other words, the Plaintiffs' right of payment was not...
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