In re Senior Living Properties, L.L.C.

• Decision Date: 23 April 2004
• Docket Number: Adversary No. 03-3262.,Bankruptcy No. 02-34243-SAF-11.
• Citation: 309 B.R. 223
• Parties: In re SENIOR LIVING PROPERTIES, L.L.C., et al., Debtors. Dan B. Lain, Trustee of Senior Living Properties, L.L.C., Trust, Plaintiff and Counter-Defendant, v. ZC Specialty Insurance Company, Defendant and Counter-Plaintiff.
• Court: U.S. District Court — Northern District of Texas

309 B.R. 223

In re SENIOR LIVING PROPERTIES, L.L.C., et al., Debtors Dan B. Lain, Trustee of Senior Living Properties, L.L.C., Trust, Plaintiff and Counter-Defendant, v. ZC Specialty Insurance Company, Defendant and Counter-Plaintiff.

Bankruptcy No. 02-34243-SAF-11.

Adversary No. 03-3262.

United States District Court, N.D. Texas, Dallas Division.

April 23, 2004.

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Marvin Isgur, Floyd, Isgur, Rios and Wahrlich, Houston, David Hill, Wellborn, Houston, et al., Henderson, TX, David Marks, The Marks Firm, Houston, TX, Lynette Warman, Jenkens & Gilchrist, Dallas, TX, for Plaintiff and Counter-Defendant.

Ronald Betman, Jack Crowe, Monika Blacha, Winston & Strawn, Chicago, IL, for Defendant and Counter-Plaintiff.

MEMORANDUM OPINION AND ORDER

STEVEN A. FELSENTHAL, Chief Judge.

In this adversary proceeding, Dan B. Lain, the Trustee of the Senior Living Properties L.L.C. (SLP) Trust, requests that the court declare that ZC Specialty Insurance Company (Zurich) was a partner with SLP in the ownership and operation of nursing homes in Illinois and Texas and that, as a partner, Zurich is liable for all of SLP's debts. Zurich responds that it merely provided a surety bond for the payment of a substantial portion of SLP's mortgage and, as a result, merely held a creditor-debtor relationship with SLP.

The trust was established pursuant to the Third Amended Joint Plan of Reorganization of SLP, confirmed by order entered August 8, 2003, with Lain appointed as the trustee. Under the plan, Lain "shall act as the representative of the [bankruptcy] Estates for the purposes of liquidating assets of the Trust." Third Am. Joint Plan of Reorganization, Art. VII, § 7.1. SLP's partnership claim against Zurich vested in the trust. Id.; see also id. at Art. I, definition of "alter ego claims." The plan charges Lain with the duty to collect unpaid debts of SLP from, among other entities, any partner. From the liquidation of the assets transferred to the trust, the plan directs Lain to satisfy claims in classes 6, 7, 8, 9, 10 and 11, making distributions to the extent possible. Id. at Art. VII, § 7.2. Those classes include SLP's unpaid unsecured vendors, service providers and personal injury claimants.

Both Lain and Zurich focus on the contractual relationship between the parties. They both agree that a Reimbursement Agreement between SLP and Zurich, and related contractual documents, inform the court's decision of whether SLP and Zurich entered a de facto partnership. GMAC Commercial Mortgage Corporation (GMAC) loaned SLP $226 million, for which SLP mortgaged its property. Zurich's surety bond guaranteed the payment of $146 million of the mortgage. SLP defaulted on its mortgage. Pursuant to the surety bond, Zurich has been dutifully paying the GMAC note since the default. Under the Reimbursement Agreement, Zurich has a claim against SLP for those payments. Lain's complaint derives from the provisions of the Reimbursement Agreement.

Indeed, had the parties adhered to the Reimbursement Agreement, Lain's constituency would not include SLP's general unsecured trade creditors and personal injury claimants. SLP and Zurich agreed in the Reimbursement Agreement that SLP would pay its operating expenses from its monthly gross receipts before the payment of any other obligations. The vendors and service providers would have been paid. Liability insurance would have been purchased. Personal injury claimants would have been compensated by that insurance coverage.

The contractual undertaking by SLP and Zurich to pay operating expenses as a first priority tempers the partnership analysis. The law derives from the expectations of a reasonable person of how the marketplace works. See Posner, Cardozo: A Study in Reputation (University of Chicago Press 1990), at 30-31, 93-94; Kaufman, Cardozo (Harvard University Press 1998), at 358-59. By providing a surety bond guaranteeing the payment of SLP's mortgage, Zurich created a credit-enhanced structured financial arrangement to induce the market to provide capital for the purchase and operations of SLP's 87 nursing homes. The arrangement included a contract requiring the payment of operating expenses and insurance before payment of debt service. That arrangement assured the marketplace that vendors, service providers and patients would be protected by receiving the first distributions from gross revenues. A reasonable person would expect that a mortgage plus a surety bond issued with that contractual obligation would result in the payment of operating expenses. A reasonable person would expect that the law governing the market for that type of transaction would enforce that reasonable expectation. By invoking the legal standards for a de facto partnership, Lain seeks nothing more than to hold Zurich to that contractual obligation.

Evidentiary Issues

The court first addresses the evidentiary issues raised by the parties.

Zurich moves to bar consideration of evidence of nursing home injuries. Lain stipulated that he would not present such evidence. The court grants the motion.

Zurich moves to exclude parol and/or extrinsic evidence. The court addresses that motion in the findings of fact and conclusions of law below. Based on those findings and conclusions, the court grants the motion in part and denies the motion in part.

Zurich moves to exclude the use of electronic mail evidence. Except where the declarant testified at trial, the court has not considered the content of an e-mail for the truth of the matter asserted, but the court does consider an e-mail as evidence of the fact of the communication. Therefore, the court grants the motion in part and denies the motion in part.

Zurich moves to exclude and/or limit the testimony of expert witnesses Lawrence Ribstein, Neil Cohen, John Dolan, Richard Clark Abbott and W. Clifford Atherton. Lain elected not to offer Ribstein as an expert witness and withdrew his expert report. The court held, at trial, that it would not consider legal opinions from Cohen or Dolan as expert evidence. The court recognized Cohen as an expert on loan agreements and the study of surety markets and surety practice, but not on below investment grade credit markets. The court recognized Dolan as an expert on loan and reimbursement agreements and fee structures within those agreements but not in the area of pricing premiums for surety bonds. Neither had expertise in dealing with credit enhancement of below investment grade debt. The court recognized Abbott as an expert in capital markets, corporate finance, workout lending, including in the healthcare field, and the review of letters of credit in a loan committee. The court did not recognize Abbott as an expert in the pricing of or the use of letters of credit or surety bonds to credit enhance below-investment grade debt. Atherton did not testify. Based on this record, the court grants the motion to exclude and limit in part and denies the motion in part.

Lain moves to strike Zurich's expert witnesses. At trial, the court recognized James Hass as an expert on mezzanine loan and surety bond pricing. At trial, the court recognized Donald Thomas, a certified public accountant, as an expert on corporate finance, credit underwriting processes, and workouts and restructuring of distressed financial transactions, including in bankruptcy cases. Within the realm of corporate finance, Thomas was not an expert on particular questions of surety bond issues. Zurich identified Allan Vestal as an expert witness but did not call him at trial. Based on this record, the court grants the motion in part and denies the motion in part.

At the beginning of the trial, the court applied Fed.R.Evid. 615, Exclusion of Witnesses. The court directed counsel for the parties to explain the rule to their witnesses. Robert Aicher, an attorney, represented Zurich in the SLP transactions. Zurich listed Aicher as a fact witness and indeed called him to testify at trial. Prior to his testimony, Zurich's trial attorneys provided Aicher with a copy of the daily transcript of the trial. The transcript included the testimony of other parties to the transaction, the principal players and an attorney who negotiated the transaction. Aicher read the transcripts prior to his testimony. Aicher conceded that he violated the rule. Zurich's attorneys conceded that they provided Aicher with the transcripts, with full knowledge of the rule. Lain moved to strike Aicher's testimony. The court granted the motion.

Zurich then moved the court to reconsider its decision to strike Aicher's testimony. By order entered January 26, 2004, the court denied the motion, reserving a statement of the reasons for the denial for this memorandum decision. However, for purposes of assuring a reviewable record in the event of an appeal, the court directed the parties to designate and submit a transcript of the portions of Aicher's deposition covering his anticipated testimony.

The court has discretion to determine whether Rule 615 had been violated and, if so, what sanction, if any, should be imposed. United States v. Berry, 670 F.2d 583, 606 (5th Cir.1982). A violation of the rule does not automatically bar the testimony of the errant witness. Rather, in the exercise of discretion, the court must assess all the circumstances, including prejudice to the parties. Providing a witness the daily copy of the trial transcript constitutes a violation of Rule 615. Miller v. Universal City Studios, Inc., 650 F.2d 1365, 1373 (5th Cir.1981). Aicher, a lawyer, knowingly violated the rule. Zurich's lawyers knowingly aided the violation of the rule. The witness represented Zurich and its parent and affiliated entities in negotiating the SLP transaction. The witness's testimony would have concerned central, substantive issues in the case regarding those negotiations and the transaction itself. The...