In re US Physicians, Inc.
| Decision Date | 29 July 1999 |
| Docket Number | Bankruptcy No. 98-34011DAS. |
| Citation | 236 BR 593 |
| Parties | In re U.S. PHYSICIANS, INC., (Jointly Administered with U.S. Medical Services of Pennsylvania, P.C., No. 98-34012DAS U.S. Medical Services of New Jersey, P.C., No. 98-34013DAS U.S. Rehabilitation Services of Pennsylvania, P.C., No. 98-34014DAS U.S. Medical Services of Delaware, P.A., No. 98-34023DAS), Debtors. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
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Gary M. Schildhorn, Adelman, Lavine, Gold and Levin, Philadelphia, PA, for Debtors.
Daniel M. Grauman, Bala Cynwyd, PA, for Trustee in U.S. Physicians Case.
Christine C. Shubert, Tabernacle, NJ, for Trustee in Other Cases.
Morton Brantzburg, Esquire, Klehr, Harrison, Harvey, Branzburg & Ellers, Philadelphia, PA, for Trustee Daniel M. Grauman.
Paul B. Maschmeyer, Ciardi, Maschmeyer & Karalis, P.C., Philadelphia, PA, for Trustee Christine C. Shubert.
Carl J. Greco, Carl J. Greco, P.C., Scranton, PA, for Movants.
Henry Dewerth-Jaffe, Pepper Hamilton, LLP, Philadelphia, PA, for HCFP Funding Inc.
Walter Weir, Jr., Weir & Partners, Philadelphia, PA, for Plaintiffs in Adv. No. 99-0225, raising a similar issue.
Frederic Baker, Ass't. U.S. Trustee, Philadelphia, PA.
The contested matter before us is in substance an attempt by former member doctors ("the Doctors") of affiliated Debtors which attempted to form a consolidated medical practice group, to separate themselves from that group upon its financial demise and thereby assert their sole right to assets previously transferred by them to the Debtors, notably the right to collect certain pre-petition accounts receivable generated by the Doctors' incorporated medical practice. The Doctors have utilized the means of a motion for relief from the automatic stay ("the Motion") to accomplish this end.
At bottom, this effort fails because the Doctors did not strictly adhere to prescribed contractual procedures in separating themselves from the Debtors, thus allowing the Debtors' trustees ("the Trustees"), standing in the shoes of the "ideal creditor," to successfully contest same. The Motion also fails under the terms of 11 U.S.C. § 362(d) of the Bankruptcy Code because the Doctors were unable to establish that they held a valid security interest under 13 Pa.C.S. § 9115 in their stock of their former practice ("the Stock"), which they had previously transferred to the Debtors in affiliating with them. The absence of a valid security interest eliminates 11 U.S.C. § 362(d)(2) as a basis for the Motion and the Doctors are unable to establish the requisite balance of hardships in their favor necessary to prevail as unsecured creditors under 11 U.S.C. § 362(d)(1).
We will therefore deny the Motion and allow the Trustees to continue to exercise their rights over the disputed assets.
This Motion is the latest in a series of attempts by doctors previously affiliated with U.S. PHYSICIANS, INC. ("USP"), and the four companies affiliated to it which are listed in the above caption ("the Debtors"), to recover assets transferred to the Debtors upon the Debtors' financial collapse. A similar dispute involving other physicians is reported in In re U.S. Physicians, Inc., 235 B.R. 367 (Bankr.E.D.Pa. 1999) ("USPI"). As is noted in USPI, at 370-71, having succeeded in its efforts to acquire numerous medical practices prior to obtaining a public stock offering ("the IPO") which it was contemplated would fund its large group practice, USP was ultimately unable to obtain the capital necessary to issue the IPO. That venture consequently failed. Many of the physicians who sold their practices to USP have filed claims as creditors in these cases, seeking various resolutions from the bankruptcy court. Dr. Joseph G. Cesare, Dr. P. Christopher Metzger, Dr. Alice R. Coyle, and Dr. Jack F. Henzes, who formed a corporate practice and thereafter a successor corporation among themselves, the Movants now before us, are typical of those physicians believing themselves entitled to assert rights in assets of their former respective practices against the claims to same of USP.
The Debtors' bankruptcy petitions were initially filed, on October 30, 1998, as voluntary Chapter 11 cases. When financing necessary to preserve the Debtors' structure during the requisite unwinding process could not be obtained, these cases were, at a very early stage, converted to cases under Chapter 7 of the Code on November 9, 1998. Christine Shubert, Esquire, was appointed as interim trustee of all five Debtors on November 10, 1998. Daniel Grauman (with Shubert, "the Trustees") was elected as the permanent Chapter 7 trustee in the USP case on April 12, 1999, while Shubert remains as trustee in the other four cases.
The Movants filed the Motion before us on February 26, 1999. After agreed continuances from the original hearing date of March 25, 1999, and the next scheduled date of April 29, 1999, the matter was listed on June 22, 1999, with several proceedings arising out of this case, mostly involving challenges by numerous physicians groups to the asserted first priority secured claim to most of the Debtors' assets by its principal lender, HCFP Funding, Inc. ("HCFP").
At the hearing, which in fact took place on June 22, 1999, when we refused to allow a further requested continuance, one of the four Movants, Dr. Cesare, testified. The Trustees and HCFP ("the Objectors") joined to oppose the Motion, with Grauman taking the lead. A post-hearing scheduling order required simultaneous initial submissions on July 2, 1999, and replies on July 9, 1999.
It was established at the hearing that the Movants were the sole shareholders in a closely-held professional corporation and its successor. On July 30, 1997, they sold the Stock, consisting of all of the shares issued by their most recent incorporated practice, to USP in furtherance of USP's aforementioned plan to form a large physician practice management company. In the sale, the Movants exchanged the Stock for a combination of current cash and future payments. The future payments were represented by promissory notes ("the Notes") issued by USP to the Movants.
There were only four stock certificates ever issued by the Movants' medical practice corporations, and three of the four could not be found at the time of closing of the sale transaction. As a result, three of the Movants executed letter affidavits, attesting to the existence of the missing certificates; agreeing that they were "inducing" their practice to issue new certificates which would be "issued" to USP; and agreeing to indemnify their corporation from claims based on the lost certificates or the issuance of the new ones.
Completion of the sale was accompanied by the execution of numerous documents memorializing the terms agreed to by the parties to the transaction. Among the documents was a Stock Purchase Agreement ("the Purchase Agreement") and a Rider to the Purchase Agreement ("the Rider"). A term in the Rider provided an option for the Movants to repurchase the Stock in the event that the IPO failed to go forward as planned ("the Option"). A separate Pledge Agreement in which USP was the obligor was also executed, and it provided that, upon an event of default, "ownership of the Securities, free and clear of all liens, security interests, encumbrances and claims, was to automatically revert to the Movants." The Option included the following provisions, at paragraph 21:
The Deliverables were further defined in the Rider, at ¶ 21(h), as "the Notes, the Common Shares, and all amounts paid to Physicians under the Notes through prepayment or otherwise, through the IPO Termination Date."
When USP's IPO did not occur as scheduled, the Movants were empowered to exercise the Option. In addition, the Movants allege that USP failed to submit the July 30, 1998, payment on the Notes, constituting an event of default under the Pledge Agreement. However, the only step taken by the Movants to extricate themselves from the transaction was the dispatch of the following letter ("the Letter") of August 11, 1998, to USP's President:
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