In re West Side Community Hosp., Inc.

• Citation: 112 BR 243
• Decision Date: 15 March 1990
• Docket Number: Bankruptcy No. 89 B 8632.
• Parties: In re WEST SIDE COMMUNITY HOSPITAL, INC. d/b/a Sacred Heart Hospital, Alleged Debtor.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois

112 B.R. 243 (1990)

In re WEST SIDE COMMUNITY HOSPITAL, INC. d/b/a Sacred Heart Hospital, Alleged Debtor.

Bankruptcy No. 89 B 8632.

United States Bankruptcy Court, N.D. Illinois, E.D.

March 15, 1990.

COPYRIGHT MATERIAL OMITTED

Daniel Zazove, Marilyn Kosin, Towbin & Zazove, Ltd., Chicago, Ill., for alleged debtor.

Tom Luetkemeyer, Hinshaw, Culbertson, Moelmann, Hoban & Fuller, Chicago, Ill., for petitioning creditors.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

JACK B. SCHMETTERER, Bankruptcy Judge.

This cause came on for trial before this Court on issues raised under 11 U.S.C. § 303 by the Involuntary Petition of Commercial Vision Corporation ("Commercial Vision"), Dorothea Bowlby ("Bowlby") and Franklin Boulevard Community Hospital ("Franklin Boulevard") (collectively the "Petitioning Creditors") against the alleged debtor West Side Community Hospital, Inc. d/b/a Sacred Heart Hospital ("West Side"). The court admitted evidence offered by the parties by stipulation and without objection, and then took testimony. After the Petitioning Creditors rested, West Side moved for dismissal under Bankruptcy Rule 7041(b) Rule 41(b) F.R.Civ.P.. For reasons stated hereinbelow, the Court finds a bona fide dispute as to claims of one creditor, and by separate order grants the motion under Bankr.R. 7041(b) and dismisses the Involuntary Petition and this case. For reasons also set forth, the request of Alleged Debtor for fees, expenses, and damages under 11 U.S.C. § 303(i)(1) and (2) is by the same order denied.

Pursuant to Bankruptcy Rule 7041(b) and Rule 52(a) F.R.Civ.P. (Bankr.R. 7052) the court hereby makes and enters the following Findings of Fact and Conclusions of Law at the close of evidence by the Petitioning Creditors:

FINDINGS OF FACT

The Franklin Boulevard Claim

1. At some time prior to May, 1988, the Board of Directors of Franklin Boulevard (the "Board") decided to solicit potential buyers for the acquisition of certain of Franklin Boulevard's assets.

2. As a result of the Board's decision to sell certain of Franklin Boulevard's assets, Franklin Boulevard received offers from, West Side, among other entities.

3. As a result of West Side's offer, the parties executed a Letter of Intent regarding the purchase of Franklin Boulevard.

See West Side Exhibit 1, July 29, 1988 Letter of Intent. Pursuant to the Letter of Intent, Franklin Boulevard agreed, among other things, "to assist and cooperate with the Buyers in assigning and obtaining the Seller's health maintenance organization agreements, public aid and medicare applications" and "(t)he Seller (agreed) to assist and cooperate with the Buyers in order to obtain JCAHO accreditation and licensure from the State of Illinois." See West Side Exhibit 1, July 29, 1988 Letter of Intent.

4. On September 12, 1988, Franklin Boulevard and West Side executed a sale of assets agreement (the "Sale Agreement"). See West Side Exhibit 3, the Sale Agreement.

5. The preamble to the Sale Agreement provided that:

(s)eller desires to sell and Buyer desires to purchase all of the property owned and used by Seller in the operation of Franklin Boulevard Community Hospital and the assets described herein and on attached exhibits, but specifically excluding those assets set forth and described on Exhibit "H" attached hereto and made a part hereof.

Exhibit H excluded the following assets:

a. Franklin Boulevard\'s pension plan;

b. Franklin Boulevard\'s self insurance trust;

c. Insurance policies on P.A. DeMoon; and

d. Personal effects of P.A. DeMoon.

See West Side Exhibit 3, Sale Agreement, at 1; Exhibit H.

6. With respect to merchantable title to hospital assets, the Sale Agreement provided, in relevant part, that:

¶ 1.10 "Assets" shall mean all of the Seller\'s assets existing at the close of business on July 31, 1988 described as follows: . . . all of the office equipment, furniture and fixtures and all fixed durable medical equipment, valued at $500 or more, described in Exhibit "B" attached hereto and made a part hereof. . . . ¹

¶ 2.0 (s)ubject to the terms and conditions of this Agreement, the Seller agrees to sell, transfer, assign and deliver to the Buyer on the closing Date, all of the rights, titles and interests in the Assets described on Section 1.10, and Buyer agrees to purchase the rights, titles and interests in the Assets.

¶ 2.1(b) (a)ll personal property to be conveyed hereunder, wherever located, shall be free and clear of all liens and encumbrances.

¶ 2.1(d) (s)eller represents that all of the items of property . . . are all of the assets and properties used by Seller in the conduct of its business on July 31, 1988 and are located at the various premises indicated. Seller will not remove any of such property from any location without the written consent of the Buyer.

¶ 4.1(iv) (t)he Seller warrants and represents to the Buyer that: (iv) It has good and merchantable title to the assets described in paragraph 1.10 and such assets are free and clear of all mortgages, liens, encumbrances, easements, security agreements, equities, options, conditions or restrictions of any kind, except as set forth in Exhibit K.

See West Side Exhibit 3, Sale Agreement, at pp. 3, 5, 7.

7. Paragraph 2.1(c) of the Sale Agreement provided: "(t)he transfer of the Med Care Health Maintenance Organization membership and COMPASS Health Maintenance Organization membership shall be in accordance with their by-laws and the law of the State of Illinois." Paragraph 3.8(h) of the Sale Agreement provided that at closing Franklin Boulevard would transfer memberships in Med Care HMO and COMPASS HMO. Finally, paragraph 3.7(e) of the Sale agreement provided that the Sale Agreement was contingent upon the "(t)ransfer of ICARE and health maintenance organization contracts to Buyer." See West Side Exhibit 3, Sale Agreement, at pp. 8, 12, 13.

8. The agreed upon sale price for all Franklin Boulevard's assets was $1,400,000. With respect to any missing equipment, fixtures and furniture, paragraph 3.1 of the Sale Agreement, provided, in relevant part:

Buyer shall receive a credit against the purchase price for the fair market value of any items removed from the facility that were contemplated by the Buyer when entering into the Letter of Intent or were on the Hospital premises at the close of business on July 31, 1988.

See West Side Exhibit 3, Sale Agreement, at 9.

9. During the period from and after August 1, 1988, through the closing of the sale on November 18, 1988, disputes arose between Franklin Boulevard and West Side regarding the condition of the premises, West Side's expense in obtaining JCAHO accreditation and the presence of certain fixtures, equipment and furniture represented by Franklin Boulevard to be owned by Franklin Boulevard and located on the hospital premises.

10. As a result of an inventory by West Side of Franklin Boulevard's assets, on September 22, 1988, West Side's counsel Carrane wrote to Franklin's counsel Tom Luetkemeyer ("Luetkemeyer") and Edmund Gronkiewicz ("Gronkiewicz") regarding items missing from the hospital. At that time, West Side claimed that the missing items had a purchase cost of $503,790. See West Side Exhibit 4, Carrane's September 22, 1988 Letter with attached Inventory Summary.

11. Pursuant to paragraphs 3.5 and 8.4 of the Sale Agreement, West Side was not responsible for pre-August 1, 1988 debt. See West Side Exhibit 3, Sale Agreement, at 11, 24-25. In or about September, 1988 Edith Rolewicz ("Rolewicz"), P.A. DeMoon's sister, released checks without authorization by an officer of West Side to pay pre-August 1, 1988 Franklin Boulevard bills which totalled approximately $80,000. See West Side Exhibit 44, Summary of Unauthorized Checks, and Checks Paid by Rolewicz.

12. On September 30, 1988, Carrane again wrote to Luetkemeyer and Gronkiewicz alleging items missing from the hospital, and some said to be in a state of disrepair. See West Side Exhibit 5, Carrane September 30, 1988 Letter.

13. On October 10, 1988, Luetkemeyer and Gronkiewicz wrote to Carrane in response to, among other things, the unauthorized release of checks. Luetkemeyer and Gronkiewicz admitted "that the release of funds in question was a mistake. . . ." See West Side Exhibit 6, Luetkemeyer and Gronkiewicz October 10, 1988 Letter.

14. On October 17, 1988 Carrane wrote to Luetkemeyer regarding the transfer of Med Care HMO. Carrane stated that a

. . . matter which we have not heard back from you is regarding the Med Care membership. Our research revealed that membership can only be transferred to a not-for-profit entity. Please advise how your client intends to transfer membership.

See West Side Exhibit 7, Carrane October 17, 1988 Letter.

15. On October 26, 1988, Carrane wrote to Luetkemeyer and Gronkiewicz again, requesting Franklin Boulevard's response regarding the transfer of membership in Med Care HMO. Carrane also informed Luetkemeyer and Gronkiewicz that West Side would expect credits against the $1.4 million purchase price for, among other things, the JCAHO fee, overtime attributable to JCAHO accreditation and additional personnel hired for JCAHO accreditation. Carrane also wrote Luetkemeyer and Gronkiewicz with respect to allegedly missing fixtures and equipment:

(w)ithout the availability of the current Appraisal, it is believed that a minimum of $350,000 of fixtures and equipment is missing from the Hospital at this time which was contemplated by the Buyer when entering into the Letter of Intent. This figure is based upon the cost at purchase indicated in the physical inventory recently conducted. . . .

See West Side Exhibit 8, Carrane October 26, 1988 Letter.

16. On October 31, 1988, Carrane again wrote to Luetkemeyer. Carrane noted that:

(a)s I advised you at the October 12, 1988 meeting, when Mr. Novak and I met with Mr. P.A. DeMoon in May, 1988, he presented us with a copy of an Appraisal, which he represented was current, and the only one available to accurately

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