LaSalle Nat. Bank Ass'n v. Paloian

Citation406 B.R. 299
Decision Date17 March 2009
Docket NumberNo. 07 C 5232.,No. 07 C 2815.,No. 07 C 5231.,No. 07 C 2722.,07 C 2722.,07 C 2815.,07 C 5231.,07 C 5232.
PartiesLaSALLE NATIONAL BANK ASSOCIATION, f/k/a LaSalle National Bank, as Trustee for Certificate Holders of Assets Securitization Corporation, Commercial Pass-Through Certificates Series 1997, D5, Appellant, v. Gus A. PALOIAN, Chapter 11 Trustee of Doctors Hospital of Hyde Park, Inc., Appellee.
CourtUnited States District Courts. 7th Circuit. United States District Court (Northern District of Illinois)

Jeffrey Lawrence Gansberg, John W. Costello, John E. Frey, Scott Allen Semenek, Wildman, Harrold, Allen & Dixon, LLP, Chicago, IL, for Appellee.

Adam Phillip Silverman, Howard L. Adelman, Adelman, Gettleman, Merens, Berish & Carter, Ltd., James M. Witz, Freeborn & Peters LLP, Michael Nicholas Ripani, Chuhak & Tecson PC, John Lawrence Conlon, Robert D. Nachman, Schwartz, Cooper, Greenberg & Krauss, Jane B. McCullough, Kimberly Marie Deshano, Nancy A. Peterman, Greenberg Traurig, LLP., David Thomas Beech Audley, Michael T. Benz, Richard Alan Wohlleber, Chapman & Cutler, John E. Frey, John W. Costello, Peter N. Moore, Wildman, Harrold, Allen & Dixon, LLP, Chicago, IL, Michael D. Warner, Warner, Stevens & Doby LLP, Fort Worth, TX, for Appellant.

MEMORANDUM OPINION AND ORDER

REBECCA R. PALLMEYER, District Judge.

FACTS
                TABLE OF CONTENTS
                Facts...........................................................................308
                Background...........................................................,..........310
                  I.    The Parties.............................................................310
                 II.   History of Doctors Hospital..............................................312
                
                III.  The Daiwa Loan............................................................312
                      A. MMA Funding's Function as a Special Purpose Entity under the Daiwa
                          Loan..................................................................314
                      B. The Contribution of Doctors Hospital's Healthcare Receivables Under
                          the Daiwa Loan........................................................315
                 IV.  The HPCH Lease/Nomura Loan................................................317
                  V.  Transfer of the Nomura Loan to the Trust..................................318
                 VI.  Cash Flow Under the Daiwa and Nomura Loans................................318
                      A. Cash Flow Before the Nomura Loan.......................................318
                      B. Cash Flow After the Nomura Loan and Up to July 7,1998 .................319
                      C. Cash Flow After July 7,1998............... ............................320
                VII.  Doctors Hospital's Insolvency ............................................321
                      A. Expert Testimony.......................................................321
                      B. Other Evidence of Insolvency...........................................322
                VIII. Bankruptcy Court Judgment.................................................324
                Discussion......................................................................325
                Summary of Issues On Appeal .............................. .....................325
                   I. The Bankruptcy Court Did Not Clearly Err In Finding Defendant Was the
                       Initial Transferee of the Pre-July 1998 Transfers........................326
                  II. The Bankruptcy Court Did Not Clearly Err In Finding that the Post-July
                       1998 Transfers Were Not Fraudulent Transfers.............................331
                      A. The Parties' Post-Agreement Conduct Did Not Modify the Terms of the
                          Daiwa Loan Agreement..................................................332
                      B. The Daiwa Transaction Was Not in Substance a Loan to Doctors
                          Hospital..............................................................336
                         1. MMA Funding Functioned as a Special Purpose Entity..................336
                         2. The Transfer of the Doctors Hospital Receivables was a True Sale....339
                         3. MMA Funding was not the Alter Ego or Instrumentality of Doctors
                             Hospital ..........................................................341
                      C. Viewing the Agreement as Written, the Post-July 1998 Transfers Were
                          Not Made with Funds Belonging to Doctors Hospital.....................344
                         1. The Trust's Right to Receive Rent Payments Does Not Make the
                             Cash Collateral Account Funds the Property of Doctors Hospital.....344
                         2. The Bankruptcy Court Did Not Clearly Err in Declining to Determine
                             Ownership of the Collection Account Funds..........................346
                         3. The Bankruptcy Court Did Not Clearly Err in Failing to Address
                             Defendant's Admissions.............................................347
                         4. The Bankruptcy Court at No Time Recognized the Transferred
                             Funds as Property of Doctors Hospital..............................348
                         5. The Bankruptcy Court Did Not Treat the Unambiguous Transaction
                             Documents Inconsistently...........................................349
                III.  The Trial Court Did Not Clearly Err In Concluding that Doctors Hospital
                       was Insolvent as of August 28,1997 ......................................349
                      A. The Bankruptcy Court Did Not Apply Improper "Hindsight Bias" in
                          Determining that Doctors Hospital was Insolvent as of August 28
                          1997 ...................... ..........................................350
                      B. The Bankruptcy Court Did Not Err in Adopting Plaintiffs Experts'
                          Opinions..............................................................352
                
                      C. Medieare/Medicaid Fraud................................................353
                      D. Inflated Specific Company Risk Premium.................................356
                      E. The $4.5 Million Add-back..............................................357
                      F. Reduction of Above-Market Rent.........................................358
                 IV. The Bankruptcy Court Did Not Clearly Err in Treating Doctors Hospital as
                      a Subchapter C Corporation for Valuation Purposes.........................359
                  V.  Conclusion as to the Bankruptcy Court's Finding of Insolvency.............360
                 VI. The Bankruptcy Court Properly Concluded That the Pre-July 1998
                      Transfers Were Payments of Rent, not Debt............. ...................360
                     A. HPCH Lease Provisions...................................................361
                     B. Defendant Could Receive Payments of Rent................................361
                     C. Defendant's Status as REMIC Trust.......................................363
                VII. The Court's Award of Prejudgment Interest..................................363
                      Conclusion................................................................366
                

Doctors Hospital of Hyde Park, Inc. (hereinafter "Plaintiff" or "Doctors Hospital" or "Debtor") filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for the Northern District of Illinois on April 17, 2000. On April 15, 2002, Doctors Hospital filed an adversary complaint in the bankruptcy court for the Northern District of Illinois, pleading a total of 28 counts against a number of individuals and entities. Counts VIII, IX, and X of the complaint assert claims against LaSalle Bank National Association, f/k/a LaSalle National Bank ("Defendant" or "Trust"), as trustee for certain asset certificateholders of Asset Securitization Corporation Commercial Mortgage Pass-Through Certificates, Series 1997, D5.1 On April 22, 2004, Gus A. Paloian was appointed the Chapter 11 trustee for Doctors Hospital. In its claims against Defendant, Doctors Hospital sought (1) to void as fraudulent transfers a guaranty and related security agreements that Doctors Hospital made in connection with a loan from Defendant's predecessor, Nomura Asset Capital Corporation, to Doctors Hospital's landlord (the "Nomura Loan," discussed below) (Count VIII); and (2) to void a lease (the "HPCH Lease", discussed below) held by Defendant as Nomura's assignee or to recover as fraudulent transfers payments of rent that Doctors Hospital had made to Defendant in excess of the property's fair market rental value (Counts IX and X).

Defendant filed a proof of claim in the bankruptcy case and a counterclaim in the adversary case, seeking approximately $60 million based on Doctors Hospital's guaranty and security agreements in connection with the Nomura Loan. Because the proof of claim in the bankruptcy case and Count VIII of the adversary proceeding were factually related to the guaranty and related security agreements between the parties, the bankruptcy court consolidated the adversary claims against the Trust and objections to the proof of claim for resolution at a trial on the issue of whether the agreements were voidable as fraudulent transfers.

Judge Schmetterer of the bankruptcy court conducted a bench trial on Counts VIII, IX, and X, and on March 2, 2007, issued his Initial Findings of Fact and Conclusions of Law. In re Doctors Hosp. of Hyde Park, Inc., 360 B.R. 787 (Bankr. N.D.Ill.2007). The findings relevant to this appeal are as follows:

(1) Doctors Hospital was insolvent at all times between August 28, 1997 and April 17, 2000, the date it filed for bankruptcy;

(2) Doctors Hospital's guaranty and security payments to Defendant pursuant to a loan Defendant made to Doctors Hospital's landlord were void as fraudulent transfers;

(3) Defendant was the initial transferee of lease payments from Doctors Hospital prior to July 7, 1998;

(4) Doctors Hospital's lease payments to Defendant were payments of rent, not debt;

(5) Doctors Hospital's payments of rent prior to July 7, 1998 were fraudulent transfers to the extent they exceeded fair market value; and

(6) Rental payments made after July 7, 1998 were not fraudulent transfers because they were not made with assets of Doctors Hospital.

The bankruptcy court also denied Defendant's...

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