Mannucci v. Cabrini Med. Ctr. (In re Cabrini Med. Ctr.)

• Decision Date: 20 December 2012
• Docket Number: Bankruptcy No. 09–14398 (AJG).,Adversary No. 11–02407 (ALG).,No. 12 Civ. 6661 (SAS).,12 Civ. 6661 (SAS).
• Parties: In re CABRINI MEDICAL CENTER, Debtor. Mannuccio Mannucci, Guido Padula, Dilva Salvioni, and Angelo Taranta, Plaintiffs–Appellants, v. Cabrini Medical Center, et al., Defendants–Appellees.
• Court: U.S. District Court — Southern District of New York

489 B.R. 7

In re CABRINI MEDICAL CENTER, Debtor.Mannuccio Mannucci, Guido Padula, Dilva Salvioni, and Angelo Taranta, Plaintiffs–Appellants,

v.Cabrini Medical Center, et al., Defendants–Appellees.

Bankruptcy No. 09–14398 (AJG).

Adversary No. 11–02407 (ALG).

No. 12 Civ. 6661 (SAS).

United States District Court, S.D. New York.

Dec. 20, 2012.

Katherine B. Harrison, Esq., Paduano & Weintraub, LLP, New York, NY, for Appellants.

Sean C. Southard, Esq., Klestadt & Winters, LLP, Frank Oswald, Esq., Togut, Segal, & Segal, LLP, New York, NY, for Appellees.

OPINION AND ORDER

SHIRA A. SCHEINDLIN, District Judge.

I. INTRODUCTION

Three doctors—Mannuccio Mannucci, Angelo Taranta, and Guido Padula—as well as Dilva Salvioni, the widow of a fourth doctor, Daniele Salvioni (“Appellants”) appeal a Bankruptcy Court decision refusing to lift the automatic stay instituted by the bankruptcy proceedings of Cabrini Medical Center (“Cabrini”). Appellants allege that Cabrini is an alter-ego of the Missionary Sisters of the Sacred Heart of Jesus (“Missionary Sisters”), and seek to lift the stay so that they may add Cabrini as a nominal defendant in a state court action against Missionary Sisters.¹

II. BACKGROUND²A. The State Court Complaints

Cabrini is a domestic not-for-profit corporation organized under the laws of New York that operated a hospital in New York but in March 2008 ceased hospital operations.³ Mannucci, Padula, Salvioni and Taranta worked for Cabrini until retiring in 2000, 1980, 1980, and 1995 respectively.⁴ Between 1967 and 1978, Cabriniset up Deferred Compensation Plans (the “Plans”) for each of the Doctors.⁵ None of the Plans had trustees.⁶ Cabrini deposited the monies subject to the Plans into a variety of brokerage accounts.⁷ In 1997, citing a tax problem, Cabrini transferred the funds from these accounts into four accounts with Merrill Lynch, Pierce, Fenner & Smith, Inc. (“Merrill Lynch”).⁸ On November 16, 2006, Cabrini's then-president and CEO Robert Chaloner sent a letter to the doctors informing them that, as part of a “major restructuring project[,]” their money would be “temporarily” moved.⁹ Between 2006 and 2007, Cabrini transferred the funds from the Merrill Lunch accounts (totaling roughly $2.9 million dollars) into its general operating account.¹⁰ Not surprisingly, Cabrini did not have the doctors' authorization to make these transfers.¹¹

On August 6, 2008, the Appellants commenced an action in the Supreme Court of the State of New York, New York County, against Cabrini, Missionary Sisters, and Merrill Lynch, seeking to recover the funds allegedly looted from the Plans.¹² The complaint alleged that the Plans were qualified ERISA plans, and that the defendants were liable under ERISA and a variety of New York common law theories.¹³ The complaint further alleged that Cabrini was dominated, controlled, and ultimately looted by Missionary Sisters. ¹⁴

After the Chapter 11 proceedings and the automatic stay (discussed below) were instituted, the state court action was dismissed with leave to re-plead and, on March 1, 2010, the Appellants filed an amended complaint, which was substantially identical to the earlier complaint but dropped Cabrini as a defendant.¹⁵ Missionary Sisters moved to dismiss on the basis that Cabrini was a necessary party not named in the complaint, and their motion was granted on January 5, 2011, and affirmed on appeal on April 5, 2012.¹⁶

B. The Bankruptcy Proceedings

On July 9, 2009, Cabrini filed for bankruptcy under Chapter 11,¹⁷ At the petition date, Cabrini had only two hundred thousanddollars cash on hand. The Bankruptcy Court therefore approved debtor-in-possession (“DIP”) financing in an Interim Order dated July 30, 2009.¹⁸ Under this Order, the Illinois Missionary Sisters, the largest secured creditor of Cabrini and an Illinois arm of the Missionary Sisters, provided DIP financing in return for Cabrini's agreement not to challenge the liens of the Missionary Sisters or otherwise assert any claims against them.¹⁹ However, the Creditors' Committee and other parties in interest were given standing and authority for ninety days to challenge the liens or otherwise bring claims against the Missionary Sisters.²⁰

Appellants did not file a complaint during this ninety day window. The Creditors' Committee, though, filed a complaint against Missionary Sisters in the Bankruptcy Court on October 28, 2009, seeking to set aside and/or subordinate various claims of the Missionary Sisters.²¹ Like the amended state court complaint that would be filed later, the Committee's complaint alleged that the Missionary Sisters had dominated, controlled, and extracted resources from Cabrini.²²

On November 19, 2009, the doctors each filed proof of claims in the bankruptcy case reflecting the monies they asserted they were owed under the Plans. ²³ The doctors did not check any of the boxes that would have indicated that their claims were secured or otherwise entitled to priority over general unsecured claims.²⁴ After an auction process, on February 11, 2010, the Bankruptcy Court approved the sale of Cabrini's assets—mostly real-estate—for $83.1 million dollars.²⁵ Subsequently, the Creditors' Committee's adversary proceeding settled, and, after the relevant parties were noticed, the settlement (the “Settlement”) was approved—without any objection by Appellants—on November 19, 2010.²⁶

Through the Settlement Agreement, the Missionary Sisters renounced a portion of their secured claims for the benefit of the unsecured creditor class, and in exchange received a release from all claims against it by Cabrini, its estate, or the Creditors' Committee.²⁷ The Settlement also includedan injunction (the “Plan Injunction”) that would prevent any creditor who received a distribution under a plan of reorganization “from pursuing claims against [the Missionary Sisters] that arise out of the creditors' dealings with the debtor.” ²⁸

With all loose ends seemingly tied up, Cabrini and the Creditors' Committee filed a joint plan of reorganization, incorporating the Settlement, and sought approval of a disclosure statement on December 22, 2010.²⁹ On January 19, 2011, the Appellants timely objected to the disclosure statement, seeking full disclosure of their claims and alleging that: (1) the funds taken from the Plans should be excluded from the estate, under either an ERISA or trust theory; and (2) the Bankruptcy Court was not justified in issuing the Plan Injunction against them.³⁰ Cabrini then modified the plan and the disclosure statement to fully disclose the Appellants' reservations, and on January 26, 2011, the Bankruptcy Court entered an Order approving the First Amended Disclosure Statement.³¹

That same day-twenty-one days after their state court action had been dismissed—the Appellants moved the Bankruptcy Court to lift the automatic stay to allow them to add Cabrini as a defendant in the state court action. ³² However, on February 4, 2011, Cabrini filed a motion in the Bankruptcy Court to fix the amounts of the Appellants claims and classify them as general unsecured claims, and in a hearing on March 23, 2011 the Bankruptcy Court decided to hold Appellants' motion to lift the stay in abeyance pending resolution of Cabrini's motion.³³

On March 30, 2011, the plan confirmation hearing went forward, opposed only by Appellants.³⁴ After negotiations between the parties over the scope of the Plan Injunction, the Court entered a Confirmation Order on April 13, 2011.³⁵ This Order enjoined those who held claims against Cabrini from “commencing or continuing in any manner any action or other proceeding with respect to a claim against the debtor or based upon a theory which arises out of such holder's Claim against the Debtor.” ³⁶ The Order further states that “the injunction precludes only those causes of action that were either (a) created by virtue of the filing of the bankruptcy or (b) that are otherwise property of the Estate, including derivative actions.” ³⁷

C. The Bankruptcy Court Decisions

Thereafter, the parties initiated respective adversary proceedings over control of the funds, which were subsequently procedurally consolidated, and each side moved for summary judgment.³⁸ In its opinion (the “Summary Judgment Opinion”), the Bankruptcy Court held that, because the funds from the Plans had been commingled with general funds and could not be traced, the Appellants' claims would be allowed as general unsecured claims, not excluded from the estate.³⁹

An appeal of the Summary Judgment Opinion was taken and heard by the Honorable Lewis A. Kaplan.⁴⁰ One of the issues designated for appeal was whether the Bankruptcy Court erred by not deciding who owned the funds.⁴¹ On October 9, 2012, Judge Kaplan heard oral arguments and issued a bench ruling affirming the Summary Judgment Opinion.⁴² In his bench ruling, Judge Kaplan found that the Appellants never had a proprietary interest in the brokerage accounts maintained by Cabrini in connection with the Plans. Instead, Cabrini had a contractual obligation under the Plans to pay Appellants, upon their respective retirement dates, a sum of money equal to the amount of money in the brokerage accounts.⁴³ Judge Kaplan further found that it would be legally impermissible to impose a constructive trust on Cabrini for these monies because, inter alia, the funds Appellants were contractually entitled to did not form an identifiable res, had been commingled with the general funds of Cabrini and then dissipated, and could not be traced. ⁴⁴ That same day, the Clerk of Court entered an order stating that the District Court had affirmed the Bankruptcy Court “substantially for the reasons [set forth] in the Bankruptcy Court's opinion, as well as those given by this Court today.” ⁴⁵ Judge Kaplan's order is currently on appeal to the Second Circuit.⁴⁶

On March 14, 2012, after the Appellate Division affirmed the dismissal of their state court complaint, the Appellants renewed their motion...