Matter of New Center Hosp.

• Citation: 187 BR 560
• Decision Date: 03 August 1995
• Docket Number: No. 94-CV-72776-DT.,94-CV-72776-DT.
• Parties: In the Matter of NEW CENTER HOSPITAL, Debtor. Basil T. SIMON, Trustee, and United States of America, Plaintiffs-Appellees, v. NEW CENTER HOSPITAL, Park Community Hospital d/b/a New Center Hospital, Central City Health Services, Inc., New Center Clinic — East, Inc., New Center Clinic — West, Inc., New Center Clinic — Central, Inc., Detroit Medical Health Facility, Inc., New Center Managed Care, Inc., Detroit Medical and Surgical Center, P.C., Central City Health Services Clinic, Defendants-Appellants.
• Court: U.S. District Court — Western District of Michigan

187 B.R. 560 (1995)

In the Matter of NEW CENTER HOSPITAL, Debtor Basil T. SIMON, Trustee, and United States of America, Plaintiffs-Appellees, v. NEW CENTER HOSPITAL, Park Community Hospital d/b/a New Center Hospital, Central City Health Services, Inc., New Center Clinic — East, Inc., New Center Clinic — West, Inc., New Center Clinic — Central, Inc., Detroit Medical Health Facility, Inc., New Center Managed Care, Inc., Detroit Medical and Surgical Center, P.C., Central City Health Services Clinic, Defendants-Appellants.

No. 94-CV-72776-DT.

United States District Court, E.D. Michigan, Southern Division.

August 3, 1995.

COPYRIGHT MATERIAL OMITTED

Jay N. Siefman, Farmington Hills, MI, for New Center Hospital.

Jerome D. Frank, Jay N. Siefman, Farmington Hills, MI, for Park Community Hospital, Central City Health Services, Inc., New Center Clinic-East, Inc., New Center Clinic-West, Inc., New Center Clinic-Central, Inc., Detroit Medical Health Facility, Inc., New Center Managed Care, Inc. and Detroit Medical and Surgical Center, P.C.

Robert A. Weisberg, Carson, Fischer & Potts, Birmingham, MI, for Basil T. Simon, Trustee.

Karen A. Smith, U.S. Department of Justice, Tax Division, Washington, DC, Lynn M. Brimer, Internal Revenue Service, District Counsel, Detroit, MI, Julia C. Pidgeon, United States Attorney's Office, Detroit, MI, for U.S.

John C. Dougherty, Dougherty, Schneider & Miller, P.C., Detroit, MI, for Urgent Care Physicians, Inc.

MEMORANDUM OPINION AND ORDER

HOOD, District Judge.

INTRODUCTION

The Appellants (New Center Hospital, Park Community Hospital d/b/a New Center Hospital, Central City Health Services, Inc., New Center Clinic — East, Inc., New Center Clinic — West., Inc., New Center Clinic — Central, Inc., Detroit Medical Health Facility, Inc., Detroit Medical and Surgical Center, P.C., Central City Health Services Clinic, and New Center Managed Care, Inc.) sought appeal from a decision by the Honorable Ray Reynolds Graves, of the United States Bankruptcy Court for the Eastern District of Michigan. Judge Graves entered an order on July 18, 1994, granting summary judgment, pursuant to Fed.R.Civ.P. 56, to the Appellees, the United States and the Trustee in Bankruptcy for New Center Hospital. The decision of the Bankruptcy Court substantively consolidated the non-debtor Appellants, as alter egos of New Center Hospital, with the bankruptcy estate of the Debtor, New Center Hospital. Appellants appeal to the District Court pursuant to 28 U.S.C. § 158 and Fed.R.Bankr.P. 8001(a).

PROCEDURAL HISTORY

New Center Hospital, the Debtor in the bankruptcy, sought the protection of the Bankruptcy Court by filing Chapter 11 proceedings in April, 1993. The United States, the largest creditor of the Debtor, engaged in extensive discovery. Following discovery, the United States (on behalf of the Internal Revenue Service and The Department of Housing and Urban Development) commenced an adversary proceeding seeking substantive consolidation of the non-debtor Appellants. The Trustee of the Chapter 11 Estate of New Center Hospital joined in this action.

On March 30, 1994, Appellants filed a Motion to Dismiss pursuant to Fed.R.Bankr.P. Rules 7037 and 7056 for failure of the Appellees to comply with discovery. The Motion to Dismiss was granted on April 11, 1994. On July 12, 1994, the Bankruptcy Court set aside the dismissal granting the United States Motion to Amend and Alter the Judgment. Also on March 30, 1994, the same day the Appellants' Motion to Dismiss was filed, the United States filed its Motion for Summary Judgment pursuant to Fed.R.Civ.P. 56, which was joined by the Trustee. On July 18, 1994, the Motion for Summary Judgment was granted, substantively consolidating the non-debtor Appellants into the Bankruptcy estate. The order granting the Motion was entered on August 2, 1994 and gave immediate effect nunc pro tunc to the date of the appointment of the Trustee.

On appeal, Appellants seek dismissal of the Complaint. Urgent Care Physicians, Inc., an unsecured creditor of Defendant New Center Clinic — East, Inc. ("NCC-East"), filed a Motion to Intervene on appeal which the District Court denied. However, the Court permitted Urgent Care to file a brief amicus curiae.

Appellants' Claims on Appeal are:

1. The United States, as creditor of the Debtor New Center Hospital, lacks standing to bring this Adversary Proceeding.

2. Due process requires notice to affected creditors of the Appellants when substantive consolidation is sought.

3. The Bankruptcy Court has no jurisdiction to substantively consolidate the non-debtor Appellants with the Debtor.

4. A genuine issue of material facts exists regarding whether or not Appellants are alter egos of the Debtor supporting substantive consolidation.

5. Assuming the Bankruptcy Court properly concluded that the Appellants were alter egos, the Bankruptcy Court erred in finding that there was was sufficient indicia to establish a basis for substantive consolidation.

6. The Bankruptcy Court erred in issuing its Order for substantive consolidation nunc pro tunc.

7. The Bankruptcy Court erroneously granted Appellee's Motion to Alter or Amend the Judgment dismissing the Complaint and erred by not granting the Appellants' Motion to Dismiss.

FACTUAL BACKGROUND

The Bankruptcy Court found the following facts were not genuinely in dispute. Bankr. Op. at pgs. 2-5. This Court sets forth those facts verbatim (including footnotes) from the Bankruptcy Court Opinion:

The Debtor in this matter, New Center Hospital\'s presence in this case began involuntarily. After mounting tax obligations owed to the United States and upon a seizure of certain books and records of the Debtor, the Debtor\'s largest creditor, by its action, caused the Debtor to seek the protection of the Bankruptcy Court by filing a Chapter 11 petition.

After extensive discovery disputes, resulting in this Court\'s orders to compel discovery and upon endless discovery, the United States filed its complaint seeking the substantive consolidation of the non-debtor defendants\' assets into the debtor\'s Chapter 11 bankruptcy estate.¹

On July 6, 1983, Harold Murdock, Paul Davidson and Leonard Hyman incorporated Central City Health Services (CCHS). Murdock, Davidson and Hyman were members of the New Center Board (NCH) Board of Trustees and when CCHS was incorporated. On April 5, 1985, Tom Barrow, Harold Murdock and Paul Davidson incorporated New Center Clinic — East, Inc. ("NCC-East"), and New Center Clinic — Central, Inc. ("NCC-Central"). On August 7, 1985, Barrow, Murdock and Davidson incorporated New Center Clinic — West, Inc. ("NCC-West"). (Hereinafter NCC-East, NCC-West and NCC-Central shall at times be referred to collectively as "the Clinics.")

In January, 1986, with board approval, NCH transferred approximately $1,200,000.00 to CCHS for the acquisition of clinics intended to feed patients to NCH. One of the clinics was Detroit Medical and Surgical Center, P.C. (DMSC), which operated out of the facilities located at 8300 Mack Avenue, Detroit, Michigan. After the acquisition, DMSC became New Center Clinic — East, Inc. A clinic, located within NCH\'s physical plant located at 801 Virginia Park, Detroit, Michigan, was also acquired. This became the NCC-Central clinic. Finally, a doctor\'s practice was purchased at a third location and established as the NCC-West Clinic.

The following facts are crucial to the outcome of this case. Loan documents were never executed in connection with the transfer of monies by NCH to CCHS for the purchase of the Clinics. The NCH audited financial statements for the subsequent years identifying the transfers to CCHS for the purchase of the Clinics as unsecured non-interest bearing loans to CCHS\' parent company. Following the purchase of the Clinics, NCH continued to transfer monies to CCHS. CCHS then transferred funds to the various clinics allegedly in order to finance their operations. The failure to repay the above stated loan obligation has been verified by deposition testimony.²

Since January of 1985, the Defendants have been under the same management and control. During all years at issue, the Defendants were all ultimately under the control of the same managing officer who took responsibility for the maintenance of the day-to-day operations and financial affairs of all defendants. Defendants essentially disregarded the corporate entities of the respective corporations in its operation of the hospital and clinics. The assets and operations of the Defendants have been extensively commingled. As evidenced by the deposition testimony, money was transferred from NCH to CCHS whenever CCHS or the Clinics needed funding. Particularly troubling is the fact that after November, 1989, NCH engaged in banking activities which not only resulted in commingling of its funds with those of the other Defendants, but apparently in an effort to defraud its creditors and to avoid the payment of its legal obligation.³

Other demonstrations of defendants acting in total disregard of the corporate entities is reflected by NCC-East maintaining its funds in an account in the name of DMSC, although DMSC was not an assumed name of NCC-East.⁴ The checks on the NCC-Central account had the name Central City Health Services-Clinic, Inc., embossed on them. Central City Health Services-Clinic, Inc., was not an assumed name of NCC-Central.

Post-petition activity on the part of defendants continued this shameful conduct. Even after the filing of the bankruptcy, NCH continued to pay for the printing supplies for NCC-East.

Creditors of both NCC-East and NCH maintained only one account on behalf of both entities. As evidenced by the retained consultant engaged to protect the interests of both NCH and NCC-East, charging only a single monthly retainer for the services provided to both NCC-East and NCH. There was no differentiation on the account for the services provided to NCC-East or for the services provided to

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