Nat'l Loan Inv'rs v. Rickerson (In re Rickerson), 21-10315-TPA
| Decision Date | 14 December 2021 |
| Docket Number | 21-10315-TPA,Doc. 28,37 |
| Parties | IN RE: RUTHELLEN W. RICKERSON, Debtor v. RUTHELLEN W. RICKERSON and JOHN C. MELARAGNO, Respondents NATIONAL LOAN INVESTORS, L.P. Movant UNITED STATES TRUSTEE, Movant v. RUTHELLEN W. RICKERSON, Respondent |
| Court | United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Western District of Pennsylvania |
Appearances:
Beverly Weiss Manne, Esq. for the Movant, National Loan Investors, L.P. Norma Hildenbrand, Esq., for the Movant United States Trustee David L. Fuchs, Esq., for the Debtor/Respondent
The matters presently before the Court present a question of first impression in this District under Chapter 11 Subchapter V, 11 U.S.C. §§1181 - 1195 ("Subchapter V"). Subchapter V, entitled "Small Business Debtor Reorganizations," was added to the Bankruptcy Code by the Small Business Reorganization Act of 2019. The primary issue before the Court is whether this Debtor is eligible to proceed under Subchapter V. For the reasons explained below, the Court concludes that the Debtor does not meet the requirements to proceed under Subchapter V. A secondary issue is whether the case should be dismissed based on the Debtor's alleged inability to propose a feasible plan and her alleged misuse of estate assets since the case was filed. As to that, the Court concludes that, while there are certainly some troubling aspects to the case, it would be premature to dismiss the case at this early stage. The Court will therefore strike Debtor's Subchapter V designation, redesignate the case as a "regular" Chapter 11 case, and deny the request for a dismissal at this time, without prejudice.
The Debtor filed a voluntary bankruptcy petition under Chapter 11 on June 3, 2021. In Item 13 of her petition, Official Form 101, Debtor checked the box indicating that she is a "small business debtor" and has chosen to proceed under Subchapter V. Two motions were filed in response to that designation. First, creditor National Loan Investors, L.P. ("NLI") filed a Motion to Dismiss Chapter 11, Subchapter V Bankruptcy Case ("NLI Motion") on July 7, 2021, at Doc. No. 28. Next, the United States Trustee filed a Motion to Strike Designation of Chapter 11 Case as Subchapter V under 11 U.S.C. §1182 () on July 30, 2021 at Doc. No. 37. [1]
The Motions raise many similar points. Both Motions claim that the Debtor does not fall within the definition of a "debtor" who is eligible to proceed under Subchapter V as set forth in 11 U.S.C. §1182(1)(A). The NLI Motion asks that the case be dismissed as a result, or that in the alternative, the case be converted from one under Subchapter V to a "conventional" Chapter 11. The UST Motion does not seek a dismissal of the case, just that the Subchapter V designation be stricken, which as a practical matter would be the same result as NLI's non-dismissal alternative. The NLI Motion further argues that the Debtor did not file the case in good faith, and that she will be unable to propose a feasible plan. The Debtor filed Responses to the Motions, arguing that she is eligible to be a debtor under Subchapter V and asking that the Motions be denied. See, Doc. Nos. 36, 45.
On September 28, 2021, the Parties filed a Stipulation of Facts ("Stipulation") at Doc. No. 68 which they agreed could be used for purposes of deciding the Motions. They nevertheless requested that the Court conduct an evidentiary hearing because of some disputes over the nature of the Debtor's federal and state tax obligations. That evidentiary hearing was held on October 14, 2021 and all Parties were given the opportunity to present evidence at that time, as well as to file post-trial briefs. The Motions are now ripe for decision.
The Debtor is a physician who specializes in obstetrics and gynecology. She is employed as a "physician adviser" by an entity named OPTUM, a part of the United Health Group. Her job duties with OPTUM are doing secondary admission reviews for hospital patients. Debtor does not have any equity or ownership interest in OPTUM and is not a manager or officer of that company. Debtor began working for OPTUM on a part-time basis in 2011 and at an unspecified point later in time that became a full-time position. Her current gross monthly income from this employment is $13 925.
The Debtor is also an owner in three different legal entities, all created in or around late-1997, that were related to her former active practice as a treating ob-gyn physician in Titusville, Pennsylvania. The record is confusing as to the names of these entities, and details of their ownership structure, but it is clear that there were three of them, and also clear as to the purpose or role of each vis-a-vis the Debtor's former medical practice. One of the entities was Ruthellen D. Weeks, P.C., a professional corporation of which the Debtor was the 100% owner and president. See, Stipulation at ¶15. Ruthellen Weeks was the Debtor's name prior to her marriage and she still sometimes uses that name.[2] For purposes of this Opinion the Court will refer to this entity as the "Professional Corporation." The Debtor testified that the Professional Corporation was formed to serve as the vehicle to provide her with revenue from the ob-gyn practice. See Transcript of Evidentiary Hearing dated Oct. 14, 2021, at 46:21-47:1, Doc. No. 78, (hereinafter, "Tr. Trans. at ___").
A second entity was formed for conducting the actual medical practice itself. The Stipulation of Facts names that entity as "Women's Health Organization," or "WHO," see Doc. No. 68 at ¶7, but at the evidentiary hearing the Debtor testified that it was named "Women's Health Association" see Tr. Transcript at 46:7-20, and the Debtor's accountant, Christopher Anderson ("Anderson"), referred to it in his testimony as "Women's Health Association of Titusville," id. at 7:13-24. In order to avoid confusion, the Court will refer to this entity as the "Medical Company." As far as the ownership of the Medical Company, according to the Stipulation, the Debtor herself was a 50% owner of that entity, with the other 50% being owned by a Dr. Leonard A. Ferreira, who was the Debtor's partner in the practice. Id. at ¶7. However, at the evidentiary hearing Anderson testified that Debtor's 50% share in the Medical Company was actually held by the Professional Corporation rather than by the Debtor in her individual capacity. Based on the testimony presented the Court finds that Anderson's explanation as to the ownership structure of the Medical Company is correct.
The third entity was a general partnership that owned the real estate at 602 W. Central Ave., Titusville, Pa. where the Medical Company operated its practice. The ownership of that entity was held 50% by the Debtor and her husband, Alfonso Rickerson, and 50% by Dr. Ferreira and his wife, Hillerinee Ferreira, with each pair of spouses holding their share as tenants by the entireties. According to the Stipulation, that entity was named "Women's Health Organization of Titusville, a/k/a Women's Health Association of Titusville," or "WHOT." Id. at ¶¶8-9. At the evidentiary hearing, however, the Debtor referred to this entity as "Women's Health Organization." Tr. Trans. at 45:8-19. Again, to avoid confusion, the Court will refer to this entity as the Real Estate Partnership.
It will be helpful at this point to take a short detour to explain how the acquisition of the 602 W. Center St. property was financed. The Real Estate Company borrowed $475, 000 from PNC Bank for that purpose in late-1997. That loan was secured by a mortgage dated December 30, 1997, and recorded at Crawford County Record Book 369, page 948 on December 31, 1997. This mortgage includes the Debtor's residence located at 12348 North Perry Rd., Titusville, Pa. ("the Residence"). The mortgage was assigned to NLI on November 8, 2002, and recorded at Crawford County on December 4, 2002 at Instrument No. 200200018591. In 2017 there was a foreclosure and sheriff sale on the 602 W. Center St. property, as discussed below, but it was apparently not sufficient to pay off the loan and as a result NLI then pursued the Residence. NLI obtained a judgment in mortgage foreclosure against the Residence on January 11, 2021, in the Crawford County Court of Common Pleas at Civil Action No. AD2103-106 in the amount of $339, 201.63, which includes real estate tax advances made by NLI on the Residence in the amount of $11, 678.24. It was an impending sheriff sale scheduled on the Residence that prompted the present bankruptcy filing by the Debtor.
Returning to the Debtor's prior medical practice, and to sum up, the Debtor and Dr. Ferreira practiced together as OB-GYN physicians in Titusville for a number of years beginning in late 1997. Three legal entities were created in connection with this activity. The Real Estate Partnership acquired and held real estate which it then rented to the Medical Company. The Medical Company, acting through the Debtor and Dr. Ferreira, provided medical services to patients and thereby generated revenue. The Debtor's share of this revenue was distributed to the Professional Corporation in its capacity as a 50% owner of the Medical Company. The Debtor provided medical services at the practice for the Professional Corporation, which paid her from the revenues it received from the Medical Company.
This general state of affairs continued until 2014 when for a number of reasons the medical practice was sold to a completely unrelated entity known as OB/GYN Associates of Erie. The Debtor was employed by that entity thereafter as a treating physician and continued seeing patients at the same...
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