Simon v. Short (In re Oakland Physicians Med. Ctr., L.L.C.)

• Decision Date: 01 February 2019
• Docket Number: Case No. 15-51011,Adv. Proc. No. 16-05125
• Citation: 596 B.R. 587
• Parties: In the MATTER OF: OAKLAND PHYSICIANS MEDICAL CENTER, L.L.C. d/b/a Doctors' Hospital of Michigan, a Michigan Limited Liability Company, Debtor Basil T. Simon, Not Individually But Solely in His Capacity as the Liquidation Trustee of Oakland Physicians Medical Center, LLC, Liquidation Trust, Plaintiff, v. Michael Short, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

596 B.R. 587

In the MATTER OF: OAKLAND PHYSICIANS MEDICAL CENTER, L.L.C. d/b/a Doctors' Hospital of Michigan, a Michigan Limited Liability Company, DebtorBasil T. Simon, Not Individually But Solely in His Capacity as the Liquidation Trustee of Oakland Physicians Medical Center, LLC, Liquidation Trust, Plaintiff,

v.Michael Short, Defendant.

Case No. 15-51011

Adv. Proc. No. 16-05125

United States Bankruptcy Court, E.D. Michigan, Southern Division, Detroit.

Signed February 1, 2019

Lawrence J. Acker, Bloomfield Hills, MI, Steven Alexsy, Stephen P. Stella, Detroit, MI, for Plaintiff.

Thomas R. Morris, Silverman & Morris, P.L.L.C., Farmington Hills, MI, for Defendant.

OPINION AFTER TRIAL

Maria L. Oxholm, United States Bankruptcy Judge

I. INTRODUCTION

This matter is before the Court after a September 25 and 26, 2018 trial on the single issue of whether pre-petition advances by defendant Michael Short ("Defendant") to debtor Oakland Physicians Medical Center, L.L.C., d/b/a Doctors' Hospital of Michigan, ("Debtor" or "the Hospital") constitute capital contributions or debt. The plaintiff Basil T. Simon ("Plaintiff"), in his capacity as the liquidation trustee of Debtor, filed this adversary proceeding to avoid prepetition transfers from Debtor to Defendant. Specifically, Plaintiff alleges the following counts in this adversary proceeding: Count I – Claim for Re-Characterization of any Advances by Defendant; Count II – Preferential Transfers – 11 U.S.C. §§ 547(b), 550(a) and 551 ; Count III – Fraudulent Transfers – 11 U.S.C. §§ 548(a)(1)(A), 548(a)(1)(B), 550 and 551 ; Count IV – Avoidance of Fraudulent Transfers under Michigan's Uniform Fraudulent Transfer Act, M.C.L. §§ 566.31 et seq.¹ , and 11 U.S.C. §§ 544(b) and 550 ; Count V – Breach of Statutory Duties to Act in Good Faith and in the Best Interests of the Company; Count VI – Equitable Subordination of Claims; and Count VII – Claim Disallowance 11 U.S.C. § 502(d). (Second Am. Compl., ECF No. 145).

After numerous dispositive motions, rulings and amendments to the complaint, Defendant filed his fourth motion for partial summary judgment pursuant to Fed. R. Civ. P. 56 or, in the alternative, dismissal pursuant to Fed. R. Civ. P. 12(b)(6) of Counts III, IV, V and VI of the second amended complaint. In relevant part, Defendant once again argued that the pre-petition transfers from Debtor to Defendant were in repayment of loans Defendant advanced to Debtor (Def.'s Fourth Mot. for Partial Summ. J., or in the alt., Dismissal Pursuant to Fed. R. Civ. P. 12(b)(6), ECF No. 163), while Plaintiff maintained that the advances were in fact capital contributions. (Pl.'s Resp. to Def.'s Fourth Mot. For Partial Summ. J., or in the alt., Dismissal Pursuant to Fed. R. Civ. P. 12(b)(6), ECF No. 168). The crux of all the remaining claims is whether Defendant's pre-petition advances to Debtor constitute debt or capital contributions. At a hearing on September 13, 2018, the Court ruled that there is a genuine issue of material fact on whether the advances constituted debt or capital contributions and ordered an evidentiary hearing on this limited issue.²

The following constitutes the Court's findings of fact and conclusions of law pursuant to Fed. R. Civ. P. 52, made applicable by Fed. R. Bankr. P. 7052. For the reasons set forth below, the Court finds that the two advances evidenced by executed promissory notes—the July 1, 2011 note in the principal amount of $ 100,000.00 and the December 28, 2012 note in the principal amount of $ 114,000.00—were loans. The remaining advances, aside from the June 29, 2015 advance that was considered and decided in a separate motion for partial summary judgment of Count II – Preferential Transfers, were capital contributions.

II. JURISDICTION AND RELATED ISSUES

This Court has jurisdiction pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157. This adversary proceeding seeks to avoid and recover prepetition advances as fraudulent and therefore is a core proceeding as defined in 28 U.S.C. § 157(b)(2)(H).

The parties have submitted a final pretrial order containing a stipulation of facts and outlining issues of fact and law to be litigated at trial. (Final Pretrial Order Re: Evidentiary Hr'g September 25, 2018, ECF No. 175). The parties additionally filed post-hearing findings of fact and conclusions of law (Pl.'s Proposed Findings of Fact and Conclusions of Law, ECF No. 188 and Def.'s Proposed Findings of Fact and Conclusions of Law, ECF No. 190), and post-trial briefs. (Pl.'s Post-Evidentiary Hr'g Brief, ECF No. 189 and Def.'s Post-Trial Brief, ECF No. 194).

As a preliminary matter, the Court wants to clarify the limited scope of the trial as some of the issues raised in the post-trial briefs were not grounds for either the relief sought, or the objection, to the fourth motion for partial summary judgment. In his post-trial brief, Plaintiff analyzed a number of factors (the Roth Steel factors) for determining whether a claim is debt or a capital contribution as discussed in Bayer Corp. v. MascoTech, Inc. (In re Autostyle Plastics, Inc. ), 269 F.3d 726 (6th Cir. 2001) and Retirement Benefit Plan of Graphic Arts International Union Local 20-B v. Standard Bindery Co. , 654 F.Supp. 770, 774 (E.D. Mich. 1986). Defendant objected to this line of inquiry as recharacterization of Defendant's claim was outside the scope of the hearing. The Court agrees that neither party moved for summary judgment on Count I – Claim for Re-Characterization of any advances by Defendant, and it will not be decided in this opinion. However, Plaintiff is not using the Roth Steel factors to recharacterize Defendant's claim. Rather, he is using the factors to establish that the advances were capital contributions, and thus Debtor's transfers to Defendant were not on account of antecedent debt as required by the reasonably equivalent value element of § 548(a)(1)(B) and M.C.L. § 566.35. The Roth Steel factors are equally relevant in evaluating whether an advance is debt or a capital contribution when making the determination of the reasonably equivalent value element under § 548(a)(1)(B) and M.C.L. § 566.35. The Court will consider the Roth Steel factors for this purpose. Defendant did not cite to any authority which would preclude Plaintiff from using these factors in this way.

In Defendant's post-trial brief, he asserts that two of Plaintiff's arguments—(1) the lack of definiteness of the terms of repayment and (2) defenses under § 548(c) and M.C.L. § 566.38(4) —should not be considered because they were not in the final pretrial order, citing to McKinney v. Galvin , 701 F.2d 584, 586 (6th Cir. 1983) (party's failure to advance theories of recovery in pretrial statement constitutes waiver). The Court will consider Plaintiff's argument that a lack of definiteness of the terms of repayment of the advances renders them unenforceable as loans. Plaintiff has maintained, in all his dispositive pleadings, that Defendant does not know the terms of the alleged notes, including interest rates and maturity dates. Additionally, Plaintiff presented this as an issue to be litigated in the final pre-trial order. The specific issue presented was, "Why do the unsigned promissory notes lack the characteristics of an enforceable loan document, including (a) a specified interest rate, (b) a repayment schedule, (c) a maturity date?" (FPTO, 8, ECF No. 175).

The Court will not consider the defenses under Section 548(c) of the Bankruptcy Code and M.C.L. § 566.38(4), the corresponding state-law provision. Defendant maintains that these issues were not in the final pretrial order. The defenses and their waiver have not been raised in Plaintiff's response to Defendant's fourth motion for partial summary judgment, or prior pleadings, and will not be considered in this opinion.

III. ANALYSIS

a. Findings of Fact

i. Background

By way of background, it is undisputed that Debtor was formed in 2008 to acquire the assets of Pontiac General Hospital. Debtor's members, who at the time consisted of approximately 45 physicians and McLaren Health Care ("McLaren"), invested millions of dollars into Debtor. In 2010, McLaren disassociated itself from the Hospital and demanded repayment of its secured loan. The member-physicians made advances to Debtor to enable it to pay off the debt owed to McLaren and to later finance Debtor's revival.

ii. Stipulated Facts

The parties have stipulated to the following facts. At all relevant times, Defendant, a practicing psychiatrist, was a member on the board of directors of Debtor.³ Debtor's Operating Agreement "Schedule of Members" reflects that Defendant made a capital contribution to Debtor in the amount of $ 250,000.00 on or about June 1, 2009 in exchange for 50 "Class B" membership units. Defendant was one of approximately 42 members in Debtor as of June 1, 2009. Defendant maintained a private practice at an office outside of the Hospital as well as provided inpatient services at the Hospital.

Despite the member-physician efforts to revive Debtor, Debtor suffered losses between 2010 and 2015 and required continued cash advances from its members in order to continue its operations. Between November 1, 2011 and July 1, 2015, Defendant made 20 advances ("Advances") to Debtor totaling $ 1,632,333.34. From April 1, 2013 to July 17, 2015, Debtor transferred $ 571,939.44 back to Defendant. The dates and amounts of the Advances and payments to Defendant are reflected in the chart below that was admitted by stipulation of the parties.⁴ The column titled "Pmt. By Defendant" matches the dates and amounts set forth in Exhibit A to Plaintiff's second amended complaint, which is the same as Plaintiff's Exhibit 4. The "Repayment" column, in turn, matches the dates and amounts contained in Exhibit B to Plaintiff's second amended complaint, and is the same as Plaintiff's Exhibit 5. The parties refer to these exhibits interchangeably. For clarification, the headings used on the following chart are the same ones the parties...