Wechsler v. Hunt Health Systems, Ltd.

Decision Date11 August 2004
Docket NumberNo. 94 Civ. 8294(PKL).,94 Civ. 8294(PKL).
Citation330 F.Supp.2d 383
PartiesRaymond H. WECHSLER, Administrative Trustee of the Towers Financial Corporation Administrative Trust, Plaintiff, v. HUNT HEALTH SYSTEMS, LTD., P & G Enterprises, Inc., MHTJ Investments, Inc., Esperanza Health Systems, Ltd. and Friendship, Inc., Defendants.
CourtU.S. District Court — Southern District of New York

Gadsby Hannah LLP, Boston, MA, Daniel J. Kelly, William A. Zucker, Neil W. Salon, Leader & Berkon LLP, New York City, Joseph G. Colao, for Plaintiff.

Brooks Banker & Assocs., New York City, Brooks Banker, Jr., Todd Lawlor, Paul R. Levenson, for Defendants.

OPINION AND ORDER

LEISURE, District Judge.

TABLE OF CONTENTS
                PAGE
                Findings of Fact ............................................................. 390
                  I. The Parties .............................................................. 391
                 II. The Contract ............................................................. 392
                     A. The HCP Contract ...................................................... 392
                     B. The Rider ............................................................. 395
                     C. The Guaranties ........................................................ 395
                     D. Changes in the Contractual Relationship ............................... 395
                        1. The July Amendment ................................................. 395
                        2. The September Early Termination Amendment .......................... 395
                        3. The Security Agreement ............................................. 396
                        4. The September Factoring Fees Amendment ............................. 396
                        5. The Letter Agreement ............................................... 396
                III. The Performance .......................................................... 397
                     A. The Parties' Performance Prior to September 1992 ...................... 397
                        1. Sale of Accounts ................................................... 397
                        2. Payment for Accounts ............................................... 397
                        3. Collection of Accounts ............................................. 397
                        4. Record Keeping of Accounts ......................................... 398
                     B. The Parties' Performance After September 1992 ......................... 399
                        1. Sale of Accounts ................................................... 399
                        2. Payment for Accounts ............................................... 399
                        3. Collection of Accounts ............................................. 400
                        4. Record Keeping of Accounts ......................................... 401
                     C. Hunt Health's Distributions to Investors .............................. 401
                 IV. The Termination .......................................................... 401
                  V. The Performance Post-Termination ......................................... 402
                     A. Aftermath of the Termination .......................................... 402
                     B. Hunt Health's Attempt to Buy Back Accounts ............................ 402
                     C. Hunt Health's Sale of Assets to Esperanza ............................. 403
                     D. Payments Made After February 26, 1993, on Accounts Sold to Towers ..... 403
                
                     E. Towers' Bankruptcy .................................................... 403
                Conclusions of Law ........................................................... 403
                  I. Plaintiff's Breach of Contract Claim ..................................... 403
                     A. What Is Hunt Health's Indebtedness to Towers? ......................... 404
                        1. The $910,870 Advance Payments from Hunt Health to Towers as
                            of February 26, 1993 .............................................. 404
                           a. Non-Reimbursable Accounts ........................................... 405
                           b. Rejected Accounts ................................................... 408
                                i. Accounts Coded as "Appealed" ................................... 408
                               ii. Accounts with no Response Within 60 or 90 Days of
                                     Treatment .................................................... 408
                              iii. Paid Accounts .................................................. 410
                           c. Advance Rate ........................................................ 411
                        2. Factoring Fees ..................................................... 412
                     B. Does Hunt Health's Early Termination Entitle Plaintiff to Early
                         Termination Damages? ................................................. 412
                     C. Did Hunt Health Materially Breach? .................................... 414
                        1. Hunt Health's Sale of Non-Reimbursable Accounts and Record
                            Keeping ........................................................... 414
                        2. Hunt Health's Distributions to Investors ........................... 415
                        3. Hunt Health's Retention of Proceeds on Accounts It Had Sold to
                            Towers ............................................................ 416
                        4. Hunt Health's Failure to Pay Liquidated Damages Upon
                            Termination ....................................................... 418
                        5. Hunt Health's Sale of Assets to Esperanza .......................... 418
                     D. Did Towers Breach Its Collection Obligation? .......................... 418
                     E. What Effect Did Hunt Health's and Towers' Respective Breaches
                         Have on the Parties' Performance Obligations ......................... 420
                        1. Plaintiff Satisfies the Elements of Breach of Contract ............. 420
                           a. Plaintiff's Performance ............................................. 421
                           b. Breach by the Defendants ............................................ 422
                           c. Damages ............................................................. 423
                                i. Advances on Non-Reimbursable and Rejected Accounts ............. 424
                               ii. Factoring Fees ................................................. 424
                              iii. Early Termination Damages ...................................... 425
                        2. None of Defendants' Defenses Apply To Bar Plaintiff's Recovery
                             for Breach of Contract ............................................... 427
                           a. Failure To Mitigate ................................................. 427
                           b. Election ............................................................ 428
                           c. Executory Contract .................................................. 429
                 II. Plaintiff's Conversion Claim ............................................. 431
                III. Plaintiff's Breach of Guaranty Claim ..................................... 432
                 IV. Defendants' Breach of Contract Claim ..................................... 432
                  V. Attorney's Fees, Costs, and Interest ..................................... 434
                     A. Attorney's Fees and Costs ............................................. 434
                     B. Prejudgment Interest .................................................. 434
                Conclusion .................................................................. 436
                

Plaintiff Raymond H. Wechsler, the administrative trustee overseeing the assets of Towers Financial Corporation ("Towers"), brings this action against Hunt Health Systems, Ltd. ("Hunt Health") and affiliated entities for breach of contract, conversion, breach of guaranty, and fraudulent conveyance in connection with the parties' factoring agreement. From October 22, 2003, through November 4, 2003, the Court conducted a bench trial regarding the disputed issues in the case, and the parties subsequently submitted post-trial briefs further addressing those issues. Having considered the parties' post-trial submissions and the evidence presented at trial, the Court sets forth herein its findings of fact and conclusions of law, pursuant to Rule 52(a) of the Federal Rules of Civil Procedure.1

Findings of Fact

This case arises out of a factoring agreement between Towers and Hunt Health. The agreement set forth the terms for Hunt Health's sale, and Towers' purchase, of Hunt Health's accounts receivable. In general, the agreement provides that Hunt Health will offer to sell its Reimbursable Accounts Receivable, payable by insurance companies, to Towers. The agreement further provides that Towers, upon choosing to purchase an account of Hunt Health, will make an initial payment, or advance, to Hunt Health, in the amount of 50% of the account's Reimbursable Value. After Towers makes this initial payment, or advance, it earns a "factoring fee" from Hunt Health while that advance remains outstanding. Then, when the insurance company thereafter remits its payment for the account, Towers recoups its advance, Hunt Health receives the balance, and Towers ceases to earn its factoring fee for that account.

The parties reached this factoring agreement in July 1991, significantly amended it in September 1992, operated outside its bounds from October 1992 to February 1993, and ended it on February 26, 1993. By that date, all of Hunt Health's accounts receivable, which had a total face value of $3.5 million, had been sold to Towers. Towers' outstanding initial payments, or advances, to Hunt Health as of that date totaled $910,000. In this action plaintiff demands the return of Towers' initial payments, or advances, on the theory that the accounts receivable Hunt Health sold to Towers were bad accounts. Plaintiff also demands the payment of factoring fees owed by Hunt Health for the outstanding advances. Defendants answer that plaintiff fails to show that Hunt Health sold bad accounts to Towers, and that Towers, in any event, breached the contract first. Defendants also demand, by their counterclaim, the payment of the balance of the accounts Hunt Health sold to Towers.

I. The Parties

Plaintiff is Raymond H. Wechsler. In December 1994, Wechsler...

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