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JP Morgan Chase Bank, N.A. v. Heritage Nursing Care

September 6, 2007

JP MORGAN CHASE BANK, N.A., PLAINTIFF,
v.
HERITAGE NURSING CARE, INC., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Geraldine Soat Brown, United States Magistrate Judge

District Judge Mark Filip

MEMORANDUM OPINION AND ORDER

Plaintiff JP Morgan Chase Bank ("Chase") alleges that defendants Heritage Nursing Care, Inc., et al ("Defendants") defaulted on two promissory notes secured by various of Defendants' assets, including the assets of two nursing home facilities for elderly or infirm patients. (See First Am. Compl. ¶¶ 15-17, 25, 31.) [Dkt 8.] Chase now moves for the appointment of what it characterizes as a "limited financial receiver" to monitor the financial activities of the nursing homes and report his findings to the court on a monthly basis. (Plaintiff's Supplemented and Amended Motion for Appointment of Limited Financial Receiver ("Pl.'s Mot.") ¶¶ 25, 26.) [Dkt 36.] Chase's motion was referred to this court for decision. (Order, May 8, 2007.) [Dkt 39.] For the reasons set forth below, Chase's motion is granted.

JURISDICTION

As an initial matter, this court must determine whether it has jurisdiction to enter an order on Chase's motion or whether this court must submit a report and recommendation to the District Judge for ultimate decision. A district judge may designate a magistrate judge to hear and determine any nondispositive civil pretrial matter. 28 U.S.C. § 636(b)(1)(A); Fed. R. Civ. P. 72(a); see United States v. Brown, 79 F.3d 1499, 1503 (7th Cir. 1996). With respect to dispositive motions, a district judge may designate a magistrate judge to conduct hearings, including evidentiary hearings, and to submit to the district judge proposed findings of fact and recommendations. 28 U.S.C. § 636(b)(1)(B). Dispositive motions include those specifically identified in 28 U.S.C. § 636(b)(1)(A), such as motions for injunctive relief and motions for summary judgment, as well as other motions not identified in the statute to the extent that they are dispositive of a claim or defense. See 12 Charles Alan Wright, Arthur R. Miller, and Richard L. Marcus, Federal Practice and Procedure: Civil 2d (hereinafter "Wright & Miller") § 3068.2 at 332-35 (1997).

Although no court in the Seventh Circuit appears to have addressed the issue, two courts in other circuits have held that a magistrate judge has the authority to appoint a receiver. In one case, the court held, in the pretrial context, that a magistrate judge has the authority to appoint a receiver under 28 U.S.C. § 636(b)(1)(A), reasoning that such motions are not dispositive of the rights of the parties nor are they specifically excepted by § 636(b)(1)(A). Fleet Devt. Ventures, LLC v. Brisker, 2006 WL 2772686 at *13 (D. Conn. Sept. 12, 2006) (Fitzsimmons, M.J.). In the other case, the court held in the post-trial context that a magistrate judge has the authority to appoint a receiver under the "additional duties" clause of 28 U.S.C. § 636(b)(3). Bache Halsey Stuart Shields Inc. v. Killop, 589 F. Supp. 390, 393 (D.C. Mich. 1984).

The District Judge referred the present motion as a nondispositive pretrial discovery motion and did not request a report and recommendation. (Order, May 8, 2007 at 2.) As in the Fleet case, the present motion is a pretrial matter and the jurisdiction to decide this motion is therefore grounded in 28 U.S.C. § 636(b)(1)(A) rather than in the "additional duties" clause of 28 U.S.C. § 636(b)(3). As the court observed in Fleet, a motion to appoint a receiver is not specifically excepted by 28 U.S.C. § 636(b)(1)(A). Furthermore, appointment of a receiver whose duties would be monitoring the financial activities of Defendants and reporting to the court would not be dispositive of any claim or defense of any party. See Fleet , 2006 WL 2772686 at *13. Thus, this court has jurisdiction to decide the present motion under 28 U.S.C. § 636(b)(1)(A).

BACKGROUND

I. The Parties

Chase alleges that defendant Avigdor Horowitz, also known as Victor Horowitz, ("Horowitz"), is the sole shareholder or member of the other Defendants, including Heritage Nursing Care, Inc. ("Heritage"), Jackson Heights Nursing Center, Inc. ("Jackson Heights"), and North Plaza Nursing Center, Inc. ("North Plaza"). (First Am. Compl. ¶¶ 3, 5, 8, 9, 10.) As the parties' counsel clarified during the evidentiary hearing, Heritage operates a nursing home facility for elderly or infirm patients located in Champaign, Illinois, and Jackson Heights operates a nursing home in Farmer City, Illinois. North Plaza previously operated a nursing home, but no longer does so.

Chase's allegations with respect to the relationships between the various Defendants and Defendants' alleged breach of two promissory notes and guarantees relating to those notes are described in the decision by the District Judge denying Defendants' motion to dismiss the First Amended Complaint. (Order, July 31, 2007.) [Dkt 59].Chase asserts that Defendants' obligations under both promissory notes are secured by the assets of both the Heritage and Jackson Heights nursing homes and that, pursuant to the applicable agreements, Chase is entitled to take possession of and liquidate those assets to pay down the obligations owed to it. (See First Am. Compl. ¶¶ 16-17, 19-20, Counts II, IV, VI, VII, IX, X; see also Pl.'s Mot., Ex. 1 ¶¶ 2-4.) Chase's motion argues that a "limited financial receiver" is necessary because Chase has no confidence in Defendants' financial management of the nursing homes that are the assets securing Defendants' obligations to Chase. (Pl.'s Mot. ¶ 1.) The receiver Chase seeks would not assume custody or management of the nursing homes, but rather monitor Defendants' financial transactions by reviewing out-going payments, inter-company transfers and transfers to insiders, and reporting to the court. (Pl.'s Mot. at 8.)

II. Procedural History

The present motion is a supplemented and amended motion; Chase's original motion [dkt 28] had also been referred to this court [dkt 31], but was subsequently stricken without prejudice as moot. (Order, April 10, 2007.) [Dkt 35]. The original motion requested the appointment of Suzanne Koenig as the receiver, and was based largely on reports filed by Ms. Koenig regarding Woodbine, another nursing home owned by Horowitz of which Ms. Koenig had been appointed as receiver in a state court proceeding. (See Pl.'s Mot. ¶¶ 4-5, 2.) Defendants objected to the appointment of a receiver in general and Ms. Koenig in particular. Counsel for the parties agreed that Defendants would produce certain documents, and Chase retained Lee J. Chorley of Abrams & Jossel Consulting, to whom Defendants did not object, to visit certain of Defendants' offices and review documents. It was hoped that Mr. Chorley's review would resolve Chase's concerns.

Defendants produced certain financial records, which Mr. Chorley reviewed. (See Pl.'s Mot., Ex. 2, Chorley Aff. ¶ 2.) Following Mr. Chorley's review, Chase brought the present motion, which supplemented the previous motion with additional information, including Mr. Chorley's affidavit laying out his findings regarding Defendants' financial books and records.*fn1 In its motion, Chase proposed that Mr. Chorley be appointed receiver. (Pl.'s Mot. ¶ 26.)

Because Defendants dispute whether the court has authority to appoint a receiver, the parties were ordered to submit memoranda of law on that issue. (Order, May 31, 2007.) [Dkt 45.]*fn2 After oral argument, the court determined that legal authority exists to support the appointment of a receiver. [See Dkt 50.] An evidentiary hearing was held on July 16, 2007. [Dkt 54.] The parties submitted exhibits and stipulated as to the admissibility and authenticity of those exhibits that have been considered in this decision. (Stipulation ("Stip.") ¶¶ 11, 12.) [Dkt 53.] All of Chase's exhibits are documents that Defendants produced to Chase, except Exhibits I and BB, which are Chase's spreadsheet summaries of Defendants' financial records. In addition, Chase called a single witness, David Abrams of Abrams & Jossel Consulting, whom Chase now proposes as the receiver instead of Mr. Chorley, because Mr. Chorley is no longer employed by Abrams & Jossel. Defendants did not call any witnesses on their own behalf. Defendants submitted four exhibits, which were admitted into evidence without objection.

Defendants object to Mr. Abrams' testimony on a number of grounds. Defendants assert that Mr. Abrams did not personally review the documents and argue that his testimony was therefore not based on his personal knowledge. They argue that Mr. Abrams' testimony was inadmissible expert testimony. They also argue that Mr. Abrams' testimony regarding what Mr. Chorley reported to him was inadmissible hearsay.

Defendants also object to Mr. Chorley's affidavit because they never had the opportunity to cross-examine Mr. Chorley. Defendants also object to Mr. Chorley's testimony regarding statements made to him by Horowitz on the basis of hearsay.

All of Defendants' objections were overruled during the evidentiary hearing. Although Mr. Chorley conducted the initial investigation, Mr. Abrams testified that he personally reviewed many of the documents. Also, Mr. Abrams testified that he was Mr. Chorley's superior when Mr. Chorley conducted his initial investigation, and that Mr. Chorley's review of the documents was conducted under Mr. Abrams' supervision. Defendants deposed Mr. Abrams before the evidentiary hearing, and had the opportunity to question him on his knowledge of Defendants' financial records and to cross-examine him at the hearing. Mr. Abrams' testimony consisted primarily of describing the data contained in Defendants' documents, and identifying patterns in that data. Mr. Abrams did not add anything to the data, and Defendants also did not present any evidence to refute the substance of the data or the patterns Mr. Abrams pointed out. The court also reviewed the documents to test Mr. Abrams' assertions, as described in more detail below. Understanding the evidence did not require specialized knowledge. See Fed. R. Evid. 702. Defendants' objections to Mr. Abrams' testimony are overruled.

Defendants' objection to Mr. Chorley's affidavit was also overruled. Affidavits are ordinarily inadmissible at trial but they may be admitted in summary proceedings, such as preliminary injunction proceedings, because of the need to conduct the proceedings expeditiously. Ty, Inc. v. GMA Accessories, Inc., 132 F.3d 1167, 1171 (7th Cir. 1997); see Goodman v. Illinois Dept. of Fin. and Prof. Reg., 430 F.3d 432, 439 (7th Cir. 2005) (citing Ty, Inc.). The evidentiary hearing on Chase's motion was a similarly expedited proceeding because of the nature of the relief requested; thus, Defendants' objection to Mr. Chorley's affidavit was overruled. In reality, however, Mr. Chorley's affidavit was essentially mooted by the fact that Mr. Abrams, whom Defendants deposed, testified in person and was subject to cross-examination.

After the evidentiary hearing, the parties submitted trial briefs. (Defs.' Trial Brief in Opposition to the Appointment of a Receiver ("Defs.' Tr. Br.") [dkt 55]; Pl.'s Reply Trial Brief in Support of Appointment of Limited Financial Receiver ("Pl.'s Reply Tr. Br.") [dkt 57].)

FINDINGS OF FACT

The following findings of fact are based on the parties' Stipulation, the exhibits submitted by the parties, and Mr. Abrams' testimony during the evidentiary hearing. As mentioned above, Defendants presented no testimony. The facts demonstrate that Defendants do not have even basic accounting and bookkeeping controls in place, and support Chase's concern that the assets it expects to secure Defendants' obligations are at risk.

I. Records Not Produced; Stipulation Regarding Professional Services

The parties stipulated that Heritage and Jackson Heights "do not possess or otherwise did not furnish" certain records that Chase had requested, including the following: Bank statements for certain months in 2005 and 2006; Heritage and Jackson Heights interim financial statements (profit and loss statements and balance sheet) for the current fiscal year of 2007; Heritage and Jackson Heights real estate and personal property tax bills for 2005; 2005 State Board of Health survey report for Heritage and the 2006 State Board of Health survey report for Jackson Heights; Heritage and Jackson Heights financial statements for 2006; Medicare cost report for Heritage (Jackson Heights does not have Medicare residents); and 2006 and 2007 Heritage and Jackson Heights budgets, including capital expense budgets. (Stip. ¶¶ 1(a)-(h).)

Additionally, the parties stipulated that payroll is processed by Defendants' staff. An outside payroll service is not used. (Stip. ΒΆ 6.) Also, as of March 2007, neither Heritage nor Jackson ...


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