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LaSalle National Bank Association v. Paloian

March 17, 2009

LASALLE NATIONAL BANK ASSOCIATION, F/K/A LASALLE NATIONAL BANK, AS TRUSTEE FOR CERTIFICATE HOLDERS OF ASSETS SECURITIZATION CORPORATION, COMMERCIAL PASS-THROUGH CERTIFICATES SERIES 1997, D5, APPELLANT,
v.
GUS A. PALOIAN, CHAPTER II TRUSTEE OF DOCTORS HOSPITAL OF HYDE PARK, INC., APPELLEE.



The opinion of the court was delivered by: Rebecca R. Pallmeyer United States District Judge

MEMORANDUM OPINION AND ORDER

TABLE OF CONTENTS

Facts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

I. The Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

II. History of Doctors Hospital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

III. The Daiwa Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

A. MMA Funding's Function as a Special Purpose Entity under the Daiwa Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

B. The Contribution of Doctors Hospital's Healthcare Receivables Under the Daiwa Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

IV. The HPCH Lease/Nomura Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

V. Transfer of the Nomura Loan to the Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

VI. Cash Flow Under the Daiwa and Nomura Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

A. Cash Flow Before the Nomura Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

B. Cash Flow After the Nomura Loan and Up to July 7, 1998 . . . . . . . . . . . . . . . . 19

C. Cash Flow After July 7, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

VII. Doctors Hospital's Insolvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

A. Expert Testimony . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

B. Other Evidence of Insolvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

VIII. Bankruptcy Court Judgment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Summary of Issues On Appeal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

I. The Bankruptcy Court Did Not Clearly Err In Finding Defendant Was the Initial Transferee of the Pre-July 1998 Transfers . . . . . . . . . . . . . . . . . . . . . . 29

II. The Bankruptcy Court Did Not Clearly Err In Finding that the Post-July 1998 Transfers Were Not Fraudulent Transfers . . . . . . . . . . . . . . . . . . . . . . 38

A. The Parties' Post-Agreement Conduct Did Not Modify the Terms of the Daiwa Loan Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

B. The Daiwa Transaction Was Not in Substance a Loan to Doctors Hospital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

1. MMA Funding Functioned as a Special Purpose Entity . . . . . . . . . . . . 46

2. The Transfer of the Doctors Hospital Receivables was a True Sale . . 50

3. MMA Funding was not the Alter Ego or Instrumentality of Doctors Hospital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

C. Viewing the Agreement as Written, the Post-July 1998 Transfers Were Not Made with Funds Belonging to Doctors Hospital . . . . . . . . . . . . . . . 57

1. The Trust's Right to Receive Rent Payments Does Not Make the Cash Collateral Account Funds the Property of Doctors Hospital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

2. The Bankruptcy Court Did Not Clearly Err in Declining to Determine Ownership of the Collection Account Funds . . . . . . . . . . . . 61

3. The Bankruptcy Court Did Not Clearly Err in Failing to Address Defendant's Admissions . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

4. The Bankruptcy Court at No Time Recognized the Transferred Funds as Property of Doctors Hospital . . . . . . . . . . . . . . . . . . . . . . . . . 64

5. The Bankruptcy Court Did Not Treat the Unambiguous Transaction Documents Inconsistently . . . . . . . . . . . . . . . . . . . . . . . . . 65

III. The Trial Court Did Not Clearly Err In Concluding that Doctors Hospital was Insolvent as of August 28, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

A. The Bankruptcy Court Did Not Apply Improper "Hindsight Bias" in Determining that Doctors Hospital was Insolvent as of August 28, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

B. The Bankruptcy Court Did Not Err in Adopting Plaintiff's Experts' Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

C. Medicare/Medicaid Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

D. Inflated Specific Company Risk Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

E. The $4.5 Million Add-back . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

F. Reduction of Above-Market Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

IV. The Bankruptcy Court Did Not Clearly Err in Treating Doctors Hospital as a Subchapter C Corporation for Valuation Purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

V. Conclusion as to the Bankruptcy Court's Finding of Insolvency . . . . . . . . . . . . . . . . 84

VI. The Bankruptcy Court Properly Concluded That the Pre-July 1998 Transfers Were Payments of Rent, not Debt . . . . . . . . . . . . . . . . . . . . . 84

A. HPCH Lease Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

B. Defendant Could Receive Payments of Rent . . . . . . . . . . . . . . . . . . . . . . . . . . 86

C. Defendant's Status as REMIC Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

VII. The Court's Award of Prejudgment Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

MEMORANDUM OPINION AND ORDER

Doctors Hospital of Hyde Park, Inc. (hereinafter "Plaintiff" or "Doctors Hospital" or "Debtor") filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for the Northern District of Illinois on April 17, 2000. On April 15, 2002, Doctors Hospital filed an adversary complaint in the bankruptcy court for the Northern District of Illinois, pleading a total of 28 counts against a number of individuals and entities. Counts VIII, IX, and X of the complaint assert claims against LaSalle Bank National Association, f/k/a LaSalle National Bank ("Defendant" or "Trust"), as trustee for certain asset certificateholders of Asset Securitization Corporation Commercial Mortgage Pass-Through Certificates, Series 1997, D5.*fn1 On April 22, 2004, Gus A. Paloian was appointed the Chapter 11 trustee for Doctors Hospital. In its claims against Defendant, Doctors Hospital sought (1) to void as fraudulent transfers a guaranty and related security agreements that Doctors Hospital made in connection with a loan from Defendant's predecessor, Nomura Asset Capital Corporation, to Doctors Hospital's landlord (the "Nomura Loan," discussed below) (Count VIII); and (2) to void a lease (the "HPCH Lease", discussed below) held by Defendant as Nomura's assignee or to recover as fraudulent transfers payments of rent that Doctors Hospital had made to Defendant in excess of the property's fair market rental value (Counts IX and X).

Defendant filed a proof of claim in the bankruptcy case and a counterclaim in the adversary case, seeking approximately $60 million based on Doctors Hospital's guaranty and security agreements in connection with the Nomura Loan. Because the proof of claim in the bankruptcy case and Count VIII of the adversary proceeding were factually related to the guaranty and related security agreements between the parties, the bankruptcy court consolidated the adversary claims against the Trust and objections to the proof of claim for resolution at a trial on the issue of whether the agreements were voidable as fraudulent transfers.

Judge Schmetterer of the bankruptcy court conducted a bench trial on Counts VIII, IX, and X, and on March 2, 2007, issued his Initial Findings of Fact and Conclusions of Law. In re Doctors Hosp. of Hyde Park, Inc., 360 B.R. 787 (Bankr. N.D. Ill. 2007). The findings relevant to this appeal are as follows:

(1) Doctors Hospital was insolvent at all times between August 28, 1997 and April 17, 2000, the date it filed for bankruptcy;

(2) Doctors Hospital's guaranty and security payments to Defendant pursuant to a loan Defendant made to Doctors Hospital's landlord were void as fraudulent transfers;

(3) Defendant was the initial transferee of lease payments from Doctors Hospital prior to July 7, 1998;

(4) Doctors Hospital's lease payments to Defendant were payments of rent, not debt;

(5) Doctors Hospital's payments of rent prior to July 7, 1998 were fraudulent transfers to the extent they exceeded fair market value; and

(6) Rental payments made after July 7, 1998 were not fraudulent transfers because they were not made with assets of Doctors Hospital.

The bankruptcy court also denied Defendant's request to void the lease pursuant to which the rental payments were made, a holding Defendant does not appeal here. For the rental payments made prior to July 7, 1998, the bankruptcy court awarded Plaintiff damages to the extent those payments exceeded fair market value and prejudgment interest in the total amount of $4,341,238.43. Based on the finding that Doctors Hospital's guaranty and security agreements were void as fraudulent transfers, the bankruptcy court granted summary judgment for Plaintiff on Defendant's proof of claim in the bankruptcy case, which was based on contractual obligations of Doctors Hospital under those agreements. Because those same agreements served as the basis for Defendant's adversary counterclaim, the court also ruled in favor of the Doctors Hospital on that claim, entering a claim denial order in the adversary proceeding. Both parties filed motions to alter or amend judgment, and both were denied in the bankruptcy court's Additional Findings of Fact and Conclusions of Law dated July 25, 2007. In re Doctors Hosp. of Hyde Park, Inc., 373 B.R. 54 (Bankr. N.D. Ill. 2007).

Defendant and Plaintiff appealed separately from the bankruptcy court's judgment and claim denial orders, and the court consolidates the appeals here. The court addresses a total of four cases on appeal. Two of the cases represent the parties' appeals from the bankruptcy court's Amended Final Judgment in the adversary proceeding. In addition, Defendant filed separate appeals from the bankruptcy court's claim denial orders of its proof of claim in the bankruptcy proceeding and its counterclaim in the adversary proceeding. In Case No. 07 C 5231, Defendant appeals from the voiding of the guaranty and security agreements*fn2 and the award of damages based on the pre-July 1998 fraudulent transfers.*fn3 In case Nos. 07 C 2722 and 07 C 2815, Defendant appeals from the Claim Denial Orders on its bankruptcy claim and counterclaim in the adversary proceeding.*fn4 In Case No. 07 C 5232, Plaintiff appeals from the bankruptcy court's finding that the post-July 1998 rental payments were not fraudulent transfers. For the reasons explained below, the judgment of bankruptcy court is affirmed.

BACKGROUND*fn5

I. The Parties

Doctors Hospital of Hyde Park ("Plaintiff' or "Debtor") is an Illinois Subchapter S corporation that had its principal place of business at 5800 South Stony Island Avenue, Chicago, Illinois. (Jt. Ex. 202 ¶ 1.) From approximately August 24, 1992 until April 17, 2000, it was owned and controlled by Dr. James Desnick. (Jt. Ex. 202 ¶ 30.)

Gus A. Paloian is the Chapter 11 bankruptcy trustee for Doctors Hospital. Paloian brought this adversary suit in his capacity as trustee.

James Desnick is an Illinois resident. At all relevant times, Desnick was the sole shareholder and director of Doctors Hospital. (Jt. Ex. 202 ¶ 5.)

LaSalle National Bank Association ("Defendant" or the "Trust"), f/k/a La Salle National Bank, as trustee for certificateholders of Asset Securitization Commercial Mortgage Pass-Through Certificates, Series 1997, D5*fn6 by and through its servicer Orix Capital Markets, LLC ("Orix"), is a trust that has elected to be treated as a Real Estate Mortgage Investment Conduit ("REMIC") under the Internal Revenue Code of 1986. (Jt. Ex. 202 ¶ 2.) LaSalle National Bank Association is a national banking association with its principal place of business in Illinois. (Id..)

Orix Capital Markets ("Orix") is the servicer of a pool of loans securitized by the Trust. As the loans' servicer, Orix attempts to maximize the collection of principal, interest, and other amounts due under loans owned by the Trust, including the Nomura Loan. (Jt. Ex. 202 ¶ 15.)

Daiwa Healthco-2 LLC ("Daiwa") is a Delaware limited liability company with its place of business located in New York, New York. (Jt. Ex. 202 ¶ 3.) It is a bankruptcy-remote corporation*fn7 associated with Dawia Securities America, Inc. and an affiliate of Daiwa Bank. No information identifying Daiwa's owners and partners appears in the record.

HPCH LLC ("HPCH") is a Delaware limited liability company. In July or August 1997, HPCH acquired record title of the Doctors Hospital property from HPCH Partners, L.P. (Jt. Ex. 202 ¶ 4.) HPCH is owned 99% by HPCH Partners, L.P. and 1% by its managing member, HP Membership. Desnick is HPCH's managing partner and, as of August 1997, owned 100% of HP Membership and a controlling (approximately 99%) interest in HPCH Partners, L.P. (Jt. Ex. 202 ¶ 13.) The record does not identify any other partners or members.

HPCH Partners, L.P. is an Illinois limited partnership. (Jt. Ex. 202 ¶ 8.) As noted, HPCH Partners, L.P. holds a 99% interest in HPCH. HPCH Partners, L.P. is owned 1% by its general partner, Stoney [sic] Island Ventures, which is wholly owned by Desnick. HPCH Partners, L.P. is 99% owned by its limited partners. According to the parties' Supplemental Stipulation of Facts, the partnership's tax returns lists its members, as of August 1997, as Desnick 95.2% and Dan Webb 3.8%. The tax returns also identify two other "partners," Robert Krasnow and Stephen Weinstein, but the parties have stipulated that Krasnow's and Weinstein's ownership interest in the partnership is 0%; and the record does not identify the owner(s) of the remaining 1% limited partnership interest. The tax returns, again according to the parties' stipulations, also show that in September 1997, Desnick acquired Webb's interest, giving Desnick 99% of the limited partnership interest in HPCH Partners. (Jt. Ex. 202, Supp. Stip. 1.)

HP Membership, Inc. ("HP Membership") is a special purpose Delaware corporation, also wholly owned by James Desnick. The parties have stipulated that HP Membership holds a 1% interest in HPCH. (Jt. Ex. 202 ¶ 13.) The stipulations also state, however, that this corporation may have been dissolved for failure to file annual franchise reports. (Jt. Ex. 202 ¶ 9.) The record contains no further information about the current status of HP Membership.

MMA Funding, Inc. is a special purpose Delaware corporation and the special purpose manager of MMA Funding, LLC. Desnick is the 100% owner of MMA Funding, Inc. (Jt. Ex. 202 ¶ 11.)

Medical Management of America, Inc. ("MMA") is a Delaware corporation and was a named manager of Doctors Hospital and HPCH, though in reality Desnick was the de facto manager of both companies. Desnick, Desnick Trust 1, and Desnick Trust 2 own 100% of MMA. (Jt. Ex. 202 ¶ 10.) Desnick and certain unnamed stockholders in MMA created Desnick Trust 1 and Desnick Trust 2. (Jt. Ex. 202 ¶¶ 6,7.) Desnick holds a controlling interest in MMA.

MMA Funding, L.L.C. ("MMA Funding") is an Illinois limited liability corporation. MMA Funding is owned 99% by Doctors Hospital and 1% by MMA Funding, Inc.

Nomura Asset Capital Corporation ("Nomura") is a Delaware corporation with its principal place of business located in New York City, New York. (Jt. Ex. 202 ¶ 14.)

As reflected above, and stipulated by the parties, Desnick at all times owned and/or controlled Doctors Hospital, HPCH, MMA Funding, Inc., MMA Funding, HP Membership, and HPCH Partners, L.P. (Jt. Ex. 202 ¶ 18.)The parties have stipulated that the chart attached as Exhibit A to this opinion illustrates the organization of these various entities.

II. History of Doctors Hospital

Doctors Hospital was built in 1916 by the Illinois Central Railroad as a component of its employee health insurance plan. In 1960 the railroad sold the facility, and it became a not-for-profit entity, Hyde Park Community Hospital. After the not-for-profit community hospital ceased operations, HPCH Partners, L.P., an entity controlled by Desnick, purchased the real estate and facilities for approximately $2,400,000.00 in 1992. (Jt. Ex. 202 ¶ 30.)

On August 24, 1992, HPCH Partners, L.P. leased the real estate located at 5800 South Stony Island Avenue, Chicago, Illinois, to Doctors Hospital until HPCH acquired the property sometime in July or August 1997. On August 28, 1997, Doctors Hospital entered into a lease agreement with HPCH, discussed below. Throughout its existence, Doctors Hospital utilized the property as a hospital. (Jt. Ex. 202 ¶ 32.) Doctors Hospital's revenue was largely derived from reimbursements from the government in the form of Medicare and Medicaid reimbursements, as well as payments from private insurance companies such as Blue Cross and Blue Shield. (Jt. Ex. 202, ¶ 31.)

III. The Daiwa Loan

Plaintiff appeals from the bankruptcy court's ruling that certain transfers to Defendant's account at the Defendant bank were not the property of Doctors Hospital and therefore could not be recovered by the Debtor as fraudulent transfers. The transfers at issue stem from a March 31, 1997 loan from Daiwa to MMA Funding, Doctors Hospital's wholly-owned subsidiary (hereinafter the "Daiwa Loan"), and were made during the period from October 1997 until Doctors Hospital filed for bankruptcy in April 2000. The Daiwa Loan was a revolving loan structured pursuant to a healthcare receivables securitization program. Under this program, Daiwa loaned funds to the wholly-owned subsidiaries of participating entities and in exchange, participating entities contributed receivables to their wholly-owned subsidiaries as security for the loan. Initial Findings, 360 B.R. at 799 ¶¶ 41-42. As discussed in greater detail below, the wholly-owned subsidiaries were structured as special purpose entities,*fn8 thereby insulating Daiwa from the possible bankruptcy of the participating entities. For this reason, the transaction documents identified the subsidiaries (but not the participating entities) as borrowers and Daiwa as lender under this program. Documents prepared by Daiwa representatives summarizing the structure of the Daiwa Loan identified Doctors Hospital and two other hospitals, Larkin Hospital and Gem-Care Nursing home, as the participating entities in the healthcare receivables securitization program. Id. at 799 ¶ 42. (Credit Approval Memorandum: Daiwa Securities America and Medical Management of America, Inc., Jt. Ex. 168 at 1.)

Under the Daiwa Loan Agreement in this case, Daiwa agreed to provide up to $25 million to MMA Funding in exchange for a security interest in MMA Funding's assets. Initial Findings, 360 B.R. at 797 ¶ 12, 799 ¶ 41. (Jt. Ex. 202 ¶ 41.) As part of the Daiwa Loan transaction, Doctors Hospital contributed all of its healthcare receivables to MMA Funding under a separate agreement, the "Healthcare Receivables Contribution Agreement" (hereinafter "Contribution Agreement"). (Jt. Ex. 5.) MMA Funding, in turn, assigned the receivables contributed by Doctors Hospital as collateral security in favor of Daiwa under another agreement titled "Assignment of Healthcare Receivables Contribution Agreement as Collateral Security by MMA Funding in favor of Daiwa" ("MMA Funding Assignment"). Initial Findings, 360 B.R. at 799 ¶ 43. In exchange for this assignment, Daiwa forwarded new loan advances to a bank account in the name of MMA Funding.

(Jt. Ex. 202 ¶ 40.)

As part of the Daiwa Loan Agreement, MMA Funding represented to Daiwa that MMA Funding was the "legal and beneficial owner" of the receivables. (Jt. Ex. 202 ¶ 48.) Plaintiff's appeal challenges MMA Funding's claim to ownership and control over the receivables for the period beginning July 7, 1998 through Doctors Hospital's April 2000 bankruptcy filing. See Initial Findings, 360 B.R. at 846-55.

Certain provisions of the Daiwa Loan transaction documents are relevant to Plaintiff's claims on appeal. First, Daiwa, the lender, and MMA Funding, the borrower, are the only signatories to the Daiwa Loan agreement; Doctors Hospital is a signatory to other agreements related to the Daiwa Loan transaction (for example, the Contribution Agreement), but was not a signatory to the Loan Agreement itself. (Jt. Ex. 202 ¶ 43.) The Daiwa Loan Agreement provides that MMA Funding (and only MMA Funding) "may borrow, repay, (without premium or penalty) and reborrow the Revolving Loan." (Id. ¶ 45.) It also requires MMA Funding to grant Daiwa a first priority lien on and a security interest plus setoff rights in all healthcare receivables and proceeds of receivables contributed by Doctors Hospital to MMA Funding under the terms of the separate Contribution Agreement. (Id. ¶ 49.) Doctors Hospital is not, however, identified in the Daiwa Loan Agreement as the contributor of the receivables. (Loan and Security Agreement, Jt. Ex. 1.) The Daiwa Loan Agreement requires MMA Funding to submit borrowing base certificates*fn9 to Daiwa in connection with each advance under the loan. (Loan and Security Agreement, Jt. Ex. 1)

The Agreement's terms further provide that MMA Funding would designate the account into which Daiwa would transfer new borrowings. (Jt. Ex. 202, ¶ 59.) From April 1997 (the inception of the Daiwa Loan) until July 7, 1998, Daiwa transferred new borrowings at MMA Funding's direction directly to Grand National Bank account #6700010103, an account titled in the name of MMA Funding. (Jt. Ex. 202.) Daiwa initially transferred $7,975,500.00 to MMA Funding. Approximately $6,524,000.00 of that amount was used to retire an existing line of credit that MMA had obtained for the benefit of Doctors Hospital, Desnick and his affiliates; approximately $1,372,000.00 was made available to Doctors Hospital; the remainder was used to pay expenses relating to the transaction. (Jt. Ex. 202 ¶ 61.) After July 7, 1998, MMA Funding directed new borrowings to be transferred directly to a bank account controlled by Defendant, LaSalle National Bank, pursuant to the terms of the Nomura loan, discussed below.

The principal of the Daiwa Loan was never fully paid down. The loan had an original maturity date of March 31, 1999, twenty-four months from its inception. (Jt. Exs. 1, 4.) MMA Funding and Daiwa extended this date to March 31, 2001 in their third amendment to the Daiwa Loan Agreement. (Jt. Ex. 4.) As of March 2000, one month before the bankruptcy filing, approximately $10.3 million of the Daiwa Loan was still outstanding. (Jt. Ex. 202 ¶¶ 54, 55.)

A. MMA Funding's Function as a Special Purpose Entity under the Daiwa Loan

The bankruptcy court found that MMA Funding was created as a "special purpose entity" pursuant to the terms of the Daiwa Loan transaction, a finding Plaintiff disputes on appeal. See Initial Findings, 360 B.R. at 847-48. According to the findings of the bankruptcy court, MMA Funding was created in conjunction with the Daiwa Loan for the specific purpose of shielding its assets- the contributed healthcare accounts receivable-from Doctors Hospital's creditors in the event of Doctors Hospital's bankruptcy. Initial Findings, 360 B.R. at 847. Thus, MMA Funding's "special purpose" was to protect Daiwa as lender from the risk that MMA Funding's operating company, Doctors Hospital, might file for bankruptcy. With this shield against the risk of losing its stake in MMA Funding's assets to Doctors Hospital's bankruptcy creditors, it could make the loan at a lower interest rate than would otherwise be available to Doctors Hospital.

The bankruptcy court found that the parties to the Daiwa Loan-MMA Funding and Daiwa -relied on MMA Funding's separate special purpose status in entering into the Loan Agreement. Initial Findings, 360 B.R. at 852. In subparagraph (p) of Exhibit IV to the Daiwa Loan Agreement, MMA Funding covenanted to Daiwa that it would observe all of its obligations under the Contribution Agreement. (Daiwa Loan Agreement, Ex. IV(p) to Jt. Ex. 1.) Such obligations included all of the "Special Covenants of Corporate Separateness" in Exhibit IV to the Contribution Agreement (the "Separateness Covenants"), pursuant to which MMA Funding agreed to be a separate and distinct corporate entity from Doctors Hospital. (Ex. IV to Jt. Ex. 5.) Daiwa memoranda prepared in connection with the Daiwa Loan indicate that Daiwa would not have entered into the Loan Agreement without the establishment of MMA Funding as a special purpose entity with a separate corporate identity. (Credit Approval Memorandum, Jt. Exs. 117, 168.)

Phillip Robinson, the chief financial officer of MMA Funding, Inc., testified at trial that MMA Funding was never intended to be an operating company; rather, it was formed as a special purpose entity in March 1997 to fit the structure of the Daiwa Loan. (Tr. II: 23-25.) Throughout the life of the Daiwa Loan, MMA Funding had no active checking account, no insurance, and no phone. Initial Findings, 360 B.R. at 803 ¶ 97. (Tr. 1:116-20.) There is no evidence of any balance sheets or profit-and-loss statements prepared for MMA Funding after the Daiwa Loan closed, and MMA Funding never filed a tax return.*fn10 Initial Findings, 360 B.R. at 803 ¶ 94. (Jt. Ex. 202 ¶ 65.)

Defendant introduced into evidence borrowing base certificates submitted by MMA Funding to Daiwa for the months of August 1998 through March 1999. (Def. Ex. 9.) The record also includes a letter and borrowing base certificate dated June 16, 1998, signed by MMA Funding officers in the name of MMA Funding, but printed on Doctors Hospital stationary, an apparent violation of MMA Funding's obligation, set forth in its operating agreement, to "maintain its own separate stationary." (Letter from MMA Funding to Daiwa re Borrowing Base Certificates, June 16, 1998, Jt. Ex. 61; Operating Agreement of MMA Funding, Jt. Ex. 174, Art. III (7)).

MMA Funding and Daiwa executed three amendments to the Daiwa Loan Agreement on August 21, 1997, August 26, 1997, and February 25, 1999. None of these amendments, admitted as Joint Exhibits 2, 3, and 4 below, appears in the record on appeal, but it is undisputed that Doctors Hospital was not a signatory to any of these amendments. Initial Findings, 360 B.R. at 802 ¶ 74.

B. The Contribution of Doctors Hospital's Healthcare Receivables Under the Daiwa Loan

Plaintiff appeals the bankruptcy court's finding that Doctors Hospital's contribution of healthcare receivables to MMA Funding constituted a "true sale."*fn11 The Healthcare Receivables Contribution Agreement (hereinafter "Contribution Agreement") between MMA Funding and Doctors Hospital provided for the transfer from Doctors Hospital to MMA Funding of "all right, title, and interest in and to such Receivables" on certain transfer dates specified in the transaction documents. (Jt. Ex. 202 ¶ 50.) The Contribution Agreement identifies the transfer of healthcare receivables as "a full and complete transfer of ownership and not a loan," (Covenants, Ex. IV to Jt. Ex. 5 ¶ 5.08), and provides for the transfer of receivables to occur not only on the closing date of the Daiwa Loan, but on a continuing basis throughout the life of the Loan. (Contribution Agreement Jt. Ex. 5 ¶ 1.10.) A separate provision of the Contribution Agreement reiterates the parties' intent that the transfer be treated "as a full and complete transfer of ownership" and specifies that in the event it is not recognized as such, Doctors Hospital shall be deemed to have granted a security interest to MMA Funding in the receivables. (Jt. Ex. 202 ¶ 52.) Doctors Hospital later explicitly ratified the transfer of receivables as a "true sale" in an amendment to the Contribution Agreement dated February 25, 1999. Initial Findings, 360 B.R. at 800 ¶ 55.

The bankruptcy court admitted into evidence two UCC-1 financing statements*fn12 executed in connection with the Daiwa Loan. Doctors Hospital executed a UCC-1 statement in connection with the transfer of its receivables to MMA Funding, and MMA Funding, in turn, executed a separate UCC-1 statement granting security interests in the receivables to Daiwa. Initial Findings, 360 B.R. at 802 ¶¶ 70, 71.*fn13 Doctors Hospital's financial statements do not reflect a transfer of any accounts receivable to MMA Funding for fiscal years 1997, 1998, or 1999. (Jt. Ex. 202 ¶¶ 63, 64, 65.) Rather, the receivables were listed as assets of Doctors Hospital on its audited financial statements for all three fiscal years. (Id. ¶ 63.) These statements further represent that Doctors Hospital "maintains a revolving line of credit arrangement pursuant to a Loan and Security Agreement dated March 31, 1997," and that "[a]ll eligible patient accounts receivable of the Hospital are pledged as collateral to secure the revolving line of credit." (Id. ¶ 66.)

In an effort to establish that the transfer of the receivables from Doctors Hospital to MMA Funding constituted a "true sale," Isaac Solemoni, Senior Vice President at Daiwa in charge of its healthcare receivables lending business, testified that the Daiwa Loan was a loan between Daiwa and MMA Funding to which Doctors Hospital contributed its receivables, not a loan between Daiwa and Doctors Hospital. Initial Findings, 360 B.R. at 801 ¶ 61. Philip Robinson, the CFO of MMA Funding, testified, similarly, that MMA Funding was always the "documented borrower" under the Daiwa Loan (Tr. I at 178), and that on the closing date of the Daiwa Loan there was "no question" that MMA Funding and Doctors Hospital were separate corporate entities. (Tr. I at 188.)

The bankruptcy court made the following additional findings of fact: On March 31, 1997, the law firm of Chuhak & Tecson, P.C. issued an opinion letter concerning MMA Funding's role as a special purpose entity. The law firm of Shefsky & Froelich also delivered an opinion that the transfer of the healthcare receivables constituted a "true sale." Desnick, as CEO of Doctors Hospital, executed Officer's Certificates in support of both legal opinions.*fn14 Initial Findings, 360 B.R. at 801. Finally, the correspondence of Stephen Weinstein, the chief executive officer of Doctors Hospital from September 1994 to September 1998, confirms a finding that Doctors Hospital transferred its healthcare receivables to MMA Funding. On June 1, 1997, Weinstein sent letters to Blue Cross/Blue Shield of Illinois, to the Comptroller for the State of Illinois, and to more than 100 private insurers, stating that Doctors Hospital had "contributed to [MMA Funding] the currently existing receivables payable by you to [Doctors Hospital] and we intend to contribute to [MMA Funding] hereafter arising receivables payable by you to [Doctors Hospital]." (Jt. Ex. 202 ¶¶ 67, 68, 69.)

IV. The HPCH Lease/Nomura Loan

In addition to the Daiwa Loan dispute, both parties have challenged the bankruptcy court's findings concerning certain rent payments to Defendant under a separate agreement between Doctors Hospital and its landlord, HPCH. Defendant appeals from the bankruptcy court's holding that certain transfers of rent made from Doctors Hospital to Defendant between August 1997 and July 1998 were void as fraudulent transfers. Plaintiff defends the court's determination that those transfers were voidable but appeals the bankruptcy court's holding that transfers of rent made after July 1998 were not void as fraudulent transfers. The transfers at issue in both appeals are governed by a lease between Doctors Hospital and its landlord, HPCH, (the "HPCH Lease"), and by a loan from Nomura to HPCH (the "Nomura Loan"), described below.

In July or August of 1997, HPCH acquired legal title to the Doctors Hospital property from HPCH Partners, L.P. On August 28, 1997, Doctors Hospital entered into an agreement with HPCH to lease the Hospital property for approximately $470,000 per month. (Jt. Ex. 202 ¶¶ 86, 88.) On that same date, Nomura made a loan to HPCH in the amount of $50 million. (Jt. Ex. 202 ¶¶ 70, 72.) Under its lease with HPCH, Doctors Hospital paid rent on a net basis equal to the debt service payment owed by HPCH on the Nomura Loan. Initial Findings, 360 B.R. at 808 ¶¶ 126, 138. (Jt. Ex. 158.) Rent payments on the HPCH Lease were HPCH's only source of income, and HPCH owned no property other than the hospital property and had no tenants other than Doctors Hospital. (Jt. Ex. 202 ¶¶ 96, 111.) HPCH assigned to Nomura all of its rights in the HPCH Lease and the rental payments due thereunder. (Id. ¶ 94.) The Nomura Loan was secured by the HPCH Lease, the hospital real estate, hospital equipment, accounts receivable, and other intangibles relating to Doctors Hospital. (Id. ¶¶ 70, 75.) Doctors Hospital also executed and delivered a Guaranty to Nomura for the entire amount of the loan. (Id. ¶ 73.) As security for its performance under that Guaranty, Doctors Hospital executed an Assignment of Management Agreement and Agreements Affecting Real Estate, by which Doctors Hospital assigned to Nomura all its rights in contracts with third parties made in connection with the management, construction, renovation, use, and operation of Doctors Hospital's facilities. Finally, Doctors Hospital executed an Equity Pledge Agreement granting Nomura a security interest and lien on all of Doctors Hospital's 99% interest in MMA Funding. (Id. ¶ 81.) Doctors Hospital represented to Nomura that it did not "have any defense or right of offset with respect to its rights, duties, and obligations under the [Pledge] or the [Lease], or any claim of right against [HPCH]." (Id. ¶ 77)

It is undisputed that although HPCH and Nomura were the parties to the Nomura Loan Agreement and Doctors Hospital the guarantor, the Nomura Loan was intended primarily to benefit Desnick, and initially all proceeds of the Loan were deposited into an account titled in the name of Desnick and his spouse. (Id. ¶ 85.) Doctors Hospital received none of the proceeds of the Nomura Loan. (Joint Pretrial Statement on Doctors Hospital's Mot. to Approve Settlement with Desnick and Other Defendants, Jt. Ex. 135 ¶ 31.) Nor did Desnick make any payments on that Loan; HPCH alone was responsible for debt service payments and other payments. Absent an Event of Default under the Nomura Loan documents, Doctors Hospital had no obligation to make any ...


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