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Milwaukee Center for Independence, Inc. v. Milwaukee Health Care, LLC

United States Court of Appeals, Seventh Circuit

July 8, 2019

Milwaukee Center for Independence, Inc., Plaintiff-Appellee,
Milwaukee Health Care, LLC, agent of Wellspring of Milwaukee, et al., Defendants-Appellants.

          Argued April 10, 2019


          Before Bauer, Manion, and Rovner, Circuit Judges.

          Manion, Circuit Judge.

         Milwaukee Health Care, LLC (MHC) and Milwaukee Center for Independence, Inc. (MCFI) entered into an agreement in 2014. Per that agreement, MCFI, a non-profit organization dedicated to providing medical care for individuals with brain injuries, would operate a brain-injury center in MHC's nursing facility. MHC would handle all billing and collections for the services MCFI provided and, through a process outlined in the agreement, remit the funds collected to MCFI (after taking a cut for itself).

         But MHC failed to follow through on its obligations under the contract, redirecting MCFI's funds to pay its employees and other creditors instead. MCFI sued MHC for breaching the contract and brought claims against MHC's principal, William Nicholson. The district court, exercising diversity jurisdiction, [1] entered summary judgment against MHC for breach of contract and against Nicholson for conversion and civil theft. The district court awarded MCFI over $2 million in damages, interest, and costs against MHC and Nicholson, jointly and severally. It also awarded MCFI over $200, 000 in attorney's fees and costs against Nicholson alone.

         MHC and Nicholson appeal the judgments against Nicholson. Because we agree with the conclusions of the district court, we affirm.


         William Nicholson was the CEO of "the Congress Companies," a collection of businesses involved in the construction of medical facilities. In 2013, Nicholson and another investor, William Koski, [2] formed MHC to operate the Wellspring of Milwaukee nursing home, with Nicholson serving as the managing member. The Wellspring facility was in a building owned by Milwaukee Healthcare Properties I, LLC (Milwaukee Properties), another of Nicholson's companies. The property was subject to a mortgage from Oppenheimer Multifam-ily Housing and Healthcare Finance, Inc. (Oppenheimer). The United States Department of Housing and Urban Development (HUD) insured the mortgage.

         In 2014, MCFI and MHC entered into an agreement whereby MCFI would operate an 18-bed brain-injury clinic within the Wellspring facility, the Nexday Brain Injury Rehab Center (BIRC). The agreement outlined a specific process for MCFI to obtain compensation for services performed at the BIRC. MHC would bill and collect from third parties (e.g., Medicaid and private insurance companies) for MCFI's services in MHC's own name and on MHC's own behalf. MHC would then place any funds collected for MCFI's services (BIRC Collections) into a general account, which was subject to a control agreement with Branch Banking & Trust Company. The agreement then required MHC to maintain a special checking account with a Milwaukee-area bank (the BIRC Depository Account) and transfer all BIRC Collections into that account. On the third business day of every month, MCFI would submit an invoice to MHC. On the 20th of each month, MHC would remit to MCFI either the amount of the invoice or the amount in the BIRC Depository Account, whichever was less, after taking a cut for itself (the "Wellspring Interim Daily Rate").[3]

         In addition to these terms, the agreement called for MHC to approach Oppenheimer and HUD about approval for MCFI to acquire a security interest in the receivables of which the BIRC Collections would be proceeds. The agreement notes any such interest would be subordinate to any security interest held by Oppenheimer, HUD, or an accounts-receivable lender. The parties do not indicate what Oppenheimer and HUD thought about MCFI acquiring a security interest in those receivables, but it is clear MCFI never got one.

         In 2015, the parties entered into a renewal agreement containing substantially similar terms.

         While the parties operated under these agreements, MHC suffered significant cash-flow problems. MHC's financial woes prompted Nicholson to invest his personal funds multiple times, totaling over $4 million. In an effort to manage these problems, Nicholson directed the CFO of the Congress Companies, Ed Tabor, to get involved to "help manage the cash."

         Under Tabor's direction, MHC began redirecting BIRC Collections to make its payroll and pay other creditors, primarily Milwaukee Properties. In 2015, MHC entered into a line-of-credit arrangement with SCM Specialty Finance Opportunities Fund, L.P. (SCM), an accounts-receivable lender. Under that agreement, MHC placed all the money it collected (including BIRC Collections) into one of two lock-box accounts (one for government payors, the other for private payors). Every day, SCM would sweep out all the funds in those accounts and apply them toward MHC's outstanding debt to SCM. MHC would then request a new draw on the line of credit to obtain operating capital.

         MCFI received its last full payment from MHC in March 2015. By the end of that ...

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