United States District Court, D. Massachusetts
CAPITAL FINANCE, LLC, et al.
22 MAPLE STREET, LLC, et al.
MEMORANDUM OF DECISION
ZOBEL, SENIOR UNITED STATES DISTRICT JUDGE
Capital Finance, LLC and Capital Funding, LLC move for
appointment of a receiver of "owner"
defendant-borrowers 22 Maple Street, LLC; 25 Oriol Drive,
LLC; 59 Coolidge Road, LLC; and 20 Kinmonth Road, LLC (the
"Owner Defendants") and "operator"
defendant-borrowers Waban Health Center, LLC; Merrimack
Valley Health Center, LLC; Watertown Health Center, LLC; and
Worcester Health Center, LLC (the "Operator
Defendants"). Defendants own and operate skilled nursing
facilities at their Massachusetts properties. Though all
defendants are distinct corporate entities, each is
controlled and managed by non-party Synergy Health Centers,
LLC ("Synergy"). See Docket # 1-2 at 88, 89.
January 16, 2018, plaintiffs filed a complaint in the
Business Litigation Session of the Suffolk Superior Court
alleging defendants had breached their loan agreements and
seeking appointment of a receiver of the properties and
nursing home operations. Defendants subsequently removed the
action to this court. After briefing the receivership motion
but the day before this court's scheduled hearing, each
Owner Defendant filed a petition for bankruptcy under Chapter
11 in the Eastern District of New York. That stayed this
litigation with respect to the Owner Defendants. See
11 U.S.C. § 362(a). Since the Operator Defendants did
not file for bankruptcy, plaintiff Capital Finance LLC's
motion for appointment of a receiver of their businesses is
properly before this court.
are the facts as set forth in the pleadings and the
parties' submissions to the pending motion.
The Loan and Forbearance Agreements; Breach Thereof
March 4, 2014, Capital Funding, LLC and other non-party
lenders provided a $36, 856, 627 mortgage loan to Owner
Defendants for the purchase of four Massachusetts properties.
Shortly thereafter, on March 28, 2014, Capital Finance, LLC
and other non-party lenders provided a $7, 500, 000 revolving
credit "AR Loan" to the Operator Defendants, who
have a combined total of over 500 beds at their respective
nursing facilities on the four properties. The Mortgage Loan
is secured by the properties and the AR Loan is secured by
all of the Operator Defendants' assets, which include all
accounts and other personal property. Plaintiffs have
perfected these interests and hold first priority to them
over other creditors.
allege that Owner and Operator Defendants defaulted on their
loan obligations just over a year after entering into the
contracts. The parties thereafter entered into a set of First
Forbearance Agreements, which were later allegedly breached,
and a set of Second Forbearance Agreements, which were also
allegedly breached. As of January 2, 2018, $31, 110, 090.97
was due on the mortgage loan and, as of January 5, 2018, $2,
669, 060.90 was due on the AR Loan. Both amounts are exclusive
of interest, fees, and other charges that continue to accrue.
Operator Defendants' Financial Picture
the Operator Defendants' defaults under the AR Loan and
Forbearance Agreements, plaintiff alleges that
"Defendants are not paying their debts and do not have
the funds to pay their debts." Docket # 25 at 6. The
situation will continue to deteriorate, plaintiff says,
because "Operator Defendants' monthly revenues have
been less than their operating expenses for at least the last
year." Docket # 32 at 2. Philip Moylan, a Director at
Capital Finance, LLC, examined defendants' balance sheets
and income statements and calculated that their 2017
operating expenses were $4, 410, 542 greater than their total
revenues. See Docket ## 32-1 ¶ 6; 32-2 at 1.
further alleges that defendants' financial problems
threaten the continued operation of the defendants'
nursing homes and, by extension, the viability of the assets
securing the AR Loan. By Administrative Bulletin 18-03, the
Commonwealth of Massachusetts Executive Office of Health and
Human Services ("EEOHS") has warned that nursing
facilities with unpaid bed taxes (also called "user
fees") may be referred to the Department of Public
Health for license revocation. See Docket # 25-1 at
3. Furthermore, by letter dated January 26, 2018, EOHHS
specifically notified defendants Worcester Health Center and
Watertown Health Center that, given their outstanding user
fees totaling $434, 453 and $367, 240, respectively, EEOHS
would begin to offset MassHealth payments to the centers by
15% to begin recouping the outstanding debts. See
Docket # 25-2 at 2, 5. In addition, defendants'
management company Next Step has threatened to cease
providing services because of defendants' failure to
timely pay them. Docket ## 1-1 ¶ 51; 1-6 at 6-17. Other
vendors are similarly dissatisfied. For example, plaintiffs
Managing Director, Glen Dywer, submitted a sworn affidavit
stating that, on February 9, 2018, he learned that the
regular HVAC service provider for the Waban Health Center had
refused to come fix problems with the heating system,
apparently because defendants owed money to the company.
Docket # 25-3 ¶ 9. Finally, plaintiff alleges that
"Defendants do not have a decision maker in charge and
running their operations, instead they are experiencing
management deadlock, which further threatens any viability of
their operations." Docket # 25 at 3. In support, Mr.
Dwyer stated that while one Zisha Lipschutz historically held
himself out as the main contact and decision maker for
defendants, Mr. Dwyer was informed on February 9, 2018 that
Mr. Lipschutz no longer has decision-making authority. Docket
# 25-3 ¶¶ 11, 13.
generally dispute the severity of the financial deficiencies
alleged by plaintiff. According to defendants, they are
"consistently" making payments "without any
issue" on the outstanding Massachusetts bed taxes and
the management fees owed to Next Step. Docket # 22 at 7.
Though they concede that the outstanding bed taxes amount to
$1, 166, 953.75 across the four facilities, defendants say
they are "making monthly payments in response to these
charges on a consistent and continuing basis" and note
that the Commonwealth has not yet initiated procedures to
revoke their licenses. Docket 22-1 ¶ 5. With respect to the
AR Loan itself, defendants argue that the balance is being
"automatically paid down whenever Synergy collects on
accounts receivables, " including payments as recent as
February 8, 2018. Docket # 22 at 7.
Court has inherent equitable power to appoint a receiver to
manage or preserve property pending judgment." U.S.
Bank Nat'l Ass'n v. Pendleton Westbrook SPE.
LLC, No. 2:16-CV-00411, 2016 WL 6808141, at*3 (D. Me.
Nov. 17, 2016) (citing United States v.
Quintana-Aguayo,235 F.3d 682, 686 & n.8 (1st Cir.
2000)). Receivership is an extraordinary remedy, justified
only when a clear showing is made that an "emergency
exists, in order to protect the interests of the plaintiff in
the property." Commodity Futures Trading Comm. v.
Comvest Trading Corp.,481 F.Supp. 438, 441 (D. Mass.
1979). To warrant the appointment of a receiver to manage and
operate a business, "there must be at the least a
'sufficient showing1 of something more than the
inadequacy of the security and the doubtful financial
standing of the debtor." Chase Manhattan Bank. N. A.
v. Turabo Shopping Ctr., Inc.,683 F.2d 25, 26 (1st Cir.
1982) (quoting Garden Homes. Inc. v. United States,200 F.2d 299, 301 (1st Cir. 1952)). In determining the
presence yej non of "something more, "
courts look to factors such as "fraudulent conduct on
the part of the defendant; imminent danger that property
would be lost, concealed, injured, diminished in value, or
squandered; the inadequacy of the available legal remedies;
the probability that harm to plaintiff by denial of the
appointment would be greater than the injury to the parties
opposing appointment; and the ...