Capital Finance, LLC v. 22 Maple Street, LLC

          MEMORANDUM OF DECISION

          RYA W. ZOBEL, SENIOR UNITED STATES DISTRICT JUDGE

         Plaintiff-lenders 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.

         On 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.^[1]

         I. Factual Background

         Following are the facts as set forth in the pleadings and the parties' submissions to the pending motion.

         A. The Loan and Forbearance Agreements; Breach Thereof

         On 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.^[2] 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.

         Plaintiffs 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.^[3] Both amounts are exclusive of interest, fees, and other charges that continue to accrue.

         B. Operator Defendants' Financial Picture

         Beyond 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.

         Plaintiff 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.

         Defendants 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.^[4] 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.

         II. Legal Standard

         "This 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 ...