Hoffman v. Sonoma Specialty Hospital, LLC

 EDWARD J. EMMONS, CLERK S/ U.S. BANKRUPTCY COURT 5 □□ 2 NORTHERN DISTRICT OF CALIFORNIA □□ □□□ Qs ast) 1 □□□□□□□□ □□ 2 The following constitutes the Memorandum Decision|/of the Court. Signed: July 22, 2021 3 4 5 . wp 6 7 RogerL.Efremsky = | | U.S. Bankruptcy Judge 8 9 10 UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF CALIFORNIA 11 SANTA ROSA DIVISION 12 In re 13 SONOMA WEST MEDICAL CENTER, INC., Chapter 7 14 Case No. 18-10665 RLE Debtor. 15 16 TIMOTHY W. HOFFMAN, Trustee in AP No. 19-1030 RLE 17 |] Bankruptcy of Estate of Sonoma West Medical Center, 18 Plaintiff, 19 V. 20 SONOMA SPECIALTY HOSPITAL, LLC, al., 22 Defendants. 23 || And Related Counterclaim 24 MEMORANDUM DECISION GRANTING MOTION FOR PARTIAL SUMMARY JUDGMENT 25 I. Introduction 26 The parties are familiar with the factual and procedural 27 28 || msj dec. -l- 1 background in this case and it will not be repeated in detail 2 here. 3 Following a four-day trial on the first phase of this case, 4 on February 23, 2021 the court issued its ruling on what is known 5 as the Threshold Issue. Docket No. 140 (the “Decision”). The 6 court there determined that the estate of the Sonoma West Medical 7 Center (“Sonoma West” or “Debtor”) owned the pre-September 9, 8 2018 receivables (the “Receivables”), as plaintiff, its Trustee, 9 asserted. The court has scheduled a trial on the second phase of 10 this case to determine the amount Defendant and Counterclaimant 11 Sonoma Specialty Hospital (“SSH”), and its parent, 12 Counterclaimant American Advanced Management Group, Inc. (“AAMG”) 13 must pay to the estate for their unauthorized use of the 14 Receivables (the “Damages”). 15 The Trustee now moves for entry of an order granting partial 16 summary judgment on the Counterclaims asserted by SSH and AAMG 17 (collectively, “Counterclaimants” or, for ease of reference, 18 “Defendants”). Memorandum of Points and Authorities, Docket No. 19 207. Each of the five claims stated in the Counterclaim is 20 premised on the allegation that SSH and AAMG owned, and were 21 entitled to use, the Receivables and have been damaged by the 22 Trustee’s competing claim of ownership. The Trustee asserts that 23 the application of the law-of-the-case doctrine mandates summary 24 judgment in his favor on each of the Claims asserted in the 25 Counterclaim because the question of ownership of the Receivables 26 has been established and the upcoming trial on Damages (i.e., the 27 28 msj dec. -2- 1 actual amount of the Receivables collected and used by 2 Defendants) will determine the remainder of this case. 3 Defendants respond that the court cannot or should not 4 employ law-of-the-case, and because there are still triable 5 issues of fact as to their damages which will either reduce or 6 eliminate the Trustee’s Damages, summary judgment on the 7 Counterclaim is not appropriate. Opposition, Docket No. 209. 8 The court is not persuaded by any of Defendants’ arguments. 9 Defendants and their counsel are reminded of their duties under 10 Bankruptcy Rule 9011(b): by presenting any position to the court, 11 they are certifying that they have made reasonable inquiry, that 12 it is not being presented to cause unnecessary delay or needless 13 increase in the cost of litigation, that their claims, defenses, 14 legal contentions are warranted, their factual contentions have 15 evidentiary support, and their denials of factual contentions are 16 warranted on the evidence. See also, Weston v. Harmatz, 335 F.3d 17 1247, 1256-58 (10th Cir. 2003) (court issued order to show cause 18 re sanctions when parties repeatedly ignored previous binding 19 rulings that were law of the case). 20 II. Background 21 A. The Counterclaim 22 In response to the Trustee’s complaint seeking, inter alia, 23 turnover of the Receivables as property of the estate, Defendants 24 filed their Answer and Counterclaim. Dkt. No. 9. 25 The general allegations section of the Counterclaim 26 describes the agreement between the Palm Drive Health Care 27 msj decision 28 -3- 1 District (the “District”) and Sonoma West that ended as of 2 September 9, 2018 (the “MSSA”) and the agreement between 3 Defendants and the District which replaced it (the “MSA”). 4 Paragraphs 7-11. These paragraphs lay out the theory that the MSA 5 is the “only operative contract” which gives rise to Defendants’ 6 claim of ownership of the Receivables. 7 From this starting point, the Counterclaim alleges the 8 following story at paragraphs 8-24: (1) The Trustee interfered 9 with Defendants’ contract with the District by “wrongfully 10 claiming” the estate “owned and/or was entitled” to the 11 Receivables and “in blocking” SSH from collecting them (¶12). 12 (2) The Trustee interfered with Defendants’ contract with the 13 District by “constantly claiming” that the estate “owned” the 14 Receivables (¶18). (3) The Trustee continued to interfere with 15 their contract with the District by “wrongfully obtaining” court 16 process when the Trustee obtained a court order requiring 17 transfer of funds to his custody (¶19). (4) The Trustee committed 18 “fraud on the court” by “misrepresenting” that the Receivables 19 “belonged to” the estate (¶22). 20 The First Claim at paragraphs 25-28 is for “tortious 21 interference with contract” and incorporates the allegations of 22 paragraphs 1-24. The First Claim alleges that the Trustee 23 interfered with Defendants’ contract with the District by his 24 misrepresentations of ownership, by blocking their billing, by 25 collection and use of the Receivables. 26 The Second Claim at paragraphs 29-34 incorporates paragraphs 27 msj decision 28 -4- 1 1-28. It alleges that the Trustee and his counsel “intentionally 2 misrepresented” to Defendants that the estate owned the 3 Receivables and this damaged them. 4 The Third Claim at paragraphs 35-38 incorporates paragraphs 5 1-34. It alleges the Trustee abused process and committed “fraud 6 on the court” when the Trustee made these alleged 7 misrepresentations of ownership to the court in order to obtain 8 the turnover orders issued in the main case. 9 The Fourth Claim at paragraphs 39-43 incorporates paragraphs 10 1-38. It alleges the Trustee “converted” the Receivables by 11 wrongfully taking possession and control over the funds under 12 these prior turnover orders and by making demand for the 13 Receivables in his complaint. 14 The Fifth Claim at paragraphs 44-48 incorporates all the 15 prior paragraphs of each of the Counterclaims. It alleges that 16 the Trustee is liable for damages due to his “gross negligence” 17 because he “breached his duty of care” to the creditors of the 18 estate by misrepresenting the estate’s ownership of the 19 Receivables when they did not “belong” to the estate because they 20 were “owned” by Defendants. 21 Defendants ask for $15 million in compensatory damages and, 22 in a truly astounding overreach, they also ask for punitive 23 damages based on the allegation that the Trustee acted 24 recklessly, maliciously, and wantonly. As the Trustee has pointed 25 out, a simple request for declaratory relief regarding ownership 26 would have sufficed. These tort claims were not necessary and 27 msj decision 28 -5- 1 have strained the resources of both the Trustee and the court. 1 2 B. The Trustee’s Summary Judgment Argument 3 The Trustee correctly articulates the summary judgment 4 standard under Fed. R. Civ. P. 56, applicable here by Bankruptcy 5 Rule 7056. According to the Trustee, the Decision on the 6 Threshold Issue established that the estate owns the Receivables 7 and this is now the law-of-the-case. None of the exceptions to 8 its application are present and the court would abuse its 9 discretion if it failed to adhere to it. Accordingly, the Trustee 10 is entitled to summary judgment in his favor dismissing the 11 Counterclaim. 12 C. Defendants’ Opposition to Summary Judgment 13 Defendants argue that the law-of-the-case doctrine does not 14 apply here because this court may not issue a final ruling on a 15 non-core matter such as the Threshold Issue. They also argue that 16 a final judgment is a prerequisite, citing In re Brizinova, 592 17 B.R. 442, 455 (Bankr. E.D. N.Y. 2018) (relying on United States 18 v. U.S. Smelting Co., 339 U.S. 186, 189 (1950) in support of this 19 final judgment requirement). 20 Defendants next assert that the court is not rigidly bound 21 to follow its former decisions especially where the facts are 22 “still undeveloped.” See generally 18B Charles Alan Wright & 23 Arthur R. Miller, Federal Practice & Procedure, §4478.1 (2d ed. 24 2015). 25 1 Defendants’ second through fifth affirmative defenses are 26 duplicative of these Claims. Docket No. 9, p.11-13. 27 msj decision 28 -6- 1 They also argue that there are genuine factual disputes 2 regarding the Claims in the Counterclaim because: (1) The estate 3 has no right to be “reimbursed” from the Receivables based on 4 Defendants’ interpretation of the Debtor’s contract with the 5 District. (2) As a condition for “reimbursement” from the 6 Receivables, the Trustee had to prove - and cannot prove - that 7 the Debtor provided management services (as defined in the MSSA), 8 which included paying all accounts payable and collecting the 9 Receivables. (3) Because the Debtor’s contract with the District 10 was “terminated for cause,” the Debtor lost the right to be 11 “reimbursed” from the Receivables and lost its merely “inchoate 12 ownership” interest in the Receivables. 13 III. Discussion 14 A. Summary Judgment Standard 15 Fed. R. Civ. P. 56(a), applicable here by Bankruptcy Rule 16 7056, provides that the court shall grant summary judgment if the 17 movant shows that there is no genuine dispute as to any material 18 fact and the movant is entitled to judgment as a matter of law. 19 The movant bears the initial burden of establishing the absence 20 of a genuine issue of material fact. Celotex Corp. v. Catrett, 21 477 U.S. 317, 324-25 (1986). If this threshold is met, Rule 56(e) 22 requires the non-moving party to identify facts that establish 23 that there is a genuine dispute for trial. Anderson v. Liberty 24 Lobby, Inc., 477 U.S. 242, 248 (1986). That is, the non-moving 25 party must present evidence from which a reasonable trier of fact 26 could rule in its favor. Id. Rule 56(g) permits the court to 27 msj decision 28 -7- 1 enter an order stating that any material fact that is not 2 genuinely in dispute is established in the case. 3 B. Law-of-the-Case Standard 4 The law-of-the-case is a discretionary doctrine based on the 5 sensible notion that litigation must come to an end. Simply 6 stated, “the law-of-the-case doctrine precludes a court from 7 reconsidering an issue previously decided by the same court or a 8 higher court in the identical case.” Ingle v. Circuit City, 408 9 F.3d 592, 594 (9th Cir. 2005) (district court’s interpretation of 10 California contract law was law of the case; sanctions in the 11 form of double costs and attorneys fees awarded for pursuing 12 appeal totally devoid of merit). The doctrine has developed to 13 maintain consistency and avoid reconsideration of matters once 14 decided during the course of a continuing lawsuit. Id. 15 For the law-of-the-case doctrine to apply, the issue in 16 question must have been decided explicitly or by necessary 17 implication in the previous disposition. Hall v. City of L.A., 18 697 F.3d 1059, 1067 (9th Cir. 2012). See also, True Health 19 Chiropractic v. McKesson Corporation, 332 F.R.D. 589, 608-09 20 (N.D. Cal. 2019) (explaining law of the case applied following 21 remand based on Ninth Circuit’s clear ruling on issue in question 22 in prior appeal). 23 A prior decision on an issue in the same case should be 24 followed unless (1) it is clearly erroneous and its enforcement 25 would work a manifest injustice; (2) intervening controlling 26 authority makes reconsideration appropriate; or (3) substantially 27 msj decision 28 -8- 1 different evidence is adduced at a subsequent trial. Ingle, 408 2 F.3d at 594; Galen v. Redfin Corporation, 2015 WL 7734137, *3-4 3 (N.D. Cal. Dec. 1, 2015) (declining to apply law of the case to 4 state court order following its reversal and removal of 5 litigation to federal court, discussing finality requirement, 6 meaning of changed circumstances and manifest injustice). 7 There is no requirement that there be a final judgment as 8 Defendants suggest in reliance on language in In re Brizinova, 9 592 B.R. 442, 455 (Bankr. E.D. N.Y. 2018) which in turn relied on 10 language from United States v. U.S. Smelting, 339 U.S. 186, 198- 11 99 (1950). There need only be a final ruling on an issue. Ingle, 12 408 F.3d at 594. See also Matter of Oil Spill by Amoco Cadiz off 13 Coast of France on March 16, 1978, 954 F.2d 1279, 1291-92 (7th 14 Cir. 1992) (explaining cases generally have not relied on 15 Smelting to limit law of the case to a decision on appeal from a 16 final judgment). 17 Finally, summary judgment is an appropriate means to dispose 18 of a case using the law-of-the-case doctrine. Pubali Bank v. City 19 National Bank, 777 F.2d 1340, 1342 (9th Cir. 1985). 20 C. The Decision Disposes of the Counterclaim 21 1. The Law-of-the-Case Doctrine Applies. 22 Each Claim in the Counterclaim is based on the allegation 23 that the estate does not own the Receivables and the Trustee 24 caused Defendants damage by saying it did. The Decision 25 conclusively and explicitly ruled that the estate owns the 26 Receivables. This is now the law of the case and Defendants offer 27 msj decision 28 -9- 1 no basis for this court to exercise its discretion to depart from 2 it. Nothing in the Defendants’ Opposition shows that the Decision 3 is clearly erroneous, or that there is some manifest injustice to 4 Defendants in adhering to it. There has been no intervening 5 change in the applicable law. They offer no new evidence to 6 support their arguments against applying law-of-the-case. 7 Finally, there is no merit to their finality arguments whether 8 premised on the non-core nature of the ownership dispute or any 9 other factor. In denying the Defendants’ motion to withdraw the 10 reference, the District Court agreed this court was the 11 appropriate court to decide the Threshold Issue. Defendants may 12 appeal any ruling of this court in due course. 13 2. Defendants do not raise any factual disputes. 14 Defendants’ effort to contort their rejected contract 15 interpretation arguments into disputed factual issues to make the 16 Counterclaim viable simply does not work. Because they have no 17 claim to ownership of the Receivables, the Trustee’s claim that 18 the estate did own the Receivables could not conceivably be the 19 basis for any damages to Defendants. 20 Comparing the arguments they made at trial, which were 21 rejected in the Decision, with the arguments they now make, by 22 twisting them into factual questions, shows their utter lack of 23 merit. Defendants essentially refuse to acknowledge that the 24 Decision exists. 25 Defendants identify the first factual issue as whether the 26 Debtor actually managed the District’s hospital by paying its 27 msj decision 28 -10- 1 payables and collecting its receivables such that it had a right 2 to be reimbursed from them, focusing on the language of §5.1 of 3 the MSSA. Opposition, p.12:26-13:12. They challenge the meaning 4 of “ownership” in the Decision on the theory that it “can only be 5 viewed as an inchoate ownership interest which does not entitle 6 the Trustee to be paid by reimbursement” because the Debtor did 7 not pay all the hospital’s accounts payable. Opposition, p.13:21- 8 23. They repeat the argument that under the MSA, the District 9 authorized Defendants to use the Receivables when the MSSA ended. 10 Opposition, p.13:23-26 (the Receivables were retained by the 11 District and Defendants were authorized to use them); p.15:7-10 12 (accrual referred to as ownership is an “empty vessel,” and the 13 District was “free to allow” Defendants to use the Receivables). 14 Defendants made the same arguments in their Post-Trial 15 Brief. Post-Trial Brief, Docket No. 139, p.10:1-3 (following 16 termination, Receivables remained property of District so 17 Defendants could use them); p.10:17-19 (obligation to reimburse 18 was discharged when MSSA ended, even if Receivables had accrued, 19 Debtor’s ownership ended); p.10:26-11:4 (Trustee failed to prove 20 Debtor provided management services so estate has no right to be 21 reimbursed from Receivables). 22 Defendants identify the second factual issue as a variation 23 on this theme, describing it as a question of what management 24 services were provided and what were their related costs, such 25 that independent of a breach of the MSSA, and the termination and 26 discharge analysis, there is a genuine issue regarding the extent 27 msj decision 28 -11- 1 to which the Trustee is entitled to reimbursement under §5.1 of 2 the MSSA and without a right to reimbursement there are no 3 Damages. Opposition, p.15:20-28 (the only evidence that can be 4 presented to the court is that accounts payable were not paid); 5 p.16:10-11 (to extent Debtor cannot prove a right to 6 reimbursement, Receivables defaulted to the District and 7 Defendants could use them); p.16:6-7 (the “mere existence of 8 accounts payable” owed by the estate “shows that the Trustee is 9 entitled to nothing”). 10 Defendants argued at trial that the Trustee could not prove 11 that the Debtor’s ownership of the Receivables had ever accrued 12 because the Debtor had failed to provide the management services 13 that were a predicate to ownership of the Receivables. Post-Trial 14 Brief, p.23:12-23 (no evidence of management services so no right 15 to reimbursement and no accrual). The Decision considered and 16 conclusively rejected this argument, noting that the sufficiency 17 of the Debtor’s management services was not for Defendants to 18 determine or quarrel with. Decision, p.12:1-28 (explaining 19 meaning of accrual accounting under GAAP and its effect here); 20 p.19:1-15 (the fact that the Receivables were generated by 21 services provided by the Debtor during the term of the MSSA is 22 conclusive on the issue of when they accrued and the question of 23 the Debtor’s pre-termination management services is irrelevant). 24 There are no disputed facts regarding “management services” 25 or “reimbursement” that are relevant here. These so-called 26 factual questions - which are in fact questions of contract 27 msj decision 28 -12- 1 interpretation - were raised, considered, and rejected in the 2 Decision.2 Defendants first and second factual issues do not 3 provide a reason to deny summary judgment. The estate owns the 4 Receivables. This is the law of the case. Nothing Defendants now 5 argue changes the meaning of ownership in the Decision and the 6 Trustee’s ownership of the Receivables is not an “empty vessel.” 7 In Defendants third alleged factual issue they reassert the 8 theory that termination of the MSSA “for cause” discharged all of 9 the District’s executory obligations including the obligation to 10 reimburse the Debtor, resulting in a loss of the “inchoate 11 ownership” of the Receivables. Opposition, p.16:19-17:28. 12 Defendants claim that the “implications of termination for cause” 13 include discharge of the District’s “executory” obligation to 14 reimburse the Debtor. Opposition, p.17:24-18:3. They claim this 15 left the Receivables with the District which was free to allow 16 Defendants to use them. Opposition, p. 18:12-13 (ownership 17 interest was lost resulting in District retaining control of the 18 Receivables). 19 At trial, Defendants made the same argument that because the 20 MSSA had been terminated “for cause,” the Debtor was divested of 21 any right to the Receivables. Post-Trial Brief, p.22:11-15 (even 22 23 2 In their Post-Trial Brief, Defendants referred to 24 “reimbursement” more than 30 times. Docket no. 139. In their Opposition, they refer to “reimbursement” more than 50 times. To 25 suggest the court did not consider their reimbursement argument in the Decision because it only relied on §5.2 rather than §5.1 26 of the MSSA verges on sanctionable. 27 msj decision 28 -13- 1 if Debtor had a right to the Receivables, termination of MSSA for 2 cause discharged District’s executory obligations so it had no 3 further obligation to pay management fee from pass-through 4 revenue). The Decision found that this argument had no merit. 5 Decision, p.15:15-22 (rejecting argument that right to accrued 6 Receivables terminated when the term of MSSA ended); p.17:9-24 7 (rejecting argument that termination of MSSA for cause defeated 8 ownership of accrued Receivables). 9 Defendants also argued at trial that once the MSSA was 10 terminated, the MSA became the “only operative agreement” and, 11 pursuant to its terms, the Debtor could no longer claim it owned 12 the Receivables and SSH was free to use them without 13 distinguishing between pre-termination and post-termination 14 accrual. Post-Trial Brief, p.11:21-23 (the “only operative 15 agreement” says the District owns the Receivables). The Decision 16 rejected this argument as well. Decision, p.15:7-12 (the District 17 could not assign the right to use the Receivables to SSH because 18 the Debtor owned them); p.18:19-20:17 (explaining Debtor’s right 19 to accrued Receivables survived termination of the MSSA). 20 Defendants’ third alleged factual issue merely restates old 21 theories. The Decision clearly considered and soundly rejected 22 Defendants’ interpretation of the MSSA and the MSA, considered 23 and rejected their argument about the “implications” of 24 termination for cause, and considered and agreed with the 25 Trustee’s position regarding the meaning of “accrual.” The law- 26 of-the-case doctrine forecloses this attack on the Decision. 27 msj decision 28 -14- 1 IV. Conclusion 2 The Trustee has met his burden for granting summary judgment 3 on the Counterclaim and the court will dismiss it. Defendants 4 have not presented any genuine factual issues that defeat summary 5 judgment; they simply re-argue issues that were raised and 6 determined in the Decision, dressing them up as factual issues. 7 It is the law of the case that the Trustee owns the 8 Receivables. It follows that the Trustee did not tortiously 9 interfere with Defendants’ contract with the District by claiming 10 to own the Receivables, did not intentionally misrepresent his 11 ownership, did not abuse process or commit fraud on the court by 12 doing so, did not convert any Receivables belonging to 13 Defendants, or act in grossly negligent manner. By definition, 14 Defendants have no damages arising from any of these Claims. 15 The Trustee is entitled to judgment in his favor dismissing 16 the Counterclaim in its entirety. The Trustee is requested to 17 submit an order conforming to this ruling. 18 19 * * * * * End of Decision * * * * * 20 21 22 23 24 25 26 27 msj decision 28 -15- 1 Court Service List 2 No service required. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 msj decision 28 -16-