Gottlieb v. State Compensation Ins Fund Of

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Case 1:05-ap-01097-MI Doc 28 Filed 01/04/06 Entered 01/04/06 13:41:51 Desc

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NOT FOR PUBLICATION

mM
—a | ENTERED
-
UAN A oi;
JAN ~ 4 2006 —
CiLih US. BANKRUPT CT COURT os
' CENTRAL DISTRICT OF CRLIFORIIA
CLEA, US. BANKRUPTCY COURT . =
CENTRAL DNTRICT OF CALIFORNIA
Deputy Clark

UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
SAN FERNANDO VALLEY DIVISION

In re
Case No. SV 02-20579 GM

Chapter 7

Adv. No. 05-01097

MEMORANDUM OF DECISION AND
ORDER DENYING PLAINTIFF’S

MOTION FOR PARTIAL SUMMARY
ADJUDICATION

International Philanthropic Hospital
Foundation fdba Granada Hills Community
Hospital,

Debtor.

David K. Gottlieb, Chapter 7 Trustee,

Plaintiff,
Date: December 8, 2005
Vv. Time: 2:00 p.m.
Place: Courtraom 302

State Compensation Insurance Fund of
California,

Defendant.

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Procedural Background
On October 12, 2005, Plaintiff David K. Gottlieb, the Chapter 7 Trustee, filed a
motion for Motion for Partial Summary Adjudication. The motion seeks recovery of
$172,860.92 from Defendant for a postpetition transfer to Defendant, State

Compensation Insurance Fund of California, on the basis that it was an avoidable

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Case 1:05-ap-01097-MI Doc 28 Filed 01/04/06 Entered 01/04/06 13:41:51 Desc

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transfer under 11 U.S.C. § 549. On November 18, 2005, Defendant filed its opposition.

On November 29, 2005, the Trustee filed his reply. On December 8, 2005, a hearing

was held on the motion. Subsequent to this hearing, Plaintiff and Defendant filed

supplementary briefs and the transcript of the July 28, 2003 conversion hearing.
Factual Background

The facts relevant to this motion are undisputed. Debtor filed chapter 11 on
November 26, 2002. At the commencement of the case, the Debtor operated a 155-bed
hospital located in Granada Hills, California. On July 22, 2003, the Debtor filed an
emergency motion to approve wind-down procedures and closure of the hospital. The
Court denied the motion but ordered the appointment of a trustee. The Trustee was
ordered to report within 72 hours on the status of patient care at the hospital, the status
of the hospital's financial condition, and its prospects for continued operations.

On July 23, 2003, the Trustee was appointed the Chapter 11 Trustee and took
possession of the hospital on July 24, 2003. The Debtor had insufficient cash to continue
its operations, meaning that patient care would be impaired unless the Debtor
immediately commenced a wind-down of the hospital's operations. At this time, the
Trustee discovered the Debtor-in-possession had cut a check to Defendant for
$172,860.92 for workers’ compensation insurance.' According to Defendant's opposition
to this motion, this check was dated July 7, 2003 and covered the postpetition payroll
period of May 1, 2003 to June 1, 2003. The Trustee determined that it was critical to
maintain in effect this insurance and intentionally did not stop payment on this check. By
contrast, the Trustee stopped payment on all other checks except this one. The
Defendant's check cleared on July 25, 2003.

At a hearing on July 28, 2003, the Trustee provided a status report to the Court
and parties in interest. Based on his review of the status of patient care, the Debtor's

books and records, and consultations with parties in interest, and evidence concerning

1 In the Trustee’s motions before Judge Greenwald, the Trustee listed this transfer in
the amount of $172,000, For the sake of simplicity and consistency, | will refer to the amount as
being in the amount of $172,000 for the remainder of this memorandum.

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MEMORANDUM OF DECISION AND ORDER DENYING PLAINTIFF'S MOTION FOR PARTIAL SUMMARY ADJUDICATION

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historical and projected cash flow presented to the Court, the Trustee requested
authorization to immediately commence an orderly wind-down of the Debtor's operations.
The Trustee further requested that the Court convert the Debtor's chapter 11 case to
chapter 7 effective as of July 23, 2003, the date that the Trustee was appointed. The
Trustee requested that the conversion be effective as of that date in order to ensure that
the Trustee would have the authority to pay all employees and vendors who provided
goods and services on and after July 23, 2003.

At this same July 28, 2003 hearing, the Trustee informed the Court that he had
allowed a $179,000 [sic] check for workers’ compensation insurance to clear and had
stopped payment on all other checks. He also represented that “we need to have a
chapter 7 administration put in place so that it isn’t encumbered with all the chapter 11
administrative expenses that we otherwise would have to deal with.” (Transcript, p. 17,
lines 18-21). There was also some discussion and a general agreement by the parties
present at the hearing that unsecured creditors would not be prejudiced by the lack of
notice of the conversion to chapter 7 because the cash flow situation was so dire and
there was no possibility of a reorganization on the horizon. Approximately 30,000
creditors were not required to be noticed because of the burden to the estate. There is
no dispute that Defendant State Compensation Insurance Fund received notice of the
conversion to chapter 7 only after it occurred.

On July 29, 2003, an order was entered converting the case to chapter 7, effective
nunc pro tunc as of July 23, 2003. However, the Court's noticing to creditors continued to
list the date of conversion as July 29, 2003, for instance in the Notice of Chapter 7
Bankruptcy Case, Meeting of Creditors & Deadlines filed on August 6, 2003. The docket
continues to list the conversion date as July 29, 2003. Upon entry of the conversion
order, Trustee Gottlieb was appointed as the Chapter 7 Trustee. An orderly wind-down
of the Debtor's operations commenced the following day, and the last patient was
discharged on August 7, 2003.

The dispute between these parties centers on their respective understanding of

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the $172,000 payment and the dates for which workers’ compensation coverage should
have been provided. The Trustee asserts that he allowed the check to clear in order to
ensure that the workers’ compensation insurance policy remained in effect while Debtor
continued to operate. However, on September 8, 2003, the Defendant canceled the
Debtor's workers’ compensation coverage effective July 29, 2003. Defendant also
applied the $172,000 payment to premiums accrued and owed for the chapter 11 period.
After the Trustee threatened Defendant with litigation over a violation of the automatic
stay, Defendant issued a new workers’ compensation policy effective as of July 23, 2003.
Defendant refused to apply the postpetition payment to the new policy and required the
Trustee to pay $13,032 for the new policy.

On July 25, 2003, at the time the check to Defendant cleared, it was a chapter 11
expense, made in the ordinary course of business. Because the case was converted to
chapter 7, nunc pro tunc to July 23, 2003, the Trustee asserts that it was a chapter 7
payment of an unauthorized chapter 11 expense. The Trustee seeks partial summary
judgment on his Section 549 claim on that basis.

While the parties have focused their arguments on whether the nunc pro tunc
nature of the order was valid, a later motion in the case raises additional facts of
significance regardless of the effective date of the conversion order. On July 30, 2003,
the Trustee filed a Motion to Operate the Debtor's Business for a Limited Period Pursuant
to Section 721 and to Pay Certain Chapter 11 Administrative Expenses. Regardless of
the effective date of the chapter 7, this motion now raises the difficult question of what
was presented to the Court and what was approved by Court order at that time. In that
motion, the Trustee sought approval of the budget for operations, which was included as
Exhibit A to the motion. This exhibit included the $172,000 payment to Defendant for
workers’ compensation insurance. Under the heading “The Trustee Should be
Authorized to Pay Certain Critical Chapter 11 Administrative Expenses to Ensure that the
Wind-Down is Completed in an Orderly Manner,” the Trustee explained that upon

appointment he had “immediately closed the debtor in possession accounts and stopped

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payment on all checks (other than a payment for workers’ compensation insurance).”
Attached to the motion was a chart with the Trustee’s accountant’s cash collateral
projection, which included the $172,000 payment to Defendant. Given that the next
payment to Defendant was due and owing only a week after the $172,000 payment was
to be made, it appears from the face of the projection that the payment of $172,000 was
to be made for a chapter 11 administrative expense. In addition, note 12 to the cash
collateral projection explicitly stated that “[t]he $172,000 payment made for the week
ended July 25, 2003 was in arrears. The next monthly payments of $122,000 are due
July 31, 2003 and on August 31, 2003, respectively.” On August 22, 2003, Judge
Greenwald entered an order granting this motion and approving these expenses. While
the order did not explicitly list the payment made to Defendant, it specifically approved all
of the expenses detailed in the Trustee’s accountant’s cash collateral projection.

On September 17, 2003, the Trustee filed a Motion for Order Authorizing Chapter
7 Trustee to Pay Certain Employee-Related Chapter 11 Administrative Expenses. This
motion sought approval of $1.4 million in employee-related chapter 11 administrative
expenses that were incurred in the weeks immediately preceding conversion to chapter
7. The Debtor's employee union filed a joinder to this motion while NPF Xll, Inc. and
National Premier Financial Services, Inc., Ceridian Tax Service, Danning, Gill, Diamond &
Kollitz, LLP, Coudert Brothers, and the Debtor filed oppositions. Judge Greenwald

entered an order denying this motion on October 21, 2003.

Analysis
“Summary judgment is to be granted if the pleadings and supporting documents,
viewed in the light most favorable to the non-moving party, show that there is no genuine
issue as to a material fact and the moving party is entitled to judgment as a matter of
Jaw." In re Raintree Healthcare Corp., =» F.3d ss, 2005 WL 3409714 (9th Cir. 2005);
see also FRCP 56(c) (incorporated by FRBP 7056). Summary judgment is appropriate at

this stage because there is no genuine issue of material fact, only questions of law.

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MEMORANDUM OF DECISION AND ORDER DENYING PLAINTIFF'S MOTION FOR PARTIAL SUMMARY ADJUDICATION

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The Trustee’s claims for relief are based on his ability to recover under Section
549. This section provides, in pertinent part, that “the trustee may avoid a transfer of
property of the estate that occurs after the commencement of the case and. . . that is not
authorized ... by the court.” There are, thus, three elements that the Trustee must show
to be successful: (1) that there was a transfer of property of the estate; (2) that the
transfer was made postpetition; and (3) that there is no court order authorizing the
transfer. This latter element is a safe harbor provision for certain parties receiving
authorized postpetition transfers. The Trustee’s motion must be denied because there is
an order authorizing the postpetition transfer.

The Trustee argues that Judge Greenwald’s order should not control here
because Judge Greenwald was not sufficiently informed that he was being asked to
authorize a chapter 11 administrative expense. The Trustee argues that had Judge
Greenwald been sufficiently informed, he would not have granted this expense. As
evidence, the Trustee points to how Judge Greenwald refused to authorize certain other
employee-related chapter 11 administrative expenses.

First, as shown from the facts above, there was sufficient information in the
motions before Judge Greenwald to inform him that the payment to Defendant was for a
chapter 11 administrative expense. This was explicit in the language in the motion and in
reviewing the cash collateral projection, and note 12 of the cash collateral projection
would have spelled out the situation clearly. The Court was also aware that this was the
one payment that the Trustee had allowed to clear because this was mentioned as well
at the hearing where the case was converted to chapter 7.

Second, a plain reading of the statute provides that so long as there is an order
authorizing the transfer, then the transfer cannot be attacked under Section 549. The
statute provides, in pertinent part, that “the trustee may avoid a transfer of property of the
estate that occurs after the commencement of the case and . . . that is not authorized...
by the court.” While the full facts and arguments related to this payment were not

litigated in any depth in the motion for authority to operate the Debtor's business, there is

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nothing in the statute that requires the judge to make specific findings when approving an
expense. Moreover, there is simply nothing in the statute regarding the circumstances
surrounding how the order was entered. The statute is clear — as long as there is an
order, there is no recovery under Section 549. Courts “must interpret a bankruptcy
statute according to its plain meaning, except in the rare cases in which the literal
application of a statute will produce a result demonstrably at odds with the intentions of
its drafters.” In re Arden, 176 F.3d 1226, 1229 (9th Cir. 1999).

Third, the Trustee’s argument is contrary to public policy favoring the finality of
orders. See, e.g., In re Whelton, 299 B.R. 306, 313 (Bankr. D. Vt. 2003) (referring to this
public policy). If the Trustee’s interpretation is correct, then there could be a cloud over
orders entered by the Court, at least orders approving postpetition transfers for the
purposes of Section 549. If a trustee could recover a postpetition transfer merely by
showing the judge was not provided sufficient evidence on the motion and would not
have authorized the transaction had she been better informed, problems would be
created for parties who otherwise would have simply relied upon the order. Parties rely
on orders, whatever the facts surrounding them when they are entered. If suddenly it
became possible that an order that appears valid on its face could be rendered void ab
initio by latter-day second guessing of the judge’s original intent, all parties that are
otherwise protected under the safe harbor provision of Section 549 by the order could
easily find themselves subject to a Section 549 action. Moreover, it could be
burdensome for these parties to determine whether the order is valid or not. They would
have to review the relevant order, review the motions seeking the order, and acquire
transcripts of all of the relevant hearings, all just to determine whether the judge was
sufficiently informed in what she was doing. This cannot be the way the safe harbor
provision under Section 549 was meant to work.

The facts of this case demonstrate a conflict between the needs of trustees and
the needs of vendors in the context of a trustee’s request for court approval of

administrative expenses. Trustees need flexibility to enable them to make hard calls

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under short deadlines. Here, for example, when the Trustee was appointed, his
paramount concern was properly with patient care. To succeed in keeping the Debtor
viable long enough to discharge all of its patients without sacrificing health care, the
Trustee was required in short order to thoroughly investigate the Debtor's affairs and to
file a flurry of paperwork with the court. As such, standing on its own, it would seem
unfair to hold every detail within the Trustee’s pleadings against him.

Here, however, the solution to this conflict is in the language of Section 549, which
states, in effect, that as long as there is an order, there is no recovery under Section 549.
The statute does not give the Court discretion to waive the requirement where the
Trustee has good arguments for a different result.

This is not to state that trustees must always be bound by every single statement
in their emergency motions and any orders entered thereon. If the Trustee wished to
assert that the Court would not have authorized the postpetition transfer to Defendant,
the appropriate recourse would have been to bring a motion under FRCP 60
(incorporated by FRBP 9024) once he realized there was a mistake concerning the
purpose of the $172,000 payment. Where the facts warrant relief, a trustee can seek to
vacate a prior order to the extent that it improperly authorized a postpetition transfer. If
relief from the order can be obtained under Rule 60, the Section 549 safe harbor would
be removed and the Trustee could then appropriately pursue an action under Section
549, By employing this procedure, Defendant would have been on fair notice within a
reasonable period of time of the Trustee’s request to vacate the prior order and could

have opposed that motion at the appropriate hearing.

Conclusion
While second guessing a trustee’s business decision in an emergency situation is
generally not desirable, this Court is especially reluctant to do so where the Trustee’s
decision was made in the course of very effectively and successfully addressing a difficult

patient care situation on only a day’s notice. In a motion for summary judgment, the

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MEMORANDUM OF DECISION AND ORDER DENYING PLAINTIFF'S MOTION FOR PARTIAL SUMMARY ADJUDICATION

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factual record and statutory language must control, however, over any analysis of what a
court considered before entering an order. This is not a Rule 60 motion.

Because there is a valid court order authorizing the challenged postpetition
transaction in effect on the docket, the Trustee’s suit under Section 549 cannot succeed.
Because this conclusion disposes of the matter and does not present any issue of
material fact, there is no need to consider whether the Court had the authority to enter a
conversion order with a backdating provision.

The Trustee’s motion for partial summary adjudication is hereby DENIED.

In light of this ruling, the January 12, 2006 hearing date on this adversary
proceeding is hereby VACATED.

IT IS SO ORDERED.

DATED: i/y/e6

4

MAUREEN A. rice
United States Bankruptcy Judge

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MEMORANDUM OF DECISION AND ORDER DENYING PLAINTIFF'S MOTION FOR PARTIAL SUMMARY ADJUDICATION

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CERTIFICATE OF SERVICE BY MAIL
| certify that a true copy of this ORDER was mailed on , aneS to the parties listed

below: ANY g,oe7

Jennifer Braun

Office of the U.S. Trustee

21051 Warner Center Lane, Ste. 115
Woodland Hills, CA 91367

David B. Shemano

Peitzman, Weg & Kempinsky LLP
10100 Santa Monica Blvd., Ste. 1450
Los Angeles, CA 90067

Virginia Hoyt

State Compensation Insurance Fund
1275 Market Street, Room 399

San Francisco, CA 94103

Dated: JAN 6 ¢ 20g \\

DEPUTY CLERK