Arnold Klein

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UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
LOS ANGELES DIVISION
In re
ARNOLD KLEIN,
Debtor.
Case No.: 2:11-BK-12718RN
Chapter 11
ORDER SUSTAINING THE OBJECTION
TO THE ADMINISTRATIVE CLAIM OF
DAVID CHARLES RISH, M.D., a
Medical Corporation
DATE: November 13, 2013
TIME: 9:00 a.m.
PLACE: Courtroom 1645
On November 13, 2013 at 9:00 a.m. in Courtroom 1645 of the
above entitled Court, the Honorable Richard M. Neiter, United States
Bankruptcy Judge presiding, heard the Movant/Trustee Bradley Sharp’s
(“Movant”) Objection to the Administrative Claim of David Charles
Rish, M.D., a Medical Corporation (“Objection”). Thomas M. Geher of
Jeffer Mangels Butler & Mitchell LLP appeared on behalf of the
Claimant David Charles Rish, M.D., a medical corporation; Peter
Gurfein of Landau Gottfried & Berger LLP appeared on behalf of the
Movant; and no other appearances were made. After hearing arguments
of counsel, the Court took the matter under submission and permitted
FILED & ENTERED
JAN 14 2014
CLERK U.S. BANKRUPTCY COURT
Central District of California
BY DEPUTY CLERK	gae
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the parties to submit supplemental briefs in support of their
respective positions no later than December 10, 2013.
Based upon the Objection, the Opposition to Chapter 11
Trustee’s Objection to Administrative Claim of Charles David Rish,
M.D. a Medical Corporation (“Opposition”), the Chapter 11 Trustee’s
Reply in Support of Objection to Administrative Claim of David
Charles Rish, M.D., a Medical Corporation (“Reply”), the
Supplemental Opposition to Chapter 11 Trustee’s Objection to
Administrative Claim of Charles David Rish, M.D. a Medical
Corporation (“Suppl. Opp’n.”), and the Chapter 11 Trustee’s
Supplemental Brief in Support of Objection to Administrative Claim
of Charles David Rish, M.D. a Medical Corporation, and the arguments
of counsel at the hearing on November 13, 2013, the Court sustains
the Objection based on the following findings of fact and
conclusions of law.
Claim #22-1 (“Rish Claim”) filed by David Rish, M.D., a medical
corporation (“Rish MD”), asserted an unsecured claim for $157,601.84
plus an indefinite amount owing between $30,100-$46,100. At the
time of the petition, Arnold William Klein, M.D., a Medical
Corporation (“Klein MD”), and Rish MD had an existing “Agreement to
Share Office Space and Expenses” (“Agreement”) dated November 4,
1987. The agreement was terminated when Debtor terminated the lease
of the office space located at 435 North Roxbury Drive in Beverly
Hills (“Roxbury Office”) postpetition. The Rish Claim has three
components: (i) for prepetition claim between 9/1/10-1/15/11 for
unpaid “draws” to which Dr. Rish is entitled pursuant to the
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parties’ Agreement totaling $157,601.841; (ii) unpaid postpetition
“draws” equal to 40% of the total receipts generated by Dr. Rish in
the approximate amount of $24,000-$40,000; and (iii) converted
personal properties relating to Dr. Rish’s medical practice totaling
$6,100. In his Opposition, Dr. Rish asserted a postpetition claim
against the Debtor’s estate in the sum of $92,213.72.2 The Trustee
does not challenge this amount.
It is uncontroverted that Claim 22-1 is not a contractual
liability of the bankruptcy estate of the Debtor. Claim 22-1 arises
from the Agreement between the medical corporations Klein MD and
Rish MD notwithstanding that the parties each signed the document as
individuals and as presidents of their respective corporations. The
Agreement provided further that references to Klein or Rish pertain
to the principal shareholders of the corporations and not as
individual parties. Neither did the Debtor guarantee the debt.
For the Rish Claim to be valid against the Debtor’s individual
estate, it must fall under the tort claim exception to
administrative claims permitted under § 503(b)(1)(A). As a general
rule, a claimant will be entitled to an administrative priority
claim under § 503(b)(1)(A) if claimant is able to demonstrate that
the administrative claim (a) arose from a transaction with the DIP
as opposed to the preceding entity (or, alternatively, that the
claimant gave consideration to the DIP); that (2) directly and
1 Pursuant to the Agreement, Dr. Rish is entitled to the following per month: (a) 40% of the first $40,000 of Dr. Rish’s
monthly gross collections; (b) 50% of the next $20,000 of his monthly gross collections; and (c) 55% of his monthly gross
collection exceeding $60,000. Dr. Rish is also entitled to draw $15,000 per month from the parties’ “common account”
which shall constitute an advance against sums to which Rish is entitled as set forth above. Obj’n. Ex. 1 ¶ 7 et seq.
2 According to Dr. Rish’s declaration, after Dr. Rish’s counsel’s numerous requests to the trustees of the Debtor’s estate
and the Klein MD estate, MD Systems provided Dr. Rish with an accounting of all postpetition monies deposited into the
Common account including postpetition money deposited from the collection of bills sent to patients of Dr. Rish. Rish
Declaration ¶ 21.
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substantially benefitted the estate. Microsoft Corp. v. DAK Indus.,
Inc., (In re DAK Indus., Inc.), 66 F.3d 1091, 1094 (9th Cir. 1995).
The claimant has the burden of proving the claim satisfies this
standard. Id. An administrative claim is granted if it reppresents
“actual, necessary costs and expenses of preserving the estate,
including wages, salaries, commission for service rendered after the
commencement of the case.” 11 USC § 503(b)(1)(A)(i).
However, postpetition damage claims arising from a DIP or a
trustee’s tort can be given administrative priority as well.
Reading Co. v. Brown, 391 U.S. 471, 485, 88 S. Ct. 1759 (1968)
(damages resulting from the negligence of a bankruptcy receiver
acting within the scope of his authority as receiver gave rise to
"actual and necessary costs" of a Chapter XI arrangement). Tort
claims arising postpetition are deemed “actual and necessary
expenses” of preserving the estate for purposes of claim allowance
notwithstanding the lack of benefit to the estate. In re Beyond
Words Corp., 193 B.R. 540, 544-45 (N.D. Cal. 1996); In re Lazar, 207
B.R. 668, 681 (Bankr. C.D. Cal. 1997). Thus, absent a finding that
the liability arose from a tort committed by the Debtor, both the
prepetition and postpetition claims are against the medical
corporation’s bankruptcy case and not the individual bankruptcy case
of Dr. Klein.
Here, Dr. Rish’s claim for conversion by the Debtor cannot
survive because no facts have been shown to demonstrate a tortious
act of conversion by the Debtor. As recognized by the Ninth
Circuit, conversion has three elements under California law:
"[plaintiff’s] ownership or right to possession of property,
[defendant’s] wrongful disposition of the property right and
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damages." G.S. Rasmussen & Assocs., Inc. v. Kalitta Flying Service,
Inc., 958 F.2d 896, 906 (9th Cir. 1992). Based on the facts
presented in this case, Dr. Rish failed to satisfy the second
element for conversion in California.
(a) Dr. Rish’s ownership right
The California Supreme Court stated, “[w]hile it is true
that money cannot be the subject of an action for conversion unless
a specific sum capable of identification is involved [citation], it
is not necessary that each coin or bill be earmarked.” PCO, Inc. v.
Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP, 150
Cal. App. 4th 384, 396 (2007) citing Haigler v. Donnelly, 18 Cal. 2d
674, 681 (1941).
Based on Dr. Rish’s declaration in support of his response
to Movant’s Objection, approximately $92,000 was collected from Dr.
Rish’s patients for services rendered by him postpetition that were
deposited into the “Common Account”. Rish Declaration ¶ 21.
Pursuant to the Agreement, “all accounts receivable based on
services rendered shall remain the separate property of each
Physician subject to distribution as provided in Art. 7 of this
Agreement.” The distribution provision of Art. 7 provides Dr. Rish
is entitled to a sum equal to the following on a monthly basis:
a. 40% of the first $40,000 of his gross collection;
b. 50% of the next $20,000 of his gross collection; and
c. 55% of any sum in excess of the first $60,000.
It further provides that Dr. Rish is entitled to a monthly draw of
$15,000 per month from the Common Account as an advance against sums
due to him monthly. Agreement ¶ 7.03. Dr. Rish shall be entitled
to draw the balance of the sum equal to the calculations set forth
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in the Agreement on the 30th of each month from the Common Account
“or as soon thereafter as necessary computations are completed in
order to determine the sum to which Dr. Rish is entitled.” Id. The
Agreement then provided that Dr. Klein shall be entitled to receive
all sums remaining in the Common Account after payment of overhead
expenses and all sums payable to Dr. Rish. Id., ¶ 7.04.
Furthermore, every 6 months (in June and December), the parties
shall cause an accounting semi-annually of all gross collections and
sums withdrawn by or paid to Rish from the Common Account as soon as
practicable following the close of each such 6-month period. Id., ¶
8.03.
Accordingly, Articles 6, 7 and 8 of the Agreement set
forth the parties’ entitlement to funds collected. Dr. Rish has a
right to a certain percentage of the $92,000 balance in Dr. Rish’s
account. See Response Ex. B. The exact amount is unclear as the
evidence presented does not clearly explain the amount owing to each
doctor entitled to money from the Common Account based on the
Agreement’s accounting procedure. Furthermore, the proof of claim
shows Dr. Rish’s postpetition claim to encompass January 16, 2011
(the petition date) through July 2011. The Exhibit B to the
Response shows a range of January 19, 2011 to May 29, 2013.
(b) Wrongful dominion and control
“Conversion is any act of dominion wrongfully exerted over
another's personal property in denial of or inconsistent with his
rights therein." Fischer v. Machado, 50 Cal. App. 4th 1069, 1072
(1996) citing Weiss v. Marcus, 51 Cal. App. 3d 590, 599 (1975).
Under California law, "conduct amounting to a breach of contract
becomes tortious only when it also violates an independent duty
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arising from principles of tort law." Petralia v. Jercich (In re
Jercich), 238 F.3d 1202, 1206 (9th Cir. 2001); see also Rella v. N.
Atl. Marine Ltd., 2004 U.S. Dist. LEXIS 11567 at 15, 2004 WL 1418028
(S.D.N.Y. 2004) ("[F]or a conversion claim to succeed in the context
of a dispute regarding a contract, the breach of contract must
result in some 'wrong' that is separately actionable.").
As other courts have noted, "[i]n general, a conversion
action cannot be maintained where damages are merely being sought
for breach of a contract." First Global Communs., Inc. v. Bond,
2006 U.S. Dist. LEXIS 5919, 13, 2006 WL 231634 (W.D. Wash. Jan. 27,
2006) citing Geler v. Nat'l Westminster Bank USA, 770 F. Supp. 210,
214 (S.D.N.Y. 1991) (applying New York law); Wechsler v. Hunt Health
Sys., 330 F. Supp. 2d 383, 431-432 (S.D.N.Y. 2004) (A conversion
claim that merely duplicates a breach of contract claim is not
actionable.) (citations omitted).
Here, Dr. Rish identifies no non-contractual duty owed to
him separate from his rights under the Agreement. His conversion
theory is based on the Debtor’s failure to pay the amount Dr. Rish
is entitled under the Agreement. The basis of his claim arose from
the Agreement. His declaration states Debtor failed to provide Dr.
Rish with an accounting postpetition and refused to disburse to Dr.
Rish funds deposited into the Common Account less the money Dr. Rish
owed under the Agreement. Rish Declaration ¶ 19. This occurred in
January 2011 when the Debtor commenced his chapter 11 case. Id.
Dr. Rish stated that he vacated the property after the petition date
which would have terminated the Agreement. Arguably, that occurred
in July 2011 per his proof of claim. Plaintiff did not meet his
burden of demonstrating an independent wrongful conduct of Debtor
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exercising dominion over the funds other than Dr. Rish was not paid
when he made a demand for payment. Dr. Klein’s control of the
“Common Account” was pursuant to the Agreement and not based on a
wrongful exercise of dominion or control over the funds for purposes
of conversion. See In re GSM Wireless, Inc., 2013 Bankr. LEXIS
3298, at 142-44 (Bankr. C.D. Cal. Apr. 5, 2013). Dr. Rish did not
raise any facts that would demonstrate a wrongful act other than
arguing the Debtor “failed to distribute to Rish the sum of
$157,601.84,”“failed to provide [Dr. Rish] with an accounting for
the collection of fees charged for services rendered by Rish for
Rish’s patients,” and “continued to refuse to disburse to Rish those
funds of Rish deposited into the Common Account” pursuant to the
Agreement. Rish Declaration ¶¶ 17 and 19.
Dr. Rish has identified no wrongful exercise of control
over the funds that would support a conversion claim. There was no
showing that Dr. Klein misappropriated the funds to which he is
entitled or that the funds were not used to pay shared office
expenses. The evidence does not support a claim for conversion. To
rule that Debtor’s failure to pay when a demand was made, without
more, constitutes conversion would make any breach of contract into
a conversion action. That cannot be and is not the law. A mere
contractual right of payment that was not honored, without more,
does not constitute conversion. Farmers Ins. Exchange v. Zerin, 53
Cal. App. 4th 445, 452 (Cal. App. 3d 1997).
Much of Dr. Rish’s analysis has been given to the cases of
Schroeder v. Auto Driveaway Co., 11 Cal. 3d 908 (1974); McCafferty
v. Gilbank, 249 Cal. App. 2d 569 (1967); Fisher v. Machado, 50 Cal.
App. 4th 1069 (1996); and Weiss v. Marcus, 51 Cal. App. 3d 590
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(1975). However, while Dr. Rish cites to the holdings of the cases,
they are not dispositive of the issues raised in the Objection.
In McCafferty, the California appellate court held that an
agent who is notified of a third party’s paramount right to certain
funds but nevertheless pays such funds to its principal is liable
for conversion. 249 Cal. App. 2d at 576. In McCafferty, the
appellate court found that a third party had an equitable lien on
certain funds held by an attorney who was an agent of his client.
Weiss has a similar fact pattern to McCafferty. In Weis,
a personal injury victim hired a lawyer to provide legal services
pursuant to a contingency fee arrangement and a lien on all amounts
recovered. The lawyer was discharged before the case concluded.
The former client then obtained a settlement but refused to pay the
lawyer. The appellate court found that the lawyer stated a cause of
action for conversion.
Dr. Rish contends that similar to the defendant in
McCafferty, Debtor knew that the monies paid by Dr. Rish’s patients
belong to Dr. Rish and that Dr. Rish has “paramount” title to the
money at issue. Suppl. Opp’n. at 4. Thus, when Debtor “wrongfully
took Rish MD’s money and refused to turn it over to Rish MD Corp.,”
Debtor “became liable to Rish MD Corp for conversion.” Id.
In contrast, however, no evidence was presented that
Debtor wrongfully took the money of Dr. Rish. The Agreement
authorized the Debtor to be the signatory in the Common Account and
Dr. Rish is not entitled to the full amount paid by his patients but
a percentage of such amount based on the accounting agreement in
place between the parties. There was no evidence presented that Dr.
Rish’s rights are paramount to those of the Debtor pursuant to the
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Agreement. His right to a distribution under the Agreement is no
more superior than Debtor’s right to his own distribution pursuant
thereto. Lastly, the factual findings in Weiss and McCafferty
assisted in deciding whether the pleadings stated sufficient causes
of action for conversion. The appellate courts in both cases did
not establish liability for conversion based on facts presented.
Similarly, Fischer speaks about the principle of an
agent’s liability for conversion when the agent was required to turn
over to his principal a defined sum received by him on his
principal’s account. Fischer, 50 Cal. App. 4th at 1072. Unlike
Fischer, however, there is no evidence that the Debtor is an agent
of Dr. Rish. In Fischer, the court found that the defendant was
designated as a “sales agent” of the plaintiff thereby establishing
an agency relationship. Id. As an agent, defendant had the
obligation to turn over the definite sum received by it on
plaintiff’s account. Id. at 1074. An agency relationship does not
exist between Dr. Rish and Debtor. Receipts for services rendered
by the participating doctors were collected, commingled and the
parties were contractually bound to get their respective portions of
the indistinguishable proceeds.
In Schroeder, the defendant was found liable for
conversion after she drove a van containing plaintiff’s personal
possessions for an unauthorized sight-seeing detour to the Grand
Canyon where the vehicle “skidded off a mountain road” which caused
Plaintiff’s possessions to be ruined or lost. Schroeder, 11 Cal. 3d
at 914. In Schroeder, defendant’s wrongful conduct of depriving
plaintiff of her personal properties was clearly demonstrated and
defendant’s failure to return or account for the properties
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constituted conversion. Here, Dr. Rish’s entitlement to certain
funds is limited by the parties’ Agreement. His right to such funds
is not immediate nor does it apply to a specific gross amount.
Rather, it was subject to an accounting every month and every six
months after various costs in operating the doctors’ medical
practice were paid. Moreover, as explained, no wrongful conduct was
shown separate from Debtor’s failure to make a payment to Dr. Rish
pursuant to the parties’ Agreement which is a breach of contract
claim.
(c) Damages
As stated, it is unclear from the evidence presented the
amount owed to Dr. Rish. The issue is immaterial, however, as Dr.
Rish cannot claim an administrative expense against this Debtor’s
estate.
Based on the foregoing reasons, and good cause appearing,
IT IS HEREBY ORDERED that the Objection is SUSTAINED. Dr.
Rish’s postpetition claim does not rise to the level of an
administrative claim against the individual estate based on a tort
by the Debtor.
IT IS FURTHER ORDERED that the claim is disallowed in full
against the individual bankruptcy case of Dr. Klein.
###Date: January 14, 2014
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