Uecker & Associates, Inc. v. Tenet Healthsystem Hospitals, Inc.

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	No. 06-41774 T
Chapter 9
WEST CONTRA COSTA HEALTHCARE
DISTRICT, etc.,
Debtor.
________________________________/
UECKER & ASSOCIATES, INC., as 	A.P. No. 08-4242 AT
Trustee for the DOCTORS MEDICAL
CENTER TRUST FOR THE BENEFIT OF
CREDITORS,
Plaintiff,
vs.
TENET HEALTHSYSTEM HOSPITALS,
INC.,
Defendant.
________________________________/
MEMORANDUM OF DECISION ON RE MOTION FOR RECONSIDERATION
On March 26, 2010, the Court issued its Memorandum of Decision,
concluding 	that 	defendant’s 	motion 	for 	summary 	judgment 	should 	be
granted and plaintiff’s motion for partial summary judgment denied.
On April 7, 2010, an order to this effect was entered. 	On April 14,
2010, plaintiff filed a motion to reconsider the Court’s order. 	The
Court’s procedure with respect to a motion for reconsideration is to
Signed: April 20, 2010
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
April 21, 2010
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 08-04242 Doc# 53 Filed: 04/20/10 Entered: 04/21/10 13:29:15 Page 1 of 7

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review 	the 	motion 	for 	merit 	before 	permitting 	it 	to 	be 	set 	for
hearing. 	This procedure relieves the prevailing party from the need
to 	file 	an 	opposition 	to 	a 	clearly 	meritless 	motion 	for
reconsideration. 	Having 	reviewed 	plaintiff’s 	motion 	for
reconsideration, 	the 	Court 	concludes 	that 	it 	should 	be 	denied
summarily, without being set for a hearing. 	The Court’s reasons for
its decision are set forth below.
DISCUSSION
A. 	SUMMARY OF COURT’S ORIGINAL DECISION
In the above-captioned adversary proceeding, plaintiff alleged
that 	within 	one 	year 	of 	the 	bankruptcy 	filing, 	the 	above-captioned
debtor 	made 	a 	series 	of 	constructively 	fraudulent 	transfers 	to 	the
defendant based on an obligation incurred on July 1, 2005. 	Plaintiff
sought 	to 	avoid 	and 	recover 	the 	transfers 	pursuant 	to 	11 	U.S.C. 	§
548(a)(1)(B). 	Section 	548(a)(1)(B)(ii) 	includes 	as 	a 	necessary
element of such a claim that the debtor was either insolvent at the
time 	of 	the 	transfer 	or 	was 	rendered 	insolvent 	by 	it. 	The 	motions
previously considered by the Court turned on whether the debtor was
insolvent at the time of the transfer. 	Plaintiff did not assert in
its motion that the debtor was rendered insolvent by the transfer.
The debtor is a municipality. 	The definition of “insolvent” as
applied 	to 	a 	municipality 	is 	that 	either 	the 	debtor: 	(1) 	is 	not
generally 	paying 	its 	debts 	as 	they 	come 	due 	(unless 	the 	debts 	are
subject to a bona fide dispute) or (2) is unable to pay its debts as
they become due. 	11 U.S.C. § 101(32)(C). 	The balance sheet test for
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insolvency, 	which 	is 	applicable 	to 	other 	types 	of 	entities, 	is 	not
applicable to municipalities.
The 	relevant 	date 	for 	determining 	whether 	the 	debtor 	was
generally 	paying 	its 	undisputed 	debts 	as 	they 	came 	due 	is 	the 	date
the 	debtor 	incurred 	the 	obligation 	pursuant 	to 	which 	the 	transfers
were 	made, 	as 	stated 	above, 	July 	1, 	2005. 	The 	analysis 	of 	the
debtor’s ability to pay its debts looks forward to those debts that
will come due during the balance of the year and the debtor’s ability
to pay those debts as they come due. 	See In re City of Bridgeport,
129 B.R. 332, 336-38 (Bankr. D. Conn. 1991).
The only evidence initially presented by the plaintiff that the
debtor was insolvent at the time of the transfer was seven proofs of
claim. 	The 	seven 	proofs 	of 	claim 	reflected 	$1.3 	million 	in 	debts
incurred during 2005, which remained unpaid at the time the debtor’s
bankruptcy 	petition 	was 	filed 	in 	October 	2006. 	The 	debtor’s
financial records established that its monthly operating expenses at
this 	time 	were 	between 	$10 	and 	11 	million. 	Thus, 	its 	operating
expenses during 2005 totaled over $100 million. 	The Court concluded
that the debtor’s failure to pay $1.3 million of these expenses was
insufficient 	to 	establish 	that 	the 	debtor 	was 	not 	generally 	paying
its debts as they came due.
Moreover, some of these claims were incurred after July 1, 2005.
In addition, no evidence was presented to establish that the unpaid
claims 	were 	not 	subject 	to 	a 	bona 	fide 	dispute. 	As 	a 	result, 	the
Court concluded that the plaintiff had failed to establish that the
debtor 	was 	insolvent 	at 	the 	time 	of 	the 	transfer 	under 	the 	first
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prong 	of 	the 	test 	for 	the 	insolvency 	of 	a 	municipality. 	Plaintiff
does not challenge this conclusion in its motion for reconsideration.
Plaintiff’s 	only 	evidence 	in 	support 	of 	the 	debtor’s 	alleged
inability to pay its debts as they came due in its original filings
was 	the 	debtor’s 	financial 	records. 	These 	records 	showed 	that 	the
debtor was losing money every month from July 2005 to the end of the
year 	and 	that 	its 	financial 	condition 	was 	deteriorating. 	However,
the debtor’s financial records showed that, at the end of the year,
the 	debtor’s 	cash 	reserves 	were 	sufficient 	to 	pay 	all 	of 	its
liabilities. 	The plaintiff contended that the debtor would not have
been 	exercising 	good 	business 	judgment 	had 	it 	exhausted 	its 	cash
reserves. 	However, 	the 	test 	for 	insolvency 	is 	whether 	the 	debtor
could 	have 	paid 	its 	debts, 	not 	whether 	it 	should 	have 	done 	so 	as 	a
matter of good business judgment.
Plaintiff filed a post-hearing brief, in which it advanced a new
argument in support of its contention that, by the end of 2005, the
debtor was unable to pay its debts as they came due. 	Plaintiff noted
that the debtor’s financial records reflected that, in November 2005,
the 	debtor’s 	assets 	totaled 	only 	$9 	million 	whereas 	its 	accounts
payable 	and 	payroll 	related 	liabilities 	totaled 	$9.5 	million.
Plaintiff noted that the shortfall was even greater in December 2005.
Moreover, plaintiff argued, this did not include the debtor’s current
liabilities 	which 	plaintiff 	estimated 	at 	in 	excess 	of 	$400,000.
Thus, 	notwithstanding 	the 	definition 	of 	insolvency 	as 	applied 	to 	a
municipality, 	plaintiff 	relied 	on 	a 	balance 	sheet 	analysis 	for 	its
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1The Court noted that, if the debtor had instituted these
measures before July 1, 2005 and if the delayed payments had been
sufficiently numerous and substantial in amount, this would have
satisfied the first test for insolvency under 11 U.S.C. §
101(32)(C). 	However, these measures were instituted too late to
have this effect.
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assertion 	that 	the 	debtor 	was 	unable 	to 	pay 	its 	debts 	as 	they 	came
during the balance of 2005.
Defendant 	responded 	that 	this 	argument 	ignored 	the 	debtor’s
monthly 	revenue 	stream 	of 	approximately 	$10 	million 	during 	each 	of
these 	two 	months. 	The 	Court 	was 	persuaded 	by 	defendant’s 	argument
that plaintiff’s new legal theory had no merit.
The debtor’s final piece of evidence was the declaration of its
Chief 	Financial 	Officer 	(the 	“CFO”), 	evidencing 	that, 	at 	a 	meeting
of 	the 	Board 	of 	Directors 	on 	June 	28, 	2005, 	he 	advised 	the 	Board
that, 	if 	the 	debtor’s 	losses 	continued 	at 	the 	current 	rate, 	the
debtor could exhaust its reserves by September 2005. 	In response to
this 	advice, 	the 	debtor 	took 	cost-cutting 	measures 	and 	delayed
payments 	to 	those 	vendors 	that 	it 	judged 	would 	not 	respond 	in 	a
fashion that would damage the debtor’s business. 1
The 	Court 	considered 	whether 	the 	CFO’s 	advice 	to 	the 	Board 	on
June 28, 2005 was sufficient to require that defendant’s motion for
summary judgment be denied and that the issue of insolvency be tried.
The 	Court 	concluded 	that 	it 	was 	not. 	The 	debtor 	was 	able 	to 	take
cost-cutting measures and pay the bulk of its debts 	through the end
of 	the 	year. 	By 	contrast, 	the 	City 	of 	Vallejo 	was 	found 	to 	be
insolvent 	when 	it 	was 	unable 	to 	reduce 	its 	expenses 	without
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endangering the public health and safety. 	See In re City of Vallejo,
408 B.R. 280, 294 (Bankr. 9 th Cir. 2009).
B. 	MOTION FOR RECONSIDERATION
Plaintiff bases its motion for reconsideration on Rule 60(b)(1)
of the Federal Rules of Civil Procedure, which are applicable to this
adversary 	proceeding 	pursuant 	to 	Rule 	9024 	of 	the 	Federal 	Rules 	of
Bankruptcy 	Procedure. 	These 	rules 	permit 	relief 	from 	an 	order 	or
judgment 	on 	the 	grounds 	of 	mistake, 	among 	other 	things. 	Plaintiff
contends that the Court made a mistake when it added the $10 million
net 	revenue 	stream 	to 	its 	balance-sheet 	analysis. 	It 	notes 	that
revenues are not relevant to a balance-sheet analysis.
Plaintiff has misunderstood the nature of the Court’s analysis
in 	the 	above-captioned 	decision. 	The 	Court 	was 	not 	employing 	a
balance sheet analysis in determining that the debtor had the ability
to pay its debts as they came due during the last half of 2005. 	It
based its conclusion on the debtor’s available cash, as reflected by
the 	debtor’s 	financial 	records. 	As 	noted 	above, 	the 	test 	for 	the
insolvency 	of 	a 	municipality 	is 	not 	a 	balance 	sheet 	test. 	See 	11
U.S.C. § 101(32)(C). 	Thus, the Court finds that plaintiff’s motion
for reconsideration has insufficient merit to warrant its being set
for 	a 	hearing. 	An 	order 	denying 	the 	motion 	for 	reconsideration 	is
being issued herewith.
END OF DOCUMENT
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COURT SERVICE LIST
Andrea T. Porter
Friedman Dumas and Springwater
150 Spear St. #1600
San Francisco, CA 94105
Ivan L. Kallick
Manatt, Phelps and Phillips
11355 W Olympic Blvd.
Los Angeles, CA 90064
Case: 08-04242 Doc# 53 Filed: 04/20/10 Entered: 04/21/10 13:29:15 Page 7 of 7