Summary
In Park Fairfield, a nursing home was being run under the control of a receiver, who removed all the company's directors and officers.
Summary of this case from Sec. & Exch. Comm'n v. IllarramendiOpinion
Nos. CV 05-4018220, CV 05-4018730
November 2, 2006
MEMORANDUM OF DECISION ON MOTION OF MARIANNE KEEVINS
On November 3, 2005, this court, upon the petition of the plaintiff, the state of Connecticut Commissioner of social services (state) and pursuant to General Statutes § 19a-543, appointed Phyllis A. Belmonte as receiver of 3030 Park Fairfield Health Center, Inc. (Fairfield), a Connecticut nonstock corporation operating a 144-bed nursing home in Fairfield, Connecticut. On November 16, 2005, this court, again upon the petition of the state and pursuant to General Statutes § 17b-532, appointed Timothy J. Coburn as receiver of Thirty-Thirty Park, Inc., 3030 Park Health Center, Inc. and 3030 Park Health Systems, Inc. (Systems) (collectively known as CCRC), Connecticut nonstock corporations operating a continuing care retirement community in Fairfield next to the nursing home.
General Statutes § 19a-543 provides: "The court shall grant an application for the appointment of a receiver for a nursing home facility upon a finding of any of the following: (1) Such facility is operating without a license issued pursuant to this chapter or such facility's license has been suspended or revoked pursuant to section 19a-494; (2) such facility intends to close and adequate arrangements for relocation of its residents have not been made at least thirty days prior to closing; (3) such facility has sustained a serious financial loss or failure which jeopardizes the health, safety and welfare of the patients or there is a reasonable likelihood of such loss or failure; or (4) there exists in such facility a condition in substantial violation of the Public Health Code, or any other applicable state statutes, or Title XVIII or XIX of the federal Social Security Act, 42 U.S.C. 301, as amended, or any regulation adopted pursuant to such state or federal laws."
Under Connecticut law, receivers stand in the place of the corporation. Robinson v. Security Trust Co., 94 Conn. 94, 113, 108 A. 665 (1919).
General Statutes § 17b-532 provides in relevant part:
(a) If at any time the commissioner determines after notice to the provider and an opportunity for the provider to be heard, that: (1) A provider has failed to maintain the reserves required under sections 17b-524 and 17b-525, or has requested release of reserves held in escrow pursuant to section 17b-525 in an amount in excess of the amount permitted thereunder or authorized by the commissioner, or has failed to replace reserve funds as prescribed in section 17b-525, or (2) a provider has been or will be unable to meet the pro forma income or cash flow projections it previously filed which may endanger its ability to fully perform its obligations pursuant to contracts for continuing care, or (3) a provider is bankrupt or insolvent or in imminent danger of becoming bankrupt or insolvent; the commissioner may apply to the Superior Court for an order appointing a receiver to rehabilitate or liquidate a facility.
(b) An order to rehabilitate a facility shall direct the receiver to take possession of the property of the provider and to conduct the business thereof, including the employment of such managers or agents as the receiver may deem necessary, and to take such steps as the court may direct toward removal of the causes and conditions which made rehabilitation necessary.
(c) If, at any time, the court finds, upon petition of the commissioner or receiver or the provider, or on its own motion, that the objectives of an order to rehabilitate a provider have been accomplished and that the facility can be returned to the provider's management without further jeopardy to the residents of the facility, creditors, owners of the facility, and to the public, the court may, upon a full report and accounting of the conduct of the facility's affairs during the rehabilitation and of the facility's current financial condition, terminate the rehabilitation and by order return the facility and its assets and affairs to the provider's management.
(d) If, at any time, the receiver determines that further efforts to rehabilitate the provider would be useless, it may apply to the court for an order of liquidation.
(e) An order to liquidate a facility may be issued upon application of the commissioner or of the receiver whether or not there has been issued a prior order to rehabilitate the facility, shall act as a revocation of the registration of the facility under section 17b-521 and shall order the receiver to marshal and liquidate all of the provider's assets located within this state.
The parties agree that Fairfield and CCRC were established pursuant to General Statutes § 33-1000 et seq.
The parties to this motion filed a stipulation of facts on September 6, 2006, in which they agreed to all of the material factual issues thereby obviating the need for testimony.
At the time of the appointment of the Belmonte receivership, the state of Connecticut health and educational facilities authority (CHEFA) had a first priority lien on substantially all of Fairfield's assets. As of the date of the appointment of the Coburn receivership, Wells Fargo Bank, National Association (Wells Fargo), as Indentured Trustee, held a first priority lien on the CCRC assets.
Marianne D. Keevins was an employee of Systems and a director and officer of all of the nonstock corporations prior to the establishment of the receiverships. On November 21, 2005, Belmonte filed a notice of change of officer/director with the secretary of state, removing Keevins and other officers or directors of Fairfield. Counsel for Belmonte sent Keevins a letter on December 22, 2005, advising her that she had been suspended as a director. On December 14, 2005, this court approved the motion of both receivers to reject Keevins' employment agreement.
On May 17, 2006, Belmonte gave notice to all potential Fairfield creditors to file claims by June 16, 2006. Similarly, Coburn gave notice to the potential CCRC creditors with a bar date of June 30, 2006. Keevins subsequently received notice from four creditors that they intend to commence legal actions against her and other officers or directors of the corporations for alleged acts she committed while an officer of the corporations. Prior to the establishment of the receiverships, the corporations obtained liability insurance for their directors and officers. Coburn renewed that policy through August 27, 2006. Keevins filed a proof of claim in an unliquidated amount with Belmonte for indemnification of any payments and expenses that she would be required to make as a result of her position, pursuant to General Statutes § 33-1118. Additionally, Keevins has made a claim pursuant to the CCRC process seeking damages in a sum not less than $3,649,230.77 for the termination of her employment contract, unpaid vacation time, and attorneys fees, indemnification and expenses as a result of the potential claims. By agreement of the parties and order of this court, both receivers have set aside $25,000 in escrow for such claims pending further order of this court.
According to the joint stipulation of facts, Keevins has been sued, along with others, by Melissa McCarthy in a case returnable March 28, 2006 to the Bridgeport judicial district for alleged violations of General Statutes § 31-51m and 31-51q and by the Estate of Lillian Blum in an action returnable April 25, 2006 to the Judicial District of Fairfield at Bridgeport for, among other things, breach of contract, misrepresentation and fraud. She has been notified that a claim may be made against her in accordance with an order of this court establishing a creditor bar date by the State of Connecticut Health and Educational Facilities Authority, U.S. Bank National Association as trustee, and the Treasure of the State of Connecticut dated June 14, 2006, by Wells Fargo Bank, National Association dated June 26, 2006 and by the Connecticut Health and Educational Facilities Authority dated June 27, 2005.
General Statutes § 33-1118 states: "A corporation shall indemnify a director who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which he was a party because he was a director of the corporation against reasonable expenses incurred by him in connection with the proceeding."
The parties did not address the claims for termination of the employment contract, unpaid vacation time and attorneys fees in the instant motion.
II
The issue in this dispute is the extent to which a receivership is responsible for prereceivership claims. Keevins argues that her claims for indemnification and expenses are entitled to administrative priority; that is, they are an expense of the receivership itself. First, she asserts that the claims have arisen after the commencement of the receivership and, in fact, that some of the lawsuits have yet to be instituted. Second, she alleges that she will be required to defend the claim which might include the receivership period. Third, she alleges that claims will not ripen until a future date and thus could not constitute a prereceivership claim.
The state, both receivers, CHEFA and Wells Fargo (collectively referred to, in this section, as the receivers) all oppose Keevins' claims. The receivers maintain that because Keevins performed no actions for the receiverships, her claims are nothing more than unsecured prereceivership claims that are not entitled to administrative priority under established principles of bankruptcy and receivership jurisprudence. It must be noted that the parties have stipulated that "after the appointment of the Receivers, Ms. Keevins was not requested to take, and she did not take, any actions for or on behalf of the [corporations]."
Noting that there is no direct Connecticut authority on these issues, Keevins looks to cases from sister states and argues that Fleischer v. Federal Deposit Ins. Corp., 70 F.Sup.2d 1238 (D. Kan. 1999) is instructive. Applying Kansas' not dissimilar statute, the court awarded indemnification to former officers and directors of a failed savings institution, who successfully defended a suit brought by the receiver. Id., 1242-43. The court rejected a claim that indemnification did not apply because the claim did not arise until after the creation of the receivership. Id. Accord Weingarten v. Gross, 264 Va. 243, 249, 563 S.E.2d 771 (2002). Keevins additionally argues that indemnification serves the public policy of encouraging citizens to serve as directors of marginal corporations knowing that, if sued by a future receiver, they would be compensated for their expenses. See Lawson v. Young, 21 Ohio App.3d 190, 486 N.E.2d 1177 (1984).
These cases are inapposite to the present case because they all provided for indemnification for expenses after suit by the receiver. In the present case, however, no claims are coming from the receivership. It is also clear that § 33-1118 authorizes indemnification only after a successful defense of a proceeding. See In re Mid-American Waste Systems, Inc., 228 B.R. 816, 823 (Bankr. D.Del. 1999).
The receivers examine the issue through a different lens and maintain that we must look to and apply federal bankruptcy procedure because there is no Connecticut precedent on this issue of indemnification in the receivership context. See In re Edgewood Park Junior College, Inc., 123 Conn. 74, 80, 192 A. 561 (1937) ("It is conceded by the claimant that its claim would not be allowed in bankruptcy . . . As we said in the Napier case [ Napier v. Peoples Stores Co., 98 Conn. 414, 426, 120 A. 295 (1923)], it is eminently desirable that in receivership proceedings there should be uniformity of decisions in the federal and state courts." [Citation omitted.]). Indeed, the court in Napier specifically stated that in dealing with a question of the allowance of unmatured claims in receivership, "[i]t is a question of commercial law, in respect of which uniformity of decision in the Federal and State courts is eminently desirable, and especially so in receiverships, in order to avert a race for jurisdiction in the interest of one or another class of creditors, with its possibilities of duplicate litigation and conflict over the possession of assets." Napier v. Peoples Stores Co., supra, 98 Conn. 426.
An administrative expense is defined in § 503 of the Bankruptcy Code as "the actual, necessary costs and expenses of preserving the estate including . . . wages, salaries, and commissions for services rendered after the commencement of the case . . ." 11 U.S.C. § 503(b)(1)(A) (2006). In In re Mid-American Waste Systems, Inc., supra, 228 B.R. 816, the court addressed issues similar to the case herein. In that case, officers and directors of a corporation were being sued by certain creditors for damages resulting from many allegations including false representations, breach of contract and fraud. The corporation sought voluntary relief under Chapter 11 of the Bankruptcy Code and the officers and directors filed indemnification claims, pursuant to the Delaware laws, arguing that they must be given priority as an administrative expense. Id., 820. The court held that "[t]o establish administrative priority under § 503(b)(1)(A), the OD [Officers and Directors] Claimants must demonstrate that the claimed expenses (I) arose out of a postpetition transaction with the debtor-in-possession and (ii) directly and substantially benefitted the estate." Id., 821. "As the Second Circuit has stated: An expense is administrative only if it arises out of a transaction between the creditor and the bankrupt's trustee or debtor in possession and `only to the extent that the consideration supporting the claimant's right to payment was both supplied to and beneficial to the debtor-in-possession in the operation of the business.' A debt is not entitled to priority simply because the right to payment arises after the debtor in possession has begun managing the estate." Id. (citing Trustees of Amalgamated Ins. Fund v. McFarlin's, Inc., 789 F.2d 98, 101 (2d Cir. 1986)). The court also found that all the conduct forming the basis of the litigation arose out of prepetition work and held that "[a]n indemnification claim by an officer or director based on that officer's or director's prepetition services is not a claim on account of services rendered after the commencement of a case that is entitled to administrative expense priority. Instead, the OD Claimants' indemnification claims are merely claims for prepetition compensation for services rendered, not unlike salary or other benefits." (Citations omitted; internal quotation marks omitted.) Id. Accord In re Chateaugay Corp., 10 F.3d 944 (2d Cir. 1993); In re Christian Life Center, 821 F.2d 1370, 1373 (9th Cir. 1987); In re Philadelphia Mortgage Trust, 117 B.R. 820, 828 (Bankr. E.D.Pa. 1990); In re Amfesco Industries, Inc., 81 B.R. 777, 784 (Bankr. E.D.N.Y. 1988.); In re Baldwin-United Corp., 43 B.R. 443, 454-56 (S.D. Ohio 1984).
In fact, in Trustees of Amalgamated Ins. Fund v. Mcfarlin's, Inc., supra, 789 F.2d 101, the court explained the purpose of the administrative expense priority and stated, "Congress granted priority to administrative expenses in order to facilitate the efforts of the trustee or debtor in possession to rehabilitate the business for the benefit of all the estate's creditors . . . Congress reasoned that unless the debts incurred by the debtor in possession could be given priority over the debts which forced the estate into bankruptcy in the first place, persons would not do business with the debtor in possession, which would inhibit rehabilitation of the business and thus harm the creditors." (Citations omitted.) Such a situation is not unlike that in the present case where the claims concern prepetition activities and, as noted, Keevins took no actions for the corporations once the receiverships were created.
Similarly, courts have treated indemnification requests based upon pending or future litigation derived from prepetition conduct as non administrative claims. In re Philadelphia Mortgage Trust, supra, 117 B.R. 830; Trustees of Amalgamated Ins. Fund v. McFarlin's, Inc., supra, 789 F.2d 101. Hence, Keevins' claims must be treated as prepetition unsecured claims that are not entitled to administrative priority. The two escrow accounts are ordered discharged.