Opinion
No. WD 56885 and (consolidated with WD 56886, WD 56887, WD 56888, WD 56889 56890)
Filed: November 21, 2000
APPEAL FROM THE CIRCUIT COURT OF COLE COUNTY, MISSOURI, THE HONORABLE THOMAS J. BROWN, III, JUDGE
Jeremiah W. (Jay) Nixon, Attorney General, Ronald Molteni and Mark E. Long, Assistant Attorneys General, Jefferson City, MO, Attorneys for Respondent.
DSS, Terry C. Allen Jefferson City, MO Respondent Receiver, Jon E. Beetem, Jefferson City, MO Attorney for Appellant.
Before Spinden, C.J., and Lowenstein, Ulrich, Breckenridge, Smart, Ellis, Stith, Smith, Howard, Newton and Holliger, JJ.
Healthcare Financial Partners Funding, Inc. (HCFP), appeals from the judgment of the Circuit Court of Cole County, authorizing, pursuant to § 198.112, the respondent, Terry C. Allen (Receiver), the receiver for six defendant nursing home facilities, to reimburse the successor operators of the facilities from the pre-receivership receivables collected by him for monies advanced by them in payment of the facilities' missed payrolls, despite the perfected security interest of HCFP in the receivables.
All statutory references are to RSMo 1994, unless otherwise indicated.
The appellant raises four points on appeal. In all four points, it claims that the trial court erred in authorizing the Receiver to expend the pre-receivership receivables, while dishonoring HCFP's perfected security interest in the same. In Point I, it claims that the trial court's ruling was in error because it was contrary to § 198.112(10), which requires the receiver to honor all secured transactions entered into by the facility's operator, and § 198.115, which authorizes a receiver to dishonor a secured transaction only if the security agreement is unconscionable. In Point II, it claims that the trial court erred because the authorized expenditure of the receivables constituted a taking of property without due process of law. In Point III, HCFP claims that the trial court erred in authorizing the expenditure by the Receiver based on a finding that he had an equitable priority claim superior to HCFP's perfected security interest because equity generally is not available to a party with an adequate remedy at law, and § 198.132 allows a receiver to seek a priority judgment against a defendant for any deficiency resulting from the operation of a receivership. In Point IV, HCFP claims the trial court erred in approving the expenditure by the Receiver of the receivables because the applicable and controlling statutes should be interpreted as requiring that such an expenditure was subject to and in violation of the security agreement of HCFP.
We reverse and remand.
Facts
On February 11, 1998, a loan and security agreement was executed between HCFP and thirty-five nursing homes, including, inter alia, the six defendant facilities: Brookside Nursing Center, Inc. (Brookside); Lincoln Manor Nursing Center, Inc. (Lincoln Manor); Carrollton Nursing Center, Inc. (Carrollton); Glenwood Healthcare, Inc. (Glenwood); Silex Management Company, Inc. (Silex); and Fayette Nursing Center, Inc. (Fayette). The agreement provided that HCFP would provide each of the facilities with a revolving line of credit in exchange for a security interest in, inter alia, their current and after-acquired "accounts, accounts receivable and other rights to payment of every kind and description." The agreement authorized HCFP, in the event of a borrower's default, including a failure to make any payment due or a judgment of insolvency, to immediately terminate the loan, accelerating the amounts due or pursuing any remedy provided for by the Uniform Commercial Code (UCC). Thereafter, HCFP perfected its security interest in the receivables by properly filing a financing statement, as required by § 400.9-302, RSMo Supp. 1997.
On July 31, 1998, the respondent, the Missouri Department of Social Services, Division of Aging (DSS), filed its petitions in the Circuit Court of Cole County seeking an ex parte emergency receivership for each of the six defendant facilities, pursuant to § 198.099. The basis alleged for the receiverships was that the facilities had failed to make payroll due at the end of July 1998 and, as a result, there existed an immediate threat that the facilities' employees would leave their employment, causing a serious risk to the health, safety, and welfare of the residents. Pursuant to § 198.108, the circuit court issued ex parte orders of receivership on July 31, 1998, for all six defendant facilities. After finding, inter alia, that the situation of each facility constituted an emergency, under § 198.099(5), and that each operator was insolvent, under § 198.099(6), the court ordered the six defendant facilities into receivership on August 4, 1998, appointing Allen as the receiver.
On August 12, 1998, the DSS filed its motions requesting the circuit court to terminate the receiverships because the successor operators of the respective facilities: N R of Sweet Springs, Inc., for Brookside; N R of Seymour, Inc., for Glenwood; N R of Fayette, Inc., for Fayette; N R of Carrollton, Inc., for Carrollton; N R of Silex for Silex; and N R of Chillicothe for Lincoln Manor, had paid the missed payrolls of the facilities and had either been issued a probationary license or temporary operating permit. On August 17, 1998, the circuit court terminated the receiverships and ordered the Receiver to, inter alia, make an accounting of all receivables and expenditures for each of the six defendant facilities.
After the receiverships had been terminated, the Receiver filed a "Motion For Authority To Expend Funds For Payroll And To Pay Secured Creditor" as to each receivership. In each motion, he acknowledged that HCFP had a prior perfected security interest in the pre-receivership receivables and that it was entitled to receipt of the same due to non-payment of the debt, which was secured by the receivables. Nonetheless, he requested that he be authorized to dishonor HCFP's security interest in and expend the receivables to reimburse the successor operators for the funds advanced by them for payment of the facilities' missed payrolls, with the balance being paid over to HCFP. The amounts advanced by the successor operators and the amounts of the receivables collected were:
Facility Advanced Receivables
Brookside $105,055.47 $177,891.39
Glenwood $43,808.04 $102,286.79
Fayette $59,629.92 $132,897.71
Carrollton $105,845.25 $182,668.86
Silex $57,284.94 $151,948.29
Lincoln Manor $ 44,171.23 $138,118.59
On January 13, 1999, HCFP filed its objections to the Receiver's motions for authority to expend the receivables.
On February 2, 1999, in its "orders" sustaining the motion of the receiver, the circuit court found that HCFP had a perfected security interest in the pre-receivership receivables of the six defendant facilities, but that:
3. The drafters of the Nursing Home Receivership statute anticipated the issue of pre-existing lienholders. Section 198.115 states that a Receiver will not be bound to honor any secured transaction entered into by the facility's former operator if the agreement is "unconscionable." The Nursing Home Receivership statute does not define "unconscionable" nor has this Court found any Missouri case interpreting this statutory section. This Court finds and concludes that payment of accounts receivables to HCFP, a corporate secured lienholder, [is] unconscionable within the meaning of § 198.115. It is unconscionable for the gross revenue produced by the efforts of uncompensated employees to be paid to the lienholder when the nursing home's employees, who provided direct care and other services to the nursing home's residents to produce that revenue, did not receive compensation for those services.
. . .
5. In this case, it would clearly be an unconscionable result if this Court denied the Receiver's request to pay the payroll. In that event, the employees will have received no economic benefit in exchange for their labor. HCFP, on the other hand, will receive the entire economic benefit of the unpaid employees' labor, i.e. the accounts receivables, undiminished by the direct cost of generating those receivables. In other words, HCFP will be better off as a result of its borrower's failure to make payroll than it would have been had the payroll been met. This is the kind of result § 198.115 was drafted to prevent.
As such, the court authorized the Receiver to reimburse the successor operators for the funds they advanced for payment of the facilities' missed payrolls, with the balance ordered paid over to HCFP. On February 10, 1999, the trial court entered a "Judgment Order Amending Order Nunc Pro Tunc" to designate its "orders" sustaining the Receiver's motions as "judgments."
This appeal follows.
I.
In both Points I and IV, HCFP asserts that the trial court erred in interpreting the implicated provisions of the Missouri Omnibus Nursing Home Act of 1979 (the Act), §§ 198.003-.186, specifically § 198.112, as authorizing the Receiver to reimburse, from the pre-receivership receivables collected, the successor operators of the facilities the monies advanced by them in payment of the facilities' missed payrolls, in violation of its perfected security interest in the receivables. In Point I, HCFP further claims that the trial court erred in authorizing the challenged expenditure based on its finding that to enforce its security agreement would be unconscionable such that, pursuant to § 198.115, the receiver was free to dishonor it, because the agreement was not unconscionable within the meaning of the statute. Because the dispositions of Points I and IV are interdependent, we address them together.
It is undisputed that HCFP, pursuant to its security agreements with the predecessor operators of the six defendant facilities securing a revolving line of credit extended to them by HCFP, had a perfected security interest, pursuant to Article 9 of the UCC, §§ 400.9-101-.9-508, in the pre-receivership receivables of the predecessor operators, § 400.9-102(1)(a); § 400.9-106, RSMo Supp. 1997, which were collected by the Receiver and are the subject of this appeal. It is also undisputed that, pursuant to its security agreements, HCFP's right to the receivables was superior to that of any other parties involved in this case, see § 400.9-301, RSMo Supp. 1997, including the successor operators who were unsecured creditors, since HCFP advanced funds for the payment of the unpaid payrolls of the predecessor operators, unless the implicated provisions of the Act could be interpreted, as the respondents contend, as statutorily authorizing the Receiver to dishonor HCFP's security interest and reimburse the successor operators for the monies they had advanced.
Section 198.112 governs the authority of a receiver in a nursing home receivership established pursuant to § 198.099. The respondents contend that this statute should be interpreted as authorizing the Receiver, with the approval of the circuit court, to expend from the pre-receivership receivables of the facility to reimburse the successor operators, in spite of the perfected security interest of HCFP. Specifically, they rely on §§ 198.112(8) and 198.112(9). Section 198.112(8) provides that the receiver "[s]hall receive and expend in a reasonable manner the revenues of the facility due on the date of the order of appointment as receiver, and to become due during the receivership." Section 198.112(9) provides that the receiver "[s]hall do all acts necessary or appropriate to conserve the property and promote the health, safety or care of the residents of the facility." Although HCFP recognizes the authority of the Receiver, as found in these subsections, it contends that they are subject to the limitation of § 198.112(10), such that the Receiver was required to honor its security interest in the receivables. Section 198.112(10) provides:
Section 198.099 provides:
The attorney general, either on his own initiative or upon the request of the department or of any other state governmental agency having an interest in the matter, a resident or residents or the guardian of a resident of a facility or the owner or operator of a facility may petition for appointment of a receiver for a facility when any of the following conditions exist:
(1) The operator is operating without a license;
(2) The department has revoked the license of an operator or refused to grant an application for a license to the operator;
(3) The department has initiated revocation procedures and has determined that the lives, health, safety, or welfare of the residents cannot be adequately assured pending a full hearing on license revocation;
(4) The facility is closing or intends to close and adequate arrangements for relocation of residents have not been made at least thirty days prior to closure;
(5) An emergency exists in the facility;
(6) The operator is insolvent; or
(7) An owner of the land or structure is insolvent and such insolvency substantially affects the operation of the facility.
Except as hereinafter specified in section 198.115, [the receiver] shall honor all leases, mortgages, secured transactions or other wholly or partially executory contracts entered into by the facility's operator or administrator while acting in that capacity, but only to the extent of payments which become due or are for the use of the property during the period of the receivership.
The respondents counter by asserting that this subsection is in conflict with subsections 8 and 9, requiring us to construe the statute to determine its legislative intent, such that the Receiver was free to dishonor HCFP's security interest in the receivables. In this regard, HCFP contends that the subsections in question are not in conflict and the legislature intended for the Receiver, in receiving and expending funds, to be subject, inter alia, to secured transactions, unless the exception of § 198.115.1 applies.
"When interpreting a statute, our primary responsibility is to ascertain the intent of the legislature from the language used and give effect to that intent if possible." Owens v. Norb Hackmann, Inc. , 979 S.W.2d 941, 943 (Mo.App. 1998) ( citing Weston Point Resort Condo. Owners' Ass'n v. Floro , 796 S.W.2d 928, 930 (Mo.App. 1990)). In interpreting a statute, the language used should be given its plain and ordinary meaning. Spradlin v. City of Fulton , 982 S.W.2d 255, 258 (Mo. banc 1998). We will "'look elsewhere for interpretation only when the meaning is ambiguous or would lead to an illogical result defeating the purpose of the legislature.'" Id. ( quoting State ex rel. Maryland Heights Fire Prot. Dist. v. Campbell , 736 S.W.2d 383, 387 (Mo. banc 1987)). If the language of the statute is clear and unambiguous, "'[t]here is no room for construction even when a court may prefer a policy different from that enunciated by the legislature.'" Id. at 261 ( quoting Kearney Special Rd. Dist. v. County of Clay , 863 S.W.2d 841, 842 (Mo. banc 1993)). "'In determining whether the language is clear and unambiguous, the standard is whether the statute's terms are plain and clear to one of ordinary intelligence.'" Gerlach v. Mo. Comm'n on Human Rights , 980 S.W.2d 589, 593 (Mo.App. 1998) ( quoting Wolff Shoe Co. v. Dir. of Revenue , 762 S.W.2d 29, 31 (Mo. banc 1988)).
Giving the language of each of the implicated subsections of the statute its plain and ordinary meaning, we find no ambiguity as to what the legislature intended as to each. The subsections are clear that, in receiving and expending revenues in a reasonable manner, § 198.112(8), and doing "all acts necessary or appropriate to conserve the property and promote the health, safety or care of the residents of the facility," § 198.112(9), a receiver is to honor, inter alia, a secured transaction, unless the exception of § 198.115 applies. The respondents do not disagree with this proposition; however, they contend that the statutes conflict in their application such that they require construing. See Hatfield v. McCluney , 893 S.W.2d 822, 825 (Mo. banc 1995). Specifically, the respondents contend that they conflict in that for the Receiver to honor the security interest of HCFP in the receivables, rather than reimbursing the successor operators for the monies advanced by them in payment of the facilities' unpaid payrolls, would interfere with the overriding purpose of the Act, as stated by the Missouri Supreme Court:
The Act before us is an exercise of the police power of the state, directed to the protection of the health, safety, and welfare of a large and increasing nursing home population. It regulates private institutions designed to shelter, feed and care for sick, aged and infirm persons, and bears a reasonable relation to the health, safety, and welfare of the community. . . .
. . .
The Act is addressed to the broad expanse of problems in the operation of nursing homes which [had] surfaced in substantial degree since the advent of Medicaid in the mid-1960's and the mushrooming of the nursing home business. From the health and safety of nursing home residents, to their personal privacy and autonomy, to the protection of their funds and property, to the solvency of nursing home operators, to prevention of Medicaid fraud, the Act is a major legislative effort towards remedying indigenous areas of abuse in the operation of nursing homes.
State, Dep't of Soc. Servs., Div. of Aging v. Colonial Healthcare Ctr., Inc. , 3 S.W.3d 798, 800 (Mo.App. 1999) ( quoting Stiffelman v. Abrams , 655 S.W.2d 522, 528-29 (Mo. banc 1983)); State, Mo. Dep't of Soc. Servs., Div. of Aging v. Cedars Nursing Ctr., Inc. , 3 S.W.3d 803, 805 (Mo.App. 1999) ( quoting Stiffelman , 655 S.W.2d at 528-29 ). This contention is predicated on the argument that, unless the missed payrolls had been paid by the successor operators, the employees would have refused to continue to work such that the facilities would have had to have been closed and the residents displaced, which would have adversely affected their health, safety and welfare. For the reasons discussed, infra, we reject the argument of the respondents that the subsections in question are in conflict, requiring us to resort to rules of statutory construction.
The Missouri Supreme Court recognized these concerns about the displacement of residents in Villines v. Division of Aging, Mo. Dept. of Soc. Servs. , 722 S.W.2d 939, 945-46 (Mo. banc 1987), which stated:
It is well documented that many nursing home residents suffer from debilitating conditions such as failing health, mental disease, and susceptibility to shock. Those seeking residences in homes designed to meet these special needs find that the availability of beds in well-run facilities continues to decrease as the demand for nursing home care continues to increase. Once settled in a home, the trauma resulting from forced transfer often causes mental and physical set backs. The severity of the complications from "transfer trauma" ranges from mild depression to severe illness and death.
(Citations omitted.)
In both Colonial and Cedars , as here, this court was confronted with the issue of whether, under § 198.112, the nursing home receiver was authorized to dishonor the security interest of HCFP in pre-receivership receivables and expend the same in payment of the unpaid payrolls of the facilities in question. Colonial , 3 S.W.3d at 800; Cedars , 3 S.W.3d at 805 . In addressing this issue in both cases, this court found no ambiguity in the language used in subsections 8 and 9 of § 198.112 in determining their effect on the authority of the receiver to expend the receivables in payment of the missed payrolls. Colonial , 3 S.W.3d at 801; Cedars , 3 S.W.3d at 806 . However, the court, after first finding that such expenditures were in keeping with the receiver's authority under subsections 8 and 9, found the mandate of § 198.112(10), requiring the receiver to honor, inter alia, certain security interests, seemingly conflicted with that authority. Colonial , 3 S.W.3d at 801-02; Cedars , 3 S.W.3d at 806 . In so finding, the court stated:
Two competing interests confronted the receiver in this case. On one hand, the receiver was obligated to do what was necessary to take care of the facility's residents. On the other hand, the receiver was obligated to honor the facility's valid security interests. These obligations conflicted because the receiver had to pay the missed payroll to protect the facility's residents and the funds available to make such payroll were encumbered by a security interest.
Colonial , 3 S.W.3d at 802; Cedars , 3 S.W.3d at 806 . Although this court found in Colonial and Cedars that the implicated subsections conflicted, it did not resolve the conflict, choosing instead to decide both cases on alternative grounds, which we discuss, infra.
In our view, the court in Colonial and Cedars was incorrect when it found that the implicated subsections of § 198.112 are in conflict. The conflict cited by the court was that the receiver could not promote the welfare of the facilities' residents by paying the missed payrolls, as required by §§ 198.112(8) and (9), allowing the facilities to continue to operate, if he was forced to honor the security interest of HCFP in the receivables, as required by § 198.112(10). However, it is our opinion that when subsections 8, 9 and 10 are read in conjunction with the exception found in § 198.115, as incorporated by § 198.112(10), this stated conflict does not, in fact, exist. Rather, for the reasons discussed, infra, what we find is a statutory scheme requiring a receiver to honor, inter alia, security agreements, unless they are found to be unconscionable, as provided in § 198.115.1, such that to honor them would defeat the overriding purpose of the Act. In other words, it is apparent to us from the plain language of the receivership statutes in question that the legislature understood and appreciated that its mandate in § 198.112(10), requiring the receiver to honor security agreements, could, in some circumstances, conflict with and threaten the overriding purpose of the Act and the express requirement of the receiver that he "do all acts necessary or appropriate to conserve the property and promote the health, safety or care of the residents of the facility," § 198.112(9), necessitating the safety net found in § 198.115.1.
As discussed, supra, § 198.112(10) requires a receiver to honor, inter alia, certain security interests, "[e]xcept as hereinafter specified in section 198.115." This section provides, in pertinent part:
A receiver may not be required to honor any lease, mortgage, secured transaction or other wholly or partially executory contract entered into by the facility's operator or administrator while acting in that capacity, if the agreement is unconscionable.
§ 198.115.1 (emphasis added). Thus, in our case, pursuant to §§ 198.112(10) and 198.115, the Receiver was statutorily authorized to dishonor HCFP's security interest in and pay the unpaid payrolls from the pre-receivership receivables, provided its security agreements with the predecessor operators were unconscionable within the meaning of § 198.115.1.
Section 198.115.1 does not define "unconscionable." "Absent statutory definition, words used in statutes are given their plain and ordinary meaning with help, as needed, from the dictionary." Am. Healthcare Mgmt., Inc. v. Dir. of Revenue , 984 S.W.2d 496, 498 (Mo. banc 1999) (citation omitted). The dictionary defines "unconscionable" as " 1 not guided or restrained by conscience; unscrupulous 2 unreasonable, excessive, or immoderate 3 not fair or just; outrageous." Webster's New World College Dictionary 1453 (3d ed. 1997). In addition to relying on the dictionary to define unconscionable, we can look to other legislative or judicial meanings which have been attached to the term. See Boyd v. State Bd. of Registration for the Healing Arts , 916 S.W.2d 311, 315 (Mo.App. 1995) ( citing Citizens Elec. Corp. v. Dir. of Revenue , 766 S.W.2d 450, 452 (Mo. banc 1989)) (holding that "[w]hen the legislature enacts a statute referring to terms which have had other legislative or judicial meanings attached to them, the legislature is presumed to have acted with knowledge of these meanings"). In this vein, "unconscionable," as the term appears in § 153 of the Restatement (Second) of Contracts, has been judicially defined as involving "'an inequality so strong, gross, and manifest that it must be impossible to state it to one with common sense without producing an exclamation at the inequality of it.'" Ricks v. Mo. Local Gov't Employees' Ret. Sys. , 981 S.W.2d 585, 594 (Mo.App. 1998) ( quoting Peirick v. Peirick , 641 S.W.2d 195, 197 (Mo.App. 1982)). This general definition has also been used in defining unconscionability in the context of separation agreements in dissolution cases. Schlottach v. Schlottach , 873 S.W.2d 928, 932 (Mo.App. 1994). An agreement or contract has also been defined, in the context of the UCC, as being "substantively unconscionable if there is undue harshness in the terms of the contract." Killion v. Bank Midwest, N.A. , 987 S.W.2d 801, 810 (Mo.App. 1998) ( citing World Enters., Inc. v. Midcoast Aviation Servs., Inc. , 713 S.W.2d 606, 611 (Mo.App. 1986)).
In determining the meaning of a term in a statute, we logically must consider the context in which it is used. Weiss v. Rojanasathit , 975 S.W.2d 113, 117 (Mo. banc 1998). Terms are not to be defined in a vacuum. Id . Here, by making the mandate of § 198.112(10), requiring the receiver to honor secured transactions, subject to the exception found in § 198.115.1, the legislature, in our view, was reflecting an intent to protect the rights of secured parties, as long as they did not conflict with the overriding purposes of the Act. Given this context, while taking into consideration the dictionary definition and the judicial meanings that have been given to the term, discussed, supra, we define "unconscionable," for purposes of § 198.115.1, such that an agreement would be deemed unconscionable and subject to being dishonored by the receiver if, pursuant to its terms, it is found to be grossly and manifestly unfair, unjust, inequitable or harsh in that to enforce it would result in an abuse in the operation of a facility that was sought to be prevented by the Act. Having ascribed this definition to an unconscionable agreement for purposes of § 198.115.1, we now turn to the issue of whether HCFP's security agreements with the predecessor operators here were unconscionable, under § 198.115.1, subject to being dishonored by the Receiver.
Although § 198.115.1 does not define unconscionable, it does set forth two factors, which are required to be considered in determining whether an agreement is unconscionable:
The person seeking payment under the agreement was an affiliate of the operator or owner at the time the agreement was made;
The rental, price, or rate of interest required to be paid under the agreement was substantially in excess of a reasonable rental, price or rate of interest at the time the agreement was entered into.
Neither of these factors apply here. However, these factors were not intended to be exclusive in that the statute expressly provides that the determination of the unconscionability of an agreement is not limited to a consideration of these two factors alone. § 198.115.1. Thus, the legislature intended that other relevant factors were to be considered in determining the unconscionability of an agreement.
By the express terms of the statute, both of the factors set forth therein are directed at preventing Medicaid fraud, but do not address any of the other abuses recognized as being targets of the Act. As noted by the Missouri Supreme Court in Stiffelman , as discussed, supra, the legislature was not only addressing Medicaid fraud in the Act, but was addressing the health, safety and welfare of nursing home residents, their personal privacy and autonomy, the protection of their funds and property, and the solvency of nursing home operators. 655 S.W.2d at 528-29. Thus, in addition to preventing Medicaid fraud, we would interpret §§ 198.112(10) and 198.115.1 as providing that, if a security agreement is found, by its terms, to threaten the health, safety and welfare of nursing home residents, their personal privacy and autonomy, the protection of their funds and property, or the solvency of the home's operator, it is unconscionable and subject to being dishonored by the receiver.
The respondents contend that the agreements in question here were unconscionable and subject to being dishonored by the Receiver in that to enforce them would have jeopardized the continuing operation of the six defendant facilities, because their employees would not have continued to work without being paid, threatening the closing of the facility and subjecting the residents to being uprooted such that their health, safety and welfare would be adversely affected. We disagree. However, even assuming, arguendo, that this factual scenario would render the security agreements unconscionable under § 198.115.1, the record does not reflect that such a scenario existed here.
What the record reflects is that the Receiver was not requesting that he be authorized to expend pre-receivership receivables to pay the missed payrolls of the facilities, but simply to reimburse the successor operators for the advancements they had already made in making the payrolls. This distinction is critical to our analysis in that, given this factual situation, it could not be asserted, as the Receiver did in his motion for approval of the expenditure of the receivables to reimburse the successor operators, that such an expenditure was an emergency and necessary to keep the employees of the facilities working in order to prevent their closings and the residents being displaced. The fact is that the payrolls had already been paid by the successor operators, such that the record would indicate that there was no immediate threat of any of the six homes being closed for a lack of staff due to missed payrolls. Thus, contrary to the intent of the legislature, what appears to have occurred here, by the circuit court's authorizing the Receiver to dishonor the security interest of HCFP and expend the receivables to reimburse the successor operators for monies advanced by them for payrolls, was not the protection of the facilities' residents, a recognized purpose of the Act, but the successor operators being given a priority over the perfected security interest of HCFP, in contravention of the UCC, specifically § 400.9-301, RSMo Supp. 1997. As such, the trial court misapplied the law and erred in authorizing the challenged expenditure by the Receiver.
In holding as we do, we do not mean to suggest that a security agreement could not be found to be unconscionable for purposes of § 198.115.1 in any case where the receiver is requesting an expenditure of receivership funds subject to the security agreement to "reimburse" a successor operator who had advanced funds at the receiver's request in order to continue the operation of the facility. We can foresee a situation where the only way that a receiver could entice a potential temporary or successor operator into advancing funds to insure the continuing operation of a facility would be to guarantee prompt reimbursement from receivership funds subject to a security agreement. Thus, to effectively remove this avenue to the receiver by holding in this case that any reimbursement to a successor operator from receivership funds subject to a security agreement could never be interpreted as an emergency situation which would empower a court under § 198.115.1 to hold the agreement unconscionable and authorize expenditure of the funds, would be to eviscerate the subsection. Accordingly, our holding is limited to applying the provisions of the implicated statutes, as we interpret them, to the facts as found in the record before us which does not reflect an emergency situation sufficient to invoke the exception of § 198.115.1.
In addition to their contention that the enforcement of HCFP's security interest in the receivables was unconscionable subject to being dishonored by the Receiver, under § 198.115.1, the respondents contend that the trial court did not err in authorizing the Receiver's expenditure of the receivables because HCFP did not "carry its burden of showing that payment of the wages was deleterious to its security interest," citing Colonial , Cedars , and State ex rel. Ashcroft v. St. Louis No. 2, Inc. , 618 S.W.2d 686, 689 (Mo.App. 1981). We disagree.
As discussed, supra, this court in Colonial and Cedars decided against the necessity of honoring HCFP's security interest in the receivables in question on the basis that it did not show that the allowed expenditures by the receiver were deleterious to its interests, citing Ashcroft . Colonial , 3 S.W.3d at 802; Cedars , 3 S.W.3d at 806-07 . In that decision, the Eastern District made no mention of the Act, nor was it relied on in deciding the issue of whether the receiver was without authority to pay the payroll of the subject facility since the Act was not in effect at the time the payments in question were made by the receiver. A careful reading of Ashcroft reveals that it was the "[trial] court's approval of the receiver's report [that] officially validated the expenditure for wages due" that formed the basis for the appellate court's decision. 618 S.W.2d at 688.
As to the issue of whether the security agreement of one of the parties had been dishonored by the receiver's expenditure, the court in Ashcroft stated:
Appellants also complain that the payment of wage claims is inimical to their security interest. The record does refer to some security interest of appellant American Geriatric Enterprises, Inc. in Fairgrounds Manor and Hamilton Medical Center. And it is true that a receiver acquires possession of the assets subject to liens and equities affecting the property. Edmiston v. J. C. G.-Medallion, Inc., 570 S.W.2d 306, 310 (Mo.App. 1978). But the record is destitute of any evidence as to the type of security held by American Geriatric or how the receiver's payment of the payroll promised to have been paid by appellants is deleterious to that security interest — a burden for appellants to carry. Thus, appellants' arguments aimed at protection for their security — whatever it may be — are not here pertinent.
Id. at 688-89. No authority was cited for the court's summary conclusion that the secured party, to enforce its security interest after default on the security agreement, had the burden of showing that the payment in question was "deleterious" to its security interest in the monies expended as opposed to the burden of showing that the monies were subject to the security interest, and our research discloses none. Section 400.9-203, RSMo Supp. 1997, of the UCC, which governs the attachment and enforceability of a security interest after default and sets forth the requirements for the same, makes no mention of the secured party being required, in enforcing its security interest, to show that the challenged payment was "deleterious" to, as opposed to violating, its security agreement and interest. Thus, we refuse to follow Ashcroft with respect to this issue and necessarily must overrule Colonial and Cedars in that their ultimate holdings rely on the same.
To summarize, for the reasons stated, we find that the circuit court erred in authorizing the Receiver to expend the pre-receivership receivables, subject to HCFP's perfected security interest, to reimburse the successor operators for monies advanced by them for payment of the unpaid payrolls of the facilities in question because in doing so it erroneously declared and applied the law as found in §§ 198.112(10) and 198.115.1. As such, HCFP is entitled to all the receivables that should have been paid to it pursuant to its perfected security interest in the receivables, absent the circuit court's order authorizing the Receiver's challenged expenditures of the same.
Given our resolution of Points I and IV, we need not address HCFP's remaining points.
Conclusion
The judgment of the trial court authorizing the Receiver to expend the pre-receivership receivables, which were subject to the perfected security interest of HCFP, to reimburse the successor operators for the monies they had advanced for payment of the facilities' missed payrolls is reversed and the cases remanded for the circuit court to enter its orders ordering the Receiver to remit and pay over to HCFP the pre-receivership receivables in accordance with this opinion.
Spinden, C.J., and Lowenstein, Ulrich, Smart, Ellis, Stith, Howard and Newton, JJ., concur.
Holliger, J., dissents in separate opinion.
Breckenridge, J., dissents in separate opinion.
DISSENT
I respectfully dissent. The majority decision is premised upon the overruling of two decisions by this court rendered less than one year ago involving the same parties and the same issues. I do not agree that the decisions in State of Missouri, Missouri Dep't of Social Services v. Cedars Nursing Home Center, Inc., 3 S.W.2d 803 (Mo.App. 1999) and State of Missouri, Department of Social Services v. Colonial Healthcare Center, Inc., 3 S.W.3d 798 (Mo.App. 1999) are factually distinct in any significant sense or that our analysis in those two recent cases was unsound.
Some additional discussion of the facts is necessary. Chartwell Healthcare Inc. was a Texas corporation, which through various subsidiaries operated 31 nursing homes in Texas, Florida and Missouri. Nine were located in rural Missouri communities. Issues arising from the loss of operating licenses of six of the homes are consolidated in this appeal. The same issues involving the closure of two others were involved in Cedars and Colonial.
The Brookside Nursing Center, Inc., was operating under a consent agreement with the Department of Social Services, Division of Aging and operated under a probationary license that was due to expire on July 31, 1998. On July 24, the Department advised that it was not in compliance with the consent agreement and needed to make arrangements for closure and relocation of residents. The record does not indicate whether any of the other homes were operating under similar circumstances. On July 30, 1998, the Division of Aging learned that none of the eight of the homes would make its payroll. On July 31, 1998, the Division initiated proceedings to revoke the license of each home because "failure to meet payroll creates a substantial risk that there will not be sufficient trained staff available to care for the residents of the facility."
It was subsequently determined that some of the homes had also not met their July 15 payroll.
The Division of Aging also on July 31, 1998, initiated legal proceedings for an emergency receivership of each home pursuant to the Omnibus Nursing Home Act, §§ 198.003 et seq., RSMo 1994. Each petition was accompanied by an affidavit from the executive director of the Missouri Health Care Association stating that the failure to make payroll normally results in employees discontinuing their employment and was likely to result in immediate jeopardy to the residents of the nursing home facility. On August 4, 1998, Judge Thomas Brown appointed Terry Allen as receiver for the facilities at issue herein pursuant to RSMo, §§ 198.099 through 198.136. The court specifically directed the receiver to assume the role of manager or administrator and take care of the residents' health and safety. The receiver was authorized to "receive and expend in a reasonable manner the revenues of the facility." The Department of Social Services was ordered to pay all amounts due each nursing home for Medicaid eligible residents for the month of July 1998 to the receiver, "without any deductions for amounts owed by defendant (the nursing home) to plaintiff (Department of Social Services) orothers." (Emphasis added). The court further ordered the Department to expedite those payments.
As of August 4, 1998, the receivers therefore were charged with the care and safety of elderly residents in eight nursing homes. The receiver appointed in Cedars was Cedars Health Care Center, Inc., who was apparently the landlord. The receiver in Colonial was Colonial Health Care Center, Inc. Accomplishment of the aforementioned duty required sufficient trained staff. The receiver had no assets to pay the July paychecks for those employees or for that matter the payroll to be accrued during the receivership. The only source of income was the state medical reimbursement for the month of July — the same month for which each nursing home had failed to pay the very employees caring for the residents for whom those Medicaid payments were intended. As the majority opinion indicates, the unpaid payrolls were in most instances less than 50 percent of the Medicaid receivables of each facility for July 1998.
The further identity of those receivers, whether landlord, successor operator, or other is not reflected in the opinions.
HCFP had a financing agreement providing a line of credit to Chartwell. All of Chartwell's nursing homes in the three states were guarantors of that line of credit. The majority opinion suggests that each nursing facility was provided with a line of credit. This writer's interpretation of the Security Agreement is that there was only one line of credit — and that to Chartwell — not to each nursing facility. Advances by HCFP were made under a complex formula based in part upon a percentage of Chartwell's Medicaid and other receivables. The record does not indicate whether HCFP made any advances to any of the Missouri nursing homes based on the July Medicaid receivables.
The majority seems to suggest a factual distinction from Cedars and Colonial in that the unpaid July payrolls herein were paid by the "successor operators" as opposed to the receivers in Cedars and Colonial. The majority also emphasizes that, here, the unpaid payroll had been paid (thus eliminating an emergency situation) as contrasted to Cedars and Colonial. Any such distinction is neither factually correct nor significant. It seems somehow implied that it was improper for the successor operator of the home to advance an unpaid payroll, take over the license and then be reimbursed by the receiver who hired it. The majority ignores the fact that in each case now before us, the ultimate successor operator was hired by the receiver as manager during the receivership pursuant to the receiver's authority under RSMo. 198.112(2)(b). Although the record does not expressly indicate, it seems obvious that the receiver expected and required the manager he hired to operate the home during the receivership: to advance the past-due payroll and retain the employees to protect and care for the residents.
The majority presumably deems it significant that here as contrasted to Cedars and Colonial the receiver was not requesting authority to expend pre-receivership reimbursements to pay missed payrolls but rather was seeking reimbursement for advances made by the receiver's retained manager. The majority states no emergency existed since the payrolls had already been paid by the successor operators or as this dissent describes them, the receiver's manager. That claimed critical distinction is in this writer's view neither factually correct nor significant. Although it does not appear in the opinions in Cedars and Colonial, the record on appeal in each case reveals that the receiver's motion for authority to expend July Medicaid payments for July payrolls requested they be "used to reimburse the receiver for funds paid by or on the receiver's behalf to meet the payroll expenses and taxes." It is correct that the receivers in Colonial and Cedars sought authority to use the funds. That authority was not sought, however, before the payrolls were made and the emergency relieved. Just as in this case, the emergency was relieved by payment of the July payroll by a manager acting on the receiver's behalf. Here, rather than filing the type of motion for authority used in Cedar or Colonial, the receiver sought the court's approval as part of his accounting to the court after termination of the receivership. HCFP, however, argued that the procedure used by the receiver in Cedars and Colonial was improper and that the receiver should have used the very procedure he has used in these cases. Cedars at 807, Colonial at 802. There is no important factual distinction between these cases and Cedars and Colonial which the majority opinion now seeks to establish.
Nor does the writer agree that Cedars and Colonial were incorrectly decided. The receiver was bound by HCFP's security interest without regard to § 198.112(10). It was well established at common law that a receiver was bound to acknowledge pre-receivership security interests — i.e., he received the assets subject to the perfected security interest. What Section 198.112(10) does is limit the obligation of the receiver to honor leases, mortgages and secured transactions "to the extent of payments which become due or are for the use of the property during the period of receivership." (Emphasis added). Read in conjunction with § 198.115 it seems that the legislature was addressing the issue of sweetheart deals between the nursing home operator and a landlord, mortgage, etc., of the real and personal property used by the nursing home. Section 198.112(10) is directing the receiver to continue to pay for the use of real and personal property if not unconscionable under § 198.115, but only for post receivership use of the property.
In my view, the true issue herein is whether it is a violation of HCFP's security interest for the receiver to use secured Medicaid receivables for the month of July 1998 to pay the payroll ignored by the borrower. In my view, the action did not violate HCFP's security interest at least where there is no showing that the loan secured by the receivable was in default or otherwise would be inadequately secured. The receiver had, pursuant to RSMo 198.112(5)(8), the same authority to receive revenues and pay day-to-day expenses that the borrower had. Section 5 of Article 9 of the U.C.C. deals with the rights of the lender (HCFP) upon default. There is no evidence in the record that any of the nursing homes or Chartwell was in default at the time the receiver was appointed. In secured accounts receivable financing the lender, if the borrower is in default, notifies the borrower's account debtors, that the receivables have been assigned to the lender, and that future payments should be made to the lender. RSMo 400.9-502. There is no record of such a notification here. A receiver is a lien creditor. RSMo § 400.9-301(3). The Department of Social Services was within its rights to pay the July Medicaid reimbursement to the receiver in the absence of a notice of default and/or assignment by HCFP to the Department.
The majority has described the issue as one of priority of security interest. No such issue is yet presented in these cases. HCFP has no claim to immediate and superior right to the funds without a default. Moreover, it is well settled that the assignee of accounts receivable (HCFP) has no greater rights than the assignor (Chartwell) had at the time of the assignment. Centennial State Bank v. S.E.K. Construction Co., Inc., 518 S.W.2d 143, 147 (Mo.App. 1974). HCFP rights are also subject to any defenses or claims that the account debtor (Department of Social Services/Receiver) has against Chartwell. Carlund Corporation v. Crown Center Redevelopment, 849 S.W.2d 647, 650 (Mo.App. 1993); RSMo 410.9-318; Summers White, Uniform Comment book 34.5 (4th ed.); Edmiston v. J.C.J.-Medallion, Inc., 570 S.W.2d 306, 310 (Mo.App. 1978); Ralph Ewing Clark, A Treatise on the Law and Practice of Receivers, §§ 269, 354 (3rd ed. 1959).
HCFP had security interests for the loan in question in the receivables of nearly 30 other nursing homes in two states. There is no showing that use of 50 percent of the receivables to keep the nursing homes open for their residents impaired to any degree the security for its loan. The arrangement between HCFP and Chartwell was a financing by security interest. Chartwell had not been assigned, in a technical legal sense, the accounts receivable and a full assignment of Medicaid receivable might be in violation of federal law. 42 U.S.C. § 1396(a)(32).
The State has a strong interest in seeing that nursing home residents are safe and cared for and that the public monies (Medicaid benefits) be used for their care (including paychecks for the caretakers). At least where there is no showing that the nursing home borrower is in default and that there is no other adequate security for a loan, those public funds were properly used first for that purpose. I believe that was the statutory intent of the Omnibus Nursing Home Act and nothing done by the trial court has impaired or ignored HCFP's security interest. I would affirm the decision of the trial court.
DISSENT
I respectfully dissent. I concur in the majority's analysis of the law but disagree with its conclusion that the agreements in question are not unconscionable because the Receiver is seeking to reimburse the manager, which he had employed, for the advancement of the payroll. I concur with the portion of Judge Holliger's dissent in which he determines that an emergency continues to exist which causes the security agreements to be unconscionable, even though the payrolls have been paid by the receiver's manager.