U.S. BANKRUPTCY COURT 3 □□□□ NORTHERN DISTRICT OF CALIFORNIA □□□□ □□□□ Qs Gis 4 & 1 □□□□□□□□ The following constitutes the Memorandum Decision of the Court. Signed: February 23, 2021 3 4 LOY 6 7 RogerL.Efremsky = | U.S. Bankruptcy Judge 8 9 UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF CALIFORNIA 10 OAKLAND DIVISION RE Case No. 18-10665 RLE '2 SONOMA WEST MEDICAL CENTER, INC. Debtor, Chapter 7 14 1S AP NO. 19-01030 TIMOTHY W. HOFFMAN, Trustee Bankruptcy of the Estate of SONOMA 17 || WEST MEDICAL CENTER, INC., 18 Plaintiff, SONOMA SPECIALTY HOSPITAL, LLC, 29 || AMERICAN ADVANCED MANAGEMENT GROUP, INC., GURPREET SINGH, 21 Defendants. 22 73 MEMORANDUM DECISION FOLLOWING TRIAL ON THRESHOLD ISSUE 24 Before the court for decision is what has been described as the "Threshold Issue"; 25 || specifically, who owns the accounts receivable generated when the Debtor Sonoma West 26 Medical Center (the "Debtor") operated Palm Drive Hospital (the "Hospital") up to and through 27 September 8, 2018 (the "Pre-September 9, 2018 Receivables"). While there was much 28 AP NO. 19-01030 - 1
1 testimony and evidence presented during the course of the four-day trial, the court only need 2 look to two unambiguous contracts to determine that the Pre-September 9, 2018 Receivables 3 are owned by Debtor. 4 A. Procedural History 5 6 For purposes of this Memorandum Decision, the relevant procedural history is as 7 follows: 8 1. On August 20, 2019, Timothy W. Hoffman, Trustee of the Bankruptcy Estate of 9 Sonoma West Medical Center (the "Plaintiff") filed the above-entitled complaint commencing 10 this adversary proceeding (the “Complaint”). Docket #1. The Complaint names Sonoma 11 12 Specialty Hospital, LLC ("SSH"), Gurpreet Singh ("Singh"), and American Advanced 13 Management Group, Inc. ("AAMG") as defendants (collectively, "Defendants"). The 14 Complaint is based on Bankruptcy Code §542 and states three related and interdependent 15 claims for relief: (1) turnover of property of the estate (i.e., the Pre-September 9, 2018 16 Receivables); (2) an accounting for the Pre-September 9, 2018 Receivables collected and used 17 18 by Defendants; and (3) damages for conversion of property of the estate. 19 2. On October 9, 2019, Defendants filed their Answer (the "Answer") and SSH and 20 AAMG filed Counterclaims (the "Counterclaimants" and the "Counterclaims"). Docket #9. 21 The Answer contains one affirmative defense that the Pre-September 9, 2018 Receivables are 22 not property of the estate. The remaining five affirmative defenses (which are identical to the 23 24 allegations in the five Counterclaims) are all based on the premise that the Pre-September 9, 25 2018 Receivables are not property of the estate. 26 3. On October 14, 2019, Plaintiff filed his Answer to the Counterclaims. Docket 27 #10. 28 AP NO. 19-01030 - 2 1 4. On October 25, 2019, Defendants filed a Motion for Withdrawal of Reference. 2 Docket #25. Defendants asserted that withdrawal of the reference was appropriate because all 3 but one claim (i.e., the turnover cause of action) involve non-core issues on which SSH, Singh 4 and AAMG are entitled to a jury trial. 5 6 5. On December 20, 2019, Plaintiff filed a Stipulation for Dismissal of Complaint 7 as to AAMG and Singh. Docket #43. As a result of the Stipulation, SSH was the only 8 remaining Defendant and SSH and AAMG remained as Counterclaimants (collectively, 9 "SSH/AAMG"). 10 6. On January 16, 2020, this court issued a Recommendation Regarding Motion to 11 12 Withdraw Reference (the "Recommendation"). Docket #47. The Recommendation recognized 13 that permissive withdrawal was appropriate but recommended to the District Court that the 14 bankruptcy court be permitted to resolve the Threshold Issue. 15 7. On June 22, 2020, the Honorable Jeffrey S. White issued an Order Denying 16 Motion for Withdrawal of Reference Without Prejudice to Renewal. In addition to denying the 17 18 Motion for Withdrawal of Reference without prejudice, Judge White adopted the bankruptcy 19 court's recommendation that the bankruptcy court resolve the Threshold Issue.1 Docket #63. 20 / / / / 21 22 23 24 1 Defendants subsequently sought leave to file a Motion for Reconsideration, which was granted by the District Court. On August 5, 2020, the District Court entered an order denying the Motion for Reconsideration. 25 The District Court noted that Defendants "do not ask the Court to reverse its prior decision and grant the motion to withdraw the reference. Instead, they seek 'clarification' about whether the Bankruptcy Court can proceed by a 26 Zoom trial and whether it can proceed without resolving the question of whether they are entitled to a jury trial on the claims, counterclaims, and the Threshold issue." The District Court went on to find that: (1) the arguments 27 regarding the appropriateness of a Zoom trial were not the proper subject for a motion for reconsideration; and (2) this court had, in fact, engaged in an analysis of whether Defendants had a right to a jury trial and had concluded 28 they did not. Docket #86. AP NO. 19-01030 - 3 1 8. A trial was held on the Threshold Issue over a four-day period from August 18, 2 2020, through August 21, 2020. Post-trial briefs were filed on September 24, 2020. The 3 Threshold Issue is now ripe for determination. 4 B. Factual History 5 6 The facts underlying the current dispute are well-known to the parties and will not be 7 repeated in detail here. For purposes of this Memorandum Decision, the relevant facts are as 8 follows: 9 1. The Management and Staffing Services Agreement 10 On March 18, 2015, Debtor entered into a Management and Staffing Services 11 12 Agreement (the "MSSA") with the Palm Drive Healthcare District (the "District"). The MSSA 13 authorized Debtor to operate the Hospital on behalf of the District. Pl. Exh. 1, p. 4 ¶2.1. The 14 MSSA provided that for operating the Hospital, Debtor would be entitled to compensation 15 consisting of: (1) an annual subsidy of $1 million from tax revenues collected by the District; 16 and (2) a management fee, consisting of "pass through reimbursement from Hospital Revenue 17 18 of all of [Debtor's] direct and reasonable costs necessary to the provision of its management 19 services . . . under this Agreement" (the "MSSA Management Fee"). Pl. Exh. 1, pp. 9-10, ¶¶5.1 20 and 5.4. 21 The MSSA further defined "Hospital Revenue" (from which the MSSA Management 22 Fee would be paid) to mean and include: 23 24 (a) all gross revenue from the provision of any and all hospital services provided on or after the Commencement and during the term of the arrangement, determined on 25 an accrual basis in accordance with GAAP consistently applied; (b) any and all disproportionate share payments or credits from Medicare or Medicaid; (c) any and all 26 quality assurance and supplemental Medi-Cal payments made by the California 27 Department of Health Care Services to [the] District or [Debtor] after the Commencement Date. . . . and (h) any all [sic] revenue of any other type or any other 28 source related to the operation of the Hospital on and after the Commencement Date. AP NO. 19-01030 - 4 1 Pl. Exh. 1, p. 9, ¶5.2 (emphasis added). 2 3 The MSSA required Debtor to "assure that all Hospital Expenses incurred in connection 4 with the operation of the Hospital on or after the Commencement Date and during the term 5 of the Agreement are paid. . . from Hospital Revenue to the extent it is available to cover 6 Hospital Expenses[.]" Pl. Exh. 1, p. 9, ¶5.3 (emphasis added). 7 Section 8.1 provided that Debtor would operate the Hospital under the MSSA 8 9 commencing on March 18, 2015 and continuing "for a period of five (5) years, unless sooner 10 terminated as provided herein." Pl. Exh. 1, p. 12, ¶8.1. 11 Section 8.2 provided that both the District and Debtor had the ability to terminate the 12 MSSA for "cause." Pl. Exh. 1, p. 12, ¶8.2. The defined instances of "cause" ranged from a 13 simple default to intentional fraudulent acts. Pl. Exh. 1, p. 12-13, ¶¶8.2.1 - 8.2.2. The MSSA 14 15 also contained an integration clause which provided that the MSSA was the entire agreement 16 and that no amendments, changes or additions shall be binding unless made in writing and 17 signed by the parties. Pl. Exh. 1, p. 17, ¶12.5. 18 Debtor commenced operation of the Hospital pursuant to the MSSA sometime in the 19 Fall of 2015. Plaintiff's Post-Trial Brief, Docket #138, p. 8, line 1. 20 21 By the Summer of 2018, the District and Debtor had concluded that it was financially 22 impossible for Debtor to continue to operate the Hospital. Plaintiff's Post-Trial Brief, Docket 23 #138, p. 8, lines 10-11; Defendant's and Counterclaimants' Post-Trial Brief, Docket #139, p. 5, 24 lines 9-11. Thus, the District withheld the $1 million subsidy due to Debtor to cover operating 25 losses and terminated the MSSA pursuant to Section 8.2.1, citing Debtor's "inability to meet its 26 27 financial obligations to operate the [H]ospital" (the "Termination Letter"). Def. Exh. L; 28 Plaintiff's Post-Trial Brief, Docket #138, p. 8, lines 11-13. AP NO. 19-01030 - 5 1 Debtor operated the Hospital continuously from the Fall of 2015 until 11:59 p.m. on 2 September 8, 2018 ("Termination"). Plaintiff's Post-Trial Brief, Docket #138, p. 8, lines 1-3. 3 Upon Termination, Debtor had several million dollars in accrued and outstanding accounts 4 receivable for services rendered prior to 11:59 p.m. on September 8, 2018. Id. at p. 8, lines 3-4. 5 6 In addition, Debtor had several million dollars in accrued and outstanding accounts payable to 7 numerous creditors who had provided goods and services to Debtor and Debtor's patients prior 8 to September 8, 2018 at 11:59 p.m. Id. at p. 8, lines 5-7. 9 2. The Management Services Agreement 10 On or about August 26, 2018, the District entered into a Management Services 11 12 Agreement (the "MSA") with AAMG. Pl. Exh. 33, p. 1. The MSA specifically anticipated that 13 AAMG would promptly convert the Hospital to a Long-Term Acute Care Hospital2 and gave 14 AAMG the authority to take the steps to accomplish that goal. Pl. Exh. 33, p. 1, Introduction; 15 p. 2, ¶2.2. The MSA stated that this conversion was necessary for the Hospital's survival. Pl. 16 Exh. 33, p. 1, Introduction. The MSA further provided that the MSA was intended to be a 17 18 bridge to AAMG ultimately entering into an agreement with the District to acquire all or part of 19 the assets of the Hospital. Pl. Exh. 33, p. 1, Introduction; p. 6, ¶5.2; p. 8, ¶11. 20 The MSA provided that for operating the Hospital, AAMG would be entitled to a 21 Management Fee consisting of: (1) a fixed amount of $100,000 per month; and (2) the 22 commercially reasonable, and industry standard, fees, costs and expenses incurred by AAMG 23 24 25
27 2 See Pl. Exh. 3, p. 2 at ¶2.2(d) (AAMG shall "file for the change of licensure immediately following the 28 Effective Date and assist the District in attaining the change of ownership as quickly as possible.") AP NO. 19-01030 - 6 1 in the course of performing its services under the MSA (the "MSA Management Fee"). Pl. 2 Exh. 33, p. 6, ¶4.2. 3 Of particular note, the MSA provided, 4 The revenues, accounts receivable and all other government payments from all such 5 billings shall be property of the District. Those revenues, accounts receivable and 6 other government payments shall be used to pay the Management Fee of AAMG incurred in performing its obligations under this Agreement[.] 7 Pl. Exh. 33, p. 3, ¶2.6(a) (emphasis added). 8 9 While Debtor was not a party to the MSA, the MSA did provide that "[a]ll hospital 10 debts, contracted engagements, and legal obligations entered into prior to the Effective Date 11 will remain the sole responsibility of [Debtor, and] debts incurred on behalf of the Hospital by 12 AAMG following the Effective Date will be the responsibility of AAMG." Pl. Exh. 33, p. 2, 13 ¶2.5. The MSA had an integration clause which confirmed that the MSA was the entire 14 15 agreement and that no changes or additions to the MSA shall be recognized unless made in 16 writing and signed by the parties. Pl. Exh. 33, p. 10, ¶20. 17 Concurrently with the negotiations of the MSA, AAMG formed Defendant SSH, and 18 subsequently assigned all its rights and liabilities under the MSA to SSH. Plaintiff's Post-Trial 19 Brief, Docket #138, p. 9, lines 14-16. SSH took over operation of the Hospital under the MSA 20 21 on September 9, 2018, at 12:00 a.m. Id. at p. 9, lines 17-18. 22 3. The Pre-September 9, 2018 Receivables 23 While there is much dispute regarding the ownership of, and the rights to use, the Pre- 24 September 9, 2018 Receivables following the transfer of the Hospital management from Debtor 25 to SSH, the court believes it is uncontroverted that SSH collected an unknown number of Pre- 26 27 September 9, 2018 Receivables and used the funds from those receivables in its operation of 28 the Hospital. AP NO. 19-01030 - 7 1 4. The Parties' Arguments 2 Stripped of all the hyperbole, SSH/AAMG's basic argument is that SSH was entitled to 3 use the funds from collection of the Pre-September 9, 2018 Receivables because: 4 1/ The MSSA was terminated "for cause" and, as a result, Debtor was divested of any 5 6 further rights to the Pre-September 9, 2018 Receivables; 7 2/ Once the MSSA was terminated "for cause," the MSA became the "only operative 8 agreement," and the MSA permitted SSH to utilize the accounts receivable without 9 distinguishing between pre- and post-September 9, 2018 receivables; and 10 3/ In any event, Debtor did not prove it's ownership to the Pre-September 9, 2018 11 12 Receivables had accrued because Debtor failed to establish the provision of management 13 services (including the billing, collecting and paying vendors) that would give rise to an accrual 14 and provided no countervailing evidence to the District's termination of the MSSA "for cause." 15 Plaintiff's basic argument is that the Pre-September 9, 2018 Receivables are owned by 16 Debtor because: 17 18 1/ The MSSA's provision for Hospital Revenue to be determined on an accrual basis 19 means that Debtor's ownership right in the Pre-September 9, 2018 Receivables vested when 20 Debtor performed the services that gave rise to the Pre-September 9, 2018 Receivables; and 21 2/ There is no provision in the MSSA that divests Debtor of the accrued rights to the 22 Pre-September 9, 2018 Receivables in the event of termination or otherwise. 23 24 C. Contract Interpretation 25 The parties agree that the starting point for the court's analysis is the language of the 26 relevant contracts themselves. 27 28 AP NO. 19-01030 - 8 1 The fundamental rules of contract interpretation are based on the premise that the 2 interpretation of a contract must give effect to the "mutual intention" of the parties at the time 3 the contract is formed. Waller v. Truck Ins. Exch., Inc., 11 Cal.4th 1, 18, 44 Cal.Rptr.2d 370, 4 900 P.2d 619 (1995), as modified on denial of reh'g (Oct. 26, 1995) (citing Cal. Civ. Code 5 6 §1636). Such intent is to be inferred, if possible, solely from the written provisions of the 7 contract. Id. at 17 (citing Cal. Civ. Code §1639). "The 'clear and explicit’ meaning of these 8 provisions, interpreted in their ‘ordinary and popular sense,’ controls judicial interpretation 9 unless ‘used by the parties in a technical sense or a special meaning is given to them by 10 usage.’" Id. (citing Cal. Civ. Code §1644 and §1638) (other citations omitted). Language in a 11 12 contract must be interpreted as a whole, and in the circumstances of the case, and cannot be 13 found to be ambiguous in the abstract. Id. at 18 (citation omitted). Courts will not strain to 14 create an ambiguity where none exists. Id. (citation omitted). "Nor is '[t]he language of a 15 contract . . . made ambiguous simply because the parties urge different interpretations." Int'l. 16 Bhd. of Teamsters v. NASA Servs., Inc., 957 F.3d 1038, 1044 (9th Cir. 2020) (citation 17 18 omitted). 19 Where ambiguity does exist, extrinsic evidence may be received to clarify the intent of 20 the parties. Molybdenum Corp. of America v. Kasey, 176 Cal.App.2d 357, 363, 1 Cal.Rptr. 21 400 (Cal. Dist. Ct. App.1959) (citation omitted). "It is also well established, however, that if 22 upon a reading of the whole contract the portion of the contract under attack is clear and 23 24 explicit no extrinsic evidence will be received to vary its plain terms." Id. (citation omitted); 25 see also, Universal Sales Corp., Ltd. v. Cal. Press Mfg. Co., 20 Cal.2d 751, 760, 128 P.2d 665 26 (1942) ("The fundamental canon of construction which is applicable to contracts generally is 27 the ascertainment of the intention of the parties (Civ. Code §1636), and in accordance with 28 AP NO. 19-01030 - 9 1 section 1638 of the Civil Code, the language of the agreement, if clear and explicit and not 2 conducive to an absurd result, must govern its interpretation."); Spitser v. Kentwood Home 3 Guardians, 24 Cal.App.3d 215, 220, 100 Cal.Rptr. 798 (Cal. Ct. App. 1972) ("When the 4 language is clear and explicit, does not involve an absurdity (Civ. Code §1638) and no 5 6 ambiguity is shown, evidence of conduct is irrelevant. In other words, evidence to clarify an 7 ambiguity is not needed when no ambiguity is shown to exist."). 8 Here, both Plaintiff and SSH/AAMG agree that the relevant contracts are unambiguous 9 and therefore, extrinsic evidence is not required to resolve the Threshold Issue.3 The court 10 agrees.4 Thus, the next question is what are the "relevant contracts"? 11 12 1. The "Relevant Contracts" 13 Plaintiff and SSH/AAMG agree the MSSA and MSA are contracts to be interpreted by 14 this court. SSH/AAMG also urges the court to consider the Termination Letter5 and the post- 15 bankruptcy Medical Receivables Collection Agreement.6 The court finds that to the extent the 16 Termination Letter and the post-bankruptcy Medical Receivables Collection Agreement are 17 18 "contracts," they are irrelevant to the question at hand and therefore declines to consider them. 19 20 21 22 3 Plaintiff argues in the alternative - the contracts are unambiguous and no extrinsic evidence is necessary, but if the contracts are ambiguous, extrinsic evidence requires a finding in Plaintiff's favor. SSH/AAMG, on the 23 other hand, take a very strict position that the contracts are unambiguous and no extrinsic evidence is appropriate. In support of its position, SSH/AAMG asserted a running objection to the admission of all extrinsic evidence 24 presented at trial. 4 As a result, the court sustains SSH/AAMG's running objection to the admission of extrinsic evidence. 25 5 Def. Exh. L. 6 Def. Exh. D. SSH/AAMG's actual position on the appropriateness of the court's consideration of the 26 Medical Receivables Collection Agreement is inconsistent. First, they argue that it should be considered. See Defendant's and Counterclaimants' Post-Trial Brief, Docket #139, p. 12, lines 11-17. In the very next paragraph, 27 however, they argue that the Medical Receivables Collection Agreement should not be considered. Id. at p. 12, lines 18-22. The court's determination that the Medical Receivables Collection Agreement is irrelevant makes 28 analysis of these inconsistencies unnecessary. AP NO. 19-01030 - 10 1 California Civil Code defines a contract as "an agreement to do or not to do a certain 2 thing," and which creates an obligation. Cal. Civ. Code §1549 (West 2021); H. Liebes & Co. 3 v. Klengenberg, 23 F.2d 611, 612 (9th Cir. 1928). Under California law, the essential elements 4 of a contract are: (1) parties capable of contracting; (2) the parties' consent; (3) a lawful object; 5 6 and (4) sufficient consideration. Cal. Civ. Code §1550 (West 2021). 7 The Termination Letter is not a contract. It is not an agreement, it does not create an 8 obligation, there are no contracting parties and there is no consideration. The Termination 9 Letter is simply a notice to Debtor of the termination of the MSSA and the District's intent to 10 enter into the MSA. To the extent that SSH/AAMG relies on the Termination Letter to support 11 12 the contention that the MSSA was terminated "for cause," it is unnecessary, because, as noted 13 below, the terms of the MSSA itself are conclusive on this point. Thus, the court will not 14 consider it. 15 The Medical Receivables Collection Agreement is, in a vacuum, a contract. In the 16 context of this inquiry, however, it is nothing more than an unconsummated and nonbinding 17 18 agreement between Plaintiff and SSH regarding their respective interpretations of their 19 obligations and rights under the MSSA and the MSA on a going-forward basis. Because the 20 MSSA and the MSA are unambiguous, the Medical Receivables Collection Agreement is 21 unnecessary to the court's inquiry. Thus, the court will not consider it. 22 For the foregoing reasons, the court's analysis and interpretation of the "relevant 23 24 contracts" will only include the MSSA and the MSA. 25 2. The MSSA 26 The MSSA unambiguously vests ownership of the Pre-September 9, 2018 Receivables 27 with Debtor. 28 AP NO. 19-01030 - 11 1 Section 5.1 of the MSSA provides that in "consideration of the management services 2 provided by [Debtor, Debtor] shall receive pass through reimbursement from Hospital Revenue 3 of all of its direct and reasonable costs necessary to the provision of its management services to 4 the Hospital under this Agreement." Pl. Exh. 1, ¶5.1. "Hospital Revenue" is then defined as: 5 6 (a) all gross revenue from the provision of any and all hospital services provided on or after 7 the Commencement and during the term of the arrangement, determined on an accrual 8 basis in accordance with GAAP consistently applied; [and] (h) all revenue of any other type 9 or any other source related to the operation of the Hospital on and after the Commencement 10 Date. Pl. Exh. 1, ¶5.2 (emphasis added). 11 12 It is undisputed that the Pre-September 9, 2018 Receivables were necessarily for 13 "services provided" by Debtor "during the term" of the MSSA. Thus, the next question is what 14 "determined on an accrual basis in accordance with GAAP" means. 15 The accrual basis of accounting is in accordance with GAAP. Raj Gnanarajah, Cash 16 Versus Accrual Basis of Accounting: An Introduction, Congressional Research Service, 17 18 R43811, December 12, 2014 at p. 3. Under accrual basis of accounting, "revenue is recorded 19 when it is earned, and expenses are reported when they are incurred. In other words, under 20 accrual accounting, revenue and expenses are recognized regardless of when payment is 21 actually made or received." Id. at p. 1. For purposes of the Pre-September 9, 2018 22 Receivables, "from an asset perspective, an accrual is recorded when a service has been 23 24 performed or a product has been delivered. . . but the payment has not yet been received." Id. 25 at p. 3; see also, Nat'l. Med. Enters. v. Bowen, 851 F.2d 291, 292 (9th Cir. 1988) ("When 26 hospitals report their cost data they must use the accrual basis of accounting. 42 C.F.R. 27 §413.24(a). 'Under the accrual basis of accounting, revenue is reported in the period when it is 28 AP NO. 19-01030 - 12 1 earned, regardless of when it is collected, and expenses are reported in the period in which they 2 are incurred, regardless of when they are paid.'"). Thus, under the clear and unambiguous 3 language of the MSSA, any receivables for services provided during the term of the MSSA 4 (i.e., pre-September 9, 2018) are owned by Debtor. 5 6 The court's determination that Debtor owns the Pre-September 9, 2018 Receivables is 7 also supported by paragraph 5.3 of the MSSA and paragraph 2.5 of the MSA. 8 Paragraph 5.3 of the MSSA provides that Debtor "will assure that all Hospital Expenses 9 incurred in connection with the operation of the Hospital on or after the Commencement date 10 and during the term of the Agreement are paid. . . from Hospital Revenue." Pl. Exh. 1, p. 9, 11 12 ¶5.3. Similarly, paragraph 2.5 of the MSA provides that "All hospital debts. . . entered into 13 prior to the Effective Date will remain the sole responsibility of [Debtor]. … No debt incurred 14 prior to the Effective Date will be assumed by AAMG." Pl. Exh. 33, p. 2. ¶2.5. Under both 15 the MSSA and MSA, even if services or goods were provided to Debtor on the very last day 16 (i.e., September 8, 2018), and Debtor was not billed or invoiced until after September 8, 2018, 17 18 Debtor would still be responsible for those expenses. Both of these paragraphs are consistent 19 with the concept of accrual accounting, consistent with the Hospital Revenue being determined 20 on an accrual basis and support the court's determination that Debtor owns the Pre-September 21 9, 2018 Receivables. 22 The court also notes that the effect of interpreting the MSSA to find that SSH was 23 24 entitled to use the Pre-September 9, 2018 Receivables would be twofold. First, it would saddle 25 Debtor with all the debts incurred up to and through September 8, 2018, while preventing 26 Debtor from collecting the receivables for the services that created the debt. Second, it would 27 effectively leave Debtor's creditors in a no-man's land where Debtor could not pay its debts 28 AP NO. 19-01030 - 13 1 because access to receivables for the services that created the debts were cut off, while 2 relieving SSH of any requirement to use those receivables to pay the debts. It is patently 3 ridiculous that the District would have granted SSH the rights to use the receivables for 4 services rendered by Debtor, while at the same time providing that SSH did not have to use 5 6 those receivables to pay any of the debts created by those services. The court declines to 7 interpret the MSSA so punitively; especially when doing so requires the court to read the 8 MSSA in a manner that is inconsistent with its plain language. See Molybdenum Corp. of 9 America v. Kasey, 176 Cal.App.2d at 364 (citation omitted) ("Where a contract is susceptible 10 of two interpretations, one of which is reasonable and fair, and the other is unreasonable and 11 12 unfair, the latter interpretation must be rejected and the first accepted."). 13 3. The MSA 14 The plain language of the MSA similarly does not support SSH/AAMG's position that it 15 was entitled to use the Pre-September 9, 2018 Receivables. 16 Section 4.2 of the MSA provides, 17 18 AAMG's compensation for the services rendered pursuant to [the MSA] shall be a fixed amount of $100,000 per month plus the commercially reasonable, and industry 19 standard, fees, costs and expenses incurred by AAMG in the course of performing its services under this Agreement ("Management Fee"). 20
21 Pl. Exh. 33 at p. 6, ¶4.2. 22 SSH/AAMG relies on Section 2.6 for the proposition that the District gave SSH the 23 right to use the Pre-September 9, 2018 Receivables to pay the Management Fee. Section 2.6 24 says no such thing. The first sentence of section 2.6 simply relegates SSH to the role of billing 25 26 27 28 AP NO. 19-01030 - 14 1 agent.7 The next sentence specifically states that "[t]he revenues, accounts receivables and all 2 other government payments from all such billings shall be property of the District." Pl. Exh. 3 33 at p. 6, ¶4.2(a) (emphasis added). The final sentence of section 2.6 provides, "Those 4 revenues, accounts receivable and other government payments shall be used to pay the 5 6 Management Fee of AAMG incurred in performing its obligations under this Agreement in 7 accordance with section 4 below." SSH/AAMG argues that section 2.6 makes no distinction 8 between pre- or post-September 9, 2018 accounts receivable, thus SSH was entitled to use all 9 the receivables. Once again, in a vacuum, this may be true. But it ignores entirely the MSSA 10 and the fact that the District could not assign the rights to use the Pre-September 9, 2018 11 12 Receivables to SSH because Debtor already owned them. 13 4. Termination of the MSSA did Not Terminate Rights Already Accrued under 14 the MSSA 15 SSH/AAMG, in an apparent attempt to avoid the plain language of the MSSA and the 16 lack of any helpful plain language in the MSA, next advances the novel argument that even if 17 18 there were accrual of the Pre-September 9, 2018 Receivables, once the MSSA was terminated, 19 the MSA became the "only operative agreement," and any rights and obligations associated 20 with the MSSA (including the accrued rights to the Pre-September 9, 2018 Receivables) were 21 also terminated. This argument is also without merit. 22 As an initial matter, SSH/AAMG repeatedly asserts that the MSSA was terminated "for 23 24 cause," in an apparent attempt to imply that Debtor's malfeasance caused the termination and, 25
27 7 "AAMG shall serve as the billing and collection agent of the Hospital for all Services and supplies 28 provided by Hospital to the patients of the Hospital." Pl. Exh. 33, p. 3, ¶2.6(a). AP NO. 19-01030 - 15 1 as a result, Debtor should be punished with divestiture of its ownership of the accrued Pre- 2 September 9, 2018 Receivables. This argument is unpersuasive. 3 The MSSA provided for termination in three different ways: (1) termination by 4 expiration of the agreement; (2) termination upon transfer of the Hospital License to Debtor; or 5 6 (3) termination for "cause." Pl. Exh. 1, pp. 12-13, ¶8.2-8.3. When the MSSA terminated, it 7 had not expired, nor had the Hospital License been transferred to Debtor. Thus, the MSSA was 8 necessarily terminated "for cause." While SSH/AAMG's use of the term "for cause" is intended 9 to be inflammatory, in the context of the MSSA, it is rather unextraordinary. Specifically, 10 section 8.2 provides that either the District or the Debtor could terminate the MSSA "for 11 12 cause." Pl. Exh. 1, p. 12, ¶ 5.2. Review of the section further reveals that the instances of 13 cause ranged from simple inability to perform, to fraud. Id. Thus, the fact that the MSSA was 14 terminated "for cause," in and of itself, is of little import. 15 In addition, SSH/AAMG's pejorative use of the term "for cause" and the related 16 implication that Debtor's malfeasance was to blame for the termination of the MSSA also 17 18 ignores the fact that the Hospital, operating as an acute care hospital, had struggled to be 19 profitable for years. Palm Drive Health Care District filed bankruptcies in 2007 and 2014 20 while running the Hospital. See, In re Palm Drive Healthcare District, Bankruptcy Case No. 21 07-103880-AJ and In re Palm Drive Health Care District, Bankruptcy Case No. 14-10510-CN. 22 Debtor then unsuccessfully attempted to bring the Hospital to profitability, ultimately filing the 23 24 underlying bankruptcy in 2018. Importantly, in apparent recognition that the Hospital would 25 never be sustainable as an acute care hospital, SSH was brought in, not to run the Hospital as- 26 is, but to turn the facility into a Long-Term Acute Care Hospital, and to do so as quickly as 27 possible, See Pl. Exh. 33, p. 1 ("WHEREAS, THE DISTRICT recognizes that a reorganization 28 AP NO. 19-01030 - 16 1 of services offered in the Hospital is necessary for its ongoing survival) (emphasis added); 2 ("WHEREAS, AAMG. . . is willing to provide its experience, skills and staff to facilitate the 3 hospital's reorganization, reclassification, and subsequent management pending a transfer of 4 ownership for the hospital's license, and assets to AAMG."); ("WHEREAS, AAMG wishes to 5 6 convert the Hospital's federal status to that of a Long-term Acute Care Hospital[.]"); and p. 2, 7 ¶2.2(d) ("AAMG [to] file for the change of licensure immediately following the Effective Date 8 and assist the District in attaining the change of ownership as quickly as possible.") (emphasis 9 added). As a result, SSH/AAMG's insistence that termination of the MSSA "for cause" equates 10 to Debtor malfeasance and should result in termination of Debtor's accrued rights to ownership 11 12 of the Pre-September 9, 2018 Receivables under the MSSA is unavailing. 13 Assuming for the sake of argument that Defendants were correct, and Debtor's 14 malfeasance caused the termination of the MSSA, there is still no basis to find that Debtor was 15 divested of its accrued ownership rights to the Pre-September 9, 2018 Receivables. 16 First and most importantly, the MSSA contains no provision that explicitly or implicitly 17 18 provides that Debtor would be divested of its rights to accrued receivables upon termination of 19 the MSSA for cause or otherwise. If the District had intended to divest Debtor of the rights to 20 accrued receivables in the event of a termination "for cause" or in any other specified event, it 21 certainly could have (and presumably would have) said so in the MSSA itself. It did not. As 22 the MSSA contains an integration clause, and the MSSA was never amended, there is no basis 23 24 to infer such a provision. 25 Second, California law does not support SSH/AAMG's argument. California Civil 26 Code section 3300 provides, "For the breach of an obligation arising from contract, the measure 27 of damages . . . is the amount which will compensate the party aggrieved for all the detriment 28 AP NO. 19-01030 - 17 1 proximately caused thereby, or which, in the ordinary course of things, would be likely to result 2 therefrom." Cal. Civ. Code §3300 (West 2021); see also, Maxwell v. Dolezal, 231 Cal.App.4th 3 93, 97-98, 179 Cal.Rptr.3d 807 (Cal. Ct. App. 2014) (to establish a cause of action for breach 4 of contract, plaintiff must plead and prove: (1) existence of a contract; (2) plaintiff's 5 6 performance or non-performance; (3) defendant's breach; and (4) resulting damages to the 7 plaintiff); Bramalea California, Inc. v. Reliable Interiors, Inc., 119 Cal.App.4th 468, 473, 14 8 Cal.Rptr.3rd 302 (Cal. Ct. App. 2004) (a breach of contract is not actionable without damages). 9 Thus, under California law, upon breach and termination of the MSSA, the District would 10 simply have a claim for damages against Debtor. The District would then have to file a lawsuit 11 12 against Debtor and obtain a judgment based on actual harm sustained. The District obtained no 13 such judgment.8 Even if the District had obtained a judgment, there is nothing in the MSA to 14 support the next required logical step - that the judgment became SSH's to enforce or that the 15 Pre-September 9, 2018 Receivables became SSH's to use. There is also nothing in the MSA 16 that granted SSH the standing to pursue the District's rights under the MSSA in the event the 17 18 District elected not to. 19 Finally, SSH/AAMG asserts that under contract law, termination of a contract 20 discharges any executory obligations. Defendant's and Counterclaimants' Post-Trial Brief, 21 Docket #139, p. 17, lines 19-25. The court agrees with SSH/AAMG's recitation of the law on 22 23
25 8 That the District did not obtain a judgment against Debtor also undercuts SSH/AAMG's contention that 26 the Pre-September 9, 2018 Receivables did not "accrue" because Debtor failed to provide the "management services" required under the MSSA (including billing and collecting and paying vendors). Surely if Debtor had 27 materially breached the MSSA sufficient to disallow payment, the District would have pursued its rights against Debtor. The fact that it did not speaks volumes. In any event, SSH/AAMG's simply saying that Debtor did not 28 provide "management services" is not sufficient to make it so. AP NO. 19-01030 - 18 1 this limited point. SSH/AAMG then goes on to assert that Debtor's ownership rights to the Pre- 2 September 9, 2018 Receivables are executory and therefore discharged because: (1) there was 3 no evidence that Debtor had provided sufficient management services prior to termination; and 4 (2) there were no services to provide once the MSSA was terminated. Id. at 17-18. The latter 5 6 point is not in dispute as Debtor does not seek any receivables that post-date September 8, 7 2018. As stated previously, however, SSH/AAMG is simply wrong on the former point. 8 Under the plain language of the MSSA and principles of accrual accounting, the Pre-September 9 9, 2018 Receivables accrued when the services were performed. Thus, the fact that the Pre- 10 September 9, 2018 Receivables were for services provided by Debtor during the term of the 11 12 MSSA is conclusive on the issue of when they accrued. Further, the sufficiency of Debtor's 13 services is not for SSH/AAMG to determine. It was squarely and solely in the District's 14 purview to pursue Debtor for any perceived deficiencies in its performance under the MSSA. It 15 did not. 16 Thus, the actual legal question is: what is the effect of contract termination on 17 18 obligations that have already accrued? The answer to that question lies in the very same legal 19 authorities cited by SSH/AAMG and is the exact opposite of the answer asserted by 20 SSH/AAMG. 21 In Grant v. Aerodraulics Co., 91 Cal.App.2nd 68, 204 P.2d 683 (Cal. Dist. Ct. App. 22 1949), a dispute arose out of a licensing agreement that gave the defendant licensee the option 23 24 to terminate the agreement in certain events. Id. at 70. Defendant terminated the agreement 25 and plaintiff sued. Id. The lower court cancelled the contract and awarded plaintiff $7,000 in 26 accrued and unpaid royalties. Defendant appealed the monetary award. Id. The appellate 27 court analyzed the cancellation provisions of the contract to determine if they were intended to 28 AP NO. 19-01030 - 19 1 operate retrospectively, thereby relieving defendant of the obligation to pay the accrued 2 royalties. Id. at 72. The court stated, 3 [W]e nevertheless cannot give a construction to paragraph 13 which would allow the 4 defendant to escape liability for a minimum royalty that had already accrued. The words "terminate," "revoke" and "cancel," as used in the context of paragraph 13 in 5 reference to the written agreement, all have the same meaning, namely the abrogation of 6 so much of the contract as might remain executory at the time notice is given, and must be sharply distinguished from the word "rescind," which appears nowhere in the 7 paragraph, and which conveys a retroactive effect, meaning to restore the parties to their former position (citations omitted). According to the settled rule of construction "the 8 exercise of an option to terminate prevents liability for further transactions but 9 does not affect obligations which have already accrued."
10 Id. at 72-73 (citations omitted) (emphasis added). 11 Similarly, Witkin states, "On 'termination' all obligations which are still executory on 12 both sides are discharged but any right based on prior. . . performance survives." 1 Witkin, 13 Summary of California Law (11th), Contracts §955. 14 15 Applying these authorities, it is incontrovertible that Debtor's ownership rights to the 16 Pre-September 9, 2018 Receivables, which accrued when the services were performed (i.e., 17 pre-September 9, 2018), survived termination of the MSSA. 18 D. Conclusion 19 For all of the above reasons, the court finds that the Pre-September 9, 2018 Receivables 20 21 accrued during the term of the MSSA and therefore, are owned by Debtor. A separate order 22 shall issue. 23 *** END OF MEMORANDUM DECISION *** 24
25 26 27 28 AP NO. 19-01030 - 20 1 Court Service List 2 No Court Service Required 3
4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 AP NO. 19-01030 - 21