Hoffman v. Sonoma Specialty Hospital, LLC

Opinion

U.S. BANKRUPTCY COURT ae, NORTHERN DISTRICT OF CALIFORNIA a □□□

2 The following constitutes the Memorandum Decision|of the Court. Signed: October 22, 2021 3 4 5 fo Vawt 6 DP 7 RogerL.Efremsky U.S. Bankruptcy Judge 8 9 10 UNITED STATES BANKRUPTCY COURT 11 NORTHERN DISTRICT OF CALIFORNIA 12 13 14 || IN RE 15 || SONOMA WEST MEDICAL CENTER, INC., Case No. 18-10665 RLE 16 Debtor. Chapter 7 17 18 || TIMOTHY W. HOFFMAN, Trustee, Adversary Proceeding 19 Plaintiff, No. 19-1030 20

22 | SONOMA SPECIALTY HOSPITAL, LLC, 23 Defendant. 24 25 MEMORANDUM DECISION REGARDING PLAINTIFF’S DAMAGES 26 || I. Introduction 27 The court bifurcated the issues in this case in order to 28 || first hold a trial on the Threshold Issue - ownership of the pre- -l-

1 September 9, 2018 receivables (the “Receivables”). In August 2 2020, the court held a four-day trial on the Threshold Issue. In 3 February 2021, the court issued its decision on the Threshold 4 Issue in which it concluded that the Receivables were property of 5 the Debtor’s estate (the “Decision”). AP Dkt. No. 140. 6 The court now rules on the remaining issue in this Adversary 7 Proceeding: the amount Defendant owes to Plaintiff, the Trustee, 8 for the Receivables Defendant wrongfully appropriated. 9 These are the court’s findings of fact and conclusions of 10 law under Bankruptcy Rule 7052. For the reasons explained below, 11 the court now finds and concludes that Defendant owes Plaintiff 12 $2,134,576 for the Receivables, plus pre-judgment interest and 13 costs. 14 II. Jurisdiction 15 The court has jurisdiction under 28 U.S.C. §1334 and the 16 District Court’s General Order 24. Under 28 U.S.C. §157(b)(1), 17 bankruptcy judges may hear and determine all cases under title 11 18 and all core proceedings arising under title 11, or arising in a 19 case under title 11, and may enter appropriate orders and 20 judgments subject to review under 28 U.S.C. §158. 21 The Complaint alleges three claims for relief: turnover, 22 accounting, and conversion. It alleges the Adversary Proceeding 23 is a core proceeding under 28 U.S.C. §157(b)(2)(A) 24 (administration of the estate), (E) (orders to turn over property 25 of the estate), and (O) (other proceedings affecting the 26 liquidation of assets of the estate). AP Dkt. No. 1, ¶4. The 27 Answer admits the Complaint’s turnover claim is core under 28 -2- 1 §157(b)(2)(E). AP Dkt. No. 9, ¶4. 2 The court finds that the gravamen of the accounting and 3 conversion claims is the same as the turnover claim such that 4 they may also be construed as core under §157(b)(2)(E). If they 5 are not construed as core, the accounting and conversion claims 6 fit within §157(b)(2)(C) as counterclaims by the estate against 7 parties filing claims against the estate because Defendant filed 8 a request for payment of an administrative expense claim (the 9 “Request”) arising from the same facts alleged in the Complaint. 10 Main Case Dkt. Nos. 63-66. When the Trustee opposed the Request, 11 Defendant responded that the Trustee’s opposition should be 12 viewed as a counterclaim by the Trustee. Main Case Dkt. No. 80. 13 Based on the foregoing, the court finds that this entire 14 Adversary Proceeding is either a core proceeding under 28 U.S.C. 15 §157(b)(2)(C), as a counterclaim by the estate against persons 16 filing claims against the estate, or as a request for turnover 17 under §157(b)(2)(E). As such, this court may enter a final 18 judgment in this Adversary Proceeding. 19 In the alternative, if the accounting and conversion claims 20 are not deemed core under §157(b)(2)(C) or (E), by filing the 21 Request, Defendant consented to this court entering a final 22 judgment. See Wellness Int’l Network v. Sharif, 575 U.S. 665 23 (2015) (bankruptcy courts may hear and determine non-core 24 proceedings and enter appropriate orders and judgments with the 25 consent of all parties). 26 If the District Court disagrees with this interpretation, 27 these are the court’s proposed findings of fact and conclusions 28 of law and recommendation to the District Court under §157(c)(1). -3- 1 III. Background 2 The parties are familiar with the background in this case 3 and certain facts are repeated here only to provide context. The 4 court incorporates by reference the Decision and the Memorandum 5 Decision dismissing Defendant’s Counterclaim. AP Dkt. Nos. 140 6 and 218. To the extent necessary, the court also takes judicial 7 notice of certain documents filed in connection with the trial on 8 the Threshold Issue. 9 A. The Parties’ Relationships with the District 10 The Palm Drive Healthcare District (the “District”), a 11 debtor in chapter 9 case no. 14-10510, owned what was known as 12 the Palm Drive Hospital in Sebastopol, California (the 13 “Hospital”). In 2015, the Debtor began to operate the Hospital 14 pursuant to the terms of the Management and Staffing Services 15 Agreement with the District (the “MSSA”). Pl. Ex. 1. The District 16 terminated the MSSA as of midnight on September 8, 2018. At that 17 point, Defendant Sonoma Specialty Hospital took over operation of 18 the Hospital pursuant to the terms of its agreement with the 19 District, the Management Services Agreement (the “MSA”). Def. Ex. 20 C. 21 The MSA made Defendant the agent for the District in billing 22 and collecting receivables generated during Defendant’s operation 23 of the Hospital but the District retained ownership of them. MSA 24 ¶2.6. Defendant, through its parent American Advanced Management 25 Group (“AAMG”), had an option to purchase the Hospital which it 26 later exercised. Ch. 9 Dkt. No. 481, Disclosure Statement, p. 33. 27 At the end of 2019 it consummated the purchase with an effective 28 date of April 2019. MSA ¶11; Def. Ex. LL, term sheet for sale of Damages -4- 1 Hospital; AP Dkt. No. 90, Gia Smith Dec., ¶3; AP Dkt. No. 93, 2 Salas Dec., ¶7, Ex. X, Defendant’s business plan. 3 On September 26, 2018, Debtor filed this chapter 7 case as a 4 skeletal filing. That is, it was filed without the required 5 schedules and statement of financial affairs. Upon his 6 appointment as Trustee, Timothy Hoffman began investigating 7 Debtor’s assets and liabilities as he is duty-bound to do by 8 Bankruptcy Code §704. Over the course of the next few weeks, he 9 learned that Debtor’s assets included certain inventory and 10 equipment at the Hospital and certain accrued Receivables. 11 Hoffman Trial Testimony, Day 1, p. 23-36. 12 B. Bank Accounts and Tentative Agreement 13 During the time period that the Debtor operated the 14 Hospital, it had an account at Regions Bank for the deposit of 15 its funds from the U.S. Center for Medicare and Medicaid Services 16 (the “DDA Account”). These accounts are highly regulated and take 17 time to obtain. When Defendant took over operating the Hospital, 18 it had not yet obtained its own such account. Because of this, 19 Defendant began using Debtor’s DDA Account without the Trustee’s 20 knowledge or consent. Sometime in October 2018, Regions Bank 21 froze the DDA Account due to its concern over Defendant’s use of 22 it. Hoffman Trial Testimony, Day 1, p. 27-31; p. 36-37. 23 At an initial meeting on October 18, 2018 with Gia Smith, 24 then CEO of both Defendant and the Hospital, and representatives 25 of the District, the Trustee learned that Defendant was 26 depositing its funds into the DDA Account. At this meeting, 27 Defendant - through Gia Smith - claimed it had an immediate need 28 to access co-mingled funds in this DDA Account to meet its Damages -5- 1 payroll. Hoffman Trial Testimony, Day 1, p. 27-28. The Trustee 2 testified that both Defendant and the District told him that most 3 of the money in this account belonged to Defendant. 1 Hoffman 4 Trial Testimony, Day 1, p. 27. 5 At the time of this initial meeting, the Trustee did not 6 have bank statements or any way to verify the accuracy of these 7 representations. As a result, based on their representations, he 8 agreed that Defendant could make use of the funds in the DDA 9 Account which he later learned was approximately $325,000. 10 Hoffman Trial Testimony, Day 1, p. 44. Following this meeting, 11 the District transferred $150,000 to the Trustee - the amount the 12 District and the Defendant said was the estate’s money. Hoffman 13 Trial Testimony, Day 1, p. 29. 14 The Trustee also testified that he was not making a gift of 15 these funds to Defendant as this would have been illegal. Hoffman 16 Trial Testimony, Day 1, p. 29. Gia Smith agreed the use of these 17 funds was not a gift and she was never told Defendant could keep 18 these funds. Smith Trial Testimony, Day 2, p. 45. At this October 19 meeting, Gia Smith also proposed that Defendant collect the 20 Receivables in exchange for a fee. 21 22 1 Gia Smith denied saying this but admitted that these funds 23 were generated from services provided by the Debtor while it ran the Hospital. She also testified that all funds “belonged to the 24 District” and that “Sonoma West would be the District.” Smith Trial Testimony, Day 2, p. 34:22-25. To be clear, Sonoma West was 25 the Debtor and not the District. The witness appeared to be 26 intentionally conflating the names of the entities to fuel Defendant’s claim to the Receivables despite the fact that under 27 the MSSA, the Debtor owned them, not the District. The court found Gia Smith’s testimony of dubious credibility and gives it 28 little weight. Damages -6- 1 Because the Trustee had no ability to undertake collection 2 himself, he tentatively agreed to this idea through which 3 Defendant would do the collecting, provide periodic accountings, 4 and turnover collected money to the Trustee, retaining 60% - 70% 5 of what it collected as its fee. Hoffman Trial Testimony, Day 1, 6 p. 30. 7 The Trustee’s counsel then sent a draft of a medical 8 receivables collection agreement (the “MRCA”) to Defendant. Def 9 Ex. D. This agreement was never consummated, due to Defendant’s 10 lengthy delay in signing and returning it, and Defendant’s 11 failure to undertake the reporting and payment obligations it had 12 ostensibly agreed to. Hoffman Trial Testimony, Day 1, p. 67:10- 13 19. 14 C. Fall 2018 to Spring 2019 15 From the Fall of 2018 until February 2019, Gia Smith told 16 the Trustee that it was impossible to differentiate between the 17 Receivables generated by the Debtor before September 9 and those 18 generated during Defendant’s operation of the Hospital due to the 19 record keeping of third party billing and coding service 20 provider, TruBridge, LLC/Computer Programs and Systems, Inc. 21 (“TruBridge”). Hoffman Trial Testimony, Day 1, p. 67:10-19. 22 Because the Trustee had no access to the relevant business 23 records, he necessarily accepted this description of the state of 24 the records. Hoffman Trial Testimony, Day 1, p. 30. However, he 25 also began to suspect that the situation was not as Defendant’s 26 representatives had described. 27 In February 2019, the Trustee obtained a Bankruptcy Rule 28 2004 Exam Order regarding TruBridge. Main Case Dkt. No. 35. Damages -7- 1 Through this discovery, the Trustee learned that Gia Smith’s 2 representation regarding the inability to differentiate between 3 pre-September 9 and post-September 9 receivables was patently 4 untrue. “[W]e found out from TruBridge that we weren’t being told 5 the truth.” Hoffman Trial Testimony, Day 1, p. 67. 6 In April 2019, at the request of Regions Bank, the Trustee 7 sought an order compelling turnover of the funds in the Regions 8 Bank account. Over Defendant’s objection, the Trustee obtained an 9 order compelling Regions Bank to turnover all funds in the DDA 10 Account. Main Case Dkt. No. 50. The Trustee then received 11 $322,228 from Regions Bank and has held this pending resolution 12 of the dispute over ownership of the Receivables. 13 D. The Trustee’s Settlement with the District 14 On May 6, 2019, the Trustee filed a request for payment of a 15 $4.8 million administrative claim in the District’s Chapter 9 16 case based on certain provisions of the MSSA. Ch. 9 Dkt. No. 503; 17 Pl. Ex. 60. The $4.8 million total in the administrative claim 18 was made up of $1 million for a tax reimbursement; $1.135 million 19 in furniture, fixtures and equipment at the Hospital; $614,056 in 20 inventory located at the Hospital; and $2.1 million in 21 Receivables. 22 The District objected to the allowance of this 23 administrative claim. In May 2019, the Trustee and the District 24 reached a compromise settling their dispute (the “Ch. 9 25 Settlement” and the “Ch. 9 Settlement Agreement”). Pl. Ex. 25. 26 The Ch. 9 Settlement was approved and made part of the Chapter 9 27 confirmation order entered in June 2019. Ch. 9 Dkt. No. 544; Def. 28 Ex. K. Damages -8- 1 The Ch. 9 Settlement called for the payment by the District 2 of $500,000, and specifically excluded from its scope any issues 3 regarding the ownership of the Receivables. 4 Recital G of the Ch. 9 Settlement Agreement provided: 5 The [T]rustee contends that certain sums and/or property are due the [Debtor’s] estate from the [D]istrict pursuant to 6 the MSSA, and that [Defendant] has misappropriated accounts receivable belonging to the [Debtor’s] estate in an amount 7 not less than $2,445,166 and that the [D]istrict is jointly and severally liable for any claims held by the [Debtor’s] 8 estate against [Defendant]. The [D]istrict denies the allegations of the chapter 9 administrative claim, asserts 9 various affirmative defenses, and denies it has any liability to the [Debtor’s] estate whatsoever. 10 Pl. Ex. 25, p. 2. 11 The Ch. 9 Settlement Agreement also provided for mutual 12 general releases as between the District and the Trustee. It then 13 specifically provided that this $500,000 payment excluded both 14 Defendant and the Receivables from this release. It defined 15 Defendant as one of the “excluded parties” with respect to the 16 mutual release between the District and the Trustee and stated as 17 follows: 18 The [T]rustee shall have the exclusive right to assert, 19 commence, prosecute and recover any and all claims against the excluded parties arising out of the alleged use and/or 20 misappropriation of the [Debtor’s] accounts receivable. 21 Pl. Ex. 25, p. 4. 22 In July 2019, the Trustee filed his motion pursuant to 23 Bankruptcy Rule 9019 to obtain this court’s approval of the Ch. 9 24 Settlement. Main Case Dkt. No. 59. The court entered its order 25 approving the Ch. 9 Settlement on August 20, 2019. Main Case Dkt. 26 No. 72. 27 // 28 Damages -9- 1 E. Defendant’s Administrative Expense Claim Request 2 While approval of the Ch. 9 Settlement was pending in this 3 court, on August 7, 2019, Defendant filed its Request. The 4 Request was based, inter alia, on Defendant’s theory that the 5 Trustee had tortiously interfered with the collection of 6 Defendant’s receivables and therefore Defendant should be 7 compensated based on a “quantum meruit or benefit basis” measured 8 by the MRCA’s 60% - 70% of the Receivables. Main Case Dkt. Nos. 9 63-66. 10 Defendant’s reply to the Trustee’s opposition to the Request 11 argued that the Trustee’s opposition should be treated as a 12 counterclaim and that the Trustee should dismiss the Complaint. 13 Main Case Dkt. No. 80. Because the factual and legal issues 14 raised by the Complaint and the Request overlapped, the court 15 denied the Request and adopted Defendant’s suggestion that all of 16 the issues be resolved in the context of the Adversary 17 Proceeding. 18 F. The Adversary Proceeding 19 The Complaint states three claims for relief. AP Dkt. No. 1. 20 The first claim is based on Bankruptcy Code §541(a) and §542 and 21 seeks turnover of the Receivables as property of the estate.2 The 22 23 2 Under §541(a)(1), the commencement of a case creates an 24 estate comprised of all legal or equitable interests of the debtor in property. Pursuant to §542(a), an entity in possession 25 of property that the trustee may use, shall deliver it to the trustee, and account for it. Section 542(b) provides that an 26 entity that owes a debt that is property of the estate shall pay 27 such debt to the trustee, except to the extent that such debt may be offset under §553 against a claim against the debtor. 28 Damages -10- 1 second claim alleges that because Defendant used the Debtor’s DDA 2 Account, funds belonging to the estate were co-mingled with 3 Defendant’s funds thus giving rise to the right to an 4 interlocutory judgment for an accounting and a final money 5 judgment according to proof. The third claim alleges that 6 Defendant is liable to Plaintiff for damages arising from its 7 conversion of property of the estate. 8 The Answer generally denies the key allegations of the 9 Complaint, and asserts that Defendant - through its relationship 10 with the District - owned or had the exclusive right to use the 11 Receivables. AP Dkt. No. 9, ¶24 (Receivables are owned by 12 Defendant); ¶37 (Defendant had and has all right, title, and 13 interest in Receivables). The affirmative defenses focus on 14 allegations that the Trustee’s fraud - in claiming to own the 15 Receivables - or gross negligence, defeat his right to relief. 16 Defendant also filed a Counterclaim which essentially restated 17 the allegations of the affirmative defenses. 18 For purposes of the present ruling, the court notes that 19 neither the Answer nor the Counterclaim assert any affirmative 20 defenses or claims based on setoff, recoupment, payment, waiver, 21 quantum meruit, or estoppel; nor do they raise in any manner any 22 other theory that would serve to mitigate, reduce or eliminate 23 Plaintiff’s damages. Finally, Defendant did not articulate a 24 defense based on the Trustee having unclean hands. 25 G. The First Phase of the Trial 26 The court held a four-day trial to determine the Threshold 27 Issue. In the Decision, the court concluded that the Receivables 28 are property of the Trustee’s estate based on the language of the Damages -11- 1 MSSA and the accrual accounting principles explained in the 2 Decision. AP Dkt. No. 140. 3 H. The Damages Phase of the Trial 4 This phase of the trial focused on the amount of Plaintiff’s 5 damages arising from Defendant’s refusal to return the 6 Receivables. Plaintiff’s expert witness Austin Wade examined 7 relevant bank statements, Defendant’s own records, and TruBridge 8 documents and concluded that $1,769,286 was the principal amount 9 of the Receivables collected and withheld by Defendant. Pl. Ex. 10 58, Wade Report. He added to this (1) the $325,263 in the Regions 11 Bank DDA Account as of September 9, 2018; (2) the $40,027 in the 12 Exchange Bank account as of September 9, 2018; and (3) $14,922 13 subsequently collected by Defendant. He then deducted the 14 $150,000 paid to the Trustee in November 2018 and the $322,229 15 turned over by Regions Bank in response to the turnover order, 16 for a total of $2,134,576. Pl. Ex. 58. Plaintiff also claims pre- 17 judgment interest at 7% and costs. Pl. Ex. 59, Wade interest 18 calculation. 19 Defendant concedes that $1,769,286 is the starting point for 20 the calculation of Plaintiff’s damages. AP Dkt. No. 243, 21 Defendant’s Post-Trial Brief. However, Defendant argues that (1) 22 the funds in the two bank accounts should not be added; (2) it is 23 entitled to a $500,000 credit for the Ch. 9 Settlement; (3) it is 24 entitled to a reduction of some $554,545 based on its billing and 25 collection costs under various theories; and (4) Plaintiff is not 26 entitled to pre-judgment interest. Plaintiff disputes each of 27 these points. AP Dkt. No. 242, Plaintiff’s Post-Trial Brief. 28 Damages -12- 1 IV. Discussion 2 A. Plaintiff has Viable Claims for Relief 3 Defendant’s Post-Trial Brief argues that Plaintiff has no 4 viable claims to pursue and thus cannot recover damages. AP Dkt. 5 No. 243, p. 13-15. These arguments have no merit.3 6 First, Defendant argues the accounting claim fails because 7 accounting is a remedy not a claim and may only be used where a 8 legal action demanding a fixed sum is impracticable, citing Civic 9 Western Corp. v. Zila Industries, Inc., 66 Cal. App.3d 1 (1977). 10 Civic Western does not support Defendant’s argument. It merely 11 provides a definition of when an accounting cause of action may 12 be appropriate under California law and concludes that the 13 accounting cause of action in that case was appropriate because 14 of the complicated commercial relationship of the parties. Id. at 15 14. Also, Bankruptcy Code §542(a) specifically provides that a 16 party in possession of property of the estate “shall deliver” and 17 “account for” such property or it value. 18 As the Trustee’s testimony explained, the records regarding 19 the Receivables were in the hands of Defendant and the District; 20 Plaintiff could not initially demand a fixed sum and necessarily 21 had to seek an accounting. Defendant’s Answer also stated that a 22 “precise accounting” could not be obtained. AP Dkt. No. 9, ¶27. 23 Second, Defendant argues the conversion claim fails because 24 the Trustee obtained a writ of attachment, thereby electing 25 26 3 These arguments are reminiscent of those Defendant raised 27 in its opposition to the issuance of the writ of attachment. AP Dkt. No. 175. They were rejected then, and for different but 28 related reasons, should not be revived now. Damages -13- 1 remedies and waiving the tort claim of conversion, citing Baker 2 v. Superior Court, 150 Cal. App.3d 140 (1983). As Baker explains, 3 this waiver doctrine is disfavored. Baker, at 145. Furthermore, 4 the doctrine is essentially a form of equitable estoppel and 5 involves situations where a party chooses one path, and by doing 6 so causes substantial prejudice to the other party. Glendale Fed. 7 Sav. & Loan Assn. v. Marina View Heights Dev. Co., 66 Cal.App.3d 8 101, 137 (1977). There is no evidence before this court that 9 issuance of Plaintiff’s writ of attachment has caused prejudice 10 to Defendant and, viewing the entire record in this case, there 11 is no basis to impose any sort of estoppel. In addition, 12 Plaintiff has stated he is not seeking punitive damages and is 13 thus not seeking concurrent but inconsistent remedies based on 14 the same set of facts. AP Dkt. No. 181, p. 3. 15 Defendant also argues that conversion requires wrongful acts 16 and there were none because the Trustee allowed Defendant to use 17 estate assets for the benefit of the District and not for 18 Defendant’s own benefit. This argument strains credulity for 19 several reasons but two stand out: First, Plaintiff allowed 20 Defendant access to the DDA Account in October 2018 based on the 21 representations of Defendant and the District that the funds in 22 it were primarily Defendant’s. Once the facts were clear, the 23 Trustee demanded turnover of the Receivables, including the funds 24 in the DDA Account. Even Defendant’s own witness reluctantly 25 admitted Defendant was never told it could keep the Receivables 26 and they were not a gift. Smith Trial Testimony, Day 2, p. 45. 27 Second, the argument that the Receivables were used for the 28 Damages -14- 1 benefit of the Hospital so there was no wrongful act is equally 2 fallacious. Defendant leased the Hospital from the District, and 3 had agreed to purchase it. In September 2018, Defendant started 4 the process of changing the Hospital’s licensing which it knew 5 would take at least six months. Defendant’s business plan 6 projected losses for the first year of its operation. AP Dkt. No. 7 9, Answer, ¶18. Defendant completed its purchase in December 2019 8 with an effective date of April 2019. AP Dkt. No. 90, Smith Dec., 9 ¶3; Ch. 9 Dkt. No. 481, Disclosure Statement, p. 33. To claim a 10 benefit redounded to anyone but itself from its misappropriation 11 of the Receivables is nonsense. 12 Finally, Defendant argues that the turnover claim fails 13 because turnover is not appropriate when property’s ownership is 14 in dispute as it was here, citing U.S. v. Inslaw, Inc., 932 F.2d 15 1467, 1472 (D.C. Cir. 1991). As such, Defendant contends - in a 16 head-spinning bit of circular reasoning - that the turnover claim 17 is really a conversion claim which has been waived due to the 18 issuance of the writ of attachment. The fact that the court has 19 now ruled that Plaintiff owns the Receivables sinks this argument 20 from the start. In addition, it is misguided and conceptually 21 flawed. 22 There is language in many cases stating generally that 23 turnover is not to be used when ownership is disputed. See, In re 24 Gurga, 176 B.R. 196, 199-200 (9th Cir. BAP 1994) (stating 25 turnover involves the return of undisputed funds; chapter 11 26 debtor’s complaint for breach of contract, conversion, 27 accounting, and turnover stated non-core claims subject to 28 Damages -15- 1 arbitration). 2 In In re Process America, Inc., 588 B.R. 82 (Bankr. C.D. 3 Cal. 2018), the court considered the argument that use of 4 turnover is limited in this way and pointed out there is a split 5 of authority among the Circuits about this disputed ownership 6 issue. The court viewed Gurga as fundamentally a case regarding 7 jurisdiction. The court found persuasive In re Commercial 8 Financial Services, Inc., 251 B.R. 414, 423 (Bankr. N.D. Okla. 9 2000) and concluded that turnover of disputed funds may be 10 ordered where a creditor has filed a proof of claim and subjected 11 itself to the jurisdiction of the bankruptcy court to adjust its 12 rights. Process America, at 101. 13 The court finds the reasoning of Process America persuasive. 14 In this case, by filing the Request, Defendant subjected itself 15 to the jurisdiction of this court. Main Case Dkt. Nos. 63-66. 16 Plaintiff’s claim for turnover is not a breach of contract claim 17 masquerading as a turnover claim which may, in the abstract, have 18 raised jurisdictional issues. 19 For all of these reasons, Plaintiff has viable claims for 20 relief in the Adversary Proceeding. 21 B. Bank Balances on September 9, 2018 22 As of September 9, 2018, there was $325,263 in the Regions 23 Bank DDA Account and $40,027 in the Exchange Bank account. Pl. 24 Ex. 58, Wade Report. Defendant contends that the Trustee is not 25 entitled to add to his damages the $325,263 in the Regions Bank 26 DDA Account because the Trustee allowed Defendant to use this 27 money when it gave Gia Smith “unconditional access” to it. 28 Damages -16- 1 Defendant also argues that the Trustee is not entitled to add the 2 $40,027 in the Exchange Bank account because it did not have 3 access to this account which was in the District’s name. AP. Dkt. 4 No. 243, Def. Post-Trial Brief, p. 27-28. 5 These arguments have no merit. In October 2018, a 6 representative of the District and Gia Smith told the Trustee 7 that the bulk of the funds in the DDA Account belonged to 8 Defendant. Based on this representation - which he had no way to 9 confirm and at that point no reason to doubt - and Defendant’s 10 claimed emergency need to use the money in this account, he 11 agreed Defendant could use funds in the DDA Account. He did so 12 believing the funds were Defendant’s own and only $150,000 in 13 this account was property of the estate. 14 As it turned out, this was not the case. The entirety of the 15 $325,263 in the DDA Account on September 9, 2018 was generated 16 during Debtor’s operation of the Hospital and is clearly property 17 of the Trustee’s estate. The Trustee made no gift of this to 18 Defendant and never told Defendant it could keep this money. Gia 19 Smith reluctantly confirmed this. Smith Trial Testimony, Day 2, 20 p. 45:2-16. 21 Defendant also argues that it lacked access to the Exchange 22 Bank account and that the funds in it were not property of the 23 estate because the account was in the District’s name. However, 24 Gia Smith testified that if Defendant needed funds from this 25 account all she needed to do was ask the District to send a 26 check. Smith Trial Testimony, Day 2, p. 53:25-54:11. This negates 27 the contention that Defendant lacked access to this account. The 28 Damages -17- 1 fact that the account was in the District’s name does not mean 2 the funds in the account as of September 9, 2018 are not property 3 of the estate and they were in fact the Debtor’s funds accrued 4 while Debtor ran the Hospital. 5 C. Credit for the $500,000 Settlement with the District 6 Defendant argues that it is entitled to a $500,000 credit 7 against the Trustee’s damages for the Ch. 9 Settlement paid by 8 the District because, in its purchase of the Hospital, Defendant 9 credited the District for this payment. AP Dkt. No. 243, Def. 10 Post-Trial Brief, p. 26-27; Def. Ex. LL, term sheet for sale of 11 Hospital, ¶6. This argument also has no merit. 12 The Ch. 9 Settlement Agreement between the District and the 13 Trustee provided that (1) the Receivables were excluded from the 14 $500,000 allowed administrative claim; (2) Defendant was excluded 15 from the mutual general release; and (3) the Trustee was given 16 the exclusive right to pursue collection of the Receivables from 17 Defendant. In short, the District’s $500,000 payment was for the 18 other elements in the Trustee’s administrative claim: the 19 inventory; the furniture, fixtures, and equipment; and the tax 20 revenue payment. It did not include the Receivables. 21 Not deterred by what is straightforward and obvious, 22 Defendant points to language in recital G in the Ch. 9 Settlement 23 Agreement in which the Trustee contends, and the District denies, 24 that Defendant has “misappropriated accounts receivable belonging 25 to” the estate and that the District “is jointly and severally 26 liable for any claims” held by the estate against Defendant. 27 Based on this disputed contention, Defendant argues that it 28 Damages -18- 1 is entitled to a credit for this $500,000 under California Code 2 of Civil Procedure §877(a). This section provides: 3 where a release ... is given in good faith before verdict or judgment to one or more of a number of different tortfeasors 4 claimed to be liable for the same wrong, or to one or more other co-obligors mutually subject to contribution rights, 5 it shall reduce the claims against [other tortfeasors or co- obligors] in an amount stipulated by the release. 6 7 Plaintiff argues in response that §877(a) is inapplicable 8 because the Ch. 9 Settlement excluded the Receivables. The 9 District’s payment was for the personal property - retained by 10 Defendant and used in its operation of the Hospital - and tax 11 revenue payment only. The court agrees. The language of the Ch. 9 12 Settlement Agreement is clear. To the extent testimony is 13 relevant on this point, the Trustee confirmed this was his 14 intention in reaching the compromise with the District. Hoffman 15 Trial Testimony, Day 1, p. 34. The court rejects Defendant’s 16 strained arguments to the contrary. 17 Plaintiff also argues that the District and the Defendant 18 were not co-obligors mutually subject to contribution rights vis 19 a vis Plaintiff, citing California Civil Code §1432 (except as 20 provided in §877, a party to a joint or joint and several 21 obligation who satisfies more than his share of the claim against 22 all may require a proportionate contribution from all the parties 23 joined with him). Plaintiff contends there was no contractual 24 relationship between Defendant and Debtor, a required predicate 25 here. This argument is not persuasive but it is also irrelevant 26 for the reasons explained above. 27 // 28 Damages -19- 1 D. Billing and Collection Costs as Mitigation of Damages 2 1. The “Unauthorized Transaction” Theory 3 Defendant claims that because the Trustee did not seek court 4 approval of the MRCA, he created an “unauthorized transaction” 5 under which he allowed Defendant to engage in billing and 6 collecting the Receivables from Fall 2018 to April 2019. AP Dkt. 7 No. 243, Def. Post-Trial Brief, p. 18. 8 Defendant claims its billing and collection costs totaled 9 $554,545 and this must reduce Plaintiff’s damages. Defendant 10 argues the Trustee “could have mitigated his damages by not 11 allowing” Defendant to use his assets and not waiting until April 12 2019 to demand Defendant stop. The Trustee “should be viewed as 13 not mitigating his damages at least to the extent of the billing 14 and collection costs.” Def. Post-Trial Brief, p. 21:5-13. 15 Defendant argues the Trustee “solely benefited” from this 16 unauthorized transaction and the value of the benefit must 17 mitigate the Trustee’s damages, citing Turpin v. Sortini, 31 Cal. 18 3d 220 (1982) (wrongful life case, in general, when tortious 19 conduct has caused harm and in so doing has conferred a special 20 benefit to the interest that was harmed, its value may act as 21 mitigation to the extent that this is equitable). Def. Post-Trial 22 Brief, p. 19:22-24. 23 Defendant posits that if it had not been able to use the 24 funds in the DDA Account and the Receivables, the Hospital would 25 have closed and the collection of the Receivables would have 26 ceased, leaving the Trustee empty-handed, as he surely must have 27 known. Defendant sees this as the “only plausible explanation” 28 Damages -20- 1 for the Trustee failing to seek court approval of the MRCA. Def. 2 Post-Trial Brief, p. 18-19. 3 In what is possibly a generous interpretation of this 4 argument, Plaintiff suggests this is really a quantum meruit 5 theory, citing Day v. Alta Bates Medical Center, 98 Cal.App.4th 6 243 (2002). AP Dkt. No. 242, Pl. Post-Trial Brief, p. 9. There, 7 the court explained that for a quantum meruit recovery there must 8 be an express or implied request for services from one party and 9 the services must be provided with an intent to benefit that 10 party; ultimately, it is a question of equity. Id. at 248-49. 11 According to Plaintiff, if the MRCA is viewed as such a 12 request for services, this request was conditioned on the 13 Defendant performing the steps outlined for it in the MRCA which 14 it never did. Also, to the extent any services were performed, 15 they were not intended to benefit Plaintiff and did not, in fact, 16 benefit Plaintiff: Defendant consistently stated that the 17 Receivables were its to use as it saw fit. The court agrees with 18 this analysis. Quantum meruit recovery is not appropriate here 19 for these reasons. 20 In addition, the entire record in this Adversary Proceeding, 21 and in the chapter 7 case itself, confirm that it would be 22 inequitable to allow any sort of reduction in the Trustee’s 23 damages based on these alleged collection costs under any theory. 24 Defendant first admitted that Plaintiff owned the Receivables. 25 Main Case Dkt. No. 48, acknowledging that Defendant “has 26 collected receivables that date from the Debtor’s operation of 27 the hospital, and thus belong to” the bankruptcy estate; AP Dkt. 28 Damages -21- 1 No. 36, Ex. 9, Gia Smith email stating “we have no intention to 2 not pay what is owed.” The MRCA itself acknowledged that 3 Plaintiff owned the Receivables. Defendant then reversed course, 4 accusing the Trustee of fraud and fraud on the court because he 5 claimed to own the Receivables. For months, Defendant insisted it 6 was impossible to tell whether any Receivables were generated 7 before or after September 9, 2018 but the Trustee’s discovery 8 from TruBridge in early 2019 showed this was patently untrue. 9 Equity will not reward this behavior. 10 Finally, this “unauthorized transaction” argument is 11 confounding and non-sensical. It is hard to address it without 12 going down the same convoluted rabbit-hole Defendant has dug for 13 itself. The court declines the invitation to engage with this 14 fundamentally unsound reasoning. Defendant misappropriated the 15 Receivables and did so consciously and deliberately through its 16 course of obfuscation and dissembling and its strained legal 17 arguments. To suggest these actions redounded to Plaintiff’s 18 benefit and that Plaintiff caused his own damages by permitting 19 Defendant to do this is offensive. To suggest - without evidence 20 - that Defendant bestowed a benefit on Plaintiff because the 21 Hospital would have closed if Defendant had not taken the funds 22 in the DDA Account and misappropriated the Receivables is doubly 23 offensive. 24 Plaintiff also argues this quantum meruit theory - to the 25 extent it is plausible - had to be raised as a compulsory 26 counterclaim pursuant to Fed. R. Civ. P. 13(a) because it arises 27 out of the transaction sued upon and it does not require adding 28 Damages -22- 1 another party over whom the court cannot acquire jurisdiction. AP 2 Dkt. No. 242, Pl. Post-Trial Brief, p. 11. Bankruptcy Rule 7013 3 modifies Fed. R. Civ. P. 13(a) and provides that a party sued by 4 a trustee need not state as a counterclaim any claim that the 5 party has against the debtor, the debtor’s property, or the 6 estate unless the claim arose after the entry of an order for 7 relief. Defendant’s alleged collection costs were incurred after 8 the Debtor’s September 26, 2018 petition date. Accordingly, 9 Plaintiff’s point is well taken and this quantum meruit theory 10 fails for this additional reason. 11 2. Failure of Proof 12 In support of its unauthorized transaction theory and its 13 other mitigation theories, Defendant offered witness Tammie 14 Thompson, identified as Defendant’s Chief Financial Officer, and 15 Exhibit NN. (Plaintiff’s Motion in Limine No. 1 objected to Ex. 16 NN on the grounds that the documents had not been previously 17 disclosed and the setoff defense was outside the pleadings. AP 18 Dkt. No. 228.) 19 Tammie Thompson testified that between October 2018 and 20 April 2019, she managed a team of people engaged in billing and 21 collecting Plaintiff’s Receivables as well as Defendant’s own 22 receivables. Thompson Trial Testimony, Day 1, p. 79. She 23 calculated that Defendant incurred costs of $554,545 based 24 on employees’ salaries plus payments to consultants and 25 TruBridge. Exhibit NN purportedly documented this total. (The 26 witness stated other numbers that conflict with this total. 27 Thompson Trial Testimony, Day 1, p. 82-83, p. 98.) In addition, 28 Damages -23- 1 her claim that the collection took strenuous and concerted effort 2 by this team is contradicted by the fact that Defendant’s CFO 3 reported that Defendant had collected $1.2 million of the $1.7 4 million in Receivables by the end of December 2018 which casts 5 doubt on the claim that collection took strenuous effort 6 extending through March 2019. Pl. Ex. 58, Wade Report, p. 4. 7 Tammie Thompson’s testimony was vague and inconsistent. It 8 was not credible and is not entitled to any weight. Even her own 9 attorney questioned her credibility at one point, suggesting 10 perhaps the total for her time was “a little too high” in light 11 of the fact that she testified she was the CFO for Defendant and 12 its parent AAMG. Thompson Trial Testimony, Day 1, p. 96. 13 The court allowed Tammie Thompson to testify regarding the 14 compilation of documents that made up Exhibit NN. However, after 15 hearing argument and admitting into evidence Plaintiff’s Rebuttal 16 Exhibit 63, the court excluded Exhibit NN. 4 17 The court agrees with Plaintiff that (1) the documents in 18 Exhibit NN came within the scope of this Request; (2) Defendant 19 had not previously produced any of these documents; and (3) the 20 general boilerplate objections stated in Defendant’s Response do 21 not supplant the statement that all responsive documents were 22 previously produced. Tammie Thompson admitted that she had only 23 assembled the documents in Exhibit NN on August 4, 2021 - only 24 25 4 Exhibit 63 was Plaintiff’s Request for Production of Documents, Set No. 3. Plaintiff asked for any and all documents 26 in Defendant’s possession pertaining to any pre-September 9, 2018 27 receivables not previously produced. The Response stated general boilerplate objections to all Requests and as to this particular 28 one stated “all previously produced.” Damages -24- 1 days before trial, presumably at Defendant’s attorney’s request, 2 and well after the close of discovery. Thompson Trial Testimony, 3 Day 1, p. 105. 4 Because Exhibit NN was excluded and the witness’s testimony 5 is not entitled to any weight, Defendant’s evidence failed to 6 quantify any amount in support of any of its various mitigation 7 theories. 8 3. Recoupment 9 Defendant also claims the theory of recoupment supports a 10 reduction in Plaintiff’s damages, citing In re TLC Hospitals, 11 Inc., 224 F.3d 1008 (9th Cir. 2000). AP Dkt. No. 243, Def. Post- 12 Trial Brief, p. 21. In TLC Hospitals, the Ninth Circuit explained 13 that under setoff based on Bankruptcy Code §553, mutual debts 14 arising from a single pre-petition transaction or separate pre- 15 petition transactions cancel each other; recoupment, in contrast, 16 is an equitable doctrine and a claim to recoupment must arise 17 from the same transaction or occurrence that gave rise to the 18 liability sought to be enforced by the bankruptcy estate and may 19 involve pre-petition and post-petition events. Id. at 1011. 20 Recoupment may only be used where it is inequitable for the 21 debtor to enjoy the benefits of a transaction without meeting its 22 obligations. Id. at 1014. 23 Defendant claims the single transaction for purposes of 24 recoupment is the so-called unauthorized transaction based on the 25 MRCA which was never submitted for court approval. While it is 26 not entirely clear, Defendant is apparently asking for recoupment 27 based on the theoretical 60% - 70% of the Receivables as proposed 28 Damages -25- 1 in the MRCA. There is nothing equitable about this notion and the 2 court finds no merit in this argument. In addition, recoupment - 3 as a concept - addresses situations in which there has been an 4 overpayment and an underpayment. Here, Defendant has made no 5 payment at all. 6 4. Setoff as an Affirmative Defense 7 Plaintiff argues that Defendant waived any argument premised 8 on setoff because Defendant failed to plead setoff as an 9 affirmative defense as required by Rule 7008(c) (in responding to 10 a pleading, a party must affirmatively state any avoidance or 11 affirmative defense). AP Dkt. No. 242, Pl. Post-Trial Brief, p. 12 11; AP Dkt. No. 228, Motion in Limine. An affirmative defense is 13 defined as any matter extraneous to a plaintiff’s prima facie 14 case which denies a plaintiff’s right to recover even if the 15 allegations in the complaint are true. Marshack v. Orange Comm’l 16 Credit (In re Nat’l Lumber and Supply, Inc.), 184 B.R. 74, 77 17 (9th Cir. BAP 1995). 18 Under Rule 7008(c), an affirmative defense is generally 19 waived and excluded from the case if not pled in the answer. In 20 re Bush, 2005 WL 6960185, at *6 (9th Cir. BAP Dec. 15, 2005) 21 (statute of limitations; explaining purpose of Rule is to prevent 22 surprise and prejudice by giving opposing party notice of 23 affirmative defense and time to rebut it). 24 Defendant argues that setoff is not included in the list of 25 affirmative defenses in Rule 7008(c) so it can be raised at any 26 time, even on the first day of the second phase of a bifurcated 27 trial. AP Dkt. No. 243, Def. Post-Trial Brief, p. 22. The court 28 Damages -26- 1 disagrees. Setoff is a matter of avoidance and is an affirmative 2 defense covered by Rule 7008(c). Slack v. Int’l Union of 3 Operating Engrs., 83 F.Supp.3d 890, 908 (N.D. Cal. 2015) (noting 4 defendant’s argument was in the nature of a set-off argument and 5 as such would be an affirmative defense). 6 Defendant’s suggestion that it timely raised this setoff 7 issue because Exhibit NN was on its exhibit list hardly warrants 8 a response. Because this theory was raised for the first time at 9 trial, Plaintiff was never given an opportunity to do discovery 10 regarding this testimony or the related documents which were 11 never produced, and had no opportunity to rebut it. Defendant 12 never sought to amend its Answer or Counterclaim and there was no 13 pretrial order in this case including setoff as one of the issues 14 the parties agreed to try. 15 E. Prejudgment Interest and Costs 16 Plaintiff seeks an award of pre-judgment interest under 17 California Civil Code §3287(a) which provides: 18 A person who is entitled to recover damages certain, or capable of being made certain by calculation, and the right 19 to recover which is vested in the person upon a particular day, is entitled also to recover interest thereon from that 20 day. 21 In Evanston Ins. Co. v. OEA, Inc., 566 F.3d 915, 920 (9th 22 Cir. 2009), the Ninth Circuit explained that the vesting 23 requirement is satisfied when the amount is certain not when the 24 liability to pay the amount is determined. Here, the amount of 25 accrued Receivables vesting each month from September 2018 26 through April 2019 is shown in Exhibit 59. 27 28 Damages -27- 1 Defendant argues that Plaintiff is not entitled to interest 2 because the amount of the Receivables was uncertain, citing cases 3 in which court’s determined interest under Civil Code §3287(a) 4 was not appropriate for various reasons. Warren v. Kia Motors, 30 5 Cal.App.5th 24 (2018) (uncertain because defendant had no means 6 to calculate damages); Jamison v. Jamison, 164 Cal.App.4th 714 7 (2008) (uncertain because of conflicting evidence regarding value 8 of asset). 9 Defendant’s argument misses the point. The amount of the 10 Receivables was not uncertain and the precise dates on which each 11 increment vested is shown in Exhibit 59. As of September 30, 12 2021, the amount of pre-judgment interest was $446,646.80 and it 13 continues to accrue at $415.06 per day. 14 Plaintiff is also entitled to an award of costs and when a 15 bill of costs is filed, it will be reviewed and appropriate costs 16 will be awarded. 17 18 V. Conclusion 19 For all the reasons explained above, Plaintiff is entitled 20 to a judgment awarding damages as he requested. Plaintiff does 21 not have unclean hands, has not acted in bad faith, will not 22 receive a windfall, and was not negligent in handling this 23 litigation or the chapter 7 case. Despite its claim to the 24 contrary in its Post-Trial Brief, Defendant never had a “cogent 25 basis to believe” it owned the Receivables and has no valid basis 26 for any of its mitigation theories. 27 28 Damages -28- 1 The court requests that Plaintiff submit an order conforming 2 to this ruling and a bill of costs. A judgment will be entered in 3 due course. 4 5 * * * * * End of Memorandum Decision * * * * * 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Damages -29- 1 Court Service List 2 None 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 Damages -30-