Scharrer v. Sanders (In re Fundamental Long Term Care., Inc.)

542 B.R. 299
CourtUnited States Bankruptcy Court, M.D. Florida
DecidedDecember 8, 2015
DocketCase No. 8:11-bk-22258-MGW; Adv. No. 8:14-ap-00486-MGW
StatusPublished
Cited by4 cases

This text of 542 B.R. 299 (Scharrer v. Sanders (In re Fundamental Long Term Care., Inc.)) is published on Counsel Stack Legal Research, covering United States Bankruptcy Court, M.D. Florida primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Scharrer v. Sanders (In re Fundamental Long Term Care., Inc.), 542 B.R. 299 (Fla. 2015).

Opinion

[301]*301 MEMORANDUM OPINION AND ORDER ON MOTION S TO DISMISS

Michael G. Williamson, Chief United States Bankruptcy Judge

The sole claim directly against the Debt- or in this bankruptcy case is a $110 million default judgment based on an allegation that the Debtor received a nursing home management company’s assets for less than reasonably equivalent value. But the Trustee’s claims in this proceeding against Troutman Sanders — for negligence and fraud — require the Trustee to prove that (1) the Debtor would have successfully defended the fraudulent transfer claim against the Debtor; or (2) the Debtor did not actually receive the management company’s assets. It would make a mockery of the legal system to permit the Trustee to pursue claims against Troutman Sanders for the benefit of the judgment creditor where those claims would require the Trustee to prove the judgment never should have been entered in the first place.

It is true the Trustee has also asserted negligence and fraud claims against Trout-man Sanders in this proceeding on behalf of the Debtor’s subsidiary. Those claims require the Trustee to prove Troutman Sanders failed to disclose certain facts to the Debtor’s subsidiary about a transaction it was a part of. But the Trustee fails to allege that Troutman Sanders owed any duty to the Debtor’s subsidiary. After all, Troutman Sanders, a national law firm,never represented the Debtor’s subsidiary. Nor do the facts alleged in the complaint give rise to any other duty to speak. Accordingly, the Trustee’s complaint should be dismissed in its entirety.

Background1

According to the Trustee, Troutman Sanders is at the center of an elaborate bust-out scheme that allowed one of its partners and a company he owned to acquire a nursing home chain and its management company without acquiring the management company’s significant liabilities. As of March 2006, THI Holdings owned Trans Healthcare, Inc. (“THI”) and THI of Baltimore, Inc. (“THI-B”).2 Both THI and THI-B operated nursing homes.3 Trans Health Management, Inc. (“THMI”), a THI subsidiary, managed the nursing homes that THI and THI-B operated.4 At the time, THMI was facing more than 150 lawsuits for negligence, fraud, conversion, and other claims.5 Leonard Grunstein (a Troutman Sanders partner) and Murray Forman (an investment banker) wanted to acquire the nursing homes THI-B operated, and they needed THMI to manage those homes, but they did not want to acquire THMI’s liabilities.

So Forman and Grunstein allegedly devised a plan to acquire THMI’s assets without its liabilities. First, they retained Troutman Sanders to incorporate Fundamental Long Term Care Holdings, LLC (“FLTCH”) to acquire all of the stock in THI-B as part of a stock sale agreement.6 Next, they directed Troutman Sanders to incorporate the Debtor, which was a sham entity, to acquire all of the stock in THMI [302]*302as part of a second stock sale agreement-that would close simultaneously with the THI-B stock sale.7 Forman and Grun-stein then gave ownership of the Debtor to Barry Saacks, an elderly gentleman living in a basement in Brooklyn, New York, who had no idea he owned THMI, much less that it would be acquiring THMI’s stock.8 Third, after the THI-B and THMI stock sales closed, Forman and Grunstein trans--ferred THMI’s assets — mostly employees and computer equipment — to another entity they owned.9

According to the Trustee, Troutman Sanders’ fingerprints were all over the stock sale agreements that were at the heart of this “bust out” scheme. In particular, the Trustee alleges that Troutman Sanders, among other things, formed the Debtor to acquire THMI; conducted the due diligence for the THMI stock sale; negotiated and drafted the stock purchase agreements for both stock sales; prepared the closing documents for both sales; collected all of the required signatures; and conducted a virtual closing of both sales.10 All of this — including the actions taken on behalf of the Debtor — was done at the direction of Forman and Grunstein.11 But despite the fact that it conducted due diligence and negotiated and drafted the sale documents for the THMI transaction, Troutman Sanders insists that the Debtor was not its client, and nobody from the firm (other than perhaps Grunstein) ever spoke with Saacks about the transaction, let alone explained the terms of the transaction to him or advised him that the firm was not representing him or the Debtor.12

Four years after the sale closed, one of the 150 or so lawsuits against THMI — a negligence claim by the Jackson Estate— resulted in a $110 million judgment. But that judgment against THMI went unsatisfied. The Jackson Estate contends it was unable to collect on its judgment because all of THMI’s assets had been looted from the company as part of the March 2006 linked stock sales, which the Jackson Estate discovered sometime after it obtained its $110 million judgment. So the Jackson Estate initiated proceedings supplementary against the Debtor and others.

In its motion for proceedings supplementary, the Jackson Estate alleged the Debtor should be liable for the judgment against THMI because the Debtor was the transferee of THMI’s assets. The motion for proceedings supplementary specifically references the THI-B and THMI stock sale transactions and alleges those transactions were a fraudulent attempt by a number of entities to thwart the Jackson Estate’s collection efforts. According to the Trustee, the motion for proceedings supplementary was served on CT Corporation (the Debtor’s registered agent), which in turn gave notice to Troutman Sanders. Troutman Sanders, however, apparently did nothing with motion, and as a consequence, the state court entered a default judgment against the Debtor for $110 million.

The Jackson Estate then forced the Debtor into an involuntary chapter 7 case, and the Trustee filed this adversary proceeding to collect on the $110 million fraudulent transfer judgment against the Debtor. The Trustee’s adversary complaint asserts claims — on behalf of both the Debtor and THMI — against Troutman [303]*303Sanders, Grunstein, and Lawrence Levin-son (another Troutman Sanders partner) for negligence (Counts I and II); fraudulent concealment (Count III), fraud (Count IV), and negligent supervision (Count V).13 The various counts are somewhat convoluted and, at times, can be difficult to decipher.

As best the Court can tell, the Trustee’s negligence counts are based on two distinct theories that can be roughly summarized as follows: (i) Troutman Sanders and Levinson received notice of the proceedings supplementary against the Debtor but failed to protect the Debtor’s interests by defending — or at least notifying the Debt- or of — the proceedings supplementary (Count I); and (ii) Troutman Sanders failed to advise the Debtor or THMI that the two stock sales were really an effort to loot THMFs assets and leave THMI a liability-ridden shell (Count II). The Trustee’s fraud claims (Counts III and IV) are largely the same as her negligence claim in Count II. And her negligent supervision claim basically alleges Troutman Sanders failed to prevent Grunstein from orchestrating the “bust out” scheme (Count V).

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Bluebook (online)
542 B.R. 299, Counsel Stack Legal Research, https://law.counselstack.com/opinion/scharrer-v-sanders-in-re-fundamental-long-term-care-inc-flmb-2015.