Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-canb-4_08-ap-04242/USCOURTS-canb-4_08-ap-04242-0/pdf.json

Parties Involved:
Uecker & Associates, Inc.
Plaintiff
Tenet Healthsystem Hospitals, Inc.
Defendant

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UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF CALIFORNIA

In re No. 06-41774 T

Chapter 9

WEST CONTRA COSTA HEALTHCARE

DISTRICT, etc.,

Debtor.

________________________________/

UECKER & ASSOCIATES, INC., as A.P. No. 08-4242 AT

Trustee for the DOCTORS MEDICAL

CENTER TRUST FOR THE BENEFIT OF

CREDITORS,

Plaintiff,

vs.

TENET HEALTHSYSTEM HOSPITALS, 

INC.,

Defendant.

________________________________/

MEMORANDUM OF DECISION ON CROSS-MOTIONS FOR SUMMARY JUDGMENT

In the above-captioned adversary proceeding, plaintiff Uecker

& Associates, Inc., as trustee for the Doctor’s Medical Center Trust

for the Benefit of Creditors under a confirmed plan, (the “Trustee”)

seeks to avoid and recover certain lease payments made pre-petition

Signed: March 26, 2010

________________________________________

LESLIE TCHAIKOVSKY

U.S. Bankruptcy Judge

________________________________________

Entered on Docket 

March 26, 2010

GLORIA L. FRANKLIN, CLERK 

U.S BANKRUPTCY COURT 

NORTHERN DISTRICT OF CALIFORNIA

Case: 08-04242 Doc# 46 Filed: 03/26/10 Entered: 03/26/10 15:06:36 Page 1 of

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The Debtor is West Contra Costa Healthcare District, a

political subdivision of the State of California, doing business as

Doctor’s Medical Center.

2

by the debtor (the “Debtor”)1

 to defendant Tenet Healthsystem

Hospitals, Inc. (“Tenet”) and to object to its claim unless the

payments are repaid. The complaint is based on 11 U.S.C. §

548(a)(1)(B) which authorizes the avoidance of obligations that are

constructively fraudulent: i.e., not made with actual intent to

defraud but which have a fraudulent effect on other creditors because

they are incurred when the debtor is insolvent or render the debtor

insolvent. 

Defendant filed a motion for summary judgment, contending that

the Trustee was unable to establish a necessary element of the claim:

i.e., that the Debtor was either insolvent when the obligation was

incurred or was rendered insolvent by it. The Trustee filed a crossmotion, contending that it was entitled to a summary adjudication in

its favor on the issue of insolvency. The motions were heard

together on March 4, 2010 and taken under submission. Thereafter,

without leave, although seeking leave, the Trustee filed a posthearing brief. Tenet objected to the post-hearing brief but also

addressed its contentions. 

As set forth below, the Court concludes that Tenet is entitled

to summary judgment in its favor. The Court has considered both the

post-hearing brief and Tenet’s response in reaching its decision. 

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3

SUMMARY OF FACTS

On or about March 2001, Tenet entered into a lease with Pinole

Medical Development Co. (“Pinole”) of a general acute care hospital

and related facilities located in Pinole, California (the “Pinole

Facility”). In August 2004, the Debtor entered into a sublease of

the Pinole Facility from Tenet. The original sublease did not

require the Debtor to pay monthly lease payments to Tenet. The

original sublease was amended several times. The November 2004 and

April 2005 amendments still did not require the Debtor to make lease

payments. However, the third amendment, in May 2005, required the

Debtor to make a lease payment for June 2005.

On July 1, 2005, the Debtor and Tenet entered into a new

sublease agreement for the Pinole Facility (the “Sublease”). The

Sublease required the Debtor to make monthly lease payments,

beginning with a payment of $41,000 in July 2005, increasing each

month thereafter to $83,333.33 in November 2005 and continuing at

that rate thereafter through February 2021 unless the Sublease was

terminated sooner. As part of the terms of the Sublease, the Debtor

was required to provide Tenet with a letter of credit in the amount

of $1.5 million upon which Tenet was permitted to draw if the Debtor

failed to make the lease payments. 

From July 1, 2005 through September 30, 2006, the Debtor paid

Tenet $980,000 in lease payments. On October 1, 2006, the Debtor

filed its chapter 9 petition, commencing the above-captioned case.

On November 20, 2006, the Court authorized the Debtor to reject the

Sublease. Tenet was authorized to draw on the letter of credit and

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did so, receiving $1.5 million from the issuer of the letter of

credit.

DISCUSSION

A. APPLICABLE LAW

1. Law Applicable to Summary Judgment Motions

Summary judgment motions are governed by Rule 56 of the Federal

Rules of Civil Procedure which is made applicable to this proceeding

by rule 7056 of the Federal Rules of Bankruptcy Procedure. Rule 56

provides that summary judgment can and should be provided, either on

all or a part of a claim, when the evidence provided demonstrates

that there is no genuine issue as to any material fact.

Fed.R.Civ.Proc. 56(c)(2). A disputed fact is material only if its

resolution affects the outcome of the case. Anderson v. Liberty

Lobby, Inc., 477 U.S. 242, 248 (1986).

An issue is genuine if the evidence makes it possible for the

trier of fact to decide in favor of the non-moving party. Id.

However, an inquiry into the materiality of a fact and its potential

significance is not necessary where a party fails to establish the

existence of an element essential to that party’s claim. A moving

party is entitled to summary judgment on a claim when the non-moving

party, in opposition to the motion, fails to present evidence

sufficient to support a finding in its favor on an essential element

of its claim. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23

(1986). 

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2. Law Applicable to Avoidance of Constructively

Fraudulent Transfers

Section 548 of the Bankruptcy Code provides, in pertinent part,

that a trustee may avoid as fraudulent an obligation incurred by the

debtor within two years of the debtor’s filing for bankruptcy, as

fraudulent if: “the debtor (i) received less than a reasonably

equivalent value in exchange for...[the] obligation; and (ii)[I] was

insolvent on the date that...such obligation was incurred, or became

insolvent as a result of such...obligation[.]” 11 U.S.C. §

548(a)(1),(b)(i)-(ii). A debtor that is a municipality is

“insolvent” if it is “(i) generally not paying its debts as they

become due unless such debts are the subject of a bona fide dispute;

or (ii) unable to pay its debts as they become due.” 11 U.S.C. §

101(32)(C). 

B. ARGUMENT

The Trustee’s complaint alleges that the Debtor was either

insolvent when it entered into the Sublease or was rendered insolvent

by doing so. However, the Trustee failed to present any evidence or

argument to support her allegation that entering into the Sublease

caused the Debtor to become insolvent. Therefore, the only issue the

Court will address is whether the Debtor was insolvent when it

entered into the Sublease. 

As noted above, the Bankruptcy Code test for the insolvency of

a municipality such as the Debtor has two prongs: (1) whether the

debtor was generally paying its undisputed debts as they came due and

(2) whether the debtor was able to pay its debts as they came due.

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2

The issue of insolvency arose in the Bridgeport case as a

question of eligibility to file a chapter 9 petition. It is

arguable that this prospective view of a debtor’s ability to pay

should not be applied in a fraudulent transfer action. However,

both parties have assumed that it should apply, and the Court

concludes that its application does not change the outcome the

decision.

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The relevant time for determining whether the Debtor was insolvent

when it entered into the Sublease is July 1, 2005, just before the

Sublease was executed. The relevant time for determining whether the

Debtor was rendered insolvent by entering into the Sublease is

prospective. It considers the Debtor’s likely ability to pay its

debts during the balance of the fiscal year–i.e., through the end of

2005. See In re City of Bridgeport, 129 B.R. 332, 336-38 (Bankr. D.

Conn. 1991).2 

1. The Debtor was generally paying is debts when it entered

into the Sublease.

The Trustee’s principal argument in support of its cross-motion

was that the Debtor was not generally paying its debts as they came

due in 2005. Her evidentiary support for this argument is seven

proofs of claim filed in the bankruptcy case, reflecting debts

incurred during 2005, which remained unpaid when the bankruptcy case

was filed in October 2005. This evidence is insufficient as a matter

of law to establish that the Debtor was not generally paying its

debts as they came due as of July 1, 2005. 

The Trustee concedes that many of the debts reflected in the

seven proofs of claim were incurred after July 1, 2005. She has not

provided a separate figure for those incurred up to July 1, 2005.

However, even if all of the debts had been incurred before July 1,

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2005, they would not be sufficient to establish insolvency at the

time the Debtor entered into the Sublease. 

 The Debtor’s financial records establish that its operating

expenses in June 2005 were approximately $10 million and in July

approximately $11 million. The Debtor’s failure to pay $1.3 million

of those expenses would not be sufficient to establish that the

Debtor was “generally not paying its debts.” Moreover, as Tenet

points out, the Trustee has failed to offer any evidence that some

or all of the debts were not being paid because they were disputed.

2. The Debtor was able to pay its debts as they came due both

before entering into the Sublease and during the balance

of 2005.

As noted above, the Debtor’s ability to pay is examined

prospectively, taking into account the balance of the Debtor’s fiscal

year. The Debtor’s financial records clearly demonstrate that it

was losing money every month and that its financial condition was

deteriorating. However, Tenet notes that the Debtor’s financial

records demonstrate that, even at the end of December 2005, the

Debtor’s cash reserves exceeded the amount of its payables. Thus,

according to Tenet, it was able to pay its debts by resorting to its

cash reserves. 

The Trustee argued that the cash reserves should not be taken

into account because the Debtor would not have been exercising good

business judgment if it had exhausted its cash reserves. Maybe so.

However, the test for insolvency does not question whether the Debtor

should have done so, simply whether it could have done so. 

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3

The delay in payment to vendors could have supported a

finding that the Debtor was generally not paying its debts as they

came due if evidence had been provided that the delays occurred

before July 1, 2005 and involved the majority of the Debtor’s

current payables. However, given the timing and lack of

specificity of the evidence presented, it does not.

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In her post-hearing brief, the Trustee argues that the Debtor’s

financial records demonstrated that, as of November 2005, the Debtor

was unable to pay its debts. At that time, the total of the Debtor’s

cash and investments and market securities was only approximately $9

million whereas its total accounts payable and payroll related

liabilities were approximately $9.5 million. The shortfall in

December 2005 was even larger. Moreover, she notes, these figures

do not include the Debtor’s current liabilities, which she estimates

exceeded $400,000 in November and December 2005. However, as Tenet

responds, the Trustee ignores the approximately $10 million revenue

stream that the Debtor received each month and used to pay its

operating expenses. Thus, this argument is unpersuasive.

The Debtor’s final piece of evidence is the declaration of Dev

Mahadevan (“Mahadevan”), the Debtor’s Chief Financial Officer. In

his declaration, Mahadevan notes that, at a meeting of the Board of

Directors on June 28, 2005, he advised the Board that, “if [the

Debtor’s] losses continued at the current rate, the District could

exhaust its reserves in four months, by September 2005.” As a result

of this advice, the Trustee notes, the Debtor undertook extensive

cost-cutting measures, including delaying payments to those vendors

it believed were not critical or would not respond by discontinuing

shipment of necessary supplies.3

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The $50,000 reference in the minutes appears to be a

typographical error. Mahadevan’s declaration states that the goal

was to reduce expenses by $500,000. This figure appears more

plausible given the amount of the Debtor’s monthly expenses.

9

A copy of the minutes from the meeting are attached to

Mahadevan’s declaration. The following statements appear immediately

after the language quoted by the Trustee: “Administration has

reviewed each department and has met nearly everyday to review

opportunities for saving expenses. The goal is to reduce expenses

by $50,000 per month and meet the original budget by the year-end.”4

As discussed above, clearly, the Debtor was successful in

reducing its expenses so as to pay its debts generally as they became

due through the end of 2005 so as to avoid exhausting its cash

reserves. By contrast, the City of Vallejo was found to be insolvent

when it was unable to reduce its expenses without endangering the

public health and safety. See In re City of Vallejo, 408 B.R. 280,

294 (Bankr. 9th Cir. 2009). Thus, the Court concludes that, even

viewed prospectively, the Debtor had the ability to pay its debts as

they came due. 

CONCLUSION

Tenet’s motion for summary judgment will be granted, and the

Trustee’s cross-motion for partial summary judgment will be denied.

The Trustee has not presented any evidence nor has it argued that

entering into the Sublease caused it to be insolvent. In addition,

the Trustee has failed to present sufficient evidence to sustain a

finding that either the Debtor was not generally paying its debts as

they came due or that, viewed prospectively, it would be unable to

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pay its debts on a timely basis during the rest of 2005. Since all

of the other claims asserted in the complaint depend on the Trustee’s

success on her claim for avoidance of the obligation represented by

the Sublease, Tenet is entitled to summary judgment on those claims

as well. Tenet is directed to submit a proposed form of order and

judgment in accordance with this decision. 

END OF DOCUMENT

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COURT SERVICE LIST

Andrea T. Porter

Friedman Dumas and Springwater

150 Spear St. #1600

San Francisco, CA 94105

Ivan L. Kallick

Manatt, Phelps and Phillips

11355 W Olympic Blvd.

Los Angeles, CA 90064 

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