United States District Court, W.D. Missouri, Western Division
REHABCARE GROUP EAST, INC. d/b/a REHABCARE GROUP THERAPY SERVICES, INC., and PHARMACY CORPORATION OF AMERICA, AS ASSIGNEE OF PHARMERICA CORPORATION, Plaintiffs,
STRATFORD HEALTH CARE PROPERTIES, LLC, et al., Defendants.
FERNANDO J. GAITAN, JR. UNITED STATES DISTRICT JUDGE.
before the Court are (1) Defendant Batson's Motion for
Summary Judgment (Doc. No. 128); (2) Defendants Stratford
Mo/Kan Development Corporation, Stratford Health Care
Properties, LLC, Fit for Life, Inc., Fitness for Life, L.C.,
Stratford Specialty Care, Inc., Kenneth Blom, and Randall
Willbanks' Motion for Partial Summary Judgment (Doc. No.
131); and (3) Plaintiffs' Motion for Partial Summary
Judgment as to Counts I, IV, VII, VIII, and XI of the First
Amended Complaint (Doc. No. 130). All are considered below.
filed their Complaint on October 8, 2014 (Doc. No. 1). On
April 29, 2015, the Court granted Plaintiffs' motion for
leave to file an amended complaint, and Plaintiffs filed
their amended complaint (Doc. No. 24) on that same date.
Plaintiffs previously obtained default judgments against
Stratford Health Care Group, Inc. (“Stratford
Operator”), and in this lawsuit Plaintiffs allege they
have suffered damages due to defendants' scheme to
defraud Stratford Health Care Group, Inc.'s creditors.
See Doc. No. 24, ¶¶ 64 and 67. Defendants
in this matter are (1) Stratford Mo/Kan Development
Corporation (“Stratford Management” or
“Stratford Development”); (2) Stratford Health
Care Properties, LLC (“Stratford Properties” or
“Properties); (3) Stratford Health Care Group, Inc.
(“Stratford Operator”); (4) Fit for Life, Inc.
(“Fit for Life”); (5) Fitness for Life, L.C.
(“FFL, L.C.” or “Fitness for Life”);
(6) Stratford Specialty Care, Inc. (“Seasons
Care” or “Specialty Care”); (7) Kenneth
Blom (“Blom”); (8) Randall Willbanks
(“Willbanks”); (9) Thad Batson
(“Batson”); and (10) John Does 1-10. As an
initial matter, plaintiffs have not identified the Doe
defendants at this stage of the litigation, and therefore the
Court will dismiss all claims against John Does 1-10.
causes of action against Defendants are as follows: Count I-
Fraudulent Conveyance against Stratford Properties; Count
II-Conspiracy to Engage in Fraudulent Conveyance against
Blom, Willbanks, John Does 1-10, and Stratford Properties;
Count III-Unjust Enrichment against Stratford Properties;
Count IV- Fraudulent Conveyance against Stratford Properties;
Count V - Conspiracy to Engage in Fraudulent Conveyance
against Stratford Properties, Batson, Blom, Willbanks and
John Does 1-10; Count VI-Unjust Enrichment against Stratford
Properties; Count VII- Fraudulent Conveyance against
Stratford Management; Count VIII-Fraudulent Conveyance
against Seasons Care; Count IX-Breach of Fiduciary Duty
against Blom and Willbanks; Count X-Aiding and Abetting
Breach of Fiduciary Duty against Batson; Count XI-Piercing
the Corporate Veil against Blom, Willbanks, Stratford
Management, Stratford Properties, Fit for Life, Fitness for
Life, and Seasons Care; and Count XII- Claim for Accounting
against Stratford Operator. Plaintiffs' claims in Counts
IX and X were previously dismissed on August 31, 2015.
See Doc. No. 64.
Stratford MO/Kan Development Corporation (“Stratford
Development” or “Stratford Management”)
wholly owns Defendants Stratford Health Care Group, Inc.
(“Stratford Operator”); Stratford Health Care
Properties, LLC (“Properties” or “Stratford
Properties”); Fit For Life, Inc. (“Fit For
Life”); Fitness For Life, L.C. (“FFL, L.C.”
or “Fitness for Life”); and Stratford Specialty
Care, Inc. (“Specialty Care” or “Seasons
Care”) (collectively the “Stratford
Entities”). The Stratford Entities plus defendants Ken
Blom, and Randy Willbanks are collectively the
“Stratford Defendants”. At all times relevant
hereto Valley View State Bank had a security interest in
various assets owned by Stratford Management and its various
subsidiaries. Defendant Thad Batson served as an attorney to
the Stratford Defendants.
Development is presently owned by Willbanks and was formerly
owned by Willbanks, Blom, and non-party Sheila Wade.
Willbanks owned about 65% and Blom owned 35%. Blom and
Willbanks are the sole members of the company's Board of
Directors. Ken Blom was the President of Stratford MO/Kan
Development Corporation, Stratford Operator and Specialty
Care. Randy Willbanks served as the Secretary of these same
three entities. From 2010 through 2012, Blom and Willbanks
were the sole members of the Boards of Directors for each of
these three entities. These entities also employed Blom.
Because he owned Type A shares, Blom technically held voting
control over Stratford MO/Kan Development Corporation at the
times relevant to this lawsuit. However, Blom and Willbanks
made all financing decisions together. Randy Willbanks and
Ken Blom have never received any distributions from Stratford
Management, and loans Randy Willbanks made to Stratford
Management at its founding have never been paid back.
2011, Stratford Operator owned the real estate, tangible
property and operations of a nursing home named Hidden Lake
Care Center (“Hidden Lake”), located in Raytown,
Missouri. In 2011, the real estate and other tangible
property of Hidden Lake were conveyed to Stratford
Properties, after which Stratford Operator leased the real
estate from Stratford Properties and operated Hidden Lake
until Hidden Lake was sold in 2012. Specialty Care owned a
skilled nursing facility dedicated to residents with
Alzheimer's disease called “Seasons Care.”
While it owned the land and the facility itself, the license
to operate that facility was held by Stratford Operator.
Stratford Entities shared a common controller, Chris Walker.
Despite working for multiple entities, Walker's salary
was paid by Stratford Development. The Stratford Entities
also shared other employees who managed all accounts payable
for these entities and who managed the payroll for all the
entities. The bookkeepers for Stratford Operator (Hidden
Lake) and Specialty Care (Seasons) were tasked with working
just on those facilities. Chris Walker was responsible for
generating all financial reports for the entities, including
providing same to Valley View Bank. Stratford Development and
Stratford Operator are S-Corporations, which means that for
tax purposes gains and losses generally flow through the
entity and are reported on the individual shareholders'
2003, Plaintiff RehabCare Group East, Inc.
(“RehabCare”) entered into a Therapy Services
Agreement with Stratford Operator for RehabCare to provide
therapy services to Stratford Operator's residents in
exchange for payment from Stratford Operator. In 2008,
Plaintiff PharMerica Corporation (“PharMerica”)
entered into a Pharmacy Services Agreement with Stratford
Operator for PharMerica to provide pharmacy services to
Stratford Operator's residents in exchange for payment
from Stratford Operator. Neither Rehab Care nor PharMerica
had any contractual relationship with any of the other
parties to this litigation. Plaintiffs assert that in 2009,
Stratford Operator was having difficulty paying its vendors,
including plaintiffs, on time.
REFINANCING OF THE HIDDEN LAKE CARE CENTER IN 2011
2010, Ken Blom and Randy Willbanks decided to refinance loans
which were secured by the Hidden Lake Care Center through a
nursing home program operated by the U.S. Department of
Housing & Urban Development (“HUD”).
Willbanks and Blom indicate they had previously considered
refinancing through HUD and finally decided to apply in 2010
because the interest rate available on HUD loans was better
and because Valley View State Bank was demanding that the
Stratford entities reduce the amount of their loans held by
the bank, essentially foreclosing on any benefits or relief
that Stratford Operator could receive from refinancing its
mortgage. (Ex. A, Blom Depo., p. 41-42, 82).
required that the real estate on which Hidden Lake Care
Center was located be owned by a special purpose, single
asset entity. This single purpose, single asset entity could
only own the group of assets related to the nursing home and
could have no other debts besides the HUD loan. Stratford
Properties was organized by defendant Batson in August 2010,
to serve as the special purpose, single asset entity as
required by HUD. Stratford Properties would own all the
tangible assets of the Hidden Lake Care Center. Blom and
Willbanks were the Managers of Stratford Properties. When he
prepared and filed the certificate of incorporation for
Properties, Batson stated that the company's purpose was
“solely to acquire, operate, construct, lease and own a
nursing home with assisted living facility and apartments
project known as Hidden Lake Care Center located in Raytown,
Jackson County, Missouri, and to do any and all things
necessary, convenient or incidental to that purpose.”
See Certificate of Incorporation, Exh. 7. Prior to June 2,
2011, Stratford Development owned independent assisted living
apartments, and, as noted above, Stratford Operator owned the
real estate for Hidden Lake. Both of those properties were
conveyed to Stratford Properties in 2011.
2, 2011, Stratford Development and Stratford Operator
executed a general warranty deed, transferring the Hidden
Lake Care Center and the independent living apartments to
Stratford Properties, LLC for Ten Dollars and other good and
valuable consideration. (Ex. A, Blom Depo., p. 85 and Ex.
A-1; Ex. C, Batson Depo., p. 62 and Ex. C-1; Ex. E, Blom Aff.
¶ 11). In June, 2011, Stratford Properties
completed its refinancing and obtained a HUD backed loan from
Lancaster Pollard Mortgage Company for $10, 369, 300. At the
closing of the HUD loan, Valley View State Bank received $9.4
million to pay down the loans to Stratford Development and
Stratford Operator which were secured by the Hidden Lake Care
Center property. The remaining funds were distributed for
attorney's fees, loan fees, title and recording fees, and
held in escrow for Stratford Operator (and were later
distributed to Stratford Operator to be used to pay some of
Stratford Operator's creditors). (Ex. A, Blom Depo.,
189-190 and Ex. A-2).
with the HUD re-financing, and as required by HUD, Stratford
Operator and Stratford Properties executed a lease agreement
whereby Stratford Operator would continue to operate the
Hidden Lake Care Center, receiving the income and paying the
bills, in exchange for making monthly lease payments to
Stratford Properties, who owned the facility pursuant to HUD
requirements. Ex. C, Batson Depo., p. 64-69, 88 and Ex. C-2;
Ex. E, Blom Aff., ¶¶ 12-14. The parties dispute
whether Stratford Operator was slow paying its bills in the
months after this transfer, and dispute the value of
Stratford Operator's accounts receivable in the 2011-12
time period. However, by June 2011, Stratford Operator owed
RehabCare approximately $190, 000 for services rendered that
went unpaid. See A/R Customer Detail Query, Exh. 15.
Stratford Operator was also in arrears to Pharmerica for in
excess of $74, 000. See Z-Hidden Lake Account Summary, Exh.
16. Further, in its August 31, 2012 Cost Report submitted to
the United States Centers for Medicare and Medicaid Services,
Stratford Operator reported current assets for year end 2011
of $1, 093, 399 and current liabilities of $3, 814, 000. At
the same time, Blom and Willbanks had personally guaranteed
the $15 million debt to Valley View Bank.
OF NURSING HOME FACILITIES
2011, Ken Blom and Randy Willbanks, as corporate officers of
the respective entities which owned the senior care
facilities, decided to sell Hidden Lake Care Center, Seasons
Care, and another facility named Elliott Place. Prior to the
sales of Seasons Care and Hidden Lake Care Center, Willbanks
consulted with his accountant/CPA Michael Dobratz about the
tax implications of the sales. To this end, Dobratz prepared
a document with calculations regarding taxes which would be
owed upon sale of the Seasons and Hidden Lake Care Center.
Defendants state that because of IRS provisions that require
the recapture of depreciation when real estate is sold, the
potential tax liability upon sale of the Hidden Lake Care
Center property was so significant that the tax liability was
likely to exceed the proceeds of the Hidden Lake Care Center
property sale. (Ex. A, Blom Depo., p. 34, 116-117; Ex. B,
Willbanks Depo., p. 65, 111; Ex. E, ¶ 17-18). Plaintiffs
deny this in part, however, arguing that the tax liability
referred to as exceeding the proceeds of the sale of the
Facility included the taxes that would have to be paid by
Blom and Willbanks as shareholders, not just the taxes that
would be owed by Properties and Stratford Operator, the
sellers of the Facility. (Ex. 4, Stratford Development Cash
Flow Recap 2/8/12; DN 133-2, Stratford Development Cash Flow
Recap 2/9/12; Ex. 5, Dobratz Depo. at pp. 52-57, 65-66).
Further, plaintiffs argue the tax analysis did not take into
account any potential effect on taxes of utilizing proceeds
of the sale of the Facility to pay Stratford Operator's
creditors, which would have been business expenses of
Stratford Operator. (Ex. 5, Dobratz Depo. at p. 28-30).
the large potential tax liability, defendants indicated it
was recommended that to avoid having to pay taxes on the
gains realized from the sale of Hidden Lake Care Center,
Stratford Properties would have to acquire property under a
1031 Exchange pursuant to § 1031 of the tax code. (Ex.
E, Blom Aff., ¶¶ 17- 18). A 1031 Exchange is a
common tax planning device which allows a seller of real
estate to defer taxable gains on the sale by using the sale
proceeds to invest in new property.
December 30, 2011, Blom signed a letter of intent with MGM
Geriatric Management, LLC (“MGM”) for the sale of
Hidden Lake and the assisted living apartment for $13.5
million. Stratford Properties sold the assets of the Hidden
Lake Care Center to Hidden Lake Realty LLC pursuant to an
Asset Purchase Agreement (“APA”) dated March 22,
2012. The operations of the Facility were separately conveyed
to Hidden Lake Management, LLC via an Operations Transfer
Agreement (“OTA”) dated August 15, 2012. (DN
133-39, Operations Transfer Agreement). The Operations
Transfer Agreement provided that the buyer was not acquiring
the liabilities of Stratford Operator. However, Stratford
Operator maintained the right to collect on its accounts
receivable accrued prior to the OTA. While the APA was dated
March 22, 2012, the sale by Properties to Hidden Lake Realty
LLC did not close until August 31, 2012. (Ex. 6, Closing
Confirmation Signed by Blom). The total sales price was $13.5
million. The sales price was allocated as follows: $7.5
million to building, $1.82 million to land, $750, 000 to
furniture and fixtures, and $3.43 million to goodwill.
indicate that the goodwill allocation was attributable to the
tangible assets of the facility being transferred, so its
value was subject to depreciation. (Ex. A. Batson Depo., p.
109-11; Ex. E, Blom Aff., ¶ 23). Further, defendants
indicate the manner in which the Hidden Lake Care Center was
operated did not generate any tangible, goodwill benefits as
part of its sale because no value was generated to Stratford
Properties from the manner in which Stratford Operator ran
the Hidden Lake Care Center. Additionally, each operator has
a different philosophy in the way the care facility is
operated, including the operator who took over for Stratford
Operator. (Ex. B Blom, Depo. p. 61-64; Ex. E; Blom Aff.,
¶ 23). Thus, defendants allocated all the goodwill to
defendant Stratford Properties.
note, however, that Blom prepared a “Seller's
Opinion on Goodwill Allocation” acknowledging that
goodwill arises from the operations of a nursing home, not
the real estate of the nursing home, and that in the case of
Hidden Lake, a 25% allocation toward goodwill was justified.
In particular, Blom stated, “The name recognition, the
reputation within the community, the long-term relationships
with the area hospitals and the hospital discharge planners
all have created value for the property. The facility has
created community relationships, physician and clinical
relationships, and established multiple contacts with health
care professionals and community leaders through its twenty
years of operation. The seller is confident that these
recognitions with the community at large will continue to
have value and will continue to enhance the census and the
rate structures for the project.” Blom confirmed at his
deposition that the opinion was prepared for the IRS and he
would not say anything in it that was not factually true. (DN
133-19, Seller's Opinion on Goodwill; Ex. 1, Blom Depo.
at p. 66- 68). Further, despite that Blom now states in his
affidavit that the goodwill was allocated to Properties'
tangible assets rather than Operator's operations, in his
deposition, Blom stated that the goodwill allocation of the
purchase price was made based on tax advice from accountant
Michael “Mickey” Dobratz, who was not even aware
that the Facility was actually two separate entities, one of
which owned only operations and the other of which owned only
tangible assets. (Ex. 1, Blom Depo. at pp. 306-308; Ex. 5,
Dobratz Depo. at p. 73; see Ex. 3, Batson Depo. at p. 114).
In short, the parties dispute whether the goodwill should be
considered an asset of Stratford Properties (which received
the payment from the sale of the property) or Stratford
Operator (which received $0 in exchange for any business
argue that Stratford Operator was insolvent on the day of the
sale, with a balance sheet showing that its assets were $1,
269, 718, with liabilities of $3, 502, 351. However,
defendants note that Stratford Operator maintained the right
to collect its accounts receivable and further received on
the date of closing $605, 846 in funds that had been held in
escrow from the HUD refinancing to pay creditors. Defendants
assert these proceeds were used to pay bills and small
vendors, including monies owed to the Federal Government,
which took a priority over other sums owed. (Ex. A, Blom
Depo., p. 120-121). Defendants state the decision to pay the
small vendors and the Federal Government with the escrow sums
was made in an attempt to vastly decrease the number of
parties to whom Stratford Operator owed money. (Ex. A, Blom
Depo., p. 115- 116). Plaintiff, however, indicates that
Stratford Operator's bank statements reflect that
following the sale, it transferred significant funds to other
Stratford Entities. (DN 133-24, Summary Charts; Ex. 1, Blom
Depo. at pp. 288-292). While Plaintiffs were not paid with
these proceeds, other larger creditors were not paid either.
of the sale, the buyer of Hidden Lake Care Center agreed to
assume the HUD mortgage of approximately $10.3 million. The
sale was not completed until August 31, 2012 because HUD had
to approve the buyer's assumption of Stratford
Properties' mortgage with HUD.
August 31, 2012 closing statement reflects net proceeds in
the amount of $1, 858, 866.19. Instead of using this money to
pay Stratford Operator's creditors, however, the
Defendants had the money deposited with First American
Exchange Company, a qualified §1031 intermediary. The
net proceeds were then used to purchase other real property
on October 14, 2012, which was titled not to Stratford
Properties or to Stratford Operator but to several different
limited liability companies, many bearing “FAE”
(First American Exchange) in their names (the “FAE
Entities”). The FAE Entities are wholly owned by
Stratford Properties. Defendants deny, however, that if the
net sale proceeds had not been used to purchase replacement
properties as part of a 1031 Exchange, any proceeds would
have been available to pay Stratford Operator's creditors
because the tax liability of the Hidden Lake Care Center sale
would exceed the net proceeds from the sale. Doc. 132,
Def's SOF ¶¶ 43-44.
January 2012 and June 2013, Stratford Operator transferred
$3, 991, 620 to Stratford Development. Between January 2012
and November 2013, Stratford Operator endorsed thirty checks
to Stratford Development totaling $1, 599, 575.71. Between
January 2012 and September 2012, Stratford Operator
transferred $79, 052.80 to Seasons Care. These companies
testified that the transfers were made to manage cash flow
needs; however, defendants note that these payments were
noted on the books of Stratford Operator, Stratford
Management, and Seasons Care as accounts payable and
receivable, and some of these payments were made to Stratford
Management for payments it held over all the Stratford
Entities. Ex. A., Blom Depo., p. 290-91. Plaintiffs argue
that these transfers meant the Stratford Defendants regularly
ignored corporate formalities by moving funds among
themselves in order to manage cash flow shortages. Defendants
dispute this characterization of the funds transfers as the
ignoring of “corporate formalities.” Plaintiffs
also argue that Willbanks used his other companies to make
loans to the Stratford Defendants, without reducing the
transfers to some sort of promissory note or writing.
period of time following the August 31, 2012 closing,
Stratford Operator continued to collect its accounts
receivable and pay certain of its accounts payable.
UNDERLYING COLLECTION ACTIONS.
April 16, 2013, RehabCare filed a lawsuit against Stratford
Operator because of Stratford Operator's failure to pay
RehabCare under the Therapy Services Agreement. Complaint in
RehabCare Group East, Inc. v. Stratford Health Care
Group, Inc., United States District Court for the
Western District of Missouri, Case No. 4:13-CV-373 (DN 1),
Exh.25. Stratford Operator did not defend against
RehabCare's lawsuit. On August 30, 2013, the United
States District Court for the Western District of Missouri
entered a default judgment in favor of RehabCare.
See RehabCare Default Judgment, Exh. 26. The
judgment entitles RehabCare to $673, 398.84 in principal,
interest and attorney fees and costs. Id. It also
entitles RehabCare to post judgment interest. Id.
12, 2013, PharMerica filed a lawsuit against Stratford
Operator because of Stratford Operator's failure to pay
PharMerica under the Pharmacy Services Agreement. Complaint
in Pharmacy Corporation of America v. Stratford
Healthcare Group, Inc., United States District Court for
the Western District of Kentucky, Case No. 3:13-cv-00704 (DN
1), Exh. 27. On November 6, 2013, the United States District
Court for the Western District of Kentucky entered a default
judgment in favor of PharMerica. See PharMerica
Default Judgment, Exh.28. The judgment awarded PharMerica
$198, 133.86 in principal, interest and attorney fees and
costs. It also entitles PharMerica to post-judgment interest.
FACTS SPECIFIC TO DEFENDANT THAD BATSON
Batson is an attorney who has been in practice for 32 years.
Batson's practice is primarily commercial real estate
transactions. Batson indicates he does not do tax law, but he
has done hundreds of real estate closing involving Section
1031 exchanges under the Internal Revenue Code. Batson has
performed real estate related legal services for Stratford
Mo/Kan Development Corporation (“Stratford
Development”) and its various subsidiaries for many
was hired to assist in closing on the HUD loan. Batson
indicates he did not know why the loans were being refinanced
and did not know about any debts incurred by Stratford
Operator other than the Valley View State Bank loans. (Ex. A,
Batson Depo., pp. 58-59). Plaintiffs argue that defendant
Batson, an experienced attorney, certainly ought to have
known that businesses incur operating expenses.Blom emailed
Batson, however, in May 2011 shortly after they had set a
finance rate for the loan, that “This [interest] rate
makes me feel a little better about the pain of ...