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RehabCare Group East, Inc. v. Stratford Health Care Properties, LLC

United States District Court, W.D. Missouri, Western Division

September 29, 2017

REHABCARE GROUP EAST, INC. d/b/a REHABCARE GROUP THERAPY SERVICES, INC., and PHARMACY CORPORATION OF AMERICA, AS ASSIGNEE OF PHARMERICA CORPORATION, Plaintiffs,
v.
STRATFORD HEALTH CARE PROPERTIES, LLC, et al., Defendants.

          ORDER

          FERNANDO J. GAITAN, JR. UNITED STATES DISTRICT JUDGE.

         Pending 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.

         I. Background

         Plaintiffs 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.

         Plaintiff's 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.

         II. Facts

         A. THE PARTIES

         Defendant Stratford MO/Kan Development Corporation (“Stratford Development” or “Stratford Management”) wholly owns Defendants Stratford Health Care Group, Inc. (“Stratford Operator”)[1]; 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.

         Stratford 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.

         Until 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.

         The 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' returns.

         In 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.

         B. HUD REFINANCING OF THE HIDDEN LAKE CARE CENTER IN 2011

         In 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).

         HUD 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.

         On June 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).[2] 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).

         Contemporaneous 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.

         C. SALE OF NURSING HOME FACILITIES

         In late 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).

         Given 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.[3]

         On 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.

         Defendants 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.

         Plaintiffs 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 operations goodwill).

         Plaintiffs 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.

         As part 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.

         The 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.

         Between 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.

         For a period of time following the August 31, 2012 closing, Stratford Operator continued to collect its accounts receivable and pay certain of its accounts payable.

         D. UNDERLYING COLLECTION ACTIONS.

         On 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.

         On July 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. Id.

         E. FACTS SPECIFIC TO DEFENDANT THAD BATSON

         Thad 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 years.

         Batson 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.[4]Blom emailed Batson, however, in May 2011 shortly after they had set a finance rate for the loan, that ‚ÄúThis [interest] rate makes me feel a little better about the pain of ...


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