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MW Capital Funding, Inc. v. Magnum Health and Rehab of Monroe LLC

United States District Court, E.D. Michigan, Southern Division

July 31, 2019

MW CAPITAL FUNDING, INC., a Delaware corporation, Plaintiff,
v.
MAGNUM HEALTH AND REHAB OF MONROE LLC, et al., Defendants.

          OPINION AND ORDER DENYING MICHIGAN DEPARTMENT OF HEALTH AND HUMAN SERVICES' MOTION FOR SURCHARGE (DOC. 110)

          GEORGE CARAM STEEH, UNITED STATES DISTRICT JUDGE

         Before the court is the Michigan Department of Health and Human Services' motion to declare that (1) the Receiver assumed the Defendants' Medicaid provider agreements; (2) Medicaid overpayments are administrative expenses of the Receivership estate, and (3) to surcharge to the Plaintiff, Abraham Shaulson, and the Receiver's bond. The court received extensive briefing, including supplemental briefs as requested. In that regard, MDHHS moved to strike MICHA's reply brief. For the reasons explained below, the motions are denied.

         BACKGROUND FACTS

         Plaintiff MW Capital Funding, Inc. (“MW Capital”), filed a complaint against several nursing homes -- Magnum Health and Rehab of Monroe, Saginaw, Adrian, and Hastings - for breach of a loan agreement. Plaintiff had a security interest in the accounts and other assets of the nursing homes. On January 4, 2017, Plaintiff obtained a consent order appointing a Receiver (Trigild, Inc.) to operate the nursing facilities. The Receiver employed Benchmark Healthcare Consultants, LLC, as operational manager for each facility. A consent judgment was entered in favor of Plaintiff on February 3, 2017, in the amount of $3, 527, 625.50. The judgment provided that “Plaintiff shall not execute on the Judgment pending further order of this Court in furtherance of and consistent with the Receiver Order.” Doc. 10.

         The Receiver, in consultation with Plaintiff, closed the Saginaw facility because of its deteriorating financial condition. The Receiver continued operating the remaining facilities and marketed them for sale. It received a bid (“Stalking Horse Bid”) in the amount of $3, 375, 000 for the assets of the Adrian, Hastings, and Monroe facilities (not including the real estate, which was owned by different entities). On May 9, 2017, the Receiver filed a motion seeking entry of an order setting certain sale procedures for a proposed auction. MI Rosdev, a member of the entities which owned the real estate, objected to the sale order. The court held a hearing on October 11, 2017. Ultimately, the Stalking Horse Bid was withdrawn, and the Receiver withdrew its motion on October 31, 2017.

         Plaintiff and MI Rosdev entered into negotiations regarding a sale of the facilities and the real estate together. They represented to the Receiver at the October 11, 2017 hearing that a “deal was imminent.” Doc. 39 at ¶ 8. However, as negotiations continued, the facilities had critical cash flow deficiencies. The Receiver filed a motion to immediately wind down operations and close the remaining facilities on March 13, 2018. Doc. 39. The Receiver reported that he “has made numerous requests to Plaintiff to provide funding to keep operations running and to ensure that payroll is met. These requests have gone unfulfilled.” Id.

         The Michigan Department of Health and Human Services (“MDHHS”) responded to the Receiver's motion, outlining its concerns about the facilities' inability to provide proper patient care during the wind-down process and the failure to provide sufficient notice of the closure. Doc. 42.

         On April 27, 2018, the Receiver withdrew the motion to close the facilities, because it “obtained temporary interim funding, ” apparently from Plaintiff or the proposed buyer in anticipation of a deal. Doc. 46. On May 15, 2018, MDHHS filed an emergency motion for a status conference, outlining numerous serious concerns, including that vendors were not being paid at the facilities, the employees' health care policies were cancelled for nonpayment, and that the financial crisis was affecting patient care. Doc. 47. In response, Plaintiff agreed that the facilities should be closed and should not be permitted to operate further without funding. Doc. 55.

         On May 25, 2018, the Receiver filed a motion for an expedited sale of the receivership assets to Plaintiff through a credit bid. Doc. 59. The court heard argument, including the objections of MDHHS and others, and took the matter under advisement. The matter was set for a hearing/settlement conference before Judge Friedman on June 13, 2018. At the conference, the parties agreed to a sale order (except for MDHHS, which did not have a person with authority present, contrary to the court's order). Docs. 81, 117.

         On June 13, 2018, the court entered an “Order Authorizing and Approving the Expedited Sale of the Operating Receivership Assets Free and Clear of All Liens, Claims, Interests and Encumbrances” (“Sale Order”). Doc. 81. Around the same time, MW Capital assigned its debt to MICHA US, LLC. In the Sale Order, the court granted MICHA “the exclusive right to acquire the Operating Receivership Assets, ” subject to certain liabilities, including the expenses incurred by the Receivership. Id. at ¶ 1. The Sale Order provides, however, that MICHA does not have “any financial liability whatsoever for amounts due or alleged to be due to the Michigan Department of Health and Human Services” arising from the operation of the nursing homes during the receivership. Doc. 81 at ¶ 11 (“Medicaid Liabilities”).

         The Sale Order provided for the closing of the sale of the Operating Receivership Assets after certain regulatory approvals (“Pre-Closing Approvals”) were obtained. Id. at ¶ 6. The closing occurred on October 1, 2018. The facilities are now owned by Monroe MI SNF Management LLC; Adrian MI SNF Management LLC; and Hastings MI SNF Management LLC (“the Purchaser Opcos”), which are affiliates of MICHA (which is an affiliate of MI Rosdev). Although the facilities are now operated by the Purchaser Opcos, the Receiver continues to manage the Receivership Estate pending discharge.

         MDHHS alleges that the Receivership Estate owes the state approximately $1.5 million for Medicaid overpayments made between January 4, 2017, and September 30, 2018. The Medicaid overpayments sought are the difference between the Medicaid reimbursements received by the nursing homes during the period of the Receivership and the amount MDHHS subsequently determined they should have received after an audit.

         As part of its acquisition of the Operating Receivership Assets, MICHA agreed to pay the expenses of the Receivership Estate, as well as certain quality assurance assessments due to MDHHS. MICHA expressly declined to take responsibility for the Medicaid overpayments at issue here. Doc. 81 at ¶ 11. MDHHS seeks to hold MW Capital, as the party who sought the receivership, liable for the Medicaid overpayments.

         MDHHS contends that the Medicaid overpayments are administrative expenses of the estate that should be charged to MW Capital and its president, Abraham Shaulson, because Plaintiff improperly sought the receivership. In supplemental briefing requested by the court, MDHHS further argues that the court should surcharge the proceeds from MW Capital's security interest in the amount of the overpayments because the plaintiff benefited from the overpayments and because MW Capital consented to the receivership. MDHHS also seeks to surcharge the Receiver's bond.

         LAW AND ANALYSIS

         In presiding over an equity receivership, a district court has “broad powers and wide discretion.” SEC v. Basic Energy & Affiliated Res., Inc., 273 F.3d 657, 668 (6th Cir. 2001) (quoting SEC v. Elliott, 953 F.2d 1560, 1566 (11th Cir. 1992)). “Receivership is an equitable remedy, and the district court may, in its discretion, determine who shall be charged with the costs of the receivership.” Gaskill v. Gordon, 27 F.3d 248, 251 (7th Cir. 1994); see also Elliott, 953 F.2d ...


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