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NATIONAL WESTMINSTER BANK USA v. CENTURY HEALTHCAR

May 9, 1995

NATIONAL WESTMINSTER BANK USA, Plaintiff, against CENTURY HEALTHCARE CORPORATION, CENTURY HEALTHCARE OF ARIZONA, INC., CENTURY HEALTHCARE OF CALIFORNIA, INC., CENTURY HEALTHCARE OF COLORADO, INC., CENTURY HEALTHCARE DEVELOPMENT CORPORATION, CENTURY HEALTHCARE OF MISSOURI, INC., CENTURY HEALTHCARE OF TEXAS, INC., AND DILLON FAMILY AND YOUTH SERVICES, INC., Defendants.


The opinion of the court was delivered by: MILTON POLLACK

 OPINION and FINDINGS (in part)

 NatWest loaned Century approximately $ 30 Million. The loans are in default. Century seeks to avoid repayment of and to invalidate the loan on a claim of lender liability by reason of alleged domination and control exercised by the bank over the debtor during the course of the loans, making it "a mere instrumentality" of the lender.

 A lender is not obligated to sit idly by and watch its financial security erode. The issue is whether a creditor may monitor the debtor's financial situation, make suggestions intended to improve it and take actions short of undue entanglement with the borrower's operations. There is nothing inherently wrong with a creditor carefully monitoring its debtor's financial situation or suggesting courses of action the debtor ought to follow to improve its financial situation.

 The Fifth Circuit, in sustaining a directed verdict in favor of a lender, stated the standard as follows:

 
An examination of the "instrumentality" cases involving creditor-debtor relationships demonstrates that courts require a strong showing that the creditor assumed actual, participatory, total control of the debtor. Merely taking an active part in the management of the debtor corporation does not automatically constitute control, as used in the "instrumentality" doctrine, by the creditor corporation.

 Krivo Industrial Supply Co. v. National Distillers and Chemical Corp., 483 F.2d 1098, 1105 (5th Cir. 1973), reh'g denied, 490 F.2d 916 (5th Cir. 1974).

 Lender liability is predicated on an unmistakable showing that the subservient corporation in reality has no separate, independent existence of its own and was being used to further the purposes of the dominant corporation. Suggestions by a major lender for a defaulted debtor, even when coupled with a threat of the exercise of its legal rights if the debtor does not comply, are both commonplace and completely proper. See In re Prima Co., (98 F.2d 952, 965 (7th Cir. 1938), cert. denied, 305 U.S. 658, 83 L. Ed. 2d 426, 59 S. Ct. 357 (1939) ("No doubt the debtor, because of its inability to meet its maturing obligations, acquiesced in Harris' recommendations [to install new management], but this we think is not sufficient to constitute domination of its will."). There is nothing inherently wrong with suggesting what course the debtor ought to follow. Unless the creditor has become, in effect, the alter ego of the debtor, he will not be held to an ethical duty in excess of the morals of the market place. In re Teltronics Services, Inc., 29 Bankr. 139, 171 (Bankr. E.D.N.Y. 1983).

 The conduct of plaintiff constituted no more than an assertion of its bargained-for rights. Even when accompanied with threats by a party to act in accordance with its legal rights that does not and cannot constitute duress. Teachers Ins. and Annuity Ass'n of America v. Wometco Enterprises, Inc., 833 F. Supp. 344, 348 (S.D.N.Y. 1993) (Sprizzo, J.).

 No credible evidence of domination or of duress on the part of the lender was adduced. Moreover, Century has run its business for nearly two years since it agreed to the restructuring of its debt with NatWest. Its delay in raising a claim of duress while its principal stockholder, Mr. Dillon, obtained millions of dollars in cash and value pursuant to that restructuring additionally negates any notion of improper control and disposes of the attempt now to void the debt on a complaint of duress by the lender which is no longer cognizable. Plainly any such claim, if it ever existed, has been waived. Idem. at 348-49.

 Having heard and seen the witnesses, the issues of credibility are resolved in favor of the plaintiff and against the defendants. The affirmative proof from the witnesses, the corroborating circumstances and the probabilities on which to draw the reasonable inferences on the claims and counterclaims favor the plaintiff and surmount the pallid semantic and almost ludicrous denials and contrived explanations of the defendants' witnesses.

 ADDITIONAL FINDINGS OF FACT

 1. Plaintiff NatWest is a national banking association having its principal place of business at 175 Water Street, New York, New York.

 2. Defendant Century is an Oklahoma corporation with its principal place of business at 5555 East 71st Street, Suite 9100, Tulsa, Oklahoma.

 3. Defendant Century Healthcare of Arizona, Inc. is an Arizona corporation with its principal place of business at 5555 East 71st Street, Suite 9100, Tulsa, Oklahoma.

 4. Defendant Century Healthcare of California, Inc. is a California corporation with its principal place of business at 5555 East 71st Street, Suite 9100, Tulsa, Oklahoma.

 5. Defendant Century Healthcare of Colorado, Inc. is a Colorado corporation with its principal place of business at 5555 East 71st Street, Suite 9100, Tulsa, Oklahoma.

 6. Defendant Century Healthcare Development Corporation is an Oklahoma corporation with its principal place of business at 5555 East 71st Street, Suite 9100, Tulsa, Oklahoma.

 7. Defendant Century Healthcare of Missouri, Inc. is a Missouri corporation with its principal place of business at 5555 East 71st Street, Suite 9100, Tulsa, Oklahoma.

 8. Defendant Century Healthcare of Texas, Inc. is a Texas corporation with its principal place of business at 5555 East 71st Street, Suite 9100, Tulsa, Oklahoma.

 9. Defendant Dillon Family and Youth Services, Inc. is an Oklahoma corporation with its principal place of business at 5555 East 71st Street, Suite 9100, Tulsa, Oklahoma.

 10. This Court has jurisdiction over this action pursuant to 28 U.S.C. § 1332 in that the matter in controversy exceeds the sum of $ 50,000 and is between citizens of different states. Venue is proper in this Court pursuant to 28 U.S.C. § 1391(a).

 11. On June 24, 1992, Century and NatWest executed an Amended and Restated Loan Agreement (as subsequently amended, the "Loan Agreement") (PX-2) which consolidated and restated various outstanding loans, evidenced by three separate notes, that NatWest made to Century under an Original Loan Agreement, dated February 12, 1988 (PX-1). Pursuant to the Loan Agreement, Century borrowed $ 25,860,250 from NatWest (the "Loan"), which was evidenced by the Note, dated June 24, 1992 (the "Note") (PX-4). In addition, NatWest and Defendants executed an Interest Rate Protection Agreement, dated July 26, 1989 (PX-13, 14, 45).

 12. Also on June 24, 1992, the remaining defendants (collectively, the "Guarantors") executed the Guarantees in favor of NatWest, absolutely guaranteeing the payment to NatWest of all amounts owed to NatWest by Century. (PX-5, 6, 7, 8, 9, 10, 11).

 13. The Guarantors are not parties to the Loan Agreement or the Note.

 14. Century was required, pursuant to § 2.4 of the Loan Agreement, to pay to NatWest the principal amount of the Loan in one hundred and fourteen (114) consecutive monthly installments commencing on December 1, 1992, and continuing on each monthly payment date thereafter until payment in full of the Loan on May 1, 2002. Beginning December 1, 1992 through and including January 1, 1994, each installment payment, in the principal amount of $ 83,333.00, was to be paid on the first day of each calendar month. Thereafter, beginning February 1, 1994 through and including May 1, 2002, each installment payment, in the principal amount of $ 234,817.13, was also to be paid on the first day of each calendar month. The Loan Agreement further required Century to pay interest in monthly arrears on the first day of each calendar month.

 15. On December 1, 1993, Century failed to make an interest installment payment of $ 140,817.90 as required by the Loan Agreement and thus defaulted under the terms of the Note and the Loan Agreement. Subsequently, on February 1, 1994, Century failed to make a $ 234,917.13 installment payment as required by the Loan Agreement thus causing a further default under the terms of the Note and the Loan Agreement.

 16. Pursuant to § 8.1 of the Loan Agreement, an event of default occurs upon the "failure to make any payment or mandatory prepayment of principal or interest upon the Note when due . . . ."

 17. Pursuant to Article 8 of the Loan Agreement, upon the occurrence of the event of default, the entire unpaid balance of principal of and interest on the Note and all other obligations and indebtedness of Century to NatWest arising under the Loan Agreement and other loan documents shall immediately become due and payable upon written notice to that effect given to Century by NatWest, without presentment or demand for payment, notice of non-payment, protest or further notice or demand of any kind, all of which Century expressly waived.

 18. Pursuant to § 9.1(b) of the Loan Agreement, Century promised to pay NatWest "all costs and expenses (including, without limitation, reasonable fees and disbursements of counsel) suffered or incurred by [NatWest] in connection with its enforcement of the payment of the Note or any other sum due to it under this Agreement or any of the other Loan Documents or any of its other rights hereunder or thereunder."

 19. By letter dated April 1, 1994, NatWest gave written notice to Century of its default under the Loan Agreement and accelerated payment on the Note, declaring due the aggregate amount of $ 27,030,970.37, plus accrued and unpaid interest, fees, costs and expenses. (PX-12). The letter stated that, until payment in full had been received by NatWest, interest would continue to accrue at the default rate of interest, determined in accordance with the Loan Agreement, on Century's obligation, pursuant to § 2.5(b) of the Loan Agreement. (PX-12).

 20. By letters dated April 1, 1994, NatWest demanded that the Guarantors pay immediately the outstanding amounts of principal and accrued and unpaid interest on the Note. (PX-12).

 21. Century has not paid the amounts due under the Loan or the Note. None of the Guarantors have made payment of any of the amounts of principal or accrued interest outstanding on the Loan or the Note.

 22. The Note provides, in part, that "The Borrower shall pay costs and expenses of collection, including, without limitation, attorneys' fees and disbursements in the event that any action, suit or proceeding is brought by the holder hereof to collect this Note." (PX-4).

 23. A portion of § 9.1(b) of the Loan Agreement provides that Century is to pay NatWest "all costs and expenses (including, without limitation, reasonable fees and disbursements of counsel) suffered or incurred by [NatWest] in connection with its enforcement of the payment of the Note or any other sum due to it under this Agreement or any of the other Loan Documents or any of its other rights hereunder or thereunder."

 24. Defendants have failed to pay the amounts required to be paid by them under the Loan Documents and the Interest Rate Protection Agreement.

 25. The amount of $ 29,885,054.40, including interest through May 8, 1995, is due under the Loan Documents and the Interest Rate Protection Agreement, plus interest from May 9, 1995, at the post-default rate of interest specified by the ...


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