United States District Court, Southern District of New York
May 15, 2001
QUANTUM CORPORATE FUNDING, LTD., PLAINTIFF,
ASSIST YOU HOME HEALTH CARE SERVICES OF VIRGINIA, L.L.C, ASSIST YOU HOME HEALTH CARE SERVICES OF RICHMOND, L.L.C, ASSIST YOU HOME HEALTH CARE SERVICES OF TRI-CITIES, L.L.C, NURSE YOU, INC., & THOMAS W. HOFLER, JR., DEFENDANTS.
The opinion of the court was delivered by: Owen, District Judge:
OPINION AND ORDER
Before me is Plaintiff Quantum's application for a preliminary
injunction pursuant to Fed. R. Civ. P. 65(a) seeking to prevent the
Defendant Assist You and Nurse You corporations from disposing of
assets pledged to Quantum under two loan and security agreements
dated June 23, 2000. On March 29, 2001, this Court directed the
defendants to show cause as to why an order enjoining the transfer of
assets should not be entered and also put a temporary restraining
order in place to maintain the status quo pending a hearing on
Quantum's application.*fn1 The parties appeared on April 19, 20 and
25, 2001 for said hearing and presented the following facts.
Quantum is a New York corporation engaged in the business of
factoring*fn2 and commercial finance. The corporate defendants,
Nurse You and Assist You, and individual defendant Hofler, are
citizens of Virginia and providers of health care services. Hofler is
manager of the Assist You entities and president and CEO of Nurse
You. On June 23, 2000, the parties entered into two virtually
identical Loan and Security Agreements, one pertaining to the Assist
You corporations and the other to the Nurse You entity, in which
Quantum, in its "sole absolute discretion," agreed to make loans and
advances (of up to $350,000 to Assist You and $100,000 to Nurse You)
against defendant's "Eligible Account" receivables.*fn3 The
agreement defined "Eligible Account" receivables at Appendix A, page S-4:
Eligible Account — shall mean Accounts created by
Borrower [Defendants] in the ordinary course of its
business arising out of its sale of goods or rendition of
services, which are and at all times shall continue to be
acceptable to Lender [Quantum] in its sole and absolute
discretion. Eligible Accounts shall exclude accounts that
are over one hundred twenty (120) days from invoice date,
contra accounts, foreign, employee and affiliate
accounts, accounts with poor credit histories, excessive
concentration accounts, accounts subject to cross-aging
or any other accounts which do not constitute acceptable
collateral to Lender. Standards of eligibility may be
fixed and revised from time to time solely by Lender in
its exclusive judgment. In determining eligibility,
Lender may, but need not, rely on aging, reports and
schedules of Accounts furnished by Borrower but reliance
by Lender thereon from time to time shall not be deemed
to limit its right to revise standards of eligibility at
any time without notice as to both Borrower's present and
The Loan and Security Agreements, among other things, require that
the corporate defendants pay their obligations when due (§ 10.1.1),
remain solvent under a definition of solvency stated in the contract
(§§ 7.1.14, 10.1.9), prepare and maintain books, records and financial
statements in accordance with Generally Accepted Accounting
Principles ("GAAP") (§§ 7.1.12, 8.1.3) and also prohibit the
defendants from making loans (§ 8.2.2) or merging or consolidating
with any other entity (§ 8.2.2).
The Agreements also established a specific manner in which Quantum
could collect on its interest in defendants' account receivables
because, as described by the witnesses and attorneys, Medicare
regulations prohibit the assignment of claims by providers, like the
defendants, to "any other person," 42 C.F.R. § 424.73. Accordingly,
the Agreements established that Medicare payments to the defendants
would be placed in a "lockbox" at First Union Bank in Charlotte,
North Carolina in defendants' name and the contents of the lockbox
would be forwarded to Quantum on a daily basis (§§ 6.2.10, 6.2.11).
Frank Madonna, Quantum's senior vice-president and officer
responsible for asset-based lending, negotiated the Agreements with
Assist You and Nurse You, which were represented by Hofler. He
testified and introduced various documents, including the UCC-1 forms
evidencing Quantum's secured interest in the defendants' receivables
and filed in the Circuit Clerk's Office in Petersburg, Virginia.
Prior to execution of the Agreements, Quantum discovered that
defendants were in arrears on payroll taxes in the amount of
approximately $80,000 and Quantum's loan in or about July 2000 was
used to pay this tax debt. Madonna testified that Quantum normally
schedules an audit somewhere within the first three months of taking
on a new client, however, plaintiff had trouble doing so with Hofler
and the corporate defendants. Quantum was finally able to audit the
defendants in October 2000 using its financial field examiner Dick
Seymour of DF Flores & Associates.
Seymour reported to Quantum in the last week of November 2000 that
the Assist You entities had failed to post general ledgers since
September 30, 2000, the same for Nurse You since August 31, 2000,
payroll taxes through November 13, 2000 were past due and no
reconciliation of defendants' accounts receivables (to determine what
monies had actually been collected) had been performed on the
financial reports submitted to Quantum. Seymour also noted that there
was no internal financial controller or outside accountant. Madonna
testified that Seymour further informed Quantum that the defendants'
aforementioned payroll tax liability was at that point in excess of
Quantum was understandably concerned because defendants' payroll
tax liability exceeded the amount of Quantum's loan and plaintiff,
therefore, reduced defendants' available financing. It informed
Hofler that, by Seymour's calculations, defendants were over-advanced
on their credit by approximately $44,000. Madonna stated that he
contacted Hofler, who conceded that defendants owed the taxes and
that payroll would be paid as soon as sufficient funds became
available. Madonna stated that approximately $16,000 of the payroll
taxes were paid on January 3, 2001, but he never saw any other
documents evidencing further payment of defendants' payroll
liability. Madonna testified that defendants stopped furnishing
Quantum financial information and lockbox payments entirely on
February 15, 2001. At this time, the parties exchanged several
letters declaring one another to be in breach of the Agreements.
Madonna, addressing a recent set of financials Quantum received
from the defendants in connection with this Court's TRO order,
concluded that defendants are insolvent as defined by the Agreements
and that as of March 23, 2001, Quantum's loan statements reflect that
(1) the total amount of the loan outstanding to the Assist You
companies was $201,748.58, including interest from February 15 to
March 23 and (2) the total amount of the loan outstanding to Nurse
You was $27,988.74.
Hofler testified on behalf of the defendants. Most of his testimony
centered on the process by which the corporate defendants get paid
under the Medicare and Medicaid regimes. Defendants' clients are
referred for community-based care from the Virginia Department of
Medical Assistance Services. This government agency pre-screens the
patients to ascertain whether they are eligible for Medicare and
Medicaid. Upon receipt of the referral, defendants send a nurse to do
an initial assessment of the patient to determine the number of hours
of care necessary. Once the care hours are determined, defendants
send an admissions packet, which includes the pre-screening
information from Virginia and the nurse's report from the initial
assessment, in order to obtain billing authorization from Medicare
and Medicaid. Without such authorization, defendants are not
permitted to bill for services rendered. The authorization process
takes somewhere between eight to twelve weeks and Hofler stated that
he had never had situation where authorization had been denied.
However, defendants are obligated under Medicare and Medicaid to
provide services within twenty-four hours of accepting the patient,
notwithstanding that authorization to bill remains pending. Hofler
estimated that Medicare and Medicaid account for approximately 85 to
90 percent of his companies' revenues.
This delay in billing for services made up the bulk of Hofler's
testimony and, in his mind, the crux of the dispute. Hofler testified
that he became frustrated with Quantum because plaintiff cut back its
funding to defendants based, in his opinion, on Quantum's lack of
familiarity with Medicare and Medicaid and GAAP principles for the
home health care industry. Moreover, Hofler testified that Quantum
had previously loaned against accounts receivable that included
unbilled services and had done so without complaint. As Hofler and
his outside accountant testified, GAAP principles for home health
care permit unbilled services rendered to be listed as accountants
receivable, which are assets of the company. Since the centerpiece of
these Agreements was asset-based lending — that is, lending against
defendants' receivables — exactly what is an asset and what is not
was an important question to Hofler and Quantum. As Hofler stated,
Quantum did not believe unbilled services were appropriate assets
against which to provide financing, despite the fact that such were
listed on defendants' books as receivables.
All of Hofler's testimony about accounting principles and billing
practices is, however, a bit removed from the real issue in this
case: the relationship is governed by the written loan and security
Agreements. Keeping this in mind, several undisputed facts came out
at the hearing. First, the Agreements grant Quantum vast and absolute
discretion to determine the amount of its loan and against which
assets it would provide advances. Second, Hofler admits that
defendants had incurred new (meaning after Quantum advanced money in
July 2000 to pay off the $80,000 in arrears) payroll tax liability of
approximately $400,000. Third, Hofler stated that defendants had
several internal problems in the billing department resulting in
receivables that were over 120 days and thus not considered "Eligible
Accounts" under the loan Agreements, although Hofler quarreled
somewhat with how Quantum computed 120 days. Fourth, defendants'
outside accountant, Wayne Lee, testified that he agreed with
Seymour's findings regarding defendants' failure to post general
ledgers and keep accurate financial records, the arrears on payroll
taxes and failure to perform reconciliations. Hofler also conceded,
as did his attorney, that the companies have not been keeping
accurate and reliable financials for quite some time. Indeed, Hofler
blamed an internal accountant, whom Hofler terminated, for the
accounting failures of the companies. These facts suggest that
defendants are in breach of the loan and security Agreements or, at
the very least, present sufficiently serious questions to litigate
about the financial condition of the companies and the terms of the
Turning to facts which tend to suggest that Quantum may suffer
irreparable harm in the absence of an injunction, Hofler testified on
cross-examination that he was formerly the president of a company
called "Assist You, Inc." This company is not a party in the instant
matter. However, Hofler was the largest (60 percent) shareholder in
Assist You, Inc. The company was in the same home health care
business as the defendants and also shared two business addresses
with the corporate defendants. Hofler closed Assist You, Inc. down at
some point and the company failed to pay off its creditors.
Specifically, it failed to pay off its Internal Revenue Service
payroll tax liability, which amounts to approximately $160,550. The
IRS has filed levies against Assist You, Inc. and the company,
despite the fact that it no longer has any revenue, has been trying
to settle the matter since 1995. The State of Virginia also filed tax
levies on Assist You, Inc. in 1996 for approximately $37,806.
Further, Assist You. Inc. left behind a number of unsatisfied
judgments from entities including Richmond Temporaries, West Home
Health Care, Inc., MCV Associate Physicians, Care Advantage, Inc.,
Robert Heff International and Terry Phillips.
Hofler professed to have no knowledge of these judgments and was
often evasive when discussing the financials of his currently-owned
companies (four of his thirteen companies are defendants in this
case) and Assist You, Inc. Hofler is simply not credible on these
issues. He was the largest shareholder of Assist You, Inc. and
acknowledged that the company was closed, that he knew it had
outstanding obligations and, moreover, testified that he was familiar
with the legal principle that the largest shareholder in a small
corporation may have personal liability for federal payroll taxes and
other claims against the corporation. Knowing this, he clearly would
have focused some degree of attention on whether he was going to be
personally out close to $200,000 for unpaid federal and state taxes,
not to mention obligations flowing from any judgments against the
corporation for which he might have personal liability. On this
record, Hofler appears to have a history of making judgments
Furthermore, having provided his adversary with a consolidated
balance sheet representing total current assets, some portion of
which is receivables, in excess of $800,000, Hofler attempted over
several painful pages in the transcript to waffle away from that
number. The colloquy went as follows:
Q. Now presently you're telling me you have over $800,000
in accounts receivable?
A. I don't know.
Q. I'll refer you to Exhibit 7 [the aforementioned
consolidated balance sheet], second page. It lists
current assets at $825,457.79?
A. I don't have that in front of me, so I can't respond.
The Court: Give him a copy.
A. Okay. So this line item indicates total current
assets. I'm not sure what that is made up of. I'm sure a
portion of it is accounts receivables, but I can't tell
you exactly what that figure is made up of. It doesn't
say AR. It says total current assets.
Q. Right, that's why I asked you if you know what your
current receivables are. So you really don't know if
you're insolvent now, is that a fair statement?
A. Well, I believe the company is solvent because we're
still doing business. You know, that's not even an
Q. Can you explain why you have such a dramatic increase
from 202 to 800 something?
A. Assuming your numbers are correct, any increase in
account receivables can be attributed to several things,
number one growth, which is what we've been in a growth
phase, number two — I'm sorry?
The Court: Finish, go ahead.
A. It will be attributed to growth as a result of
additional clients coming on. Current assets also would
be, if I'm not mistaken, a portion of that would be
unbilled charges and those unbilled charges are as a
result of new patients coming in the door. It can also be
a result of acquisitions that we did where we took over a
company and we had to admit all of their patients, and as
a result of that it created a huge current asset bucket,
if you will. Then lastly, it could be contributed to just
overall growth and the individuals that are in the
billing department being properly focused on making sure
that they are focusing on current billing as well as
collections, and that's an areas that we've really been
working on as a result of our growth.
Q. Are you saying then that the $825,000 includes the
A. I'm not sure. I'm just saying that it could be an
asset on the books because of the fact that when we did
the transaction —
The Court: Mr. Hofler, you're the CEO of this
The Witness: Yes, sir.
The Court: Can't you do any better than that in telling
us where this comes from? I mean don't you look at the
books? Don't you talk? You've got managers or whatever
you want to call them. Don't you know where this money is
The Witness: Well, more specifically regarding the
current asset column, I'm not really sure of the detail
of it, your Honor.
The Court: I know, but you're running the business.
Aren't you on top of that?
The Witness: Well, it wasn't until your order that we
were able to even get a financial statement done.
The Court: Forget that. You know how the business has
been doing. You know where stuff is coming in. You say,
hey Joe, how are we doing in this section, how are we
doing in that section?
The Witness: That's correct.
The Court. Are you telling us that you don't know where
the $800,000 really came from?
The Witness: I don't know.
The Court: It could be this, it could be that?
The Witness: I don't know the specifics, but I'm sure the
individual who did —
The Court: No. You're the chief. You're on top of this
thing. I ran a law firm for 14 years. I knew all the time
where the money was coming from, who was paying me, who
wasn't paying me. Otherwise you couldn't run the thing.
You're telling me you don't know where this is coming
from or that's coming from?
The Witness: What I do know, your Honor, is the total AR
based on the reports that we submitted and I know the
total unbilled charges based on the reports that we submitted.
The Court: Is that where the $800,000 is coming from?
The Witness: I'm not real sure exactly what the $800,000
is made up of, your Honor.
The Court: Well, that's what I'm asking you.
The Witness: On the current asset line on the balance
sheet, I'm not sure where that number came from.
The Court: Don't you have a curiosity?
The Witness: Oh, sure. We just, again, because of sake of
time have not had an opportunity to fully analyze statements.
The Court: But as the year was rolling along, did you
know this section is doing well, that section is not
doing well, we've lost money here, we've lost patients
there, we got new patients here? Don't you keep track?
The Witness: As far as the financial statements were
concerned, over the past six months —
The Court: As far as income is concerned, how the
business is doing?
The Witness: of course. We get weekly and daily reports
on that, your Honor.
The Court: So then you know?
The Witness: That's correct.
The Court: So that's what he's asking you, where did it
The Witness: I don't know where it came from on the
balance sheet that was provided here.
The Court: Forget the balance sheet. Where did it come
from, in fact?
The Witness: Where did the current asset line come from?
The Court: Where did those assets come from in fact?
The Witness: I can't answer the question because I don't
know what this CPA firm put in that line item, your
Honor, but our CPA is here.
(Tr. 237-242.) All of the foregoing testimony also comes after
Hofler made assertions at the TRO hearing that the companies'
receivables exceed $500,000. (TRO Hearing Tr. at 16.)
To prevail on its claim for a preliminary injunction, Quantum must
demonstrate a threat of irreparable injury and either (1) a
probability of success on the merits, or (2) sufficiently serious
questions going to the merits of the claims to make them a fair
ground for litigation, and a balance of hardships tipping decidedly
in its favor. See, e.g., Brenntag Int'l Chems. Inc. v. Bank of India,
175 F.3d 245, 249 (2d Cir. 1999). Although the monetary injury
claimed here usually does not constitute irreparable harm because
such injury can be estimated and compensated, irreparable harm may
exist where "but for the grant of equitable relief, there is a
substantial chance that upon final resolution of the action the
parties cannot be returned to the positions they previously
occupied." Id. (internal cite omitted); S.E.C. v. Princeton Econ.
Int'l. Ltd., 73 F. Supp.2d 420, 425 (S.D.N.Y. 1999) (same).
Preliminary injunctions are therefore appropriate to thwart a
defendant from making a judgment uncollectible. See id.
I find that Quantum has adequately satisfied its burden. Quantum
faces irreparable harm in the form of an actual and imminent threat
that Hofler's companies, wrought with accounting and payroll
problems, will either cease to exist by Hofler's actions of shutting
them down, as he has previously done with Assist you, Inc., or go
under of their own accord for failure to pay operating expenses and
payroll taxes, thereby making a judgment in Quantum's favor
uncollectible. Although I make no finding with respect to plaintiffs
likelihood of success on the merits, there are unquestionably
sufficiently serious questions to litigate about the loan and
factoring agreements, especially with regard to the ambit of
Quantum's discretion in evaluating when and whether it would loan
money against defendants' account receivables, Hofler's good faith
and fair dealing and Quantum's good faith.
The balance of hardships also tips decidedly in Quantum's favor.
First, the evidence established a continuing pattern of bad-faith by
Hofler in evading creditor claims and simply winding-up companies at
the first hint of financial trouble. Without an injunction, Quantum
would suffer a hardship because plaintiff would not be paid monies
that, it claims, are justly due and owed for financing that has
already been provided. Indeed, defendants admitted at argument on the
aforementioned order to show cause that they owe Quantum money under
the Agreements, but maintain that this is simply a dispute about how
much they owe.*fn5 Second, the injunction would ensure that Quantum
would be paid in the future should it prevail, but it would not shut
down Hofler's corporations. By Hofler's own admission at the TRO
hearing, the hearing on this preliminary injunction and in the
consolidated balance sheets defendants provided to Quantum under this
Court's order, there are currently receivables substantially in
excess of the amount this Court will freeze enabling defendants to
continue to do business and even, should they so choose, apply for
One other point bears emphasis with respect to the propriety of
seizing the amounts allegedly owed Quantum. Relying on Grupo Mexicano
de Desarrollo. S.A. v. Alliance Bond Fun Inc., 527 U.S. 308 (1999),
it has been argued that this Court may not issue an injunction
seizing defendants' assets. In Grupo Mexicano, the Supreme Court held
that district courts do not have the power to issue preliminary
injunctions freezing a defendant's assets in order to secure a money
judgment, because unsecured creditors had no such remedy at common
law. See id. at 329-33. However, the Court made a distinction between
general, unsecured creditors and those possessing a lien or equitable
interest in the property at issue. See id. at 324-26. The issue in
Grupo Mexicano, as other courts have recognized, was whether a
district court has the power to enjoin assets in which the potential
judgment creditor has absolutely no equitable interest. Such is not
the record before me and Grupo Mexicano is therefore distinguishable.
Aside from the terms of the Agreements creating a security interest
in defendants' receivables,*fn6 the state UCC-1 filings perfecting
Quantum's security interest*fn7 and the opinion letter dated June
23, 2000 by defendants' own counsel suggesting that plaintiff indeed
possesses a security interest in the receivables*fn8 — all of which
standing alone are significant distinctions from the concerns set
forth in Grupo Mexicano — there is a strong nexus between the
receivables (only a portion of which are to be enjoined) and
Quantum's claims for money damages.*fn9 See, e.g., Republic of
Philippines v. Marcos, 806 F.2d 344, 356 (2d Cir. 1986); State of New
York v. Panex Indus. Inc., 860 F. Supp. 977, 980-81 (W.D.N.Y. 1994).
The foregoing constitute the Court's findings of fact and
conclusions of law.
1. Quantum's motion for a preliminary injunction is granted.
2. Defendants are directed to deposit $229,736 plus interest since
February 15, 2001 into the Court Registry Investment System
3. Quantum's previously posted security in the amount of $5,000 is to
remain in place.
4. This matter is set down for an expedited trial to begin on June