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WECHSLER v. HUNT HEALTH SYSTEMS LTD.

February 20, 2002

RAYMOND H. WECHSLER, ADMINISTRATIVE TRUSTEE OF THE TOWERS FINANCIAL CORPORATION ADMINISTRATIVE TRUST, PLAINTIFF,
V.
HUNT HEALTH SYSTEMS, LTD., P&G 86605 ENTERPRISES, INC., MHTJ INVESTMENTS, INC., ESPERANZA HEALTH SYSTEMS, LTD. AND FRIENDSHIP, INC., DEFENDANTS.



The opinion of the court was delivered by: Peter K. Leisure, District Judge:

OPINION AND ORDER

I. BACKGROUND

A. Factual Background

Familiarity with the prior decisions relating to this case is assumed. Except as otherwise indicated, for purposes of these motions, the parties have stipulated to, or do not otherwise contest, the following facts as noted in the original summary judgment decision, which are repeated below in their entirety, from that earlier decision. See Wechsler v. Hunt Health Sys., Ltd., No. 94 Civ. 8294, 1999 WL 397751 (S.D.N.Y. June 16, 1999) ("Welchsler I"), at *1-*3.

1. The Accounts Receivable Purchase Contract

On July 10, 1991, Towers executed an accounts receivable purchase contract (the "HCP Agreement") with Hunt Health, a Texas limited partnership formed in 1991, to operate a drug and alcohol dependency rehabilitation center located in Hunt, Texas doing business as "La Hacienda Treatment Center," or "La Hacienda." Plaintiffs Counter-Statement Pursuant to Local Civil Rule 56.1(b), dated July 29, 1998 (hereinafter "Pl. 56.1 Counter-Statement"), ¶ 1. The HCP Agreement provides that Hunt Health will offer to sell to Towers the "Reimbursable Accounts" receivable of Hunt Health, defined by the agreement as "clean claim obligation[s] payable in whole or in part by a governmental entity . . . or by an insurance company or other entity approved by [Towers]". Defendants' Response to Plaintiffs Statement Pursuant to Local Civil Rule 56.1, dated July 24, 1998 (hereinafter "Def. 56.1 Response"), ¶ 22.

The contractual purchase price for a Reimbursable Account is 95% of the amount Towers actually recovers on the account, plus 95% of any remaining "Reimbursable Value", defined as "the amount that is represented by [Hunt Health] to be due and payable by a Third Party Obligor with respect to such Account." See exhibits attached to the affidavits of Jeffrey B. Finnell, Esq. (hereinafter "Pl. Ex."), Ex. 22, ¶ 3. The parties have referred to the difference between the discounted value paid by Towers and its full face value as a "factoring fee".

Towers's payment for purchased accounts is to occur in two installments. The first installment, consisting of 50% of the Reimbursable Value of the account, is due upon purchase. See id. The remaining balance is due upon the earlier of (i) receipt by Towers of full payment on the account, (ii) 30 days from the date a third party obligor informs Towers that the account will not be paid, or (iii) 365 days after the date of purchase. See id. Upon Towers's payment of the initial installment, Hunt Health's rights, title and interest in the accounts, including Hunt Health's right to payment on the accounts, transfers to Towers. See id. ¶ 4.

Simultaneous with the execution of the HCP Agreement, Towers and Hunt Health executed a rider whereby Towers acquired a lien on, among other things, all of the accounts receivable of Hunt Health and proceeds thereof as collateral for any liabilities of Hunt Health to Towers resulting from operation of the HCP Agreement. See Pl. Ex. 23.

The final relevant contemporaneous agreements are letter agreements (the "Guaranties") entered into with Towers by P&G Enterprises, Inc. ("P&G"), and MHTJ Investments, Inc. ("MHTJ"), Texas corporations that each have a 50% ownership interest in Hunt Health.*fn3 The letter agreements set forth absolute and unconditional guaranties by P&G and MHTJ of Hunt Health's obligations and liabilities to Towers, if any. See Pl. Exs. 26, 27.

2. The September 1992 Agreements

In September 1992, Towers and Hunt Health effected several changes in their contractual relationship. On September 25, 1992, the parties executed an amendment (the "Amendment") to the HCP Agreement allowing Hunt Health to elect early termination. See Pl. Ex. 29. In the event of such election, the Amendment provides that Hunt Health must pay Towers liquidated damages equal to $10,000 for each month or part thereof remaining prior to the HCP Agreement's original termination date. See id.

In addition, that same day, Towers and Hunt Health executed a more elaborate security agreement regarding Towers' lien on Hunt Health's assets (the "Security Agreement") and a separate letter agreement altering the method for determining the factoring fee charged by Towers. See Pl. Exs. 28, 74.

Finally, on September 30, 1992, Towers and Hunt Health entered into a letter agreement (the "Letter Agreement") providing in part that "the amount of Accounts [Hunt Healthl offer[s] to [Towers] under the Contract can result in maximum initial payments outstanding from Towers to Hunt [Health] of One Million ($1,000,000.00) Dollars". Pl. Ex. 30.*fn4

3. The Unraveling of Towers's Fraudulent Note and Bond Sale Schemes

On February 8, 1993, the United States Securities and Exchange Commission ("S.E.C.") brought suit against Towers and several of its executives, seeking, among other things, to enjoin disposal of Towers's assets outside the ordinary course of business. See Exhibits attached to the affidavits of Brooks Banker, Jr., Esq. (hereinafter "Def. Ex."), Ex. 41. The S.E.C. lawsuit was premised on allegations that Towers had sold over $400 million worth of promissory notes and unregistered bonds from 1989 to 1993 based on materially false and misleading statements regarding Towers's financial condition, the risks of investing in the securities and the intended use by Towers of proceeds of the note and bond sales. See Def. Exs. 40, 41.

The next day, Towers stopped depositing proceeds it received on accounts receivable into lockboxes controlled by Shawmut Bank Connecticut ("Shawmut"), the indenture trustee of Towers's bond issuances. See Def. Ex. 27. As a result of this event and Towers's ongoing failure to provide adequate assurances of its financial viability, Shawmut declared Towers in default of its obligations under the indenture agreement. See id.; see also Def. Exs. 28, 29. Shawmut subsequently sought and obtained a temporary restraining order in the United States District Court for the District of Connecticut ordering Towers to deposit proceeds from the accounts into the lockboxes and to provide Shawmut access to Towers's financial records. See Def. Ex. 32. On March 8, 1993, following transfer of the Shawmut lawsuit to the United States District Court for the Southern District of New York, a preliminary injunction substantially similar to the temporary restraining order was entered by Judge Knapp of this Court. See Def. Ex. 31.

In the separate action initiated by the S.E.C., a preliminary injunction issued on February 17, 1993, prohibiting Towers from, inter alia, disposing of its assets except in the ordinary course of business. See Pl. Ex. 117.

4. Hunt Health's Notice of Termination of the HCP Agreement

As of January 1993, Hunt Health had begun to make arrangements to switch to a different factoring service provider, MediMax, Inc., a competitor of Towers. See Def. 56.1 Response, ¶ 56. By February 22, 1993, Hunt Health expected the transfer of Towers's servicing to MediMax to occur by that Friday, February 26, 1993. See id. ¶ 57. On that Friday, Hunt Health gave Towers notice of Hunt Health's intention to terminate the HCP Agreement. See Def. 56.1 Response, ¶ 58; Pl. Ex. 79.

Of serious contention between the parties are the events, if any, occurring the previous day, February 25, 1993. Defendants assert that on that date Hunt Health requested from Towers a $60,000 payment pursuant to the Letter Agreement. Plaintiff disputes whether Hunt Health made the request. In all events, it is undisputed that Towers remitted no funds to Hunt Health on that day or, indeed, on any day after February 19, 1993. Towers' final purchases of Hunt Health's accounts receivable occurred at some point between February 19 and 26, 1993. See Def. Ex.77, ¶ 2.

5. Subsequent Events

A month later, on March 26, 1993, Towers filed a voluntary petition for relief under chapter 11 of the United States Bankruptcy Code, and a chapter 11 trustee was subsequently appointed. See Def. 56.1 Response, ¶ 2.

On April 2, 1993, Esperanza, a Texas limited partnership, was formed by P&G and Friendship, a Texas corporation created that same day by Givens, Mehendale and Thomas. By written agreement executed as of that date, Hunt Health agreed to sell Esperanza certain of Hunt Health's assets in exchange for Esperanza's assumption of certain of Hunt Health's liabilities. See Pl. Ex. 38. The decision of Esperanza and Hunt Health to execute the agreement was made by the same persons on both sides, and Gaines and Givens executed the agreement on behalf of both entities.*fn5 See Def. 56.1 Response, ¶¶ 92, 95.

On November 11, 1994, pursuant to his authorization by the bankruptcy court, the chapter 11 trustee initiated this action. Upon confirmation of Towers's plan of reorganization on December 8, 1994, the remaining assets of Towers were transferred to an administrative trust (the "Trust"), with Raymond Wechsler designated as administrative trustee (the "Trustee"). See id. ¶ 4. Pursuant to the plan of reorganization, the Trustee pursued this litigation in the place of the chapter 11 trustee. See id. ¶¶ 5-6.*fn6

B. Procedural Background

On June 16, 1996, this Court issued an Opinion and Order regarding plaintiffs motion for summary judgment on most of its claims and defendants' cross-motion for partial summary judgment regarding certain of their breach-of-contract claims. See Wechsler I, No. 94 Civ. 8294, 1999 WL 397751 (S.D.N.Y. June 16, 1999). The Court,inter alia, granted partial summary judgment to plaintiff and denied defendants' motion for summary judgment. See id. at *1.

One of the many breach-of-contract claims addressed in the Opinion was Hunt Health's assertion that Towers breached a letter agreement ("the Letter Agreement"), by failing to make a $60,000 payment Hunt Health allegedly requested. See id. at *10-*14 Plaintiff responded in its opposition papers that the Letter Agreement had expired by the time of the alleged request. See id. at *11. Defendants later moved to preclude plaintiffs assertion of the "expiration argument" because plaintiff had failed to disclose it in response to relevant contention interrogatories during the discovery phase of this action. On August 27, 2001 this Court granted defendants' motion to preclude plaintiff from asserting that the Letter ...


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