The opinion of the court was delivered by: PETER LEISURE, District Judge
Plaintiff Raymond H. Wechsler, the administrative trustee
overseeing the assets of Towers Financial Corporation ("Towers"),
brings this action against Hunt Health Systems, Ltd. ("Hunt
Health") and affiliated entities for breach of contract,
conversion, breach of guaranty, and fraudulent conveyance in
connection with the parties' factoring agreement. From October
22, 2003, through November 4, 2003, the Court conducted a bench
trial regarding the disputed issues in the case, and the parties
subsequently submitted post-trial briefs further addressing those
issues. Having considered the parties' post-trial submissions and
the evidence presented at trial, the Court sets forth herein its
findings of fact and conclusions of law, pursuant to Rule 52(a)
of the Federal Rules of Civil Procedure.*fn1 Findings of Fact
This case arises out of a factoring agreement between Towers
and Hunt Health. The agreement set forth the terms for Hunt
Health's sale, and Towers' purchase, of Hunt Health's accounts
receivable. In general, the agreement provides that Hunt Health
will offer to sell its Reimbursable Accounts Receivable, payable
by insurance companies, to Towers. The agreement further provides
that Towers, upon choosing to purchase an account of Hunt Health,
will make an initial payment, or advance, to Hunt Health, in the
amount of 50% of the account's Reimbursable Value. After Towers
makes this initial payment, or advance, it earns a "factoring
fee" from Hunt Health while that advance remains outstanding.
Then, when the insurance company thereafter remits its payment
for the account, Towers recoups its advance, Hunt Health receives
the balance, and Towers ceases to earn its factoring fee for that
The parties reached this factoring agreement in July 1991,
significantly amended it in September 1992, operated outside its
bounds from October 1992 to February 1993, and ended it on
February 26, 1993. By that date, all of Hunt Health's accounts
receivable, which had a total face value of $3.5 million, had
been sold to Towers. Towers' outstanding initial payments, or
advances, to Hunt Health as of that date totaled $910,000. In
this action plaintiff demands the return of Towers' initial payments, or advances, on the theory
that the accounts receivable Hunt Health sold to Towers were bad
accounts. Plaintiff also demands the payment of factoring fees
owed by Hunt Health for the outstanding advances. Defendants
answer that plaintiff fails to show that Hunt Health sold bad
accounts to Towers, and that Towers, in any event, breached the
contract first. Defendants also demand, by their counterclaim,
the payment of the balance of the accounts Hunt Health sold to
Plaintiff is Raymond H. Wechsler. In December 1994, Wechsler
was appointed the administrative trustee of Towers Financial
Corp. ("Towers"), after Towers had filed a voluntary petition for
bankruptcy in March 1993. Defs. Exh. 25. In August 1999, the
United States Bankruptcy Court for the Southern District of New
York terminated Towers administrative trust, and assigned the
trust's claim against Hunt Health to Wechsler in his personal
capacity. Defs. Exh. 42. Prior to its bankruptcy, Towers provided
accounts receivable financing and management services for
thousands of corporate and healthcare clients. Such services
included the purchase and financing of accounts receivable and
the collection of accounts receivable on a contractual basis for
a fee. Defs. Ex. 141, at 13.
Defendants are Hunt Health Systems, Ltd. ("Hunt Health"), P&G
Enterprises, Inc. ("P&G"), MHTJ Investments, Inc. ("MHTJ"),
Esperanza Health Systems, Ltd. ("Esperanza"), and Friendship, Inc
("Friendship"). Hunt Health, a Texas limited partnership, was
formed in 1991 to operate a drug and alcohol dependency
rehabilitation center located in Hunt, Texas, doing business as
La Hacienda Treatment Center ("La Hacienda"). Wechsler, 1999 WL
397751, at *1. La Hacienda is a 110-bed drug and alcohol
treatment facility that presently employs a staff of 183 and
serves roughly 80 patients each month. Tr. 111:7-20;
789:14-790:10. It is situated on roughly 35 acres and includes several buildings. Tr.
112:14-17. La Hacienda conducts, among other things, a 12-step,
28-day rehabilitation program consistent with the Alcoholics
Anonymous framework. Tr. 786:23-788:20.
Hunt Health operated La Hacienda from 1991 to 1993. Tr.
747:12-748:2. During its relationship with Towers, Hunt Health
was owned by P&G and MHTJ. Wechsler, 1999 WL 397751, at *2. P&G
is a Texas corporation that was formed in 1991 to acquire an
interest in Hunt Health. Tr. 123:13-15. P&G is owned by two
sisters, Gail Gaines and Patricia McDonough. Tr. 124:3-4. MHTJ is
a Texas corporation that was formed by John L. Givens III, Anand
Mehendale, Rex Thomas and Thomas Havard. Wechsler, 1999 WL
397751, at *2, n. 1. Hunt Health's last day of business was April
1, 1993, although it remains an entity today. Tr. 159:14-17.
On April 2, 1993, Esperanza was formed by P&G and Friendship, a
company itself formed on the April 2, 1993, by Givens, Mehendale,
and Thomas. Wechsler, 1999 WL 397751, at *3. On the day
Esperanza was formed, Hunt Health agreed to sell to Esperanza
certain of Hunt Health's assets in exchange for Esperanza's
assumption of certain of Hunt Health's liabilities. Wechsler,
1999 WL 397751, at *3; Pl. Exh. 16. On April 2, 1993, Hunt Health
ceased to own or operate La Hacienda, and Esperanza took over
ownership of La Hacienda. Tr. 180:16-185:8; Pl. Exh. 16; see
Several writings set forth the contractual relationship between
On July 10, 1991, Hunt Health and Towers executed an accounts
receivable purchase contract (the "HCP Contract" or "HCP
Agreement"). Pl. Exh. 2. The HCP Contract provides that Hunt Health will offer to sell Towers the "Reimbursable
Accounts" receivable of Hunt Health, defined in paragraph 1 of
the HCP Contract 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]." Pl. Exh. 2. The
HCP Contract refers to these insurance companies, governmental
entities, and other account payors as "Third Party Obligors." Pl.
Exh. 2, ¶ 1. The phrase "non-Reimbursable Account" does not
appear in the HCP Contract, although the parties and the Court
have used this term throughout the litigation. For the purposes
of this opinion and order, a non-Reimbursable Account is any
account receivable that does not meet the definition of a
Reimbursable Account as set forth in paragraph 1 of the HCP
Contract. An account, therefore, not payable at least in part by
a governmental entity or insurance company is a non-Reimbursable
According to paragraph 3 of the HCP Contract, the 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." Pl. Exh. 2. The parties have
referred to the difference between the discounted value paid by
Towers and its full value as a "factoring fee."
Paragraph 3 of the HCP Contract also sets forth the method by
which Towers was to pay Hunt Health for the accounts receivable.
Towers' payment for purchased accounts is to occur in two
installments. Pl. Exh. 2. The first installment, consisting of
50% of the Reimbursable Value of the account, is due upon
purchase. Pl. Exh. 2. 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. Pl. Exh. 2. Upon Towers' 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. Pl. Exh. 2.
The Court has already found that Towers and Hunt Health in fact
used a more refined method of payment for accounts receivable
that is consistent with the contract terms set forth in Paragraph
3 of the HCP Contract. See Wechsler, 198 F. Supp.2d at 518
n. 11. In particular, Towers applied a "dilution factor" to the
accounts Hunt Health sold to it to calculate the initial payment
owed to Hunt Health. See id. Before signing the HCP Contract,
Towers determined that 60% of the face value of the Reimbursable
Accounts that were subject to the HCP Agreement were in fact
collectible. See id. As a result of this determination,
Towers advanced initial payments of 30% of the face value of
accounts receivable to Hunt Health. Thirty percent of the face
value of the accounts receivable is 50% of the Reimbursable Value
of the accounts receivable (which is 60%), thus Towers' payments
comply with the HCP Contract provisions. See id. Towers,
therefore, obligated by paragraph 3 of the HCP Contract to make
initial payments of 50% of the Reimbursable Value of accounts,
paid Hunt Health 30% of the face value of each account, and
thereby met its obligation. The witnesses, the parties and the
Court have referred to this deduction as the "dilution factor."
See id.; Pl. Exh. 213a, ¶ 11. As the Court has noted, the
parties agree that the dilution factor did in fact exist and that
it was deemed to be the calculus for the "Reimbursable Value" of
the accounts receivable purchased by Towers. See Wechsler,
198 F. Supp.2d at 518 n. 11.
Paragraph 4 of the HCP Contract provides, among other things,
that Towers' "purchase of Reimbursable Accounts . . . will be
evidenced by [its] delivery to [Hunt Health] a list of those
Accounts which [Towers is] purchasing, together with payment of
the initial installment of the Purchase Price for such Accounts. Upon such delivery and payment
[Hunt Health] will be deemed to have sold to [Towers] all of
[Hunt Health's] rights, title and interest in such Accounts and
[Towers] will become the absolute owner thereof." Pl. Exh. 2.
Paragraphs 5 and 8 of the HCP Contract set forth the parties'
agreement as to which accounts receivable are eligible for sale
to Towers. The Court addressed these provisions at length during
the summary judgment phase of this case, finding, among other
things, that they are not ambiguous. Wechsler, 198 F. Supp.2d 508,
516-22. Paragraph 5 sets forth the parties' agreement as to
"Rejected Accounts." Pl. Exh. 2. A Rejected Account is an account
receivable that fails to comply with the representations and
warranties in Paragraph 8 of the HCP Contract. Wechsler,
198 F. Supp.2d at 518; Pl. Exh. 2. Paragraph 8 states, among other
things, that when Hunt Health offers to sell accounts to Towers
it represents and warrants that "the Third Party Obligors
identified by [Hunt Health] as being financially obligated to pay
each Account purchased by [Towers] are obligated to pay the full
Reimbursable Value without dispute, reduction in amount for any
reason whatsoever, offset, defense or counterclaim." Wechsler,
198 F. Supp.2d at 518; Pl. Exh. 2. A Rejected Account,
therefore, is a Reimbursable Account that Hunt Health offers to
sell to Towers that is disputed, denied, or paid by the Third
Party Obligor. For example, if a patient received treatment at La
Hacienda, and the patient's insurance company disputes the
payment owed to Hunt Health for the treatment, then the account
receivable would be a Rejected Account if Hunt Health offered to
sell it to Towers. Paragraph 5 obligates Hunt Health to notify
Towers "promptly of any disputes, offsets, deductions, defenses
or counterclaims which are or may be asserted by a Third Party
Obligor" on an account receivable offered to Towers. Paragraph 5 of the HCP Contract sets forth the options
available to Hunt Health in the event that it offers to sell to
Towers a Rejected Account. Pl. Exh. 2. Upon learning of a defect
in an account, Hunt Health may choose to cure the defect in the
account within three days of such discovery, or to substitute one
or more accounts for the Rejected Account within five days of
such discovery. Pl. Exh. 2. Hunt Health's failure to cure or
substitute a Rejected Account gives rise to an indebtedness, or
overpayment, to Towers, in the amount of the initial payments, or
advances, Towers made to Hunt Health on that Rejected Account.
Pl. Exh. 2; Wechsler, 198 F. Supp.2d at 519. This indebtedness
arises automatically from the sale of a Rejected Account to
Towers. Wechsler, 198 F. Supp.2d at 519. Formal or affirmative
notice by Towers of an account becoming a Rejected Account is not
a condition precedent to the genesis of an indebtedness owed to
Towers by Hunt Health. Id. In other words, as this Court has
already found, Hunt Health was indebted to Towers for the
advances Towers had made on accounts receivable, as well as
factoring fees associated with those advances, when the accounts
failed to comply with paragraph 8. Id. at 522.
Paragraph 5 of the HCP Contract also sets forth the options
available to Towers upon its purchase of a Rejected Account that
Hunt Health has not cured or substituted. The Court has already
ruled that Towers had no obligation to notify Hunt Health about a
defect in an account for Hunt Health to become indebted to Towers
for advances paid on that account. Id. at 520. Upon purchasing
a Rejected Account not cured or substituted by Hunt Health,
Towers could either offset the amount it advanced as an initial
payment on the Rejected Account from the balance of other
accounts, or it could make a demand for the repayment of the
advance on the Rejected Account. Id.; Pl. Exh. 2. If Towers
chooses the latter option, then the indebtedness owed by Hunt
Health to Towers would bear 18% interest (annually) running from
the date of the demand Pl. Exh. 2. The parties and Court have at times termed
the process of Towers exercising its options as a "charge back."
Wechsler, 198 F. Supp.2d at 521.
To summarize with the Court's earlier description of the
agreement between the parties,
if an account is not paid to Towers because of a
breach of the Paragraph 8 warranties, the advances
made to Hunt Health represent an overpayment, or
indebtedness, to Towers. Hunt Health can then choose
to cure or substitute for this non-conforming
account. If Hunt Health does not cure or substitute,
Towers can then make a demand for payment, with an
18% interest rate running from the date of demand, or
Towers can choose to offset the indebtedness from the
balance of the purchase price it owes on new accounts
it may purchase.
Wechsler, 198 F. Supp.2d at 519.
Paragraph 7 of the HCP Contract provides, among other things,
that Hunt Health must forward to Towers any checks it receives
for accounts Hunt Health has sold to Towers. Pl. Exh. 2.
Paragraph 7 does not explicitly obligate Towers to collect the
accounts it purchases from Hunt Health. The Court has already
ruled, however, that plaintiff is judicially estopped from
asserting that Towers had no collection obligation under the HCP
Contract. Wechsler, 1999 WL 397751, at *10; Wechsler,
198 F. Supp.2d at 524. Thus, for the purposes of this case, the HCP
Contract imposes a collection duty upon Towers.
Paragraph 9 of the HCP Contract provides, among other things,
that Hunt Health covenants to "make a notation on [its] computer
files and other physical books and records to indicate which
Accounts have been sold to [Towers]." Pl. Exh. 2.
Finally, paragraph 10 of the HCP Contract includes, among other
things, a merger clause, a forum selection clause, and an
attorney's fees clause. Pl. Exh. 2. Paragraph 10 also sets
December 31, 1994, as the date on which Hunt Health's obligation
to offer accounts for sale to Towers terminates.
B. The Rider On July 10, 1991, the same day that the parties executed the
HCP Contract, the parties also executed a rider, titled "Rider
A." Pl. Exh. 6. Pursuant to Rider A, 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 the operation of the HCP
Contract. Pl. Exh. 6; Wechsler, 1999 WL 397751, at *2. Rider A
gives Towers a security interest in "all presently existing or
hereafter arising or acquired accounts . . . whether or not such
accounts have been purchased by [Towers] under the Contract." Pl.
Exh. 6. Rider A lists the events which would constitute a default
by Hunt Health, such as Hunt Health's failure "to pay or perform
any of the Obligations after demand by [Towers] or otherwise when
due." Pl. Exh. 6. "Obligations" are defined as "all present and
future debts, liabilities, obligations, interest and charges of
any kind whatsoever owing by you to us in connection with the
Contract, whether with respect to Rejected Accounts or
otherwise." Pl. Exh. 6. Rider A states that "Upon the occurrence
of an Event of Default all Obligations shall become immediately
due and payable." Pl. Exh. 6.
On July 10, 1991, the same day that the parties executed the
HCP Contract and Rider A, Towers executed Guaranties with MHTJ
and P&G. Pl. Exhs. 3, 4. The Guaranties set forth absolute and
unconditional guaranties by P&G and MHTJ of Hunt Health's
obligations and liabilities to Towers, if any. Pl. Exhs. 3, 4;
Wechsler, 198 F. Supp.2d at 511. Pursuant to the Guaranties,
P&G and MHTJ are jointly and severally liable to Towers for any
liabilities of Hunt Health arising under the HCP Contract. Pl.
Exhs. 3, 4. The Court has already granted summary judgment in
plaintiff's favor that P&G and MHTJ are jointly, severally and
unconditionally liable for any liability of Hunt Health to
Towers. Wechsler, 1999 WL 397751, at *23. D. Changes in the Contractual Relationship
The parties made several changes to their original contractual
On July 10, 1991, the same day that the parties executed the
HCP Contract, Rider A, and the Guaranties, the parties agreed to
an amendment (the "July Amendment"). Pl. Exh. 5. The July
Amendment alters, among other things, Paragraph 5 of the HCP
Contract, such that the interest rate Hunt Health would pay
Towers for Rejected Accounts for which Towers had demanded
repayment would be 18% or the lesser of the Commercial Prime
Rate, as published daily in the Wall Street Journal, plus 2%. Pl.
2. The September Early Termination Amendment
On September 25, 1992, the parties executed an amendment to the
HCP Contract allowing Hunt Health to elect early termination. Pl.
Exh. 7; Wechsler, 1999 WL 397751, at *2. The Amendment provides
that, in the event of such election, Hunt Health must pay for
Towers liquidated damages equal to $10,000 for each month or part
thereof remaining prior to the HCP Contract's original
termination date. Pl. Exh. 7; Wechsler, 1999 WL 397751, at *2.
The parties have referred at times to this amount as an early
3. The Security Agreement
On September 25, 1992, the parties executed a more elaborate
security agreement regarding Towers' lien on Hunt Health's assets
(the "Security Agreement"). Pl. Exh. 8; Wechsler, 1999 WL
397751, at *2. The Security Agreement expands Towers' security
interest in Hunt Health's assets and amplifies Towers' remedies
in the event Hunt Health fails to perform any of the obligations
in the HCP Contract, and all modifying agreements, including the
Security Agreement itself. Pl. Exh. 8. The Security Agreement defines the
"Secured Indebtedness" which is the subject of the Security
all present and future debts and other obligations of
Debtor to Secured Party (including interest, fees,
charges, costs, expenses and attorneys fees), whether
arising by contract, tort, guaranty, or otherwise;
whether or not the advances or events creating such
debts or other obligations are presently
foreseen. . . . "Secured Indebtedness" specifically
includes the obligations of Debtor under this
Agreement and any indebtedness arising under the [HCP
Pl. Exh. 8, ¶ 1.
In the Security Agreement, the parties agreed to, among other
things, the following terms: financial statements delivered from
Hunt Health to Towers must be true, accurate and complete (Pl.
Exh. 8, ¶ 23(a); Wechsler, 1999 WL 397751, at *5); Hunt Health
will give Towers written notice of, among other things, any
material adverse change in the financial condition of Hunt Health
or any entity liable for any of Hunt Health's Secured
Indebtedness (Pl. Exh. 8, ¶ 24; Wechsler, 1999 WL 397751, at
*5-6); Hunt Health will give Towers notice of any condition that
materially impairs the value of Hunt Health's accounts, which are
referred to in the Security Agreement as "Collateral" (Pl. Exh.
8, ¶¶ 2, 5); Hunt Health will not sell, lease, transfer, assign
or otherwise dispose of title or possession of any of the
Collateral (Pl. Exh. 8, ¶ 8); Hunt Health will maintain detailed
records of its accounts (Pl. Exh. 8, ¶ 14(a)); any materially
false representation or warranty of Hunt Health discovered by
Towers constitutes a default (Pl. Exh. 8, ¶ 41(c)); the cessation
of Hunt Health's business constitutes a default (Pl. Exh. 8, ¶
41(f)); upon Hunt Health's default, Towers may, among other
things, exercise its lien upon and right of setoff against any
monies Towers has in its possession which belong to Hunt Health
for the payment of any or all of the Secured Indebtedness (Pl.
Exh. 8, ¶ 42(e)).
4. The September Factoring Fees Amendment Also on September 25, 1992, the parties executed an amendment
to the HCP Contract that changed the method by which Towers
earned factoring fees from Hunt Health. Pl. Exh. 257. The HCP
Contract provided that Towers would earn a 5% factoring fee for
every account that it purchased and collected. The September
Factoring Fees Amendment changed this term of the parties'
agreement. Pursuant to this Amendment, Towers' factoring fee
instead would equal "two percent (2%) per month, or twenty-four
percent (24%) per annum, of the Average Outstanding Daily Balance
from Towers to [Hunt Health]." Pl. Exh. 257. In other words,
rather than charging 5% for each account, pursuant to the
Amendment Towers charged Hunt Health 2% each month of the total
amount of outstanding initial payments that Towers had made to
Hunt Health on all accounts combined.
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 Health] 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. Exh. 9; see Wechsler, 1999 WL 672902. The
Letter Agreement, in other words, imposes a cap of $1,000,000 on
the cumulative amount of advances outstanding at any one time
from Towers to Hunt Health for accounts receivable. From Hunt
Health's perspective, the most important part of the changes in
the contractual relationship was Hunt Health's new entitlement to
$1 million in advances from Towers. Pl. Exh. 213, ¶ 42. It was
Towers' promise of this money that prompted Hunt Health to agree
to the changes to the contractual relationship. Id. To summarize the parties' contractual relationship, then, the
factoring agreement between Towers and Hunt Health involved
essentially four facets: the sale of accounts; the payment for
accounts sold; the collection of accounts; and the record keeping
of the accounts sold and purchased.
The performance of the parties from July 1991 to February 1993
consisted at times with the terms of the parties' contractual
relationship, but also diverged at times from those terms.
A. The Parties' Performance Prior to September 1992
The following describes the parties' performance from roughly
July 1991 through September 1992.
Beginning in July 1991, approximately once a week, Hunt Health
prepared a list of accounts receivable to be offered to Towers
for sale. Pl. Exh. 213, ¶ 13 (Affidavit of Lori Dittmar); Tr.
814:15-815:5. Hunt Health sent additional insurance information
with this list of accounts. Pl. Exh. 213, ¶ 13. These documents
were then reviewed by Towers. Id. The accounts that Towers
decided to purchase were listed on a purchase letter that Towers
sent to Hunt Health a few days after receiving the list. Id.
Towers wired payments to Hunt Health that totaled 30% of each
account it purchased, which accounted for the dilution factor
discussed above. Id.; Tr. 814:15-23. Towers made this payment
as soon as it purchased the account. Pl. Exh. 213, ¶ 13. The
balance of the payment was made as Towers collected the
receivable. Id. For its services, Towers charged Hunt Health a
5% factoring fee, discussed above, on all funds it collected on
the accounts. Id. This fee was deducted off the top of any payment from Towers to Hunt Health on
an account. Id. Towers also deducted from the collections its
30% initial payment. Id. Therefore, only after Towers had
received its 5% fee and reimbursed itself for the 30% initial
payment did Hunt Health receive the balance of the collections of
the accounts. Id.
3. Collection of Accounts
Once Towers began purchasing accounts receivable from Hunt
Health in July 1991, it began collecting the payments on those
accounts. "Collecting" accounts means essentially pursuing
payment from a Third Party Obligor, i.e., an insurance company,
for treatment given to a patient at La Hacienda. "Collecting"
implies efforts made to facilitate the prompt payment of an
account, and involves gathering information, contacting insurance
companies, and receiving payments from insurance companies with
EOBs attached. Pl. Exh. 254, at 25-36.
Lynn McLaughlin was a collector at Towers specifically assigned
to work with account receivables Towers purchased from Hunt
Health to get them paid. Defs. Exh. 136, at 21:7-16; 36:1-17;
Defs. Exh. 49, ¶ 133. McLaughlin and two or three other
collectors worked on accounts sold to Towers by Hunt Health.
Defs. Exh. 136, at 36:14-37:22. McLaughlin's work included
calling insurance companies "all day long" to cause the insurance
companies to pay accounts receivable sold to Towers as quickly as
possible. Id. at 23:15-29:2. Hunt Health also employed
personnel to collect on accounts receivable, including accounts
sold to Towers. Tr. 771:25-773:5; see Pl. Exhs. 259, at
12:1-16, 213 at 13; Tr. 144:9-14; 171:15-17; 748:11-20.
Towers also retrieved checks sent by insurance companies to
Hunt Health. Pl. Exh. 252, at 50:22-52:12. Towers engaged a local
representative, Susan Nidever, an accountant, to pick up the
checks at the Hunt post office that came in from insurance
companies for accounts that Towers had purchased and to submit
them to Towers. Defs. Exh. 135, at 16:22-17:6; Defs. Exh. 48, at 98. Nidever was an employee of a Texas accounting
firm, Stewart T. Davis & Co. Defs. Exh. 135, at 8. Nidever picked
up the checks for Hunt Health at the post office every day and
then drove them to La Hacienda. Defs. Exh. 135, at 48:20-52:22.
She brought with her a list, from Towers, of the accounts Towers
had purchased that included the patient's name for each account.
Id. At La Hacienda, Nidever and a person from Hunt Health would
go through the mail together. Id. Nidever would remove the
checks for accounts that Towers had purchased, make copies of the
checks and record their receipt, and then send them to Towers in
New York. Id.
Barbara Lutes Harris (formerly Barbara Gardner) also worked to
monitor the inflow of payments on accounts receivable.
Lutes-Harris was an accounts receivable manager employed by
Towers who worked on location at Hunt Health. Pl. Exh. 259, at
6:15-20, 22:15-25. Lutes-Harris thought of her duties as those of
a clerk. Id. at 28:11-18. Lutes-Harris performed very little
collections services while stationed at Hunt Health. Id. at
11:24-12:7. Lutes-Harris's job was to monitor the inflow of
payments on accounts receivable into Hunt Health for the purpose
of making sure those monies were forwarded to Towers. Id. at
10:7-22, 21:5-22:6. Lutes-Harris reported daily to a Towers
employee in New York, Michelle Albanese-Wanna, about the amount
of the deposit Hunt Health would make to Towers based on payments
it had received. Id. at 20:15-22:14. Lutes-Harris apparently
worked in tandem with, or in place of Nidever. Id. at 27:1-14.
4. Record Keeping of Accounts
Paragraph 4 of the HCP Contract provides that the evidence of
Towers' purchase of an account receivable from Hunt Health will
be delivery by Towers of a list of those accounts it is
purchasing. Paragraph 9 of the HCP Contract provides that Hunt
Health will "make a notation on [its] computer files and other physical books and records to
indicate which Accounts have been sold to [Towers]." Pl. Exh. 2.
These provisions essentially impose record-keeping obligations on
Towers and Hunt Health. Before September 1992, once a week,
Towers listed on a purchase letter the accounts it had decided to
purchase and sent the letter to Hunt Health. Pl. Exh. 213, ¶ 13.
In addition, Nidever prepared monthly reports for Towers. Defs.
Exh. 135, at 17:7-11. Nidever's reports compared Towers' accounts
receivable aging report to Hunt Health's aged listing and
transaction report and noted any discrepancies between the two.
See, e.g., Defs. Exhs. 67, 82. Towers paid Nidever for
providing the check retrieval and reporting service. Id. at
18:8-20; Pl. Exh. 236.
Hunt Health also maintained explanation of benefit forms, or
"EOBs," in its files for its patients. Tr. 740:5-8. An EOB is a
document prepared by an insurance company after it receives a
claim. It indicates the dates of treatment, the amount of the
claim, any discounts the insurance company has taken off, the
amount paid and/or not paid and, if applicable, the reason for
nonpayment. Tr. 740:9-14. Insurance companies send EOBs to the
insured and the hospital. Tr. 741:4-6. Hunt Health retained these
EOBs for their patient files.
B. The Parties' Performance After September 1992
The parties' performance changed in roughly late September or
early October 1992. Defs. Exh. 135, at 74:2-76:21; Tr. 830:3-15.
Nidever describes the change as a conversion to "bulk." Defs.
Exh. 135, at 74:2-18.*fn2 1. Sale of Accounts
After the conversion to bulk, the parties no longer transacted
sales on an account-by-account basis. Hunt Health did not submit
lists from which Towers selected certain accounts to purchase.
The evidence shows that Hunt Health did not perform any selection
process among its accounts to find the Reimbursable Accounts it
would offer to sell to Towers. Nor did Towers sift through Hunt
Health's accounts receivable and select those it would purchase.
Rather, as the Court discusses below, Hunt Health had "aging
account receivable reports" prepared which assembled the payment
information on all of Hunt Health's accounts receivable, and the
parties referred to these reports after the conversion to bulk to
determine what accounts Hunt Health had sold to Towers. Pl. Exh.
213, ¶¶ 37-39.
Towers' payments to Hunt Health changed correspondingly under
the bulk method. In late 1992 and early 1993, Towers advanced
lump-sum payments to Hunt Health, rather than individualized
payments for each account it purchased. Tr. 533:9-538:19; see,
e.g., Pl. Exh. 44 (account number 1350-000, reflecting payments
from Towers received by La Hacienda in the February 1993 ledger
report). Towers did not send payments automatically upon the
purchase of accounts, but rather sent payments upon Hunt Health's request.
Pl. Exh. 252, at 152:3-17. Specifically, Hunt Health wired
requests for funds to Towers and Towers then wired money straight
to Hunt Health's account. Tr. 819:9-820:17. By February 26, 1993,
Towers had advanced a total sum of $910,870 to Hunt Health for
accounts receivable it had purchased. Wechsler, 198 F. Supp.2d
at 522-23. By this date, Hunt Health had sold to Towers all of
its accounts receivable. Pl. Exh. 213, ¶ 38; Tr. 210:21-24;
871:21-877:20. The face value of all of the accounts sold as of
this date was $3,556,048. Pl. Exh. 210; Tr. 255:13-256:22.
3. Collection of Accounts
Upon the conversion to bulk, Towers essentially stopped
collecting on accounts receivable it had purchased. Plaintiff's
position throughout the litigation has been that Towers owed Hunt
Health no collection obligation by the HCP Contract. See Defs.
Exh. 49, ¶ 161; Wechsler, 1999 WL 397751, at *9-10. The Court
has already rejected plaintiff's position, finding that plaintiff
is judicially estopped from arguing that it had no collection
obligation under the HCP Contract. Wechsler, 1999 WL 397751, at
In October 1992, Hunt Health entered into an agreement with
Kerr Medical Billing Services, Inc. ("KMBS"), by which KMBS
agreed to perform billing and collection services for Hunt
Health. Pl. Exh. 11; Tr. 170:2-172:5. KMBS was formed in part by
John Givens, La Hacienda's Chief Financial Officer and part
owner, specifically for the purpose of billing and collecting the
accounts of Hunt Health. Tr. 170:19-24; 143:21-144:8; Wechsler,
1999 WL 397751, at *2, n. 1; Pl. Exh. 254, at 13:3-12. This
agreement took effect on or around November 16, 1992. Pl. Exh.
11. Clay Corder worked as the executive director of KMBS. Pl.
Exh. 254, at 9:7-11. KMBS hired employees from Hunt Health to
work on the collections, which these employees had done
previously at Hunt Health. Tr. 771:9-772:2. KMBS thereafter handled all billing for patient treatment at La
Hacienda. Pl. Exh. 254, at 26:25-27:14; Tr. 760:10-12; 810:5-21.
Hunt Health transferred all of the patient files located in Hunt
Health's business offices to KMBS. Tr. 755:3-756:22. KMBS called
insurance companies to collect on accounts, and received a fee
for these services from Hunt Health. Pl. Exhs. 252, at
101:18-102:11; 254, at 29:18-29:21, 39:11-25. KMBS essentially
performed all of the billing and collection services for Hunt
Health's accounts receivable, including those that Hunt Health
had sold to Towers. Pl. Exh. 252, at 100:18-102:12.
Under the bulk method, Towers, through its agent Nidever,
picked up every check sent to Hunt Health. Id. at 74:23-75:9.
Nidever no longer compared the incoming checks to her list of
accounts purchased by Towers. Id. at 76:9-12. Instead, Nidever
simply retrieved all of the checks, without discriminating
between those that matched to an account purchased by Towers, or
between those that were issued by eligible Third-Party Obligors
as defined in the HCP Contract. Id. at 75:2-16; Tr. 210:21-24.
Nidever continued to pick up checks in this manner until February
25 or 26, 1993. Tr. 828:4-13, 909:3-15.
4. Record Keeping of Accounts
The chief, and essentially only, record of Hunt Health's
accounts receivable transacted with Towers are Hunt Health's
"aging account receivable reports." Hunt Health's aging account
receivable reports were prepared by Kerr Medical Billing Services
("KMBS"). Tr. 810:5-811:16. Each report lists the current balance
owed on each account receivable as of the date of the report. Tr.
829:1-20. Hunt Health's aging account receivable reports for
October, November and December 1992, and January 1993, do not
denote which accounts belonged to Towers and which accounts did
not. Pl. Exhs. 73, 74, 75, 76; Defs. Exhs. 83, 84, 85, 86; Tr.
873:14-16. The aging account receivable reports needed no
denotation, in fact, because Towers had bought every account shown on the report. Pl. Exh. 213, ¶ 38; Tr. 210:21-24;
871:21-877:20. Thus, the parties knew what accounts had been sold
to Towers at the end of 1992 and beginning of 1993 by referring
to the aging account receivable reports provided by Hunt Health
to Nidever. Pl. Exh. 213, ¶ 39.
As Towers paid Hunt Health with lump sums and retrieved all of
Hunt Health's incoming checks, Nidever no longer performed
account-by-account reconciliations. Defs. Exh. 135, at 76:19-21;
Defs. Exh. 83. Nidever states in her October 1992 report that
Hunt Health's aging account receivables report "includes all
receivables outstanding." Defs. Exh. 83.
Lastly, EOBs for accounts after the conversion to bulk were
sent directly to KMBS, which continued to retain those documents
in patient files. Tr. 740:15-22.
C. Hunt Health's Distributions to Investors
The Court has already granted summary judgment to plaintiff
that Hunt Health's distributions totaling approximately $787,712
to investors from September 1991 to February 1993 constituted a
breach of the HCP Contract and, when operative, the Security
Agreement. Wechsler, 1999 WL 397751, at *5-6. Specifically, the
Court granted summary judgment to plaintiff that "the
distributions violated provisions of the HCP Contract and
Security Agreement (i) prohibiting transfer of assets forming
part of the collateral subject to Towers' lien, and (ii)
requiring notice to Towers of material changes in Hunt Health's
financial position." Wechsler, 1999 WL 397751, at *5-6. The
Court held that these violations constituted breaches of the
agreements between the parties, but left unresolved whether these
breaches were material.
Hunt Health's distributions to partners totaled $321,801 in
1991, $374,986 in 1992, and $89,900 in January and February of
1993. Tr. 612:23-613:5, 621:5-13, 291:1-14; Pl. Exhs. 97B, 97C,
97D. During that time, Hunt Health reported a loss of operating
cash of $451,129 in 1991, $200,069 in 1992, and a gain of $160,827 in 1993. Tr.
287:7-8, 288:1-2; Pl. Exhs. 97B, 97C, 97D. The distributions to
investors are not reflected in the totals for loss of operating
cash. Tr. 288:16-21. Generally speaking, because of the
distributions to investors, more cash was taken out of Hunt
Health from 1991 through 1993 than was put into Hunt Health over
that span. Tr. 308:22-23. Hunt Health operated at a net cash loss
during this time.
As of January 1993, Hunt Health had begun to make arrangements
to switch to a different factoring service provider, MediMax,
Inc. Tr. 177:1-17, 866:5-867:8; Wechsler, 1999 WL 397751, at
*3. By February 22, 1993, Hunt Health expected the transfer of
Towers' servicing to MediMax to occur by that Friday, February
26, 1993. Pl. Exhs. 147, 162, 163; Wechsler, 1999 WL 397751, at
*3. On Friday, February 26, 1993, Hunt Health terminated its
relationship with Towers via letter. Pl. Exh. 167; Tr. 175:11-14.
V. The Performance Post-Termination
The following events, which occurred after Hunt Health's
termination, pertain to this action.
A. Aftermath of the Termination
Once Hunt Health terminated the contract, Nidever never
returned to Hunt Health to pick up checks. Tr. 828:4-13.
Lutes-Harris continued to work as Towers' on-site representative
at Hunt Health until the third week of April 1993. Pl. Exh. 259,
at 19:1-6. Until this time Lutes-Harris continued to list checks
that came in to Hunt Health. Pl. Exh. 259, at 64:22-65:1. After
February 26, 1993, Hunt Health no longer offered accounts for
Towers to purchase and Towers no longer made advances.
Wechsler, 1999 WL 397751, at *3.
B. Hunt Health's Attempt to Buy Back Accounts Shortly after Hunt Health terminated its contractual
relationship with Towers by letter, representatives of Hunt
Health met with representatives from Towers. Defs. Exh. 138, at
215:13-217:9, 302:7-304:14; Defs. Exh. 49, ¶¶ 215-19; Defs. Exh.
45; Pl. Exhs. 168, 172; Tr. 836:15-837:14. In particular, John
Givens and Dan Perry, Hunt Health's Chief Financial Officer and
attorney, respectively, traveled to New York to meet with Michael
Gervais and Charles Chugerman, Towers' auditor and vice
president, respectively, to try and buy back the accounts
receivable Hunt Health had sold to Towers. Pl. Exh. 168; Defs.
Exh. 138, at ...