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WECHSLER v. HUNT HEALTH SYSTEMS

August 11, 2004.

RAYMOND H. WECHSLER, ADMINISTRATIVE TRUSTEE OF THE TOWERS FINANCIAL CORPORATION ADMINISTRATIVE TRUST, Plaintiff,
v.
HUNT HEALTH SYSTEMS, LTD., P&G ENTERPRISES, INC., MHTJ INVESTMENTS, INC., ESPERANZA HEALTH SYSTEMS, LTD. AND FRIENDSHIP, INC., Defendants.



The opinion of the court was delivered by: PETER LEISURE, District Judge

OPINION AND ORDER

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 account.

  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 Towers.

  I. The Parties

  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 infra I.V.C.

  II. The Contract

  Several writings set forth the contractual relationship between the parties.

  A. The HCP Contract

  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 Account.

  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.

  C. The Guaranties

  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 relationship.

  1. The July Amendment

  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. Exh. 5.

  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 termination fee.

  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 Agreement as:
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 Contract].
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.

  5. The Letter Agreement

  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.

  III. The Performance

  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.

  1. Sale of Accounts

  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.

  2. Payment for Accounts

  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.

  2. Payment for Accounts

  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 *9-10.

  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.

  IV. The Termination

  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 ...


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