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Ef Consulting LLC and Oasis Hc LLC v. General Electric Capital Corporation

July 12, 2012


The opinion of the court was delivered by: David N. Hurd United States District Judge



Appellants EF Consulting LLC ("EF" or "Substitute Receiver") and Oasis HC LLC ("Oasis") (collectively "appellants") appeal the order*fn1 of Hon. Robert E. Littlefield, Jr., United States Bankruptcy Judge, granting appellee General Electric Capital Corporation's ("GECC") motion to dismiss appellants' adversary complaint. GECC filed a brief in opposition, and appellants replied. The appeal was taken on submission.*fn2


Debtors Highgate LTC Management, LLC, and Highgate Manor Group, LLC ("debtors" or "Highgate") were owners and operators of nursing homes at various locations in upstate New York. On May 26, 2005, debtors secured financing for the operations of its nursing home facilities from GECC in the form of a revolving line of credit ("Line of Credit"). GECC also refinanced the real properties with a loan to debtors of up to $23.5 million. As collateral for these loans, debtors granted GECC security interests in the real properties as well as the rents, income, accounts receivables, general intangibles, equipment, inventory, fixtures, and proceeds from the properties' operations. To that end, debtors and GECC executed various loan documents setting forth the manner in which Line of Credit funds, accounts receivable, and payments on the loans would be handled. Loan and Security Agreement, Dkt. No. 2-7 ("LSA"); Lockbox Account Agreement, Dkt. No. 2-8 ("Lockbox Agreement"). Non-party Citizens Bank also executed the Lockbox Agreement.

The maximum amount available under the Line of Credit was $4 million. LSA § 2.1(a). However, the amount GECC would loan under the Line of Credit was limited to eighty-five percent of certain specified accounts receivable, such as those due from Medicare,

Medicaid, and private insurance (collectively "qualified accounts"), to which liquidity factors had been applied ("borrowing base"). Id. § 2.1(d). Two business days before it wished to borrow from the Line of Credit, Highgate would give GECC notice of its intent to borrow specifying the amount and date of the proposed borrowing. Id. § 2.2(a). GECC would then make an advance against the Line of Credit, up to the maximum amount of $4 million also taking into consideration the borrowing base, which was deposited in a bank account as directed by Highgate. Id. § 2.2(b)

Additionally, if Highgate failed to pay on the due date any amounts that became due as to the Line of Credit loan, such amounts were deemed a request for a loan against the Line of Credit, as of the day after the due date. Id. § 2.2(a). GECC would disburse to itself such funds to apply directly against the amounts due. Id. § 2.2(b).

All collections of accounts were to be paid directly to a Lockbox Account. Id. § 2.3(a). Every business day Citizens Bank would open the mail from the lockbox, endorse checks, accept electronic transfers to the lockbox, deposit the foregoing funds into the Lockbox Account, and then transfer the funds to a deposit account at Deutsche Bank ("Concentration Account"). Id. Daily, GECC would apply funds in the Concentration Account to the indebtedness first to fees, costs and expenses; then to interest; then to outstanding principal, all of which were due and owing pursuant to the loan documents. Id. §§ 2.2(d), 2.3(c). After GECC applied the Concentration Account funds as set forth toward the indebtedness, if there was a credit balance that balance was available to debtors so long as there was no default. Id. § 2.3(e).

In sum, the Line of Credit available for borrowing was measured as eighty-five percent (85%) of the receivables due from qualified accounts up to the $4 million maximum.

Highgate took advances against the Line of Credit as operating funds. All of Highgates' receivables were paid into a lockbox, from which GECC received payment on the Line of Credit loan. In this manner, as a revolving line of credit, the outstanding principal balance fluctuated, increasing by amounts loaned or advanced, and decreasing by repayments. Remedies for default included reduction in the credit limit for the Line of Credit, use of the collateral and/or funds in the Concentration Account, and initiation of proceedings against the collateral. Id. § 8.3(a)(iii)(D).

In April 2006 debtors defaulted on their obligations regarding the GECC loans. Consequently, in October 2006 GECC initiated a foreclosure action in Supreme Court of the State of New York, Rensselaer County ("Foreclosure Court"). On November 29, 2006, the Foreclosure Court, upon application by GECC, appointed non-party The Long Hill Alliance Company ("Long Hill") as receiver "to operate the Mortgaged Premises and to collect the rents, issues, income, fees and profits." Order Appointing Receiver at 3, Dkt. No. 2-9.*fn3 The receivership was to remain in effect until a foreclosure sale was completed. Id. at 6. Long Hill was to be paid its service fees as well as expenses out of receivables, which were paid first before any other operating expenses. Id. at 8. Further, the Foreclosure Court ordered Long Hill and GECC to enter into a Shortfall Agreement, under which GECC would, in essence, underwrite any shortfall between revenues and operational expenses. Id. at 7. Any shortfall related to the Long Hill's fees and expenses would be satisfied according to the Shortfall Agreement. Id. at 9. All liabilities incurred prior to the receivership remained with debtors; Long Hill did not assume any such liabilities. Id. The Order Appointing Receiver did not change the Lockbox Agreement, and accounts receivable continued to be deposited into the Lockbox Account for ultimate payment of amounts due to GECC under the Line of Credit. Id. at 18. GECC's costs and expenses relating to the receivership, including any shortfalls which it paid pursuant to the Shortfall Agreement, were added to the mortgages and created a lien on the collateral, and hence were recoverable from the debtors and as against any property securing debtors' loans. Id. at 22.

The Shortfall Agreement provided a framework for how Long Hill was to conduct the receivership. Shortfall Agreement, Dkt. No. 2-10. Under this agreement, when Long Hill's expenses were greater than the facilities' income, GECC agreed to pay the difference. Id. at 3. That is, GECC would make up any working capital deficit. Id. However, any such funds provided by GECC would constitute loans, added to the principal of the Line of Credit loan.

On April 16, 2007, debtors voluntarily filed for bankruptcy protection under Chapter 11. According to appellants, debtors owed GECC $3,492,795*fn4 on the Line of Credit debt as of the bankruptcy filing. Sherman Decl. ¶ 12, Dkt. No. 3-2.

On May 14, 2007, the Bankruptcy Court entered a Final Order authorizing the debtors to borrow money and use cash collateral.*fn5 Cash Collateral Order, Dkt. No. 2-11. In essence, the Cash Collateral Order permitted Long Hill to continue, as it had been, to operate the facilities using the GECC Line of Credit, and pursuant to the terms of the loan documents. Id. at 8. Moreover, as further security for GECC's agreement to continue the loan, the Bankruptcy Court granted GECC a lien pursuant to 11 U.S.C. §§ 361, 363(e), senior to all other liens except those delineated. Id. at 9.

On May 18, 2007, the Bankruptcy Court entered an Order permitting Long Hill to continue as receiver pursuant to the Foreclosure Court's Order Appointing Receiver, that is, excusing non-compliance with 11 U.S.C. ยงยง 543(a)-(b). Section 543 Order at 2, Dkt. No. 2-12. The May 18, 2007, Order further required Long Hill to continue the lockbox arrangements pursuant to the terms of the loan documents. ...

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