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Loveridge v. Johnson Land Enterprises, LLC

United States District Court, D. Utah, Central Division

December 12, 2017

ELIZABETH R. LOVERIDGE, Chapter 7 Trustee for the Bankruptcy Estates of East Lake Care Center, LLC; Castle Country Care Center, Inc.; and South Valley Health Care Center, LLC, Plaintiff,


          TENA CAMPBELL U.S. District Court Judge

         Introduction [1]

         In this consolidated adversary proceeding, the Plaintiff, Elizabeth Loveridge, is the Chapter 7 Trustee for three related bankruptcy cases. The bankruptcy debtors, East Lake Care Center, LLC (East Lake), Castle Country Care Center, Inc. (Castle Country), and South Valley Health Care Center LLC (South Valley), (Debtors) operate skilled nursing facilities. The Defendants Patricia Johnson, Craig Johnson, and Bruce Johnson own the Defendant Johnson Land Enterprises, LLC (JLE). They also own East Lake, Castle Country, and South Valley.

         The center of the dispute is the sale of the Debtors by the Defendants to a California business, the Ensign Group (Ensign) and affiliates of Ensign.[2] The Trustee contends that the Defendants failed to give Debtors their share of the sale proceeds. The Defendants respond that at the time of the sale, Debtors had no interest in any assets that were sold and so were not entitled to anything.

         The Trustee has filed a motion for partial summary judgment asking the court to find that: (1) the Debtors owned the intangible assets of the skilled nursing facilities immediately before the sale to Ensign; (2) the Debtors were insolvent immediately before and after the sale; (3) the Debtors received nothing from the sale; and (4) the parties intended that the twenty- three million dollar purchase price was for all the assets of the Debtors, including the intangible assets.

         Because the court finds that there are disputed issues of material fact surrounding the questions of the ownership of the intangible assets and the insolvency of Debtors before the sale, the court denies the Trustee's motion on those issues. But there is no genuine dispute that the Debtors were insolvent after the sale, the Debtors received none of the proceeds from the sale, and the intent of the parties was that the twenty-three million dollars was for all of the assets of the Debtors. Accordingly, the court grants the Trustee's motion on those questions.

         The Defendants have filed a motion for summary judgment on all of the Trustee's causes of action. Because resolution of those causes of action depends upon whether Debtors owned the intangible assets at the time of the sale, a question the court cannot resolve at this time, the court denies the Defendants' motion.


         Summary Judgment Standard

         Summary judgment is appropriate “if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c)(1)(B); see also Justice v. Crown Cork & Seal Co., Inc., 527 F.3d 1080, 1085 (10th Cir. 2008). Examining that evidence, the court must construe all facts and reasonable inferences in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); Seegmiller v. LaVerkin City, 528 F.3d 762, 766 (10th Cir. 2008).

         1. Intention of the Parties to the PSA and OTAs [3]

         The intention of the parties to the PSA, according to the Trustee, was to sell every asset related to operating the facilities and to deliver title free and clear of encumbrances. (Trustee's Mot. for Partial Summ. J. 27, ECF No. 113 (Trustee's Mot.).) The plain language of the PSA also reflects that intent. (See PSA § 2.5, ECF No. 113-13.) Additionally, according to Gregory K. Stapley, Ensign's representative, Ensign not only entered into the PSA but aslo simultaneously entered into Operations Transfer Agreements (OTAs) in order to achieve this goal. (Dep. of Gregory K. Stapley 95, ECF No. 114-1.) In his deposition, he explains the redundancy of asset listings between the PSA and the OTAs as a methodically prudent strategy to ensure that Ensign purchased everything related to the facilities.

We did those separate bills of sale [OTAs], again, as part of sort of a belt-and- suspenders approach [the Debtors] signed to neutralize the fact that we frequently dealt with small operators who, while they were very good operators, sophisticated on the operations side, were typically anything but sophisticated when it came to their own corporate structures and where and how their accounting was done. It was just impossible to tell where things were.

(Id. at 88.)

With respect to the transfer provisions of the Operations Transfer Agreement, it was merely a catchall to pick up anything that we could get that might have been held or might have been in question, because oftentimes we would find questions about who owned what. . . . [I]t [the OTAs] simply would refer to kind of very vagely whatever you [operator and seller] have hold on, those kinds of things. . . . It's just kind of a way to say the current operator doesn't claim any of this stuff. . . . [T]hey [the operator and seller] usually didn't know because they typically didn't keep those things [assets] separate in their mind. They were running things monolithically.

(Id. at 105-06.)

         Craig Johnson agrees with Mr. Stapley's interpretation of the purpose of the OTAs. “The Operation Transfer Agreement, in my opinion, was almost an overkill type of document that would have covered anything we left out or that somehow got omitted from the Purchase and Sale Agreement.” (Errata App. to Trustee's Mem. in Opp'n to the Johnson Parties' Mot. for Summ. J. 65, ECF No. 123 (citing Dep. of Craig Johnson 28:3-7, ECF No. 113-3 (Johnson Dep.).) Further, JLE and the Johnsons “acknowledge that the purchase price of $23 million was intended to include all assets belonging to Johnson Land, a party, ...

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