Jackson v. General Electric Capital Corp. (In re Fundamental Long Term Care, Inc.)
Docket: Case No. 8:11-bk-22258-MGW
Court: United States Bankruptcy Court, M.D. Alabama; August 31, 2016; Us Bankruptcy; United States Bankruptcy Court
Federal Rule of Bankruptcy Procedure 8009 allows supplementation of the record on appeal for material omissions. In this case, six probate estates appealed a judgment favoring Rubin Schron, following the dismissal of their claims against him with prejudice. They requested to include a deposition transcript in the appeal record, but the Court declined as it had not considered the transcript.
The background involves the probate estates’ long-standing legal battles against Trans Healthcare Management, Inc. (THMI) over various judgments totaling $1.21 billion, initiated after the estates alleged a fraudulent scheme to strip THMI of its assets. This scheme, orchestrated by Schron’s associates, involved creating legitimate and sham entities to facilitate the acquisition of THMI's assets at undervalued prices, resulting in substantial profits for the masterminds while leaving creditors unpaid. The Jackson Estate's $110 million default judgment against the sham company FLTCI prompted the current proceedings, leading the Chapter 7 Trustee and the probate estates to consolidate their claims against multiple parties involved in the scheme, including Schron.
The Probate Estates alleged multiple claims against the GTCR Group, THI Holdings, Jannotta, and others, accusing them of breaching fiduciary duties by selling THMI and THI Baltimore at undervalued prices, and asserting that other defendants aided and abetted this breach. They also claimed that certain entities were successors or alter egos of THI and THMI and sought to impose liability under veil-piercing theories for THI's debts. Additionally, they accused the defendants of fraudulent transfers and later added claims of abuse of process, conspiracy to commit abuse of process, negligence, and avoidance of a postpetition transfer.
The Court dismissed all claims against Schron with prejudice, noting that only 69 of the 1,600 allegations in the complaints specifically involved him. Key allegations included Schron's introduction of Saacks to Grunstein and his financial dealings regarding FLTCH. However, the Court found these allegations insufficient to establish Schron's participation in or benefit from the asset transfers. Attempts by the Probate Estates to attribute actions of Forman and Grunstein to Schron were rejected, as they contradicted other allegations within the complaints. The Court emphasized the lack of specific identification of Schron's actions as a critical weakness in the claims, leading to the dismissal. Three other defendants were dismissed at the summary judgment stage.
Trial proceedings were held regarding several claims, including breach of fiduciary duty and fraudulent transfer, involving parties such as the GTCR Group and Schron. After a tentative ruling favoring some defendants, all parties except Schron settled. On November 4, 2015, Schron requested a final judgment to initiate the appeal timeline for the Probate Estates, who objected based on newly discovered evidence, including a deposition of Harry Grunstein. They argued this deposition indicated Schron’s involvement in prior negligence actions related to THI Baltimore. The Court overruled the objection and entered a final judgment in favor of Schron on December 16, 2015.
On appeal, the Probate Estates sought to supplement the record with the email exchange regarding objections and the Grunstein deposition. The district court determined that the original Court was best positioned to decide on the inclusion of the evidence. The Court allowed the inclusion of the email communications but denied the Grunstein transcript, noting it was never considered during the initial ruling as it was not attached to the objection. The Court clarified that it did not prevent the parties from submitting further materials but merely requested email objections for efficiency.
The Probate Estates had the option to attach the deposition transcript to their email objection to the proposed final judgment, but they did not do so. Their objection was emailed on November 6, 2015, yet the Court did not rule on it until a status conference on December 16, 2015. The Probate Estates had forty-one days to file the transcript before the conference. Even if they had attached it, the Court would not have considered it, as there is no authority preventing a final judgment from being entered when claims against a defendant are dismissed with prejudice, despite the discovery of new evidence. To address newly discovered evidence, a Rule 60(b) motion was necessary, but any such motion would have been untimely in this case. The Probate Estates could have sought relief based on the newly discovered evidence within a reasonable time frame, but waited over sixteen months after becoming aware of the transcript to raise the argument. They also did not seek relief from the final judgment entered on December 16, 2015, for reasons unclear to the Court. Consequently, the motion to supplement the record on appeal appears to circumvent the intended use of Rule 60(b). The Court ultimately granted the motion in part, allowing the inclusion of an email exchange between the Court's law clerk and counsel, but denied the inclusion of the Grunstein deposition transcript, which the Court did not consider in its ruling. The background information regarding THI and its subsidiaries is derived from the complaint filed in the proceedings.
Abe Briarwood leased the nursing homes it acquired to THI Baltimore for operation. FLTCH rebranded THMI’s assets, generating significant profits. The Court's rationale is detailed in two memorandum opinions related to the bankruptcy cases of Fundamental Long Term Care Holdings, LLC. The negligence and postpetition transfer claims were initiated by the Trustee, who also served as a plaintiff. The Probate Estates alleged that Schron benefitted from asset transfers, raising concerns about a one-third interest in FLTCH held by Quality Health. Under Bankruptcy Code § 550(a), a trustee can recover fraudulent transfers from the initial transferee or the entity benefiting from such transfers. However, the Probate Estates failed to establish that the "owner" of an entity receiving a fraudulent transfer was a beneficiary, particularly since the ownership was established months after the transfer without specific ownership allegations. They claimed that FLTCH and others transferred THI’s and THM’s assets for less than reasonably equivalent value and improperly controlled FLTCI’s corporate form. After dismissing some claims from the second amended complaint, the Probate Estates and Trustee filed a revised complaint containing only the surviving counts.
The Court questions the materiality of the Grunstein transcript, which ambiguously suggests that Schron was tasked with managing negligence claims against Integrated Health Services, the bankrupt entity whose assets were transferred to Abe Briarwood and leased to THI Baltimore prior to the alleged fraudulent scheme. Two significant issues arise from this evidence: it does not address the Probate Estates' failure to prove Schron's involvement in or benefit from the asset transfer to FLTCH, undermining their claims; and it is considered cumulative, as the initial complaint already includes irrelevant allegations regarding Abe Briarwood's acquisition, including claims that Schron attempted to obstruct negligence claims against Integrated Health Services. The Court notes that under Rule 60(b), the Probate Estates could have pursued relief from the final judgment and dismissal order. While a notice of appeal typically limits the bankruptcy court's jurisdiction, the Court may still issue an indicative ruling on a Rule 60(b) motion, allowing for various outcomes regarding the motion's consideration.
